Burt v. Maasberg
| Decision Date | 31 March 2013 |
| Docket Number | Civil Action No.: ELH-12-0464 |
| Parties | DAVID R. BURT, et al., Plaintiffs, v. WOLFGANG MAASBERG, et al., Defendants. |
| Court | U.S. District Court — District of Maryland |
Plaintiffs David R. Burt ("Burt"), a former Chief Executive Officer ("CEO") of Lyris, Inc. ("Lyris" or "the Company"), and his wife, Janet Burt, filed a 103-page Complaint (ECF 1)1 against fourteen defendants, alleging that between 2007 and 2011 the defendants engaged in a fraudulent scheme to take control of Lyris, a technology company that develops, markets and sells online marketing tools for small and medium businesses. Compl. ¶¶ 2-3. In particular, plaintiffs, who are Lyris stockholders, allege that defendants, who are officers, directors, and/or stockholders of Lyris, amassed 87 percent of Lyris's stock through various manipulative actions, without disclosing their plan to other stockholders or to the Securities and Exchange Commission ("SEC"). Plaintiffs claim, inter alia, that, as a result, they sold a significantpercentage of their Lyris stock to defendants at artificially depressed prices, and without receipt of a control premium.2
Of the fourteen defendants named in the Complaint, five serve as officers and/or directors of Lyris (collectively, the "O&D Defendants"). They are Wolfgang Maasberg, the Company's current CEO and a director of Lyris, id. ¶ 35; William T. Comfort, III ("Ty Comfort"), the Chairman of the Lyris Board of Directors, id. ¶ 41; Jamie Urry, a Lyris director, id. ¶ 42; Richard Blair, also a Lyris director, id. ¶ 43; and Richard McDonald, the Director of Investor Relations at Lyris since approximately 2005, id. ¶ 36. Four defendants are Lyris stockholders (collectively, the "SH Defendants"). They are William T. Comfort, Jr. ("Bill Comfort"), id. ¶ 37; Stuyvesant Pierpont Comfort, who served as a director of Lyris between 2000 and 2002, id. ¶ 40; LDN Stuyvie Partnership ("LDN" or "LDN Stuyvie"), an Oklahoma partnership in which Stuyvesant and Ty Comfort are partners, id. ¶ 44; and Meudon Investments Partnership ("Meudon"), a New York partnership allegedly controlled by Urry, id. ¶ 45. The Complaint also names five corporate John Doe defendants, referred to as the "Hidden Comfort Entities," which are "believed to be partnerships or other entities whose investments are controlled directly or indirectly (in whole or in part) by Defendants Bill Comfort, Ty Comfort, Stuyvesant Comfort, Urry and/or Blair." Id. ¶ 46.
Bill, Ty, and Stuyvesant Comfort, as well as Urry, are members of the same family (collectively, the "Comforts"). In particular, Ty and Stuyvesant Comfort are brothers, and the sons of Bill Comfort; Urry is Bill Comfort's son-in-law and the brother-in-law of Ty and Stuyvesant Comfort. Id. ¶¶ 40-42.
The Complaint contains eight claims.3 The first three counts allege violations of federal securities laws and regulations. In Count I, plaintiffs allege that, by engaging in a scheme to take control of Lyris and misrepresenting or failing to disclose their plan to do so, defendants violated § 10(b) of the Exchange Act of 1934 ("§ 10(b)"), 15 U.S.C. § 78j(b), and SEC Rule 10b-5 ("Rule 10b-5"), 17 C.F.R. § 240.10b-5. See Compl. ¶¶ 260-62. In Count II, plaintiffs allege that defendants conspired to violate § 10(b) and Rule 10b-5. Id. ¶¶ 263-65. Count III alleges that defendants violated § 14(a) of the Exchange Act of 1934 ("§ 14(a)"), 15 U.S.C. § 78n(a), and SEC Rules 14a-3 and 14a-9 ("Rule 14a-3" and "Rule 14a-9"), 17 C.F.R. §§ 240.14a-3 & 240.14a-9, by causing Lyris to issue false proxy statements that failed to disclose the defendants' plan. Id. ¶¶ 266-69.
The remaining five counts allege violations of Maryland and Delaware law. In Count IV, plaintiffs allege that defendants violated the Maryland Securities Act, § 11-7034 of the Corporations & Associations Article ("C.A.") of the Maryland Code (2007 Repl. Vol., 2012 Supp.). Compl. ¶¶ 270-72. Count V alleges that Maasberg, Ty Comfort, Urry, and Blair breached their duty of loyalty under Delaware law. Id. ¶¶ 273-78. In Count VI, plaintiffs allegethat Ty Comfort, Urry, and Blair engaged in self-dealing, by purchasing shares of Lyris stock at artificially depressed prices, in violation of their fiduciary duties under Delaware law. Id. ¶¶ 279-93. Count VII alleges that the Maasberg, Ty Comfort, Urry, and Blair breached their duty of care under Delaware law. Id. ¶¶ 294-300. In Count VIII, plaintiffs allege that Ty Comfort, Urry, Blair, McDonald and Bill Comfort are liable for intentional infliction of emotional distress, based on their purchase of Lyris stock from plaintiffs at artificially depressed prices, when they knew that the Burts needed the proceeds for Janet Burt's medical care. Id. ¶¶ 301-06. Plaintiffs claim damages "in excess of $1,000,000" for Counts I through VI, id. ¶¶ 262, 265, 269, 272, 278, 293; damages "in excess of $100,000" for Count VII, id. ¶ 300; and an unspecified amount of damages for Count VIII, id. ¶ 306. They appended voluminous exhibits to the Complaint
The SH Defendants and O&D Defendants each filed a motion to dismiss, see ECF 13 ("SH Motion"); ECF 14 ("O&D Motion"), along with a supporting memorandum of law, see ECF 13-1 ("SH Memo"); ECF 14-1 ("O&D Memo"). They claim that, pursuant to Fed. R. Civ. P. 12(b)(6) and the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4(b)(3)(A), plaintiffs have failed to state a claim as to each count. They also assert affirmative defenses based on the various statutes of limitations applicable to each claim. In addition, they claim that plaintiffs previously released all of their claims through an agreement signed by Burt when he resigned as CEO of Lyris. And, the defendants argue that, because plaintiffs have failed to state a claim under the federal securities laws, this Court lacks personal jurisdiction over defendants as to the remaining state law claims, which are subject to dismissal pursuant to Fed. R. Civ. P.12(b)(2).5
Plaintiffs, through counsel, filed a consolidated response in opposition ("Opposition" or "Opp.," ECF 21). They concede that Count II, for conspiracy to violate § 10(b), fails to state a claim. But, they contend that the release does not apply to plaintiffs' claims, that plaintiffs' claims are not barred by limitations, and that the Complaint is otherwise sufficient to survive defendants' motions. However, they do not dispute the argument that, if plaintiffs' federal securities claims are dismissed, this Court lacks personal jurisdiction over defendants with respect to the remaining state law claims. Both the SH Defendants and the O&D Defendants filed replies. See ECF 26 (""SH Reply"); ECF 27 ("O&D Reply").
The motions to dismiss have been fully briefed,6 and no hearing is necessary to resolve them. See Local Rule 105.6. For the reasons that follow, I will grant defendants' motions with respect to Counts I, II and III, and will grant leave to amend Counts I and III. Additionally, because plaintiffs have not opposed the argument that this Court lacks personal jurisdiction overdefendants absent viable federal claims, I will also dismiss, without prejudice, plaintiffs' claims arising under Maryland and Delaware law (i.e., Counts IV, V, VI, VII, and VIII).
As indicated, Lyris is a "technology company that develops, markets, and sells online [or internet] marketing tools to small and medium businesses." Compl. ¶ 3; see also id. ¶ 47. It is headquartered in Emeryville, California and incorporated under the laws of Delaware. Id. ¶¶ 2, 65.7 Lyris formerly operated as a healthcare company under the name J.L. Halsey Corporation. Id. ¶ 48; Compl. Exh. 12; O&D Exhs. 2, 3. It gradually sold off its healthcare businesses and accumulated cash reserves through "litigation and claims activities." Compl. ¶ 48. Lyris also "had" a valuable asset, consisting of a "net operating loss ['NOL'] carryforward of approximately $180 million," which "would allow Lyris to buy a company and not pay federal corporate income tax on $180 million dollars of federal income." Id. ¶ 49.8
Lyris is publicly-traded via the Over-the-Counter ("OTC") market. Id. ¶ 3. From early 2006 to early 2007, Lyris stock traded at prices between $0.75 and $1.75 per share. According to a "Google finance" graph of Lyris stock prices attached to the Complaint, see Exh. 6, prices hovered between $0.75 and $1.00 for all of 2006, and increased to $1.75 in early 2007. See Compl. ¶ 24; Compl. Exh. 6. Since mid 2007, however, Lyris's stock has suffered a gradualdecline and, by the end of 2011, it traded at between 10 and 33 cents per share. Compl. ¶ 24; Compl. Exh. 6.9
David Burt served as CEO of Lyris from approximately June 2000 to January 2007. Compl. ¶¶ 7, 47, 53.10 During his tenure as CEO, Burt oversaw much of Lyris's transition to its present business, including the identification of acquisition targets for Lyris. Id. ¶¶ 49, 51. Lyris's proxy statements reflect that, as part of Burt's compensation package as CEO, he acquired 20,850,000 shares of Lyris common stock in 2002. See Compl. Exh. 12, Jan. 3, 2008 Proxy Statement, at 19; see also SH Memo at 18; O&D Memo at 23.
Between April 2007 and December 1, 2011 (the "Fraud Period"), Compl. ¶ 2, plaintiffs allegedly owned from 4% to 7% of Lyris's stock, either directly or indirectly through Addison LP, their investment vehicle. Compl. ¶ 7.11 However, the Burts sold "nearly all" of these sharesin 2010 and 2011. Id. ¶ 7. Specifically, in March 2010, Addison LP sold 3,000,000 shares of Lyris stock to Ty Comfort and Meudon for $0.33 per share, totaling $1,000,000. Id. ¶ 248. And in or about May 2011, Addison LP sold 5,000,000 shares to the "Comfort Defendants" at $0.24 per share, totaling $1,200,000.12 Id. ¶¶ 242, 247, 249. According to plaintiffs, they sold these shares to finance "expensive" medical treatment for Janet Burt, who "suffers from a significant illness" that she has "been battling . . . for...
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