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Precedo Capital Group Inc. v. Twitter Inc.

United States District Court, S.D. New York

April 21, 2014

PRECEDO CAPITAL GROUP INC. and CONTINENTAL ADVISORS SA, Plaintiffs,
v.
TWITTER INC, Defendant

Page 246

For Plaintiffs: Joseph Peter Baratta, Sr., Esq., Ottavio Vincenzo Mannarino, Esq., Baratta, Baratta & Aidala LLP, New York, NY.

For Defendant: Bruce Domenick Angiolillo, Esq., Jonathan K. Youngwood, Esq., Daniel Joseph Stujenske, Esq., Simpson Thacher & Bartlett LLP, New York, NY.

Page 247

OPINION AND ORDER

Shira A. Scheindlin, U.S.D.J.

I. INTRODUCTION

Plaintiffs, two financial services companies, bring this suit against Twitter Inc.

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for common law fraud.[1] They claim that Twitter led them to believe that non-party GSV Asset Management Inc. (" GSV Asset" ) was its agent for the purpose of selling privately held Twitter stock. As a result, plaintiffs entered into agreements with GSV Asset to promote a fund of Twitter stock. However, Twitter canceled the stock sales. Plaintiffs contend that Twitter never intended to permit the stock sales, and were only taking advantage of plaintiffs' marketing efforts to increase the company's value in advance of its planned initial public offering (" IPO" ).

Twitter moves to dismiss the complaint with prejudice pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons set forth below, Twitter's motion is granted.

II. BACKGROUND

A. Facts[2]

1. The Parties

Precedo Capital Group Inc. (" Precedo" ) and Continental Advisors SA (" Continental" ) are both in the financial services industry.[3] Twitter is a social media network that was privately held from the time of its founding in 2006 until its IPO in November 2013.[4]

The Complaint's allegations relate to events that began in early 2012 and ended in October 2012, a year before the IPO.[5] During this time, plaintiffs never communicated directly with Twitter.[6] Instead, they dealt with GSV Asset, believing GSV Asset to be Twitter's agent in connection with the sale of Twitter stock.[7]

2. The Alleged Fraud

On an unspecified date, plaintiffs met GSV Asset's managing partner, Matthew Hanson.[8] During this meeting, Hanson, or someone else, told plaintiffs that Twitter had authorized GSV Asset to create and manage a fund that would purchase shares of Twitter stock in private transactions.[9] GSV Asset stated that Twitter wanted it to manage these positions in order to (1) " avoid one of the pitfalls of the Facebook IPO by removing an overhang of Twitter shares from the market; " (2) stabilize the market price of Twitter shares; and (3) provide support for a $10 billion valuation of Twitter before its IPO.[10] At some point, Hanson also told plaintiffs that GSV Asset had a right of first refusal for a

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$278,000,000 block of third-party Twitter shares.[11]

Precedo entered into a Mandate Agreement with GSV Asset on May 6, 2012.[12] Continental and GSV Asset executed a separate Mandate Agreement on August 20, 2012.[13] Under the Mandate Agreements, plaintiffs would find investors for @GSV Fund LP (" @GSV" ) in exchange for fees or commissions.[14] Believing that GSV Asset would be able to obtain Twitter's consent to acquisitions of Twitter stock, plaintiffs marketed @GSV both domestically and abroad.[15]

The Complaint alleges that Twitter never intended to consent to the sale of Twitter stock.[16] Instead, " Twitter's intention . . . was to induce Precedo Capital and Continental Advisors to create an artificial private market for Twitter stock . . . at or about $19 per share . . . ." [17] The Complaint further alleges that Twitter knew that plaintiffs " were in the process of obtaining investors to sell them Twitter stock, and that to withdraw the shares from the private market, both Continental [ ] and Precedo [ ] would sustain damages, as accredited buyers had already committed [to] the purchase of Twitter's stock." [18]

" Twitter cancelled the GSV Asset Offering on October 5, 2012. GSV Asset then sent a formal letter of cancellation to [Continental] on October 22, 2012." [19] By the time Twitter cancelled the GSV Asset offering on October 5, 2012, Continental alone had made arrangements for accredited foreign investors to purchase up to 11,395,000 shares of Twitter stock.[20]

3. The Alleged Agency Relationship

The Complaint identifies several grounds for plaintiffs' belief that GSV Asset was Twitter's agent.[21] First, GSV Asset used the law firm Wilson Sonsini Goodrich & Rosati (" Wilson Sonsini" ), which is also Twitter's counsel, to draft the @GSV term sheet, offering documentation, subscription and mandate agreements, and other documents.[22] Second, GSV Asset had access to what plaintiffs believed was Twitter's highly confidential information, such as a stockholder list and certain financial projections.[23] Finally, GSV Asset represented that Twitter said that GSV Asset was an approved buyer of Twitter stock.[24]

Beginning in April 2012, GSV Asset told Precedo that Twitter wanted GSV Asset to sell third-party Twitter stock " and that GSV Asset was directly authorized by Twitter to offer up to 18 million secondary shares of Twitter stock and that GSV Asset had the exclusive right." [25] " This representation was made at every presentation that Precedo [ ] held[,]" including

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presentations to at least ten financial institutions in five different states between April 2012 and June 2012.[26] Precedo also used " confidential Twitter information" at the investor presentations.[27] At a presentation on April 18, 2012, " Moe," an officer of GSV Asset, presented various documents prepared by Wilson Sonsini.[28]

On August 10, 2012, Hanson told plaintiffs that the pre-IPO sale of Twitter shares was approved by Twitter, GSV Asset, and Wilson Sonsini.[29] On August 22, 2012, Hanson told Continental and several institutional investors on a conference call that GSV Asset was one of nine approved buyers of Twitter stock.[30] He also said that GSV Asset was the only approved buyer that currently had an allocation of stock to sell.[31] Hanson repeated these representations on five conference calls held between August 23, 2012 and September 6, 2012.[32]

On September 4, 2012, Hanson sent an email to Mark Porcelli of Continental indicating that " we will move our closing date or at least append the closing date to indicate we'll have to get through a [right of first refusal] period with Twitter" and that " the fund can't close til Twitter signs off." [33] That same day, Hanson informed Andrea Porcelli of Continental that Twitter told him that potential investors could contact ...


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