Grupo Verzatec S.A. de C.V. v. Rosser
1:17-cv-09887
S.D.N.Y.Mar 29, 2019Background
- Verzatec acquired NPI (which owned Nudo) via a December 18, 2015 Merger Agreement that contained representations and warranties by NPI about inventory accounting and pending litigation.
- Before the closing, Nudo received a warranty claim and later suit from Palmyra Macedon CSD (PMCSD); Nudo allegedly failed to timely notify its insurer and coverage was denied.
- Plaintiff alleges NPI officers Darryl Rosser and Len Farrell concealed PMCSD litigation, under-reserved for slow-moving/obsolete inventory (creating a ~$1.5M shortfall), and provided false financial schedules during negotiations and after closing.
- Verzatec submitted post-closing working-capital adjustments and later asserted indemnity/fraud and securities claims (Sections 10(b) and 20(a)) against RFE (majority NPI shareholder) and others; Officer Defendants were later dismissed by plaintiff.
- Defendants moved to dismiss; the court granted dismissal of all federal securities claims and declined supplemental jurisdiction over state-law claims, dismissing them without prejudice.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether alleged misrepresentations/supporting facts state a Rule 10b-5 claim against RFE | Rosser/Farrell made material misrepresentations about litigation and inventory that induced the purchase; RFE is liable as the controlling shareholder | RFE did not "make" the statements; Janus requires the maker to have ultimate authority over content and communication | Dismissed: plaintiff adequately alleged material misstatements by NPI officers, but Janus bars 10b-5 liability against RFE because NPI (not RFE) was the maker |
| Whether PSLRA/Rule 9(b) particularity satisfied for securities fraud allegations | Allegations identify false statements (inventory method change; undisclosed PMCSD claim), when and who made them | Defendants argue allegations are vague/conclusory and insufficient under 9(b)/PSLRA | Court found particularity adequate as to the statements and why they were false, but liability still fails under Janus as to RFE |
| Whether RFE is liable under Section 20(a) as a control person (including via agency theory) | RFE exercised control: installed Rosser/Farrell, they acted as RFE agents in negotiations and disclosures, so RFE is a culpable participant | RFE lacked factual allegations showing it had actual power over the specific representations or control over the transaction; agency not pled with requisite facts | Dismissed: plaintiff failed to allege RFE had control over the transaction/misrepresentations or an agency relationship sufficient to impute officer conduct to RFE |
| Whether the court should retain supplemental jurisdiction over state-law claims after dismissing federal claims | Verzatec sought to pursue remaining fraud and contract claims | Defendants asked for dismissal of federal claims and urged dismissal of state claims if federal claims gone | Court declined supplemental jurisdiction and dismissed state-law claims without prejudice |
Key Cases Cited
- McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184 (2d Cir.) (pleading-stage factual-acceptance and inference rule)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (must not accept legal conclusions at pleading stage)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility standard for pleadings)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (holistic assessment of securities fraud allegations and scienter evaluation)
- Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011) (maker of statement is the entity with ultimate authority over its content and communication)
- In re Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501 (2d Cir.) (elements of Section 10(b)/Rule 10b-5 claims)
- McIntire v. China MediaExpress Holdings, 927 F. Supp. 2d 105 (S.D.N.Y.) (dismissing 10(b) claims where defendant lacked ultimate authority over statements)