Carmack v. Amaya Inc.

Citation: 258 F. Supp. 3d 454Docket: Civil Action No. 16-1884

Court: District Court, D. New Jersey; June 15, 2017; Federal District Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Four motions to dismiss in a securities fraud case were addressed by the court, with motions from Defendants Amaya, Inc. and David Baazov denied, while those from Daniel Sebag, Divyesh Gadhia, and Harlan Goodson were granted in part and denied in part. The plaintiffs allege that Amaya, a Canadian gambling company, significantly expanded through acquisitions and became the largest online poker operator globally. David Baazov, the company's founder and former CEO, is accused of sharing insider information about these acquisitions with associates, violating securities regulations and Amaya's internal policies.

The Autorité des Marchés Financiers (AMF) initiated an investigation into Baazov in 2014, which expanded in 2015, focusing on trading activities related to Amaya's $4.9 billion acquisition of the Oldford Group in August 2014. This acquisition was pivotal for Amaya's entry into the U.S. market. Following the acquisition announcement, the AMF launched an investigation into prior trading of Amaya securities. On December 11, 2014, search warrants were executed at Amaya's headquarters, implicating several employees, including Baazov and Sebag. Amaya cooperated with the investigation, asserting that it had no adverse impact on business operations.

In subsequent press releases, Amaya maintained that internal reviews found no violations of Canadian securities laws and expressed confidence in its compliance and cooperation with regulatory authorities. The company noted that certain documents related to the investigation were sealed, limiting its ability to comment on specific individuals mentioned in the case without risking contempt of court.

On April 8, 2015, Ben Soave, a retired Chief Superintendent of the Royal Canadian Mounted Police and a member of Amaya's Compliance Committee, reported that an internal review of Amaya's acquisition of Oldford Group found no evidence of violations of Canadian securities laws, including insider trading, by CEO David Baazov or CFO Daniel Sebag. Amaya expressed confidence that the Autorité des marchés financiers (AMF) would reach a similar conclusion. However, plaintiffs claim this statement was misleading, as it failed to disclose that Baazov did not comply with Amaya's insider trading policies.

On May 26, 2015, Amaya submitted its Registration Statement under Section 12 of the Exchange Act, with financial statements and certifications signed by Baazov and Sebag, claiming there was no undisclosed fraud involving management affecting internal controls over financial reporting, as required by Section 302(a)(5)(B) of the Sarbanes-Oxley Act. The class period commenced with allegations that these statements were misleading by not revealing Baazov’s fraudulent actions.

On June 1, 2015, Amaya issued a press release regarding the ongoing AMF investigation into the trading of Amaya securities related to the Oldford Group acquisition. The AMF was examining the conduct of Amaya employees, including Baazov and Sebag, but had not initiated any formal proceedings or charges. Amaya's internal review, overseen by independent board members and external counsel, found no violations of securities laws. Gadhia, Amaya's then-Lead Director, stated there was no reasonable basis for proceedings against the company or its personnel, while Baazov maintained that concerns regarding violations of Canadian securities laws were unfounded and expressed confidence in the AMF's eventual findings.

On June 8, 2015, Amaya common shares began trading on NASDAQ, with the AMF expanding its investigation into various companies, including Amaya, by July 23, 2015, as mandated by the Quebec Securities Act (244), which ensures confidentiality for such investigations. The defendants argue this investigation is distinct due to different subjects compared to a prior December 2014 warrant. On November 10, 2015, Amaya registered up to $3 billion in debt and equity securities with the SEC via a Form F-10. Subsequently, on March 7, 2016, the AMF filed a confidential application for an emergency freeze and cease trading order against 13 individuals, excluding Amaya and its executives, based on evidence that Baazov leaked confidential information about acquisitions.

Amaya's annual report for fiscal year 2015, filed on March 14, 2016, included Sarbanes-Oxley certifications from Baazov and Sebag, which plaintiffs allege were misleading due to nondisclosure of Baazov's fraudulent activities. On March 21, 2016, Amaya launched PokerStars in New Jersey, and the following day, the BDR issued a non-public order to enjoin trades. Baazov faced criminal charges for insider trading, leading to his resignation and Gadhia's appointment as Chairman. The AMF announced charges against Baazov on March 23, 2016, detailing five counts including insider trading and market manipulation based on information from December 2013 to June 2014.

In response to the charges, Amaya proclaimed no anticipated impact on its operations or business relationships. Gadhia mentioned that an independent review of the Oldford Group acquisition found no violations of Canadian securities laws, conducted with the aid of external legal counsel.

On March 22, 2016, the AMF requested the BDR to issue freeze and cease trading orders against several individuals, including Josh Baazov and others, for allegedly trading or leaking privileged information regarding potential mergers and acquisitions involving Amaya, Inc. Following the announcement, Amaya’s stock price dropped from $14.25 to $10.30 before closing at $11.18 on March 23, 2016. Amaya later clarified that it was unaware of the BDR Order and that the alleged conduct of Baazov extended beyond the charges and the company's internal investigation. The Board decided to expand the Special Committee's investigation into these additional matters, appointing Gadhia as Chairman to lead the inquiry.

In the Amended Complaint, four counts for damages are asserted on behalf of a class of investors who acquired Amaya securities between May 26, 2015, and March 22, 2016. Count I alleges violations of Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5 against Baazov, Sebag, and Amaya. Count II claims controlling person liability against Baazov and Sebag under Section 20(a) of the Exchange Act. Count III seeks strict liability for violations of Section 11 of the Securities Act against all defendants, while Count IV alleges violations of Section 15 by individual defendants as senior executives.

Under Rule 12(b)(6), a complaint may be dismissed for failing to state a claim upon which relief can be granted. Courts must accept factual allegations as true and construe the complaint favorably for the plaintiff, determining if the allegations raise a right to relief above a speculative level. Legal conclusions, however, are not afforded this presumption. To satisfy heightened pleading standards for securities fraud under the PSLRA, plaintiffs must detail the circumstances of their claims with enough specificity to inform defendants of the alleged misconduct.

A plaintiff alleging fraud must provide detailed information, including the date, time, and place of the alleged fraud, aligning with the Third Circuit's requirement for essential background facts (who, what, when, where, and how). The Private Securities Litigation Reform Act (PSLRA) establishes two key pleading requirements for a complaint to withstand a motion to dismiss. First, under 15 U.S.C. § 78u-4(b)(1), the complaint must identify each misleading statement, explain why it was misleading, and provide particular facts supporting any information and belief allegations. Second, it must detail facts indicating a strong inference of the defendant's required state of mind regarding each alleged violation.

Section 10(b) of the Securities Exchange Act prohibits manipulative or deceptive practices, while Rule 10b-5 makes it unlawful to make untrue statements or omit material facts in connection with securities transactions. To assert a claim under Section 10 and Rule 10b-5, a plaintiff must demonstrate: 1) a material misrepresentation or omission by the defendant; 2) scienter; 3) a connection between the misrepresentation and the transaction; 4) reliance on the misrepresentation; 5) economic loss; and 6) loss causation. Scienter involves intent to deceive or defraud, requiring a strong inference derived from the collective facts rather than isolated allegations.

Plaintiffs can utilize the fraud on the market theory to presume reliance based on the market's reflection of public information, allowing courts to assume reliance on public misstatements when purchasing or selling stock. Additionally, an Exchange Act plaintiff must establish a causal link between the misrepresentation and the economic loss incurred. Under Section 20(a) of the Exchange Act, individuals who control others who violate Section 10(b) can be held jointly liable if: 1) they controlled the violator; 2) the violator committed a primary securities law violation; and 3) the controller was a culpable participant in the fraud.

Plaintiffs must demonstrate both control over and liability of the controlled person under the statute, specifically proving an underlying violation of Section 10(b) for liability under Section 20(a). Culpable participation involves either substantial knowing involvement in wrongdoing or intentional inaction to facilitate fraud. District courts differ on the pleading requirements for Section 20(a) claims. To establish control person liability under Section 15 of the Securities Act, plaintiffs must allege: 1) a primary violation of federal securities laws by the controlled entity; 2) control by the defendant; and 3) meaningful culpable participation by the controlling person in the primary violation. Section 11 of the Securities Act allows purchasers to sue for material misstatements or omissions in registration statements without needing to prove intent to deceive. The court finds that plaintiffs adequately allege that statements made by defendants were false and misleading due to undisclosed insider trading by Baazov, detailing the specifics of his actions and violations. The court rejects the argument that two separate AMF investigations invalidate these allegations. Baazov's claims of transparency with the board and compliance with Canadian laws are alleged to be false. His motion to dismiss Count I is denied. However, the allegations against Sebag, who served as Amaya’s CFO, do not sufficiently demonstrate insider trading or culpability. The claims against him rely on his role and certain communications but lack a strong inference of the necessary state of mind to support liability regarding his Sarbanes-Oxley certifications.

Sebag’s motion to dismiss Count I is granted. The Court finds that Amaya’s Code of Business Conduct does not represent an actionable material misrepresentation under securities laws. Plaintiffs' reliance on an April 8, 2015 exhibit attached to the May 26, 2015 Registration Statement, which expresses confidence that the AMF investigation will exonerate the company, does not suffice to demonstrate that the statement was false or misleading. The Court clarifies that a statement of opinion is not false merely because it later proves incorrect, unless it is shown to be insincere. In this instance, there are no allegations indicating insincerity in Amaya’s opinion, and the statements are deemed non-actionable. 

Baazov’s June 1, 2015 statement, which also expresses confidence in the outcome of the AMF investigation, is suggested to lack sincerity, leading the Court to impute a strong inference of scienter to Amaya based on Baazov's actions. The adverse interest exception, which might shield a corporation from liability for an agent’s misconduct for personal gain, does not apply here since the company benefited from Baazov’s misleading statements that helped maintain its stock price. 

Plaintiffs’ claims regarding the risks posed by Baazov’s misconduct and the potential jeopardy to Amaya’s gaming license do not absolve the company of responsibility to its investors. There are insufficient allegations regarding Sebag, Gadhia, or Goodson's involvement in the misleading statements; mere control or directorship does not meet the threshold to survive a motion to dismiss. Consequently, Counts II and IV are dismissed against Sebag, Gadhia, and Goodson. The defendants also assert that Plaintiffs cannot claim to have purchased securities issued pursuant to the November 2015 Registration Statement, as Amaya did not issue any securities under either the May or November Registration Statements.

Section 11 allows individuals who acquire securities linked to a materially false registration statement to file a lawsuit unless they were aware of the falsehood. Plaintiffs' claims regarding stock purchases associated with public offerings meet the necessary pleading requirements, as they are not subject to the stricter standards outlined in the PSLRA but rather adhere to the more lenient pleading standards of Federal Rule of Civil Procedure 8, unless fraud is involved. Here, the Plaintiffs clarify that their Section 11 claim does not involve fraud. They allege that they purchased Amaya stock connected to an Offering based on a Registration Statement that was inaccurate, containing untrue statements, and omitting necessary material facts. Consequently, Count III has been adequately pled. The motions to dismiss from Defendants Amaya, Inc. and David Baazov are denied, while those from Daniel Sebag and Divyesh Gadhia are partially granted and partially denied. Motions to strike are also denied. The Court finds that Plaintiffs have presented sufficient allegations to establish personal jurisdiction over Gadhia and Goodson, grounded in the nationwide service of process provisions of the Securities Act, as their claims relate to activities conducted within the United States, including SEC filings.