United States District Court, S.D. New York
JEROME SCHENTAG, individually and derivatively on behalf of TheraBrake, Inc. Plaintiff,
GEORG NEBGEN, PARVIZ GHAHRAMANI, VOLANT HOLDINGS GMBH, VOLANT PHARMA AG, and JOSEPH M. FAYAD, Defendant.
MEMORANDUM OPINION AND ORDER
GREGORY H. WOODS, United States District Judge
Jerome Schentag, an inventor and holder of numerous medical
patents, sought to develop and commercialize his inventions.
Seduced by Defendant Georg Nebgen's promise of investment
capital that would enable Plaintiff to accomplish his goal,
Plaintiff agreed to the transfer of his intellectual property
to a Swiss entity that would be formed by Nebgen. In the
resulting integrated transaction, Nebgen formed two Swiss
limited liability companies, of which Plaintiff became a
shareholder. TheraBrake, the New York corporation holding
Plaintiff's intellectual property, transferred its rights
in that property to one of the Swiss companies in exchange
for a promissory note. After the transaction was consummated,
things began to disintegrate. Plaintiff discovered that
Nebgen's statements that investors were standing by to
invest were false. No payment was made on the promissory
note. The Individual Defendants refused to pay for incurred
liabilities. A lien was asserted against the assets of the
Swiss holding company. And Plaintiff was removed as president
filed this action, asserting securities fraud claims under
the Securities and Exchange Act of 1934 and violations of
various provisions of the Securities Act of 1933. Plaintiff
also brings claims under state law. Defendants have moved to
dismiss the complaint in its entirety. Because Plaintiff
fails to plead that he acquired his shares of the Swiss LLCs,
or that TheraBrake acquired the promissory note, in domestic
transactions, Defendants' motion to dismiss the federal
securities claims is granted. Plaintiff's breach of
fiduciary duties claim survives, but the remainder of
Plaintiff's state law claims are dismissed.
Jerome Schentag is a professor of pharmaceutical sciences and
pharmacy at the University of Buffalo School of Pharmacy.
Compl. (ECF No. 2) ¶ 3. He is also an inventor and holds
numerous pharmaceutical patents. Id. Among those
inventions are pharmaceutical drugs and devices used to treat
and monitor diabetes, obesity, and other related diseases.
Id. ¶ 30. Through TheraBrake, Inc., a Delaware
corporation formed on April 8, 2011, Plaintiff and Defendant
Joseph M. Fayad continued their research, development, and
commercialization of patents and other intellectual property
held by them. Id. ¶ 5. From the time TheraBrake
was formed until November 1, 2014, Plaintiff and Fayad each
held fifty percent of the corporation's shares.
Id. ¶ 6.
Georg Nebgen held himself out to be the co-founder and
managing general partner of NGN Capital, a venture capital
firm with offices in Manhattan. Id. ¶ 12. On
several occasions during 2010, 2011, and 2012, Plaintiff
discussed his inventions with Nebgen at NGN's Manhattan
office. Id. ¶ 30.
January 8, 2013, Plaintiff met with Nebgen in San Francisco,
California. Id. ¶ 31. During that meeting,
Nebgen informed Plaintiff that he was no longer with NGN
Capital and had begun operating his own business, Vivant
Holdings. Id. Plaintiff shared with Nebgen his
desire to commercially exploit his and other patents.
Id. ¶ 32. Nebgen told Plaintiff that he was a
successful investment banker, had closed several venture
capital deals, and had access to investors willing to invest
the capital required to have the existing patents issued
worldwide. Id. These investors, according to Nebgen,
also had money to invest in the continued research and
development of the patented inventions. Id. Nebgen
explained to Plaintiff that before Nebgen could secure these
investments, Plaintiff would need to transfer his patents and
other intellectual property to an entity that Nebgen would
create. Id. ¶ 33. Nebgen recommended that the
entity be formed in Switzerland so that investors could enjoy
substantial personal tax benefits. Id.
point after the San Francisco meeting, Plaintiff and Nebgen
met again in New York City to further discuss the proposed
venture. Id. ¶ 34. The two also discussed the
proposal by telephone and electronic communication.
Id. During those conversations, Nebgen continued to
represent to Plaintiff that he had access to investors
willing to come on board. Id.
following year, in September 2014, Nebgen informed Plaintiff
that he had investors interested in investing in the
development and marketing of the pharmaceutical products.
Id. ¶ 35. In return for securing the capital,
Nebgen demanded 33% of the shares of TheraBrake. Id.
On November 1, 2014, because of Nebgen's representations
regarding his investors, he was granted the requested shares.
Id. As of that date, Plaintiff, Nebgen, and Fayad
each have held 33% of the TheraBrake shares. Id.
2014 and 2015, Nebgen continued to insist on the importance
of forming a Swiss entity before his investors would
contribute to their venture. Id. ¶ 36. Based on
these statements, Plaintiff, Nebgen, and Fayad agreed upon
the integrated transaction at the heart of this case.
Id. ¶ 37. As part of that agreement, on
September 16, 2015, Nebgen formed Volant Holdings GmbH
(“Holdings”) as a Swiss limited liability
company. Id. ¶ 20. Holdings' principal
place of business is in Feusisberg, Canton Schwyz,
Switzerland. Id. Holdings was formed to be the
holder of the intellectual property that TheraBrake agreed to
transfer to it. Id. ¶¶ 24, 37. Nebgen also
represented that Holdings would pay for all costs associated
with the research and development of the intellectual
property, as well as any legal expenses incurred to protect
the intellectual property. Id. ¶ 45.
October 15, 2015, Plaintiff, Nebgen, and Fayad executed
several written agreements to consummate the agreed-upon
transaction. Id. ¶ 21. Among those documents
were an Asset Purchase Agreement (“APA”) and a
Patent Assignment. Id. Pursuant to the APA, Holdings
agreed to pay a total sum of $566, 510 as well as certain
other liabilities described in Section 1.2 of the APA
(“Assumed Liabilities”), as consideration for the
transfer of the intellectual property. Id. ¶
53. Payment of the $566, 510 was to be made in the form of a
promissory note payable by Holdings to TheraBrake (the
“Note”). Id. Holdings issued the Note on
October 15, 2015. Id. ¶ 43. The patent
assignments were subsequently recorded in the United States
Patent and Trademark Office. Id. ¶ 21.
weeks after the contracts were executed, on October 30, 2015,
Nebgen organized Volant Pharma AG (“Pharma”) as a
Swiss limited liability company with its principal place of
business in Feusisberg, Canton Schwyz, Switzerland.
Id. ¶ 22. Pharma was intended to be the
operating company and was formed to license the intellectual
property acquired from TheraBrake and, along with Holdings,
to pay for all research and development and legal fees and
costs associated with protecting the intellectual property.
Id. ¶ 24. Pharma was also intended to be the
entity pursuing investment capital. Id. When Nebgen
formed Holdings and Pharma, he appointed himself the chairman
of the board and chief executive officer of each entity.
Id. ¶ 10. He was the sole director of each
entity and failed to explain to Plaintiff the significance of
this fact. Id. ¶¶ 38, 48.
result of the integrated transaction, Nebgen holds 31% of the
shares of Holdings and 20% of the shares of Pharma.
Id. ¶ 8. Plaintiff and Fayad each hold 31% of
the shares of Holdings and 28% of the shares of Pharma.
Id. ¶¶ 2, 18. To pay for his shares in
Holdings, Plaintiff sent $7, 602 from his New York bank
account via wire transfer to an account at Zuricher
Kantonalbank in Zurich, Switzerland. Id. ¶ 39.
He also wire-transferred $14, 678 on October 14, 2015 and
$13, 798 on December 23, 2016 to the Swiss account to pay for
his shares in Pharma. Id. Plaintiff also paid for
Fayad's shares in Pharma by sending $7, 500 from his New
York account to Fayad's Bank of America account in New
York on October 21, 2015. Id. ¶¶ 19, 40.
October 23, 2015, Defendant Parviz Ghahramani was hired as
the Chief Operating Officer of Holdings and Pharma.
Id. ¶ 42. Ghahramani holds 8% of the shares of
both Holdings and Pharma. Id. ¶ 15. From late
October 2015, Holdings and Pharma have conducted business out
of Ghahramani's New Jersey office. Id. ¶
16. Nebgen has also held meetings in New York City for
Holdings and Pharma business since that date. Id.
the October 2015 transaction, Nebgen continued to state that
he had investors who were ready to invest in Holdings and
Pharma. Id. ¶ 46. During monthly meetings with
Plaintiff and Ghahramani between October 2015 and July 2017,
Nebgen gave allegedly false reports regarding the status of
investor solicitations. Id. This was done, according
to Plaintiff, to induce Plaintiff to continue his research
and development in connection with the intellectual property.
Nebgen told Plaintiff that he never intended for Plaintiff to
become a shareholder of Pharma. Id. ¶ 56.
Nebgen also demanded that Plaintiff re-subscribe for his
Pharma shares. Id. ¶ 57. Plaintiff refused,
arguing that Nebgen was “changing the deal.”
Id. ¶ 58. Subsequently, Nebgen and Fayad
informed Plaintiff that he was no longer an officer of
has not paid on the promissory note. Id.
¶¶ 52, 54. Plaintiff alleges that Nebgen,
Ghahramani, and Fayad “have caused” Holdings not
to make the payments due. Id. ¶ 52. Plaintiff
further alleges that Nebgen's statements regarding the
availability of ready and willing investors, the necessity of
transferring the intellectual property to a Swiss entity
because of those investors, and that Holdings and Pharma
would pay any research and development and legal costs
“have all turned out to be false and were knowingly
false when made.” Id. ¶ 47.
complaint alleges a scheme in which Defendants
“continuously” misrepresented the status of
investor negotiations to secure Plaintiff's investment
and credit from third parties. Id. ¶ 90.
According to the complaint, Nebgen induced Plaintiff and
TheraBrake to transfer their intellectual property to
Holdings and enticed Plaintiff to purchase shares in
Holdings. Id. ¶¶ 48, 50. Plaintiff also
alleges that Nebgen used Holdings to strip Plaintiff of his
intellectual property by promising consideration without any
intent of actually paying. Id. ¶ 55. It was
because of the allegedly false statements that Plaintiff
purchased shares of Holdings and Pharma and that TheraBrake
purchased the promissory note. Id. ¶ 49.
complaint also documents various expenses that have been
incurred as a result of the integrated transaction, expenses
which various of the Individual Defendants refuse to pay. The
Individual Defendants retained counsel on behalf of Pharma
and Holdings to prosecute and protect the acquired patents.
Id. ¶ 87. Defendants have not paid for those
legal services, and counsel has asserted a lien for $472, 539
on the assets of Holdings. Id. ¶¶ 87, 90.
Nebgen and Ghahramani also retained Swiss counsel to prepare
the documents necessary to effectuate the transfer of the
intellectual property. Id. ¶ 88. Nebgen and
Ghahramani refuse to pay for those services, a total sum in
excess of $90, 000. Id. Nebgen and Ghahramani also
retained Swiss counsel to draft the transactional documents
associated with the licensing of intellectual property to an
affiliated entity. Id. ¶ 89. They have refused
to pay for those legal services, valued at over $96, 000.
asserts that it would be futile to move the Board of
Directors of TheraBrake to bring claims on its own behalf;
Nebgen and Fayad have the controlling votes. Id.
commenced this action on November 9, 2017. ECF No. 1. In a
joint letter filed on January 26, 2018, Defendants advised
the Court of their intent to move to dismiss the complaint.
ECF No. 26. On January 31, 2018, Defendants filed an answer,
stating that they were not providing a substantive response
to the complaint at that time because of the anticipated
motion to dismiss. ECF No. 28. Nebgen, Ghahramani, and Fayad
filed counterclaims against Plaintiff. Id. On
February 9, 2018, Defendants filed their motion to dismiss
the complaint. ECF No. 33. On February 23, 2018, Plaintiff
answered the counterclaims. ECF No. 38. After several
extensions of time, Plaintiff filed his opposition to the
motion to dismiss on March 26, 2018. ECF No. 50. Defendants
replied on April 11, 2018. ECF No. 51.
survive a motion to dismiss under Federal Rule of Civil
Procedure 12(b)(6), “a complaint must allege sufficient
facts, taken as true, to state a plausible claim for
relief.” Johnson v. Priceline.com, Inc., 711
F.3d 271, 275 (2d Cir. 2013) (citing Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 555-56 (2007)). To determine
plausibility, courts follow a “two-pronged
approach.” Ashcroft v. Iqbal, 556 U.S. 662,
679 (2009). “First, although a court must accept as
true all of the allegations contained in a complaint, that
tenet is inapplicable to legal conclusions, and threadbare
recitals of the elements of a cause of action, supported by
mere conclusory statements, do not suffice.” Harris
v. Mills, 572 F.3d 66, 72 (2d Cir. 2009) (alterations
and internal quotation marks omitted) (quoting
Iqbal, 556 U.S. at 678). Second, a court determines
“whether the ‘well-pleaded factual allegations,
' assumed to be true, ‘plausibly give rise to an
entitlement to relief.'” Hayden v.
Paterson, 594 F.3d 150, 161 (2d Cir. 2010) (quoting
Iqbal, 556 U.S. at 679). Determining whether a
complaint states a plausible claim is a
“context-specific task that requires the reviewing
court to draw on its judicial experience and common
sense.” Iqbal, 556 U.S. at 679.
sounding in fraud are subject to the heightened pleading
requirements of Federal Rule of Civil Procedure 9(b).
Ganino v. Citizens Utils. Co., 228 F.3d 154, 168 (2d
Cir. 2000). Rule 9(b) requires that the complaint
“state with particularity the circumstances
constituting fraud.” Fed.R.Civ.P. 9(b). To satisfy that
requirement, the complaint must “(1) specify the
statements that the plaintiff contends were fraudulent, (2)
identify the speaker, (3) state where and when the statements
were made, and (4) explain why the statements were
fraudulent.” ATSI Commc'ns, Inc. v. Shaar Fund,
Ltd., 493 F.3d 87, 99 (2d Cir. 2007) (citing Novak
v. Kasaks, 216 F.3d 300, 306 (2d Cir. 2000)).
resolving a motion to dismiss under Rule 12(b)(6), courts
generally may not consider materials extrinsic to the
complaint. Fed.R.Civ.P. 12(d). However, that rule is not
absolute. In addition to the facts alleged in the complaint,
courts “may consider any written instrument attached to
the complaint, statements or documents incorporated into the
complaint by reference, legally required public disclosure
documents filed with the SEC, and documents possessed by or
known to the plaintiff and upon which it relied in bringing
the suit.” ATSI, 493 F.3d at 98. Courts may
also consider “matters of which judicial notice may be
taken.” Goel v. Bunge, Ltd., 820 F.3d 554, 559
(2d Cir. 2016) (citation omitted).
move to dismiss the federal securities claims on two grounds:
(1) the Note and Plaintiff's shares in Holdings and
Pharma do not constitute securities; and (2) even if those
interests were securities, the complaint fails to plead a
The Shares and Promissory Note as
brings claims under Section 10(b) of the Securities and
Exchange Act of 1934 and Sections 5(a) and (b)(2), 12(a) and
(b), and 15(a) of the Securities Act of 1933. Section 10(b)
of the Securities Exchange Act makes it unlawful to
“use or employ, in connection with the purchase or
sale of any security . . . any manipulative or deceptive
device or contrivance in contravention of such rules and
regulations as the [Securities and Exchange] Commission may
prescribe.” 15 U.S.C. § 78j(b) (emphasis added).
Thus, to state a claim under Section 10(b) for fraudulent
misrepresentations, a plaintiff must allege “(1) a
material misrepresentation or omission by the defendant; (2)
scienter; (3) a connection between the misrepresentation or
omission and the purchase or sale of a security; (4) reliance
upon the misrepresentation or omission; (5) economic loss;
and (6) loss causation.” GAMCO Investors, Inc. v.
Vivendi Universal, S.A., 838 F.3d 214, 217 (2d Cir.
2016) (quoting Halliburton Co. v. Erica P. John Fund,
Inc., 134 S.Ct. 2398, 2407 (2014)).
5 of the Securities Act requires that “a
security” be registered with the SEC prior to its sale.
15 U.S.C. § 77e(a); see SEC v. Cavanagh, 445
F.3d 105, 111 (2d Cir. 2006). To state a cause of action
under Section 5, a plaintiff must show “(1) lack of a
registration statement as to the subject securities; (2) the
offer or sale of the securities; and (3) the use of
interstate transportation or communication and the mails in
connection with the offer or sale.” Cavanagh,
445 F.3d at 111 n.13 (quoting Eur. & Overseas
Commodity Traders, S.A. v. Banque Paribas London, 147
F.3d 118, 124 n.4 (2d Cir. 1998)).
12 of the Securities Act imposes liability on “[a]ny
person who . . . offers or sells a security in violation of
section ” of the Act or “offers or sells a
security . . . by means of a prospectus or oral
communication, which includes an untrue statement of a
material fact or omits to state a material fact necessary in
order to make the statements . . . not misleading.” 15
U.S.C. § 77l(a) (emphasis added); see In re Morgan
Stanley Info. Fund Sec. Litig., 592 F.3d 347, 359 (2d
Cir. 2010) (“Section 12(a)(2) provides . . . redress
where the securities at issue were sold using
prospectuses or oral communications that contain material
misstatements or omissions” (emphasis added)). Section
15(a) of the Securities Act imposes liability on a person who
controls another person liable under Section 11 or Section
12. See 15 U.S.C. § 77o(a). To establish a
claim under this section, a plaintiff must prove “a
‘primary violation' of the statute ‘and
control of the primary violator by defendants.'”
In re MF Global Holdings Limited Sec. Litig., 982
F.Supp.2d 277, 308 (S.D.N.Y. 2013) (quoting In re Lehman
Bros. Mortg.-Backed Sec. Litig., 650 F.3d 167, 185 (2d
to avoid dismissal of his federal claims, Plaintiff must
plead the threshold issue: that the shares and promissory
note at issue are “securities” within the meaning
of the 1933 and 1934 Acts. See OSRecovery, Inc. v. One
Groupe Int'l, Inc., 354 F.Supp.2d 357, 369 (S.D.N.Y.
2005) (“A preliminary issue is whether the scheme
involved ‘securities, ' as that term is defined by
the Securities Act of 1933 . . . and the Securities and
Exchange Act of 1934 . . . .”).
Plaintiff's Shares in Holdings and Pharma
determining whether LLC membership interests are
“securities” under the federal acts, courts
generally apply the Supreme Court's test enunciated in
SEC v. W.J. Howey Co., 328 U.S. 293 (1946), to
determine whether the interests constitute an
“investment contract.” See, e.g.,
Uni-World Capital L.P. v. Preferred Fragrance, Inc.,
No. 13-cv-7204 (PAE), 2014 WL 3900565, at *7 (S.D.N.Y. Aug.
8, 2014) (“LLC membership interests are not
‘securities' unless they meet the definition of an
‘investment contract' . . . .” (quoting
Automated Teller Mach. Advantage LC v. Moore, No.
08-cv-3340 (RMB), 2009 WL 2431513, at *4 (S.D.N.Y. Aug. 6,
2009))); Keith v. Black Diamond Advisors, Inc., 48
F.Supp.2d 326, 332 (S.D.N.Y. 1999) (noting that the
plaintiff's LLC membership interests were not
“securities” unless they satisfied the
Howey criteria). The Howey test is met when
a plaintiff alleges “[i] an investment of money [ii] in
a common enterprise [iii] with profits to come solely from
the efforts of others.” Automated Teller, 2009
WL 2431513, at *4 (alterations in original) (quoting
Endico v. Fonte, 485 F.Supp.2d 411, 412 (S.D.N.Y.
2007)); see also Howey, 328 U.S. at 301 (“The
test is whether the scheme involves an investment of money in
a common enterprise with profits to come solely from the
efforts of others”).
consideration is “whether, under all the circumstances,
the scheme was being promoted primarily as an investment or
as a means whereby participants could pool their own
activities, their money and the promoter's contribution
in a meaningful way.” United States v.
Leonard, 529 F.3d 83, 88 (2d Cir. 2008) (quoting SEC
v. Aqua-Sonic Prods. Corp., 687 F.2d 577, 582 (2d Cir.
1982)). Therefore, the Howey test is not satisfied
if, “at the time of investment, the investor possesses
a ‘reasonable expectation of significant investor
control.'” Uni-World Capital, 2014 WL
3900565, at *7 (quoting Automated Teller, 2009 WL
2431513, at *4). In making this determination, a court must
conduct a “‘case-by-case analysis' into the
‘economic realities' of the underlying
transaction.” Leonard, 529 F.3d at 89 (quoting
Reves v. Ernst & Young, 494 U.S. 56, 62 (1990)).
“The question is whether an investor, as a result of
the investment agreement itself or the factual circumstances
that surround it, is left unable to exercise meaningful
control over his investment.” Id. at 91
(quoting Robinson v. Glynn, 349 F.3d 166, 170 (4th
Plaintiff not only alleges but emphasizes that Nebgen
recommended the transfer of the intellectual property to the
Swiss LLCs in order to attract investors. Repeatedly, the
complaint alleges that Nebgen consistently represented to
Plaintiff that formation of a Swiss entity was a necessary
predicate to obtaining the anticipated investment. In fact,
Plaintiff alleges that he purchased the LLC interests because
Nebgen assured him that investors were ready and willing to
contribute. See Compl. ¶¶ 46-50. These
allegations suggest that, at the time Plaintiff purchased his
interests, he did so with the expectation of significant
passive investment in the companies.
the complaint also explains that Holdings and Pharma were
created “as part of” the parties' agreement
to commercially exploit the relevant patents and other
intellectual property. See Id. ¶¶ 21, 23.
Thus, the complaint dually suggests that the Swiss LLCs were
formed with the expectation that their shareholders would
actively control the companies. The Asset Purchase Agreement
executed by Nebgen and Plaintiff also lends support to the
latter expectation.The Agreement provides for the transfer of
“all assets” of TheraBrake, including all of
TheraBrake's records, books, mailing lists, study
materials, inventory, and “all intellectual property
rights.” Affirmation of Joseph M. Fayad (ECF No. 35)
(“Fayad Aff.”), Ex. 2 § 1.1. The Agreement
also contains a non-compete clause. See Id. §
6.4. These provisions suggest that all of TheraBrake's
assets were transferred to Holdings so that the parties,
through Holdings, could continue TheraBrake's work to
commercially exploit the intellectual property. Although none
of the assets were transferred to Pharma, the complaint
describes Pharma as the entity designed to be the
“operating company”; Pharma was established for
the dual purpose of licensing the intellectual property and
obtaining investor capital. See Compl. ¶ 24.
The complaint itself creates a question as to whether the
expectation, at the time Plaintiff purchased the LLC
interests, was that shareholders would be passive investors
or have an active role in controlling the companies that were
to capitalize on Plaintiff's inventions.
light of these competing allegations, the Court cannot
determine at this stage whether Plaintiff's membership
interests in the Swiss LLCs are investment contracts and,
thereby, securities under the federal securities
acts. Instead, the question of “[w]hether
or not [Plaintiff's] membership interests are ultimately
determined to be investment contracts is more appropriately
addressed in a summary judgment motion.” Automated
Teller, 2009 WL 2431513, at *4 (citation omitted);
see also Uni-World Capital, 2014 WL 3900565, at *8
(denying motion to dismiss when court was unable to conclude
based on the pleadings that “significant investor
control” was expected at the time of the relevant
determining whether a promissory note is a security under the
1933 and 1934 Acts, “[c]ourts begin with the
presumption that notes with terms exceeding nine months are
securities.” United States v. Bergstein, No.
16-cr-746 (PKC), 2018 WL 2417845, at *3 (S.D.N.Y. May 29,
2018) (citing Reves, 494 U.S. at 65 n.3, 70-71).
This presumption is rebuttable upon a showing that the note
either falls into or resembles categories of notes that have
been judicially deemed not to constitute securities. See
Pollack v. Laidlaw Holdings, Inc., 27 F.3d 808, 811 (2d
Cir. 1994); Reves, 494 U.S. at 65. Such notes
the note delivered in consumer financing, the note secured by
a mortgage on a home, the short-term note secured by a lien
on a small business or some of its assets, the note
evidencing a “character loan” to a bank customer,
short-term notes secured by an assignment of accounts
receivable, . . . a note which simply formalizes an
open-account debt incurred in the ordinary course ...