Levy v. Maggiore

Decision Date29 September 2014
Docket NumberNo. 13–CV–2219 MKB.,13–CV–2219 MKB.
Citation48 F.Supp.3d 428
PartiesSteven LEVY, Plaintiff, v. Dominic MAGGIORE, Jason Santiago, Thomas Pragias, John Kamen, Hugh Ward and Raiche Ende Malter & Co., LLP, Defendants.
CourtU.S. District Court — Eastern District of New York

Christopher Robert Travis, Travis LLC, Michael P. Mangan, Michael P. Mangan, LLC, New York, NY, for Plaintiff.

Harris Bruce Katz, Anthony D. Green, Eric William Swartz, Winget, Spadafora & Schwartzberg LLP, New York, NY, for Defendants.


MARGO K. BRODIE, District Judge:

Plaintiff Steven Levy commenced this action on April 11, 2013, against Defendants Dominic Maggiore, Jason Santiago, Thomas Pragias, John Kamen and Hugh Ward (collectively the IBG Defendants),1 and Raiche Ende Malter & Co., LLP (Raiche Ende). Plaintiff alleges claims of fraud pursuant to sections 10(b) and 20(a) of the Securities Exchange Act (the Exchange Act), 15 U.S.C. §§ 78j(b) (section 10(b)) and 78t (section 20(a)), as well as common law claims of fraud, fraud in the inducement, and for an accounting against the IBG Defendants. Plaintiff also alleges an aiding and abetting fraud claim against Raiche Ende. Plaintiff filed an Amended Complaint on October 8, 2013, adding a claim of fraud and violations of section 10(b) of the Exchange Act against Raiche Ende, and withdrawing the claim for an accounting as to the IBG Defendants. (Docket Entry No. 14.) All Defendants move to dismiss the Amended Complaint and Plaintiff seeks leave to submit a Second Amended Complaint (“SAC”), (annexed to Declaration of Christopher Travis in Opposition to Defendants' Motion to Dismiss (“Travis Decl.” as Ex. 11), and to submit a revised Second Amended Complaint, (Docket Entry No. 32), which the Court refers to as the Third Amended Complaint. For the reasons set forth below, the Court accepts Plaintiff's Second Amended Complaint and considers it in deciding the motions, and grants Defendants' motions to dismiss the Second Amended Complaint. The Court denies Plaintiff's motion to submit the Third Amended Complaint, but grants leave to amend the Second Amended Complaint only as to Maggiore and to add the second proposed plaintiff.

I. Background

IBG was a New York corporation that manufactured sports, recreational and “nutraceutical” beverages.2 (SAC ¶ 4.) The IBG Defendants are current or former officers and directors of IBG, and Raiche Ende was IBG's accounting firm. (Id. ¶ 2.)

In May 2009, IBG offered a private placement of shares to Plaintiff and other investors, (the May 2009 private placement”), and engaged a non-party brokerage firm, Lighthouse Financial Group, Inc. (“Lighthouse Financial”), to act as its agent in the placement. (Id. ¶¶ 28–29.) The IBG Defendants instructed Lighthouse Financial brokers to market shares in IBG by telling potential investors that IBG had $2,130,000 in sales in 2008, and was “on track” to earn more than $2,000,000 in sales in 2009. (Id. ¶¶ 30–31.) Lighthouse Financial brokers gave Plaintiff a Private Placement Memorandum (“PPM”) in connection with the May 2009 Private Placement.3 (Id. ¶ 32.) The PPM stated that IBG's auditor, Raiche Ende, had provided preliminary audited results of 2008 that reflected “gross sales of approximately $2,130,000,” as compared to $289,000 in 2007, and that the growth in sales from 2007 to 2008 was 737%. (Id. ¶¶ 32–33.) In addition to giving Plaintiff a copy of the PPM, Lighthouse Financial brokers verbally told Plaintiff that IBG was on the verge of going public, and that the proceeds of Plaintiff's investment in IBG would go toward marketing, branding and product development. (Id. ¶¶ 31–32, 47.) Plaintiff purchased 350,000 shares of IBG stock between September and November 2009. (Id. ¶ 3.) In purchasing the shares of IBG stock, Plaintiff relied on oral and written representations made by IBG and Raiche Ende that IBG had more than $2,130,000 in gross sales in 2008, that IBG was about to go public, and that Plaintiff's investment would be used for marketing and product development. (Id. ¶ 6.)

In reality, IBG did not have either gross or net sales of $2,130,000, and received only $1.575 million for goods shipped in 2008. (Id. ¶¶ 38–39.) According to the Lighthouse Financial broker who sold Levy his shares, a portion of the claimed sales of $2,130,000 were “consignment shipments,” which were shipments of products to retailers, for which title did not pass and the sale was not complete until a customer purchased the product from the retailer. (Id. ¶ 8.) These sales were also comprised of ‘guaranteed sales,’ meaning IBG would pay retailers for its products if they went unsold.” (Id. ¶ 40.)

A section titled “Risk Factors,” in the PPM includes the following language:

The Company's gross sales include all shipped goods inclusive of merchandise sold by retailers pursuant to in-store promotions, coupons, slotting fees, co-operative advertising fees, rebate and free-bate programs. Accordingly, retailers deduct the cost of these goods and in certain programs deduct their per unit profit from their invoices which reduces the net cash receipts of the Company. No assurances can be given that the Company will collect payment for all of the goods sold as these deductions and other deductions are taken by retailers and, in certain cases, by wholesalers.

(PPM, annexed to Declaration of Dominic Maggiore (“Maggiore Decl.”) as Ex. A, at 19.)

In addition, instead of using the proceeds from the May 2009 private placement for marketing and product development as represented to Plaintiff, the IBG Defendants used all of the proceeds to compensate officers and to pay directors' fees. (SAC ¶ 47.) The IBG Defendants “had the power and authority to control the contents” of the PPM, as well as the representations made by Lighthouse Financial brokers to potential investors. (Id. ¶ 26.) The IBG Defendants either “disseminated” the information contained in the PPM, or were aware that the statements contained therein were false and misleading. (Id. )

An independent audited financial statement completed by Raiche Ende (2008 Audited Financial Statement) and issued on June 8, 2009, stated that IBG's 2008 sales were $2,130,000, and stated “revenue is recognized at the time the product is shipped to the buyer.” (Id. ¶ 51; 2008 Audited Financial Statement, annexed to Travis Decl. as Ex. 2, at 1, 6.) This revenue recognition statement contradicted the statement in the May 2009 PPM that IBG “booked sales when shipped—whether there was a buyer or not.” (Id. ) Because there were few, if any, “buyers” of IBG's products in 2008, the audited 2008 sales figure was a misrepresentation. (Id. ) Raiche Ende also failed to identify the amount of compensation paid to IBG officers and directors, and the amount of time those officers and directors dedicated to IBG business on IBG's federal corporate tax returns. (Id. ¶ 52.) In addition, Raiche Ende conspired with the directors of IBG to refrain from deducting the “directors['] fees paid to IBG directors,” who in turn failed to report these amounts on their own individual tax returns. (Id. ) In 2011, the directors and officers of IBG sold IBG's most valuable brand, “Power Ice,” for $1,000,000. (Id. ¶ 53.) IBG subsequently declared bankruptcy, leaving Plaintiff's shares in IBG worth nothing. (Id. )

II. Discussion
a. Standards of Review
i. Motion to dismiss

In reviewing a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, the court “must take all of the factual allegations in the complaint as true.” Pension Ben. Guar. Corp. ex rel. St. Vincent Catholic Med. Centers Ret. Plan v. Morgan Stanley Inv. Mgmt. Inc., 712 F.3d 705, 717 (2d Cir.2013) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ); see also Lundy v. Catholic Health Sys. of Long Island Inc., 711 F.3d 106, 113 (2d Cir.2013) (quoting Holmes v. Grubman, 568 F.3d 329, 335 (2d Cir.2009) ); Matson v. Bd. of Educ., 631 F.3d 57, 63 (2d Cir.2011) (quoting Connecticut v. Am. Elec. Power Co.,

582 F.3d 309, 320 (2d Cir.2009) ). A complaint must plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A claim is plausible “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Matson, 631 F.3d at 63 (quoting Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 ); see also Pension Ben. Guar. Corp., 712 F.3d at 717–18. [W]here the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged—but it has not ‘show[n]‘that the pleader is entitled to relief.’ Pension Ben. Guar. Corp., 712 F.3d at 718 (alteration in original) (quoting Iqbal, 556 U.S. at 679, 129 S.Ct. 1937 ). Although all allegations contained in the complaint are assumed true, this principle is “inapplicable to legal conclusions.” Iqbal, 556 U.S. at 678, 129 S.Ct. 1937.

When deciding a motion to dismiss, a court's review is limited to the four corners of the complaint but a court may also review (1) documents attached to the complaint, (2) any documents incorporated in the complaint by reference, (3) any documents deemed integral to the complaint, and (4) public records. See L–7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419, 422 (2d Cir.2011) (documents attached to the complaint and those incorporated by reference); Global Network Commc'ns, Inc. v. City of New York, 458 F.3d 150, 156 (2d Cir.2006) (documents integral to the complaint); Blue Tree Hotels Inv. (Canada), Ltd. v. Starwood Hotels & Resorts Worldwide, Inc., 369 F.3d 212, 217 (2d Cir.2004) (public records). In the context of securities litigation, the Court may consider “any written instrument attached to the Complaint as an exhibit or any statements or documents incorporated in it by reference, as well as public disclosure documents required by law to be, and...

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