SuperCom Ltd. v. Sabby Volatility Warrant Master Fund Ltd.

Background

SuperCom sued Sabby Volatility Warrant Master Fund Ltd. and Wedbush Securities, Inc., asserting claims for fraud, breach of contract, negligence, and violations of federal securities laws. SuperCom withdrew its negligence claim against Wedbush, and the court stated that claim was dismissed. The remaining claim against Wedbush was for securities fraud under Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5.

SuperCom and Sabby entered into a stock purchase agreement and a warrant agreement. The warrant agreement allowed Sabby, under specified conditions, to buy additional SuperCom shares at a set price and potentially exercise the warrant without paying cash. On March 19, 2021, Sabby attempted a cashless exercise and began an electronic share transfer. SuperCom alleged that the exercise notice was improperly transmitted and that it later told Sabby the notice was invalid. SuperCom further alleged that a Sabby employee misrepresented Sabby’s authority to Wedbush, and that Wedbush resubmitted the transfer request despite being told that SuperCom had not approved the share issuance. According to SuperCom, the transfer resulted in 647,000 unauthorized shares being issued and delivered to Sabby’s brokerage account. SuperCom alleged that the shares were later returned.

Motion to dismiss standard

Wedbush moved to dismiss under Rule 12(b)(6), which tests whether a complaint states a legally sufficient claim. Because the claim alleged securities fraud, the court also applied Rule 9(b) and the Private Securities Litigation Reform Act. Those rules require a plaintiff to identify the alleged misleading statements or omissions with particularity, including what was said, who said it, when and where it was said, why it was misleading, and the facts supporting a strong inference that the defendant intended to deceive or acted recklessly.

Misstatements and omissions

The court held that SuperCom did not identify any specific misrepresentation or omission by Wedbush. The complaint alleged generally that Wedbush misled SuperCom’s transfer agent into issuing the shares, but it did not specify what Wedbush said or omitted, who communicated it, when or where the communication occurred, or why it was fraudulent.

SuperCom argued in its opposition papers that Wedbush’s initiation or resubmission of the electronic transfer itself represented that Wedbush had SuperCom’s authorization. The court rejected that theory because the complaint still did not identify specific statements or omissions, establish the sequence of events, or explain why any statement was fraudulent. The court also declined to consider an affidavit and emails submitted with the opposition because the complaint did not refer to those materials clearly enough. It declined to treat the affidavit as an amendment to the complaint, noting that SuperCom was represented by counsel and had an opportunity to amend before the motion was filed.

Intent to deceive or recklessness

The court also held that SuperCom failed to plead the required fraudulent state of mind, commonly called scienter. SuperCom did not allege facts showing that Wedbush received a concrete personal benefit from the alleged scheme. Its argument that Wedbush may have received transaction fees appeared for the first time in the opposition papers, and the court stated that those new facts could not be considered. The court also stated that receiving ordinary compensation, without more, was not enough to show a motive to commit securities fraud.

The court further found insufficient SuperCom’s allegations that Wedbush knowingly violated Securities and Exchange Commission requirements or acted unreasonably by initiating the transfer without SuperCom’s consent. Alleging a regulatory violation, without facts showing fraudulent intent, was not enough. The complaint also did not establish that Wedbush knew about SuperCom’s rejection before initiating the transfer, or that Wedbush made representations to the transfer agent that contradicted facts known to it. Finally, the allegation that Sabby later returned the shares did not show what Wedbush knew or intended.

Reliance

A securities-fraud claim also requires reliance: the plaintiff must allege that it or its agent relied reasonably on the defendant’s misrepresentation and was harmed because of that reliance. SuperCom did not allege that it relied on any statement by Wedbush. It argued instead that its transfer agent relied on Wedbush’s alleged misrepresentations. The court rejected that argument because SuperCom had not identified any misstatement by Wedbush to the transfer agent and had not pleaded facts showing that the transfer agent relied on such a statement or that any reliance was reasonable. The complaint’s only reliance allegation stated that Wedbush relied on a misrepresentation by Sabby.

Disposition

Judge Analisa Torres granted Wedbush’s motion to dismiss SuperCom’s securities-fraud claim and dismissed Wedbush from the action. The clerk was directed to terminate the motion and Wedbush from the case. The court did not address the remaining elements of the securities-fraud claim, including loss causation, because it found that SuperCom had failed to adequately plead at least three elements. The opinion does not state a disposition of SuperCom’s claims against Sabby.