Schentag v. Nebgen et al

Filing 56

MEMORANDUM OPINION AND ORDER re: 33 MOTION to Dismiss filed by Volant Pharma AG, Joseph M. Fayad, Volant Holdings GMBH, Parviz Ghahramani, Georg Nebgen. For the reasons stated herein, Defendants' motion to dismiss th e complaint is GRANTED in part and DENIED in part. Plaintiff's claims under the Securities Act and the Exchange Act are dismissed without prejudice. Plaintiff's common law fraud claim is dismissed without prejudice. Plaintiff's b reach of contract claim is dismissed without prejudice. Plaintiff's breach of fiduciary duties claim survives. Plaintiff is granted leave to replead those claims that have been dismissed without prejudice no later than thirty (30) days follow ing the date of this order. See Rutolo v. City of New York, 514 F.3d 184, 191 (2d Cir. 2008) (noting that leave to amend is "liberally granted"). The Clerk of Court is directed to terminate the motion pending at Dkt. No. 33. SO ORDERED. (Signed by Judge Gregory H. Woods on 6/21/2018) (anc)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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JEROME SCHENTAG, individually and
:
derivatively on behalf of TheraBrake, Inc.
:
:
Plaintiff, :
:
-against:
:
GEORG NEBGEN, PARVIZ GHAHRAMANI, :
VOLANT HOLDINGS GMBH, VOLANT
:
PHARMA AG, and JOSEPH M. FAYAD,
:
:
Defendant. :
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USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: 6/21/18

1:17-cv-8734-GHW
MEMORANDUM OPINION
AND ORDER

GREGORY H. WOODS, United States District Judge:
Plaintiff Jerome Schentag, an inventor and holder of numerous medical patents, sought to
develop and commercialize his inventions. Seduced by Defendant Georg Nebgen’s promise of
investment capital that would enable Plaintiff to accomplish his goal, Plaintiff agreed to the transfer
of his intellectual property to a Swiss entity that would be formed by Nebgen. In the resulting
integrated transaction, Nebgen formed two Swiss limited liability companies, of which Plaintiff
became a shareholder. TheraBrake, the New York corporation holding Plaintiff’s intellectual
property, transferred its rights in that property to one of the Swiss companies in exchange for a
promissory note. After the transaction was consummated, things began to disintegrate. Plaintiff
discovered that Nebgen’s statements that investors were standing by to invest were false. No
payment was made on the promissory note. The Individual Defendants refused to pay for incurred
liabilities. A lien was asserted against the assets of the Swiss holding company. And Plaintiff was
removed as president of TheraBrake.
Plaintiff filed this action, asserting securities fraud claims under the Securities and Exchange
Act of 1934 and violations of various provisions of the Securities Act of 1933. Plaintiff also brings

claims under state law. Defendants have moved to dismiss the complaint in its entirety. Because
Plaintiff fails to plead that he acquired his shares of the Swiss LLCs, or that TheraBrake acquired the
promissory note, in domestic transactions, Defendants’ motion to dismiss the federal securities
claims is granted. Plaintiff’s breach of fiduciary duties claim survives, but the remainder of Plaintiff’s
state law claims are dismissed.
I.

BACKGROUND
A. Factual Background1
Plaintiff Jerome Schentag is a professor of pharmaceutical sciences and pharmacy at the

University of Buffalo School of Pharmacy. Compl. (ECF No. 2) ¶ 3. He is also an inventor and
holds numerous pharmaceutical patents. Id. Among those inventions are pharmaceutical drugs and
devices used to treat and monitor diabetes, obesity, and other related diseases. Id. ¶ 30. Through
TheraBrake, Inc., a Delaware corporation formed on April 8, 2011, Plaintiff and Defendant Joseph
M. Fayad continued their research, development, and commercialization of patents and other
intellectual property held by them. Id. ¶ 5. From the time TheraBrake was formed until November
1, 2014, Plaintiff and Fayad each held fifty percent of the corporation’s shares. Id. ¶ 6.
Defendant Georg Nebgen held himself out to be the co-founder and managing general
partner of NGN Capital, a venture capital firm with offices in Manhattan. Id. ¶ 12. On several
occasions during 2010, 2011, and 2012, Plaintiff discussed his inventions with Nebgen at NGN’s
Manhattan office. Id. ¶ 30.
On January 8, 2013, Plaintiff met with Nebgen in San Francisco, California. Id. ¶ 31.
During that meeting, Nebgen informed Plaintiff that he was no longer with NGN Capital and had

1 Unless otherwise noted, the facts are taken from the complaint and accepted as true for purposes of this motion. See
Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002). However, “the tenet that a court must accept as true all
of the allegations contained in a complaint is inapplicable to legal conclusions.” Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009).

2

begun operating his own business, Vivant Holdings. Id. Plaintiff shared with Nebgen his desire to
commercially exploit his and other patents. Id. ¶ 32. Nebgen told Plaintiff that he was a successful
investment banker, had closed several venture capital deals, and had access to investors willing to
invest the capital required to have the existing patents issued worldwide. Id. These investors,
according to Nebgen, also had money to invest in the continued research and development of the
patented inventions. Id. Nebgen explained to Plaintiff that before Nebgen could secure these
investments, Plaintiff would need to transfer his patents and other intellectual property to an entity
that Nebgen would create. Id. ¶ 33. Nebgen recommended that the entity be formed in Switzerland
so that investors could enjoy substantial personal tax benefits. Id.
At some point after the San Francisco meeting, Plaintiff and Nebgen met again in New York
City to further discuss the proposed venture. Id. ¶ 34. The two also discussed the proposal by
telephone and electronic communication. Id. During those conversations, Nebgen continued to
represent to Plaintiff that he had access to investors willing to come on board. Id.
The following year, in September 2014, Nebgen informed Plaintiff that he had investors
interested in investing in the development and marketing of the pharmaceutical products. Id. ¶ 35.
In return for securing the capital, Nebgen demanded 33% of the shares of TheraBrake. Id. On
November 1, 2014, because of Nebgen’s representations regarding his investors, he was granted the
requested shares. Id. As of that date, Plaintiff, Nebgen, and Fayad each have held 33% of the
TheraBrake shares. Id. ¶ 18.
Throughout 2014 and 2015, Nebgen continued to insist on the importance of forming a
Swiss entity before his investors would contribute to their venture. Id. ¶ 36. Based on these
statements, Plaintiff, Nebgen, and Fayad agreed upon the integrated transaction at the heart of this
case. Id. ¶ 37. As part of that agreement, on September 16, 2015, Nebgen formed Volant Holdings
GmbH (“Holdings”) as a Swiss limited liability company. Id. ¶ 20. Holdings’ principal place of

3

business is in Feusisberg, Canton Schwyz, Switzerland. Id. Holdings was formed to be the holder of
the intellectual property that TheraBrake agreed to transfer to it. Id. ¶¶ 24, 37. Nebgen also
represented that Holdings would pay for all costs associated with the research and development of
the intellectual property, as well as any legal expenses incurred to protect the intellectual property.
Id. ¶ 45.
On October 15, 2015, Plaintiff, Nebgen, and Fayad executed several written agreements to
consummate the agreed-upon transaction. Id. ¶ 21. Among those documents were an Asset
Purchase Agreement (“APA”) and a Patent Assignment. Id. Pursuant to the APA, Holdings agreed
to pay a total sum of $566,510 as well as certain other liabilities described in Section 1.2 of the APA
(“Assumed Liabilities”), as consideration for the transfer of the intellectual property. Id. ¶ 53.
Payment of the $566,510 was to be made in the form of a promissory note payable by Holdings to
TheraBrake (the “Note”). Id. Holdings issued the Note on October 15, 2015. Id. ¶ 43.2 The patent
assignments were subsequently recorded in the United States Patent and Trademark Office. Id. ¶ 21.
Two weeks after the contracts were executed, on October 30, 2015, Nebgen organized
Volant Pharma AG (“Pharma”) as a Swiss limited liability company with its principal place of
business in Feusisberg, Canton Schwyz, Switzerland. Id. ¶ 22. Pharma was intended to be the
operating company and was formed to license the intellectual property acquired from TheraBrake
and, along with Holdings, to pay for all research and development and legal fees and costs associated

Defendants have filed copies of the APA and the Note with their motion papers. See Affidavit of Joseph Fayad (ECF
No. 35) (“Fayad Aff.”), Ex. 2. Plaintiff has not included in the complaint a full description of the terms of the APA or
detailed facts regarding the promissory note. Nor has Plaintiff appended those documents as exhibits to the complaint.
Nonetheless, both the APA and the promissory note are clearly integral to the complaint: Plaintiff has relied on both
documents in framing his allegations, and Defendants’ alleged failure to pay under the promissory note underlies
Plaintiff’s breach of contract claim. See Compl. ¶¶ 21, 53-55, 79-83. Therefore, the Court considers those documents in
evaluating Defendants’ motion to dismiss. See DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010) (“In
considering a motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6), a district court may consider the
facts alleged in the complaint, documents attached to the complaint as exhibits, and documents incorporated by
reference in the complaint.”); id. (“Where a document is not incorporated by reference, the court may never[the]less
consider it where the complaint ‘relies heavily upon its terms and effect,’ thereby rendering the document ‘integral’ to the
complaint.” (quoting Mangiafico v. Blumenthal, 471 F.3d 391, 398 (2d Cir. 2006))).
2

4

with protecting the intellectual property. Id. ¶ 24. Pharma was also intended to be the entity
pursuing investment capital. Id. When Nebgen formed Holdings and Pharma, he appointed himself
the chairman of the board and chief executive officer of each entity. Id. ¶ 10. He was the sole
director of each entity and failed to explain to Plaintiff the significance of this fact. Id. ¶¶ 38, 48.
As a result of the integrated transaction, Nebgen holds 31% of the shares of Holdings and
20% of the shares of Pharma. Id. ¶ 8. Plaintiff and Fayad each hold 31% of the shares of Holdings
and 28% of the shares of Pharma. Id. ¶¶ 2, 18. To pay for his shares in Holdings, Plaintiff sent
$7,602 from his New York bank account via wire transfer to an account at Zuricher Kantonalbank
in Zurich, Switzerland. Id. ¶ 39. He also wire-transferred $14,678 on October 14, 2015 and $13,798
on December 23, 2016 to the Swiss account to pay for his shares in Pharma. Id. Plaintiff also paid
for Fayad’s shares in Pharma by sending $7,500 from his New York account to Fayad’s Bank of
America account in New York on October 21, 2015. Id. ¶¶ 19, 40.
On October 23, 2015, Defendant Parviz Ghahramani was hired as the Chief Operating
Officer of Holdings and Pharma. Id. ¶ 42. Ghahramani holds 8% of the shares of both Holdings
and Pharma. Id. ¶ 15. From late October 2015, Holdings and Pharma have conducted business out
of Ghahramani’s New Jersey office. Id. ¶ 16. Nebgen has also held meetings in New York City for
Holdings and Pharma business since that date. Id. ¶ 25.
Following the October 2015 transaction, Nebgen continued to state that he had investors
who were ready to invest in Holdings and Pharma. Id. ¶ 46. During monthly meetings with Plaintiff
and Ghahramani between October 2015 and July 2017, Nebgen gave allegedly false reports
regarding the status of investor solicitations. Id. This was done, according to Plaintiff, to induce
Plaintiff to continue his research and development in connection with the intellectual property. Id.
Recently, Nebgen told Plaintiff that he never intended for Plaintiff to become a shareholder
of Pharma. Id. ¶ 56. Nebgen also demanded that Plaintiff re-subscribe for his Pharma shares. Id. ¶

5

57. Plaintiff refused, arguing that Nebgen was “changing the deal.” Id. ¶ 58. Subsequently, Nebgen
and Fayad informed Plaintiff that he was no longer an officer of TheraBrake. Id.3
Holdings has not paid on the promissory note. Id. ¶¶ 52, 54. Plaintiff alleges that Nebgen,
Ghahramani, and Fayad “have caused” Holdings not to make the payments due. Id. ¶ 52. Plaintiff
further alleges that Nebgen’s statements regarding the availability of ready and willing investors, the
necessity of transferring the intellectual property to a Swiss entity because of those investors, and
that Holdings and Pharma would pay any research and development and legal costs “have all turned
out to be false and were knowingly false when made.” Id. ¶ 47.
The complaint alleges a scheme in which Defendants “continuously” misrepresented the
status of investor negotiations to secure Plaintiff’s investment and credit from third parties. Id. ¶ 90.
According to the complaint, Nebgen induced Plaintiff and TheraBrake to transfer their intellectual
property to Holdings and enticed Plaintiff to purchase shares in Holdings. Id. ¶¶ 48, 50. Plaintiff
also alleges that Nebgen used Holdings to strip Plaintiff of his intellectual property by promising
consideration without any intent of actually paying. Id. ¶ 55. It was because of the allegedly false
statements that Plaintiff purchased shares of Holdings and Pharma and that TheraBrake purchased
the promissory note. Id. ¶ 49.
The complaint also documents various expenses that have been incurred as a result of the
integrated transaction, expenses which various of the Individual Defendants refuse to pay. The
Individual Defendants retained counsel on behalf of Pharma and Holdings to prosecute and protect
the acquired patents. Id. ¶ 87. Defendants have not paid for those legal services, and counsel has
asserted a lien for $472,539 on the assets of Holdings. Id. ¶¶ 87, 90. Nebgen and Ghahramani also
With his opposition papers, Plaintiff filed a copy of an email dated October 29, 2017, sent from Fayad to Plaintiff,
which reads: “Effective immediately you are removed from the position of President, CEO and director of TheraBrake
Inc. Note that effective immediately, all corporate authority to act on behalf of, bind or otherwise govern the business
of the Corporation is removed from you as stated in the Written Consent of Sole Director of TheraBrake Inc.”
Schentag Aff., Ex. Q. Plaintiff has not filed copies of the written consents that were purportedly attached to that email.
See id.

3

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retained Swiss counsel to prepare the documents necessary to effectuate the transfer of the
intellectual property. Id. ¶ 88. Nebgen and Ghahramani refuse to pay for those services, a total sum
in excess of $90,000. Id. Nebgen and Ghahramani also retained Swiss counsel to draft the
transactional documents associated with the licensing of intellectual property to an affiliated entity.
Id. ¶ 89. They have refused to pay for those legal services, valued at over $96,000. Id.
Plaintiff asserts that it would be futile to move the Board of Directors of TheraBrake to
bring claims on its own behalf; Nebgen and Fayad have the controlling votes. Id. ¶ 59.
B. Procedural History
Plaintiff commenced this action on November 9, 2017. ECF No. 1. In a joint letter filed on
January 26, 2018, Defendants advised the Court of their intent to move to dismiss the complaint.
ECF No. 26. On January 31, 2018, Defendants filed an answer, stating that they were not providing
a substantive response to the complaint at that time because of the anticipated motion to dismiss.
ECF No. 28. Nebgen, Ghahramani, and Fayad filed counterclaims against Plaintiff. Id. On
February 9, 2018, Defendants filed their motion to dismiss the complaint. ECF No. 33. On
February 23, 2018, Plaintiff answered the counterclaims. ECF No. 38. After several extensions of
time, Plaintiff filed his opposition to the motion to dismiss on March 26, 2018. ECF No. 50.
Defendants replied on April 11, 2018. ECF No. 51.
II.

LEGAL STANDARD
A. Rule 12(b)(6)
To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), “a complaint

must allege sufficient facts, taken as true, to state a plausible claim for relief.” Johnson v. Priceline.com,
Inc., 711 F.3d 271, 275 (2d Cir. 2013) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555-56 (2007)).
To determine plausibility, courts follow a “two-pronged approach.” Ashcroft v. Iqbal, 556 U.S. 662,
679 (2009). “First, although a court must accept as true all of the allegations contained in a

7

complaint, that tenet is inapplicable to legal conclusions, and threadbare recitals of the elements of a
cause of action, supported by mere conclusory statements, do not suffice.” Harris v. Mills, 572 F.3d
66, 72 (2d Cir. 2009) (alterations and internal quotation marks omitted) (quoting Iqbal, 556 U.S. at
678). Second, a court determines “whether the ‘well-pleaded factual allegations,’ assumed to be true,
‘plausibly give rise to an entitlement to relief.’” Hayden v. Paterson, 594 F.3d 150, 161 (2d Cir. 2010)
(quoting Iqbal, 556 U.S. at 679). Determining whether a complaint states a plausible claim is a
“context-specific task that requires the reviewing court to draw on its judicial experience and
common sense.” Iqbal, 556 U.S. at 679.
Claims sounding in fraud are subject to the heightened pleading requirements of Federal
Rule of Civil Procedure 9(b). Ganino v. Citizens Utils. Co., 228 F.3d 154, 168 (2d Cir. 2000). Rule 9(b)
requires that the complaint “state with particularity the circumstances constituting fraud.” Fed. R.
Civ. P. 9(b). To satisfy that requirement, the complaint must “(1) specify the statements that the
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.” ATSI Commc’ns, Inc. v. Shaar Fund,
Ltd., 493 F.3d 87, 99 (2d Cir. 2007) (citing Novak v. Kasaks, 216 F.3d 300, 306 (2d Cir. 2000)).
In resolving a motion to dismiss under Rule 12(b)(6), courts generally may not consider
materials extrinsic to the complaint. Fed. R. Civ. P. 12(d). However, that rule is not absolute. In
addition to the facts alleged in the complaint, courts “may consider any written instrument attached
to the complaint, statements or documents incorporated into the complaint by reference, legally
required public disclosure documents filed with the SEC, and documents possessed by or known to
the plaintiff and upon which it relied in bringing the suit.” ATSI, 493 F.3d at 98. Courts may also
consider “matters of which judicial notice may be taken.” Goel v. Bunge, Ltd., 820 F.3d 554, 559 (2d
Cir. 2016) (citation omitted).

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III.

DISCUSSION
A. Federal Claims
Defendants move to dismiss the federal securities claims on two grounds: (1) the Note and

Plaintiff’s shares in Holdings and Pharma do not constitute securities; and (2) even if those interests
were securities, the complaint fails to plead a domestic transaction.
1. The Shares and Promissory Note as “Securities”
Plaintiff brings claims under Section 10(b) of the Securities and Exchange Act of 1934 and
Sections 5(a) and (b)(2), 12(a) and (b), and 15(a) of the Securities Act of 1933. Section 10(b) of the
Securities Exchange Act makes it unlawful to “use or employ, in connection with the purchase or sale of any
security . . . any manipulative or deceptive device or contrivance in contravention of such rules and
regulations as the [Securities and Exchange] Commission may prescribe.” 15 U.S.C. § 78j(b)
(emphasis added). Thus, to state a claim under Section 10(b) for fraudulent misrepresentations, a
plaintiff must allege “(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.”
GAMCO Investors, Inc. v. Vivendi Universal, S.A., 838 F.3d 214, 217 (2d Cir. 2016) (quoting Halliburton
Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398, 2407 (2014)).
Section 5 of the Securities Act requires that “a security” be registered with the SEC prior to
its sale. 15 U.S.C. § 77e(a); see SEC v. Cavanagh, 445 F.3d 105, 111 (2d Cir. 2006). To state a cause of
action under Section 5, a plaintiff must show “(1) lack of a registration statement as to the subject
securities; (2) the offer or sale of the securities; and (3) the use of interstate transportation or
communication and the mails in connection with the offer or sale.” Cavanagh, 445 F.3d at 111 n.13
(quoting Eur. & Overseas Commodity Traders, S.A. v. Banque Paribas London, 147 F.3d 118, 124 n.4 (2d
Cir. 1998)).

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Section 12 of the Securities Act imposes liability on “[a]ny person who . . . offers or sells a
security in violation of section [5]” of the Act or “offers or sells a security . . . by means of a
prospectus or oral communication, which includes an untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements . . . not misleading.” 15 U.S.C. §
77l(a) (emphasis added); see In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 359 (2d Cir. 2010)
(“Section 12(a)(2) provides . . . redress where the securities at issue were sold using prospectuses or
oral communications that contain material misstatements or omissions” (emphasis added)). Section
15(a) of the Securities Act imposes liability on a person who controls another person liable under
Section 11 or Section 12. See 15 U.S.C. § 77o(a). To establish a claim under this section, a plaintiff
must prove “a ‘primary violation’ of the statute ‘and control of the primary violator by defendants.’”
In re MF Global Holdings Limited Sec. Litig., 982 F. Supp. 2d 277, 308 (S.D.N.Y. 2013) (quoting In re
Lehman Bros. Mortg.-Backed Sec. Litig., 650 F.3d 167, 185 (2d Cir. 2011)).
Thus, to avoid dismissal of his federal claims, Plaintiff must plead the threshold issue: that
the shares and promissory note at issue are “securities” within the meaning of the 1933 and 1934
Acts. See OSRecovery, Inc. v. One Groupe Int’l, Inc., 354 F. Supp. 2d 357, 369 (S.D.N.Y. 2005) (“A
preliminary issue is whether the scheme involved ‘securities,’ as that term is defined by the Securities
Act of 1933 . . . and the Securities and Exchange Act of 1934 . . . .”).
a. Plaintiff’s Shares in Holdings and Pharma
In determining whether LLC membership interests are “securities” under the federal acts,
courts generally apply the Supreme Court’s test enunciated in SEC v. W.J. Howey Co., 328 U.S. 293
(1946), to determine whether the interests constitute an “investment contract.” See, e.g., Uni-World
Capital L.P. v. Preferred Fragrance, Inc., No. 13-cv-7204 (PAE), 2014 WL 3900565, at *7 (S.D.N.Y. Aug.
8, 2014) (“LLC membership interests are not ‘securities’ unless they meet the definition of an
‘investment contract’ . . . .” (quoting Automated Teller Mach. Advantage LC v. Moore, No. 08-cv-3340

10

(RMB), 2009 WL 2431513, at *4 (S.D.N.Y. Aug. 6, 2009))); Keith v. Black Diamond Advisors, Inc., 48 F.
Supp. 2d 326, 332 (S.D.N.Y. 1999) (noting that the plaintiff’s LLC membership interests were not
“securities” unless they satisfied the Howey criteria). The Howey test is met when a plaintiff alleges
“[i] an investment of money [ii] in a common enterprise [iii] with profits to come solely from the
efforts of others.” Automated Teller, 2009 WL 2431513, at *4 (alterations in original) (quoting Endico
v. Fonte, 485 F. Supp. 2d 411, 412 (S.D.N.Y. 2007)); see also Howey, 328 U.S. at 301 (“The test is
whether the scheme involves an investment of money in a common enterprise with profits to come
solely from the efforts of others”).
The key consideration is “whether, under all the circumstances, the scheme was being
promoted primarily as an investment or as a means whereby participants could pool their own
activities, their money and the promoter’s contribution in a meaningful way.” United States v. Leonard,
529 F.3d 83, 88 (2d Cir. 2008) (quoting SEC v. Aqua-Sonic Prods. Corp., 687 F.2d 577, 582 (2d Cir.
1982)). Therefore, the Howey test is not satisfied if, “at the time of investment, the investor
possesses a ‘reasonable expectation of significant investor control.’” Uni-World Capital, 2014 WL
3900565, at *7 (quoting Automated Teller, 2009 WL 2431513, at *4). In making this determination, a
court must conduct a “‘case-by-case analysis’ into the ‘economic realities’ of the underlying
transaction.” Leonard, 529 F.3d at 89 (quoting Reves v. Ernst & Young, 494 U.S. 56, 62 (1990)). “The
question is whether an investor, as a result of the investment agreement itself or the factual
circumstances that surround it, is left unable to exercise meaningful control over his investment.”
Id. at 91 (quoting Robinson v. Glynn, 349 F.3d 166, 170 (4th Cir. 2003)).
Here, Plaintiff not only alleges but emphasizes that Nebgen recommended the transfer of
the intellectual property to the Swiss LLCs in order to attract investors. Repeatedly, the complaint
alleges that Nebgen consistently represented to Plaintiff that formation of a Swiss entity was a
necessary predicate to obtaining the anticipated investment. In fact, Plaintiff alleges that he

11

purchased the LLC interests because Nebgen assured him that investors were ready and willing to
contribute. See Compl. ¶¶ 46-50. These allegations suggest that, at the time Plaintiff purchased his
interests, he did so with the expectation of significant passive investment in the companies.
Nevertheless, the complaint also explains that Holdings and Pharma were created “as part
of” the parties’ agreement to commercially exploit the relevant patents and other intellectual
property. See id. ¶¶ 21, 23. Thus, the complaint dually suggests that the Swiss LLCs were formed
with the expectation that their shareholders would actively control the companies. The Asset
Purchase Agreement executed by Nebgen and Plaintiff also lends support to the latter expectation.4
The Agreement provides for the transfer of “all assets” of TheraBrake, including all of TheraBrake’s
records, books, mailing lists, study materials, inventory, and “all intellectual property rights.”
Affirmation of Joseph M. Fayad (ECF No. 35) (“Fayad Aff.”), Ex. 2 § 1.1. The Agreement also
contains a non-compete clause. See id. § 6.4. These provisions suggest that all of TheraBrake’s
assets were transferred to Holdings so that the parties, through Holdings, could continue
TheraBrake’s work to commercially exploit the intellectual property. Although none of the assets
were transferred to Pharma, the complaint describes Pharma as the entity designed to be the
“operating company”; Pharma was established for the dual purpose of licensing the intellectual
property and obtaining investor capital. See Compl. ¶ 24. The complaint itself creates a question as
to whether the expectation, at the time Plaintiff purchased the LLC interests, was that shareholders
would be passive investors or have an active role in controlling the companies that were to capitalize
on Plaintiff’s inventions.

The Court may consider the Asset Purchase Agreement in connection with its evaluation of Defendants’ motion to
dismiss because the Agreement is referenced in the complaint. See Compl. ¶¶ 21, 37, 53, 80-82, 90; see also Yung v. Lee,
432 F.3d 142, 146 (2d Cir. 2005) (“In addition to allegations in the complaint, we also consider on a Rule 12(b)(6)
motion ‘any written instrument attached to [the complaint] as an exhibit,’ ‘any statements or documents incorporated in
it by reference,’ and any document not incorporated but that is, nevertheless, ‘integral’ to the complaint because the
complaint ‘relies heavily upon its terms and effect.’” (alterations in original) (quoting Chambers, 282 F.3d at 152-53)).
4

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In light of these competing allegations, the Court cannot determine at this stage whether
Plaintiff’s membership interests in the Swiss LLCs are investment contracts and, thereby, securities
under the federal securities acts.5 Instead, the question of “[w]hether or not [Plaintiff’s] membership
interests are ultimately determined to be investment contracts is more appropriately addressed in a
summary judgment motion.” Automated Teller, 2009 WL 2431513, at *4 (citation omitted); see also
Uni-World Capital, 2014 WL 3900565, at *8 (denying motion to dismiss when court was unable to
conclude based on the pleadings that “significant investor control” was expected at the time of the
relevant transaction).6
b. Promissory Note
In determining whether a promissory note is a security under the 1933 and 1934 Acts,
“[c]ourts begin with the presumption that notes with terms exceeding nine months are securities.”
United States v. Bergstein, No. 16-cr-746 (PKC), 2018 WL 2417845, at *3 (S.D.N.Y. May 29, 2018)
(citing Reves, 494 U.S. at 65 n.3, 70-71). This presumption is rebuttable upon a showing that the
note either falls into or resembles categories of notes that have been judicially deemed not to

The parties have not provided the Court with true and correct copies of the LLCs’ formation documents, including any
operating agreements. See Automated Teller Mach. Advantage LC v. Moore, No. 08-cv-3340 (RMB), 2009 WL 2431513, at *4
(S.D.N.Y. Aug. 6, 2009) (noting the need to consider “the structure of the particular LLC at issue, as provided in its
operating agreement” (quoting Great Lakes Chem. Corp. v. Monsanto Co., 96 F. Supp. 2d 376, 392 (D. Del. 2000))).
Appended to an exhibit of Plaintiff’s affidavit in opposition to the motion to dismiss is a document entitled Articles of
Association for Pharma. See Affidavit of Jerome Schentag (ECF No. 49) (“Schentag Aff.”), Ex. M at 45-64 (ECF docket
notation). However, Schentag’s affidavit does not address this document and provides no factual basis for the Court to
conclude that this document is in fact a true copy of Pharma’s articles of association. Therefore, the Court has not
considered this document in evaluating the motion to dismiss.
5

6 Plaintiff argues in his opposition that the shares at issue are “securities” in part because of the use of terms such as
“securities” and “common stock” in various documents related to the October 2015 transaction, including the share
purchase agreements. See Pl.’s Mem. in Opp. (ECF No. 50) at 2-3. The Supreme Court, however, has counseled that
“in searching for the meaning and scope of the word ‘security’ in the Act, form should be disregarded for substance and
the emphasis should be on economic reality.” United States v. Leonard, 529 F.3d 83, 90 (2d Cir. 2008) (quoting Tcherepnin
v. Knight, 389 U.S. 332, 336 (1967)); see also SEC v. W.J. Howey Co., 328 U.S. 293, 300 (1946) (disregarding “the legal
terminology in which . . . contracts are clothed”). Therefore, the mere fact that the parties described the interests as
“securities” does not command the conclusion that they are, in fact, securities.

13

constitute securities. See Pollack v. Laidlaw Holdings, Inc., 27 F.3d 808, 811 (2d Cir. 1994); Reves, 494
U.S. at 65. Such notes include
the note delivered in consumer financing, the note secured by a
mortgage on a home, the short-term note secured by a lien on a small
business or some of its assets, the note evidencing a “character loan”
to a bank customer, short-term notes secured by an assignment of
accounts receivable, . . . a note which simply formalizes an openaccount debt incurred in the ordinary course of business . . . [and] notes
evidencing loans by commercial banks for current operations.
Leemon v. Burns, 175 F. Supp. 2d 551, 559 (S.D.N.Y. 2001) (quoting Reves, 494 U.S. at 65).
In applying the Reves “family resemblance” test, courts consider four factors:
(1) the motivations that would prompt a reasonable buyer and seller to
enter into the transaction; (2) the plan of distribution of the
instrument; (3) the reasonable expectations of the investing public; and
(4) whether some factor, such as the existence of another regulatory
scheme, significantly reduces the risk of the instrument, thereby
rendering application of the securities laws unnecessary.
Pollack, 27 F.3d at 812 (quoting Banco Espanol de Credito v. Sec. Pac. Nat’l Bank, 973 F.2d 51, 55 (2d Cir.
1992)); see also Reves, 494 U.S. at 66-67. “A party asserting that a note of more than nine months
maturity is not within the 1934 Act . . . or that any note is not within the anti-fraud provisions of the
1933 Act has the burden of showing that ‘the context otherwise requires.’” Exchange Nat’l Bank of
Chi. v. Touche Ross & Co., 544 F.2d 1126, 1137-38 (2d Cir. 1976) (Friendly, J.); accord Leemon v. Burns,
175 F. Supp. 2d 551, 559 (S.D.N.Y. 2001).
As an initial matter, the promissory note at issue here does not fall squarely within one of the
judicially recognized classes of non-security notes. Also, the Note provides for a three-year term,
and is therefore presumptively a security. See Fayad Aff., Ex. 2 at 44-517 (the “Note”).8 Therefore,
the family resemblance test applies, and the Court must evaluate the Reves factors.

7

In citing to the promissory note, the Court refers to the page numbers contained in the ECF docket notation.

The Court may consider the promissory note in evaluating the motion to dismiss because the note is referenced in the
complaint. See Compl. ¶¶ 43, 53, 80-81, 90; see also supra, n.4.
8

14

Of particular relevance to this motion is the first Reves factor, which “examines the
motivations that would prompt reasonable parties to enter into the transaction.” Bergstein, 2018 WL
2417845, at *4 (citing Reves, 494 U.S. at 66). “The inquiry is whether the motivations are investment
(suggesting a security) or commercial or consumer (suggesting a non-security).” Pollack, 27 F.3d at
812. “If the seller’s purpose is to raise money for the general use of a business enterprise . . . and the
buyer is interested primarily in the profit the note is expected to generate, the instrument is likely to
be a ‘security.’” Reves, 494 U.S. at 66.
An evaluation of this factor raises serious questions about the motives underlying the
issuance of the Note. Viewing the relevant transaction as the purchase of the Note by TheraBrake
in exchange for the transfer of its intellectual property to Holdings, that transaction, in isolation,
could be characterized as a commercial transaction. Holdings’ purpose in selling the Note to
TheraBrake is not alleged to have been “to raise money for the general use of a business enterprise.”
Id. Rather, Plaintiff alleges that Holdings sold TheraBrake the Note for the sole purpose of
obtaining TheraBrake’s intellectual property. See, e.g., Compl. ¶¶ 47-50 (alleging that Nebgen’s
scheme was to induce Plaintiff and TheraBrake to transfer their intellectual property rights to
Holdings); id. ¶¶ 52-53 (alleging that the money due under the note was consideration for the
intellectual property transfer); id. ¶ 55 (“In essence, Nebgen used Holdings to defraud plaintiffs of
the Intellectual Property by agreeing to pay consideration which he had no intention of paying.”).
The Note itself reflects this. Section 1 explains that “[t]his Note evidences an obligation
under, and is subject to the provisions of, the Asset Purchase Agreement dated October 15, 2015 . . .
.” Note § 1. The Note provides for payment of the principal amount of $566,510 plus interest, id.
at 1 & § 2, and provides that “[a]ll payments shall be made in U.S. dollars in immediately available
funds,” id. § 5. The Note is not convertible to Holdings’ stock, and nowhere in the Note, the APA,
or in the complaint, is there any indication that TheraBrake invested in Holdings as part of this

15

transaction. Nor does the complaint allege that TheraBrake was entitled to any portion of Holdings’
profits. Rather, the Note is alleged to constitute nothing more than payment for the transfer of a
business asset—the intellectual property. An application of the first Reves factor, therefore, could
suggest that the Note is not a security. See New Earthshell Corp. v. Jobookit Holdings Ltd., No. 14-cv3602 (JMF), 2015 WL 1000343, at *4 (S.D.N.Y. Mar. 5, 2015) (finding that issuance of note was not
motivated by investment purposes when it was issued to cover a portion of the sale of a business
and the plaintiff was not alleged to be entitled to “receive equity, a percentage of [the sold
business’s] profits, or any other stake in the ongoing success of the business”), vacated on other grounds,
634 F. App’x 44 (2d Cir. 2015); Intelligent Digital Sys., LLC v. Visual Mgmt. Sys., Inc., 683 F. Supp. 2d
278, 284-85 (E.D.N.Y. 2010) (finding that a note issued as payment for technology was not a
security when the seller of the technology did not invest in the buyer’s business and the transaction
could “best [be] described as the sale of technology from one business to another for a lump sum”);
cf. SEC v. Constantin, 939 F. Supp. 2d 288, 305 (S.D.N.Y. 2013) (finding that first Reves factor
indicated convertible note was a security when broker-dealer’s clients “were motivated by a desire to
invest their funds for a profitable return and were led to reasonably believe that they had indeed
invested in [ ] securities”).
On the other hand, if the Note is considered in light of the larger transaction—the October
2015 integrated transaction—questions arise as to the motivation of Holdings in issuing the Note.
As discussed above in Section II.A.1, Plaintiff has sufficiently alleged that Holdings was formed in
order to secure investment capital. Therefore, it is reasonable to infer from the complaint that, had
investment not been a motivating factor, there would have been no transfer of TheraBrake’s
intellectual property to Holdings, and, thus, no Note. Viewing the issuance of the Note in this larger
context, it is less clear that the exchange of the Note for TheraBrake’s intellectual property was
purely commercial in nature. See Private Corporate Advisors, Inc. v. Heard, No. 92-cv-5952 (LAP), 1995

16

WL 66647, at *8 (S.D.N.Y. Feb. 17, 1995) (finding note to be a security when it was “part of a larger
financing operation”). At this stage, the Court cannot readily conclude that the first Reves factor
weighs in favor of, or against, a finding that the note is a security.
The second and third Reves factors weigh against the presumption that the note is a security.
In evaluating the second factor, the plan of distribution, “courts consider whether the instrument
involved is one which involved ‘common trading for speculation or investment.’” Roer v. Oxbridge
Inc., 198 F. Supp. 2d 212, 224 (E.D.N.Y. 2001) (quoting Reves, 494 U.S. at 66). The “common
trading” element may be satisfied by alleging that the note was “offered and sold to a broad segment
of the public.” Reves at 68 (citations omitted). The third factor, the “reasonable expectations of the
investing public,” id. at 66, examines whether there exists “public expectation that the notes would
be traded as securities,” Benedict v. Amaducci, No. 92-cv-5239 (KMW), 1995 WL 413206, at *10
(S.D.N.Y. July 12, 1995).
Here, Plaintiff does not allege that the Note was publicly traded, or even offered to members
of the public. Rather, the Note was conveyed to TheraBrake as payment for the transfer of the
company’s intellectual property. Moreover, the complaint does not allege that there was an investing
public, and the APA on its face reflects the expectation of “a single seller who expected only to be
paid in full for an asset sale.” Intelligent Design Sys., 683 F. Supp. 2d at 285. Accordingly, the second
and third Reves factors weigh against the conclusion that the Note is a security. See id. (concluding
that Reves factors two and three indicated that a note was not a security when the note was not
offered to “a broad segment of the public” but instead was issued as payment in a single transaction
for the purchase of an asset). Nonetheless, a note may be deemed a security even when the plan of
distribution weighs against such a finding. See Fragin v. Mezei, No. 09-cv-10287 (AJN), 2012 WL
3613813, at *10 (S.D.N.Y. Aug. 22, 2012); Jaquith v. Newhard, No. 91-cv-7503 (PKL), 1993 WL
127212, at *10 (S.D.N.Y. Apr. 20, 1993).

17

With respect to the fourth Reves factor, Defendants have pointed to no risk-reducing factors
outside of the federal securities laws. Therefore, this factor weighs in favor of finding that the Note
is a security. See Fragin, 2012 WL 3613813, at *11.
Weighing these factors, the Court cannot readily determine that the Note is a security. This
is particularly the case because of the complaint’s competing allegations with respect to the motive
underlying the Note’s issuance. Nonetheless, the Court need not conclusively decide this issue
because, as discussed below, Plaintiff has failed to plead that the note was issued in connection with
a domestic transaction.
2. Extraterritoriality of the Transaction
In Morrison v. Nat’l Australia Bank Ltd., the Supreme Court held that Section 10(b) of the
Exchange Act applies only to “transactions in securities listed on domestic exchanges[ ] and
domestic transactions in other securities.” 561 U.S. 247, 267 (2010). “With regard to securities not
registered on domestic exchanges, the exclusive focus [is] on domestic purchases and sales . . . .” Id. at
268; accord Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 66 (2d Cir. 2012).
Although Morrison did not further define a domestic transaction, the Second Circuit
addressed that issue in Absolute Activist. There, the Second Circuit held that “transactions involving
securities that are not traded on a domestic exchange are domestic if irrevocable liability is incurred
or title passes within the United States.” Absolute Activist, 677 F.3d at 67. “‘[I]rrevocable liability’
attaches ‘when the parties to the transaction are committed to one another,’ or, ‘in the classic
contractual sense, there was a meeting of the minds of the parties.’” Myun-Uk Choi v. Tower Research
Capital LLC, 890 F.3d 60, 66 (2d Cir. 2018) (quoting Absolute Activist, 677 F.3d at 68). Thus, to
determine whether the Exchange Act reaches a transaction not involving securities traded on a U.S.
exchange, the relevant inquiry is “the location of the securities transaction.” City of Pontiac Policemen’s
and Firemen’s Retirement Sys. v. UBS AG, 752 F.3d 173, 180 (2d Cir. 2014). That location falls within

18

the United States when a purchaser agrees “to take and pay for a security” in the United States or
when the seller agrees “to deliver a security” in this country. Absolute Activist, 677 F.3d at 68.
“Relevant ‘facts concerning the formation of the contracts, the placement of purchase orders, . . . or
the exchange of money’ should be considered.” Giunta v. Dingman, ___ F.3d ___, 2018 WL
3028686, at *4 (2d Cir. June 19, 2018) (quoting Absolute Activist, 677 F.3d at 70). “[A] purchaser’s
citizenship or residency does not affect” this inquiry. City of Pontiac, 752 F.3d at 181 (citation
omitted).
The Second Circuit has applied the Morrison test to claims brought under both the Securities
Act and the Exchange Act. See In re Petrobras Sec., 862 F.3d 250, 259 (2d Cir. 2017) (noting that
noteholders were “entitled to assert claims under the Exchange Act and the Securities Act if they
[could] show that they acquired their Notes in ‘domestic transactions’” (quoting Morrison, 561 U.S. at
267)), petition for cert. docketed, No. 17-664 (Nov. 3, 2017).
Here, Plaintiff does not argue, nor does the complaint allege, that title in the securities
passed within the United States. Rather, Plaintiff contends that he has plausibly alleged that he and
TheraBrake incurred irrevocable liability for the purchase of the LLC interests and Note within this
country. For the reasons that follow, the Court disagrees.
a. Plaintiff’s Purchase of Shares in Pharma and Holdings
The complaint provides little information with respect to the location of the relevant events.9
Plaintiff alleges that he met with Nebgen “numerous times” in New York City “to discuss his
inventions of drugs and devices.” Compl. ¶ 30. Plaintiff also alleges that, on January 8, 2013, the

In an affidavit submitted in opposition to the motion to dismiss, Plaintiff sets forth additional facts regarding the
locations of several pre-transaction meetings and the manner in which he received and executed the share purchase
agreements. See Schentag Aff. The Court cannot properly consider Plaintiff’s affidavit in connection with this motion.
See Chambers, 282 F.3d at 152-53 (explaining that, on a motion to dismiss, a court may consider documents attached to
the complaint, documents incorporated in the complaint by reference, and documents that are “integral” to the
complaint).
9

19

two men met again, this time in San Francisco, and discussed Nebgen’s ability to secure investment
in Plaintiff’s intellectual property. Id. ¶ 31-32. During that meeting, Nebgen explained the benefit
of forming a Swiss entity and the need to transfer the intellectual property to that entity. Id. ¶ 33.
The complaint then explains that Plaintiff met with Nebgen in New York City on some unspecified
date after the San Francisco meeting. Id. ¶ 34. Plaintiff describes the subject of that meeting to have
been “a venture to commercially exploit his and TheraBrake’s patents, trademarks and intellectual
property.” Id.
These meetings alone, however, do not plausibly plead that this was a domestic transaction.
See Arco Capital Corps. Ltd. v. Deutsche Bank AG, 949 F. Supp. 2d 532, 541 (S.D.N.Y. 2013) (“While
potentially relevant under conduct and effects test, courts have found such pleadings that ‘some acts
that ultimately result in the execution of the transaction abroad [took] place in the United States
amounts to nothing more than the reinstatement of the conducts test.’” (alteration in original)
(quoting Pope Invs. II, LLC v. Deheng Law Firm, No. 10-cv-6608 (LLS), 2012 WL 3526621, at *8
(S.D.N.Y. Aug. 15, 2012))); Cornwell v. Credit Suisse Grp., 729 F. Supp. 2d 620, 625-26 (S.D.N.Y. 2010)
(noting that “read as a whole, the Morrison options indicate that the Court considered that under its
new test § 10(b) would not extend to foreign securities trades executed on foreign exchanges even if
purchased or sold by American investors, and even if some aspects of the transaction occurred in
the United States”). At no point during those meetings does Plaintiff allege that he came to an
agreement with Nebgen about the terms of the transaction. Plaintiff does not allege, for example,
that it was during those meetings that he agreed to become a shareholder in the Swiss entity. Nor
does the complaint allege that Plaintiff, on behalf of TheraBrake, agreed at that time that it would
accept a promissory note in exchange for its intellectual property. Accordingly, neither Plaintiff or
TheraBrake is alleged to have incurred irrevocable liability during any of those meetings. Cf. Giunta,
2018 WL 3028686, at *4 (finding meetings in New York provided basis for domestic transaction

20

when the plaintiff agreed during those meetings to invest capital in exchange for an equity stake in a
Bahamian company).
Plaintiff’s other argument—that his signing of the share purchase agreements in New York10
and his wiring of funds from a New York bank establish a domestic transaction—is equally
handicapped. First, it is reasonable to infer from Plaintiff’s allegations and the language of each
share purchase agreement (“SPA”) that Plaintiff’s original purchases of shares in Pharma and
Holdings were consummated the year before he executed the share purchase agreements. The SPA
that Plaintiff executed in connection with his Holdings shares, signed by Plaintiff on September 23,
2016, states that, “[o]n the occasion of the incorporation of [Holdings] . . . Purchaser [Plaintiff] had
paid in an amount of CHF 7,000.00 into [Holdings] (“Capital Contribution”) for 70 [Holdings]
Shares and by this received beneficial ownership of those Shares.” Affidavit of Jerome Schentag
(ECF No. 49) (“Schentag Aff.”), Ex. E, Preamble § 2 (emphasis added). That SPA also provides
that it is merely a transfer of “legal ownership” in the shares already held by Plaintiff. Id. It is clear
that Plaintiff had paid for those shares at the time of the integrated transaction in 2015. See id.;
Compl. ¶ 39. No additional payment was required of him at the time he executed the SPA. See
Schentag Aff., Ex. E § 1 (“The Purchaser pays the purchase price by way of set-off against
Purchaser’s claim against Seller for reimbursement of the Capital Contribution in the amount of
CHF 7,000.00.”). Similarly, the Pharma SPA, signed by Plaintiff on December 21, 2016, states that,
“[o]n the occasion of the incorporation of the Company . . . Purchaser paid in an amount of CHF
13,293.00 into the Company (“Capital Contributions”) for 26,586 Shares, and, thus, received
beneficial ownership of those Shares as of the incorporation of the Company, i.e. as of 30 October
10 Plaintiff relies on his affidavit testimony to establish that he executed the share purchase agreements in New York. See
Pl.’s Opp. at 6. While the Court has no basis for considering the averments in that affidavit, it may consider the share
purchase agreements themselves, which are referenced in the complaint. See Compl. ¶ 57; see also, e.g., DiFolco v. MSNBC
Cable LLC, 622 F.3d 104, 111 (2d Cir. 2010). Those documents indicate that Plaintiff executed each agreement in New
York. See Schentag Aff., Ex. E at 5, Ex. L at 5.

21

2015.” Schentag Aff., Ex. L, Preamble § (b). Plaintiff alleges in the complaint that he paid for those
shares by wire transfer on October 14, 2015. Compl. ¶ 39.
Based on these facts, it appears that Plaintiff’s original interests in the LLCs were acquired in
October 2015, at or around the same time as the consummation of the integrated transaction.11
There is no information in the complaint, however, regarding Plaintiff’s location when he agreed to
the terms of that transaction, or the place in which the transaction took place. Nor do the APA and
other related agreements indicate their place of execution. See Fayad Aff., Ex. 2. Moreover, the
vague and unspecific allegations in the complaint regarding the October 2015 transaction say
nothing about the purchase of shares in the Swiss LLCs other than to allege that Plaintiff, Nebgen,
and Fayad “became shareholders in Pharma.” Compl. ¶ 37. On these allegations, the Court is
unable to infer from the complaint that Plaintiff became “irrevocably bound” to purchase his shares
in the United States. Absolute Activist, 677 F.3d at 70.
Plaintiff’s allegation that he paid for his shares by wiring money from a New York bank is
also insufficient to establish a domestic transaction. The Second Circuit has held that allegations
that investors transferred money to or between U.S. bank accounts, without more, are insufficient to
satisfy Morrison. See Loginovskaya v. Batratchenko, 764 F.3d 266, 275 (2d Cir. 2014) (concluding that a
“direction to wire transfer money to the United States is insufficient to demonstrate a domestic
transaction” because the wire transfers “were actions needed to carry out the transactions, and not
the transactions themselves”); see also MBC Fin. Servs. Ltd. v. Boston Merchant Fin., Ltd., No. 15-cv-275
(DAB), 2016 WL 5946709, at *11 (S.D.N.Y. Oct. 4, 2016) (citing Loginovskaya and rejecting

The parties offer no argument with respect to any distinction in the Morrison analysis that may exist based on the
transaction granting Plaintiff “beneficial” ownership versus “legal” ownership of the shares. The complaint alleges that
Plaintiff became a shareholder in Pharma as part of the October 2015 transaction. Compl. ¶ 37. Therefore, for
purposes of this motion, the Court accepts that Plaintiff became a Pharma shareholder at the time of Pharma’s
formation. Based on the representations in the Holdings SPA, the Court likewise infers the same with respect to
Plaintiff’s shares in Holdings.

11

22

argument that the wiring of funds to a New York bank account by itself established a domestic
transaction).
In addition to the “original” shares in Holdings and Pharma, the Pharma SPA describes an
additional 211 shares that Plaintiff was to purchase for the price of CHF 105.50. Schentag Aff., Ex.
L § 1. The Court is unable to infer, however, that Plaintiff ever purchased those shares, much less
that he did so in the United States. The complaint is silent as to the total numbers of shares that
Plaintiff purchased in Pharma. While the complaint does allege that Plaintiff wire-transferred a
second payment for his Pharma shares on December 23, 2016, two days after he signed the SPA,
that payment was in the amount of $13,798.00. Compl. ¶ 39. The SPA makes clear that Plaintiff’s
original Pharma shares were paid for by a “set-off” against his original capital contributions; no
previously unpaid money was to exchange hands. Schentag Aff., Ex. L § 1. Only the 211 additional
shares were to be paid for by wire transfer to the seller’s bank account, and the only payment due
for those shares was CHF 105.50, approximately $103.53.12 See id. Therefore, it is entirely unclear
what shares Plaintiff purchased by paying $13,798 in December 2016. Without additional
information regarding that transaction, the Court cannot conclude that Plaintiff has adequately
pleaded that he incurred irrevocable liability for his purchase of any additional Pharma shares within
the United States.
b. TheraBrake’s Purchase of the Note
As with the LLC membership interests, the Court is unable to conclude at this time that
Plaintiff has adequately pleaded that TheraBrake’s purchase of the Note was a domestic transaction.
As discussed above, the complaint offers no facts regarding the location of the October 2015

The exchange rate on December 31, 2016 between the Swiss Franc and the U.S. Dollar was CHF 1.0190 to 1 USD.
See U.S. Dep’t of the Treasury, Bureau of the Fiscal Service, Treasury Reporting Rates of Exchange: Historical Rates, December
31, 2016, https://fiscal.treasury.gov/fsreports/rpt/treasRptRateExch/historicalRates.htm (last visited June 15, 2018).

12

23

integrated transaction. The APA’s provisions offer no additional insight. The APA details the terms
of closing of “the transactions contemplated by” the APA, which included the issuance of the Note.
Fayad Aff., Ex. 2 at 2-1713 (the “APA”), Art. III. Those provisions say nothing with respect to the
location in which closing deliveries were to be made. See id. §§ 3.2, 3.3. Nor does the APA indicate
the location of Plaintiff and Nebgen at the time of its execution; it states their respective addresses,
but not the loci of execution. See id. at 17. The Note itself likewise contains no indication of the
location at which it was executed. The signature line, containing Nebgen’s signature, merely
indicates that Nebgen signed the Note on behalf of Holdings, “a Swiss limited company.” Note at
8. Absent more specific allegations regarding the whereabouts of the parties when they agreed to
the APA’s terms, the Court is left unable to infer that the Note was acquired by TheraBrake in a
domestic transaction.
For all of these reasons, Defendants’ motion to dismiss Plaintiff’s federal securities claims is
granted.
B. State Law Claims
The Court has original jurisdiction over this case under 28 U.S.C. § 1331 (federal question
jurisdiction) and under 28 U.S.C. § 1332 (diversity jurisdiction). Accordingly, despite the dismissal
of all of the federal claims, the Court must evaluate Defendants’ arguments in favor of dismissal of
the state law claims as well.
1. Personal Jurisdiction over the Corporate Defendants
Defendants move to dismiss the state law claims against Holdings and Pharma for lack of
personal jurisdiction. It is well established that, on a motion to dismiss pursuant to Rule 12(b)(2),
the “plaintiff bears the burden of demonstrating personal jurisdiction over a person or entity against

13

The pages cited are those listed on the ECF docket notation.

24

whom it seeks to bring suit.” Penguin Grp. (USA) Inc. v. Am. Buddha, 609 F.3d 30, 34 (2d Cir. 2010)
(citing In re Magnetic Audiotape Antitrust Litig., 334 F.3d 204, 206 (2d Cir. 2003) (per curiam)); see also
Bank Brussels Lamberts v. Fiddler Gonzalez & Rodriguez, 171 F.3d 779, 784 (2d Cir. 1999) (Sotomayor,
J.) (“When responding to a Rule 12(b)(2) motion to dismiss for lack of personal jurisdiction, the
plaintiff bears the burden of establishing that the court has jurisdiction over the defendant.” (citation
omitted)). To defeat a jurisdiction-testing motion, the plaintiff’s burden of proof “varies depending
on the procedural posture of the litigation.” Dorchester Fin. Sec., Inc. v. Banco BRJ, S.A., 722 F.3d 81,
84 (2d Cir. 2013) (quoting Ball v. Metallurgie Hoboken-Overpelt, S.A., 902 F.2d 194, 197 (2d Cir. 1990)).
At the pleading stage—and prior to discovery—a plaintiff need only make a prima facie showing that
jurisdiction exists. Id. at 84-85; see also Eades v. Kennedy, PC Law Offices, 799 F.3d 161, 167-68 (2d Cir.
2015) (“‘In order to survive a motion to dismiss for lack of personal jurisdiction, a plaintiff must
make a prima facie showing that jurisdiction exists.’” (quoting Licci ex rel. Licci v. Lebanese Canadian
Bank, SAL, 732 F.3d 161, 167 (2d Cir. 2013))).
If the court considers only pleadings and affidavits, the plaintiff’s prima facie showing “must
include an averment of facts that, if credited by the ultimate trier of fact, would suffice to establish
jurisdiction over the defendant.” In re Terrorist Attacks on Sept. 11, 2001, 714 F.3d 659, 673 (2d Cir.
2013) (quoting Chloe v. Queen Bee of Beverly Hills, LLC, 616 F.3d 158, 163 (2d Cir. 2010). Courts may
rely on materials outside the pleading in considering a motion to dismiss for lack of personal
jurisdiction. See DiStefano v. Carozzi N. Am., Inc., 286 F.3d 81, 84 (2d Cir. 2001). “The allegations in
the complaint must be taken as true to the extent they are uncontroverted by the defendant’s
affidavits.” MacDermid, Inc. v. Deiter, 702 F.3d 725, 727 (2d Cir. 2012) (quoting Seetransport Wiking
Trader Schiffarhtsgesellschaft MBH & Co., Kommanditgesellschaft v. Navimpex Centrala Navala, 989 F.2d 572,
580 (2d Cir. 1993)). If the parties present conflicting affidavits, however, “all factual disputes are
resolved in the plaintiff’s favor, and the plaintiff’s prima facie showing is sufficient notwithstanding

25

the contrary presentation by the moving party.” Seetransport Wiking, 989 F.2d at 580 (citation
omitted).
a. Standard for Exercising Personal Jurisdiction
Federal courts must satisfy three requirements in order to exercise personal jurisdiction over
an entity: (1) the entity must have been properly served, (2) the court must have a statutory basis for
exercising personal jurisdiction, and (3) the exercise of personal jurisdiction must comport with
constitutional due process. Licci ex rel. Licci v. Lebanese Canadian Bank, SAL, 673 F.3d 50, 59-60 (2d
Cir. 2012). In a federal question case, the manner in which district courts assess whether the
exercise of personal jurisdiction comports with constitutional due process varies depending on the
asserted statutory basis.
“The constitutional analysis under the Due Process Clause consists of two separate
components: the ‘minimum contacts’ inquiry and the ‘reasonableness’ inquiry. The ‘minimum
contacts’ inquiry requires [the court] to consider ‘whether the defendant has sufficient contacts with
the forum state to justify the court’s exercise of personal jurisdiction.’” Id. at 60 (quoting Chloe, 616
F.3d at 164). Although the Second Circuit has not “has not yet decided” whether to adopt this
approach, other circuits have held that “when a civil case arises under federal law and a federal
statute authorizes nationwide service of process, the relevant contacts for determining personal
jurisdiction are contacts with the United States as a whole.” Gucci Am., Inc. v. Weixing Li, 768 F.3d
122, 142 n.21 (2d Cir. 2014) (collecting cases). Courts in this district have followed this approach.
See, e.g., S.E.C. v. Straub, 921 F. Supp. 2d 244, 253 (S.D.N.Y. 2013) (“When the jurisdictional issue
flows from a federal statutory grant that authorizes suit under federal-question jurisdiction and
nationwide service of process, however, the Fifth Amendment applies, and the Second Circuit has
consistently held that the minimum-contacts test in such circumstances looks to contacts with the
entire United States rather than with the forum state.” (internal quotation marks and citations

26

omitted)); Estate of Ungar v. Palestinian Auth., 400 F. Supp. 2d 541, 548 (S.D.N.Y. 2005), aff’d, 332 F.
App’x 643 (2d Cir. 2009) (“If a federal statute provides for nationwide service of process, the
jurisdictional reach of an enforcing court is at its fullest—its analysis is limited only by the
requirements of due process, and it may consider a party’s contacts with the United States as a
whole, rather than with the forum state.”); see also Sullivan v. Barclays PLC, No. 13-cv-2811 (PKC),
2017 WL 685570, at *42 (S.D.N.Y. Feb. 21, 2017) (examining nationwide contacts in an action
alleging CEA and Sherman Act violations); In re Amaranth Nat. Gas Commodities Litig., 587 F. Supp.
2d 513, 526 (S.D.N.Y. 2008); Grosser v. Commodity Exch., Inc., 639 F. Supp. 1293, 1312 (S.D.N.Y.
1986) (“Section 12 [of the Clayton Act] is construed as conferring nationwide personal jurisdiction
over corporate antitrust defendants.”), aff’d, 859 F.2d 148 (2d Cir. 1988).
If the federal statute at issue does not provide for nationwide service, or if the claim does
not arise under federal law, the personal jurisdiction analysis begins by applying the forum state’s
long-arm statute. See PDK Labs, Inc. v. Friedlander, 103 F.3d 1105, 1108 (2d Cir. 1997) (“In a federal
question case where a defendant resides outside the forum state, a federal court applies the forum
state’s personal jurisdiction rules ‘if the federal statute does not specifically provide for national
service of process.’” (quoting Mareno v. Rowe, 910 F.2d 1043, 1046 (2d Cir. 1990))). If the long-arm
statute is satisfied, the due process inquiry examines whether the foreign defendant has sufficient
minimum contacts with the forum state. Computer Assocs. Int’l, Inc. v. Altai, Inc., 126 F.3d 365, 370
(2d Cir. 1997).
Whether personal jurisdiction is based on a statute containing nationwide service or a statelong arm statute, the court must also determine that the exercise of personal jurisdiction comports
with the Due Process Clause.14 “[D]ue process requires a plaintiff to allege (1) that a defendant has

Depending on the basis for personal jurisdiction, due process under either the Fifth or Fourteenth Amendment
applies. “[T]he due process analysis is basically the same under both the Fifth and Fourteenth Amendments. The
principal difference is that under the Fifth Amendment the court can consider the defendant’s contacts throughout the
14

27

‘certain minimum contacts’ with the relevant forum, and (2) that the exercise of jurisdiction is
reasonable in the circumstances.” In re Terrorist Attacks, 714 F.3d at 673 (citing Int’l Shoe Co. v.
Washington, 326 U.S. 310, 316 (1945)). As discussed above, the “relevant forum” for the purpose of
the contacts analysis may be the forum state (here, New York) or the United States as a whole.
“To determine whether a defendant has the necessary ‘minimum contacts,’ a distinction is
made between ‘specific’ and ‘general’ personal jurisdiction.” Id. (citing Metro. Life Ins. Co. v.
Robertson-Ceco Corp., 84 F.3d 560, 567-68 (2d Cir. 1996)). “A court may assert general personal
jurisdiction over a foreign defendant to hear any and all claims against that defendant only when the
defendant’s affiliations with the State in which the suit is brought ‘are so constant and pervasive as
to render [it] essentially at home in the forum State.’” Waldman v. Palestinian Liberation Org., 835 F.3d
317, 331 (2d Cir. 2016) (alteration in original) (quoting Daimler AG v. Bauman, 134 S. Ct. 746, 751
(2014)). “‘Specific jurisdiction, on the other hand, depends on an affiliation between the forum and
the underlying controversy, principally, activity or an occurrence that takes place in the forum State
and is therefore subject to the State’s regulation.’” Id. (quoting Goodyear Dunlop Tires Operations, S.A.
v. Brown, 564 U.S. 915, 919 (2011)); see also Licci, 732 F.3d at 170 (“‘Where the claim arises out of, or
relates to, the defendant’s contacts with the forum—i.e., specific jurisdiction [is asserted]—minimum
contacts [necessary to support such jurisdiction] exist where the defendant purposefully availed itself
of the privilege of doing business in the forum and could foresee being haled into court there.’”
(alterations in original) (quoting Bank Brussels, 305 F.3d at 127)).
Specific personal jurisdiction is predicated on “an affiliation between the forum and the
underlying controversy, principally, activity or an occurrence that takes place in the forum.”

United States, while under the Fourteenth Amendment only the contacts with the forum state may be considered.” Chew
v. Dietrich, 143 F.3d 24, 28 n.4 (2d Cir. 1998); see also S.E.C. v. Straub, 921 F. Supp. 2d 244, 253 (S.D.N.Y. 2013)
(“[B]ecause the language of the Fifth Amendment’s due process clause is identical to that of the Fourteenth
Amendment’s due process clause, the same general principles guide the minimum contacts analysis.”).

28

Goodyear, 564 U.S. at 919 (internal quotation marks, alteration, and citations omitted). “In contrast
to general, all-purpose jurisdiction, specific jurisdiction is confined to adjudication of ‘issues deriving
from, or connected with, the very controversy that establishes jurisdiction.’” Id. (citation omitted).
A plaintiff must plead personal jurisdiction with respect to each claim asserted. Sunward Elecs., Inc. v.
McDonald, 362 F.3d 17, 24 (2d Cir. 2004). “[T]he relationship must arise out of contacts that the
‘defendant himself’ creates with the forum . . . .” Walden v. Fiore, 134 S. Ct. 1115, 1122 (2014)
(quoting Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475 (1985)) (emphasis in Walden). “The
activities of plaintiffs or third parties alone will not confer jurisdiction, and the court’s analysis is
directed to the defendant’s contacts with the forum itself and ‘not the defendant’s contacts with
persons who reside there.’” Sullivan, 2017 WL 685570, at *43 (quoting Walden, 134 S. Ct. at 1122).
Specific jurisdiction over a foreign defendant may also exist even if the relevant conduct
took place entirely outside the forum. Under the so-called “effects test,” personal jurisdiction is
“typically invoked where . . . the conduct that forms the basis for the controversy occurs entirely
out-of-forum, and the only relevant jurisdictional contacts with the forum are therefore in-forum
effects harmful to the plaintiff.” Licci, 732 F.3d at 173; see also Best Van Lines, Inc. v. Walker, 490 F.3d
239, 243 (2d Cir. 2007) (describing “independent, if conceptually overlapping, methods of
demonstrating minimum contacts,” including on the basis of “in-state effects of out-of-state
activity”). For such claims, “the exercise of personal jurisdiction may be constitutionally permissible
if the defendant expressly aimed its conduct at the forum.” Licci, 732 F.3d at 173 (emphasis added) (citing
Calder v. Jones, 465 U.S. 783, 789 (1983). Harmful effects alone will not establish jurisdiction: “[T]he
fact that harm in the forum is foreseeable . . . is insufficient for the purpose of establishing specific
personal jurisdiction over a defendant.” Waldman, 835 F.3d at 339 (quoting In re Terrorist Attacks,
714 F.3d at 674). “[T]he defendant must ‘expressly aim’ his conduct at the United States.” Id. at 337
(alterations omitted) (citing Licci, 732 F.3d at 173); see also In re Libor-Based Fin. Instruments Antitrust

29

Litig., No. 11 MDL 2262 (NRB), 2015 WL 4634541, at *27 (S.D.N.Y. Aug. 4, 2015) (concluding that
effects in forum did not support personal jurisdiction over a foreign defendant when “there [wa]s no
suggestion, and it [did] not stand to reason, that foreign defendants aimed their manipulative
conduct at the United States or any particular forum state”), amended sub nom. In re LIBOR-Based Fin.
Instruments Antitrust Litig., No. 11 MDL 2262 (NRB), 2015 WL 13122396 (S.D.N.Y. Oct. 19, 2015).
In addition, the underlying “suit-related conduct must create a substantial connection with
the forum State.” Walden, 134 S. Ct. at 1121. “[I]t is the defendant’s conduct that must form the
necessary connection with the forum State that is the basis for its jurisdiction over him.” Id. at 1122.
Therefore, the analysis necessarily includes consideration of the claims’ elements and where the
conduct occurred. See Waldman, 835 F.3d at 335-39. The forum must be the “focal point” or
“nucleus” of plaintiff’s alleged harm. Id. at 340. Continuous presence in the forum does not confer
specific jurisdiction unless that presence involves “suit-related conduct.” Id. at 335; see also 7 W. 57th
Street Realty Co., LLC v. Citigroup, Inc., No. 13-cv-981 (PGG), 2015 WL 1514539, at *10 (S.D.N.Y.
Mar. 31, 2015) (“Plaintiff must demonstrate that the Foreign Banks’ suit-related conduct creates
minimum contacts with New York, however, not simply that the Foreign Banks have a presence
here or conduct business activities here in general.” (citing Walden, 134 S. Ct. at 1121).
If the contacts are not sufficient, the due process inquiry ends. See Metro. Life Ins., 84 F.3d at
568. If the court has either general or specific jurisdiction, it must turn to the second step of the due
process inquiry, and determine “whether the assertion of personal jurisdiction comports with
‘traditional notions of fair play and substantial justice’—that is, whether it is reasonable to exercise
personal jurisdiction under the circumstances of the particular case.” Licci, 673 F.3d at 60 (quoting
Chloe, 616 F.3d at 164). The “reasonableness” analysis requires district courts to evaluate the
following five factors: “(1) the burden that the exercise of jurisdiction will impose on the defendant;
(2) the interests of the forum state in adjudicating the case; (3) the plaintiff’s interest in obtaining

30

convenient and effective relief; (4) the interstate judicial system’s interest in obtaining the most
efficient resolution of the controversy; and (5) the shared interest of the states in furthering
substantive social policies.” Chloe, 616 F.3d at 164-65 (citing Asahi Metal Indus., Co., Ltd. v. Superior
Court of Cal., 480 U.S. 102, 113-14 (1987)).
b. Statutory Basis for Personal Jurisdiction
Although Defendants move to dismiss any state law claims against both Pharma and
Holdings on the basis of the Court’s lack of personal jurisdiction, Plaintiff asserts no state claims
against Pharma. The common law fraud claim is based on representations made by Nebgen and
Ghahramani, and the complaint does not allege that those representations were made on behalf of
the corporate Defendants. See Compl. ¶¶ 74-78.15 The breach of fiduciary duties claim is brought
against the Individual Defendants. See id. ¶¶ 84-90.16 And the remaining breach of contract claim,
while seeking remedies that involve rescission of “all agreements” that Plaintiff entered into with
Defendants, is asserted against Holdings, the party to the contract. See id. ¶¶ 79-83. Therefore, the
Court must evaluate only its jurisdiction over Holdings.
Neither party contends that Holdings is subject to the general jurisdiction of New York
courts. Rather, Plaintiff’s arguments under N.Y. C.P.L.R. § 302 suggest that he believes the Court to
have specific jurisdiction over the Swiss LLC.17

The complaint explains that, after Holdings and Pharma were formed, Nebgen continued to make the same
misrepresentations regarding the availability of investors that he had prior to the LLCs’ formation. Compl. ¶ 46.
Plaintiff stops short, however, of pleading that Nebgen made these statements on behalf of Pharma or Holdings. Cf.
Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 105 (2d Cir. 2001) (finding allegations that individual
defendant was the agent of the corporate defendants and was acting on their behalf when he disseminated the allegedly
false or misleading statements sufficient to plead fraud on the part of the corporate defendants).

15

In his opposition, Plaintiff also clarifies, to the extent there were any confusion, that the breach of fiduciary duties
claim is asserted only against the Individual Defendants. Pl.’s Opp. at 11.
16

17 In New York courts, general jurisdiction is exercised pursuant to C.P.L.R. § 301 and is proper when “a company has
engaged in such a continuous and systematic course of ‘doing business’ that a finding of its ‘presence’ [in New York] is
warranted.” Sonera Holdings B.V. v. Cukurova Holding A.S., 750 F.3d 221, 224 (2d Cir. 2014) (citation omitted). Here,
New York courts lack general jurisdiction over Holdings. According to the complaint, Holdings is a Swiss LLC, formed
in Switzerland and with its principal place of business in Switzerland. Compl ¶ 20. While Nebgen is alleged to have

31

Under Section 302 of the C.P.L.R., New York’s long-arm statute, “a court may exercise
personal jurisdiction over any non-domiciliary . . . who in person or through an agent: (1) transacts
any business within the state or contracts anywhere to supply goods or services in the state; or (2)
commits a tortious act within the state . . . ; or (3) commits a tortious act without the state causing
injury to person or property within the state . . . .” N.Y. C.P.L.R. 302(a). Here, Plaintiff does not
specifically identify the subsection of Section 302 under which he believes jurisdiction is appropriate.
However, Plaintiff points to various “facts” in support of personal jurisdiction in this state. Those
facts relate to Holdings’ contract negotiations and investment solicitation in New York and include:
(1) Holdings’ execution of the APA with a New York-based company, and TheraBrake’s related
acquisition of a “worthless” promissory note, (2) Nebgen’s sending of the Holdings SPA to Plaintiff
in New York for his signature, (3) the assignments of patents by Plaintiff, Fayad, and another entity,
Therasyn, to TheraBrake in New York, as part of the integrated transaction, (4) the negotiation of
the APA and related contracts via email and telephone between Plaintiff in New York on behalf of
TheraBrake and Nebgen on behalf of Holdings, (5) Nebgen’s repeated solicitation of investments in
New York on behalf of Holdings, (6) Nebgen’s signing of the Bioventure Term Sheet in New York
City on behalf of Holdings, (7) Nebgen’s retention in New York, on behalf of Holdings, of the
China Merchants Bank for the “proposed issuance, offering and sale . . . of approximately $30
million of equity securities . . . on a private placement basis,” and (8) the transfer of one-third of
TheraBrake’s shares to Nebgen and Nebgen’s assumption of his role as a director and officer of that
company. Pl.’s Mem. in Opp. (ECF No. 50) (“Pl.’s Opp.”) at 8-10.18 Based on Plaintiff’s reliance on
these facts, it appears that Plaintiff understands the basis for personal jurisdiction under the long-

conducted meetings on behalf of Holdings in New York City, see id. ¶ 25, there is no allegation that Holdings’ contacts
with New York have been “continuous or systematic.” Sonera Holdings, 750 F.3d at 224; see also Waldman v. Palestinian
Liberation Org., 835 F.3d 317, 331 (2d Cir. 2016).
18

Many of these asserted facts are not pleaded in the complaint.

32

arm statute as Holdings’ transaction of business within the state.
Jurisdiction is appropriate under section 302(a)(1) when a foreign defendant “transacts any
business within the state” and “the claim arises from those business transactions.” Sunward Elecs.,
362 F.3d at 22 (quoting N.Y. C.P.L.R. § 302(a)(1)). Under Section 302(a)(1), New York courts may
exercise jurisdiction over a foreign defendant who has “purposely availed [himself] of the privilege
of conducting activities within New York and thereby invoked the benefits and protections of its
laws . . . . [A] single transaction would be sufficient to fulfill this requirement, so long as the relevant
cause of action also arises from that transaction.” Bank Brussels, 171 F.3d at 787 (alterations in
original) (internal quotation marks and citations omitted); accord Grand River Enterprises Six Nations,
Ltd. v. Pryor, 425 F.3d 158, 166 (2d Cir. 2005).
The Second Circuit has instructed that several factors should be considered in determining
whether a defendant transacts business in New York. Those include:
(1) whether the defendant has an on-going contractual relationship
with a New York corporation; (2) whether the contract was negotiated
or executed in New York and whether, after executing a contract with
a New York business, the defendant has visited New York for the
purpose of meeting with parties to the contract regarding the
relationship; (3) what the choice-of-law clause is in any such contract;
and (4) whether the contract requires franchisees to send notices and
payments into the forum state or subjects them to supervision by the
corporation in the forum state.
Sunward Elecs., 362 F.3d at 22 (quoting Agency Rent A Car Sys., Inc. v. Grand Rent A Car Corp., 98 F.3d
25, 29 (2d Cir. 1996)). No single factor is dispositive, however, and a finding of personal jurisdiction
must be based on the totality of the circumstances. Agency Rent A Car, 98 F.3d at 29. “The test
[under C.P.L.R. § 302(a)(1)] is hardly a precise one; the court must look at the aggregation of
defendant’s activities, coupled with the selective weighing of the various actions.” Eastboro
Foundation Charitable Tr. v. Penzer, 950 F. Supp. 2d 648, 658 (S.D.N.Y. 2013) (alteration in original)
(quoting Rolls-Royce Motors, Inc. v. Charles Schmitt & Co., 657 F. Supp. 1040, 1050-51 (S.D.N.Y. 1987)).

33

Ultimately, “in order to sustain jurisdiction, there must be some transaction attributable to the one
sought to be held which occurs in New York.” Bank Brussels, 171 F.3d at 787 (quoting Ferrante Equip.
Co. v. Lasker-Goldman Corp., 26 N.Y.2d 280, 284 (1970)) (emphasis in Bank Brussels).
“New York courts place ‘special emphasis on the locale of contract negotiations’ when
analyzing contracting activity for § 302(a)(1) purposes.” Sherwin-Williams Co. v. C.V., No. 14-cv-6227
(RA), 2016 WL 354898, at *2 (S.D.N.Y. Jan. 28, 2016) (quoting Jarolim v. Akris Inc., No. 14-cv-3361
(AT), 2015 WL 5821094, at *5 (S.D.N.Y. Sept. 9, 2015)); see Grand River Enterprises, 425 F.3d at 16667 (“[T]he transacts-business standard can be satisfied where both the negotiations and execution of
a contract took place within New York.” (citing George Reiner & Co. v. Schwartz, 41 N.Y.2d 648, 65253 (1977))). Indeed, “courts have held that New York-based contractual negotiations can by
themselves constitute the transaction of business in New York under Section 302(a)(1) if they
substantially advanced or were substantively important or essential to the formation of the
contract.” Body Beautiful, Inc. v. Fred Hayman Beverly Hills, Inc., No. 96-cv-8541 (MBM), 1997 WL
527784, at *4 (S.D.N.Y. Aug. 25, 19977) (internal citation and quotation marks omitted); see also
Sherwin-Williams, 2016 WL 354898, at *3 (collecting cases).
Here, Plaintiff fails to make a prima facie showing that personal jurisdiction over Holdings is
appropriate under New York’s long-arm statute. Plaintiff alleges that Nebgen met with him in New
York to discuss the anticipated integrated transaction at some point after their January 8, 2013 San
Francisco meeting. Compl. ¶¶ 31, 34. The complaint implies that this meeting took place prior to
September 2014. See id. ¶¶ 34-35. At that point, however, Holdings had not yet been formed. It
was not until September 16, 2015 that Holdings was organized in Switzerland—one month before
the integrated transaction was consummated, including the signing of the APA and issuance of the
Note. There are no allegations that during that month Holdings, or anyone acting on behalf of
Holdings, took any action in New York to finalize negotiations of the APA. Nor does the

34

complaint allege that Holdings assumed liability for Nebgen’s representations made prior to the
company’s formation, or that it could have assumed such liability under Swiss law. Moreover, the
complaint stops short of alleging that the APA was executed in New York. Rather, Plaintiff only
avers that he signed the patent assignments, assigning the rights of Plaintiff, Fayad, and TheraSyn to
TheraBrake, in Buffalo. See Schentag Aff. ¶ 6.19 New York’s long-arm statute requires in-state
action by the defendant, however. See Bank Brussels, 171 F.3d at 787. With no factual assertions that
Holdings negotiated or executed the APA within New York, the APA provides no independent
basis for a conclusion that Holdings transacted business in this state.
An analysis of the Sunward Electronics factors yields a similar result. With respect to the first
factor, neither the complaint nor Plaintiff’s affidavit present facts showing an ongoing business
relationship between Holdings and TheraBrake, or any other New York corporation. “[T]emporary,
random, or tenuous relationships with the forum” will not suffice. Agency Rent A Car, 98 F.3d at 30.
Thus, “a single short-term contract” is insufficient to constitute an “ongoing contractual
relationship.” Sandoval v. Abaco Club on Winding Bay, 507 F. Supp. 2d 312, 317 (S.D.N.Y. 2007)
(collecting cases). Rather, the out-of-state defendant must have had a continuous business
relationship with the New York entity. See, e.g., Agency Rent A Car, 98 F.3d at 30 (finding ongoing
contractual relationship when defendants had “done constant business with” the New York entity
for more than three decades); George Reiner & Co., Inc. v. Schwartz, 41 N.Y.2d 648, 653 (1977) (finding
personal jurisdiction appropriate in part because the parties’ establishment of a four-year
employment relationship constituted a “continuing relationship between the parties”).
The APA provides for a single exchange, TheraBrake’s intellectual property for the Note.
While performance under the Note remained outstanding (Holdings was to make four annual

Courts may rely on materials outside the pleading in considering a motion to dismiss for lack of personal jurisdiction.
See DiStefano v. Carozzi N. Am., Inc., 286 F.3d 81, 84 (2d Cir. 2001).

19

35

payments to TheraBrake), performance under the APA was completed in 2015. This contract,
therefore, created a temporary and tenuous relationship to New York. See Duff v. Phelps Sec., LLC v.
Wisniewski, No. 16-cv-7226 (VEC), 2017 WL 2880849, at *3 (S.D.N.Y. July 5, 2017) (“Courts within
the Second Circuit have repeatedly concluded there is no ‘ongoing contractual relationship’ where
the contract at issue is the only transaction between the parties.”); Mortgage Funding Corp. v. Boyer Lake
Pointe, L.C., 379 F. Supp. 2d 282, 287 (E.D.N.Y. 2005) (finding that one contract did not establish an
ongoing contractual relationship); cf. Gordian Grp., LLC v. Syringa Exploration, Inc., 168 F. Supp. 3d
575, 586 (S.D.N.Y. 2016) (examining cases and noting that “courts in this district have found
personal jurisdiction where parties’ communications were part and parcel of an extended
relationship involving multiple transactions or the provision of services over multiple years” (citation
omitted). Plaintiff points to no facts that would suggest that the relationship between Holdings and
TheraBrake extended beyond the APA transaction. Therefore, the lack of a continuous business
relationship weighs against a finding that Holdings transacted business in New York for
jurisdictional purposes.20
Turning to the second factor, the Court has already found insufficient support to show that
Holdings negotiated or executed the APA in New York. In addition, there are no allegations that
Holdings, or Nebgen on Holdings’ behalf, visited New York after execution of the APA for
purposes related to Holdings’ relationship with TheraBrake. The complaint alleges vaguely that,
“[s]ince late October 2015 and continuing to date, Nebgen has conducted business for Holdings and
Pharma in meetings held in New York City.” Compl. ¶ 25. Plaintiff’s affidavit expands on this
allegation, listing a handful of meetings that Nebgen attended in New York after the October 2015

20 Plaintiff’s affidavit suggests that Holdings, through Nebgen, may have met with other entities in New York for the
purpose of transacting business. See Schentag Aff. ¶¶ 28-32. Those averments, however, do not speak to the nature of
any relationship developed between Holdings and the other entities. Nor do they establish that the other entities are in
fact New York businesses.

36

transaction. See Schentag Aff. ¶¶ 28-32. Plaintiff provides few details regarding those meetings.
They appear, however, to be related to securing investment in the Swiss LLCs, not to the contractual
relationship created by the APA or to Holdings’ obligations thereunder. Because the only state
claim asserted against Holdings is for breach of the APA, Holdings’ activities in New York unrelated
to that agreement cannot satisfy the long-arm statute for purposes of this action. See Grand River,
425 F.3d at 166; see also Bank Brussels, 171 F.3d at 787 (explaining the requirement that the plaintiff’s
cause of action must arise from the defendant’s New York business transactions). Therefore, the
second factor also weighs against a finding of personal jurisdiction under the long-arm statute.
The third factor—the choice-of-law provision—additionally weighs against jurisdiction in
New York. The APA provides that it is governed by Delaware law. See APA § 7.1. So does the
Note. See Note § 19. See Sunward Elecs., 362 F.3d at 23 (explaining that, although not dispositive, a
choice of law clause is “a significant factor in a personal jurisdiction analysis because the parties, by
so choosing, invoke the benefits and protections of [the agreed-upon state’s] law”).
The fourth factor is the only factor that serves to tip the scale in favor of personal
jurisdiction. Under the APA, any notices from Holdings to TheraBrake are to be sent to
TheraBrake at 100 Crosby Boulevard, Eggertsville, New York. APA § 7.8 & at 16. The Note
similarly sets the Eggertsville address as the address at which Holdings was to send any notice to
TheraBrake. Note § 9. The Note further provides that all payments thereunder are to be made to
TheraBrake at the same New York address. Note §§ 5, 9. Of course, Plaintiff pleads that Holdings
made no payment under the Note. Nonetheless, by the contract’s terms, this factor lends some
weight in favor of a finding that Holdings transacted business in New York. But it does not tip the
scale far enough.
Weighing all of the Sunward Electronics factors, there is simply an insufficient basis on which
to find that Holdings, a Swiss LLC with a principal place of business in Switzerland, purposefully

37

availed itself of doing business in New York, or that any such purposeful availment gave rise to the
breach of contract claim at issue here.21 Because the long-arm statute is not satisfied, the Court need
not determine whether an exercise of personal jurisdiction would comport with constitutional due
process requirements.
2. Breach of Contract Claim
Defendants argue that Plaintiff improperly seeks rescission of his agreements with
Defendants other than Holdings, the only Defendant to have executed the APA. Defendants also
assert that Plaintiff is barred from bringing the breach of contract claim derivatively on behalf of
TheraBrake because he inadequately pleads demand futility. Because the Court lacks personal
jurisdiction over Holdings, the breach of contract claim is dismissed. The Court need not resolve
the parties’ dispute regarding the appropriateness of the remedies sought. Likewise, the Court need
not determine whether Plaintiff has satisfied the demand requirements to bring a derivative suit on
behalf of TheraBrake.
3. Breach of Fiduciary Duties
A federal court sitting in diversity must apply the choice of law rules of the forum state. Licci
ex rel. Licci v. Lebanese Canadian Bank, SAL, 672 F.3d 155, 157 (2d Cir. 2012). Under New York law,
the law of the state of incorporation governs an allegation of breach of fiduciary duty owed to a
corporation. Walton v. Morgan Stanley & Co., Inc., 623 F.2d 796, 798 n.3 (2d Cir. 1980) (citing
Diamond v. Oreamuno, 24 N.Y.2d 494 (1969)); see also John Swann Holding Corp. v. Simmons, 62 F. Supp.
3d 304, 309 (S.D.N.Y. 2014). Holdings and Pharma were formed in Switzerland as Swiss LLCs.
Therefore, Swiss law governs any claims for breach of fiduciary duties brought by Plaintiff against
21 Plaintiff’s opposition references additional contacts with New York by Nebgen on behalf of Holdings. See Pl.’s Opp.
at 9-10. Those contacts include the retention of the New York City branch of China Merchants Bank in connection
with a private offering of equity securities to investors residing in China, Nebgen’s and Ghahramani’s other unspecified
solicitation of investors in New York, and the execution of the Bioventure Term Sheet in New York City. These
contacts are unrelated to the breach of contract claim, and the claim asserted against Holdings does not arise in
connection with these contacts.

38

the other members of those entities. Defendants’ briefing, however, relies entirely on New York
law. See Defs.’ Mem. (ECF No. 34) at 17-19.
“[W]here the parties have agreed to the application of the forum law, their consent
concludes the choice of law inquiry.” Am. Fuel Corp. v. Utah Energy Dev. Co., 122 F.3d 130, 134 (2d
Cir. 1997). If “[t]he parties’ briefs assume that New York substantive law governs the issues . . .
such implied consent is, of course, sufficient to establish the applicable choice of law.” Arch Ins. Co.
v. Precision Stone, Inc., 584 F.3d 33, 39 (2d Cir. 2009) (quoting Golden Pac. Bancorp v. FDIC, 273 F.3d
509, 514 n.4 (2d Cir. 2001)); see also Guardian Life Ins. Co. v. Gilmore, 45 F. Supp. 3d 310, 323
(S.D.N.Y. 2014) (collecting cases). “[I]n the absence of a strong countervailing public policy, the
parties to litigation may consent by their conduct to the law to be applied.” Walter E. Heller & Co. v.
Video Innovations, Inc., 730 F.2d 50, 52 (2d Cir. 1984). Therefore, had Plaintiff’s opposition brief also
relied on New York law, an analysis of the breach of fiduciary duties claim under New York law may
have been appropriate. However, Plaintiff raises no legal argument in opposition, and instead
merely contends that Defendants mischaracterize his claim. See Pl.’s Opp. at 11. In the absence of
substantive briefing by Plaintiff, it is not apparent that the parties agree that New York law should
govern this claim.
Because Defendants have presented no argument as to why Plaintiff’s claim for breach of
fiduciary duties is insufficiently pleaded under Swiss law, the Court is unable to evaluate the
adequacy of the complaint’s allegations. Accordingly, Plaintiff’s breach of fiduciary duties claim
survives.
4. Common Law Fraud
Under New York law, a plaintiff asserting common law fraud must allege: “(1) a
misrepresentation or omission of material fact; (2) which the defendant knew to be false; (3) which
the defendant made with the intention of inducing reliance; (4) upon which the plaintiff reasonably

39

relied; and (5) which caused injury to the plaintiff.” Wynn v. AC Rochester, 273 F.3d 153, 156 (2d Cir.
2001) (per curiam) (citing Lama Holding Co. v. Smith Barney, Inc., 88 N.Y.2d 413, 421 (1996)). “A
claim for common law fraud is subject to the particularity requirements of Federal Rule of Civil
Procedure 9(b).” Fin. Guar. Ins. Co. v. Putnam Advisory Co., LLC, 783 F.3d 395, 402-03 (2d Cir. 2015).
Rule 9(b) requires that the complaint “state with particularity the circumstances constituting fraud.”
Fed. R. Civ. P. 9(b). To satisfy that requirement, the complaint must “(1) specify the statements that
the 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.” ATSI Commc’ns, Inc. v.
Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007) (citing Novak v. Kasaks, 216 F.3d 300, 306 (2d Cir.
2000)).
Defendants first argue that the complaint fails to plead misstatements by Fayad and
Ghahramani. Plaintiff concedes this point and simply requests leave to amend in this regard. Pl.’s
Opp. at 8. The Court observes that the complaint asserts a common law fraud claim only against
Nebgen and Ghahramani, not against Fayad. See Compl. ¶¶ 74-78. Nonetheless, the parties are
correct: the complaint fails to plead with particularity any misstatements made by Fayad or
Ghahramani.
With respect to the fraud claim against Nebgen, Defendants argue that the complaint fails to
raise a strong inference of scienter. The Court agrees. The scienter element of common law fraud
“is essentially the same as that under federal securities laws.” Special Situations Fund III QP, L.P. v.
Deloitte Touche Tohmatsu CPA, Ltd., 33 F. Supp. 3d 401, 446 (S.D.N.Y. 2014) (quoting Saltz v. First
Frontier, LP, 782 F. Supp. 2d 61, 75 (S.D.N.Y. 2010)). Although Rule 9(b) provides that “[m]alice,
intent, knowledge, and other conditions of a person’s mind may be alleged generally,” Fed. R. Civ. P.
9(b), a plaintiff must “allege facts giving rise to ‘a strong inference of fraudulent intent,’” Novak, 216
F.3d at 306 (quoting Acito v. IMCERA Grp., Inc., 47 F.3d 47, 52 (2d Cir. 1995)).

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“The requisite ‘strong inference’ of fraud may be established either by (a) alleging facts to
show that the defendants had both motive and opportunity to commit fraud, or (b) by alleging facts
that constitute strong circumstantial evidence of conscious misbehavior or recklessness.” Shields v.
Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994); see also In Touch Concepts, Inc. v. Cellco P’ship,
949 F. Supp. 2d 447, 481 (S.D.N.Y. 2013). “Motive would entail concrete benefits that could be
realized by one or more of the false statements and wrongful nondisclosures alleged. Opportunity
would entail the means and likely prospect of achieving concrete benefits by the means alleged.”
SEC v. Egan, 994 F. Supp. 2d 558, 565 (S.D.N.Y. 2014) (quoting Shields, 25 F.3d at 1130). “In the
securities fraud context,” the Second Circuit has “typically found it sufficient to state a claim based
on recklessness if the complaint ‘specifically allege[s] defendants’ knowledge of facts or access to
information contradicting their public statements.’” Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec.,
LLC, 797 F.3d 160, 177 (2d Cir. 2015) (quoting Novak, 216 F.3d at 308). Nonetheless, “conclusory
allegations—that Defendants ‘knew but concealed’ some things, or ‘knew or were reckless in not
knowing’ other things—do not satisfy the requirements of Rule 9(b).” Shields, 25 F.3d at 1129.
Here, Plaintiff alleges the following false statements by Nebgen: (1) that Nebgen “had and
has investors willing to invest,” (2) that “it was necessary to transfer the Intellectual Property to a
Swiss company (Holdings) because of these investors,” and (3) that “Holdings and Pharma would
pay for all costs of research, development, [and] legal fees and costs.” Compl. ¶ 47. Defendants
aptly argue that the allegation that these statements “were false when made and were made with
knowledge of their falsity,” id. ¶ 76, is conclusory and insufficient to raise a strong inference of
fraudulent intent. See, e.g., Henneberry v. Sumitomo Corp. of Am., 532 F. Supp. 2d 523, 542 (S.D.N.Y.
2007) (finding that complaint failed to plead scienter when it alleged only that the statements at issue
were “incorrect or should have been known by [the defendants] to be incorrect”). Apart from the
conclusory statement that the statements were false when made, Plaintiff pleads no specific facts

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showing that Nebgen knew the statements were false when made or was otherwise reckless in not
knowing. See Coronel v. Quanta Capital Holdings Ltd., No. 07-cv-1405 (RPP), 2009 WL 174656, at *27
(S.D.N.Y. Jan. 26, 2009) (noting that “to establish scienter in misrepresentation cases, facts must be
alleged which particularize how and why each defendant actually knew, or was reckless in not
knowing, that the statements were false at the time made” (quoting Silva Run Worldwide Ltd. v. Bear
Stearns & Co., No. 96-cv-5102 (WK), 2000 WL 1672324, at *4 (S.D.N.Y. Nov. 6, 2000))). The
complaint provides no facts, for example, that show that Nebgen either had no investors willing and
ready to invest, or that Nebgen had contacted investors but that those investors had not yet decided
on whether to invest in the intellectual property.
Similarly, the complaint fails to explain why the statement that those investors would only be
attracted to a Swiss entity was false. In fact, the complaint plausibly alleges that investors would
prefer to invest in a Swiss company because of the personal tax benefits to them, a fact that
mitigates against the falsity of Nebgen’s statement. Compl. ¶ 33. See Tellabs, Inc. v. Makor Issues &
Rights, Ltd., 551 U.S. 308, 324 (2007) (explaining that a plaintiff adequately alleges a “strong
inference” of scienter “only if a reasonable person would deem the inference of scienter cogent and
at least as compelling as any opposing inference one could draw from the facts alleged” (emphasis
added)).
Finally, the complaint alleges that Holdings and Pharma have refused to assume the costs of
research and development (and related legal expenses), but alludes to no facts that would suggest
that Nebgen’s representation that the companies would cover those costs was false at the time it was
made. See Coronel, 2009 WL 174656, at *27; Tyler v. Liz Claiborne, Inc., 814 F. Supp. 2d 323, 336
(S.D.N.Y. 2011) (emphasizing, in pleading circumstantial evidence of fraud, the need for a showing
that “specific contradictory information [ ] was available to the defendants [ ] at the same time they
made their misleading statements”).

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Because of Plaintiff’s failure to raise a strong inference of Nebgen’s fraudulent intent, and
Plaintiff’s failure to plead the misstatements attributable to any other Individual Defendant, the
common law fraud claim is dismissed.
IV.

CONCLUSION
For the reasons stated herein, Defendants’ motion to dismiss the complaint is GRANTED

in part and DENIED in part.
Plaintiff’s claims under the Securities Act and the Exchange Act are dismissed without
prejudice.
Plaintiff’s common law fraud claim is dismissed without prejudice.
Plaintiff’s breach of contract claim is dismissed without prejudice.
Plaintiff’s breach of fiduciary duties claim survives.
Plaintiff is granted leave to replead those claims that have been dismissed without prejudice
no later than thirty (30) days following the date of this order. See Rutolo v. City of New York, 514 F.3d
184, 191 (2d Cir. 2008) (noting that leave to amend is “liberally granted”).
The Clerk of Court is directed to terminate the motion pending at Dkt. No. 33.
SO ORDERED.
Dated: June 21, 2018
New York, New York

_____________________________________
GREGORY H. WOODS
United States District Judge

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