United States District Court, D. Massachusetts
MEMORANDUM AND ORDER
ALLISON D. BURROUGHS, UNITED STATES DISTRICT JUDGE
2016, Plaintiff Securities and Exchange Commission (the
“SEC” or the “Commission”) filed this
civil enforcement action against two corporate entities and
four individuals, including James Gondolfe
(“Gondolfe”) and Cannabiz Mobile, Inc.
(“Cannabiz”). [ECF No. 1 (hereinafter the
“Complaint”)]. The case arises out of allegations
that the defendants schemed to offer or sell securities
without registration or exemption in violation of federal
securities laws and regulations. Currently before the Court
is the SEC's Motion for a Default Judgment against
Gondolfe and Cannabiz [ECF No. 39], which is supported by a
Memorandum of Law [ECF No. 40] and the Declarations of David
H. London (“London Dec.”) [ECF No. 40-1] and Mark
Albers (“Albers Dec.”) [ECF No. 40-2].
3, 2016, the SEC served process on Gondolfe. [ECF No. 10].
Gondolfe, as Cannabiz's CEO, agreed to accept service on
Cannabiz's behalf by email on June 7, 2016. [ECF No. 7].
Neither Gondolfe nor Cannabiz filed an answer or motion
within the required time period, which prompted this Court to
order Gondolfe and Cannabiz to show cause as to why the Court
should not instruct the Clerk to enter a default against
them. [ECF No. 18]. They failed to respond to this
Court's Show Cause Order. Accordingly, the Court directed
the Clerk to enter a default against Gondolfe and Cannabiz on
August 2, 2016. [ECF No. 35].
reasons set forth in this Memorandum and Order, the SEC's
Motion for Default Judgment against James Gondolfe and
Cannabiz [ECF No. 39] is GRANTED IN PART.
forth in Fed.R.Civ.P. 55(b), “a plaintiff ‘must
apply to the court for a default judgment' where the
amount of damages claimed is not a sum certain.”
Vazquez-Baldonado v. Domenech, 792 F.Supp.2d 218,
221 (D.P.R. 2011) (quoting Fed.R.Civ.P. 55(b)). As to the
defendants' liability, the entry of default
“constitutes an admission of all facts well-pleaded in
the complaint” Id. (internal quotations and
citations omitted). Because Gondolfe and Cannabiz have
defaulted in this case, they are “taken to have
conceded the truth of the factual allegations in the
complaint as establishing the grounds for liability.”
In re The Home Restaurants, Inc., 285 F.3d 111, 114
(1st Cir. 2002) (quoting Franco v. Selective Ins.
Co., 184 F.3d 4, 9 n.3 (1st Cir. 1999)). On a motion for
a default judgment, however, it is appropriate to
independently “examine a plaintiff's complaint,
taking all well-pleaded factual allegations as true, to
determine whether it alleges a cause of action.”
Ramos-Falcon v. Autoridad de Energia Electrica, 301
F.3d 1, 2 (1st Cir. 2002). Allegations that support a viable
cause of action will establish the defendants' liability.
See Fed.R.Civ.P. 55(b).
regard to damages, Fed.R.Civ.P. 55(b)(2) provides that the
court “may conduct hearings or make referrals . . .
when, to enter or effectuate judgment, it needs to (A)
conduct an accounting; (B) determine the amount of damages;
(C) establish the truth of any allegation by evidence; or (D)
investigate any other matter.” A hearing, however, is
not necessarily required, particularly where the pleadings
and the moving party's affidavits establish the amount of
the default judgment. See In re The Home Restaurants,
Inc., 285 F.3d at 114 (holding that district court did
not abuse its discretion by entering default judgment without
first holding evidentiary hearing, where there was “no
uncertainty about the amounts at issue, ” the pleadings
contained “specific dollar figures, ” and the
court requested and received affidavits in support of the
argues that the facts alleged in its Complaint establish that
the defaulting defendants violated federal securities laws by
selling and offering to sell unregistered securities in
interstate commerce. The SEC further argues that these facts
entitle it to a permanent injunction against Gondolfe and
Cannabiz enjoining their further violation of federal
securities laws and regulations, disgorgement of their
ill-gotten gains with prejudgment interest, civil monetary
penalties against Gondolfe and Cannabiz, and an order barring
Gondolfe from serving as an officer or director of a public
company and from participating in penny stock offerings. In
this Memorandum and Order, the Court will address whether the
Complaint adequately supports liability before turning to the
SEC's requests for remedies.
SUMMARY OF RELEVANT FACTS
salient facts alleged in the Complaint are summarized below.
The Court accepts the well-pleaded facts as true for purposes
of this Memorandum and Order. See Conetta v. Nat'l
Hair Care Ctrs., Inc., 236 F.3d 67, 76 (1st Cir. 2001)
(noting that the “entry of default prevents the
defendant from disputing the truth of well-pleaded facts in
the complaint pertaining to liability.”).
is a corporation purportedly based in Cambridge, MA, but in
reality operated out of office space it shares with
co-defendant Lionshare Ventures LLC
(“Lionshare”), a privately held corporation with
its principal place of business in Danvers, MA. Compl.
¶¶ 14 - 15; London Dec., Ex. A, at 34. Cannabiz
initially claimed to be in the business of mineral
exploration in Brazil, and, later, the business of servicing
the medical marijuana industry. Id. ¶ 15.
Before adopting its current name of Cannabiz, it operated as
ReBuilder Medical Technologies, Inc. from March 2007 to
August 2012 and as Lion Gold Brazil, Inc. from August 2012 to
May 2014. Id. Cannabiz's stock is not registered
with the SEC, and it has not registered any securities
offerings with the SEC. Id. Since at least March
2007, however, Cannabiz (and its predecessors) has been
quoted and publicly traded on the Over-the-Counter (OTC)
securities markets (“OTC Markets”). Id.
April 3, 2014, Lionshare's Managing Director Christopher
R. Esposito (“Esposito”), despite having no
official position with Cannabiz, id. ¶¶
10, 26, installed Gondolfe as Cannabiz's President, Chief
Executive Officer (CEO), Chairman, and sole Director.
Id. ¶¶ 12, 39. Before then, Gondolfe had
been working odd jobs and at a Boston nightclub. London Dec.,
Ex. A, at 27.
following factual allegations are again taken from the
SEC's Complaint, the well-pleaded portions of which are
taken to be true by virtue of the entry of default against
Gondolfe and Cannabiz. See In re The Home
Restaurants, 285 F.3d at 114.
alleges that, beginning in late May 2012, Esposito used
approximately $75, 000 of Lionshare investors' money to
purchase five convertible promissory notes collectively
amounting to $711, 238, which represented all of the
outstanding debt obligations of Cannabiz (then known as
ReBuilder). Compl. ¶ 23. The notes gave Esposito
(through Lionshare) effective control over Cannabiz because
they were convertible at any time into 711, 238, 000 shares
of Cannabiz's common stock (almost 18 times the amount of
outstanding shares). Id. ¶ 24.
though Esposito had no official position with Cannabiz, he
secretly controlled and funded it. Id. ¶ 26;
London Dec., Ex. A, at 56, 74 - 76, 172, 174; Ex. B
(“Chris [Esposito] is among the largest debt holders of
[Cannabiz] and can sink [it] at any time, as we have no
access to capital and are asking Chris to fund the
company.”). By virtue of their control over Cannabiz,
Esposito and Lionshare were “affiliates” of the
company. See 17 C.F.R. § 230.144(a)(1)
(defining a company's “affiliate” as “a
person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under
common control with” the company).
however, concealed his affiliate status in order to profit
from prohibited transactions, such as inducing Cannabiz's
transfer agent to issue to Esposito and others millions of
Cannabiz common shares without a restrictive legend. Compl.
¶¶ 27, 28; London Dec., Ex. A, at 199-200. Without
a restrictive legend, these shares could be sold into the
public market despite Esposito and Cannabiz's having
failed to comply with the applicable laws regulating sales of
shares owned or controlled by affiliates. By hiding his
affiliate status and inducing the issuance of unlegended
common shares, Esposito contravened an SEC rule prohibiting
sales of securities received from an affiliate prior to the
completion of a one-year holding period. 17 C.F.R. §
Esposito provided the transfer agent various fraudulent and
misleading documents stating that Lionshare was not an
affiliate of Cannabiz (by August 2012, Cannabiz was known not
as ReBuilder, but as Lion Gold) and that the to-be-issued
ReBuilder common shares were “free trading common
stock” unburdened by “restrictive legend or
transfer restrictions.” Compl. ¶ 29. On July 27,
2012, based on Esposito's misrepresentations about his
and Lionshare's affiliate status, the transfer agent
issued 47 stock certificates without restrictive legends,
representing 18, 236, 000 shares of ReBuilder common stock,
at least 3, 675, 000 of which went to Esposito personally.
Id. ¶ 31.
around October 8, 2012, Esposito directed the transfer agent
to issue additional stock certificates without restrictive
legends in order to transfer 3.3 million of his personal
shares to various investor relations
“consultants” as payment for their blasts of
promotional emails to potential investors. Id.
¶ 32. The consultants sold 2, 396, 000 of their shares
to the public, gaining a profit of $62, 835; Esposito
personally sold 94, 500 shares to the public, gaining $1,