The opinion of the court was delivered by: Sifton, Senior Judge
Hybred International, Inc. ("HYII") and Iddo Batcha ("Batcha") (collectively, "plaintiffs") commenced this action against Anthony Guglieri ("Guglieri"), Allstate Funding, Inc. ("Allstate"), Peter Nicosia, Bull In Advantage, Inc., Janie Collins, InvestSource, Inc. ("InvestSource"), Thorne Legal, Inc. ("Thorne"), Louis Sorrentino, Lakeview Consulting, Inc., Lugion Associates, Inc., and Christine Carew*fn1 (collectively, "defendants"), alleging: breach of contract (Count II); unjust enrichment (Count IV); conversion (Count V); negligence per se in violation of the Securities and Exchange Act of 1933 § 17(a), 15 U.S.C. § 77q ("Securities Act")(Count VI);*fn2 negligence per se in violation of the Securities and Exchange Act of 1934 § 10B-5, 15 U.S.C. § 78j ("Exchange Act") (Count VII); fraud (Count VIII); consumer fraud (Count IX); and fraudulent transfers (Count X). Plaintiffs seek a temporary restraining order, replevin, attorneys fees, actual damages, consequential damages, punitive damages, 1,650,000 shares of HYII common stock, and a preliminary injunction. Now before the Court is plaintiff's motion for a preliminary injunction to restrain defendants from transferring shares of HYII stock. Defendants Guglieri, Allstate, Thorne Legal, and InvestSource have filed papers opposing the motion. Based on the findings of fact and conclusions of law set forth below, the motion is denied.
The following facts are taken from the parties' submissions in connection with this motion. Disputes are noted.
Plaintiff HYII states that it is in the business of manufacturing horseshoes. Compl. at ¶ 41. Defendants state that HYII has and had nothing of value, that it has an office space but no factory or employees, and that it is a shell. Guglieri Affidavit at ¶ 11 ("Guglieri Aff."). HYII is incorporated within the State of Colorado and is authorized to do business within the State of New Jersey, where it has its headquarters. Compl. at ¶ 21. HYII's current CEO is Gary Kouletas. Id. Plaintiff Batcha is an individual and a domiciliary of the State of Florida, and was the CEO prior to Mr. Kouletas. Id. at ¶ 22.
Defendant Guglieri is the secretary of Allstate Funding, Inc, and has his principal address in Staten Island, New York. Compl. at ¶ 23. Defendant Allstate Funding, Inc. has its principal place of business in Staten Island, New York. Id. Defendant Peter Nicosia has his principal address in Rochester, New York. Id. Defendant Bull In Advantage, LLC has its principal place of business in Rochester, New York. Id. Defendant Janie Collins has her principal address in San Antonio, Texas. Id. Defendant InvestSource, Inc. has its principal place of business in Huntington Beach, California. Id. Defendant Thorne Legal, Inc. has its principal place of business in Huntington Beach, California. Id. Defendant Louis Sorrentino has his principal address in Highlands, New Jersey. Id. Defendant New Media Advisors, Inc. has its principal place of business in Rochester, New York. Id. Defendant Lakeview Consulting, LLC, has its principal place of business in Encinitas, California. Id. Defendant Lugion Associates, Ltd. has its principal place of business in Pittsford, New York. Id.
Plaintiffs claim that in July of 2008, HYII engaged defendants Guglieri and Allstate to perform investment relations and public relations services (collectively, the "Services"). Complaint at ¶ 24 ("Compl."). The Services were arranged for by an agent of HYII, Brett Hamburger ("Hamburger"), who finalized the contract orally. Id. at ¶ 25. Defendants claim that Guglieri entered into the contract solely with Hamburger, and not with HYII or Batcha. Guglieri Aff. at ¶ 3. Defendants further claim that Guglieri did not make any promises to Hamburger, except that he intended to perform the contract. Id. at ¶ 5. Guglieri explained to Hamburger that he could not do all of the work, and that he knew other people and organizations that specialize in public relations. Id. Guglieri and Hamburger entered into a contract whereby defendants would receive 1,650,000 shares of stock in exchange for doing various pieces of work. Id. The defendants did receive 1,650,000 shares of common stock (the "Shares"). Compl. at ¶ 26. Plaintiffs do not acknowledge that they knew that the various defendants would be doing various pieces of the work, and instead claim that Guglieri and Allstate requested that the consideration be paid to the other defendants. Id. at ¶ 28. The allocations were as follows:
Defendant Shares Certificate No. Antony Guglieri 500,000 536 Peter Nicosia 75,000 537 Bull In Advantage, LLC 75,000 538 Allstate Funding Services, Inc. 200,000 539 Janie C. Collins 100,000 540 InvestSources, Inc. 75,000 541 Thorne Legal, Inc. 75,000 542 Christine Carew 90,000 543 Louis Sorrentino 10,000 544 New Media Advisors, Inc. 150,000 545 Lakeview Consulting, LLC 250,000 534 Lugion Associates, Ltd. 50,000 535 Compl. at ¶ 28. Plaintiffs claim that to date, the Services have not been rendered. Id. at ¶ 29.
Defendants claim that they did the work as requested. Guglieri claims that he paid $45,000 from his own funds to do the marketing campaign, and that he bought additional shares of HYII stock in the hopes that the company would do well. Guglieri Aff. at ¶ 6. He hired a company called BNM Investments ("BNM") to do an email and profile campaign, and paid that company $50,000 for the work (the $5000 in additional funds came from his colleague). Id., Ex. A. BNM in turn hired other experts on public relations, such as OTC Advisors, which Guglieri evidences with a copy of their disclaimer indicating that they received $20,000 to do public relations work for HYII. Id. at ¶ 7.
Guglieri also approached InvestSource and Thorne and requested that they assist in providing financial and marketing services to Hybred. Sahachiaisere Aff. at ¶ 2. On July 14, 2008, Greg Kouletas sigend a Press Account Contract with InvestSource, permitting pre-releases to be provided to InvestSource. Id. at ¶ 5. Pursuant to this agreement, Investsource and Thorne provided financial consulting services to Hybred, including dissemination of Hybred company information, issuance of press releases, publishing interviews with Hybred's CEO, and other related services. Id. at ¶ 6. InvestSource created a company profile, which was posted on the InvestSource website, and prepared a newsletter including interviews with Hybred's CEO. Id. at ¶ 7.
Defendants point out that evidence of their marketing work is viewable in the internet, where a recent Google search returns numerous hits for the search "Hybred International," some of which were posted by defendant InvestSource. Defendants claim that most of these search returns exist as a result of the work they performed. Guglieri Aff. at ¶ 8.
HYII's stocks are penny stocks. Guglieri Aff. at ¶ 1. People who wish to invest in penny stocks tend to check various websites that specialize in those types of stocks. Id. at ¶ 9. Defendants state that they prepared various stories and reports on HYII in order to bring attention to the corporation. Id. For example, they circulated a report regarding HYII's announcement that the company was preparing a new kind of horseshoe, and that it was retaining a well known jocky on its board of directors. Id., Ex. E. In the beginning, the marketing endeavor was very successful, as evidenced by the fact that the volume of trading "skyrocketed" in the month of July, 2008. Id. at ¶ 10. Plaintiffs characterize this shift in trading volume differently, as discussed below.
Plaintiffs claim that as part of the Agreement, defendants agreed not to sell the Shares prior to full execution of the Services, and that despite this, defendants have sold the majority of their Shares into the market. Compl. at ¶ ¶30, 31. As evidence, they point to the July fluctuations in stock trading volume and price. Id., Ex. A, B. Plaintiffs further claim that this concentrated sale has decreased the price of HYII shares by 90%, and that this makes raising capital for HYII very difficult, and has long term implications for HYII's borrowing capacity and credit rating. Id. Defendants claim that the volume of trading increased due to the marketing efforts, and that the share price dropped due to the precipitous drop in the markets overall and the fact that the company has no business to offer. Id. at ¶ 14. According to defendants, HYII only has an office space, has no factory or employees, and has no current business. Id. at ¶ 11. Furthermore, defendants claim, HYII never had any news to report through the various marketing channels that had been established. Id. at ¶ 12. Regarding the claim that they have impermissibly sold shares, defendants offer evidence that Allstate continues to retain its original 200,000 shares. Guglieri Aff. Ex. G. Guglieri claims to know that other defendants have not sold many or all of their shares, and that defendant Janie Collins mailed back her certificates to plaintiffs' attorney when there was threat of a lawsuit. Guglieri Aff. at ¶ 17.
InvestSource and Thorne state that after they had performed the agreed upon services, they sold the shares provided to them, realizing a profit of $4000. Sahachiaisere Aff. at ¶ 9. Nearly five months after InvestSource and Thorne's services were complete, the companies received a letter stating that they should stop sales of Hybred Common Stock. Id. at ¶ 10. However, the shares had already been sold. InvestSource and Thorne claim that the agreement by which they received 150,000 shares of common stock ...