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New Enterprises Ltd. v. SenesTech Inc.

United States District Court, D. Arizona

August 16, 2019

New Enterprises Limited, Plaintiff,
v.
SenesTech Incorporated, et al., Defendants.

          ORDER

          JAMES A. TEILBFRG SENIOR UNITED STATES DISTRICT JUDGE

         Pending before the Court are Defendant SenesTech, Inc.'s (“Defendant SenesTech”) Motion to Dismiss (Doc. 71) and Defendant Roth Capital Partners, LLC's (“Defendant Roth”) Motion to Dismiss (Doc. 70) 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

         The Court previously dismissed Plaintiff New Enterprises, Ltd.'s (“Plaintiff”) original Complaint (“OC, ” Doc. 1), finding that Plaintiff failed to state a claim upon which relief could be granted. (See Doc. 57). Specifically, the Court found that Plaintiff both failed to adequately plead fraud with particularity, because it did not state the “who, what, when, where, and how” of allegedly fraudulent misrepresentations, and failed to plead an essential element of its other claims. (See Doc. 57 at 7, 13 (citation omitted)). Plaintiff then amended the OC, and Defendants now seek to dismiss Plaintiff's First Amended Complaint (“FAC, ” Doc. 69).

         On April 18, 2019, Defendant SenesTech filed its Motion to Dismiss (Doc. 71). Plaintiff filed a Response (Doc. 73) on May 2, 2019, and Defendant SenesTech then filed a Reply (Doc. 74) on May 9, 2019. On April 18, 2019, Defendant Roth also filed its Motion to Dismiss (Doc. 70). Plaintiff filed a Response (Doc. 72) on May 2, 2019, and Defendant Roth filed a Reply (Doc. 75) on May 9, 2019.

         The eight-count FAC (Doc. 69) asserts the following causes of action discussed herein: (I) common law fraud; (II) federal securities fraud; (III) state securities fraud (Arizona); (IV) violation of Delaware Code § 8-401; (V) breach of contract; (VI) tortious interference with a prospective business advantage; (VII) conversion; and (VIII) breach of contract. (FAC ¶¶ 71-139).[1] Plaintiff asserts counts (I)-(V) against only Defendant SenesTech, counts (VI)-(VII) against both Defendant SenesTech and Defendant Roth (collectively, “Defendants”), and count (VIII) against only Defendant Roth. (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. (FAC at ¶ 7). Plaintiff is a privately held family investment trust incorporated in the British Virgin Islands with its principal place of business in Singapore. (Id. at ¶¶ 1-6). At times, Plaintiff acted through its agent, Subbiah Subramanian. (Id. at ¶ 6). Defendant Roth is a California-based investment banking firm that acted as the underwriter for Defendant SenesTech's initial public offering (the “IPO”). (Id. at ¶ 8).

         1. Negotiations and Loans

         In March 2015, Defendant SenesTech's then-CEO, Thomas Ziemba, engaged Plaintiff-through Subramanian as its agent-in negotiations for capital. (Id. at ¶ 12). Plaintiff alleges Ziemba orally represented to Subramanian at an in-person meeting in Fremont, California that Defendant SenesTech “was worth approximately $55 to $60 million.” (Id. at ¶ 13). Plaintiff also alleges Ziemba stated that the “current value of [Defendant] SenesTech's stock” was “$1.50 per share” at this meeting. (Id.).

         Plaintiff further alleges Defendant SenesTech “commissioned Redwood Valuation Partners, an independent professional appraiser, ” to provide a valuation (the “Redwood Valuation”) of its company in March 2015. (Id. at ¶¶ 14, 21). The Redwood Valuation concluded, “as of March 9, 2015, the fair market value of the Company's common stock was $0.06 per share, consistent with a total corporate valuation of less than $2 million.” (Id. at ¶¶ 14, 22). Plaintiff alleges Ziemba “was aware of the Redwood Valuation when he first informed Subramanian that SenesTech had a corporate valuation of $55 million to $60 million, and at all subsequent times he repeated that statement.” (Id. at ¶ 23).

         Without knowledge of the Redwood Valuation, Plaintiff made a secured loan of $500, 000 to Defendant SenesTech (the “April 2015 Loan”) on April 18, 2015. (Id. at 15). In connection with the April 2015 Loan, Plaintiff received a warrant allowing it to purchase up to 346, 667 shares of common stock in Defendant SenesTech at $1.50 per share. (Id.). Between September 4, 2015 and December 15, 2015, Plaintiff made a series of four additional secured loans to Defendant SenesTech, totaling $500, 000 (the “Late 2015 Loans”). (Id. ¶ 16). 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.).

         2. 2015 Option Awards

         On July 3, 2015, Defendant SenesTech awarded 1, 500, 000 options to its founders and an additional 2, 528, 466 options to Ziemba, all with an exercise price of $0.10 per share. (Id. at ¶ 25). Defendant SenesTech continued to provide similar options grants at the $0.10 per share exercise price throughout the rest of 2015 (collectively, the “2015 Option Awards”). (Id. ¶¶ 26-28). Plaintiff alleges Defendant SenesTech concealed these stock option awards from Plaintiff during all relevant time periods, including during negotiation of the Late 2015 Loans. (Id. ¶¶ 20, 29-30). The board of directors of Defendant SenesTech also affirmed the validity of the Redwood Valuation when awarding options throughout 2015. (Id. at ¶¶ 24, 28).

         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 while still unaware of the Redwood Valuation. (Id. at ¶ 32). 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. at ¶ 37). Plaintiff also purchased an additional 300, 000 shares at this time. (Id.). Plaintiff alleges it would not have made these additional equity investments had it known of the millions of options awarded at a lower exercise price of $0.10 per share or the Redwood Valuation. (Id. ¶ at 38). 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 $3.45 per share. (Id. at ¶ 41). At all relevant times, all stock in Defendant SenesTech owned by Plaintiff was “maintained in uncertificated ‘book entry' form, such that no physical stock certificates exist.” (Id. at ¶ 42).

         4. Stock Restrictions

         All of the book entries for Plaintiff's stock in Defendant SenesTech contained a restriction “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. at ¶ 43). In advance of the IPO, Plaintiff's counsel provided an opinion letter (the “November Opinion Letter”) on November 7, 2016 to Defendant SenesTech stating that certain shares held by Plaintiff did not require registration, so the restriction on the corresponding shares could be removed. (Id. at ¶¶ 48-49). Plaintiff alleges Defendant SenesTech was “obligated to conclude that the [November Opinion Letter] was a ‘satisfactory opinion of counsel[.]'” (Id. at ¶ 49). 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. at ¶ 51). Defendant SenesTech continued to refuse to instruct its transfer agent to remove the restriction from Plaintiff's shares, allegedly blocking Plaintiff from selling its shares and profiting during the IPO process. (Id. at ¶ 53).

         5. Lock-Up Agreement

         Shortly thereafter, Defendant Roth proposed Plaintiff agree to a “Lock-Up Agreement, ” under which Plaintiff and other investors would be prohibited from selling its shares in Defendant SenesTech for 180 days following the IPO without the prior written consent of Defendant Roth. (Id. at ¶ 54). 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. at ¶¶ at 55, 60). In exchange for Plaintiff's acquiescence 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 “right after the IPO[.]” (Id. at ¶ 55). Defendant SenesTech's filing with the U.S. Securities and Exchange Commission (“SEC”) stated that Defendant Roth had “sole discretion” to “release for sale in the public market all or any portion of the shares restricted by the terms of the lock-up agreements.” (Id. at ¶ 58 (emphasis added)).

         6. The IPO

         On December 8, 2016 Defendant SenesTech held an IPO of common stock at a price of $8 per share. (Id. at ¶ 62). In December 2016, Plaintiff contacted Defendant Roth to secure removal of the restriction on sale for the 50, 000 shares carved out of the Lock-Up Agreement. (Id. at ¶ 64). Defendant Roth, however, “refused to authorize [Defendant] SenesTech to remove the restriction, ” thus rendering it impossible for Plaintiff to sell any shares at that time. (Id.). On April 18, 2017, Plaintiff presented Defendant SenesTech with a new opinion letter stating that the shares held by Plaintiff did not require registration in order to be sold or transferred. (Id. at ¶ 67). On May 4, 2017, Defendant SenesTech's transfer agent reissued 50, 000 shares of stock in Defendant SenesTech to Plaintiff without the applicable restriction. (Id. at ¶ 68). At that point, Defendant SenesTech's stock had fallen from an all-time high of $10.68 on January 17, 2017 to $6.58 on May 18, 2017. (Id. at ¶¶ 65, 68). Defendant SenesTech authorized the removal of the restriction from Plaintiff's remaining 281, 011 shares by June 13, 2017. (Id. ¶ at 69). Plaintiff has since sold most of its shares in Defendant SenesTech at prices “substantially below” the post-IPO high and its acquisition costs. (Id. at ¶ 70).

         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) (2012).

         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.ANALYSIS

         Defendant SenesTech moves to dismiss Plaintiff's fraud claims (Counts I-III) on the grounds that Plaintiff fails to plead fraud with sufficient particularity in the FAC. (See Doc. 71 at 11). Defendants also move to dismiss Plaintiff's remaining claims on the grounds that Plaintiff fails to plead facts that satisfy an essential element of each outstanding claim in the FAC. (See Id. at 20-23; Doc. 70 at 10-14).

         A. Common Law ...


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