United States District Court, D. Massachusetts
MEMORANDUM AND ORDER ON DEFENDANT VSTOCK TRANSFER,
LLC's MOTION TO DISMISS
RICHARD G. STEARNS UNITED STATES DISTRICT JUDGE
VStock Transfer, LLC (VStock), moves to dismiss a bucket full
of claims brought by plaintiff B2 Opportunity Fund, LLC (B2),
related to an ill-boded stock transaction. For the reasons
that follow, the court will grant the motion.
a California limited liability company with a principal place
of business in New York City, provides stock transfer
services. In 2014, VStock was hired as a transfer agent by
Mazzal Holding Corp., a Massachusetts-based company. In this
capacity, VStock became entangled in the allegedly fraudulent
transaction at issue. In early 2016, Mazzal's CEO, Nissim
Trabelsi, entered into a Stock Purchase Agreement (SPA) in
which he agreed to sell 45.8 million restricted shares of
Mazzal to B2. The SPA also promised that “Shawn
Telsi” would sell to B2 9.5 million
“free-trading” shares of Znergy-Mazzal stock. B2
alleges that Trabelsi held “Shawn Telsi” out to
be his brother-in-law, when in fact that name was an alias
for Trabelsi himself.
negotiations on the SPA inched forward, the parties contacted
VStock regarding the share transfers. On January 11, 2016, a
VStock representative emailed instructions to Trabelsi
explaining the mechanism for transferring shares from himself
to another shareholder. Dkt #77-10 at 10. On January 27,
2016, Trabelsi emailed a request to Joseph Donohue (another
VStock employee) to cancel certain shares of Mazzal being
held in trust. Trabelsi emailed the same instruction to the
escrow agent. The next day, the escrow agent emailed Donohue,
introducing himself and asking Donohue to review the adequacy
of some attached documentation to complete share transfers
other than those contemplated in the SPA. Id. at 6.
was signed on February 4, 2016, and specified a closing date
of February 5. The SPA specified that B2's payment for
the shares was to be held in escrow until the promised shares
were either delivered or the escrow agent was “informed
by VStock” that the shares “have been returned to
[VStock] for transfer to” B2 or its designee. An
identical requirement appeared in the escrow agreement that
accompanied the SPA. On February 4, the escrow agent emailed
Trabelsi, copying B2 (but not VStock), with copies of
transfer forms for the shares covered by the SPA and
instructions for completing the transfers. Am. Compl.
¶¶ 79-80; Dkt # 77-9.
February 8, Trabelsi sent emails to B2's managing member,
the escrow agent, and Donohue, stating that on February 5 he
had mailed VStock an envelope containing certain
documentation: “transfer 9.5 million in stocks from
interactive brokerage, ” “transfer from Shawn to
new member, ” “transfer from Shawn to a new
member, ” “transfer from Nissim Trabelsi to new
member, ” and “cancelling the stocks from the
trust.” Dkt # 77-10 at 3. Later on the morning of
February 8, the escrow agent emailed Donohue asking if the
package contained “all you need to complete those
transfers of the shares from Nissin [sic] and Shawn Telsi and
to cancel the shares owned by the Trust?” Id.
Donohue replied that afternoon that he had “received
the paperwork about a half hour ago and it appears we have
all necessary paperwork to process now all we need is
confirmation from Nissim to continue with [the]
transaction.” Id. at 1. Relying on this
statement, the escrow agent released the funds to Trabelsi.
for B2, the transactions envisioned by the SPA were never
finalized because Trabelsi had not sent all of the required
paperwork. As a result, the transactions VStock processed
came up short. On February 5, 2016, it recorded a transfer of
9.5 million restricted Znergy-Mazzal shares from Trabelsi to
Telsi. Dkt # 77-11. Several weeks later, on February 26, it
received instructions from Trabelsi to transfer these same
9.5 million shares from Telsi to B2's designees. Am.
Compl. ¶ 92. B2 alleges that this was a central element
of the alleged scheme - this transaction made it appear as if
B2 was receiving the promised free-trading shares from Telsi,
when in fact it was receiving restricted shares. In March of
2016, B2 discovered the bait and switch, and, through the
escrow agent, made demands on Trabelsi and Telsi for the
transfer of the free-trading shares. These shares were never
delivered; the only additional transfer, recorded in April,
sent Trabelsi's remaining restricted shares to one of
B2's designees. Id. ¶ 148.
of 2016, B2 asked VStock for copies of the documents that
Trabelsi had provided VStock in February. Donohue initially
replied that VStock had received “no formal paperwork,
” but only “emailed instructions.” Dkt #
77-14. When B2 pointed to Donohue's prior assertion that
he had received the “necessary paperwork, ”
Donohue responded that VStock had returned “all
originals” to Trabelsi, and the only form it retained
from the February transaction was the withdrawal form
transferring 9.5 million shares from a Telsi account at
“Interactive Brokerage” to another Telsi account.
Dkt # 77-15 at 1, 11.
filed this lawsuit in January of 2017. As against VStock, B2
asserts claims for securities fraud (Count I), common-law
fraud (Counts II and IV), conversion (Count VI), breach of
fiduciary duty (Counts XVII and XVIII), gross negligence
(Counts XIX and XX), and wrongful registration (Count
XXI). VStock has moved to dismiss, asserting
that the court lacks personal jurisdiction over it and that,
in any event, B2 has failed to state a viable claim against
it. See Fed. R. Civ. P. 12(b)(2), (6).
court turns first to B2's securities fraud claim. If this
claim survives, VStock's objections to personal
jurisdiction go by the boards, as the Securities Exchange Act
of 1934 provides for nationwide service of process.
See 15 U.S.C. § 78aa(a); United Elec.,
Radio & Mach. Workers of Am. v. 163 Pleasant St.
Corp., 960 F.2d 1080, 1086 n.6 (1st Cir. 1992).
prevail on a claim under Section 10(b) of the Securities
Exchange Act and its implementing Rule 10b-5, a plaintiff
must establish “(1) a material misrepresentation or
omission; (2) scienter; (3) a connection with the purchase or
sale of a security; (4) reliance; (5) economic loss; and (6)
loss causation.” Miss. Pub. Employees' Ret.
Sys. v. Boston Sci. Corp., 523 F.3d 75, 85 (1st Cir.
2008). VStock asserts that B2 has failed to adequately plead
both scienter and loss causation.
is a “mental state embracing intent to deceive,
manipulate, or defraud.” Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 193 n.12 (1976). A defendant
may also have the requisite mental state if he “acted
with a high degree of recklessness.” Aldridge v.
A.T. Cross Corp., 284 F.3d 72, 82 (1st Cir. 2002).
“Recklessness, as used in this context, ‘does not
include ordinary negligence, but is closer to being a lesser
form of intent.'” Fire & Police Ass'n
of Colo. v. Abiomed, Inc., 778 F.3d 228, 240 (1st Cir.
2015) (quoting Greebel v. FTP Software, Inc., 194
F.3d 185, 188 (1st Cir. 1999)). Thus, “a defendant can
be held liable for ‘a highly unreasonable omission,
involving not merely simple, or even inexcusable, negligence,
but an extreme departure from the standards of ordinary care,
and which presents a danger of misleading buyers or sellers
that is either ...