Prime Mover Capital Partners L.P. v. Elixir Gaming Techs., Inc.

• Decision Date: 27 September 2012
• Docket Number: No. 10 Civ. 2737(LAK).,10 Civ. 2737(LAK).
• Citation: 898 F.Supp.2d 673
• Parties: PRIME MOVER CAPITAL PARTNERS L.P., et al., Plaintiffs, v. ELIXIR GAMING TECHNOLOGIES, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

898 F.Supp.2d 673

PRIME MOVER CAPITAL PARTNERS L.P., et al., Plaintiffs,

v.ELIXIR GAMING TECHNOLOGIES, INC., et al., Defendants.

No. 10 Civ. 2737(LAK).

United States District Court, S.D. New York.

Sept. 27, 2012.

Daniel A. Osborn, Osborn Law, P.C., for Plaintiffs.

Paul R. Bessette, Michael A. Piazza, Jesse Z. Weiss, Greenberg Traurig LLP, for Defendant Elixir Gaming Technologies, Inc. and the Individual Defendants.

David J. Schindler, Robert W. Perrin, Matthew L. Kutcher, Cameron Smith, Latham & Watkins LLP, for Defendant Elixir Group Limited.

MEMORANDUM OPINION

LEWIS A. KAPLAN, District Judge.

This is an action for damages in connection with plaintiffs' purchases of shares of Elixir Gaming Technologies, Inc. (“EGT”). Plaintiffs sue under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) ¹ and Rule 10b–5 thereunder,² the Nevada Uniform Securities Act, and on various common law theories. They claim that the defendants made material misrepresentations that (1) inflated EGT's share price, (2) caused them to purchase and hold EGT shares at that inflated price, and (3) injured them when the truth was made public and led to a decline in EGT's share price.

The Court previously dismissed certain defendants from the case ³ and dismissed the majority of the claims in their amended complaint without prejudice. Plaintiffs then sought leave to amend. The matter is now before the Court on motions to dismiss the second amended complaint (“SAC”) for failure to state a claim upon which relief may be granted by the remaining defendants—EGT, Elixir Group Limited (“EGL”), and the individual director and/or officer defendants (the “Individual Defendants”).⁴

Facts

I. The Parties

A. Plaintiffs

Plaintiffs are hedge funds that allegedly “invested in the securities of EGT and suffered millions of dollars in damages” as a result of defendants' alleged misstatements.⁵

Plaintiff Prime Mover Capital Partners L.P. (“Prime Mover”) allegedly purchased EGT shares on June 13 and June 22, 2007.⁶

Plaintiffs Strata Fund L.P., Strata Fund Q.P., L.P., and Strata Offshore Fund, Ltd. (collectively, “Strata”) purchased EGT shares at various times in 2007. ⁷ Some of these shares were purchased in private placements pursuant to two separate agreements: (1) a Securities Purchase Agreement (“SPA”) executed by EGT and certain purchasers, including Strata, on October 19, 2007, and (2) a Warrant Purchase Agreement (“WPA”) executed by EGT, EGL, and certain purchasers, including Strata, on December 10, 2007.⁸

B. Defendants

EGT is a corporation organized under the laws of and having its principal place of business in Nevada.⁹ At all relevant times, its stock has traded on the AmericanStock Exchange.¹⁰ EGL is a corporation organized under the laws of and having its principal place of business in Hong Kong.¹¹ Each Individual Defendant was a director and/or officer of EGT and/or EGL during the relevant period.¹²

II. The Securities Purchase and Product Participation Agreement

On or about June 13, 2007, EGT announced that EGT and EGL had entered into the Securities Purchase and Product Participation Agreement (the “SPPPA”). ¹³ Under its terms, EGT was to become a 75 percent owned subsidiary of EGL pursuant to an “earn-in” arrangement by which EGL would gain an equity interest in EGT based on the number of electronic gaming machines (“EGMs”) EGT placed with gaming operators in Asia, pursuant to participation agreements to be secured by EGL.¹⁴

The SPPPA included specific “milestones.” For example, once EGL secured “the Placement of 1,000 EGMs,” EGT would “(i) issue to EGL 25,000,000 shares of EGT's stock; (ii) reduce the exercise price of each of 10,000,000 of the 2006 Warrants [which EGL had purchased from EGT in October 2006], by one dollar each; and (iii) amend the terms of the 2006 Warrants to make them freely transferable.” ¹⁵ The second milestone provided that EGL would receive another 15 million shares of EGT stock and additional reductions in warrant exercise prices when EGT had “entered into Participation Agreements for the Placement of a Cumulative Total of 2,000 EGMs” and when “actual Placement of a Cumulative Total of 1,000 EGMs” had been achieved.¹⁶

EGT's shareholders approved the SPPPA on September 10, 2007.¹⁷

III. The Allegedly False and Misleading Statements

Plaintiffs allege that many statements in the June 13, 2007 Form 8–K and press release that disclosed the SPPPA—as well as many subsequent statements made by defendants—were false and misleading.¹⁸ For the purposes of this motion, the relevant statements are those made between June 13, 2007, when the SPPPA was first announced, and December 31, 2007, when Strata made its final purchase of EGT stock.¹⁹

These alleged false and misleading statements are easily grouped into nine categories:

1. Defendants stated that they had entered into “binding written lease contracts, called ‘Participation Agreements,’ ” for the placement of thousands of EGMs at Asian gaming venues when the agreements in fact were non-binding “memoranda of understanding.” ²⁰

2. Defendants stated that they had “arranged to ‘Place’ (and, later, that they had ‘Placed’) thousands of EGM's.” However, the number of EGMs “that ever went into operation was materially smaller than Defendants stated.” ²¹

3. Defendants claimed that software called “CasinoLink” would be installed in each EGM placed in the Asian gaming venues, thereby allowing EGT to monitor those units and obtain data to improve its marketing and profitability. ²²

4. Defendants represented that they expected the EGMs placed in the Asian gaming venues to generate a profit, or “net win,” of $125 per day per machine. ²³

5. Defendants claimed that EGT would receive (and was receiving) at least a 20 percent participation share of the “net win” from the venues.²⁴

6. Defendants claimed that EGT would supply (and later supplied) the “best possible type of machine” for each venue, “based on extensive due diligence with respect to each venue.” ²⁵

7. Defendants represented that EGT's average cost for placing each machine would be $20,000.²⁶

8. Defendants stated that EGT had earnings before interest, taxes, depreciation, and amortization (“EBITDA”) margins as high as 60 to 90 percent. ²⁷

9. Defendants claimed to have “access to significant sources of capital to fund and expand its Participation Business.” ²⁸

IV. Alleged Disclosures

The SAC alleges that various disclosures between February and May 2008 revealed the inaccuracy of defendants' prior statements and led to the decline in EGT's share price. It alleges also that these disclosures led to “the materialization of the risks about EGT and the Participation Business that Defendants' numerous misrepresentations ... had been intended to, and did conceal.” ²⁹

During a conference call on February 19, 2008, EGT disclosed additional information about the “net-win” rate. Defendant Pisano stated that “ ‘[f]or our modeling, we have assumed that at the end of one year, the machines on the floor will be achieving a $125 return.’ ” ³⁰ The SAC alleges that “[t]his was the first time EGT stated that the $125 net win per day figure assumed a twelve month prior operating history” and that “it represented a dramatic departure from the representations EGT, EGL, and their representatives had consistently adhered to since June 12, 2007 that the daily net win of $125 would be, and had been, the average over the first year of operation.” ³¹ Between February 19 and February 22, 2008, the price of EGT's stock dropped from $4.25 per share to $3.47 per share.³²

Less than a week later, on February 25, 2008, defendant Reberger stated that “ ‘as of February 19, 2008, EGL had installed 1655 gaming devices across 15 venues' ” but noted also that “ ‘of those 1655 installed units ... approximately 1107 are facilities that are open to the market and are earning revenue for both the operator and EGT.’ ” ³³ He explained the difference between the number of EGMs placed and the number in operation by noting that EGT “ ‘anticipates there is a 90–day [lag] between the time the machines are installed and the time that [the] ... machines become operational.’ ” ³⁴ The SAC alleges that this statement about the number of machines “in operation” “was the first disclosure to begin to correct previous misrepresentations” about the number of EGMs “[p]laced” in gaming areas as defined by the SPPPA ³⁵ because “Plaintiffs and other investors in EGT stock reasonably understood Defendants' statements about the number of ‘placements' or of EGMs ‘placed’ to mean that all such EGMs were in operation and earning revenue for EGT.” ³⁶

During the same February 25, 2008 call, defendant Pisano attributed some of the lag time between EGM placement and operation to “inexperienced venue operators, stating ‘what we've found, and this is reflected in our $125 per day net win with the new business, these are also new operators, and they take time to learn the business.’ ” ³⁷ Plaintiffs claim that this disclosure undercut earlier representations about the thoroughness of EGT's “due diligenceand familiarity with the markets they were attempting to penetrate.” ³⁸ By March 27, 2008, EGT's stock had fallen $2.28 per share, representing a 35 percent decline between February 25 and March 27, 2008.³⁹

On March 27, 2008, EGT conducted another conference call, during which defendant Reberger stated that the delays between placement and operation depend on several factors, including (1) the operators' discretion, (2) delays due to construction or renovation at the gaming venue, and (3) obtaining the necessary regulatory approvals or business licenses.⁴⁰ Moreover, the SAC alleges that he “obliquely corrected the stated cost of the machines,” stating that “ ‘[t]he depreciation at the moment is $14 per day per machine’ ” and that “[t]his figure implied a total landed cost of $25,550, over 25% above the numbers that had been given.” ⁴¹ EGT's share price dropped from $2.28...