The opinion of the court was delivered by: Kenneth A. Marra United States District Judge
This cause is before the Court upon Defendants Stock News Info, LLC and Steven Koifman's ("the Koifman Defendants" ) Notice of Motion to Dismiss the First Amended Complaint with Prejudice (DE 17). The Court has carefully considered the motion and is otherwise fully advised in the premises.
Plaintiff Stock Fraud Prevention, Inc. ("Plaintiff") brings this First Amended Complaint (DE 14) against Defendants Stock News Info, LLC ("Stock News"), Skyline Investments, Inc. ("Skyline"), Steven Koifman ("Koifman") and Scott Wilding ("Wilding") (collectively, "Defendants") for breach of contract against all Defendants (count one), unjust enrichment against all Defendants (count two) and money had and received against Skyline and Stock News (count three).
According to the allegations of the First Amended Complaint, Plaintiff is a Wyoming corporation whose predecessors-in-interest Cylogic Aerospace ("Cylogic"), a Nevada corporation, and Crown Marketing ("Crown"), a Wyoming corporation, have assigned their rights against Defendants to Plaintiff. (First Am. Compl. ¶ ¶ 1, 7.) Cylogic and Crown are entities which dealt directly with Defendants. (Id. at ¶ 7.) There are various third-party beneficiaries of the contract between Cylogic and Crown and Defendants, which are all either incorporated or have their principal place of business outside the United States or outside the state of Florida. (Id. at 8.) Plaintiff was incorporated solely for the purpose of asserting Cylogic, Crown and the third-party beneficiaries' rights against Defendants.*fn1 Cylogic and Crown are each owners of one-half the shares of Plaintiff and they assigned their claims to Plaintiff upon its incorporation. (Id. at ¶ 10.) The third-party beneficiaries have also assigned their rights against Defendants to Plaintiff. (Id. at ¶ 11.)
Cylogic and Crown sold an aggregate of 3,000,000 shares of CUBV common stock ("shares"), approximately 78% of their holdings, to Defendants. (Id. at ¶ 14.) The consideration for this purchase was $50,000. The purchase price was to be paid by Defendants Skyline and Stock News via four promissory notes due on March 4, 2011, bearing interest in the amount of 4% per annum. Defendants also promised to launch, fund and manage a public relations campaign aimed at increasing awareness of company operations for the purposes of drawing attention to the company as an investment opportunity. Defendants also represented that they would find buyers for the 15 million shares held by the third-party beneficiaries at prices considered satisfactory to the third-party plaintiffs. (Id. at ¶ 15; Stock Purchase Agreements, Exs. C, D, F, DE 14-3, 14-4, 14-6; Promissory Notes, Exs. A-B, E, G, DE 14-1, 14-2, 14-5, 14-7.)
At a January 20, 2011 meeting, Wilding indicated that he had authority to engage Koifman and Stock News into a binding contract as Koifman would be working closely with Wilding and, at Wilding's behest, managing the promotional campaign. (Id. at ¶ 17.) Wilding promised, on behalf of Koifman, Skyline and Stock News, that Defendants would not knowingly take any action that would likely have a significant adverse effect on the trading price of CUBV shares. Defendants knew that "penny stocks," such as CUBV, tend to have limited trading volume and that the share price can be unstable in the early years of being publicly traded. Defendants promised to limit their sales of the shares and agreed to a formal "lock-up" provision. (Id. at ¶ 18.)
The lock-up provision consisted of two independent commitments. First, Defendants promised not to sell shares in an amount that exceeded one-fourth (25%) of the total actual trading volume of CUBV shares on any given day. Second, Wilding promised, on behalf of all Defendants, to reinvest eighty percent (80%) of the income generated from the sale of shares into the promised promotional campaign detailed above. (Id. at 19.) The individual defendants assured Plaintiffs that they would personally oversee the public relations campaign and the sale of the third-party Plaintiffs' stock. (Id. at 20.) Plaintiffs did not believe they were dealing directly with the corporate defendants, but rather that they were in privity with Wilding and Kaufman to whom the corporate defendants were entirely subservient. (Id. at ¶ 21.)
At the time the agreements were entered into, CUBV common shares were trading in the range of $0.37 per share. Cylogic and Crown agreed to sell, and Defendants agreed to buy, the shares for a discounted purchase price that would be tendered via a promissory note, in conjunction with the promise by Defendants to provide the public relations campaign. (Id. at ¶ 22.) Defendants estimated the cost of the campaign to be $800,000. The selling Plaintiffs agreed that the individual defendants would be permitted to reimburse themselves for costs advanced via a sale of the shares and obtain payment for their management services, as long as they did not breach the lock-up provision. (Id. at ¶ 23.)
The promissory notes exchanged as partial consideration for the sale of the 3,000,000 shares represent a heavily discounted purchase price of $50,000 that would be supplemented by the provision of services equal in value to $1,060,000 - $800,000 in anticipated expenses related to the promotional campaign and $260,000 in management and consulting fees paid to Defendants- for a total value of $1,110,000, or $0.37 per share. This would represent an exchange of cash and services roughly equivalent to the market value of the shares at the time, as indicated by the price at which they were then trading on a public exchange. (Id. at ¶ 24; Exs. AH, DE 14.) Defendants' management fee for the public relations campaign was estimated to be 16% of the total campaign costs. (Id. at ¶ 26.)
Wilding agreed to allow Adam Hand, an agent for Cylogic and Crown, to periodically review Defendants' trading accounts to ensure that the 1 to 4 sales ratio was being honored (Id. at ¶ ¶ 16, 29.) The individual defendants knew they were receiving a discounted purchase price in exchange for their promise to invest in and manage a public relations campaign on behalf of the Company and its shareholders. (Id. at ¶ 31.) Defendants, however, made no effort to launch a sustained public relations campaign on behalf of the Company and its investors. Instead, Defendants sold the bulk of their shares as quickly as possible, and then stopped responding to the selling Plaintiffs' inquiries and ceased all contact. The stock price dropped precipitously during this time. (Id. at ¶ 32.)
On or around March 14, just 8 days after the shares were transferred to Defendants' accounts, CUBV shares began trading in significant volumes. On April 5, trading was up from virtually nothing to 800,000 shares in a day. Later in that week, the sales volume of CUBV shares rose to 5 million shares in a single day, with two additional days in that week registering trading volume between 1 and 2 million shares per day. (Id. at ¶ 33.) After conferring with all of the largest stakeholders, the only ones who would have owned enough shares to trigger such a selloff, and reviewing their trading accounts, it became apparent to Cylogic and Crown that Defendants were the prime suspects in triggering the selloff. (Id. at ¶ 35.) Wilding refused to grant Hand access to his trading accounts despite his promises that he would do so at the January 20 meeting. (Id. at 36.)
"On information and belief" Defendants were primarily responsible for the sell-off that crushed the share price from $0.37/share to $0.08/share in less than one week. (Id. at ¶ 37.) "On information and belief," Wilding, Koifman, Stock News and Skyline sold heavily at this time, even though no expenditures had yet been made towards a public relations campaign. (Id. at ¶ 38.) Virtually none of the proceeds of the sale of CUBV shares was devoted to the promised promotional campaign, despite the fact that Plaintiffs claim Defendants generated income in the range of $700,000 to $900,000 between them from the sale of CUPV shares. (Id. at ¶ 39; Disclosure from hotstocked.com Ex. I, DE 14.)
The individual defendants claimed that the sales of CUBV shares were being made by "short sellers" and not by them. Around the same time, Wilding sent to Plaintiffs photographs of himself at Prestige Imports, the Lamborghini dealership in Miami. (Id. at ¶ 41.) In mid-April of 2011, Hand, on behalf of selling Plaintiffs, asked Wilding to prove that he had not breached the investment contract by selling shares in an unauthorized manner. Hand suggested that Wilding prove his compliance with the lock-up provision by presenting business records from trading accounts to confirm that Skyline and Stock News had not sold a single share, as was his claim at the time. Wilding replied that he would not provide such documents absent a subpoena. (Id. at ¶ 43.) According to Yahoo Financials, the price of CUBV shares sank from $0.29/share on April 4 to $0.07/share on April 8, based on millions of shares of trading activity. (Id. at ¶ 46.)
Cylogic and Crown lost the difference between the market value of the CUBV shares and the price at the time they sold the discounted shares to Defendants. Plaintiffs claim damages arising from this fraudulently induced discount amount is $1,062,000. (Id. at ¶ 48.) The selling Plaintiffs were further injured when the market value of their remaining shares dropped precipitously as a direct consequence of Defendants' selling activity in contravention of the promises made at the time shares were originally purchased from the selling Plaintiffs. (Id. at ¶ 49.) Defendants were unjustly enriched when they sold the shares into the market, reaping illicit gains in an amount approximating ...