Hull v. Global Digital Solutions, Inc.
| Decision Date | 19 December 2017 |
| Docket Number | Civ. Action No. 16-5153(FLW) |
| Parties | JEFF HULL, on behalf of himself and all those similarly-situated, Plaintiff, v. GLOBAL DIGITAL SOLUTIONS, INC., et al., Defendants. |
| Court | U.S. District Court — District of New Jersey |
*NOT FOR PUBLICATION*
Lead Plaintiff Michael Perry1 ("Plaintiff") brings this putative securities-class action, on behalf of himself and all other similarly situated individuals, against Global Digital Solutions, Inc. ("GDS" or the "Company"), a specialty-vehicle manufacturing company, as well as GDS's former Chief Executive Officer Richard J. Sullivan ("Sullivan"),2 former Chief Financial Officer David Loppert ("Loppert"), former director and Executive Vice President William J. Delgado ("Delgado"), and former directors Arthur F. Noterman and Stephanie C. Sullivan (collectively "Individual Defendants") ("GDS" and "Individual Defendants" together referred to as "Defendants"), alleging violations under, inter alia, various provisions of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., and the rules promulgated thereunder. Plaintiff accuses Defendants of making false representations and omissions to artificially raise GDS's stock pricein an effort to finance specific acquisitions and raise cash using the inflated stock. In the instant matter, Defendants GDS and Delgado move for dismissal on the basis that Plaintiff has failed to adequately allege the elements of his securities claims. In addition, Defendant Loppert separately moves to dismiss the Amended Complaint (collectively, the "Moving Defendants").3 For the reasons set forth below, the Moving Defendants' motions are GRANTED; however, in lieu of dismissal, Plaintiff shall have leave to amend his Amended Complaint within 30 days from the date of the Order accompanying this Opinion.
GDS is a company that builds mobile command/communications and specialty vehicles for emergency management, first responders, national security, and law enforcement operations. During all relevant periods, GDS's stock traded on the over-the-counter exchange, OTCQB, under the ticker symbol "GDSI." Id. at ¶ 14. The class period is October 8, 2013 through August 11, 2016. During the class period, Loppert was GDS's Chief Financial Officer ("CFO") from August 12, 2013 through April 10, 2015; Delgado was responsible for GDS's business development and served in various roles, such as, President, CEO, CFO, Chairman, and Executive Vice President; and Sullivan was GDS's CEO from the start of the class period through May 13, 2016. Plaintiff alleges that based on these individual defendants' roles in the Company, they participated in the day-to-day management and operations of GDS at the highest level, were privy to confidentialinformation, and were directly or indirectly involved in drafting, producing, reviewing, approving, and/or disseminating false and misleading statements to deceive investors. Id. at ¶¶ 17, 22, 112.
More specifically, Plaintiff alleges that during the class period, unbeknownst to investors, GDS's stock was "worthless." Id. at ¶ 2. In that regard, Plaintiff accuses Defendants of disseminating false and misleading statements, and participating in several schemes designed to artificially inflate the price of GDS's common stock. Id. In his Amended Complaint, Plaintiff sets forth various alleged "schemes" perpetuated by Defendants:
The Court will detail each of these "schemes," in turn.
In March 2012, Airtronic, an arms manufacturer and distributor, was in bankruptcy proceedings in the United States Bankruptcy Court for the Northern District of Illinois. Id. at ¶ 29. Before and after Airtronic entered bankruptcy, Merriellyn Kett ("Kett"), the President of Airtronic, attempted to obtain an infusion of working capital in order to preserve Airtronic'sgovernment contracts. Id. at. ¶ 30. In August 2012, Airtronic and GDS executed a letter of intent involving a prospective merger, wherein GDS agreed to furnish a bridge loan to Airtronic to sustain Airtronic's operations through confirmation of a plan of reorganization approving the merger and treatment of creditors' claims. Id. at ¶ 31. According to Plaintiff, based on their agreement, Defendants were firmly in control of Airtronic's finances, payroll, and rent obligations. Id. at. ¶ 52. On October 2, 2013, the Bankruptcy Court confirmed Airtronic's plan, and set a sixty day deadline, i.e., December 2, 2013, for GDS and Airtronic to finalize the merger. Id. at. ¶ 37. However, according to Plaintiff, because, in part, GDS failed to fulfill its loan obligations under the merger agreement, the merger ultimately did not complete. Id. at ¶¶ 34, 57.
On October 8, 2013 (the start of the class period), Defendants issued a press release entitled, "Global Digital Solutions' Planned Merger Partner, Airtronic USA, Becomes Exclusive [Office of Emergency Management] Supplier for a Major International Client Under a Private Label Agreement with An Estimated First State Value of Approximately $95 Million." Id. at ¶ 38. The press release also quoted Kett as stating, Id. at. ¶ 39. Following publication of the October 8, 2013 press release, GDS's stock allegedly rose 7.6%. Id. at. ¶ 43.
Similarly, on October 11, 2013, Defendants again issued a press release touting the merger. Both Delgado and Sullivan were listed as the contact persons for the substance of this second press release. Id. at ¶ 45. Specifically, the release quoted Sullivan: "[t]his news is especially welcome coming so soon after two other important developments: our October 8, 2013 announcement thatAirtronic has become the exclusive OEM supplier for a major international client with a first stage value of approximately $95 million . . . ." Id. at. ¶ 44.
Plaintiff alleges that GDS had not supplied Kett with the a copy of the first two press releases before their publication, and that Kett eventually learned of the purported $95 million OEM contract that was touted by Defendants in the press. Thereafter, on October 15, 2013, Kett emailed Sullivan to inquire about the existence of the OEM contract; however, Kett, allegedly, never received an explanation regarding the contract.5 Id. at. ¶ 46. Plaintiff alleges that, according to Kett, Airtronic's $95 million contract was "not real" and that Kett did not make any statements "touting this supposed exclusive contract." Id. at ¶ 50.
Six days after Kett questioned Sullivan about the OEM contract, Defendants issued, on October 21, 2013, a third press release allegedly repeating the false claim that "Airtronic USA has become the exclusive OEM supplier for a major international client . . . ." Id. at ¶ 47. Indeed, this press release, again, listed Delgado and Sullivan as contact persons regarding the substance of the press release. Following the issuance of the October 21, 2103 press release, GDS's stock rose 12%, on volume 62% higher than the previous trading day. Id. at. ¶ 49.6
Furthermore, Plaintiff avers that, according to Kett, Defendant Loppert informed Kett, on October 15, 2013, that GDS would not have the necessary governmental approval for the merger, and that any conditions or requirements set by the government would have to be waived; however, Defendants allegedly knew that the merger agreement would not be sanctioned by the BankruptcyCourt, if the merger, itself, was not expressly approved by certain governmental agencies. Id. at. ¶ 51. Plaintiff alleges that because GDS was firmly in control of Airtronic's finances, payroll, and rent obligations, Defendants knew that the statements they made regarding the merger, as well as Airtronic's $95 million contact, were false. Indeed, according to Plaintiff, based on all the filings in the bankruptcy proceedings, Airtronic never identified any $95 million orders from the government. Plaintiff claims that, following the filing of the Kett declaration in the Adversary Proceeding, on November 26, 2013, shares of GDS's stock fell 17.6%, and, on December 2, 2013, after the public revelation that the GDS/Airtronic merger failed, GDS's stock fell further by 11.1%, on immense trading volume of 304,600 shares. Id. at. ¶¶ 53-55. Plaintiff alleges that GDS never told investors that the press releases of October 8, 11 and 21 were false. Id. at. ¶ 59.
On November 15, 2013, GDS issued a press release entitled, "GDSI Solutions, Inc., Offering Additional Details to the Public About Strategic Plans and Expected Near-Term Results, Anticipates Several Targeted Acquisition Agreements in the Fourth Quarter of 2013 and an Annual Revenue Run Rate Between $60 Million and $75 Million During the First Quarter of 2014." Id. at. ¶ 60. The release stated that "during the fourth quarter of 2013, GDSI expects to be able to announce several agreements regarding potential acquisitions that fit into the company's targeted global growth strategy." Id. And, the Company touted that "[t]aking into account GDSI's various lines of business and assuming these...
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