Charles Schwab & Co. v. Retrophin, Inc.
| Decision Date | 30 September 2015 |
| Docket Number | 14 Civ. 4294 (ER) |
| Parties | CHARLES SCHWAB & CO., INC., Plaintiff, v. RETROPHIN, INC., STANDARD REGISTRAR AND TRANSFER COMPANY, INC, JACKSON SU, and CHUN YI GEORGE HUANG, Defendants. JACKSON SU and CHUN YI GEORGE HUANG, Crossclaim Plaintiffs, v. RETROPHIN, INC. and STANDARD REGISTRAR AND TRANSFER COMPANY, INC, Crossclaim Defendants. JACKSON SU and CHUN YI GEORGE HUANG, Third-Party Plaintiffs, v. KATTEN MUCHIN ROSENMAN LLP, Third-Party Defendant. |
| Court | U.S. District Court — Southern District of New York |
Plaintiff Charles Schwab & Co., Inc. ("Schwab") brought this suit to recover the losses that it suffered when it was forced to cover a series of failed sales of stock issued by Retrophin, Inc. ("Retrophin"), a biopharmaceutical company. Schwab had executed the failed sales on behalf of two of its customers, Jackson Su ("Su") and Chun Yi George Huang ("Huang"), whowere former Retrophin employees. Schwab allegedly did not know that Retrophin, through its agents—Standard Registrar and Transfer Company, Inc. ("Standard") and the law firm Katten Muchin Rosenman LLP ("Katten Muchin")—had placed a Stop-Transfer Order that restricted the sale of Retrophin shares held by Su and Huang, due to disputes arising from their employment at Retrophin. Schwab alleged that, in forming its false belief that the restricted stock was transferable, it had relied on representations by Retrophin, Standard, Su, and Huang, and commenced suit against those four parties.
On August 7, 2015, Schwab voluntarily dismissed all of its claims pursuant to Federal Rule of Civil Procedure 41(a)(1)(a)(ii). (Doc. 37). What remains are crossclaims filed by Su and Huang ("Crossclaim Plaintiffs") against Retrophin and Standard ("Crossclaim Defendants"), and third-party claims filed by Su and Huang against Katten Muchin ("Third-Party Defendant"). Before the Court is a motion by Retrophin, Standard, and Katten Muchin (together, "Defendants") to dismiss those crossclaims and third-party claims pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure, which, for the reasons set forth herein, is GRANTED.
Su and Huang are former employees of Retrophin, a biopharmaceutical company that, today, is publicly traded on the NASDAQ stock exchange. Answer, Cross Claims and Third Party Complaint ("Crosscl.") (Doc. 11) ¶¶ 6, 10, 24.2 Su and Huang both joined Retrophin inapproximately July 2012, in the midst of the company's efforts to go public via a reverse merger, an undertaking that both Su and Huang "worked diligently to support." Id. ¶¶ 10-12. Retrophin aimed to complete its reverse merger by December 2012, but its capital reserves dwindled as that goal approached, and Retrophin allegedly "began to fail to meet its internal obligations to its employees, including, but not limited to, salary and benefit obligations." Id. ¶¶ 13-14. Su and Huang were among those employees not paid their full salary and benefits. Id. ¶ 15.
On December 13, 2012, Retrophin awarded Su and Huang, respectively, 126,388 and 78,644 shares of restricted Retrophin stock ("the shares") in order to "make up for a portion of the salary and benefits that it failed to properly provide [them]." Id. ¶¶ 16-18. The physical stock certificates for the shares were stamped with a restrictive legend indicating that they were not registered under the Securities Act of 1933 (the "Act") and could not be sold without being registered under the Act or qualifying for a recognized exemption to such registration. Id. ¶ 19.
In late 2012, both Su and Huang left Retrophin. Id. ¶ 24. Both then commenced individual legal actions against Retrophin and its affiliates, seeking unpaid salary and benefits. Id. ¶ 25. On March 25, 2013, Huang filed an action in the New York State Supreme Court. See Gordon Decl. (Doc. 19), Ex. 3.3 On May 20, 2013, Su, whose Employment Agreement with Retrophin contained an arbitration provision, commenced an arbitration proceeding before theAmerican Arbitration Association. See id., Exs. 2, 4.4 Both legal actions were ongoing during the events of December 2013 that are most critical to the instant motion.
Both Su and Huang maintained individual brokerage and checking accounts with Schwab. Crosscl. ¶ 8. In March 2013, Su asked Schwab to determine whether he could offer his Retrophin shares for public sale. Id. ¶ 28. Schwab contacted Retrophin's legal counsel, Katten Muchin, which informed Schwab that, under United States Securities and Exchange Commission ("SEC") Rule 144, 17 C.F.R. § 230.144 ("Rule 144"), Su's shares could not yet be publicly sold. Id. ¶ 31. Rule 144 permits public resale of restricted stock shares only where a holder has held those shares for a minimum period of six months. Crosscl. ¶ 21. Where an issuing company was at some point in its existence defined as a "shell company" under SEC regulations, however, a holder may not sell its restricted stock for a period of one year from the date on which the issuing company files notice with the SEC indicating that it is no longer a shell company. Id. ¶ 22. In June 2013, Su learned that he would need to hold his restricted Retrophin shares for one year, rather than the usual six-month waiting period under Rule 144, due to the fact that Retrophin had been classified as a shell company. Id. ¶ 32.
In December 2013, having held their restricted shares for the required one-year period, Su and Huang informed Schwab that they wished to sell their shares. Id. ¶¶ 34-35. Both men "correctly and truthfully informed Schwab" that they were not aware of any "restrictions on their individual ability to offer their shares of Retrophin stock for sale," apart from the now-lapsed Rule 144 restrictions. Id. ¶ 36. On December 13, 2013, Schwab contacted Retrophin's transfer agent, Standard, which confirmed (i) that Su's shares were eligible for public sale, subject onlyto standard seller's and broker's representation letters, and (ii) that Michelle Griswold, Esq. ("Griswold") at Katten Muchin was Retrophin's authorized contact attorney. Id. ¶¶ 39-40. That same day, Schwab contacted Griswold, who confirmed that Su's shares were eligible for sale, subject only to standard representation letters and not to a formal legal opinion from Katten Muchin. Id. ¶¶ 41-42. On December 26, 2013, Schwab contacted Griswold to confirm that Huang's shares were eligible for public sale under the same conditions. Id. ¶¶ 43-44. On December 30, 2013, Schwab contacted Standard, which confirmed the same. Id. ¶¶ 45-46.
Between December 17, 2013 and December 23, 2013, Schwab sold all of Su's 126,388 shares at an average price of approximately $7.10 per share, netting $896,819.16 in total proceeds. Id. ¶¶ 48-49. On December 26, 2013, Su's shares were sent to Standard for clearance and transmission to Schwab's custodian, the Depository Trust Company ("DTC"), which "credited Schwab's position in Retrophin," and the proceeds from Su's sales were then transmitted into his Schwab brokerage account. Id. ¶¶ 50-51. Schwab informed Su that the proceeds from the sales were in his account on December 27, 2013. Id. ¶ 52. On December 30, 2013, however, Standard informed Schwab that despite Standard's prior representation that Su's shares were eligible for sale, the shares were in fact subject to an order from Retrophin (the "Stop-Transfer Order") that prohibited the sale or transfer of Su's shares absent Retrophin's express written approval. Id. ¶ 53.5
The same sequence occurred with respect to Huang's shares shortly thereafter. On December 30, 2013, Schwab sold 60,649 of Huang's Retrophin shares at an average price of $6.83 per share, netting $414,093.74 in total proceeds. Id. ¶ 56. On January 6, 2014, Huang's shares were sent to Standard for clearance and transmission to DTC, and the proceeds from Huang's sales were transmitted into his Schwab brokerage account that same day. Id. ¶ 57. On January 10, 2014, however, Standard notified Schwab that it was issuing "an after-the-fact notice rejecting Schwab's sales transaction of Huang['s] shares," which were subject to the same Stop-Transfer Order as Su's shares. Id. ¶ 58.
The actual timing of the Stop-Transfer Order, placed on both Su's and Huang's shares, remains unclear. Defendants, in their moving papers, maintain that the Stop-Transfer Order was placed in response to Su's arbitration and Huang's state-court suit, but they do not specify a particular date. See Mem. Supp. Crosscl. Defs.' & Third-Party Def.'s Mot. Dismiss ( ) (Doc. 20) 6. Su and Huang, on the other hand, allege a number of alternative theories.
First, Su and Huang allege that the Stop-Transfer Order as to Su's shares had not been put in place prior to December 13, 2013, the day Schwab was told that Su's shares were freely transferable, but that nonetheless Retrophin falsely informed Standard that the Stop-Transfer Order on Su's shares had been put in place prior to that date. Id. ¶¶ 67-68. Likewise, they allege that Retrophin, again falsely, informed Standard that the Stop-Transfer Order on Huang's shares had been put in place prior to December 26, 2013, the day Standard and Katten Muchin told Schwab that Huang's shares were freely transferable. Id. ¶¶ 69-70.
Second, and in the alternative, Su and Huang allege that Retrophin did in fact place a Stop-Transfer Order on Su's and Huang's shares prior to December 13, 2013 (for Su) andDecember 26, 2013 (for Huang), but that Retrophin failed to inform Standard of the existence of the Stop-Transfer Order until December 30, 2013, at earliest. Id. ¶¶ 71-72.
Third, again in the alternative, Su and Huang allege that Retrophin placed the Stop-Transfer Order prior to their requests to sell, that Retrophin did in fact inform Standard in a timely fashion, but that Standard subsequently failed to inform Schwab of the existence of the Stop-Transfer Order on December 13, 2013 and December 26, 2013. Id. ¶¶ 73-74.
Unfortunately, none of the...
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