New Enterprises Limited v. SenesTech Inc.

          ORDER

          James A. Teilborg Senior United States District Judge.

         Pending 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.

         I. BACKGROUND

         On 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.

         The 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, “Defendants”). (Id.).

         A. Facts

         The 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).

         1. Loans

         On 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).

         2. Options Grants

         On July 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).

         3. Equity Investments by Plaintiff

         On 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. ¶ 28-29).

         4. Restrictive Legends

         All of 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).

         5. Lock-Up Agreement

         Also in 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).

         6. The IPO

         On 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).

         II. LEGAL STANDARD

         To 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).

         Although 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, the-defendant-unlawfully-harmed-me accusation.” Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 555).

         For 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. § 78u-4(b)(1)(B).

         In 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).

         III. ...