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Puddu v. 6D Global Technologies, Inc.

United States District Court, S.D. New York

March 6, 2017


          Attorneys for Plaintiff THE ROSEN LAW FIRM, P.A. By: Jonathan R. Home, Esq. Phillip C. Kim, Esq.

          Attorneys for Defendants K&L GATES LLP By: Peter N. Flocos, Esq. B. John Casey, Esq.


          ROBERT W. SWEET U.S.D.J.

         Defendants 6D Global Technologies, Inc. ("6D"), Tejune Rang ("Kang"), Mark Szynkowski ("Szynkowski"), and Terry McEwen ("McEwen" and, collectively, the "6D Defendants" or the "Defendants") have moved pursuant to Rule 12(b)(6), Fed. R. Civ. P., to dismiss the second amended complaint ("SAC") of plaintiffs Joseph Puddu, Mark Ghitis, Valery Burlak, and Adam Butter (collectively, the "Plaintiffs"). Based upon the conclusions set forth below, the motion of the 6D Defendants is granted, and the SAC is dismissed.

         I. Prior Proceedings

         The Plaintiffs filed their putative class action complaint on October 13, 2015. The SAC was filed on April 4, 2016. It alleges that the Defendants violated Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission ("SEC"), and Section 20(a) of the Exchange Act.

         CleanTech, a now-defunct company based in China, manufactured structural towers used in wind turbines and was briefly listed on the NASDAQ. SAC ¶ 7. 6D, which is a successor to CleanTech, is a Delaware company whose operations - software offerings and technology consulting - take place entirely in the United States. SAC ¶¶ 25-26. Kang is its CEO, and Szynkowski is its CFO. SAC ¶¶ 27-28. McEwen has served as a 6D director since September 30, 2013, and between June and September 2014, he served as its sole director and CEO. SAC ¶ 29.

         Wey is alleged to be a notorious promoter of fraudulent Chinese companies. SAC ¶ 30. He, through his companies New York Global Group ("NYGG") and NYGG (Asia), assists the Chinese companies in listing their stock on U.S. exchanges and connects them with investment bankers and a compliant auditor in exchange for a large portion of their stock. SAC ¶ 46. Wey then discreetly sells the stock through a network of associates and nominees. Id. The companies' stock price collapses soon after Wey's stock sales. Id. Wey made more than $70 million from his fraud. SAC ¶ 61.

         In early 2011, CleanTech was delisted by the NASDAQ for failing to disclose its connections with Wey in its listing application. SAC ¶ 76. Wey was the acknowledged principal of NYGG, and CleanTech claimed that it had a relationship with NYGG (Asia) but not with NYGG. Additionally, CleanTech claimed NYGG (Asia) was separately owned and operated by Ming "Roger" Li ("Li"), a false statement Wey himself repeated in a letter to the NASDAQ. SAC ¶¶ 5, 69 a., 80 b., c, 81, 191. Wey at all times was NYGG (Asia)'s controlling shareholder and personally controlled its operations. SAC ¶¶ 126, 127. CleanTech eventually obtained a reversal of the NASDAQ's decision, but the NASDAQ warned that if it ever discovered that Wey was NYGG (Asia)'s controlling shareholder, it would promptly delist CleanTech.

         In June 2014, CleanTech announced that it would merge with a private company, Six Dimensions, to become 6D. SAC ¶ 7. In connection with the merger, CleanTech would sell its existing business and convert CleanTech's debt held by NYGG (Asia) into equity in the new company, 6D. Id. Following the merger, which closed in September 2014, NYGG (Asia) held approximately 45% of 6D's shares. SAC ¶ 95.

         6D's bylaws represented that it was governed much like other public companies. Its day-to-day business was purportedly handled by its named executive officers, nominated by the Board of Directors, who were identified for the benefit of shareholders in 6D's SEC filings. SAC ¶¶ 137, 138, 149. Defendants implied that NYGG (Asia)'s (and not Wey's) control would be limited to matters requiring stockholder approval, such as the election of directors. SAC ¶¶ 151, 152, 156, 157.

         The 6D Defendants were aware that they could not report that Wey was associated with 6D. Prior to the Class Period, Wey's fraudulent business dealings were partially exposed to the press and to investors. Wey's business associates have claimed his business is a "front for illegal activities, " SAC ¶ 174, while a Barron's news article reported that the stock price of firms Wey promoted would typically collapse to zero amidst accusations of fraud that his handpicked auditor had missed, SAC ¶ 67. Wey accused public figures of things like having bodies ravaged by "years of consuming hormone-fried chicken and stressing over money" and being "like a dog wagging her tail trying to attract a mating partner" or being an "Uncle Tom" who was "caught messing with another man's wife." SAC ¶¶ 174, 175. Moreover, Wey sexually harassed a NYGG intern, who later won a widely-publicized lawsuit in which the jury awarded her $18 million in damages, $16 million of which were punitive, and the Honorable Paul G. Gardephe held that Wey's misconduct was "at the extreme end of the [reprehensibility] spectrum." SAC ¶ 177. Matthew Sullivan ("Sullivan"), a named 6D executive officer, referred to Wey as a "very creepy guy, " and in March 2015, told Kang he felt "uncomfortable in my position as an officer of the company, [about how] Ben Wey was conducting himself not just on a personal level but on a business level and I was deeply concerned." SAC ¶ 178.

         Wey told Kang "you don't want to be seen with me." SAC ¶ 179. Kang instructed other 6D employees not to discuss or mention Wey in any emails, except in an emergency, and then to use a code word to refer to Wey. SAC ¶ 181.

         However, Wey was personally involved in 6D's day-today management. He had primary responsibility for securing 6D's financing. SAC ¶ 107 a.-b. Wey selected 6D's auditor. SAC ¶ 107 c. Wey interviewed 6D's CFO candidate and signed off on its choice. SAC ¶ 107 e. Wey personally interviewed the candidates for all leadership positions. Id. Wey dictated how and when 6D personnel could sell their 6D stock, demanding they sell stock to Wey's friends. SAC ¶ 107 d. In May or June of 2015, Wey instructed Kang to create and implement an aggressive document destruction policy, requiring that all emails be destroyed within 90 days. SAC ¶ 107 e. Wey reviewed, made changes to, and approved 6D's SEC filings before they were filed. SAC ¶ 107 g. Wey controlled 6D's litigation, selected its counsel, and gave instructions. SAC ¶ 107 i. 6D rescheduled meetings, including marketing discussions, if Wey could not attend. SAC ¶ 107 h. Wey caused 6D to violate Board directives, including by disobeying a direct Board order and violating restrictions imposed by 6D's publicly filed employee stock compensation program to award stock options to NYGG employees. SAC ¶ 109. Wey manipulated public trading in 6D's stock. SAC ¶ 127.

         Wey was responsible for 6D's capital markets strategy and activity, which Kang acknowledged. SAC ¶ 107 b. Wey personally controlled 6D's acquisition strategy. SAC ¶ 110. Wey dictated 6D's overall strategy, which was to acquire targets to entice a large investor. SAC ¶¶ 111, 113. Wey selected individual acquisition targets. SAC ¶¶ 115, 117. Wey provided 6D's form acquisition agreement, negotiated individual terms, and reviewed all acquisition agreements. SAC ¶¶ 112, 114, 118.

         Wey visited 6D's offices every few weeks, and Kang also regularly visited NYGG's offices in Trump Tower. SAC ¶ 107 j. Wey's attorney and co-conspirator Robert Newman ("Newman") also regularly visited 6D's offices. Id.

         In December 2014, Kang emailed Sullivan, stating that a proposed acquisition "aligns [the] interests of [Benjamin Wey] even more [with] our success and growth because this is more than just [money] to him, " and that Wey's interests already were "aligned" with 6D's because of his "investment" in 6D. SAC ¶ 115. Further, Kang stated that the proposed transaction would mean Wey's family "as well" benefits from 6D's growth. Id. In a June 2015 call, Kang admitted that Wey "is a shareholder" of 6D and as such "he's got influence" over it. SAC ¶ 13.

         Additionally, in discussions with Discover Growth Fund ("Discover"), a large investor, Defendants referred interchangeably to NYGG (Asia) and Wey as the holder of 45% of 6D's stock. SAC ¶ 126. After Discover had signed investment agreements with 6D, Kang summarized his relationship with Wey to Discover as: "[B]asically, I work for him." SAC ¶ 127. When Wey excused himself to use the bathroom during a meeting with Discover, Discover asked Kang pointed questions about Wey, but when Wey returned, Kang immediately stopped speaking and "sheepishly" recounted the questions and answers. SAC ¶ 128. Wey also stated at the meeting with Discover, in Kang's presence, that he (Wey) controlled 6D. SAC ¶ 127.

         On September 10, 2015, the United States Department of Justice ("DOJ") and the SEC announced that they had indicted and sued, respectively, Wey and certain of his associates for securities fraud, including in connection with CleanTech. The SEC complaint and DOJ indictment, and the accompanying press releases, revealed that NYGG (Asia) was a Wey nominee, and that Wey - not Li, as had been claimed - was in truth 6D's controlling shareholder. SAC ¶ 164.

         The NASDAQ immediately halted trading in 6D's stock on the ground that Wey actually held NYGG (Asia)'s 6D shares. SAC ¶ 164 d., 166-67. 6D appealed the NASDAQ's delisting.

         In the course of its audit of 6D's 2015 financial statements, BDO USA LLP ("BDO") conducted procedures to determine whether Wey's influence over 6D violated its internal controls. BDO determined that Wey and Kang had disobeyed the Board's explicit instructions and issued stock options to NYGG employees in violation of company rules, and that Kang had repeatedly lied to 6D's Board, and to an internal 6D investigation conducted by the law firm Blank Rome LLP, about Wey. SAC ¶ 15. BDO told 6D it could no longer rely on its CEO's Kang's representations and would have to resign as auditors unless Kang resigned himself. When 6D refused to terminate Kang, BDO resigned, along with 6D's audit committee chair, making its findings public. Id.

         Shortly thereafter, the NASDAQ delisted 6D's stock. When trading resumed in March 2016, 6D's stock price fell to $1.00 the first day, and continued to fall to $0.21 over the next three trading days. SAC ¶ 172.

         III. The ...

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