United States District Court, D. New Jersey
MADELINE COX ARLEO UNITED STATES DISTRICT JUDGE
MATTER comes before the Court on Defendants Chinh
Chu's (“Chu”), Douglas Newton's
(“Newton”) and Truc To's (“To”)
(collectively “Defendants”) Motions to Dismiss,
ECF Nos. 70 & 71, Plaintiffs Paul Parmar
(“Parmar”) and Alpha Cepheus, LLC's, First
United Health, LLC's, Constellation Health, LLC's,
Naya Constellation Health, LLC's, Constellation Health
Investment, LLC's (“CHI, ” and together with
Alpha Cepheus, LLC, First United Health, LLC, Constellation
Health, LLC, Naya Constellation Health, LLC, the “LLC
Plaintiffs”) Amended Complaint, ECF No. 65. For the
reasons stated herein, the motions are granted.
action arises from a transaction to take a medical billing
company private, uncovering an alleged fraud by its the
senior officers and shareholders.
Parmar, CHT and the “Empty Shell” LLCs
2012, Parmar and others acquired Orion Healthcorp, Inc., a
medical billing, collections and physician practice
management company. Am. Compl. ¶ 57. They merged the
company into Constellation Healthcare Technologies, Inc.
(“CHT”), which they later took public, listing
CHT's shares on the London Stock Exchange's
Alternative Investment Market (“AIM”).
Id. ¶ 60. CHT grew its business by acquiring
existing medical billing and practice management companies,
to use their existing customer lists and relationships.
Id. ¶ 59. CHT followed a “common
pattern” for its acquisitions, first forming a
“shell” subsidiary limited liability company
(“LLC”), with the intention of merging the
proposed target into the shell. Id. ¶ 61.
“[E]very acquisition of CHT” followed this
pattern, and “the majority of these shell [LLCs] were
filled, but two remained unfilled: Phoenix Health LLC
(‘Phoenix') and MDRX Medical Billing, LLC
(‘MDRX').” Id. ¶¶ 61-62. A
third shell LLC, Northstar First Health, LLC
(“Northstar”) “was filled, but with a
smaller subsidiary than expected.” Id. ¶
CHT was a public company, it regularly sought financing in
the form of secondary share offerings and announced its
activities via press releases. Id. ¶¶
63-64. CHT issued press releases concerning Phoenix, MDRX,
and Northstar, which they concede were inaccurate.
Id. These included: (1) an announcement that CHT
acquired Northstar on September 16, 2015, when Northstar was
actually a shell LLC filled by Vachette Business Services,
LLC; (2) an announcement that CHT acquired Phoenix on
September 18, 2015, when Phoenix was a shell LLC created by
CHT; and (3) an announcement on February 10, 2016 that CHT
acquired MDRX, when MDRX was also a shell LLC created by CHT.
Id. ¶¶ 65-66, 68.
CC Capital's Interest in CHT
September 2015, Parmar met Chu. Am. Compl. ¶ 70. Chu is
the Senior Managing Director and Founder of nonparty CC
Capital, LLC (“CC Capital”), a private equity
firm. Id. ¶ 37. Defendant Newton is a CC
Capital Senior Managing Director. Id. ¶ 39. In
January 2016, Chu began to show interest in acquiring CHT,
de-listing its stock and taking it private. Id.
Capital's first set of bids were unsuccessful. After an
initial disagreement, Parmar and Chu agreed that Parmar would
hold a minority position after the deal “and give
limited voting rights to CC Capital on the equity [he and the
LLC Plaintiffs] continue to hold.” Id. ¶
74. In order to raise the price offered for CHT, Parmar
agreed to contribute $10 million to the purchase.
Id. ¶ 77. As a result of his position as a
buyer, CHT's board required Parmar to recuse himself from
bid evaluations and formed a special committee to evaluate
the offer. Id. ¶¶ 77-78. Chu directed CC
Capital to hire defendant To, then a KPMG partner, to conduct
due diligence. Id. ¶ 80. After receiving a
fairness opinion from Duff & Phelps, CHT's special
committee rejected Chu and Parmar's bid on August 23,
2016. Id. ¶ 86.
time, Parmar did not want to proceed with the transaction,
and told Chu and Newton as much. ¶¶ 87-88, 90.
Parmar “was honest with Newton, ” telling him
that he wanted “more time to resolve the CHT issues,
” while Newton responded that “Chu did not want
to drop the deal and that they would be happy to work out any
of CHT's issues with Parmar once they became
partners.” Id. ¶ 92. Despite wanting to
proceed with the transaction, on September 12, 2016 CC
Capital withdrew its offer, allegedly in order to have Chu
select advisors for a new CHT special committee. Id.
¶ 99. Chu then had his associates introduce Parmar to
SunTrust Robinson Humphrey (“SunTrust”) and
McGuireWoods LLP as potential financial and legal advisors
for CHT. Id. ¶¶ 102-03.
CC Capital withdrew its first bid, To and KPMG began
performing due diligence. Id. ¶ 108. CC Capital
had access to CHT's proprietary internal database that
accurately represented all “data, collections and
fees” concerning CHT, and thus Plaintiffs allege that
Chu and To “had actual knowledge” that MDRX,
Northstar and Phoenix were not as represented by CHT, and
that “the empty shells had no assets, revenue or
employees, ” Id. ¶¶108-09.
Plaintiffs also claim that other audit data provided to To
and Chu indicate that they “knew that the empty shells
were indeed empty.” Id. ¶¶
The Deal Closes
Capital submitted another bid for CHT on September 14, 2016.
Id. ¶ 119. CHT formed a new independent
committee and rejected the offer, without the benefit of a
new fairness opinion.Id. ¶¶ 124, 129. CC
Capital then raised its bid again, which the committee again
rejected, after which all board members offered to resign.
Id. ¶ 131. CC Capital then increased its bid
“by 2 cents/share, ” and at the request of the
special committee's legal counsel, included an offer of
indemnity for the committee's counsel and all board
members, along with increased compensation for board members.
Id. ¶ 133. The board approved this offer on
November 29, 2016, with defendant CHT Holdco LLC, an entity
part owned by CC Capital and Plaintiffs, to purchase CHT.
Id. ¶¶ 133-34. At the CHT board's
request, Chu agreed to add a 30-day “go shop”
period, during which CHT could solicit competing bids.
Id. ¶¶ 134-42. Plaintiffs allege that Chu
set up this go shop period “to ensure that no other
buyer could outbid him” and that he “improperly
and corruptly influenc[ed] the bidding process” to
ensure that his bid was successful. Id. ¶ 141,
145. Despite receiving at least one other bid, CHT accepted
CC Capital's offer. Id. ¶ 145.
of the transaction, certain Plaintiffs executed a
“Voting and Support Agreement and Release of
Claims” (the “Proxy Agreement”), agreeing
to vote in support of the proposed merger and to release
certain claims. Id. ¶ 146. Plaintiffs allege
that the Proxy Agreement “was fraudulent in several
respects and unenforceable in others, ” specifically
that the document failed to disclose that Duff &
Phelps's fairness opinion concluded CHT was worth more
than CC Captial's offer, SunTrust's resignation
(see supra n. 3), that CHT's board had approved
the offer without a fairness opinion, that CHT had delayed a
scheduled acquisition at the request of CC Capital, that CHT
disregarded superior bids during the go shop period, that
CHT's special committee refused to approve the CC Capital
offer without indemnification, or that the special committee
were given additional compensation to approve CC
Capital's offer. Id. ¶ 148(a)(i)-(vii). The
Proxy Agreement was also allegedly unenforceable as it
purported to release future claims, in violation of Delaware
law. Id. ¶ 148(b)(i)-(ii).
on January 26, 2017, the Financial Times published a story on
the empty shell LLCs, “exposing” them four days
before the transaction closed on January 30, 2017.
Id. ¶¶ 174, 177. Plaintiffs allege that
“at closing, the final funds flow document showed a
very different flow of funds than was anticipated in the
prior documents.” Id. ¶ 180. This
document allegedly reflected that CC Capital contributed
approximately $6 million less to the transaction than
“originally anticipated” and included fees of
“questionable legitimacy.” Id. ¶
Post-Closing and CHT's Bankruptcy
of the merger, Parmar and Chu agreed to keep Parmar as
CHT's CEO after closing. Id. ¶ 186. Chu
also requested that To be hired as chief financial officer of
CHT. Id. ¶ 185. Plaintiffs allege that Chu had
Parmar fired as CEO in July 2017, shortly after the
transaction closed. Id. ¶ 189. After Parmar was
fired, “multiple employees” told him that To had
approached them, stating that “they were aware that
Parmar and Zaharis had been stealing money and faking the
books, and asking for any information that they might
have.” Id. ¶ 191.
filed for bankruptcy on March 16, 2018, in the United States
Bankruptcy Court for the Eastern District of New York.
Id. ¶ 220. Plaintiffs allege that the
bankruptcy petitions on behalf of CHT were fraudulent as they
failed to disclose that plaintiff Alpha Cepheus, LLC's
consent to filing was required under an operating agreement
executed as part of the merger, that the Eastern District of
New York had “minimal” jurisdiction over CHT and
was chosen to steer the bankruptcy to a specific trustee, and
failed to properly list all creditors of CHT. Id.
¶ 224. Chu allegedly engaged in other misconduct related
to the bankruptcy, including inter alia, an attempt
to rig a bankruptcy auction to ensure that Chu's
preferred entity won some of CHT's assets, Id.
¶¶ 225-35, and making fraudulent representations as
to the value of CHT. Id. ¶¶ 236-42.
Parmar's Arrest and Criminal Charges
15, 2018, the United States Attorney for the District of New
Jersey (the “Government”) filed a two-count
criminal complaint against Parmar and two of his associates,
Sotirios Zaharis and Ravi Chivukula. See Compl.,
United States v. Parmar, No. 18-cr-735 (D.N.J. May
15, 2018) (the “Criminal Complaint”). The
Criminal Complaint charges Parmar, Zaharis and Chivukula with
one count of securities fraud in violation of Section 10(b)
of the Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule
10b-5, 17 C.F.R. § 240.10b-5, and one count of
conspiracy to defraud the United States in violation of 18
U.S.C. § 371, based on misstatements in the press
releases concerning the empty shells. Id.
the Government claims that the false press releases were part
of a scheme to “grossly inflate the value” of
CHT. Criminal Compl. ¶ 2. The press release concerning
Northstar represented that CHT had acquired it for $18
million, and that it was an operating company with 77
retained clients, more than 200 employees, and approximately
$7.9 million in revenue. Id. ¶¶ 33-34. In
reality, Northstar was formed only a few months before its
acquisition, and only two weeks before the press release had
purchased a business asset for approximately $2.78 million.
Id. The Government also contends that Parmar and his
codefendants misrepresented that they used $15 million from
secondary offerings to purchase Northstar, while the
company's bank records do not reflect any such use of
those funds. Id. Two days after the Northstar
announcement, Parmar, Zaharis and Chivukula announced that
CHT had acquired Phoenix for $14 million, “which it
described as a company employing 138 people with revenue of
$9.8 million as of the end of 2014.” Id.
¶ 35. In reality, Phoenix was formed only a week before
the release, and had no employer tax number. Id.
the Government also alleges that Parmar and his codefendants
used information they received from an unrelated third-party
company to make it appear that MDRX was an operating company,
when in fact it was not. Parmar, Zaharis and Chivukula
allegedly “used the description” of the unrelated
company “in many cases lifting the description word for
word.” Id. ¶ 18. They allegedly created
an extensive set of false documentation concerning MDRX,
including a detailed merger agreement, false financial
documents, and bank transfers to make it appear as though
MDRX was an operating company. Id. ¶¶
23-32. The Government indicted Parmar, Zaharis and Chivukula
on December 13, 2018, and that indictment is still pending.
See Indictment, ECF No. 32, United States v.
Parmar, No. 18-cr-735 (D.N.J. December 13, 2018)
was arrested by the Federal Bureau of Investigation
(“FBI”) on May 16, 2018. Id. ¶
Plaintiffs allege Parmar was arrested at the direction of CC
Capital, which made “false representations to the
DOJ” after Parmar refused Chu's demands to transfer
his interest in CHT to him and to give Chu $10 million.
Id. ¶¶ 248, 256, 201-02, 324(b).
Plaintiffs also allege that “Defendants prepared and
transmitted an anonymous tip to the FBI” that falsely