LEWIS A. KAPLAN, District Judge.
This is an action by several U.S. hedge funds for damages under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act")1 and Rule 10b-5 thereunder,23 as well as on common law theories, for damages in connection with their purchases of shares in Elixir Gaming Technologies, Inc. ("EGT"). Plaintiffs claim that the defendants intentionally made misrepresentations that inflated EGT's share price, that the plaintiffs purchased shares of EGT at that inflated price, and that they were injured when the truth became known and the share value then declined. The matter is before the Court on motions by the remaining defendants—EGT, Elixir Group Limited ("EGL"), and the individual director and/or officer defendants (the "Individual Defendants")4—to dismiss the action for failure to state a claim upon which relief may be granted. For the reasons set forth below, their motions are granted in part and denied in part.
The well pleaded factual allegations of the complaint are assumed to be true for purposes of the motions.5
Plaintiffs are hedge funds that claim to have purchased shares of EGT on the open market "[d]uring 2006 and the early part of 2007."6 Plaintiffs Strata Fund L.P., Strata Fund Q.P., L.P., and Strata Offshore Fund, Ltd. (collectively, "Strata") claim also that they bought securities of EGT in private placements pursuant to two separate agreements: (1) a Securities Purchase Agreement ("SPA") executed by EGT and certain purchasers, including Strata, on October 19, 2007, and (2) a Warrant Purchase Agreement ("WPA") executed by EGT, EGL, and certain purchasers, including Strata, on December 10, 2007,7 in which the purchasers contracted both to purchase warrants from EGL and immediately to exercise those warrants by purchasing stock from EGT.8
EGT is a corporation organized under the laws of and having its principal place of business in Nevada.9 At all times relevant to this motion, its stock has traded on the American Stock Exchange.10 EGL is a corporation organized under the laws of and having its principal place of business in Hong Kong.11 Each Individual Defendant was a director and/or officer of EGT and/or EGL during the period in which plaintiffs allege EGT's price fraudulently was inflated.12
EGL's Contractual Relationship With EGT
On or about June 12, 2007, EGL entered into a Securities Purchase and Product Participation Agreement (the "SPPPA") with EGT's predecessor, VendingData Corporation.13 Under the terms of that agreement, VendingData (now EGT) agreed, among other things, to issue equity securities and warrants to EGL as part of an "earn-in" arrangement. The extent of the equity interest to be acquired depended upon the number of electronic gaming machines ("EGMs") placed by EGT, pursuant to Participation Agreements secured by EGL, with gaming operators in Asia. The SPPPA states that "subject to the Placement of 1,000 EGMs on or before the Closing Date,"14 EGT would issue to EGL 25 million shares of EGT common stock, reduce the exercise price of certain EGT stock warrants previously purchased by EGL, and amend the terms of those warrants so they would be freely transferable.15 EGL was to receive another 15 million shares of EGT common stock and additional reductions in warrant exercise prices once EGT had "entered into Participation Agreements for the Placement of a Cumulative Total of 2,000 EGMs" and "actual Placement of a Cumulative Total of 1,000 EGMs" had been achieved.16
On September 10, 2007, the SPPPA was approved by EGT's shareholders and deemed fair by an independent advisor, after which EGT's board proceeded with the initial closing.17 According to the amended complaint, EGL ultimately came to own 75 percent of EGT as a result of this "earn-in" arrangement.18
Strata Purchases EGT Common Stock in Two Private Placements
In the three months after the SPPPA closed, EGT made two private placements of its common stock.19 It sold $52.5 million worth of its common stock to Strata and others pursuant to the SPA on October 19, 2007.20 About two months later, on December 10, 2007, EGT, EGL, Strata, and other purchasers signed the WPA, pursuant to which (1) EGL sold to Strata and others 16 million warrants that had been repriced in September when the SPPPA closed, and (2) Strata and the other purchasers immediately exercised those warrants in full, purchasing stock from EGT.21
The Allegedly False and Misleading Statements
Plaintiffs allege that between June 13, 2007, when the SPPPA first was announced, and December 10, 2007, when Strata made its final alleged purchase of EGT common stock,22 the defendants issued press releases, made statements in conference calls and road shows, met with EGT shareholders, and made SEC filings in the course of which they made false and misleading statements concerning EGT's business and future prospects.23 These may be grouped and summarized as follows:
1. Defendants claimed to have entered into Participation Agreements for the placement of thousands of EGMs at Asian gaming venues when the defendants knew that many of these agreements were memorialized in non-binding "memoranda of understanding" rather than "binding written lease contracts."24 As a result, many of the defendants' statements regarding how many EGMs had been or were going to be placed, and how many agreements for placement had been secured, allegedly were false or highly misleading.
2. Defendants represented that the CasinoLink Enterprise Edition casino management system ("CasinoLink") would be installed in the EGMs that they placed in Asian gaming venues, allowing EGT to monitor those units and providing data that would improve EGT's marketing and enhance profitability.25
3. Defendants represented that they expected the EGMs to generate an average "net win" of $125 per day per machine—averaged over a year of operations and over all of the EGMs placed in Asian venues—and that this estimate was based on the defendants' due diligence.26
4. Defendants represented that EGT would receive (and later, was receiving) a minimum of 20 percent participation share of the net win from the venues.27
5. Defendants represented that EGT would install the "best possible type" of EGM for each gaming venue as determined by due diligence with respect to that venue.28
6. Defendants stated that they expected earnings before interest, taxes, depreciation, and amortization ("EBITDA") to be as high as 60 to 90 percent.29
7. Defendants claimed that EGT, by virtue of its relationship with EGL, "had access to significant sources of capital to fund and expand" its new business and had special connections in the Asian gaming market that would give EGT a competitive advantage.30
Plaintiffs claim that the defendants made these alleged misrepresentations in order to inflate EGT's stock price, secure shareholder approval of the SPPPA, and procure additional investments, including those made by Strata and others pursuant to the SPA and WPA.31
Plaintiffs assert that EGT's share price was inflated by these alleged misrepresentations when they bought its stock and that they were injured when public disclosure of the truth caused the price to decline.32 The complaint, however, tells two different stories as to precisely when, how, and why this decline occurred.
On the one hand, the complaint repeatedly states that EGT's stock "artificially [was] inflated . . . between June 13, 2007 and August 13, 2008,"33 when "[EGT] finally revealed its net win reports by country, which were of course far short of the $125 day figure, and admitted that CasinoLink was only present in five venues of the fifteen it had opened."34 It thus implies that the disclosures that caused the price drop of which they complain did not occur until August 13, 2008.
On the other hand, detailed allegations in the complaint tell another story, suggesting a series of disclosures that caused EGT's stock price to decline more gradually between February 19, 2008, and August 13, 2008.35 First, plaintiffs allege that there was an analyst conference call on February 19, 2008, during which EGT disclosed an important change to its Asian gaming business metric. Whereas defendants are alleged to have represented previously that they expected the EGMs placed at Asian venues to have an average daily net win rate of $125 per machine, averaged over all venues for a year of operation, defendant Pisano allegedly announced in the February 19 conference call that EGT then expected that EGMs would not achieve that average net win rate until after they had been in operation for 12 months.36 According to plaintiffs, "[t]his was the first time [that EGT] stated that the $125 net win per day figure assumed a twelve month prior operating history."37 They allege that "[i]n the days following [the February 19, 2008] conference [call, EGT's] stock price fell, presumably reflecting investors' displeasure with the report that [EGT] now expected the average $125 daily net win per machine would take a year to achieve."38 "By March 27, 2008 [EGT's] stock had fallen by 50% off its highest price."39
The complaint alleges that, in the months following that first disclosure, the defendants continued to assert many of the misrepresentations previously alleged40 but that they also made additional disclosures that caused the stock price to decline further. The next alleged public disclosure occurred on March 31, 2008, when EGT filed its 2007 Form 10-K, which made clear for the first time that EGT's EBITDA had been negative, allegedly contrary to the defendants' previous representations.41
Plaintiffs claim also that defendants made certain disclosures to them in private in April and May of 2008. In late April, Reberger allegedly told an EGT representative that EGL did not enjoy any special relationship with Filipino authorities, as previously claimed.42 And on May 22, 2008, Reberger allegedly admitted in a private conversation that most of the EGMs that had gone into operation had not been equipped with CasinoLink.43
Aside from the price decline following the February 2008 disclosure, however, plaintiffs have alleged almost no details regarding how, if at all, any particular disclosure affected EGT's stock price. The complaint merely alleges in general terms that "[a]s 2008 progressed, further information emerged that revealed the misrepresentations described for what they were. By August 13, 2008, when [EGT] finally revealed its net win reports by country, which were of course far short of the $125 day figure, and admitted that CasinoLink was only present in five venues of the fifteen it had opened, its stock was down 90% for the year."44
Plaintiffs do not allege that the stock price declined any further after August 13, 2008, but it seems that the writing was on the wall by then. In October 2008, EGT and EGL announced that they were discontinuing their joint Asian gaming venture as established under the SPPPA.45 It was not until November 8, 2008—well after the alleged price—inflation already had been removed from EGT's stock price-that certain Individual Defendants allegedly admitted for the first time, in a conference call with Prime Mover representatives, that the prior EGT leadership had not had any special expertise with similar business models, had badly mismanaged EGT's Asian gaming business, and had done no due diligence on particular venues, and that many of the agreements between EGT and the gaming venues had taken the form of "memoranda of understanding" rather than "binding written lease agreements."46 Plaintiffs claim to have learned also, in "the fourth quarter of 2008," that EGL's parent company, Melco, never had had any intention of causing EGL to capitalize EGT's Asian gaming business through the exercise of warrants.47
The Motion to Dismiss Standard
In deciding a motion to dismiss, a court must accept as true all well pleaded facts alleged in the complaint and draw all reasonable inferences in the plaintiffs' favor.48 At the same time, "`[c]onclusory allegations or legal conclusions masquerading as factual conclusions will not suffice to [defeat] a motion to dismiss.'"49 A court must apply a plausibility standard: while "not akin to a `probability requirement'. . . it asks for more than a sheer possibility that a defendant has acted unlawfully."50 The plaintiff must plead "factual allegations sufficient `to raise a right to relief above the speculative level.'"51 Such motions are addressed to the face of the pleadings, but a court may consider also documents attached to the complaint as exhibits or incorporated into it by reference.52
For federal securities fraud claims, a plaintiff must "state with particularity the circumstances constituting fraud."53 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."54 Under the PSLRA, a plaintiff must state with particularity also "facts giving rise to a strong inference that the defendant acted with the required state of mind."55
The Federal Securities Law Claims
Under Rule 10b-5 and Section 10(b) of the Exchange Act, plaintiffs must allege that defendants "(1) made misstatements or omissions of material fact; (2) with scienter; (3) in connection with the purchase or sale of securities; (4) upon which plaintiffs relied; and (5) that plaintiff[s'] reliance was the proximate cause of their injury."56
Prime Mover Has Not Pleaded Transaction Causation Adequately
"It is long settled that a securities-fraud plaintiff, must prove both transaction and loss causation."57 Transaction causation "is akin to reliance, and requires only an allegation that `but for the claimed misrepresentations and omissions, the plaintiff would not have entered into the detrimental securities transaction.'"58
Prime Mover has failed to state a claim for securities fraud because it has not alleged transaction causation—that is, the complaint fails to allege that Prime Mover purchased or sold any EGT stock during the period in which EGT's stock price allegedly was inflated by defendants' misstatements and omissions.59 This disposes of Prime Mover's claims in Counts 1, 2, 3, and 4. In addition, its claims in Counts 6 (common law fraud), 7 (negligent misrepresentation), and 10 (unjust enrichment) must be dismissed for essentially the same reason: Prime Mover has not alleged that it was injured because it took any action, refrained from acting, or entered into any transaction, as a result of, or in reliance upon, the defendants' alleged misstatements or omissions during the relevant period.60 It therefore has not alleged that it was harmed as a result of the defendants' alleged misconduct or that the defendants were enriched unjustly at its expense.
Accordingly, Prime Mover's claims in Counts 1, 2, 3, 4, 6, 7, and 10 are dismissed. Prime Mover's only other claim—Count 5 (breach of fiduciary duty)—is disposed of below.
Strata Has Not Pleaded Loss Causation Adequately With Respect to Most of the Alleged Misrepresentations
Unlike Prime Mover, Strata claims to have relied on the defendants' alleged misstatements when it purchased EGT common stock at an allegedly inflated price in two private placements pursuant to (1) the SPA, on October 19, 2007, and (2) the WPA, on December 10, 2007. It therefore has alleged transaction causation. Its problems, however, are with loss causation.
Loss causation is analogous to proximate cause: it is "the causal link between the alleged misconduct and the economic harm ultimately suffered by the defendant."61 In Dura Pharmaceuticals, Inc. v. Broudo,62 the Supreme Court held that in fraud-on-the-market cases, merely purchasing securities at "an inflated price will not itself constitute or proximately cause the relevant economic loss."63 Rather, plaintiffs must allege not only that the price was inflated by the fraudulent misrepresentation or omission, but also that the share price fell significantly after, and because, the truth became known:64
"[T]o establish loss causation, `a plaintiff must allege . . . that the subject of the fraudulent statement or omission was the cause of the actual loss suffered, i.e., that the misstatement or omissions concealed something from the market that, when disclosed, negatively affected the value of the security. . . .'"65
In other words, plaintiffs must allege "that the subject of the [misrepresentations], or any corrective disclosure regarding the falsity of [the misrepresentations, was] the cause of the decline in stock value that plaintiffs claim as their loss."66
Here, most of the misrepresentations alleged in the complaint could not have caused economic loss because the truth allegedly concealed by those misrepresentations did not become public until after August 13, 2008, by which time EGT's share price already had dropped to the lowest level alleged in the complaint.67
This is the case with respect to the alleged misrepresentations summarized in the first numbered paragraph on page 7—that defendants repeatedly misrepresented that EGT had entered into a certain number of Participation Agreements for the Placement of EGMs at various gaming venues when the defendants knew that many if not all of those agreements were not "binding written lease agreements" but instead "memoranda of understanding."68 The fact that these agreements were non-binding was not disclosed until November 2008,69 well after EGT's stock had reached the lowest point pleaded in the complaint. Nor does Strata allege that the fact that the agreements were non-binding ever became public. Accordingly Strata has not alleged that either the non-binding nature of the agreements or the public disclosure thereof caused EGT's stock price to decline and resulted in economic loss to it.
The same is true also with respect to the defendants' alleged misrepresentations that (1) they intended to install, and later had installed, CasinoLink in EGMs that EGT placed at Asian gaming venues,70 (2) EGT would receive, and was receiving, a minimum of 20 percent participation share of the net wins from its Asian venues,71 (3) EGT would install the "best possible type" of EGM for each venue as determined by due diligence,72 and (4) EGT's relationship with EGL afforded it special connections and access to sources of capital that would give it an advantage in the Asian gaming market.73 Strata alleges only one public corrective disclosure regarding the fact that EGT had installed CasinoLink in only a portion of its EGMs in Asian venues.74 That disclosure allegedly occurred on August 13, 2008, by which time EGT's stock already had dropped as far as is alleged in the complaint. Likewise, Strata has alleged that the misrepresentations regarding EGT's due diligence on venues, selection of machines, and the relative benefits of its close relationship with EGL were not corrected until November 2008 (and even then, it appears, only privately).75 And Strata has not alleged specifically any corrective disclosure with respect to EGT's 20 percent participation share of net wins.
The complaint insufficiently pleads loss causation with respect also to defendants' alleged misrepresentations that they expected EBITDA margins to be as high as 60-90 percent.76 The allegations are vague as to when and how this alleged misrepresentation was disclosed.77 More importantly, Strata fails to allege with any specificity what effect any disclosure had on the market value of EGT's stock. Such vague allegations are insufficient to plead loss causation.
Strata adequately has pleaded loss causation, however, with respect to one type of alleged misrepresentation: defendants' alleged statements, between June 13, 2007, and December 10, 2008, regarding the expected average net win rate for the EGMs placed in Asian venues.78
Defendants' Alleged Misrepresentations Regarding Projected Net Win Rates Were Protected Forward-Looking Statements
The complaint specifically identifies three alleged misrepresentations in the relevant time period in which defendants represented that they expected the EGMs placed at Asian venues to achieve an overall average net win rate of $125 for the first year of operation (rather than taking twelve months to achieve that net win rate).
First, in a June 13, 2007 press release, EGT stated that "[i]t is expected that by December 31, 2008, [EGL] will have secured placement of over 3,000 gaming machines on participation for [EGT] with an expectation of a net win rate per machine of approximately US$125."79 EGT's chief executive officer Newburg reiterated this projection in a conference call with analysts the next day: "by the end of '08 we will have 3,000 machines out there at an average net win per day of $125."80 Finally, in a conference call for analysts in November 2007, defendant Pisano again stated the company's expectation—in that instance referred to as an "assumption"—that EGT would achieve "net win of $125 over a 12-month operating period."81 As previously described, plaintiffs claim that the public first learned that the EGMs would not achieve this average daily rate until after they had been in operation for 12 months—rather than earning this daily average for the whole first year—on February 19, 2008, and that EGT's common stock dropped sharply and immediately as a result.82 The fact that the complaint adequately alleges loss causation in this regard, however, does not get Strata all the way home.
These alleged misrepresentations regarding expected average net win rates fell within the PSLRA's statutory safe harbor for forward-looking statements and therefore do not support a securities fraud claim. Under the PSLRA, "a defendant is not liable if the forward-looking statement is identified and accompanied by meaningful cautionary language or is immaterial or the plaintiff fails to prove that it was made with actual knowledge that it was false or misleading."83 Moreover, pursuant to the PSLRA's heightened pleading standard,
"a plaintiff must plead facts to support a strong inference of scienter, 15 U.S.C. § 78u-4(b)(2), that is, the `inference of scienter must be more than merely plausible or reasonable—it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.' Moreover, because the safe harbor specifies an `actual knowledge' standard for forward-looking statements, `the scienter requirement for forward-looking statements is stricter than for statements of current fact. Whereas liability for the latter requires a showing of either knowing falsity or recklessness, liability for the former attaches only upon proof of knowing falsity.'"84
In making this determination, courts consider "whether a reasonable person would, based on the facts alleged . . . deem an inference that the defendants (1) did not genuinely believe [the statement], (2) actually knew that they had no reasonable basis for making the statement, or (3) were aware of undisclosed facts tending to seriously undermine the accuracy of the statement, cogent and at least as compelling as any opposing inference."85 In deciding questions of scienter, a court's "job is not to scrutinize each allegation in isolation but to assess all of the allegations holistically."86
Here, the defendants' statements that they expected EGT to achieve an average net win rate per machine of $125 at some future time clearly were "forward-looking" within the meaning of the statute.87 Moreover, plaintiffs have not alleged facts sufficient to make the requisite strong showing that the defendants who made these statements actually knew the statements were false when made. The facts alleged in the complaint, taken as a whole, do not support a strong inference that Newburg, Pisano, or any of the EGT officers who might have written or approved the June 13, 2007 press release knew that the $125 net win per day projection was false or misleading when he or she stated or approved release of that projection on the occasions identified in the complaint.
Plaintiff's scienter allegations consist primarily of bald assertions that the defendants knew, or should have known, that they had no basis for asserting the expected $125 average net win figure88 and that they lied in order to inflate EGT's stock price. Only one factual allegation comes close to suggesting a motive or potential concrete benefit to an Individual Defendant: "On or about June 15, 2007 [two days after the SPPPA was announced], Newburg exercised 367,333 options and made concurrent sales of [EGT's] stock into the market, selling all of the shares he received upon exercise of the options."89 In other circumstances this sale might have been "unusual" and more strongly indicate a motive for misrepresenting aspects of EGT's new business venture.90 That is not the case here, however. A Form 8-K filed just a few days later publicly disclosed the transaction and shows that Newburg maintained another 1.3 million options even after the sale.91 Moreover, the complaint does not allege that Newburg or any other Individual Defendant sold additional EGT stock during the more than 12 months during which plaintiffs allege EGT stock prices were inflated. In all the circumstances, the mere fact that Newburg exercised roughly a fifth of his existing options (not counting any stock he already may have owned outright) after the SPPPA was announced—and, notably, well before nearly all of the alleged misrepresentations even took place and long before the first alleged disclosure in February 2008—does not create a strong inference that he actually knew on June 14, 2007, that his statement regarding the expected net win rate for EGMs in the new business model was false or misleading.92
Because defendants have not sufficiently alleged facts creating a strong inference that any of the defendants who made the three forward-looking statements at issue here actually knew that those statements were false or misleading, those statements are protected by the safe harbor for forward-looking statements and cannot form the basis for plaintiff's securities fraud claims.
* * *
Accordingly, all of plaintiffs' claims under the federal securities laws are dismissed.93
The State Law Claims
Counts 3 and 4: Nevada Uniform Securities Act
Counts 3 and 4 allege that the course of conduct described in the complaint violated also the Nevada Uniform Securities Act.
The specific statutory provision on which plaintiffs base their primary liability claim—Section 90.580 of the Nevada Revised Statutes—applies only if (1) an offer to sell securities originated in Nevada or an offer to purchase was made and accepted in Nevada,94 and (2) those securities were not traded on a national stock exchange.95 Here, the complaint states that EGT's common stock was traded on the America Stock Exchange at all times relevant to this motion, and plaintiffs have not alleged that defendants offered to sell, or that plaintiffs received and accepted an offer to buy, EGT stock in Nevada. Moreover, because plaintiffs have failed adequately to allege a primary violation under the Nevada Uniform Securities Act, they have not made out a claim for control person liability under the same statute. Accordingly, Counts 3 and 4 are dismissed.
Count 5: Breach of Fiduciary Duty
Plaintiffs allege that all of the Individual Defendants owed plaintiffs fiduciary duties "by virtue of their status as directors or officers of [EGT], or of its controlling shareholder [EGL]" and that they breached those duties by (1) "making or approving the materially false and misleading statements" identified in the complaint, and (2) "recommending to the minority shareholders, and by causing [EGT] to enter into, transactions that [the Individual Defendants] knew or should have known. . . benefitted [EGL, Yuen] and others to the unfair detriment of plaintiffs and other minority shareholders of [EGT]."96 Plaintiffs assert that this is a direct rather than a derivative claim and that they therefore were not required to make a demand on the board or allege demand futility.97 The Individual Defendants argue the opposite, claiming that plaintiffs' fiduciary duty claims are derivative in nature and must be dismissed for lack of standing.
A shareholder may bring a direct claim—that is, a claim on his or her own rather than the corporation's behalf-only for "injuries that are independent of any injury suffered by the corporation."98 By contrast, "[a] derivative claim is one brought by a shareholder on behalf of the corporation to recover for harm done to the corporation."99 "[A] shareholder must, before filing [a derivative] suit, make a demand on the board, or if necessary, on the other shareholders, to obtain the action that the shareholder desires," or he or she must allege facts indicating that such a demand would have been futile.100
Plaintiffs have alleged two distinct breaches by the defendants of their alleged fiduciary duties. The claim based on the first—"making or approving the materially false and misleading statements" identified in the complaint—is direct in nature in that plaintiffs allege they were harmed individually when they bought stock at prices inflated by the defendants' misrepresentations and the price later declined. That alleged injury was not felt by the corporation itself but only by certain shareholders, including Strata, who bought EGT stock at an allegedly inflated price as a result of the alleged misrepresentations.101 In order to make out this direct claim, however, Strata was obliged to allege facts which, if proved, would show the existence of a fiduciary duty by the defendants that ran to it directly.102 Strata has alleged no such facts.103 This portion of the fiduciary duty claim therefore fails.
The second alleged breach identified by plaintiffs—defendants' recommendation that shareholders vote for, and cause EGT to enter into, the SPPPA—states only a derivative claim. The thrust of this argument is that EGT as a company, and its shareholders pro rata, suffered when the defendants caused it to enter into an agreement that changed its business model in a manner that benefitted the defendants to the ultimate detriment of the company. This claim belongs to the corporation itself. But plaintiffs have not alleged that they made a pre-suit demand on the board or that such a demand would have been futile.104 They therefore may not pursue this portion of their claim.
Accordingly, plaintiffs' breach of fiduciary duty claims are dismissed.
Count 6: Common Law Fraud
Plaintiffs assert that Nevada law governs all of their common law tort claims while defendants argue that New York law applies. "In the absence of substantive difference [between two states' laws] . . . a New York court will dispense with choice of law analysis; and if New York law is among the relevant choices, New York courts are free to apply it."105 Here the elements of common law fraud are substantially the same under New York and Nevada law.106 The Court therefore applies New York law, which requires that a plaintiff allege: "(1) a misrepresentation or a material omission of fact which was false and known to be false by defendant, (2) made for the purpose of inducing the other party to rely upon it, (3) justifiable reliance of the other party on the misrepresentation or material omission, and (4) injury."107
Here, as under Rule 10b-5, Strata's failure adequately to plead loss causation dooms its common law fraud claims with respect to most of the statements alleged to have inflated share prices between June 13, 2007, and December 10, 2007.108 As previously explained, Strata adequately has pleaded loss causation only with respect to the three statements allegedly made during that time period regarding expected net win rates for the EGMs that were to be placed pursuant to EGT's new business venture.109 While the federal statutory safe harbor for forward-looking statements does not itself protect such statements from common law fraud claims, essentially the same considerations—that is, the facts that (1) the statements were forward-looking statements of belief as to expected future net win rates, and (2) plaintiffs have alleged no facts, as opposed to conclusory assertions, showing that the defendants who made the statements did not believe them at the time—dictate dismissal here because the plaintiffs have not adequately alleged that these statements in fact were false.
Strata argues that the Court should infer falsity because (1) "defendants knew CasinoLink was not being installed, [therefore] they had no way of knowing what percentage of each venue's "net win" they were receiving;" (2) "it can be deduced [from EGT's Form 10-K, filed in March 2008,]that the maximum average net win per machine for the fourth quarter of 2007 was only $44; (3) in May 2008, Reberger admitted to Prime Mover representatives that as early as March 2008 he had received bad net win reports for venues in Indochina;" and (4) when EGT issued results by country on August 13, 2008, the net win figures in all venues were substantially below the projected figures.110
None of this gives rise to an inference that the defendants knew at the times the statements were made—in June and November 2007, when the new business venture still was in its early stages—that they were false. Strata's first argument illogically presumes that the defendants and venues had no means other than the CasinoLink electronic management system of calculating, or projecting, net win rates. Even if the defendants knew at the time that CasinoLink was not being installed in all of the EGMs, that would not begin adequately to allege that they lacked any other basis for their projections and knew that the stated projections were false. Defendants' other three arguments are similarly unavailing. At most, they suggest that months after the relevant alleged misrepresentations certain of the defendants may have come to possess information that undercut the $125 average net win figure. Strata has failed adequately to plead "falsity" with respect to these statements.
Accordingly, Strata's claim for common law fraud is dismissed.
Count 7: Negligent Misrepresentation
Because New York and Nevada law differ regarding the elements of negligent misrepresentation,111 the Court must decide which law applies.
Under New York choice of law rules, courts look to the jurisdiction with the greatest interest in regulating the tortious conduct at issue.112 Here, however, plaintiffs have not alleged sufficient facts for the Court to determine which jurisdiction has the most significant contacts with plaintiffs' tort claims.113 Nevada, California, and New York law each properly might govern,114 but the facts alleged in the complaint are not adequate to determine with any degree of certainty which of these has the strongest interest in each claim. In this circumstance, the Court applies the law of the forum specifically chosen by the plaintiffs—that is, New York.115
Under New York law,
"a negligent statement may be the basis for recovery of damages, where there is carelessness in imparting words upon which others were expected to rely and upon which they did act or failed to act to their damage, but such information is not actionable unless expressed directly, with knowledge or notice that it will be acted upon, to one to whom the author is bound by some relation of duty, arising out of contract or otherwise, to act with care if he acts at all."116
That is, "under New York law, a plaintiff may recover for negligent misrepresentation only where the defendant owes her a fiduciary duty."117 Such a "special relationship" requires "a closer degree of trust between the parties than that of the ordinary buyer and seller in order to find reliance on such statements justified."118
Strata has not alleged any such special relationship between itself and any of the defendants. As portrayed in the complaint, Strata was simply one more customer that relied on the misrepresentations allegedly made by the defendants to the public when it purchased EGT's common stock, and warrants to purchase that stock, at inflated prices. This is not the sort of "special relationship" on which to base recovery for negligent misrepresentation. Accordingly, Strata's negligent misrepresentation claim is dismissed.
Counts 8 and 9: Breach of Contracts
Under New York law,119 "[i]n order to recover from a defendant for breach of contract, a plaintiff must prove, by a preponderance of the evidence, (1) the existence of a contract between itself and that defendant; (2) performance of the plaintiff's obligations under the contract; (3) breach of the contract by that defendant; and (4) damages to the plaintiff caused by that defendant's breach."120 "[A]n express warranty is part and parcel of the contract containing it and an action for its breach is grounded in contract."121
Strata claims that EGT breached the SPA, and that EGT and EGL breached the WPA, "by receiving and retaining performance due from Strata . . . when the representations and warranties made by [EGT, and, in the WPA, EGL] were untrue and inaccurate in numerous material respects."122 Specifically, it identifies six "representations and warranties" by EGT in the SPA, as well as two "representations and warranties" by EGL and seven by EGT in the WPA, that it alleges were breached.123 These breaches allegedly "caused damage to Strata, including but not limited to the loss of the money Strata paid to [EGT and EGL] pursuant thereto."124
EGT's Warranties in the SPA
Strata identifies the following six warranties in the SPA as allegedly having been breached by EGT:
1. EGT's SEC filings up to that date had "complied in all material respects with the requirements of the [Exchange Act]" and did not contain misrepresentations or omissions of material fact;
2. "[T]here ha[d] been no event, occurrence or development that has had or that could reasonably be expected to result in a Material Adverse Effect" as defined in the contract;
3. EGT was not and had not been "in violation of any statute, rule or regulation of any governmental authority, including without limitation all foreign, federal, state and local laws applicable to its business;"
4. EGT "possesse[d] all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct [its] business as described in the SEC reports;"
5. "All disclosures furnished by or on behalf of [EGT] to the Purchasers regarding [EGT], its business and the transactions contemplated hereby, including the Disclosure Schedules to this Agreement, with respect to the representations and warranties made herein [were] true and correct" and did not omit any material fact; and
6. No event, development, or circumstance had occurred or existed with respect to EGT that was required to be and had not been disclosed in its SEC filings.125
These warranties fall into two groups: (1) warranties that EGT had been and was in compliance with the federal securities laws and regulations (the first, third, and sixth warranties listed above), and (2) warranties unrelated to such compliance (the second, fourth, and fifth warranties).
With respect to the second group of warranties, Strata has not pleaded sufficient facts to make out any claim for breach. The complaint does not allege any facts at all related to the fourth warranty—possession of appropriate certificates and permits—much less any suggesting that it was false.
Strata's allegations regarding the second and fifth warranties are too vague to state a claim. The complaint relates a long tale of allegedly fraudulent conduct and then simply asserts in a cursory manner that this whole course of conduct evidences breach of these two warranties. Strata does not state clearly which of the many events or occurrences alleged in the complaint reasonably could have been expected to result in "Material Adverse Effects."126 Nor does it state which disclosures furnished by EGT to Strata regarding EGT and the SPA were inaccurate.127 Even under Rule 8(a)'s forgiving pleading standard, such sparse allegations are insufficient to state a claim because they fail to put EGT on notice as to the nature and scope of the claims against it.128
Strata sufficiently has pleaded a breach, however, with respect to the first group of warranties. The contract claim regarding this group tracks Strata's securities fraud claims—that is, Strata asserts that EGT breached the SPA by falsely warranting that it had not violated securities laws or regulations prior to the SPA's closing. The fact that Strata's securities fraud claims fail primarily for lack of loss causation does not doom its breach of contract claim on the same basis. If EGT breached an express warranty in the SPA then Strata was injured at the moment it purchased stock at an inflated price pursuant to that instrument, and it is entitled to recover the benefit of its bargain.129 Thus if EGT or its representatives in fact did make false statements of material fact in violation of the securities laws prior to the SPA's closing—even statements as to which Strata has failed to plead loss causation—then EGT breached that warranty as soon as the deal closed. Giving Strata the benefit of every reasonable inference and in light of the allegations as a whole—particularly those regarding disclosures made to plaintiffs in November 2008130—Strata adequately has pleaded at least that certain material statements made publicly, and contained in documents filed with the SEC, by EGT and its representatives prior to the SPA were false and violated the securities laws.131
Because plaintiffs adequately have alleged breach of the first group of warranties, Strata's claim against EGT for breach of the SPA survives.
EGT's Warranties in the WPA
The same is true with respect to EGT's warranties in the WPA. Strata identifies in the WPA a set of warranties by EGT equivalent to those described above—as well as one additional warranty132—as having been breached.133
For the reasons explained above with respect to the nearly identical set of warranties contained in the SPA, Strata has made out an adequate claim against EGT for breach of the WPA. If in fact certain of the defendants' statements and SEC filings on EGT's behalf leading up to the WPA contained materially false information, as adequately is alleged, then EGT breached at least one of its warranties in the WPA.
EGL's Warranties in the WPA
Strata identifies only two warranties by EGL in the WPA as having been breached: (1) "[t]hat [EGL] has not, and to its knowledge no one acting on its behalf has taken, directly or indirectly, any action designed to cause or to result in the stabilization or manipulation of the price of any security of EGT to facilitate the sale of the Warrants" and (2) that the "transfer and sale of the Warrants . . . do not and will not . . . conflict with or result in a violation of any law, rule [or] regulation . . . or other restriction of any . . . governmental authority to which [EGL] is subject (including federal and state securities laws and regulations)."134
Strata's claim with respect to the former warranty essentially restates its securities fraud claims against EGL, except that here the warranty speaks only to specific intent or "design"—not recklessness—in manipulating EGT's stock and warrant prices. While scienter may be alleged "generally" under Rule 9(b),135 "the relaxation of Rule 9(b)'s specificity requirement for scienter must not be mistaken for [a] license to base claims of fraud on speculation and conclusory allegations, and a plaintiff must still allege facts that give rise to a strong inference of fraudulent intent."136 "When the defendant is a corporate entity, this means that the pleaded facts must create a strong inference that someone whose intent could be imputed to the corporation acted with the requisite scienter."137
Here, the pleadings are insufficient to infer that any of the Individual Defendants, or any other individual whose scienter might be attributed to EGL for the summer and fall of 2007, had a concrete personal motive to manipulate the price of EGT's stock.138 The complaint does not allege that any EGL officer or director sold any EGT stock during the period in which the price allegedly was inflated or otherwise benefitted from the alleged inflation in any direct, personal way.139 In fact, the complaint alleges that EGL acquired, through the SPPPA's "earn-in" arrangement, far more EGT stock and options than it converted or sold during the period in which the price allegedly was inflated. In the absence of allegations giving rise to a strong inference that EGL or any of its agents took actions designed to manipulate the price of EGT's stock and warrants, Strata's claim against EGL for breach of this warranty fails.
Strata's claim fails also with respect to the second warranty identified by Strata as having been breached by EGL. Strata has not alleged how the sale of stocks and warrants pursuant to the WPA—as distinguished from any of the allegedly fraudulent conduct that preceded those sales—violated any particular law, rule, or regulation. While this Court can conceive of theories on which such a claim might rest, it is the plaintiff's burden to plead its allegations with sufficient clarity to give defendants notice of the claim. It has not done so here.
Accordingly, Strata's contract claim against EGL for breach of the WPA is dismissed.
Count 10: Unjust Enrichment
Finally, plaintiffs allege that the defendants were unjustly enriched by plaintiffs' purchases of EGT stock at artificially inflated prices.140 As with negligent misrepresentation, New York and Nevada law vary slightly with respect to unjust enrichment claims.141 For the reasons described above, the Court applies New York law to Strata's claim.142
"To prevail on a claim for unjust enrichment in New York, a plaintiff must establish (1) that the defendant benefitted; (2) at the plaintiff's expense; and (3) that equity and good conscience require restitution."143 However, "[t]he existence of a valid and enforceable written contract governing a particular subject matter ordinarily precludes recovery in quasi contract for events arising out of the same subject matter."144
Here, Strata has alleged only two purchases of EGT stock: those pursuant to the SPA and the WPA, written contracts that govern those sales. This precludes recovery for unjust enrichment at least with respect to EGT, which was a party to both agreements, and EGL for those claims based on the WPA to which it was a party.
The claim may be foreclosed on the same basis also with respect to the other defendants, who were not parties to the two contracts, and to EGL regarding shares purchased under the SPA.145 Even if it is not barred on this basis, however, Strata has not alleged a direct benefit to the other defendants of the type required to make out an unjust enrichment claim.146 Rather, Strata has alleged only that it "conferred a benefit upon the [defendants] by purchasing [EGT] stock at artificially inflated prices. The revenue from those purchases went to [EGT] for the ultimate benefit of the [defendants]."147 This is not specific or direct with respect to EGL or the Individual Defendants. Strata's unjust enrichment claim therefore is dismissed.
For the foregoing reasons, defendants' motions to dismiss [DI 29, 31, 39] the amended complaint are granted to the extent that (1) all of Prime Mover's claims are dismissed and (2) all of Strata's claims are dismissed except for Counts 8 and 9 against EGT. The motions are denied in all other respects.