DarkPulse, Inc. v. EMA Financial, LLC

Background

DarkPulse, Inc. sued EMA Financial, LLC (EMA), EMA Group, LLC (EMA Group), and Felicia Preston. The case concerns a September 2018 Securities Purchase Agreement and Convertible Note. In exchange for $94,000, EMA received a note with a $100,000 principal amount, 8% annual interest, a nine-month maturity date, and an option to convert the debt into DarkPulse stock at a 30% discount from the stock’s market price.

From April 2019 through October 2020, EMA completed 19 conversions. It converted $83,244.18 in debt and received more than 567 million shares, which had a market value of $265,493.55 when converted. DarkPulse alleged that the agreements and transactions violated the Securities Exchange Act, the Racketeer Influenced and Corrupt Organizations Act (RICO), and New York law. The defendants moved to dismiss the First Amended Complaint under the rule requiring a complaint to allege enough facts to make a claim legally plausible.

Rulings

The court granted in part and denied in part the motion to dismiss. Counts I, II, and III, which alleged violations of the Securities Exchange Act, were dismissed. Count VI, which sought a constructive trust, was also dismissed. Count IV, the civil RICO claim, was dismissed as to EMA but survived as to EMA Group and Preston. Count V, the unjust-enrichment claim, survived.

Exchange Act Claims

The court held that the Exchange Act claims were barred by the statute of repose, a deadline that generally cannot be extended based on when a violation is discovered. The relevant contracts were executed on September 25, 2018, so claims seeking rescission based on EMA’s alleged status as an unregistered broker-dealer had to be filed by September 25, 2021. The action was commenced on January 4, 2022. The court rejected DarkPulse’s arguments that later stock conversions restarted the deadline or that a different five-year deadline applied.

Civil RICO Claim

The court allowed the civil RICO claim to proceed against EMA Group and Preston. RICO requires a distinct “person” and “enterprise”; the court concluded that the complaint plausibly alleged EMA as the enterprise and EMA Group and Preston as the persons associated with it. The complaint also plausibly alleged an “unlawful debt,” meaning a debt made in connection with lending at a sufficiently usurious rate.

The complaint alleged an effective annual rate of 73%, based on the note’s stated interest, the original issue discount, and the value of the stock-conversion option. The court held that the conversion option could be considered interest and that the allegations plausibly showed a rate exceeding New York’s 25% criminal-usury threshold. The complaint also alleged that the defendants were in the business of making similar convertible-note loans at usurious rates.

The RICO claim was dismissed only as to EMA. Because the complaint identified EMA as the RICO enterprise, the court held that EMA could not also be the RICO person liable for conducting that enterprise’s affairs.

Unjust Enrichment

The court denied dismissal of the unjust-enrichment claim. Ordinarily, a valid written contract covering the subject matter prevents recovery under an unjust-enrichment theory. Here, however, DarkPulse plausibly alleged that the Securities Contracts were usurious, void, and unenforceable. Because the contracts’ enforceability was disputed, they did not bar the unjust-enrichment claim at the pleading stage.

Constructive Trust

The court granted dismissal of the constructive-trust claim because a constructive trust is an equitable remedy rather than an independent cause of action. The court explained that this dismissal was largely technical: the First Amended Complaint was construed to request a constructive trust as a remedy for unjust enrichment if DarkPulse ultimately prevails on that claim. The court also explained that Delaware law would apply to this issue under the relevant choice-of-law analysis and that Delaware does not recognize an independent constructive-trust cause of action.

Disposition

The defendants’ motion was granted in part and denied in part. Counts I, II, and III and Count VI were dismissed. Count IV was dismissed against EMA but not against EMA Group or Preston. The motion to dismiss Count V was denied. The parties were directed to file a joint letter and proposed case-management plan by March 13, 2023, and the clerk was directed to close the motion.