CARMACK v. AMAYA INC. et al, No. 1:2016cv01884 - Document 68 (D.N.J. 2017)
Court Description: OPINION. Signed by Judge Joseph H. Rodriguez on 6/15/2017. (dmr)
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CARMACK v. AMAYA INC. et al Doc. 68 UNITED STATES DISTRICT COURT DISTRICT OF NEW J ERSEY J AMES CARMACK, MICHAEL NEUBERGER, BAHRAM SALEHIAN, AND ANDREW SONG, Individually and on Behalf of all Others Sim ilarly Situated, Plaintiffs, : Hon. J oseph H. Rodriguez : Civil Action No. 16-1884 : OPINION : v. : AMAYA INC., DAVID BAAZOV, DANIEL SEBAG, DIVYESH GADHIA, AND HARLAN GOODSON, Defendants. : : : This securities fraud m atter is before the Court on four motions to dism iss filed by Defendants. The Court heard oral argument on the m otions on May 23, 20 17 and the record of that proceeding is incorporated here. For the reasons placed on the record that day and those provided below, the m otions of Defendants Am aya, Inc. [47] and David Baazov [50 ] will be denied. The m otions of Daniel Sebag [48] and Divyesh Gadhia and Harlan Goodson [49] will be granted in part and denied in part. Background Plaintiffs have alleged that Am aya, a Canadian com pany that has always been in the business of gam bling, grew significantly as a result of 1 Dockets.Justia.com m ultiple acquisitions to run the largest internet-based poker operation in the world. (Am . Com pl. ¶ 2.) Defendant David Baazov was CEO, President, and Chairm an of the Board of Directors of Am aya from 20 0 6, when he founded the company, until his leave of absence in March 20 16. (Am . Com pl. ¶ 14.) As such, Baazov possessed valuable insider inform ation regarding these acquisitions. Plaintiffs allege that he dissem inated this insider information to friends, relatives, and associates in contravention of securities regulations and Am aya’s own policies prohibiting insider trading. (Am . Com pl. ¶ 3.) Am aya and Baazov denied any wrongdoing when the Autorité des Marchés Financiers (“AMF”), the securities regulatory authority in the Province of Quebec, began to investigate Baazov in 20 14. (Am . Com pl. ¶ 4.) That initial investigation, later expanded in 20 15, focused on trading activities relating to Am aya’s August 20 14 $ 4.9 billion acquisition of the Oldford Group, Inc. (Am . Com pl. ¶ 40 .) This particular acquisition was notable not only because it propelled Am aya to the num ber one publicly traded online gam ing company in the world but because it led to Am aya’s entry into the United States m arket via a tem porary authorization to operate in New J ersey. (Am . Compl. ¶ 36, 38.) On J une 12, 20 14, Am aya announced its potential acquisition of Oldford Group, the owner and operator of, am ong other things, online 2 poker sites. (Am . Com pl. ¶ 32; Horowitz Decl. Ex. A.) That sam e day, the AMF launched an investigation into trading in Am aya securities in advance of the Announcement. (Am . Compl. Ex. 3.) On December 11, 20 14, AMF executed search warrants at Am aya’s headquarters indicating that the investigation involved three or four Amaya em ployees, including Baazov and Sebag, and 21 other individuals who traded in Am aya’s securities. That day, Am aya issued a press release confirm ing that it and its officers were cooperating with the AMF Investigation. Am aya stated “[t]he investigation has had no im pact on Am aya’s business operations, employees or com panies.” (Horowitz Decl. Ex. B; Ex. C at 5.) On March 31, 20 15, Am aya issued a press release attached as Exhibit 99.10 3 to its May 26, 20 15 Registration Statement filed pursuant to Section 12 of the Securities Exchange Act of 1934 (“Exchange Act”). In the release, Am aya summ arized the December 11, 20 14 press release as follows: Am aya thoroughly reviewed the relevant internal activities around the Oldford Group acquisition and has found no evidence of any violation of Canadian securities laws or regulations. Nor has the corporation been provided with any evidence that any executives, directors or em ployees violated any securities regulations. (Horowitz Decl. Ex. C at 5.) On April 8, 20 15, Am aya issued a press release following a Quebec court’s decision to release redacted copies of a warrant and supporting 3 affidavit issued in connection with the AMF investigation. (Am . Com pl. ¶ 58; Horowitz Decl. Ex. D.) In the release, attached as Exhibit 99.10 4 to Am aya’s May 26, 20 15 Registration Statem ent, Am aya noted that: [R]elease of the redacted docum ents presents nothing new to Am aya. Am aya has previously received the redacted affidavit and reviewed its lim ited contents and did not contest the court’s decision today. It will wait to see the actual unredacted affidavit, but it does not believe there is a reasonable basis for proceedings against Am aya or its em ployees. (Horowitz Decl. Ex. D.) Am aya confirmed that it “has been fully cooperating with regulators since approxim ately one week after it announced its acquisition of Oldford Group on J une 12, 20 14, and has been required to m aintain strict confidentiality during the process.” (Id.) Am aya also stated: Certain docum entation related to the investigation are and have been sealed by court order and Am aya has not been able to discuss the details of their contents without risking being in contem pt of court. This m eans Am aya has not been and is still not perm itted by the court to com m ent on individuals nam ed in the investigation docum ents. Am aya has also yet to obtain an unredacted version of the affidavit since the investigation was first announced. A court ordered seal remains in place related to details of the warrant and the redacted contents of the affidavit. (Id.) In the April 8, 20 15, release, Ben Soave, retired Chief Superintendent of the Royal Canadian Mounted Police, a m ember of Am aya’s Com pliance Com m ittee, and an advisor to Am aya’s Board of Directors, stated: 4 We have thoroughly reviewed the relevant internal activities around [Am aya’s] acquisition of Oldford Group and have found no evidence of any violation of Canadian securities laws or regulations including tipping and insider trading by CEO David Baazov and CFO Daniel Sebag. Additionally, the com pany has not been provided with any evidence that m y executives, directors, or em ployees violated any securities laws or regulations. (Id.) The com pany stated it “is confident that at the end of the investigation the AMF will com e to the same conclusion as Am aya has-that if there were violations of Canadian securities laws, they were not comm itted by the Com pany, officers or directors.” (Id.; Am . Com pl. ¶ 58.) Plaintiffs allege this statement was m isleading because it did not disclose that Baazov did not adhere to Am aya’s insider trading policies. (Am . Compl. ¶ 59.) On May 26, 20 15, Am aya filed its Registration Statem ent pursuant to Section 12 of the Exchange Act signed by Daniel Sebag as CFO on SEC Form 40 -F in order to become a reporting com pany under the Act. (Am . Com pl. ¶ 55.) Attached to the May 26, 20 15 Registration Statem ent as exhibits 99.5 and 99.11 were financial statements signed by Daniel Sebag, as CFO, and David Baazov, as CEO, for the year ending Decem ber 31, 20 14 and the period ending March 31, 20 15. (Rosen Decl. Ex. 1.) Attached as exhibits 99.9 and 99.10 to the May Registration Statement were Certifications of Annual Filings for the year ending December 31, 20 14, 5 dated May 1, 20 15, and signed by Defendants Baazov as CEO and Sebag as CFO. Each certification stated in relevant part: R e p o r t in g t o t h e is s u e r ’s a u d it o r s a n d b o a r d o f d ir e ct o r s o r a u d it co m m it t e e : The issuer’s other certifying officer(s) and I have disclosed, based on our m ost recent evaluation of ICFR, to the issuer’s auditors, and the board of directors or the audit com m ittee of the board of directors any fraud that involves m anagement or other employees who have a significant role in the issuer’s ICFR [internal controls over financial reporting]. (Am . Com pl. ¶ 56.) These statem ent ostensibly were signed to satisfy Section 30 2(a)(5)(B) of the Sarbanes-Oxley Act that each signator had disclosed any fraud by management. (Am . Com pl. ¶ 56.) The class period starts here, as Plaintiffs assert that this statement was m isleading for failing to disclose that Baazov him self had com m itted fraud. (Am . Com pl. ¶ 57.) On J une 1, 20 15, Am aya issued a press release that was filed with the SEC on Form 6-K, signed by Sebag to satisfy Am aya’s obligations under the Exchange Act. (Am. Com pl. ¶ 62; Horowitz Decl. Ex. E.) The Com pany stated while it was “not perm itted by law to disclose further details surrounding the AMF investigation,” Am aya requested and received perm ission from the AMF to m ake the following disclosure: As previously announced by Am aya, the [AMF], the securities regulatory authority in the Province of Quebec, is conducting an investigation into the trading of Am aya securities surrounding the announcem ent of the Oldford Group acquisition on J une 12, 20 14. The investigation involves em ployees of Am aya, including 6 David Baazov, Chief Executive Officer of the Corporation and Daniel Sebag, Chief Financial Officer of the Corporation (but not involving any personal trading by such individuals). The AMF has neither announced any proceedings nor filed any charges. (Id.) Soave further stated: To date, the AMF has neither threatened nor initiated any legal proceedings against the Corporation or its em ployees. Am aya has also not been provided with any evidence that any officers, directors, or other em ployees violated any securities laws or regulations. Nonetheless, as we previously announced, the Corporation conducted an internal review, supervised by its independent board members with the assistance of external legal counsel, which thoroughly reviewed the relevant internal activities surrounding the Oldford Group acquisition. This review found no evidence of any violations of Canadian securities laws or regulations. (Id.) Defendant Gadhia, Am aya’s current Chairm an (then-Lead Director and independent board m ember) stated: “The Corporation is not aware of any reasonable basis for proceedings against Am aya or its directors, officers or em ployees.” (Id.) Baazov stated: “I believe that any concerns that I or other Am aya officers or directors violated any Canadian securities laws are unfounded and we are confident that at the end of its investigation, the AMF will com e to the sam e conclusion.” (Id.) On J une 8, 20 15, Am aya comm on shares began trading on NASDAQ. (Am . Com pl. ¶ 37.) 7 On J uly 23, 20 15, the AMF expanded its investigation to transactions in the securities of various com panies, including Am aya. By statute (Quebec Securities Act § 244), the investigation, like all such investigations, was confidential. Defendants characterize this as a separate investigation because the ex parte application indicates the investigation “began” J uly 23, 20 15 and identified different individuals from those included in the December 20 14 warrant. On Novem ber 10 , 20 15, Am aya filed a Form F-10 Registration Statement under the Securities Act of 1933 (“Securities Act”) with the SEC registering up to $ 3 billion of debt and equity securities. (Am . Com pl. ¶ 64; Horowitz Decl. Ex. F.) This Registration Statement/ Prospectus incorporated by reference exhibits to the May 26, 20 15 Registration Statement and was signed by Baazov, Sebag, Gadhia, and Goodson. (Id.) On March 7, 20 16, the AMF filed an ex parte confidential application with the BDR for an em ergency freeze and cease trading order against 13 respondents, not including Am aya, Baazov, or Sebag. (Am. Com pl. Ex. 1.) The application detailed AMF’s evidence that Baazov leaked confidential inform ation about Am aya’s acquisitions that allowed for trades based on confidential inform ation. (Am . Compl. ¶ 42.) 8 On March 14, 20 16, Am aya filed its annual report signed by Sebag for the fiscal year ending Decem ber 31, 20 15 on Form 40 -F. (Am . Com pl. ¶ 65.) It contained Sarbanes-Oxley certifications signed by Baazov and Sebag that they had disclosed to the board of directors any fraud involving m anagement that has control over financial reporting. Plaintiffs allege this was a m isleading statem ent for failing to disclose Baazov’s fraud. (Am . Com pl. ¶ 66.) March 21, 20 16, Am aya launched PokerStars online poker and casino in New J ersey. (Am . Com pl. ¶ 38.) On March 22, 20 16, after ex parte hearings, the BDR issued, but did not publicly announce, the BDR Order enjoining trades. (Am . Com pl. Ex. 2.) Baazov was charged crim inally with insider trading in a Quebec court; he initiated a leave of absence that culm inated in his resignation from Am aya and Gadhia was named Chairman of the Board of Directors. (Am . Com pl. ¶ 49; Ex. 3; ¶ 16.) This marks the end of the class period. Before the m arket opened on March 23, 20 16, (i) the AMF issued a press release announcing charges against Baazov resulting from the AMF investigation (Am. Com pl. ¶ 67; Horowitz Decl. Ex. G), (ii) Am aya issued a press release responding to the charges, which it filed with the SEC on Form 6-K as required by the Exchange Act (Horowitz Decl. Ex. H), and (iii) 9 the AMF issued a second press release announcing that it obtained the BDR Order (Horowitz Decl. Ex. I.) In its press release announcing the charges against Baazov under the heading “Matter of Am aya inc.” the AMF announced: David Baazov, president, CEO, board chairm an and a significant shareholder of Am aya, [I]nc., is facing five charges, in particular for aiding with trades while in possession of privileged inform ation, influencing or attem pting to influence the m arket price of the securities of Amaya [I]nc., and com m unicating privileged inform ation. (Horowitz Decl. Ex. G.) The release continued, “Based on the AMF’s investigation, the respondents are alleged in particular to have used, between December 20 13 and J une 20 14, privileged information pertaining to the securities of Am aya, [I]nc. for trading purposes.” (Id.) In its press release responding to the charges, Am aya stated: Am aya does not anticipate the charges will have any im pact on the m anagement or day-to-day affairs of the operating business. Operations continue as usual and there will be no change to the PokerStars or Full Tilt product offerings, either in customer experience, player fund security or gam e integrity. Am aya will continue to com m unicate with its regulators and does not currently anticipate any m aterial negative im pact on its current or potential licenses, approvals or partnerships as a result of the allegations against Mr. Baazov. (Horowitz Decl. Ex. H.) Gadhia stated: As previously noted, Am aya conducted an extensive internal review, supervised by its independent board members with the assistance of external legal counsel from Osler, Hoskin & 10 Harcourt LLP in Canada and Greenberg Traurig LLP in the U.S., which thoroughly reviewed the relevant internal activities surrounding the Oldford Group acquisition. This review found no evidence of any violations of Canadian securities laws or regulations. The independent members of the board received and reviewed the inform ation and concluded that no action should be taken. We have not been provided with any new inform ation upon which the AMF's allegations of infractions are based. (Id.) The AMF press release announcing the BDR Order provided: On March 22, 20 16, at the request of the AMF, the [BDR] issued several freeze orders and orders to cease trading in securities against J osh Baazov, Craig Levett, Nathalie Bensm ihan, Isam Mansour, Mona Kassfl, Allie Mansour, J ohn Chatzidakis, Eleni Psicharis, Alain Anawati, Karl Fallenbaum , Earl Levett, Feras Antoon and Mark Wael Antoon. The AMF alleges that these individuals traded while in possession of privileged inform ation or they leaked privileged inform ation about potential m ergers and acquisitions involving Am aya inc. in particular. (Horowitz Decl. Ex. I.) On March 23, 20 16, Am aya’s stock price opened at $ 10 .30 per share, down from a close of $ 14.25 per share the day before. The stock price closed on March 23 at $ 11.18 per share. (Horowitz Decl. Ex. M.) On March 29, 20 16, Am aya issued a press release, providing an update on the AMF proceedings in which it explained that, when it issued its press release on March 23, 20 16 concerning the AMF charges, it was unaware of the BDR Order and that it concerned alleged conduct by Baazov 11 “beyond the scope of the charges and of the [Com pany’s] internal investigation.” (Horowitz Decl. Ex. J .) On March 23, 20 16, Am aya announced that the AMF had charged Mr. Baazov with aiding with trades while in possession of privileged inform ation, influencing or attem pting to influence the m arket price of securities of Am aya and com m unicating privileged inform ation. Subsequent to that announcement, the Board becam e aware of a decision of the [BDR], the adm inistrative tribunal in Quebec that hears certain AMF applications, which discloses additional AMF investigations into the alleged conduct of Mr. Baazov and others which are beyond the scope of the charges and of the internal investigation referred to in Am aya’s March 23rd announcement. While none of these allegations have been proven, the Board takes them seriously and has expanded the m andate of the Special Com m ittee to investigate these additional m atters. (Id.) Gadhia, Am aya’s new Chairman of the Board was tasked with investigating Baazov. The Am ended Complaint contains four counts for dam ages purportedly on behalf of a class consisting of all persons other than Defendants who purchased or otherwise acquired Am aya securities between May 26, 20 0 15 and March 22, 20 16. (Am. Com pl. ¶ 1.) Count I states a claim pursuant to Section 10 (b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b), and SEC Rule 10 b-5 prom ulgated thereunder, 17 C.F.R. § 240 .10 b-5, against Baazov, Sebag, and Am aya. Count II is brought under Section 20 (a) of the Exchange Act, 15 U.S.C. § 12 78t(a), against Baazov and Sebag as “controlling persons.” Count III alleges strict liability against all Defendants for violations of Section 11 of the Securities Act, 15 U.S.C. § 77k. Finally, Count IV asserts violations of Section 15 of the Securities Act, 15 U.S.C. § 77o, by the individual Defendants as senior executive officers. Motion to Dism iss Standard Under Rule 12(b)(6), a com plaint m ay be dism issed for “failure to state a claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). When reviewing a m otion to dism iss on the pleadings, courts “accept all factual allegations as true, construe the com plaint in the light m ost favorable to the plaintiff, and determ ine whether, under any reasonable reading of the complaint, the plaintiff m ay be entitled to relief.” Phillips v. Cnty . of Allegheny , 515 F.3d 224, 233 (3d Cir. 20 0 8) (quotations om itted). Under such a standard, the factual allegations set forth in a com plaint “m ust be enough to raise a right to relief above the speculative level.” Bell Atlantic Corp. v. Tw om bly , 550 U.S. 544, 555 (20 0 7). Indeed, “the tenet that a court m ust accept as true all of the allegations contained in a com plaint is inapplicable to legal conclusions.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (20 0 9). “[A] com plaint m ust do m ore than allege the plaintiff's 13 entitlem ent to relief. A com plaint has to ‘show’ such an entitlem ent with its facts.” Fow ler v. UPMC Shady side, 578 F.3d 20 3, 211 (3d Cir. 20 0 9). “[I]n cases alleging securities fraud, plaintiffs m ust ‘satisfy the heightened pleading rules codified in’ the [Private Securities Litigation Reform Act, or] PSLRA.” OFI Asset Mgm t. v. Cooper Tire & Rubber, 834 F.3d 481, 493 (3d Cir. 20 16) (quoting Institutional Investors Grp. v. Avay a, Inc., 564 F.3d 242, 252 (3d Cir. 20 0 9)). To satisfy this heightened pleading standard, a plaintiff m ust state the circum stances of his alleged cause of action with “sufficient particularity to place the defendant on notice of the ‘precise m isconduct with which [it is] charged.’” Frederico v. Hom e Depot, 50 7 F.3d 188, 20 0 (3d Cir. 20 0 7) (quoting Lum v. Bank of Am erica, 361 F.3d 217, 223-24 (3d Cir. 20 0 4)). Specifically, the plaintiff m ust plead or allege the “date, tim e and place of the alleged fraud or otherwise inject precision or some measure of substantiation into a fraud allegation.” Frederico, 50 7 F.3d at 20 0 (citing Lum , 361 F.3d at 224). The Third Circuit has advised that, at a m inim um , a plaintiff m ust allege the “essential factual background that would accom pany ‘the first paragraph of any newspaper story’—that is, the ‘who, what, when, where and how’ of the events at issue.” In re Suprem a Specialties, Inc. Sec. Litig., 438 F.3d 256, 14 76-77 (3d Cir. 20 0 6) (quoting In re Rockefeller Ctr. Prop., Inc. Sec. Litig., 311 F.3d 198, 216 (3d Cir. 20 0 2)). The PSLRA provides two distinct pleading requirem ents, both of which m ust be met in order for a complaint to survive a m otion to dism iss. Avay a, 564 F.3d at 252. First, under 15 U.S.C. § 78u-4(b)(1), the complaint m ust “specify each allegedly m isleading statement, why the statem ent was m isleading, and, if an allegation is m ade on inform ation and belief, all facts supporting that belief with particularity.” W iner Fam ily Trust v. Queen, 50 3 F.3d 319, 326 (3d Cir. 20 0 7) (construing 15 U.S.C. § 78u-4(b)(1)). Second, the complaint m ust, “with respect to each act or om ission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of m ind.” 15 U.S.C. § 78u-4(b)(2). Securities Laws Section 10 (b) of the Securities Exchange Act prohibits the use of “any m anipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Com m ission may prescribe . . . .” 15 U.S.C. § 78j(b). The SEC has in turn prom ulgated Rule 10 b-5, which m akes it unlawful for any person to “m ake any untrue statement of a m aterial fact or to om it to state a m aterial fact necessary in 15 order to m ake the statem ents m ade, in the light of the circum stances under which they were made, not m isleading . . . in connection with the purchase or sale of any security.” 17 C.F.R. § 240 .10 b– 5. OFI Asset Mgm t., 834 F.3d at 493. To state a claim for securities fraud under Section 10 of the Exchange Act and Rule 10 b-5, a plaintiff m ust plead the following: “(1) a m aterial m isrepresentation or om ission by the defendant; (2) scienter; (3) a connection between the m isrepresentation or om ission and the purchase or sale of a security; (4) reliance upon the m isrepresentation or om ission; (5) econom ic loss; and (6) loss causation.” Am gen, Inc. v. Conn. Retirem ent Plans & Trust Fund, 133 S. Ct. 1184, 1192 (20 13) (internal citation om itted). Scienter is a “mental state embracing intent to deceive, manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 218 n.12 (1976). Under the PSLRA’s second pleading requirem ent for Exchange Act claim s, a plaintiff m ust “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of m ind.” 15 U.S.C. § 78u-4(b)(2). In evaluating scienter’s “strong inference” requirement, courts m ust weigh “plausible nonculpable explanations for the defendant’s conduct” against the “inferences favoring the plaintiff.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 30 8, 324 (20 0 7). A 16 “strong inference” of scienter is one that is “cogent and at least as com pelling as any opposing inference of nonfraudulent intent.” Id. at 314; see also id. at 324 (“The inference that the defendant acted with scienter need not be irrefutable, i.e., of the ‘sm oking gun’ genre, or even the m ost plausible of com peting inferences.” (Internal quotation m arks om itted.)). The pertinent question is “whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, m eets that standard.” Id. at 323; see also id. at 326 (“[T]he court’s job is not to scrutinize each allegation in isolation but to assess all of the allegations holistically.”). An Exchange Act plaintiff m ust also plead a connection between the m isrepresentation or om ission and the purchase or sale of a security and reliance. Am gen, 133 S. Ct. at 1192; Blue Chip Stam ps v. Manor Drug Stores, 421 U.S. 723 (1975). Plaintiffs can invoke a rebuttable presum ption of reliance based on what is known as the “fraud on the market” theory, under which “the market price of shares traded on well-developed markets reflects all publicly available information available, and, hence, any m aterial m isrepresentations.” Basic, Inc. v. Levinson, 485 U.S. 224, 246 (1988). Under that doctrine, a court can assume an investor relies on public m isstatem ents whenever he “buys or sells stock at the price set by the 17 m arket.” Id. at 247. Finally, an Exchange Act plaintiff m ust allege econom ic loss and loss causation, i.e., a causal connection between the m aterial m isrepresentation and the loss. 15 U.S.C. § 78u-4(b)(4). Section 20 (a) of the Exchange Act im poses joint and several liability on any individual who exercises control over a “controlled person” who violates Section 10 (b). 15 U.S.C. § 78t(a); In re Merck & Co., Inc. Sec. Litig., 432 F.3d 261, 275 (3d Cir. 20 0 5). The three elements of a Section 20 (a), or “control person” claim are as follows: (1) the defendant controlled another person or entity; (2) the controlled person or entity committed a prim ary violation of the securities laws; and (3) the defendant was a culpable participant in the fraud. In re Suprem a Specialties, 438 F.3d at 286. “Under the plain language of the statute, plaintiffs m ust prove not only that one person controlled another person, but also that the ‘controlled person’ is liable under the [Exchange] Act.” Belm ont v. MB Inv. Partners, Inc., 70 8 F.3d 470 , 484 (3d Cir. 20 13) (quoting In re Alpharm a Inc. Sec. Litig., 372 F.3d 137, 153 (3d Cir. 20 0 4), abrogated on other grounds by Tellabs, 551 U.S. 30 8). Accordingly, liability under Section 20 (a) is contingent upon sufficiently pleading an underlying violation of Section 10 (b) by the controlled person. Culpable participation refers to either knowing and substantial participation in the wrongdoing or inaction with the intent to 18 further the fraud or prevent its discovery. Rochez Bros., Inc. v. Rhoades, 527 F.2d 880 , 890 (3d Cir. 1975). “[A] difference of opinion has emerged am ong district courts of this Circuit as to the pleading requirem ents for a § 20 (a) claim .” Belm ont, 70 8 F.3d at 485. Sim ilarly, “[t]o state a claim for control person liability under Section 15 of the Securities Act, the plaintiff m ust allege (1) a primary violation of the federal securities laws by a controlled person or entity; (2) control of the prim ary violator by the defendant; and (3) that the controlling person was in som e meaningful way a culpable participant in the prim ary violation.” Dutton v. Harris Stratex N etw orks, Inc., 270 F.R.D. 171, 178 (D. Del. 20 10 ). Section 11 of the Securities Act prom otes compliance with required disclosure provisions relevant to public offerings contained in registration statements “by giving purchasers a right of action against an issuer or designated individuals (directors, partners, underwriters, and so forth) for m aterial m isstatements or om issions in registration statem ents.” Om nicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, 135 S. Ct. 1318, 1323 (20 15). It provides: “In case any part of the registration statement, when such part became effective, contained an untrue statement of a m aterial fact or om itted to state a m aterial fact required to be stated 19 therein or necessary to m ake the statem ents therein not m isleading, any person acquiring such security . . . [m ay] sue.” § 77k(a). “Section 11 thus creates two ways to hold issuers liable for the contents of a registration statement—one focusing on what the statem ent says and the other on what it leaves out. Either way, the buyer need not prove (as he m ust to establish certain other securities offenses) that the defendant acted with any intent to deceive or defraud.” Id. (citing Herm an & MacLean v. Huddleston, 459 U.S. 375, 381-82 (1983)). Analysis A. Section 10 (b) of the Exchange Act, 15 U.S.C. § 78j(b), and SEC Rule 10 b-5 prom ulgated thereunder, 17 C.F.R. § 240 .10 b-5, against Baazov, Sebag, and Am aya. The Court finds that Plaintiffs’ factual allegations sufficiently plead that certain statements Defendants made during the class period were false and m isleading because they failed to disclose that Baazov engaged in insider trading. The Am ended Complaint specifies what Baazov did, who he did it with, and how what he did constituted a violation of the securities laws. At this stage of the litigation, Defendants’ argument that there were two separate AMF investigations does not serve to nullify Plaintiffs’ allegations. Baazov’s statements that he had disclosed to the board of directors any fraud involving m anagement that has control over financial 20 reporting have and that he did not violate any Canadian securities laws been sufficiently alleged to be false, m isleading, m aterial, and knowing, because it is alleged that Baazov him self had com m itted fraud through insider trading. Baazov’s m otion to dism iss Count I will be denied. The factual allegations, rather than conclusory statements, contained in the Am ended Com plaint insufficiently plead that Sebag either com m itted insider trading or drafted the press releases at issue. Defendant Sebag was Am aya’s CFO, Treasurer, and a director during the relevant tim e period. Plaintiffs seek to hold him in the case based on this role and paragraphs 75 to 78 of the Am ended Com plaint. The personal conduct alleged is: “[Sebag] received calls from [Craig] Levett, one of the m embers of the Baazov Trading Ring, during the acquisition of Cryptologic, before Levett traded on that inform ation.” (Am . Com pl. ¶ 75.) While Sebag signed Sarbanes-Oxley certifications that he had reported any fraud involving m anagem ent, the alleged facts do not support a strong inference that he acted with the required state of m ind in doing so. See In re Intelligroup Sec. Litig., 527 F. Supp. 2d 262, 356– 57 (D.N.J . 20 0 7) (Sarbanes-Oxley certifications establish scienter only if facts are set forth to show that defendants had actual knowledge or “turned a ‘blind eye’” to inform ation showing that the 21 certification was erroneous). Sebag’s m otion to dism iss Count I will be granted. As to Am aya, the Court does not view the com pany’s Code of Business Conduct, which provides that all officers and directors m ust adhere to Am aya’s confidentiality, disclosure, and insider trading policies as an actionable m aterial m isrepresentation or om ission under the securities laws. Next, Plaintiffs point to an exhibit dated April 8, 20 15 that Am aya attached to the May 26, 20 15 Registration Statement stating that “The com pany is confident that at the end of the investigation the AMF will com e to the same conclusion that Am aya has – that if there w ere violations of Canadian securities law s, they w ere not com m itted by the Com pany , officers, or directors.” (Am . Compl. ¶ 58 ; em phasis added to focus on what Plaintiffs allege is a false or m isleading statement.) Through its m otion, Am aya argues that Plaintiffs have set forth insufficient facts (1) to find the statement false or m isleading, or (2) giving rise to a strong inference of its scienter. A statem ent of opinion does not constitute an “untrue statem ent of . . . fact” sim ply because the stated opinion ultim ately proves incorrect. Om nicare, 135 S. Ct. at 1327 (in the context of a Section 11 Securities Act claim ). If the opinion expressed was not sincerely held, it 22 qualifies as an untrue statement of fact. Id. Further if a registration statement om its m aterial facts regarding a statem ent of opinion and those facts conflict with what a reasonable investor objectively would perceive, then the om ission creates liability as misleading. Id. In this case, there are no factual allegations that Am aya’s April 8, 20 15 press release was insincere; the statem ents cited are purely opinion, as expressly indicated by the wording, “the com pany is confident that . . . .” In addition, Plaintiffs have not alleged facts that would tend to give rise to a perception of om ission on Am aya’s part as to the bases for its opinion. As such, Am aya’s April 8, 20 15 press release does not constitute an actionable m aterial m isrepresentation or om ission. As part of a J une 1, 20 15 Am aya press release attached as Exhibit 99.1 to an Am aya SEC filing under the Exchange Act, Form 6-K, Baazov stated: “I believe that any concerns that I or other Am aya officers or directors violated any Canadian securities laws are unfounded and we are confident that at the end of its investigation, the AMF will com e to the sam e conclusion.” (Am. Com pl. ¶ 62.) Although this is a statement of opinion, Baazov is plausibly alleged to have lacked sincerity in m aking it. In addition, the Court has already determ ined Baazov’s Sarbanes-Oxley certification in the May 20 15 Registration Statem ent to be actionable. 23 The Court im putes Baazov’s strong inference of scienter to Am aya. “[I]imputation to an em ployer is proper based on acts comm itted by one of its agents within his actual or apparent scope of authority.” Belm ont, 70 8 F.3d at 496. See also In re ChinaCast Educ. Corp. Sec. Litig., 80 9 F.3d 471 (9th Cir. 20 15). The “adverse interest” exception, “which directs a court not to im pute to a corporation the bad acts of its agent when the fraud was com m itted for personal benefit,” In re Bernard L. Madoff Inv. Sec. LLC, 721 F.3d 54, 64 (2d Cir. 20 13), is inapplicable here. See ChinaCast, 80 9 F.3d at 477 (finding that even in the case of embezzlement, “the adverse interest rule collapses in the face of an innocent third party who relies on the agent’s apparent authority). Am aya’s failure to disclose Baazov’s conduct in its filings allowed the com pany to continue to attract investors and customers; thus, the com pany benefitted from the m isleading statements, preventing a decline in the com pany’s stock price. Although Plaintiffs argue that Baazov’s m isconduct raised risks of regulatory backlash and jeopardized Am aya’s New J ersey gam ing license, the com pany should not benefit at the detrim ent of innocent third party investor. 24 B. Section 20 (a) of the Exchange Act, 15 U.S.C. § 78t(a), against Baazov and Sebag as “controlling persons” and violations of Section 15 of the Securities Act, 15 U.S.C. § 77o, by the individual Defendants as senior executive officers. The Court finds no particularized allegations of Sebag’s, Gadhia’s, or Goodson’s 1 alleged control of, or culpable participation in, any of the alleged false or m isleading statements m ade by Am aya and Baazov. The conclusory statement that Sebag was “able to, and did, control the contents of the various reports, press releases, and public filings,” (Am . Com pl. ¶ 10 1), is insufficient to survive a m otion to dism iss. As to Gadhia and Goodson, there are no factual allegations other than that they were directors. Counts II and IV will be dismissed as to Sebag, Gadhia, and Goodson. C. Strict liability against all Defendants for violations of Section 11 of the Securities Act, 15 U.S.C. § 77k Defendants argue that Plaintiffs do not and cannot allege they purchased securities issued pursuant to the Novem ber 20 15 Registration Statement filed pursuant to Section 6 of the Securities Act because Am aya At this stage of the litigation, the Court is satisfied that Plaintiffs have pled, in good faith, legally sufficient allegations of personal jurisdiction over Gadhia and Goodson based on the nationwide service of process provision in the Securities Act. The claim s against the two directors arose from their activities in the United States, that is, the filings with the SEC. 1 25 did not issue any securities pursuant to either the May or November Registration Statem ent. “By its terms, Section 11 provides that ‘any person acquiring’ a security issued pursuant to a m aterially false registration statem ent m ay sue (unless the purchaser knew about the false statement). 15 U.S.C. § 77k(a) (em phasis added).” In re Suprem a Specialties, 438 F.3d at 274 n.7. Plaintiffs’ assertions of stock purchases “in” or “traceable to” public stock offerings are sufficient at the pleading stage. Id. Section 11 claim s are generally not subject to the heightened pleading standards required under the PSLRA; rather, the liberal notice pleading requirements of Federal Rule of Civil Procedure 8 generally apply, unless the claim s “sound in fraud.” Id. at 270 . In this case, Plaintiffs expressly state that their Section 11 claim does not sound in fraud. (Am . Com p. ¶ 10 4.) They allege that they purchased Am aya stock “traceable to” the “Offering” that was m ade pursuant to “the Registration Statem ent” which “was inaccurate and contained untrue statements of m aterial fact, om itted to state facts necessary to m ake the statements m ade therein not inaccurate, and om itted to state m aterial facts required to be stated therein.” (Am . Com p. ¶¶ 116, 10 8.) Accordingly, Count III has been sufficiently pled. 26 Conclusion For these reasons and those stated on the record during oral argument, the m otions of Defendants Am aya, Inc. [47] and David Baazov [50 ] will be denied. The m otions of Daniel Sebag [48] and Divyesh Gadhia and Harlan Goodson [49] will be granted in part and denied in part. Defendants’ m otions to strike are denied. An Order will be entered. Dated: J une 15, 20 17 / s/ J oseph H. Rodriguez J OSEPH H. RODRIGUEZ U.S.D.J . 27
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