United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
B. Gottschall, United States District Judge
Securities and Exchange Commission (“SEC”)
brought this enforcement under Sections 20(b) and 20(d) of
the Securities Act of 1933 (“Securities Act”), 48
Stat. 74, as amended, 15 U.S.C. § 77t(b) and (d), and
Sections 21(d) and (e) of the Securities Exchange Act of 1934
(“Exchange Act”), 15 U.S.C. § 78u(d) and
§ 78(e) against several defendants, including attorney
Diane D. Dalmy (“Dalmy”). The SEC alleges that
the defendants perpetrated a so-called “pump and
dump” scheme. Remaining for decision are portions of
the SEC's request for remedies. An important inquiry is
whether Dalmy acted in bad faith and with scienter. For the
following reasons, the court finds that she did and imposes
appropriate civil penalties and a permanent injunction.
Facts and Dalmy's Liability
September 30, 2015, the court entered partial summary
judgment finding Dalmy “liable for selling unregistered
securities in violation of Section 5.” SEC v.
Zenergy Int'l, Inc. (Zenergy I), 141 F.Supp.3d 846,
855 (N.D. Ill. 2015), available at ECF No. 84. The undisputed
facts of the scheme are set forth in detail in that opinion
and subsequent opinions. See Zenergy I, 141
F.Supp.3d at 847-51; SEC v. Zenergy Int'l, Inc.
(Zenergy II), 2016 WL 5080423, at *2-4 (N.D. Ill. Sept.
brief, Dalmy acted as the transaction attorney for a reverse
merger in which Zenergy acquired the publicly traded stock of
Paradigm Tactical Products, Inc. (“Paradigm”).
See Zenergy I, 141 F.Supp.3d at 849-50. As part of
the merger, Bosko R. Gasich (“Gasich”) assigned
convertible debt securities to Dalmy, his friends, family
members, and business associates, who converted the
securities to Zenergy shares and sold those shares after the
merger to the tune of at least $4.4 million. See Id.
wrote several letters opining that the converted shares were
exempt from the registration requirements of Section 5 of the
Securities Act. Id. at 851. She received stock as
payment for her services and used one of her opinion letters
to sell that stock, netting approximately $40, 000. See
Id. Dalmy maintained that she and the other individuals
to whom she issued opinion letters fell within the exemption
to Section 5's registration requirements “for
transactions by any person other than an issuer, underwriter,
or dealer.” 15 U.S.C. § 77d(1).
court ruled that the exemption did not apply because Gasich
underwrote the reverse merger in which Dalmy received her
stock. See Zenergy I, 141 F.Supp.3d at 853-55. At
issue was whether Gasich qualified as an underwriter.
Id. at 853. Reviewing the applicable statutory and
regulatory definitions, the court explained that the
undisputed evidence showed that Zenergy was under
Gasich's control, and so Dalmy had to wait a year to sell
stock she received from him before invoking the safe harbor
of 17 C.F.R. § 230.144, commonly referred to as Rule
144. See Id. at 853-55. Accordingly, Dalmy and
Gasich's sales of Zenergy stock violated the registration
requirements of § 5 of the Securities Act. Id.
at 855. The court noted that Dalmy “acknowledge[d] that
Gasich assisted her in drafting the documents necessary to
effectuate the transaction. In Dalmy's own words,
‘Gasich had significant involvement' in the
negotiations on behalf of Zenergy.” Id.
(citing Dalmy's Resp. to SEC's SOF ¶ 46).
The Parties Agree to Rely on Dalmy's Video
the entry of summary judgment on liability, the SEC moved for
entry of final judgment awarding civil penalties and
injunctive relief against Dalmy and other defendants. On
September 20, 2016, the court, among other things, ordered
Dalmy to disgorge $43, 995 in profits and $9, 877.11 in
prejudgment interest. Zenergy II, 2016 WL 5080423,
at *9. The court reserved ruling on the SEC's requests
for civil monetary penalties and injunctive relief against
Dalmy, however. Id. at 14, 15. The court
contemplated holding a hearing before ruling on those
The SEC argues that Dalmy is a “pervasive
offender” who, in this case alone, committed at least
eleven separate violations of the securities laws. Dalmy, on
the other hand, argues that her “only transgression was
opining incorrectly that the shares at issue did not need
registration. The public does not need protection from
that.” [Dalmy Resp. in Opp. 9, ECF No. 99.]
As noted in its order on September 15, 2016, the court is
unaccustomed to deciding issues like scienter and good faith
without a hearing. Therefore, the court reserves ruling on
the SEC's motion for civil penalties against Dalmy until
a hearing on the matter is conducted. A status hearing is set
for September 28, 2016 at 9:30 a.m. in order to schedule an
evidentiary hearing to resolve this issue.
Id. at *7.
declined the court's invitation for an in-person
hearing. She argued that holding such a hearing
would impose an “undue burden” because publicity
surrounding this case and related administrative actions left
her with little discretionary income to support herself and
her daughter. Mem. dated Oct. 15, 2016, at 3, ECF No. 112.
Also, holding an in-person hearing “would add little
significant value” according to Dalmy because the
evidentiary record is extensive and the parties have briefed
the issues extensively. Id.
Dalmy claimed an undue hardship, the court suggested an
alternative to an evidentiary hearing:
The scienter question left to decide depends in large part on
determining how much weight to give Dalmy's testimony and
what inferences to draw from it. The SEC and Dalmy rely
heavily, but not exclusively, on excerpts of Dalmy's
deposition taken June 10, 2014, ECF No. 90-2, to convince the
court to draw contradictory inferences concerning scienter
and what Dalmy knew when she wrote the opinion letters made
the subject of this suit. Compare ECF No. 90 at
10-12 (citing Dalmy's deposition transcript to establish
knowledge), with ECF No. 99 at 3-4. The deposition
transcript communicates none of the information about
Dalmy's demeanor, body language, and tone of voice on
which credibility findings depend.
at 3, ECF No. 123 (Aug. 2, 2017). The court suggested that it
“could assess Dalmy's credibility by watching the
recording.” Id. at 4. The parties conferred
and agreed to the proposal. They have jointly designated
portions of the video deposition they consider relevant to
the questions before the court. ECF No. 127.
The Connecticut and Colorado Cases
the court ruled on the designations, the SEC filed two
motions asking the court to take judicial notice of
Dalmy's guilty plea and other papers filed in in a
criminal case against Dalmy in the United States District
Court for the District of Connecticut, United States v.
Dalmy, No. 3:18-CR-21 (JAM) (D. Conn.)
(“Connecticut case”). Both motions to take
judicial notice were granted. See Fed. R. Evid. 201.
ECF Nos. 138, 143. The court ordered the SEC to file a
memorandum explaining what evidentiary weight should be given
to the noticed documents. The SEC did so. ECF No. 144. The
deadline set by the court for Dalmy to file a response has
passed, and she has not filed anything. See ECF
The Connecticut Case
pleaded guilty in the Connecticut case to conspiracy to
commit wire fraud. 18 U.S.C. §§ 1343, 371. She
stipulated to a fact statement as part of her written plea
agreement. Plea Agreement, Feb. 6, 2018, Ex. A, ECF No. 136-1
at 11-14. Dalmy admitted to participating in another pump and
dump scheme between January 2009 and July 2016. Id.
at 11. She wrote “fraudulent opinion letters, ”
permitted others to write such letters in her name, and
“ghost wrote” opinion letters in another
attorney's name. Id. at 11, 12. Dalmy also
stipulated that she provided capital for the scheme and
assisted with laundering a portion of the proceeds.
Id. The letters were materially false “as to
whether the issuing company was a shell company, whether the
[shareholder] was an affiliate of the issuer, whether the
transactions described in the letters actually had occurred,
and whether the defendant had performed the due diligence
that she described in the letters.” Id. at 12.
court in the Connecticut case sentenced Dalmy to serve three
years in prison and pay restitution of $2 million. Judgment
1, May 15, 2018, ECF No. 140-1 Ex. A. Dalmy was re-sentenced,
however, because the court found that she willfully failed to
pay restitution. See 18 U.S.C. §§ 3572(h),
3614(a). Based on evidence submitted by the government, the
court found that Dalmy “squirreled . . . away”
tens of thousands of dollars in cash in a rented storage
unit. Order at 5, Nov. 6, 2018, ECF No. 140-1 Ex. C. Among
the court's findings, “Dalmy acted with knowledge
and willful intent to evade her restitution
obligations.” Id. Dalmy argued that she was
unaware that she had to pay restitution immediately instead
of after her release from prison. Id. The court
found her argument disingenuous because it had specifically
admonished her both at sentencing hearing and in the criminal
judgment that restitution was due immediately. Id.
The Connecticut court increased Dalmy's sentence to the
statutory maximum of five years. Am. Judgment 1, Dec. 7,
2018, ECF No. 140-1 Ex. D.