Alpha Capital Anstalt v. Schwell Wimpfheimer & Assocs. LLP
| Decision Date | 30 March 2018 |
| Docket Number | 1:17-cv-1235-GHW |
| Parties | ALPHA CAPITAL ANSTALT and ELLIS INTERNATIONAL, LTD., Plaintiff, v. SCHWELL WIMPFHEIMER & ASSOCIATES LLP, DOV SCHWELL, MICHAEL HUGHES, WILLIAM SCHMITZ, ADEEB SABA, and MARK MATTHEWS, Defendants. |
| Court | U.S. District Court — Southern District of New York |
In an effort to develop an efficient and affordable power co-generation system for residential and commercial buildings, a New York startup, Arista Power, found itself in need of funding for its projects. Instead of seeking third-party loans, Arista affiliates contrived a plan to privately sell stock options in its company that were held by family members of an Arista consultant and known securities-law violator. With the help of counsel, Arista officers put the plan into action, sparking sales that ultimately led to approximately $1 million in capital influx. At the same time, however, Arista's public filings concealed the private stock sales and instead credited the capital infusion to a loan that the company had secured from a third-party strawman. Following that raising of capital, Arista was still faced with financing needs and sought Plaintiffs' investment. Arista representatives spoke glowingly to Plaintiffs of the company's flagship project and its potential to light the way for future growth. Plaintiffs invested, but less than two years later, Arista's lights went out when the company filed for bankruptcy protection.
Plaintiffs brought this action against various Arista officers, the company's general counsel, and the law firm of which two of the Individual Defendants are partners. Plaintiffs allege violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, as well as violations of Section 20(a) of the Exchange Act and claims for common-law fraud. Defendants have all moved to dismiss the amended complaint. Because Plaintiffs' allegations insufficiently plead loss causation; Plaintiffs' reliance on the misstatements of certain Individual Defendants is precluded by the parties' contractual agreements; and Arista's counsel is not pleaded to have made the alleged misleading statements, Defendants' motions are GRANTED in their entirety.
Arista Power ("Arista" or "the Company") is a New York corporation headquartered in Rochester, New York that was formerly known as Future Energy Solutions, Inc. and WindTamer Corp. Amended Compl., ECF No. 74, ¶ 25. As WindTamer Corp., the company purported to develop and sell wind turbines and was first quoted publicly in November 2009 on the OTCQB with ticker symbol WNDT. Id. In 2010, the company developed its "Power on Demand" system, which utilized "inputs from multiple energy sources including solar, wind, fuel cells, generators, and the grid, in conjunction with a custom-designed battery storage system and a proprietary smart monitory technology, to release energy at optimal times to reduce peak power demand, thereby lowering electricity costs." Id. ¶ 26. The first Power on Demand system was commissioned in the first quarter of 2011. Id. In conjunction with this shift in business operations, from development and sales of wind turbines to the more comprehensive Power on Demand system, WindTamer changed its name to Arista Power and its ticker symbol to ASPW in May 2011. Id. ¶ 27.
At all times relevant to the issues raised in this case, Defendant William Schmitz served as Arista Power's chief executive officer ("CEO") and was a member of the company's board of directors. Id. 18. Defendant Adeeb Saba served as Arista's chief operating officer ("COO"). Id. ¶ 19. Defendant Mark Matthews served as Arista's president in 2012 and 2013, and was thereafter a representative and agent of the company. Id. ¶ 20.
Defendant Schwell Wimpfheimer & Associates LLP ("SWA") is a law firm with offices in New York, New York. Id. ¶ 17. SWA was at all relevant times primary outside counsel to Arista Power. Id. During the relevant period, SWA's managing partner, Defendant Dov Schwell, also served as the chairman of the Arista board of directors and a member of the board's audit committee. Id. ¶ 16. As of April 28, 2010, Schwell also served as an Arista director. Id.
Defendant Michael Hughes is an attorney admitted to the bars of the States of New York and New Jersey and a partner at SWA. Id. ¶ 15. Hughes was initially retained as a legal consultant to Arista Power in July 2008. Id. Five years later, in July 2013, Hughes assumed the role of Arista's general counsel. Id.2 Hughes also served as an executive officer of the Company. Id. ¶ 8.3
Non-party Peter Kolokouris joined Hughes in becoming a consultant to Arista Power in July 2008. Id. ¶¶ 34, 38. Twenty years earlier, Kolokouris had been charged by the SEC with securities fraud in connection with his alleged misappropriation of proceeds from an initial public offering of North Atlantic Fisheries, Inc. and his alleged receipt of illegal kickbacks from an underwriter. Id. ¶ 32. In connection with those charges, Kolokouris entered into a consent settlement with the SEC, under the terms of which he resigned as an officer and director of North Atlantic Fisheries andother entities; agreed to an injunction prohibiting him from serving as an officer or director or owning fifty percent or more of the securities of a public company; and disgorged over two million dollars. Id. ¶ 33.
On July 10, 2008, Kolokouris entered into a handwritten "Option Agreement" with Arista (then Future Energy) which granted Kolokouris options to purchase 166,000 shares of the company's stock—over fifteen percent of the Company's outstanding stock—at an exercise price of $1.00 per share. Id. ¶¶ 34, 40. Kolokouris subsequently assigned those stock options to entities affiliated with Kolokouris's family. Id. ¶ 41. In the related enforcement action, the SEC has alleged that the purpose of this stock transfer was to evade the bar that was imposed on Kolokouris in 1990 from owning five percent or more of the securities of a public company. Id.
The Option Agreement also granted Hughes, Kolokouris's attorney, options to purchase 167,000 shares of the company's common stock at the same exercise price of $1.00 per share. Id. ¶ 34. The Option Agreement contained a clause stating: "The Company acknowledges that Michael Hughes is an attorney and has represented the Investors and has not represented the Company." Id. ¶ 35.
On November 26, 2008, the Company disclosed that Hughes had "provided consulting services to the company in connection with its management structure and business development and product marketing strategies" since July 2008. Id. ¶ 36. The following year, the Company further disclosed that Hughes beneficially owned 1.66 million shares of the Company's stock through 609 MTH, Inc. and 7.89 million shares of Company stock through both 609 MTH, Inc. and another entity, 10EJH. Id. ¶ 37.
On March 30, 2009, the Company disclosed that Kolokouris had "acted as a consultant to the Company since July 2008 . . . provid[ing] consulting services involving advice and assistance onits management structure and business development and developing a product marketing strategy and publicity strategy." Id. ¶ 38 (alterations in original). The Company also disclosed that Kolouris's consulting role had included "assis[ting] the Company in locating auditing services, legal services, and assistance in locating financial market professionals to assist the Company." Id. (alteration in original).
In addition to its disclosure regarding Kolokouris's role as consultant, the Company also disclosed at that time that "Hughes ha[d] acted as consultant to the Company since July 2008" and "[d]uring this time [ ] provided consulting services involving advice and assistance on its management structure and business development and developing a product marketing strategy and publicity strategy." Id. ¶ 39. The Company further disclosed that Hughes had "also assisted the Company in locating auditing services, legal services, insurance and assistance in locating financial market professional to assist the Company." Id.
In February 2011, Hughes, at Kolokouris's request, performed all of the legal work necessary to create TMK-ENT, Inc., an entity nominally owned and directed by Tim Davin, Kolokouris's neighbor. Id. ¶ 52.
Beginning in the summer of 2012, Arista faced difficulty in raising capital for its operations. Id. ¶ 42. Hughes and Schmitz, working with Kolokouris, recommended that Arista raise short-term capital through private sales of the stock options that had been transferred to the Kolokouris family entities. Id. Kolokouris would transmit payment from these sales to Arista after withdrawing cash from accounts that he controlled. Id. ¶ 43.
In late August 2012, Arista decided to put this plan into play. Id. ¶ 42. To effectuate the sales, Hughes and Schmitz, among other Arista affiliates, privately offered Kolokouris family stock to various of their acquaintances, including their friends, family members, tennis club associates, andothers. Id. ¶¶ 44, 60. Kolokouris directed Hughes and Schmitz with respect to what stock to sell, the amounts to sell, and the price at which to sell it. Id. ¶ 60. Kolokouris himself took various steps to manipulate the price of publicly traded Arista stock so that the privately offered stock could be sold at an apparent discount. Id. ¶¶ 44, 76. Specifically, Kolokouris executed "manipulative stock transactions" in his family members' brokerage accounts and marked the closing price of Arista stock on a number of trading days. Id. ¶ 76. In this way, Kolokouris was able to increase and maintain Arista's public market stock price at a price above $1.00 per share, while the private sales of Kolokouris family stock were made at a...
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