“DOG ATE MY HOMEWORK” DEFENSE DOESN’T FLY WITH SEC’S CHIEF ADMINISTRATIVE LAW JUDGE

 

SEC SealFinding that a securities lawyer’s “continued participation in the industry presents a significant threat to the integrity of the Commission’s processes established to protect investors,” Chief Administrative Law Judge Brenda P. Murray July 29 permanently barred Diane D. Dalmy from appearing or practicing before the Securities and Exchange Commission as an attorney.

The action arose from an alleged pump-and-dump scheme involving a purported biofuel company in Chicago, in which the company, Zenergy International, entered into a reverse merger with a publicly-traded shell entity, Paradigm Tactical Products. The scheme generated $4.4 million in illicit profits.

The SEC alleged that Dalmy advised on the structure of the transaction and drafted and submitted attorney opinion letters to Zenergy’s transfer agent stating that Zenergy’s shares were exempt from registration and approving the issuance of unrestricted stock. Holders of the purportedly unrestricted stock then obtained at least $4.4 million from their stock sales to public investors, and Dalmy personally sold 1 million shares to public investors for $43,995.

Chief Judge Murray found Dalmy’s conduct to be egregious, stating that “the evidence contradicts Dalmy’s position that she acted in good faith in any aspect of the reverse merger of Paradigm and Zenergy and the resulting unlawful issuance of unrestricted Zenergy stock.” Murray cited emails to Dalmy from a Paradigm consultant in which the consultant wrote to Dalmy that “[w]e’re golden once the shares hit our accounts, payday is right around the corner.”

Murray called “absurd” Dalmy’s assertion that she conducted due diligence on Paradigm by reading press releases and talking with Paradigm’s principal. She also rejected Dalmy’s “my dog ate my homework” defense, in which Dalmy claimed that she lost the documentation of her due diligence review due to a flood and a computer crash.

“An experienced securities attorney such as Dalmy cannot reasonably claim to have done due diligence without independent confirmation of information received from a party to the transaction and without having retained financials that she allegedly relied on for her opinion,” concluded Murray.

Dalmy also presented an extreme risk of engaging in future misconduct. Not long after submitting her response to the Enforcement Division’s “Wells notice” advising her of the Division’s intent to file charges, Dalmy prepared opinion letters for 18 purported mining companies. The SEC suspended the registration statements of these companies because they were used for sham offerings of stock to investors. Dalmy allegedly falsely stated that she conducted a due diligence investigation of each company in this case.

For more information on Administrative Law Judge actions, see Bloomberg Law’s SEC ALJ Enforcement Analytics and SEC ALJ Enforcement Tracker.

In the Matter of Diane D. Dalmy, Esq., Admin. Proc. File No. 3-17020 (July 29, 2016).