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Bertolino v. Fracassa

Superior Court of Massachusetts, Suffolk, Business Litigation Session

August 30, 2018

Leo BERTOLINO and Twenty-Nine Others
Terence FRACASSA et al.

          File Date: September 5, 2018


          Kenneth W. Salinger, Justice of the Superior Court

          Plaintiffs all purchased and own Class A membership units in a Delaware limited liability company called Kettle Black of MA, LLC. They assert that defendants Terence Fracassa and Frederick McDonald sold, were in control of a company that sold, or materially aided the sale of these securities by means of misleading statements, and are therefore liable under the Massachusetts Uniform Securities Act, G.L.c. 110A, § 410 (the "MUSA"). Plaintiffs seek the statutory remedy of rescinding their purchases by compelling Fracassa and McDonald to pay Plaintiffs the full amount of their investments in Kettle Black upon the tender by Plaintiffs of their Kettle Black membership units.

         Defendants have both moved pursuant to Mass.R.Civ.P. 12(b)(6) to dismiss the claims against them. They assert that the complaint fails to state a claim for which relief may be granted against them under the MUSA.

         To survive a motion to dismiss under Rule 12(b)(6), a complaint must allege facts that, if true, would "plausibly suggest[ ] ... an entitlement to relief." Lopez v. Commonwealth, 463 Mass. 696, 701 (2012), quoting Iannacchino v. Ford Motor Co., 451 Mass. 623, 636 (2008), and Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007). For the purpose of deciding the pending motions to dismiss, the Court must assume that the factual allegations in the complaint and any reasonable inferences that may be drawn in Plaintiffs’ favor from the facts alleged are true. See Golchin v. Liberty Mut. Ins. Co., 460 Mass. 222, 223 (2011).

         The Court will DENY the motions to dismiss because the facts alleged in the complaint plausibly suggest that: (i) Defendants may both be liable under the MUSA for offering to sell securities by means of statements that were misleading because they failed to state material facts; (ii) McDonald may also be liable because Kettle Black sold securities by such means and McDonald, as a manager of the company, could and did exercise control of Kettle Black; and (iii) Fracassa may also be liable because he acted as an agent of Kettle Black and materially aided such sales.

         1. Factual Background

         The complaint alleges the following facts. Kettle Black was formed in September 2015 for the purpose of funding Commonwealth Pain Management Connection, LLC ("CPMC"). In turn, CPMC was formed to fund and provide services to a non-profit registered marijuana dispensary called Wellness Connection of MA, Inc. The Kettle Black investors understood that Kettle Black would own 40 percent of CPMC. Plaintiffs collectively hold over 80 percent of the issued and outstanding Class A membership units of Kettle Black.

         When Kettle Black first purchased its 40 percent equity interest in CPMC, only non-profit organizations like Wellness were allowed to obtain licenses to grow and dispense medical marijuana in Massachusetts. Such non-profits were allowed to contract with for-profit management companies to obtain the supplies, equipment, and services needed to cultivate and dispense their products.

         Plaintiffs allege that they invested in Kettle Black in order to obtain an indirect interest in CPMC’s expected profits from its contract with Wellness. Indeed, they allege that CPMC’s anticipated management agreement with Wellness "was the only potential source of revenue for CPMC and thus Kettle Black, and the sole means by which the Plaintiffs could realize any return on their investment."

          Fracassa and McDonald are the principals behind CPMC. They actively helped Kettle Black sell its Class A membership units to Plaintiffs and other investors, in order to raise money for Kettle Black and thus indirectly for CPMC. Defendants helped to prepare a private offering memorandum, participating in "road shows" with potential investors, and proving materials during the road shows touting their central role in CPMC and their collective experience in all aspects of the medical marijuana industry. Defendants personally profited from Kettle Black’s investment in CPMC and thus, indirectly, from Plaintiffs’ investment in Kettle Black.

         Plaintiffs claim that Fracassa and McDonald "intentionally withheld and misrepresented material facts" while helping Kettle Black raise capital that it would then invest in CPMC. In particular, they claim that Defendants failed to disclose that Fracassa "had signed a secret side agreement" with Matthew Philbin, who was Wellness’s landlord, that gave Philbin "extensive rights" in as well as "de facto control over" Wellness and the business of CPMC.

         Plaintiffs allege that the undisclosed information about the Side Agreement was material because that contract gave Philbin rights in CPMC that were inconsistent with what had been disclosed to potential investors in Kettle Black’s offering memorandum. The complaint asserts that Philbin has refused to execute CPMC’s Operating Agreement (which was disclosed to investors) because it was inconsistent with his rights under the Side Agreement (which was not disclosed). It further alleges that as a result CPMC has been unable to secure anticipated lending or to enter into any fee-for-service agreement with Wellness.

         2. Legal Background

         The MUSA "creates a strong incentive for sellers of securities to disclose fully all material facts about the security," and "provides strong protections for a buyer who received misleading information from a seller of securities." Marram v. Kobrick Offshore Fund, Ltd., 442 Mass. 43, 51 & 52 (2004). It does so by "rendering tainted transactions voidable at the option of the defrauded purchaser," without the purchaser having to prove that the misrepresentation caused them to suffer any loss or even that they relied upon the misrepresentation when they bought the security. Id. at 51, 53, 57 n.24. "The buyer’s sophistication is also irrelevant." Id. at 53.

         The statute "seeks not only to secure accuracy in the information that is volunteered to investors, but also, and perhaps more especially to compel disclosure of significant matters that were heretofore rarely, if ever, disclosed." Id. at 51-52, quoting Shulman, Civil Liability and the Securities Act, 43 Yale L.J. 227, 227 (1933).[1] The MUSA imposes a duty of full disclosure on sellers of securities; the buyer has no "duty to investigate or to ‘verify a statement’s accuracy.’" Id. at 53, quoting Mid-America Fed. Sav. & Loan Ass’n v. Shearson/American Express, Inc., 886 F.2d 1249, 1256 (10th Cir. 1989).

         The MUSA imposes primary liability on any person or entity who "offers or sells a security by means of" a false statement or by omitting to disclose some material fact. See G.L.c. 110A, § 410(a)(2). To state such a claim, a plaintiff must allege facts plausibly suggesting that: "(1) the defendant ‘offers or sells a security’; (2) in Massachusetts; (3) by making ‘any untrue statement of a material fact’ or by omitting to state a material fact; (4) the plaintiff did not know of the untruth or omission; and (5) the defendant knew, or ‘in the exercise of reasonable ...

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