Callais Capital Mgmt., LLC v. Wilhite

• Court: U.S. District Court — Eastern District of Louisiana
• Writing for the Court: WENDY B. VITTER UNITED STATES DISTRICT JUDGE
• Decision Date: 31 March 2021
• Docket Number: CIVIL ACTION NO. 17-12039 SECTION D (5)
• Citation: Callais Capital Mgmt. v. Wilhite, CIVIL ACTION NO. 17-12039 SECTION D (5) (E.D. La. Mar 31, 2021)
• Parties: CALLAIS CAPITAL MANAGEMENT, LLC v. BRIAN WILHITE, ET AL.

CALLAIS CAPITAL MANAGEMENT, LLC v. BRIAN WILHITE, ET AL.

CIVIL ACTION NO. 17-12039 SECTION D (5)

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF LOUISIANA

March 31, 2021

ORDER AND REASONS

Before the Court is the Motion to Dismiss filed by Defendants Brian Wilhite, Emaleigh Wilhite, Brian May, John Durham, Brett Favre and Jon Gregg.¹ Plaintiff Callais Capital Management, LLC has filed an Opposition,² and Defendants have filed a Reply.³ After careful review of the parties' memoranda, the record, and the applicable law, the Court grants the Motion.

I. FACTUAL BACKGROUND

This is a securities fraud case arising out of investments in a digital media company which focused on sports. The following factual allegations are drawn fromPlaintiff's First Amended Complaint⁴ and must be considered true for the purposes of this Motion.

Sqor was a business which created a digital platform designed for sports fans.⁵ Sqor aspired to be "the best enterprise solution for Sports in the world, while delivering the most engaging sports platform for the Global sports fan."⁶ In July 2015, Sqor solicited Plaintiff Callais Capital Management ("CCM") to invest in Sqor.⁷ In its Complaint, CCM often focuses on the actions of Brian Wilhite, Sqor's co-founder. CCM also levies claims against Jon Gregg, a shareholder and Sqor's Chief Revenue Officer,⁸ Michael Worley, a major investor and a board member of Sqor,⁹ Brian May, a major investor and board member of Sqor,¹⁰ John Durham, another shareholder and investor in Sqor,¹¹ Emaleigh Wilhite, a co-founder of Sqor who was in charge of the company's finances,¹² Dimitrios Bachadakis, a shareholder and board member of Sqor who was "in charge of continuing efforts to attract European football (soccer) teams and enter into contracts with them for Sqor,"¹³ and Brett Favre, a former professional football player who purportedly leant his "prestige and legitimacy" to the organization.¹⁴

Over the course of a year, CCM engaged in four transactions with Sqor:

• First, on June 12, 2015, CCM entered a Loan and Security Agreement ("LSA") for $6,000,000. The transaction gave CCM the right to purchase shares of preferred stock in a subsequent financing round. The transaction also included a Series A Preferred Stock Warrant for 2,095,791 shares at a price of $0.19086 per share. As a result of the transaction, Sqor could request "capital growth loans" of $500,000 up to a cumulative amount of $6,000,000.¹⁵

• Second, on December 3, 2015, CCM entered a Supplement to the LSA for an additional $6,000,000. The transaction gave CCM the right to purchase shares of preferred stock in a subsequent financing round. The transaction also included a Series A Preferred Stock Warrant for 11,922,279 shares at a price of $0.14997 per share. As a result of the transaction, Sqor could request "capital growth loans" of $500,000 up to a cumulative amount of $6,000,000.¹⁶

• Third, on April 1, 2016, CCM entered Supplement No. 2 to the LSA for an additional $2,000,000. The transaction gave CCM the right to purchase shares of preferred stock in a subsequent financing round. The transaction also included a Series A Preferred Stock Warrant for 6,157,736 shares at a price of $0.14518 per share. As a result of the transaction, Sqor could request "capital growth loans" of $500,000 up to a cumulative amount of $2,000,000.¹⁷

• Fourth, on June 15, 2016, CCM entered Supplement No. 3 to the LSA for an additional $2,750,000. The transaction gave CCM the right to purchase shares of preferred stock in a subsequent financing round. The transaction also included a Series A Preferred Stock Warrant for 6,593,013 shares at a price of $0.14518 per share. As a result of the transaction, Sqor could request "capital growth loans" of $500,000 up to a cumulative amount of $2,750,000.¹⁸

The thrust of CCM's Complaint is that Sqor's directors and management, as well as the members of Pontchartrain Capital, LLC (Sqor's investment bank), misled CCM into investing more than $16,000,000 in Sqor. CCM contends Defendants artificially inflated the value of Sqor, and had CCM been properly advised, it would not have invested in Sqor. CCM points to a plethora of alleged misrepresentations, each explored below.

The Business Plan

CCM's first set of allegations revolve around the 2015 Business Plan presented to CCM before it made its initial investment.¹⁹ In July 2015, Defendants sent a Business Plan to CCM to solicit its investment in securities.²⁰ The Business Plan made clear that Sqor was looking for a growth loan to "continue operations, while expanding capacity to capture a larger market."²¹ CCM alleges that "Sqor represented to CCM that it would raise additional growth equity capital to repay and'cover all loans and continued global growth opportunities.'"²² The Business Plan also included a growth chart that represented that Sqor's net income for 2016 to be $1.3 million, and projected a 2017 net income of $12.7 million, and a 2018 net income of $44 million.²³ The Business Plan further represented that it had a "total potential reach of current combined social reach of 350MM+ fans and growing."²⁴

CCM alleges that the Business Plan contained numerous false representations. It contends that "Sqor would not or could not fund immediate international growth or secure up to ten (10) major Sports Enterprises over the next six (6) months" and that "Sqor could not raise round of equity capital of up to $25,000,000."²⁵ CCM also alleges that the numbers on the growth chart were "simply not true"²⁶ and that various defendants "knew at the time they provided the Business Plan to CCM that Sqor did not have 325,000,000 fans or users, and Sqor did not have a social reach of 350MM fans or users."²⁷

Users

CCM also alleges that Defendants regularly misrepresented the number of users Sqor had by attributing professional athletes' social media followers as "users" of Sqor.²⁸ Plaintiff specifically alleges that Defendants were inflating the social media followers of Defendant Brett Favre (a former professional football player) withSqor users.²⁹ CCM also alleges that various controlling persons, including Wilhite, "regularly misrepresented monthly active users ("MAUs") and daily active users ("DAUs") - fundamental and critical metrics for online social platforms,"³⁰ factors which had the effect of making CCM's investment look more valuable to CCM.³¹

Business Dealings with Sports Clubs

CCM alleges that Defendants misrepresented the likelihood that Sqor would enter into business developments or agreements with sports clubs and organizations.³² In particular, CCM alleges that Sqor touted its relationship with FC Bayern Munich, a soccer club.³³ In 2015, Defendants Wilhite and Hammer provided an unsigned draft "Sports and Enterprise Agreement" between FC Bayern Munich and Sqor to CCM.³⁴ The agreement was described by Wilhite as "standard and used for all teams."³⁵ But the finalized agreement—entered into after the LSA was signed—contained small but material changes that CCM contends did not bind FC Bayern to "anything meaningful."³⁶

CCM further alleges that a Sqor representative provided detailed projections (with dollar figures) regarding negotiations with sports clubs and organizations and misrepresented to CCM how close the negotiations were to cumulating in a deal that would be profitable to Sqor.³⁷ Plaintiff singles out ESPN as an example. Accordingto CCM, Wilhite represented that ESPN was "very interested" in Sqor and had considering buying Sqor.³⁸ But CCM later learned that this potential agreement ended with a "preliminary meeting" with a "mid-level person" at ESPN, and that there was no deal to be had.³⁹ CCM also alleges that Wilhite and Hammer made various other false representations about potential deals with other sports organizations, including the Dallas Cowboys, NFL Players Association, and Under Armor.⁴⁰

Brand Capabilities Deck

CCM alleges that Defendants sent CCM a "Brand Capabilities Deck" that contains various misrepresentations, including conflating Favre's social media followers as Sqor's user base.⁴¹ CCM further alleges that the Brand Capabilities Deck falsely asserted that "Conor McGregor to drive 16 million ad impressions with 344,000 users engaged; Ron Gronkowski to drive downloads of the Mobile Strike game with 7.5 million impressions and 71,000 users engaged; and partnerships with NFL Athletes (Richard Sherman, Rob Gronkowski and Odell Beckham, Jr.), NFL Retirees (Brett Favre, Matt Hasselback and Steve Marinucci) And "Sports Icons" (Allen Iverson, Conor McGregor and Pele)."⁴² CCM alleges that the Brand Capabilities Deck misrepresented the endorsement of NBA players "and the actualprospects and existence of a 'Road to the Draft' program, which was to provide an online Q&A Chat and Custom Content program on Sqor's social medial platform."⁴³

Aftermath and Litigation

In sum, Plaintiff alleges that "Sqor, Wilhite, and Gregg at least, knew at the time they made the aforementioned representations to CCM that they were false. Nevertheless, Sqor, Wilhite, the Pontchartrain Defendants, May and Worley continued to make and reiterated these misrepresentations during in-person meetings, telephone conferences and through written correspondence" before CCM's transactions with Sqor.⁴⁴ According to CCM, it only learned of these misrepresentations in April 2017, when a representative of Defendant Bachadakis "relayed that Wilhite and Gregg routinely told third-party potential investors and customers that Sqor's MAU was generally around 10 million, a key threshold for receiving advertising revenue, but in Sqor's case, the number was not true."⁴⁵

Plaintiff alleges that "[b]ecause it turned out that there was no imminent $25 million third party investment, and because there were no revenue generating deals, the value of Sqor at the time of investment was likely $0."⁴⁶ On October 3, 2017, Sqor filed for Chapter 7 bankruptcy in the United States Bankruptcy Court for the Northern District of California.⁴⁷...