Puddu v. NYGG, LTD.

Background

The plaintiffs filed a proposed class action alleging violations of Section 10(b), Rule 10b-5, and Section 20(a) of the Securities Exchange Act of 1934. The operative pleading alleged that Benjamin Wey, described as 6D’s unofficial chief executive officer, beneficially owned approximately 46% of 6D’s stock through NYGG (Asia), Ltd., a company he allegedly controlled, and that he controlled 6D’s operations. The plaintiffs alleged that Wey failed to disclose those interests and his role in 6D’s public filings.

The Second Amended Complaint also alleged that Wey was involved in 6D’s financing, selection of auditors and executives, legal strategy, capital-markets activities, acquisitions, stock transactions, and preparation of filings with the Securities and Exchange Commission. The plaintiffs further alleged that Wey and others concealed his relationship with 6D and that this concealment misled investors.

Wey had previously been in default, but the court granted his motion to vacate the default in May 2020. He then moved to dismiss the Second Amended Complaint, strike portions of it, and dismiss the action for failure to prosecute.

Motion to dismiss

The court applied the standard for a motion to dismiss for failure to state a claim. It accepted the complaint’s factual allegations as true and drew reasonable inferences for the plaintiffs, while requiring the complaint to plead a plausible claim and to satisfy heightened requirements for fraud allegations under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act.

The court held that the plaintiffs plausibly alleged that Wey was responsible for material omissions and misstatements. In particular, the complaint alleged that Wey was required to file a Schedule 13D disclosing beneficial ownership exceeding five percent but did not do so. The court concluded that this alleged failure could constitute a material omission because the disclosure requirement was intended to alert investors to possible changes in corporate control.

The court rejected Wey’s argument that news articles about his relationship with NYGG and NYGG-Asia made the omission immaterial. It explained that whether public information sufficiently corrected an alleged misrepresentation was fact-specific and generally not suitable for resolution on a motion to dismiss. The complaint also alleged that Wey publicly denied or minimized his relationship with NYGG-Asia, supporting an inference that investors could have been misled despite the news articles.

The court further held that the complaint plausibly alleged that Wey was a “maker” of misleading statements in 6D’s filings. Although the Second Circuit had previously found that the plaintiffs adequately alleged Wey’s beneficial ownership and that 6D’s failure to disclose that information could be misleading, this court separately considered whether Wey himself could be connected to the statements. It concluded that allegations that Wey reviewed filings, gave instructions about their contents, participated in calls concerning 6D’s periodic reports, and exercised extensive operational control supported an inference that he had ultimate authority over the filings.

The court also held that the plaintiffs adequately alleged Wey’s liability under the group-pleading theory for certain written corporate statements. The court treated the theory as potentially applicable where an individual was directly involved in the company’s daily business or acted as a corporate insider. It found sufficient allegations that Wey handled or influenced financing, capital-markets strategy, auditing, executive selection, legal matters, operational decisions, and the preparation of 6D’s filings. The court stated that an official title was not necessarily required and that the alleged functional role was sufficient at the pleading stage.

The court separately held that the plaintiffs adequately pleaded scheme liability under Rule 10b-5(a) and (c). It concluded that, after the Supreme Court’s decision in Lorenzo v. Securities and Exchange Commission, alleged misstatements or omissions could constitute the deceptive act in a scheme-liability claim, so long as the claim also involved the other required elements, including an alleged scheme to defraud. Wey did not challenge the other elements of that claim in the motion.

The court also found a sufficiently strong inference of scienter, meaning the required fraudulent intent or recklessness. It considered the allegations collectively, including the alleged strategy of concealing Wey’s involvement, acquiring large stock interests, influencing companies’ listings and stock prices, and profiting from the scheme. The complaint also alleged that Wey had made more than $70 million through the alleged scheme and that concealing his involvement was important because of his notoriety and prior dealings with the Nasdaq.

For the Section 20(a) controlling-person claim, the court held that the plaintiffs plausibly alleged a primary securities-law violation by 6D-related persons, Wey’s control over those persons, and Wey’s culpable participation in the alleged fraud. The court therefore denied the motion to dismiss that claim as well.

Wey no longer pursued his arguments concerning reliance and whether the alleged conduct was connected to securities purchases or sales. The court stated that the motion to dismiss on those points was denied.

Motion to strike

Wey moved under Rule 12(f) to strike allegations concerning a federal indictment that was later dismissed, a dismissed Securities and Exchange Commission enforcement action, alleged improprieties, the delisting of CleanTech, litigation involving Nasdaq, and litigation involving Discover Growth Fund and 6D. The court denied the motion to strike. It found that the allegations could be relevant to the plaintiffs’ theory concerning why Wey allegedly concealed his involvement and to the scienter issue. The court also rejected the argument that allegations from dismissed or unresolved proceedings were automatically irrelevant.

Failure to prosecute

Wey also sought dismissal under Rule 41(b), arguing that the plaintiffs had delayed serving the amended complaints and prosecuting the case against him. The court denied that request. It stated that dismissal for failure to prosecute is a harsh remedy and found that the relevant factors did not support dismissal. The court noted that Wey had received actual notice of the action, failed to appear after being served with the original complaint, and bore significant responsibility for the delay. The plaintiffs also had not previously been warned that the case could be dismissed for failure to prosecute.

Disposition

Judge Alison J. Nathan denied Wey’s motion to dismiss the Second Amended Complaint, denied his motion to strike portions of it, and denied his motion to dismiss for failure to prosecute. The ruling allowed the claims against Wey to proceed past the pleading stage; it did not determine ultimate liability or whether the plaintiffs would succeed on the merits.