Chien v. Skystar Bio Pharmaceutical Co.

• Decision Date: 17 July 2008
• Docket Number: No. 3:07CV781 (MRK).,3:07CV781 (MRK).
• Citation: 566 F.Supp.2d 108
• Court: U.S. District Court — District of Connecticut
• Parties: Andrew CHIEN, Plaintiff, v. SKYSTAR BIO PHARMACEUTICAL CO. et al., Defendants.

566 F.Supp.2d 108

Andrew CHIEN, Plaintiff, v. SKYSTAR BIO PHARMACEUTICAL CO. et al., Defendants.

No. 3:07CV781 (MRK).

United States District Court, D. Connecticut.

July 17, 2008.

Andrew Chien, New Haven, CT, pro se.

Jody M. Borrelli, Richardson & Patel, LLP, Los Angeles, CA, Timothy M. Herring, Cummings & Lockwood, Stamford, CT, for Defendants.

RULING AND ORDER

MARK R. KRAVITZ, District Judge.

In this action, Plaintiff Andrew Chien sues Defendants Skystar Bio Pharmaceutical Company ("Skystar"), Scott Cramer, Steve Lowe and David Wassung (collectively, the "Defendants") for securities fraud in connection with a 2005 reverse merger between Cyber Group Network Corporation ("CGPN") and Skystar. Defendants have moved to dismiss Mr. Chien's Amended Complaint [doc. # 35] on the basis of Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4 ("PSLRA"). See Defendants' Motion to Dismiss Amended Complaint [doc. # 39]. Because Mr. Chien has failed adequately to allege either fraud or loss causation, the Court grants Defendants' motion and dismisses this case.

I.

In considering a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the Court "must accept as true all allegations in the complaint and draw all reasonable inferences in favor of the non-moving party." Gorman v. Consol. Edison Corp., 488 F.3d 586, 591-92 (2d Cir.2007) (citing Taylor v. Vt. Deft of Educ., 313 F.3d 768, 776 (2d Cir.2002)). Furthermore, on a Rule 12(b)(6) motion, "[a] complaint is deemed to include any written instrument attached to it as an exhibit, materials incorporated in it by reference, and documents that, although not incorporated by reference, are integral to the complaint." Sira v. Morton, 380 F.3d 57, 67 (2d Cir.2004) (citations and quotations omitted). A document is integral to the complaint "where the complaint relies heavily upon its terms and effect...." Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir.2002) (quotations omitted); see Collier v. Aksys, Ltd., No. 3:04cv1232(MRK), 2005 WL 1949868, at *1 (D.Conn. Aug. 15, 2005). As the Second Circuit stated in Chambers, "a plaintiffs reliance on the terms and effect of a document in drafting the complaint is a necessary prerequisite to the court's consideration of the document on a dismissal motion; mere notice or possession is not enough." Id. (emphasis in original); see also Beary v. ING Life Ins. And Annuity Co., 520 F.Supp.2d 356, 359 (D.Conn.2007). Finally, and as is relevant to the present case, a court considering a motion to dismiss may look at public stock prices as well as "public disclosure documents required by law to be, and that have been, filed with the [Securities and Exchange Commission ("SEC")]." Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000) (citations omitted); see also Blue Tree Hotels Inv. (Canada), Ltd. v. Starwood Hotels & Resorts Worldwide, Inc., 369 F.3d 212, 217 (2d Cir.2004) (A court "may also look to public records ... in deciding a motion to dismiss."); Malin v. XL Capital Ltd., 499 F.Supp.2d 117, 128 (D.Conn.2007).

At oral argument, the parties agreed that on the Motion to Dismiss the Court could take judicial notice of stock quotations and disclosure documents filed with the SEC, without transforming Defendants' Motion to Dismiss into a Motion for Summary Judgment. See Request for Judicial Notice [doc. # 25]. Accordingly, the following facts are taken from the Amended Complaint, SEC disclosure documents, and stock quotations.

A.

On September 20, 2005, CGPN issued a press release announcing that it had entered into an agreement to acquire Skystar in a reverse merger through the issuance of common stock.¹ Four business days later, on September 26, 2005, CGPN timely filed a Form 8-K with the SEC, which attached the full text of the Share Exchange Agreement between CGPN and Skystar. Among other things, the Share Exchange Agreement stated that at the closing, CGPN's authorized and issued common stock would total 500,000,000 shares and that CGPN would have no material liabilities. The Share Exchange Agreement also stated that as of the date of the closing, Messrs. Cramer, Lowe and Wassung would "hold an amount of shares of CGPN common stock which represents at least a majority of the issued and outstanding capital stock of CGPN." See Request for Judicial Notice [doc. # 25], Ex. A, §§ 4.2, 4.9, 7.1(b).

Before the closing of the merger, CGPN had only 177,188,665 shares of common stock issued and outstanding (though its authorized shares of common stock totaled 500,000,000). See Amended Compl. [doc. # 35] at 9-10, ¶ 13. The company had assets of only $1,137 and liabilities of over $1.5 million, approximately $1 million of which was owed to Messrs. Cramer, Lowe and Wassung, the company's officers. CGPN Form 10Q, Dec. 1, 2005, at 2, available at http://www.sec.gov/Archives/edgar/ data/1076939/00011442040503 8556/ v030582_10qsb.htm.²

The closing of the reverse merger occurred on November 7, 2005, at which time CGPN issued approximately 316, 461,335 shares of common stock to Messrs. Cramer, Lowe and Wassung, in payment of the debts owed those individuals. CGPN timely filed a Form 8-K dated November 14, 2005 that disclosed that the merger had taken place and also set forth the precise number of shares of common stock issued to Messrs. Cramer, Lowe and Wassung in return for cancellation of debt owed those individuals. See Request for Judicial Notice [doc. #25], Ex. B at 30. As a result of the issuance of these shares, Messrs. Cramer, Lowe and Wassung held 72% of CGPN's common stock on the date of the closing. As recited in the Share Exchange Agreement, as of the closing, CGPN had 500,000,000 shares outstanding. Id. at 37.

On January 23, 2006, CGPN, now Skystar, filed a Form 14f-1 with the SEC, which stated that Messrs. Cramer, Lowe and Wassung had failed to file their Forms 3, 4 and 5 with the SEC. Specifically, the company stated, "[b]ased solely on the company review of these reports or written representations from certain reporting persons, during the year ended December 31, 2004, and during the current fiscal year, the Company believes that all filing requirements applicable to the Company's officers and directors subject to Section 16(a) of the Exchange Act were met, except that directors R. Scott Cramer, Steve Lowe and former director David Wassung were not able to file their Form 3 within 10 days after he was elected or appointed an officer and/or director of the Company nor were Cramer, Lowe and Wassung able to file Form 4's or Form 5's in connection with transactions that occurred in the last fiscal year and/or in the current fiscal year." See Amended Compl. [doc. # 35] at 6-7, ¶ 2. CGPN, now Skystar, also filed a Form 10-K with the SEC on or about April 17, 2006. That report stated as follows:

On November 7, 2005, the Company issued 201,849,516 (pre 1-for-397 Reverse Split) shares of common stock valued at approximately $0.0025 per share (the average price over the last 90 trading days prior to September 1, 2005, the date on which the Board authorized the issuances for amounts owed to Mr. Cramer, Mr. Lowe and Mr. Wassung) to its former Chief Executive Officer and current Director, R. Scott Cramer as payment for accrued salary and expenses owed to him in the amount of $573,270. On November 30, 2005, the Company also issued 68,100,454 (pre 1-for-397 Reverse Split) shares of common stock valued at approximately $0.0025 per share to its former officer and current Director, Steve Lowe as payment for accrued salary and expenses owed to him in the amount of $195,954. On November 7, 2005, the Company also issued 46,511,365 (pre 1-for-397 Reverse Split) shares of common stock valued at approximately $0.0025 per share to its former Director, David Wassung, as payment for accrued salary and expenses in the amount of $133,833.

Id. at 7-8, ¶ 4.

In his Amended Complaint, Mr. Chien alleges that he purchased 6,391,700 shares of CGPN common stock beginning in "approximately the end of September 2005 to November 4, 2005." See Amended Compl. [doc. #35] at 8, ¶ 5. He claims that he was defrauded because he did not know that CGPN's issued and outstanding shares, which he believed totaled only 177,188,665, would be "significantly diluted" in connection with the reverse merger. Id. at 7, ¶ 3. According to Mr. Chien, "after November 7, 2005, there were 500,000,000 shares [issued and outstanding, and] ... [t]he issued new common stock severely diluted the share's value, and caused the stock price to drop by 65%." Id. at 8, ¶ 5. He alleges that this "dilution was not reported, on any filed SEC Filings despite filings being made," id. at 22, ¶ 46, and that "Defendants also gave no advance notice to the Plaintiff or to any other shareholders of the merger or of the dilution by issue of additional shares," id. at 22, ¶ 49. According to Mr. Chien, "in reliance on the misrepresentations of the Defendants [he] purchased 6,391,700 shares of common stock, which he thought would be valuable because the company misrepresented the amount of common shares as 177,188,665." Id. at 23, ¶ 50.

B.

Mr. Chien filed this lawsuit on May 17, 2007, alleging violations of §§ 10(b) and 20(a) of the Securities Exchange Act, 15 U.S.C. §§ 78j(b), 78t(a), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. See Complaint [doc. # 1]. Promptly thereafter Defendants moved to dismiss `the Complaint under Rules 12(b)(6) and 9(b) and the PSLRA. See Defendants' Motion to Dismiss [doc. # 23].³

In accordance with the Court's usual practice, the Court held an on-the-record telephonic conference with counsel for the parties and asked Mr. Chien's counsel if he would like to amend the complaint to address the alleged defects raised in Defendants' Motion to Dismiss. As the Court explained, "It's been my practice to, before briefing begins, see if the plaintiff would like to file, take one last chance to...