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ENDOVASC LTD., INC. v. J. P. TURNER & CO.

March 30, 2004.

ENDOVASC LTD., Inc., Plaintiff -against- J. P. TURNER & CO., LLC; KCM GROUP LLC; THE KESHET FUND, L.P.; KESHET, LP; NESHER, LTD; TALBIYA B. INVESTMENTS, LTD; BALMORE FUNDS, S.A.; DAVID GRIN; LH FINANCIAL SERVICES CORP.; LAURUS MASTER FUND, LTD.; LAURUS CAPITAL MANAGEMENT, LLC; CELESTE TRUST REG; PATRICK POWERS; JOHN CLARK; ABRAHAM GRIN; TALBIYA, LTD; and KESHET MANAGEMENT, INC., Defendants


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") Page 2 (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 sanctions denied.

Procedural History

  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 Page 3 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 Page 4 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.

 Background

  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 Page 5 of a private placement offering of equity securities of Endovasc.*fn2

  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. E.)

  On or about April 18, 2000, Endovasc signed a second term sheet (the "April 18 term sheet") with KCM proposing a $15 Page 6 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 term sheet.

  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 Page 7 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 at F-6.)

  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 Page 8 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 Agreement." (Id.)

  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 Page 9 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. ¶ 43.)

 Discussion

 I. Legal Standards

  A. Rule 12(b)(6)

  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 Page 10 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., 22 ...


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