The opinion of the court was delivered by: LORETTA PRESKA, District Judge
Memorandum Opinion and Order
Plaintiff, Endovasc Ltd., Inc. ("Endovasc" or "Plaintiff", brings
this action asserting in their Second Amended Complaint (the "Complaint"
or "Compl.") that they were injured by the fraudulent acts of defendants
J.P. Turner & Co., LLC ("JP Turner"), KCM Group LLC ("KCM"), The
Keshet Fund, L.P. "Keshet Fund"), Keshet, LP ("Keshet"), Nesher, Ltd.
("Nesher"), Talbiya B. Investments, Ltd. ("Talbiya"), Balmore Funds S.A.
("Balmore"), David Grin ("Grin"), LH Financial Services Corp. "LH"),
Laurus Master Fund, Ltd. ("Laurus Master Fund"), Laurus Capital
Management, LLC ("Laurus Capital"), Celeste Trust Reg."Celeste', Patrick
Power; "Power"), and John Clark ("Clark")
(collectively, "Defendants"), in violation of Section 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) ("Section 10(b)")
and Rule 10b-5 promulgated thereunder by the Securities and Exchange
Commission ("SEC"), 17 C.F.R. § 240.10b-5 ("Rule 10b-5") and Section
20(a) of the Securities Exchange Act ("Section 20(a)"),
15 U.S.C. § 78t(a).*fn1 Endovasc also asserts claims for common law fraud and
deceit, civil conspiracy to defraud, breach of contract, and restitution
under the Securities Exchange Act of 1934. Defendants move to dismiss the
Complaint in its entirety on various grounds and for sanctions under
Rule 11 of the Federal Rules of Civil Procedure. For the reasons stated below,
Defendants' motions to dismiss are granted, and their motions for
As set forth more fully in the Court's Order dated August 18, 2003,
following service of plaintiff's First Amended Complaint, defendants7
counsel forwarded their draft motion to dismiss to plaintiff's counsel so
that counsel could decide whether to avail themselves of a final
opportunity to amend further or to stand on the First Amended Complaint.
Plaintiff's counsel, with the benefit of defendants' views of the
deficiencies in the First Amended Complaint, chose to amend
further. By Orders dated November 18, 2002 and December 18, 2002,
the Court provided plaintiff with one final opportunity to amend the
complaint, with the November 18 Order expressly stating "no additional
amendments will be permitted." Plaintiff took approximately three months
to file the Second Amended Complaint, dated January 31, 2003.
Pursuant to the Court's instructions, counsel for the various
defendants coordinated their briefing to avoid duplicative arguments,
and, with respect to certain claims, relied on arguments made in each
other's briefs. On April 1, 2003. counsel for KCM, Keshet Fund, Keshet,
Nesher, Talbiya, Grin, Laurus Master Fund, and Laurus Capital
(collectively, "the KCM defendants") filed their motion to dismiss the
Complaint accompanied by a Memorandum of Law in support of that motion
"KCM Mem."). Also on April 1, counsel for JP Turner and Power
collectively, "the JP Turner defendants") filed their motion to dismiss
accompanied by a Memorandum of Law in support of that motion ("JP Turner
Mem."). On April 3, counsel for LH, Balmore, and Celeste (collectively,
"the LH defendants") filed their motion co. dismiss accompanied by a
Memorandum of Law in support of that motion ("LH Mem.").
On July 16, 2003, approximately two months later, Endovasc filed three
separate responsive opposition memoranda thereinafter, "Opp. to KCM,"
"Opp. to JP Turner," and "Opp. to
LH". Along with these opposition memoranda, plaintiff's counsel
requested an opportunity to amend the complaint yet again, primarily to
include information not specifically relating to defendants herein but to
other parties as set forth in an SEC investigation. The Court denied that
request by Order dated August 18, 2003. On October 9 and 10, 2003 defense
counsel filed their reply memoranda (ULH Reply," "KCM Reply," and "JP
Turner Reply"). As stated in the Court's Order of August 18, 2003, and as
agreed in a conference held on August 11, 2003, defendant Clark was
permitted to join in the other Defendants' motions to dismiss.
The following facts are taken from allegations in the Complaint, except
where noted, which are accepted as true for purposes of the motion to
dismiss. Endovasc is a "development stage company in the business of
market development and licensing of biopharmaceutical products for the
health care industry" whose stock is publicly traded on the NASDAQ
over-the-counter bulletin board. (Compl. ¶ 27.) Endovasc was in
search of capital and was approached by JP Turner. (Compl. ¶ 28.) On
or about February 29, 2000, Endovasc signed a "Finders Agreement" with
JP Turner to act as a "finder" for all or part
of a private placement offering of equity securities of
In connection with its role as a finder, JP Turner referred Endovasc to
KCM as a funding source. (Compl. ¶ 30.) David Grin, identified as
"a principal of KCM," (Compl. ¶ 10), "was the person in
charge of the Endovasc financing," (Compl. ¶ 30) On or about April
17, 2000, Endovasc signed a term sheet (the "April 17 term sheet") with
KCM setting forth preliminary terms for a $4.5 million investment in
preferred stock, which would be convertible into Endovasc common stock.
(Compl. ¶ 30; Affidavit of Hillary Richard, sworn to Apr. 1, 2003
(the "Richard Aff.") Ex. E.) The investment was to be funded according to
the following schedule: $1.5 million at the closing of the agreement, an
additional $1.5 million ten days after Endovasc secured an effective
registration statement, and the final $1.5 million 120 days after
Endovasc secured an effective registration statement. (Richard Aff. Ex.
On or about April 18, 2000, Endovasc signed a second term sheet (the
"April 18 term sheet") with KCM proposing a $15
million line of equity financing. (Richard Aff. Ex. F.) According
to the Complaint, at an unspecified time and place, David Grin "made
verbal promises or covenants to Endovasc that KCM and its agents and/or
subsidiaries or other offshore entities would not short sell the stock of
Endovasc" and based on this representation, Endovasc signed the April 18
On or about May 9, 2000, Endovasc entered into stock purchase
agreements (the "May 9 agreements") with several of the defendants:
Celeste, Balmore, Keshet Fund, Keshet, Talbiya, and Nesher. Those
investors agreed to purchase Endovasc's Series A 3% Cumulative
Convertible Preferred Stock in exchange for, in total, $4.5 million in
financing, to be paid in separate tranches. (Richard Aff. Ex. G.) The
first tranche was a $1.5 million investment to be paid at the closing
date of May 9, 2000, and the second tranche, the remaining $3 million,
was structured to obligate the investors to purchase additional preferred
stock at the request of Endovasc, subject to Endovasc'3 meeting certain
conditions. (Richard Aff. Ex. G ¶¶ 11.1, ll.2.) The deal closed, and
these investors purchased $1.5 million of the preferred stock. (Compl.
¶ 32.) Thereafter, registration statements were filed with the SEC,
allowing for the issuance of registered common shares upon conversion of
the preferred shares. (Compl. ¶ 33.) The second tranche was never
paid. (Compl. ¶ 77.) However, from
Endovasc's own SEC filings, it appears that Endovasc reported that
although the obligation to pay existed at the option of Endovasc "subject
to [Endovasc's] being in compliance with various covenants," Endovasc was
"not currently in compliance with these covenants." (Richard Aff. Ex. N
In or about November, 2000, Balmore purchased an additional 1,500
shares of the preferred stock pursuant to the terms of agreements dated
November 21, 2000. (Affidavit of Kenneth A. Zitter, sworn to Apr. 1, 2003
(the "Zitter Aff.") Ex. D.)
On or about August 17, 2001, Laurus Master Fund purchased from Endovasc
$200,000 in convertible notes, pursuant to the terms of a stock purchase
agreement (the "August 17 agreement"). (Richard Aff. Ex. R.) The notes
were convertible into Endovasc's common stock under the same formula as
the May 9 agreement. (Richard Aff. Ex. S ¶ 2(1)(b).)
Endovasc paid JP Turner a cash fee of approximately $350,000 (10% of
the transaction) and 1 million common shares of Endovasc stock. (Compl.
¶ 39.) The terms of the Finder's Agreement required Endovasc to pay
JP Turner a fee of 13% of the funds raised from the sale of Endovasc
securities as a result of JP Turner's introduction and warrants in
Endovasc stock. (Snyder Aff. Ex. A ¶ 3.3.) On or about March 27,
2001, the Finder's Agreement was jointly terminated in consideration of
Endovasc's issuing warrants to purchase 1,000,000 shares of common
stock at $.01 per share with some restrictions. (Snyder Aff. Ex. B.) The
termination letter expressly stated that "neither party shall have any
further obligations or duties to the other in respect of the Finder's
The Complaint does not refer separately to the agreements. Instead,
Endovasc alleges generally that "the offshore Funds," identified in the
Complaint as Keshet Fund, Keshet, Celeste, Balmore, Laurus Master Fund,
Laurus Capital, Nesher, and Talbiya (Compl. ¶ 23), paid the $1.5
million investment: to Endovasc and received the convertible notes Compl.
32). Insofar as these allegations can be interpreted to conflict with the
agreements provided by defendants, I decline to accept them as true for
purposes of the motion to dismiss. See In re Livent, Inc.
Noteholders Sec. Litig., 151 F. Supp.2d 371, 405-06 (S.D.N.Y. 2001)
("a court need not feel constrained to accept as truth conflicting
pleadings . . . that are contradicted either by statements in the
complaint itself or by documents upon which its pleadings rely, or by
facts of which the court may take judicial notice") (citations omitted).
Generally, Endovasc alleges that based upon the agreements described
above, Defendants drove down the price of Endovasc stock in order to
profit from the spread. (Compl. ¶ 44. Defendants did so by `'employ
[ing] a variety of
manipulative devices and techniques, including, without limitation,
stacked trades, washed trades, bulk trades, lockouts, [and] secret
trading between market makers or for their own account." (Compl. ¶
For the purposes of a motion to dismiss under Rule 12(b)(6), all
well-pleaded factual allegations of the complaint are accepted as true
and all inferences are drawn in favor of the pleader. See City of
Los Angeles v. Preferred Communications, Inc., 476 U.S. 488, 493
(1986); Miree v. Dekalb County, 433 U.S. 25, 27 n.2 (1977)
(referring to "well-pleaded allegations"); Mills v. Polar Molecular
Corp., 12 F.3d 1170, 1174 (2d Cir. 1993). "`The complaint is deemed
to include any written instrument attached to it as an exhibit or any
statements or documents incorporated in it by reference.'"
International Audiotext Network, Inc. v. American Tel. & Tel.
Co., 62 F.3d 69, 72 (2d. Cir. 1995) (quoting Cortec Indus., Inc.
v. Sum Holding, L.P., 949 F.2d 42, 47 (2d Cir. 1991)). In order to
avoid dismissal, plaintiffs must do more than plead mere "conclusory
allegations or legal conclusions masquerading as factual conclusions."
Gebhardt v. Allspect, Inc., 96 F. Supp.2d 331, 333 (S.D.N.Y.
2000) (quoting 2 James Wm. Moore, Moore's
Federal Practice P 12.34 [a] [b] (3d ed. 1997)). Dismissal is
proper only when "it appears beyond doubt that plaintiff can prove no set
of facts in support of his claim which would entitle him to relief."
Conley v. Gibson, 355 U.S. 41, 45-46 (1967); accord Cohen
v. Koenig, 25 F.3d 1168, 1172 (2d Cir. 1994).
B. Section 10(b) and Rule 10b-5
Section 10(b) of the Exchange Act provides that:
It shall be unlawful for any person, directly or
indirectly, by the use of any means or
instrumentality of interstate commerce or the
mails, or of any facility of any national
securities exchange (b) To use or employ,
in connection with the purchase or sale of any
security registered on a national securities
exchange or any security not so registered, any
manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the
Commission may prescribe as necessary or
appropriate in the public interest or for the
protection of investors.
15 U.S.:. § 78j (b).
In order to state a misrepresentation claim under Section 10(b) and
Rule 10b-5 promulgated thereunder, a plaintiff must plead that
defendants, "`in connection with the purchase or sale of securities, made
a materially false statement or omitted a material fact, with scienter,
and that the plaintiff's reliance on the defendant[s'] action caused
injury to the plaintiff.'" Lawrence v. Cohn, 325 F.3d 141, 147
(2d Cir. 2003) quoting Ganino v. Citizens Utils. Co.,