Tchatchou v. India Globalization Capital Inc.

ALDE-BINET TCHATCHOU,on behalf of himself and all others similarly situated Plaintiff v. INDIA GLOBALIZATION CAPITAL INC., et al., Defendants.

Civil No.: PWG-18-3396

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND Southern Division

January 28, 2021

Consolidated Case Class Action

MEMORANDUM AND ORDER

This is a consolidated securities class action, in which Plaintiffs seek to recover damages caused by alleged violations of federal securities laws, specifically Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission ("SEC"), 17 C.F.R. § 240.10b-5. Consol. Am. Compl., ECF No. 45. Defendant, India Globalization Capital Inc. ("IGC") is a Maryland company whose common stock trades on the NYSE American exchange under the symbol "IGC." Id. at ¶ 19. The members of Lead Plaintiff, IGC Investor Group,¹ acquired IGC's common stock between September 26, 2018 and October 26, 2018. Id. at ¶¶ 1, 18. In addition to suing IGC, Plaintiffs also sue Defendant Ram Mukunda, IGC's Executive Chairman, Chief Executive Officer, and President, and Claudia Grimaldi, IGC's Principal Financial Officer. Id. at ¶¶ 20-21. Mukunda and Grimaldi are collectively referred to as the "Individual Defendants."

Plaintiffs allege that IGC attempted to take advantage of a hot market trend by promoting its entrance into a marijuana-based products business in partnership with a manufacturer located in Malaysia, causing its stock price to jump six-fold. However, when the truth was revealed that the product was illusory, and it was illegal to manufacture marijuana-based products in Malaysia, IGC's stock price plummeted, causing investors to lose millions of dollars. Multiple lawsuits followed, including the two related suits that form this consolidated class action. Currently pending before me is Defendants' motion to dismiss the Consolidated Amended Complaint for failure to plausibly allege a violation of federal securities laws. Mot., ECF No. 61.² Because Plaintiffs allege sufficient facts to create a plausible inference of securities fraud, Defendants' motion is DENIED.

BACKGROUND

For purposes of considering the Defendants' dismissal motion, this Court takes all well-pleaded facts alleged in the Consolidated Amended Complaint as true. Wikimedia Found. v. Nat'l Sec. Agency, 857 F.3d 193, 208 (4th Cir. 2017) (citing SD3, LLC v. Black & Decker (U.S.) Inc., 801 F.3d 412, 422 (4th Cir. 2015)). Additionally, I may consider documents attached as exhibits to the complaint and the motion to dismiss, if they are integral to the complaint and their authenticity is not disputed, as well as documents that are explicitly incorporated into the complaint by reference. Goines v. Valley Cmty. Servs. Bd., 822 F.3d 159, 166 (4th Cir. 2016).³

IGC was organized in Maryland in 2005 as a "blank check company"⁴ for the purpose of acquiring businesses, primarily in India. Consol. Am. Compl. ¶ 24. It completed its initial public offering on March 8, 2006. Id. at ¶ 28. Over the next fourteen years, Plaintiffs allege that IGC "dabbled" in a string of disparate business lines, which included trading of infrastructure commodities like steel and iron ore, the rental of heavy equipment, indoor farming facilities, extracting medical grade oils from plants, and developing methods to use blockchain⁵ for product identification. Id. at ¶¶ 26-27, 29-33, 41. In its 2018 annual report, IGC stated that its "main focus [wa]s to develop and commercialize cannabinoid based alternative therapies for indications such as Alzheimer's disease, Parkinson's disease, and pain" and that "[i]ts lead product [wa]s Hyalolex, an alternative oral therapy for the treatment of symptoms associated with Alzheimer's disease." Id. at ¶ 35. That same year, in its SEC filing for the quarter ending June 30, 2018, it posted a loss of $512,296 on revenue of $1.5 million. Id. at ¶ 36. An analyst report in September 2018 described IGC as "in need of a cure." Id. at ¶ 39.

On September 25, 2018, IGC issued a press release announcing "that it was entering 'the Hemp/CBD-infused energy drink space' and would begin producing a sugar-free cannabis drink called 'Nitro G.'" Id. at ¶ 46; see also id. at ¶ 78; Defs.' Ex. B, September 25, 2018 Press Release, ECF No. 61-3. Although the press release did not include the name of the company that IGC was to partner with, it was later revealed to be a Malaysian company, Treasure Network. Id. at ¶ 71-72.⁶ The same day, IGC commenced an "at-the-market" (or "ATM") stock offering.⁷ Id. at ¶ 48. IGC's stock began rising in response to the announcement, and by October 2, 2018, when it closed its ATM offering, IGC's stock price hit a high of $14.58 on volume of 19 million shares, over six times higher than a week earlier, when the price was $2.33 per share.⁸ Id. at ¶¶ 47, 50, 79. IGC's ATM offering raised $30 million of capital at $5.30 per share. Id. at ¶ 50.

Plaintiffs allege that beginning the morning of October 2, 2018, "the truth" about IGC's announcement and stock offering began to emerge. Id. at ¶¶ 85-86. First, on October 2, 2018, Citron Research, a stock commentary website, labeled IGC "the poster child of a cannabis bubble" in a Twitter post, cautioning investors that it was all hype, recommending the stock be sold short. Id. at ¶¶ 85-86. By midday on October 2, 2018, the Citron tweets were being reported on the financial blog Seeking Alpha. Id. at ¶ 87. Market observers followed up with an uploaded photo of the address listed in IGC's June 21, 2018 annual report that showed an image of a small suburban home identified as a closed child-care center. Id. at ¶ 88. By October 3, 2018, IGC's share price fell $4.15, to close at $8.85. Id. at ¶ 89. Plaintiffs allege that IGC's September 25, 2018 press release indicated that IGC would partner with a manufacturer in Malaysia,⁹ but manufacturing CBD-based beverages was, and is, illegal under Malaysia's drug laws. Id. at ¶¶ 55-56. Plaintiffs allege that IGC failed to disclose this fact, which was only revealed to investorsupon publication of the MarketWatch October 4, 2018 report identifying numerous "red flags." Id. at ¶¶ 56, 90-94. Following publication of the MarketWatch report, IGC's stock price fell from $6.41 per share on October 4, 2018 to $4.05 per share on October 5, 2018. Id. at ¶ 95.

IGC did not respond directly to the MarketWatch report, but on October 5, 2018, it posted on Twitter that its staff worked from the corporate office in Potomac Maryland or nearby virtual offices, and it also maintained offices in the State of Washington. Id. at ¶¶ 96-98. And on October 6, 2018, IGC posted on Twitter: "Our growth and expansion strategies are to commercialize and license our products in states and countries where we can legally enter the market." Id. at ¶ 81. Plaintiffs allege that IGC's posts were materially false and misleading. Id. at ¶ 99.

On October 29, 2018, the NYSE American exchange announced it was commencing proceedings to delist IGC's common stock, and trading was suspended. Id. at ¶¶ 100-101. On October 30, 2018, IGC shares began trading over-the-counter and the price fell to $0.56 per share. Id. at ¶ 102. IGC appealed the NYSE decision, and about three months later, on February 21, 2019, IGC announced that its shares would be relisted on the NYSE American exchange. Id. at ¶ 105. On February 26, 2019, IGC issued a press release stating that on November 5, 2018, Treasure Network had cancelled the Nitro G distribution agreement that had initially been announced in the September 25, 2018 Press Release. Id. at ¶ 106. On March 26, 2019, IGC issued a press release stating that it had elected to terminate its Strategic Distributor & Partnership Agreement with Treasure Network, related to the sugar-free energy drink, Nitro G. Id. at ¶ 107.

On November 2, 2018, two class action lawsuits were filed accusing IGC and certain executives of making false or misleading statements in violation of Section 10(b) of the Exchange Act and Rule 10b-5, and also accusing certain executives of aiding and abetting the fraud in violation of Section 20(a) of the Exchange Act. See Harris-Carr v. India Globalization Capital,Inc., No. 18-3408-GJH; Tchatchou v. India Globalization Capital Inc., No. 18-3396-PWG.¹⁰ I granted the motions to consolidate the cases and named IGC Investor Group as Lead Plaintiff. Mem. Op., ECF No. 37; Order, ECF No. 38. The purported class consists of all persons other than Defendants who purchased or otherwise acquired IGC common stock during the Class Period, which is defined as September 26, 2018 to October 26, 2018 inclusive. Consol. Am. Compl. ¶ 1. Plaintiffs bring two causes of action against Defendants:

• Count I - Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder Against All Defendants;

• Count II - Violations of Section 20(a) of the Exchange Act Against the Individual Defendants.

Id. at ¶¶ 117-32. After an unsuccessful attempt to resolve their disputes through private mediation, Defendants sought permission to file a dismissal motion. See Joint Status Report, ECF No. 53; Pre-motion Ltr., ECF No. 54. Plaintiffs declined the opportunity to further amend the complaint, and Defendants filed the pending Motion to Dismiss on October 11, 2019. Defendants argue that Plaintiffs' allegations of falsity and scienter are plainly insufficient to plausibly plead a material false or misleading statement, scienter, or loss causation, and Defendants seek dismissal with prejudice and without leave to amend. Mot. Mem. 2; Reply 1, ECF No. 70.

STANDARD OF REVIEW

Federal Rule of Civil Procedure 12(b)(6) provides for "the dismissal of a complaint if it fails to state a claim upon which relief can be granted." Velencia v. Drezhlo, Civil Action No. RDB-12-237, 2012 WL 6562764, at *4 (D. Md. Dec. 13, 2012). This rule's purpose "'is to test the sufficiency of a complaint...