Poptech, L.P. v. Stewardship Inv. Advisors, LLC

• Decision Date: 19 March 2012
• Docket Number: No. 3:10cv967 (MRK).,3:10cv967 (MRK).
• Citation: 849 F.Supp.2d 249
• Court: U.S. District Court — District of Connecticut
• Parties: POPTECH, L.P., individually and on behalf of a class of others similarly situated, Plaintiff, v. STEWARDSHIP INVESTMENT ADVISORS, LLC; Acorn Capital Group, LLC; Marlon Quan; Gustav E. Escher, III; Stewardship Credit Arbitrage Fund, LLC; Paul Seidenwar; and Robert Bucci, Defendants.

849 F.Supp.2d 249

POPTECH, L.P., individually and on behalf of a class of others similarly situated, Plaintiff,

v.STEWARDSHIP INVESTMENT ADVISORS, LLC; Acorn Capital Group, LLC; Marlon Quan; Gustav E. Escher, III; Stewardship Credit Arbitrage Fund, LLC; Paul Seidenwar; and Robert Bucci, Defendants.

No. 3:10cv967 (MRK).

United States District Court, D. Connecticut.

March 19, 2012.

James E. Miller, Karen Leser Grenon, Patrick A. Klingman, Shepard, Finkelman, Miller & Shah, LLP, Chester, CT, Lawrence D. Berger, Scott R. Shepherd, Shepherd, Finkelman, Miller & Shah, LLP, Media, PA, for Plaintiff.

David Steven Smith, Smith Campbell, LLP, David Gourevitch, David Gourevitch, P.C., New York, NY, Francis H. Morrison, III, Nicholas Andrew Geiger, Axinn, Veltrop & Harkrider LLP, Christopher F. Girard, Theodore J. Tucci, Robinson & Cole, LLP, Hartford, CT, Patrick J. Monahan, II, Garfunkel Wild, P.C., Stamford, CT, Frank J. Silvestri, Jr., Levett Rockwood, Westport, CT, Marc J. Grenier, DePanfilis & Vallerie, Norwalk, CT, Ian E. Bjorkman, Law Office of Ian E. Bjorkman, LLC, New Haven, CT, for Defendants.

MEMORANDUM OF DECISION

MARK R. KRAVITZ, District Judge.

In this securities fraud case, Plaintiff Poptech, L.P. (“Poptech”) and Movants Terence Isakov, M.D. and William A. Meyer (collectively “Plaintiffs”) have filed a 98–page–long Second Amended Complaint [doc. # 101], bringing suit against numerous defendants: Acorn Capital Group (“Acorn”); Stewardship Investment Advisors, LLC (“Advisors”); the Stewardship Credit Arbitrage Fund, LLC (“the Fund”); Marlon Quan; Gustav E. Escher, III; Paul Seidenwar; and Robert Bucci (collectively “Defendants”). Plaintiffs' suit is brought pursuant to § 10(b) of the Securities Exchange Act of 1934 (“the Exchange Act”), 15 U.S.C. § 78j(b), and Rule 10b–5 promulgated under that statute by the United States Securities and Exchange Commission (“SEC Rule 10b–5”), 17 C.F.R. § 240.10b–5(b). The Second Amended Complaint also alleges claims under § 20(a) of the Exchange Act against those defendants who are alleged to have exerted control over the primary violators, see15 U.S.C. § 78t(a), and state law claims under the Connecticut Uniform Securities Act (“CUSA”), Conn. Gen.Stat. § 36b–29, against those defendants who offered to sell interests by means of untrue statements of material facts and those who aided and abetted in such violations.

Numerous motions to dismiss are pending before this Court. The first three make substantially similar arguments; namely, that (1) Plaintiffs lack standing to bring any of their claims, as the claims are derivative on behalf of the Fund; (2) with regard to their first count alleging a violation of § 10–b, Plaintiffs fail to meet the enhanced pleading standards of Rule 9(b) of the Federal Rules of Civil Procedureand the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u–4, because Plaintiffs fail to plead loss causation, fraud, or scienter with the requisite specificity; (3) as Plaintiffs have failed to state a claim upon which relief can be granted under § 10(b), Plaintiffs have also failed to state a claim upon which relief can be granted under § 20(a); and (4) because Plaintiffs have failed to establish the federal claims, the Court should not exercise supplemental jurisdiction over the remaining two state law claims. See Quan & Advisors Mot. to Dismiss Second Am. Class Action Compl. [doc. # 111]; the Fund Mot. to Dismiss Counts I and III of Pls.' Second Am. Class Action Compl. [doc. # 114]; Acorn Mot. to Dismiss Second Am. Class Action Compl. [doc. # 115].

The remaining two individual defendants—Mr. Bucci and Mr. Escher ¹—filed separate motions adopting the above arguments and advancing additional ones. Mr. Bucci argues that Plaintiffs fail to plead with adequate specificity a cause of action for control person liability under § 20(a), and both Mr. Bucci and Mr. Escher argue that Plaintiffs fail to plead with adequate specificity a cause of action for aiding and abetting under CUSA. See Bucci Mot. to Dismiss Second Am. Class Action Compl. [doc. # 121]; Escher Mot. to Dismiss Second Am. Compl. [doc. # 110].

After reviewing the extensive briefing on all motions and conducting oral argument—at which lawyers for all parties argued impressively on these close questions—the Court concludes that Plaintiffs pled their § 10–b claim with adequate specificity. Accordingly, their § 20(a) and state law claims stand and Mr. Quan and Advisors's Motion to Dismiss [doc. # 111]; the Fund's Motion to Dismiss [doc. # 114]; and Acorn's Motion to Dismiss [doc. # 115] are denied. However, because Dr. Isakov fails to allege a connection between an omission for which Defendants are liable and his purchase of a security, he does not state a § 10(b) claim and is dismissed as a proposed Class Representative.

The Court further finds that Plaintiffs have adequately alleged that Mr. Bucci is subject to control person liability and materially assisted in the violation of securities laws and therefore denies his Motion to Dismiss [doc. # 121]. However, as Plaintiffs fail to adequately allege that Mr. Escher materially assisted in the violation of securities, his Motion to Dismiss [doc. # 110] is granted.

I.

The Court has had prior opportunity to review the facts of this case, see Poptech, L.P. v. Stewardship Credit Arbitrage Fund, LLC, 792 F.Supp.2d 328 (D.Conn.2011), but they bear reiteration and supplementation here. These factual allegations are taken from the Second Amended Complaint [doc. # 101], which the Court must accept as true for the purposes of this motion. Additional facts are provided where appropriate in the analysis.

A.

Poptech is a Delaware limited partnership, and its sole general partner, Poptech, LLC, is a Delaware limited liability company, with its principal place of business in Florida. In January 2005, Poptech acquired Class “P” interests in the Fund, thereby becoming a Fund member. During the Class Period, which extends from February 6, 2006 to September 25, 2008, Poptech converted these shares to Class “A” interests.

Movant and proposed Class Representative, Terence Isakov, M.D., resides in Ohio. Dr. Isakov's spouse originally invested in the Fund. Thereafter, as the manager of the Isakov Family LLC, his family's investment vehicle, Dr. Isakov invested in the Fund in January 2005. Dr. Isakov claims to be a Fund member since 2005 as the manager of the Isakov Family LLC. On September 1, 2006, Dr. Isakov, as an individual, purchased an additional $450,000 in Class A shares through his IRA.

Movant and proposed Class Representative William A. Meyer resides in Florida. On or around June 1, 2007, Mr. Meyer acquired Class “A” interests in the Fund and thereby became a Fund member.

At all times relevant to this action, Acorn was a finance company that specialized in asset-based lending, which entails investing in privately originated loans secured by a specific asset or pool of assets. Acorn sold its loans as investments to the Fund. Advisors was the Fund's managing member and controlled it.² The Fund, Advisors, and Acorn all operated out of a single office in Greenwich, Connecticut, where employees of one company frequently worked for the other companies. For example, Dominick Miele “initially perform[ed] Fund-related responsibilities ... and then transitioned into a loan monitoring role for Acorn.” Second Am. Compl. (“SAC”) [doc. # 101] ¶ 37. In essence, Plaintiffs allege, all of the companies operated as a single entity: they were each grossly undercapitalized, failed to observe corporate formalities insofar as officers and employees were treated as interchangeable, and the roles of officers and employees for the three companies were not separate or distinct.

Marlon Quan was the creator of the Fund, Advisors, and Acorn and the sole member of Advisors and Acorn. Mr. Quan was also the President of the two Fund subsidiaries and one of two representatives and contact persons for the subsidiaries; Acorn's President, owner, and managing member; and Advisors's managing member.³

Paul Seidenwar was Acorn's President during the Class Period; he had previously served as its Chief Credit Officer and Managing Director. Mr. Seidenwar was also identified as a representative of and contract person for the Fund's subsidiaries. He is currently the President of ABRG, Acorn's successor-in-interest.

Robert Bucci was Acorn's Chief Financial Officer, Advisors's Chief Financial Officer, and an Assistant Portfolio Manager for the Fund.

Finally, Gustav E. Escher, III, along with his other positions in non-parties, was identified as the “Independent Manager” of the Fund, responsible for independently evaluating transactions between Acorn and the Fund. He was simultaneously one of four directors of the Offshore Fund and a director of one of the Fund's subsidiaries, the latter of which was created in November 2007.

B.

The Fund's Private Placement Memoranda (“PPMs”), the first of which was issued in September 2004, disclosed that the Fund's primary investment strategy was asset-based lending, a strategy which involved purchasing short-term loans. The Fund represented in its PPMs that it would acquire all or substantially all of its short-term notes from Acorn, which might transact with numerous types of businesses, including “merchandise distributors ... who are engaged in the business of buying excess high-quality, consumer merchandise inventory arising, for example, from manufacturing overruns, wholesale inventory overages and retail bankruptcies, at distressed prices and selling the merchandise to retailers at a profit.” Escher Mot. to Dismiss [doc. # 35–2] Ex. A at 10 (2006 PPM).

The Fund's PPMs represented that it would engage in a safe, low-risk investment strategy. They indicated that the loans the Fund would purchase from Acorn would be short-term loans, meaning for terms of 180 days or less; would be secured by cash, cash equivalent, inventory, and...