United States District Court, D. Massachusetts
MEMORANDUM AND ORDER ON MOTION FOR DEFAULT
ALLISON D. BURROUGHS UNITED STATES DISTRICT JUDGE
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.
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”).
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.
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).
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).
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.
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 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.”).
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].
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. 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].
Summary of Facts
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.
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. Id.;
London 2nd Decl., Ex. A at 32-33, 43-44,
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
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. §
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