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Securities & Exchange Commission v. Esposito

United States District Court, D. Massachusetts

April 14, 2017





         In May 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].

         On May 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 Lionshare. Id.

         On 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].

         For the reasons set forth below, the SEC's Motion for Default Judgment against Lionshare [ECF No. 69] is GRANTED.


         As set 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).

         With 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).


         The SEC 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 against Lionshare.

         A. Summary of Relevant Facts

         The 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”).

         i. Relevant Defendants

         Esposito 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 Markets”). Id.

         ii. Allegations

         The SEC 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.

         In 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 held. Id.

         The PPM 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.[1]Id.; London 2nd Decl., Ex. A at 32-33, 43-44, 46, 56-58.

         In late 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. Id. ...

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