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Case 2:12-cv-05662-JGB-CW Document 66 Filed 04/15/13 Page 1 of 12 Page ID #:1161

Leslie J. Hughes, Colo. Bar No. 15043 Email: HughesLJ@sec.gov Nancy J. Gegenheimer, Cal. Bar. No. 235521 Email: GegenheimerN@sec.gov Securities and Exchange Commission 1801 California Street, Suite 1500 Denver, Colorado 80202 Telephone: (303) 844-1000 Fax: (303) 844-1068 Local Counsel: Donald W. Searles, Cal. Bar No. 135705 Email: SearlesD@sec.gov Securities and Exchange Commission 5670 Wilshire Boulevard, 11th Floor Los Angeles, California 90036-3648 Telephone: (323) 965-4573 Fax: (323) 965-3908 Attorneys for Plaintiff United States Securities and Exchange Commission UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA WESTERN DIVISION SECURITIES AND EXCHANGE COMMISSION, Plaintiff ) ) ) ) ) ) ) ) ) ) ) ) )

Case No. CV 12-5662 JGB (CWx) SEC REPLY IN SUPPORT OF APPLICATION FOR DEFAULT JUDGMENT AND OTHER RELIEF AGAINST GRUBER AND GRUBER & CO. Date: April 29, 2013 Time: 9:00 a.m. Courtroom 1 Judge: Hon. Jesus G. Bernal

v. Gold Standard Mining Corp., et al., Defendants.

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Plaintiff Securities and Exchange Commission (SEC) submits this reply in support of entry of default judgment against defendants Edward Randall Gruber (Gruber) and Gruber and Company LLC (Gruber & Co. and jointly defendants). After the clerk entered default against the defendants on August 10, 2012 (Dkt #17), the SEC moved for default judgment, a permanent injunction, and other relief against the defendants on February 4, 2013 (Dkt # 53). After the deadline to respond had passed, defendants counsel entered an appearance on February 28, 2013 (Dkt # 55), moved to set aside entry of the default, and filed a response to the application for default judgment on April 1, 2013 (Dkt # 58 & 59). In response to the motion for default judgment, defendants requested that the hearing on default judgment be considered at the same time as the motion to set aside default, which extension was granted (Dkt # 62). Defendants incorporated the arguments from their motion to set aside default into their response to the motion for default judgment. Plaintiff incorporates its response to the motion to set aside the default (Dkt # 64) into this reply. Defendants request to set aside the default and not to enter default judgment should be rejected because they failed to show good cause or excusable neglect for failing to answer the complaint. Defendants acted culpably in failing to respond, and present no facts demonstrating a meritorious defense. Defendants conceded liability when they failed to respond to the complaint. They have admitted the allegations that establish their violation of the anti-fraud and auditing provisions of the federal securities laws. Gruber presents no facts to support his statements that he conducted the audit in conformance with PCAOB auditing standard. Without facts, they do not present an issue of a litigable defense. The SEC will be prejudiced if the default is set aside, because Gruber and Gruber & Co. engaged in fraud and continue to audit financial statements of public companies which has the potential to harm public investors. In addition, further delay may result in the SEC being unable to obtain disgorgement of the

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defendants ill-gotten gains or civil penalties. Furthermore, defendants fail to address any of the factors the Court may consider in granting the permanent injunction, disgorgement or prejudgment interest, or civil penalties. For the reasons discussed below, the SEC respectfully requests that the defendants motion to set aside default be denied, and that default judgment, permanent injunction and other relief be granted. A. Defendants Have Not Demonstrated Excusable Neglect to Support Setting Aside Default. Defendants assert that their failure for more than seven months to answer the complaint was excusable neglect because Gruber believed settlement discussions were on going, citing Eitel v. McCool, 782 F.2d 1470 (9th Cir. 1986). Grubers belief about settlement discussions is not supported by the facts. He submitted no settlement offers or Wells Submission before the complaint was filed. Second Hughes Decl. 5, 6, Dkt # 64-1. SECs counsel advised defendants attorney, Mr. Vanderkam, that the SEC intended to file for the default on July 26, 2012. When Mr. Vanderkam stated he was not representing defendants in the litigation and had advised the defendants to hire other counsel, SEC counsel served the notice of service on defendants which stated the date the answer was due, and also a separate application for default was served directly upon the defendants. But they did not respond. There was no agreement to delay filing for default or default judgment because of any pending settlement discussions. Second Hughes Decl. 5, 6, 10-15. Default was entered on August 10, 2012. SEC counsel drafted and sent a settlement proposal to Mr. Vanderkam in September, the offer was rejected on October 12, 2012, and there were no further discussions. Mr. Vanderkam reiterated that he was not representing defendants in the litigation and had advised them to obtain counsel admitted to practice in California. Second Hughes Decl. 14-15. Grubers belief that the parties were

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engaged in settlement discussions is insufficient justification for failure to respond to the complaint. Franchise Holding, 375 F.3d at 926; Derek Andrew, Inc. v. Poof Apparel Corp., 282 Fed. Appx 554, 555, 2008 U.S. App. LEXIS 12878 (9th Cir. 2008); Cyan Contr. Corp. v. Natl Grange Mut. Ins. Co., 257 F.R.D. 626 (S.D.N.Y. 2009) (failure to complete settlement was not excusable neglect to allow relief under Rule 60(b)(1)) . Ignorance of ones legal obligation to respond to a complaint does not constitute the type of mistake or neglect that Rule 60(b)(1) excuses. See, e.g., United States v. Williams, No. 06-6362, 257 Fed. Appx. 65, 2007 U.S. App. LEXIS 26482, 2007 WL 3374806, at *2 (10th Cir. Nov. 14, 2007) (no relief under Rule 60(b)(1) for default due to taxpayer's decision to ignore IRS proceeding); see also Mazengo v. Mzengi, 542 F. Supp. 2d 96, 99 (D. D.C. 2008). The excuse of inability to locate acceptable counsel has also been rejected by multiple courts. Id. In December 2012, SEC counsel and other defense counsel who had entered appearances participated in a telephone conference and submitted a joint report under Fed. R. Civ. P. 26(f). The report stated that Gruber and Gruber & Co. did not participate in the conference and were in default. Second Hughes Decl. 17. Defendants did not respond to the joint report, hire counsel or enter an appearance. They received actual notice of the complaint and failed to answer; their conduct was culpable. Franchise Holding, 375 F.3d at 926. The standards for setting aside a default for good cause and setting aside a judgment for excusable neglect under Fed. R. Civ. P. 60(b) are the same. TCI Group Life Ins. Plan v. Knoebber, 244 F.3d 691, 697 (9th Cir. 2001) (overruled on other grounds, Egelhoff v. Egelhof ex rel. Breiner, 532 U.S. 141, 147-50 (2001). Gruber meets neither standard. Eitel identifies seven factors that courts consider in exercising discretion onas the entry of a default judgment: (1) the possibility of prejudice to the plaintiff, (2) the merits of plaintiff's substantive claim, (3) the sufficiency of the

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complaint, (4) the sum of money at stake in the action; (5) the possibility of a dispute concerning material facts; (6) whether the default was due to excusable neglect, and (7) the strong policy underlying the Federal Rules of Civil Procedure favoring decisions on the merits. Id., 782 F.2d at 1471-72. Gruber and Gruber & Co. have not demonstrated that they meet these factors to support a decision not to enter the default judgment. On the first Eitel factor, the SEC will be prejudiced if default judgment is not granted. If relief is denied, then fraudulent conduct of Gruber and Gruber & Co., which audits public companies, would remain unchecked and they would be free to pursue similar activities in the future, directly endangering the general public. SEC v. Abacus Intl Holding Corp., 2001 U.S. Dist. LEXIS 12635 * 9 (N.D. Cal. Aug. 15, 2001). On the second and third factors, the SEC alleged that Gruber and Gruber & Co. engaged in fraud when they falsely represented in an audit reported filed with the SEC and available to investors that they audited Gold Standards financial statements in accordance with PCAOB auditing standards and that the financial statements were prepared in conformance with generally accepted accounting principles (GAAP). Complaint 5, 6, 38, 39, 48-49, 54-57, 62-67, 71-74, 84-93, 103-112 (Dkt # 1). By failing to answer or otherwise defend, the defendants admitted the factual allegations of the complaint, except those relating to the amount of damages . . . . Geddes v. United Fin. Group, 559 F.2d 557, 560 (9th Cir. 1977) (citing Pope v. U.S., 323 U.S. 1, 12 (1944)); Televideo Sys. Inc. v. Heidenthal, 826 F.2d 915, 917 (9th Cir. 1987); SEC v. Interlink Data Network of Los Angeles, Inc., 1993 U.S. Dist. Lexis 20163 *27-28, 1993 WL 603274 (D.C. Cal. Nov. 15, 1993) (allegations admitted on a default, even though defendant granted two extensions to respond). The complaint sufficiently describes defendants violations of the federal securities laws and demonstrates the merits of the SECs claims. These three factors do not support defendants request not to enter default judgment.

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The fifth Eitel factor addresses the possibility of disputed issues of material fact. But defendants admitted the allegations of the complaint when the default was entered and those allegations establish the liability of Gruber and Gruber & Co. Grubers declaration, unsupported by specific facts, does not create a disputed issue of material fact. See e.g. SEC v. Platforms Wireless Intl Corp., 617 F.3d 1072, 1089 (9th Cir. 2010) (addressing disputed issues of fact under Fed. R. Civ. P. 56). For example, Gruber states he performed procedures to determine the Yukos appraisal was not unreasonable. (Gruber Decl. 14). But he presents no facts on how he complied with the auditing standards in PCAOB AU Section 336 for using the work of a specialist, like a mining appraiser. (Complaint 89) Similarly, Gruber states that he had procedures to verify that gold sales occurred and the company received the sales proceeds; that he obtained sufficient evidential matter to support the opinion. (Gruber Decl. 16, 21). But he does not identify the procedures he used to exercise due professional care, demonstrate how the procedures were carried out, or attach the information he purportedly received, such as confirmations from the banks that purchased the gold, to support his statements that he obtained evidential matter sufficient to validate the assertions in the financial statements. Defendants admitted they relied upon the representations of management about the amount of gold produced and sold, and did not obtain evidence from third parties to confirm managements representations. (Complaint 90). Gruber does not present evidence of disputed issues of material fact to support denial of the default judgment. The fourth Eitel factor considers the sum of money at stake. The SEC is seeking disgorgement of $111,784.24 in ill-gotten gains, $6,117.39 in prejudgment interests jointly and severally from Gruber and Gruber & Co., and a civil penalty of $150,000 from each of them. These amounts are proportionate to the seriousness of each defendants conduct. See Abacus Intl Holding Corp.,

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2001 U.S. Dist. LEXIS 12635 * 9 (seeking disgorgement of $170,000, $25,601 in prejudgment interest and $110,000 in civil penalties); see also Marcelos v. Dominguez, 2009 U.S. Dist. LEXIS 5306 *14 (N.D. Cal. 2009) (allowing $194,000 of damages under fourth prong of Eitel.) This factor does not support defendants request. On the sixth Eitel factor, defendants fail to demonstrate the default was due to excusable neglect. Unlike the facts in Eitel, Gruber presents no evidence that the parties were engaged in settlement negotiations that appeared to have reached a final agreement prior to the deadline for the answer. Eitel, 782 F.2d at 1472. While SECs counsel sent a proposal for discussion in September 2012 after default was entered, it was rejected and there were no agreements to forego default or default judgment. Second Hughes Decl. 14-15. The final Eitel factor is the policy of the Federal Rules of Civil Procedure favoring decisions on the merits. The mere existence of Fed. R. Civ. P. 55(b) indicates that the preference for resolution of cases on the merits, standing alone, is not dispositive. When a party fails to defend against an action and delays a decision on the merits, the policy does not preclude the Court from granting default judgment. Abacus, 2001 U.S. Dist. LEXIS 12635 * 9. As discussed in the SECs response to the motion to set aside the default, and after considering the Eitel factors, Gruber and Gruber & Co. have not met their burden of demonstrating that the court should not enter default judgment against them. B. The SEC Will Be Prejudiced If Default Judgment Is Rejected. The SEC, and the investors it protects, will be prejudiced if the motion for default judgment is rejected. First, the SEC has alleged that Gruber and Gruber & Co. committed fraud when they filed a false audit report representing they audited Gold Standards financial statement in accordance with PCAOB auditing standards and that the financial statements were prepared in conformance with

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GAAP. If relief is denied, then Gruber and Gruber & Co.s fraudulent conduct will remain unchecked and they will be free to pursue similar activities in the future, directly endangering the general public. SEC v. Abacus Intl Holding Corp., 2001 U.S. Dist. LEXIS 12635 * 9 (N.D. Cal. Aug. 15, 2001). Gruber & Co. continues to be a public accounting firm registered with the PCAOB, and Gruber remains a certified public accountant and its sole managing member. Denying the default judgment may also deny the SEC the remedies of disgorgement of defendants ill-gotten gains and civil penalties. Gruber has already walked away from a settlement with the PCAOB claiming an inability to escrow $100,000 to resolve the matter. Second Hughes Decl. 14. Defendants cites a Third Circuit case, Chamberlain v. Giampapa, 210 F.3d 154 (3rd Cir. 2000), for the proposition that the Court may deny entry of a default judgment if the plaintiff fails to demonstrate prejudice. However, the standard in the Ninth Circuit does not focus solely on prejudice to the plaintiff. The three factors considered to establish good cause for lifting a default under Fed. R. Civ. P. 55(c) are in the disjunctive. See Franchise Holding II, LLC. v. Huntington Rests. Group, Inc., 375 F.3d 922, 925-26 (9th Cir. 2004), cert. denied 544 U.S. 949 (2005); Falk v. Allen, 739 F.2d 461, 463 (9th Cir. 1984) (per curiam). As discussed in the SECs response to the motion to set aside the default, Gruber and Gruber & Co. have not met their burden of establishing good cause because they acted culpably in failing to respond to the complaint, the application for default and motion for default judgment, presented no facts demonstrating a meritorious defense, and the SEC will be prejudiced if the default judgment is rejected. C. Gruber has not Presented Facts Demonstrating He Has a Meritorious Defense. A default judgment may be vacated if the defendant presents the district court with specific facts that would constitute a meritorious defense. See Madsen v. Bumb, 419 F.2d 4, 6 (9th Cir. 1969). But "mere general denial without facts to

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support it" is not enough to justify vacating a default or default judgment. Id.; see also Franchise Holding, 375 F. 3d at 926. Prior to the filing of the complaint, defendants were given the opportunity to make a Wells Submission in which they could outline any reasons of law, policy or fact why an enforcement action should not be brought against them, but they were silent. Second Hughes Decl. 4. In addition, Gruber and Gruber & Co. conceded liability when they failed to respond to the well-pled allegations in the complaint so the allegations regarding liability are deemed true. Franchise Holding, 375 F. 3d at 926; see also Fair Hous. of Marin v. Combs, 285 F.3d 899, 906 (9th Cir. 2002) ; SEC v. Interlink Data Network of Los Angeles, Inc., 1993 U.S. Dist. Lexis 20163 *27-28, 1993 WL 603274 (D.C. Cal. Nov. 15, 1993) (allegations are taken as admitted on a default judgment, even though defendant was granted two extensions to respond). Unless the Court determines to set aside the default, the defendants cannot present a defense because they have already admitted liability. Moreover, Grubers declaration does not establish any meritorious defenses because it contains conclusory statements that the audit was in accordance with PCAOB standards, but is unsupported by facts. See discussion above of fifth Eitel factor. For example, the SEC alleged that Gold Standard had no accounting records related to the costs for extracting gold from year to year, did not list costs of production as a separate line item in the financial statements, and did not report inventory in conformance with GAAP because it did not track its costs. (Complaint 65). Gruber makes a conclusory statement that his audit included procedures to determine the cost of sales for gold mining production, and the movement of inventory. (Gruber Decl. 17-18) But he provides no evidence of the companys costs for extracting gold, does not identify a separate line item in the financial statements for costs of goods sold, or demonstrate how he determined the company had calculated inventory in compliance with GAAP. The financial statement in Gold Standards Form 8-K that was audited by Gruber

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does not lists cost of sales or inventory. See Exhibit 9, audit opinion and financial statements at p. 12 & 13. (Dkt # 64-7) Gruber also provides no evidence that he confirmed that gold sales occurred in Russia and the company received the sales proceeds represented. (Gruber Decl. 16) On April 5, 2011, Gold Standard filed a Form 8-K announcing that an error was made in its financial statements where gold inventory was incorrectly reported as revenue and its financial statements should not be relied upon. Exhibit 4 at p. 2. (Dkt # 64-4) Gruber states the audit included procedures to determine that the values assigned to PPE were appropriate because they were based in part on an appraisal by Yukos Co. (Gruber Decl. 14-15, 19), but he provides no audit work papers showing how he evaluated the professional qualifications of the appraiser, understood the appraisers work, evaluated the appraisers relationship with the client or performed additional procedures to determine if there was any risk of impairment of the appraisers objectivity as required by auditing standards. Gruber states that Yukos Co. did not share a business address with Ross Zoloto. Id. But Grubers own audit work papers included the Executive Summary of Gold Standard, which lists on the first page Ross Zolotos address at No. 19 Kantimirova Street, Blagoveshensk 67500 Russia. See Executive Summary, Exhibit 5 at p. 1 and 11 (Dkt # 65-5). The Yukos Co. appraisal produced to the SEC by Gruber as part of his work papers lists Yukos Co.s address, which is cut off, as Blagoveshensk ,19 Kantimirova Street. See Exhibit 8, at p. Gruber369 (Dkt # 65-5). Grubers conclusory statements in his declaration do not establish that he had sufficient evidential matter to support Gruber & Co.s audit opinion. Defendants have failed to demonstrate they have a meritorious defense to the SECs claims.

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D. Conclusion While the Court has discretion, it should enter default judgment against Gruber and Gruber & Co. because they received actual or constructive notice of the complaint and failed to answer. Their conduct is culpable and they have not demonstrated good cause or excusable neglect to set aside the default. Furthermore, defendants have not presented facts showing they have a meritorious defense. The SEC will be prejudiced by allowing the defendants to set aside the default and deny the motion for default judgment. The defendants seek to thwart the remedies that the SEC requests, and to continue to engage in fraudulent audits. The allegations of the complaint, which the defendants have admitted establish they have violated the anti-fraud, auditing and reporting provisions federal securities laws. Entry of a permanent injunction against further violations is warranted to protect public investors. Disgorgement, prejudgment interest and civil penalties should be entered to deter the defendants and others. The SEC respectfully requests that the Court grant its motion for default judgment. DATED: April 15, 2013. Respectfully submitted, s/ Leslie J. Hughes Leslie J. Hughes, Esq. Nancy J. Gegenheimer Attorneys for Plaintiff Securities and Exchange Commission

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CERTIFICATE OF SERVICE I certify that on April 15, 2013, I electronically filed the SECS RESPONSE TO MOTION TO SET ASIDE DEFAULT AGAINST GRUBER AND GRUBER & CO. with the Clerk of the Court using the ECF system, which will send notification of such filing to all parties of record herein: Kenneth G. Eade, Esq. 6699 Wilshire Blvd. Suite 507 Los Angeles, California 90048-5708 Keneade@gmail.com Appearing Pro se Marc A. Indeglia Indeglia & Carney 1900 Main Street, Suite 300 Irvine, California 92614 Phone: (949) 861-3321 Facsimile: (949) 861-3324 Email: marc@indegliacarney.com Attorney for Edward Randall Gruber and Gruber & Co. LLC I certify that on April 15, 2013, I caused true and correct copies of the foregoing to be mailed: Irving M. Einhorn, Esq. 1710 10th Street Manhattan Beach, CA 90266 Attorney for Gold Standard Mining Corporation And Panteleimon Zachos

s/ Leslie J. Hughes

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