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Securities and Exchange Commission v. Zenergy International, Inc.

United States District Court, N.D. Illinois, Eastern Division

September 20, 2016

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
ZENERGY INTERNATIONAL, INC., et al., Defendants.

          MEMORANDUM OPINION & ORDER

          Joan B. Gottschall United States District Judge

         Before the court is the SEC's motion for award of monetary remedies and for entry of final judgments as to Defendants Bosko R. Gasich (“Gasich”), Market Ideas, Inc. (“Market Ideas”), Robert J. Luiten (“Luiten”), Scott H. Wilding (“Wilding”), and Skyline Capital Investments, Inc. (“Skyline Capital”) (collectively, the “Settling Defendants”) [ECF No. 87.] Also before the court is the SEC's motion for award of remedies and for entry of final judgments as to Defendants Diane D. Dalmy (“Dalmy”) and Ronald Martino (“Martino”). [ECF No. 89.] For the following reasons, the SEC's motions are granted.

         I. INTRODUCTION

         The SEC's Complaint alleges that the Settling Defendants, Martino, and Dalmy devised and implemented a “pump-and-dump” scheme involving the stock of Zenergy International, Inc. (“Zenergy”).[1] [Complaint, ECF No. 1.] The SEC's Complaint generally seeks two categories of relief against the defendants: injunctions and monetary remedies. Soon after the SEC filed its Complaint, the Settling Defendants entered into “bifurcated” settlements, by which they consented to the injunctive relief sought by the SEC.[2] Pursuant to those settlement agreements, the Court entered partial consent judgments (“Consent Judgments”) imposing the injunctive relief sought by the SEC. In addition to entering injunctive relief, the Consent Judgments also provide a mechanism for resolving, by motion, the SEC's remaining claims for monetary relief. As a result, the SEC has filed the instant motion for monetary relief-disgorgement, prejudgment interest, and civil penalties.[3]

         Specifically, the Consent Judgments state that the Settling Defendants “shall pay … disgorgement of ill-gotten gains and pre-judgment interest thereon; [and] the amount of the disgorgement shall be determined by the court upon motion of the Commission[.]” [See, e.g., Memo. of Law in Supp. of Mot. for Award Against Settling Defs., Ex. 5 § VI, ECF No. 88-6.] With respect to civil penalties, the Consent Judgments for Gasich and Luiten provide that “the Court shall determine whether a civil penalty … is appropriate and, if so, the amount of the penalty.” [Id., Ex. 5 § VI; Ex. 7 § V.] The Consent Judgment for Wilding and Skyline Capital, however, provides that they “shall pay … a civil penalty” in an amount “determined by the Court.” [Id., Ex. 6 § III (emphasis added).] The Consent Judgments further provide that, in connection with the SEC's motion: (a) the Settling Defendants are “precluded from arguing that they did not violate the federal securities laws as alleged in the Complaint” and (b) “the allegations of the Complaint shall be accepted as and deemed true by the Court.” [Id.]

         Accordingly, the only issues remaining for the court to decide with respect to the Settling Defendants are the amounts of disgorgement, prejudgment interest and civil penalties to be imposed. In making this determination, the court will accept as true the allegations in the Complaint.

         The SEC has also filed its motion for monetary relief against Defendants Martino and Dalmy. On September 30, 2015, in separate orders, the Court granted the SEC's partial motions for summary judgment against Defendants Martino [9/30/15 Order, ECF No. 85] and Dalmy [9/30/15 Order, ECF No. 84]. The SEC alleges that Martino and Dalmy were participants in the “pump-and-dump” scheme involving the stock of Zenergy. In its September 30, 2015 orders, the court held Dalmy, a securities lawyer, liable for violating the registration requirements of Section 5 of the Securities Act of 1933 (“Securities Act”), both by selling her own Zenergy stock and by writing false attorney opinion letters, which enabled numerous other scheme participants to sell their Zenergy stock. In a separate order, the court also found Martino liable for violating Section 17(b) of the Securities Act by failing to disclose the compensation he was promised or received for publicly touting Zenergy's stock.

         The SEC now seeks an Order imposing remedies for the violations of Martino and Dalmy and for entry of final judgment. Specifically, the SEC requests an Order (1) holding Martino and Dalmy liable for disgorgement of their ill-gotten gains; (2) awarding prejudgment interest; and (3) imposing civil penalties. In addition to monetary relief, the SEC also seeks to permanently enjoin Martino and Dalmy from engaging in conduct that violates the federal securities laws and also seeks to bar Martino and Dalmy from penny stocks. Despite the fact that Martino did not settle with the SEC, he did not respond to the SEC's motion for remedies and final judgment. Accordingly, there is no evidence to rebut the claims SEC for monetary and injunctive as to Martino. S.E.C. v. Cook, 2015 WL 5022152, at *27 (S.D. Ind. Aug. 24, 2015) (“We note that [Defendant] has interposed no response or other objection to the SEC's request for permanent injunction.”). Dalmy, however, has responded to the SEC's motion for monetary and injunctive relief.

         II. THE SEC'S COMPLAINT

         As noted, the facts of this case are more thoroughly laid out in this court's September 30, 2015 Order granting partial summary judgment in favor of the SEC against Dalmy. Therefore, the court will assume familiarity with the facts. However, in the interest of identifying each of the parties at issue in this order, the court will briefly recite the facts as laid out in the Complaint. Zenergy was founded by Gasich, Luiten, and a third person who died before the events giving rise to this case. [Complaint, ¶¶ 20, 21, ECF No. 1.] Luiten was Zenergy's Chairman and CEO and managed its day-to-day operations. Gasich, however, participated in the management of Zenergy as a controlling shareholder and pursuant to consulting agreements. Luiten and Gasich were the only two individuals operating Zenergy. [Id.] According to the SEC, Zenergy had no revenue or income, nor any assets of consequence and it did not observe corporate formalities. [Id. ¶ 22.]

         In late 2008, Zenergy decided to merge with a publicly traded shell entity to access publicly traded stock. [Id. ¶ 24.] In early 2009, Gasich identified Paradigm for this purpose. [Id.] At the time, Paradigm purported to be in the unrelated business of selling handheld metal detectors and had no operations or assets. [Id. ¶ 25.] Gasich handled the merger negotiations for Zenergy, and Wilding negotiated for Paradigm. [Id. ¶ 26.] Wilding, a stock promoter, was previously ordered by the SEC to cease and desist from violating the federal securities laws prohibiting the sale of unregistered securities. [Id. ¶ 14.] Zenergy and Paradigm entered into a share exchange agreement, where by Zenergy would be merged into Paradigm. Through this “reverse merger, ” Zenergy's shareholders assumed control of Paradigm. [Id. ¶ 32.]

         In connection with the reverse merger, Gasich, together with Wilding and others, planned to distribute 300 million shares of purportedly unrestricted stock to Gasich's family and friends, promoters and touters, and associates of Paradigm. [Id. ¶ 34.] As partial consideration for the merger, Paradigm agreed to assume $30, 000 of convertible debt purportedly owed by Zenergy. [Id. ¶ 35.] Gasich agreed to assign portions of the debt, which the assignees would then convert into shares to be sold in connection with a promotional campaign. [Id. ¶ 36.]

         To memorialize the supposed convertible debt, Gasich prepared a backdated convertible note. [Id. ¶ 37.] On May 17, 2009, pursuant to Gasich's request, Defendant Diane Dalmy sent Gasich a template for a “standard convertible note.” [Id.] On May 27, 2009, Gasich returned to Dalmy an executed note that followed Dalmy's template. [Id.] Days after the share exchange agreement was signed, Gasich assigned portions of the convertible debt to his family and friends, promoters, associates of Paradigm, and Dalmy, all of whom immediately exercised the option to convert the debt into shares of Paradigm stock. [Id. ¶ 39.] From June 19 to 23, 2009, Paradigm-Zenergy's predecessor entity-issued 300 million shares to Gasich's assignees. [Id. ¶ 40.] Wilding, through his company Skyline Capital, received 38 million shares. [Id.] The Zenergy stock received by Gasich's assignees was designated as restricted and could not be freely sold to the public. [Id. ¶ 134.] To get the restriction removed, Dalmy prepared and submitted to transfer agents numerous attorney opinion letters that falsely represented that the assignees' Zenergy stock, including her own shares, could be reissued and sold without restriction pursuant to Rule 144 under the Securities Act. [Id. ¶¶ 137-54.]

         From June 2009 to August 2009, Zenergy and Paradigm issued a number of press releases designed to generate interest in Zenergy securities. [Id. ¶ 47.] These press releases were initiated by Gasich, who reviewed, edited, approved, and distributed them. [Id. ¶ 48.] Luiten also reviewed and approved all or nearly all of the press releases. [Id.] In several of these press releases, Gasich and Luiten misrepresented or omitted material facts about Zenergy. [Id. ¶ 49.]

         In early September 2009, OTC Markets (formerly Pink OTC Markets Group, Inc.) identified Zenergy's securities with a caveat emptor label and blocked quotations of Zenergy until Zenergy submitted a disclosure statement containing information about its ownership, operations, and financial condition. [Id. ¶ 81.] On or about September 15, 2009, Zenergy posted to the OTC Markets website an information and disclosure statement (the “Statement”). [Id. ¶ 82.] The Statement was drafted, reviewed, and approved by Luiten and Gasich. [Id. ¶ 83.] Zenergy's Statement contained numerous misstatements and omissions. [Id. ¶ 84.] Among other things, the Statement misrepresented or omitted to disclose material information about the control of Zenergy, as well as its operations and assets. Because the Statement did not contain any financial statements, OTC Markets refused to change or remove the caveat emptor label. Accordingly, on or about October 21, 2009, Zenergy posted financial statements dated September 30, 2009 as a supplement to the Statement. [Id. ¶ 92.] These financial statements were prepared and approved by Gasich and Luiten. [Id. ¶ 93.] The financial statements, however, contained several materially false statements and omissions designed to give Zenergy the appearance of legitimacy. [Id. ¶¶ 94, 95.] After the financial statements were posted on the OTC Markets website, OTC Markets removed the caveat emptor label and replaced it with a “limited information” emblem. [Id. ¶ 100.]

         With the removal of the caveat emptor label, Gasich and Luiten caused Zenergy to issue another series releases designed to inflate the price of Zenergy's stock. Gasich also coordinated waves of touting activity in connection with Zenergy's press releases. Wilding retained a number of touters, including Ronald Martino, to publicly promote Zenergy in emails, on message boards, and newsletters.

         In total, the Gasich assignees and their transferees obtained trading profits of approximately $4.4 million of their sales of the assigned shares into the public market. [Id. ¶ 155.] No registration statement was filed or in effect for any of the transactions during the relevant time period. As detailed below, the Settling Defendants, Martino, and Dalmy profited from this illegal scheme.

         III. THE SEC'S REQUEST FOR RELIEF

         A. Disgorgement and ...


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