“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.” —Jarvey, District Judge 

Facts: Local farmers in Manchester, Iowa, decided to build an ethanol plant. The farmers and other investors invested $3,865,000 and formed Northeast Iowa Ethanol, LLC (Northeast Iowa) to hold the money and develop the project. 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. Drizin formed GSI for the purpose of assisting Northeast Iowa to raise the additional financing for the project. Drizin talked Northeast Iowa into transferring its money to GSI and the money was placed in 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 by GSI, the funds of Northeast Iowa were stolen. Some funds were invested in a worthless gold mine and other worthless investments. Plaintiff Northeast Iowa sued Drizin for civil fraud to recover its funds. Drizin defended, arguing that GSI, the corporation, was liable but that he was not personally 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? 

Language of the Court: 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 initial capitalization of GSI is, in fact, trifling compared with the business to be done and the risk of loss. And now, GSI is a defunct corporation. Justice and equity call for piercing the corporate veil. 

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 damages of $3.8 million and punitive damages of $7.6 million against Drizin. 

Ethics Questions: Did Drizin act ethically in this case? Did the owners of Northeast Iowa have any responsibility for the losses they suffered in this case? Explain.