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 Lionshare Ventures LLC
(“Lionshare”). [ECF No. 1 (hereinafter the
“Complaint”)]. The case arises out of allegations
that the defendants schemed to offer or sell unregistered
securities in violation of federal securities laws and
regulations. Currently before the Court is the SEC's
Motion for a Default Judgment against Lionshare [ECF No. 69],
which is supported by a Memorandum of Law [ECF No. 70] and
the Declarations of David H. London (“London 2nd
Decl.”) [ECF No. 70-1] and Mark Albers (“Albers
2nd Decl.”) [ECF No. 70-2].
31, 2016, the SEC served process on Lionshare. [ECF No. 5].
Lionshare did not file an answer or motion within the
required time period, which prompted this Court to order
Lionshare to show cause as to why the Court should not
instruct the Clerk to enter a default against it. [ECF No.
20]. On August 1, 2016, Lionshare requested additional time
to retain counsel and respond to the Commission's
Complaint or to begin settlement negotiations. [ECF No. 31].
The Court granted Lionshare's request and ordered it to
file a status report by September 2, 2016. [ECF No. 35].
Lionshare filed its Answer on September 1, 2016. [ECF No.
43]. The Answer was signed by Defendant Christopher R.
Esposito (“Esposito”) as Managing Director of
September 7, 2016, the Commission moved to strike
Lionshare's Answer pursuant to Local Rule 83.5.5(c),
which precludes corporations and limited liability companies
from proceeding pro se. [ECF No. 44]. The Court set
a hearing on the motion to strike for October 18, 2016. [ECF
No. 46]. Neither Esposito nor counsel for Lionshare appeared
at the hearing. [ECF No. 48]. As Lionshare failed to file an
amended answer, the Court granted the motion to strike on
October 19, 2016. Id. The Court then ordered
Lionshare to file an amended answer by November 2, 2016. [ECF
No. 49]. On January 18, 2017, the Commission moved for entry
of default against Lionshare. [ECF No. 60]. Finding that
Lionshare had failed to file an amended answer, the Court
granted the motion and directed the Clerk to enter a default
against Lionshare on January 31, 2017. [ECF No. 65].
reasons set forth below, the SEC's Motion for Default
Judgment against Lionshare [ECF No. 69] is GRANTED.
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
defendant's liability, the entry of default
“constitutes an admission of all facts well-pleaded in
the complaint.” Id. (internal quotations and
citations omitted). Because Lionshare has defaulted in this
case, it is “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) (citing
Quirindongo Pacheco v. Rolon Morales, 953 F.2d 15,
16 (1st Cir. 1992)). Allegations that support a viable cause
of action will establish the defendant's 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 114-15 (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 default judgment).
argues that the facts alleged in its Complaint establish that
the defaulting defendant 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 Lionshare
enjoining it from further violating federal securities laws
and regulations, disgorgement of Lionshare's ill-gotten
gains with prejudgment interest, and a civil monetary penalty
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 the “entry of default prevents the defendant
from disputing the truth of well-pleaded facts in the
complaint pertaining to liability”).
is the Managing Director of Lionshare, a privately-held
corporation with its principal place of business in Danvers,
MA. Compl. ¶¶ 10, 14; London 2nd Decl., Ex. A at 19
[ECF No. 42 (hereinafter “Esposito Ans.”) at
¶ 10]. Lionshare is purportedly a business incubator for
microcap companies (a microcap company is a business with a
market capitalization of $50 million to $300 million). Compl.
¶ 14. Lionshare's securities have never been
registered with the Commission, and it has never registered
any securities offerings with the Commission. Id. On
August 19, 2015, Esposito was subpoenaed to testify as part
of the Commission's investigation that resulted in the
filing of this civil action. London 2nd Decl. ¶ 2.
Esposito asserted his Fifth Amendment privilege against
self-incrimination as to almost every question asked of him.
Id.; see generally London 2nd Decl., Ex. A.
Cannabiz Mobile, Inc. (“Cannabiz”) is a
corporation purportedly based in Cambridge, MA, but in
reality operated out of office space it shares with
Lionshare. Compl. ¶ 15; [ECF No. 40-1 (hereinafter
“London Decl.”), Ex. A at 34]. Cannabiz initially
claimed to be in the business of mineral exploration in
Brazil, and, later, the business of servicing businesses in
the medical marijuana industry. Compl. ¶ 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
alleges that, between June 2011 and June 2012, Esposito and
Lionshare raised $556, 452 from 24 investors through an
offering of Lionshare Class “B” Membership
Interest Shares (“Membership Interest Shares”).
Compl. ¶¶ 2, 16; Esposito Ans. ¶¶ 2, 16;
Albers 2nd Decl. ¶ 7. The Membership Interest Shares
were sold in “units, ” each of which entitled
investors to 200, 000 shares of Lionshare membership
interest, or 1% equity ownership, in Lionshare. Compl. ¶
16. Neither Esposito nor Lionshare filed a registration
statement for the offering with the Commission. Compl. ¶
17; Esposito Ans. ¶ 2. While certain offerings are
exempt from registration, Esposito and Lionshare did not
satisfy any of the exemptions contained in the securities
laws. Compl. ¶ 18. In addition, Esposito and Lionshare
conducted a general solicitation that included cold-calling
unaccredited and unsophisticated investors and then failed to
provide audited financial statements to investors who did not
meet the “accredited investor” definition of Rule
501(A) of Securities Act Regulation D. Compl. ¶ 18;
London 2nd Decl., Ex. A at 39.
Lionshare's private placement memorandum
(“PPM”), Esposito and Lionshare represented to
investors and potential investors that the proceeds of the
Membership Interest Shares offering would be used to acquire
an OTC public company to be named Lion Gold. Compl. ¶
19. Lion Gold would, in turn, acquire mineral interests and
mining operations. Id. After the acquisition of Lion
Gold, Lionshare investors would receive one share of Lion
Gold common stock for each Membership Interest Share they
stated that the Lionshare investor funds would be used for
“business acquisition costs (50%), ”
“promotion & marketing (25%), ”
“operations, salaries and administrative (12.5%),
” “regulatory fees, filings and legal expenses
(7.5%), ” “working capital (4%), ” and
“offering expense (1%).” Id. ¶ 20.
Contrary to these representations, Esposito spent over $290,
500 of the investor funds for unauthorized personal and
business expenses. Id. ¶ 21. In addition,
between August 2011 and November 2012, approximately $153,
000 of investor funds were used to form Lion Mineracao Ltda.
(“Lion Mineracao”), a private Brazilian
corporation, for the stated purpose of mining in Brazil.
Id. ¶ 22. Although investor funds were used to
fund Lion Mineracao, Esposito owned 99.99% of the company
while Lionshare investors owned nothing.Id.;
London 2nd Decl., Ex. A at 32-33, 43-44, 46, 56-58.
May 2012, Esposito used approximately $75, 000 of Lionshare
investor funds 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. On May 29, 2012,
Esposito assigned one Cannabiz note to Lionshare.