Court: District Court, E.D. New York; September 29, 2014; Federal District Court
Plaintiff Steven Levy initiated a lawsuit on April 11, 2013, against multiple defendants, including the IBG Defendants (Dominic Maggiore, Jason Santiago, Thomas Pragias, John Kamen, and Hugh Ward) and the accounting firm Raiche Ende Malter Co. LLP. The claims include violations of the Securities Exchange Act sections 10(b) and 20(a) for fraud, as well as common law fraud, fraud in the inducement, and an accounting against the IBG Defendants, with an aiding and abetting fraud claim against Raiche Ende. An Amended Complaint was filed on October 8, 2013, adding further fraud allegations against Raiche Ende and dropping the accounting claim against the IBG Defendants.
All defendants sought to dismiss the Amended Complaint, while Plaintiff requested permission to submit a Second Amended Complaint (SAC) and a revised version, referred to as the Third Amended Complaint. The Court accepted the SAC for consideration in the dismissal motions but dismissed it. The Court denied the request for the Third Amended Complaint but allowed amendments to the SAC concerning Maggiore and the addition of another plaintiff.
Background information reveals that IBG, a New York corporation involved in manufacturing beverages, engaged Lighthouse Financial Group, Inc. to facilitate a private placement of shares in May 2009. The IBG Defendants represented to potential investors, including Plaintiff, that IBG had $2,130,000 in sales for 2008 and was projected to exceed $2,000,000 in 2009. Plaintiff was provided with a Private Placement Memorandum (PPM) containing these claims, and brokers conveyed that IBG was on the verge of going public and that the investment would fund marketing and product development. However, it was later revealed that IBG's actual gross sales for 2008 were only $1.575 million, with the reported figure partly consisting of consignment shipments where the sale was not complete until the products were sold by retailers.
IBG's sales included 'guaranteed sales,' where IBG would pay retailers for unsold products. The Private Placement Memorandum (PPM) highlighted that gross sales encompass all shipped goods, factoring in various retailer deductions that lower IBG's net receipts. The company could not guarantee full collection on sales due to these deductions. Contrary to representations made to an investor, proceeds from a May 2009 private placement were used to pay officer compensation and directors' fees rather than for marketing or product development. The IBG Defendants controlled the PPM’s content and were aware of the false and misleading statements within. An independent audit revealed IBG’s 2008 sales as $2,130,000, yet the PPM claimed sales were booked regardless of buyers, indicating a misrepresentation since there were few buyers. The audit did not disclose officer compensation or their time spent on IBG business, and there was a conspiracy to avoid reporting directors' fees on tax returns. In 2011, IBG’s directors and officers sold Power Ice for $1,000,000 before the company declared bankruptcy, rendering investor shares worthless. The excerpt also addresses standards of review for a motion to dismiss under Rule 12(b)(6), emphasizing that factual allegations in the complaint must be accepted as true and must state a plausible claim for relief.
A complaint must contain well-pleaded facts that allow the court to infer more than a mere possibility of misconduct to establish entitlement to relief. Allegations in the complaint are assumed true, but this does not apply to legal conclusions. When considering a motion to dismiss, the court's review is confined to the complaint's four corners, although it may also encompass attached documents, those incorporated by reference, integral documents, and public records, especially in securities litigation.
Under the Federal Rules of Civil Procedure, courts are encouraged to grant leave to amend complaints freely when justice requires. This permissive approach aligns with the preference for resolving disputes on their merits. Leave to amend may be denied if the moving party exhibits undue delay, bad faith, dilatory motives, undue prejudice to the opposing party, or if the proposed amendment is futile. Futility occurs when an amendment would not survive a motion to dismiss under Rule 12(b)(6). Bad faith is present if a party amends for an improper purpose, while prejudice to the opposing party is considered a significant reason to deny an amendment. The decision to grant or deny leave to amend lies within the district court's discretion.
Plaintiff asserts claims of violations of Sections 10(b) and 20(a) of the Exchange Act against the IBG Defendants and Raiche Ende. Section 10(b) prohibits employing manipulative or deceptive practices in connection with securities transactions. The SEC's Rule 10b-5 outlines unlawful actions, including fraud, false statements, and misleading omissions related to securities. Primary liability under Section 10(b) requires proof of six elements: (1) a material misrepresentation or omission, (2) scienter, (3) a connection to the securities transaction, (4) reliance on the misrepresentation, (5) economic loss, and (6) loss causation. The plaintiff also claims secondary liability under Section 20(a), which holds individuals accountable for controlling persons who are directly liable under the Exchange Act. While a party cannot be liable for both primary and controlling-person violations, alternative theories are allowed at the pleading stage. Controlling-person liability is distinct from primary liability and presents an alternative basis for culpability.
A plaintiff must demonstrate that the defendant made a material misrepresentation under 17 C.F.R. § 240.10b-5, which prohibits untrue statements or omissions of material facts in securities transactions. The maker of a statement is defined as the individual or entity with ultimate authority over its content and communication, as established in Janus Capital Grp. Inc. v. First Derivative Traders. Claims under Section 10(b) of the Securities Exchange Act require adherence to heightened pleading standards set by Rule 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act (PSLRA). The PSLRA mandates that plaintiffs specify misleading statements, the reasons for their misleading nature, and, if based on information and belief, provide detailed facts supporting that belief. Additionally, plaintiffs must show facts indicating a strong inference of the defendant's intent or state of mind.
In the case against the IBG Defendants, the plaintiff alleges they falsely overstated IBG's 2008 gross sales and misrepresented IBG's performance and future prospects. The IBG Defendants contend that the plaintiff has not sufficiently pled material misrepresentations or requisite intent, nor established individual liability against them. Although the plaintiff may have presented adequate facts regarding the misrepresentation of 2008 gross sales, only CEO Dominie Maggiore can be considered to have "made" that statement, and the plaintiff has not sufficiently pled intent (scienter) regarding him. Consequently, the plaintiff's claim under 10(b) fails against the IBG Defendants.
Plaintiff accuses the IBG Defendants of three actionable material misrepresentations: (1) falsely claiming that IBG had gross sales of $2,130,000 in 2008 as per the May 2009 Private Placement Memorandum (PPM) and oral statements from Lighthouse Financial brokers; (2) asserting that IBG was 'about to go public'; and (3) stating that proceeds from a 2009 private placement would be used for marketing and product development.
Regarding the first allegation, Plaintiff contends that the claim of $2,130,000 in sales was untrue, arguing that these figures represented consignment shipments rather than actual sales, as the title to the products only transferred upon sale to end customers. The IBG Defendants counter that oral statements are not actionable since they contradict the written PPM, which claims that 'gross sales include all shipped goods.' They also argue that the Amended Complaint fails to meet the heightened pleading standards of the Private Securities Litigation Reform Act (PSLRA).
The Court finds that Plaintiff has provided adequate factual pledging. Specifically, the Second Amended Complaint (SAC) includes assertions from a broker indicating that IBG's reported sales were inflated through consignment and fictitious sales. Affidavits from former brokers Jeffrey Wallner and Brad Feinstein support these claims, detailing how IBG's reported sales involved consignment arrangements and potential 'charge-backs' to retailers. Additionally, Plaintiff references a document from IBG's bankruptcy proceedings, indicating claims from retailers for returned merchandise, and an email outlining terms with Walgreens that included guaranteed sales. The Court concludes that these elements collectively support Plaintiff's allegations of misrepresentation regarding IBG's sales figures, and finds the IBG Defendants' argument that the absence of documentary evidence undermines Wallner's affidavit unpersuasive.
Rule 9(b) and the PSLRA do not require a strict standard for substantiating sworn statements based on personal knowledge with documentary evidence, as such a requirement would elevate pleadings to a summary judgment standard. Plaintiffs must demonstrate that their belief sources had personal knowledge, and if relying on confidential witnesses, they need not be named but should be described with enough detail to establish the likelihood that they possess the relevant information. In *In re Scottish Re Grp. Sec. Litig.*, the court found that statements from confidential witnesses indicating systemic failures in financial management provided adequate support for the plaintiffs' allegations. Similarly, in *Novak v. Kasaks*, reliance on confidential witness statements met PSLRA's heightened pleading standard when sufficiently detailed.
The Wallner affidavit supports the plaintiff's allegations by establishing Wallner's personal knowledge of financial matters due to his due diligence when acquiring the 'Power Ice' brand from IBG. The plaintiff's claims about misrepresentations related to IBG's 2008 gross sales meet the particularity requirements of the PSLRA and Rule 9(b). The plaintiff asserts that including consignment shipments in gross sales misrepresents IBG's financial health, as these shipments lack guaranteed payment. The IBG Defendants counter that the PPM's language warned against reliance on oral statements. Under Rule 10b-5, it is unlawful to make misleading statements or omit material facts that could mislead a reasonable investor. A statement is materially misleading if its overall representations could deceive an investor.
To prove the materiality of a misrepresentation, a plaintiff must show that a reasonable investor would find a statement or omission significant for investment decisions. Misrepresentation can be an omission, requiring the plaintiff to demonstrate that disclosing the omitted fact would likely alter the total mix of information available to an investor. The IBG Defendants argue that the definition of “gross sales” in the Private Placement Memorandum (PPM) would not lead a rational investor to conclude it included only goods already paid for. However, the plaintiff contends that the PPM misleadingly defined "gross sales" in a way that was false or deceptive. The court agrees with the plaintiff, noting that the PPM failed to disclose that "gross sales" included speculative sales where payment collection was uncertain. The PPM states that gross sales encompass all shipped goods, including those sold through various promotional programs, but does not adequately inform investors that some goods might be returned without payment. The defendants' reliance on language in the PPM indicating that payment might not be received does not support their claim, as it does not clarify that the definition of "gross sales" could include goods that were shipped but not sold. The language implies that some payment is expected from retailers, contrary to the notion that unsold products could be returned without payment. Additionally, the defendants' interpretation conflicts with IBG’s own revenue recognition policy, which states that revenue is recognized at shipment, not upon payment.
A contradiction between IBG's revenue recognition policy and its statements may indicate misleading information. The omission of IBG's inclusion of consignment shipments in its May 2009 Private Placement Memorandum (PPM) is deemed materially misleading for a reasonable investor under Section 10(b). The IBG Defendants contend that they cannot be held individually liable for statements in the PPM since they were made by the company as a whole. However, the Second Amended Complaint asserts that these defendants are responsible for false statements due to the 'group-published' nature of the documents, which creates a presumption of liability for corporate insiders involved in daily operations. The group pleading doctrine allows plaintiffs to attribute such statements to individuals with significant involvement in the company, provided there are sufficient allegations of their insider status. This doctrine applies to written, collective documents but not to oral statements. The plaintiff highlights Maggiore's roles as founder and CEO of IBG, his mention in the PPM, and a March 2010 email indicating his active participation in company affairs, supporting the claim that he qualifies as a corporate insider under the group pleading doctrine.
Allegations against Maggiore, the CEO of IBG, suggest he was a corporate insider involved in the company's daily operations and played a crucial role in the statements made in the Private Placement Memorandum (PPM) regarding 2008 gross sales. The group pleading doctrine supports the assertion that executives like Maggiore, Wheeler, and Vitetta are linked to allegedly fraudulent statements due to their high-level positions. However, the doctrine does not apply to oral statements, as illustrated in cases where executives were not held liable for remarks made by others.
The complaint lacks sufficient factual allegations against Santiago, the Chief Branding Officer, as it only cites his title without evidence of his involvement in the PPM's preparation. Consequently, the group pleading doctrine does not apply to Santiago. Similarly, minimal factual allegations are made against other IBG board members—Pragias, Kamen, and Ward—who are not established as corporate insiders with direct involvement in IBG’s operations, limiting the allegations primarily to Maggiore.
Plaintiff claims the IBG Defendants were high-level executives or agents of the Company, involved in the creation and distribution of the May 2009 Private Placement Memorandum (PPM). The allegations state that these defendants had significant interactions with one another and access to internal information regarding the Company’s operations and finances. They are accused of being aware of misleading information disseminated to investors. However, the court finds these claims to be conclusory and insufficient to demonstrate that the IBG Defendants were engaged in the Company’s day-to-day operations. Previous cases are cited to support the argument that mere participation in board activities or access to information does not equate to involvement in daily operations. Additionally, the plaintiff asserts that the IBG Defendants falsely claimed IBG was "about to go public," a statement the defendants counter by referencing the PPM and Subscription Agreement, which indicated no immediate public market for the shares.
Plaintiff’s failure to respond to the IBG Defendants' argument regarding the abandonment of claims is construed by the Court as an abandonment of those claims, as established in precedent cases. The Court indicates that a lack of response typically signifies a strategic decision by an attorney to pursue only certain claims. Specifically, the Plaintiff contends that IBG Defendants made oral misrepresentations about IBG “going public” through Lighthouse Financial brokers, which cannot be attributed to IBG Defendants under the group pleading doctrine. Additionally, the Plaintiff alleges false representations regarding the use of proceeds from a May 2009 private placement, but does not respond to the Defendants' argument that the Private Placement Memorandum (PPM) explicitly states intended uses for the proceeds, which include inventory, marketing, and product development. Since the Plaintiff does not contest this argument, the Court views it as abandoned. Furthermore, the Court finds that the express language of the PPM contradicts the Plaintiff's allegations, leading to a rejection of these claims. The Court cites that allegations unsupported by referenced documents in the complaint are insufficient to withstand a motion to dismiss, reinforcing that courts may examine documents to determine the truth of alleged misrepresentations in fraud claims.
The Court finds that the Second Amended Complaint (SAC) sufficiently alleges that Maggiore made a material misrepresentation in the Private Placement Memorandum (PPM) by reporting gross sales figures of $2,130,000 for 2008 while omitting that a substantial part of these figures derived from consignment sales. The IBG Defendants contend that the Plaintiff has not adequately established scienter—defined as the intent to deceive or defraud—concerning any misleading statements attributed to them. The Plaintiff argues that each defendant knowingly or recklessly participated in the fraudulent conduct due to their awareness or disregard of information revealing the true situation regarding IBG.
To prove scienter, a plaintiff must meet a heightened pleading standard, demonstrating a strong inference of the defendant's required mental state through specific factual allegations. The Court emphasizes that the combined allegations must make the inference of scienter as compelling as any opposing inferences. Scienter can be shown through evidence of motive and opportunity or by strong circumstantial evidence of recklessness. Recklessness is characterized as a severe deviation from ordinary care, with evidence including personal gains from the fraud, engagement in illegal activities, awareness of inaccuracies in public statements, or failure to verify information that one has a duty to monitor.
The complaint asserts that defendants, including Maggiore, acted with recklessness by knowing or disregarding facts that contradicted their public statements regarding the corporation, thereby misrepresenting material facts. The court evaluates whether the Second Amended Complaint (SAC) sufficiently alleges "scienter" for Maggiore, indicating that he knowingly participated in disseminating misleading statements and documents that violated federal securities laws. The SAC claims that each defendant, including Maggiore, was aware of the misleading nature of their statements or failed to disclose necessary facts that would prevent their statements from being misleading.
The plaintiffs argue that Maggiore had access to information indicating their public statements were inaccurate, referencing a learning experience during Wallner's due diligence related to a 2011 purchase from IBG, where it was revealed that IBG’s sales involved consignment shipments that could not guarantee payment. However, the affidavit does not specify when Maggiore became aware of this information and fails to connect it to the timeline of the plaintiff's initial stock purchase in 2009. As a result, there is insufficient factual support to conclude that Maggiore had the requisite knowledge of the misleading nature of the statements at the time of the plaintiff’s stock purchase.
A significant part of the claimed 2008 gross sales was attributed to consignment sales, leading to a lack of sufficient evidence to demonstrate that Maggiore's actions were "highly unreasonable" or represented an extreme departure from ordinary care. Legal precedents indicate that plaintiffs must show the required scienter, which was not established in this case. Specifically, the plaintiffs failed to provide adequate factual support indicating that Maggiore had knowledge of facts or access to non-public information contradicting public statements about the 2008 sales figures at the relevant time.
The plaintiff argued that as a board member, Maggiore possessed the requisite scienter, suggesting that principal shareholders are motivated to maintain company viability through investment. However, general motivations shared by corporate insiders do not suffice to establish fraudulent intent. The plaintiff's assertion that the amendment of the May 2009 Private Placement Memorandum (PPM) indicated board awareness of inaccuracies in the 2008 sales figures lacked factual support, as the amendment did not alter the total proceeds intended from the private placement. Consequently, the plaintiff did not meet the pleading standard required to demonstrate scienter regarding Maggiore's knowledge of the alleged misrepresentation in sales figures.
Plaintiff has presented sufficient allegations indicating that the May 2009 PPM's claim about 2008 gross sales was misleading due to its failure to clarify that the figure included consignment shipments, thereby implicating Maggiore as a corporate insider under the group pleading doctrine. However, the Second Amended Complaint (SAC) does not meet the heightened pleading standard to demonstrate that Maggiore possessed the necessary state of mind when making the statement, resulting in the dismissal of the Section 10(b) claim against the IBG Defendants.
Regarding Raich Ende, the Plaintiff asserts that the firm made a fraudulent statement in the PPM regarding 2008 gross sales of approximately $2,130,000, which were purportedly fictitious. Although Raich Ende assisted in preparing this statement and it was attributed to them, the firm argues that the Plaintiff has not adequately pleaded material misrepresentation, scienter, or reliance. The only potentially actionable statement against Raich Ende is the gross sales figure in the PPM. Even if the SAC establishes attribution to Raich Ende, the Plaintiff fails to meet the stringent requirements for demonstrating scienter for an auditor with respect to this statement.
To establish recklessness for auditor scienter, a Plaintiff must show conduct that significantly deviates from ordinary care and suggests intent to assist in the fraud. The requirements for auditor scienter are particularly high, necessitating evidence that an audit was negligently performed or that the auditor ignored clear warning signs of wrongdoing by the audited company. The mere failure of an accounting firm to detect issues with a client's internal controls does not amount to recklessness. The Plaintiff argues that Raich Ende's alleged violation of Generally Accepted Accounting Principles (GAAP) could support a claim of scienter.
Raiche Ende is accused of violating GAAP principles by including consignment sales in its revenue estimates for IBG, resulting in a preliminary gross sales estimate of $2,130,000 for 2008. The plaintiff claims that Raiche Ende ignored indications in IBG's Private Placement Memorandum (PPM) that it was inflating sales figures to attract investors, and that Raiche Ende should have recognized that revenue was improperly reported when products were shipped rather than sold to actual buyers. Raiche Ende contends that the plaintiff has not met the stringent criteria for proving scienter, arguing that mere allegations of GAAP violations do not suffice for a securities fraud claim. The law indicates that evidence of fraudulent intent must accompany claims of accounting irregularities; such evidence may include "red flags" that an auditor consciously disregards, which would alert a reasonable auditor to potential wrongdoing.
The plaintiff maintains that Raiche Ende was aware or should have been aware of IBG's practices, but the evidence presented merely indicates negligence rather than an extreme departure from ordinary care or intent to assist in fraud. The failure of an auditor to identify internal control issues or accounting problems does not equate to recklessness or intent to facilitate fraud, as established in case law. Thus, while the plaintiff's claims suggest potential negligence, they fall short of demonstrating that Raiche Ende acted with the requisite intent to support a securities fraud allegation.
Plaintiffs in the case against Raiche Ende, an external auditor, failed to demonstrate scienter, which is a necessary element for proving liability. The court noted that, despite the plaintiffs claiming a close relationship between the auditor and the audited company, they could not establish that Raiche Ende was aware of or recklessly ignored key documents indicating guaranteed sales. The only red flag identified by the plaintiffs was a statement in a May 2009 private placement memorandum (PPM) about gross sales, which did not adequately signal any wrongdoing since it was part of the same document that supposedly contained misleading statements from Raiche Ende. The court emphasized that an auditor must be actually aware of a red flag for it to support an inference of scienter. General allegations of access to information were deemed insufficient to imply recklessness. Therefore, the plaintiffs did not meet the burden of showing that Raiche Ende acted with the required level of intent or recklessness regarding IBG's alleged misrepresentation of revenue. Consequently, the Second Amended Complaint (SAC) failed to state a claim against Raiche Ende under section 10(b) of the Exchange Act. Additionally, the SAC asserted that the IBG Defendants could be liable as either primary violators or controlling persons under section 20(a).
To establish a prima facie case of control person liability, a plaintiff must demonstrate three elements: (1) a primary violation by the controlled person, (2) the defendant's control over the primary violator, and (3) the defendant's culpable participation in the fraud. The culpable participation requirement parallels the scienter requirement under Section 10(b), necessitating that plaintiffs plead specific facts indicating that the controlling person knew or should have known of the primary violator's fraudulent activities. A failure to adequately plead this culpable participation or the requisite mental state will result in dismissal of the claim. In this case, the plaintiff's claims against the IBG Defendants fail due to insufficient allegations of scienter, mirroring the deficiencies observed in the Section 10(b) claims.
Additionally, the plaintiff alleges common law fraud and fraud in the inducement against the IBG Defendants, based on false representations concerning IBG’s sales figures and plans, made to induce investment. Under New York law, fraud claims require a material misrepresentation made with knowledge of its falsity, intent to defraud, reasonable reliance by the plaintiff, and resulting damages. Fraud in the inducement claims share similar elements, allowing for action based on misrepresentations collateral to the induced contract. In the securities context, the elements of fraud align closely with those necessary for a Section 10(b) claim.
Plaintiff’s claims of fraud and fraud in the inducement against Santiago, Pragias, Kamen, and Ward are dismissed due to insufficient factual allegations linking them to the misleading statement in the May 2009 Private Placement Memorandum (PPM), which can only be attributed to Maggiore. The elements required for a Section 10(b) claim are similar to those for common law fraud in New York; since the Section 10(b) claim fails, the common law fraud claim based on the same facts is also dismissed. Additionally, the allegations against Maggiore lack the necessary scienter for a valid claim. The aiding and abetting fraud claim against Raiche Ende is likewise dismissed because there is no established primary fraud claim to support it.
Plaintiff seeks to amend the complaint to include a second plaintiff, Tiffany Hott, who purchased 70,000 shares of IBG stock in February 2010, but provides no additional factual support for her claims. The proposed Third Amended Complaint incorporates further factual allegations, including information about the Lighthouse Financial brokers and an admission from Defendants regarding IBG's financials, specifically a gross amount of $1,575,000 received for goods shipped in 2008. However, the Court finds that these added allegations do not sufficiently address the existing deficiencies in the claims against Santiago, Pragias, Kamen, Ward, and Raiche Ende, particularly regarding any material misrepresentation beyond the stated sales figure in the May 2009 PPM. The Court emphasizes its responsibility to allow amendments when justice requires but concludes that the proposed changes do not adequately correct the identified gaps.
The Court has denied the Plaintiffs' application to amend their claims against certain IBG Defendants, concluding that further amendment would be futile. Specifically, the Plaintiffs failed to establish that any individual Defendant, other than Maggiore, made misleading statements in the Private Placement Memorandum (PPM) or that Raiche Ende acted with the required recklessness to prove scienter. Additionally, the application to add a second plaintiff was deemed insufficient because it lacked specific factual allegations regarding the proposed plaintiff's awareness of and reliance on the PPM. The Court has granted the Plaintiffs 30 days to submit a Third Amended Complaint with more detailed factual allegations to support claims for securities fraud under the Exchange Act and common law fraud against Maggiore. The Court emphasized that it accepts all factual allegations in the Second Amended Complaint as true when reviewing the Defendants' motions to dismiss. The PPM, dated May 5, 2009, was acknowledged as having been provided to the Plaintiff around August 2009. The Plaintiffs allege both primary and controlling-person liability against the IBG Defendants, who are accused of participating in or controlling the wrongful conduct. The Court reviewed various documents submitted by the Plaintiffs but noted the IBG Defendants' objections regarding their admissibility, as they were not referenced in the Amended Complaint and were considered potentially self-serving.
The Court considers the Wallner and Feinstein affidavits as part of the Second Amended Complaint (SAC). During a motion to dismiss, the Court does not evaluate the credibility of sworn statements but assesses the legal feasibility of the complaint without weighing evidence. The IBG Defendants had the chance to challenge the affidavits' sufficiency. The Court agrees with the IBG Defendants regarding Feinstein's sworn statement, which inadequately supports claims due to its generality and lack of personal knowledge. Conversely, the Wallner affidavit sufficiently substantiates the Plaintiff's belief that the 2008 gross sales were misrepresented, allowing the SAC to meet heightened pleading standards for misrepresentation without considering additional evidence. The Plaintiff's allegations focus on consignment shipments in the 2008 gross sales estimate, while the language used in the PPM regarding "sold" is deemed ambiguous, leaving unclear whether it refers to past sales or future expectations. The absence of a clear valuation method for "the Company’s gross sales" further complicates the IBG Defendants' argument that the "bespeaks caution" doctrine should dismiss the claim. The doctrine states that forward-looking statements with adequate cautionary language are non-actionable if not materially misleading to a reasonable investor.
Statements about the likelihood of FDA approval for a product were not deemed misrepresentations, as the defendants consistently warned investors of the potential for non-approval. Similarly, investment goals outlined in a prospectus were not actionable misrepresentations because they included a caution regarding the company's thin capitalization, indicating uncertainty about achieving those goals. The court emphasized that cautionary language must not be misleading in light of historical facts; generic warnings fail when undisclosed facts significantly impact an investor's risk assessment. A misleading statement regarding preliminary 2008 gross sales was not considered forward-looking and was deemed misleading due to its presentation without sufficient disclaimers. The method of revenue recognition, which included unsold goods, lacked adequate disclosure, leading to potential misinterpretation of "gross sales." The SEC's criteria for revenue recognition were highlighted, establishing that conditions must be met for revenue reporting. Misstatements related to income, particularly those based on incorrect inventory valuations, can be material due to their relevance to investor decisions.
Plaintiff's claim that the May 2009 Private Placement Memorandum (PPM) is misleading due to the omission of "guaranteed sales" lacks sufficient support. "Guaranteed sales," as defined by Plaintiff, involve IBG committing to pay retailers for unsold products or buying them back. The Court does not evaluate whether not disclosing that 2008 gross sales included guaranteed sales constitutes a material misrepresentation. Plaintiff's description could fit within the PPM's "Risk Factors" but fails to explain how the omission is misleading to a reasonable investor. Although Plaintiff references SEC guidelines on revenue recognition, these do not specifically address guaranteed sales.
Furthermore, Plaintiff misinterprets a footnote from the IBG Defendants’ motion, claiming they admitted that the gross sales figure did not reflect actual sales, citing a figure of $1,575,000 for goods shipped in 2008. However, the Defendants deny the allegation of minimal actual sales in 2008, stating that they received significant revenue. The $1,575,000 figure does not equate to the $2.1 million in net sales reported in the 2008 audit and does not support Plaintiff's misrepresentation claim, as the PPM indicates that gross sales include shipped goods but does not assert exclusivity. Thus, the Plaintiff's reliance on the Defendants' footnote to claim an admission of misrepresentation is unfounded.
Several courts have raised doubts about the continued viability of the group pleading doctrine following the Supreme Court's ruling in *Janus Capital Grp. Inc. v. First Derivative Traders*, which determined that an investment adviser could not be held liable for misleading statements in client investment fund prospectuses if the adviser merely assisted in crafting those statements but lacked ultimate authority over them. This ruling has led to questions about whether the group pleading doctrine has been effectively abrogated, particularly since *Janus* focused on the liability of parties external to a corporate defendant, whereas group pleading addresses the liability of individual corporate defendants. The *Janus* decision asserts that the "maker" of a statement is the entity with ultimate authority, a principle that seems compatible with the group pleading doctrine, which posits that multiple individuals can have ultimate authority over a statement.
The IBG Defendants contend that the Second Circuit's decision in *Pacific Investment Management Company LLC v. Mayer Brown LLP* imposes an attribution requirement on corporate board members, hindering the argument that the individual defendants "made" the misleading statement. They further argue that failing to directly attribute a statement would violate the Supreme Court's prohibition against aiding and abetting liability under Section 10(b). However, this assertion is only partially correct; *PIMCO* addressed the liability of secondary actors—those not employed by the issuing firm—and established that attribution is necessary for them to be liable in private securities fraud actions under Rule 10b-5. The court clarified that its ruling did not pertain to claims against corporate insiders, where attribution may not be required, suggesting that investors often rely on corporate executives’ roles in public statements even without explicit attribution.
The IBG Defendants inaccurately claim that, according to the PIMCO case, to establish individual liability of corporate officers and directors, a plaintiff must directly link false statements to those individuals. In contrast, subsequent rulings, including those from district courts and the Second Circuit, have upheld the Scholastic precedent, not requiring such attribution for corporate insiders. While it is acknowledged that aiding and abetting liability under §10(b) is not applicable, the plaintiff does not pursue that claim but alleges that the IBG Defendants, as board members, made materially misleading statements in the May 2009 PPM and via Lighthouse Financial brokers. The IBG Defendants' reliance on case law regarding secondary actors fails to address the plaintiff's claims of direct misrepresentation. Specifically, the plaintiff asserts reliance on oral and written statements about IBG's sales and potential public offering, although the only detailed allegation pertains to an oral statement from a broker. An email from Maggiore in 2010 indicates awareness of a guaranteed sales transaction with Walgreens, but the court does not determine if this supports the claim regarding 2008 sales figures. The court finds that the plaintiff's allegations regarding the misleading nature of the PPM regarding guaranteed sales are insufficient but allows 30 days for the plaintiff to file a third amended complaint against Maggiore to assert a §10(b) claim.
Plaintiff must provide a factual basis indicating that knowledge of guaranteed sales would have made the statement regarding IBG's 2008 revenues of $2,130,000 misleading, and show that Maggiore possessed the necessary scienter related to this statement. The May 2009 Private Placement Memorandum (PPM) initially offered 5,000,000 shares at $1.00 each, totaling up to $5,000,000 in gross proceeds, but was later amended to allow for 12,500,000 shares at $0.40 each, still aiming for $5,000,000 in gross proceeds. The plaintiff also claims that the 2008 audited financial statement, released on June 8, 2009, misleadingly reported IBG's "net sales" as $2,130,000, a figure based on product shipments rather than actual sales. Additionally, the plaintiff alleges that Raich Ende conspired with IBG officers to conceal significant income by not disclosing their compensation on tax returns. However, the plaintiff has not asserted awareness or reliance on these financial statements or tax returns before purchasing shares, which is critical for establishing reliance under Section 10(b) of the Securities Exchange Act. Reliance is demonstrated by awareness of a company's statements and engaging in transactions based on those misrepresentations. Consequently, the plaintiff cannot base a 10(b) claim on the 2008 audited financial statement or tax returns; the only actionable statement appears to be from the May 2009 PPM regarding the preliminary audited results. The discussion of Raich Ende’s scienter relates primarily to the audited financial statement released after the PPM. The plaintiff's legal arguments do not clearly differentiate between 10(b) claims and common law claims, leading to a unified analysis by the Court. Furthermore, the plaintiff's request to submit a proposed Third Amended Complaint does not mention the Second Amended Complaint submitted with opposition papers.
