United States District Court, S.D. New York
For Alpha Capital Anstalt, A Lichtenstein Company, doing business as, Alpha Capital, Plaintiff: Anthony Andrew LoPresti, LoPresti & Meltzer, LLP, New York, NY; Stanley Charles Morris, Corrigan & Morris LLP, Los Angeles, CA.
For Lee S. Rosen, Defendant: Jonathan Honig, LEAD ATTORNEY, Feder, Kaszovitz LLP, New York, NY.
For John E. Mack, Andrea Festuccia, David Goebel, David A. Gillespie, Cary J. Claiborne, Diane Saglio, Inclusive, Defendants: Joseph D. Pizzurro, Kevin Arthur Meehan, Nancy Eileen Delaney, LEAD ATTORNEYS, Curtis, Mallet-Prevost, Colt & Mosle, LLP(NYC), New York, NY.
OPINION & ORDER
VALERIE CAPRONI, United States District Judge.
Plaintiff, Alpha Capital Anstalt (" Alpha"), brings this action against New Generation Biofuels, Inc. (" NGBF" or the " Company"), the company's founder, Lee S. Rosen (" Rosen") and six officers and directors of NGBF alleging securities fraud under the Securities Exchange Act (the " Exchange Act") and various state law claims, all arising out of losing investments that Alpha made in NGBF in 2011. Alpha alleges that it was fraudulently induced to invest in NGBF as a result of Defendants' misrepresentations and omissions regarding the viability of NGBF's pending patent applications, the value of a master license agreement covering those pending patents and Rosen's concealed NGBF stockholdings and sales.
The Individual Defendants have moved to dismiss principally pursuant to Federal Rules of Civil Procedure 12(b)(6) for failure to state a claim and Rule 9(b) and the Private Securities Litigation Reform Act (" PSLRA"), 15 U.S.C. § 78u-4(b)(1)-(3)(A), for failure to plead fraud with particularity. Defendant Festuccia has also moved to dismiss pursuant to Rule 12(b)(2) for lack of personal jurisdiction.
For the reasons stated below, the Individual Defendants' motion to dismiss is GRANTED IN PART and DENIED IN PART.
This action arises out of investments totaling approximately $1.19 million that Alpha, a Lichtenstein-based company, made in NGBF between January 2011 and October 2011.
NGBF is a Florida-based biofuels start-up company that was founded by Defendant Rosen in 2006. First Am. Compl. (" FAC") ¶ ¶ 4, 26. Rosen was Chairman of the Board of Directors and also served as an untitled and undisclosed executive officer until May 7, 2010. Id. ¶ 4. After stepping down as Chairman of the Board, Rosen continued to exercise de facto control over NGBF. Id. ¶ 4. Defendant Andrea Festuccia (" Festuccia"), a resident of Italy, acted as NGBF's Chief Technology Officer throughout the Company's existence. Id. ¶ 6. All of the other Individual Defendants were, at various times, NGBF officers or board members.
NGBF's primary asset was a master license agreement with Ferdinando Petrucci (the " Master License Agreement"), under which NGBF held licenses to intellectual property rights in a variety of biofuel technologies for which it had patent applications pending. Id. ¶ ¶ 26, 30-31. The Master License Agreement covered the exploitation of those technologies in North America, Central America and the Caribbean. Id. ¶ ¶ 26, 31, 34-35. Apart from the Master License Agreement, NGBF had very few assets. Id. ¶ 26.
A. NGBF's Patent Applications
On April 27, 2006 and April 10, 2007, NGBF filed applications with the United States Patent and Trademark Office (" USPTO") and various international patent receiving offices for 37 patent claims based on an additive allegedly created by Mr. Petrucci (the " Petrucci Patent Applications"). Id. ¶ 36. On October 23, 2007, NGBF received a report from the International Search Authority (" ISA") regarding the Petrucci Patent Applications. ISA is an organization authorized under the Patent Cooperation Treaty (" PCT") to conduct preliminary examinations of patent claims. Id. ¶ ¶ 36 n.1, 40. The ISA Report made negative findings, noting, inter alia, that the Petrucci Patent Applications (1) were " not considered to be of particular relevance" and (2) " cannot be considered novel or cannot be considered to involve an inventive step." Id. ¶ 40.
In 2010, based on technology allegedly invented by Defendant Festuccia, NGBF filed approximately 40 additional patent claims with the USPTO and the PCT's European Patent Office (the " Festuccia Patent Applications"). Id. ¶ 37. Throughout 2010 and 2011, NGBF received reports from various foreign patent authorities analyzing the Petrucci and Festuccia Patent Applications, all of which cited deficiencies similar to those noted in the October 23, 2007 ISA Report (these reports, together with the October 23, 2007 ISA Report, are collectively referred to as the " Foreign Patent Reports"). Id. ¶ 41. Plaintiff alleges that the deficiencies cited in the Foreign Patent Reports were " devastating" and that the deficiencies were ultimately the reason why all of NGBF's patent applications were either withdrawn by NGBF or rejected by the USPTO. Id.
B. Defendants' Alleged Misrepresentations and Omissions
Alpha claims that it was defrauded by three distinct types of misrepresentations and omissions. Id. ¶ 22. First, Defendants overstated the value of the Master License Agreement. Id. ¶ 23. Second, Defendants failed to disclose the negative feedback it had received in the Foreign Patent Reports and instead discussed its pending patents in positive terms. Id. ¶ 24. Third, Rosen improperly concealed his ownership and sales of NGBF stock. Id. ¶ 25.
1. The Value of the Master License
In public statements signed by Defendants and filed with the Securities and Exchange Commission (" SEC") for fiscal years 2007 through 2010, Defendants represented that the value of NGBF's licenses under the Master License Agreement ranged from over $5 million to over $8 million. Id. ¶ ¶ 23, 27. Each year, in its Form 10-K, NGBF stated that it had reviewed the value of the Master License Agreement on a periodic basis for impairment, and that its valuation was measured by the future undiscounted net cash flows expected to be generated. Id. NGBF's Form 10-Ks also represented that NGBF had capitalized its Master License Agreement and estimated its useful life to be 13 years. Id. With the exception of one write-down for approximately $1.6 million in 2008, the only other reductions in value reported in NGBF's 10-K filings represented amortization based on the Master License's estimated 13-year period of usefulness. Id. ¶ ¶ 28-29.
Alpha alleges that each of NGBF's public filings from 2007 through 2010 contained fraudulent misstatements and omissions. Instead of being worth $5 to $8 million, the intellectual property rights held under the Master License Agreement were worthless, or at least worth significantly less than the disclosed value, because the underlying patent claims had been found deficient by every governmental authority to have examined them. Id. ¶ ¶ 23, 41. NGBF's public filings also misrepresented that the Master License Agreement had been periodically assessed to ensure that the reported value reflected a fair estimate of future cash flow, when, in fact, no such assessments were made and, knowing what NGBF knew, there was no rational basis to project any future cash flow from the Master License Agreement. Id. ¶ 30. Although NGBF's public filings warned that the Company was having financial difficulties and that it might never realize the value of its intellectual property rights, in Plaintiff's view, these warnings were insufficient to keep NGBF's positive statements about the viability of its pending patents and the value of its rights under the Master License Agreement from misleading investors. Opp. to Rosen Mem. at 1-2, 26-27; Opp. to Mack Mem. at 4.
Alpha further alleges that Defendant Rosen made oral misrepresentations and omissions in 2008 and late in the summer of 2010 to Ari Rabinowitz, who was acting on behalf of Alpha at the time. FAC ¶ ¶ 31-32. Specifically, Rosen told Rabinowitz that NGBF's proprietary technologies were the subject of viable pending patent applications in the United States, the value of which was reflected in a multi-million dollar Master License Agreement. Id. During the latter meeting, Rosen explained that even though he had formally resigned from NGBF in 2010, he was still running the Company but was focused at that time on raising additional funds to ensure the Company's future success. Id. ¶ 32. Following the meeting, Rabinowitz spoke to Defendants Saglio and Goebel, who also failed to disclose that NGBF's patent applications had been found deficient in multiple Foreign Patent Reports and were likely to be rejected by the USPTO. Id.
2. The Viability of NGBF's Pending Patents
In SEC filings and other written statements, Defendants failed to disclose negative feedback that they had received in the Foreign Patent Reports regarding NGBF's pending patents and instead described the patent applications in positive terms. Id. ¶ ¶ 24, 47. NGBF's 2007 Form 10-K, filed on March 31, 2008, stated:
We rely on our contractual exclusivity in North America, Central America and the Caribbean under our license and on a combination of know-how and trade secret rights and potential patent rights to establish and protect our rights in our technology. In April 2006, we filed a U.S. provisional patent application on behalf of the inventor and directed to the technology covered by our license. In April 2007, we filed a U.S. nonprovisional patent application and foreign patent applications for the technology. Until patent protection is granted, we must rely on trade secret protection, which requires reasonable steps to preserve secrecy. . . . In addition, trade secret protection does not provide any barrier to a third party " reverse engineering" fuel made with the technology, to the extent that the technology is readily ascertainable by proper means. Neither the patent, if it issues, nor trade secret protection will preclude third parties from asserting that the technology, or the products we or our sub-licensees commercialize using the technology, infringes upon their proprietary rights.
Id. ¶ 34; FAC Exhibit 18 at 7.
NGBF's 2008 and 2009 Forms 10-K,  which were filed on March 31, 2009, and March 26, 2010, respectively, contained substantially identical language, and further stated that, in April 2007, NGBF filed a patent application under the PCT that claimed the benefit of the United States provisional application, and in September 2008, NGBF filed national applications in the United States and certain foreign countries. FAC ¶ 34; Ex. 19 at 9; Ex. 20 at 10.
NGBF's Form 10-K for 2010,  which was filed on April 15, 2011, contained similar language regarding NGBF's pending patent applications in the United States and abroad. FAC ¶ 35. The 2010 Form 10-K also stated that NGBF had amended its original provisional patent and continued to develop new technology due to significant improvements in its research and development efforts between 2006 and 2009. Id.; Ex. 21 at 8. In addition, NGBF's 2010 10-K included the following statements:
We are a clean energy company deploying novel technologies to produce cleaner, renewable biofuels. We have rights to a portfolio of patented and patent pending technology to manufacture alternative biofuels from plant oils, animal fats and related oils, which we market as a new class of biofuel for power generation, commercial and industrial heating, and related uses.
FAC ¶ 35; Ex. 21 at 1.
We believe the patents we have filed for the glycerin and pyrolysis oil based biofuels, that are solutions instead of emulsions, are available to us for global production, sales and licensing and are not covered by our emulsion technology license agreement. Until patent protection is granted, we must rely on trade secret protection, which requires reasonable steps to preserve secrecy.
FAC ¶ 35; Ex. 21 at 8.
The Company believes that its proprietary biofuel can provide a lower cost, renewable alternative energy source with significantly lower emissions than traditional fuels. Through our wholly owned subsidiary . . . the Company holds an exclusive license for North America, Central America and the Caribbean to commercialize proprietary emulsion technology (the " Licensed Technology"), as fully described in Note 3. The Company has two patent applications pending for solution based biofuel utilizing low alternative use feedstocks sourced from by-products of other technologies. The Licensed Technology coupled with the new filed patents constitute the Company's technology ...