Gordon et al v. Dailey et al

BRIEF in Opposition

D.N.J.July 3, 2017

3891099_1 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY (Camden Vicinage) BRANDON GORDON, CURTIS GREEN, JAKUB VONDRAK, JESSE LOBB, BYRON MCDONALD, DEREK PIPER, CHRISTOPHER GALIDO, MARK BOEHLER, MERLIN FISHER- LEVINE, NATHANAEL FLACHSBART, JAMES KOLONUSZ, and RUSS HENDERSON, Plaintiffs, v. ZACHARY DAILEY, and LAB RAT DATA PROCESSING, LLC, Defendants. Civil Action No. 14-cv-7495 (JHR)(JS) Return Date: July 17, 2017 (Document Electronically Filed) PLAINTIFFS’ BRIEF IN OPPOSITION TO ZACHARY DAILEY’S MOTION TO DISMISS THE SECOND AMENDED COMPLAINT BRESSLER, AMERY & ROSS A Professional Corporation 325 Columbia Turnpike Florham Park, New Jersey 07932 P.O. Box 1980 Morristown, New Jersey 07962 (973) 514-1200 Attorneys for Plaintiffs Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 1 of 33 PageID: 1211 3891099_1 Brandon Gordon, Derek Piper, and Merlin Fisher-Levine On the Brief: Michael T. Hensley, Esq. Christopher B. Hopkins, Esq. (pro hac vice) Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 2 of 33 PageID: 1212 3891099_1 i TABLE OF CONTENTS Page TABLE OF AUTHORITIES .................................................................................... ii PRELIMINARY STATEMENT ............................................................................... 1 LEGALARGUMENT……………………………………………………………...2 CONCLUSION…………………………………………………………………...28 Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 3 of 33 PageID: 1213 3891099_1 ii TABLE OF AUTHORITIES Page Cases Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009)…..6 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)………………………………………………………….5,6 Borough of West Caldwell v. Borough of Caldwell, 26 N.J. 9, 138 A.2d 402 (1958)……………………………………………………………………………..25 Chester County Intermediate Unit v. Pa. Blue Shield, 896 F.2d 808 (3d Cir.1990) ……………………………………………………………………...5 Dow Corning Corp. v. BB & T Corp. No. CIV. 09-5637 FSH PS, 2010 WL 4860354 (D.N.J. Nov. 23, 2010) …………………………………………………13 Dudley v. Haub, No. 2:11-CV-05196 WJM, 2013 WL 1845519, at *1 (D.N.J. Apr. 30, 2013)…………………………………………………………………………..14 Flora v. Cnty. of Luzerne, 776 F. 3d 169 (3d Cir. 2015)……………………...14,17 Florian Greenhouse, Inc. v. Cardinal IG Corp., 11 F. Supp. 2d 521 (D.N.J. 1998)………………………………………………………………………………23 Gargiulo v. Isolagen, Inc., 527 F. Supp. 2d 384 (E.D. Pa. 2007) ...........................12 G & F Graphic Servs., Inc. v. Graphic Innovators, Inc., No. CIV. 13-6482 JEI/AMD, 2014 WL 1818235 (D.N.J. May 8, 2014)……………………………..22 In re Burlington Coat Factory Sec. Litig., 114 F. 3d 1410 (3d Cir. 1997)………………………………………………………………………..3,5,10 In re Merck & Co., Inc. Vytorin/Zetia Sec. Litig., No. CIV.A.08-CV-2177(DMC), 2009 WL 2855601 (D.N.J. Sept. 2, 2009)……………………...……………………………………………………….13 In re Nice Sys., 135 F.Supp.2d 551 (D.N.J. 2001)…………………………………9 Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 4 of 33 PageID: 1214 3891099_1 iii In re Schering-Plough Corp., Enhance Sec. Litig., No. CIV.A.08-CV-397(DMC), 2009 WL 2855457 (D.N.J. Sept. 2, 2009)……………,,,,,,,,,,…………………….14 In re Suprema Specialties, Inc. Sec. Litig., 438 F. 3d 256 (3d Cir. 2006)……..18,20 In re Synchronoss Sec. Litig., 705 F. Supp. 2d 367 (D.N.J. 2010)………………..15 In re The Score Bd., Inc., 238 B.R. 585 (D.N.J. 1999)……………………………25 Johnson & Johnson v. Charmley Drug Co., 11 N.J. 526, 95 A.2d 391 (1953)…….25 Lasky v. Evesham Owner LLC, No. CIV. 14-03035, 2014 WL 2710969 (D.N.J. June 16, 2014) ......................................................................................................... 5 Lahue v. Pio Costa, 263 N.J.Super. 575, 623 A.2d 775 (App.Div.1993)…...........26 Lithuanian Commerce Corp. v. Sara Lee Hosiery, 219 F. Supp. 2d 600 (D.N.J. 2002)………………………………………………………………………………22 Monk v. Johnson & Johnson, No. CIV.A. 10-4841 FLW, 2011 WL 6339824 (D.N.J. Dec. 19, 2011) ………...………………………………………………….13 Trinity Wall Street v. Wal-Mart Stores, Inc., 792 F.3d 323 (3d Cir. 2015) ............... 4 UBI Telecom Inc. v. KDDI Am., Inc., No. CIV.A. 13-1643 KSH, 2014 WL 2965705 (D.N.J. June 30, 2014)………………………………………………17,22 Watson v. Abington Twp., 478 F.3d 144 (2007) ........................................................ 5 Weichert Co. Realtors v. Ryan, 128 N.J. 427, 608 A.2d 280 (1992)……………...25 Statutes 17 C.F.R. § 240.10b-5 ................................................................................... 10,11,12 Rules Fed. R. Civ . P. 9………………………………………………………6,9,10,11,12 L.Civ.R. 7.2 .............................................................................................................2,3 Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 5 of 33 PageID: 1215 3891099_1 PRELIMINARY STATEMENT This lawsuit arises from Defendant’s unlawful solicitation and sale of unregistered securities that Defendant claimed were bonds that would be issued by former Defendant, Lab Rat Data Processing, LLC1 (the “LRM Bonds”). As alleged in the Second Amended Complaint (the “Complaint”) [D.E. 116], Defendant induced Plaintiffs to invest in LRM and participate in a Bitcoin (“BTC”) related “initial public offering” (the “LRM Offering”) of the LRM Bonds during a series of related transactions and occurrences. In order to effectuate his fraudulent scheme, Defendant utilized a website, www.bitfunder.com; contracts; and fraudulent and/or negligent misrepresentations and omissions relating to the nature and legality of the LRM Bonds. In the Memorandum, Defendant falsely claims that the Complaint fails to satisfy pleading standards. In support of this argument, Defendant merely cites the governing pleading standards and then repeatedly alleges that Plaintiffs failed to plead ultimate facts supporting their claims with the required particularly. As described more specifically below, Plaintiffs alleged sufficient facts in the Complaint establishing the elements of Plaintiffs’ claims and the Complaint was drafted with the particularity required by Rule 9(b) and the Private Securities Litigation Reform Act (“PSLRA”). Plaintiffs’ allegations provide Defendant with 1 Lab Rat Data Processing, LLC (“LRM”) was administrative dismissed from this lawsuit after it filed for bankruptcy. Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 6 of 33 PageID: 1216 3891099_1 2 proper notice of the general content of the misrepresentations and omissions at issue, as well as the essential factual background of the fraud at issue in this lawsuit. It is evident, as has been Defendant’s strategy in this lawsuit, that the Motion to Dismiss is nothing more than a delay tactic designed to slow the Plaintiffs’ prosecution of their meritorious claims, and it should accordingly be denied in it totality. LEGAL ARGUMENT POINT ONE The Memorandum Should be Stricken Because it Fails to Comply with L. Civ. R. 7.2(b) and (d) Pursuant to L. Civ. R. 7.2(b), briefs “should not exceed 40 ordinary typed or printed pages.” Further, L. Civ. R. 7.2(d) states that if briefs are written in “a 12- point non-proportional font” then “the page limits shall be reduced by 25 percent (e.g., the 40 page limit become 30 pages in this font . . .).” Here, Defendant used 12-point Times New Roman (which is a proportional font identified in these Rules) in the Memorandum, which totals an excessive and improper 49 pages. Pursuant to L. Civ. R. 7.2(b), briefs of greater length than that specified in the Local Rules “will only be accepted if special permission of the Judge or Magistrate Judge is obtained prior to submission of the brief,” which Defendant failed to do. Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 7 of 33 PageID: 1217 3891099_1 3 Accordingly, this Court should either strike, or decline to accept, Defendant’s Memorandum as contrary to L. Civ. R. 7.2(b) and (d). POINT TWO The Court Should Strike or Disregard Defendant’s Declaration Defendant has submitted an 85-page filing seeking the dismissal of the Complaint, including a 23-page “Declaration.” The Court should either strike or ignore the Declaration. The Declaration may not be considered by the Court because it does not fall within the scope of any of the exceptions to the general rule that “a district court ruling on a motion to dismiss may not consider matters extraneous to the pleadings.” In re Burlington Coat Factory Sec. Litig., 114 F. 3d 1410, 1426 (3d Cir. 1997). Here, unlike in the cases cited by Defendant in unavailing support of his Motion to Dismiss, and with respect to the allegations made in the Declaration and the exhibits attached thereto, (1) Plaintiffs did not “rel[y] upon these documents in framing the complaint;” (2) these documents are not “integral” to the Complaint; (3) Plaintiffs did not extract any isolated statement from these documents and include it in the Complaint; (4) the Complaint does not even refer to these documents; and (5) none of the claims alleged by Plaintiff “are ‘based’” on these documents. Id. at 1426-27. The allegations made in the Declaration and the exhibits attached thereto, other than being unauthenticated, are Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 8 of 33 PageID: 1218 3891099_1 4 wholly extraneous to Plaintiffs’ claims and therefore should be stricken or disregarded by the Court. Moreover, the Declaration fails to comply with the Local Rule 7.2(a) and should be stricken from the record because it presents legal argument and is not restricted to statements of fact. Even if the Declaration were considered, at best it creates factual issues that should be addressed at trial. Regardless of whether the Court elects to take judicial notice, the No-Action Letter cannot operate to foreclose Plaintiffs’ claims for securities fraud. The Third Circuit Court of Appeals has recognized that SEC “no-action letters are not binding—they reflect only informal views of the staff and are not decisions on the merits[.]” Trinity Wall Street v. Wal-Mart Stores, Inc., 792 F.3d 323, 331 (3d Cir. 2015). Additionally, Defendant omits the fact that the No-Action Letter expressly provides that it “must in no way be construed as indicating that the party has been exonerated or that no action may ultimately result from the staff’s investigation.” [D.E. 126] (emphasis added). Contrary to the inference that Defendant seeks to draw from the SEC’s apparent forbearance to date, neither the parties nor the Court can speculate as to the SEC’s motivations, and certainly not at the motion to dismiss stage. POINT THREE Defendant Asks the Court to Misapply the Rule 12(b)(6) Standard Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 9 of 33 PageID: 1219 3891099_1 5 Defendant seeks to misapply the governing pleading standards in this case. As this Court observed in Lasky v. Evesham Owner LLC, No. CIV. 14-03035, 2014 WL 2710969, at *1-2 (D.N.J. June 16, 2014), “[w]hen deciding a motion to dismiss pursuant to Rule 12(b)(6), ordinarily only the allegations in the complaint, matters of public record, orders, and exhibits attached to the complaint, are taken into consideration. It is not necessary for the plaintiff to plead evidence.” Id. (citing Chester County Intermediate Unit v. Pa. Blue Shield, 896 F.2d 808, 812 (3d Cir.1990)). As the court in Lasky further observed, "the question before the Court is not whether the plaintiff will ultimately prevail," but "[i]nstead, the Court simply asks whether the plaintiff has articulated “enough facts to state a claim to relief that is plausible on its face.” Id. (citing Watson v. Abington Twp., 478 F.3d 144, 150 (2007) and Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). In a 12(b)(6) analysis, “[t]he issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims.” In re Burlington Coat Factory Sec. Litig., 114 F. 3d at 1420. As the United States Supreme Court has concluded, “a claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 10 of 33 PageID: 1220 3891099_1 6 Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citing Twombly, 550 U.S. at 556). “Where there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.” Iqbal, 556 U.S. at 679. Thus, a motion to dismiss should not be granted where the plaintiff’s factual allegations are “enough to raise a right to relief above the speculative level on the assumption that all of the complaint's allegations are true (even if doubtful in fact).” Twombly, 550 U.S. at 556. The facts pleaded in the Complaint support a reasonable inference that Defendant is liable for the misconduct alleged and rise far above the level of mere speculation necessary to sustain Defendant’s Motion to Dismiss. POINT FOUR The Complaint States a Claim for Fraud with the Particularity Required By Rule 9(B) and the PSLRA Contrary to Defendant’s arguments, the Complaint satisfies the governing standards for stating a claim for common law fraud as well as federal and state securities fraud, all with the particularity required by Fed.R.Civ.P. 9(b) and the PSLRA. While Defendant alleges that Plaintiffs pleaded conclusory, boilerplate statements of the elements without sufficient allegations of ultimate fact, a cursory inspection of the Complaint demonstrates otherwise. A. The Complaint Satisfies all of the Elements of Common Law Fraud with the Requisite Particularity. Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 11 of 33 PageID: 1221 3891099_1 7 Count XI of the Complaint adequately alleges all of the elements of a common law fraud claim, including the existence of present and preexisting misrepresentations and omissions of fact by the Defendant relating to the LRM Bonds and LRM Offering. Among the numerous misrepresentations and omissions of fact supporting Plaintiffs’ fraud claims that Defendant’s Motion ignores, the following loom large (the “Fraudulent Misrepresentations and Omissions”):  Defendants falsely represented in his July 6, 2013 "Official Announcement" on a Bitcoin forum ("BTC Forum") that "[t]his company and the PMB's being offered are not regulated by any governmental entities including the SEC or any other agency or board";  Defendants falsely represented that each bond offered for sale constituted an ownership interest in and a right to a proportional share of the BTC generated through LRM's purchase and operation of specialized BTC mining computer hardware, when Defendant in fact had no present intention of granting ownership interest and a proportional share of the BTC mining operation in which LRM was purportedly engaged;  Defendant falsely represented that he intended to pay-out weekly dividends resulting from the BTC mining operations managed by LRM based on the guaranteed minimum hashrates, and omitted the fact that Defendant had no such intentions;  Defendant falsely represented that the LRM Bonds were not securities and that the LRM Offering and LRM Bonds complied with all legal and regulatory requirements;  Defendant falsely represented that LRM’s Business Plan was accurate, legal and complete in all respects; Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 12 of 33 PageID: 1222 3891099_1 8  Defendant omitted that he lacked the financial resources, knowledge, experience, equipment and ability to distribute weekly dividends resulting from the BTC mining operations managed by LRM or repay the BTC Plaintiffs provided to purchase the LRM Bonds;  Defendant omitted that the bonds issued by LRM constituted “securities” as defined by the Securities Act of 1933;  Defendant omitted that LRM had failed to register the bonds offered for sale to Plaintiffs or seek any applicable exemption;  Defendant omitted that the bonds issued by LRM and LRM’s sale and delivery of the unregistered LRM Bonds constituted a violation of the federal securities laws;  Defendant omitted that the bonds issued by LRM and sold to the Plaintiffs were worthless and non-marketable; and  Defendant omitted that the BTC and other compensation that he obtained from the Plaintiffs in connection with the LRM Offering and the sale of the Bonds would be diverted to other, improper purposes (such as Defendant’s purchase of a new home). See the Complaint, ¶¶ 34, 37-52, 56-65, 104-110, 126-130. These allegations demonstrate that Defendant’s position is untenable. Moreover, the Defendant’s statements were not merely unfulfilled promises of future performance, as Defendant argues, but rather actionable misrepresentations that Defendant knew were false and misleading. Moreover, the fact that Defendant employed uniform misrepresentations and omissions as part of his fraudulent scheme does not render his misconduct any less actionable. Nor does it evidence a lack of particularity in the well-pleaded allegations supporting Plaintiffs’ fraud claims. Rather, the fact Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 13 of 33 PageID: 1223 3891099_1 9 that Defendant solicited Plaintiffs to invest in LRM by use of the same exact false representations and omissions indicates that Defendant was engaged in a sophisticated fraudulent investment scheme directed at members of the BTC community in general, and the individual Plaintiffs in particular. Additionally, Defendant’s allegation that Plaintiffs failed to plead the exact date, place and times of the Defendant’s fraud is equally unavailing. Contrary to what Defendant would have the Court believe, Rule 9(b) does not require that “every material detail of the fraud such as date, location, and time” be expressly pleaded, but instead, allows plaintiffs to use ‘alternative means of injecting precision and some measure of substantiation into their allegations of fraud.’” In re Nice Sys., 135 F.Supp.2d 551, 577 (D.N.J. 2001). Here, the Plaintiffs have in fact delineated the date, circumstances and medium by which they were solicited in virtual identical fashion by the Defendant to invest in LRM Bonds through the false and misleading representations and omissions outlined above. Complaint, ¶¶ 34, 37-52, 56-65, 104-110, 126-130. Conversely, to the extent that Defendant claims there are additional details relating to their fraudulent scheme not delineated in the Complaint, those facts have been concealed from the Plaintiffs by the Defendant or are uniquely within the Defendant’s knowledge and possession, as the perpetrator of the fraud. “[I]n applying Rule 9(b), courts should be ‘sensitive’ to situations in which Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 14 of 33 PageID: 1224 3891099_1 10 ‘sophisticated defrauders' may ‘successfully conceal the details of their fraud.’” Id. (quoting Burlington Coat, 114 F.3d at 1418). Thus, “[w]here it can be shown that the requisite factual information is peculiarly within the defendant’s knowledge or control, the rigid requirements of Rule 9(b) may be relaxed.” Id. That is exactly the case here, as the Defendant has restricted or terminated Plaintiff’s access to critical information relating to the LRM Bonds and it is the Defendant who is in sole possession of such information (including information relating to the exact date, time and manner of the Defendant’s solicitations and Plaintiffs’ resulting investments in LRM Bonds). Defendant also disregards the fact that a number of misrepresentations used to induce the Plaintiffs into purchasing LRM Bonds are evidenced by the Defendant’s own written “propaganda” – i.e., the Official Announcement, the LRM “Prospectus” and the LRM Business Plan – all of which were attached as exhibits to and incorporated into the Complaint. See Complaint, ¶¶ 37, 39-41, 43 Exhibits 2-6. These materials establish in and of themselves a sufficient factual basis for a claim of fraud that is plausible on its face. Plaintiffs’ allegations provide Defendant with more than adequate notice of both the general content of the misrepresentations and omissions at issue as well as the essential factual background of the fraud. The allegations thus satisfy the ‘who, what, when, where and how’ required by Rule 9(b). Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 15 of 33 PageID: 1225 3891099_1 11 Defendant’s related claim that the Complaint fails to adequately allege that Defendant acted knowingly and intentionally is similarly devoid of merit. Here, the Complaint both generally avers the Defendant’s fraudulent scienter, as well as ultimate facts that demonstrate the Defendant’s motive and opportunity to commit fraud and give rise to a strong inference of fraudulent intent. Complaint, ¶¶ 34, 37- 52, 56-65, 104-110, 126-130. Additionally, the Complaint sufficiently alleges facts demonstrating the Plaintiffs suffered damages as a consequence of their reasonable and detrimental reliance upon the Defendant’s fraudulent misrepresentations and omissions. Specifically, Plaintiffs allege that they have made repeated demands upon Defendant to rescind the unlawful transactions at issue and to return the BTC and other compensation that Defendant fraudulently obtained from Plaintiffs, but that Defendant failed and refused these requests. Complaint, ¶ 130. These factual allegations establish a prima facia claim for damages that is directly and causally linked to the Defendant’s well-pleaded misconduct. Accordingly, Defendant’s Motion should be denied. B. The Complaint Satisfies all of the Elements of Securities Fraud Under §10(b) and Rule 10b-5. Defendant’s argument that Plaintiffs’ claims in Count V-VI for securities fraud in violation of §10(b) and Rule 10b-5 of the Securities Act of 1934 do not state a cause of action are similarly flawed and unavailing. As demonstrated above, Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 16 of 33 PageID: 1226 3891099_1 12 the well-pleaded allegations of the Complaint satisfy all of the elements of a fraud claim under §10(b) and Rule 10b-5 with the sufficiency required by Rule 9(b) as well as PSLRA. (i) Plaintiffs Properly Pleaded a Claim for Defendant’s Violation of 10(b) and Rule 10b-5 of the Securities Act of 1934 Plaintiffs have identified each statement they allege is misleading and the reasons why the statement was misleading, as required by PSLRA. For instance, and most notably, Plaintiffs have alleged that Defendant’s falsely represented that the LRM Bonds were not securities and that the Bonds complied with all legal and regulatory requirements. Plaintiffs further allege that these representations were materially false, because LRM’s issuance, sale and delivery of the unregistered LRM Bonds constituted a violation of the federal securities laws. Complaint, ¶¶ 34, 37-52, 56-65, 104-110, 126-130. Second, Plaintiffs’ securities fraud claims state particularized facts giving rise to a strong inference that the Defendant acted with the required scienter. Once again, if Defendant’s alleged misconduct in selling unregistered securities by way of false and misleading statements does not establish motive and opportunity and give rise to a strong inference of their intent to deceive, manipulate and defraud, it is hard to conceive of what type of conduct would evidence such an intent. See, e.g., Gargiulo v. Isolagen, Inc., 527 F. Supp. 2d 384, 390 (E.D. Pa. 2007) (holding Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 17 of 33 PageID: 1227 3891099_1 13 that “Plaintiffs, by establishing motive and opportunity, have met their burden and pled facts with sufficient particularity to give rise to a strong inference of scienter”). There is no plausible nonculpable explanation for the Defendant’s conduct in creating a public offering of unregistered, non-exempt securities that Defendant falsely represented were not regulated by the SEC or any other governmental entities. The Court should accordingly find that the well-pleaded allegations of the Complaint are sufficient to state §10(b) and Rule 10b-5 claims even under the heightened pleading standards, just as its sister courts have repeatedly done. See, e.g., Monk v. Johnson & Johnson, No. CIV.A. 10-4841 FLW, 2011 WL 6339824, at *25 (D.N.J. Dec. 19, 2011) (refusing to dismiss 10b-5 claims against several defendants and finding that plaintiff had sufficiently pled scienter and met PSLRA’s heightened pleading standard);Dow Corning Corp. v. BB & T Corp., No. CIV. 09-5637 FSH PS, 2010 WL 4860354, at *11 (D.N.J. Nov. 23, 2010) (denying in part motion to dismiss based on court's conclusion that plaintiffs had adequately pled scienter for alleged material misrepresentations or omissions that occurred in a specific time frame); In re Merck & Co., Inc. Vytorin/Zetia Sec. Litig., No. CIV.A.08-CV-2177(DMC), 2009 WL 2855601, at *3 (D.N.J. Sept. 2, 2009) (denying defendants' motion to dismiss and finding that plaintiffs stated a claim under the Exchange Act); In re Schering-Plough Corp., Enhance Sec. Litig., No. Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 18 of 33 PageID: 1228 3891099_1 14 CIV.A.08-CV-397(DMC), 2009 WL 2855457, at *4 (D.N.J. Sept. 2, 2009) (denying motion to dismiss plaintiff's Exchange Act claims);Dudley v. Haub, No. 2:11-CV-05196 WJM, 2013 WL 1845519, at *1 (D.N.J. Apr. 30, 2013) (denying in part a motion to dismiss §10(b) claims based on finding that scienter was sufficiently pled). (ii) Plaintiffs Properly Pleaded Control-Person Liability Pursuant to 15 U.S.C. § 78t(a) Because the Motion to Dismiss does not expressly seek the dismissal of Count VI for violations of the Securities Act of 1934 based on control-person liability, Defendant has waived those arguments. See Flora v. Cnty. of Luzerne, 776 F. 3d 169, 174 at n. 8 (3d Cir. 2015) (noting that failure to raise argument in 12(b)(6) motion constitutes waiver of those arguments). However, in an abundance of caution, Plaintiffs will show that Count VI should survive a facial challenge from Defendant like the one alleged against every other count: that Plaintiffs did not allege facts underlying the fraud with sufficient particularity. 15 U.S.C. § 78t(a), states that “[e]very person who, directly or indirectly, controls any person liable [for securities fraud] shall also be liable jointly and severally with and to same extent as such controlled person.” 15 U.S.C. § 78t(a). “To establish a prima facie case that the defendant was a controlling person within the meaning of Section 20(a), the plaintiff must show that: (1) the defendant had actual power or influence over the controlled person; and (2) the defendant Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 19 of 33 PageID: 1229 3891099_1 15 actually participated in the alleged illegal activity.” In re Synchronoss Sec. Litig., 705 F. Supp. 2d 367, 404 (D.N.J. 2010). Additionally, “for a controlling person to be liable, the person over whom control was exercised must have committed a primary violation of the securities laws.” Id. To allege a claim for control-person liability under 15 U.S.C. § 78t(a), Plaintiffs are not required to plead a claim for piercing LRM’s corporate veil to pursue Defendant individually, nor are Plaintiffs seeking to do so. As the Fraudulent Misrepresentations and Omissions demonstrate, and properly allege, Plaintiffs adequately pleaded that Defendant had actual control over LRM, that Defendant actually participated in the fraudulent scheme alleged, and that LRM itself committed various primary violations of securities laws. See the Complaint, ¶¶ 34, 37-52, 56-65, 104-110, 126-130. C. The Complaint Satisfies all of the Elements of Claim Under the New Jersey Uniform Securities Act and the Florida Securities and Investor Protection Act. Defendant’s demand for the dismissal of Plaintiffs’ claims in Counts VII- VIII and IX-X for violation of the New Jersey Uniform Securities Act (the “New Jersey Act”) and the Florida Securities and Investor Protection Act (the “Florida Act”) must be rejected for all of the reasons discussed above. The elements of Plaintiffs’ state securities fraud claims under the New Jersey Act and Florida Act are substantially similar to those of Plaintiffs’ securities fraud claims under Section Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 20 of 33 PageID: 1230 3891099_1 16 10(b) of the Exchange Act (with the exception of the heightened scienter requirement, which is not required under the Florida Act). As shown above, Plaintiffs have stated viable claims arising under Section 10(b) and Rule 10b-5, and the same well-pleaded allegations supporting Plaintiffs’ federal securities fraud claims are sufficient to state a cause of action under the New Jersey Act and Florida Act. D. The Complaint States a Valid Cause of Action for Fraudulent Inducement. The Court should similarly reject the Defendant’s attempt to dismiss Plaintiffs’ well-pleaded claim for fraudulent inducement in Count XIII of the Complaint. Defendant’s claim that Plaintiffs failed to identify the fraudulent statements and omissions giving rise to their claims with the requisite particularity is frivolous for all of the reasons already discussed in Point Four, Subsection A. Defendant’s alternative argument that Plaintiffs’ fraudulent inducement claims fail to state a cause of action because they are “premised solely” upon Defendant’s failure to fulfill his future promise to pay dividends, bonuses and compensation is also false. Rather, the gravamen of Plaintiffs’ fraud claims in this case is that Defendant, as part of his fraudulent scheme to issue and sell unregistered, non-exempt securities, induced Plaintiffs into purchasing LRM Bonds through a series of misrepresentations and omissions of existing fact, not the least of which being that the LRM Bonds were not securities and that LRM and its Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 21 of 33 PageID: 1231 3891099_1 17 LRM Offering were not subject to regulation by the SEC or any other governmental. Further, the Plaintiffs’ allegations that they were fraudulently induced by Defendant’s promises to pay dividends, without any intention to do so, is also sufficient to state a viable cause of action. See UBI Telecom Inc. v. KDDI Am., Inc., No. CIV.A. 13-1643 KSH, 2014 WL 2965705, at *15 (D.N.J. June 30, 2014) (holding that claims for fraudulent inducement can be predicated on the promisor having no intention of fulfilling a promise at the time it was made). Plaintiffs have also satisfied the element of justifiably reliance, as they explicitly aver that they would not have purchased the LRM Bonds or entered into the contracts with the Defendant if Plaintiffs had known about the Defendant’s misrepresentations and omissions. Complaint, ¶ 127. The Complaint accordingly pleads sufficient misrepresentations and omissions of existing fact upon which Plaintiffs reasonably relied to their detriment, and Count XIII therefore states a viable cause of action for fraudulent inducement. E. The Complaint Properly States Claims for Violation of the Securities Act of 1933 The Motion to Dismiss does not expressly seek the dismissal of Counts I-IV for violations of the Securities Act of 1933. Accordingly, Defendant has waived those arguments. See Flora, 776 F. 3d at 174 at n. 8. However, in an abundance Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 22 of 33 PageID: 1232 3891099_1 18 of caution, Plaintiffs will show that Counts I-IV survive a facial challenge from Defendant like the one alleged against every other count: that Plaintiff did not allege facts underlying the fraud with sufficient particularity. (i) Plaintiffs Properly Pleaded that Defendant Violated 15 U.S.C. § 77l (a)(1) and (2) Plaintiffs alleged in Count I of the Complaint that Defendant violated 15 U.S.C. § 77l(a)(1) by offering or selling a securities in violation of 15 U.S.C. § 77e(a) without the proper registration statement and: (1) mak[ing] use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise; or (2) carry[ing] or caus[ing] to be carried through the mails or in interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale. See 15 U.S.C. § 77e(a). Plaintiffs properly pleaded the necessary facts to support this claim at Paragraphs 34, 37-52, 56-65, 104-110, 126-130 of the Complaint. Moreover, “[t]o state a prima facie claim under [15 U.S.C. § 77e(a)(2)], the plaintiff must allege the purchase of securities pursuant to a materially false or misleading prospectus or oral communication.” In re Suprema Specialties, Inc. Sec. Litig., 438 F. 3d 256, 269 (3d Cir. 2006). This is a less onerous standard because 15 U.S.C. § 77e(a)(2) “is a ‘virtually absolute’ liability provision that does not require an allegation that defendants possessed scienter.” Id. Because Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 23 of 33 PageID: 1233 3891099_1 19 Plaintiffs’ allegations are based on claims of fraud, Plaintiffs must meet, and did, Rule 9(b) pleading requirements. Id. See the Complaint, ¶¶ 34, 37-52, 56-65, 104- 110, 126-130. Additionally, Plaintiffs alleged in Count III of the Complaint that Defendant violated 15 U.S.C. § 77l(a)(2) by: Offer[ing] or sell[ing] a security (whether or not exempted by the provisions of section 77c of this title, other than paragraphs (2) and (14) of subsection (a) of said section), by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, 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, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission. See 15 U.S.C. § 77l(a)(2). Plaintiffs properly pleaded the necessary facts to support this claim at Paragraphs 34, 37-52, 56-65, 104-110, 126-130 of the Complaint. (ii) Plaintiffs Properly Pleaded Alternative Control- Person Liability Claims Under 15 U.S.C. § 77o(a) As an alternative to the claims alleged in Counts I and III, and if the Court were to determine that the acts and omissions complained of in Counts I and III are found to be those of LRM and not Defendant, Plaintiffs properly alleged claims for control-person-liability under 15 U.S.C. § 77o in Counts II and IV arising from Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 24 of 33 PageID: 1234 3891099_1 20 violations of 15 U.S.C. § 77l(a)(1) and (2) and 15 U.S.C. § 77e(a). It bears repeating, Plaintiffs are not seeking to pierce LRM’s corporate veil, merely to allege an independent and alternative claim of control-person liability. Pursuant to 15 U.S.C. § 77o(a): Every person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock ownership, agency, or otherwise, controls any person liable under sections 77k or 77l of this title, shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist. See 15 U.S.C. § 77o(a). To plead control-person liability, Plaintiffs must allege, and did, “that one person controlled another person or entity and that the controlled person or entity committed a primary violation of the securities laws.” In re Suprema Specialties, Inc. Sec. Litig., 438 F. 3d at 284 (vacating the dismissal of control-person liability claims against officers of a corporation where the officers were “alleged to have tightly controlled [the corporation’s] business and operations and acted as culpable participants in the fraud.” Id. at 286). Controlling persons, like Defendant, do not escape liability merely because the liability of the person under control, LRM in this case, “cannot be formally adjudicated due to its insolvency.” Id. at 285. Nonetheless, the liability of the controlled person must be pleaded and established at trial. Id. As the Fraudulent Misrepresentations and Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 25 of 33 PageID: 1235 3891099_1 21 Omissions demonstrate, and properly allege, Plaintiffs adequately pleaded that Defendant had actual control over LRM, that Defendant actually participated in the fraudulent scheme alleged, and that LRM itself committed various primary violations of securities laws. See the Complaint, ¶¶ 34, 37-52, 56-65, 104-110, 126-130. POINT FIVE The Complaint States a Valid Claim for Negligent Misrepresentation Defendant’s demand for the dismissal of Plaintiffs’ negligent misrepresentation claim in Count XII should be denied for all of the reasons discussed above in Point Four, Subsection A. The well-pleaded factual allegations of the Complaint establishing viable claims for fraudulent misrepresentation against the Defendant are also sufficient to satisfy all of the elements of Plaintiffs’ negligent misrepresentation claim. Defendant’s misrepresentations and omissions have also been detailed with the requisite particularity, and Defendant has no doubt or uncertainty about the exact nature of the fraud he is accused of committing. POINT SIX Plaintiffs’ Fraud, Negligent Misrepresentation and Unjust Enrichment Claims are not Barred by the Economic Loss Doctrine Defendant’s effort to dismiss Plaintiffs’ tort and equitable claims based on the economic tort doctrine are without merit and should be rejected like the rest of Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 26 of 33 PageID: 1236 3891099_1 22 Defendant’s Motion. Contrary to Defendant’s arguments, the Plaintiffs have plainly alleged fraudulent and tortious misconduct by the Defendant arising outside the four corners of the Official Contract. Most notably, Plaintiffs contend that Defendant falsely represented that the LRM Bonds were not securities and that the Bonds complied with all legal and regulatory requirements. Defendant likewise concealed that LRM’s issuance, sale and delivery of the unregistered LRM Bonds constituted a violation of the federal securities laws. These and the other misrepresentations and omissions contained in the propaganda (e.g., the LRM Official Announcement, Prospectus and Business Plan) that Defendant used to fraudulently induce the Plaintiffs into purchasing LRM Bonds arise independently from, and are not contained within, the four corners of the parties’ contracts. This separate and distinct misconduct is extraneous to the contract and thus renders the economic loss rule inapplicable. See UBI Telecom Inc. v. KDDI Am., Inc., 2014 WL 2965705, at *15 (finding that plaintiff’s fraudulent inducement claim was not barred by and could co-exist with a breach of contract claim);G & F Graphic Servs., Inc. v. Graphic Innovators, Inc., No. CIV. 13-6482 JEI/AMD, 2014 WL 1818235 (D.N.J. May 8, 2014) (denying a motion to dismiss where "the fraud alleged is not 'contained within the four corners of the contract'"); Lithuanian Commerce Corp. v. Sara Lee Hosiery, 219 F. Supp. 2d 600, 608 (D.N.J. 2002) (holding the plaintiff's fraudulent inducement claim was premised upon fraud that Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 27 of 33 PageID: 1237 3891099_1 23 was extrinsic to the contract and that plaintiff was not barred from pursuing simultaneous tort and contract claims); Florian Greenhouse, Inc. v. Cardinal IG Corp., 11 F. Supp. 2d 521, 526 (D.N.J. 1998) (denying a motion to dismiss based on the economic loss doctrine based on the court's finding that the fraud was extraneous to the contract as it did not involve nonfulfillment of a warranty or guarantee contained within the contract itself). The Complaint also alleges the existence of damages that are separate and distinct from those resulting from Defendant’s breach of the parties’ contract. Again, Plaintiffs seek compensatory and rescissory damages based on the BTC and other compensation Defendant realized from his fraudulent inducement and sale of unregistered securities, which are plainly separate and independent from Plaintiffs’ claims for lost dividends and profits due under the parties’' contract. POINT SEVEN The Complaint States a Proper Alternative Claim for Unjust Enrichment The Court should also reject Defendant’s attempt to dismiss Plaintiffs’ alternative unjust enrichment claim. Count XXIV of the Complaint states all of the elements of an unjust enrichment claim. The claims are pleaded with Rule 9(b)’s required particularly as shown above, as Defendant has more than adequate notice of the unjust and inequitable misconduct in fraudulently inducing Plaintiffs to invest in unregistered securities that serves as the basis for Plaintiffs’ claim. The Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 28 of 33 PageID: 1238 3891099_1 24 Complaint also adequately identifies the benefits that were conferred upon the Defendant, named the BTC and other compensation that Defendant extracted from Plaintiffs in connection with their offering and sale of unregistered LRM Bonds and which they have refused to return to Plaintiffs. Count XXIV accordingly states a prima facie claim for unjust enrichment claim and should not be dismissed. POINT EIGHT Plaintiffs Pleaded a Viable Breach of Contract Claim Defendant seeks the dismissal of Plaintiffs’ breach of contract claims in Counts XIV and XXI on the grounds that the Complaint fails to identify the existence or breach of the parties’ contracts. The Complaint alleges that the Defendant provided and entered into an LRM “Official Contract” with the Plaintiffs that set forth the alleged terms of Plaintiffs’ investment in LRM Bonds. Complaint, ¶¶ 231-241 and 315-325. As Plaintiffs further aver, with the exception of Plaintiff Gordon (who actually signed an Initial Investor Contract in addition to accepting the LRM Official Contract), they were not required or provided with a mechanism to sign or date the Official Contracts. Regardless, the Complaint plainly alleges facts showing that the Defendant by his actions and performance assented to and accepted the Official Contracts with each of the individual Plaintiffs. Complaint, ¶¶ 234 and 318. Consequently, Plaintiffs are not required to Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 29 of 33 PageID: 1239 3891099_1 25 plead a claim for piercing LRM’s corporate veil to pursue Defendant individually, nor are Plaintiffs seeking to do so. New Jersey law does not require an expressly executed written contract where the parties have manifested their intent to be bound by the contract. “[A] contract is an agreement resulting in obligation enforceable at law.” Borough of West Caldwell v. Borough of Caldwell, 26 N.J. 9, 24, 138 A.2d 402 (1958). Where parties agree on essential terms and manifest an intention to be bound by such terms, an enforceable contract is created. See Weichert Co. Realtors v. Ryan, 128 N.J. 427, 435, 608 A.2d 280 (1992). Significantly, “the manifestation of mutual assent is usually had by an offer and an acceptance either in words or by conduct.”Johnson & Johnson v. Charmley Drug Co., 11 N.J. 526, 538, 95 A.2d 391 (1953); Weichert, 128 N.J. at 436, 608 A.2d 280. (“An offeree may manifest assent to the terms of an offer through words, creating an express contract, or by conduct, creating a contract implied-in-fact”). As such, “conduct may take the place of written or spoken words in the formation of contracts." Johnson & Johnson, at 538–39. Equally important, the recipient of an offer may communicate acceptance by means other than a formally signed contract, and thus performance of a contract's executory obligations can serve as acceptance even in the absence of any writing. In re The Score Bd., Inc., 238 B.R. 585, 590-91 (D.N.J. 1999) (citing Lahue v. Pio Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 30 of 33 PageID: 1240 3891099_1 26 Costa, 263 N.J.Super. 575, 598, 623 A.2d 775 (App.Div.1993). For instance, in In re The Score Bd., Inc., the court noted that it has consistently been recognized that part performance of an oral agreement can create an enforceable contract despite the absence of a signed writing: In this case Debtor mailed the $10,000 payment to Bryant which was required by the agreement, and both parties performed under the agreement for a year and a half. Bryant's acceptance of the $10,000 check and the parties subsequent performance were more than adequate to satisfy the offer and acceptance requirements of contract formation. Id. Here, the Defendant’s unequivocal assent to the LRM Official Contract is evidenced by his solicitation of the Plaintiffs to purchase LRM Bonds, by his transmission of the written Official Contract relating to the investment, and by his acceptance, receipt and retention of the BTC and other compensation paid by Plaintiffs in exchange for LRM Bonds. These allegations are more than sufficient to establish the existence of an enforceable contract between the parties. POINT NINE The Defendant’s Request for Dismissal of all Claims Already Dismissed by the Dismissed Plaintiffs Should be Denied as Moot On May 29, 2017, Plaintiffs and the dismissed plaintiffs, Curtis Green, Jakob Vondrak, Jesse Lobb, Christopher Galido, Mark Boehler, Nathanael Flachsbart, and Russ Henderson (the “Dismissed Plaintiffs”), and with Defendant’s agreement, filed a Stipulation of Dismissal without prejudice as to the Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 31 of 33 PageID: 1241 3891099_1 27 Dismissed Plaintiffs pursuant to Fed. R. Civ. P. 41(a) [D.E. 125]. Notwithstanding the fact that the Dismissed Plaintiffs are no longer parties to this case and dismissed their claims without prejudice, and are thus not before the Court, Defendant insists in his Memorandum that those claims should be dismissed a second time. Because these claims have already been dismissed without prejudice by the plaintiffs who pleaded them, and who are non-nonparties to the lawsuit no longer before the Court, Plaintiffs respectfully request that that the Court deny Defendant’s request that these claims be dismissed a second time. Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 32 of 33 PageID: 1242 3891099_1 28 CONCLUSION For the foregoing reasons, Plaintiffs respectfully request entry of an Order denying Defendant Zachary Dailey’s Motion to Dismiss, striking his Declaration and Memorandum of Law, and for such other and further relief the Court deems just and proper. Dated: July 3, 2017 BRESSLER, AMERY & ROSS, P.C. By: /s/ Michael T. Hensley Michael T. Hensley, Esq. Attorneys for Plaintiffs MCDONALD HOPKINS LLC By: /s/ Christopher B. Hopkins Christopher B. Hopkins, Esq. Attorneys for Plaintiffs Case 1:14-cv-07495-JHR-JS Document 129 Filed 07/03/17 Page 33 of 33 PageID: 1243 1 3865653 Michael T. Hensley, Esq. (#031952001) BRESSLER, AMERY & ROSS A Professional Corporation 325 Columbia Turnpike Florham Park, New Jersey 07932 P.O. Box 1980 Morristown, New Jersey 07962 (973) 514-1200 Attorneys for Plaintiffs IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY (Camden Vicinage) BRANDON GORDON, CURTIS GREEN, JAKUB VONDRAK, JESSE LOBB, BYRON MCDONALD, DEREK PIPER, CHRISTOPHER GALIDO, MARK BOEHLER, MERLIN FISHER-LEVINE, NATHANAEL FLACHSBART, JAMES KOLONUSZ and RUSS HENDERSON, Plaintiffs, v. ZACHARY DAILEY and LAB RAT DATA PROCESSING, LLC, Defendants. Civil Action No. 14-cv-7495(JHR) CERTIFICATION OF SERVICE (Document Electronically Filed) MICHAEL T. HENSLEY hereby certifies as follows: 1. I am a Principal at the law firm of Bressler, Amery & Ross, P.C., attorneys for Plaintiffs in the above-captioned matter. 2. I hereby certify that on July 3, 2017, I caused Plaintiffs’ Opposition Brief to Zachary Dailey’s Motion to Dismiss the Second Amended Complaint to be filed with the Court via the Court’s CM/ECF filing system and to be sent to the following via electronic mail and United States Postal Service: Case 1:14-cv-07495-JHR-JS Document 129-1 Filed 07/03/17 Page 1 of 2 PageID: 1244 2 3865596 1 Zachary Dailey 5 Lambert Johnson Drive Ocean, New Jersey 07712 dailey.zachary1@gmail.com I certify that the foregoing statements made by me are true. I am aware that if any of the foregoing statements made by me are willfully false, I am subject to punishment. /s/ Michael T. Hensley Michael T. Hensley, Esq. Dated: July 3, 2017 Case 1:14-cv-07495-JHR-JS Document 129-1 Filed 07/03/17 Page 2 of 2 PageID: 1245