Prime Mover Capital Partners L.P. et al v. Elixir Gaming Technologies, Inc. et al

Filing 63

MEMORANDUM OPINION. For the foregoing reasons, defendants motions to dismiss [DI 29, 31, 39] the amended complaint are granted to the extent that (1) all of Prime Movers claims are dismissed and (2) all of Stratas claims are dismissed except for Counts 8 and 9 against EGT. The motions are denied in all other respects. (Signed by Judge Lewis A. Kaplan on 6/22/11) (djc)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
------------------------------------------x
PRIME MOVER CAPITAL PARTNERS L.P., et al.,
Plaintiffs,

-against-

10 Civ. 2737 (LAK)

ELIXIR GAMING TECHNOLOGIES, INC., et al.,
Defendants.
------------------------------------------x

MEMORANDUM OPINION

Appearances:
Daniel A. Osborn
O SBORN LAW, P.C.
Attorney for Plaintiffs

Paul R. Bessette
Michael A. Piazza
Jesse Z. Weiss
G REENBERG T RAURIG LLP
Attorneys for Defendant Elixir Gaming Technologies, Inc.
and the Individual Defendants
David J. Schindler
Robert W. Perrin
Matthew L. Kutcher
Cameron Smith
LATHAM & WATKINS LLP
Attorneys for Defendant Elixir Group Limited

LEWIS A. KAPLAN , District Judge.
This is an action by several U.S. hedge funds for damages under Sections 10(b) and

2
20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”)1 and Rule 10b-5 thereunder,23
as well as on common law theories, for damages in connection with their purchases of shares in
Elixir Gaming Technologies, Inc. (“EGT”). Plaintiffs claim that the defendants intentionally made
misrepresentations that inflated EGT’s share price, that the plaintiffs purchased shares of EGT at
that inflated price, and that they were injured when the truth became known and the share value then
declined. The matter is before the Court on motions by the remaining defendants – EGT, Elixir
Group Limited (“EGL”), and the individual director and/or officer defendants (the “Individual
Defendants”)4 – to dismiss the action for failure to state a claim upon which relief may be granted.
For the reasons set forth below, their motions are granted in part and denied in part.

Facts
The well pleaded factual allegations of the complaint are assumed to be true for
purposes of the motions.5

1

15 U.S.C. §§ 78j(b), 78t(a).
2

17 C.F.R. § 240.10b-5.
3

Plaintiffs sue also under the Nevada Securities Law. Amended complaint (“Cpt.”) ¶¶ 13541.
4

The motion of defendants Melco International Development Limited (“Melco”) and
Lawrence Ho to dismiss the action for lack of personal jurisdiction [DI 35] already has been
granted. Prime Mover Capital Partners L.P. v. Elixir Gaming Techs., Inc., — F. Supp. 2d
—, 2011 WL 70144 (S.D.N.Y. Jan. 4, 2011).
5

Gonzalez v. Caballero, 572 F. Supp. 2d 463, 466 (S.D.N.Y. 2008); See also Bernheim v. Litt,
79 F.3d 318, 321 (2d Cir. 1996).
In addition to the complaint, the plaintiffs have submitted a declaration and additional

3

The Parties
Plaintiffs
Plaintiffs are hedge funds that claim to have purchased shares of EGT on the open
market “[d]uring 2006 and the early part of 2007.”6 Plaintiffs Strata Fund L.P., Strata Fund Q.P.,
L.P., and Strata Offshore Fund, Ltd. (collectively, “Strata”) claim also that they bought securities
of EGT in private placements pursuant to two separate agreements: (1) a Securities Purchase
Agreement (“SPA”) executed by EGT and certain purchasers, including Strata, on October 19, 2007,
and (2) a Warrant Purchase Agreement (“WPA”) executed by EGT, EGL, and certain purchasers,
including Strata, on December 10, 2007,7 in which the purchasers contracted both to purchase
warrants from EGL and immediately to exercise those warrants by purchasing stock from EGT.8

exhibits [DI 46] in opposition to the motions. “W hen matters outside the pleadings are
presented in response to a 12(b)(6) motion, a district court must either exclude the additional
material and decide the motion on the complaint alone or convert the motion to one for
summary judgment . . . and afford all parties the opportunity to present supporting material.”
Friedl v. New York, 210 F.3d 79, 83 (2d Cir. 2000) (internal quotations omitted).
Accordingly, the Court is obliged either to exclude these materials or to convert the motion
into one for summary judgment. See Gurary v. Winehouse, 190 F.3d 37, 42-43 (2d Cir.
1999) (upholding district court’s consideration of affidavit and conversion of motion to
dismiss to motion for summary judgment). The Court excludes the additional materials
except for those documents that were referenced, and relied upon, in the complaint. See
Chambers v. Time Warner, Inc., 282 F.3d 147, 153 & n.3 (2d Cir. 2002).
6

Id. ¶ 40.
7

Plaintiffs acknowledge that the WPA was executed on December 10, 2007, rather than
December 11, 2007, as alleged in the complaint. See Pl. Mem. [DI 44], at 52 n.38; Cpt. ¶
95.
8

Cpt. ¶¶ 87-88, 95-99.

4
Defendants
EGT is a corporation organized under the laws of and having its principal place of
business in Nevada.9 At all times relevant to this motion, its stock has traded on the American Stock
Exchange.10 EGL is a corporation organized under the laws of and having its principal place of
business in Hong Kong.11 Each Individual Defendant was a director and/or officer of EGT and/or
EGL during the period in which plaintiffs allege EGT’s price fraudulently was inflated.12

EGL’s Contractual Relationship With EGT
On or about June 12, 2007, EGL entered into a Securities Purchase and Product
Participation Agreement (the “SPPPA”) with EGT’s predecessor, VendingData Corporation.13
Under the terms of that agreement, VendingData (now EGT) agreed, among other things, to issue
equity securities and warrants to EGL as part of an “earn-in” arrangement. The extent of the equity
interest to be acquired depended upon the number of electronic gaming machines (“EGMs”) placed
by EGT, pursuant to Participation Agreements secured by EGL, with gaming operators in Asia. The

9

Id. ¶¶ 2, 10.
10

Id.
11

Id. ¶ 12.
12

Id. ¶¶ 14-26.
13

Id. ¶¶ 41-51.

5
SPPPA states that “subject to the Placement of 1,000 EGMs on or before the Closing Date,”14 EGT
would issue to EGL 25 million shares of EGT common stock, reduce the exercise price of certain
EGT stock warrants previously purchased by EGL, and amend the terms of those warrants so they
would be freely transferable.15 EGL was to receive another 15 million shares of EGT common stock
and additional reductions in warrant exercise prices once EGT had “entered into Participation
Agreements for the Placement of a Cumulative Total of 2,000 EGMs” and “actual Placement of a
Cumulative Total of 1,000 EGMs” had been achieved.16
On September 10, 2007, the SPPPA was approved by EGT’s shareholders and
deemed fair by an independent advisor, after which EGT’s board proceeded with the initial closing.17
14

According to the SPPPA, “‘Placement’ means a Qualified Lessee’s full-time operation of an
EGM in its public gaming area pursuant to a Participation Agreement (subject to any
temporary closure of such public gaming area for a period of up to three months as may be
required in order to comply with applicable Legal Requirements or due to any public safety
reasons or such other causes which are beyond the reasonable control of the relevant
Qualified Lessee).” Weiss Decl. [DI 33], Ex. 3, at 7 (a copy of the SPPPA is attached to
VendingData’s Form 8-K filed with the SEC on June 13, 2007).
15

Id. at 9.
16

Id.
“‘Participation Agreement’ means . . . a written lease agreement between [EGT] and a
Qualified Lessee, pursuant to which the Company leases an EGM to the Qualified Lessee,
for a minimum period of three years, and the Qualified Lessee agrees to (a) locate in the
Qualified Lessee’s public gaming area and make available to the gaming public the EGM,
and (b) pay to [EGT] at least 20% of the Net Win for the operation of the EGM.” Id. at 7.
“‘Cumulative Total’ means (a) when used in the context of Participation Agreements for the
Placement of EGMs, the total number of EGMs subject to Placement under Participation
Agreements that are in full force and effect, and where the Qualified Lessee is not then in
material breach thereof, and (b) when used in the context of the Placement of EGMs, the
total number of EGMs subject to Placement net of any EGMs previously subject to
Placement that have been removed from operation by the Qualified Lessee.” Id. at 3.
17

Cpt. ¶¶ 62, 70-72.

6
According to the amended complaint, EGL ultimately came to own 75 percent of EGT as a result
of this “earn-in” arrangement.18

Strata Purchases EGT Common Stock in Two Private Placements
In the three months after the SPPPA closed, EGT made two private placements of
its common stock.19 It sold $52.5 million worth of its common stock to Strata and others pursuant
to the SPA on October 19, 2007.20 About two months later, on December 10, 2007, EGT, EGL,
Strata, and other purchasers signed the WPA, pursuant to which (1) EGL sold to Strata and others
16 million warrants that had been repriced in September when the SPPPA closed, and (2) Strata and
the other purchasers immediately exercised those warrants in full, purchasing stock from EGT.21

The Allegedly False and Misleading Statements
Plaintiffs allege that between June 13, 2007, when the SPPPA first was announced,

18

Cpt. ¶ 42; see also Weiss Decl., Ex.12, at 2-3 (EGT’s Form 8-K, filed with the SEC on Sept.
14, 2007, indicating that EGL met its first milestone under the SPPPA and was issued 25
million shares of EGT common stock on September 10, 2007); Cpt. ¶¶ 79-80 (“On
September 13, 2007, [EGL] represented that it had met the second milestone of the [SPPPA],
i.e., that [EGT] had, as of that date, entered into ‘Participation Agreements’ for the
‘Placement’ of a ‘Cumulative Total’ of 2,000 EGMs and the ‘actual Placement of a
Cumulative Total of 1,000 EGMs’ had occurred.”).
19

Cpt. ¶ 87.
20

Id. (Strata paid $13,300,000 for its shares pursuant to the SPA).
21

Id. ¶¶ 95-97 (Strata purchased and committed immediately to exercise warrants for roughly
3 million shares, for a total purchase price of $11,074,050); Weiss Decl., Ex. 15 (WPA), §
2.1-2.2 (describing parties’ respective obligations pursuant to the WPA to sell, purchase,
and exercise warrants).

7
and December 10, 2007, when Strata made its final alleged purchase of EGT common stock,22 the
defendants issued press releases, made statements in conference calls and road shows, met with EGT
shareholders, and made SEC filings in the course of which they made false and misleading
statements concerning EGT’s business and future prospects.23

These may be grouped and

summarized as follows:
1.

Defendants claimed to have entered into Participation Agreements for the
placement of thousands of EGMs at Asian gaming venues when the
defendants knew that many of these agreements were memorialized in nonbinding “memoranda of understanding” rather than “binding written lease
contracts.”24 As a result, many of the defendants’ statements regarding how
many EGMs had been or were going to be placed, and how many agreements
for placement had been secured, allegedly were false or highly misleading.

2.

Defendants represented that the CasinoLink Enterprise Edition casino
management system (“CasinoLink”) would be installed in the EGMs that
they placed in Asian gaming venues, allowing EGT to monitor those units
and providing data that would improve EGT’s marketing and enhance
profitability.25

3.

Defendants represented that they expected the EGMs to generate an average
“net win” of $125 per day per machine – averaged over a year of operations
and over all of the EGMs placed in Asian venues – and that this estimate was
based on the defendants’ due diligence.26

22

Plaintiffs in fact allege that the share price was inflated for the entire period between June
13, 2007, and August 13, 2008. Cpt. ¶¶ 124-25. For purposes of analyzing plaintiffs’

claims, however, only those misrepresentations that predated plaintiffs’ stock purchases –
that is, before December 10, 2007 – are relevant.
23

Id. ¶¶ 41, 52-55, 57-58, 60-61, 63-69, 83-85, 89-94, 101-05, 108-11, 113.
24

Cpt. ¶ 3(a); see also, e.g., id. ¶¶ 63-65; Pl. Mem. 2-7.
25

Cpt. ¶ 3(c); see also, e.g., id. ¶¶ 60, 74, 93(c); Pl. Mem. 8-10.
26

Cpt. ¶ 3(d); see also, e.g., id. ¶¶ 55, 58, 93; Pl. Mem. 11-13.

8
4.

Defendants represented that EGT would receive (and later, was receiving) a
minimum of 20 percent participation share of the net win from the venues.27

5.

Defendants represented that EGT would install the “best possible type” of
EGM for each gaming venue as determined by due diligence with respect to
that venue.28

6.

Defendants stated that they expected earnings before interest, taxes,
depreciation, and amortization (“EBITDA”) to be as high as 60 to 90
percent.29

7.

Defendants claimed that EGT, by virtue of its relationship with EGL, “had
access to significant sources of capital to fund and expand” its new business
and had special connections in the Asian gaming market that would give
EGT a competitive advantage.30

Plaintiffs claim that the defendants made these alleged misrepresentations in order
to inflate EGT’s stock price, secure shareholder approval of the SPPPA, and procure additional
investments, including those made by Strata and others pursuant to the SPA and WPA.31

Alleged Disclosures
Plaintiffs assert that EGT’s share price was inflated by these alleged
misrepresentations when they bought its stock and that they were injured when public disclosure of

27

Cpt. ¶ 3(e); see also, e.g., id. ¶¶ 53, 93(f); Pl. Mem. 11-13.
28

Cpt. ¶ 3(f); see also, e.g., id. ¶ 93(c); Pl. Mem. 17-18.
29

Cpt. ¶ 3(h); see also, e.g., id. ¶¶ 55, 59, 93(g); Pl. Mem. 16.
30

Cpt. ¶ 3(i); see also, e.g., id. ¶¶ 58-59, 61, 66-67; Pl. Mem. 14-15.
31

See Cpt. ¶¶ 4, 95.

9
the truth caused the price to decline.32 The complaint, however, tells two different stories as to
precisely when, how, and why this decline occurred.
On the one hand, the complaint repeatedly states that EGT’s stock “artificially [was]
inflated . . . between June 13, 2007 and August 13, 2008,”33 when “[EGT] finally revealed its net
win reports by country, which were of course far short of the $125 day figure, and admitted that
CasinoLink was only present in five venues of the fifteen it had opened.”34 It thus implies that the
disclosures that caused the price drop of which they complain did not occur until August 13, 2008.
On the other hand, detailed allegations in the complaint tell another story, suggesting
a series of disclosures that caused EGT’s stock price to decline more gradually between February
19, 2008, and August 13, 2008.35 First, plaintiffs allege that there was an analyst conference call on
February 19, 2008, during which EGT disclosed an important change to its Asian gaming business
metric. Whereas defendants are alleged to have represented previously that they expected the EGMs
placed at Asian venues to have an average daily net win rate of $125 per machine, averaged over
all venues for a year of operation, defendant Pisano allegedly announced in the February 19
conference call that EGT then expected that EGMs would not achieve that average net win rate until
32

See, e.g., id. ¶ 124 (“As a result of their purchases of [EGT’s] securities between June 13,
2007 and August 13, 2008, Plaintiffs suffered economic loss, i.e., damages, under the federal
securities laws, in an amount to be determined at trial, but in no event less than
$25,000,000.”).
33

Id. ¶ 125.
34

Id. ¶ 114.
35

Id. ¶ 126 (“When [EGT] finally began disclosing the true state of [its Asian gaming
business], the price of [EGT’s] common stock fell to less than $2.00 per share in just over
a month and ultimately to less than $0.10 per share. This drop removed the inflation from
the price of [EGT’s] stock . . . .”).

10
after they had been in operation for 12 months.36 According to plaintiffs, “[t]his was the first time
[that EGT] stated that the $125 net win per day figure assumed a twelve month prior operating
history.”37 They allege that “[i]n the days following [the February 19, 2008] conference [call,
EGT’s] stock price fell, presumably reflecting investors’ displeasure with the report that [EGT] now
expected the average $125 daily net win per machine would take a year to achieve.”38 “By March
27, 2008 [EGT’s] stock had fallen by 50% off its highest price.”39
The complaint alleges that, in the months following that first disclosure, the
36

Id. ¶ 105(i) (“For our modeling, we have assumed that at the end of one year, the machines
on the floor will be achieving a $125 return.”).
On February 25, 2008, defendant Reberger acknowledged and explained this change, stating
that
“. . . . [W]ith more units being placed in operation in December, January, and
February that is providing [EGT] with additional data points, we believe it’s prudent
to have a more conservative baseline expectation in the marketplace with a ramp-up
to achieve the $125 net win per day threshold.
“We now believe that we will achieve our goal of $125 in win per day by
the end of the first 12 months that the devices are in operation. . . . The reason why
it will take longer to achieve the $125 per day threshold is that a longer period of
time is now expected for customer patronage in the venues to reach the required
level.”
Weiss Decl. Ex. 21, at 3. Pisano made similar statements on the same call: “W hat we’ve
found, and this is reflected in our $125 per-day net win with the new business, these are also
new operators, and they take time to learn the business. . . . This has slowed down our takeup in the first six months, and is reflected in the numbers.” Id. at 5.
37

Id.
38

Id. ¶ 106.
39

Id. ¶ 109.
Plaintiffs have alleged only additional misrepresentations, however, and not any additional
disclosures, between February 19, 2008, and March 27, 2008. See id. ¶¶ 106-109.

11
defendants continued to assert many of the misrepresentations previously alleged40 but that they also
made additional disclosures that caused the stock price to decline further. The next alleged public
disclosure occurred on March 31, 2008, when EGT filed its 2007 Form 10-K, which made clear for
the first time that EGT’s EBITDA had been negative, allegedly contrary to the defendants’ previous
representations.41
Plaintiffs claim also that defendants made certain disclosures to them in private in
April and May of 2008. In late April, Reberger allegedly told an EGT representative that EGL did
not enjoy any special relationship with Filipino authorities, as previously claimed.42 And on May
22, 2008, Reberger allegedly admitted in a private conversation that most of the EGMs that had gone
into operation had not been equipped with CasinoLink.43
Aside from the price decline following the February 2008 disclosure, however,
plaintiffs have alleged almost no details regarding how, if at all, any particular disclosure affected
EGT’s stock price. The complaint merely alleges in general terms that “[a]s 2008 progressed,
further information emerged that revealed the misrepresentations described for what they were. By

40

See, e.g., id. ¶¶ 106-11, 113 (defendants continued to claim that “we will achieve our goal
of $125 in win per day by the end of the first 12 months that the devices are in operation,”
that they expected to receive at least 20% of revenue on each contract, that working with
EGL provided unique opportunities to penetrate Asian gaming markets, and that the business
remained in good shape and EGM Placements were proceeding as planned).
41

Id. ¶ 93(g).
42

Id. ¶ 68(e).
43

Id. ¶ 112.
Plaintiffs have alleged no facts indicating that this knowledge became public, however, until
EGT filed its Form 10-Q in August 2008. Id. ¶¶ 113-14.

12
August 13, 2008, when [EGT] finally revealed its net win reports by country, which were of course
far short of the $125 day figure, and admitted that CasinoLink was only present in five venues of
the fifteen it had opened, its stock was down 90% for the year.”44
Plaintiffs do not allege that the stock price declined any further after August 13, 2008,
but it seems that the writing was on the wall by then. In October 2008, EGT and EGL announced
that they were discontinuing their joint Asian gaming venture as established under the SPPPA.45 It
was not until November 8, 2008 – well after the alleged price-inflation already had been removed
from EGT’s stock price – that certain Individual Defendants allegedly admitted for the first time,
in a conference call with Prime Mover representatives, that the prior EGT leadership had not had
any special expertise with similar business models, had badly mismanaged EGT’s Asian gaming
business, and had done no due diligence on particular venues, and that many of the agreements
between EGT and the gaming venues had taken the form of “memoranda of understanding” rather
than “binding written lease agreements.”46 Plaintiffs claim to have learned also, in “the fourth
quarter of 2008,” that EGL’s parent company, Melco, never had had any intention of causing EGL
to capitalize EGT’s Asian gaming business through the exercise of warrants.47

44

Id. ¶ 114.
Plaintiffs allege also that on May 13, 2008, defendant Reberger “finally admitted that ‘there
is no magic’ behind the average $125 daily net win figure.” Id. ¶ 112. The precise meaning

and import of this statement, however, are not clear.
45

Id. ¶ 116.
46

Id. ¶¶ 68, 118-20.
47

Id. ¶ 68(b); see also id. ¶ 61.

13
Discussion
The Motion to Dismiss Standard
In deciding a motion to dismiss, a court must accept as true all well pleaded facts
alleged in the complaint and draw all reasonable inferences in the plaintiffs’ favor.48 At the same
time, ‘“[c]onclusory allegations or legal conclusions masquerading as factual conclusions will not
suffice to [defeat] a motion to dismiss.’”49 A court must apply a plausibility standard: while “not
akin to a ‘probability requirement’ . . . it asks for more than a sheer possibility that a defendant has
acted unlawfully.”50 The plaintiff must plead “factual allegations sufficient ‘to raise a right to relief
above the speculative level.’”51 Such motions are addressed to the face of the pleadings, but a court
may consider also documents attached to the complaint as exhibits or incorporated into it by
reference.52
For federal securities fraud claims, a plaintiff must “state with particularity the
circumstances constituting fraud.”53 The complaint must “(1) specify the statements that the
48

See Levy v. Southbrook Int'l Invs., Ltd., 263 F.3d 10, 14 (2d Cir. 2001).
49

Achtman v. Kirby, McInerney & Squire, LLP, 464 F.3d 328, 337 (2d Cir. 2006).
50

Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009).
51

Boykin v. KeyCorp, 521 F.3d 202, 213 (2d Cir. 2008) (quoting Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 555 (2007)).
52

Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000).
53

F ED . R. C IV . P. 9(b) (“In alleging fraud or mistake, a party must state with particularity the
circumstances constituting fraud or mistake.”); Private Securities Litigation Reform Act (the
“PSLRA”), 15 U.S.C. § 78u-4b (requiring that omissions and “state of mind” be pleaded
with particularity); see also Eternity Global Fund Ltd. v. Morgan Guar. Trust Co., 375 F.3d
168, 187 (2d Cir. 2004).

14
plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements
were made, and (4) explain why the statements were fraudulent.”54 Under the PSLRA, a plaintiff
must state with particularity also “facts giving rise to a strong inference that the defendant acted with
the required state of mind.”55

The Federal Securities Law Claims
Under Rule 10b-5 and Section 10(b) of the Exchange Act, plaintiffs must allege that
defendants “(1) made misstatements or omissions of material fact; (2) with scienter; (3) in
connection with the purchase or sale of securities; (4) upon which plaintiffs relied; and (5) that
plaintiff[s’] reliance was the proximate cause of their injury.”56

Prime Mover Has Not Pleaded Transaction Causation Adequately
“It is long settled that a securities-fraud plaintiff, must prove both transaction and loss
causation.”57 Transaction causation “is akin to reliance, and requires only an allegation that ‘but for
the claimed misrepresentations and omissions, the plaintiff would not have entered into the

54

Acito v. IMCERA Group, Inc., 47 F.3d 47, 51 (2d Cir. 1995) (quoting Mills v. Polar
Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)).
55

15 U.S.C. § 78s-4b(2).
56

Lentell v. Merrill Lynch & Co., Inc. 396 F.3d 161, 172 (2d Cir. 2005); see also 17 C.F.R.
§ 240.10b-5.
57

Lentell, 396 F.3d at 172 (quotation marks omitted) (quoting First Nationwide Bank v. Gelt
Funding Corp., 27 F.3d 763, 769 (2d Cir. 1994)) .

15
detrimental securities transaction.’”58
Prime Mover has failed to state a claim for securities fraud because it has not alleged
transaction causation – that is, the complaint fails to allege that Prime Mover purchased or sold any
EGT stock during the period in which EGT’s stock price allegedly was inflated by defendants’
misstatements and omissions.59 This disposes of Prime Mover’s claims in Counts 1, 2, 3, and 4. In
addition, its claims in Counts 6 (common law fraud), 7 (negligent misrepresentation), and 10 (unjust
enrichment) must be dismissed for essentially the same reason: Prime Mover has not alleged that
it was injured because it took any action, refrained from acting, or entered into any transaction, as
a result of, or in reliance upon, the defendants’ alleged misstatements or omissions during the
relevant period.60 It therefore has not alleged that it was harmed as a result of the defendants’
alleged misconduct or that the defendants were enriched unjustly at its expense.
Accordingly, Prime Mover’s claims in Counts 1, 2, 3, 4, 6, 7, and 10 are dismissed.
Prime Mover’s only other claim – Count 5 (breach of fiduciary duty) – is disposed of below.

58

Lentell, 396 F.3d at 172 (quoting Emergent Capital Inv. Mgmt., LLC v. Stonepath Group,
Inc., 343 F.3d 189, 197 (2d Cir. 2003)).
59

The complaint states only that “[d]uring 2006 and the early part of 2007, Prime Mover and
Strata made a number of purchases of [EGT’s] common stock, which they continued to hold
as of June 2007.” Cpt. ¶ 40. Prime Mover did not participate in the SPA or the WPA.
60

Notably, with respect to the common law fraud claim, Prime Mover has not alleged also that
it held EGT stock in reliance on defendants’ misrepresentations when it otherwise would
have sold that stock.

16
Strata Has Not Pleaded Loss Causation Adequately With Respect to Most of the Alleged
Misrepresentations
Unlike Prime Mover, Strata claims to have relied on the defendants’ alleged
misstatements when it purchased EGT common stock at an allegedly inflated price in two private
placements pursuant to (1) the SPA, on October 19, 2007, and (2) the WPA, on December 10, 2007.
It therefore has alleged transaction causation. Its problems, however, are with loss causation.
Loss causation is analogous to proximate cause: it is “the causal link between the
alleged misconduct and the economic harm ultimately suffered by the defendant.”61 In Dura
Pharmaceuticals, Inc. v. Broudo,62 the Supreme Court held that in fraud-on-the-market cases, merely
purchasing securities at “an inflated price will not itself constitute or proximately cause the relevant
economic loss.”63 Rather, plaintiffs must allege not only that the price was inflated by the fraudulent
misrepresentation or omission, but also that the share price fell significantly after, and because, the
truth became known:64
“[T]o establish loss causation, ‘a plaintiff must allege . . . that the subject of the
fraudulent statement or omission was the cause of the actual loss suffered, i.e., that
the misstatement or omissions concealed something from the market that, when
disclosed, negatively affected the value of the security. . . .”65
61

Lentell, 396 F.3d at 172 (internal quotation marks and citations omitted).
62

544 U.S. 336 (2005).
63

Id. at 342.
64

Id. at 347.
65

Id. at 173 (emphasis in original) (citations omitted); id. at 175 (“[T]he complaint must allege
facts that support an inference that [plaintiff’s] misstatements and omissions concealed the
circumstances that bear upon the loss suffered such that plaintiffs would have been spared
all or an ascertainable portion of that loss absent the fraud.”).

17
In other words, plaintiffs must allege “that the subject of the [misrepresentations], or any corrective
disclosure regarding the falsity of [the misrepresentations, was] the cause of the decline in stock
value that plaintiffs claim as their loss.”66
Here, most of the misrepresentations alleged in the complaint could not have caused
economic loss because the truth allegedly concealed by those misrepresentations did not become
public until after August 13, 2008, by which time EGT’s share price already had dropped to the
lowest level alleged in the complaint.67
This is the case with respect to the alleged misrepresentations summarized in the first
numbered paragraph on page 7 – that defendants repeatedly misrepresented that EGT had entered
into a certain number of Participation Agreements for the Placement of EGMs at various gaming
venues when the defendants knew that many if not all of those agreements were not “binding written

66

Id.
W hile the Second Circuit has not decided the issue specifically, it appears that a plaintiff
need not allege subsequent sales of the securities purchased at inflated prices in order
adequately to allege an economic loss for purposes of loss causation. See 15 U.S.C. § 78u4(e) (prescribing damage limitations that implicitly allow plaintiffs to hold shares past 90day period); Malin v. XL Capital Ltd., 2005 WL 2146089, at *4 (D. Conn. 2005)
(recognizing that “a sale is not necessary or the only way a plaintiff could plead economic
loss under the circumstances,” but finding the allegations insufficient where no sale was
alleged and the current stock “value [wa]s commensurate to the purchase prices”); In re
Royal Dutch/Shell Transport Secs. Litig., 404 F. Supp. 2d 605, 607-13 (D. N.J. 2005)
(discussing statutory and policy considerations at length and holding that “[i]n order to plead
and prove loss causation and economic loss, a plaintiff alleging fraud in connection with the
purchase of securities is not necessarily required to sell the subject securities”).
67

Plaintiffs argue a materialization of the risk theory of loss causation in their papers, but the
facts and allegations contained in the complaint all are directed toward a corrective
disclosure theory and are insufficiently particular in either case. In the same way that
plaintiffs have not pleaded sufficiently specific disclosures causing particular changes to the
stock price, they have not pleaded specific materializations of risks or how in particular
such materializations caused the price decline generally alleged to have occurred in the
spring and summer of 2008.

18
lease agreements” but instead “memoranda of understanding.”68 The fact that these agreements were
non-binding was not disclosed until November 2008,69 well after EGT’s stock had reached the
lowest point pleaded in the complaint. Nor does Strata allege that the fact that the agreements were
non-binding ever became public. Accordingly Strata has not alleged that either the non-binding
nature of the agreements or the public disclosure thereof caused EGT’s stock price to decline and
resulted in economic loss to it.
The same is true also with respect to the defendants’ alleged misrepresentations that
(1) they intended to install, and later had installed, CasinoLink in EGMs that EGT placed at Asian
gaming venues,70 (2) EGT would receive, and was receiving, a minimum of 20 percent participation
share of the net wins from its Asian venues,71 (3) EGT would install the “best possible type” of EGM
for each venue as determined by due diligence,72 and (4) EGT’s relationship with EGL afforded it
special connections and access to sources of capital that would give it an advantage in the Asian
gaming market.73 Strata alleges only one public corrective disclosure regarding the fact that EGT

68

See supra note 24 and accompanying text.
69

Cpt. ¶ 64.
70

See supra note 25 and accompanying text.
71

See supra note 27 and accompanying text.
72

See supra note 28 and accompanying text.
73

See supra note 30 and accompanying text.

19
had installed CasinoLink in only a portion of its EGMs in Asian venues.74 That disclosure allegedly
occurred on August 13, 2008, by which time EGT’s stock already had dropped as far as is alleged
in the complaint. Likewise, Strata has alleged that the misrepresentations regarding EGT’s due
diligence on venues, selection of machines, and the relative benefits of its close relationship with
EGL were not corrected until November 2008 (and even then, it appears, only privately).75 And
Strata has not alleged specifically any corrective disclosure with respect to EGT’s 20 percent
participation share of net wins.
The complaint insufficiently pleads loss causation with respect also to defendants’
alleged misrepresentations that they expected EBITDA margins to be as high as 60-90 percent.76

74

Cpt. ¶ 114 (“By August 13, 2008, when [EGT] finally revealed its net win reports by
country, which were of course far short of the $125 day figure, and admitted that CasinoLink
was only present in five venues of the fifteen it had opened, its stock was down 90% for the
year.”).
75

See id. ¶ 61 (plaintiffs discovered in “late 2008” that EGL’s parent company had no intention
of causing EGL to capitalize EGT’s business by exercising its warrants); id.¶ 68(b)
(plaintiffs only learned in “the fourth quarter of 2008” that “Melco and [EGL] had no
intention of paying cash to exercise the warrants”); id. ¶ 118 (on November 8, 2008, Chung
admitted that the EGT had done no due diligence with respect to particular venues or
markets); Pl. Mem. 18 (“The foregoing statements about the expertise of management and
the extensive and venue-specific due diligence that Defendants had supposedly performed
were revealed to be false in November 2008 . . . .”).
76

See supra 29 note and accompanying text.
The complaint identifies three such statements as having been made prior to December 10,
2007. Cpt. ¶ 52 (June 13, 2007, EGT press release: “Based on current projections, the
growth in both numbers of gaming machines placed and EBITDA to [EGT] from this new
revenue stream is expected to be 50% or greater in 2009.”); id. ¶ 55(d) (June 14, 2007,
conference call: Newburg stated in response to an analyst’s question about gross profit
margins a year out that “EBITDA margins will be something greater than 60% and the profit
before tax margins will be something greater than 50%”); id. ¶ 93(g) (November 14, 2007,
conference call: Reberger stated that EGT’s “EBITDA margins are over 90%”).

20
The allegations are vague as to when and how this alleged misrepresentation was disclosed.77 More
importantly, Strata fails to allege with any specificity what effect any disclosure had on the market
value of EGT’s stock. Such vague allegations are insufficient to plead loss causation.
Strata adequately has pleaded loss causation, however, with respect to one type of
alleged misrepresentation: defendants’ alleged statements, between June 13, 2007, and December
10, 2008, regarding the expected average net win rate for the EGMs placed in Asian venues.78

Defendants’ Alleged Misrepresentations Regarding Projected Net Win Rates Were Protected
Forward-Looking Statements
The complaint specifically identifies three alleged misrepresentations in the relevant
time period in which defendants represented that they expected the EGMs placed at Asian venues
to achieve an overall average net win rate of $125 for the first year of operation (rather than taking

77

Plaintiffs allege relevant disclosures in March and May of 2008, although they fail to provide
any details as to the supposed May disclosure. See Id. ¶ 59(g) (“Projected EBITDA figures
were significantly overstated because, as Defendants were aware, they failed to take into
account certain overhead expenses to which [EGT] had already contractually committed,
including generous compensation packages for Yuen, Pisano and Reberger (as eventually
became apparent from [EGT] disclosures in March and May 2008) . . . .”); id. ¶ 93(g)
(“[EGT] did not enjoy, and had never enjoyed, EBITDA margins close to 90%. In fact, at
the time of the statement, [EGT] EBITDA margins were negative (as [EGT’s] 2007 10-K,
filed on March 31, 2008, eventually revealed.”).
78

See supra 26 note and accompanying text.
Plaintiffs allege that on February 19, 2008, defendant Pisano, on behalf of EGT, stated that
“[o]ur venues target daily net win per machine as $125. For our modeling, we have assumed
that at the end of one year, the machines on the floor will be achieving a $125 return.” Cpt.
¶ 105(i). According to plaintiffs, “[t]his was the first time [EGT] stated that the $125 net win
per day figure assumed a twelve month prior operating history” and “[i]n the days following
. . . [EGT’s] stock price fell, presumably reflecting investors’ displeasure with the report that
EGT now expected the average $125 daily net win per machine would take a year to
achieve.” Id. ¶ 105(i)-106.

21
twelve months to achieve that net win rate).
First, in a June 13, 2007 press release, EGT stated that “[i]t is expected that by
December 31, 2008, [EGL] will have secured placement of over 3,000 gaming machines on
participation for [EGT] with an expectation of a net win rate per machine of approximately
US$125.”79 EGT’s chief executive officer Newburg reiterated this projection in a conference call
with analysts the next day: “by the end of ‘08 we will have 3,000 machines out there at an average
net win per day of $125.”80 Finally, in a conference call for analysts in November 2007, defendant
Pisano again stated the company’s expectation – in that instance referred to as an “assumption” –
that EGT would achieve “net win of $125 over a 12-month operating period.”81 As previously
described, plaintiffs claim that the public first learned that the EGMs would not achieve this average
daily rate until after they had been in operation for 12 months – rather than earning this daily
average for the whole first year – on February 19, 2008, and that EGT’s common stock dropped

79

Id. ¶ 52.
80

Id. ¶ 55(a); see also id. ¶ 55(b) (“If we look at the 125, that goes across a number of
countries. . . . Many countries [are] involved. That 125, we wanted to be a little conservative
just to be sure that we don’t disappoint anyone. But it is a number we arrived at based on
the number of units per country, per jurisdiction, and the net win per day per country.”).

The complaint states that “The Defendants” made essentially the same representation at a
dinner meeting on September 7, 2007, that included Yuen, Pisano, Reberger, PatajoKapunan, and Peter Belton, the Managing Member and Portfolio Manager of Prime Mover.
Id. ¶ 67. The complaint does not indicate which of these Individual Defendants made the

representation.
81

Weiss Decl. Ex. 13, at 3 (transcript of Nov. 15, 2007, conference call: “[B]ack in July,
[EGT] provided some market guidance. We provided four figures. . . . And [fourth] we . .
. provided an assumption for net win of $125 over a 12-month operating period.”); see also
id. (“The other . . . assumption of net win of $125 over 12-month operating period, with this
number, Elixir developed a game performance metrics which provided for machine –
machines to achieve this over a 12-month period.”); Cpt. ¶ 93(b).

22
sharply and immediately as a result.82 The fact that the complaint adequately alleges loss causation
in this regard, however, does not get Strata all the way home.
These alleged misrepresentations regarding expected average net win rates fell within
the PSLRA’s statutory safe harbor for forward-looking statements and therefore do not support a
securities fraud claim. Under the PSLRA, “a defendant is not liable if the forward-looking statement
is identified and accompanied by meaningful cautionary language or is immaterial or the plaintiff
fails to prove that it was made with actual knowledge that it was false or misleading.”83 Moreover,
pursuant to the PSLRA’s heightened pleading standard,
82

Cpt. ¶¶ 105(i), 106.
83

Slayton v. American Exp. Co., 604 F.3d 758, 766 (2d Cir. 2010).
Under the statute, a defendant “shall not be liable with respect to any forward-looking
statement ...” if and to the extent that:
“(A) the forward-looking statement is(i) identified as a forward-looking statement, and is accompanied by
meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those in the forward-looking
statement; or
(ii) immaterial; or
(B) the plaintiff fails to prove that the forward-looking statement(i) if made by a natural person, was made with actual knowledge by that
person that the statement was false or misleading; or
(ii) if made by a business entity; was(I) made by or with the approval of an executive officer of that
entity; and
(II) made or approved by such officer with actual knowledge by
that officer that the statement was false or misleading.” 15 U.S.C.
§ 78u-5(c).

23
“a plaintiff must plead facts to support a strong inference of scienter, 15 U.S.C. §
78u-4(b)(2), that is, the ‘inference of scienter must be more than merely plausible or
reasonable – it must be cogent and at least as compelling as any opposing inference
of nonfraudulent intent. Morever, because the safe harbor specifies an ‘actual
knowledge’ standard for forward-looking statements, ‘the scienter requirement for
forward-looking statements is stricter than for statements of current fact. Whereas
liability for the latter requires a showing of either knowing falsity or recklessness,
liability for the former attaches only upon proof of knowing falsity.’”84
In making this determination, courts consider “whether a reasonable person would, based on the
facts alleged . . . deem an inference that the defendants (1) did not genuinely believe [the statement],
(2) actually knew that they had no reasonable basis for making the statement, or (3) were aware of
undisclosed facts tending to seriously undermine the accuracy of the statement, cogent and at least
as compelling as any opposing inference.”85 In deciding questions of scienter, a court’s “job is not
to scrutinize each allegation in isolation but to assess all of the allegations holistically.”86
Here, the defendants’ statements that they expected EGT to achieve an average net
win rate per machine of $125 at some future time clearly were “forward-looking” within the
meaning of the statute.87 Moreover, plaintiffs have not alleged facts sufficient to make the requisite
strong showing that the defendants who made these statements actually knew the statements were
false when made. The facts alleged in the complaint, taken as a whole, do not support a strong
84

Slayton, 604 F.3d at 773 (internal citations omitted).
85

Id. at 775 (citing In re Apple Computer Secs. Litig., 886 F.2d 1109, 1113 (9th Cir. 1989)).
86

Id.
87

See 15 U.S.C. § 78u-5(i)(1) (defining “forward-looking statement” as including “a statement
containing a projection of revenues, income . . . , earnings . . . per share, capital expenditures,
dividends, capital structure, or other financial items” and “a statement of future economic
performance, including any such statement contained in a discussion and analysis of
financial condition by the management.”); Slayton, 604 F.3d at 766-67 (discussing
definition).

24
inference that Newburg, Pisano, or any of the EGT officers who might have written or approved the
June 13, 2007 press release knew that the $125 net win per day projection was false or misleading
when he or she stated or approved release of that projection on the occasions identified in the
complaint.
Plaintiff’s scienter allegations consist primarily of bald assertions that the defendants
knew, or should have known, that they had no basis for asserting the expected $125 average net win
figure88 and that they lied in order to inflate EGT’s stock price. Only one factual allegation comes
close to suggesting a motive or potential concrete benefit to an Individual Defendant: “On or about
June 15, 2007 [two days after the SPPPA was announced], Newburg exercised 367,333 options and
made concurrent sales of [EGT’s] stock into the market, selling all of the shares he received upon
exercise of the options.”89 In other circumstances this sale might have been “unusual” and more
strongly indicate a motive for misrepresenting aspects of EGT’s new business venture.90 That is not
88

See, e.g., Cpt. ¶ 55 (“During the [June 14, 2007] call, Newburg fielded questions from
analysts and made numerous statements of material fact which he and others at [EGT] knew
to be false . . . .”); id. ¶ 59(b) (“Among other things, Defendants knew . . . [t]hat they had no
basis for the asserted $125 average net win figure at all, let alone for their repeated claims
that it was ‘conservative’ . . . .”).
Plaintiffs do allege that by March 27, 2008, “[d]efendants had received abysmal net win
reports for the venues in Indochina (as Reberger ultimately admitted to [Prime Mover
representative] Belton in a conversation in May 2008).” Id. ¶ 109. But this suggests nothing
more than that representations that Reberger and others made in March 2008 – long after
plaintiffs had purchased their shares – may have misrepresented then-present facts. It does
not suggest that defendants who made the statements at issue here knew that their stated
projections for future net win rates were inaccurate in the fall of 2007.
89

Cpt. ¶ 56.
90

See Acito v. IMCERA Group, Inc., 47 F.3d 47, 54 (2d Cir. 1995) (“[U]nusual insider trading
activity during the class period may permit an inference of bad faith and scienter.”); see also
In re Scholastic Corp. Securities Litigation, 252 F.3d 63, 74 -75 (2d Cir. 2001) (“Factors
considered in determining whether insider trading activity is unusual include the amount of

25
the case here, however. A Form 8-K filed just a few days later publicly disclosed the transaction
and shows that Newburg maintained another 1.3 million options even after the sale.91 Moreover,
the complaint does not allege that Newburg or any other Individual Defendant sold additional EGT
stock during the more than 12 months during which plaintiffs allege EGT stock prices were inflated.
In all the circumstances, the mere fact that Newburg exercised roughly a fifth of his existing options
(not counting any stock he already may have owned outright) after the SPPPA was announced – and,
notably, well before nearly all of the alleged misrepresentations even took place and long before the
first alleged disclosure in February 2008 – does not create a strong inference that he actually knew
on June 14, 2007, that his statement regarding the expected net win rate for EGMs in the new
business model was false or misleading.92
Because defendants have not sufficiently alleged facts creating a strong inference that
any of the defendants who made the three forward-looking statements at issue here actually knew
that those statements were false or misleading, those statements are protected by the safe harbor for

profit from the sales, the portion of stockholdings sold, the change in volume of insider sales,
and the number of insiders selling.”); id. at 75 (“But none of these cases [regarding insider
sales and motive allegations] established a per se rule . . . [r]ather, each case was decided on
its own facts.”).
91

Weiss Decl., Ex. 6 (Form 8-K, dated June 19, 2007) (“On June 15, 2007, Mark Newburg,
President and CEO, exercised 367,333 options and made concurrent sales into the market.
Mr. Newburg took advantage of an open trading window to exercise options for estate
planning purposes. Mr. Newburg maintains approximately 1.3 million options and has no
plans to exercise any additional options in the foreseeable future.”).
92

Accord Acito, 47 F.3d at 54 (finding scienter allegations insufficient as to outside director
who sold 11% of his holdings days before a negative press release caused the stock price to
plummet and where the other defendants did not sell stock during the class period); In re
eSpeed, Inc. Secs. Litig., 457 F. Supp. 2d 266, 289-92 (S.D.N.Y. 2006) (finding motive
allegations insufficient as to defendants who sold 17.4% and 11%, respectively, of their
stock holdings in the company during the putative class period where the other two
individual defendants did not sell stock during the class period).

26
forward-looking statements and cannot form the basis for plaintiff’s securities fraud claims.
*

*

*

Accordingly, all of plaintiffs’ claims under the federal securities laws are dismissed.93

The State Law Claims
Counts 3 and 4: Nevada Uniform Securities Act
Counts 3 and 4 allege that the course of conduct described in the complaint violated
also the Nevada Uniform Securities Act.
The specific statutory provision on which plaintiffs base their primary liability claim
– Section 90.580 of the Nevada Revised Statutes – applies only if (1) an offer to sell securities
originated in Nevada or an offer to purchase was made and accepted in Nevada,94 and (2) those
securities were not traded on a national stock exchange.95 Here, the complaint states that EGT’s
common stock was traded on the America Stock Exchange at all times relevant to this motion, and
plaintiffs have not alleged that defendants offered to sell, or that plaintiffs received and accepted an

93

Plaintiffs’ claims for “control person” liability under Section 20(a) of the Exchange Act fail
also because plaintiffs have failed to state a claim for a primary violation. See Pacific Inv.
Mgmt. Co. LLC v. Mayer Brown LLP, 603 F.3d 144, 160 (2d Cir. 2010) (“Any claim for
‘control person’ liability under § 20(a) of the Exchange Act must be predicated on a primary
violation of securities law. Because we hold that plaintiffs failed to state a claim for a
primary violation against the defendants, we also hold that the District Court properly
dismissed their § 20(a) claim against Mayer Brown.” (internal citations omitted)).
94

N EV . R EV . S TAT . § 90.830.
95

Id. § 90.660(3) (“A person who willfully participates in any act or transaction in violation
of NRS 90.580 is liable to a person who purchases or sells a security, other than a security
traded on a national securities exchange or quoted on a national automated quotation system
administered by a self-regulatory organization, at a price that was affected by the act or
transaction for the damages sustained as a result . . . .”).

27
offer to buy, EGT stock in Nevada. Moreover, because plaintiffs have failed adequately to allege
a primary violation under the Nevada Uniform Securities Act, they have not made out a claim for
control person liability under the same statute. Accordingly, Counts 3 and 4 are dismissed.

Count 5: Breach of Fiduciary Duty
Plaintiffs allege that all of the Individual Defendants owed plaintiffs fiduciary duties
“by virtue of their status as directors or officers of [EGT], or of its controlling shareholder [EGL]”
and that they breached those duties by (1) “making or approving the materially false and misleading
statements” identified in the complaint, and (2) “recommending to the minority shareholders, and
by causing [EGT] to enter into, transactions that [the Individual Defendants] knew or should have
known . . . benefitted [EGL, Yuen] and others to the unfair detriment of plaintiffs and other minority
shareholders of [EGT].”96 Plaintiffs assert that this is a direct rather than a derivative claim and that
they therefore were not required to make a demand on the board or allege demand futility.97 The
Individual Defendants argue the opposite, claiming that plaintiffs’ fiduciary duty claims are
derivative in nature and must be dismissed for lack of standing.
A shareholder may bring a direct claim – that is, a claim on his or her own rather than
the corporation’s behalf – only for “injuries that are independent of any injury suffered by the
96

Cpt. ¶¶ 143-44.
These allegedly detrimental transactions include “approval of [the SPPPA], the
implementation of [the SPPPA], the abandonment of [EGT]’s pre-existing business in the
United States, the private placements and conversion and exercise of warrants in October and
December 2007, the acquisition from EGL of Stargames machines, and various agreements
entered into as part of the Participation Business and the severance payment to Yuen.” Id.
¶ 144.
97

See Pl. Mem. 48-49.

28
corporation.”98 By contrast, “[a] derivative claim is one brought by a shareholder on behalf of the
corporation to recover for harm done to the corporation.”99 “[A] shareholder must, before filing [a
derivative] suit, make a demand on the board, or if necessary, on the other shareholders, to obtain
the action that the shareholder desires,” or he or she must allege facts indicating that such a demand
would have been futile.100
Plaintiffs have alleged two distinct breaches by the defendants of their alleged
fiduciary duties. The claim based on the first – “making or approving the materially false and
misleading statements” identified in the complaint – is direct in nature in that plaintiffs allege they
were harmed individually when they bought stock at prices inflated by the defendants’
misrepresentations and the price later declined. That alleged injury was not felt by the corporation
itself but only by certain shareholders, including Strata, who bought EGT stock at an allegedly
inflated price as a result of the alleged misrepresentations.101 In order to make out this direct claim,
however, Strata was obliged to allege facts which, if proved, would show the existence of a fiduciary

98

Cohen v. Mirage Resorts, Inc., 62 P.3d 720, 732 (Nev. 2003) (citing Parnes v. Bally Entm’t
Corp., 722 A.2d 1243, 1244-45 (Del. 1999)).
Plaintiffs and defendants agree that Nevada law governs this claim. See Pl. Mem. 47 n.36;
Individual Def. Mem. [DI 32], at 20-21.
99

Cohen, 62 P.3d at 732.
100

Shoen v. SAC Holdings Co., 137 P.3d 1171, 1179 (Nev. 2006); id. (“[A] derivative
complaint must state, with particularity, the demand for corrective action that the shareholder
made on the board of directors (and, possibly, other shareholders) and why he failed to
obtain such action, or his reasons for not making a demand.”).
101

As previously explained, Prime Mover has not alleged that it purchased any EGT stock
during the period in which the price allegedly was inflated.

29
duty by the defendants that ran to it directly.102 Strata has alleged no such facts.103 This portion of
the fiduciary duty claim therefore fails.
The second alleged breach identified by plaintiffs – defendants’ recommendation that
shareholders vote for, and cause EGT to enter into, the SPPPA – states only a derivative claim. The
thrust of this argument is that EGT as a company, and its shareholders pro rata, suffered when the
defendants caused it to enter into an agreement that changed its business model in a manner that
benefitted the defendants to the ultimate detriment of the company. This claim belongs to the
corporation itself. But plaintiffs have not alleged that they made a pre-suit demand on the board or

102

See Fraternity Fund Ltd. v. Beacon Hill Asset Management LLC, 376 F. Supp. 2d 385, 409
(S.D.N.Y. 2005) (“[A] shareholder may sue individually ‘when the wrongdoer has breached
a duty owed to the shareholder independent of any duty owing to the corporation wronged.’”
(quoting Abrams v. Donati, 66 N.Y.2d 951, 953, 498 N.Y.S.2d 782, 783, 489 N.E.2d 751
(1985)); Fifty States Management Corp. v. Niagara Permanent Sav. and Loan Assn., 58
A.D.2d 177, 179, 396 N.Y.S.2d 925, 927 (4th Dep’t 1977) (“Where the injury to the
stockholder results from a violation of a duty owing to the stockholder from the wrongdoer,
having its origin in circumstances independent of and extrinsic to the corporate entity, the
stockholder has a personal right of action against the wrongdoer. Absent such independent
duty, however, the wrong suffered by the shareholder is deemed to be the same as the wrong
suffered by the corporation and there is no shareholder right of action separate and apart
from the corporate right of action.” (internal citations omitted)).
103

The fact that the Individual Defendants owed fiduciary duties by virtue of their positions as
corporate officers and directors does not mean that those duties were owed directly to Strata.
The fiduciary duty owed by a director or officer as a result of his or her position is owed to
the company itself. See 18B A M . J UR . 2 D Corporations § 1462 (2010) (“As a general rule,
the fiduciary duties owed to shareholders of a corporation by directors and officers is owed
to shareholders collectively and not individually.”); Leavitt v. Leisure Sports Inc., 103 Nev.
81, 86, 734 P.2d 1221, 1224 (Nev. 1987) (“A corporate officer or director stands as a
fiduciary to the corporation.”). An officer or director may owe a fiduciary duty, by virtue
of his or her control, directly to an individual shareholder only in limited circumstances not
present here. See, e.g., Powers v. British Vita, P.L.C., 57 F.3d 176, 189 (2d Cir. 1995) (“By
the time the termination and settlement agreements were signed, defendants were directors
and, arguably, controlling shareholders of Spartech. They therefore owed a fiduciary duty
to Powers, a fellow director and minority shareholder.”).

30
that such a demand would have been futile.104 They therefore may not pursue this portion of their
claim.
Accordingly, plaintiffs’ breach of fiduciary duty claims are dismissed.

Count 6: Common Law Fraud
Plaintiffs assert that Nevada law governs all of their common law tort claims while
defendants argue that New York law applies. “In the absence of substantive difference [between
two states’ laws]. . . a New York court will dispense with choice of law analysis; and if New York
law is among the relevant choices, New York courts are free to apply it.”105 Here the elements of
common law fraud are substantially the same under New York and Nevada law.106 The Court
therefore applies New York law, which requires that a plaintiff allege: (1) a misrepresentation or a
material omission of fact which was false and known to be false by defendant, (2) made for the
purpose of inducing the other party to rely upon it, (3) justifiable reliance of the other party on the
104

See Pl. Mem. 47-49 (seeming to acknowledge that plaintiffs have not met the
requirements for a derivative action).
105

Int’l Bus. Mach. Corp. v. Liberty Mut. Ins. Co., 363 F.3d 137, 143 (2d Cir. 2004).
106

“Under Nevada law, a plaintiff asserting a fraud claim must prove that (1) the defendant
made a false representation (2) knowing or believing that the representation was false (or
lacking a sufficient basis for making the representation), (3) intending to induce the plaintiff
to act or to refrain from acting in reliance on the misrepresentation; (4) the plaintiff
justifiably relied on the misrepresentation; and (5) damage to the plaintiff resulted from such
reliance.” Weinstein v. Mortgage Capital Assocs., Inc., 2011 WL 90085, at *6 (D. Nev. Jan.
11, 2011).
Plaintiffs seem to assume that New York, unlike Nevada, law requires a showing of actual
knowledge to prove scienter. See Pl. Mem. 44. That is not the case. Under New York law,
the plaintiff must show that the misrepresentation made by the defendant was “either known
by the defendant to be untrue or [was] recklessly made.” Suez Equity Investors, L.P. v.
Toronto-Dominion Bank, 250 F.3d 87, 104 (2d Cir. 2001).

31
misrepresentation or material omission, and (4) injury.”107
Here, as under Rule 10b-5, Strata’s failure adequately to plead loss causation dooms
its common law fraud claims with respect to most of the statements alleged to have inflated share
prices between June 13, 2007, and December 10, 2007.108 As previously explained, Strata
adequately has pleaded loss causation only with respect to the three statements allegedly made
during that time period regarding expected net win rates for the EGMs that were to be placed
pursuant to EGT’s new business venture.109 While the federal statutory safe harbor for forwardlooking statements does not itself protect such statements from common law fraud claims,
essentially the same considerations – that is, the facts that (1) the statements were forward-looking
statements of belief as to expected future net win rates, and (2) plaintiffs have alleged no facts, as
opposed to conclusory assertions, showing that the defendants who made the statements did not
believe them at the time – dictate dismissal here because the plaintiffs have not adequately alleged
that these statements in fact were false.
Strata argues that the Court should infer falsity because (1) “defendants knew
CasinoLink was not being installed, [therefore] they had no way of knowing what percentage of

107

Premium Mortg. Corp. v. Equifax, Inc., 583 F.3d 103, 108 (2d Cir. 2009) (internal quotation
marks omitted).
108

Unlike federal securities law, New York common law in certain circumstances allows a
plaintiff to recover on a fraud claim where the plaintiff was injured because he or she held,
rather than bought or sold, securities in reliance on defendants’ misrepresentations. See
Weinberger v. Kendrick, 698 F.2d 61, 78 (2d Cir. 1982); In re WorldCom, Inc. Securities
Litig., 382 F. Supp. 2d 549, 558 (S.D.N.Y. 2005). Here, such a theory might implicate
alleged misrepresentations made by the defendants even after the WPA closed. Plaintiffs,
however, have neither argued nor pleaded such a “holder” claim.
109

See supra notes 79 - 82 and accompanying text.

32
each venue’s “net win” they were receiving;” (2) “it can be deduced [from EGT’s Form 10-K, filed
in March 2008,]that the maximum average net win per machine for the fourth quarter of 2007 was
only $44;” (3) in May 2008, Reberger admitted to Prime Mover representatives that as early as
March 2008 he had received bad net win reports for venues in Indochina;” and (4) when EGT issued
results by country on August 13, 2008, the net win figures in all venues were substantially below
the projected figures.110
None of this gives rise to an inference that the defendants knew at the times the
statements were made – in June and November 2007, when the new business venture still was in its
early stages – that they were false. Strata’s first argument illogically presumes that the defendants
and venues had no means other than the CasinoLink electronic management system of calculating,
or projecting, net win rates. Even if the defendants knew at the time that CasinoLink was not being
installed in all of the EGMs, that would not begin adequately to allege that they lacked any other
basis for their projections and knew that the stated projections were false. Defendants’ other three
arguments are similarly unavailing. At most, they suggest that months after the relevant alleged
misrepresentations certain of the defendants may have come to possess information that undercut
the $125 average net win figure. Strata has failed adequately to plead “falsity” with respect to these
statements.
Accordingly, Strata’s claim for common law fraud is dismissed.

Count 7: Negligent Misrepresentation
Because New York and Nevada law differ regarding the elements of negligent

110

Pl. Mem. 13.

33
misrepresentation,111 the Court must decide which law applies.
Under New York choice of law rules, courts look to the jurisdiction with the greatest
interest in regulating the tortious conduct at issue.112 Here, however, plaintiffs have not alleged
sufficient facts for the Court to determine which jurisdiction has the most significant contacts with
plaintiffs’ tort claims.113 Nevada, California, and New York law each properly might govern,114 but

111

As described below, New York law requires the plaintiff to show that a “special relationship”
of trust and confidence existed between the plaintiff and the defendant. Nevada law requires
no such special relationship. See Ideal Elec. Co v. Flowserve Corp., 357 F. Supp. 2d 1248,
1255 (D. Nev. 2005).
112

GlobalNet Financial.Com, Inc. v. Frank Crystal & Co., Inc., 449 F.3d 377, 384 (2d Cir.
2006) (“The New York Court of Appeals has defined “interest analysis” as requiring that
“[t]he law of the jurisdiction having the greatest interest in the litigation will be applied and
... the [only] facts or contacts which obtain significance in defining State interests are those
which relate to the purpose of the particular law in conflict.”); see also id. at 384 -385 (“If
conflicting conduct-regulating laws are at issue, the law of the jurisdiction where the tort
occurred will generally apply because that jurisdiction has the greatest interest in regulating
behavior within its borders.”).
113

Plaintiffs argue that the following contacts require application of Nevada law to all of
plaintiffs’ state law claims: (1) EGT is incorporated and headquartered in Nevada, (2) EGT
issued fraudulent press releases from Nevada, (3) many of the Individual Defendants lived
and worked in Nevada, and (4) the SPPPA closed in Las Vegas. Pl. Mem. 44; see also Cpt.
¶ 62 (alleging that “A shareholders’ meeting to vote on the [SPPPA] was called for
September 10, 2007, in Las Vegas.”).
114

EGT is a Nevada corporation, and several of the individual defendants were Nevada citizens.
Certain of the alleged misrepresentations presumably were prepared in and made from
EGT’s headquarters in Nevada, and the SPPPA was approved at a shareholder meeting held
in Las Vegas. EGL, however, is based in Hong Kong, and the remainder of the individual
defendants are citizens of various U.S. and foreign states.
The alleged injuries were felt by Strata in California, the seat of its principal place of
business, and by its limited liability partners who were domiciliaries of various states. See
Cpt. ¶¶ 6-9.
The complaint indicates also, however, that “many of the acts charged herein, including the
preparation and dissemination of materially false and misleading information, occurred in
substantial part in [New York].” Id. ¶ 32.

34
the facts alleged in the complaint are not adequate to determine with any degree of certainty which
of these has the strongest interest in each claim. In this circumstance, the Court applies the law of
the forum specifically chosen by the plaintiffs – that is, New York.115
Under New York law,
“a negligent statement may be the basis for recovery of damages, where there is
carelessness in imparting words upon which others were expected to rely and upon
which they did act or failed to act to their damage, but such information is not
actionable unless expressed directly, with knowledge or notice that it will be acted
upon, to one to whom the author is bound by some relation of duty, arising out of
contract or otherwise, to act with care if he acts at all.”116
That is, “under New York law, a plaintiff may recover for negligent misrepresentation only where
the defendant owes her a fiduciary duty.”117 Such a “special relationship” requires “a closer degree
of trust between the parties than that of the ordinary buyer and seller in order to find reliance on such
statements justified.”118
Strata has not alleged any such special relationship between itself and any of the
defendants. As portrayed in the complaint, Strata was simply one more customer that relied on the
115

See Conceria Vignola SRL v. AXA Holdings, LLC, 2010 WL 3377476, *3 (S.D.N.Y. Aug.
3, 2010) (applying forum law where “[p]laintiff's allegations . . . do not clearly establish the
“center of gravity” of the parties' contract”); Bravado Intern. Group Merchandising Services,
Inc. v. Ninna, Inc., 655 F. Supp. 2d 177, 193 n.14 (E.D.N.Y. 2009) (“Since the Complaint
does not specify the location of the assets alleged to have been fraudulently conveyed by
Schwartz, there is no way for the Court to make a choice of law determination with any
certainty. Because plaintiffs have chosen to bring their action in New York, the Court has
assumed that the law of New York applies.”).
116

White v. Guarente, 43 N.Y.2d 356, 363-64, 401 N.Y.S.2d 474, 372 N.E.2d 315 (1977)
(citation omitted).
117

Stewart v. Jackson & Nash, 976 F.2d 86, 90 (2d Cir. 1992) (citing White v. Guarente, 43
N.Y.2d 356, 362-63, 401 N.Y.S.2d 474, 478, 372 N.E.2d 315, 319 (2d Dept.1977)).
118

Dallas Aerospace, Inc. v. CIS Air Corp., 352 F.3d 775, 788 (2d Cir. 2003).

35
misrepresentations allegedly made by the defendants to the public when it purchased EGT’s
common stock, and warrants to purchase that stock, at inflated prices. This is not the sort of “special
relationship” on which to base recovery for negligent misrepresentation. Accordingly, Strata’s
negligent misrepresentation claim is dismissed.

Counts 8 and 9: Breach of Contracts
Under New York law,119 “[i]n order to recover from a defendant for breach of
contract, a plaintiff must prove, by a preponderance of the evidence, (1) the existence of a contract
between itself and that defendant; (2) performance of the plaintiff'’s obligations under the contract;
(3) breach of the contract by that defendant; and (4) damages to the plaintiff caused by that
defendant’s breach.”120 “[A]n express warranty is part and parcel of the contract containing it and
an action for its breach is grounded in contract.”121
Strata claims that EGT breached the SPA, and that EGT and EGL breached the WPA,
“by receiving and retaining performance due from Strata . . . when the representations and
warranties made by [EGT, and, in the WPA, EGL] were untrue and inaccurate in numerous material

119

The SPA and WPA both contain clauses specifying that New York law shall govern all
claims brought pursuant to the agreements. See Weiss Decl., Ex. 15 (WPA), § 5.12; id.
Ex. 24 (SPA) § 5.12.
120

Diesel Props S.r.l. v. Greystone Business Credit II LLC, 631 F.3d 42, 52 (2d Cir. 2011).
121

Merrill Lynch & Co. Inc. v. Allegheny Energy, Inc., 500 F.3d 171, 184-85 (2d Cir. 2007);
see also id. at 185 (“A party injured by breach of contract is entitled to be placed in the
position it would have occupied had the contract been fulfilled according to its terms. It
follows that appellant is entitled to the benefit of its bargain, measured as the difference
between the value of [the company purchased by defendant] as warranted by Merrill Lynch
and its true value at the time of the transaction.” (internal citations omitted)).

36
respects.”122 Specifically, it identifies six “representations and warranties” by EGT in the SPA, as
well as two “representations and warranties” by EGL and seven by EGT in the WPA, that it alleges
were breached.123 These breaches allegedly “caused damage to Strata, including but not limited to
the loss of the money Strata paid to [EGT and EGL] pursuant thereto.”124

EGT’s Warranties in the SPA
Strata identifies the following six warranties in the SPA as allegedly having been
breached by EGT:
1.

EGT’s SEC filings up to that date had “complied in all material respects with
the requirements of the [Exchange Act]” and did not contain
misrepresentations or omissions of material fact;

2.

“[T]here ha[d] been no event, occurrence or development that has had or that
could reasonably be expected to result in a Material Adverse Effect” as
defined in the contract;

3.

EGT was not and had not been “in violation of any statute, rule or regulation
of any governmental authority, including without limitation all foreign,

122

Cpt. ¶¶ 163, 169.
Strata argues also that defendants breached the implied covenant of good faith and fair
dealings by “interfering, unfairly and in bad faith, with Strata’s right to receive the benefits
of [the agreements].” Cpt. ¶¶ 164, 171. New York law, however, “does not recognize a
separate cause of action for breach of the implied covenant of good faith and fair dealing
when a breach of contract claim, based upon the same facts, is also pled.” Harris v.
Provident Life & Accident Ins. Co., 310 F.3d 73, 81 (2d Cir. 2002); see also Pramer S.C.A.
v. Abaplus Intern. Corp., 76 A.D.3d 89, 100, 907 N.Y.S.2d 154, 162 (1st Dep’t 2010) (the
lower court “correctly dismissed plaintiff's cause of action of breach of the implied covenant
of good faith and fair dealing, as subsumed in the breach of contract action” where both were
“based on the same underlying facts”).
123

See Cpt. ¶¶ 88(a)-(f); 99-100.
124

Id. ¶¶ 166, 173.

37
federal, state and local laws applicable to its business;”
4.

EGT “possesse[d] all certificates, authorizations and permits issued by the
appropriate federal, state, local or foreign regulatory authorities necessary to
conduct [its] business as described in the SEC reports;”

5.

“All disclosures furnished by or on behalf of [EGT] to the Purchasers
regarding [EGT], its business and the transactions contemplated hereby,
including the Disclosure Schedules to this Agreement, with respect to the
representations and warranties made herein [were] true and correct” and did
not omit any material fact; and

6.

No event, development, or circumstance had occurred or existed with respect
to EGT that was required to be and had not been disclosed in its SEC
filings.125

These warranties fall into two groups: (1) warranties that EGT had been and was in
compliance with the federal securities laws and regulations (the first, third, and sixth warranties
listed above), and (2) warranties unrelated to such compliance (the second, fourth, and fifth
warranties).
With respect to the second group of warranties, Strata has not pleaded sufficient facts
to make out any claim for breach. The complaint does not allege any facts at all related to the fourth
warranty – possession of appropriate certificates and permits – much less any suggesting that it was
false.
Strata’s allegations regarding the second and fifth warranties are too vague to state
a claim. The complaint relates a long tale of allegedly fraudulent conduct and then simply asserts
in a cursory manner that this whole course of conduct evidences breach of these two warranties.
Strata does not state clearly which of the many events or occurrences alleged in the complaint

125

Id. ¶ 87(a)-(f).

38
reasonably could have been expected to result in “Material Adverse Effects.”126 Nor does it state
which disclosures furnished by EGT to Strata regarding EGT and the SPA were inaccurate.127 Even
under Rule 8(a)’s forgiving pleading standard, such sparse allegations are insufficient to state a
claim because they fail to put EGT on notice as to the nature and scope of the claims against it.128
Strata sufficiently has pleaded a breach, however, with respect to the first group of
warranties. The contract claim regarding this group tracks Strata’s securities fraud claims – that is,
Strata asserts that EGT breached the SPA by falsely warranting that it had not violated securities
laws or regulations prior to the SPA’s closing. The fact that Strata’s securities fraud claims fail
primarily for lack of loss causation does not doom its breach of contract claim on the same basis.
If EGT breached an express warranty in the SPA then Strata was injured at the moment it purchased
stock at an inflated price pursuant to that instrument, and it is entitled to recover the benefit of its
bargain.129 Thus if EGT or its representatives in fact did make false statements of material fact in

126

See Cpt. ¶ 88(b) (“In fact, by October 19, 2007, there had been numerous events, occurrences
and developments that had had and could reasonably be expected to result in Material
Adverse Effects, including the course of fraudulent dealings up to that date, as described
above, and the tremendous, as yet undisclosed problems facing the implementation of the
Participation Agreement.”).
127

See id. ¶ 88(e) (“In fact, the disclosures furnished by and on behalf of [EGT] to the
Purchasers were replete with false and inaccurate statements of material facts, as described
above.”).
128

See E & L Consulting, Ltd. v. Doman Indus. Ltd., 472 F.3d 23, 32 (2d Cir. 2006) (“Notice
pleading requires at a minimum that the pleading give the opposing party notice of the nature
of the claim against it, including which of its actions gave rise to the claims upon which the
complaint is based. The claim must be sufficiently particular to allow the defendant to
commence discovery and prepare a defense.”).
129

“Under New York law, an express warranty is part and parcel of the contract containing it
and an action for its breach is grounded in contract. A party injured by breach of contract is
entitled to be placed in the position it would have occupied had the contract been fulfilled

39
violation of the securities laws prior to the SPA’s closing – even statements as to which Strata has
failed to plead loss causation – then EGT breached that warranty as soon as the deal closed. Giving
Strata the benefit of every reasonable inference and in light of the allegations as a whole –
particularly those regarding disclosures made to plaintiffs in November 2008130 – Strata adequately
has pleaded at least that certain material statements made publicly, and contained in documents filed
with the SEC, by EGT and its representatives prior to the SPA were false and violated the securities
laws.131
Because plaintiffs adequately have alleged breach of the first group of warranties,
Strata’s claim against EGT for breach of the SPA survives.

EGT’s Warranties in the WPA
The same is true with respect to EGT’s warranties in the WPA. Strata identifies in
the WPA a set of warranties by EGT equivalent to those described above – as well as one additional

according to its terms. It follows that appellant is entitled to the benefit of its bargain,
measured as the difference between the value of [the company purchased by defendant] as
warranted by Merrill Lynch and its true value at the time of the transaction.” Merrill Lynch,
500 F.3d at 184-85 (internal citations omitted); see also id. (“It is a well established principle
that contract damages are measured at the time of the breach.”).
130

See supra notes 46 - 47 and accompanying text.
131

To take but one example, Strata alleges that statements made by various defendants in the
summer and fall of 2007 regarding the numbers of Participation Agreements entered into and
placements secured were material and false because, as plaintiffs first learned in November
2008, most if not all of what defendants referred to as Participation Agreements in fact were
non-binding “memoranda of understanding” that plaintiffs assert were not “Participation
Agreements” within the meaning of the SPPPA. See supra note 24 and accompanying text.
Taking all reasonable inferences in favor of Strata, it adequately has pleaded that these
allegedly false and material statements regarding placements and Participation Agreements
– contained in numerous press releases, conference calls, and SEC filings in the summer and
fall of 2007 – violated the securities laws and regulations.

40
warranty132 – as having been breached.133
For the reasons explained above with respect to the nearly identical set of warranties
contained in the SPA, Strata has made out an adequate claim against EGT for breach of the WPA.
If in fact certain of the defendants’ statements and SEC filings on EGT’s behalf leading up to the
WPA contained materially false information, as adequately is alleged, then EGT breached at least
one of its warranties in the WPA.

EGL’s Warranties in the WPA
Strata identifies only two warranties by EGL in the WPA as having been breached:
(1) “[t]hat [EGL] has not, and to its knowledge no one acting on its behalf has taken, directly or
indirectly, any action designed to cause or to result in the stabilization or manipulation of the price
of any security of EGT to facilitate the sale of the Warrants” and (2) that the “transfer and sale of
the Warrants . . . do not and will not . . . conflict with or result in a violation of any law, rule [or]
regulation . . . or other restriction of any . . . governmental authority to which [EGL] is subject
(including federal and state securities laws and regulations).”134
Strata’s claim with respect to the former warranty essentially restates its securities
132

EGT warranted also that it had not, and to its knowledge no one acting on its behalf had,
“taken, directly or indirectly, any action designed to cause or to result in the stabilization or
manipulation of the price of any security of [EGT] to facilitate the sale of the Warrants or
the resale of any of the Warrant Shares.” Cpt. ¶ 100(g). Plaintiffs allege that in fact EGT
and the individual defendants had by that time “engaged in a sustained course of fraudulent
dealings which had been intended to, and which did, artificially inflate EGT’s stock price
. . . .” Id.
133

Id. ¶ 100(a)-(f).
134

Cpt. ¶ 99(a)-(b).

41
fraud claims against EGL, except that here the warranty speaks only to specific intent or “design”
– not recklessness – in manipulating EGT’s stock and warrant prices. While scienter may be alleged
“generally” under Rule 9(b),135 “the relaxation of Rule 9(b)’s specificity requirement for scienter
must not be mistaken for [a] license to base claims of fraud on speculation and conclusory
allegations, and a plaintiff must still allege facts that give rise to a strong inference of fraudulent
intent.”136 “When the defendant is a corporate entity, this means that the pleaded facts must create
a strong inference that someone whose intent could be imputed to the corporation acted with the
requisite scienter.”137
Here, the pleadings are insufficient to infer that any of the Individual Defendants, or
any other individual whose scienter might be attributed to EGL for the summer and fall of 2007, had
a concrete personal motive to manipulate the price of EGT’s stock.138 The complaint does not allege
135

F ED . R. C IV . P. 9(b) (“In alleging fraud or mistake, a party must state with particularity the
circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions
of a person’s mind may be alleged generally.”).
Rule 9(b)’s heightened pleading standard applies here because the breach claim turns on
whether fraudulent conduct adequately has been pleaded. See Rombach v. Chang, 355 F.3d
164, 171 (2d Cir. 2004) (“By its terms, Rule 9(b) applies to ‘all averments of fraud.’ This
wording is cast in terms of the conduct alleged, and is not limited to allegations styled or
denominated as fraud or expressed in terms of the constituent elements of a fraud cause of
action.” (internal citation omitted)).
136

Vaughn v. Air Line Pilots Ass'n, 377 Fed. Appx. 88, 90 (2d Cir. 2010) (internal quotation
marks and citations omitted) (quoting Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128
(2d Cir. 1994)).
137

Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190, 195
(2d Cir. 2008).
138

“The requisite ‘strong inference’ of fraud may be established either (a) by alleging facts to
show that defendants had both motive and opportunity to commit fraud, or (b) by alleging
facts that constitute strong circumstantial evidence of conscious misbehavior or
recklessness.” See Novak v. Kasaks, 216 F.3d 300, 307 (2d Cir. 2000). With respect to

42
that any EGL officer or director sold any EGT stock during the period in which the price allegedly
was inflated or otherwise benefitted from the alleged inflation in any direct, personal way.139 In fact,
the complaint alleges that EGL acquired, through the SPPPA’s “earn-in” arrangement, far more
EGT stock and options than it converted or sold during the period in which the price allegedly was
inflated. In the absence of allegations giving rise to a strong inference that EGL or any of its agents
took actions designed to manipulate the price of EGT’s stock and warrants, Strata’s claim against
EGL for breach of this warranty fails.
Strata’s claim fails also with respect to the second warranty identified by Strata as
having been breached by EGL. Strata has not alleged how the sale of stocks and warrants pursuant
to the WPA – as distinguished from any of the allegedly fraudulent conduct that preceded those sales
– violated any particular law, rule, or regulation. While this Court can conceive of theories on which
such a claim might rest, it is the plaintiff’s burden to plead its allegations with sufficient clarity to
give defendants notice of the claim. It has not done so here.
Accordingly, Strata’s contract claim against EGL for breach of the WPA is
dismissed.

specifically intended, rather than reckless, behavior, this is met where “the complaint
sufficiently alleges that the defendants: (1) benefitted in a concrete and personal way from
the purported fraud; [or] (2) engaged in deliberately illegal behavior . . . .” Id. at 311.
139

Plaintiffs allege that Lawrence Ho – an EGL director and the Chairman and controlling
shareholder of EGL’s parent company Melco – “personally received over two million
warrants for the purchase of [EGT] stock” at the closing of the [SPPPA].” Cpt. ¶ 82. They
do not allege, however, that Ho ever exercised or sold those warrants.

43
Count 10: Unjust Enrichment
Finally, plaintiffs allege that the defendants were unjustly enriched by plaintiffs’
purchases of EGT stock at artificially inflated prices.140 As with negligent misrepresentation, New
York and Nevada law vary slightly with respect to unjust enrichment claims.141 For the reasons
described above, the Court applies New York law to Strata’s claim.142
“To prevail on a claim for unjust enrichment in New York, a plaintiff must establish
(1) that the defendant benefitted; (2) at the plaintiff's expense; and (3) that equity and good
conscience require restitution.”143 However, “[t]he existence of a valid and enforceable written
contract governing a particular subject matter ordinarily precludes recovery in quasi contract for
events arising out of the same subject matter.”144
Here, Strata has alleged only two purchases of EGT stock: those pursuant to the SPA
140

Specifically, plaintiffs allege that (1) they conferred a benefit upon the defendants by
purchasing EGT’s stock at artificially inflated prices, (2) “the revenue from those purchases
went to EGT for the ultimate benefit” of the defendants, (3) defendants acknowledged and
accepted that benefit, and (4) it would be inequitable to permit the defendants to retain that
benefit. Cpt. ¶¶ 175-77.
141

New York law requires that the plaintiff show a direct benefit to the defendant, whereas
Nevada law allows recovery also where the benefit to the defendant was indirect. See Villa
v. First Guar. Financial Corp., 2010 WL 2953954, at *5 (D. Nev. July 23, 2010) (“In
Nevada . . . . [a]n indirect benefit will support an unjust enrichment claim.”).
142

As previously explained, Prime Mover’s claim necessarily fails because it has not alleged
any purchase of EGT stock in the relevant time period.
143

Beth Israel Med. Ctr. v. Horizon Blue Cross & Blue Shield of N.J. Inc., 448 F.3d 573, 586
(2d Cir. 2006) (internal quotation marks and citations omitted).
144

Clark-Fitzpatrick, Inc. v. Long Island R. Co., 70 N.Y.2d 382, 388, 516 N.E.2d 190, 193
(1987); see also Mid-Hudson Catskill Rural Migrant Ministry, Inc. v. Fine Host Corp., 418
F.3d 168, 175 (2d Cir. 2005); MJM Advertising, Inc. v. Panasonic Indus. Co., 741 N.Y.S.2d
874, 875 (N.Y. App. Div. 2002).

44
and the WPA, written contracts that govern those sales. This precludes recovery for unjust
enrichment at least with respect to EGT, which was a party to both agreements, and EGL for those
claims based on the WPA to which it was a party.
The claim may be foreclosed on the same basis also with respect to the other
defendants, who were not parties to the two contracts, and to EGL regarding shares purchased under
the SPA.145 Even if it is not barred on this basis, however, Strata has not alleged a direct benefit to
the other defendants of the type required to make out an unjust enrichment claim.146 Rather, Strata
has alleged only that it “conferred a benefit upon the [defendants] by purchasing [EGT] stock at
artificially inflated prices. The revenue from those purchases went to [EGT] for the ultimate benefit
of the [defendants].”147 This is not specific or direct with respect to EGL or the Individual
Defendants. Strata’s unjust enrichment claim therefore is dismissed.

145

See Taberna Capital Mgm’t, LLC v. Dunmore, No. 08 Civ. 1817, 2009 WL 2850685, at *3
(S.D.N.Y. Sept. 2, 2009) (finding that express contract terms that governed a dispute
precluded also third party from recovering); Law Debenture v. Maverick Tube Corp., No.
06 Civ. 14320, 2008 WL 4615896, at *12-13 (S.D.N.Y. Oct. 15, 2008) (surveying cases and
concluding that under New York law “a claim for unjust enrichment, even against a third
party, cannot proceed when there is an express agreement between two parties governing the
subject matter of the dispute”).
146

See Kaye v. Grossman, 202 F.3d 611, 616 (2d Cir. 2000) (unjust enrichment claim requires
an allegation of a “specific and direct benefit” received by the defendant); Simon v. Keyspan
Corp., 2011 WL 1046119, at *12 n.143 (S.D.N.Y. Mar. 22, 2011) (“Plintiff’s unjust
enrichment claim . . . must be dismissed on the ground that plaintiff has failed to allege that
defendants received a “specific and direct benefit” from plaintiff.”).
147

Cpt. ¶ 175.

45
Conclusion
For the foregoing reasons, defendants’ motions to dismiss [DI 29, 31, 39] the
amended complaint are granted to the extent that (1) all of Prime Mover’s claims are dismissed and
(2) all of Strata’s claims are dismissed except for Counts 8 and 9 against EGT. The motions are
denied in all other respects.
SO ORDERED.
Dated:

June 22, 2011