JOSE L. LINARES, Chief District Judge.
This matter comes before the Court by way of a motion to dismiss the Second Amended Complaint filed by Defendants Zoompass Holdings, Inc., Robert Lee, and Brian Morales ("Defendants"). (ECF No. 35). Lead Plaintiff Carlos Guillermo Julian Vega ("Plaintiff') has opposed this motion, (ECF No. 42), and Defendants have replied to same, (ECF No. 43). The Court decides this matter without oral argument pursuant to Federal Rule of Civil Procedure 78. For the reasons stated below, Defendants' motion to dismiss is granted.
The Court writes for the benefit of the parties. As the Second Amended Complaint is largely duplicative of the First Amended Complaint ("FAC"), the Court has simply adjusted the "background" section from its prior Opinion, (ECF No. 31), making small changes where necessary.
Defendant Zoompass is a financial services technology company that has built a platform that helps its customers digitize their financial transactions. (SAC ¶ 21). Zoompass is a Nevada corporation headquartered in Toronto, Canada. (SAC ¶ 16). Zoompass' common stock trades on the "Venture Market" or the "OTCQB," which is one of three financial markets organized by OTC Markets Group, Inc. (SAC ¶ 16). Defendant Robert Lee is the director and CEO of Zoompass and the owner of roughly 38.1% of the company's common stock as of April 18, 2017. (SAC ¶ 17). Defendant Brian Morales is Zoompass' CFO and has served in that role since August of 2016. (SAC ¶ 18).
Plaintiff is a purchaser of Zoompass securities during the Class Period—between April 24, 2017 and May 24, 2017 who purchased those securities "at artificially inflated prices." (SAC ¶¶ 1, 15). Plaintiff brings this putative federal securities class action "on behalf of all persons or entities who purchased or otherwise acquired Zoompass common stock" during the Class Period. (SAC ¶ 1).
On March 27, 2017, Zoompass stock began actively trading on the OTCQB. (SAC ¶ 44). Shortly thereafter, on April 10, 2017, Currin Technology released a "special high-tech issue" of its technology stock newsletter titled "Wall Street Investor." (SAC ¶ 45). Plaintiff alleges that this newsletter was a paid-for advertisement for Zoompass as opposed to an unbiased analysis of certain technology stocks. (SAC ¶ 45). The newsletter set forth a glowing recommendation of Zoompass stock, for example, stating that Zoompass was "one of the most attractive tech stocks" of the last 15 years, with the potential to earn investors "270% profits or more." (SAC ¶ 48). A website titled "zoompassinvestor.com" accompanied the newsletter. (SAC ¶ 49). Following the dissemination of the newsletter and the accompanying website, Zoompass shares rose from $1.80 per share to $3.64 per share from April 10, 2017 through May 9, 2017. (SAC ¶ 50).
On April 24, 2017, the date on which the Class Period began, Zoompass filed its 2016 annual financial disclosure statement ("2016 10-K"), which stated that Zoompass "did not have any promoters at any time during the past five fiscal years." (SAC ¶ 58). The 2016 10-K also informed investors that Zoompass' CEO and CFO had looked at the effectiveness of the company's internal disclosure controls and procedures, and that "the price of [Zoompass] common stock may be negatively impacted by factors that are unrelated to [its] operations." (SAC ¶¶ 59-60). Mr. Lee and Mr. Morales signed the 2016 10-K. (SAC ¶ 61). The next day, nearly two million Zoompass shares traded on the OTCQB, the largest volume in Zoompass' trading history. (SAC ¶ 62). Zoompass stock continued to rise steadily through May 8, 2017. (SAC ¶ 64).
On that day, OTC Markets became aware of the newsletter promoting Zoompass stock and so informed the company. (SAC ¶ 65). OTC Markets then labeled Zoompass shares as "caveat emptor," notifying traders that "[t]here is a public interest concern associated with [Zoompass], which may include a spam campaign, questionable stock promotion, known investigation of fraudulent activity committed by the company or insiders, regulatory suspensions, or disruptive corporate actions." (SAC ¶ 66).
Zoompass then issued two statements. The company issued the first statement on May 9, 2017 after the close of the market, stating:
(SAC ¶ 67). Zoompass continued, stating:
(SAC ¶68).
Following these announcements, Zoompass' share price fell 45% over three trading days. (SAC ¶ 70). Then, on May 11, 2017, Zoompass publicly acknowledged that OTC Markets moved Zoompass stock from the OTCQB to OTC Pink Current Information, and that OTC Markets had placed the caveat emptor label on the company's stock as a result of the promotional newsletter and website. (SAC ¶ 71).
After Zoompass made its two press releases and filed its 10-Q, its shares briefly rebounded until May 25th, 2017, when an article published on the website Seeking Alpha "fully and finally exposed and outlined the Defendants' involvement in the scheme to make hidden payments to stock promoters to pump up the price of Zoompass stock." (SAC ¶ 77). After the release of the Seeking Alpha article, Zoompass' share price fell over 23% by close of business on May 25, 2017. (SAC ¶ 91). The following day, Zoompass acknowledged that it was aware of the Seeking Alpha article and filed an amended 10-K to correct the identity of its CEO, a mistake the Seeking Alpha article exposed. (SAC ¶¶ 92-93). Zoompass did not issue any other statements rebutting or denying the information in the Seeking Alpha article. (SAC ¶ 94). Over the course of the next week, Zoompass shares plummeted to less than $1 per share. (SAC ¶ 95).
Plaintiff sets forth six statements made by Zoompass or the individual defendants that he believes are material false or misleading statements. (SAC ¶¶ 98-106, Ex. E).
On August 8, 2018, this Court granted Defendants' motion to dismiss the Amended Complaint. (ECF Nos. 31-32). In its Opinion, this Court granted Plaintiff leave to amend, despite the PSLRA's narrowed "application of the amendment standard in securities fraud cases," and the Court's intuition that "amendment may well be futile, as Plaintiff ha[d] failed to satisfy the pleading requirements of the PSLRA . . ., and [] ha[d] failed to propose an amendment to the FAC that would satisfy this requirement. (ECF No. 31 at 18). On August 21, 2018, Plaintiff filed the SAC. (SAC). Attached to the SAC is a redlined copy of the SAC against the FAC. (SAC, Ex. A). The redline shows that the SAC is essentially unchanged from the FAC, with the exception of a new section titled "Additional Allegations Connecting Defendants to the Promotional Campaign." (SAC, Ex. A at 38). This new section alleges a series of facts that compare the promotional activity surrounding Zoompass to the promotional activity surrounding Pura Naturals, a company that Defendant Lee was allegedly also a director of. (SAC, Ex. A ¶¶ 107-134).
The allegations in the SAC remain the same. This putative class action asserts securities violations under the Securities and Exchange Act of 1934 (the "Act"). Specifically, in Count I of the Second Amended Complaint, Plaintiff asserts a violation of Section 10(b) of the Act, and Rule 10b-5 promulgated thereunder. In Count II, Plaintiff asserts derivative claims against Defendants Lee and Morales for violation of Section 20(a) of the Act. Defendants now move again for a dismissal of this action for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6).
Federal Rule of Civil Procedure 8(a) requires that a complaint set forth "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P 8(a)(2). The plaintiff's short and plain statement of the claim must `give the defendant fair notice of what the. . . claim is and the grounds upon which it rests.'" Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). For a complaint to survive dismissal, it "must contain sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570).
In evaluating the sufficiency of a complaint, a court must "accept all well-pleaded allegations in the complaint as true and draw all reasonable inferences in favor of the non-moving party." Phillips v. Cty. of Allegheny, 515 F.3d 224, 231 (3d Cir. 2008) (quoting In re Rockefeller Ctr. Props., Inc., Sec. Litig., 311 F.3d 198, 215-16 (3d Cir. 2002)). "Factual allegations must be enough to raise a right to relief above the speculative level." Twombly, 550 U.S. at 555. Further, "[a] pleading that offers `labels and conclusions' or `a formulaic recitation of the elements of a cause of action will not do.' Nor does a complaint suffice if it tenders `naked assertion[s]' devoid of `further factual enhancement.' Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 555, 557). To that end, a court considering a motion to dismiss must take account of the elements necessary to plead the claims alleged in the complaint.
In this case, Plaintiffs seek relief under Sections 10(b) and 20(a) of the Act. "Section 10(b) prohibits the `use or employ, in connection with the purchase or sale of any security, . . . [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe. . . ." In re Ikon Office Sols., Inc., 277 F.3d 658, 666 (3d Cir. 2002) (quoting 15 U.S.C. § 78j(b)). Rule 10b-5, in turn, created a private right of action for investors harmed by materially false or misleading statements to enforce Section 10(b), and it "makes it unlawful for any person [t]o make any untrue statement of a material fact or to omit to state a material fact necessary to make the statements made in the light of the circumstances under which they were made, not misleading . . . in connection with the purchase or sale of any security." Id. (quoting 17 C.F.R. § 240.10b-5(b)).
To establish liability under 10(b) and 10b-5, a plaintiff must show:
Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 41-42 (2004) (internal citations omitted).
"Because this is a securities fraud case, . . . [the Court] do[es] not merely ask, as [it] normally would under Rule 12(b)(6), `whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief" Institutional In'rs Grp. v. Avaya, Inc., 564 F.3d 242, 252 (3d Cir. 2009) (quoting Phillips, 515 F.3d at 233). This is because the Private Securities Litigation Reform Act ("PSLRA"), applicable to this case, imposes a heightened pleading standard for claims arising under the Securities Exchange Act. Id. at 252-53. Specifically, under the PSLRA, a plaintiff must "state with particularity both the facts constituting the alleged violation, and the facts evidencing scienter, i.e., the defendant's intention `to deceive, manipulate, or defraud.' Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007) (first quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 & n. 12 (1976); then citing 15 U.S.C. § 78u-4(b)(1), (2)).
First, with regard to misleading statements and omissions of material fact, a plaintiff must "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1). Further, "[t]o be actionable, [the] statement or omission must have been misleading at the time it was made; liability cannot be imposed on the basis of subsequent events." In re NAHC, Inc. Sec. Litig., 306 F.3d 1314, 1330 (3d Cir. 2002).
Second, as to the scienter requirement, with respect to each alleged wrongful misrepresentation or omission, a complaint must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2)(A). Under the PSLRA, unlike the general rule for pleading fraud under FRCP 9(b), "any private securities complaint alleging that the defendant made a false or misleading statement must. . . state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." Avaya, 564 F.3d at 253 (quoting Tellabs, 551 U.S. at 321).
The Court declines to revisit every argument made by Plaintiff and Defendants. To the extent that the SAC mirrors the FAC—and it does almost entirely—the Court directs the parties to its August 8, 2018 Opinion, (ECF No. 31). To the extent that Plaintiff's additional allegations change the Court's prior analysis or raises new issues, both will be discussed below.
As mentioned above, the additions to the SAC concern the parallels between the promotional campaigns directed at Pura Naturals and at Zoompass. The similarities between these campaigns were raised in the FAC as well. As to the import of the comparison, this Court wrote:
(ECF No. 31 at 12-13).
Plaintiff argues that the new additions to the SAC, when read in conjunction with the prior allegations, show that Defendant Lee was the director and controlling shareholder of Pura Naturals' predecessor—Yummy Flies—at the time of a stock exchange transaction that was the mirror image of the stock exchange transaction that preceded the promotional campaign targeting Zoompass. (ECF No. 42 at 17). Plaintiff also argues that the Pura Naturals promotional materials explicitly link Defendant Lee to the financing of the Pura Naturals promotional campaign. (ECF No. 42 at 17-18). Defendants argue that this is an inaccurate and incomplete reading of the SAC, and that the documents attached thereto reveal a different reality. (ECF No. 35-1 at 20-23).
The timing of the Yummy Flies Pura Naturals stock transaction is critical to its relevance to the case at hand. According to Plaintiff, Defendant Lee "was appointed as a member of the board of directors" of Yummy Flies on April 11, 2016. (SAC ¶ 109). "On that same date, Mr. Lee agreed to purchase enough shares of Yummy Flies to acquire 78% of the total votes entitled to be cast at any meeting of shareholders, giving him voting control of Yummy Flies." (SAC ¶109). According to a Pura Naturals form 8-K, Defendant Lee remained the company's controlling shareholder as of July 26, 2016. (SAC ¶ 109). The promotional materials were released on January 17, 2017. (SAC, Ex. F at 2). Plaintiff also points out that the Pura Naturals promotional materials contained a disclaimer stating that the mailing was "a paid promotional advertisement of the featured company, `Pura Naturals, Inc.,'" and that "a shareholder(s)" of Pura Naturals had paid $1,926,538 for the promotional marketing campaign. (SAC ¶ 113). Plaintiffs allege that, "[b]ecause Defendant Lee apparently held almost all of the shares of Pura Naturals at th[e time of the promotional mailing], it is highly likely that the 51.9 million paid to International Marketing Research, Ltd. by `a shareholder' of the company came from Defendant Lee directly." (SAC ¶ 115).
When documents are incorporated into a complaint by reference, the Court is entitled to consider them. Winer Family Tr. v. Queen, 503 F.3d 319, 327 (3d Cir. 2007). When looking at the underlying SEC filings, it is true that Mr. Lee acquired his voting share of Yummy Flies stock on April 11, 2016. (ECF No. 35-3 at 35). Yummy Flies' July 2016 Form 8-K indicates that Defendant Lee's 8,289,000 shares of common stock were cancelled pursuant to a "Share Exchange Agreement," between Pura Naturals and Yummy Flies. (ECF No. 35-4 at 3). Plaintiff argues that the only fair inference given this information in Pura Naturals and Yummy Flies' financial disclosure documents is that Defendant Lee remained the controlling shareholder of Pura Naturals following the share exchange. (ECF No. 42 at 25-27). This is because: (1) the financial disclosure statements "provide
The financial disclosure statements do not support these inferences. The Pura Naturals 2016 10-K does not list Defendant Lee as a shareholder or a director. (ECF No. 35-5 at 28, 34-35). The largest single shareholder of Pura Naturals, according to the 2016 10-K, was a company called AIRTech, which owned 35.39% of Pura Naturals stock. (ECF No. 35-5 at 35). Together with the stock owned by the officers and directors of Pura Naturals, the total percentage of shares owned by these entities was 54.2%. (ECF No. 35-5 at 35). These facts obscure the already cloudy inference that Plaintiff asks this Court to make—that Defendant Lee necessarily funded the Pura Naturals promotional campaign, and, due to the similarities between that campaign and the one targeting Zoompass, Defendant Lee must have also funded or directed the Zoompass campaign. As Defendants correctly note, any combination of the shareholders holding 54.2% of Pura Naturals stock could have been the alleged shareholder who paid International Marketing Research Ltd. to fund the Pura Naturals promotional campaign. (ECF No. 35-1 at 23 n.5).
Plaintiff's remaining new allegations also fail to convince the Court to alter the reasoning in its August 8, 2018 Opinion. First, with regard to the Zoompass promotional campaign, Plaintiff suggests that "various financial maneuverings that occurred around the time the payment was made suggest the initial source of the nearly $2 million payment was Zoompass itself." (ECF No. 42 at 18). Plaintiff believes this conclusion is warranted based on several allegations. First, the Zoompass board of directors "approved the grant of 1,480,000 options to purchase common stock . . . and 460,000 deferred share units to certain directors, officers, employees,
As Defendants point out, reaching Plaintiff's conclusions based on these allegations requires a fair amount of speculation. (ECF No. 43 at 10). Plaintiff alleges no facts that Sargon Finance—the alleged financier of the promotional campaign was a consultant of Zoompass. Plaintiff alleges no facts showing that Sargon Finance received either stock options, deferred share units, or warrants. Lastly, Plaintiff alleges no facts showing that Sargon Finance exercised its rights to any of these options, deferred shares, or warrants and then used those options, shares, or warrants to pay for the promotional campaign.
For the reasons stated herein, Plaintiff's Second Amended Complaint is hereby dismissed with prejudice. An appropriate Order accompanies this Opinion.
