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Iroquois Master Fund, Ltd., Individually v. Cel-Sci Corp

March 28, 2011

IROQUOIS MASTER FUND, LTD., INDIVIDUALLY
AND AS AGENT FOR 13 PURCHASERS UNDER A SECURITIES
PURCHASE AGREEMENT DATED AUGUST 4, 2006,
IROQUOIS CAPITAL MANAGEMENT L.L.C.,
INDIVIDUALLY AND AS AUTHORIZED REPRESENTATIVE OF
IROQUOIS MASTER FUND, LTD., BRISTOL
INVESTMNET FUND, LTD., CASTLERIGG MASTER INVESTMENTS LTD., CRANSHIRE
CAPITAL, LP, HUDSON BAY FUND LP, HUDSON BAY OVERSEAS FUND, LTD.,
LONGVIEW FUND, L.P., OPTION OPPORTUNITIES COMPANY, OTAGO
PARTNERS, LLC, PARAGON CAPITAL LP, PORTSIDE GROWTH AND OPPORTUNITY
FUND, ROCKMORE INVESTMENT MASTER FUND, LTD., ROCKMORE CAPITAL LLC,
INDIVIDUALLY AND AS AUTHORIZED REPRESENTATIVE OF ROCKMORE INVESTMENT MASTER FUND,
LTD., AND SMITHFIELD FIDUCIARY LLC PLAINTIFFS,
v.
CEL-SCI CORP.,
DEFENDANT.



The opinion of the court was delivered by: Hon. Harold Baer, Jr., District Judge:

OPINION & ORDER

Iroquois Master Fund, Ltd. ("Iroquois") and other investors (collectively, "Plaintiffs") bring this action to recover losses allegedly suffered in connection with their investment in Defendant CEL-SCI Corporation. Plaintiffs invoke this Court's diversity jurisdiction and assert claims for breach of contract, breach of fiduciary duty, conversion, negligence, and a mandatory injunction. Before the Court is Defendant's motion to dismiss the complaint in its entirety, and plaintiff Option Opportunities Company's motion for partial summary judgment. For the reasons that follow, the motion to dismiss is granted in part and denied in part. The motion for summary judgment is denied.

F ACTUAL B ACKGROUND

Plaintiffs are investors who claim to hold securities issued by Defendant CEL-SCI that give them certain contractual rights with respect to CEL-SCI stock. CEL-SCI is a corporation organized under the laws of Colorado, with its principal offices in Virginia. CEL-SCI is engaged principally in the research and development of its flagship product, Multikine®, which is a form of cancer treatment designed to simulate the activities of a healthy patient's immune system and promote an anti-tumor immune response. It has been cleared for Phase III clinical trials in the United States, Canada, and parts of Europe and Asia. Its stock is traded on the NYSE Amex Equities, and it uses the funds it raises towards development of Multikine®.

In a transaction between the parties in August, 2006 (the "Original Transaction"), plaintiff Iroquois paid $2 million for a secured note (the "Note") and warrant (the "Warrant") for the purchase of shares of CEL-SCI. The terms of the deal were stated in the Note, the Warrant, and a securities purchase agreement ("SPA") dated August 4, 2006. In the same transaction CEL-SCI also entered into a security agreement ("SA" and, together with the Note, Warrant and SPA, the "Transaction Documents") with Iroquois individually, and on behalf of 13 other purchasers who purchased an additional $6.3 million in Secured Notes. Am. Compl. ¶ 3. These purchasers or their alleged successors-in-interest are the other named Plaintiffs.

The Transaction Documents contain certain anti-dilution and price protection provisions that can be triggered by future issuances of Defendant's securities at prices below those it negotiated in the Original Transaction. See Am. Compl. ¶¶ 1, 4. In brief, Plaintiffs contend that under section 10(d) of the Note they are entitled to an adjustment of the conversion price of their secured notes and, under section 9(d) of the Warrant, they are entitled to a similar adjustment of the price at which the Warrants could be exercised into shares. They additionally claim that section 9(e) of the Warrant requires Defendant to adjust the number of shares into which the Warrant could be exercised in proportion to the number of new shares issued in order to avoid dilution of the Plaintiffs' total stake. Am. Compl. ¶ 7. These provisions are nottriggered by issuances of a limited category of exempt securities defined in section 1.1 of the SPA (the "Excluded Stock").

In March 2009, Defendant entered into a transaction with non-party Byron Biopharma LLC, pursuant to which Defendant sold 3,750,000 units of its securities to Byron at $.20 per unit, for a total of $750,000 (the "Byron Transaction"). Defendant asserts that the primary purpose of the Byron Transaction was to grant Byron a license to market Multikine® in South Africa.

At the heart of this dispute is whether the securities issued as part of the Byron Transaction are Excluded Stock, or whether they triggered the anti-dilution and price protection provisions established in the Note and Warrant. Having failed to come to terms on this key issue, Iroquois commenced this action on October 21, 2009, seeking, among other things, to exercise its rights under the Transaction Documents. Additional investors were added as plaintiffs in the Amended Complaint filed May 14, 2010.

D ISCUSSION

I.THE MOTION TO DISMISS

A.Legal Standard

A complaint will be dismissed if there is a "failure to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). To survive a motion to dismiss on this ground, a plaintiff must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A facially plausible claim is one where "the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009). Where the Court finds well-pleaded factual allegations, it should assume their veracity and determine whether they "plausibly give rise to an entitlement to relief." Id. at 1950. While the court must "draw inferences [] in the light most favorable to the plaintiff," Roth v. Jennings, 489 F.3d 499, 510 (2d Cir. 2007), it need not accord "[l]egal conclusions, deductions or opinions couched as factual allegations ... a presumption of truthfulness." In re NYSE Specialists Secs. Litig., 503 F.3d 89, 95 (2d Cir. 2007).

B.Martin Act Preemption

Plaintiffs' claims for negligence, breach of fiduciary duty, and conversion are preempted by the Martin Act, New York's "Blue Sky" law*fn1 designed to combat fraudulent and deceitful practices in the distribution, exchange, sale, and purchase of securities. See N.Y. Gen. Bus. Law ยง 352, et seq. (McKinney 1960) (the "Act"). The Act gives the New York Attorney General exclusive authority to enforce its provisions, and courts have interpreted this to preempt private common law claims falling within the Martin Act's purview, because to do otherwise "would effectively create an end-run around the New York Attorney General's exclusive enforcement authority." Horvath v. Banco Comercial Portugues, S.A., No. 10 Civ. 4697 (GBD), 2011 WL 666410, at *7 (S.D.N.Y. Feb. 15, 2011). Although decisions on Martin Act preemption have not been wholly uniform, as Judge Sand recently wrote "the overwhelming majority of courts to consider the issue have found that such claims are preempted." In re Beacon Assocs. Litig., No. 09 Civ. 777(LBS), --- F.Supp.2d ----, 2010 WL 3895582, at *35 (S.D.N.Y. Oct. 5, 2010). In its only case on the issue, the ...


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