DarkPulse, Inc. v. EMA Fin.

• Decision Date: 01 March 2023
• Docket Number: 22 Civ. 45 (LGS)
• Parties: DARKPULSE, INC., Plaintiff, v. EMA FINANCIAL, LLC, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

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DARKPULSE, INC., Plaintiff, v. EMA FINANCIAL, LLC, et al., Defendants.

No. 22 Civ. 45 (LGS)

United States District Court, S.D. New York

March 1, 2023

ORDER

LORNA G. SCHOFIELD, District Judge

Plaintiff DarkPulse, Inc. brings this civil action against Defendants EMA Financial, LLC (“EMA”), EMA Group, LLC (“EMA Group”), and Felicia Preston, the sole owner of EMA Group. In September 2018, Plaintiff and EMA executed a Securities Purchase Agreement (the “Agreement”) and a Convertible Note (the “Note”) (together, the “Securities Contracts”), which gave EMA the option to convert Plaintiff's debt into shares of Plaintiff's stock. In a series of transactions in 2019 and 2020, EMA exercised this option, receiving over 567 million shares of Plaintiff's stock with a market value when converted of over $265,000. Plaintiff alleges the Securities Contracts violate the Securities Exchange Act (“Exchange Act”), 15 U.S.C. § 78a, et seq., the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C § 1961, et seq., and New York state law. Defendants move to dismiss the First Amended Complaint (“FAC”). For the reasons below, the motion is granted in part and denied in part.

I. BACKGROUND

The following facts are taken from the FAC and its exhibits. See Lively v. WAFRA Inv. Advisory Grp Inc., 6 F.4th 293, 306 (2d Cir. 2021). The facts are construed in the light most favorable to Plaintiff as the non-moving party and presumed to be true for the purpose of this motion. Id. at 299 n.1.

Defendant EMA is a lender that offers financing to small public companies by purchasing convertible notes. Defendant EMA Group is the investment manager of EMA, and Defendant Felicia Preston is the managing member of EMA and EMA Group, with control over both entities. EMA's business model consists of purchasing convertible notes from small companies in need of financing, converting the debt under those notes into shares of stock in those companies, and then selling the stock in the public market.

Plaintiff is a Delaware company, with its principal place of business in New York, whose stock trades in the over-the-counter market. On September 25, 2018, Plaintiff and Defendant EMA executed the Securities Contracts. In exchange for $94,000, EMA received the Note, a promissory note in the principal amount of $100,000 with an annual interest rate of 8% and a nine-month maturity date. The Note also contains a conversion option allowing EMA to exchange the accrued debt, in part or in full, for shares of Plaintiff's stock. The conversion option allows EMA to exchange the debt “in its sole and absolute discretion, at any time” at a conversion price equal to a 30% discount from the stock's market price. The Agreement also allows EMA to offset and withhold from the conversion price $4,000 in fees and expenses related to the execution of the Securities Contracts.

Beginning in April 2019 and ending in October 2020, EMA submitted nineteen conversions under the Note. In total, EMA converted $83,244.18 in debt and received more than 567 million shares of Plaintiff's stock with a market value of $265,493.55 at the time of conversion.

II. STANDARD

To withstand a motion to dismiss, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Kaplan v. Lebanese Canadian Bank, SAL, 999 F.3d 842, 854 (2d Cir. 2021) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Iqbal, 556 U.S. at 678; accord Dane v. United Healthcare Ins. Co., 974 F.3d 183, 189 (2d Cir. 2020). It is not enough for a plaintiff to allege facts that are consistent with liability; the complaint must “nudge[]” claims “across the line from conceivable to plausible.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). To survive dismissal, “plaintiffs must provide the grounds upon which [their] claim rests through factual allegations sufficient to raise a right to relief above the speculative level.” Rich v. Fox News Network, LLC, 939 F.3d 112, 121 (2d Cir. 2019) (alteration in original) (internal quotation marks omitted). “The proper question is whether there is a permissible relevant inference from all of the facts alleged, taken collectively, not whether an inference is permissible based on any individual allegation, scrutinized in isolation . . . Determining whether a complaint states a plausible claim for relief is a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Vengalattore v. Cornell Univ., 36 F.4th 87, 102 (2d Cir. 2022) (cleaned up).

III. DISCUSSION

The Exchange Act and constructive trust claims are dismissed. The civil RICO claim is dismissed only as to Defendant EMA and survives as to Defendants EMA Group and Preston. The unjust enrichment claim survives.

A. Exchange Act Claims (Counts I, II and III)

The FAC asserts three causes of action under the Exchange Act, alleging that EMA acted as an unregistered dealer of securities and that Preston is liable as a control person of EMA. The Exchange Act includes a statute of limitations of one year after the discovery of an alleged violation, and a statute of repose of three years after the violation, irrespective of when it was discovered. Because Plaintiff did not bring its claims within the statute of repose, Defendants' motion to dismiss the Exchange Act claims is granted.

The FAC alleges a violation of Exchange Act § 15(a), which bars “any broker or dealer . . . to make use of . . . any means or instrumentality of interstate commerce to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security . . . unless such broker or dealer is registered” with the Securities and Exchange Commission. 15 U.S.C. § 78o(a)(1). Exchange Act § 29(b) states “[e]very contract made in violation of any provision of this chapter” and “every contract . . . the performance of which involves the violation of, or the continuance of any relationship or practice in violation of, any provision of this chapter . . . shall be void.” 15 U.S.C. § 78cc. A proviso to Exchange Act § 29(b) adds a statute of limitations and a statute of repose: “[N]o contract shall be deemed to be void by reason of this subsection . . . unless such action is brought within one year after the discovery that such sale or purchase involves such violation and within three years after such violation.” Id.

Plaintiff and EMA executed the Securities Contracts on September 25, 2018. Any Claim alleging that EMA was acting as an unregistered broker-dealer in violation of Exchange Act § 15(a) was required to be filed by September 25, 2021. This action was commenced on January 4, 2022. The FAC's Exchange Act claims are therefore untimely under § 29(b). See, e.g., Anderson v. Binance, No. 20 Civ. 2803, 2022 WL 976824, at *3 (S.D.N.Y. Mar. 31, 2022) (dismissing claims under § 29(b) as untimely under the statute of limitations), appeal docketed, No. 22-972 (2d Cir. May 2, 2022); Alpha Capital Anstalt v. Oxysure Sys., Inc., 216 F.Supp.3d 403, 408 (S.D.N.Y. 2016) (rejecting an affirmative defense to contract enforcement based on § 15(a) because it was raised after the statute of limitations ran).

Plaintiff's arguments to evade the statute of repose are unpersuasive. Plaintiff first argues that the limitations periods in § 29(b) do not apply to claims under § 15(a). This argument is belied by the FAC itself and § 29(b). The FAC expressly relies on “15 U.S.C. § 78cc” -- which is § 29(b) -- in seeking relief in the form of a declaration that the Securities Contracts “are void and subject to rescission.” Also, § 29(b) by its terms applies to “every contract made in violation of any provision of this chapter.” 15 U.S.C. § 78cc(b) (emphasis added). The “chapter” in question is the entirety of the Exchange Act, embodied in 15 United States Code § 78 and its subparts, including § 15(a) codified at 15 U.S.C. § 78o(a). See 15 USC § 78a (“This chapter may be cited as the “Securities Exchange Act of 1934.”).

To support its reading, Plaintiff cites Lawrence v. Richman Grp. of Conn., LLC, 407 F.Supp.2d 385 (D. Conn. 2005). Lawrence, as a district court case, is not binding authority and in any event is distinguishable. The court in Lawrence rejected an argument based on the statute of limitations where the defendant raised the plaintiff's alleged § 15(a) violation as an affirmative defense. See id. at 389 n.7 (“[T]he plain language of the statute applies only to ‘actions maintained in reliance upon th[e] subsection,' i.e., affirmative actions for rescission, not to defenses raised.”). Here, the FAC asserts affirmative causes of action alleging violations of § 15(a). Section 29(b)'s statute of repose applies to claims such as Plaintiff's, requiring it to bring them within three years of the relevant violation, here the formation of the Securities Contracts.

Plaintiff next argues that Alpha Capital Anstalt and Kahn v. Kohlberg, Kravis, Roberts & Co., 970 F.2d 1030 (2d Cir. 1992), cited by Defendants, indicate that claims under § 15(a) involve fraud, and are therefore governed by the Sarbanes-Oxley Act of 2002, 15 U.S.C. § 7201 et seq., which creates a five-year statute of repose for an action involving “a claim of fraud, deceit manipulation, or contrivance in contravention of a regulatory requirement concerning the securities law.” 28 U.S.C. § 1658(b)(2). Plaintiff cites no cases in support of this argument, conceding that “[w]hether a claim under § 15(a) is governed by Sarbanes-Oxley is unclear.” Courts in this Circuit have continued to apply § 29(b)'s statutes of limitations and repose to claims under the Exchange Act,...