Friday, October 20, 2017

Stock purchase scheme almost ensnares transfer agent

By R. Jason Howard, J.D.

The Massachusetts District Court has granted VStock Transfer, LLC’s motion to dismiss after it determined that the plaintiff, B2 Opportunity Fund, LLC, failed to plead scienter in connection with a questionable transfer of shares in February, 2016 (B2 Opportunity Fund, LLC v. Trabelsi, October 18, 2017, Stearns, R.).

Scheme. VStock, a California LLC based in New York, was hired as a transfer agent by Mazzal Holding Corp., a Massachusetts-based company. In early 2016, Mazzal’s CEO entered into a stock purchase agreement (SPA) in which he agreed to sell 45.8 million restricted shares of Mazzal to B2. The SPA also promised that another individual would sell 9.5 million “free-trading” shares of Znergy-Mazzal stock to B2.

The SPA was signed in February 2016 and specified that B2’s payment for the shares was to be held in escrow until the promised shares were either delivered or the escrow agent was informed by VStock that the shares had been returned to VStock for transfer to B2 or its designee.

The escrow agent emailed a VStock employee asking if a package of documents contained all the necessary information to complete the share transfers and the VStock employee replied that it appeared they had all the paperwork necessary and, relying on that, the escrow agent released the funds to the CEO.

The CEO, however, had not provided all the required paperwork and VStock recorded a transfer of 9.5 million restricted shares of Znergy-Mazzal to B2’s designee. The issue was the promise for the “free-trading” shares and the receipt by B2 of restricted shares.

Claims. B2 asserted claims for securities fraud, common-law fraud, conversion, breach of fiduciary duty, gross negligence and wrongful registration.

The court, in addressing the securities fraud claim, noted that VStock asserted that B2 had failed to adequately plead both scienter and loss causation. B2 alleged that VStock’s representative must have known the terms of the SPA and therefore he could not have believed that he had received all the required forms but the court explained that the allegation was made on information and belief and did not demonstrate that level of knowledge on the part of the VStock representative.

B2’s second argument was that the representative should have known that the documents received did not match the items the CEO claimed to have sent based on emailed instructions sent from the CEO to the representative that explained the documents sent to VStock. From this, B2 argued that it could be inferred that the representative had examined the documents and if he had compared them to the email he would have recognized they did not match. The court said that inference could be drawn but that the more plausible inference was that VStock was simply negligent.

The court continued, explaining that other aspects of the transaction “make the inference of negligence the more cogent and compelling explanation.” For instance, VStock only gained a nominal fee of at most $200 for the transaction. B2 also argued that since the CEO chose VStock as Mazzal’s transfer agent, discovery could well “show additional motivations and connections behind that choice that are not currently known.” The court replied, “maybe so,” but it noted that under the heightened pleading standards of the PSLRA, B2 had failed to sufficiently plead scienter.

The court concluded by noting that any torts that VStock committed occurred outside Massachusetts and had no relation to VStock’s forum contacts and thus, the court was without jurisdiction over any remaining state-law claims. Motion to dismiss granted.

The case is No. 17-10043-RGS.