Alpha Capital Anstalt v. Intellipharmaceutics International Inc.

Background

Alpha Capital Anstalt sued Intellipharmaceutics International Inc. (IPCI), Isa Odidi, Amina Odidi, and Andrew Patient under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. Alpha alleged that IPCI’s registration statement and prospectus failed to disclose that Patient, then IPCI’s Chief Financial Officer, would leave the company within approximately two months of the offering.

IPCI filed its final registration statement on October 11, 2018, and it became effective on October 12. Alpha met with Patient on October 9 during its due diligence and bought IPCI securities on October 12 for approximately $1,677,333. On November 6, IPCI announced that Patient would resign effective November 30. The complaint alleged that IPCI knew by the offering date that Patient would leave by the end of 2018.

Rule 12(b)(6) Standard

The defendants moved to dismiss for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure. At this stage, the court accepted the complaint’s factual allegations as true, drew reasonable inferences for Alpha, and considered whether the pleaded facts made liability plausible.

Section 11 Claim

Alpha alleged that the registration statement was materially misleading because it described Patient as IPCI’s Chief Financial Officer, described his employment agreement, and stated that IPCI’s success depended in part on retaining qualified management, while omitting his planned departure.

The court held that the complaint adequately pleaded a material omission. Read as a whole, the registration statement suggested that Patient would continue as a member of senior management, which the complaint alleged IPCI knew was false. The court rejected the defendants’ arguments that they did not know about the departure, had no duty to disclose it, or that the omission was immaterial. Those arguments raised factual issues or involved materiality questions that could not be resolved on this motion.

The court also rejected the defendants’ reliance on the “bespeaks caution” doctrine, which can protect forward-looking statements accompanied by adequate warnings. IPCI’s warning that employees could terminate their employment did not, as a matter of law, warn investors that Patient’s departure had already become likely by the offering date. The motion to dismiss the Section 11 claim was denied.

Section 12(a)(2) Claims

Section 12(a)(2) provides a remedy for material misstatements or omissions in a prospectus or oral communication. A potential defendant must generally be a “statutory seller”—someone who transferred the security for value or successfully solicited the purchase, at least partly to serve that person’s financial interests or those of the security’s owner.

The court granted Isa Odidi’s motion to dismiss. The complaint alleged that his participation in the offering was limited to signing the registration statement. It did not allege that he engaged in marketing activities with Alpha or another purchaser or that he successfully solicited a purchase. His scheduled participation in the October 9 meeting was not enough because the complaint did not allege that he actually participated in marketing IPCI stock.

The court denied the remainder of the motion to dismiss the Section 12(a)(2) claims. Patient attended the October 9 meeting and served as Alpha’s IPCI contact, which adequately supported the allegation that he solicited the sale. The court also held that IPCI could be treated as a statutory seller in its primary offering even though an underwriter handled the sales. The complaint adequately alleged that IPCI participated directly in soliciting the securities by sending an officer to assist Alpha’s due diligence and directing Alpha to contact Patient for additional information.

Section 15 Claims

Section 15 imposes control-person liability on someone who controls a person liable under Section 11 or Section 12. The court denied the motion to dismiss the Section 15 claims against Isa Odidi, Amina Odidi, and Patient. The individual defendants did not dispute that the complaint adequately alleged their control over persons who committed the alleged primary Securities Act violations. The court rejected their arguments that the complaint failed to plead a primary violation and that the Section 15 claims duplicated the Sections 11 and 12(a)(2) claims.

Disposition

The court stated that the defendants’ December 12 motion was largely denied. The claim against Isa Odidi under Section 12(a)(2) of the Securities Act was dismissed. The remainder of the motion was denied.