Ethics and Corporate Responsibility

If capital is illusory or trifling compared with the business to be done and the risk of loss, this is a ground for

denying the separate entity privilege.”

—Judge Jarvey

Facts

Local farmers in Manchester, Iowa, decided to build an ethanol plant in the Manchester area. An ethanol plant

produces ethanol and feed grain, which can be sold at a profit exceeding that of the sale of grain. After many

meetings, the local farmers invested $2,365,000 for the project. The farmers formed Northeast Iowa Ethanol, LLC

(Northeast Iowa), to hold the money and develop the project. William Ethanol Service agreed to invest $1 million,

and North Central Construction agreed to invest $500,000. In all, $3,865,000 was raised for the construction of the

ethanol plant. The funds were placed in an escrow account. The project needed another $20 million, for which

financing needed to be secured.

Jerry Drizin formed Global Syndicate International, Inc. (GSI), a Nevada corporation, with $250 capital. GSI was

formed for the purpose of assisting Northeast Iowa raise the additional financing for the project. Traditional

financing from banks was not available for such a project, so Drizin looked for other sources of money. Drizin

talked Northeast Iowa into transferring money to a bank in south Florida to serve as security for a possible loan.

Drizin commingled those funds with his own personal funds. Through an array of complex transfers orchestrated

by Drizin, all of the funds of Northeast Iowa were stolen. Drizin invested some funds in a worthless gold mine and

lost the rest of the money in other worthless investments.

Plaintiff Northeast Iowa sued Drizin for civil fraud to recover its funds. Drizin defended, arguing that GSI was liable

but that he was not liable because he was but a shareholder of GSI. The plaintiffs alleged that the doctrine of

piercing the corporate veil applied and that Drizin was therefore personally liable for the funds.

Issue

Does the doctrine of piercing the corporate veil apply in this case, thus allowing the plaintiffs to pierce the

corporate veil of GSI and reach shareholder Drizin for liability for civil fraud?

BU2760: Week 6 Ethics and Corporate Responsibility

Essay 6.1

2

Language of the Court

In every financial scam like that perpetrated on the plaintiff here, there comes a point at which the victim must

make an exceedingly quick decision and seemingly, the entire fate of the project depends on taking that leap of

faith. From that point on, very bad things follow and only time will tell what they are. Generally a corporation is a

distinct entity from its shareholders. This distinction usually insulates shareholders from personal liability for

corporate debts. However, this protection is not absolute. Personal liability may be imposed upon shareholders in

“exceptional circumstances.” The corporate veil may be pierced, for example, where the corporation is a mere shell,

serving no legitimate business purpose, and used primarily as an intermediary to perpetuate fraud or promote

injustice.

If a corporation lacks substantial capital such that it would not be able to meet its debts, this is a ground for

denying the privilege of separate entity. If capital is illusory or trifling compared with the business to be done and

the risk of loss, this is a ground for denying the separate entity privilege. Secondly, if corporate funds are not

segregated, there is a strong inference that they are being used by the shareholders for their individual purposes. A

major corporate officer cannot avoid liability be emulating the three fabled monkeys, “hearing, seeing and speaking

no evil.”

Without question, this case presents the “exceptional circumstance” warranting the piercing of GSI’s corporate veil

and finding Mr. Drizin personally liable for GSI’s misdeeds, as the sole purpose of establishing GSI was to perpetuate

fraud. GSI engaged in no legitimate business transactions whatsoever. The $250.00 initial capitalization of GSI is, in

fact, “trifling compared with the business to be done and the risk of loss.” GSI had no errors and omissions

insurance. Mr. Drizin used GSI’s accounts as his own, constantly transferring money from the GSI escrow account to

his personal accounts for “reimbursement” and to other accounts for “safe keeping” and “diversification.” And now,

GSI is a defunct corporation. Justice and equity call for piercing the corporate veil.

Drizin’s actions with respect to plaintiff’s money were both outrageous and malicious. As a result of Drizin’s tortious

conduct, good people were hurt. The evidence is clear, convincing, and satisfactory that punitive damages are

appropriate in this case to punish Drizin and to deter others from engaging in similar conduct.

Decision

The U.S. District Court held that the corporate veil of GSI could be pierced to reach its shareholder Drizin. The

Court awarded the plaintiff compensatory damage of $3.8 million and punitive damages of $7.6 million against

Drizin.