ScripsAmerica, Inc. v. Ironridge Global LLC

• Decision Date: 03 November 2014
• Docket Number: Case No. CV 14–03962 MMM AGRx.
• Citation: 56 F.Supp.3d 1121
• Court: U.S. District Court — Central District of California
• Parties: SCRIPSAMERICA, INC., Plaintiff, v. IRONRIDGE GLOBAL LLC d/b/a Ironridge Global IV, Ltd., John Kirkland, Brendan O'Neil, and Does 1–5, Defendants.

56 F.Supp.3d 1121

SCRIPSAMERICA, INC., Plaintiff

v.IRONRIDGE GLOBAL LLC d/b/a Ironridge Global IV, Ltd., John Kirkland, Brendan O'Neil, and Does 1–5, Defendants.

Case No. CV 14–03962 MMM AGRx.

United States District Court, C.D. California.

Signed Nov. 3, 2014.

Carlos E. Needham, Carlos Needham Law Offices, Valencia, CA, for Plaintiff.

Shannon Edward Mader, Gibson Dunn and Crutcher LLP, Los Angeles, CA, for Defendants.

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS AND GRANTING DEFENDANTS' MOTION TO STAY

MARGARET M. MORROW, District Judge.

On May 22, 2014, ScripsAmerica, Inc. (“Scrips”) filed this action against Ironridge Global LLC d/b/a Ironridge Global IV, Ltd., John Kirkland, and Brendan O'Neil (collectively “Ironridge”), as well as certain fictitious defendants.¹ The complaint alleges claims for securities fraud, breach of contract, tortious bad faith, and declaratory relief. The claims arise from an allegedly fraudulent scheme to manipulate Scrips' stock price in order to obtain additional shares of the stock under an agreement between the parties pursuant to which Ironridge would pay off certain of Scrips' accounts payable in exchange for issuance of stock set by an agreed upon formula.²

On June 25, 2014, defendants filed a motion to dismiss, or alternatively to stay.³ Scrips opposes the motion.⁴

I. FACTUAL BACKGROUND

This action arises out of an allegedly fraudulent scheme devised by Ironridge. Scrips is a pharmaceuticals distributor whose stock is publicly traded on the over-the-counter (“OTC”) market. Ironridge's purported scheme involved the issuance of Scrips' common stock to Ironridge in exchange for an undertaking by Ironridge to pay Scrips' outstanding accounts payable.⁵ Scrips alleges that the transaction was first proposed during a telephone call it received from John Kirkland and Brendan O'Neil—directors of Ironridge—on August 28, 2013.⁶ It contends that Kirkland and O'Neil told Scrips' chief executive officer, Robert Schneiderman, that Ironridge could pay Scrips' accounts payable, which totaled approximately $700,000, in exchange for an amount of Scrips stock to be determined by contractual formula.⁷ Kirkland and O'Neil explained that to effect the exchange, Scrips did not need to register the shares before transferring them to Ironridge. The parties discussed the transaction further on September 4 and October 2, 2013.⁸

During the calls, Ironridge requested that the contract memorializing the transaction include a provision for an adjustment to protect it in the event of a decline in Scrips' stock price.⁹ Scrips allegedly agreed to the inclusion of such a provision, pursuant to which Ironridge was to receive more stock than the originally agreed amount if Scrips' stock price declined following consummation of the transaction.¹⁰ The adjustment mechanism was outlined, together with certain other terms, in a term sheet Ironridge prepared and gave to Scrips.¹¹ Scrips contends that Ironridge, Kirkland, and O'Neil did not disclose their intention to manipulate the market for Scrips shares in order to reduce the share price and increase the number of shares Ironridge was entitled to receive under the agreement.¹²

On October 4, 2013, Schneiderman, Kirkland, and O'Neil purportedly discussed the potential effect Ironridge's sale of the stock it received might have on Scrips' share price. Unlike other entities that had funded Scrips in exchange for stock, Ironridge allegedly represented that it would not act to manipulate or otherwise affect Scrips' stock price.¹³ Specifically, Ironridge purportedly said that its sales of Scrips shares would “never be more than ten percent of the volume of sales on any given day.”¹⁴ Scrips contends that Ironridge's representations were knowingly and wilfully false.¹⁵

Because the shares were unregistered, Ironridge and Scrips had to obtain court approval under California and federal securities laws before a transfer of the stock could take place.¹⁶ Thus, on October 11, 2013, Ironridge filed a breach of contract complaint in Los Angeles Superior Court that sought to collect the accounts payable debts; it sued as the successor in interest to Scrips' creditors under receivables purchase agreements into which it had entered with the creditors.¹⁷ Ironridge and Scrips then submitted a stipulation to the court that was the means by which the exchange transaction was to be effected. The stipulation provided that Scrips would transfer 8,690,000 shares of stock to Ironridge in satisfaction of $686,962.08 in debt owned by Ironridge.¹⁸ The shares were to be “unrestricted and freely tradeable exempted shares” of Scrips common stock.¹⁹ The stipulation stated the shares had to be capable of being “immediately resold ... without restriction,”²⁰ and noted that Ironridge could “sell any of its shares of [Scrips] common stock issued pursuant to the [stipulation] at any time.”²¹ The stipulation warned that issuance of the shares could “have a dilutive effect [on Scrips' stock], which [might] be substantial.”²²

The stipulation also memorialized the adjustment mechanism the parties had previously discussed. First, Scrips would immediately issue and deliver to Ironridge 8,690,000 shares of its common stock; the issuance, however, was subject to certain “adjustments, issuances, returns, and ownership limitations.”²³ Future adjustments were to be made based on trading activity in Scrips stock during the “calculation period.”²⁴ The “final amount” of shares to which Ironridge was entitled was to be calculated by taking (a) the sum of the claim amount [i.e., $686,962.08], 10 % of third party agent fees, and Ironridge's reasonable attorneys' fees and expenses, and dividing it by (b) 80 % of the following: the closing price of Scrips common stock on the trading day immediately preceding the date the state court entered an order on the stipulation; the resulting number was not to exceed the arithmetic average of the individual volume weighted average price of any five trading days during the calculation period, less $.01 per share (based on data reported by Bloomberg LP).²⁵

The stipulation also provided that if at any point during the calculation period the shares issued to Ironridge dropped below “any reasonably possible [f]inal [a]mount” or if Scrips shares closed below 80 % of the closing price on the trading day prior to entry of an order on the stipulation, Ironridge was entitled to request the issuance of additional shares.²⁶ At the conclusion of the calculation period, if the total value of the initial issuance and subsequent issuances was less than the final amount, Scrips was required to issue further shares so that the total number of shares issued equaled the final amount; conversely, if the number of shares issued to Ironridge exceeded the final amount, Ironridge was required to return the excess shares to Scrips.²⁷ The stipulation stated, however, that Scrips was not required to issue at any one time a number of shares that, aggregated with all other shares beneficially owned or controlled by Ironridge or its affiliates, exceeded 9.99 % of the total number of shares of common stock outstanding.²⁸ Despite the fact that Kirkland, O'Neil, and Schneiderman allegedly discussed the issue, there is no provision in the stipulation requiring that Ironridge's sales of Scrips shares not exceed 10% of the daily trading volume on any given day.

On November 8, 2013, the parties filed a joint ex parte application in state court for an order approving the stipulation; they argued that ex parte relief was necessary because the stipulation addressed the issuance of “shares of [Scrips] stock with a substantially fluctuating market price.”²⁹ The application recited that over the course of the previous year, the price of Scrips common stock had fluctuated between $1.05 and $.08, and that it would be difficult to reach any negotiated resolution that did not require ex parte relief, as the agreement could collapse if Scrips' stock price fluctuated too much.³⁰ As support for their request that the court approve the stipulation, both parties filed declarations stating that they believed the terms of agreement were fair.³¹ The stipulation recited that the agreement was fair to Ironridge and that Scrips' board had resolved that the terms were fair to and in the best interests of its shareholders.³²

On November 8, 2013, Superior Court Judge Rolf M. Treu entered an order on the parties' stipulation.³³ Scrips alleges that thereafter, on several trading days, Ironridge sold an amount of Scrips stock that exceeded ten percent of all sales on that day.³⁴ Specifically, it contends that Ironridge's sales during the week of January 6, 2014 represented 28.4 % of total sales; sales during the week of January 21, 2014 represented 22.6%; and weekly sales throughout February 2014 ranged from 30–50%.³⁵ Scrips maintains that Ironridge made these sales with the intent and purpose of manipulating the market to reduce the price of Scrips' stock so that the number of shares to which it was entitled under the parties' agreement would increase. Scrips contends that the sales in fact reduced its stock price.³⁶ It asserts that during the period of alleged manipulation, Ironridge refused to provide any information concerning its trading activity, claiming it was confidential.³⁷

Based on the decline in Scrips' share price, Ironridge filed an ex parte application for an order compelling the issuance of additional shares pursuant to the May 6, 2014 stipulation.³⁸ Scrips opposed the application.³⁹ It argued that the court should deny it because Ironridge had engaged in “wrongful conduct” in “bad faith” and had “unclean hands.”⁴⁰ Specifically, it asserted that Ironridge had fraudulently manipulated the market for Scrips stock, i.e., engaged in “open market manipulation,” by “short selling” Scrips' shares during the calculation period in an effort to drive the share price down artificially and require Scrips to issue more...