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LLC v. Trabelsi

United States District Court, D. Massachusetts

October 18, 2017




         Defendant 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.


         VStock, 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.

         As 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.

         The SPA 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.

         On 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.

         Unfortunately 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.

         In June 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.

         B2 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).[1] 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).


         The 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).

         To 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.

         Scienter 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 ...

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