260 F. Supp. 3d 79
D. Mass.2017Background
- SEC sued Lionshare and individuals alleging unregistered securities offerings, fraudulent misappropriation of investor funds, and schemes to issue and sell unregistered Cannabiz (formerly Lion Gold/ReBuilder) shares. Lionshare defaulted after its answer was struck for being pro se and failing to file an amended answer.
- Lionshare (through managing director Christopher Esposito) raised $556,452 from investors via Lionshare Membership Interest Shares (2011–2012) and later received proceeds from sales of unlegended Cannabiz shares and convertible debt, totaling $980,761 in alleged ill-gotten gains.
- The Lionshare offering PPM misrepresented intended use of proceeds (acquire Lion Gold and mining assets); substantial funds were instead spent on personal/business expenses and a Brazil entity wholly owned by Esposito.
- Esposito (via Lionshare) secretly acquired and controlled Cannabiz by buying convertible notes convertible into massive shares, concealed affiliate status, induced transfer agent to issue millions of shares without restrictive legends, backdated notes, and orchestrated stock promotions to facilitate sales into the public market.
- The SEC sought permanent injunctive relief, disgorgement with prejudgment interest, and civil penalties; court granted default judgment, found statutory securities violations, ordered disgorgement ($1,107,413) and a third-tier civil penalty ($775,000), and entered a permanent injunction.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Lionshare violated Sections 5(a) and 5(c) (unregistered offers/sales) | Lionshare sold/offered securities in interstate commerce without registration (Membership Interest Shares, unlegended Cannabiz shares, convertible debt) | Defaulted; no rebuttal or exemption shown | Court found prima facie Section 5 violations and imputed liability |
| Whether Lionshare violated §17(a)(2)/(3), §10(b), and Rule 10b-5 (fraud, misstatements, scheme) | Lionshare misrepresented PPM uses, concealed affiliate status, submitted false documents, causing issuance/sale of unregistered shares and investor losses | Defaulted; no defense presented | Court held allegations sufficient for liability under §17(a)(2), §10(b), Rule 10b-5(b), and scheme liability under §17(a)(1)/(3) and Rule 10b-5(a),(c) |
| Whether scienter is established for claims requiring it (e.g., §10(b), §17(a)(1)) | Alleged facts show intent/recklessness: misappropriation, concealment, backdating, control over Cannabiz, directing others to sign false documents | Defaulted; no contest | Court concluded scienter adequately pleaded and imputable to Lionshare via Esposito |
| Remedies: disgorgement, prejudgment interest, civil penalty, permanent injunction | SEC requests disgorgement of ill-gotten gains ($980,761) + prejudgment interest, third-tier penalty, and permanent injunction due to pattern, egregiousness, and risk of recurrence | Defaulted; no mitigation or financial defense | Court approved disgorgement + interest = $1,107,413, imposed $775,000 third-tier penalty, and entered permanent injunction |
Key Cases Cited
- Ralston Purina Co. v. S.E.C., 346 U.S. 119 (1953) (burden shifts to defendant to prove exemption from registration)
- Aaron v. S.E.C., 446 U.S. 680 (1980) (scienter required for §17(a)(1) and §10(b) but not for §17(a)(2)/(3))
- Basic Inc. v. Levinson, 485 U.S. 224 (1988) (materiality: reasonable investor standard altering the ‘total mix’ of information)
- TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976) (definition of materiality for securities disclosures)
- Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) (scienter as intent to deceive, manipulate, or defraud)
- SEC v. First Jersey Sec., Inc., 101 F.3d 1450 (2d Cir. 1996) (disgorgement and prejudgment interest principles; reasonable approximation standard)
- SEC v. Bilzerian, 29 F.3d 689 (D.C. Cir. 1994) (factors for permanent injunction: pattern, flagrancy, future opportunity to violate law)