PATEL v. ZOOMPASS HOLDINGS, INC. et al

Filing 44

OPINION. Signed by Chief Judge Jose L. Linares on 01/23/2019. (sms)

NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
NAYMISH PATEL, Individually and On
Behalf ofAll Others Sirn ilctrlv Situa ted,

Civil Action No.: 17-3831 (JLL)

OPINION
Plaintiff,
V.

ZOOMPASS HOLDINGS, INC., et a!.,

Defendants.

LINARES, Chief District Judge.

This matter comes before the Court by way of a motion to dismiss the Second Amended
Complaint filed by Defendants Zoompass Holdings, Inc., Robert Lee, and Brian Morales
(“Defendants”). (ECF No. 35). Lead Plaintiff Carlos Guillermo .Julian Vega (“Plaintiff’) has
opposed this motion, (ECF No. 42), and Defendants have replied to same, (ECF No. 43). The
Court decides this matter without oral argument pursuant to Federal Rule of Civil Procedure 78.
For the reasons stated below, Defendants’ motion to dismiss is granted.

I.

BACKGROUND1

The Court writes for the benefit of the parties. As the Second Amended Complaint is
largely duplicative of the First Amended Complaint (“FAC”), the Court has simply adjusted the

The facts as stated herein are taken as alleged in Plaintiff’s Second Amended Complaint. (ECf No. 33 (“SAC”)).
for purposes of this motion to dismiss, these allegations are accepted by the Court as true. See Phi/l(ps v. Ctv. of
Allegheny, 515 f.3d 224, 228 (3d Cir. 200$) (“The District Court, in deciding a motion [to dismiss under Rule]
12(b)(6). was required to accept as true all factual allegations in the complaint and draw all inferences from the facts
alleged in the light most favorable to [the plaintiff’]”).

“background” section from its prior Opinion, (ECF No. 31), making small changes where
necessary.
A. Parties
Defendant Zoompass is a financial services technology company that has built a platform
that helps its customers digitize their financial transactions. (SAC
corporation headquartered in Toronto, Canada. (SAC

¶

¶ 21).

Zoompass is a Nevada

16). Zoompass’ common stock trades on

the “Venture Market” or the “OTCQB,” which is one of three financial markets organized by OTC
Markets Group, Inc. (SAC

¶

16). Defendant Robert Lee is the director and CEO of Zoompass

and the owner of roughly 38.1% of the company’s common stock as

of

April 18, 2017. (SAC

¶

17). Defendant Brian Morales is Zoompass’ CFO and has served in that role since August of 2016.
(SAC

¶ 18).
Plaintiff is a purchaser of Zoompass securities during the Class Period—between April 24,

2017 and May 24, 201 7—who purchased those securities “at artificially inflated prices.” (SAC’
1, 15). Plaintiff brings this putative federal securities class action

“on

¶

behalf of all persons or

entities who purchased or otherwise acquired Zoompass common stock” during the Class Period.
(SAC1).
B. Zoompass Stock During the Class Period
On March 27, 2017, Zoompass stock began actively trading on the OTCQB. (SAC

¶ 44).

Shortly thereafter, on April 10, 2017, Currin Teclmology released a “special high-tech issue” of
its technology stock newsletter titled “Wall Street Investor.” (SAC

¶ 45).

Plaintiff alleges that

this newsletter was a paid-for advertisement for Zoompass as opposed to an unbiased analysis of
certain technology stocks. (SAC

¶ 45).

The newsletter set forth a glowing recommendation of

Zoompass stock, •for example, stating that Zoompass was “one of the most attractive tech stocks”

of the last 15 years, with the potential to earn investors ‘270% profits or more.” (SAC 148). A

wthsite titled “zoompassinvestor.com” accompanied the newsletter. (SAC ¶49). Following the
dissemination of the newsletter and the accompanying website, Zoompass shares rose from S 1.80
per share to $3.64 per share from April 10, 2017 through May 9,2017. (SAC ¶ 50).
On April 24, 2017, the date on which the Class Period began, Zoompass filed its 2016
annual financial disclosure statement (‘2016 10-K’, which stated that Zoompass “did not have
any promoters at any time during the past five fiscal years.” (SAC 158). The 2016 10-K also
informed investors that Zoompass’ CEO and CFO had looked at the effectiveness of the
company’s internal disclosure controls and procedures, and that “the price of[Zoompass] common
stock may be negatively impacted by factors that are unrelated to [its] operations.” (SAC ¶ 59—
60). Mr. Lce and Mr. Morales signed the 2016 10-IC (SAC 161). The next day, nearly two
million Zoompass shares traded on the OTCQB, the largest volume in Zoompass’ trading history.
(SAC ¶ 62). Zoompass stock continued to rise steadily through May 8,2017. (SAC ¶64).
On that day, OTC Markets became aware ofthe newsletter promoting Zoompass stock and
so informed the company. (SAC ¶ 65). OTC Markets then labeled Zoompass shares as “caveat
emptor,” notifying traders that “[t]here is a public interest concern associated with [Zoompass],
which may include a spain campaign, questionable stock promotion, known investigation of
fraudulent activity committed by the company or insiders, regulatory suspensions, or disruptive
corporate actions.” (SAC ¶ 66).
Zoompass then issued two statements. The company issued the first statement on May 9,
2017 after the close of the market, stating:
The Company is unaware of the full nature and content of the promotional
newslefter and any related promotional activity, the responsible parties and the
extent of the email newsletters’ dissemination. The Company is not aware of the
promotional materials’ author or its affiliated entities or persons, other than the
3

identifying information disclosed in the newsletter. The Company’s recent press
releases have reported on and provided disclosure of legitimate and ongoing
corporate activity only, and are not pad of any promotional activities or campaign.
(SAC ¶67). Zoompass continued, stating:
After inquiry, the Company states definitively that its officers, directors and, to the
Company’s knowledge, its controlling shareholders (i.e., shareholders owning 10%
or more of the Company’s securities), of which there are only two, have not,
directly or indirectly, authorized or been involved in any way (including payment
to a third-party) with the creation or distribution ofpromotional materials including
the subject newsletter; and that the Company, its officers, directors, and to the
knowledge of the Company, any controlling shareholders, have not sold or
purchased the Company’s securities within the past 90 days on[] the open market
Additionally, the shares currently held by the Company’s officers, directors and
controlling shareholders are not registered.
(SAC 168).
Following these announcements, Zoompass’ share price fell 45% over three trading days.
(SAC ¶ 70). Then, on May 11, 2017, Zoompass publicly acknowledged that OTC Markets moved
Zoompass stock from the OTCQB to OTC Pink Current information, and that OW Markets had
placed the caveat emptor label on the company’s stock as a result of the promotional newsletter
and website. (SAC ¶[ 71)? The frllowing day, nearly 2.6 million shares ofZoompass stock traded
on the OTC Pink Current Inlbrmation market, which was the second heaviest daily trading volume
in the company’s history. (SAC ¶73). On May 15, 2017, Zoompass filed its quarterly financial
disclosure statement (“10-Q’ for the first quarter of 2017. (SAC ¶74). In its lO-Q, Zoompass
conceded that its disclosure controls and procedures were “ineffective.” (SAC ¶74).
After Zoompass made its two press releases and filed its l0-Q, its shares briefly rebounded
until May 25th, 2017, when an article published on the website Seeking Alpha “fully and finally
exposed and outlined the Defendants’ involvement in the scheme to make hidden payments to

2

According to Plaintifi the OTC Pink Current Information market requires no minimum financial standards and
advises investors to proceed with caution as companies listed on that exchange “are not willing or able to provide
adequate information to investors.” (SAC 71 a4).

4

stock promoters to pump up the price of Zoompass stock.” (SAC

¶ 77).

After the release of the

SeekingA/pha article, Zoompass’ share price felt over 23% by close of business on May 25, 2017.

(SAC

¶ 91).

The following day, Zoompass acknowledged that it was aware of the Seeking Alpha

article and filed an amended 10-K to correct the identity of its CEO, a mistake the Seeking Alpha
article exposed. (SAC ¶j 92—93). Zoompass did not issue any other statements rebutting or
denying the information in the Seeking Alpha article. (SAC

¶

94). Over the course of the next

week, Zoompass shares ptummeted to less than $1 per share. (SAC

¶ 95).

C. The Alleged false and Misleading Statements During the Class Period
Plaintiff sets forth six statements made by Zoompass or the individual defendants that he
believes are material false or misleading statements. (SAC

¶f 98—1 06,

Ex. E).

1. In its 2016 10—K, Zoompass stated that it, “did not have any promoters at any time during
the past five fiscal years.” (SAC, Ex. E (noting that this statement is misleading because
it omits that Defendants were engaged in a scheme to artificially inflate the value of
Zoompass stock and because Defendants did have a paid relationship with stock promoters
at that time)). Plaintiff also argues that this statement “creates the false and misleading
impression that fluctuations in the price of the stock were caused solely by dissemination
of information related to the Company’s finances and operations, rather than promotional
advertisements paid for by” Zoompass. (SAC, Ex. E).
2. In its 2016 10-K, Zoompass stated that its CEO and CEO concluded its “disclosure controls
and procedures

.

.

.

were effective” as of December 31, 2016. (SAC, Ex. E (alleging that

this statement is false and misleading because Zoompass later admitted it did not have
effective controls and because it created “the false and misleading impression that
[Zoompass’] disclosures complied with SEC rules”)). Additionally, Zoompass’ 2016 10-K

included signed certifications by Mr. Lee and Mr. Morales that were required by the
Sarbanes-Oxley Act of 2002 C’SOfl. (SAC ¶ 101). These certifications stated that the

financial information in the 2016 10-K was accurate, disclosed any “tnaterial changes to
[Zoompass’] internal controls over financial reporting,” and represented “in all material
respects, the financial condition and results of operations of Zoompass Holdings, Inc.”
(SAC ¶ 101). Plaintiff alleges that these certifications were false or misleading because
they failed to disclose that Zoompass was engaged in the stock promotion scheme, and that
as a result of that conduct, Zoompass would be subject “to heightened regulatory scrutiny
and potential criminal sanctions.” (SAC ¶102).
3. In its 2016 10-K, Zoompass stated that, “[t]he price of [its] common stock may be
negatively impacted by factors that are unrelated to [its] operations.” (SAC, Ex. E).
Plaintiffnotes that this statement is false or misleading because it both omits that the price
of Zoompass stock was actually being manipulated by the promotional newsletter at the
time the statement was made and further “creates the false and misleading impression that
the dramatic increase in the value ofthe Company’s stock was caused by factors related to
the Company’s operations, [even] though Defendants knew that the Company’s stock price
had increased as a direct result of their promotional scheme.” (SAC, Ex. E).
4. In its May 9, 2017 press release, Zoompass stated that its controlling shareholders, “have
not, directly or indirectly, authorized or been involved in any way (including payment to a
third-party) with the creation or distribution ofpromotional materials including the subject
newsletter.” (SAC, Ex. E). Plaintiff alleges that this statement “omits the fact that at least
one.

.

.

of [Zoompass’] controlling shareholders was involved with the creation or

6

distribution ofthe promotional materials,” and creates the false and misleading impression
that Defendants were not engaged in the promotional scheme. (SAC, Ex. E).
5. In its May 11, 2017 press release, Zoompass stated that it “assure[s] the public that all of

[its] press releases, SEC filings and information on our wthsite (www.zoompass.com) and
the OTC markets profile remains true, correct and complete.” (SAC, Ex. E). Plaintiff
alleges that this statement is false and misleading because Zoompass’ SEC filings were not
true, correct, and complete, it ignores Defendants’ involvement in the promotional scheme,
and it was contradicted by Defendants’ later admission that their disclosure controls were
ineffective. (SAC, Ex. E).
6. In its May 15,2017 10-Q, Zoompass stated that after an internal evaluation ofits corporate
disclosure controls and procedures, its CEO and Cit “concluded that [its] disclosure
controls and procedures as of the end of the period covered by this Quarterly Report were
ineffective.” (SAC, Ex. E (alleging that this statement omits Defendants’ involvement in
the promotional scheme and their &ilure to maintain adequate internal controls, while
misleading investors into thinking that Defendants had just learned of the inadequacy of
those controls when they had known about the deficiencies for over a month)).
D. The Second Amended Complaint
On August 8, 2018, this Court granted Defendants’ motion to dismiss the Amended
Complaint. (ECF Nos. 3 1—32). In its Opinion, this Court granted Plaintiff leave to amend, despite
the PSLRA’s narrowed “application of the amendment standard in securities fraud cases,” and the
Court’s intuition that “amendment may well be futile, as Plaintiff ha[d] failed to satisfS’ the
pleading requirements of the PSLRA.. ,and [] ha[d] failed to propose an amendment to the FAC
.

that would satisfr this requirement. (ECF No. 31 at 18). On August 21,2018, Plaintiff filed the

7

SAC. (SAC). Attached to the SAC is a redlined copy of the SAC against the FAC. (SAC, Ex.
A). The redline shows that the SAC is essentially unchanged from the FAC, with the exception of
a new section titled “Additional Allegations Connecting Defendants to the Promotional
Campaign.” (SAC, Ex. A at 38). This new section alleges a series of facts that compare the
promotional activity surrounding Zoompass to the promotional activity surrounding Purn Naturals,
a company that Defendant Lee was allegedly also a director of. (SAC, Ex. A ¶ 107—134).
E. Allegations
The allegations in the SAC remain the same. This putative class action asserts securities
violations under the Securities and Exchange Act of 1934 (the “Act”). Specifically, in Count I of
the Second Amended Complaint, Plaintiff asserts a violation of Section 10(b) ofthe Act, and Rule
lOb-S promulgated thereunder. in Count 11, Plaintiff asserts derivative claims against Defendants
Lee and Morales for violation of Section 20(a) of the Act. Defendants now move again for a
dismissal of this action for failure to state a claim pursuant to Federal Rule of Civil Procedure
I 2(bX6).
II.

LEGAL STANDARD

Federal Rule of Civil Procedure 8(a) requires that a complaint set faith “a shod and plain
statement of the claim showing that the pleader is entitled to relief” Fed. R. Civ. P 8(a)(2). The
plaintiff’s short and plain statement of the claim must “‘give the defendant fair notice of what the
claim is and the grounds upon which it rests.” Bell At!. Corp.

t

Thvrnb!v, 550 U.S. 544,555

(2007) (quoting Confrv i Gibson, 355 U.S. 41,47(1957)). For a complaint to survive dismissal,
it “must contain sufficient factual matter, accepted as true, to ‘state a claim to reliefthat is plausible
on its face.” Ashcrqft i Jqbal, 556 U.S. 662,678 (2009) (quoting Twombly, 550 U.S. at 570).

8

In evaluating the sufficiency of a complaint, a court must “accept all well—pleaded
allegations in the complaint as true and draw all reasonable inferences in favor of the non—moving
party.” Phi/tips v. Ct. ofAtleghenv, 515 F.3d 224, 231 (3d Cir. 200$) (quoting In re I?ocke/llcr
Ct,. Props., Inc.. Sec. Liüg., 311 F.3c1 198, 21 5—16 (3d Cir. 2002)). “Factual allegations must be
enough to raise a right to relief above the speculative level.” Twombly, 550 U.S.at 555. further,
“[a] pleading that offers ‘labels and conclusions’ or ‘a formulaic recitation of the elements of a
cause of action will not do.’ Nor does a complaint suffice if it tenders ‘naked assertion[s]’ devoid
of ‘further factual enhancement.” Iqbctt, 556 U.S. at 678 (quoting TwombI, 550 U.S. at 555,
557). To that end, a court considering a motion to dismiss must take account of the elements
necessary to plead the claims alleged in the complaint.
In this case, Plaintiffs seek relief under Sections 10(b) and 20(a) of the Act. “Section 1 0(b)
prohibits the ‘use or employ, in connection with the purchase or sale of any security,

.

.

.

[ofl any

manipulative or deceptive device or contrivance in contravention of such rules and regulations as
the Commission may prescribe
2002) (quoting 15 U.S.C.

In re Ikon 0//ice So/s., Inc., 277 f.3d 658, 666 (3d Cir.

“

§ 78j(h)). Rule lob-5, in turn, created a private right of action for

investors harmed by materially false or misleading statements to enforce Section 10(b), and it
“makes it unlawful for any person ‘[t]o make any untrue statement of a material fact or to omit to
state a material fact necessary to make the statements made in the light of the circumstances under
which they were made, not misleading
Id. (quoting 17 C.f.R.

.

.

.

in connection with the purchase or sale of any security.”

§ 240.lOb-5(b)).

To establish liability under 10(b) and lob-5, a plamtiff must show:
(1) ci matericil misrepresentation or omission); (2) scienter, i.e., a wrongful state of mind;
(3) a connection with the purchase or scite 0/cl security; (4) reflcince, often referred to in
cases involving public securities markets (fraud-on-the-market cases) as “transaction

9

causation;” (5) economic loss; and (6) “loss causation,” i.e., a causal connection between
the material misrepresentation and the loss.
Dura Pharm., Inc. v. Broudo, 544 U.S. 336,41-42(2004) (internal citations omitted).

“Because this is a securities fraud case,.

.

.

[the Court] do[es] not merely ask, as [it]

normally would under Rule 12(bX6), ‘whether, under any reasonable reading ofthe complaint the
plaintiff may be entitled to relief” Institutional mv ‘itc Gip.

i’

Awiya, Inc., 564 F.3d 242,252 (3d

Cir. 2009) (quoting Phill4ps, 515 F.3d at 233). This is because the Private Securities Litigation
Reform Act (‘PSLRA”), applicable to this case, imposes a heightened pleading standard for claims
arising under the Securities Exchange Act Id. at 252—53. Specifically, under the PSLRA, a
plaintiffmust “state with particularity both the facts constituting the alleged violation, and the facts
evidencing scienter, La, the defendant’s intention ‘to deceive, manipulate, or defraud.” Tellabs,
Inc.

t

Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007) (first quoting Ernst & Ernst

i

Ilochfelder, 425 U.S. 185, 194 & n.12 (1976); then citing 15 U.S.C. § 78u—4(bXl), (2)).

First, with regard to misleading statements and omissions of material fact, a plaintiff must
“specify each statement alleged to have been misleading, the reason or reasons why the statement
is misleading, and, ifan allegation regarding the statement or omission is made on information and
belief the complaint shall state with particularity all facts on which that belief is formed.” 15
U.S.C.

§ 78u—4(bXl).

Further, “[t]o be actionable, [the] statement or omission must have been

misleading at the time it was made; liability cannot be imposed on the basis of subsequent events.”
hi re NAIIC Inc. Sec. Lug., 306 F.3d 1314, 1330 (3d Cir. 2002).

Second, as to the scienter requirement, with respect to each alleged wrongful
misrepresentation or omission, a complaint must “state with particularity facts giving rise to a
strong infrrence that the defendant acted with the required state of mind.” 15 U.S.C.

§

78u-

4(bX2)(A). Under the PSLRA, unlike the general rule for pleading fraud under FRCP 9(b), “any
10

private securities complaint alleging that the defendant made a false or misleading statement must
state with particularity facts giving rise to a strong inference that the defendant acted with the
required state of mind.” Avact, 564 f.3d at 253

III.

(qLtoting

Tdllabs, 551 U.S. at 321).

DISCUSSION

The Cotirt declines to revisit every argument made by Plaintiff and Defendants. To the
extent that the SAC mirrors the FAC—and it does almost entirely—the Court directs the parties to
its August 8, 2018 Opinion, (ECF No. 31). To the extent that Plaintiffs additional allegations
change the Court’s prior analysis or raises new issties, both will be discussed below.
As mentioned above, the additions to the SAC concern the parallels between the
promotional campaigns directed at Pura Naturals and at Zoompass. The similarities between these

campaigns were raised in the FAC as well. As to the import of the comparison, this Court wrote:
Plaintiff dedicates a significant amount of space in its FAC and brief to the alleged
similarities between the promotional campaigns that targeted Zoompass and Pura
Naturals. (See FAC ¶J $4--95; ECF No. 29 at 15, 29 & n.15). These similarities
are set out in the Seeking Alpha article, which claims that: (1) the promotional
websites for Zoompass and Pura Naturals had similar layouts and domain names
and were allegedly both connected to CDMG; (2) the companies’ press releases
concerning the promotional campaigns were “almost identical in context,” which
could only be explained by plagiarism or the creation of both press releases by one
party; (3) both Zoompass and Pura Naturals’ stocks had similar chart patterns; and
(4) Mr. Lee is a director of Pura Naturals and may actually be the CEO of Pura
Naturals under the name Rob Doherty. (ECf No. 27-2 at 5—10).
None of these alleged similarities plausibly establishes that Defendants paid for or
even knew about the promotional campaign. That the promotional websites for
Zoompass and Pura Naturals had similar layouts and domain names, along with
their alleged connection to CDMG, establishes only that it is plausible that the same
company created both websites. That CDMG may have been that company
establishes no relationship between the promotional campaign and the Defendants.
Similarly, Plaintiffs contention that the similarity of Zoompass and Pura Naturals’
press releases can be explained only by plagiarism or the creation of both press
releases by one party does little to establish that Defendants paid for, or were
involved in the creation of, the promotional campaign. Nor does the similarity of
II

Zoompass and Pura Natcirals’ stock chart patterns lend any credence to Plaintiffs
theory. The most plausible takeaway from that comparison is that stocks behave
similarly when targeted by a promotional campaign, not that Defendants paid for
the promotional campaign that targeted Zoompass.
Finally, Plaintiffs contention that Mr. Lee may be the CEO of Pura Naturals under
the name Robert Doherty is mere conjecture. The origin of this claim is that Robert
Doherty was listed in Zoompass’ 2016 10-K as the Companys Director and CEO.
(FAQ ¶ 91). Zoompass filed an amended 10—K, attributing the mistake to a
‘scriveners[sic] error” and clarified that its CEO is Mr. Lee, who has not used any
other name. (FAQ ¶ 94). This scrivener’s error, white curious, does not establish
that Defendants were involved in the creation of or paid for the promotional
campaign. At best, it establishes a plausible connection between Zoompass and
Pura Naturals. Even assuming that Mr. Lee was the CEO of Pura Naturals under
the name Robert Doherty, Plaintiff pleads no facts establishing that Pura Naturals.
or any of its officers, paid for or were otherwise responsible for the promotional
campaign that targeted it. Taken to its furthest logical conclusion, Plaintiff has pled
instances of two potentially connected companies that were the targets of two
nearly identical promotional campaigns that were likely created by the same third—
party and financed by one or more additional third-parties. Even interpreting the
facts in the light most favorable to Plaintiff, that conclusion does not establish that
Defendants were involved with or paid for the promotional campaign.
(ECf No.31 at 12—13).
Plaintiff argues that the new additions to the SAC’, when read in conjunction with
the prior allegations, show that Defendant Lee was the director and controlling shareholder
of Pura Naturals’ predecessor—Yummy Flies—at the time of a stock exchange transaction
that was the mirror image of the stock exchange transaction that preceded the promotional
campaign targeting Zoompass. (ECF No. 42 at 1 7). Plaintiff also argues that the Pura
Naturals promotional materials explicitly link Defendant Lee to the financing of the Pura
Naturals promotional campaign. (ECF No. 42 at 17—1 8). Defendants argue that this is an
inaccurate and incomplete reading of the SAC, and that the documents attached thereto
reveal a different reality. (ECF No. 35-I at 20—23).
The timing of the Yummy Flies/Pura Naturals stock transaction is critical to its
relevance to the case at hand. According to Plaintiff. Defendant Lee was appointed as a
12

member of the board of directors” of Yummy Flies on April 11,2016. (SAC ¶109). “On
that same date, Mr. Lee agreed to purchase enough shares ofYummy Flies to acquire 78%
of the total votes entitled to be cast at any meeting of shareholders, giving him voting
• control ofYummy Flies.” (SAC ¶109). According to a Pun Naturals form 8-K, Defendant
Lee remained the company’s controlling shareholder as of July 26, 2016. (SAC ¶ 109).
The promotional materials were released on January 17,2017. (SAC, Ex. F at 2). Plaintiff
also points out that the Pun Naturals promotional materials contained a disclaimer stating
that the mailing was “a paid promotional advertisement of the featured company, ‘Pun
Naturals, Inc.,” and that “a shareholder(s)” of Pun Naturals had paid $1,926,538 for the
promotional marketing campaign.

(SAC

¶

113).

PlaintifI allege that, “[b]ecause

Defendant Lee apparently held almost all of the shares of Pura Naturals at th[e time of the
promotional mailing], it is highly likely that the $1.9 million paid to International
Marketing Research, Ltd. by ‘a shareholder’ of the company came from Defendant Lce
directly.” (SAC 1115).
When documents are incorporated into a complaint by reference, the Court is
entitled to consider them. Winer Family Th. v. Queen, 503 F.3d 319,327 (3d Cir. 2007).
When looking at the underlying SEC filings, it is true that Mr. Lee acquired his voting
share ofYummy Flies stock on April 11,2016. (ECF No. 35-3 at 35). Yummy Flies’ July
2016 Form 8-K indicates that Defendant Lee’s 8,289,000 shares of common stock were
cancelled pursuant to a “Share Exchange Agreement,” between Pun Naturals and Yummy
Flies. (ECF No. 354 at 3). Plaintiff argues that the only fair inference given this
information in Pun Naturals and Yummy Flies’ financial disclosure documents is that

Defendant Lee remained the controlling shareholder of Pun Naturals thllowing the share

13

exchange. (ECF No. 42 at 25—27). This is because: (1) the financial disclosure statements

‘‘provide

110

injinwiation as to what, if anything. Defendant Lee received in return,’’ (2)

that this lack of information means that Defendant Lee acquired 78% of Yummy Flies
shares and then cancelled his interest in the

company

for “zero consideration,” which is

“utterly implausible,” and (3) “45% of Yummy flies shares remained outstanding after the
transaction and the Complaint alleges that ‘upon information and belief, Defendant Lee
remained as the only controlling shareholder of Pura Naturals after the share exchange.”
(ECF No. 42 at 26 & n.13).
The financial disclosure statements do not support these inferences. The Pura
Naturals 2016 10-K does not list Defendant Lee as a shareholder or a director. (ECF No.

35-5 at 28, 34—35). The largest single shareholder of Pura Naturals, according to the 2016
10-K, was a company called AiRTech, which owned 35.39% of Pura Naturals stock. (ECf
No. 35-5 at 35). Together with the stock owned by the officers and directors of Pura
Naturals. the total percentage of shares owned by these entities was 54.2%. (ECF No. 355 at 35). These facts obscure the already cloudy inference that Plaintiff asks this Court to
make—that Defendant Lee necessarily funded the Pura Naturals promotional campaign,
and, due to the similarities

between

that campaign and the one targeting Zoompass,

Defendant Lee must have also funded or directed the Zoompass campaign. As Defendants
correctly note, any combination of the shareholders holding 54.2% of Pura Naturals stock
could have been the alleged shareholder who paid International Marketing Research Ltd.
to fund the Pura Naturals promotional campaign. (ECF No. 35-1 at 23 n.5).
Plaintiff’s remaining new allegations also fail to convince the Court to alter the
reasoning in its August 8, 2018 Opinion. First, with regard to the Zoompass promotional

14

campaign, Plaintiff suggests that “various financial maneuverings that occurred around the
time the payment was macic suggest the initial source of the nearly $2 million payment was
Zoompass itself.” (ECF No. 42 at 1 8). Plaintiffbelieves this conclusion is warranted based

on several allegations. First, the Zoompass board of directors “approved the grant of
I ,480,000 options to purchase common stock

...

and 460,000 deferred share units to

certain directors, officers, employees, and consultants of the Company. (SAC

¶

123).

Zoompass also “issued 1,471,659 warrants [to ‘certain individuals’] to purchase common
stock of the Company,” and the expiration date of these warrants “was amended by the
Company from November 30, 2016 to March 31, 2017,” approximately one week before
Zoompass shares began trading on the market. (SAC

¶]

1 24—26).

As Defendants point out, reaching Plaintiffs conclusions based on these allegations
requires a fair amount of speculation. (ECF I\Io. 43 at 10). Plaintiff alleges no facts that

Sargon Finance—the alleged financier of the promotional campaign—was a consultant of
Zoompass. Plaintiff alleges no facts showing that Sargon Finance received either stock
options, deferred share units, or warrants. Lastly, Plaintiff alleges no facts showing that
Sargon finance exercised its rights to any of these options, deferred shares, or warrants

and then used those options, shares, or warrants to pay for the promotional campaign.-3
These new facts, even interpreted in the light most favorable to Plaintiff, fail to sufficiently
establish what the Court found previously lacking: Defendants’ involvement with or
financing of the promotional canipaign.

The SAC also alleges that the promotional newsletter was paid for “in the form of securities, rather than cash.” (SAC
f 128). Plaintiff does not repeat this argument in his brief, and in any event, the promotional newsletter states that
“[a]dvertising agencies involved in the campaign received funds for services and no securities.” (SAC. Ex. B at 13).

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IV.
For

CONCLUSION

the reasons stated herein, Plaintiffls Second Amended Complaint is hereby dismissed

with prejudice .An appropriate Order accompanies this

DATED: January

Opinion.

9

T. JOSE L. LINARES
7iefJude. United States District Court

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