Vekaria v. MThree Corporate Consulting, Ltd.

Background

Jitendra Vekaria alleged that he entered an employment agreement with Mthree Corporate Consulting Limited in January 2019. According to the amended complaint, Mthree promised him 1% equity at the beginning of his employment and either an additional 2% equity if Mthree was acquired or additional 1% awards on the first and second anniversaries of his employment. Mthree was later acquired by John Wiley & Sons Limited, a subsidiary of John Wiley & Sons, Inc. Vekaria alleged that the acquisition triggered the additional equity, but that Mthree and Wiley later denied that he was a stockholder or entitled to compensation for the equity.

Vekaria asserted state-law claims involving the employment agreement, wages, alleged misrepresentations, interference with contractual relations, conversion, and a declaration of his ownership interest. He also asserted a federal claim under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. The defendants filed motions to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint adequately states a claim. Thomas Seymour separately sought dismissal for lack of personal jurisdiction under Rule 12(b)(2).

Jurisdiction

Vekaria invoked federal-question jurisdiction, supplemental jurisdiction over the state-law claims, and diversity jurisdiction. The court held that it had federal-question jurisdiction over the securities claim. But it found that the amended complaint did not adequately plead diversity jurisdiction because it alleged residences rather than citizenships for the individuals, omitted the required corporate citizenship information for Mthree and Wiley, and did not plead the citizenship of ECI Partners LLP’s partners.

Federal Securities Claim

The court held that Vekaria had adequately pleaded a securities transaction because an employment contract promising shares as compensation can qualify as a securities transaction even if the shares were never issued. The court nevertheless dismissed Count Seven because the alleged misrepresentations were not made “in connection with” the purchase or sale of a security as required by Section 10(b) and Rule 10b-5.

The court understood the central allegation to be that the defendants fraudulently refused to issue or recognize Vekaria’s promised Mthree equity. It found no allegation that the defendants misrepresented the stock’s value, characteristics, or other attributes that would influence an investor to buy or sell it. The court concluded that the allegations instead appeared to concern breach of contract, fraudulent inducement, or another state-law claim. It therefore did not reach the defendants’ alternative arguments about timeliness, the specificity of allegations against Chapman and Seymour, or scienter, which means the required intent for securities fraud.

The court granted Mthree’s, Seymour’s, and Chapman’s motions to dismiss Count Seven. It also dismissed Count Seven against Headley and Town, who had not appeared, because they had received notice and an opportunity to address the dismissal arguments through the briefing. The opinion’s conclusion states these dismissals were without prejudice.

State-Law Claims

After dismissing the only federal claim, the court declined to exercise supplemental jurisdiction over the remaining state-law claims. It cited the early stage of the case, the absence of discovery, and the fact that the remaining claims primarily involved state law. Counts One through Six and Counts Eight through Ten were dismissed without prejudice.

The court also stated that the defendants’ motions were otherwise denied without prejudice in light of the decision not to exercise supplemental jurisdiction and the inadequately pleaded diversity jurisdiction. The opinion’s conclusion specifically states that the state-law causes of action were dismissed without prejudice.

Leave to Amend and Disposition

The court granted Vekaria leave to file another amended complaint. He could attempt to replead the claims, including Count Seven, and could amend the jurisdictional allegations if he had a good-faith belief that diversity of citizenship actually existed. The court cautioned that Count Seven should be repleaded only if Vekaria could correct the deficiencies identified in the opinion.

Vekaria had thirty days from issuance of the Opinion and Order to file a Second Amended Complaint. The court stated that failure to do so, without showing good cause in advance, would result in dismissal of Count Seven with prejudice. Judge John P. Cronan directed the Clerk of Court to close the listed pending motions.