Gavin/Solmonese LLC v. D'Arnaud-Taylor

68 F.Supp.3d 530

GAVIN/SOLMONESE LLC, Liquidating Trustee of the Waste2Energy Liquidating Trust created in Accordance with the confirmed Chapter 11 Plan of Reorganization for Waste2Energy Holdings, Inc., Waste2Energy, Inc., Waste2Energy Group Holdings PLC, and Waste2Energy Technologies International Ltd., Plaintiff

v.Christopher D'ARNAUD–TAYLOR, Peter Bohan, John Joseph Murphy, Charles Vista LLC, Gregg Lorenzo, and Francis Lorenzo, Defendants.

No. 13–CV–6400LAP.

United States District Court, S.D. New York.

Signed Dec. 23, 2014.

Filed Dec. 24, 2014.

Steven L. Klepper, Cole Schotz Meisel Forman & Leonard, P.A., Hackensack, NJ, for Plaintiff.

Bruce G. Vanyo, Jonathan Asher Rotenberg, William Michael Regan, Katten Muchin Rosenman, LLP, New York, NY, for Defendants.

OPINION AND ORDER

LORETTA A. PRESKA, Chief Judge:

In this action, Gavin/Solmonese LLC (the “Trustee” or “Plaintiff”), acting on behalf of the bankrupt Waste2Energy Holdings Inc. (“W2E”) and buyers of its debentures, brings securities fraud claims pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“the 1934 Act”) against the management of W2E as well as the broker-dealer it hired to conduct a private offering, Charles Vista LLC (“Vista”). 15 U.S.C. § 78j(b) ; 17 C.F.R. § 240.10b–5. Plaintiff also brings related common law claims against the defendants, including negligent misrepresentation, breach of fiduciary duty, negligent hiring and retention, conversion, and unjust enrichment.

Three motions are presently before the court. Two motions to dismiss the First Amended Complaint (“FAC”) for failure to state a claim have been filed by employees of W2E and by Vista employee Francis Lorenzo. In addition, Vista and its other employees have moved to compel arbitration, or, in the alternative, to dismiss. Taken together, these motions challenge all of Plaintiff's claims. For the reasons stated below, Plaintiff's securities fraud claims under Section 10(b) and 20(a) are dismissed against both the W2E and Vista defendants. Because Plaintiff's only federal claims have failed, the court declines to exercise supplemental jurisdiction over the remaining common law claims. However, Plaintiff is granted leave to supplement the complaint to plead the existence of diversity jurisdiction properly.

I. Background

Waste2Energy Holdings Inc. is a cleantech technology company founded in 2007 to create customized facilities that generate clean renewable energy from materials typically disposed of as waste. The company, as well as its three subsidiaries (Waste2Energy, Inc., (“Inc”) Waste2Energy Group Holdings PLC, (“PLC”) and Waste2Energy Technologies International Ltd. (“Technologies”)), will collectively be referred to as “W2E” throughout this opinion.

Christopher D'Arnaud–Taylor (“Taylor”) was involved in founding W2E and during the offering period served as Chairman of the Board of W2E Holdings and W2E Inc. and in fact as its sole director for at least part of this period. (FAC ¶ 38) He was also the managing director of the two subsidiaries W2E Technologies and PLC, which are part of the Liquidating Trust. (FAC ¶ 25.) John Joseph Murphy (“Murphy”) was hired as managing director of Technologies and PLC in 2008 and afterwards was responsible for managing the Dargavel Project, W2E's only project in development. (FAC ¶ 27.) Peter Bohan (“Bohan”) served as CEO of both W2E Inc. and W2E Holdings during the offering period but was replaced by Murphy in May 2011 after personal differences arose between them. (FAC ¶¶ 27, 29.) Together, these defendants collectively are referred to as “the W2E Defendants.”

Gregg Lorenzo (“G. Lorenzo”) is the owner of Charles Vista, LLC, a registered broker-dealer. Francis Lorenzo (“F. Lorenzo”), who is not related to him, was the head of investment banking at Vista. Together with Charles Vista itself, these defendants comprise the “Vista defendants.”

W2E initially acquired a proprietary technology for waste “gasification” by purchasing the company Enerwaste Europe Ltd. (“EE”) and hiring its owner, Friofinnur Einarsson (“Finni”), as W2E's Chief Technology Officer. In 2007, W2E was hired by Ascot Environmental Ltd. (“Ascot”) to complete a waste to energy facility in Scotland called “the Dargavel Project” that EE was originally contracted to complete using its technology. (FAC ¶ 28.) The project was plagued by persistent problems, causing W2E to conclude that the intellectual property it had acquired was not operable, creating significant delays that put W2E in breach of its contract, and eventually leading the client to develop its own technological adaptations in order to complete the project.

The fraud and negligent misrepresentation claims in this case concern a private placement conducted by W2E between September 2009 and the middle of 2010 designed to raise up to $15 million which was imminently needed to finance the short-term operations of the company. W2E offered senior convertible debentures at a 12% interest rate, which matured a year from the date of issue. Investors also received additional warrants entitling them to buy common stock at a specified cost per share. (FAC ¶ 2.) W2E retained Vista to act as its exclusive placement agent for the offering. In addition to consulting and investment banking fees, Vista was to receive a commission of ten percent of the gross proceeds of the debentures sold as well as a non-accountable expense allowance of three percent of the proceeds. (FAC ¶¶ 36–37.) Vista's compensation would double if the debenture purchasers exercised their warrants to acquire company stock, and if $10 Million of debentures were sold, Vista would also have the right to name a minority of new directors. (Id. at 36, 38.)

Prospective investors were given a confidential private offering memorandum (“POM”) which described the opportunity and identified the risk factors for the investment. Defendants also held live information sessions for investors. Plaintiff alleges that the POM and information sessions contained numerous fraudulent misrepresentations including the message that W2E had “significant IP, valuable trade secrets and know-how to operate, control and manage” waste gasification facilities, when in actuality, its intellectual property was worthless and its sole project under construction was unsuccessful and the subject of protracted disputes. (FAC ¶ 4, 9.)

In August 2011, a group of investors filed a successful petition to force W2E Holdings, Inc. into involuntary bankruptcy pursuant to Section 303 of the Bankruptcy Code, 11 U.S.C. § 303. (FAC ¶ 6.) A Chapter 11 trustee was appointed, and in early 2012 he conducted an examination of the pre-petition business activities of W2E. Plaintiffs claim that this investigation brought to light key facts indicating that W2E had engaged in fraudulent misrepresentations throughout the offering period. (See FAC ¶ 9.) As part of the company's liquidation plan, debenture holders were given the option to assign their claims to the Liquidating Trust for prosecution, and 22 investors chose to do so. (FAC ¶ 18.)

In August of 2011, the SEC also launched an investigation of the Vista Defendants for the role they played as the placement agent for W2E's debentures. On February 15, 2013, the SEC issued a cease and desist order including allegations of misrepresentations made to three anonymous customers in order to induce them to purchase debentures. (FAC ¶ 79.)

Plaintiff also alleges that the officers and directors of W2E incompetently managed the company's affairs and, when it began to fail, seized corporate assets for themselves. However, this opinion need not go into depth about the facts underlying these claims because they are based in common law.

II. Securities Claims

A. Statute of Limitations

Claims brought under Section 10(b) must be brought by the earlier of “2 years after the discovery of the facts constituting the violation; or 5 years after such violation.” 28 U.S.C.A, § 1658(b). Plaintiff's Section 10(b) claim against the W2E defendants is time-barred because W2E investors were or should have been aware of the key facts constituting the violation more than two years prior to the filing of this case on September 11, 2013. The Court need not determine whether Plaintiff's Section 10(b) claim against the W2E defendants is adequately pled because it was not timely filed. See e.g. Steginsky v. Xcelera Inc., 741 F.3d 365, 369 (2d Cir.2014), (affirming dismissal of claim as untimely even though Plaintiff's case was previously dismissed by the district court for failure to plead scienter.)

The statute of limitations begins to run when a reasonably diligent plaintiff would have discovered the facts constituting the violation. Merck & Co. v. Reynolds, 559 U.S. 633, 653, 130 S.Ct. 1784, 176 L.Ed.2d 582 (2010). All elements of a Section 10(b) violation must be discovered, including facts establishing a defendant's scienter. Id. A fact is not deemed “discovered” until the Plaintiff can plead it with sufficient detail and particularity to survive a 12(b)(6) motion to dismiss. City of Pontiac Gen. Employees' Ret. Sys. v. MBIA, Inc., 637 F.3d 169, 175 (2d Cir.2011).

While mere inquiry notice no longer triggers the statute of limitations, the Supreme Court has noted that this does not put all plaintiffs in the same position no matter when they choose to begin investigating. Merck & Co., Inc., 559 U.S. at 652, 130 S.Ct. 1784. Courts must still consider when “storm warnings” would have prompted a reasonably diligent plaintiff to begin investigating in order to determine when a reasonable plaintiff would have discovered the necessary facts. Id. For instance, in a statute of limitations analysis governed by Merck, the Third Circuit has stated that a reasonably diligent plaintiff would undertake an investigation based on “ ‘[t]he filing of related lawsuits,’ ‘news articles and analyst's reports,’ and ‘prospectuses, quarterly reports, and other information related to their investments.’ ” Pension Trust...