SECURITIES AND EXCHANGE COMMISSION, Plaintiff, -against- NUTRA PHARMA CORPORATION, ERIK DEITSCH a/k/a RIK DEITSCH, and SEAN PETER MCMANUS, Defendants.
18-CV-5459(JS)(GRB)
UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK
March 31, 2020
SEYBERT, District Judge
APPEARANCES
For Plaintiff:
Marc P. Berger, Esq.
Preethi Krishnamurthy, Esq.
Lara Shalov Mehraban, Esq.
Lee Attix Greenwood, Esq.
Lindsay Senechal Moilanen, Esq.
Sheldon Leo Pollock, III, Esq.
Securities and Exchange Commission
Brookfield Place
200 Vesey Street, Suite 400
New York, New York 10281
For Defendants:
Nutra Pharma
Daniel Desouza, Esq.
DeSouza Law, PA
101 NE Third Avenue, Suite 1500
Fort Lauderdale, Florida 33301
Erik Deitsch
Carl F. Schoeppl, Esq.
Kyle Gustin DeValerio, Esq.
Schoeppl & Burke, P.A.
4651 North Federal Highway
Boca Raton, Forida 33431-5133
Sean P. McManus
Pro Se
SEYBERT, District Judge:
In this securities fraud action, defendants Nutra Pharma Corporation (“Nutra Pharma“) and Erik Deitsch (“Deitsch“)
BACKGROUND
The Court takes the following facts from the Amended Complaint as true and construes them in the light most favorable to the SEC.1
I. Facts
Nutra Pharma was incorporated in 2000. (Am. Compl. ¶ 23.) During the relevant period, from approximately July 2013 through June 2018, Nutra Pharma purported to sell two pain relievers made with cobra venom. (Am. Compl. ¶¶ 1, 26.) Deitsch has run Nutra Pharma since approximately 2002, and during the relevant period, acted as its CEO, president, CFO, and chairman. (Am. Compl. ¶ 20.) Defendant Sean McManus (“McManus“) worked as a consultant for Nutra Pharma from approximately 2013 to 2017.
A. The Alleged Misleading Press Releases and Q-10 Reports
1. The Promoter Releases
In July 2013, Nutra Pharma entered into a consulting agreement with Wall Street Buy. (Am. Compl. ¶ 57.) Christopher Castaldo (“Castaldo“) ran Wall Street Buy from at least 2013 through 2017. (Am. Compl. ¶ 22.) Deitsch looked into Castaldo and learned Castaldo had been found liable for violating securities laws as a broker in a 2008 SEC civil enforcement action. (Am. Compl. ¶¶ 49, 44.) In 2012, aware of Castaldo‘s background, Deitsch and Nutra Pharma hired him to promote Nutra Pharma‘s stock to potential investors. (Am. Compl. ¶ 50.) The 2013 consulting agreement, signed by Deitsch on Nutra Pharma‘s behalf, required Nutra Pharma to pay Wall Street Buy $10,000 in cash plus five million shares of Nutra Pharma stock for each month of the three-month term and to issue a $30,000 note convertible to Nutra Pharma shares to Wall Street Buy. (Am. Compl. ¶¶ 59-60.)
In August and October 2013, Nutra Pharma issued two press releases. They were drafted by Deitsch, who controlled their distribution and posted them on Nutra Pharma‘s website. (Am. Compl. ¶¶ 54-56.) Neither press release referenced the consulting agreement. (Am. Compl. ¶¶ 65, 70.) The August release read that
In March 2013, a marketing and distribution company known as New Vitality entered into a consulting agreement with MGRD, Inc. (“MGRD“), a company controlled by Deitsch. Deitsch signed on behalf of MGRD. New Vitality engaged Deitsch as a consultant. Pursuant to the agreement, Deitsch was a “Chief Science Officer and Formulator” and had to travel to New Vitality‘s offices once per quarter. New Vitality agreed to pay MGRD $7,000 per month and a percentage of gross receipts of certain New Vitality products. (Am. Compl. ¶¶ 72-74.) On August 29, 2013, Nutra Pharma issued a press release announcing that New Vitality had placed its first order of Nutra Pharma‘s Nyloxin product. The release did not mention the agreement between Deitsch and New Vitality. (Am. Compl. ¶¶ 76, 79.)
Next, in June 2015, Deitsch and the CEO of SeeThruEquity, an equity research firm, exchanged emails about a potential analyst report of Nutra Pharma stock. The CEO emailed Deitsch about two
2. The Distribution Releases
In January 2015, Nutra Pharma entered into a confidentiality and nondisclosure agreement with Nature‘s Clinic, a Canadian corporation and distributor, which Deitsch signed, to “evaluate a potential business relationship.” (Am. Compl. ¶¶ 108-09.) In April 2015, Deitsch and Nature‘s Clinic‘s CEO spoke on the phone and discussed a potential transaction. They did not agree on a price during the call but stated they would attempt to execute written contracts. They did not ultimately execute any written contracts. (Am. Compl. ¶¶ 110-13.)
In May 2015, Nutra Pharma issued a press release “[a]nnounc[ing] that they ha[d] engaged the Nature‘s Clinic to begin the process of distributing Nyloxin in Canada” and had “engaged the Nature‘s Clinic to begin the process of regulatory
About two months later, on July 7, 2015, Nutra Pharma received correspondence from a regulatory consultant representing Nature‘s Clinic, stating that it could not establish a Canadian warehouse for the products without more information. (Am. Compl. ¶¶ 119-21.) The consultant asked for additional information, including a draft contract, to work out the potential transaction between the parties. (Am. Compl. ¶ 123.) However, the following month, Nutra Pharma filed a Form 10-Q quarterly report with the SEC reiterating that Nutra Pharma had “engaged the Nature‘s Clinic to begin the process of regulatory approval of . . . Nyloxin . . . [t]he Nature‘s Clinic has already begun setting up their [Canadian] warehouse.” (Am. Compl. ¶¶ 124-126.)
Finally, in February 2015, Deitsch sent a trial shipment of Nyloxin to someone in India in an attempt to reach an India distribution deal. Nutra Pharma never distributed Nyloxin in India. (Am. Compl. ¶¶ 129-30.) In May 2015, Deitsch sent a letter to a Canadian company providing it with authorization to identify a Chinese company capable of obtaining government approval for Nutra Pharma products in China. (Am. Compl. ¶¶ 131-32.) Nutra Pharma never distributed its products in China. (Am. Compl. ¶ 134.)
B. Deitsch Sells Shares
The SEC also alleges that Deitsch manipulated the market for Nutra Pharma stock. (Am. Compl. § IV, ¶¶ 164-208.) On June 17, 2015, using his brokerage account at a broker-dealer firm registered with the SEC, Deitsch placed five orders for Nutra Pharma stock at the outstanding ask price--the lowest price at which a seller is willing to sell. (Am. Compl. ¶ 164.) Each time, he placed a 100-share limit buy order. (Am. Compl. ¶¶ 167, 170, 173, 176, 179.) Though he never spent more than $20.00 on any order, each time, he also paid a $9.99 commission. (Am. Compl. ¶ 181.) The broker-dealer‘s representative told Deistch the compliance department had flagged the trades as uneconomical and
Deitsch opened a new account with a new broker-dealer in August 2015. Between September 1 and September 8, 2015, he purchased 3,400 Nutra Pharma shares through eleven buy orders. (Am. Compl. ¶¶ 188-89.) With four orders, he purchased shares at a price above the outstanding ask price. (Am. Compl. ¶ 191.) For example, in one order, the outstanding ask price was $.074 per share, and he paid $0.18 per share for 100 shares. (Am. Compl. ¶¶ 192-94.) His broker disabled access to his account and explained that the trading appeared manipulative. (Am. Compl. ¶¶ 204-05.) Deitsch responded that “if you do nothing else but tickle the ask with 100 shares, 200 shares, [the shorters] go away. I have market makers that do that for me, and every once in awhile I do it myself.” (Am. Compl. ¶ 206.)
C. McManus as a Broker Dealer
McManus was barred by the Financial Industry Regulatory Authority (“FINRA“) in 2001. He has not been licensed or registered as a broker-dealer since 2001. (Am. Compl. ¶¶ 35, 37.) In 2014, he called at least seven people and attempted to solicit
II. Procedural History
Defendant Deitsch moves to dismiss Counts 1, 2, 3, 5, 11, 12 and 13 of the Amended Complaint. (Deitsch Mot. at 1.) Defendant Nutra Pharma joins in Deitsch‘s application and also moves to dismiss Count 4. (Nutra Pharma Mot. at 1-2.) Pro se defendant McManus, charged in Counts 1, 2, and 6 of the Amended Complaint, filed a motion to dismiss the original Complaint. (See McManus Mot., D.E. 24.) In that motion, he joined in Deitsch‘s application as to Counts 1 and 2, and also argued that the Count alleging he acted as an unregistered broker (the Seventh Claim in the original Complaint and Sixth Claim in the Amended Complaint, both against McManus alone) should be dismissed. Although McManus has not filed a motion to dismiss the Amended Complaint, because he is proceeding pro se, the Court will consider the arguments raised in his motion to dismiss the original Complaint.
Accordingly, variously and collectively, Defendants move to dismiss claims for violations of
DISCUSSION
I. Motion to Dismiss
To withstand a motion to dismiss, a complaint must contain factual allegations that “‘state a claim to relief that is plausible on its face.‘” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 1949, 173 L. Ed. 2d 868 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 1974, 167 L. Ed. 2d 929 (2007)). This plausibility standard is not a “probability requirement” and requires “more than a sheer possibility that a defendant has acted unlawfully.” Id. (internal quotation marks and citation omitted). In a securities fraud action, the complaint must contain “particular allegations giving rise to a strong inference of scienter.” In re PXRE Grp., Ltd., Sec. Litig., 600 F. Supp. 2d 510, 525 (S.D.N.Y. 2009), aff‘d sub nom. Condra v. PXRE Grp. Ltd., 357 F. App‘x 393 (2d Cir. 2009).
As to Count 1, under
(1) to employ any device, scheme, or artifice to defraud, or
(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
As to Count 2, SEC
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
“The touchstone of the [materiality] inquiry is not whether isolated statements . . . were true, but whether [the] defendants’ representations or omissions, considered together and in context, would affect the total mix of information and thereby mislead a reasonable investor regarding the nature of the securities offered.” Halperin v. eBanker USA.com, Inc., 295 F.3d 352, 357 (2d Cir. 2002) (citation omitted). “Materiality depends on all relevant circumstances, and a complaint normally should not be dismissed based on materiality unless the statements or omissions are so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance.” SEC v. Fiore, 416 F. Supp. 3d 306, 322 (S.D.N.Y. 2019) (internal quotation marks and citations omitted). “‘When the government (as opposed to a private plaintiff) brings a civil or criminal action under
Under
Defendants argue that Counts 1 and 2 fail to state a claim because the press releases and SEC reports did not contain material misstatements. (Deitsch Br., at 6.) The SEC responds that “the Amended Complaint adequately alleges that the relevant press releases and Form 10-Q contain material misrepresentations--both false statements and misleading half-truths . . . .” (SEC Br., D.E. 34, at 12.)
As to the promoter press releases, the parties agree that Section 17(b)2 of the Securities Act “puts the onus on the promoter to disclose compensation it receives from a stock issuer.” (SEC Br. at 13 n.7; see also Deitsch Br. at 7 (“it is the stock promoter which has the duty to disclose any compensation paid to promote a security, not the issuer of a security.“).) Defendants argue that that the two firms they engaged, Wall Street Buy and SeeThruEquity, thus had the responsibility to disclose to investors that Defendants had paid them. With respect to Wall Street Buy, Defendants note that the consulting agreement contained language requiring Wall Street Buy to disclose any compensation from Nutra Pharma. They further note that the Wall Street Buy press releases contained links to videotaped interviews
The Company [Wall Street Buy] is compensated for profiling the featured companies on the Program. The Company may receive cash, stock, warrants or other consideration.
The Company was compensated by Nutra Pharma . . . in the amount of ten thousand dollars, the Company also received a six month note for ten thousand dollars and five million restricted shares for development of corporate videos and a marketing/awareness campaign.
(Deitsch Br. at 7-9.)
The SEC counters that because Defendants “chose to make statements about these third-party endorsements . . . [they] had a duty to speak accurately and completely by disclosing that they had paid the promoters.” (SEC Br. at 13 (internal quotation marks and citations omitted).) The SEC points to language (1) in the two Wall Street Buy press releases that it had “identified” Nutra Pharma as “an enormous opportunity” and (2) in the SeeThruEquity press release that it had issued a research report on Nutra Pharma that was “not paid for” and was “unbiased.” (SEC Br. at 12.) The SEC contends that these “misrepresentations or half-truths” from Defendants required Defendants’ further disclosure. (SEC Br. at 12.) The SEC also argues that the Court should not consider the videotaped interviews, but in any event, that the extent to which disclaimers impact whether the statements are misleading and material is an issue for a jury. (SEC Br. at 14 n.8.)
The two Wall Street Buy releases present a closer question. They each stated that Wall Street Buy had apparently independently “identified” Nutra Pharma as a good investment opportunity--which was not the case. However, the releases did provide links to videos where Wall Street Buy sufficiently disclosed the arrangement and compensation between Nutra Pharma and Wall Street Buy. The Court considers these videos as integral
The Court next considers the distribution press releases. First, as for the Canadian distribution, Defendants argue that the SEC has given the word “engaged” an arbitrary meaning. Defendants contend that Nutra Pharma had actually engaged Nature‘s Clinic to begin the process of obtaining regulatory approval in Canada, and that the press release made this clear. (Deitsch Br. at 12-14.) Defendants contend that “Nutra Pharma has never claimed to have solid contracts for the sale of its products in Canada, India, or China, [but] instead [made] clear that it was announcing plans for its future after it had taken preliminary steps toward the accomplishment of its goals.” (Deitsch Br. at 16 (emphasis in original.) Defendants argue that the releases
The SEC responds that (1) arguments “about the literal truth of alleged misstatements should not be resolved on a motion to dismiss,” (2) the statements were literally false because a reasonable investor would not interpret “engage” to mean only a preliminary discussion about doing business, and (3) regardless of the literal truth, the Amended Complaint alleges that “the statements were at least misleading half-truths.” (SEC Br. at 15-16.) The SEC further responds that boilerplate disclaimers do not render the relevant statements accurate, and that even if the disclaimers limit liability for future events, they do not shield Defendants from misleading statements about past events. (SEC Br. at 16-17.) The SEC repeatedly argues that whether statements in the releases and forms are truthful is a question for a jury and cannot be decided on a motion to dismiss. (SEC Br. at 14 n. 8, 15, 18.)
Defendants essentially argue that each individual release was “literally” true. However, the Court finds that in considering the “total mix” of information provided to reasonable investors, the Amended Complaint adequately alleges that the distribution releases contain material misrepresentations. They each imply that things are happening--new orders, increased
Deitsch also argues that with respect to Count 2, the SEC fails to plead the scienter necessary for a 10(b) violation. (Deitsch Br. at 18-20.) However, again, considering the “allegations [ ] accepted as true and taken collectively [ ] a reasonable person [would] deem the inference of scienter at least as strong as any opposing inference.” In re PXRE Grp., 600 F. Supp. 2d at 528 (internal quotation marks and citation omitted). Viewed together, the promoter and distribution releases paint an inaccurate picture of Nutra Pharma. Deitsch was in control of Nutra Pharma‘s actions and statements and thus the Amended Complaint “establish[es] a strong inference of fraudulent intent by alleging . . . facts that constitute strong circumstantial
Further, the Amended Complaint alleges that Defendants raised approximately $929,000 from investors in response to the alleged misstatements and that Deitsch personally received approximately $113,000 in cash and other transfers. (Am. Compl. ¶¶ 91-93, 228-30.) These allegations, if true, adequately demonstrate receipt of money or property for purposes of
III. Market Manipulation under Exchange Act Section 10(b) and Rule 10b-5 (Claim 2) and Exchange Act Section 9(a)(2) (Claim 3)
“[M]arket manipulation comprises a class of conduct prohibited by
A. Application
Deitsch argues that the Amended Complaint does not demonstrate that he made the alleged manipulative trades with scienter or for the purpose of inducing Nutra Pharma stock‘s sale or purchase by others. He contends that he actually did the opposite, by trying to “protect” the stock from “professional shorters.” (Deitsch Br. at 20.)
Deitsch‘s own statements about his motivations are insufficient to establish a lack of scienter. Issues going to Deitsch‘s mental state and reasons for making the trades are issues of fact that cannot be resolved on this motion to dismiss. At this stage, the Court finds that all of the facts alleged, collectively, give rise to a strong inference of scienter. See Tellabs, 551 U.S. at 322-23. Accordingly, the motion to dismiss Claims 2 and 3 is DENIED.
The Amended Complaint alleges that Deitsch certified that Nutra Pharma‘s periodic SEC reports were truthful when he knew that they contained untrue statements of material fact or omissions of material fact. (Am. Compl. ¶ 261.) The reports contain the same statements alleged to be misleading in the press releases. For the reasons already stated with respect to Claims 1 and 2 and the press releases, these portions of the motions to dismiss are DENIED.
V. McManus as an Unregistered Broker Dealer in Violation of Exchange Act Section 15(a) (Claim 6)
Under
While McManus is correct that the Amended Complaint does not explicitly allege he effected any transactions, it does plausibly allege that he induced or attempted to induce the purchase or sale of securities by calling investors, mailing invitations to promotional events, and attending dinners and lunches and making promotional pitches. (Am. Compl. ¶¶ 82-101, 212-13.) He is alleged to have “worked as a consultant for Nutra Pharma” from 2013 to 2017 (Am. Compl. ¶ 21) and “received [compensation] from Nutra Pharma [after completing specific tasks,] purportedly for ‘investor relations‘” (Am. Compl. ¶ 101). He was involved in negotiations between Nutra Pharma and potential
VI. Aiding and Abetting (Claims 11, 12, and 13)
Defendants argue that the aiding and abetting claims should be dismissed because the SEC has not alleged primary violations. (Deitsch Br. at 21.) Because the Court finds the SEC has adequately alleged the primary violations as discussed above, the portion of the Defendants’ motions to dismiss the aiding and abetting claims is DENIED.
VII. The Amended Complaint and Pleading Requirements
The Amended Complaint contains 247 paragraphs of factual allegations, followed by fourteen claims that each “re-allege[] and incorporate[] by reference the allegations in paragraphs 1 through 247.” Thus, the Court is left to puzzle over which of the 247 factual allegations are intended to support and underlie each individual claim. See, e.g., S.E.C. v. Fraser, No. 09-CV-0443, 2009 WL 2450508, at *14 (D. Ariz. Aug. 11, 2009) (SEC Complaint violates
The Court has dismissed allegations with respect to the Wall Street Buy press releases. Accordingly, the SEC is DIRECTED to file a Second Amended Complaint that complies with this Memorandum and Order. Additionally, in the Second Amended Complaint, the SEC shall briefly identify which factual allegations underlie and support each claim, and not merely incorporate almost 250 paragraphs by reference. See Corrado v. N.Y. State Unified Court Sys., No. 12-CV-1748, 2014 WL 4626234, at *5 (E.D.N.Y. Sept. 15, 2014) (“While these problems may not rise to the level that would warrant dismissal of the complaint, the repetition of allegations and the organization of the [ ] pleading would unnecessarily burden the defendant[s] in attempting to respond.“).
CONCLUSION
Accordingly, Defendants’ motions to dismiss (D.E. 31 and 33) are GRANTED IN PART and DENIED IN PART. The allegations regarding the Wall Street Buy press releases are DISMISSED. The SEC shall file a Second Amended Complaint in accordance with this Memorandum and Order within thirty (30) days of the date of this Order. The parties shall comply with the discovery deadlines (D.E. 43) approved by Magistrate Judge Steven Tiscione in his February 14, 2020 Electronic Order or make the appropriate
The SEC is directed to mail a copy of this Memorandum and Order to pro se Defendant McManus and file proof of service on ECF.
SO ORDERED.
/s/ JOANNA SEYBERT
Joanna Seybert, U.S.D.J.
Dated: March 31, 2020
Central Islip, New York