In re Cannavest Corp. Sec. Litig.
Citation | 307 F.Supp.3d 222 |
Decision Date | 31 March 2018 |
Docket Number | 14 Civ. 2900 (PGG) |
Parties | IN RE: CANNAVEST CORP. SECURITIES LITIGATION |
Court | U.S. District Court — Southern District of New York |
This is a federal securities law class action brought on behalf of investors who purchased the common stock of CannaVest between May 20, 2013 and April 14, 2014 (the "Class Period"). The Consolidated Complaint alleges violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b–5.
Defendants CannaVest, Michael Mona, Jr., Bart P. Mackay, Theodore R. Sobieski, and Edward A. Wilson (the "CannaVest Defendants") have moved to dismiss pursuant to Fed. R. Civ. P. 12(b)(6). (Dkt. No. 81) Defendant Stuart Titus has likewise moved to dismiss under Rule 12(b)(6). (Dkt. No. 108)1 The CannaVest Defendants argue that Plaintiffs have not pled facts establishing (1) loss causation; (2) a strong inference of scienter; or (3) a claim for control person liability against the individual Defendants. (Def. Br. (Dkt. No. 81) ) Titus contends that he cannot be held responsible for any misstatements made by CannaVest, and that Plaintiffs have not pled facts sufficient to establish (1) scienter; (2) a market manipulation claim; or (3) a control person liability claim, (Titus Br. (Dkt. No. 109) )
For the reasons stated below, the Court concludes that Plaintiffs have adequately alleged material misstatements and omissions. The misstatements and omissions claim against Mackay, Sobieski, and Titus will be dismissed, however, because Plaintiffs have not alleged—under the "group pleading doctrine"—that these Defendants were actively involved in the day-to-day management of CannaVest.
As to Plaintiffs' market manipulation claim, the Court concludes that Plaintiffs have not alleged market activity. Accordingly, Plaintiffs market manipulation claim will be dismissed as to all Defendants,
Finally, as to control person liability, Plaintiffs have not pled facts demonstrating that Sobieski controlled CannaVest, and have likewise not pled facts demonstrating that Titus was a "culpable participant." Accordingly, Plaintiffs' Section 20(a) claim against Sobieski and Titus will be dismissed.
Defendants' motions to dismiss will otherwise be denied.
I. FACTS2
Defendant CannaVest is a publicly traded Delaware corporation whose shares are listed on the over-the-counter ("OTC") Bulletin Board under the symbol "CANV." (Consol. Cmplt. (Dkt. No. 61) ¶ 12) CannaVest's primary business is the development, marketing, and sale of consumer products containing industrial hemp-based compounds, including the hemp plant extract cannabidiol. (Id. ¶ 20)
Defendant Michael Mona, Jr. became president, treasurer, and secretary of CannaVest on November 26, 2012. (Id. ¶ 13.) On January 28, 2013, Mona became the sole Board member of CannaVest, and remained so until March 15, 2013, when three additional directors were appointed to CannaVest's board. (Id. ) On July 25, 2013, he resigned as treasurer and secretary and was appointed chief executive officer. (Id. ) Prior to joining CannaVest, Mona was a consultant to Medical Marijuana, Inc., and during the Class Period he retained a 4% stake in that company. (Id. )
Defendant Bart P. Mackay is the majority owner of CannaVest. (Id. ¶ 14) He became a CannaVest director on March 14, 2013. (Id. ¶ 27)
Defendant Stuart Titus is the chief executive officer of Medical Marijuana, Inc. (Id. ¶ 17) Prior to the Class Period, Titus owned a 7.1% stake in CannaVest. Between January and March 2014, Titus sold CannaVest stock he had bought for a nickel at prices ranging from $40.76 to $166,17 a share, for a total of $7 million, Titus served as a consultant and advisor to CannaVest, and he provided the financing for a group of purchasers to buy 99.7% of CannaVest's stock in November 2012, including the interest acquired by Mackay. (Id. ¶¶ 17, 22)
Defendants Edward A. Wilson and Theodore R. Sobieski became CannaVest directors on March 14, 2013, (Id. ¶ 27) Wilson is the president of Wilson & Company, a Las Vegas accounting firm. (Id. ¶ 84)
CannaVest's corporate predecessor—Foreclosure Solutions, Inc.—was incorporated on December 9, 2010 in Texas. (Id. ¶ 21) Foreclosure Solutions was in the business of "provid[ing] information on pre-foreclosure and forecasted residential properties to homebuyers and real estate professionals on its website." (Id. ) The company was not able to secure financing for its business plan, however. (Id. )
On November 16, 2012, entities controlled by Mackay (Mai Dun Limited, LLC and Mercia Holdings, LLC) and Titus (General Hemp, LLC and Banburgh Holdings, LLC) acquired 6,979,000 shares of Foreclosure Solutions—99.7% of its outstanding stock—for $375,000. (Id. ¶ 22) Titus loaned the purchase price to the buying entities pursuant to the terms of individual promissory notes. (Id. ¶ 22) On January 29, 2013, the company changed its name to CannaVest. (Id. ¶ 23)
That same day, CannaVest purchased the assets of PhytoSphere Systems, LLC, a subsidiary of Medical Marijuana, Inc. These assets were purchased for $35 million in cash or CannaVest stock at CannaVest's sole discretion. (Id. ¶ 3) CannaVest announced the acquisition in a February 12, 2013 press release:
(Id. ¶ 25)
Medical Marijuana, Inc. announced the sale of PhytoSphere on March 1, 2013. (Id. ¶ 31) Medical Marijuana had acquired an interest in PhytoSphere in April 2012 for $2.5 million. (Id. ¶ 26) Throughout the Class Period, both CannaVest and Medical Marijuana, Inc. issued a number of press releases regarding PhytoSphere. (Id. ¶¶ 33–41)
In its 2013 Form 10–K, CannaVest reported that it had "accounted for the acquisition of the assets of PhytoSphere Systems, LLC in accordance with the Accounting Standards Codification ("ASC") Topic 805, Business Combinations ("ASC Topic 805")" (id. ¶ 56),3 as required by Generally Accepted Accounting Principles ("GAAP").4
According to Plaintiffs, CannaVest "utilized the acquisition (purchase) method [of accounting] prescribed under certain provisions of ASC [Topic] 805." (Id. ¶ 57) Under this approach, (Id. ) This accounting treatment requires the following steps: "[i]dentifying the acquirer"; "[d]etermining the acquisition date"; "[r]ecognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree"; and "[r]ecognizing and measuring goodwill or a gain from a bargain purchase." (Id. ¶ 59) (emphasis omitted).
On March 14, 2013, CannaVest's Board added three new directors: Mackay, Sobieski, and Wilson. With these additions, the Company's Board now had four directors. (Id. ¶ 27) As of April 12, 2013, CannaVest had five employees. (Id. ¶ 28)
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