In re Longfin Corp. Sec. Class Action Litig.
| Decision Date | 11 April 2019 |
| Docket Number | 18cv2933(DLC) |
| Parties | IN RE LONGFIN CORP. SECURITIES CLASS ACTION LITIGATION |
| Court | U.S. District Court — Southern District of New York |
Appearances:
For the plaintiffs:
Christopher James Kupka
Eduard Korsinsky
Levi & Korsinsky, LLP
55 Broadway, 10th Floor
New York, NY 10006
Donald J. Enright
Elizabeth K. Tripodi
John A. Carriel
Levi & Korsinsky LLP (DC)
1101 30th, Street, NW
Washington, DC 20007
For defendant Network 1:
Peter George Siachos
Jack I. Siegal
Gordon Rees Scully Mansukhani
18 Columbia Turnpike N.
Florham Park, NJ 07932
This is a federal securities class action brought against defendants Longfin Corp ("Longfin"), Venkata S. Meenavalli ("Meenavalli"), Vivek Kumar Ratakonda ("Ratakonda"), Andy Altahawi ("Altahawi," and together with Meenavalli, and Ratakonda, the "Executive Defendants"), Suresh Tammineedi ("Tammineedi"), Dorababu Penumarthi ("Penumarthi"), (with the Executive Defendants, "Individual Defendants"), and Network 1 Financial Securities Inc. ("Network 1," and together with the other defendants, "Defendants") on behalf of investors who purchased Longfin's stock.
This Opinion addresses the motions to dismiss filed by Tammineedi, Penumarthi and Network 1. Tammineedi and Penumarthi have moved to dismiss for lack of personal jurisdiction pursuant to Fed. R. Civ. P. 12(b)(2) and Network 1 has moved to dismiss for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6). For the reasons that follow, Network 1's motion is granted in part and Tammineedi and Penumarthi's motions are denied.
The following facts are taken from the First Amended Complaint ("FAC") and documents attached to and incorporated in it by reference. They are taken in the light most favorable to the plaintiffs. This Opinion also incorporates by reference and assumes familiarity with the description of the alleged Longfin scheme and statutory framework for these claims, as set forth in a May 1, 2018 Opinion granting a preliminary injunction in a related SEC enforcement action. See Sec. & Exch. Comm'n v. Longfin Corp., 316 F. Supp. 3d 743 (S.D.N.Y. 2018).
Longfin describes itself as a finance and technology corporation that provides foreign exchange and financesolutions. It purports to be an American corporation headquartered in New York. Longfin and its associates are accused of perpetrating a securities fraud that included false statements and insider trading.
Tammineedi is a citizen and resident of India. He is the former director of two entities related to Longfin. Penumarthi is a citizen and resident of the United Kingdom. He has described himself as the "head of Longfin's United Kingdom operations". Network 1 is a registered broker-dealer located in Red Bank, New Jersey.
Longfin publicly offered its shares for the first time in 2017 through what is known as a Regulation A+ offering. See Longfin, 316 F. Supp. 3d 743 (describing Regulation A+ offerings). On June 16, 2017, the SEC first qualified Longfin's Regulation A+ offering.
Longfin retained Network 1 as its lead underwriter for its Regulation A+ offering on August 21, 2017. According to its underwriting agreement ("Underwriter Agreement"), Network 1 was to act on a "best efforts basis" to issue and sell Longfin shares in an initial public offering. In exchange, Longfin would pay Network 1 a fee, issue it "Underwriter's Warrants," and reimburse it for all expenses. The Underwriter Agreement provided that investors would purchase Longfin shares throughbroker transactions and that payment for such purchases would be placed in a segregated bank account.
In the Agreement, Longfin represented that its Offering Statement and the company's Amended Final Offering Circular "present fairly, in all material respects, the financial condition of the Company." Longfin also agreed that it would "use its reasonable best efforts to ensure" that its shares are listed for trading on the NASDAQ. Network 1 represented that it would not use or distribute written offering materials other than the Amended Final Offering Circular, and would make no representations inconsistent with those made in the Longfin Offering Statement. Network 1's obligations under the agreement were subject to, inter alia, Longfin furnishing certain certificates to Network 1, including any certificates "reasonably requested as to the accuracy and completeness" of statements made by the company in connection with its offering.
Longfin began issuing shares under its Regulation A+ offering on September 1, 2017. As per its underwriting agreement with Longfin, Network 1 was to receive a percentage of the gross proceeds from the first 3,000,000 shares sold in the offering. Network 1 ultimately received $438,757 in commissions based on 1,140,989 shares sold.
On August 11, 2017, Longfin submitted its application for listing on NASDAQ. The FAC alleges that Network 1 -- along with Altahawi, Longfin's then-Secretary -- were responsible for communicating with NASDAQ regarding Longfin's application.
Under NASDAQ Listing Rule 5505(a), a company seeking to list its equity securities must have, inter alia, at least 1,000,000 publicly-held shares, defined as shares not directly or indirectly held by an officer, director, or "any person who is the beneficial owner of more than 10 percent of the total shares outstanding." On November 15, NASDAQ approved Longfin's listing.
On November 22, the SEC qualified a November 3 Longfin Amended Offering Statement. This qualified Longfin to conduct an offering of up to 10 million Class A shares for $5.00 per share with a minimum purchase amount of 100 shares. On November 29, Longfin informed NASDAQ that it anticipated listing its Class A Stock on December 11, 2017.
On December 4, Network 1 requested updated information from Altahawi on Longfin's issued shares to use in its communications with NASDAQ. At Altahawi's instruction, Longfin's transfer agent provided Network 1 with a list of issuances and a reconciliation document detailing the deposits and remittances associated with issuances.
By December 6, Longfin was still short of NASDAQ's requirement that it have issued 1,000,000 publicly-held shares. One of the fraudulent transactions at the heart of this action is alleged to have occurred on that day to assist in getting Longfin listed on the NASDAQ. Longfin issued 409,360 Class A shares to 24 individuals for $0 in consideration ("December 6 Shares").
Longfin promptly informed NASDAQ that it would close its offering on December 7, and list its Class A Stock on December 13. The individuals who received the December 6 Shares include Longfin insiders such as Tammineedi and Penumarthi and officers such as Ratakonda. Tammineedi received 30,000 shares and Penumarthi received 40,000 shares. Later, through trading on the open market, Tammineedi sold 2,200 of his December 6 Shares for $127,335, and Penumarthi sold 39,800 of his December 6 Shares for $1,531,187.39.
On December 7, Altahawi sent Network 1 an updated list of shareholders that included the 24 individuals who had received December 6 Shares and informed Network 1 that Longfin wished to close the Regulation A+ Offering that day. In response, Network 1 requested "the list of people that invested" and "proof of Funds received." Altahawi provided Network 1 with a list of the 24 individuals who received December 6 Shares and bank statements purportedly containing payment information for theseshares. Plaintiffs allege that the December 6 Shares were never paid for and the bank statements did not actually contain proof of funds received.
On December 11, Altahawi informed NASDAQ that Longfin had sold 1,140,989 Class A shares under its Regulation A+ Offering to 364 shareholders. Beginning on December 13, Longfin's Class A Shares were listed on NASDAQ under the ticker symbol "LFIN." On December 13 and 14, Tammineedi purchased 67,000 additional shares of Longfin Class A Stock. Tammineedi later sold these shares for a profit of $2.7 million.
Around December 21, in response to requests by Tammineedi, Penumarthi, and five additional December 6 shareholders to open brokerage accounts, Network 1 asked Altahawi to confirm that these shareholders had paid for their shares. Altahawi again provided Network 1 with bank statements that purportedly showed payment for the stocks. Plaintiffs allege that the two escrow accounts used in connection with Longfin's Regulation A+ offering and Longfin's bank account do not actually contain evidence of payments made for the December 6 Shares.
Between December 13 and March 22, 2018, Longfin issued a series of false and misleading press releases announcing its acquisition of a "[b]lockchain technology empowered solutions provider" named Ziddu.com, a multi-billion dollar investment inthe company, and the company's listing on performance indexes. In response, the price of Longfin's Class A stock skyrocketed.
Between March 26 and April 3, 2018, Longfin's stock price fell precipitously following disclosure of, inter alia, the SEC investigation. On April 6, the SEC announced it had acquired a court order freezing $27 million in trading proceeds from allegedly illegal sales of Longfin Class A stock. That same day, NASDAQ announced that it was halting the trading of Longfin's Class A Stock. On May 24, Longfin stock was officially delisted from NASDAQ and began trading on the over-the-counter market.
Plaintiffs allege that Tammineedi and Penumarthi sold their Longfin shares while in possession of material non-public information and neglected their duty to disclose such information or abstain from trading. They allege as well that Tammineedi breached his duty as an executive employee of Longfin to refrain from trading Longfin stock.
Plaintiffs filed this action on April 3, 2018 on behalf of a class consisting of all persons and entities, other than the defendants and...
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