Small Ventures USA, L.P. v. Rizvi Traverse Management, LLC et al

Filing 118

MEMORANDUM AND ORDER. It is ORDERED that Defendants Rizvi Traverse Management, LLC, MLRT Film Holdings, LLC, Suhail Rizvi, John Giampetroni, Diane Stidham,and Danny Mandel's Motion to Dismiss Counts I, II, and III of Plaintiff's Second Amended Complaint (Document No. 99 ) is GRANTED and Counts I, II, and III of the Second Amended Complaint are DISMISSED.(Signed by Judge Ewing Werlein, Jr) Parties notified.(gkelner, 4)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
SMALL VENTURES USA, L.P.,
Plaintiff l

v.
RIZVI TRAVERSE MANAGEMENT, LLC,
MLRT FILM HOLDINGS LLC I
SUHAIL RIZVI, JOHN
GIAMPETRONI I DIANE STIDHAM
DANNY MANDELl and BEN KOHN
I

I

I

Defendants.

§
§
§
§
§
§
§
§
§
§
§
§
§

CIVIL ACTION NO. H-11-3072

MEMORANDUM AND ORDER
Pending are Defendants Rizvi Traverse Management

I

LLC I MLRT

Film Holdings l LLC, Suhail Rizvi l John Giampetroni l Diane Stidham,
and Danny Mandel's Motion to Dismiss Counts I,
Plaintiff

I

S

Second Amended Complaint

II,

(Document No.

and III of
99).

After

reviewing the motion l response, replYI surreply, and the applicable
law l the Court concludes as follows.
I.

Background

Plaintiff Small Ventures USAI L.P.

("Plaintiff")

I

a venture

capital and private equity investment firm based in Houston, Texas

I

invested $10 million in Newbridge Film Capital, LLC ("Newbridge"),
a company which provides gap financing to producers of independent

films.l

Plaintiff brings

Traverse Management, LLC

this action against Defendants Rizvi
("Rizvi Traverse"), MLRT Film Holdings,

LLC ("MLRT"), Suhail Rizvi, John Giampetroni, Diane Stidham, and
Danny Mandel

(collectively,

"Defendants")

to recover damages for

alleged violations of federal and state securities laws, fraud, and
other tortious

conduct surrounding the

solicitation,

sale,

and

management of this investment. 2
A.

Additional Factual Allegations Bearing on Counts I, II,
and III
On September 6, 2008, Rizvi called Plaintiff's founder William

O. Perkins III ("Perkins") and offered him an opportunity to invest
in Newbridge. 3

During this call,

Rizvi allegedly made several

misrepresentations to Perkins "for the purposes of inducing Perkins

See Document No. 94 ~~ I, 8, 16 (2d Am. Complt.). Plaintiff
made this investment through RT Newbridge, III, LLC, ("RT NB III") ,
which in turn held a membership interest in Newbridge that
consisted of the Newbridge securities that are the subject of this
sui t . Id. ~ 8.
1

See Document No. 94.
Diane Stidham ("Stidham") and Danny
Mandel ("Mandel") are officers and Managing Directors of Newbridge
and are allegedly employed by Rizvi Traverse and MLRT. Id. ~~ 1314. Newbridge is managed by MLRT which, in turn, is 100% held and
controlled by Rizvi Traverse. Id. ~~ 10, 16. Suhail Rizvi is the
co-founder and Chief Investment Officer of Rizvi Traverse, and John
Giampetroni is co-founder and Chief Operating Officer of Rizvi
Traverse and Managing Director of MLRT. See id. ~~ 11-12. A more
comprehensive recitation of the background facts can be found in
the Court's October 2, 2012 Memorandum and Order at Document
No. 58.
2

3

Document No. 94

~

24.
2

and

[Plaintiff]

to

agree

to

ultimately

invest

in

Newbridge,"

including representations that Plaintiff "could acquire an interest
in Newbridge because the selling entity, Merrill Lynch Holdings,
[("Merrill

Lynch")]

was

liquidating

its

interest,

and

that

[Plaintiff] could purchase the [Merrill Lynch] interest at the same
price [Merrill Lynch] would receive on the sale with no 'markup'
and with no compensation to Defendants. ,,4

At this time,

Rizvi

allegedly also failed to disclose that Tekken, a film accounting
for more than one-third of Newbridge's portfolio, received negative
reviews at the Cannes Film Festival and was regarded as "really
bad" by its own producer, and that no significant pre-sales of the
film had occurred in the previous six months.5
The next month, Rizvi Traverse, Rizvi, and Giampetroni ("the
10 (b) Defendants") provided Plaintiff with an investor presentation
stating that the investment was "co-arranged" by Merrill Lynch and
Rizvi

Traverse,

listing

Merrill

Lynch

as

a

"Sponsor"

of

the

investment with a co-equal role and capital commitment to Rizvi
Traverse, and utilizing the Merrill Lynch bull logo.6

Plaintiff

alleges that despite these representations, Merrill Lynch had no

4

rd. ~ 25-26.

5 rd. ~ 26.
6 rd. ~ 29.
3

ownership interest in Newbridge when Plaintiff entered into the
transaction. 7
Plaintiff alleges that during this due diligence period, the
10(b) Defendants repeatedly and falsely assured Plaintiff that it
was purchasing the Newbridge interest at the same price for which
Merrill Lynch was selling it, and that the 10(b) Defendants would
make no profit on the deal, while actually they marked up the price
to derive for themselves a $4 million profit. s
Plaintiff further alleges that the transaction was structured
to conceal the 10(b)

Defendants'

alleges that the 10(b)

misrepresentations.

Plaintiff

Defendants created an intermediary shell

entity, RT/MLRT, to acquire Merrill Lynch's Newbridge interest for
$9.5 million,9 and chose the name RT/MLRT falsely to suggest that

this entity was jointly owned by Rizvi Traverse and Merrill Lynch. 10

7

Id.

~

29.

8
See
id.
~
34
("Rizvi falsely assured Perkins that
[Plaintiff] would be paying the same consideration that [Merrill
Lynch] would receive as a result of the transaction, and that the
10(b) Defendants would not receive any compensation as a result of
the transaction.") i id. ~ 37 (Giampetroni told Plaintiff's Chief
Financial Officer Kayla Bruzzese "that [Plaintiff) would be
acquiring the former
[Merrill Lynch]
interest at 'net book
value.'''); id. ~ 38 (Rizvi "falsely assured Perkins that neither
Rizvi, Rizvi Traverse nor its principals would receive" any
compensation from Plaintiff's purchase of the former Merrill Lynch
interest). See also id. ~ 33 (10 (b) Defendants "captured more than
$4 million in undisclosed and therefore improper profits.").

9

10

Id.
Id.

~~ 42,
~

45.

43.
4

The

10 (b)

securities

Defendants
from

then

RT/MLRT,

formed
and

a

separate

entity

that

NB

induced

beneficial ownership of RT NB III,
that

RT

the

III

to

purchase

Plaintiff

to

buy

the
the

in order "to conceal the fact
10(b)

Defendants

owned

and

controlled, and not [Merrill Lynch], would be the counterparty.lfll
In transferring what was misrepresented as Merrill Lynch's interest
in

Newbridge

to

Plaintiff,

the

10(b)

Defendants

allegedly

"unilaterally and secretly marked up that interest by approximately
40%,

allowing them to capture an improper profit of more than

If

$4 million. 12
Plaintiff also alleges that Defendants failed to disclose any
negative information about the Tekken loan, and continued to mark
it at full face value without a discount, even though the producer
had defaulted on the loan on July 31,

2008.13

Defendants also

failed to disclose that if they could not recover or collect on the
Tekken loan, Newbridge would likely default on its credit facility
and be foreclosed upon.14
failed

to

collect

on

the

Plaintiff alleges that when Defendants
Tekken

loan

or

the

guaranty

Newbridge failed and Plaintiff lost its investment. 15

11

Id. ~ 43.

12 Id.
~~ 51, 53.
13

Id. ~~ 78-80.

14

Id. ~ 80.

15 Id.
~ 81.
5

bond,

B.

Procedural History
Plaintiff in its original Complaint alleged that Defendants

made misrepresentations about the Tekken loan and the risks of
Plaintiff's investment, and grossly mismanaged the investment by
failing

to collect on the Tekken completion guaranty bond and

mishandling at least one other loan. 16
for

violations

of

the

Texas

Plaintiff asserted claims

Securities Act

Influenced and Corrupt Organizations Act
several common law claims. 17

and

the

("RICO"),

Racketeer

as

well

as

Plaintiff later filed a First Amended

Complaint based on similar factual allegations, and asserting the
same claims. 18

Plaintiff subsequently dismissed its RICO claims,19

and the Court dismissed its breach of fiduciary duty claim.20
In July 2013,

Plaintiff requested leave

to file

a

Second

Amended Complaint "to assert allegations based upon information
just learned during the
Plaintiff

asserted

course of discovery in this matter. ,,21

that

this

new

information

$4 million profit earned by Rizvi Traverse. 22
16 Document No.

1

(Complt.) .

17 Id.
18 See Document No. 40.
19 See Document No. 42 at vii.
20 Document No. 58.
21 Document No. 84 at 1.
22 Id. at 4-5.
6

concerned

the

The

Court granted leave

for

Plaintiff

to

file

its

Second

Amended Complaint, in which Plaintiff alleged the new information
it

had

added

discovered,

allegations

regarding

the

10(b)

Defendants' misrepresentations regarding Merrill Lynch's role, and
10 (b)

Defendants'

named

shell

secret markup scheme by use of a

corporation

Plaintiff's expense. 23

to

capture

a

$4

million

deceptively
profit

at

Plaintiff's Second Amended Complaint asserts

claims for violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 ("the Exchange Act") and Article 581-33 of the
Texas

Securities

Act,

and

for

common

law

fraud,

fraud

by

nondisclosure, and negligent and grossly negligent misrepresentation.24

Defendants move to dismiss Plaintiff's Securities Exchange

Act claims. 25
II.

Legal Standard

Rule 12 (b) (6) provides for dismissal of an action for" failure
to state a claim upon which relief can be granted."
12(b)(6).

When a

district court reviews

FED.

R. Crv. P.

the sufficiency of a

complaint before it receives any evidence either by affidavit or
admission,

23

its task is inevitably a limited one.

See Scheuer v.

See Document No. 94.

24 Plaintiff's Second Amended Complaint also alleges negligence
and gross negligence, but the Court dismissed those claims in its
September 4, 2013 Order.
See Document No. 93.
25 Document No. 99.
7

Rhodes, 94 S. Ct. 1683, 1686 (1974), abrogated on other grounds by
Harlow v.

Fitzgerald, 102 S. Ct.

2727

(1982).

The issue is not

whether the plaintiff ultimately will prevail,

but whether the

plaintiff is entitled to offer evidence to support the claims.

Id.

In considering a motion to dismiss under Rule 12(b) (6), the
district

court must

construe

the

allegations

in the

complaint

favorably to the pleader and must accept as true all well-pleaded
facts
117

in

the

F.3d

242,

247

Lowrey v.

See

complaint.

(5th Cir.

Tex.

To

1997).

A&M Uni v .

survive

Sys . ,

dismissal,

a

complaint must plead "enough facts to state a claim to relief that
is plausible on its face./I
1955,

1974

(2007).

Bell Atl. Corp. v. Twombly, 127 S. Ct.

"A claim has facial plausibility when the

plaintiff pleads factual content that allows the court to draw the
reasonable

inference

misconduct alleged.
(2009) .

While

allegations . .

a

/I

that

the

defendant

Ashcroft v.
complaint

"does

not

liable

129 S.

Iqbal,

is

Ct.

need

for

1937,

detailed

the
1949

factual

[the] allegations must be enough to raise a right

to relief above the speculative level, on the assumption that all
the allegations in the complaint are true
fact) .

II

Twombly,

127 S.

Ct.

at 1964-65

footnote omitted) .

8

(even if doubtful in

(citations and internal

III.

Discussion

Section 10(b) of the Exchange Act makes it unlawful for any
person, directly or indirectly, "[t]o 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

Commission

appropriate

in

the

public

15

investors."

U.S.C.

may

interest

or

for

Rule

78j (b) .

§

prescribe

as

necessary
protection

the

10b-5,

or
of

promulgated to

enforce Section 10(b), makes it unlawful:
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make
the statements made, in the light of the circumstances
under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit upon
any person.
17 C.F.R.
tion

or

§

240.10b-5.

omission

To state a claim based on a misrepresenta-

under

(1)

defendants

made

(2)

defendants

a

acted

Rule

10b- 5 (b),

material
with

(6)

loss

causation,

scienter;

i. e.,

must

(3)

a

connection

(4) reliance;
a

(5)

Partners,

LLC v.

the

causal connection between the

Scientific-Atlanta,

9

to

economic loss;

misrepresentation or omission and plaintiff's loss.
Inv.

allege:

misrepresentation or omission;

purchase or sale of a security;
and

Plaintiff

128

S.

Stoneridge
Ct.

761,

768

(2008);
Tex.

2006 )

conduct
(1)

In re Enron Corp. Secs.,
(Harmon,

under

defendants

Rule

529 F. Supp.

To state a

J .) .

10b-5(a)

committed

and

a

2d 644,

678

(S.D.

claim based on deceptive

(c),

deceptive

Plaintiff
or

must

allege:

manipulative

act;

(2) defendants acted with scienter; (3) the act affected the market
for securities or was otherwise in connection with their purchase
or sale; and (4) defendants' actions caused plaintiff's injuries.
In re Enron, 529 F. Supp. 2d at 678 n.45.
A.

Loss Causation
Defendants allege that Plaintiff's Exchange Act claims fail

because

Plaintiff

has

not

adequately

pled

loss

causation. 26

Defendants contend that Plaintiff's Exchange Act claims are based
on allegedly fraudulent conduct concerning the $4 million markup
and Merrill

Lynch's

role

in

the

seller's identity deceptions"),

transaction

("the markup

and

and that this conduct is wholly

unrelated to Defendants' alleged mishandling of the Tekken loan and
a loan for the film Norm of the North, the actions that Plaintiff
alleges caused Newbridge to fail.27

Plaintiff counters that the

Court should look at its allegations as a whole, and consider the

26 Document No. 99 at 20-24.
27

See

id. at 21-23.
10

Tekken

loan

misrepresentations

and

( "the

omissions

Tekken

deceptions") as part of the Exchange Act claims. 28
1.

The Tekken misrepresentations and omissions are not part
of Plaintiff's Exchange Act claims

The Second Amended Complaint states it alleges "two separate
but complementary schemes" designed to defraud Plaintiff, the first
of

which

discovery.

Plaintiff

"only

In

first

1129

the

recently
scheme,

learned

the

10 (b)

about

through

Defendants

made

misrepresentations about who owned the Newbridge securities sold to
Plaintiff, why the transaction was structured the way it was, that
there would be no markup on the price of the securities, and that
the

10 (b)

Defendants would receive no

investment. 3o

financial

gain from

the

In the second scheme, all Defendants made misrepre-

sentations and omissions concerning Tekken. 31

After brief mention

of

the

Tekken

early

in

the

"Facts"

section,

32

Second Amended

Complaint does not allege facts pertaining to the Tekken scheme in
the next 36 paragraphs. 33

It is in these paragraphs that Plaintiff

28

Document No. 100 at 23-24.

29

Document No. 94 ~ 1.

30

Id. ~~ 2-3.

31

Id. ~ 4.

32

See id. ~ 26.

33

See id. ~~ 27-62.
11

details

the

misrepresentations

and

omissions

committed by

the

"10(b) Defendants," and pleads the other elements of its Exchange
Act

claims. 34

Damages"

Notably,

alleges

that

the

section

Plaintiff's

entitled

losses were

"Loss

Causation/

"immediate"

when

Plaintiff purchased the Newbridge membership interests, and were
caused by the markup and seller's identity deceptions, all without
any mention whatever of the Tekken deceptions. 35

Furthermore, the

id. ~ 54 (titled "10 (b) Defendants' Scienter"); id.
~~
55-59
(titled "SMV's Reasonable Reliance on the 10 (b)
Defendants' Misrepresentations") i id. ~~ 60-62 (titled "Loss
Causation/Damages") .
34

35

See

The "Loss Causation/Damages" section reads:

60.
[Plaintiff] was damaged as a result of the 10 (b)
Defendants' fraudulent schemes. As described above, the
10(b) Defendants' fraud caused [Plaintiff] to overpay to
acquire assets as a result of an undisclosed and
therefore improper, greater than 40% 'markup' from a
shell corporation that the 10(b) Defendants owned and
controlled.
The 10(b) Defendants' misrepresentations,
omissions and deceptive conduct concealed the risk-about
which
[Plaintiff]
repeatedly inquired-regarding an
undisclosed and therefore improper 'markup' and selfdealing by the 10(b) Defendants.
[Plaintiff's] purchase
of Newbridge membership interests based on the 10 (b)
Defendants actions resulted in an immediate loss and
damages.
61. In addition, [Plaintiff] has suffered lost opportunity damages because the funds that the 10(b)
Defendants induced [Plaintiff], through RT NB III, to
invest in Newbridge could have been invested for further
gains elsewhere.
62. [Plaintiff] was further harmed, directly as a result
of any management and advisory fees Rizvi Traverse
received as manager to RT NB III, and indirectly as a
result of fees Rizvi Traverse received as manager and
adviser to MLRT, given Rizvi Traverse's breach of duties
12

sections of the Second Amended Complaint listing Plaintiff's Causes
of Action for federal securities law violations do not plead any of
the Tekken deceptions. 36

A fair reading of Plaintiff's Exchange Act

claims discloses no reliance on the Tekken deceptions as having
bearing

on

the

10 (b)

Defendants'

liability

or

on

Plaintiff's

claimed damages for violations of Section 10(b).
2.

Plaintiff has not adequately pled loss causation based on
the markup and seller's identity deceptions

The loss causation element requires that Defendants' actions
caused the loss for which Plaintiff seeks to recover.
v.

US Unwired,

Inc.,

(citing 15 U.S.C.

§

565 F.3d 228,

78u-4 (b) (4)).

255

&

n.18

See Lormand

(5th Cir.

2009)

Plaintiff argues that the markup

and seller's identity deceptions caused Plaintiff to overpay to
acquire the Newbridge securities, and that Newbridge failed when
Defendants neglected to collect on the Tekken 10an. 37
Plaintiff's
markup

and

\\ immediate"

allegations

seller's

that

identity

the

10 (b)

deceptions

Defendants'
caused

secret

Plaintiff's

loss and damages because Plaintiff overpaid for the

Newbridge securities is not sufficient to allege loss causation

owed to these entities and conflicts of interest.
Document No. 94
~~

~~

60-62.

36

Id.

114-136.

37

Document No. 100 at 24.
13

under
§

the

Private

78u-4 (b) (4) .

Ct. 1627 (2005)

Securities Litigation Reform Act,

15 U.S.C.

See Dura Pharmaceuticals. Inc. v. Broudo, 125 S.
(holding that a plaintiff cannot satisfy the loss

causation requirement simply by alleging that the price of the
security on the

date

of

purchase was

Rather,

misrepresentation) .

inflated because of

the

a plaintiff has to allege a causal

connection between the misrepresentations at issue and the decrease
Although this is not a typical

in the value of its investment.

fraud-on-the-market case where Plaintiff could easily re-sell the
securities it purchased, the fundamental principle of Dura seems no
less applicable.
(4)

The statute reads:

Loss causation

In any private action arising under this chapter,
the plaintiff shall have the burden of proving that
the act or omission of the defendant alleged to
violate this chapter caused the loss for which the
plaintiff seeks to recover damages.
15 U.S.C. 78u-4(b) (4).

Plaintiff's claim for damages must be based

on a plausible claim that the alleged misrepresentation or fraud
caused the damages.

The Fifth Circuit put it this way:

[We] conclude that Rule 8(a) (2) requires the plaintiff to
allege,
in respect to loss causation,
a facially
"plausible" causal relationship between the fraudulent
statements or omissions and plaintiff's economic loss,
including allegations of a material misrepresentation or
omission, followed by the leaking out of relevant or
related truth about the fraud that caused a significant
part of the depreciation of the stock and plaintiff's
economic loss.
14

Lormand v. US Unwired,

Inc.,

565 F.3d 228,

258

(5th Cir. 2009).

Plaintiff argues that it was the failure of the Tekken loan that
caused the loss of its investment, not the concealed markup and
seller's identity deceptions.

Although the latter deceptions and

misrepresentations may add additional

substance

to

Plaintiff's

common law fraud claims against Defendants, these facts as alleged
by Plaintiff do not state a claim upon which relief can be granted
under the Exchange Act because of the absence of loss causation.
Accordingly, Plaintiff's Section 10(b) claims are dismissed. 38
B.

Section 20(a) Claims
Plaintiff also asserts a claim against Defendants Rizvi and

Giampetroni for "control person liability" under Section 20(a) of
the Securities Exchange Act. 39
person who,

Section 20 (a) holds liable" [e]very

directly or indirectly,

controls any person liable

under any provision of this chapter."

15 U.S.C.

§

78t(a).

As

Section 20(a) is a secondary liability provision, failure to plead
a cognizable primary securities fraud violation under Section 10 (b)

Plaintiff also advances the materialization of the risk
theory, under which a plaintiff pleads that his loss was caused by
the materialization of the risk concealed by the fraudulent
statement.
See Dawes v. Imperial Sugar Co., 975 F. Supp. 2d 666,
709 (S.D. Tex. 2013) (Rosenthal, J.).
The Fifth Circuit has not
adopted this theory.
Id.
Even if it did so, Plaintiff has not
alleged that any risk materialized from the markup and seller's
identity deceptions that caused its loss, but rather that the risk
of the Tekken loan materialized and caused Newbridge to fail.
38

39

Document No. 94

~~

132-136.
15

or Rule

10b- 5 constitutes

liability.

failure

to

establish control

person

See Fin. Acquisition Partners LP v. Blackwell, 440 F.3d

278, 288 (5th Cir. 2006).
C.

Leave to Amend
Plaintiff requests leave to amend to incorporate the Tekken

deceptions into its Exchange Act c1aims. 40

When Plaintiff sought

leave to file its Second Amended Complaint, Defendants challenged
Plaintiff's ability to plead "that the 10(b) Defendants' purported
misrepresentations
[markup]
10SS."41

on

the

about

the

transaction

identity

of

proximately

the

seller

caused

and

the

[Plaintiff's]

Plaintiff knew that this was an issue before the amendment

was allowed but did not seek to modify or change its proposed
pleading at that time.

Moreover, Plaintiff has known of the Tekken

deceptions since before it filed its Original Complaint, but offers
no reason for not having pled them as an Exchange Act claim in any
of its three previously filed Complaints. 42

40

See Document No. 106-1 at 6 n.6.

41

Enough time has passed.

Document No. 89 at 21.

Plaintiff filed its Original Complaint on August 23, 2011.
Document NO.1. With leave of the Court, Plaintiff filed a First
Amended Complaint on April 5,
2012,
pleading its factual
allegations with further particularity. See Document No. 38 (Order
of the Court of March 22, 2012, granting Plaintiff leave to amend
to allege fraud with the specificity required by Rule 9 (b) ) ;
Document No. 40 (1st Am. Compl.)
Plaintiff's Second Amended
Complaint was deemed filed on September 4, 2013. Document No. 93.
42

16

Nearly three years after filing its Original Complaint, and with
two amended complaints having already been allowed, Plaintiff has
failed to show sufficient diligence to permit the filing of yet
another complaint.
Davis,

83

S.

Ct.

The request is therefore denied.
227,

230

(1962)

(listing

See Foman v.

"undue delay"

as

a

justification for denying leave to amend) .
IV.

Order

Based on the foregoing, it is
ORDERED that Defendants Rizvi Traverse Management, LLC, MLRT
Film Holdings, LLC, Suhail Rizvi, John Giampetroni, Diane Stidham,
and Danny Mandel's Motion to Dismiss Counts I,

II,

and III of

Plaintiff's Second Amended Complaint (Document No. 99) is GRANTED
and Counts I,

II,

and III of the Second Amended Complaint are

DISMISSED.
The clerk shall notify all parties and provide them with a
true copy of this Order.
SIGNED at Houston, Texas on this

of July, 2014.

WERLE IN , JR.
ATES DISTRICT JUDGE

17