1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 Kathryn AYERS, et al., Case No.: 14-cv-00542-BGS-NLS 12 Plaintiffs, ORDER GRANTING IN PART PLAINTIFFS’ MOTION 13 v. REGARDING THE ISSUE 14 James Yiu LEE, et al., PRECLUSIVE EFFECT OF FACTS AND CONCLUSIONS OF LAW IN 15 Defendants. SEC v. LEE FOR THIS ACTION 16 [ECF No. 204] 17
18 I. INTRODUCTION 19 Plaintiffs move this Court to determine if certain issues decided in the previous SEC 20 litigation, 14-cv-00347-LAB-BGS (hereinafter “SEC case”), are collaterally estopped in 21 the present case. (See ECF Nos. 204; 215.) Defendant Larissa Ettore (hereinafter “Ettore”) 22 opposes Plaintiffs’ motion. (ECF No. 210.) The Court will address each parties’ 23 contentions within the body of this Order. 24 II. LEGAL STANDARD 25 The doctrine of issue preclusion prevents the relitigation of all “‘issues of fact or law 26 that were actually litigated and necessarily decided’ in a prior proceeding.” See Americana 27 Fabrics, Inc. v. L & L Textiles, Inc., 754 F.2d 1524, 1529 (9th Cir. 1985) (citing Segal v. 28 1 American Tel. & Tel. Co., 606 F.2d 842, 845 (9th Cir. 1979)). “In both the offensive and 2 defensive use situations, the party against whom estoppel[, i.e. issue preclusion,] is asserted 3 has litigated and lost in an earlier action.” Parklane Hosiery Co. v. Shore, 439 U.S. 322, 4 329 (1979). “The issue must have been ‘actually decided’ after a ‘full and fair opportunity’ 5 for litigation.” Robi v. Five Platters, Inc., 838 F.2d 318, 322 (9th Cir. 1988) (citing 18 6 CHARLES A. WRIGHT, ARTHUR R. MILLER & EDWARD H. COOPER, FEDERAL PRACTICE AND 7 PROCEDURE: JURISDICTION § 4416 (3d ed. 1981)). 8 Under the Full Faith and Credit Act, federal courts must give “state judicial 9 proceedings ‘the same full faith and credit [. . .] as they have by law or usage in the courts 10 of [the] State [. . .] from which they are taken.’” See Parsons Steel, Inc. v. First Alabama 11 Bank, 474 U.S. 518, 519 (1986); see also 28 U.S.C. § 1738. This Act requires federal 12 courts to apply the res judicata rules of a particular state to judgments issued by courts of 13 that state. See Parsons Steel, Inc., 474 U.S. at 523. Accordingly, we apply California law 14 of res judicata to the California judgment, New York law to the New York judgment, and 15 federal law to the federal judgments. See id. at 523–26. Here, the SEC case involves a 16 federal judgment. 17 Under federal law, “[w]hen an issue of fact or law is actually litigated and 18 determined by a final and valid judgment, and the determination is essential to the 19 judgment, the determination is conclusive in a subsequent action between the parties, 20 whether on the same or a different claim.” United States v. Hernandez, 572 F.2d 218, 220– 21 21 (9th Cir. 1978) (citing RESTATEMENT OF THE LAW (SECOND): JUDGMENTS, § 68 (Tent. 22 Draft No. 1, March 28, 1973)). 23 Collateral estoppel precludes a party from relitigating an issue if (1) the issue at stake 24 is identical to the one alleged in the prior litigation; (2) the issue was actually litigated in 25 the prior litigation; and (3) the determination of the issue in the prior litigation was a critical 26 and necessary part of the judgment in the earlier action. See Figueroa v. Campbell Indus., 27 45 F.3d 311, 315 (9th Cir. 1995); Clark v. Bear Stearns & Co., 966 F.2d 1318, 1320 (9th 28 Cir. 1992); Hernandez, 572 F.2d at 220–21 (“The collateral estoppel analysis involves a 1 three-step process: (1) An identification of the issues in the two actions for the purpose of 2 determining whether the issues are sufficiently similar and sufficiently material in both 3 actions to justify invoking the doctrine; (2) an examination of the record of the prior case 4 to decide whether the issue was “litigated” in the first case; and (3) an examination of the 5 record of the prior proceeding to ascertain whether the issue was necessarily decided in the 6 first case.”). 7 Under federal law, while the availability of issue preclusion in a particular case is a 8 question of law, the decision of whether to apply the doctrine is vested in the trial court’s 9 discretion. See In re Daily, 47 F.3d 365, 368 n. 6 (9th Cir. 1995); Davis & Cox v. Summa 10 Corp., 751 F.2d 1507, 1519 (9th Cir. 1985); In re Gottheiner, 703 F.2d 1136, 1139 (9th 11 Cir. 1983). As to offensive collateral estoppel, the Supreme Court concluded that the 12 preferable approach for dealing with these problems in federal court “is not to preclude the 13 use of offensive collateral estoppel, but to grant trial courts broad discretion to determine 14 when it should be applied.” Parklane Hosiery Co., 439 U.S. at 331. “The general rule 15 should be that in cases where a plaintiff could easily have joined in the earlier action or 16 where, either for the reasons discussed above or for other reasons, the application of 17 offensive estoppel would be unfair to a defendant, a trial judge should not allow the use of 18 offensive collateral estoppel.” Id. 19 III. ANALYSIS 20 Plaintiffs contend that the issue of secondary liability under NRS § 90.660(4) was 21 resolved in the SEC case. (ECF No. 204-1 at 7.) Plaintiffs assert that the SEC case resolved 22 that Ettore was an agent of Defendant James Y. Lee (hereinafter “Lee”) and that she was 23 an officer and director of Lee through ELX and SOT, both within the meaning of NRS § 24 90.660(4). (Id.) Plaintiffs further argue that the SEC case revealed the relationship 25 between Ettore and Lee and the shell corporations, and how Lee manipulated the victims 26 and shielded illicit gains from the view of regulators with Ettore’s support. (ECF No. 215 27 at 4–5; see also ECF No. 204-1 at 3–5 (Plaintiffs citing to facts alleged in the SEC 28 complaint and claim they were litigated in SEC case).) 1 A. Prong 1 2 Under Prong 1 of the collateral estoppel doctrine, Plaintiffs must prove that the 3 issues at stake between the two cases are identical or substantially identical. See Figueroa, 4 45 F.3d at 315. Under NRS § 90.660(4), agents or employees, as well as people in certain 5 other roles relative to the principal wrongdoer, can themselves be liable if they “materially 6 aid[ ] in the act, omission, or transaction constituting the violation[.]” The agent’s or 7 employee’s actual or constructive knowledge of facts underlying the liability is not an 8 element of the claim; rather, absence of such actual or constructive knowledge is a defense. 9 See NRS § 90.660(4); see also (ECF No. 59 at 4). Applied to the present case, Ettore 10 herself need not have made misleading statements or omitted making disclosures necessary 11 to avoid misleading investors, or actively misled investors herself in some other way. It is 12 enough if acting as Lee’s agent, she materially aided Lee when he misled them, or if she 13 materially aided in his unlicensed sale of securities. 14 In contrast, in the SEC case, Ettore was named as a Relief Defendant in the 15 Complaint. (14-cv-00347-LAB-BGS, ECF No. 1 at 16.) As a Relief Defendant, the SEC 16 sought equitable relief for unjust enrichment, i.e., investor funds received by Ettore under 17 circumstances dictating that in equity and good conscience, she should not be allowed to 18 retain the funds. (Id. at 16–17.) As a result, the SEC alleged that Ettore was liable for 19 unjust enrichment and should be required to return her ill-gotten gains as determined by 20 the Court. (Id.) For unjust enrichment, the SEC properly asserted that they only had to 21 prove that the Relief Defendants, at Lee’s direction, received management fees paid by 22 Lee’s clients and they did not have a legitimate claim to those ill-gotten funds. (14-cv- 23 00347-LAB-BGS, ECF No. 46-1 at 29–30.) The SEC stated that it is “seeking 24 disgorgement of Lee’s ill-gotten gains—specifically, the commissions paid to the relief 25 defendants at Lee’s direction.” (14-cv-00347-LAB-BGS, ECF No. 52 at 2.) A finding that 26 Ettore received ill-gotten investor funds from Lee for which she was not entitled, suffices 27 for a finding of disgorgement. (See e.g. 14-cv-00347-LAB-BGS, ECF No. 1 at 16–17.) 28 /// 1 The only substantially similar factual issue necessary to prove the SEC case, i.e., 2 Ettore’s undeserved receipt of Lee’s ill-gotten gains, and the present case, i.e., whether 3 Ettore acting as an agent for Lee and materially aided him in his fraudulent scheme, was 4 the existence of Lee’s fraudulent scheme. In their First Amended Complaint (“FAC”), 5 Plaintiffs alleged substantially similar factual allegations concerning Lee’s securities fraud 6 scheme as that alleged in the SEC’s complaint. (See ECF No. 65 at 2; see also 14-cv- 7 00347-LAB-BGS, ECF No. 1.) The FAC alleges that Lee devised a scheme to defraud 8 Plaintiff investors. (ECF No. 65 at 9.) The FAC alleges that Lee bought and sold securities 9 on behalf of the Plaintiffs, by misrepresenting the nature of the investment and trading 10 strategy, and by making material misrepresentations and omissions to the Plaintiffs. (Id. 11 at 52.) Lee wanted the investors’ agreement to share 50% of the gains with him, in the 12 form of a monthly “management fee,” and for the management fee to constitute payment 13 for his investment advising services. (Id. at 12.) 14 However, according to the Plaintiffs, the SEC case decided the relationship between 15 Ettore and Lee and the shell corporations, and how Lee manipulated the victims and 16 shielded illicit gains from the view of regulators with Ettore’s support. (ECF No. 215 at 17 4–5; see also ECF No. 204-1 at 3–5 (Plaintiffs citing to facts alleged in the SEC complaint 18 and claim that they were litigated in that action).) As for the Prong 1 analysis only, the 19 factual allegations in the SEC case concerning Ettore’s role in Lee’s securities fraud are 20 substantially identical to the facts also alleged in the FAC. 21 B. Prong 2 22 Under Prong 2, Plaintiffs must prove that the issues at stake were actually litigated 23 in the prior litigation. See Figueroa, 45 F.3d at 315. Plaintiffs argue that because of Judge 24 Burns’ disgorgement sanction, the issues regarding the relationship between Ettore and Lee 25 and the shell corporations, and how Lee manipulated the victims and shielded illicit gains 26 from the view of regulators with Ettore’s support, as detailed in the SEC complaint, were 27 “actually litigated” in the SEC case and conclusively decided. (ECF No. 215 at 4–5.) 28 “When an issue of fact or law is actually litigated and determined by a final and valid 1 judgment, and the determination is essential to the judgment, the determination is 2 conclusive in a subsequent action between the parties, whether on the same or a different 3 claim.” Hernandez, 572 F.2d at 220–21 (citing RESTATEMENT OF THE LAW (SECOND): 4 JUDGMENTS, § 68 (Tent. Draft No. 1, March 28, 1973)). 5 The Plaintiffs argue that the “actually litigated” prong, as regards to the factual 6 allegations identified in the SEC’s complaint, are deemed litigated where a default 7 judgment was imposed as an abuse of the judicial process. (See ECF No. 204-1 at 3–6) 8 (citing In re Daily, 47 F.3d 365 (9th Cir. 1995)). 9 Some exceptions exist to the general rule that issue preclusion does not apply to 10 federal court default judgments. The bankruptcy court in In re Daily allowed the FDIC to 11 use a district court default judgment to establish a nondischargeability claim against the 12 debtor. 47 F.3d 365 (9th Cir. 1995). The Ninth Circuit affirmed the use of issue preclusion; 13 however, the Ninth Circuit explicitly noted that the judgment entered in the case was not 14 an ordinary default judgment. Id. at 368–69. Instead, the District Court had issued the 15 default judgment as a sanction against the debtor for deliberate abuse of the judicial 16 process. Id. Specifically, the Court found that Daily actively participated in the adversary 17 process for almost two years prior to the FDIC’s Motion for Default Judgment and did not 18 simply give up. Id. at 368. As the bankruptcy court observed, “Daily had a full and fair 19 opportunity to litigate the allegations contained in the [RICO complaint] but [instead] . . . 20 chose not to participate in the discovery process and pre-trial proceedings[, and to] 21 frustrate[ ] and thwart [ ] the FDIC’s trial preparation[ ] and def[y] the [o]rder of the United 22 States District Court compelling discovery.” Id. 23 The holding in Daily is a limited one. The “actual litigation” requirement may be 24 satisfied where a party deliberately precludes resolution of factual issues by obstructing the 25 normal adjudicative process. See id. The Ninth Circuit indicated that “[a] party who 26 deliberately precludes resolution of factual issues through normal adjudicative procedures 27 may be bound in subsequent and related proceedings involving the same parties and issues, 28 by a prior judicial determination reached without completion of the usual process of 1 adjudication.” Id. at 368. In such a case, the “actual litigation” requirement may be 2 satisfied by “substantial participation in an adversary contest in which the party is afforded 3 a reasonable opportunity to defend himself on the merits but chooses not to do so.” Id. 4 Plaintiffs assert that the allegations in the SEC complaint, as recited in their motion, 5 regarding Ettore’s role in Lee’s complex security fraud scheme are within the scope of the 6 default judgement sanction as having been “actually litigated” and therefore conclusively 7 decided. (See ECF No. 204-1 at 3–7.) The issue before that Court is in which, if any, of 8 the factual allegations in the SEC complaint did Ettore substantially participate and 9 deliberately preclude resolution through the normal adjudicative procedures. 10 On November 20, 2014, in the SEC case, the parties filed Joint Motion for 11 Withdrawal of Relief Defendant Larissa Ettore’s Answer and for Entry of Default. (14- 12 cv-00347-LAB-BGS, ECF No. 40.) As part of this Joint Motion, Ettore admitted that she 13 had not fully responded to discovery, withdrew her answer, and assented to the entry of 14 default against her. (Id. at 2.) 15 On March 17, 2015, the SEC filed its Motion for Default Judgment. (See 14-cv- 16 00347-LAB-BGS, ECF No. 46.) On May 4, 2015, the Defendants’ filed their Opposition 17 to the SEC’s Motion for Default Judgment, where Ettore disputed the amount of the ill- 18 gotten gains. (See 14-cv-00347-LAB-BGS, ECF No. 56.) Ettore requested “this Court to 19 reduce her disgorgement obligation by $263,086.17, and limit her personal liability as 20 [R]elief [D]efendant to $79,708.25.” (Id. at 7–8.) As to Lee’s liability, the Relief 21 Defendants’ position was that there was “no evidence produced by the SEC that shows that 22 the SEC-styled ‘[R]elief [D]efendants’ bear any culpability in the offense for which Lee 23 plead guilty. The [R]elief [D]efendants in this case find themselves in this position based 24 solely upon their relationship to him.” (Id. at 16.) Thereafter, Ettore filed a Declaration in 25 Opposition to the SEC’s Motion for Default Judgement. (14-cv-00347-LAB-BGS, ECF 26 No. 57-2.) In that declaration, Ettore denied knowledge of Lee’s fraudulent scheme, and 27 claimed she borrowed and paid back $33,000.00 from ELX. (Id. at 2.) 28 /// 1 On March 7, 2016, Judge Burns issued an Order denying the SEC’s Motion for 2 Default Judgment. (14-cv-00347-LAB-BGS, ECF No. 65.) In that Order, Judge Burns 3 summarized the Defendants’ positions as follows: 4 Defendants filed a joint opposition to the motion for default judgment. The relief defendants argue both that they are not responsible for James Lee’s 5 wrongdoing, and also that the amount being sought from them is inflated. 6 Some ask that the disgorgement be reduced, and some ask that they not be ordered to disgorge anything. They also argue that, because there was no 7 scienter on their part, they be relieved of any obligation to pay prejudgment 8 interest. In short, some of them are willing to pay some of the requested disgorgement, but not all of it. The opposition denies James Lee’s liability and 9 asks that the Court not award a civil penalty or prejudgment interest. 10 (Id. at 2.) Additionally, Judge Burns noted that Ettore asked that her disgorgement 11 obligation “be reduced by over $260,000 and her personal liability be limited to just under 12 $80,000.” (Id. at 4.) 13 In sum, the only factual issue Ettore disputed in her opposition was the amount of 14 money she received from Lee to which she was not entitled under the unjust enrichment 15 claim. Ettore did not dispute that Lee was involved in a scheme to defraud. Ettore only 16 disputed whether she knew of it when she received the money from Lee.1 17 On December 6, 2016, this Court issued its Report and Recommendation (“R&R”) 18 that recommended terminating sanctions in the SEC case, which laid out the sanctionable 19 conduct committed by Ettore. (See 14-cv-00347-LAB-BGS, ECF No. 99.) In that R&R, 20 the Court summarized the discovery upon which the sanction was granted: 21 On March 7, 2016, the Honorable Judge Burns denied Plaintiff’s Motion for 22 Default against the Relief Defendants in this case. Shortly thereafter, the parties contacted the Court to discuss the need to reopen discovery. (ECF No. 23 69.) The parties agreed on a limited reopening of discovery, and filed a Joint 24 Motion so stating. (ECF No. 71.) This Joint Motion specified that the parties could serve Rule 34 document requests limited to the issue of disgorgement 25 for the Relief Defendants and the anticipated deposition testimony of Relief 26
27 1 Ettore’s intent is not an element of the Plaintiffs’ claim against her, rather an affirmative defense. (See ECF Nos. 46-1 at 29–30; 56 at 7–8.) 28 1 Defendants Ettore, Gatchalian and Clayton Lee. (ECF No. 71 at 5.) The Joint Motion also allowed for the depositions of the Relief Defendants. (Id.) The 2 Court granted this Joint Motion and set forth deadlines for the completion of 3 discovery. (ECF No. 72.) 4 (14-cv-00347-LAB-BGS, ECF No. 99 at 2.) Specifically, the parties agreed, “[g]iven 5 Defendant Lee’s stipulation and anticipated settlement, the parties jointly submit that the 6 trial in this matter should be limited to a bench proceeding to determine the amount, if any, 7 of equitable disgorgement to be imposed on the Relief Defendants.” (14-cv-00347-LAB- 8 BGS, ECF No. 71 at 4) (emphasis added). 9 On January 12, 2017, Judge Burns adopted this Court’s R&R and ordered the 10 terminating sanction of default judgment. (14-cv-00347-LAB-BGS, ECF No. 101.) In that 11 Order, Judge Burns indicated that he had previously denied the SEC’s Motion for Default 12 Judgment, noting that the Relief Defendants had appeared and were actively trying to 13 defend. (Id. at 3.) Judge Burns stated that the parties then agreed to reopen discovery, 14 “and their request for limited discovery was granted.” (Id.) (emphasis added). But instead 15 of cooperating, the Relief Defendants began engaging in tactics that can only be called 16 obstructionist, which are outlined in detail in the R&R. (Id.) The tactics included, among 17 other things, Relief Defendants’ refusal to comply with discovery requests, their 18 disobedience to the Court’s orders, and their refusal to attend either their own depositions 19 or the mandatory settlement conference. (Id.) 20 The “actual litigation” requirement may be satisfied by substantial participation in 21 an adversary contest where a party was afforded the reasonable opportunity to defend 22 herself or himself on the merits, but chooses not to. See In re Daily, 47 F.3d at 36. In 23 determining whether a party actively participated in litigation for purposes of issue 24 preclusion, cases consider the nature and extent of participation in the litigation by the party 25 against whom issue preclusion is to be invoked. In re Child, 486 B.R. 168, 174 (B.A.P. 26 9th Cir. 2013) (citations omitted). Various factors that are considered are “whether a party 27 (i) answers the complaint, (ii) files pleadings such as motions or oppositions, (iii) appears 28 and participates at hearings, conferences and trials, (iv) engages in discovery, and (v) is 1 represented by counsel.” Id. 2 In the SEC case, Ettore withdrew her Answer to the Complaint before she filed an 3 Opposition to the SEC’s Motion for Default. (See 14-cv-00347-LAB-BGS, ECF Nos. 40, 4 43, 44, 46, 56 at 2.) Although represented by counsel, Ettore limited her participation in 5 the adversary process to the Court’s determination to the amount, if any, of equitable 6 disgorgement to be imposed on the Relief Defendants. (See 14-cv-00347-LAB-BGS, ECF 7 No. 71 at 4–5.) After the Court’s order granting limited discovery in this issue, Ettore did 8 not file any other pleadings or motions concerning her disgorgement liability. No trial was 9 held nor were there any hearings on this issue. 10 In sum, the only part of the adversary process to which Ettore deliberately precluded 11 resolution was the amount of money she received under the SEC’s unjust enrichment claim 12 against her. As such, the Court finds that her substantial participation in the litigation 13 involved the amount of her disgorgement, not her role in Lee’s fraudulent scheme. This 14 issue was the only part of the adversary process in which Ettore was afforded a reasonable 15 opportunity to defend, and therefore is deemed to have been “actually litigated” under In 16 re Daily.2 17 The doctrine of issue preclusion prohibits relitigating issues that have been 18 adjudicated in a prior action. Lopez v. Emergency Serv. Restoration, Inc. (In re Lopez), 19 367 B.R. 99, 104 (B.A.P. 9th Cir. 2007). “The party asserting issue preclusion bears the 20 burden of proof as to all elements and must introduce a sufficient record to reveal the 21 controlling facts and the exact issues were litigated.” In re Kirkland, No. ADV.03-01086, 22 2008 WL 8444824, at *7 (B.A.P. 9th Cir. 2008) (citing Kelly v. Okoye (In re Kelly), 182 23 B.R. 255, 258 (B.A.P. 9th Cir. 1995)). The Court finds that the Plaintiffs, relying on the 24
25 2 As noted in the Prong 1 analysis, Lee’s scheme to defraud investors in the SEC case and the present 26 case are substantially identical and material in both the SEC’s disgorgement claim and the NRS § 90.660(4) claim against Ettore. However, the Court finds Lee’s fraudulent scheme was not “actually 27 litigated” in the SEC case since Ettore did not dispute this issue, and therefore was not part of the adversary process. As such, Ettore did not deliberately preclude its resolution, nor was she afforded a 28 1 In re Daily exception, have met their burden under the “actually litigated” prong, only as 2 to the disgorgement amount that Ettore received from Lee to which she was not entitled.3 3 (See 14-cv-00347-LAB-BGS, ECF No. 103 at 3.) 4 C. Prong 3 5 Prong 3 requires a determination of the issues in the prior litigation that must have 6 been a critical and necessary part of the judgment in the earlier action. See Figueroa, 45 7 F.3d at 315. The general rule is that in order to justify invoking collateral estoppel, a factual 8 determination must have been “necessarily” (and not “presumably”) decided in the first 9 proceeding. Pettaway v. Plummer, 943 F.2d 1041, 1044 (9th Cir. 1991) (although 10 “[d]iscussion of the necessity prong of collateral estoppel analysis is usually framed in 11 terms of determinations that were necessary to the ‘judgment’ or the ‘verdict’ [. . .] [t]he 12 primary purpose of the rule [. . .] is to ensure that the finder of fact in the first case took 13 sufficient care in determining the issue.”); Hernandez, 572 F.2d at 220; see also 18 14 CHARLES A. WRIGHT, ARTHUR R. MILLER & EDWARD H. COOPER, FEDERAL PRACTICE AND 15 PROCEDURE: JURISDICTION § 4421 (3d ed. 1981). 16 The material issues argued by the Plaintiffs in the present case regarding whether 17 Ettore was an agent and/or officer of Lee and whether she materially aided Lee in his fraud 18 scheme and/or his unlicensed sale of securities, were not present in the SEC case. (See 19 ECF No. 204-1 at 5–7; see also 14-cv-00347-LAB-BGS.) Whether Ettore was an agent of 20 Lee when she received these funds, or whether her receiving these funds materially aided 21 in Lee’s scheme, were not necessary and critical issues in the SEC case. The critical and 22 necessary issue in the SEC case was whether she received ill-gotten gains from Lee to 23 which she was not entitled. 24 /// 25
26 3 The other selected sections of the SEC complaint cited by the Plaintiffs were not the subject of the 27 limited discovery to which the Court found that Ettore deliberately precluded resolution. The discovery sanction order dealt with Ettore’s conduct during the limited discovery to address the amount of 28 1 Plaintiffs take the view that Judge Burns’ disgorgement sanction for Ettore’s 2 obstructive and bad faith conduct also included factual findings that decided the 3 relationship between Ettore and Lee and the shell corporations, and how Lee manipulated 4 the victims and shielded illicit gains from the view of regulators with Ettore’s support. 5 (ECF No. 215 at 4–5.) In support of this argument, Plaintiffs cite to facts alleged in the 6 SEC complaint which detail Lee’s fraudulent scheme and how Ettore, acting as his agent, 7 aided his fraudulent scheme. (ECF No. 204-1 at 3–5.) 8 Thus, the issue presented is whether Judge Burns necessarily, and not presumably, 9 decided these factual allegations in the SEC case. Judge Burns’ Final Order of 10 Disgorgement in the SEC case, (14-cv-00347-LAB-BGS, ECF No. 103), stemmed from 11 another Order adopting this Court’s R&R, (See 14-cv-00347-LAB-BGS, ECF Nos. 99, 12 101), which recommended terminating sanctions for discovery abuses. In this Order, Judge 13 Burns adopted the R&R’s factual findings, which included the case’s procedural history 14 and the parties’ behavior. (14-cv-00347-LAB-BGS, ECF No. 101 at 2.) Judge Burns 15 indicated that “[t]he R&R’s factual findings, including its findings concerning the case’s 16 procedural history and the parties’ behavior, appear to be correct, and the Court ADOPTS 17 them.”4 (14-cv-00347-LAB-BGS, ECF No. 101 at 2.) Judge Burns’ only reference to 18 Ettore’s role in Lee’s fraud provides: 19 This case concerns a fraudulent investment scheme by James Y. Lee, who has already pled guilty to obstructing justice and securities fraud, and now 20 incarcerated. It is one of three related cases. In case 14cv1737, SEC v. Lee, as 21 well as in this case, judgment has been entered against Lee. He is facing default judgment in another related case, 14cv542, Ayers v. Lee. Relief 22 Defendants have or have had close and ongoing associations with Lee. 23 According to the complaint, Lee diverted significant assets to them; this action seeks disgorgement of those assets. 24 (Id.) Judge Burns then granted the SEC’s motion for terminating sanctions for the Relief 25 Defendants’ conduct described or adopted therein. (Id. at 3–4.) 26
27 4 The R&R did not make any factual findings regarding Ettore’s role in the scheme, nor her involvement 28 1 Nowhere in this Adoption Order did Judge Burns include factual findings that 2 decided the relationship between Ettore and Lee and the shell corporations, and how Lee 3 manipulated the victims and shielded illicit gains from the view of regulators with Ettore’s 4 support. (See 14-cv-00347-LAB-BGS, ECF No. 101.) Further, the SEC’s Motion for 5 Sanctions does not recite any of these Complaint allegations in support of their Motion for 6 Default Judgment. (See 14-cv-00347-LAB-BGS, ECF Nos. 46; 90.) The material and 7 critical issues for disgorgement that were necessary, and not presumptive, regarded the 8 amount of money Ettore received from Lee’s securities fraud scheme. (See 14-cv-00347- 9 LAB-BGS, ECF Nos. 101; 103.) Judge Burns did not make any factual findings as to 10 Ettore’s role in Lee’s scheme and to what extent, if any, she materially aided him in that 11 scheme. (Id.) At most, Judge Burns’ final judgment of disgorgement included a finding 12 that Lee perpetuated a fraudulent investment scheme and that Lee diverted significant 13 assets to the Relief Defendants which came from this scheme. (See id.) Therefore, the 14 allegations cited by the Plaintiffs from the SEC complaint regarding Ettore acting as Lee’s 15 agent, as well as her role in materially aiding his fraudulent scheme, were not a critical or 16 necessary part of the final judgment of disgorgement. (See ECF No. 103 at 2–3.) 17 D. Court’s Broad Discretion 18 Notwithstanding the above analysis, the Court exercises its broad discretion to not 19 allow the use of offensive collateral estoppel as to the allegations in the SEC complaint 20 regarding Lee’s fraudulent scheme or Ettore’s role therein.5 Once an issue is actually and 21 necessarily determined by a court of competent jurisdiction, under the doctrine of collateral 22 estoppel, “that determination is conclusive in subsequent suits based on a different cause 23 of action involving a party to the prior litigation.” Montana v. U.S., 440 U.S. 147, 153 24 (1979). Applying res judicata and collateral estoppel is “central to the purpose for which 25
26 5 Offensive non-mutual collateral estoppel arises when “a plaintiff seeks to estop a defendant from 27 relitigating an issue which the defendant previously litigated and lost against another plaintiff.” Appling v. State Farm Mut. Auto. Ins. Co., 340 F.3d 769, 775 (9th Cir. 2003). 28 1 civil courts have been established, the conclusive resolution of disputes within their 2 jurisdictions.” Id. Precluding parties from contesting matters where they already had a 3 “full and fair opportunity to litigate” protects their opposition from the “expense and 4 vexation attending multiple lawsuits, conserves judicial resources, and fosters reliance on 5 judicial action by minimizing the possibility of inconsistent decisions.” Id. at 153–54. 6 As this Court has already found, Ettore did not have a full and fair opportunity to 7 actual litigate the factual allegations cited by the Plaintiffs in the SEC complaint other than 8 the issue of the amount of disgorgement, for which she was sanctioned. Ettore was not 9 accorded a full and fair opportunity to litigate whether Lee was involved in a complex 10 securities fraud, whether she acted as Lee’s agent in that fraud, and whether she materially 11 aided him therein. Further, the Plaintiffs were not parties to the SEC action, and have not 12 spent any resources litigating that case. There is no apparent threat of them having to 13 expend resources on multiple lawsuits nor is there any possibility of inconsistent decisions, 14 since the final default judgement in the SEC case dealt solely with the issue of the 15 disgorgement amount due to unjust enrichment. 6 See Montana, 440 U.S. at 153–54. 16 In Parklane Hosiery Co., the Supreme Court outlined some potential hazards that 17 could arise if offensive issue preclusion were applied under inappropriate circumstances. 18 The Court described two basic purposes for issue preclusion: “protecting litigants from the 19 burden of relitigating an identical issue with the same party or his privy and [ ] promoting 20 judicial economy by preventing needless litigation.” Parklane Hosiery Co., 439 U.S. at 21 326. The Court recognized that these purposes might be disserved by the application of 22 offensive issue preclusion in some circumstances. Id. at 329–31. The Court cautioned that 23
24 6 The Court has found the disgorgement amount received by Ettore to have satisfied all three prongs of 25 the doctrine. However, even though such a finding was necessary to the Court’s final judgement in the SEC case (14-cv-00347-LAB-BGS, ECF No. 103), the Plaintiffs have not addressed whether this 26 finding is relevant to issues in the present case. Therefore, this issue is not before the Court and is best suited to be raised in a motion in limine. In any event, were it to be found relevant, the Plaintiffs would 27 not need to expend funds to relitigate this issue, which satisfies the purpose underlying the doctrine of issue preclusion. 28 1 || use of offensive issue preclusion may be unfair to some defendants. 2 This Court finds that these underlying purposes of offensive issue preclusion are 3 || disserved by its application to the present case. In sum, given the reasons stated above, 4 ||imposition of the doctrine would be unfair to Ettore. 5 CONCLUSION 6 Plaintiffs’ Motion Regarding the Issue Preclusive Effect of Facts and Conclusions 7 Law in SEC v. Lee is GRANTED IN PART as addressed herein. 8 IT IS SO ORDERED. 9 || Dated: October 23, 2020 p / / 10 on. Bernard G. Skomal 11 United States Magistrate Judge 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28