Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—D. Mass.: Default judgment entered against Cannabiz scheme mastermind, (May 1, 2018)

By Rebecca Kahn, J.D.

After repeated failures to respond, the District Court of Massachusettshas entered default judgment against Lionshare Ventures LLC’s managing director Christopher R. Esposito for securitiesfraud, registration violations, and other offenses. Because Lionshare and Esposito’s violations were "so closely intertwined," Esposito was held jointly and severally liable with Lionshare for a previously entered order of disgorgement plus interest totaling $1,107,413.Esposito was also ordered to pay $160,000 in civil penalties and was permanently barred from acting as an officer or director of a public company orparticipating in penny stock offerings(SEC v. Esposito, Apr.30, 2018, Burroughs, A..).

Unregistered securities. The SEC filed this civil enforcement action in May 2016 against Lionshare Ventures LLC, Cannabiz Mobile, Inc., Esposito and three other individuals for scheming to offer or sell unregistered securities in violation of federal securities laws. On January 27, 2017, the court entered default judgments against Cannabiz and its president and officer, James Gondolfe. Defaultjudgment was also entered against Lionshare in April of 2017, includingdisgorgement and interest of$1,107,413 plus a $775,000 civil penalty, and permanent injunctions. On January 8, 2018, Cannabiz consultant and secretary, Anthony Jay Pignatello, agreed to settle with the SECpending the resolution of a related criminal case.

Illegal fundraising. The SEC alleged that Between June 2011 and July 2012, Lionshare and Esposito raised $556,452 by offering shares without first filing a registration statement in violation of Securities Act Sections 5(a) and 5(c). They also conducted a general solicitation and failed to provide audited financial statements to investors who did not meet the "accredited investor" definition of Securities Act Regulation D Rule 501(A).

Misrepresentations and misappropriations. In its PPM, Esposito and Lionshare represented that proceeds of the Lionshare offering would be used to acquire mineral and mining company Lion Gold, after which investors would receive common stock in the company. Contrary to these representations, however, nearly $300,000 of the funds were used by Esposito for unauthorized personal and business expenses and approximately $153,000 of the funds were used to form a Brazilian mining company, Lion Mineracao Ltda., owned 99.99 percent by Esposito alone.

Secret control of Cannabiz. In June 2014, Lion Gold changed its name to Cannabiz Mobile, Inc., and changed its business purpose from mineral mining to medical marijuana marketing. Lionshare and Esposito spent $75,000 of investor funds to purchase all of Cannabiz’s debt, totaling $711,238. These notes gave Esposito control over Cannabiz because they were convertible into 711,238,000 shares of Cannabiz’s common stock. Esposito assigned one of the notes to Lionshare, and the remaining notes to his brother-in-law. Esposito had no official position with Cannabiz, but he secretly controlled and funded the company via Lionshare and his brother-in-law. By virtue of their control over Cannabiz, Esposito and Lionshare were "affiliates" of Cannabiz, but concealed their affiliation in order to profit from illegal transactions. 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." A few months later, Esposito caused Cannabiz to issue three additional convertible notes to Lionshare and had the notes backdated to appear as though they had been issued in 2012, thereby concealing that the securities in question had not satisfied Rule 144’s one-year holding period. Esposito also paid stock promoters to pump up Cannabiz stock price and trading volume; sold Cannabiz convertible debt for nearly $304,000; and sold millions of shares of Cannabiz stock directly into the public market.

"While covertly controlling the public company Cannabiz, Esposito intentionally hid his control, falsified and backdated corporate documents, and colluded in the sale of millions of shares of Cannabiz into the public market in violation of SEC statutes and regulations" the court wrote.

Failure to cooperate. When subpoenaed in August 2015 to testify as part of the SEC’s investigation, Esposito "took the Fifth" in response to almost every question. Having failed to attend either of his noticed depositions, comply with a court order to show cause, or respond to the motion for entry of default, and having ignored specific warnings, the court concluded: "Esposito has not taken responsibility for his actions." As a result, default judgment was entered against Esposito. Besides joint and several liability with Lionshare’s judgment, he was ordered to pay a civil penalty of $160,000 and permanently barred from serving as a public company’s officer or director or engaging in penny stock transactions.

The case is No. 16-cv-10960-ADB (Memorandum and Order on Motion for Default Judgment)(Final Order against Esposito).

Attorneys: David H. London for the SEC. Ellyn S. Garofalo (DLA Piper) for Anthony Jay Pignatello.

LitigationEnforcement: DirectorsOfficers Enforcement FraudManipulation SecuritiesOfferings ColoradoNews MassachusettsNews