Mazuma Holding Corp. v. Bethke

1 F.Supp.3d 6

MAZUMA HOLDING CORP., Plaintiff,

v.Steven H. BETHKE, Herbert H. Pratt, Graham R. Williams, and Zicix Corporation, Defendants.

No. 13–cv–6458 (ADS)(GRB).

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

Signed March 3, 2014.

Naidich Wurman Birnbaum & Maday By: Richard S. Naidich, Esq., of Counsel, Great Neck, NY, Loewinsohn Flegle Deary, L.L.P., by Alan S. Loewinsohn, Esq Carole E. Farquhar, Esq. Kerry F. Schonwald, Esq., of Counsel, Dallas, TX, for the Plaintiff.

Nelson S. Ebaugh, P.C. by Nelson S. Ebaugh, of Counsel, Houston, TX, for the Defendants Herbert H. Pratt, Graham R. Williams, and Zicix Corporation.

MEMORANDUM OF DECISION AND ORDER

SPATT, District Judge.

On November 21, 2013, the Plaintiff Mazuma Holding Corp (the “Plaintiff” or “Mazuma”), a holding company, commenced this action against Steven H. Bethke, Herbert H. Pratt, Graham R. Williams, and the Zicix Corporation (“Zicix”) (collectively the “Defendants”) alleging violations of federal securities law and Texas State law.

On December 31, 2013, Williams and Zicix moved for an order staying this action under Colorado River Water Conservation District v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976), or, in the alternative, transferring venue to the Southern District of Texas pursuant to 28 U.S.C. § 1404(a) on the grounds, among others, that there is a parallel action pending in Texas State court. On January 21, 2014, Mazuma (1) cross-moved for leave to file its first amended complaint pursuant to Federal Rule of Civil Procedure (“Fed. R. Civ. P.”) 15(a) and (2) cross-moved to strike certain evidence relied upon by Williams and Zicix in support of their motion for a stay.

The three pending motions are each opposed and fully briefed. For the following reasons, the Court (1) denies Mazuma's motion to strike; (2) grants Mazuma's motion to amend; and (3) denies Williams and Zicix's motion for a stay or to transfer venue.

I. BACKGROUND

Unless stated otherwise, the following facts are drawn from the original complaint and construed in a light most favorable to the Plaintiff, Mazuma.

A. The Parties and Other Relevant Individuals

Mazuma is a non-bank holding company that makes investments in other entities. Mazuma concedes that it is a Texas corporation with its principal place of business in Texas. However, Mazuma also has an office located in Great Neck, New York.

The Non-party Curt Kramer is Mazuma's sole officer. The Non-party Carlos Mayo is the sole “finder” for Mazuma, though it is not clear what that role entails.

Zicix, a Nevada corporation, is the successor company of Bederra Corporation, a nano-cap company described in more detail below.

At all relevant times, Williams was the President and Chief Executive Officer (“CEO”), as well as a director, of Bederra and currently serves in the same role for Zicix. Williams is a Texas resident.

At all relevant times, Pratt was Bederra's Vice President, as well as a director. Pratt is a Texas resident.

Bethke was also a director of Bederra and is a Texas resident

B. The Underlying Facts

Mazuma invested in Bederra, and was well-known to the Defendants. Mazuma's business strategy at the time of the stock purchases at issue was to invest in publicly-traded, nano-cap companies, such as Bederra, whose securities are traded on the “Pink Sheets.” Nano-cap companies are often capital-constrained, as their low market capitalization hinders their access to banks or investment firms. Mazuma provided capital to these companies as an investment in return for shares purchased at a discount from the market price.

In 2008, Mazuma invested more than $140,000 in Bederra by purchasing directly from Bederra blocks of shares at a discount. Williams instructed Mazuma to coordinate the purchases with Bethke, which Mazuma did. On each occasion, Williams directed, in writing, First National Trust Company, Inc. (“First National Trust”), Bederra's transfer agent, to issue stock certificates to Mazuma pursuant to the terms of the investment. Those stock certificates contained the signature of Williams, then the Secretary of Bederra.

Beginning in early 2009, Mazuma again purchased blocks of Bederra shares, this time directly from Bethke. Mazuma purchased a total of approximately 1.139 billion shares of Bederra stock from Bethke between January 2009 and May 2010 (the “Mazuma Shares”). Bethke represented that the shares were duly issued, unrestricted, and freely tradeable. In advance of each transaction, Mazuma received several documents signed by Williams certifying that Bethke held good title to the shares and that Williams and the company had authorized the pending share sales to Mazuma. On each occasion, Mazuma received supposedly authentic Bederra stock certificates containing the signatures of Williams and Pratt.

However, Mazuma contends that, to conceal Bethke's stock sales and to lure Mazuma into believing that they were legitimate, the Defendants made several material misrepresentations related to the authenticity of the shares and the authority of Blake. The Defendants allegedly manufactured business records and signed stock certificates to make it appear as if Mazuma's shares were not restricted, authorized, and freely tradeable.

During the relevant period, the volume of trading in Bederra stock exceeded the number of free-trading shares issued and outstanding (the “float”) due to the introduction of the Mazuma Shares into the market.

Mazuma also alleges that, during the relevant time period, Bederra had no financial reporting requirements, but nonetheless filed periodic reports and disclosures on an electronic quotation system. Bederra allegedly made at least 22 filings on the Pink Sheets between May 28, 2008 and December 22, 2009, and issued more than 60 press releases between March 2008 and January 2011. According to Mazuma, Bederra routinely represented in its filings with the Pink Sheets the numbers of shares authorized and outstanding, as well as the public float. Mazuma contends that Bederra's numerous public disclosures and press releases demonstrate that Williams and Pratt were monitoring and publicly disclosing the float of Bederra securities and the numbers of authorized and restricted shares.

Mazuma alleges that Zicix, Williams, and Pratt knew or were reckless in not knowing that Bethke was issuing shares to Mazuma. Had Williams and Pratt monitored the volume of trading in Bederra stock, they would have seen that the volume in Bederra stock often exceeded the “represented” float. For example, on two-trading days—January 12 and January 13, 2010—the volume of trading in Bederra stock allegedly exceeded the float as reported two weeks earlier by more than 1,000,000 shares. Further, on January 29, 2010, Bederra reported that the float of Bederra stock was 404,827,453, even though the volume of trading in a single trading day on January 26, 2010—three days earlier—exceeded that amount.

Mazuma further asserts that, in an effort to cover up the presence of the fraudulent shares, Pratt and/or Williams caused Bederra to continually increase the number of authorized shares—eventually increasing the number of authorized shares on the market by more than 1500 percent in an apparent effort to conceal the Defendants' fraud. Pratt and/or Williams also allegedly caused Zicix to ratify the issuance of the Mazuma Shares on October 29, 2010 as part of a cover-up of the Defendants' role in the Mazuma Share issuances.

C. Texas State Court action

In what Mazuma characterizes as an attempt to deflect increasing regulatory pressure, on August 31, 2012, Zicix filed a civil action in the State of Texas against Mazuma and several other defendants, alleging that the Mazuma Shares were not authorized by Bederra (the “State Lawsuit”).

In the State Lawsuit, three defendants, including Kramer and Mayo, unsuccessfully challenged the trial court's personal jurisdiction. Kramer and Mayo are currently taking interlocutory appeals of the denials of their motions to dismiss for lack of personal jurisdiction. Mazuma asserts that the defendants in the State Lawsuit that are challenging the personal jurisdiction of the Texas trial court have not engaged in any “merits-based” discovery and that there has been no depositions of any party or non-party witness.

In June 2013, the state trial court entered an interlocutory judgment against Bethke and two companies controlled by him.

At some point, Mazuma moved to dismiss the State Lawsuit for forum non conveniens and/or have that action refiled in New York.

On August 26, 2013, the Texas trial court denied Mazuma's motion.

On January 9, 2014, Mazuma and others filed a joint motion for continuance of the State Lawsuit. Bederra, the plaintiff in the State Lawsuit, agreed that the State Lawsuit should be continued and its counsel has requested a Fall 2014 trial date while the defendants in the State Lawsuit have proposed any date after January 19, 2015 due to conflicts with other cases.

D. The SEC Proceeding

On November 25, 2013, the SEC instituted cease-and-desist proceedings pursuant to Section 8A of the Securities Act of 1033 (the “Securities Act”) against Mazuma and related parties. Of relevance here, the SEC and Mazuma reached a settlement, the terms of which are described later (the “Cease–and–Desist order”).

E. The Present Action

Meanwhile, on November 21, 2013, Mazuma brought the instant action alleging violations of federal securities law and Texas State law. In particular, Mazuma alleges violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78j(b) and Rule 10b–5(b), 17 C.F.R. § 240.10b–5(b).

The Court notes that Zicix (previously Bederra), Bethke, and Mazuma are parties in both this action and in the State Lawsuit, while Williams and Pratt are not parties in the State Lawsuit. Bethke has not answered or appeared in this action.

On December 31, 2013, Williams and Zicix moved to stay this action under the Colorado...