Fund v. 6D Global Techs. Inc.

• Decision Date: 30 October 2015
• Docket Number: 15-cv-7618 (PKC)
• Citation: Discover Growth Fund v. 6D Global Techs. Inc., 15-cv-7618 (PKC) (S.D. N.Y. Oct 30, 2015)
• Parties: DISCOVER GROWTH FUND, Plaintiff, v. 6D GLOBAL TECHNOLOGIES INC.; NEW YORK GLOBAL GROUP, INC.; NYGG (ASIA), LTD.; BENJAMIN TIANBING WEI A/K/A BENJAMIN WEY; TEJUNE KANG; MARK SYNKOWSKI; ADAM HARTUNG; DAVID S. KAUFMAN; TERRY MCEWEN; ANUBHAV SAXENA; TIANYI WEI; MICHAELA WEI; SEREF DOGAN ERBEK, Defendant.
• Court: U.S. District Court — Southern District of New York

DISCOVER GROWTH FUND, Plaintiff, v. 6D GLOBAL TECHNOLOGIES INC.; NEWYORK GLOBAL GROUP, INC.; NYGG (ASIA),LTD.; BENJAMIN TIANBING WEI A/K/ABENJAMIN WEY; TEJUNE KANG; MARKSYNKOWSKI; ADAM HARTUNG; DAVID S.KAUFMAN; TERRY MCEWEN; ANUBHAVSAXENA; TIANYI WEI; MICHAELA WEI;SEREF DOGAN ERBEK, Defendant.

15-cv-7618 (PKC)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

October 30, 2015

MEMORANDUM AND ORDER

CASTEL, U.S.D.J.

Plaintiff Discover Growth Fund ("Discover") seeks an order attaching $10 million in the possession of 6D Global Technologies Inc. ("6D"). In its complaint, Discover alleges, among other things, that 6D and others violated sections 10(b) and 29(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§78(j); 78cc, and breached certain representations, warranties, and closing conditions in a Stock Purchase Agreement ("SPA"). Specifically, Discover alleges that 6D failed to disclose the existence of investigations by a federal grand jury and the Securities and Exchange Commission ("SEC") into Benjamin Wei, also known as Benjamin Wey, relating to a corporate predecessor of 6D, CleanTech Innovations, Inc. ("CleanTech"). 6D vigorously denies any knowledge at the time of closing of the SPA of the grand jury and SEC investigations and asserts that it was a target of neither. Wei is a defendant in this action and is alleged to be a principal shareholder of defendant New York Global Group ("NYGG") and its alleged affiliate New York Global Group Asia LTD ("NYGG-Asia"). NYGG-Asia is alleged to own somewhere in excess of 45% of the shares of 6D.

Discover and 6D entered into the SPA on August 10, 2015. On August 13, 2015, 6D confirmed receipt of Discover's $10 million payment. A grand jury indictment of Wei was unsealed on September 10, 2015. United States v. Wei, et al., 15 cr 611 (AJN). Also, Wei, NYGG, and others were named as defendants in an SEC enforcement action filed September 10, 2015. SEC v. Wey, 15 cv 7116 (PKC). Two days later, NASDAQ suspended trading in the common stock of 6D. Neither the indictment nor the SEC enforcement action charged 6D or its predecessor.

As noted, Discover now seeks an order of attachment directed to $10 million in the possession of 6D. Pending the hearing and determination of the motion, the Court granted and alter modified a temporary restraining order, set a bond in the amount of $50,000, and set the matter down for a hearing on the requested attachment. Discover does not seek any provisional remedies against Wei, NYGG, or NYGG-Asia.

Prior to the October 5, 2015 hearing, neither side sought expedited discovery of the other. At the hearing, the Court gave Discover and 6D the opportunity to present evidence. Neither side called live witnesses; both sides rested on their declarations and documentary evidence. This Memorandum and Order sets forth the Court's finding of facts and conclusions of law.

At this early stage and without the benefit of discovery, Discover has not proven a likelihood of success on the merits against 6D and, accordingly, the application for attachment will be denied.

JURISDICTION

Unquestionably, the Court has federal question jurisdiction over Discover's claims of alleged violations of the Exchange Act. 28 U.S.C. §1331. The Court has supplemental jurisdiction over Discover's remaining common law claims, including its breach of contract claim, because they derive from the same "case or controversy" involving the parties' SPA. 28 U.S.C. §1367. Although not alleged as a basis for subject matter jurisdiction, it appears that there is also diversity jurisdiction. 28 U.S.C. 1332. Discover is a Cayman Islands corporation with its principal place of business in the Cayman Islands and 6D Global is a Delaware Corporation with its principal place of business in New York. (Compl. ¶¶7-8). No other defendant is domiciled in the Cayman Islands. (See Compl. ¶¶9-20). The amount in controversy is at least $10 million. (See Compl. ¶5).

BACKGROUND

Discover is a mutual fund registered in the Cayman Islands. (Compl. ¶7). 6D is a digital business solutions company that provides marketing and technology services to other businesses. (Szynkowski Decl. ¶4). It is a Delaware corporation headquartered in New York, New York and its shares have traded on NASDAQ under the symbol "SIXD."¹ (Compl. ¶8).

On August 10, 2015, Discover and 6D entered into the SPA whereby Discover paid 6D $10 million in exchange for 1,088 shares of Series A Redeemable Convertible Preferred Stock at an 8% original discount. (Compl. Ex A, p.1-2). On August 13, 2015, 6D confirmed receipt of Discover's $10 million payment. (Kirkland Decl. ¶1). Those preferred shares are convertible into common stock at $5.25 per share. (Compl. Ex A, p.1-2). Discover elected not to obtain confidential due diligence materials from 6D and, indeed, demanded that neither 6Dnor any affiliated person or entity provide Discover with any material non-public information of any kind related to 6D. (Compl. Ex. A, IV.F; Meyerson Decl. ¶3). The acquisition of material non-public information of 6D may have inhibited Discover's ability to trade in the securities of 6D.

Benjamin Wei is the founder and President of NYGG, a company that offers consulting and other services to China-based operating companies that wish to raise funds in the United States capital markets. (Serio Decl. 2, Ex. P, p.10). On September 8, 2015, a grand jury sitting in this District indicted Wei for crimes including securities fraud, wire fraud, and stock manipulation. (Compl. Ex. B). On September 10, 2015, the indictment was unsealed and the SEC filed an enforcement action against Wei for various violations of the Exchange Act. (Compl. Ex. C). Both the criminal and enforcement actions derive, in part, from Wei's allegedly fraudulent activities in relation to the purchase or sale of CleanTech securities. (See Compl. Ex. B ¶¶18-20; Ex. C ¶¶63-64, 81). No claim is made in the indictment or enforcement action that CleanTech was an active participant in any fraud.

CleanTech is, as defense counsel conceded at the October 5 hearing, a predecessor company to 6D. (See Serio Decl. 2, Ex. H; Transcript from Hearing on Motion for Order of Attachment, October 5, 2015 ("Tr., Oct. 5, 2015"), p.37-39). In September 2014, CleanTech and a company called Six Dimensions merged to become 6D.² (See Serio Decl. 2, Ex. H; Tr., Oct. 5, 2015, p.37-39). It was through the terms of that merger that NYGG-Asia, an affiliate of NYGG and a large creditor of CleanTech's, became a 45% shareholder in 6D. (See Serio Decl. 2, Ex. H; Ex. P, p.9-10). CleanTech's 14C filing, which describes the transactionbetween CleanTech and Six Dimensions, noted Wei's presence at an April 8, 2014 meeting of the two companies. (Serio Decl. 2, Ex. H, p.12).

Discover was aware that NYGG-Asia was the largest single shareholder of 6D prior to entering the SPA, (See Serio Decl., Ex. D, p.3), but claims to have never heard of Wei before meeting him on August 18, 2015, i.e. after the closing, (Kirkland Decl. ¶2). The fact that NYGG-Asia controlled 45% of 6D's shares was documented in 6D's most recent 10-K filed with the SEC on March 19, 2015. (Szynkowski Decl., Ex. 5, p.23). Discover does not claim that, prior to entering into the SPA, it asked any questions of 6D as to the identity of the principals or shareholders of the entity holding 45% of the shares of 6D, in which it was making a $10 million investment. Discover now claims that NYGG-Asia is controlled by NYGG and Wei and that Wei is the de facto 45% shareholder of 6D. (See Serio Decl. 2, Ex. K; Meyerson Decl. ¶4; Tr., Oct. 5, 2015, p.24). 6D admits that Wei has acted as an occasional uncompensated consultant for the company. (Szynkowski Decl. ¶30). Tejune Kang, the CEO of 6D, told Discover in an email that he would bring "a representative from NYGG Asia" to meet Discover in the Cayman Islands on August 18, 2015. (Kirkland Decl. 2, Ex. A). Kang brought Wei to that meeting. (Kirkland Decl. ¶2).

On September 12, 2015, approximately one month after the parties executed the SPA and two days after the indictment of Wei was unsealed and the SEC filed its enforcement action, NASDAQ suspended trading of 6D's common shares. (Serio Decl. 2, Ex. N). On September 28, 2015, Discover brought this action. (Compl.) Discover now seeks an attachmentin aid of an arbitration that it stated it intends to initiate within 30 days of any Order from this Court ruling on the application for attachment.³ (Tr., Oct. 5, 2015, p.27).

DISCUSSION

A. Legal Standard for an Attachment in Aid of Arbitration

Rule 64, Fed. R. Civ. P., provides that "[a]t the commencement of and throughout an action, every remedy is available that, under the law of the state where the court is located, provides for seizing a person or property to secure satisfaction of the potential judgment." An attachment is one of those remedies. Rule 64(b). Discover's motion for attachment is governed by New York law, the law of the forum. See Rule 64.

There are two parallel paths to obtaining the provisional remedy of attachment under New York law. One is Article 62 of the Civil Practice Law and Rules ("CPLR"), setting forth the grounds for attachment, and the other is Article 75 of the CPLR, the catch-all section for provisional remedies in aid of arbitration. Discover has announced its intention to timely commence an arbitration in the Virgin Islands against 6D and, indeed, 6D has asserted that the claims against it can only be brought in arbitration. (See Defendant's Memorandum of Law in Opposition, p.13-18). Discover has made it plain that it is seeking the attachment in aid of arbitration. (Tr., Oct. 5, 2015, p.27).

To obtain a provisional remedy in aid of arbitration, whether a preliminary injunction or attachment, the applicant must demonstrate that "the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief." N.Y. CPLR§7502(c).⁴ The express language of section...