In re Biozoom, Inc. Sec. Litig.
| Decision Date | 26 February 2015 |
| Docket Number | Case No. 1:14–CV–01087. |
| Parties | In re BIOZOOM, INC. SECURITIES LITIGATION. |
| Court | U.S. District Court — Northern District of Ohio |
Alan L. Rosca, James P. Booker, Peiffer, Rosca, Wolf, Abdullah, Carr & Kane, Daniel R. Karon, Cleveland, OH, Joseph C. Peiffer, Peiffer, Rosca, Wolf, Abdullah, Carr & Kane, New Orleans, LA, Paul J. Scarlato, Goldman Scarlato & Karon, Wayne, PA, Brendan M. Mewhinney, Henderson & Schmidlin, Highland Heights, OH, for Plaintiff.
Joseph C. Lombard, Murphy & McGonigle, Washington, DC, Michael V. Rella, Murphy & McGonigle, Adam S. Hakki, Agnes Dunogue, Elizabeth Johnson Stewart, Shearman & Sterling, William J. Harrington, Goodwin Procter, Ian H. Hummel, Maxim Group, Ari J. Savitzky, Fraser L. Hunter, Jr., David S. Lesser, Jamie S. Dycus, Wilmer, Cutler, Pickering, Hale & Dorr, Barry M. Kazan, Richard A. De Palma, Thompson Hine, New York, NY, Brian J. Lamb, Thomas M. Ritzert, Thompson Hine, Jennifer D. Armstrong, William J. O'Neill, McDonald Hopkins, Hugh E. McKay, Tracey L. Turnbull, Tracy A.S. Francis, Porter, Wright, Morris & Arthur, David H. Wallace, Michael J. Zbiegien, Jr., Taft Stettinius & Hollister, Cleveland, OH, Brian E. Cohen, Donald A. Tarkington, Matthew J. Singer, Novack & Macey, Brett M. Doran, Steven M. Malina, Greenberg Traurig, Chicago, IL, Kurt A. Kappes, Greenberg Traurig, Sacramento, CA, Jeremy T. Kamras, Jonathan W. Hughes, Kenneth G. Hausman, Arnold & Porter, San Francisco, CA, Anthony S. Fiotto, Jr., Goodwin Procter, Boston, MA, Russell S. Sayre, Aaron M. Herzig, Michael J. Zbiegien, Jr., David H. Wallace, Taft Stettinius & Hollister, Cincinnati, OH, Katharine Szczepanik Jones, Wilmer, Cutler, Pickering, Hale & Dorr, Dayton, OH, for Defendant.
In this putative securities class action, Plaintiffs generally seek rescission or damages after the value of Biozoom securities that Plaintiffs had purchased collapsed. Plaintiffs purchased the stock in over-the-counter markets from market makers. Plaintiffs contend the Biozoom securities were unregistered and argue that the Defendant market makers are strictly liable for selling the unregistered stock.
Plaintiffs make claims under Section 12(a)(1) of the Securities Act of 1933 and under a variety of state-law theories. Defendants seek the dismissal of both the federal claims and the state claims. Plaintiffs have responded, and Defendants have replied. The Court has held oral argument on the motions. For the reasons below, the Court GRANTS IN PART and DENIES IN PART the motions to dismiss.
Plaintiffs are investors who were victims of a pump-and-dump scheme involving Biozoom, Inc. stock. Pump-and-dump schemes often involve small cap stocks whose value is artificially inflated by false statements to sell the cheaply purchased stock at a higher price. The schemes typically victimize investors who attempt to quickly profit from recently disclosed “news” on a new and cheap stock.
Plaintiffs sue a number of brokerage firms who acted as market makers for Biozoom in the Over–the–Counter Bulletin Board (“Bulletin Board”) and, in that capacity, sold Biozoom stock to Plaintiffs. To this point, nothing suggests Defendants were aware of the fraudulent scheme to raise Biozoom's stock price or participated in the scheme. Instead, Defendants were market-makers in Biozoom stock when that stock was sold on the Bulletin Board.1
The Financial Industry Regulatory Authority owns the Bulletin Board, which is operated by NASDAQ OMX.2 The Bulletin Board is a “regulated quotation service that displays real-time quotes, last-sale prices, and volume information in over-the-counter ... securities.”3 Securities transactions on the Bulletin Board are conducted by market makers through a computer system run from New Jersey.4
Securities may only be quoted on the Bulletin Board when sponsored by a market maker, and Bulletin Board transactions occur between Bulletin Board members, not retail investors.5 Moreover, the securities traded on the Bulletin Board are not traded on any national securities exchange.6 Market makers may post quotations that reflect their own buying or selling interest or the unsolicited buying or selling interest of retail customers.7 Plaintiffs say that each of the Defendants served as a market maker for Biozoom common stock.8
Plaintiffs' complaint primarily uses the factual background alleged in a related SEC proceeding.9 Although the background alleged in the SEC action and repeated here is somewhat involved, the Court recites an abbreviated history of the shares at issue because of that history's relevance to several of the parties' arguments.
The long and winding road begins on June 25, 2007, with the formation of a Nevada corporation called Entertainment Art.10 Entertainment Art eventually became Biozoom. Entertainment Art's stated purpose was to “design, produce, and sell a line of leather bags.”11 The company was controlled by three officers.12
As will be discussed, the Defendants say they are entitled to the dealer's exemption from the Securities Act's registration requirement because the stock they sold to Plaintiffs had been offered to the public more than forty days before Plaintiffs purchased their stock.
By March 2008, Entertainment Art had sold 610,000 of its 1,810,000 shares in a series of private placement transactions.13 On July 18, 2008, Entertainment Art filed a registration statement for these 610,000 shares with the Securities and Exchange Commission (“SEC”). Defendants argue that this 2008 registration and sale began the forty day clock on the dealer's exemption and exempted Defendants from liability for their later sale of unregistered securities.
The next twist came on May 1, 2009, when Entertainment Art was sold in a private transaction to Medford Financial Ltd. (“Medford”).14 Medford held all 1,810,000 shares of Entertainment Art. After a 33:1 split on July 21, 2009, Medford owned all 59,730,000 shares of Entertainment Art.
Entertainment Art was apparently dormant for over three years. Then, on October 25, 2012, Medford sold Entertainment Art to Le Mond Capital (“Le Mond”) in a private transaction.15
Several months later, and arguably to facilitate a stock fraud scheme, Entertainment Art seemingly morphed into a different entity. First, on March 12, 2013, it announced that it would no longer focus on leather bags, but instead would transition to biotechnology.16 Concurrently, Entertainment Art announced that a newly formed subsidiary, Biozoom Technologies, Inc., had acquired patents, licenses, and related assets in exchange for shares of Entertainment Art stock.17
Le Mond retained the 20,130,000 shares corresponding to the shares mentioned in the 2008 registration statement.
On April 1, 2013, Entertainment Art changed its name to Biozoom.18
Between January 2013 and June 2013, ten Argentinian citizens acquired these 20,130,000 shares from Le Mond and deposited them with two broker-dealers (not the Defendants).19
Plaintiffs say that on May 16, 2013, Biozoom shares were quoted on the Bulletin Board for the first time.20 Defendants respond that Biozoom shares had been earlier quoted in 2009 on the Bulletin Board. Shortly thereafter, Biozoom issued a number of press releases claiming to have made a scientific breakthrough.21 These claims were picked up and repeated by others.22
Over approximately the next month the Argentinian citizens sold 14,078,406 shares of Biozoom stock over the Bulletin Board.23 On June 25, 2013, the SEC suspended trading in Biozoom shares.24
For their claim against the Defendant market makers, Plaintiffs allege that the Defendants sold shares that were unregistered in violation of Section 12(a)(1) of the Securities Act of 1933. Plaintiffs also allege that the Defendants impermissibly sold, offered, and delivered unregistered securities “until the delivery of the last shares they sold on June 24, 2013, which delivery took place, upon information and belief, on June 27, 2013.”25 Plaintiffs also allege a variety of state-law causes of action arising from the same conduct.
As discussed below, Defendants make several arguments why this case should be dismissed, including an argument that the statute of limitations should stop this lawsuit.
On May 20, 2014, Charles Corso, acting as trustee for the Anthony O. Corso Living Trust, (“Corso”) filed this putative class lawsuit against Defendant KCG Americas LLC (“KCG”). Corso sought to represent a class of “all persons who purchased Biozoom stock between May 16, 2013[,] and June 25, 2013[,] from Defendant, inclusive, ... seeking to pursue remedies under the Securities Act [of 1933].”26
On June 24, 2014, Plaintiffs filed an amended complaint, adding several more plaintiffs and adding all other Defendants except for VFinance.27 In their first amended complaint, the Plaintiffs again made a single claim for violation of the Securities Act of 1933.28
On September 18, 2014, Plaintiffs filed a Second Amended Complaint, adding two new plaintiffs and Defendant VFinance Investments, Inc.29 The Second Amended Complaint also added a variety of state law claims.30
The Defendants have now filed consolidated motions to dismiss Plaintiffs' federal and state law claims.31 Plaintiffs have opposed these motions,32 and Defendants have replied.33 After obtaining leave from the Court, Plaintiffs have filed a brief sur-reply.34
“To survive 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.’ ”35 The plausibility requirement is not “akin to a probability requirement,” but requires “more than a sheer possibility that the defendant has acted unlawfully.”36
Federal Rule of Civil Procedure 8 provides the general standard of pleading and only requires that a...
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