Sec. & Exch. Comm'n v. Nutra Pharma Corp., 18-CV-5459(JS)(GRB)
| Court | United States District Courts. 2nd Circuit. United States District Court (Eastern District of New York) |
| Writing for the Court | SEYBERT, District Judge |
| Citation | 450 F.Supp.3d 278 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. NUTRA PHARMA CORPORATION, Erik Deitsch a/k/a Rik Deitsch, and Sean Peter McManus, Defendants. |
| Decision Date | 31 March 2020 |
| Docket Number | 18-CV-5459(JS)(GRB) |
450 F.Supp.3d 278
SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
NUTRA PHARMA CORPORATION, Erik Deitsch a/k/a Rik Deitsch, and Sean Peter McManus, Defendants.
18-CV-5459(JS)(GRB)
United States District Court, E.D. New York.
Signed March 31, 2020
For Plaintiff: Marc P. Berger, Esq., Preethi Krishnamurthy, Esq., Lara Shalov Mehraban, Esq., Lee Attix Greenwood, Esq., Lindsay Senechal Moilanen, Esq., Sheldon Leo Pollock, III, Esq., Securities and Exchange Commission, Brookfield Place, 200 Vesey Street, Suite 400, New York, New York 10281.
For Defendants: Nutra Pharma, Daniel Desouza, Esq., DeSouza Law, PA, 101 NE Third Avenue, Suite 1500, Fort Lauderdale, Florida 33301, Erik Deitsch, Carl F. Schoeppl, Esq., Kyle Gustin DeValerio, Esq., Schoeppl & Burke, P.A., 4651 North Federal Highway, Boca Raton, Forida 33431-5133.
Sean P. McManus, Pro Se.
MEMORANDUM & ORDER
SEYBERT, District Judge:
In this securities fraud action, defendants Nutra Pharma Corporation ("Nutra Pharma") and Erik Deitsch ("Deitsch") partially move to dismiss (see Deitsch Mot., D.E. 31; Nutra Pharma Mot., D.E. 33) the Amended Complaint of Plaintiff the Securities and Exchange Commission (the "SEC") (Am. Compl., D.E. 28). For the following reasons, the motions are GRANTED in part and DENIED in part.
BACKGROUND
The Court takes the following facts from the Amended Complaint as true and construes them in the light most favorable to the SEC.1
I. Facts
Nutra Pharma was incorporated in 2000. (Am. Compl. ¶ 23.) During the relevant period, from approximately July 2013 through June 2018, Nutra Pharma purported to sell two pain relievers made with cobra venom. (Am. Compl. ¶¶ 1, 26.) Deitsch has run Nutra Pharma since approximately 2002, and during the relevant period, acted as its CEO, president, CFO, and chairman. (Am. Compl. ¶ 20.) Defendant Sean McManus ("McManus") worked as a consultant for Nutra Pharma from approximately 2013 to 2017. (Am. Compl.
¶ 21.) The SEC alleges that Nutra Pharma has never turned a profit, and in December 2016, reported annual losses of $3.5 million. (Am. Compl. ¶¶ 27-28.)
A. The Alleged Misleading Press Releases and Q-10 Reports
1. The Promoter Releases
In July 2013, Nutra Pharma entered into a consulting agreement with Wall Street Buy. (Am. Compl. ¶ 57.) Christopher Castaldo ("Castaldo") ran Wall Street Buy from at least 2013 through 2017. (Am. Compl. ¶ 22.) Deitsch looked into Castaldo and learned Castaldo had been found liable for violating securities laws as a broker in a 2008 SEC civil enforcement action. (Am. Compl. ¶¶ 49, 44.) In 2012, aware of Castaldo's background, Deitsch and Nutra Pharma hired him to promote Nutra Pharma's stock to potential investors. (Am. Compl. ¶ 50.) The 2013 consulting agreement, signed by Deitsch on Nutra Pharma's behalf, required Nutra Pharma to pay Wall Street Buy $10,000 in cash plus five million shares of Nutra Pharma stock for each month of the three-month term and to issue a $30,000 note convertible to Nutra Pharma shares to Wall Street Buy. (Am. Compl. ¶¶ 59-60.)
In August and October 2013, Nutra Pharma issued two press releases. They were drafted by Deitsch, who controlled their distribution and posted them on Nutra Pharma's website. (Am. Compl. ¶¶ 54-56.) Neither press release referenced the consulting agreement. (Am. Compl. ¶¶ 65, 70.) The August release read that "[t]he stated goal at Wall Street Buy ... is to identify cutting edge growth companies that offer unique products and services" and quoted Castaldo as saying "I believe we have identified an enormous opportunity [in Nutra Pharma] and take great pleasure in sharing our findings with the investing public." (Am. Compl. ¶¶ 62-63.) The October release contained similar language with a new Castaldo quote: "I continue to believe that we have identified an enormous opportunity." (Am. Compl. ¶¶ 67-69.)
In March 2013, a marketing and distribution company known as New Vitality entered into a consulting agreement with MGRD, Inc. ("MGRD"), a company controlled by Deitsch. Deitsch signed on behalf of MGRD. New Vitality engaged Deitsch as a consultant. Pursuant to the agreement, Deitsch was a "Chief Science Officer and Formulator" and had to travel to New Vitality's offices once per quarter. New Vitality agreed to pay MGRD $7,000 per month and a percentage of gross receipts of certain New Vitality products. (Am. Compl. ¶¶ 72-74.) On August 29, 2013, Nutra Pharma issued a press release announcing that New Vitality had placed its first order of Nutra Pharma's Nyloxin product. The release did not mention the agreement between Deitsch and New Vitality. (Am. Compl. ¶¶ 76, 79.)
Next, in June 2015, Deitsch and the CEO of SeeThruEquity, an equity research firm, exchanged emails about a potential analyst report of Nutra Pharma stock. The CEO emailed Deitsch about two pricing options offering "complimentary" reports. (Am. Compl. ¶¶ 145-46.) Nutra Pharma paid SeeThruEquity $8,000 for one of the packages. (Am. Compl. ¶¶ 153-54.) Eventually, Deitsch posted SeeThruEquity's press release, which he had reviewed and commented upon. The release stated that SeeThruEquity's "research is not paid for and is unbiased" and did not mention the financial arrangement between the companies. (Am. Compl. ¶¶ 159-63.) The release also claimed that Nutra Pharma's stock had a "target price" of $0.53 a share, which was approximately double the highest price Nutra Pharma
stock traded at that year. (Am. Compl. ¶¶ 155, 161.)
2. The Distribution Releases
In January 2015, Nutra Pharma entered into a confidentiality and nondisclosure agreement with Nature's Clinic, a Canadian corporation and distributor, which Deitsch signed, to "evaluate a potential business relationship." (Am. Compl. ¶¶ 108-09.) In April 2015, Deitsch and Nature's Clinic's CEO spoke on the phone and discussed a potential transaction. They did not agree on a price during the call but stated they would attempt to execute written contracts. They did not ultimately execute any written contracts. (Am. Compl. ¶¶ 110-13.)
In May 2015, Nutra Pharma issued a press release "[a]nnounc[ing] that they ha[d] engaged the Nature's Clinic to begin the process of distributing Nyloxin in Canada" and had "engaged the Nature's Clinic to begin the process of regulatory approval of Nyloxin for marketing and distribution in Canada." (Am. Compl. ¶¶ 114-16.)
About two months later, on July 7, 2015, Nutra Pharma received correspondence from a regulatory consultant representing Nature's Clinic, stating that it could not establish a Canadian warehouse for the products without more information. (Am. Compl ¶¶ 119-21.) The consultant asked for additional information, including a draft contract, to work out the potential transaction between the parties. (Am. Compl. ¶ 123.) However, the following month, Nutra Pharma filed a Form 10-Q quarterly report with the SEC reiterating that Nutra Pharma had "engaged the Nature's Clinic to begin the process of regulatory approval of ... Nyloxin ... [t]he Nature's Clinic has already begun setting up their [Canadian] warehouse." (Am. Compl. ¶¶ 124-126.)
Finally, in February 2015, Deitsch sent a trial shipment of Nyloxin to someone in India in an attempt to reach an India distribution deal. Nutra Pharma never distributed Nyloxin in India. (Am. Compl. ¶¶ 129-30.) In May 2015, Deitsch sent a letter to a Canadian company providing it with authorization to identify a Chinese company capable of obtaining government approval for Nutra Pharma products in China. (Am. Compl. ¶¶ 131-32.) Nutra Pharma never distributed its products in China. (Am. Compl. ¶ 134.)
In June 2015, Nutra Pharma announced that it had "completed upgrades and an expansion to the reptile farm that houses the Asian cobras utilized in the production of [Nyloxin]" by adding "100 snakes to the existing milking line to increase venom production for the upcoming international orders from India and China." (Am. Compl. ¶¶ 138-40.) In August 2015, Nutra Pharma filed a Q-10 with the same claims. (Am. Compl. ¶ 142.) However, at the time of this press release and Q-10, Deitsch was aware that Nutra Pharma had never produced Nyloxin or other referenced products and no one else had produced them. He also knew that Nutra Pharma had never owned cobras, cobra farms, or cobra facilities. (Am. Compl. ¶¶ 134-37.)
B. Deitsch Sells Shares
The SEC also alleges that Deitsch manipulated the market for Nutra Pharma stock. (Am. Compl. § IV, ¶¶ 164-208.) On June 17, 2015, using his brokerage account at a broker-dealer firm registered with the SEC, Deitsch placed five orders for Nutra Pharma stock at the outstanding ask price--the lowest price at which a seller is willing to sell. (Am. Compl. ¶ 164.) Each time, he placed a 100-share limit buy order. (Am. Compl. ¶¶ 167, 170, 173, 176, 179.) Though he never spent more than $20.00 on any order, each time, he also
paid a $9.99 commission. (Am. Compl. ¶ 181.) The broker-dealer's representative told Deitsch the compliance department had flagged the trades as uneconomical and that they looked manipulative. Deitsch replied that ...
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