Levy v. Maggiore et al
Filing
35
MEMORANDUM & ORDER granting 24 Motion to Dismiss for Failure to State a Claim; granting 26 Motion to Dismiss for Failure to State a Claim. For the reasons set forth in the attached Memorandum and Order, the Court grants Defendants' motions t o dismiss the Second Amended Complaint, denies Plaintiff's 32 application to submit the proposed Third Amended Complaint, but grants 30 days leave to amend the Second Amended Complaint. Ordered by Judge Margo K. Brodie on 9/29/2014. (Prakash, Swati)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
--------------------------------------------------------------STEVEN LEVY,
Plaintiff,
MEMORANDUM & ORDER
13-CV-2219 (MKB)
v.
DOMINIC MAGGIORE, JASON SANTIAGO,
THOMAS PRAGIAS, JOHN KAMEN, HUGH
WARD and RAICHE ENDE MALTER &
CO., LLP,
Defendants.
--------------------------------------------------------------MARGO K. BRODIE, United States District Judge:
Plaintiff Steven Levy commenced this action on April 11, 2013, against Defendants
Dominic Maggiore, Jason Santiago, Thomas Pragias, John Kamen and Hugh Ward (collectively
the “IBG Defendants”), 1 and Raiche Ende Malter & Co., LLP (“Raiche Ende”). Plaintiff alleges
claims of fraud pursuant to sections 10(b) and 20(a) of the Securities Exchange Act (the
“Exchange Act”), 15 U.S.C. §§ 78j(b) (“section 10(b)”) and 78t (“section 20(a)”), as well as
common law claims of fraud, fraud in the inducement, and for an accounting against the IBG
Defendants. Plaintiff also alleges an aiding and abetting fraud claim against Raiche Ende.
Plaintiff filed an Amended Complaint on October 8, 2013, adding a claim of fraud and violations
of section 10(b) of the Exchange Act against Raiche Ende, and withdrawing the claim for an
accounting as to the IBG Defendants. (Docket Entry No. 14.) All Defendants move to dismiss
the Amended Complaint and Plaintiff seeks leave to submit a Second Amended Complaint
1
Defendants were members of the board of directors of Integrated Beverage Group, Ltd.
(“IBG”), a New York corporation.
(“SAC”), (annexed to Declaration of Christopher Travis in Opposition to Defendants’ Motion to
Dismiss (“Travis Decl.” as Ex. 11), and to submit a revised Second Amended Complaint,
(Docket Entry No. 32), which the Court refers to as the Third Amended Complaint. For the
reasons set forth below, the Court accepts Plaintiff’s Second Amended Complaint and considers
it in deciding the motions, and grants Defendants’ motions to dismiss the Second Amended
Complaint. The Court denies Plaintiff’s motion to submit the Third Amended Complaint, but
grants leave to amend the Second Amended Complaint only as to Maggiore and to add the
second proposed plaintiff.
I.
Background
IBG was a New York corporation that manufactured sports, recreational and
“nutraceutical” beverages. 2 (SAC ¶ 4.) The IBG Defendants are current or former officers and
directors of IBG, and Raiche Ende was IBG’s accounting firm. (Id. ¶ 2.)
In May 2009, IBG offered a private placement of shares to Plaintiff and other investors,
(the “May 2009 private placement”), and engaged a non-party brokerage firm, Lighthouse
Financial Group, Inc. (“Lighthouse Financial”), to act as its agent in the placement. (Id. ¶¶ 28–
29.) The IBG Defendants instructed Lighthouse Financial brokers to market shares in IBG by
telling potential investors that IBG had $2,130,000 in sales in 2008, and was “on track” to earn
more than $2,000,000 in sales in 2009. (Id. ¶¶ 30–31.) Lighthouse Financial brokers gave
Plaintiff a Private Placement Memorandum (“PPM”) in connection with the May 2009 Private
2
In reviewing Defendants’ motion to dismiss under Rule 12(b)(6) of the Federal Rules
of Civil Procedure, the Court accepts all of the factual allegations in the Second Amended
Complaint as true. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Matson v. Bd. of Educ., 631
F.3d 57, 63 (2d Cir. 2011).
2
Placement. 3 (Id. ¶ 32.) The PPM stated that IBG’s auditor, Raiche Ende, had provided
preliminary audited results of 2008 that reflected “gross sales of approximately $2,130,000,” as
compared to $289,000 in 2007, and that the growth in sales from 2007 to 2008 was 737%. (Id.
¶¶ 32–33.) In addition to giving Plaintiff a copy of the PPM, Lighthouse Financial brokers
verbally told Plaintiff that IBG was on the verge of going public, and that the proceeds of
Plaintiff’s investment in IBG would go toward marketing, branding and product development.
(Id. ¶¶ 31–32, 47.) Plaintiff purchased 350,000 shares of IBG stock between September and
November 2009. (Id. ¶ 3.) In purchasing the shares of IBG stock, Plaintiff relied on oral and
written representations made by IBG and Raiche Ende that IBG had more than $2,130,000 in
gross sales in 2008, that IBG was about to go public, and that Plaintiff’s investment would be
used for marketing and product development. (Id. ¶ 6.)
In reality, IBG did not have either gross or net sales of $2,130,000, and received only
$1.575 million for goods shipped in 2008. (Id. ¶¶ 38–39.) According to the Lighthouse
Financial broker who sold Levy his shares, a portion of the claimed sales of $2,130,000 were
“consignment shipments,” which were shipments of products to retailers, for which title did not
pass and the sale was not complete until a customer purchased the product from the retailer. (Id.
¶ 8.) These sales were also comprised of “‘guaranteed sales,” meaning IBG would pay retailers
for its products if they went unsold.” (Id. ¶ 40.)
A section titled “Risk Factors,” in the PPM includes the following language:
The Company’s gross sales include all shipped goods inclusive of
merchandise sold by retailers pursuant to in-store promotions,
3
The PPM is dated May 5, 2009. (Private Placement Memorandum (“PPM”), annexed
to Declaration of Dominic Maggiore (“Maggiore Decl.”) as Ex. A at 1.) Plaintiff’s
memorandum of law in opposition to Defendants’ motions to dismiss states that this PPM was
given to Plaintiff in or about August 2009. (Pl. Opp’n Mem. 3.)
3
coupons, slotting fees, co-operative advertising fees, rebate and
free-bate programs. Accordingly, retailers deduct the cost of these
goods and in certain programs deduct their per unit profit from their
invoices which reduces the net cash receipts of the Company. No
assurances can be given that the Company will collect payment for
all of the goods sold as these deductions and other deductions are
taken by retailers and, in certain cases, by wholesalers.
(PPM, annexed to Declaration of Dominic Maggiore (“Maggiore Decl.) as Ex. A, at 19.)
In addition, instead of using the proceeds from the May 2009 private placement for
marketing and product development as represented to Plaintiff, the IBG Defendants used all of
the proceeds to compensate officers and to pay directors’ fees. (SAC ¶ 47.) The IBG
Defendants “had the power and authority to control the contents” of the PPM, as well as the
representations made by Lighthouse Financial brokers to potential investors. (Id. ¶ 26.) The
IBG Defendants either “disseminated” the information contained in the PPM, or were aware that
the statements contained therein were false and misleading. (Id.)
An independent audited financial statement completed by Raiche Ende (“2008 Audited
Financial Statement”) and issued on June 8, 2009, stated that IBG’s 2008 sales were $2,130,000,
and stated “revenue is recognized at the time the product is shipped to the buyer.” (Id. ¶ 51;
2008 Audited Financial Statement, annexed to Travis Decl. as Ex. 2, at 1, 6.) This revenue
recognition statement contradicted the statement in the May 2009 PPM that IBG “booked sales
when shipped — whether there was a buyer or not.” (Id.) Because there were few, if any,
“buyers” of IBG’s products in 2008, the audited 2008 sales figure was a misrepresentation. (Id.)
Raiche Ende also failed to identify the amount of compensation paid to IBG officers and
directors, and the amount of time those officers and directors dedicated to IBG business on
IBG’s federal corporate tax returns. (Id. ¶ 52.) In addition, Raiche Ende conspired with the
directors of IBG to refrain from deducting the “directors[’] fees paid to IBG directors,” who in
4
turn failed to report these amounts on their own individual tax returns. (Id.) In 2011, the
directors and officers of IBG sold IBG’s most valuable brand, “Power Ice,” for $1,000,000.
(Id. ¶ 53.) IBG subsequently declared bankruptcy, leaving Plaintiff’s shares in IBG worth
nothing. (Id.)
II. Discussion
a.
Standards of Review
i.
Motion to dismiss
In reviewing a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil
Procedure, the court “must take all of the factual allegations in the complaint as true.” Pension
Ben. Guar. Corp. ex rel. St. Vincent Catholic Med. Centers Ret. Plan v. Morgan Stanley Inv.
Mgmt. Inc., 712 F.3d 705, 717 (2d Cir. 2013) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009)); see also Lundy v. Catholic Health Sys. of Long Island Inc., 711 F.3d 106, 113 (2d Cir.
2013) (quoting Holmes v. Grubman, 568 F.3d 329, 335 (2d Cir. 2009)); Matson v. Bd. of Educ.,
631 F.3d 57, 63 (2d Cir. 2011) (quoting Connecticut v. Am. Elec. Power Co., 582 F.3d 309, 320
(2d Cir. 2009)). A complaint must plead “enough facts to state a claim to relief that is plausible
on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim is plausible
“when the plaintiff pleads factual content that allows the court to draw the reasonable inference
that the defendant is liable for the misconduct alleged.” Matson, 631 F.3d at 63 (quoting Iqbal,
556 U.S. at 678); see also Pension Ben. Guar. Corp., 712 F.3d at 717–18. “[W]here the wellpleaded facts do not permit the court to infer more than the mere possibility of misconduct, the
complaint has alleged — but it has not ‘show[n]’ — ‘that the pleader is entitled to relief.’”
Pension Ben. Guar. Corp., 712 F.3d at 718 (alteration in original) (quoting Iqbal, 556 U.S.
at 679). Although all allegations contained in the complaint are assumed true, this principle is
5
“inapplicable to legal conclusions.” Iqbal, 556 U.S. at 678.
When deciding a motion to dismiss, a court’s review is limited to the four corners of the
complaint but a court may also review (1) documents attached to the complaint, (2) any
documents incorporated in the complaint by reference, (3) any documents deemed integral to the
complaint, and (4) public records. See L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419, 422
(2d Cir. 2011) (documents attached to the complaint and those incorporated by reference);
Global Network Commc’ns, Inc. v. City of New York, 458 F.3d 150, 156 (2d Cir. 2006)
(documents integral to the complaint); Blue Tree Hotels Inv. (Canada), Ltd. v. Starwood Hotels
& Resorts Worldwide, Inc., 369 F.3d 212, 217 (2d Cir. 2004) (public records). In the context of
securities litigation, the Court may consider “any written instrument attached to the Complaint as
an exhibit or any statements or documents incorporated in it by reference, as well as public
disclosure documents required by law to be, and that have been, filed with the SEC, and
documents that the plaintiffs either possessed or knew about and upon which they relied in
bringing the suit.” City of Pontiac Policemen’s & Firemen’s Ret. Sys. v. UBS AG, 752 F.3d 173,
179 (2d Cir. 2014) (alteration, citation and internal quotation marks omitted).
ii.
Amendment of a complaint
The Federal Rules of Civil Procedure provide that courts “should freely give leave” to amend
a complaint “when justice so requires.” Fed. R. Civ. P. 15(a)(2). The Second Circuit has stated that
“[t]his permissive standard is consistent with our strong preference for resolving disputes on the
merits.” Williams v. Citigroup Inc., 659 F.3d 208, 212–13 (2d Cir. 2011) (citation omitted). Leave
to amend should be given “absent evidence of undue delay, bad faith or dilatory motive on the part of
the movant, undue prejudice to the opposing party, or futility.” Monahan v. N.Y.C. Dep’t of Corr.,
214 F.3d 275, 283 (2d Cir. 2000); see also Burch v. Pioneer Credit Recovery, Inc., 551 F.3d 122,
126 (2d Cir. 2008); Savitsky v. Mazella, 210 F. App’x 71, 72 (2d Cir. 2006) (“It is well
6
established that leave to amend a complaint need not be granted when amendment would be
futile.” (quoting Ellis v. Chao, 336 F.3d 114, 127 (2d Cir. 2003))). “[M]ere delay . . . absent a
showing of bad faith or undue prejudice, does not provide a basis for [a] district court to deny the
right to amend.” Azkour v. Haouzi, No. 11-CV-5780, 2012 WL 3667439, at *2 (S.D.N.Y. Aug.
27, 2012) (citation and internal quotation marks omitted) (quoting State Teachers Ret. Bd. v.
Fluor Corp., 654 F.2d 843, 856 (2d Cir. 1981)). An amendment is futile if the proposed claim
could not survive a motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil
Procedure. Lucente v. Int’l Bus. Machines Corp., 310 F.3d 243, 258 (2d Cir. 2002) (citation
omitted). “Bad faith exists when a party attempts to amend its pleading for an improper
purpose.” Id. (citing Austin v. Ford Models, Inc., 149 F.3d 148, 155 (2d Cir.1998) (affirming
denial of leave to amend a complaint where the plaintiff sought to “erase . . . admissions [made]
in [the previous] complaint”), abrogated on other grounds, Swierkiewicz v. Sorema N.A., 534
U.S. 506 (2002)).
The Second Circuit has identified prejudice to the opposing party resulting from a
proposed amendment as among the “most important” reasons to deny leave to amend. AEP
Energy Servs. Gas Holding Co. v. Bank of Am., N.A., 626 F.3d 699, 725 (2d Cir. 2010). It is
“within the sound discretion of the district court to grant or deny leave to amend.” Green v.
Mattingly, 585 F.3d 97, 104 (2d Cir. 2009) (quoting McCarthy v. Dun & Bradstreet Corp., 482
F.3d 184, 200 (2d Cir. 2007)); MHANY Mgmt. Inc. v. County of Nassau, 843 F. Supp. 2d 287,
340 (E.D.N.Y. 2012).
b.
Exchange Act claims
Plaintiff asserts claims of violations of § 10(b) and § 20(a) of the Exchange Act against
the IBG Defendants and Raiche Ende. Section 10(b) makes it unlawful to “use or employ, in
connection with the purchase or sale of any security . . . any manipulative or deceptive device or
7
contrivance in contravention of such rules and regulations as the [Securities and Exchange]
Commission may prescribe . . . .” 15 U.S.C. § 78j(b); see Dalberth v. Xerox Corp., --- F.
3d ---, ---, 2014 WL 4390695, at *9 (2d Cir. Sept. 8, 2014); Capital Mgmt. Select Fund Ltd. v.
Bennett, 680 F.3d 214, 225 (2d Cir. 2012). The corresponding Securities and Exchange
Commission (“SEC”) regulation provides that:
It shall be unlawful for any person, directly or indirectly, by the
use of any means or instrumentality of interstate commerce, or of
the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud, (b) To
make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in
the light of the circumstances under which they were made, not
misleading, or (c) To engage in any act, practice, or course of
business which operates or would operate as a fraud or deceit upon
any person, in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b–5. Liability under § 10(b) is referred to as “primary liability.” See, e.g.,
Cent. Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 191 (1994)
(discussing “requirements for primary liability under Rule 10b–5”); Levitt v. J.P. Morgan Sec.,
Inc., 710 F.3d 454, 467 (2d Cir. 2013) (discussing district court finding that allegations were
“sufficient to state a claim for primary liability under § 10(b)”); see also Stoneridge Inv.
Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 166 (2008) (“the implied right of action in
§ 10(b) continues to cover secondary actors who commit primary violations”).
The Exchange Act also provides for secondary liability, or “controlling-person liability,”
through § 20(a), for “‘[e]very person who, directly or indirectly, controls any person’ directly
liable under the Securities Exchange Act.” 4 Steginsky v. Xcelera Inc., 741 F.3d 365, 371 (2d Cir.
4
Section 20(a) states in relevant part:
Every person who, directly or indirectly, controls any person liable
under any provision of this chapter or of any rule or regulation
thereunder shall also be liable jointly and severally with and to the
8
2014) (quoting 15 U.S.C. § 78t). “Controlling-person liability” may be pled as an alternative to
primarily liability as a basis for establishing liability. 5 See Szulik v. Tagliaferri, 966 F. Supp. 2d
339, 368–69 (S.D.N.Y. 2013) (“While a party cannot be held liable for both a primary violation
and as a control person, alternative theories of liability are permissible at the pleading stage.”
(citing In re Fannie Mae 2008 Sec. Litig., 742 F. Supp. 2d 382, 416 (S.D.N.Y. 2010))); see also
In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 77 (2d Cir. 2001) (“‘Controlling-person liability’
is a separate inquiry from that of primary liability and provides an alternative basis of
culpability.” (citing SEC v. Mgmt. Dynamics, Inc., 515 F.2d 801, 812 (2d Cir. 1975)); Suez
Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 101 (2d Cir. 2001) (same).
i.
Section 10(b) claim
Plaintiff alleges violations of § 10(b) against the IBG Defendants and Raiche Ende.
(SAC ¶¶ 55–67, 92–95.) To prevail on a claim pursuant to section 10(b) and the corresponding
Rule 10b-5, “a plaintiff must prove (1) a material misrepresentation or omission by the
defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the
purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic
loss; and (6) loss causation.” Carpenters Pension Trust Fund of St. Louis v. Barclays PLC, 750
F.3d 227, 232 (2d Cir. 2014) (quoting Stoneridge, 552 U.S. at 157); see also Dalberth, --- F.
App’x at ---, 2014 WL 4390695, at *10.
same extent as such controlled person to any person to whom such
controlled person is liable . . . unless the controlling person acted
in good faith and did not directly or indirectly induce the act or
acts constituting the violation or cause of action.
15 U.S.C. § 78t.
5
Plaintiff alleges both primary and controlling-person liability. (SAC ¶ 58 (“All of the
IBG Defendants are sued either as either as primary participants in the wrongful and illegal
conduct charged herein or as controlling persons . . . .”).)
9
In addition a plaintiff must make a threshold showing that the material
misrepresentation was made by the defendant. See 17 C.F.R. § 240.10b–5 (“It shall be unlawful
for any person, directly or indirectly . . . [t]o make any untrue statement of a material fact or to
omit to state a material fact necessary . . . .” (emphasis added)); Halliburton Co. v. Erica P. John
Fund, Inc., 573 U.S. ---, ---, 134 S. Ct. 2398, 2407 (2014) (“Section 10(b) of the Securities
Exchange Act of 1934 and the Securities and Exchange Commission’s Rule 10b–5 prohibit
making any material misstatement or omission in connection with the purchase or sale of any
security.” (emphasis added)). “For purposes of Rule 10b–5, the maker of a statement is the
person or entity with ultimate authority over the statement, including its content and whether and
how to communicate it. Without control, a person or entity can merely suggest what to say, not
‘make’ a statement in its own right.” Janus Capital Grp., Inc. v. First Derivative Traders, 564
U.S. ---, ---, 131 S. Ct. 2296, 2302 (2011).
A claim of securities fraud under § 10(b) of the Exchange Act “must satisfy the
heightened pleading requirements of Rule 9(b) and the Private Securities Litigation Reform Act
of 1995.” City of Pontiac, 752 F.3d at 184. Rule 9(b) of the Federal Rules of Civil Procedure
provides that, when bringing a complaint “alleging fraud or mistake, a party must state with
particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b); Krys v.
Pigott, 749 F.3d 117, 129 (2d Cir. 2014). The Private Securities Litigation Reform Act
(“PSLRA”) requires a plaintiff to “specify each statement alleged to have been misleading, the
reason or reasons why the statement is misleading, and, if an allegation regarding the statement
or omission is made on information and belief, . . . state with particularity all facts on which that
belief is formed.” 15 U.S.C. § 78u-4(b)(1); Steginsky, 741 F.3d at 368. In addition, a plaintiff
must “state with particularity facts giving rise to a strong inference that the defendant acted with
10
the required state of mind.” 15 U.S.C. § 78u-4(b)(1)(A); Steginsky, 741 F.3d at 368.
1.
IBG Defendants
The gravamen of Plaintiff’s § 10(b) claim against the IBG Defendants is that they falsely
and recklessly overstated and misrepresented IBG’s 2008 gross sales as $2,130,000, both in
writing in the PPM and orally through Lighthouse Financial brokers. (See SAC ¶¶ 30–38.)
Plaintiff also alleges that the IBG Defendants falsely represented IBG’s performance, growth,
business operations and future prospects by suggesting that IBG was about to go public, and
made untrue statements about how IBG would use offering proceeds. (Id. ¶¶ 6, 47, 59, 63.) The
IBG Defendants argue that Plaintiff has not adequately pled that they made any material
misrepresentations or that they acted with the requisite state of mind, and that Plaintiff has failed
to state a basis for individual liability against the IBG Defendants. (IBG Defendants
Memorandum of Law in Support of Motion to Dismiss (“IBG Def. Mem.”) 8–15, 19–25.) As
discussed below, while Plaintiff has arguably alleged sufficient facts to show that the IBG
Defendants made a material misrepresentation with respect to the statement of 2008 gross sales
in the PPM, only one of the IBG Defendants, the CEO Dominic Maggiore, can be said to have
“made” this statement, and Plaintiff has failed to adequately plead scienter as to him. Therefore,
Plaintiff has failed to state a § 10(b) claim against any of the IBG Defendants.
A.
Material Misrepresentation
Plaintiff alleges that the IBG Defendants made three actionable material
misrepresentations: (1) that IBG had 2008 gross sales of $2,130,000 as stated in the May 2009
PPM and in the oral statements by Lighthouse Financial brokers, (2) that IBG was “about to go
public,” and (3) that the IBG would use the proceeds raised from the 2009 private placement for
marketing and product development.
11
(1) 2008 gross sales of $2,130,000
Plaintiff alleges that the IBG Defendants made material misrepresentations in the May
2009 PPM and in oral statements made by Lighthouse Financial brokers. Plaintiff cites to page
11 of the March 2009 PPM, which states that “the Auditors [Raiche Ende] have informed [IBG]
that the preliminary audited results for 2008 will reflect gross sales of approximately $2,130,000,
as compared to 2007 gross sales of $289,000.” (SAC ¶¶ 31–32; see PPM 11.) 6 Plaintiff claims
that the statement was false, that IBG did not have $2,130,000 in sales in 2008, and that these
“sales” were actually consignment shipments, in which IBG “shipped product to retailers to be
placed on retailers’ shelves but title would only pass if (and no sale would take place until) a
customer purchased the IBG product,” or “‘guaranteed sales,” in which IBG “would pay retailers
for its products if they went unsold.” (SAC ¶¶ 8, 37–40.) The IBG Defendants argue that any
oral representations made by the Lighthouse Financial brokers are not actionable
misrepresentations, as they are contradicted by written statements in the PPM itself stating that
IBG’s “gross sales include all shipped goods,” (IBG Def. Mem. 12 (quoting PPM 19)), including
“goods shipped pursuant to various programs with retailers for which IBG could not guarantee
collection of payment,” (id.). The IBG Defendants further argue that the Amended Complaint
fails to meet the heightened pleading requirements of the PSLRA. (IBG Def. Mem. 19–22; IBG
Def. Reply 8–11.) The Court addresses this argument first.
a.
Plaintiff pled sufficient facts
The SAC alleges that “the broker who . . . sold [Plaintiff] his IBG stock . . . told
[Plaintiff] that in reality, IBG did not have sales, either gross or net, of $2,130,000 in product in
6
The Court reviews the PPM as incorporated by reference into the SAC.
12
2008, but that IBG booked consignment shipments and other fictitious sales as ‘sales’ in order to
inflate its sales numbers.” (SAC ¶ 8.) In addition, Plaintiff includes affidavits from two former
Lighthouse financial brokers, Jeffrey Wallner and Brad Feinstein, with his opposition papers
opposing Defendants’ motions to dismiss. 7 (See Affidavit of Jeffrey R. Wallner (“Wallner
Aff.”), annexed to Travis Decl. as Ex. 4; Affidavit of Brad Feinstein (“Feinstein Aff.”), annexed
to Travis Decl. as Ex. 5.) Wallner states that in May 2011, he purchased the “Power Ice” brand
from IBG, and during the due diligence process associated with that transaction, Maggiore told
Wallner that many of the reported sales for 2008 and 2009 “were consignment sales and
‘chargebacks’ (shipments to retailers that had to be bought back by IBG if the product didn’t
sell).” (Wallner Aff. ¶ 10.) Plaintiff also attaches to the SAC a document from IBG’s
bankruptcy proceedings, which identifies two retailers as “contingent creditors,” each claiming
$250,000 for “returned merchandise.” (“List of Creditors,” annexed to Travis Decl. as Ex. 6.)
Plaintiff also submits an email from Maggiore to Feinstein, one of the Lighthouse
Financial brokers, dated March 16, 2010, along with an unsigned “term sheet,” dated March 3,
2010, as an attachment. (Email dated Mar. 16, 2010, annexed to Travis Decl. as Ex. 7.) The
email explains that the unsigned attachment is a term sheet between IBG and Walgreen’s for the
Fall of 2010, in which IBG “agrees to a guaranteed sale on all products sold to Walgreens.” (Id.
at 1, 3) The term sheet also states that IBG understands that if the item does not meet
Walgreens[’] sales expectations, Walgreens will . . . send all remaining store and DC inventory
back” to IBG. (Id.) Plaintiff asserts that “together these documents are consistent with the
7
The SAC refers to the “Lighthouse Financial broker who had sold [Plaintiff] his IBG
stock” as the source of information regarding his allegations that the 2008 gross sales are largely
consignment shipments. (SAC ¶ 8.) The Court construes and reviews the Wallner and Feinstein
affidavits as documents attached to the SAC.
13
assertions by plaintiff that the products shipped to retailers were not sales . . . .” (Pl. Opp’n
Mem. 6.) 8
Wallner’s affidavit statements provide a sufficient basis for Plaintiff to “state with
particularity all facts on which” Plaintiff relies to support his belief that IBG’s 2008 gross sales
were in fact comprised largely of consignment shipments. The IBG Defendants argue that
Wallner’s failure to attach or cite to “any actual documentary evidence,” of a consignment
arrangement precludes Plaintiff’s reliance on Wallner’s affidavit to state the facts with
particularity. The Court disagrees. Neither Rule 9(b) nor the PSLRA impose such a stringent
requirement. Defendants’ arguments that sworn statements based on personal knowledge must
be substantiated with documentary evidence would transform the pleading standard into a
summary judgment standard. Plaintiff is only required to show that the source of the belief is
someone in a position to have had personal knowledge. See Campo v. Sears Holdings Corp.,
635 F. Supp. 2d 323, 329–30 (S.D.N.Y. 2009) (“Where plaintiffs rely on confidential witnesses
in support of their allegations [made on information and belief], they need not identify them by
name, but they must describe each informant ‘with sufficient particularity to support the
probability’ that someone in the informant’s position would possess the information alleged”),
8
The IBG Defendants object to the submission of these documents for the Court’s
consideration on the grounds that they were not referenced in the Amended Complaint, and
argue that the affidavits are self-serving in that the Lighthouse Financial brokers are concerned
with their own potential liability for having made allegedly false statements to Plaintiff. (Id. at
10.) As discussed supra in note 7, the Court construes the Wallner and Feinstein affidavits as
documents attached to the SAC. In addition, at the motion to dismiss stage, the Court does not
assess the credibility of a sworn statement. See Eternity Global Master Fund Ltd. v. Morgan
Guar. Trust Co. of N.Y., 375 F.3d 168, 176 (2d Cir. 2004) (noting that Court’s role during
motion to dismiss “is merely to assess the legal feasibility of the complaint, not to assay the
weight of the evidence which might be offered in support thereof” (quoting Geisler v. Petrocelli,
616 F.2d 636, 639 (2d Cir. 1980))). Moreover, the IBG Defendants have had the opportunity to
address the Wallner and Feinstein affidavits and robustly challenge their sufficiency.
14
aff’d, 371 F. App’x 212 (2d Cir. 2010); In re Scottish Re Grp. Sec. Litig., 524 F. Supp. 2d 370,
392–93 (S.D.N.Y. 2007) (finding that plaintiff’s submission of statements from confidential
witnesses, “all of whom claim knowledge of a systemic failure in the Company’s ability to
manage its financial information [and] occupied positions that would have allowed for relevant
hands-on experience in various parts of the Company,” provides sufficient particularized facts to
support plaintiff’s allegations made under Rule 9(b) and the PSLRA); see also Novak v. Kasaks,
216 F.3d 300, 314 (2d Cir. 2000) (finding that plaintiff’s reliance on confidential witness
statements to buttress allegations made on information and belief met heightened pleadings
standard of PSLRA, “provided they are described in the complaint with sufficient particularity to
support the probability that a person in the position occupied by the source would possess the
information alleged”).
The fact that Wallner purchased the “Power Ice” brand from IBG and had to conduct a
due diligence examination of IBG in order to do so, reasonably establishes a basis for his
personal knowledge of relevant financial material and information, and provides a sufficient
basis to find that Plaintiff has pled the allegations with particularity. 9 See New Orleans Empls.
Ret. Sys. v. Celestica, Inc., 455 F. App’x 10 (2d Cir. 2011) (reversing and remanding district
court’s dismissal of plaintiff’s claim for insufficiently alleging a factual basis for scienter, and
finding that the statements of three confidential witnesses, “former Celestica employees who
9
The Court agrees with the IBG Defendants that the sworn statement of Feinstein, which
provides only that he “came to find out” that IBG did not have $2.1 million in sales for 2008 but
provides no further elaboration, is too generalized and is not based on an adequate basis of
personal knowledge required to meet the pleading requirement. Because the Court finds that the
Wallner affidavit provides a sufficient factual basis to support Plaintiff’s belief that the 2008
gross sales were falsely stated, the Court does not consider the Maggiore email or IBG’s
bankruptcy proceedings in finding that the SAC meets the heightened pleading requirements for
alleging a misrepresentation.
15
occupied positions in the company that afforded them direct knowledge of Celestica's inventory
buildup during the class period,” who “provided information about rising inventory levels to [the
individual defendants] directly or participated in meetings where they heard [the individual
defendants] informed by others about the company’s inventory management problems” was
sufficient to meet the plaintiff’s pleading burden”); cf. City of Dearborn Heights Act 345 Police
& Fire R v. Axonyx, Inc., 374 F. App’x 83, 85 (2d Cir. 2010) (“appellants rely on opinions of
confidential witnesses to support their allegations, but they fail to offer any factual underpinnings
for those opinions”).
Because Plaintiff, through the Wallner affidavit, has “plead[ed] the circumstances that
allegedly constitute fraud ‘with particularity,’” see Krys, 749 F.3d at 129, the allegations in the
SAC that the IBG Defendants’ statement about the the 2008 gross sales was a misrepresentation
meets the pleading requirements of the PLSRA and Rule 9(b).
b.
Statement was misleading.
Plaintiff contends that the inclusion of consignment shipments in the gross sales amount,
where goods are shipped to a retailer but title does not pass until they are purchased by a
customer, is improper and does not fit within the definition of “sales.” (Pl. Opp’n Mem. 22–23.)
Plaintiff further contends that because the PPM “does not mention ‘consignments’ . . . ‘chargebacks’ . . . [or] ‘guaranteed sales,’ all of which means that there is no buyer when the product is
shipped, because there is no guarantee to payment,” the estimate of 2008 gross sales presented in
the May 2009 PPM materially misrepresented and inflated the financial health of IBG. (Id.)
Plaintiff further alleges that IBG “did not have $2,130,000 in sales in 2008, net, gross or
16
otherwise.” 10 (Id. ¶ 38.) The IBG Defendants argue that the “language in the PPM cautioning
. . . that IBG would not collect payment for all goods that were included in Raiche Ende’s
preliminary ‘gross sales’ figure” clearly cautioned Plaintiff against reliance on any oral
statements to the contrary. (IBG Defs. Mem. 17–18.)
Rule 10b-5 renders it unlawful to “make any untrue statement of a material fact or to omit
to state a material fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b–5;
Parkcentral Global Hub Ltd. v. Porsche Auto. Holdings SE, --- F.3d ---, ---, 2014 WL 3973877,
at *8 (2d Cir. Aug. 15, 2014) (same). A statement is considered materially misleading under §
10(b) when its “representations, viewed as a whole, would have misled a reasonable investor.”
Berger v. Apple REIT Ten, Inc., 563 F. App’x 81, 83 (2d Cir. 2014) (quoting Rombach v. Chang,
355 F.3d 164, 178 n.11 (2d Cir. 2004)). To establish the materiality of the misrepresentation, a
plaintiff must “allege[] ‘a statement or omission that a reasonable investor would have
considered significant in making investment decisions.’” Litwin v. Blackstone Grp., L.P., 634
F.3d 706, 717 (2d Cir. 2011) (quoting Ganino v. Citizens Utils. Co., 228 F.3d 154, 161–62 (2d
Cir. 2000)). Although § 10(b) and Rule 10b-5 “do not create an affirmative duty to disclose any
and all material information,” where the misrepresentation in question is an omission, the
plaintiff must allege that “there [i]s a substantial likelihood that the disclosure of [the omitted
fact] ‘would have been viewed by the reasonable investor as having significantly altered the
10
Although Plaintiff alleges and discusses Defendants’ inclusion of “guaranteed sales”
and “charge-backs” in the 2008 estimate of gross sales, Plaintiff focuses his allegations and
arguments on the inclusion of consignment shipments in the 2008 estimate. The Court does the
same.
17
‘total mix’ of information made available.’” Dalberth, --- F.3d at ---, 2014 WL 4390695, at *10
(quoting Basic Inc. v. Levinson, 485 U.S. 224, 231–32 (1988)).
The IBG Defendants argue that “no rational person or investor could read the definition
of ‘gross sales’ in the PPM and conclude that [it] only included goods for which IBG had already
been paid or for which it would certainly receive payment.” (IBG Def. Mem. 13.) Contrary to
Defendants’ characterization, Plaintiff’s allegation of misrepresentation is not that the PPM
represented that the 2008 gross sales figure “only included goods for which IBG had already
been paid or for which it would certainly receive payment.” Rather, the Court understands
Plaintiff’s assertion to be that the PPM contained a representation as to 2008 “gross sales” that,
by any definition of “gross sales,” was false or misleading.
Reading the relevant provisions of the PPM, the Court agrees with Plaintiff that the PPM
failed to convey crucial information “that a reasonable investor would have considered
significant in making investment decision” — namely, that IBG was defining “gross sales” to
include products for which the sale to a customer and the collection of payment was merely
speculative rather than likely. The PPM explains that:
The Company’s gross sales include all shipped goods inclusive of
merchandise sold by retailers pursuant to in-store promotions,
coupons, slotting fees, co-operative advertising fees, rebate and
free-bate programs. Accordingly, retailers deduct the cost of these
goods and in certain programs deduct their per unit profit from
their invoices which reduces the net cash receipts of the Company.
No assurances can be given that the Company will collect payment
for all of the goods sold as these deductions and other deductions
are taken by retailers and, in certain cases, by wholesalers.
(PPM 19 (emphasis added).) Defendants rely on the above emphasized language to argue that
the PPM expressly provided that payment may not be received for all “shipped goods.” (Def.
Mem. 12–13.) This language does not support the IBG Defendants’ claim. It specifically
references that IBG cannot assure collection on all goods sold, not as to all goods shipped. As
18
currently constructed, this section does not caution a reasonable investor that the term “gross
sales” includes anything other than “goods sold.” 11
Moreover, while the sentence “retailers deduct the cost of these goods and in certain
programs deduct their per unit profit from their invoices which reduces the net cash receipts of
the Company” provides for the possibility that the net cash received by IBG for products sold by
retailers could be less than the sales figure that is anticipated when the product is initially
shipped to the retailer, there is nothing in this sentence that suggests more than the deduction of
certain costs by the retailers. It does not inform a reasonable investor that some goods could be
completely rejected and returned to IBG, without any payment having ever been made. Indeed,
the language “deduct the cost of these goods and . . . their per unit profit from their invoices”
suggests that retailers are making some payment to IBG, albeit a smaller payment than may have
been initially anticipated by IBG at the time of shipment. 12
11
Likewise, the word “sold” in the first sentence of this section of the PPM — “[t]he
Company’s gross sales include all shipped goods inclusive of merchandise sold by retailers” —
is, at best, ambiguous; it is unclear if it is being used as the past tense of a verb, to describe
merchandise that has been sold (as opposed to merchandise that will be sold), or if it is being
used simply as an adjective to include merchandise that, as a general matter, will be sold by
retailers pursuant to certain programs. To the extent that this word is ambiguous, the Court
cannot say, at this early stage of the proceedings, that a reasonable investor would have
understood it to mean what Defendants’ urge. In addition, this sentence is missing a value term
that would specify how IBG is quantifying the price for the shipped goods it includes in “the
Company’s gross sales” — the retail value of the goods at the time shipped to retailers, the price
of the goods once sold by retailers, or the net price of the goods received by IBG.
12
For this reason, the IBG Defendants’ argument that the “bespeaks caution” doctrine
bars Plaintiff’s claim is without merit. (See IBG Defs. Mem. 17–18.) The bespeaks caution
doctrine provides that “[a] forward-looking statement accompanied by sufficient cautionary
language is not actionable because no reasonable investor could have found the statement
materially misleading.” Iowa Pub. Empls.’ Ret. Sys. v. MF Global, Ltd., 620 F.3d 137, 141 (2d
Cir. 2010); see, e.g., P. Stolz Family P’ship L.P. v. Daum, 355 F.3d 92, 98 (2d Cir. 2004) (oral
representations concerning, inter alia, “a financing which would raise $30 million” was
“neutralized by . . . cautionary statements” such as “[n]o assurance can be given, nor has any
19
Even if the contested PPM language could be read to convey what Defendants urge, such
an interpretation — that IBG recognizes revenue when it ships unsold product to a retailer — is
contrary to IBG’s own revenue recognition policy, as stated in the 2008 audited financial
statement, which provides that “revenue is recognized at the time the product is shipped to the
buyer.” (2008 Audited Financial Statement at 5) (emphasis added). To the extent that such a
reading would violate IBG’s own revenue recognition policy, such a contradiction weighs in
been given, that any of the Financing transactions . . . will be consummated”); In re Delcath
Sys., Inc. Sec. Litig., --- F. Supp. 2d ---, ---, 2014 WL 2933151, at *10 (S.D.N.Y. June 27, 2014)
(statements regarding the likelihood of FDA approval of one of its products not
misrepresentation where defendants “consistently gave warnings that the FDA might not approve
the Defendants’ product, and no reasonable investor could have believed that there was no risk in
this regard”); In re Apple REITs Litig., No. 11-CV-2919, 2013 WL 1386202, at *11 (E.D.N.Y.
Apr. 3, 2013) (statement of investment goals in prospectus, including “achieving long-term
growth in cash distributions” and “acquiring income-producing real estate,” not actionable
misrepresentation, where prospectus included the caution that “we are a thinly-capitalized
company and, as a result, you cannot be sure . . . if we will achieve the investment objectives
described in this prospectus”); see also Iowa Pub. Empls/’ Ret. Sys., 620 F.3d at 142 n.7
(collecting examples).
Defendants argue that the language in the PPM stating that “[n]o assurances can be given
that [IBG] will collect payment for all of the goods sold,” clearly cautioned that IBG “would not
collet payment for all goods that were included” in the “preliminary ‘gross sales’” figure of
$2,130,000 for 2008. (Def. Mem. 17–18.) However, “[i]n applying the judicially-created
bespeaks caution doctrine . . . [the Second Circuit has] held that cautionary language that is
misleading in light of historical fact cannot be meaningful.” Slayton v. Am. Exp. Co., 604 F.3d
758, 770 (2d Cir. 2010) (citing Rombach v. Chang, 355 F.3d 164, 173 (2d Cir. 2004)).
Moreover, “[a] generic warning of a risk will not suffice when undisclosed facts on the ground
would substantially affect a reasonable investor’s calculations of probability.” Meyer v.
Jinkosolar Holdings Co., Ltd., 761 F.3d 245 (2d Cir. 2014) (citing Rombach, 355 F.3d at 173).
Here, the misleading statement is not “forward-looking,” but rather is a statement, issued in May
2009, about preliminary 2008 gross sales. Even if the statement refers to “preliminary figures,”
the statement is not the type of prediction about future performance that the bespeaks caution
doctrine encompasses; it is “preliminary” only in the sense that all of the analysis of the relevant
data about past performance had yet to be finalized. In addition, the generic warning of risk in
the PPM — that IBG might not collect payment for all goods “sold” — is insufficient in light of
the undisclosed fact that IBG’s method of calculating revenue included the value of goods
shipped but not sold.
20
favor of finding the statement to be misleading. 13 See United States v. Tomasetta, No. 10-CR1205, 2012 WL 2064978, at *2 (S.D.N.Y. June 6, 2012) (finding that the defendants statements
could give rise to “scheme to defraud” liability under the Exchange Act, where the company’s
policy “defer[red] recognition of revenue on such products until the products are sold by the
customer to the end user” and “[t]he Government introduced evidence that, contrary to this
disclosure, [the company] recorded the quarterly stocking packages as revenue when they were
shipped to Nu Horizons, even though Defendants knew that Nu Horizons could and did
frequently return large amounts of product”); In re Bausch & Lomb, Inc. Sec. Litig., No. 01-CV6190, 2003 WL 23101782, at *24 (W.D.N.Y. Mar. 28, 2003) (finding that plaintiff’s allegation
that defendant pharmaceutical company “intentionally failed to report $6 million in [customer]
rebates,” stated a claim for misrepresentation, where this failure violated the company’s own
revenue recognition policy, which provided that “ [t]he company establishes liabilities for
estimated returns and allowances at the time of shipment”).
13
In addition, using SEC documents as a guide to what a reasonable investor would
understand “gross sales” to mean, the Court agrees with Plaintiff that a policy that recognized
revenue upon shipment of unsold goods to an intermediate retailer, absent an accurate
disclaimer, would be misleading. See Gould v. Winstar Commc’ns, Inc., 692 F.3d 148, 153 (2d
Cir. 2012) (“Staff Accounting Bulletin No. 101 . . . , issued by the Securities and Exchange
Commission (‘SEC’) . . . states that four conditions must be satisfied before revenue can be
recognized: (1) Persuasive evidence of an arrangement for the sale of goods or services exists,
(2) Delivery has occurred or services have been rendered, (3) The seller’s price to the buyer is
fixed or determinable, and (4) Collectibility is reasonably assured.” (alteration and internal
quotation marks omitted) (quoting SEC Staff Accounting Bulletin No. 101, 1999 WL 1100908));
cf. New Orleans Empls. Ret. Sys. v. Celestica, Inc., 455 F. App’x 10, 16 (2d Cir. 2011)
(“Misstatements of income, such as Celestica’s net earnings statements based on incorrect
inventory valuations, can be material ‘because earnings reports are among the pieces of data that
investors find most relevant to their investment decisions.’” (quoting Ganino v. Citizens Utils.
Co., 228 F.3d 154, 164 (2d Cir. 2000)).
21
Because a reasonable investor would have considered the undisclosed fact that IBG was
including consignment shipments of goods to retailers in determining whether to invest, 14 the
omission of this fact from the May 2009 PPM was materially misleading within the meaning of
§ 10(b). 15
14
Plaintiff has insufficiently supported his allegation that the May 2009 PPM was
misleading inasmuch as he argues that it failed to account for “guaranteed sales,” which Plaintiff
defines as an arrangement by which IBG “pay[s] retailers for its products if they went unsold,”
or “if a product did not sell, IBG would buy the product back from the retailer.” (SAC ¶¶ 8, 40.)
The Court does not analyze whether the failure of the May 2009 PPM to caution a reasonable
investor that the estimate of 2008 gross sales included such “guaranteed sales” was a material
misrepresentation. Ostensibly, Plaintiff’s description of “guaranteed sales” could fall within the
PPM “Risk Factors” disclaimer since they are technically “goods sold.” However, the SAC and
Plaintiff’s memorandum of law lack any details explaining whether or why the omission of
information explaining that the 2008 gross sales included “guaranteed sales” would be
misleading to a reasonable investor. While the provision of the SEC Staff Accounting Bulletin
relied on by Plaintiff explains why consignment arrangements violate its revenue recognition
principles, it does not speak to guaranteed sales. (See SAC ¶ 45.) Consequently, the SAC, as
currently pled, fails to sufficiently allege that the May 2009 PPM was misleading by not
including information related to guaranteed sales.
15
Relying on a footnote in the IBG Defendants’ opening motion papers, Plaintiff asserts
that “the IBG Defendants now openly admit in court papers that the ‘gross sales’ number did not
actually represent sales, and that the money ‘taken in’ by IBG ‘for goods shipped in 2008’ was
only $1,575,000.” (SAC ¶ 39.) In the cited footnote, Defendants state, “The IBG Defendants
further vehemently deny Plaintiff’s allegation that IBG had few actual sales in 2008 [citing
(Amended Complaint, ¶ 31)]. In actuality, IBG took in significant monies for goods shipped in
2008, taking in approximately $1,575,000.” (Def. Mem. 12 n.4.) Plaintiff incorrectly assumes
that the figure provided by Defendants in this footnote is its “actual sales” figure for 2008,
asserting that IBG’s actual sales in 2008 were “not more than $1.6 million.” (Pl. Opp’n Mem.
21; see id. at 26 (“For the first time in its Motion to Dismiss, four (4) years after these figures
should have been provided to Plaintiff, IBG purportedly provides the actual amount of money
“taken in” by the Company in 2008.”) Plaintiff relies on this assertion to support his claim that
the representation of 2008 sales as $2,130,000 was false. (Id. at 26 (“$1,575,000 is, of course,
not the $2.1 million net sales number stated in Raiche Ende’s 2008 audit.”).) However, the cited
statement does not bolster Plaintiff’s claim of misrepresentation, where the PPM states only that
“gross sales include shipped goods,” but does not assert that it is comprised exclusively of
shipped goods. (PPM 19.) Similarly, the footnote language cited by Plaintiff, that “IBG took in
[approximately $1,575,000] for goods shipped in 2008,” while a factual admission of payment
collected for “goods shipped,” is not an admission of 2008 actual sales. Indeed, Plaintiff
concedes that “IBG’s counsel does not state that $1,575,000 were revenues received for sales[,
22
c.
Maker of the statement
The IBG Defendants argue that any statement made in the PPM cannot be attributed to
them as individuals, as they were made by IBG and not by any one of them individually. (IBG
Def. Mem. 25.) The Second Amended Complaint alleges that “[t]he IBG Defendants are liable
for the false statements pleaded herein, as each one of those statements was ‘group-published’
information, the result of the collective actions of the IBG Defendants.” (SAC ¶ 26.)
The “group pleading doctrine” creates the presumption “that ‘group-published’
documents such as ‘statements in prospectuses, registration statements, annual reports, [and]
press releases’ are attributable to ‘individuals with direct involvement in the everyday business
of the company,’” 16 who either were or acted like a corporate insider. DeAngelis v. Corzine, ---
but only states] that these amounts were ‘taken in’ for shipped goods.” (Pl. Opp’n Mem. 26.)
While Plaintiff may be correct that he “still does not know what IBG’s 2008 sales actually
were,” (see id.), his reliance on footnote 4 of the IBG’s memorandum of law to establish that
“the IBG Defendants now openly admit in court papers that the ‘gross sales’ number did not
actually represent sales” is misplaced.
16
Several courts have questioned whether the group pleading doctrine is still viable after
the Supreme Court’s decision in Janus Capital Grp., Inc. v. First Derivative Traders, 564
U.S. ---, 131 S. Ct. 2296 (2011), which held that an investment adviser could not be held liable
for “making” misleading statements in its clients’ investment fund prospectuses, where the
adviser at most “assisted” with crafting the statements, but did not have “ultimate authority” over
the statement. Janus, 564 U.S. at ---, 131 S. Ct. at 2300–302; see In re ShengdaTech, Inc. Sec.
Litig., No. 11-CV-1918, 2014 WL 3928606, at *10 (S.D.N.Y. Aug. 12, 2014) (“there is some
question whether the group pleading doctrine has been abrogated by Janus . . . .” (citing Rolin v.
Spartan Mullen Et Cie, S.A., No. 10-CV-1586, 2011 WL 5920931, at *5 (S.D.N.Y. Nov. 23,
2011) and In re Optimal U.S. Litig., 837 F. Supp. 2d 244, 262 (S.D.N.Y. 2011))). Janus
addressed the liability of a party external to a corporate defendant rather than, as is the case with
group pleading, the liability of individual corporate defendants. In addition, the holding in Janus
that “the maker of a statement is the person or entity with ultimate authority over the statement,”
does not appear to be incompatible with the premise of the group pleading doctrine that often
more than one individual defendant has ultimate authority or control over a written statement.
See City of Pontiac Gen. Empls.’ Ret. Sys. v. Lockheed Martin Corp., 875 F. Supp. 2d 359
(S.D.N.Y. 2012) (noting that Janus “addressed only whether third parties can be held liable for
statements made by their clients . . . and has no bearing on how corporate officers who work
together in the same entity can be held jointly responsible on a theory of primary liability”).
23
F. Supp. 2d ---, ---, 2014 WL 1695186, at *4–5 (S.D.N.Y. Apr. 16, 2014) (quoting In re BISYS
Sec. Litig., 397 F. Supp. 2d 430, 438 (S.D.N.Y. 2005)); see also Illinois State Bd. of Inv. v.
Authentidate Holding Corp., 369 F. App’x 260, 266 (2d Cir. 2010) (remanding the district
court’s dismissal of section 10(b) claims against individual defendants because “the district court
did not address the individual defendants’ liability under any of the other theories presented in
the SAC, including liability for individual misstatements and omissions or liability for those
attributable to them under the group pleading doctrine”); City of Pontiac Gen. Empls.’ Ret. Sys.
v. Lockheed Martin Corp., 875 F. Supp. 2d 359, 373 (S.D.N.Y. 2012) ([T]he ‘group pleading’
doctrine . . . allows a plaintiff to rely on a presumption that written statements that are ‘grouppublished,’ e.g., SEC filings and press releases, are statements made by all individuals ‘with
direct involvement in the everyday business of the company.’” (quoting Camofi Master LDC v.
Riptide Worldwide, Inc., No. 10-CV- 402, 2011 WL 1197659, at *6 (S.D.N.Y. Mar. 25, 2011)));
In re BISYS Sec. Litig., 397 F. Supp. 2d 430, 440–41 (S.D.N.Y. 2005) (“A plaintiff may invoke
the group pleading doctrine against a defendant only if the plaintiff has alleged facts indicating
that the defendant was a corporate insider or affiliate with direct involvement in the daily affairs
of the company.”). The group pleading doctrine applies to collectively-authored written
documents, but does not apply to oral statements. See Camofi Master LDC v. Riptide
Worldwide, Inc., No. 10-CV-4020, 2011 WL 1197659, at *6 (S.D.N.Y. Mar. 25, 2011) (noting
that the group pleading doctrine “does not apply to oral statements” (citing In re AOL Time
Warner, Inc. Sec. and Erisa Litig., 381 F. Supp. 2d 192, 220 (S.D.N.Y. 2004))).
1. Maggiore
Plaintiff alleges that, in addition to being a member of the Board of Directors, Maggiore
was IBG’s founder, and was its Chief Executive Officer for the relevant times during this action.
(SAC ¶ 19.) Plaintiff also notes that the PPM lists Maggiore as the “CEO and President” and
24
invites readers to contact him to ask questions and obtain additional information. (Pl. Opp’n
Mem. 7, 9–10 (citing PPM vi).) In addition, in the March 3, 2010 email from Maggiore to one of
the Lighthouse Financial brokers attaching an unsigned term sheet between IBG and Walgreens
for Fall 2010, which term sheet has Maggiore’s name printed at the end of the agreement,
references a recent meeting between IBG and Walgreens, and states that Maggiore “would like
to detail our offering for Walgreens adding IBG’s Throat Coolers product,” supporting the
finding that Maggiore had “direct involvement in the everyday business of the company.”
(Email dated Mar. 16, 2010, at 1, 3); see DeAngelis v. Corzine, --- F. Supp. 2d at ---, 2014 WL
1695186, at *4–5.) These allegations, taken together, are sufficient to support a claim that
Maggiore, as the Chief Executive Officer of IBG, was a corporate insider with directly
involvement in the everyday business of IBG, and who played a key role in “making” the
statement contained in the PPM regarding the 2008 gross sales. 17 See City of Pontiac Gen.
17
The IBG Defendants’ argue that the Second Circuit decision in Pacific Investment
Management Company LLC v. Mayer Brown LLP [“PIMCO”], 603 F.3d 144 (2d Cir. 2010),
imposes an “attribution” requirement on corporate board members and precludes a finding here
that the individual defendants “made” the misleading statement. (IBG Def. Mem. 24–25; IBG
Def. Reply 11–12.) Defendants further argue that “[a]nything short of directly attributing a
statement to the defendant would run afoul of the Supreme Court’s proscription against aiding
and abetting liability under Section 10(b).” (IBG Def. Mem. 24 (citing Cent. Bank of Denver,
N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994)).) The IBG Defendants’
argument is only partially accurate and, in any event, is inapposite.
In PIMCO the Second Circuit addressed whether secondary actors could be held liable
for statements drafted by them but not attributed to them. PIMCO, 603 F.3d at 148 (2d Cir.
2010). The court held that “attribution is required for secondary actors to be liable in a private
damages action for securities fraud under Rule 10b–5.” Id. at 152. The court defined
“secondary actors” as “lawyers . . . , accountants, or other parties who are not employed by the
issuing firm whose securities are the subject of allegations of fraud.” Id. at 148 n.1 (emphasis
added). The court expressly stated that because the case before them “does not involve claims
against corporate insiders, [it] intimate[d] no view on whether attribution is required for such
claims,” id. at 158 n.6, acknowledging and declining to alter its holding in In re Scholastic Corp.
Sec. Litig., 252 F.3d 63, 75–76 (2d Cir. 2001) that attribution was not required for a “corporate
insider defendant.” PIMCO, 603 F.3d at 152. The Court observed, however, that “[t]here may
25
Empls.’ Ret. Sys, 875 F. Supp. 2d at 374–75 (finding basis for using group pleading doctrine as
to the executive vice president of the defendant corporation who was “(1) the executive in charge
of the division whose misconduct is at the heart of plaintiff’s claims; (2) an officer of Lockheed;
and (3) one of seven individuals listed as part of Lockheed’s ‘Leadership,’”); Camofi Master
LDC v. Riptide Worldwide, Inc., No. 10-CV- 4020, 2011 WL 1197659, at *9 (S.D.N.Y. Mar. 25,
2011) (“[B] y virtue of their executive positions within the company, Wheeler and Vitetta are
linked to the allegedly fraudulent statements . . . . Thus, under the group pleading doctrine, the
complaint adequately links alleged fraudulent statements to Vitetta and Wheeler.”); 380544
Canada, Inc. v. Aspen Tech., Inc., 544 F. Supp. 2d 199, 218–19 (S.D.N.Y. 2008) (finding that
allegations about CEO of corporation defendant, who spoke frequently to the media about the
corporation’s financial performance and signed SEC registration forms and investment
prospectuses sufficed to meet group pleading requirements); In re BISYS Sec. Litig., 397 F. Supp.
2d 430, 441 (S.D.N.Y. 2005) (“By virtue of their high level positions at the Company throughout
be a justifiable basis for holding that investors rely on the role corporate executives play in
issuing public statements even in the absence of explicit attribution.” Id. at 158 n.6. In light of
this observation, albeit in dicta, the IBG Defendants’ assertion that PIMCO held that “when
considering potential liability of officers and directors of a company . . . the Second Circuit has
held that in order to establish individual/direct liability, the Plaintiff must be able to attribute the
purportedly false statements by the company to those officer” is inaccurate. Since PIMCO,
several district courts, as well as the Second Circuit, in an unpublished summary order, have
continued to treat Scholastic as good law and/or have not imposed an attribution requirement on
corporate insiders, including CEOs and Board members. See City of Austin Police Ret. Sys. v.
Kinross Gold Corp., 957 F. Supp. 2d 277, 309 (S.D.N.Y. 2013) (finding that plaintiff stated a 10b claim against the CFO and senior vice president of a corporation, despite a lack of allegations
that they personally made the statements at issue) (collecting cases).
While the IBG Defendants are correct that it is well-established that there is no aiding
and abetting liability under § 10(b), Plaintiff does not assert such a claim here. Rather, Plaintiff
claims that the IBG Defendants, members of IBG’s board of directors, themselves made a
materially misleading statement in the May 2009 PPM and through Lighthouse Financial
brokers. By relying primarily on case law that only addresses the liability of secondary actors,
the IBG Defendants have not addressed the other legal bases for Plaintiff’s assertion that the IBG
Defendants in fact made the misleading statement at issue.
26
the Class Period, the Court is bound to infer at this stage that all three [individual defendants]
had direct involvement in BISYS’ daily affairs.”)
Because the group pleading doctrine does not extend to oral statements, however,
Maggiore cannot be said to have made the oral statements made by Lighthouse brokers to
Plaintiff. See Ho v. Duoyuan Global Water, Inc., 887 F. Supp. 2d 547, 572 (S.D.N.Y. 2012)
(rejecting plaintiff’s attempt to use group pleading to assert that the chief financial officer could
be held liable for oral statements made by the chair of the board, noting that plaintiff’s did not
overcome “the well-established rule that the group-pleading doctrine does not apply to oral
statements”); City of Pontiac Gen. Empls.’ Ret. Sys., 875 F. Supp. 2d at 375 (finding that while
executive vice president could be held liable under group pleading doctrine for statement made
in written corporate materials, she could not be “held liable based on what [the company’s CEO
and CFO] said in their oral remarks.”).
2. Remaining IBG Defendants
Plaintiff makes no factual allegations regarding Santiago’s involvement in the preparation
of the PPM, but appears to rely solely on his title as Chief Branding Officer and board member.
(See SAC ¶ 20.) Although courts have found that a misleading statement may be attributable to a
corporate insider “by virtue of [his] high level position[],” see In re BISYS Sec. Litig., 397 F.
Supp. 2d at 441, Plaintiff does not directly allege or provide facts supporting the finding that
Santiago “Chief Branding Office” is a “high level” executive position within IBG, or that he was
involved with the development of the PPM. Absent any factual allegations with respect to
Santiago, other than his title, the group pleading doctrine does not encompass Santiago.
Similarly, Plaintiff only alleges that the remaining IBG Defendants, Pragias, Kamen and
Ward are members of the Board of Directors. (SAC ¶¶ 22–25.) Plaintiff fails to plead sufficient
facts as to the IBG Defendants other than Maggiore and the remainder of the SAC contains very
27
few allegations which do not support a finding that the board members other than Maggiore were
“corporate insiders” with direct involvement in the daily affairs of IBG. Plaintiff alleges:
(1) the IBG Defendants were high-level executives, directors,
and/or agents at the Company and/or members of the Company’s
management team or had control thereof; (2) each of the IBG
Defendants, by virtue of his responsibilities and activities as a
senior officer and/or director of the Company, was privy to and
participated in the creation, development and distribution of the
Company’s May 2009 Private Placement Memorandum; (3) each
of the IBG Defendants enjoyed significant personal contact and
familiarity with the other IBG Defendants and was advised of and
had access to other members of the Company’s management team,
internal reports and other data and information about the
Company’s finances, operations, and sales at all relevant times;
and (4) each of the IBG Defendants was aware of the Company’s
dissemination of information to investors which they knew or
recklessly disregarded was materially false and misleading.
(Id. ¶ 60.)
The allegations that suggests a greater-than-typical involvement of the board members in
the day-to-day operations of IBG are conclusory — that “each of the IBG Defendants . . . was
privy to and participated in the creation, development and distribution of the Company’s May
2009” PPM, and “w[ere] aware of the Company’s dissemination of information to investors
which they knew or recklessly disregarded was materially false and misleading — are
conclusory, and the remaining allegations do not suggest that these Defendants were acting as
“corporate insiders.” Thus, the allegations are insufficient to establish that these IBG Defendants
were involved in the day-to-day operations of IBG. See In re ShengdaTech, Inc. Sec. Litig., No.
11-CV-1918, 2014 WL 3928606, at *3, 10 (S.D.N.Y. Aug. 12, 2014) (finding on a motion to
dismiss that allegations that two board members, who attended meetings of the Board of
Directors and three Board committees, “ held routine meetings with auditors and management,”
as members of the Audit Committee, and “had access to the adverse undisclosed information
about [the corporation defendant’s] business, operations, products, operational trends, financial
28
statements, markets and present and future business prospects via internal corporate documents”
were insufficient to “show that [the two individual defendants], who are outside directors,
exceeded those roles and became involved in the everyday business of” the defendant
corporation); DeAngelis, --- F. Supp. 2d at ---, 2014 WL 1695186 (S.D.N.Y. Apr. 16, 2014)
(finding on a motion to dismiss that plaintiff failed to allege sufficient facts to meet group
pleading requirements where the Complaint “makes no showing that the Independent Directors
were corporate insiders or involved in MF Global’s day-to-day operations.”); cf. In re Citigroup
Inc. Sec. Litig., 753 F. Supp. 2d 206, 239 (S.D.N.Y. 2010) (finding allegations outside director
who “wielded significant influence within the company and . . . convened the meetings in the
summer of 2007 that considered the company’s CDO exposure” sufficed to meet group pleading
requirement); In re GeoPharma, Inc. Sec. Litig., 411 F. Supp. 2d 434, 452 (S.D.N.Y. 2006)
(allegations that outside director “had a consulting agreement with [corporation defendant] for
which he was paid $200,000 per year-exceeding the salaries of both of the other individual
defendants, the highest officers in the company, and that he “own[ed] 31% of GeoPharma
common stock” satisfied group pleading requirement).
(2) “About to go public”
Plaintiff alleges that the IBG Defendants’ statements, made orally through the Lighthouse
Financial brokers, that IBG “was about to go public” were untrue. (SAC ¶¶ 6, 31 63.) The IBG
Defendants argue that this representation is expressly contradicted by statements in the PPM and
in the Subscription Agreement signed by Plaintiff expressly acknowledging that “there is, and
there will be for the foreseeable future, no public market for the shares.” (IBG Def. Mem. 16–
17.) Plaintiff does not respond to this argument and the Court therefore construes Plaintiff’s
failure to respond as an abandonment of this claim. See Reid v. Ingerman Smith LLP, 876 F.
29
Supp. 2d 176, 186 (E.D.N.Y. 2012) (“This Court may, and generally will, deem a claim
abandoned when a plaintiff fails to respond to a defendant’s arguments that the claim should be
dismissed.” (quoting Arma v. Buyseasons, Inc., 591 F. Supp. 2d 637, 643 (S.D.N.Y. 2008)));
Abbatiello v. Monsanto Co., 522 F. Supp. 2d 524, 530 (S.D.N.Y. 2007) (deeming a claim
abandoned due to the plaintiffs’ failure to oppose the defendants’ motion); see also Jackson v.
Fed. Exp., --- F.3d ---, ---, 2014 WL 4412333, at *5 (2d Cir. Sept. 9, 2014) (“Generally, but
perhaps not always, a partial response reflects a decision by a party’s attorney to pursue some
claims or defenses and to abandon others. Pleadings often are designed to include all possible
claims or defenses, and parties are always free to abandon some of them.”). In any event,
because Plaintiff alleges that the statement that IBG “was about to go public” was made orally by
Lighthouse Financial brokers, (see SAC ¶ 31), 18 the statement could not have been made by the
IBG Defendants pursuant to the group pleading doctrine, as discussed supra in Part
II.b.i.1.A(1).c., and is thus not an actionable material misrepresentation by the IBG Defendants.
(3) Representations about the use of proceeds
Plaintiff alleges that the IBG Defendants made false representations, in the PPM and
through the Lighthouse Financial brokers, stating that the proceeds raised from the May 2009
private placement would go toward marketing and product development. (SAC ¶¶ 11, 31, 47.)
The IBG Defendants argue that the PPM expressly provides that IBG “presently intends to use
18
The SAC also alleges “the IBG Defendants made material representations to Plaintiff,
that Plaintiff relied upon in making his investments, orally and in writing, that IBG had over
$2,130,000 in gross sales in 2008 (up from $289,000 in 2007), that the Company was ‘about to
go public,’” (SAC ¶ 6), but the only factual detail provided as to this statement is “[t]he
Lighthouse Financial broker told Levy that IBG was on the verge of ‘going public’ and
purchasing IBG shares was an opportunity to ‘get in’ before the public offering,” (Id. ¶ 31). In
the absence of any factual allegations that this statement was made in writing, the Court
construes this allegation as referring solely to this as an oral statement.
30
the net proceeds of this Offering for inventory; implementation of the Company’s marketing
plan; salaries and bonuses; product development; and for general working capital.” (IBG Def.
Mem 15 (quoting PPM at 22).) Plaintiff does not respond to this argument. Thus, as discussed
supra in part II.b.i.1.A(1).c.1, the Court considers Plaintiff to have abandoned this argument.
However, even if the Court considers Plaintiff’s allegations, because Plaintiff alleges that
these statements were made orally by the Lighthouse Financial brokers, as discussed supra in
Park II.b.i.1.A.(1).c., such oral statements cannot be attributed to the IBG Defendants. As for the
alleged misrepresentation, the express language of the PPM rebuts this claim. The PPM states
that IBG “presently intends to use the net proceeds of this Offering for inventory;
implementation of the Company's marketing plan; salaries and bonuses; product development;
and for general working capital.” (PPM 22.) In light of the express language of the PPM
contradicting Plaintiff’s allegations, the Court rejects Plaintiff’s factual allegations challenging
the statements made in the PPM about the use of proceeds. See Williams v. Citibank, N.A., 565
F. Supp. 2d 523, 527 (S.D.N.Y. 2008) (“The court need not accept as true an allegation that is
contradicted by documents on which the complaint relies.” (quoting In re Bristol-Myers Squibb
Sec. Litig., 312 F. Supp. 2d 549, 555 (S.D.N.Y. 2004))); Empls.’ Ret. Sys. of Gov’t of Virgin
Islands v. Morgan Stanley & Co., 814 F. Supp. 2d 344, 353 (S.D.N.Y. 2011) (“[I]f a plaintiff's
allegations are contradicted by [a document incorporated into the complaint by reference] those
allegations are insufficient to defeat a motion to dismiss” (alteration in Empls.’ Retirement)
(quoting Matusovsky v. Merrill Lynch, 186 F. Supp. 2d 397, 400 (S.D.N.Y. 2002))); see also
Roth v. Jennings, 489 F.3d 499, 509 (2d Cir. 2007) (noting, the context of fraud claims, that
“when the complaint alleges that [a document filed with the SEC] made a particular
31
representation, the court may properly look at the document to see whether that representation
was made”).
The Court concludes that the SAC pleads sufficient facts to establish that Maggiore made
a material misrepresentation in the PPM by stating 2008 gross sales figures of $2,130,000,
without disclosing that a significant portion of this sales figure was consignment sales.
B.
Scienter
The IBG Defendants argue that Plaintiff has not adequately pleaded scienter as to each
IBG Defendant with respect to any of the allegedly misleading statements. (IBG Def. Mem. 25;
IBG Def. Reply 12.) Plaintiff alleges that “[b]y virtue of their receipt or reckless disregard of
information reflecting the true facts regarding IBG, . . . each defendant knowingly or recklessly
participated in the fraudulent scheme and conduct alleged herein.” (SAC ¶ 27)
Scienter is “a mental state embracing intent to deceive, manipulate, or defraud.” Tellabs,
Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319 (2007) (quoting Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 193 & n.12 (1976)); see also S.E.C. v. Obus, 693 F.3d 276, 286 (2d
Cir. 2012) (“Liability for securities fraud requires proof of scienter, defined as ‘a mental state
embracing intent to deceive, manipulate, or defraud.’” (quoting Ernst, 425 U.S. at 193 & n.12
(1976)). Because of the heightened pleading standard, a plaintiff asserting a securities fraud
claim must “state with particularity facts giving rise to a strong inference that the defendant acted
with the required state of mind.” 15 U.S.C. § 78u-4; Steginsky, 741 F.3d at 368. A complaint
will survive only if the factual allegations, “taken collectively, would allow a reasonable person
to “deem the inference of scienter cogent and at least as compelling as any opposing inference
one could draw from the facts alleged.” Slayton v. Am. Exp. Co., 604 F.3d 758, 766 (2d Cir.
2010) (quoting Tellabs, 551 U.S. at 324).
32
Scienter “may be established by facts (1) showing that the defendants had both motive
and opportunity to commit the fraud or (2) constituting strong circumstantial evidence of
conscious misbehavior or recklessness.” City of Pontiac, 752 F.3d at 184 (citation and internal
quotation marks omitted). When a plaintiff seeks to establish scienter through evidence of
recklessness, he may do so “through a showing of reckless disregard for the truth, that is,
conduct which is highly unreasonable and which represents an extreme departure from the
standards of ordinary care.” Obus, 693 F.3d at 286 (quoting S.E.C v. McNulty, 137 F.3d 732,
741 (2d Cir. 1998)); see also City of Pontiac, 752 F.3d at 184 (noting that, in this context,
recklessness is defined as “a state of mind ‘approximating actual intent,’ which can be
established by ‘conduct which is highly unreasonable and which represents an extreme departure
from the standards of ordinary care to the extent that the danger was either known to the
defendant or so obvious that the defendant must have been aware of it.” (quoting Novak, 216
F.3d at 308, 312)).
Circumstances comprising evidence of recklessness include allegations that a defendant
“(1) benefitted in a concrete and personal way from the purported fraud; (2) engaged in
deliberately illegal behavior; (3) knew facts or had access to information suggesting that their
public statements were not accurate; or (4) failed to check information they had a duty to
monitor.” ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553
F.3d 187, 199 (2d Cir. 2009) (internal quotation marks omitted) (quoting Novak, 216 F.3d
at 308); see also In re Scholastic Corp. Sec. Litig., 252 F.3d at 76 (“Where the complaint alleges
that defendants knew facts or had access to non-public information contradicting their public
statements, recklessness is adequately pled for defendants who knew or should have known they
were misrepresenting material facts with respect to the corporate business.”).
33
Because the Court finds that only Maggiore can be held liable for making the misleading
statements, the Court assesses whether the SAC sufficiently alleges scienter as to Maggiore. The
Amended Complaint alleges:
each of the Defendants acted with scienter in that each defendant
knew or recklessly disregarded that the documents and statements
issued or disseminated in the name of the Company were
materially false and misleading or omitted to state facts necessary
in order to make the statements made, in light of the circumstances
under which they were made, not misleading. Each defendant
knew that such statements or documents would be issued or
disseminated to investors and knowingly and substantially
participated in or acquiesced in the making, issuance or
dissemination of such statements or documents as a primary
violation of the federal securities laws. By virtue of their receipt or
reckless disregard of information reflecting the true facts regarding
IBG, their control over and/or receipt and/or modification of IBG’s
materially misleading statements, and/or their other associations
with the Company, each defendant knowingly or recklessly
participated in the fraudulent scheme and conduct alleged herein.
(SAC ¶ 27.)
(1) Knowledge of facts contradicting misleading
statement
In asserting that, “[b]y virtue of their receipt or reckless disregard of information
reflecting the true facts regarding IBG, . . . each defendant knowingly or recklessly participated
in the fraudulent scheme,” (id. ¶ 27), Plaintiff’s theory appears to be that Maggiore “knew facts
or had access to information suggesting that their public statements were not accurate,” see ECA,
Local 134, 553 F.3d at 199. Under heightened pleading requirements, “[w]here plaintiffs
contend defendants had access to contrary facts, they must specifically identify the reports or
statements containing this information.” Teamsters Local 445 Freight Div. Pension Fund v.
Dynex Capital Inc., 531 F.3d 190, 196 (2d Cir. 2008) (quoting Novak, 216 F.3d at 309).
The SAC asserts that Wallner learned from Maggiore, during the “due diligence” process
for his May 2011 purchase of the Power Ice brand from IBG, that IBG’s 2008 and 2009 sales
34
were largely comprised of consignment shipments and “chargebacks,” which are “shipments to
retailers that had to be bought back by IBG if the product didn’t sell.” (SAC ¶ 8; Wallner Aff.
¶ 10.) However, there is nothing in that affidavit, or in any of Plaintiff’s other submissions, to
establish when Maggiore became aware that the shipments were consignment shipments, for
which the likelihood of payment was merely speculative. Although Wallner’s affidavit states
that Wallner learned this information from Maggiore during the due diligence process associated
with Wallner’s May 2011 purchase of the Power Ice brand, it does not state or suggest that this
due diligence process had begun as early as September 2009, when Plaintiff made his first
purchase of IBG stock, nor does it otherwise provide a basis for the Court to infer that Maggiore
may have known this information in 2009. Without any factual allegations establishing that
Maggiore was aware in 2009 at the time that Plaintiff purchased his shares in IBG, that a
significant portion of the claimed 2008 gross sales was consignment sales, there is an insufficient
basis from which to draw the “strong inference” that Maggiore’s actions were “highly
unreasonable” representing “an extreme departure from the standards of ordinary care to the
extent that the danger was either known to Maggiore or so obvious that Maggiore must have
been aware of it.” See City of Pontiac, 752 F.3d at 184; Pension Comm. of Univ. of Montreal
Pension Plan v. Banc of Am. Sec., LLC, 592 F. Supp. 2d 608, 629 (S.D.N.Y. 2009) (granting
summary judgment “with respect to the plaintiffs who purchased all of their shares in the Funds
prior to June 2001,” because the plaintiffs could not show that they had the requisite scienter
prior to that date); cf. City of Pontiac Gen. Empls.’ Ret. Sys., 875 F. Supp. 2d at 369 (finding that
plaintiffs who purchased shares of common stock between April and July 2009 adequately
pleaded scienter where “the Amended Complaint alleges, based on interviews with multiple
confidential witnesses, that . . . in or around February 2009, three confidential witnesses who
35
were executives in [the Information Systems & Global Systems divisions] told [the individual
defendant] that the financial goals for [those departments] for 2009 were overstated and could
not be achieved,” establishing the required strong inference that the individual defendant “knew
the public representations made by Lockheed Martin about IS & GS were false”). 19
Because Plaintiff has not pleaded adequate factual allegations that Maggiore “knew facts
or had access to non-public information contradicting” the public statement about the 2008 gross
sales figures at the time the statement was made (or at least prior to Plaintiff’s purchase of his
shares), Plaintiff has failed to state a claim pursuant to 10(b) against the IBG Defendants. See In
re Scholastic Corp. Sec. Litig., 252 F.3d at 76.
(2) Knowledge based on board membership
Plaintiff alleges in the SAC, and makes additional arguments in his opposition brief, that
as a board member, Maggiore had the requisite level of scienter. (See SAC ¶¶ 59–62; Pl. Opp’n
Mem. 23–24.) These allegations are insufficient to establish scienter. Plaintiff argues that
scienter as to the IBG Defendants can be established by the fact that, as principal shareholders in
19
The Court notes that the March 26, 2010 email from Maggiore to Feinstein in which
Maggiore explains that “Walgreen’s is taking in Children’s Throat Cooler for the fall cough cold
set,” and attaches a proposed unsigned “term sheet” for a distribution arrangement with
Walgreens, with Maggiore’s name typed at the bottom of the term sheet, establishes that
Maggiore was aware in 2010 that IBG engaged in a “guaranteed” sales transaction. (See Email
dated Mar. 16, 2010, annexed to Travis Decl. as Ex. 7.) The term sheet includes a provision that
IBG “agrees to a guaranteed sale on all products sold to Walgreens. [IBG] understands that if
the item does not meet Walgreens[’] sales expectations, Walgreens will . . . send all remaining
store and DC inventory back to [IBG].” (Id. at 3). The Court is not deciding whether the email
and attached unsigned term sheet provide a sufficient basis to support the allegation that in 2009
at the time Plaintiff made his purchase, Maggiore knew that those “guaranteed” sales were
included in IBG’s estimated 2008 gross sales. Although, as noted supra in n.14, the SAC fails to
plead sufficient facts establishing that the PPM was misleading with respect to guaranteed sales,
the Court will grant Plaintiff 30 days from the date of this Memorandum and Order to file a third
amended complaint against Maggiore to attempt to assert a § 10(b) claim. Plaintiff should
allege, if possible, a sufficient factual basis to show that knowledge of guaranteed sales would
have rendered the statement that IBG’s 2008 revenues were $2,130,000 misleading, and that
Maggiore had the requisite scienter with respect to this statement.
36
IBG, each IBG Defendant was “incentivized to keep the company alive through investment.”
(Pl. Opp’n Mem. 23.) However, “in attempting to show that a defendant had fraudulent intent, it
is not sufficient to allege goals that are ‘possessed by virtually all corporate insiders,’ such as the
desire to . . . sustain the appearance of corporate profitability or the success of an investment, or
the desire to maintain a high stock price in order to increase executive compensation.” S. Cherry
St., LLC v. Hennessee Grp. LLC, 573 F.3d 98, 109 (2d Cir. 2009).
Plaintiff also argues that as members of the board, the IBG Defendants “would have to
determine how effective the company had been in the prior year in terms of revenues generated,”
and points to the facts that (1) the auditors received the 2008 Audited Financial Statement on
June 8, 2009, and (2) “immediately thereafter” IBG, “at the behest and authority of the board,
amended the” May 2009 PPM. 20 (Pl. Opp’n Mem. 23–24.) While Plaintiff’s rationale is not
entirely clear, he appears to be arguing that the fact that the PPM was amended supports an
inference that the individual members of the Board were aware that the 2008 sales figures
represented in the PPM were inaccurate. However, Plaintiff does not cite to any factual
allegations in the SAC or propose additional factual allegations that would support the inferential
leap that the amendment of the May 2009 PPM was the result of the Board of Directors realizing
that the 2008 sales figures were inaccurate. The July 23, 2009 amendment changed the number
of shares offered and individual share price, but did not change the total proceeds to be raised
through the May 2009 private placement. Without a factual basis to support the inference that
20
The May 2009 PPM offered up to 5,000,000 shares at a price of $1.00 per share, for a
total of gross proceeds of up to $5,000,000. (PPM i.) The amendment reduced the price of
individual shares and increased the total number of shares issued by providing for the sale of up
to 12,500,000 shares at a price of $0.40 per share, for a total of gross proceeds of up to
$5,000,000. (Id.) (See Amendment dated July 23, 2009, annexed to Travis Decl. as Ex. 3.)
37
the decision to amend the PPM is indicative of knowledge or recklessness with respect to the fact
that $2,130,000 in sales for 2008 was a misrepresentation, Plaintiff has not met the pleading
standard for showing scienter as to Maggiore.
In sum, Plaintiff has pleaded sufficient factual allegations that the statement about
estimated 2008 gross sales in the May 2009 PPM was misleading because it failed to convey that
this gross sales figure including consignment shipments, and under the group pleading doctrine,
this statement is attributable to Maggiore as a corporate insider. However, the SAC lacks
sufficient factual allegations, under the heightened pleading standard, to raise the strong
inference that Maggiore acted with the requisite state of mind in making this statement.
Accordingly, Plaintiff’s § 10(b) claim against the IBG Defendants is dismissed.
2.
Section 10(b) claim against Raiche Ende
Plaintiff’s § 10b claim against Raiche Ende is that “[t]he May 2009 PPM attributes the
following fraudulent statement to Raich Ende: ‘[t]he Auditors [Raich Ende] have informed the
Company that the preliminary audited results for 2008 will reflect gross sales of approximately
$2,130,000, as compared to 2007 gross sales of $289,000,” which statement was a
misrepresentation as “[t]he 2008 ‘sales’ figures provided by Raich Ende were fictitious.” (SAC
¶ 90(i).) Plaintiff argues that the statement in the May 2009 PPM regarding the 2008 gross sales
figure can be attributed to Raiche Ende because Raiche Ende admitted to assisting with the
preparation of this statement, and because the PPM attributes the statement to Raiche Ende. 21
21
Plaintiff also appears to allege that the 2008 audited financial statement, released on
June 8, 2009, also contained a misleading statement that IBG’s 2008 “net sales” were
$2,130,000. (SAC ¶ 51 (“Raich Ende’s audit is a misrepresentation because the $2,130,000 ‘net
sales’ figure is based upon product shipments not sales to a buyer, as claimed by Raich Ende.”).)
Plaintiff further alleges that Raiche Ende conspired with officers of IBG to hide material
amounts of income to the officers and directors by failing to identify on IBG tax returns the
38
(Pl. Opp’n Mem. 30–31.) Raiche Ende argues that Plaintiff has failed to plead with particularity
(1) material misrepresentation or omission, (2) scienter, or (3) reliance, and further argues that
any statement made in the May 2009 PPM cannot be attributed to Raiche Ende. (Raiche Ende
Memorandum of Law in Support of Motion to Dismiss (“Raiche Ende. Mem.”) 6, 8–18.)
The only potentially actionable statement against Raiche Ende is the statement in the
May 2009 PPM that “the preliminary audited results for 2008 will reflect gross sales of
approximately $2,130,000.” (See PPM 11.) Even assuming that the SAC adequately alleges
that this statement in the PPM could be attributed to Raiche Ende, because Plaintiff fails to meet
the exacting standard for establishing scienter against an auditor with respect to the PPM
statement, Plaintiff’s § 10(b) against Raiche Ende fails.
A.
Scienter
To adequately plead recklessness as the basis for scienter as to an auditor, a plaintiff must
show “conduct that is highly unreasonable, representing an extreme departure from the standards
amount of compensation paid to them. (Id. ¶ 89(iii).) However, Plaintiff has not alleged that he
was aware of and relied on the 2008 Audited Financial Statement, or either IBG’s or the IBG
Defendants’ tax returns, prior to purchasing his shares. Because Plaintiff does not allege that he
was aware of the 2008 Audited Financial Statements or the tax returns prior to purchasing his
shares, Plaintiff cannot establish that he relied on these alleged misrepresentations, necessary to
meet the reliance element of his §10(b) claim. See Erica P. John Fund, Inc. v. Halliburton Co.,
573 U.S. ---, ---, 131 S. Ct. 2179, 2181(2011) (“The traditional way a plaintiff can demonstrate
reliance is by showing that he was aware of a company's statement and engaged in a relevant
transaction — e.g., purchasing common stock — based on that specific misrepresentation.”);
Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 159 (2008) (“Reliance by the
plaintiff upon the defendant’s deceptive acts is an essential element of the § 10(b) private cause
of action. It ensures that, for liability to arise, the ‘requisite causal connection between a
defendant's misrepresentation and a plaintiff's injury’ exists as a predicate for liability.”).
Accordingly, Plaintiff cannot premise a §10(b) claim against Raiche Ende based on the 2008
Audited Financial Statement or the tax returns; the only potentially actionable statement is the
statement in the May 2009 PPM that “the preliminary audited results for 2008 will reflect gross
sales of approximately $2,130,000.” (See PPM 11.)
39
of ordinary care,” and that “approximate[s] an actual intent to aid in the fraud being perpetrated
by the audited company.” Meridian Horizon Fund, LP v. KPMG (Cayman), 487 F. App’x 636,
640 (2d Cir. 2012) (quoting Rothman v. Gregor, 220 F.3d 81, 98 (2d Cir. 2000)); see also
Special Situations Fund III QP, L.P. v. Deloitte Touche Tohmatsu CPA, Ltd., No. 13-CV-1094,
2014 WL 3605540, at *15 (S.D.N.Y. July 21, 2014) (“The pleading requirements for auditor
scienter are particularly stringent.” (collecting cases))). A plaintiff may plead facts
demonstrating that “an audit was so shoddy as to constitute ‘no audit at all,’” or that the “auditor
disregarded specific ‘red flags’ that would place a reasonable auditor on notice that the audited
company was engaged in wrongdoing to the detriment of its investors.” Stephenson v.
PricewaterhouseCoopers, LLP, 482 F. App’x 618, 623 (2d Cir. 2012), as amended (June 13,
2012) (quoting In re Tremont Sec. Law, State Law and Ins. Litig., 703 F. Supp. 2d 362, 370
(S.D.N.Y. 2010)). “The failure of a non-fiduciary accounting firm to identify problems with a
company’s internal controls and accounting practices does not constitute recklessness.”
Stephenson, 482 F. App’x at 623 (alteration omitted) (quoting Novak, 216 F.3d at 309).
Plaintiff argues that scienter as to Raiche Ende can be established by the fact that (1)
Raiche Ende’s violated General Acceptable Accounting Principles (“GAAP”) in conducting an
audit that counted consignment sales as revenue in order to come up with the “preliminary” gross
sales estimate of $2,130,000 in 2008, and (2) Raiche Ende disregarded “red flags in IBG’s PPM
that [IBG] was engaged in the practice of calling product shipments and consignments, ‘sales,’ in
order to inflate its sales figures for the purpose of luring investors.” (Pl. Opp’n Mem. 30.)
Plaintiff further asserts that Raiche Ende “knew, because it was its duty to know,” that IBG
recognized revenue when a product was shipped, rather than when it was shipped to an actual
buyer. (Id.) Raiche Ende argues that Plaintiff’s allegations do not meet the high standard for
40
establishing scienter as to an auditor. (Raiche Ende Def. Mem. 13–15; Raiche Ende Reply 10–
11.)
“Allegations of GAAP violations or accounting irregularities, standing alone, are
insufficient to state a securities fraud claim,” ECA, 553 F.3d at 200 (2d Cir. 2009) (quoting
Novak, 216 F.3d at 309)), as Plaintiff concedes, (see Pl. Opp’n Mem. 12). However, allegations
of GAAP violations, “coupled with evidence of corresponding fraudulent intent,” may be
sufficient.” (Id.) One type of evidence of fraudulent intent is the existence of “red flags” that
were ignored by an external auditor. “A ‘red flag’ is a sign consciously disregarded by the
auditor that ‘would place a reasonable auditor on notice that the audited company was engaging
in wrongdoing to the detriment of its investors.’” Perry v. Duoyuan Printing, Inc., No. 10-CV7235, 2013 WL 4505199, at *7 (S.D.N.Y. Aug. 22, 2013) (quoting In re IMAX Secs. Litig., 587
F. Supp. 2d 471, 483–84 (S.D.N.Y. 2008)).
1.
Violation of GAAP Principles
Plaintiff’s argues that Raiche Ende violated GAAP revenue recognition principles in
including consignment shipments in its “preliminary estimate” published in the May 2009 PPM.
This argument relies on the assumption that Raiche Ende actually knew, or consciously
disregarded a significant likelihood, that IBG itself was counting consignment shipments as sale
revenue. Plaintiff argues that Raiche Ende “knew or should have known” that these consignment
shipments were not actual sales. However, the only evidence Plaintiff can muster in support of
this assertion is the fact that Raiche Ende states in the 2008 Audited Financial Statement that as
part of its audit procedures Raiche Ende “examines [the] evidence supporting the amounts and
disclosures on financial statements,” and “was obligated to review [IBG’s] finances for its
audit.” (Pl. Opp’n Mem. at 28–29 (quoting 2008 Audited Financial Statement 1).) This
41
argument establishes, at most, that Raiche Ende acted negligently in not uncovering, through its
auditing process, that IBG was counting consignment shipments as sales revenue, but does not
establish that Raiche Ende’s actions were “highly unreasonable, representing an extreme
departure from the standards of ordinary care,” or otherwise “approximate[d] an actual intent to
aid in the fraud being perpetrated” by IBG. See Meridian, 487 F. App’x at 640; Stephenson v.
PricewaterhouseCoopers, LLP, 482 F. App’x 618, 623 (2d Cir. 2012) (“[T]he failure of a nonfiduciary accounting firm to identify problems with [a company’s] internal controls and
accounting practices does not constitute reckless[ness].” (alteration in Stephenson) (quoting
Novak, 216 F.3d at 309)), as amended (June 13, 2012); In re Scottish Re Grp. Sec. Litig., 524 F.
Supp. 2d at 394 (noting that while “plaintiffs have alleged that a reasonable auditor would have
discovered the problems with IBG’s valuation of the deferred tax assets and internal controls,”
that “such allegations would support a claim of negligence, but would not ‘approximate an actual
intent to aid in the fraud being perpetrated’ ” (quoting Rothman, 220 F.3d at 98)); see also
Nappier v. Pricewaterhouse Coopers LLP, 227 F. Supp. 2d 263, 276 (D.N.J. 2002) (finding
plaintiff’s failed to establish scienter as to external auditor where plaintiff alleged that “in light of
[the auditor’s] extremely close working relationship with [the audited company], including its
long history as [audited company’s] auditor and its role as consultant to [the audited company],
there is at the very least a strong inference that [the auditor] was aware of and reviewed (or
recklessly ignored) credit memoranda and return authorizations and similar basic documents that
revealed . . . the guaranteed sales”).
2.
“Red flags”
Even assuming that Plaintiff had pleaded sufficient facts to establish that Raiche Ende in
fact knew about IBG’s policy of counting consignment shipments as revenue and violated GAAP
42
principles, Plaintiff fails to establish that Raiche Ende ignored the existence of red flags that
would have placed a reasonable auditor on notice that IBG was engaged in fraudulent activity.
While Plaintiff alleges that Raiche Ende disregarded red flags, the only red flag cited by Plaintiff
is the statement in the May 2009 PPM that IBG’s “gross sales include all shipped goods.” (Pl.
Opp’n Mem. 30.) Because this statement appeared in the same publication as the allegedly
misleading statement by Raiche Ende that the “preliminary estimate” of 2008 gross sales was
$2,130,000, Plaintiff cannot show that the statement placed Raiche Ende “on notice” with respect
to the veracity of its own statement. 22 See In re Advanced Battery Techs., Inc. Sec. Litig., No.
11-CV-2279, 2012 WL 3758085, at*16 (S.D.N.Y. Aug. 29, 2012) (“In order for a red flag to
support a strong inference of scienter, the auditor must have actually been aware of its
existence.”).
Plaintiff has alleged no red flags other than the statements in the PPM that were missed
by Raiche Ende during the auditing process. The general allegations that, as the external auditor,
Raiche Ended had access to information that should have served as a red flag is insufficient to
support the inference of recklessness. See Stephenson, 768 F. Supp. 2d at 575 (finding that
purported “red flags” that “allege no more than that [defendant auditor] had access to
information by which it could have discovered warning signs of fraud or that [defendant] would
have discovered these warnings signs if it had conducted an audit in accordance with GAAS and
its own policies” were insufficient to support an inference of scienter).
Because Plaintiff has not alleged sufficient facts to support an inference that Raiche Ende
both knew that IBG was counting consignment revenues as actual sales in violation of GAAP
22
At most, this red flag speaks to Raiche Ende’s scienter with respect to the 2008
audited financial statement, which was released subsequent to the May 2009 PPM; the Court
considers this argument infra.
43
principles, and that it acted with the requisite level of recklessness in ignoring any specific red
flags that would have put a reasonable auditor on notice that IBG was engaging in wrongdoing to
the detriment of its investors, the SAC does not meet the high standard of showing recklessness
approximating intent to aid in the fraudulent conduct. Therefore, the SAC fails to state a claim
against Raiche Ende pursuant to section 10(b) of the Exchange Act.
ii.
Section 20(a) claim
The SAC alleges that the IBG Defendants are liable either as primary violators or as
controlling persons pursuant to § 20(a), and alleges that “[t]he IBG Defendants acted as
controlling persons of IBG . . . .” (SAC ¶ 69.) “To establish a prima facie case of control person
liability, a plaintiff must show (1) a primary violation by the controlled person, (2) control of the
primary violator by the defendant, and (3) that the defendant was, in some meaningful sense, a
culpable participant in the controlled person’s fraud.” ATSI Commc’ns, Inc. v. Shaar Fund, Ltd.,
493 F.3d 87, 108 (2d Cir. 2007); see also ECA, 553 F.3d at 207 (“In order to establish a prima
facie case of controlling-person liability, a plaintiff must show a primary violation by the
controlled person.” ).
Even if Plaintiff had been able to allege a claim of primary violation by IBG upon which
to predicate the IBG Defendants liability as controlling persons, this claim fails for the same
reason that the § 10(b) claim fails. Plaintiff has insufficiently pled the requisite state of mind —
here, “culpable participa[tion].” This culpable participation requirement of § 20(a) “is similar to
the scienter requirement of Section 10(b); plaintiffs must ‘plead with particularity facts giving
rise to a strong inference that the controlling person knew or should have known that the primary
violator, over whom that person had control, was engaging in fraudulent conduct.’” In re Refco,
Inc. Sec. Litig., 503 F. Supp. 2d at 661 (quoting In re Global Crossing, Ltd. Secs. Litig., 471 F.
44
Supp. 2d 338, 351 (S.D.N.Y. 2006)); see McIntire v. China MediaExpress Holdings, Inc., 927 F.
Supp. 2d 105, 122–23 (S.D.N.Y. 2013) (“In order to withstand a motion to dismiss, a § 20(a)
claim must allege, at a minimum, particularized facts of the controlling person’s conscious
misbehavior or recklessness.”); In re MBIA, Inc., Sec. Litig., 700 F. Supp. 2d 566, 598 (S.D.N.Y.
2010) (same).
Here, the lack of factual allegations that precludes a finding that the IBG Defendants
acted with the scienter necessary to plead a § 10(b) claim also requires dismissal of the § 20(a)
claim. See In re Alstom SA, 406 F. Supp. 2d 433, 493 (S.D.N.Y. 2005) (finding that plaintiffs
had not pled culpable participation as to the controlling persons where they “have not alleged
any facts supporting a strong inference of any extreme conduct that even approximates
recklessness . . . .”).
b.
Other fraud claims
The SAC alleges claims of common law fraud and fraud in the inducement against the
IBG Defendants, based on their material misrepresentations regarding IBG’s sales figures, plans
to go public, and intended use of Plaintiff’s investment, made with the intention of causing
Plaintiff to invest in IBG. (SAC ¶¶ 73–88.) The SAC also alleges that Raiche Ende engaged in
fraud and aiding and abetting fraud by materially concealing the fact that IBG did not have
$2,130,000 in sales and by conspiring with officers of IBG to hide income paid to the directors.
(Id. ¶¶ 90, 97.)
Under New York law, the elements of a fraud claim are: “(1) a material misrepresentation
or omission of fact (2) made by defendant with knowledge of its falsity (3) and intent to defraud;
(4) reasonable reliance on the part of the plaintiff; and (5) resulting damage to the plaintiff.”
Crigger v. Fahnestock & Co., 443 F.3d 230, 234 (2d Cir. 2006). A fraud in the inducement
45
claim has the same elements as a fraud claim, but allows a plaintiff to bring an action “when the
misrepresentation is collateral to the contract it induced.” Wall v. CSX Transp., Inc., 471 F.3d
410, 416 (2d Cir. 2006) (citing WIT Holding Corp. v. Klein, 724 N.Y.S.2d 66, 68 (App. Div.
2001) (“[A] misrepresentation of material fact, which is collateral to the contract and serves as an
inducement for the contract, is sufficient to sustain a cause of action alleging fraud.”)).
In the securities context, these elements are “essentially the same” as “the elements
necessary to establish a claim under 10(b).” 23 Marini v. Adamo, 995 F. Supp. 2d 155, 197
(E.D.N.Y. 2014) (citing Meridian Horizon Fund, LP v. Tremont Grp. Holdings, Inc., 747 F.
Supp. 2d 406, 414 (S.D.N.Y.2010), aff’d sub nom. Meridian Horizon Fund, LP v. KPMG
(Cayman), 487 F. App’x. 636 (2d Cir. 2012), and Sawabeh Info. Servs. Co. v. Brody, 832 F.
Supp. 2d 280, 298 (S.D.N.Y. 2011)). Because Plaintiff fails to allege sufficient facts to support a
finding the the misleading statement in the May 2009 PPM can be attributed to any IBG
Defendant other than Maggiore, Plaintiff’s claims of fraud and fraud in the inducement as to
Santiago, Pragias, Kamen and Ward are dismissed. See In re Tremont Sec. Law, State Law &
Ins. Litig., 703 F. Supp. 2d 362, 372 (S.D.N.Y. 2010) (“the elements of Section 10(b) claims are
essentially the same as those for common law fraud in New York. Since plaintiffs’ Section 10(b)
claim does not survive, plaintiffs’ common law fraud claim, based on the same allegations of
fact, must be dismissed as well.”) Because Plaintiff does not allege sufficient facts to support a
finding that Maggiore acted with the requisite scienter necessary to support a §10(b) claim, the
SAC, as currently pled, also fails to state a claim of common law fraud and fraud in the
inducement as to Maggiore.
23
Plaintiff’s memorandum of law does not distinguish between the § 10(b) claims and
the common law claims, reinforcing the Court’s identical analysis of the federal and state claims.
46
Plaintiff’s claim of aiding and abetting fraud against Raiche Ende is also without merit.
Under New York law, the elements of an aiding and abetting fraud claim are: “(1) the existence
of a fraud; (2)[ the] defendant’s knowledge of the fraud; and (3) that the defendant provided
substantial assistance to advance the fraud's commission.” Krys, 749 F.3d at 127 (alteration in
original). Here, because Plaintiff has not established a primary fraud claim that Raiche Ende
aided or abetted, this claim also fails.
c.
Amendment of the Complaint
Plaintiff seeks leave to submit a proposed Third Amended Complaint. Plaintiff states that
the Third Amended Complaint “asserts the same claims on similar facts as the First Amended
Complaint, but adds a second plaintiff.” 24 (Pl. Letter dated May 14, 2014.) The Second
Amended Complaint and the proposed Third Amended Complaint include additional factual
allegations in addition to adding a second plaintiff. The proposed Third Amended Complaint
alleges that the proposed additional plaintiff, Tiffany Hott, purchased 70,000 shares of IBG stock
in February 2010, but provides no further factual allegations with respect to her claims.
(Proposed Third Amended Complaint ¶ 4.) The proposed Third Amended Complaint also
includes the names of the Lighthouse Financial brokers referenced in the SAC, and includes the
factual admission from Defendants’ summary judgment motion papers that “IBG now claims . . .
that in actuality, IBG took in significant monies for goods shipped in 2008, taking in
approximately $1,575,000.” (Id. ¶ 56.) Plaintiff alleges that “[t]his $1,575,000 appears to be
gross and is, of course, not the $2.1 Million net sales number stated in Raich[e] Ende’s 2008
Audit.” (Id.)
24
Plaintiff’s letter seeking leave to submit the proposed Third Amended Complaint does
not reference the Second Amended Complaint that was included with Plaintiff’s opposition
papers.
47
The additional allegations in the proposed Third Amended Complaint are insufficient to
withstand a motion to dismiss with respect to Plaintiff’s claims against Santiago, Pragias,
Kamen, and Ward (the remaining IBG Defendants other than Maggiore), and against Raiche
Ende. While the Court recognizes its obligation to freely give leave to amend a complaint “when
justice so requires,” see Fed. R. Civ. P. 15, here, the proposed Third Amended Complaint does
not address the deficiencies and gaps in Plaintiff’s allegations with respect to these Defendants
— namely, that (1) any statement other than the one about 2008 gross sales in the May 2009
PPM was a material misrepresentation, (2) any individual IBG Defendant other than Maggiore
made this misleading statement in the PPM, or (3) Raiche Ende acted with the an exacting level
of recklessness required to establish scienter. Because granting leave to amend as to Plaintiff’s
claims against Santiago, Pragias, Kamen, and Ward and against Raiche Ende would be futile, the
Court denies Plaintiff’s application to amend as to them. See Savitsky, 210 F. App’x at 72.
Plaintiff’s application to add a second plaintiff, as currently pled, is also insufficient to
state a claim as to Maggiore because Plaintiff alleges only that Hott purchased 70,000 shares of
IBG stock in February 2010, but provides no specific factual allegations as to the proposed
plaintiff’s awareness of and reliance on the statement in the May 2009 PPM or on any other
statement. Plaintiff is granted 30 days leave to submit a Third Amended Complaint with
additional factual allegations as to the proposed additional plaintiff, and any additional factual
allegations necessary to state a viable claim for securities fraud pursuant to the Exchange Act
§ 10(b) and the common law claims of fraud and fraud in the inducement against Maggiore.
48
III. Conclusion
For the foregoing reasons, the Court grants Defendants’ motions to dismiss the Second
Amended Complaint, denies Plaintiff’s application to submit the proposed Third Amended
Complaint, but grants 30 days leave to amend the Second Amended Complaint.
SO ORDERED:
s/MKB
MARGO K. BRODIE
United States District Judge
Dated: September 29, 2014
Brooklyn, New York
49
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