Lifeline Legacy Holdings, LLC v. Ozy Media

Background

LifeLine Legacy Holdings, LLC sued OZY Media, Inc., Samir Rao, and Carlos Watson for federal and state securities fraud. Rao and Watson solicited LifeLine’s investments in OZY Media. LifeLine entered into a stock purchase agreement for approximately $2 million of Series C preferred shares in February 2021 and a second agreement for approximately $250,000 of Series D preferred shares in May 2021.

LifeLine alleged that, before signing the agreements, the defendants failed to disclose that Rao had tried to impersonate a YouTube executive to obtain an investment from Goldman Sachs, that Goldman Sachs declined to invest because of Rao’s conduct, and that government agencies were investigating OZY Media. The amended complaint asserted three federal securities-fraud claims under Section 10(b) of the Securities Exchange Act and Rule 10b-5, three claims under California Corporations Code § 25401, and one California common-law claim for fraud by concealment.

OZY Media moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint adequately states a legally sufficient claim. Rao and Watson joined the motion. LifeLine argued that its claims were adequately pleaded.

Federal Securities Claims

The court dismissed Claims 1 through 3, which asserted federal securities fraud against OZY Media, Rao, and Watson. The court found several pleading defects.

First, LifeLine’s counsel clarified that the federal claims were based on omissions, not oral representations. The court therefore focused on the stock purchase agreements. The amended complaint identified one relevant representation: that, to OZY Media’s knowledge, the company was not violating any applicable federal or state statute, rule, or regulation. LifeLine did not explain how the alleged nondisclosure of Rao’s impersonation or the government investigations made that particular statement false or misleading. It also did not identify a statute, rule, or regulation that Rao’s conduct violated.

Second, the court held that LifeLine had not adequately pleaded scienter—the required knowledge, intent, or deliberate recklessness. Watson signed the stock purchase agreements as OZY Media’s chief executive officer, so the court treated Watson and OZY Media as makers of the relevant statement. But the amended complaint did not allege that Watson knew Rao’s conduct violated an applicable law or when Watson learned about the government investigations. The complaint also did not adequately allege scienter as to Rao because it did not show that Rao knew his conduct violated an applicable law. The court further found that the desire to obtain financing was not, by itself, a sufficient motive to establish scienter.

Third, the court rejected LifeLine’s argument that reliance should be presumed. LifeLine characterized the case as one involving omissions, but the court found that LifeLine’s theory involved alleged omissions that made representations in the stock purchase agreements misleading. LifeLine therefore had to allege that it relied on the identified representation when investing, and it had not done so.

Fourth, the court found that LifeLine had not adequately alleged economic loss or loss causation. LifeLine alleged that the value of OZY Media declined after Rao’s conduct became known, but it did not allege facts showing that the shares’ value actually decreased or otherwise providing a factual basis for the claimed loss.

The court granted the motion as to Claims 1 through 3, with leave to amend to the extent those claims were based on alleged omissions that made representations or warranties in the stock purchase agreements false or misleading. The court granted the motion without leave to amend to the extent the claims were based on oral representations or an alleged fiduciary duty. The court understood LifeLine to be withdrawing its fiduciary-duty theory.

State-Law Claims

Claims 4 through 6 asserted violations of California Corporations Code § 25401 against OZY Media, Rao, and Watson. Claim 7 asserted fraud by concealment against all defendants. The defendants argued that these claims repeated the same allegations as the federal securities claims and should therefore also be dismissed.

The court granted the motion as to Claims 4 through 7, with leave to amend to the extent those claims were based on alleged omissions involving representations and warranties in the stock purchase agreements. The court granted the motion without leave to amend to the extent those claims were based on oral representations or an alleged fiduciary duty.

Order

The motion to dismiss was granted, with leave to amend in part and without leave to amend in part. Any amended pleading had to be filed by July 29, 2022, and amendment was limited to the defects identified in the order. LifeLine could not add new claims or parties without express permission from the court. Judge Beth Labson Freeman ordered that the motion docket entry be terminated.