Stephenson v. El-Batrawi

524 F.3d 907 (8th Cir. 2008)

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Nature of the Case

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Facts

MJK Clearing, Inc. (MJK) was a securities clearing company that entered into stock-loan transactions involving GenesisIntermedia, Inc. (GENI) stock with reconciliation by 'marking to the market.' D was the CEO, chairman of the board, and a major stockholder in GENI. The GENI stock-loan scheme commenced in the summer of 1999. Deutsche Bank SL would give the brokers/dealers the cash collateral for the stock. The cash collateral would then pass down the chain through the other brokers/dealers until it reached the hands of D and Ultimate Holdings. As the GENI stock sat at Deutsche Bank SL, and thus out of public circulation, the perpetrators of the scheme would manipulate the price of the stock by offering the few remaining public shares. As the price of the stock increased, the brokers/dealers in the chain marked to market, sending more cash collateral down the chain to D and Ultimate Holdings. Following September 11, 2001, the GENI stock-loan scheme collapsed. Over $ 200 million in cash collateral was owed to MJK for the stock loans. MJK had an independent obligation to return the funds to the broker/dealer behind it in the chain. Unable to absorb this over $200 million loss, MJK contacted officials at the Federal Reserve Bank and almost immediately ceased operations. The entire liquidation proceeding was removed to the United States Bankruptcy Court. P brought an adversary proceeding in the Bankruptcy Court which was eventually transferred to the United States District Court. P served the complaint on D by first-class mail. Proof of service was filed. The amended complaint was served by first-class mail and the proof was filed. The mailings sent to the Beckman address were never returned. Copies of the summons and amended complaint were mailed by first-class mail to three additional addresses; each of these attempts was returned to P. D did not appear to defend. P filed for leave to serve D by publication. P served D by publication in the Los Angeles Times once a week for four consecutive weeks. D did not file or serve any pleading in response to the service by publication. P filed for entry of default against D, and the Clerk of Court entered default against D. In 2005, P reached a settlement with the Deutsche Bank SL. P claimed approximately $67.5 million in uncompensated damages remained. P filed a motion for default judgment against D and other defendants who did not participate in the Deutsche Bank SL settlement agreement. A week after the filing of the second motion for default judgment, but three and one-half years after service of the complaint and summons at the Beckman address, D made his first appearance in the case. D filed a motion to set aside the default that had been entered against him in 2003. D denied that he ever obtained actual notice and urged the district court to set aside the default against him, arguing he had meritorious defenses. Judgment was entered in the amount of $ 67.5 million against D and the remaining co-defendants, jointly and severally. D appealed.