United States District Court, D. Arizona
A. TEILBFRG SENIOR UNITED STATES DISTRICT JUDGE
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.
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).
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.
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). 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.).
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).
Negotiations and Loans
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.).
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).
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.).
2015 Option Awards
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).
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 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).
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).
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)).
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).
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).
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).
Common Law ...