Schentag ex rel. Therabrake, Inc. v. Nebgen, 1:17-cv-8734-GHW
| Decision Date | 21 June 2018 |
| Docket Number | 1:17-cv-8734-GHW |
| Parties | JEROME SCHENTAG, individually and derivatively on behalf of TheraBrake, Inc. Plaintiff, v. GEORG NEBGEN, PARVIZ GHAHRAMANI, VOLANT HOLDINGS GMBH, VOLANT PHARMA AG, and JOSEPH M. FAYAD, Defendant. |
| Court | U.S. District Court — Southern District of New York |
Plaintiff Jerome Schentag, an inventor and holder of numerous medical patents, sought to develop and commercialize his inventions. Seduced by Defendant Georg Nebgen's promise of investment capital that would enable Plaintiff to accomplish his goal, Plaintiff agreed to the transfer of his intellectual property to a Swiss entity that would be formed by Nebgen. In the resulting integrated transaction, Nebgen formed two Swiss limited liability companies, of which Plaintiff became a shareholder. TheraBrake, the New York corporation holding Plaintiff's intellectual property, transferred its rights in that property to one of the Swiss companies in exchange for a promissory note. After the transaction was consummated, things began to disintegrate. Plaintiff discovered that Nebgen's statements that investors were standing by to invest were false. No payment was made on the promissory note. The Individual Defendants refused to pay for incurred liabilities. A lien was asserted against the assets of the Swiss holding company. And Plaintiff was removed as president of TheraBrake.
Plaintiff filed this action, asserting securities fraud claims under the Securities and Exchange Act of 1934 and violations of various provisions of the Securities Act of 1933. Plaintiff also brings claims under state law. Defendants have moved to dismiss the complaint in its entirety. Because Plaintiff fails to plead that he acquired his shares of the Swiss LLCs, or that TheraBrake acquired the promissory note, in domestic transactions, Defendants' motion to dismiss the federal securities claims is granted. Plaintiff's breach of fiduciary duties claim survives, but the remainder of Plaintiff's state law claims are dismissed.
Plaintiff Jerome Schentag is a professor of pharmaceutical sciences and pharmacy at the University of Buffalo School of Pharmacy. Compl. (ECF No. 2) ¶ 3. He is also an inventor and holds numerous pharmaceutical patents. Id. Among those inventions are pharmaceutical drugs and devices used to treat and monitor diabetes, obesity, and other related diseases. Id. ¶ 30. Through TheraBrake, Inc., a Delaware corporation formed on April 8, 2011, Plaintiff and Defendant Joseph M. Fayad continued their research, development, and commercialization of patents and other intellectual property held by them. Id. ¶ 5. From the time TheraBrake was formed until November 1, 2014, Plaintiff and Fayad each held fifty percent of the corporation's shares. Id. ¶ 6.
Defendant Georg Nebgen held himself out to be the co-founder and managing general partner of NGN Capital, a venture capital firm with offices in Manhattan. Id. ¶ 12. On several occasions during 2010, 2011, and 2012, Plaintiff discussed his inventions with Nebgen at NGN's Manhattan office. Id. ¶ 30.
On January 8, 2013, Plaintiff met with Nebgen in San Francisco, California. Id. ¶ 31. During that meeting, Nebgen informed Plaintiff that he was no longer with NGN Capital and hadbegun operating his own business, Vivant Holdings. Id. Plaintiff shared with Nebgen his desire to commercially exploit his and other patents. Id. ¶ 32. Nebgen told Plaintiff that he was a successful investment banker, had closed several venture capital deals, and had access to investors willing to invest the capital required to have the existing patents issued worldwide. Id. These investors, according to Nebgen, also had money to invest in the continued research and development of the patented inventions. Id. Nebgen explained to Plaintiff that before Nebgen could secure these investments, Plaintiff would need to transfer his patents and other intellectual property to an entity that Nebgen would create. Id. ¶ 33. Nebgen recommended that the entity be formed in Switzerland so that investors could enjoy substantial personal tax benefits. Id.
At some point after the San Francisco meeting, Plaintiff and Nebgen met again in New York City to further discuss the proposed venture. Id. ¶ 34. The two also discussed the proposal by telephone and electronic communication. Id. During those conversations, Nebgen continued to represent to Plaintiff that he had access to investors willing to come on board. Id.
The following year, in September 2014, Nebgen informed Plaintiff that he had investors interested in investing in the development and marketing of the pharmaceutical products. Id. ¶ 35. In return for securing the capital, Nebgen demanded 33% of the shares of TheraBrake. Id. On November 1, 2014, because of Nebgen's representations regarding his investors, he was granted the requested shares. Id. As of that date, Plaintiff, Nebgen, and Fayad each have held 33% of the TheraBrake shares. Id. ¶ 18.
Throughout 2014 and 2015, Nebgen continued to insist on the importance of forming a Swiss entity before his investors would contribute to their venture. Id. ¶ 36. Based on these statements, Plaintiff, Nebgen, and Fayad agreed upon the integrated transaction at the heart of this case. Id. ¶ 37. As part of that agreement, on September 16, 2015, Nebgen formed Volant Holdings GmbH ("Holdings") as a Swiss limited liability company. Id. ¶ 20. Holdings' principal place ofbusiness is in Feusisberg, Canton Schwyz, Switzerland. Id. Holdings was formed to be the holder of the intellectual property that TheraBrake agreed to transfer to it. Id. ¶¶ 24, 37. Nebgen also represented that Holdings would pay for all costs associated with the research and development of the intellectual property, as well as any legal expenses incurred to protect the intellectual property. Id. ¶ 45.
On October 15, 2015, Plaintiff, Nebgen, and Fayad executed several written agreements to consummate the agreed-upon transaction. Id. ¶ 21. Among those documents were an Asset Purchase Agreement ("APA") and a Patent Assignment. Id. Pursuant to the APA, Holdings agreed to pay a total sum of $566,510 as well as certain other liabilities described in Section 1.2 of the APA ("Assumed Liabilities"), as consideration for the transfer of the intellectual property. Id. ¶ 53. Payment of the $566,510 was to be made in the form of a promissory note payable by Holdings to TheraBrake (the "Note"). Id. Holdings issued the Note on October 15, 2015. Id. ¶ 43.2 The patent assignments were subsequently recorded in the United States Patent and Trademark Office. Id. ¶ 21.
Two weeks after the contracts were executed, on October 30, 2015, Nebgen organized Volant Pharma AG ("Pharma") as a Swiss limited liability company with its principal place of business in Feusisberg, Canton Schwyz, Switzerland. Id. ¶ 22. Pharma was intended to be the operating company and was formed to license the intellectual property acquired from TheraBrake and, along with Holdings, to pay for all research and development and legal fees and costs associatedwith protecting the intellectual property. Id. ¶ 24. Pharma was also intended to be the entity pursuing investment capital. Id. When Nebgen formed Holdings and Pharma, he appointed himself the chairman of the board and chief executive officer of each entity. Id. ¶ 10. He was the sole director of each entity and failed to explain to Plaintiff the significance of this fact. Id. ¶¶ 38, 48.
As a result of the integrated transaction, Nebgen holds 31% of the shares of Holdings and 20% of the shares of Pharma. Id. ¶ 8. Plaintiff and Fayad each hold 31% of the shares of Holdings and 28% of the shares of Pharma. Id. ¶¶ 2, 18. To pay for his shares in Holdings, Plaintiff sent $7,602 from his New York bank account via wire transfer to an account at Zuricher Kantonalbank in Zurich, Switzerland. Id. ¶ 39. He also wire-transferred $14,678 on October 14, 2015 and $13,798 on December 23, 2016 to the Swiss account to pay for his shares in Pharma. Id. Plaintiff also paid for Fayad's shares in Pharma by sending $7,500 from his New York account to Fayad's Bank of America account in New York on October 21, 2015. Id. ¶¶ 19, 40.
On October 23, 2015, Defendant Parviz Ghahramani was hired as the Chief Operating Officer of Holdings and Pharma. Id. ¶ 42. Ghahramani holds 8% of the shares of both Holdings and Pharma. Id. ¶ 15. From late October 2015, Holdings and Pharma have conducted business out of Ghahramani's New Jersey office. Id. ¶ 16. Nebgen has also held meetings in New York City for Holdings and Pharma business since that date. Id. ¶ 25.
Following the October 2015 transaction, Nebgen continued to state that he had investors who were ready to invest in Holdings and Pharma. Id. ¶ 46. During monthly meetings with Plaintiff and Ghahramani between October 2015 and July 2017, Nebgen gave allegedly false reports regarding the status of investor solicitations. Id. This was done, according to Plaintiff, to induce Plaintiff to continue his research and development in connection with the intellectual property. Id.
Recently, Nebgen told Plaintiff that he never intended for Plaintiff to become a shareholder of Pharma. Id. ¶ 56. Nebgen also demanded that Plaintiff re-subscribe for his Pharma shares. Id. ¶57. Plaintiff refused, arguing that Nebgen was "changing the deal." Id. ¶ 58. Subsequently, Nebgen and Fayad informed Plaintiff that he was no longer an officer of TheraBrake. Id.3
Holdings has not paid on the promissory note. Id. ¶¶ 52, 54. Plaintiff alleges that Nebgen, Ghahramani, and Fayad "have caused" Holdings not to make the payments due. Id. ¶ 52. Plaintiff further alleges that Nebgen's statements regarding the availability of ready and willing investors, the necessity of transferring the intellectual property to a Swiss entity because of those investors, and that Holdings and Pharma would pay any research and...
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