Sabby Volatility Warrant Master Fund Ltd. v. Safety Shot Inc.

Background

Sabby Volatility Warrant Master Fund Ltd. sued Safety Shot, Inc. for breach of contract. Sabby alleged that it invested in Safety Shot in January 2023 by purchasing common stock and warrants. Under a registration-rights agreement, Safety Shot allegedly agreed to register the shares underlying the warrants and maintain an effective registration statement until the warrants were fully exercised.

After Safety Shot issued 2,000,000 shares as a special dividend, an anti-dilution provision increased the number of shares covered by Sabby’s warrants by 306,728. Sabby alleged that Safety Shot failed to amend its registration statement to cover those additional shares.

In November 2023, Safety Shot proposed that Sabby exercise all of its remaining warrants in a single cash transaction. Sabby paid approximately $2.5 million and expected to receive approximately 2.6 million warrant shares plus 200,000 additional inducement shares. Safety Shot admitted that it did not deliver the inducement shares. Sabby also received only 2,333,999 of the approximately 2,640,727 warrant shares it expected, which Sabby attributed to the unregistered additional shares.

Motion and Discovery Disputes

Safety Shot’s amended answer included a third affirmative defense based on unclean hands and a fifth affirmative defense asserting that the governing contracts were void as against public policy. Both defenses relied on Section 29(b) of the Securities Exchange Act of 1934. Safety Shot sought to use those defenses to argue that Sabby’s contracts should be invalidated because Sabby acted as an unregistered broker or dealer.

Sabby moved under Rule 12(f) of the Federal Rules of Civil Procedure to strike the two defenses. Rule 12(f) permits a court to remove an insufficient, redundant, immaterial, impertinent, or scandalous defense from a pleading.

The parties also disputed discovery. Safety Shot sought broad information about Sabby’s transactions, communications with securities regulators, financial accounts, and trading positions, including information involving nonparties Wedbush Securities and Pershing LLC. The court concluded that Safety Shot was attempting to use the defenses to obtain wide-ranging discovery concerning other activity and alleged price manipulation rather than the specific transactions at issue.

Court’s Analysis

The court held that the defenses were factually insufficient. Safety Shot had not provided facts showing that Sabby acted as a broker by entering warrant transactions on behalf of another person or acted as a dealer by conducting the transactions through an intermediary broker. The court found that Safety Shot’s statements that it had a “good reason to believe” Sabby conspired with other hedge funds to manipulate Safety Shot’s securities were unsupported conclusions.

The court also held that the defenses were legally insufficient. To show that Sabby acted as an unregistered broker or dealer, Safety Shot would need to establish, among other things, that the contract involved a prohibited transaction and that the contract itself violated the Exchange Act. The court found no allegation that the parties’ contracts were legally defective in that way. It also noted that Safety Shot did not intend to assert that its own contracts were illegal.

Finally, the court found prejudice because the defenses had produced intrusive and burdensome discovery requests unrelated to the parties’ transaction. The court therefore struck both dealer defenses.

Disposition

Judge Naomi Reice Buchwald granted Sabby’s motion to strike the third and fifth affirmative defenses. The court also limited discovery to information related to the parties’ bilateral dealings in this specific transaction. The order asked the Clerk of Court to terminate the motion to strike at ECF No. 32 and the discovery-related letter motions at ECF Nos. 48 and 52.