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Securities and Exchange Commission v. Zenergy International, Inc.

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

December 20, 2019

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

          MEMORANDUM OPINION AND ORDER

          Joan B. Gottschall, United States District Judge

         The 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.

         I. BACKGROUND

         A. Facts and Dalmy's Liability

         On 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. 20, 2016).

         In 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. at 850-51.

         Dalmy 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).

         The 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).

         B. The Parties Agree to Rely on Dalmy's Video Deposition

         Following 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 requests:

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.

         Dalmy declined the court's invitation for an in-person hearing.[1] 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.

         Because 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.

         Order 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.

         C. The Connecticut and Colorado Cases

         Before 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.[2] See ECF No. 145.

         1. The Connecticut Case

         Dalmy 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.

         The 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.

         2. The ...


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