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Trustcash Holdings, Inc. v. Moss

November 12, 2009


The opinion of the court was delivered by: Walls, Senior District Judge



Plaintiffs, Trustcash Holdings, Inc., Dylan Callum, Tyee Capital Consultants, Inc., Jill Carasquero and Kent Carasquero, allege in their Second Amended Complaint ("Complaint") that Defendants, Gregory Moss ("Moss") and Ayuda Funding Corp. ("Ayuda"), violated certain provisions of the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). Ayuda moves pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure to dismiss the claims in the Complaint asserted against it.*fn1 Plaintiffs oppose the motion. The parties appeared before the Court for oral argument. The Court grants Ayuda's motion and dismisses with prejudice the claims in the Complaint asserted against Ayuda.


Plaintiff Trustcash Holdings, Inc. ("Trustcash" or the "Company") is a publicly traded company that offers an online payment system for use in Internet transactions. Plaintiff Kent Carasquero ("Carasquero") is the CEO of Trustcash and a director of the Company. He is also the beneficial owner of a substantial amount of Trustcash common stock. The other named plaintiffs are current shareholders of Trustcash.

Defendant Gregory Moss ("Moss") is a former Trustcash CEO and member of the Company's Board of Directors. Defendant Ayuda is a financial advisory firm and independent lender whose business includes offering personal loans collateralized by the pledge of publicly-traded securities.

Moss became CEO of Trustcash June 30, 2007. Plaintiffs allege that, as of July 17, 2007, he was the beneficial owner of 16,913,959 shares of Trustcash common stock, amounting to 21.8 percent of all outstanding shares. (Compl. ¶ 15.) On February 12, 2008, Moss was removed involuntarily as the CEO. On March 27, 2008, he voluntarily resigned as a director of the Company.

Plaintiffs allege that, sometime before February 19, 2008, Moss received a loan from Ayuda that was collateralized by shares of Trustcash common stock. (Compl. ¶ 23.) Plaintiffs allege that Moss then defaulted on the loan, providing Ayuda, a secured party with a secured interest in the collateralized shares, the right to take beneficial ownership of those shares. (Compl. ¶ 23.) Plaintiffs claim that, pursuant to Moss's default, on February 19, 2008, Signature Stock Transfer, Inc. ("Signature"), Trustcash's appointed stock transfer agent, processed the


cancellation of a share certificate owned by Moss representing 15,587,745 Trustcash common stock shares. (Compl. ¶ 22.) Signature issued in replacement (i) Share Certificate No. 1082 to Moss, representing 13,837,745 common stock shares, and (ii) Share Certificate No. 1081 to Ayuda, representing 1,750,000 common stock shares. (Compl. ¶ 22.)

Plaintiffs allege that Ayuda then sold the shares in the market, flooding the market with Trustcash common stock shares and resulting in a "severe devaluation" of Trustcash common stock. (Compl. ¶ 27.) Plaintiffs also allege that Ayuda engaged in "short-selling" at least some of the shares by selling them before Moss had defaulted on his loan and delivering them after acquiring them upon Moss's default. (Compl. ¶ 32.) Plaintiffs allege that, on March 18, 2008, the process was repeated: Signature cancelled a different stock certificate owned by Moss and re-issued 7 million of those shares to Ayuda, again as collateral for a recourse loan upon which Moss defaulted. (Compl. ¶ 31.)

Plaintiffs allege that the recourse loans were actually "shams" constituting a scheme by Defendants to evade the Securities Act's registration requirements and selling limitations. (Compl. ¶ 4.) Plaintiffs explain that Moss could not sell a significant percentage of his Trustcash common stock shares directly into the public market in winter 2008 because he was an "affiliate" of the Company under SEC Rule 144. See 17 C.F.R. § 230.144(a)(1) ("An affiliate of an issuer is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such issuer."). As an affiliate, Moss was restricted by Rule 144 from selling, within a three-month period, a greater number of securities than both (i) one percent of the shares of that class outstanding as shown by the most recent report of the issuer, and (ii) the average weekly reported volume of trading in those securities (per designated reporting systems). 17 C.F.R. § 230.144(e)(1). Plaintiffs allege that Moss transferred his shares to Ayuda so that Ayuda, a non-affiliate of the issuer, could distribute Moss's securities in the public market unconstrained by volume limitations.

Plaintiffs contend that Moss did not transfer his Trustcash common stock shares directly to Ayuda because then Ayuda would have been subject to a six-month holding period before Ayuda would have been able to resell those shares. See 17 C.F.R. § 230.144(d)(1) ( "a minimum of six months must elapse between the later of the date of the acquisition of the securities from the issuer, or from an affiliate of the issuer . . ." ); T. Hazen, Law of Securities Regulation § 4.27[3] (6th ed. 2009) (noting that the six-month holding period helps establish that a seller's original intent when acquiring the securities was for investment purposes rather than with an eye towards distribution). Plaintiffs say that, to circumvent the holding period, Moss pledged his common stock shares to Ayuda in a sham recourse loan that Moss never intended to repay. Plaintiffs claim that the only purpose of the loan was to allow Ayuda to tack on Moss's time period of ownership of the Trustcash common stock shares to its own, enabling Ayuda to distribute the shares immediately. See 17 C.F.R. § 230.144(d)(3)(iv) (providing that, if a lender makes a recourse loan collateralized by a bona-fide pledge of a security, then the lender's acquisition of that security upon the borrower's default is deemed for holding period purposes to have occurred at the time that the pledgor originally acquired it). Plaintiffs allege that Ayuda did not have the requisite investment intent when it acquired the shares and that Defendants are not protected by the Rule 144 safe harbor.

Plaintiffs sued Defendants on October 27, 2008, claiming that Defendants violated Sections 5(a), 5(c), and 17(a) of the Securities Act, Sections 10(b) and 13(d) of the Exchange Act, and Exchange Act Rule 10b-5. In their Second Amended Complaint, Plaintiffs further charge that Defendants violated Sections 12(a)(1) and (2) of the Securities Act. Plaintiffs ask the Court to (1) enjoin Defendants from (a) distributing any more unregistered shares of Trustcash common stock into the public markets, (b) releasing the restrictive legends on certain shares currently owned by Moss, and (c) committing the securities violations alleged in the Complaint; (2) "find" that Defendants have committed the alleged violations;*fn2 (3) order Defendants to pay monetary damages to Plaintiffs; and (4) order Defendants to disgorge their alleged ill-gotten gains.


On a motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6), the court is required to "accept all factual allegations as true, construe the complaint in the light most favorable to the plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief." Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 306 (3d Cir. 2007). However, "a pleading that offers 'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action will not do.' Nor does a complaint suffice if it tenders 'naked assertion[s]' devoid of 'further factual enhancement.' To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 557 (2007)). "Once a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint." Twombly at 546. Thus, "a district court weighing a motion to dismiss asks 'not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims.'" Twombly at 563 n.8 (quoting Scheuer v. Rhodes, 416 U.S. 232, 236 (1974)).


I. First Claim for Relief: Section 12(a) claims

Section 12(a)(1) of the Securities Act creates a private right of action against parties who offer or sell unregistered securities in violation of Section 5 of the Securities Act. Section 12(a)(1) provides in part: "Any person who -- offers or sells a security in violation of section 5 . . . shall be liable . . . to the person purchasing such security from him, who may sue either at law or in equity . . . to recover the consideration paid for such security . . . ." 15 U.S.C. § 77l(1).

Section 12(a)(2) of the Securities Act creates a private cause of action against parties who offer or sell securities using a prospectus or oral communication containing material misrepresentations or omissions. This section provides in part: "Any person who -- offers or sells a security . . . by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact . . . shall be liable . . . to the person purchasing such security from him, who may sue either at law or in equity . . . to recover the consideration paid for such security . . . ." 15 U.S.C. § 771(2).

Sections 12(a)(1) and Sections 12(a)(2) of the Securities Act "use identical language to indicate . . . the persons who may sue ('the person purchasing such a security from him')." Craftmatic Sec. Litig. v. Kraftsow, 890 F.2d 628, 635 (3d Cir. 1989) (quoting 15 U.S.C. § 771(1)-(2)). Under either section, only a purchaser of the unregistered security may sue. See also Pinter v. Dahl, 486 U.S. 622, 644 (1988) ("The purchase requirement clearly confines § 12 liability to those situations in which a sale has taken place. Thus, a prospective buyer has no recourse against a person who touts unregistered securities to him if he does not purchase the securities.").

Defendants argue that Plaintiffs' First Claim for Relief must be dismissed because there is no private right of action under Section 12 for non-purchasers. Plaintiffs do not argue that they are purchasers of the unregistered securities at issue. Nonetheless, Plaintiffs argue that they have a private right of action under Section 12 to seek injunctive relief. They contend that "an application of the private right of action here will not lead to duplicative liabilities nor would it render other provisions of the Act superfluous and, more importantly, the concern over vexatious litigation and mounting costly securities defenses, by allowing an issuing corporation to seek redress for its shareholders, would not be ...

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