393 F.Supp.3d 376
S.D.N.Y.2019Background
- Securities class action against Longfin, Network 1 (lead underwriter), former Longfin secretary Andy Altahawi, and others arising from Longfin’s Reg A+ offering and related SEC enforcement actions.
- Network 1 acted as lead underwriter for Longfin’s Regulation A+ offering; received commissions for ~1.14M shares sold; not named as a defendant in the SEC suits.
- Longfin allegedly issued 409,360 Class A shares on December 6, 2017 to 24 individuals (the “December 6 Shares”), many of whom were insiders, to reach NASDAQ’s 1,000,000 publicly held share listing threshold.
- Network 1 repeatedly requested confirmation and “proof of funds” that the December 6 Shares were paid for; Altahawi provided bank statements and later Meenavalli (Longfin founder) supplied a letter falsely stating payments were made.
- Plaintiffs allege Network 1 knew or was reckless in not knowing the December 6 Shares were invalidly issued and thus aided market-manipulation fraud; Network 1 moved to dismiss and then for reconsideration after a prior opinion denied dismissal of the Rule 10b-5 claim.
- The court granted reconsideration, held the Second Amended Complaint (SAC) failed to plead scienter for Network 1 under Section 10(b)/Rule 10b-5, and dismissed all claims against Network 1.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the SAC alleges a strong inference of scienter by Network 1 for Rule 10b-5 market-manipulation claims | Network 1 received suspicious bank statements, knew some December 6 recipients were insiders, and repeatedly sought confirmation only to paper the transaction — supporting knowledge or recklessness | Network 1 repeatedly sought and received assurances and documentation showing payment; more plausible that Network 1 was misled by Longfin rather than knowingly participated | Court held the SAC fails to plead scienter with particularity; inference that Network 1 was unaware/misled is at least as compelling as knowing participation; claim dismissed |
| Whether requests for proof of payment support inference of concealment (i.e., creating a paper trail to hide complicity) | Multiple requests for proof imply the provided statements did not genuinely show payments and were used to fabricate records | The requests plausibly reflect routine confirmation and review of documents that on their face purported to show payments; no particularized description of statements to show falsity | Court held the SAC lacks sufficient detail about the bank statements to infer concealment; inference weak |
| Whether absence of payments in identified bank accounts ties to documentary submissions to Network 1 | Plaintiffs point to three accounts showing no payments for December 6 Shares, arguing Network 1 must have known statements were false | No particularized allegation connects those accounts to the statements provided to Network 1; no evidence Network 1 knew the account details or their link | Court held plaintiffs failed to link the accounts to the documents provided to Network 1; undermines scienter inference |
| Whether Network 1’s role as underwriter and receipt of commissions supports primary liability under Rule 10b-5 | Plaintiffs argue a co-participant/primary violator theory: a lead underwriter who assists issuer obtain listing can be liable if knowingly participating and profiting | Defendant argues mere facilitation or ordinary underwriter conduct without knowledge is not enough; plaintiffs must plead each element for primary liability including scienter | Court agreed with defendant: absent particularized scienter allegations, being an underwriter and earning commissions does not establish primary liability; dismissal affirmed |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (controls standard for pleading a strong inference of scienter)
- Stoneridge Investment Partners, LLC v. Scientific-Atlanta, 552 U.S. 148 (secondary actors cannot be held liable by private plaintiffs for aiding and abetting; must meet primary liability elements)
- Fezzani v. Bear, Stearns & Co. Inc., 716 F.3d 18 (elements of a market-manipulation claim and reliance via efficient-market assumption)
- ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (particularity requirements for pleading manipulative acts)
- Lorenzo v. Securities & Exchange Commission, 139 S. Ct. 1094 (even minor market participants can be primary violators if requirements are met)
- City of Providence v. Bats Global Markets, Inc., 878 F.3d 36 (participant who co-participates and profits may be liable as a primary violator)