United States District Court, D. Maryland
DAVID R. BURT, et al., Plaintiffs,
WOLFGANG MAASBERG, et al., Defendants.
ELLEN LIPTON HOLLANDER, District Judge.
Plaintiffs David R. Burt ("Burt"), a former Chief Executive Officer ("CEO") of Lyris, Inc. ("Lyris" or the "Company"), and his wife, Janet Burt, shareholders of Lyris, filed suit against nine defendants, alleging that, between April 2007 and December 2012 (the "Fraud Period"), the defendants engaged in a fraudulent scheme to take control of Lyris. See Amended Complaint ("Am. Comp., " ECF 33) ¶ 1. In particular, plaintiffs allege that defendants, who are officers, directors, and/or stockholders of Lyris, amassed 95 percent of Lyris's stock through various manipulative actions, without disclosing their plan to other stockholders or to the Securities and Exchange Commission ("SEC"). Plaintiffs claim, inter alia, that, as a result, they sold a significant percentage of their Lyris stock to defendants at artificially depressed prices.
Of the nine defendants named in the suit, five served as officers and/or directors of Lyris during the Fraud Period (collectively, the "O&D Defendants"). They are Wolfgang Maasberg, former CEO and former director of Lyris, id. ¶ 30; William T. Comfort, III ("Ty Comfort"), the former Chairman of the Lyris Board of Directors, id. ¶ 24-25; James Urry, a former Lyris director, id. ¶ 26; A. Richard Blair, a former Lyris director and the "exclusive stock broker" for several other defendants, id. ¶ 32; and Richard McDonald, the Director of Investor Relations at Lyris since approximately 2005, id. ¶ 31. Four defendants are alleged to be Lyris stockholders (collectively, the "SH Defendants"). They are William T. Comfort, Jr. ("Bill Comfort"), id. ¶ 22; Stuyvesant ("Stuyvie") Pierpont Comfort, who served as a director of Lyris between 2000 and 2002, id. ¶ 27; LDN Stuyvie Partnership ("LDN Stuyvie"), an Oklahoma partnership in which Stuyvesant and Ty Comfort are partners, id. ¶ 28; and Meudon Investments Partnership ("Meudon"), a New York partnership allegedly controlled by Urry, id. ¶ 29.
Bill Comfort, Ty Comfort, Stuyvesant Comfort (collectively, the "Comforts"), and Urry are members of the same family. In particular, Ty and Stuyvesant Comfort are brothers and the sons of Bill Comfort; Urry is Bill Comfort's son-in-law and the brother-in-law of Ty and Stuyvesant Comfort. See id. ¶¶ 24-27.
Plaintiffs filed their initial Complaint on February 14, 2012. ECF 1. Both groups of defendants filed motions to dismiss, ECF 13-14, which were fully briefed. By a Memorandum Opinion ("Memo Op., " ECF 29) and Order (ECF 30), I granted the motions to dismiss, without prejudice and with leave to amend. Thereafter, plaintiffs filed an Amended Complaint, containing seven claims. ECF 33. The first two claims allege violations of federal securities laws and regulations. In Count I, plaintiffs allege that defendants, by engaging in a scheme to take control of Lyris and misrepresenting or failing to disclose their plan to do so, violated § 10(b) of the Exchange Act of 1934 ("§ 10(b)"), 15 U.S.C. § 78j(b), and SEC Rule 10b-5 ("Rule 10b-5"), 17 C.F.R. § 240.10b-5. See Am. Comp. ¶¶ 118-120. Count II alleges that the O&D Defendants violated § 14(a) of the Exchange Act of 1934 ("§ 14(a)"), 15 U.S.C. § 78n(a), and SEC Rules 14a-3 and 14a-9 ("Rule 14a-3" and "Rule 14a-9"), 17 C.F.R. §§ 240.14a-3 & 240.14a-9, by causing Lyris to issue false proxy statements that failed to disclose the defendants' plan. Am. Comp. ¶¶ 121-124.
The remaining five counts allege violations of Maryland and Delaware law. In Count III, plaintiffs allege that defendants violated the Maryland Securities Act, § 11-703 of the Corporations & Associations Article ("C.A.") of the Maryland Code (2007 Repl. Vol., 2012 Supp.). Am. Comp. ¶¶ 125-127. Count IV alleges that the O&D Defendants breached their duty of loyalty under Delaware law. Id. ¶¶ 128-131. In Count V, plaintiffs allege that the O&D Defendants engaged in self-dealing, by purchasing shares of Lyris stock at artificially depressed prices, in violation of their fiduciary duties under Delaware law. Id. ¶¶ 132-142. Count VI alleges that the O&D Defendants breached their duty of care under Delaware law. Id. ¶¶ 143-146. In Count VII, plaintiffs allege that Bill Comfort, Ty Comfort, Urry, Blair, and McDonald are liable for intentional infliction of emotional distress, based on their purchase of Lyris stock from plaintiffs at artificially depressed prices, when they knew that the Burts needed the proceeds for Janet Burt's medical care. Id. ¶¶ 147-154. Plaintiffs claim damages "in excess of $1, 000, 000" for each of Counts I through VI, id. ¶¶ 120, 124, 127, 131, 142, 146, and an unspecified amount of damages for Count VII. Id. ¶ 154.
The SH Defendants and the O&D Defendants filed motions to dismiss, see ECF 36 ("SH Motion"); ECF 37 ("O&D Motion"), along with supporting memoranda. See ECF 36-1 ("SH Memo"); ECF 37-1 ("O&D Memo"). They claim that, pursuant to Fed.R.Civ.P. 12(b)(6) and the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4(b)(3)(A), plaintiffs have failed to state a claim as to each count. The defendants also argue that, because plaintiffs have failed to state a claim under the federal securities laws, this Court lacks personal jurisdiction over defendants as to the remaining state law claims. And, defendants argue that, even if personal jurisdiction exists as to the state law claims, those claims are defective.
Plaintiffs filed a consolidated response in opposition ("Burt Memo" or "Opp., " ECF 45), to which the SH Defendants and the O&D Defendants replied. See ECF 51 ("SH Reply"); ECF 48 ("O&D Reply"). No hearing is necessary to resolve the motions. See Local Rule 105.6. For the reasons set forth below, I will deny defendants' motions, in part, and will grant defendants' motions, in part. To summarize, plaintiffs may proceed with their federal securities claims against all defendants; they may proceed with their state law securities claim against Bill Comfort, Ty Comfort, Urry, Meudon, and Blair; and they may proceed with their state law breach of fiduciary duties claims, as pled. However, I will dismiss plaintiffs' claim for intentional infliction of emotional distress.
Lyris is a technology company that "develops and sells Internet marketing technology and services to small- and medium-sized businesses in the United States and around the world." Am. Comp. ¶ 33. Lyris was acquired in 2005 by a healthcare company operating under the name NovaCare, Inc. Id. ¶ 36. Prior to that acquisition, NovaCare had gradually sold off its healthcare businesses and accumulated cash reserves through litigation and claims activities, as well as sales of its business assets. Id. ¶¶ 34-35. NovaCare also "had" a valuable asset, consisting of a "net operating loss [NOL'] carry-forward of approximately $180 million, " which "would allow NovaCare to buy a company and not pay federal corporate income tax" on $180 million dollars of federal income. Id. ¶ 35. After NovaCare acquired Lyris, the combined company was renamed "Lyris, Inc." and sold the brand name "NovaCare" to another company. Id. ¶ 36.
David Burt served as CEO of NovaCare, and then Lyris, from approximately June 2000 to January 2007. Am. Comp. ¶ 18. During his tenure as CEO, Burt oversaw much of NovaCare's transition to its present business, including identifying and acquiring Lyris. Id. ¶ 36. Lyris's proxy statements reflect that, as part of Burt's compensation package as CEO, he acquired 20, 850, 000 shares of Lyris common stock in 2002. See Ex. 12 to ECF 1. Janet Burt "has been receiving treatment for severe depression and other mental illnesses since at least 2000, " and the Burts have incurred "more than $1 million in medical expenses to treat these illnesses." Am. Comp. ¶ 19.
Bill Comfort is the Managing Partner of Court Square Capital Partners ("Court Square"), a private equity investment firm, and the former Chair of Court Square's predecessor, Citicorp Venture Capital. Id. ¶ 22. His son, Ty Comfort, "was Chairman of the Board of Directors of Lyris from 2003 through August 2012. At the end of the Fraud Period, Ty Comfort personally owned 10% of Lyris's outstanding stock, or approximately 17 million shares." Id. ¶ 24. Ty Comfort also "directly controls at least two investment vehicles that acquired substantial amounts of Lyris stock during the Fraud Period, " including 65 BR Trust and Lyr, Ltd. ("Lyr"), which, at the end of the Fraud Period, owned 13% and approximately 17% of Lyris's outstanding stock, respectively. Id. ¶ 25. He is also the general partner of defendant LDN Stuyvie, which, at the end of the Fraud Period, owned 25% of Lyris's outstanding stock, making it the largest single shareholder of Lyris stock. Id. ¶ 28.
Urry, Bill Comfort's son-in-law, is a "professional investor" and was a member of Lyris's Board of Directors during the Fraud Period. Id. ¶ 26. He also "controls" defendant Meudon, which is a New York partnership that owns "approximately 6% of the common stock of Lyris, or just over 10 million shares." Id. ¶ 29. Stuyvesant Comfort, Bill Comfort's "youngest son, " is a "professional investor and partner of Stirling Square Capital Partners, a private equity buyout firm." Id. ¶ 27. He served on the Lyris Board of Directors from "approximately 2000 until 2002, " and "shares voting and dispositive power over [LDN Stuyvie's] common stock with Ty Comfort" and Urry's wife, Nathalie Comfort Urry, who is Bill Comfort's daughter. Am. Comp. ¶ 28.
Maasberg served as CEO of Lyris and was a member of its Board of Directors from August 2010 to March 2013. In February 2011, Maasberg "acquired approximately 625, 000 shares of Lyris stock at $0.19 per share." Id. ¶ 30. McDonald "became Lyris's Director of Investor Relations" in 2005. Id. ¶ 31. In February 2011, McDonald acquired approximately 200, 000 shares of Lyris stock at $0.19 per share, bringing his total ownership to approximately 1%. Id. Blair became a member of Lyris's Board of Directors in 2004 and was a director throughout the Fraud Period. According to plaintiffs, "Blair told Mr. Burt that [Blair] was the exclusive stock broker for Bill Comfort, Ty Comfort, Stuyvie Comfort, and Urry, and was involved in facilitating and executing their purchases of Lyris stock." Id. ¶ 32.
According to plaintiffs, the Comforts and Urry "work together to invest in and run all their businesses." Id. ¶ 39. In particular, they allege that "Bill Comfort demanded approval of all the family's major investment decisions, " including those involving Lyris, and that Ty Comfort, Stuyvie Comfort, and Urry cannot make major investment decisions without the express consent of Bill Comfort. Id. ¶¶ 38-39. Further, plaintiffs allege that Bill Comfort has held an early morning teleconference with Ty Comfort, Stuyvie Comfort, and Urry "nearly every workday to discuss managing the family's investments." Id. ¶ 39. Additionally, "Ty Comfort and Stuyvie Comfort share an office and regularly discuss their joint investment plans, as did Bill Comfort and Urry." Id. And, Ty Comfort "made it explicitly clear to Mr. Burt" that he, Bill Comfort, Stuyvie Comfort, and Urry jointly managed their investment in Lyris. Id.
The Alleged Take-Over Scheme
Plaintiffs allege that between April 2007 and December 2012, defendants "surreptitiously" "orchestrated a scheme" to depress the stock price of Lyris and then acquire large amounts of the stock. Id. ¶¶ 1, 78. Specifically, plaintiffs aver that "defendants secretly drove down Lyris's stock price so they could acquire a dominant stake in Lyris at bargain-basement prices without disclosing their plans to do so to the market, the SEC, or the IRS." Id. By the end of the Fraud Period, the price per share plummeted from over $1.50 to under $.20, see id. ¶¶ 43, 104, while defendants' holdings in Lyris stock - in their own name or through investment vehicles they directly control - rose from 18% to 95%. Id. ¶¶ 1, 63.
According to plaintiffs, defendants executed their fraudulent scheme to gain control of Lyris through a variety of means, discussed below.
Market Manipulation: The Amended Complaint alleges that Blair executed manipulative stock trades intended to depress the price of Lyris stock, which involved "hitting the bid" and "hitting the ask." Am. Comp. ¶¶ 44-53. "Hitting the bid" involves selling shares immediately upon market opening, at the best available "bid" price, i.e., the highest price that an investor is offering to pay at that time. Id. ¶ 47; see NASDAQ.com Glossary of Stock Market Terms, Hit the Bid, http://www.nasdaq.com/investing/glossary/h/hit-the-bid ("A dealer who agrees to sell at the bid price quoted by another dealer is said to hit' that bid. Antithesis of take the offer.") (last visited February 26, 2014). "Hitting the ask" involves buying "a small sum of shares" of stock at the "ask" price, which is generally a high price. Am. Comp. ¶ 48; see NASDAQ.com Glossary of Stock Market Terms, Take the Offer, http://www.nasdaq.com/investing/glossary/t/take-the-offer ("Buy stock by accepting a floor broker's (listed) or dealer's (OTC) offer at an agreed-upon volume. Antithesis of hit the bid.") (last visited February 26, 2014). According to plaintiffs, by repeatedly "hitting the bid" each morning over a period of time, defendants signaled to the market that Lyris stock was an unattractive investment. Am. Comp. ¶ 47. By "hitting the ask, " defendants could "provide cover to the earlier down trades and to manage the decline of the price of the stock." Id. ¶ 48.
According to plaintiffs, Mr. Burt noticed these irregular trading patterns and, in January 2009, sent to Bill Comfort a detailed analysis of the trading of Lyris stock over much of the previous 18 months. Id. ¶ 46. After Mr. Burt sent the letter to Bill Comfort, Blair directly contacted Mr. Burt to discuss the letter. Id. ¶ 51. According to Mr. Burt, Blair "admitted" that "he believed that at least the afternoon trades had been manipulated" and that " the only reason why someone would engage in this pattern of trading would be to buy large blocks of stock at cheap prices." Id. ¶ 51 (emphasis added). And, plaintiffs allege that no entity or individual, other than defendants, owns more than 10% of Lyris stock. Id. ¶ 53. Thus, according to plaintiffs, an inference arises that defendants were the ones manipulating the price of Lyris's stock. Plaintiffs allege that this inference was confirmed in February 2011, when McDonald "admitted [to Mr. Burt] that Defendants had a common understanding to depress the price of Lyris's stock and were responsible for doing so." Id. ¶¶ 53, 68-69. Further, plaintiffs assert that Blair told Mr. Burt "that one of the most important things he had learned in his career as a stock trader... is that the buyers are the sellers and the sellers are the buyers.'" Id. ¶ 52.
Marketing of Lyris: Plaintiffs allege that defendants failed to market Lyris stock to potential investors. Id. ¶¶ 54-61. They claim that during the Fraud Period "Ty Comfort, Urry, Maasberg, McDonald, and Blair intentionally and recklessly refused to promote Lyris to investors and refused to raise capital for the company from the public." Id. ¶ 54. Moreover, plaintiffs allege that those defendants "did so at the express direction of, and in agreement with, Bill Comfort, and, on information and belief, with the mutual understanding and approval of Stuyvie Comfort." Id. For example, Ty Comfort, Urry, McDonald, Blair, and Maasberg "did not participate in investor conferences, while their public company counterparts made dozens of presentations." Id. ¶ 56. And, although McDonald was Lyris's Director of Investor Relations, he "has not presented or marketed Lyris at a single investor conference in more than five years on the job, even though he made several purchases of Lyris stock for himself during the Fraud Period." Id. ¶ 57.
Further, plaintiffs allege that this activity is particularly suspect in light of the fact that both Ty Comfort and "McDonald repeatedly admitted to Mr. Burt (in 2009, 2010, and 2011) that Lyris's stock price would be significantly higher if Lyris were to market its stock." Id. ¶ 58; see id. ¶¶ 59-61. According to plaintiffs, McDonald's "awareness and admission that Lyris's stock price would be higher if it were marketed amounts to reckless conduct with deliberate intent to mislead the market and harm non-Defendant Lyris stockholders." Id.
Additionally, plaintiffs allege that various defendants told Mr. Burt that "small-cap companies such as Lyris do not attract investors in the same way as large companies.... Instead, these companies' executives and investor-relations directors must present and market themselves at investor conferences and other events likely to attract attention and interest." Id. ¶ 55. And, "McDonald, Ty Comfort, and Blair each stated to Mr. Burt on separate occasions in 2006 and 2008 that stocks like Lyris are sold, they are not bought.'" Id. Plaintiffs assert: "Ty Comfort's admission that marketing Lyris would raise its price, combined with his refusal to take any such actions, amounted to reckless conduct deliberately designed to depress Lyris's stock price and harm non-Defendant stockholders." Id. ¶ 60.
Plaintiffs recount that Maasberg served as head of U.S. sales for a company called Omniture prior to becoming CEO of Lyris. Id. ¶ 61. They allege that "Omniture's management team, including Maasberg, grew that company's U.S. revenues from approximately $40 million to $240 million during his tenure, after which Adobe bought the company for approximately $1.8 billion." According to plaintiffs, Maasberg's background with Omniture "could have been a big draw for tech investors looking for new investments, " but "Maasberg never presented at any investor conference as CEO of Lyris, even though he made several purchases of Lyris stock during the Fraud Period." Id. Plaintiffs aver that Maasberg's failure to promote Lyris is explained by his involvement in "the scheme set in place by Bill Comfort, Ty Comfort, Urry, Stuyvie Comfort, Blair, and McDonald, " and that "Maasberg's failure to market Lyris was a result of reckless and deliberate conduct designed to depress the stock price of Lyris and harm non-Defendant stockholders." Id.
Accumulation of Lyris Stock: According to the Amended Complaint, defendants owned roughly 18% (or 16 million shares) of Lyris stock in 2007. By the end of the Fraud Period, defendants had accumulated 95% (or 167 million shares) of Lyris stock. Am. Comp. ¶ 1; see Ex. 19. Some of that stock was purchased from plaintiffs. In particular, plaintiffs allegedly owned between 4% and 7% of Lyris's stock, either directly or indirectly through Addison LP, their investment vehicle. Id. ¶ 20. However, the Burts sold "nearly all" of these shares to the various defendants. Id. Specifically, in March 2010, Addison LP sold 3, 000, 000 shares of Lyris stock to Meudon and Ty Comfort for $0.33 per share, totaling $1, 000, 000. See id. ¶ 71. And, in or about May 2011, Addison LP sold 5, 000, 000 shares to Ty Comfort and Meudon "at a low price." Id. ¶ 72; see id. ¶¶ 73-75; Am. Comp. Ex. 19. Plaintiffs claim they sold these shares to finance medical treatment for Ms. Burt, who suffers from "multiple severe psychiatric illnesses, including major depressive disorder." Id. ¶¶ 73, 112. These sales form the basis of plaintiffs' claims that they were victimized by defendants' conduct in "depressing Lyris's stock price, squeezing out every other large owner of Lyris shares, and reducing liquidity of Lyris stock through failures to market the company, " thereby leaving Mr. Burt with no alternative buyer who would be interested in purchasing his Lyris shares. Id. ¶ 73.
The Amended Complaint also describes several other purchases of Lyris stock by defendants. For example, in April 2010 "Defendants Bill Comfort, Ty Comfort, Jamie Urry, Stuyvie Comfort, Blair, and McDonald, arranged to have the Company sell them 18 million shares of Lyris stock for a price equal to 33 cents per share, " knowing that the price was "artificially low." Id. ¶ 64. In February 2011, McDonald "bragged" to Burt, stating that he, Ty Comfort, Urry, Maasberg, and Blair had purchased Lyris stock from Raging Bull Capital for 19 cents per share, even though the stock was "worth at least $1 per share." Id. ¶ 68. In November 2011, Ty Comfort, through an entity he controls called 65 BR Trust, purchased 20 million shares of Lyris stock directly from the Company at a price of 10.5 cents per share. Id. ¶ 65. And, in late 2012, "Ty Comfort arranged for Lyris to sell 30 million shares to 65 BR Trust... at a price equal to 22 cents per share, implying a total enterprise valuation of only $24 million." Id. ¶ 105. In all, from 2010 to 2012, "[d]efendants arranged to have the Company sell them 72 million shares for a total of $15 million." Id. ¶¶ 64-66.
According to plaintiffs, several of the defendants purchased additional amounts of Lyris stock through "off-shore entities owned or controlled by Bill Comfort, Ty Comfort, Stuyvie Comfort, and Urry ("Comfort Shell Entities")... based in or incorporated in off-shore financial and tax havens such as Bermuda, the Cayman Islands, or Madeira, Portugal. Id. ¶ 78. And, plaintiffs allege that "Each of the Comfort Shell Entities' purchases was likely small enough to avoid the SEC's 5% ownership stake reporting requirements." Id. 
In addition, plaintiffs allege that, just prior to the sale of 30 million shares to 65 BR Trust, defendants declined an opportunity to sell Lyris at a price significantly above market value and, in particular, significantly above the price charged to 65 BR Trust. In August 2012, officers of a company called J2 Global "had several conversations with Ty Comfort and Maasberg regarding a sale of Lyris to J2 Global." Id. ¶ 103. Plaintiffs allege that, during these discussions, "Maasberg and Ty Comfort separately stated that the current trading price of approximately 16 cents per share was not even close to the true value of Lyris as a company and that Lyris's other officers and directors were aware that the value of the company far exceeded its current stock price." Id. ¶ 104. Eventually, J2 Global offered to buy Lyris for a price of $100 million in cash, which is "over four times greater than Lyris's market value of approximately $22 million at the time." Id. ¶ 105. According to plaintiffs, Maasberg and Ty Comfort rejected this offer and replied that Lyris was worth $150 million. See Ex. 24 to Am. Comp., E-mail from Rick Faulk, Landslide, to David Burt (Aug. 31, 2012, 9:02:55 AM EDT). However, "[w]ithin sixty days of rejecting this offer, " Ty Comfort allegedly arranged the above-described purchase for 65 BR Trust that implied that Lyris had a total value of "only $24 million." Am. Comp. ¶ 105. Plaintiffs claim that this series of events confirms that defendants sought to dilute the value of Lyris's stock, rather than to increase its value for the benefit the Company's other shareholders.
Misleading Public Filings: As discussed more fully, infra, § 13(d) of the Exchange Act of 1934 requires any investor or group of investors holding or acquiring beneficial ownership of more than five percent of an issuer's stock to file a "Schedule 13D, " disclosing, inter alia, any plans with respect to the stock, including any intent to assume control of the company. See 15 U.S.C. § 78m(d); 17 C.F.R. § 240.13d-101; Vladimir v. Bioenvision Inc., 606 F.Supp.2d 473, 491 (S.D.N.Y. 2009). The Amended Complaint alleges that, during the Fraud Period, defendants either filed false and misleading Schedule 13Ds that disclaimed any intent as a group to take over Lyris, or failed to file required Schedule 13Ds. See Am. Comp. ¶¶ 79, 81-90. Plaintiffs identify the following Schedule 13Ds as false:
a. Ty Comfort: March 10, 2008; March 19, 2010; April 12, 2010; May 20, 2011; June 3, 2011; November 9, 2011; November 21, 2011; November 29, 2011; October 17, 2012, id. ¶ 81;
b. LDN Stuyvie: March 10, 2008; March 19, 2010; April 12, 2010; June 3, 2011, id. ¶ 83;
c. Urry: April 12, 2010; August 28, 2010; June 8, 2011, id. ¶ 82;
d. Meudon: April 12, 2010; August 27, 2010; June 8, 2011, id. ¶ 84.
Further, the Amended Complaint alleges that Bill and Stuyvesant Comfort, Blair, McDonald, and Maasberg failed to file Schedule 13Ds during the Fraud Period, despite being a part of the group. See id. ¶¶ 89-90.
Further, the Amended Complaint avers that defendants caused Lyris to issue false public filings. Section 14(a) of the Exchange Act of 1934, 15 U.S.C.A. § 78n(a), and Rules 14a-3 and 14a-9 thereunder, 17 C.F.R. §§ 240.14a-3 & 240.14a-9, require the filing of an annual "Proxy Statement" and its dissemination to stockholders. According to the Amended Complaint, "none of the agreements or understandings among defendants set forth herein were disclosed by Lyris in any of the 10-Qs [quarterly financial reports filed with the SEC, see 17 C.F.R. § 249.308a] or 10-Ks [annual financial reports filed with the SEC, see 17 C.F.R. § 240.310], or Proxy Statements it filed during the Fraud period." Id. ¶ 91. The Amended Complaint sets forth the "materially false filings" as follows, id. ¶ 92:
a. Proxy Statements (filed April 2008, April 2009, April 2010, April 2011, and April 2012) (Exs. 12, 21).
b. Forms 10-K (for Fiscal Years ending June 30, 2008, June 30, 2009, June 30, 2010, June 30, 2011, and June 30, 2012) (Exs. 13, 22).
c. Report on Forms 10-Q (filed November 2007, February 2008, May 2008, November 2008, February 2009, May 2009, November 12, 2009, February 10, 2010, May 12, 2010, November 12, 2010, February 9, 2011, May 15, 2011, September 30, 2011 (with amendment), December 31, 2011 (with amendment), March 31, 2012 (with amendments), September 30, 2012, and December 31, 2012).
Defendants' Alleged Motives: According to plaintiffs, defendants had two motives to conceal their intentions to work together to acquire the vast majority of Lyris stock. First, concealing their intentions allowed them to keep the stock price low, facilitating their acquisition of more shares of Lyris stock. Plaintiffs explain that if the market learns that a major investor intends to buy more stock or to obtain a controlling share of the company, the market reacts favorably and the price of the company's stock increases. Id. ¶ 99. Moreover, "stockholders become aware that a takeover attempt may be underway, and it enables them to demand a control premium' for their shares from the individual or group seeking to gain control." Id.  According to plaintiff, defendants' actions "drove away all other major holders of Lyris stock such that the only buyers were Defendants themselves, and by withholding their intentions, Plaintiffs were unable to sell their shares for a fair value or at a control premium.'" Id. ¶ 110. Second, if Lyris experienced an "ownership change" pursuant to Section 382 of the Internal Revenue Code-which plaintiffs allege would have occurred if a group reported that it had acquired 95% of the Company's stock-"the value of the $180 million NOL would fall dramatically." Id. ¶ 101.
No facts are alleged indicating that any defendants, individually or collectively, misused their "control" of the Company. Further, plaintiffs do not allege that the price of Lyris stock has appreciated since plaintiffs sold their shares.
Most of the allegations in the Amended Complaint were also contained in the original Complaint, which I dismissed, without prejudice. However, plaintiffs have added new factual allegations, some of which were included in the summary above. Plaintiffs claim that the new allegations are sufficient to overcome the shortcomings of the original Complaint. The following factual allegations were among those added to the Amended Complaint:
"In February 2011, McDonald admitted that Defendants had a common understanding to depress the price of Lyris's stock and were responsible for doing so." Am. Comp. ¶ 53; see id. ¶ 68.
"McDonald explained that Defendants were responsible for the decline in Lyris's stock price pursuant to a plan to depress the value of Lyris's stock in order to purchase it for themselves." Id. ¶ 69.
"Bill Comfort demanded approval of all the family's major investment decisions" and "had to review and approve each material decision regarding Lyris." Id. ¶ 38.
"Ty Comfort, Urry, and Stuyvie Comfort must obtain sign-off from Bill Comfort before making major investment decisions, and Bill Comfort regularly dictates the terms of such investments, including the structure and price of any stock purchase." Id. ¶ 3.
5 million of the shares of Lyris stock purchased from Raging Bull Capital were purchased by Ty Comfort and Urry, who "placed them in off-shore entities to evade any disclosure requirements - including SEC and IRS reporting requirements - in part to protect the value of Lyris's NOL. To date, no person or entity has claimed that it owns the 5 million shares of Lyris stock that Ty Comfort and Urry purchased from Raging Bull Capital in February 2011." Id. ¶ 69.
Maasberg and Ty Comfort rejected an offer from J2 Global to buy Lyris for a price of $100 million in cash, which is "over four times greater than Lyris's market value of approximately $22 million at the time." Id. ¶ 105. And, "[w]ithin sixty days of rejecting this offer... Ty Comfort arranged for Lyris to sell 30 million shares to 65 BR Trust, an entity he controls, at a price equal to 22 cents per share, implying a total enterprise valuation of only $24 million." Id.
During negotiations preceding Mr. Burt's sale of 5 million shares of Lyris stock in May 2011, "Blair would not reveal which persons or entities would be acquiring the shares. Instead, he stated that the Comforts' would determine later how to distribute the shares among the entities participating in the acquisition." Id. ¶ 76.
During the same negotiations, Blair also informed Mr. Burt that he "required Bill Comfort's direction on how to structure the deal." Id. ¶ 75.
In connection with the May 2011 sale of Lyris shares, and prior to the institution of this lawsuit, Bill Comfort and Urry demanded that plaintiffs release " all defendants from liability for any causes of action Plaintiffs may have relating to Defendants' conduct concerning Lyris and its stock." Id. ¶ 77.
Standard of Review
1. Fed.R.Civ.P. 12(b)(6)
A defendant may test the adequacy of a complaint by way of a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure. To survive a motion under Fed.R.Civ.P. 12(b)(6), a complaint must contain facts sufficient to "state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2008); see Aschroft v. Iqbal, 556 U.S. 662, 684 (2009) ("Our decision in Twombly expounded the pleading standard for all civil ...