(CN) - A federal appellate panel upheld a district court's default ruling against a tire shredding and recycling business which the Securities and Exchange Commission accused of fraudulently raising $7.2 million by touting spurious recycling technology.
Encore Associated Leasing LLC, based in Livonia, Mich., and founder Paul G. Merklinger convinced five investors between September 2006 and July 2007 they would see a return on their investment after five years, according to the SEC's complaint. Merklinger, they say, promised the return based on the leasing and operation of bogus tire shredding technology.
The U.S. District Court for the Eastern District of Michigan issued a default ruling in favor of the SEC, which sought disgorgement and civil penalties, when EAL failed to plead or defend against the complaint.
The default caused Merklinger to surface, the court granting his pro se motion to set it aside, allowing him to "file a motion to dismiss under Rule 12(b)(6) based on his defense that the EAL investments did not constitute 'securities' under federal securities law." The court, however, denied his motion for reconsideration, "asserting that the entry of default should be set aside without any conditions."
The court denied the motion, as well as Merklinger's motion as EAL President and CEO to dismiss. The court cited his lack of standing to bring such a motion on behalf of the company. After he failed to file a timely answer, the court granted the SEC's motion to reinstate the default ruling against Merklinger, who then filed an appeal with the 6th Circuit.
He claimed that the district court abused its discretion by "limiting his relief from the entry of default by only allowing him to file a Rule 12(b)(6) motion to dismiss and (2) the district erred in summarily dismissing the Rule 12(b)(6) motion for lack of standing."
A 6th Circuit per curiam panel said Merklinger claims he had other defenses available, that the district court ignored his medical issues and labeled him with malicious intent for failing to respond. But the appellate panel wasn't impressed.
"Merklinger's arguments lack merit because the district court's decision on setting aside the entry of default did not preclude him from raising other defenses or from otherwise defending against the SEC's claims," the panel wrote. "In the order denying Merklinger's motion for reconsideration, the district court specifically stated that Merklinger could raise other defenses in addition to his claim that the investments in EAL did not constitute 'securities.' More importantly, nothing in the district court's order foreclosed Merklinger from filing an answer to the complaint after the district court denied the Rule 12(b)(6) motion. We can discern no abuse of discretion."
The court also denied his challenge to the district courts lack of standing ruling.
"Regardless of whether Merklinger personally brought the Rule 12(b)(6) motion, the district court properly denied the motion because the SEC alleged sufficient facts to show that the investments at issue were 'securities,'" the panel said.