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Levy v. Maggiore

United States District Court, E.D. New York

September 29, 2014

STEVEN LEVY, Plaintiff,
v.
DOMINIC MAGGIORE, JASON SANTIAGO, THOMAS PRAGIAS, JOHN KAMEN, HUGH WARD and RAICHE ENDE MALTER & CO., LLP, Defendants

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For Steven Levy, Plaintiff: Christopher Robert Travis, LEAD ATTORNEY, Travis LLC, New York, NY; Michael P. Mangan, LEAD ATTORNEY, Michael P. Mangan, LLC, New York, NY.

For Dominic Maggiore, Jason Santiago, Thomas Pragias, John Kamen, Hugh Ward, Defendants: Harris Bruce Katz, LEAD ATTORNEY, Anthony D. Green, Eric William Swartz, Winget Spadafora & Schwartzberg, LLP, New York, NY.

For Raiche Ende Malter & Co. LLP, Defendant: Gregory Wayne Gilliam, LEAD ATTORNEY, Wilson Elser Moskowitz Edelman & Dicker LLP, White Plains, NY; Matthew Lawrence Elkin, Wilson Elser, White Plains, NY; Peter J. Larkin, Wilson, Elser, Moskowitz, Edelman & Dicker, White Plains, NY.

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MEMORANDUM & ORDER

MARGO K. BRODIE, United States District Judge.

Plaintiff Steven Levy commenced this action on April 11, 2013, against Defendants Dominic Maggiore, Jason Santiago, Thomas Pragias, John Kamen and Hugh Ward (collectively the " IBG Defendants" ),[1] and Raiche Ende Malter & Co., LLP (" Raiche Ende" ). Plaintiff alleges claims of fraud pursuant to sections 10(b) and 20(a) of the Securities Exchange Act (the " Exchange Act" ), 15 U.S.C. § § 78j(b) (" section 10(b)" ) and 78t (" section 20(a)" ), as well as common law claims of fraud, fraud in the inducement, and for an accounting against the IBG Defendants. Plaintiff also alleges an aiding and abetting fraud claim against Raiche Ende. Plaintiff filed an Amended Complaint on October 8, 2013, adding a claim of fraud and violations of section 10(b) of the Exchange Act against Raiche Ende, and withdrawing the claim for an accounting as to the IBG Defendants. (Docket Entry No. 14.) All Defendants move to dismiss the Amended Complaint and Plaintiff seeks leave to submit a Second Amended Complaint (" SAC" ), (annexed to Declaration of Christopher Travis in Opposition to Defendants'

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Motion to Dismiss (" Travis Decl." as Ex. 11), and to submit a revised Second Amended Complaint, (Docket Entry No. 32), which the Court refers to as the Third Amended Complaint. For the reasons set forth below, the Court accepts Plaintiff's Second Amended Complaint and considers it in deciding the motions, and grants Defendants' motions to dismiss the Second Amended Complaint. The Court denies Plaintiff's motion to submit the Third Amended Complaint, but grants leave to amend the Second Amended Complaint only as to Maggiore and to add the second proposed plaintiff.

I. Background

IBG was a New York corporation that manufactured sports, recreational and " nutraceutical" beverages.[2] (SAC ¶ 4.) The IBG Defendants are current or former officers and directors of IBG, and Raiche Ende was IBG's accounting firm. ( Id. ¶ 2.)

In May 2009, IBG offered a private placement of shares to Plaintiff and other investors, (the " May 2009 private placement" ), and engaged a non-party brokerage firm, Lighthouse Financial Group, Inc. (" Lighthouse Financial" ), to act as its agent in the placement. ( Id. ¶ ¶ 28-29.) The IBG Defendants instructed Lighthouse Financial brokers to market shares in IBG by telling potential investors that IBG had $2,130,000 in sales in 2008, and was " on track" to earn more than $2,000,000 in sales in 2009. ( Id. ¶ ¶ 30-31.) Lighthouse Financial brokers gave Plaintiff a Private Placement Memorandum (" PPM" ) in connection with the May 2009 Private Placement.[3] ( Id. ¶ 32.) The PPM stated that IBG's auditor, Raiche Ende, had provided preliminary audited results of 2008 that reflected " gross sales of approximately $2,130,000," as compared to $289,000 in 2007, and that the growth in sales from 2007 to 2008 was 737%. ( Id. ¶ ¶ 32-33.) In addition to giving Plaintiff a copy of the PPM, Lighthouse Financial brokers verbally told Plaintiff that IBG was on the verge of going public, and that the proceeds of Plaintiff's investment in IBG would go toward marketing, branding and product development. ( Id. ¶ ¶ 31-32, 47.) Plaintiff purchased 350,000 shares of IBG stock between September and November 2009. ( Id. ¶ 3.) In purchasing the shares of IBG stock, Plaintiff relied on oral and written representations made by IBG and Raiche Ende that IBG had more than $2,130,000 in gross sales in 2008, that IBG was about to go public, and that Plaintiff's investment would be used for marketing and product development. ( Id. ¶ 6.)

In reality, IBG did not have either gross or net sales of $2,130,000, and received only $1.575 million for goods shipped in 2008. ( Id. ¶ ¶ 38-39.) According to the Lighthouse Financial broker who sold Levy his shares, a portion of the claimed sales of $2,130,000 were " consignment shipments," which were shipments of products to retailers, for which title did not pass and the sale was not complete until a customer purchased the product from the retailer. ( Id. ¶ 8.) These sales were also comprised of " 'guaranteed sales," meaning

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IBG would pay retailers for its products if they went unsold." ( Id. ¶ 40.)

A section titled " Risk Factors," in the PPM includes the following ...


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