United States District Court, District of Columbia
A. HOWELL, Chief District Judge.
United States Securities and Exchange Commission
("SEC") initiated this action, under the Securities
Exchange Act of 1934 ("Exchange Act"), against
three defendants, China Infrastructure Investment Corporation
("CIIC"), Li Xipeng, Chief Executive Officer
("CEO") and Chairman of CIIC, and Wang Feng,
Corporate Secretary of CIIC. Corrected Compl. ("Corr.
Compl.") Â¶Â¶ 11, 16-17, ECF No. 3. The Corrected
Complaint alleges that over the course of six weeks, the
defendants submitted three filings to the SEC, and one letter
to NASDAQ, which falsely represented that a person named Li
Lei was the Chief Financial Officer ("CFO") of the
defendant CIIC, despite the fact that he had resigned.
Id. Â¶Â¶ 37-46. Shortly after the initiation of this
action, the defendants stopped paying fees to and
communicating with defense counsel, failed to respond to the
SEC's discovery requests, and ignored several of this
Court's Orders compelling compliance with the
defendants' obligations under the Federal Rules of Civil
Procedure. The SEC now seeks default judgment pursuant to
Federal Rules of Civil Procedure 16(f) and 37(b)(2)(A)(vi).
See Pl.'s Mot. Default J. Against Defs. CIIC,
Xipeng, and Fang ("Pl.'s Mot."), ECF No. 21;
Pl.'s Mem. Supp. Default J. Against Defs. CIIC, Xipeng,
and Fang ("Pl.'s Mem."), ECF No.
21-1. For the reasons discussed below,
default judgment is granted.
below is the factual and procedural background of this case.
The background is based on the allegations in the Corrected
Complaint, as supplemented by the SEC's declaration and
facts deemed admitted pursuant to this Court's October
27, 2015 Minute Order. See Min. Order (Oct. 27,
2015) ("Oct. 27, 2015 Min. Order"); Decl. of
Stephen J. Schlegelmilch in Supp. Pl.'s Mot. for Default
J. Against Defs. CIIC, Xipeng, and Fang (Nov. 23, 2015)
("Schlegelmilch Decl. Supp. Default J."), Exs. 2-4
(the "CIIC Admis., " "Xipeng Admis., "
and "Feng Admis., " respectively), ECF Nos.
defendant CIIC, a Nevada corporation, is headquartered in
Zhengzhou, Henan Province, The People's Republic of
China. Corr. Compl. Â¶ 15. "Through a series of holding
companies, " including Pingdingshan Pinglin Expressway
Co., Ltd., CIIC "owns and operates" a "portion
of the Pinglin Expressway" in China. Id.
"CIIC is registered with the [SEC] under Section 12(g)
of the Exchange Act, " and "CIIC stock was traded
on the NASDAQ stock exchange from 2008 until it was delisted
on February 17, 2012." Id. The defendant Xipeng
is a fifty-one-year-old Chinese national and resident, who
has served as both the CEO and Chairman of CIIC since 2008.
Id. Â¶ 16. Xipeng owns fifty percent of the stock of
Joylink Holdings Limited, which owns eighty-five percent of
the voting stock of CIIC. Id. Â¶Â¶ 15-16. This makes
Xipeng "the largest beneficial owner of CIIC
stock." Id. During this period, "Xipeng
had control over CIIC business decisions and influenced votes
on CIIC's Board of Directors." Id. Â¶ 27.
The defendant Feng is a forty-one-year-old Chinese national
and resident, and since 2008, he has served as the Corporate
Secretary of CIIC. Id. Â¶ 17. His role "included
getting the signatures of CIIC officers on SEC-required
filings and correspondence." Id. Â¶ 27.
September 9, 2010, NASDAQ notified CIIC that its common stock
had failed to maintain the required $1.00 minimum bid
price" and gave CIIC "180 days to regain
compliance, followed by a second 180-day period."
Id. Â¶ 26. A year later, on September 7, 2011, NASDAQ
issued a decision to delist CIIC and the company appealed.
Id. Â¶ 29. NASDAQ then scheduled a hearing for
October 27, 2011 and requested additional information,
including "the accounting treatment of certain
non-performing loans in which Xipeng had a financial
interest." Id. Both the defendants Xipeng and
Feng "knew that NASDAQ had decided to delist CIIC for
failure to maintain a minimum share price of at least $1.00,
and they knew that the company was appealing the delisting
decision." Id. Â¶ 6.
to the NASDAQ delisting decision and appeal, Lei, who is not
a party to this action, was appointed to the position of CFO
of CIIC, effective June 27, 2011. Id. Â¶Â¶ 2, 28. Lei
also served as a member of CIIC's Board of Directors.
Id. Â¶ 28. Only three months after he was hired, on
September 21, 2011, Lei resigned from all of his positions at
CIIC, effective immediately, in a letter to the defendant
Xipeng citing "personal reasons." Id. Â¶Â¶
2, 30; Schlegelmilch Decl. Supp. Default J. Â¶ 12; see
also CIIC Admis., No. 3; Xipeng Admis., No. 3; Feng
Admis., No. 3. Lei also sent an e-mail communicating his
resignation to the defendant Feng, the Independent Director
on the defendant CIIC's audit committee, CIIC's
outside auditor, and its legal counsel, the Crone Law Group,
resigning his positions. Corr. Compl. Â¶ 30; see also
Schlegelmilch Decl. Supp. Default J., Ex. 6, ECF No. 22-6.
response to Lei's resignation, that same day, the
Independent Director e-mailed Lei, copying the defendant
Feng, to report that "legal counsel had advised him that
CIIC needed to file a Form 8-K disclosing Lei's
resignation by the following Tuesday (September 27)."
Corr. Compl. Â¶ 31; see also Schlegelmilch Decl.
Supp. Default J., Ex. 6. Feng asked the Independent Director
to tell the legal counsel not to act, stating: "We will
have an internal discussion first." Corr. Compl. Â¶ 32.
On September 23, "the Independent Director emailed Feng
with a proposed resolution of the Board of Directors
appointing an interim CFO" and reminding the defendant
Feng of the need to file the Form 8-K with the SEC.
Id. Â¶ 33. On September 26, 2011, "Feng told the
Independent Director that Lei had decided to continue as CFO
until the Form 10-K was filed." Id. Â¶ 36;
see also Feng Admis., No. 26. The next day, Feng
sent an e-mail to the Independent Director, the outside
auditor, and defendant CIIC's other legal
counsel, Loeb & Loeb LLP ("Loeb"), writing falsely
that the "CFO is on sick leave in the hospital."
Corr. Compl. Â¶ 36; see also Feng Admis., Nos. 27-28.
That same day, CIIC terminated its relationship with the
Crone Law Group. Corr. Compl. Â¶ 35.
September 30, 2011, "CIIC sent a letter to NASDAQ
responding to its request for additional information."
Id. Â¶ 37; Schlegelmilch Decl. Supp. Default J., Ex.
7 ("NASDAQ Letter"), ECF No. 22-7. Despite the fact
that Lei had resigned the week prior, "Lei's
electronic signature was on the letter." Corr. Compl. Â¶
37; NASDAQ Letter at 2. "Lei did not sign the document,
nor did he authorize the use of his signature." Corr.
Compl. Â¶ 37; see also CIIC Admis., Nos. 29, 32.1,
31-32.2; Xipeng Admis., Nos. 29, 32.1, 31-32.2; Feng Admis.,
Nos. 29, 32.1, 31-32.2. On October 27, 2011, NASDAQ held the
scheduled hearing, and on February 17, 2012, issued its final
decision delisting the defendant CIIC. Corr. Compl. Â¶ 38.
October 10 and November 14, 2011, CIIC sent Weinberg and Co.,
P.A. ("Weinberg"), the company's the principal
auditor, "management representation letters in
connection with the June 30, 2011 audit and the September 30,
2011 first quarter review." Id. Â¶ 39;
Schlegelmilch Decl. Supp. Default J., Exs. 8-9 ("Oct.
10, 2011 Letter" and "Nov. 14, 2011 Letter, "
respectively), ECF Nos. 22-8-22-9. The representation letters
contained the defendant Xipeng's handwritten signature
and Lei's forged signature. Corr. Compl. Â¶ 39; Oct. 10,
2011 Letter at 6; Nov. 14, 2011 Letter at 4. "Again, Lei
did not sign the document, nor did he authorize the use of
his signature." Corr. Compl. Â¶ 39; see also
CIIC Admis., Nos. 36-43; Xipeng Admis., Nos. 36-43; Feng
Admis., Nos. 36-43. Further, these letters "contained
the material misrepresentation that the signatories had no
knowledge of any fraud affecting CIIC by management and that
there had been no violations of laws or regulations whose
effect should be considered for disclosure in the
consolidated financial statements." Corr. Compl. Â¶ 40;
Oct. 10, 2011 Letter at 2-3; Nov. 14, 2011 Letter at 2-3.
relied on the October 10, 2011 representation letter"
signed by the defendant Xipeng and (purportedly) Lei in
conducting the audit of "CIIC's consolidated
financial statements" for the 201110-K filed on October
13, 2011. Corr. Compl. Â¶ 41; Schlegelmilch Decl. Supp.
Default J., Ex. 10 ("Form 10-K"), ECF No. 22-10.
Additionally, Weinberg relied on CIIC's representation
letter in connection with "its review of CIIC's
condensed consolidated interim financial statements contained
in CIIC's first quarter 2012 Form 10-Q, which was filed
along with its Form 10-K/A for 2011, on November 14,
2011." Corr. Compl. Â¶ 41; Schlegelmilch Decl. Supp.
Default J., Exs. 11-12 ("Form 10-Q" and "Form
10-K/A, " respectively), ECF Nos. 22-11-22-12.
Form 10-K, Form 10-Q, and Form 10-K/A filed with the SEC
contained Xipeng's signature and the forged signature of
Lei. See Corr. Compl. Â¶ 42; Form 10-K at 70;
Form 10-Q at 55; Form 10-K/A at 6; see also CIIC
Admis., Nos. 12-24; Xipeng Admis., Nos. 12-24; Feng Admis.,
Nos. 12-24. These filings "failed to disclose that: (1)
Lei had resigned as CFO at the time of the filings, (2) CIIC
had no CFO at the time of the filings, and (3) Lei had not
authorized the use of his signature as CFO of CIIC."
Corr. Compl. Â¶ 42; see, e.g., Form 10-K at 52
(listing Li Lei as the Chief Financial Officer and Director).
The "omissions were material in that any reasonable
investor would have considered the omitted information as
significantly altering the total mix of available information
about CIIC." Corr. Compl. Â¶ 42.
all of these filings with the SEC contained the defendant
Xipeng's signature, see Form 10-K at 70; Form
10-Q at 55; Form 10-K/A at 6, and thus "represented,
falsely that: (1) CIIC had a CFO at the time of the filings,
(2) Lei was the CFO at the time of the filings, (3) Lei had
authorized his signature on the filings, and (4) the CFO had
concluded that CIIC's internal control over financial
reporting as of June 30, 2011, was effective." Corr.
Compl. Â¶ 43. "At the time Xipeng signed CIIC's Forms
10-K, 10-K/A, and 10-Q, Lei had not been performing any
duties as a CFO or member of the Board of Directors" and
"Xipeng knew, or was reckless in not knowing, that Lei
had resigned as CFO and that the [f]ilings falsely portrayed
CIIC as having a CFO." Id. Â¶Â¶ 44-45; see
also Xipeng Admis., Nos. 3-17, 31-32.1, 45, 47, 49.
Finally, without his authorization, Lei's electronic
signature was placed on the Officer's Certifications in
each of these filings, as required by the Sarbanes-Oxley Act
of 2002. Corr. Compl. Â¶Â¶ 5, 46; Form 10-K at 112, 115; Form
10-Q at 58, 60; Form 10-K/A at 9, 12; see also CIIC
Admis., Nos. 51-52; Xipeng Admis., Nos. 51-52; Feng Admis.,
November 28, 2011, Lei contacted the Independent Director for
the first time since his resignation. By e-mail, Lei informed
the Independent Director that he "found his name in
CIIC's Yahoo! Finance company profiles as CIIC's CFO
and director." Corr. Compl. Â¶ 47. Further, Lei stated
that, after his resignation, he had not spoken with the
defendant Xipeng. Id. Lei wrote to the Independent
Director, "I just wonder if you guys have officially
processed my resignation. My name should not be there and
should not be attached to the company." Id.
receiving this e-mail, the Independent Director telephoned
the defendant Feng, who "admitted forging Lei's
signature on the Forms 10-K and 10-Q" because "he
did not want bad publicity from the CFO's resignation
during the NASDAQ inquiry and annual report filing."
Id. Â¶ 48; see also CIIC Admis., No. 53;
Xipeng Admis., No. 53; Feng Admis., No. 53. "Feng told
the Independent Director that Xipeng knew of Lei's
resignation but did not accept it." Corr. Compl. Â¶ 48.
"The Independent Director recommended to Feng that Feng
resign." Id. Â¶ 49.
the Independent Director called CIIC's legal counsel,
Loeb, and reported Feng's admitted forgery. Id.
Â¶ 50. On December 16, 2011, Loeb filed a Form 8-K with the
SEC on behalf of CIIC stating that "Lei resigned on
September 21, 2011, and although the Company did not accept
Mr. [Lei's] Resignation, Mr. [Lei] did not continue to
perform his duties as [CFO].'" Id. Â¶ 51
(quoting Schlegelmilch Decl. Supp. Default J., Ex. 13
("Form 8-K"), ECF No. 22-13). The Form 8-K further
represented that "the Board learned on December 15 that
CIIC's Form 10-K, 10-K/A and 10-Q, all of which bear
Lei's purported signature, had not been prepared,
reviewed, signed or authorized by Lei." Corr. Compl. Â¶
52. CIIC was delinquent in paying Loeb's fees but
nevertheless Loeb was tasked with conducting an internal
investigation, which never took place. Id. Â¶ 53.
Loeb filed the Form 8-K on December 16, 2011, CIIC has been
"delinquent in its filings, which is itself a violation
of the securities laws." Id. Â¶ 10;
Schlegelmilch Decl. Supp. Default J. Â¶ 16 (declaring that the
October 13, 2011 Form 10-K and the November 14, 201110-Q were
the last Form 10-K and Form 10-Q filed on behalf of defendant
CIIC as of November 20, 2015).
March 3, 2015, the SEC filed this lawsuit against the
defendants, alleging eight counts of securities fraud,
namely, that: (1) the defendants CIIC, Xipeng, and Feng
violated the Exchange Act Section 10(b) and Rule 10b-5; (2)
the defendant CIIC violated the Exchange Act Section 13(a)
and Rules 12b-20, 13a-1 and 13a-13; (3) the defendants Xipeng
and Feng aided and abetted violations of the Exchange Act
Section 10(b) and Rule 10b-5; (4) the defendants Xipeng and
Feng aided and abetted violations of the Exchange Act Section
13(a) and Rules 12b-20, 13a-1 and 13a-13; (5) the defendants
Xipeng and Feng violated the Exchange Act Rule 13b2-2; (6)
the defendant Xipeng violated the Exchange Act Rule 13a-14;
(7) the defendant Feng aided and abetted violations of the
Exchange Act Rule 13a-14; and (8) the defendant Xipeng is
liable as a "control person" under the Exchange Act
Section 20(a). Corr. Compl. Â¶Â¶ 54-81; see also
Compl., ECF No. 1.
March 20, 2015, pursuant to the SEC's ex parte
motion, Pl.'s Mot. For Leave to Serve Defs. Xipeng and
Feng by Alternative Means, ECF. No. 5, the SEC was granted
leave to serve the Corrected Complaint, Summons, and Standing
Order on the defendants Xipeng and Feng, both residents of
China, by alternative means. Order (March 20, 2015)
("March 20, 2015 Order") at 2, ECF No. 6. Defendant
CIIC was subsequently served on March 23, 2015, by serving
Gateway Enterprises, Inc., CIIC's registered agent.
Notice of Service on Def. CIIC, ECF No. 8. The defendants
Xipeng and Feng were served, in accordance with the
Court's March 20, 2015 Order, on March 26, 2015, by
e-mail and by serving Gateway Enterprises, Inc. Decl. of
Stephen J. Schlegelmilch in Supp. of Pl.'s Notice of
Service by Alternative Means Â¶Â¶ 2-9, ECF No. 7-1.
April 15, 2015, counsel entered an appearance for the
defendant CIIC and filed an answer on its
behalf. Notice of Appearance, ECF. No. 9;
Answer ("CIIC Answer"), ECF No. 10. The defendants
Xipeng and Feng filed their answer on April 29, 2015.
See Answer ("Xipeng and Feng Answer"), ECF
No. 12. Thereafter, the parties submitted a Joint Meet and
Confer Report, ECF No. 13, and on June 2, 2015, the Court
entered a Scheduling Order requiring Rule 26 disclosures to
be exchanged by June 16, 2015, any additional parties to be
joined, and any pleadings to be amended, no later than June
16, 2015, and all discovery to be closed by June 1, 2016.
Min. Order (June 2, 2015) ("June 2, 2015 Min.
Order"). As required, the defendants filed their Rule 26
disclosures on June 16, 2015. Defs.' Initial Disclosures
Pursuant to Rule 26(a)(1), ECF No. 15.
that point forward, the defendants become unresponsive.
"On July 13, 2015, [the SEC] served by e-mail to the
defendants' counsel requests for admission,
interrogatories, and requests for production of
documents." Pl.'s Mot. Compel and Deem Admitted
Pl.'s Req. Admis. ("Pl.'s Mot. Compel") at
3, ECF No. 16; see also Decl. of Stephen M.
Schlegelmilch in Supp. of Pl.'s Mot. Compel and to Deem
Admitted Req. for Admis. ("Schlegelmilch Decl. Supp.
Mot. Compel") Â¶Â¶ 3-5, ECF No. 16-2. Included in this
discovery request were fifty-three requests for admission,
fewer than ten interrogatories, and seventeen requests for
production of documents to each defendant. Id., Exs.
2-4 (Xipeng); id., Exs. 5-7 (Feng); id.,
Exs. 8-10 (CIIC). The SEC also requested that the defendants
provide information regarding their availability for
depositions. Id., Ex. 11. The defendants'
counsel responded that "I have not heard from my clients
in a while and will update you on that status when I
can." Id., Ex. 12 at 1. The defendants failed
to respond to any of the discovery requests or to provide
deposition dates. Id. Â¶Â¶ 7-8. As a result, on August
27, 2015, the SEC moved to compel the defendants to respond
to its interrogatories and requests for production of
documents, and to deem admitted each of the SEC's pending
requests for admission. Pl.'s Mot. Compel, ECF No. 16.
same day, the defendants' counsel moved to withdraw due
to the defendants' "fail[ure] to honor their
continuing obligations under a written retainer
agreement." Mot. to Withdraw as Att'y Â¶ 2, ECF
No. 17. Over a week later, on September 11, 2015, counsel for
the defendants filed a response to the SEC's discovery
motion, requesting a stay of consideration of the SEC's
motion pending resolution of defense counsel's motion to
withdraw. Defs.' Resp. to Pl.'s Mot. Compel and Deem
Admitted Pl.'s Req. Admis., ECF No. 19. Counsel noted,