Hull v. Global Digital Solutions, Inc., Civil Action No. 16-5153 (FLW)

JEFF HULL, on behalf of himself and all those similarly-situated, Plaintiff, v. GLOBAL DIGITAL SOLUTIONS, INC., et al., Defendants.

Civil Action No. 16-5153 (FLW)

UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY

September 14, 2018

*NOT FOR PUBLICATION*

OPINION

WOLFSON, United States District Judge:

Lead Plaintiff Michael Perry ("Plaintiff") brings this putative securities class action, on behalf of himself and all other similarly situated individuals, against Global Digital Solutions, Inc. ("GDS" or "Company"), a company involved in specialty-vehicle manufacturing, as well as GDS's former Chief Executive Officer Richard J. Sullivan ("R. Sullivan"), former Chief Financial Officer David Loppert ("Loppert"), former director and Executive Vice President William J. Delgado ("Delgado"), and former directors Arthur F. Noterman ("Noterman") and Stephanie C. Sullivan ("S. Sullivan") (collectively "Individual Defendants") (GDS and Individual Defendants together referred to as "Defendants"), alleging violations under, inter alia, various provisions of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., and the rules promulgated thereunder. Plaintiff accuses Defendants of making false representations and omissions to artificially raise GDS's stock price in an effort to finance specific acquisitions and raise cash using the inflated stock. The Court previously dismissed Plaintiff's Complaint without prejudice on December 19, 2017, holding that Plaintiff had failed to adequately allege reliance, an element of his securities claim. See Hull v. Glob. Digital Sols., Inc., No. 16-5153, 2017 WL 6493148, at *17 (D.N.J. Dec. 19, 2017). In accordance with that opinion, Plaintiff filed a Second Amended Complaint ("SAC") on January 18, 2018. ECF No. 38.

In the instant matter, Defendants GDS, Delgado, and Loppert move for dismissal on the basis that the additional allegations in the SAC still do not satisfy Plaintiff's burden of pleading reliance. ECF Nos. 38, 41. In addition, Loppert separately moves for dismissal for lack of personal jurisdiction or venue. ECF. No. 41. For the reasons that follow, Defendants' motions are DENIED.

I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

The facts of the case are fully laid out in the Court's previous opinion. See Hull, 2017 WL 6493148, at *2-4. For the sake of clarity, the Court states here the facts relevant to the current motions.

GDS is a company that, through its subsidiary, builds mobile command/communications and specialty vehicles for emergency and law enforcement operations. SAC at ¶¶ 91-93. During all relevant periods, GDS's stock traded on an over-the-counter exchange, OTCQB, under the ticker symbol "GDSI." Id. at ¶ 15. The putative class period is October 8, 2013 through August 11, 2016 ("Class Period"). Id. at ¶ 1. From August 12, 2013 through April 10, 2015, Loppert was GDS's Chief Financial Officer ("CFO"), id. at ¶ 17; Delgado was responsible for GDS's business development and served in various roles, such as President, CEO, CFO, Chairman, and Executive Vice President, id. at ¶ 18; and R. Sullivan was GDS's CEO from the start of the Class Period through May 13, 2016. Id. at ¶ 16. Plaintiff alleges that these individual defendantsparticipated in the day-to-day management and operations of GDS at the highest level, were privy to confidential information, and were directly or indirectly involved in drafting, producing, reviewing, approving, and/or disseminating false and misleading statements to deceive investors. Id. at ¶¶ 18, 23, 116.

More specifically, Plaintiff alleges that during the class period, unbeknownst to investors, GDS's stock was "worthless." Id. at ¶ 2. Plaintiff accuses Defendants of disseminating false and misleading statements and participating in several schemes designed to artificially inflate the price of GDS's common stock. Id. In the SAC, Plaintiff sets forth various alleged "schemes" perpetuated by Defendants:

1. By way of press releases, Defendants misrepresented a failed merger with Airtronic USA, Inc. ("Airtronic") for $95 million, id. at ¶ 3;

2. Defendants issued a misleading press release announcing that GDS "expects to announce several agreements regarding potential acquisitions," when in reality, Defendants knew GDS had neither the cash nor credible financing to acquire any company, id. at ¶ 4; and

3. Defendants falsely issued press releases in March 2014, announcing an unsolicited bid to acquire, inter alia, Remington Outdoor Company, Inc. ("Remington") for over $1 billion in cash and stock, when, in fact, GDS had very little cash on hand, and no credible financing options, id. at ¶ 5.

Plaintiff further avers that Defendants used the artificially inflated stock to finance acquisitions. Id. at ¶ 90. Additional details for each of these schemes are described in Hull, 2017 WL 6493148 at *2-4.

On August 11, 2016, the SEC filed a civil complaint charging Defendants GDS, R. Sullivan, and Loppert with multiple counts of securities fraud, including claims related to the $95 million Airtronic contract, GDS's allegedly knowingly false revenue forecast for the first quarter of 2014, the documents announcing GDS's Remington offers, and the allegations concerning additional acquisitions. Id. at ¶ 104. Upon this news, GDS shares dropped 52% on August 12, 2016. Id. at ¶ 107.

Plaintiff alleges that only with the filing of the SEC complaint did the public learn of an SEC investigation into GDS and its officers. Id. at. ¶ 105. According to Plaintiff, the SEC Complaint revealed, for the first time, the full extent of Defendants' alleged schemes to artificially inflate the price of its stock, despite lacking any working businesses or revenue, in order to use the inflated stock to finance acquisitions. Id. at. ¶¶ 105-106.

Based on the above allegations, on August 24, 2016, Plaintiff brought this putative class action against Defendants, asserting two causes of action under the Securities Exchange Act: 1) violation of Section 10(b) against all Defendants; and 2) violation of Section 20(a) against the Individual Defendants. On December 19, 2017, this Court granted Defendants' Motions to Dismiss on certain grounds but granted Plaintiff leave to amend his Amended Complaint. Hull, 2017 WL 6493148 at *23. With respect to the Section 10(b) claim, the Court found that while Plaintiff adequately alleged material misrepresentations, scienter, economic loss, and loss causation, Plaintiff failed to allege that GDS's stock traded in an efficient market, which is required for pleading reliance under a fraud-on-the-market theory. Id. at *16-17, 22. The Court also dismissed without prejudice, the Section 20(a) claim, which is derivative of the Section 10(b) claim.

On January 18, 2018, Plaintiff filed the SAC, which is the current operative complaint. ECF No. 38. In the SAC, Plaintiff made additional factual allegations supporting his fraud-on-the-market presumption of reliance.¹ SAC at ¶ 127. In particular, Plaintiff alleged the following:

1. GDS's stock was listed on the over-the-counter stock market, which is an efficient and automated market, id. at ¶ 127(a);

2. GDS's stock had an average weekly trading volume of nearly 3.4 million shares, or 10.65% of outstanding shares during the Class Period, id. at ¶ 127(b);

3. GDS regularly disseminated press releases to national newswire services, id. at ¶ 127(c);

4. There were at least 195 news articles about GDS published during the Class Period, id. at ¶ 127(d);

5. There were 25 market makers for GDS stock during the class period, id. at ¶ 127(e);²

6. From January 22, 2014 to January 24, 2014, and on March 12, 2014, GDS was eligible for S-3 registration with a tradeable float in excess of $75 million, id. at ¶ 127(f);

7. GDS stock reacted quickly to unexpected GDS-related news, id. at ¶ 127(g); and8. False and misleading statements directly impacted the price of GDS stock. Id. at ¶ 127(h). Plaintiff alleges 17 specific instances of "price impact," including how the stock rose and fell in response to allegedly false or misleading statements in connection with the the Airtronic, Remington, and revenue forecast allegations, as well as the filing of the SEC complaint. Id. at ¶¶ 127(h), 131-133.

In the instant matter, Defendants seek dismissal of Plaintiff's SAC for failure to state a claim on the basis that Plaintiff did not adequately plead that GDS traded in an efficient market. ECF No. 39. In addition, Loppert separately moves for dismissal of the SAC for lack of personal jurisdiction and improper venue. ECF No. 41. Plaintiff opposes the motion, arguing that the additional allegations in the SAC support a finding of reliance, and that Loppert waived personal jurisdiction and venue objections. ECF No. 44.

II. STANDARD OF REVIEW

Under Fed. R. Civ. P. 12(b)(6), a complaint may be dismissed for "[f]ailure to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). When reviewing a motion to dismiss on the pleadings, courts "accept all factual allegations as true, construe the complaint in the light most favorable to the plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief." Phillips v. Cnty. of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008) (quotations omitted). Under this standard, the factual allegations set forth in a complaint "must be enough to raise a right to relief above the speculative level." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). Indeed, "the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). "[A] complaint must do more than allege theplaintiff's entitlement to relief. A complaint has to 'show' such an entitlement with its facts." Fowler v. UPMC Shadyside, 578 F.3d 203, 211 (3d Cir. 2009).

However, Rule 12(b)(6) only requires a "short and plain statement of the claim showing that the pleader is entitled to relief"...