Lifeline Legacy Holdings, LLC v. OZY Media, Inc.
| Decision Date | 13 June 2022 |
| Docket Number | 21-cv-07751-BLF |
| Parties | LIFELINE LEGACY HOLDINGS, LLC, Plaintiff, v. OZY MEDIA, INC., SAMIR RAO, and CARLOS WATSON, Defendants. |
| Court | U.S. District Court — Northern District of California |
ORDER GRANTING MOTION TO DISMISS FIRST AMENDED COMPLAINT WITH LEAVE TO AMEND IN PART AND WITHOUT LEAVE TO AMEND IN PART [RE: ECF 31]
Plaintiff LifeLine Legacy Holdings, LLC sues Defendants OZY Media Inc., Samir Rao, and Carlos Watson for securities fraud under federal and state laws. OZY Media has filed a motion to dismiss the first amended complaint (“FAC”) under Federal Rule of Civil Procedure 12(b)(6), which is joined by Rao and Watson.
The motion to dismiss is GRANTED WITH LEAVE TO AMEND IN PART AND WITHOUT LEAVE TO AMEND IN PART.
OZY Media is a digital media company specializing in news podcasts, television, and film. FAC ¶ 13, ECF 18. The company was founded by Rao and Watson in 2013. Id. Rao is the Chief Operating Officer, Watson is the Chief Executive Officer, and both serve on the company's Board of Directors. Id. ¶¶ 11-13.
Rao and Watson solicited LifeLine to invest in OZY Media. FAC ¶ 14. In February 2021, they reached out to LifeLine via telephone and electronic correspondence, touting OZY Media's financial performance and claiming interest from large institutional investors such as Goldman Sachs. Id. On February 15, 2021, Watson informed LifeLine that Goldman Sachs had declined to invest, but stated that other institutional investors were interested. Id. LifeLine entered into a Stock Purchase Agreement (“SPA”) with OZY Media on February 24, 2021, for the purchase of approximately $2 million of Series C Preferred Shares. Id. ¶ 15. In April and May 2021, Rao and Watson solicited further investments from LifeLine, making oral and written representations that a Google affiliate was leading the Series D financing by investing approximately $30 million in OZY Media. Id. ¶ 18. LifeLine entered into a second SPA with OZY Media on May 13, 2021, for the purchase of approximately $250, 000 of Series D Preferred Shares. Id. ¶¶ 15-19.
LifeLine claims that Defendants failed to disclose material information regarding OZY Media prior to execution of the SPAs. FAC ¶¶ 6, 22-26. Specifically, LifeLine alleges that, “At no time prior to LifeLine's execution of the Series C and Series D SPAs did Defendants disclose to LifeLine that Rao attempted to impersonate an executive of YouTube in an effort to obtain a substantial investment from Goldman Sachs, or that, as a result of Rao's fraudulent conduct, Goldman Sachs declined to invest in Ozy Media and that Ozy Media was under investigation by government agencies.” Id. ¶ 24. Rao's actions became publicly known in September 2021. Id. ¶ 26. OZY Media's Board of Directors initially decided to wind down the company's affairs, but Watson subsequently announced that the company would continue operations. Id.
LifeLine filed this suit against Ozy Media and Rao on October 4, 2021, and thereafter amended as of right to add Watson as a defendant. See Compl., ECF 1; FAC, ECF 18. The FAC asserts the following claims: (1) violations of § 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 against OZY Media; (2) violations of § 10(b) of the Exchange Act and Rule 10b-5 against Rao; (3) violations of § 10(b) of the Exchange Act and Rule 10b-5 against Watson; (4) violations of California Corporations Code § 25401 against OZY Media; (5) violations of California Corporations Code § 25401 against Rao; (6) violations of California Corporations Code § 25401 against Watson; and (7) fraud by concealment against all Defendants. LifeLine seeks rescission of the SPAs and damages. FAC ¶¶ 8, 32, 49.
“A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted tests the legal sufficiency of a claim.” Conservation Force v. Salazar, 646 F.3d 1240, 1241-42 (9th Cir. 2011) (internal quotation marks and citation omitted). While a complaint need not contain detailed factual allegations, it “must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is facially plausible when it “allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id.
When evaluating a Rule 12(b)(6) motion, the district court is limited to consideration of the allegations of the complaint, documents incorporated into the complaint by reference, and matters which are subject to judicial notice. See Louisiana Mun. Police Employees' Ret. Sys. v. Wynn, 829 F.3d 1048, 1063 (9th Cir. 2016).
Defendants assert that LifeLine's federal securities claims are not adequately pled, and that because the federal securities claims fail, so too do the state law claims based on the same allegations. In opposition, LifeLine contends that its claims are adequately pled. The Court first discusses the federal securities claims, and then it takes up the state law claims.
Claims 1, 2, and 3 are asserted under § 10(b) of the Exchange Act and Rule 10b-5. Claim 1 is asserted against OZY Media, Claim 2 is asserted against Rao, and Claim 3 is asserted against Watson. The elements of a claim under § 10(b) and Rule 10b-5 are: “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” In re Volkswagen “Clean Diesel” Mktg., Sales Pracs., & Prod. Liab. Litig., 2 F.4th 1199, 1203 (9th Cir. 2021) (internal quotation marks and citation omitted). “If one of these elements is missing, the claim fails.” Id.
Defendants contend that LifeLine has not alleged a material misrepresentation or omission, scienter, reliance, economic loss, or loss causation. LifeLine asserts that these elements are adequately alleged.
The FAC alleges that Rao and Watson made several oral representations to LifeLine regarding OZY Media, and the § 10(b) claims appear to be based at least in part on those oral representations. FAC ¶¶ 14, 18, 30, 36, 42. However, LifeLine's counsel clarified at the hearing that the § 10(b) claims are not based on any oral representations, but instead are based on alleged material omissions. See Hrg. Tr. 17:8-18, ECF 55.
Section 10(b) and Rule 10b-5 “do not create an affirmative duty to disclose any and all material information.” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 44 (2011). “The person who omitted the material information must have had a duty to disclose it to the person supposedly harmed by the omission.” Desai v. Deutsche Bank Sec. Ltd., 573 F.3d 931, 939 (9th Cir. 2009). “Such a duty may arise from a relationship of trust and confidence between parties to a transaction.” Id. (internal quotation marks and citation omitted). Alternatively, disclosure is required “when necessary to make . . . statements made, in the light of the circumstances under which they were made, not misleading.” Matrixx, 563 U.S. at 44 (internal quotation marks and citation omitted).
Claim 7 of the FAC, for fraud by concealment under state law, alleges that “a fiduciary and confidential relationship existed between Defendants, and each of them, and Plaintiff.” FAC ¶ 61. That allegation does not appear in Claims 1-3 for federal securities fraud. LifeLine's counsel stated at the hearing that its claims are not premised on an alleged fiduciary relationship, and that the allegations of breach of fiduciary duty “will be withdrawn.” Hrg. Tr. 17:8-18. Counsel stated that “this is a case about the failure to disclose the conduct that rendered representations in the actual document itself[, ] the Stock Purchase Agreements, misleading or false.” Id. The Court therefore focuses on the representations and warranties of the SPAs in evaluating the adequacy of LifeLine's claims. The Court understands LifeLine to be withdrawing its fiduciary duty theory as to all claims, including Claim 7 for fraud by concealment.
The FAC identifies only one representation and warranty that is set forth in the SPAs: “to the Company's knowledge, the Company is not in violation of any federal or state statute, rule or regulation applicable to the Company.” FAC ¶¶ 16, 20. LifeLine does not explain how this statement was rendered false or misleading by Defendants' failure to disclose the Rao impersonation and resulting government investigations. LifeLine does not identify any statute, rule, or regulation that was violated by Rao's impersonation of a YouTube executive. Nor has LifeLine tied the alleged failure to disclose government investigations to the alleged representation and warranty. LifeLine must clearly connect the alleged nondisclosure of investigations to the specific statement allegedly rendered false or misleading by that nondisclosure. See Metzler Inv. GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049, 1071 (9th Cir. 2008) ().
In its opposition to the motion, LifeLine identifies other representations and warranties in the SPAs that LifeLine contends were rendered false or misleading by Defendants' failure to disclose. When evaluating a Rule 12(b)(6) motion, the Court cannot consider representations and warranties that are not alleged in the FAC.
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