A New York federal district court denied motions to dismiss federal securities fraud claims brought against two former officers of a computer software company, World Logistics Services (World Logistics).
Plaintiffs, a publicly traded company and its wholly-owned subsidiary, entered into a Purchase Agreement with defendants to acquire certain assets of World Logistics in exchange for cash and plaintiffs’ stock. In their complaint, plaintiffs alleged that they entered into the Purchase Agreement believing that they were acquiring exclusive rights to the assets at issue when, in fact, defendants had already granted “non-exclusive” rights to such assets to another company. Accordingly, plaintiffs brought claims for securities fraud under Sections 10(b) and 20(a) of the Securities Exchange Act. Defendants filed separate motions to dismiss the complaint.
In denying defendants’ motions, the court concluded that plaintiffs adequately pled all elements of their securities claims. The court held that plaintiffs adequately pled scienter by alleging that defendants were “personally liable” for more than $2 million in World Logistics’ overdue payroll taxes and thus had an incentive to commit the alleged securities fraud. Because defendants’ liability to Word Logistics at the time of the parties’ transaction was “present, existing and personal,” rather than a “mere speculative possibility,” it created a “concrete and personal” motive for securities fraud. In addition, the court rejected defendants’ argument that their alleged misrepresentations or omissions were not made “in connection with” a purchase or sale of securities. Noting that Rule 10b-5 prohibits fraud in connection with a contract to purchase stock, the court concluded that plaintiffs’ allegations satisfy the “in connection with” element because the Purchase Agreement was a contract to purchase plaintiffs’ stock in exchange for the World Logistics’ assets at issue. (Janel World Trade, Ltd. v. World Logistics Services, Inc., 2009 WL 735072 (S.D.N.Y. March 20, 2009))