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Securities & Exchange Commission v. Esposito

United States District Court, D. Massachusetts

April 30, 2018

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
CHRISTOPHER R. ESPOSITO, et al., Defendants.

          MEMORANDUM AND ORDER ON MOTION FOR DEFAULT JUDGMENT

          ALLISON D. BURROUGHS UNITED STATES DISTRICT JUDGE

         In May 2016, Plaintiff Securities and Exchange Commission (“SEC”) filed this civil enforcement action against two corporate entities and four individuals, including Christopher R. Esposito. [ECF No. 1] (“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 pending before the Court is the SEC's motion for the entry of a default judgment against Esposito. [ECF No. 115]. For the reasons that follow, the motion is GRANTED.

         I. BACKGROUND

         On May 31, 2016, the SEC served process on Esposito. [ECF No. 6]. After being granted an extension of time to respond to the Complaint [ECF No. 12], Esposito failed to timely file a responsive pleading, which prompted the Court to order Esposito to show cause as to why the Court should not instruct the Clerk to enter a default against him. [ECF No. 20]. Acting pro se, Esposito filed an answer on September 1, 2016. [ECF No. 42] (“Answer”).

         On September 28, 2017, the SEC moved for sanctions against Esposito for failing to attend his properly noticed deposition on September 27, 2017. [ECF No. 102]. The Court advised Esposito that it may enter a default against him if he failed to either (1) be deposed by November 3, 2017 or arrange an extension of that deadline, or (2) show cause as to why he had not done so by that date. [ECF No. 105]. Esposito failed to attend this second properly-noticed deposition and did not otherwise comply with the Court's show-cause order, prompting the entry of a default against him. [ECF Nos. 112, 113]. Esposito has not responded to the instant motion for the entry of a default judgment.

         II. LEGAL STANDARD

         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 Esposito defaulted in this case, he 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). 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 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, ” pleadings contained “specific dollar figures, ” and court requested and received affidavits in support of the default judgment).

         III. DISCUSSION

         The SEC argues that the facts alleged in the Complaint establish that Esposito violated federal securities laws by selling and offering to sell unregistered securities in interstate commerce. The SEC further argues that these facts warrant (1) permanently enjoining Esposito from further violating federal securities laws and regulations, (2) imposing a third-tier civil penalty on Esposito individually, (3) holding him jointly and severally liable with Defendant Lionshare Ventures LLC (“Lionshare”) for the disgorgement of ill-gotten gains with pre-judgment interest in the total amount of $1, 107, 413, (4) barring him from acting as an officer or director of a public company, and (5) barring him from participating in a penny stock offering.

         A. Background

         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 that the “entry of default prevents the defendant from disputing the truth of well-pleaded facts in the complaint pertaining to liability.”).

         1. 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; Ans. ¶ 10. Lionshare is purportedly a business incubator for “microcap companies” (businesses with a market capitalization of $50 million to $300 million). Compl. ¶ 14. Lionshare's securities have never been registered with the SEC, nor has Lionshare ever registered any securities offerings with the SEC. Id. On August 19, 2015, Esposito was subpoenaed to testify as part of the SEC's investigation that resulted in the filing of this action. [ECF No. 70 at 8]. Esposito asserted his privilege against self-incrimination under the Fifth Amendment of the United States Constitution in response to almost every question asked of him. Id.; [ECF No. 70-1 at Ex. A] (“London 2nd Decl.”).

         On April 14, 2017, the Court entered a final default judgment as to Lionshare. [ECF Nos. 90, 91]. The Court ordered Lionshare to pay disgorgement of $980, 761, together with prejudgment interest of $126, 652, for a total of $1, 107, 413. [ECF No. 90 at 17]. The Court also imposed a third-tier civil penalty of $775, 000, entered a permanent injunction enjoining Lionshare from committing further violations of the federal securities laws, and imposed a penny stock bar in a supplemental order. [ECF Nos. 93, 94].

         Defendant Cannabiz Mobile, Inc. (“Cannabiz”) is a corporation purportedly based in Cambridge, MA, but actually operates out of office space that it shares with Lionshare. Compl. ¶ 15. Cannabiz initially claimed to be in the business of mineral exploration in Brazil, and, later, the business of servicing the medical marijuana industry. Id. Before adopting its current name of Cannabiz, it operated as ReBuilder Medical Technologies, Inc. (“ReBuilder”) from March 2007 to August 2012 and as Lion Gold Brazil, Inc. (“Lion Gold”) from August 2012 to May 2014. Id. Cannabiz never registered any securities offerings with the SEC. Id. Since at least March 2007, however, Cannabiz has been publicly traded on the Over-the-Counter (“OTC”) securities markets.[1] Id. Defendant James Gondolfe served as the Chairman and President of Cannabiz. Id. ¶ 12. Defendant Anthony Jay Pignatello was a consultant to Cannabiz and its Secretary. Id. ¶ 11. On January 27, 2017, the Court entered default judgments against Cannabiz and Gondolfe. [ECF Nos. 62, 64]. On January 8, 2018, Pignatello informed the Court that he has agreed to enter into a settlement agreement with the SEC, pending the resolution of a related criminal case. [ECF Nos. 124, 128].[2]

         2. Summary of Facts

         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. Compl. ¶¶ 2, 16; Ans. ¶¶ 2, 16; [ECF No. 70-2 at ¶ 7] (“Albers 2nd Decl.”). The Membership Interest Shares were sold in “units, ” each of which entitled investors to 200, 000 shares of membership interest, or 1% equity ownership, in Lionshare. Compl. ¶ 16. Neither Esposito nor Lionshare filed a registration statement with the SEC for the offering, and the offering did not qualify for any of the exemptions from registration under the relevant securities laws. Id. ¶¶ 17-18. In addition, Esposito and Lionshare conducted a general solicitation that included cold-calling unaccredited and unsophisticated investors and 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. Id.; London 2nd Decl., Ex. A at 39. Esposito further represented to investors and potential investors in emails and in the Lionshare private placement memorandum (“PPM”) that the proceeds of the Membership Interest Shares offering would be used to acquire an OTC public company to be named Lion Gold, which would acquire mineral interests and mining operations. Compl. ¶ 19. Lionshare investors in turn would receive one share of Lion Gold common stock for each Membership Interest Share they held. Id.

         The PPM specified that a percentage of Lionshare investor proceeds 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 the representations in the PPM, Esposito used over $290, 500 of the investor funds for unauthorized personal and business expenses. Id. ¶ 21. Further, between August 2011 and November 2012, Esposito used approximately $153, 000 of Lionshare investor funds to form Lion Mineracao Ltda. (“Lion Mineracao”), a private Brazilian corporation, for the stated purpose of mining in Brazil. Id. ¶ 22. Although Lionshare investor proceeds were used to fund Lion Mineracao, the investors had no ownership interest in the company while Esposito owned 99.99% of Lion Mineracao.[3] 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 totaling $711, 238, which comprised all of the outstanding debt obligations of Cannabiz (then known as ReBuilder). Compl. ¶ 23. The notes gave Esposito 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 of the notes to Lionshare, and assigned the remaining four notes to his brother-in-law. Id.

         Even though Esposito had no official position with Cannabiz, he (through Lionshare and his brother-in-law) secretly controlled and funded the company. Id. ¶ 26. Esposito made his Brazilian representative the President, CEO, CFO, Chairman, and sole member of the Cannabiz Board of Directors, and he hired Pignatello as the Secretary of Cannabiz. Id. ¶ 25. 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). Esposito and Lionshare, however, concealed their affiliation with Cannabiz in order to profit from transactions that are prohibited under the securities laws. Compl. ¶ 27. Without a restrictive legend, these shares could be sold into the public market despite Esposito and Cannabiz having failed to comply with the applicable laws regulating sales of shares owned or controlled by affiliates. Compl. ¶ 29. By hiding their affiliate status and inducing the issuance of unlegended common shares, Esposito and Lionshare 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. § 230.144(d)(1)(ii).

         Moreover, Esposito provided various fraudulent and misleading documents to the Cannabiz transfer agent, which stated that Lionshare was not an affiliate of Cannabiz and that the to-be-issued Cannabiz (then known as 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 ...


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