United States District Court, D. Arizona
A. Teilborg Senior United States District Judge.
before the Court are Defendant SenesTech, Inc.'s
(“Defendant SenesTech”) Motion to Dismiss (Doc.
14) and Defendant Roth Capital Partners, LLC's
(“Defendant Roth”) Motion to Dismiss (Doc. 30)
pursuant to Federal Rules of Civil Procedure
(“Rules”) 8(a), 9(b), and 12(b)(6). The Court now
rules on the motions.
April 23, 2018, Defendant SenesTech filed its Motion to
Dismiss (Doc. 14). Plaintiff New Enterprises, Ltd.
(“Plaintiff”) filed a Response (Doc. 34) on May
29, 2018. Defendant SenesTech then filed a Reply (Doc. 44) on
June 5, 2018. On May 18, 2018, Defendant Roth filed its
Motion to Dismiss (Doc. 30) and further joined Defendant
SenesTech's motion. (Doc. 30 at 2). Plaintiff filed a
Response (Doc. 47) on June 15, 2018, and Defendant Roth filed
a Reply (Doc. 49) on June 22, 2018.
nine-count Complaint (Doc. 1) asserts the following causes of
action discussed herein: (I) common law fraud; (II) common
law fraud; (III) federal securities fraud; (IV) state
securities fraud (Arizona); (V) violation of Delaware Code
§ 8-401; (VI) breach of contract; (VII) tortious
interference with a prospective business advantage; (VIII)
conversion; and (IX) breach of contract. (Doc. 1
(“Compl.”) ¶¶ 53-107). Plaintiff
asserts counts (I)-(IV) and (VI) against only Defendant
SenesTech, and asserts counts (V) and (VII)-(IX) against both
Defendant SenesTech and Defendant Roth (collectively,
following facts are either undisputed or recounted in the
light most favorable to the non-moving party. See Wyler
Summit P'ship v. Turner Broad. Sys., Inc., 135 F.3d
658, 661 (9th Cir. 1998). Defendant SenesTech, a Delaware
corporation, is a public company that sells a rodent-control
solution that causes infertility in rats. (Doc. 1 ¶ 7).
Plaintiff is a Singapore-based privately held family
investment trust, at times acting through its agent,
Subramanian Subbiah. (Id. ¶ 6). Defendant Roth
is a California-based investment banking firm that acted as
lead underwriter for Defendant SenesTech's Initial Public
Offering (“IPO”). (Id. ¶ 8).
April 18, 2015, Plaintiff made a secured loan of $500, 000 to
Defendant SenesTech (the “April 2015 Loan”),
which was executed with a common stock warrant that allowed
Plaintiff to purchase up to 346, 667 shares of common stock
in Defendant SenesTech at $1.50 per share. (Id.
¶ 12). Between September 4, 2015 and October 28, 2015,
Plaintiff made a series of four additional secured loans to
Defendant SenesTech, totaling $500, 000 (the “Late 2015
Loans”). (Id. ¶ 13). These loans were
convertible to common or Series B preferred stock in
Defendant SenesTech at $1.55 per share, and executed with
another stock warrant permitting Plaintiff to purchase
additional common stock at $1.50 per share. (Id.).
Plaintiff alleges that Defendant SenesTech would not have
been able to stay in business without obtaining the April
2015 Loan and Late 2015 Loans. (Id. ¶ 13-14).
3, 2015, Defendant SenesTech awarded a total of 5, 528, 465
stock options to its corporate insiders at an exercise price
of $0.10 per share. (Id. ¶ 15). Defendant
SenesTech continued to provide similar options grants at the
$0.10 per share exercise price throughout the rest of 2015.
(Id. ¶ 19). Defendant SenesTech concealed these
stock option grants from Plaintiff during all relevant time
periods, including during negotiation of the Late 2015 Loans.
(Id. ¶ 20).
Equity Investments by Plaintiff
December 31, 2015, Plaintiff agreed to convert the Late 2015
Loans into 333, 255 shares of Series B preferred stock at
$1.55 per share in reliance on Defendant SenesTech's
representation that Plaintiff's security interests under
the Late 2015 Loans were no longer valid. (Id.
¶ 23-24). Between April 8, 2016 and May 6, 2016,
Plaintiff agreed to cancel the April 2015 Loan in exchange
for an additional 1, 021, 800 shares of common stock in
Defendant SenesTech at $0.50 per share. (Id. ¶
26). Plaintiff also purchased an additional 300, 000 shares
at this time. (Id.). Plaintiff alleges that it would
not have made these additional equity investments if it had
knowledge of the millions of options granted at a lower
exercise price of $0.10 per share. (Id. ¶ 27).
In September 2016, Defendant SenesTech approved a reverse
stock split that brought Plaintiff's total holdings in
Defendant SenesTech to 331, 011 shares, acquired at a
weighted average basis of $7.19 per share. (Id.
Defendant SenesTech's stock certificates contained a
restrictive legend “stating the securities at issue had
not been registered and could not be sold or otherwise
transferred or assigned until either the securities became
registered, or [Defendant] SenesTech received a satisfactory
opinion of counsel stating that such registration is not
required for sale or transfer.” (Id. ¶
31). In advance of the IPO, Plaintiff's counsel provided
an opinion letter on November 7, 2016 to Defendant SenesTech
stating that certain shares held by Plaintiff did not require
registration, so the restrictive legends on the corresponding
stock certificates could be removed. (Id. ¶
34). Defendant SenesTech refused this request the same day by
explaining that “[Defendant] Roth has said they will
not permit any delegending of shares at this [time].”
(Id. ¶ 35). Defendant SenesTech continued to
refuse to instruct its transfer agent to remove the
restrictive legend from the stock certificates corresponding
to Plaintiff's shares, allegedly blocking Plaintiff from
selling its shares and profiting during the IPO process.
(Id. ¶ 37).
November 2016, Defendant Roth proposed that Plaintiff agree
to a “Lock-Up Agreement, ” under which Plaintiff
and other investors would be prohibited from selling its
stock in Defendant SenesTech for 180 days following the IPO
without the prior written consent of Defendant Roth.
(Id. ¶ 38). On or about November 13, 2016,
Plaintiff agreed to the Lock-Up Agreement that prohibited
Plaintiff from selling its stock for 180 days post-IPO.
(Id. ¶¶ 40, 42). In exchange for its
acquiesce to the Lock-Up Agreement, Defendant Roth agreed to
exempt 50, 000 shares held by Plaintiff, such that Plaintiff
would not have to procure prior authorization from Defendant
Roth to sell any of those 50, 000 shares within 180 days
after the IPO. (Id. ¶ 40).
December 8, 2016 Defendant SenesTech held an IPO of common
stock at a price of $8 per share. (Id. ¶ 43).
In mid-December 2016, Plaintiff learned that Defendants
failed to register any shares owned by Plaintiff in
connection with the IPO, rendering it impossible for
Plaintiff to sell any shares at that time. (Id.
¶ 44). On April 18, 2017, Plaintiff presented Defendant
SenesTech with a new opinion letter stating that the stock
held by Plaintiff did not require registration in order to be
sold or transferred. (Id. ¶ 49). On May 18,
2017, Plaintiff authorized its transfer agent to remove the
restrictive legend from 50, 000 shares held by Plaintiff.
(Id. ¶ 50). At that point, Defendant
SenesTech's stock had fallen from an all-time high of
$10.68 on January 17, 2017 to $6.50 on May 18, 2017.
(Id. ¶¶ 48, 50). Defendant SenesTech
authorized the removal of the legend from Plaintiff's
remaining 281, 011 shares on June 13, 2017. (Id.
¶ 51). Plaintiff has since sold most of its shares in
Defendant SenesTech at prices “substantially
below” the post-IPO high and its acquisition costs.
(Id. ¶ 52).
survive a Rule 12(b)(6) motion for failure to state a claim,
a complaint must meet the requirements of Rule 8(a)(2). Rule
8(a)(2) requires a “short and plain statement of the
claim showing that the pleader is entitled to relief, ”
so that the defendant has “fair notice of what the . .
. claim is and the grounds upon which it rests.”
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)
(quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)).
A complaint must also contain sufficient factual matter,
which, if accepted as true, states a claim to relief that is
“plausible on its face.” Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009). Facial plausibility
exists if the pleader sets forth factual content that allows
a court to draw the reasonable inference that the defendant
is liable for the misconduct alleged. Id.
Plausibility does not equal “probability, ” but
requires more than a sheer possibility that a defendant acted
unlawfully. Id. “Where a complaint pleads
facts that are ‘merely consistent' with a
defendant's liability, it ‘stops short of the line
between possibility and plausibility of entitlement to
relief.'” Id. (citing Twombly,
550 U.S. at 557).
a complaint attacked for failure to state a claim does not
need detailed factual allegations, the pleader's
obligation to provide the grounds for relief requires
“more than labels and conclusions, and a formulaic
recitation of the elements of a cause of action will not
do.” Twombly, 550 U.S. at 555 (internal
citations omitted). Rule 8(a)(2) “requires a
‘showing,' rather than a blanket assertion, of
entitlement to relief, ” as “[w]ithout some
factual allegation in the complaint, it is hard to see how a
claimant could satisfy the requirement of providing not only
‘fair notice' of the nature of the claim, but also
‘grounds' on which the claim rests.”
Id. at 555 n.3 (citing 5 Charles A. Wright &
Arthur R. Miller, Federal Practice & Procedure
§ 1202, at 94-95 (3d ed. 2004)). Thus, Rule 8's
pleading standard demands more than “an unadorned,
Iqbal, 556 U.S. at 678 (citing Twombly, 550
U.S. at 555).
claims involving fraud, Rule 9(b) poses additional pleading
requirements. Fed.R.Civ.P. 9(b). Under Rule 9(b), a plaintiff
alleging fraud “must state with particularity the
circumstances constituting fraud or mistake.”
Id. “Averments of fraud must be accompanied by
‘the who, what, when, where, and how' of the
misconduct charged.” Vess v. Ciba-Geigy Corp.
USA, 317 F.3d 1097, 1106 (9th Cir. 2003). Each and every
element of securities fraud must meet this heightened
pleading standard. See Or. Pub. Emps. Ret. Fund v. Apollo
Gp. Inc., 774 F.3d 598, 605 (9th Cir. 2014). A complaint
alleging securities fraud is also subject to the Private
Securities Litigation Reform Act (“PSLRA”). Under
the PSLRA, the complaint must “specify each statement
alleged to have been misleading, the reason or reasons why
the statement is misleading, and, if an allegation regarding
the statement or omission is made on information and belief,
the complaint shall state with particularity all facts on
which that belief is formed.” 15 U.S.C. §
ruling on a Rule 12(b)(6) motion to dismiss, a court must
construe the facts alleged in the complaint in the light most
favorable to the drafter and must accept all well-pleaded
factual allegations as true. See Shwarz v. United
States, 234 F.3d 428, 435 (9th Cir. 2000); see also
Cafasso v. Gen. Dynamics C4 Sys., 637 F.3d 1047, 1053
(9th Cir. 2011). However, a court need not accept as true
legal conclusions couched as factual allegations. Papasan
v. Allain, 478 U.S. 265, 286 (1986).