Lickteig v. Cerberus Capital Management, L.P.

UNITED STATES DISTRICT COURT DOC #: _________________

SOUTHERN DISTRICT OF NEW YORK

DATE FILED: 4/26/2020

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RONALD LICKTEIG, :

:

Plaintiff, :

: 1:19-cv-5263-GHW

-against- :

: MEMORANDUM OPINION

CERBERUS CAPITAL MANAGEMENT, L.P., : AND ORDER

COVIS PHARMACEUTICALS, INC., COVIS :

MANAGEMENT INVESTORS LLC, COVIS :

HOLDINGS, L.P., and DEAN MITCHELL, :

:

Defendants. :

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GREGORY H. WOODS, United States District Judge:

When Plaintiff Ronald Lickteig resigned from his position with Defendant Covis

Pharmaceuticals Inc., Lickteig’s employment contract required Defendants to purchase equity that

Lickteig had accrued in the firm. For the purpose of determining the value of Lickteig’s equity

interest, Defendants valued the company at approximately $450 million. Less than eight months

later, however, Defendants sold the firm’s assets for $1.2 billion. Nearly five years after he left the

firm, Lickteig sued Defendants. Lickteig alleges that Defendants induced him to accept less for his

equity than it was worth by making false or misleading statements about the firm’s value.

Because Lickteig has adequately alleged that two of Defendants’ statements were false or

misleading, Defendants’ motion to dismiss for failure to state a claim is DENIED in part. However,

the motion is also GRANTED in part as to Defendants’ other statements. And because the Court

does not have personal jurisdiction over Defendant Dean Mitchell pursuant to a forum-selection

clause in a contract that Mitchell did not sign, Defendants’ motion to dismiss for lack of personal

jurisdiction as to Mitchell is also GRANTED.

I. BACKGROUND

A. Facts1

1. Lickteig Joins Covis

Cerberus Capital Management, L.P. (“Cerberus”) created Covis Holdings, L.P. (“Covis

Holdings”) in 2011 to acquire the rights to certain pharmaceutical products from GlaxoSmithKline

(“GSK”). Compl. ¶ 22.2 Lickteig had previously served as national accounts director at GSK. Id.

¶ 24. Cerberus and Covis Holdings offered Lickteig a job as “General Manager, Acute Care” at

Covis Pharma. Id. In December 2011, Lickteig entered into a contribution agreement (the

“Contribution Agreement”), under which he contributed intellectual property rights to Covis S.á.r.l.

Id. ¶ 25; see Contribution Agreement, Ex. A to Declaration of Brandon M. Fierro (“Fierro Decl.”),

Dkt No. 38-1. In exchange, Covis Management issued Lickteig profit interests equal to 200,000

Class B Partnership Interests in Covis Management (the “Profit Interests”). Additional Profit

Interest Terms and Conditions (“Additional Terms”), Ex. A to Contribution Agreement at 1, § 1; see

also Compl. ¶ 25. “These Profit Interests were intended to enable Lickteig to participate in the

increase in value of Covis Holdings (and, indirectly, in Covis S.á.r.l.), and represented two percent of

the fully diluted equity interests in Covis Holdings.” Compl. ¶ 25.

In the Contribution Agreement, Lickteig had an option to require Covis Management to

purchase all of his vested Profit Interests at their “Fair Market Value” as of Lickteig’s termination

date (the “Put Option”). Additional Terms at 4, § 4(a); see also Compl. ¶¶ 26, 29. “‘Fair Market

Value’ was defined in Covis Management’s Amended and Restated Limited Liability Company

1 The facts are drawn from Plaintiff’s Complaint (“Compl.”), Dkt No. 1, and are accepted as true for the purposes of

this motion to dismiss. See, e.g., Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002). However, “[t]he tenet

that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions.”

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

2 After Cerberus, via Covis Holdings, acquired these products from GSK, “the commercial rights” to those products

were to be “held by non-party Covis S.á.r.l., “an indirect wholly owned subsidiary of Covis Holdings.” Id. Covis

Pharmaceuticals Inc. (“Covis Pharma”) is a “wholly owned subsidiary” of Covis Holdings which was intended to

“distribute those products in the United States.” Id. Cerberus also formed Covis Management Investors LLC (“Covis

Management”) to “issue membership interests” in other Covis entities to other parties. Id. Collectively, this opinion

refers to Covis Holdings, Covis Pharma, Covis S.á.r.l, and Covis Management as the “Covis Enterprise.”

Agreement to mean ‘the fair market value of such Profits Interest, asset or liability, as determined in

good faith by the Board of Managers, taking into account all relevant factors, including without

limitation the most recent valuation, prior to such determination, of the Company and/or its equity

interests.” Id. ¶ 29. The Contribution Agreement defined Lickteig as the “Contributor” and Covis

Management as the “MIP Limited Partner.” Contribution Agreement at 1.

The Contribution Agreement contained a mechanism for Lickteig to dispute the Board of

Managers’ calculation of the Fair Market Value of his shares. After Lickteig notified Covis

Management of his intent to exercise the Put Option (the “Put Notice”), Covis Management would

“determine the Fair Market Value of the Lickteig Profit Interests to be purchased . . . pursuant to

Contributor’s exercise of the Put Option[.]” Additional Terms at 4, § 4(b). Lickteig was then

entitled to dispute in good faith the MIP Limited Partner’s determination of Fair

Market Value by delivering written notice to the MIP Limited Partner within ten (10)

business days of its receipt of the Put Notice setting forth in reasonably specific detail

the good faith basis of the dispute, including (i) the value that Contributor reasonably

believes should be ascribed to the Subject Lickteig Profits Interests and (ii) all facts

and figures that Contributor reasonably believes supports Contributor’s view of the

relevant valuation[.]

Id. If Lickteig failed to dispute Covis Management’s calculation within ten days, then the Fair

Market Value was “conclusively deemed to be equal to the Fair Market Value established by the MIP

Limited Partner[.]” Id. In other words, if Lickteig failed to dispute the calculation of fair market

value, Covis Management’s calculation—which was to be calculated in good faith and taking into

account all relevant factors—was presumed correct. However,

[i]f Contributor delivers a Dispute Notice on a timely basis and the MIP Limited

Partner and Contributor are unable to reach agreement on the Fair Market Value

within twenty (20) business days after the delivery of the Dispute Notice, then each of

the MIP Limited Partner and Contributor shall select an independent third-party

appraiser, which two appraisers shall select a third independent appraiser, and this

third appraiser shall prepare and deliver to the MIP Limited Partner and Contributor

a Fair Market Value determination within twenty (20) days after such selection. Such

appraisal shall be binding upon the MIP Limited Partner and Contributor.

Id. Hence, the Contribution Agreement set out a process by which disputes over the value of

Lickteig’s Profit Interests would be settled.

2. Lickteig’s Resignation and the Valuation

Lickteig voluntarily resigned on June 6, 2014 and exercised the Put Option three days later.

Compl. §] 28. At that time, Lickteig held 95,000 vested Profit Interests. Id In July 2014, Defendant

Dean Mitchell—chairman of the board of Covis S.4.r.L and “acting on behalf of the other

Defendants”—“provided a written valuation to Lickteig ... which purported to value Lickteig’s

Profit Interests at $1.1 million (the ‘Valuation’).” Id. 17, 30. The complaint contains a picture of

the Valuation that Mitchell allegedly provided to Lickteig, which is reproduced below.

$ in MM, unless otherwise noted

OP MBRAMBPHA 1717123711 TISTPIIITII IIIS

SERIES senile 2 —_

Sere ee eee ae eee eee

Memo: 2014 Adjusted EBITDA 5 68.5

Memo: Implied 2014 EBITDA Multiple 6.8x

Net Debt as of 3/31/2014 s 139.5

Class A Preferred as of 3/31/14 138.4

tpts] Common Rqulty (contre mestetabisy "eee

;on-marketable / Non-control Discount oe

□□□ gi Om

Ron Lickteig's Interests

Ron's Vested Interests 95,000

otal Interests 13,585,714

% of Total Common Interests 0.699%

ace eens neem et LTTE NMA COCA

Date Vested % Vested Amount

12/23/2011 90.000% 90,000

_ . . 12/23/2012 __ _ _92.500% ____—_—_—92,500

ea 220 eee TE sO

12/23/2014 97.500% 97,500

12/23/2015 100.000% 100,000

The Valuation stated the “total enterprise value (TEV’) of Covis Holdings as $466.7

million.” Id § 31. Mitchell calculated this TEV by “multipl[ying] Covis Holding’s purported ‘2013

Adjusted EBITDA’” 3—which the Valuation stated was $62.2 million—by a “‘TEV/EBITDA

Multiple’ of 7.5.” Id. The 2013 Adjusted EBITDA and the TEV/EBITDA Multiple were the only

figures that factored into the Valuation. Thus, the Valuation was based entirely on 2013 data.

Mitchell also divided this TEV by Covis Holdings’ “‘2014 Adjusted EBITDA’—which he

represented was $68.5 million”—to calculate an “‘implied 2014 EBITDA Multiple’ of 6.8.” Id.

(brackets omitted). “Mitchell then subtracted Covis Holding’s net debt as well as the value of its

Class A preferred shares as of March 31, 2014 to arrive at a total common equity amount of

$188,800,000.” Id. ¶ 32. After Mitchel subsequently “applied a 15 percent marketability discount

and multiplied that amount by Lickteig’s total ownership percentage in Covis Holdings,” he arrived

at the $1.1 million valuation for Lickteig’s Profit Interests. Id. On July 22, 2014, Lickteig agreed in

principal sell his Profit Interests for $1.3 million. Id. ¶ 34.

3. The Separation Agreement

The parties’ executed the Separation and General Release Agreement (the “Separation

Agreement”) on August 11, 2014. Id. ¶ 35. The Separation Agreement was executed by Lickteig;

Mike Kelly, the CEO of Covis Pharma on behalf of Covis Pharma; and Alexander Benjamin as

“authorized signatory” on behalf of Covis Holdings. Separation Agreement, Ex. F to Declaration of

Joseph Matteo (“Matteo Decl.”), Dkt No. 38-6, at 7. Section 4 of the Separation Agreement

provided that the $1.3 million payment “represents full consideration for any and all vested profits

interests to which Employee was entitled pursuant to the Contribution Agreement, and that the

payment set forth in this Section 4 satisfies any obligations the Company owes to Employee

pursuant to the Contribution Agreement . . . including any Claims for unvested profits interests

pursuant to Section 4(h) of the Contribution Agreement.” Id. at 2-3, § 4. Section 4 also stated that

Lickteig was “not otherwise entitled to receive the consideration set forth” in that section unless he

3 EBITDA stands for “Earnings Before Interest, Tax, Depreciation, and Amortization.”

agreed to release claims against Covis Pharm and Covis Holdings. Id. at 3. Section 14 of the

Separation Agreement likewise stated that Lickteig “shall not be entitled to the consideration set

forth in Section 4 of this Separation Agreement” if he did not return a signed Separation Agreement

by August 22, 2014. Id. at 6, § 14(A).

Section 2 of the Separation Agreement also provided that Lickteig waived all of his claims

against Covis Holdings, Covis Pharma, and their respective affiliates, including claims under the

“laws, statutes, and/or regulations of the States of North Carolina, Iowa, or any other state and the

United States.” Id. at 1-2, § 2. The release provision provided a non-exhaustive list of statutes from

which Lickteig released the Covis entities, which did not include the Securities Exchange Act of

1934. Id. at 2, § 2. The release provision excluded “[c]laims that, by law, cannot be waived.” Id.

“The Contribution Agreement provided that Covis Management (which had issued the

Profit Interests to Lickteig) would purchase those interests upon Lickteig’s exercise of his Put

Option.” Compl. ¶ 35. However, the Separation Agreement “provided that Covis Holdings itself

would pay Lickteig for his Profit Interests.” Id. Lickteig received payment for his Profit Interests in

September 2014. Id. ¶ 36.

4. Defendants’ Allegedly False or Misleading Statements

Lickteig alleges that Defendants’ valuation of Covis Holdings was materially misleading in

several respects. Lickteig first alleges that “Defendants knew that the estimated 2014 Adjusted

EBITDA of $68.5 million that they provided to Lickteig in the Valuation . . . was grossly

understated.” Id. ¶ 38. That was because “a PowerPoint deck prepared for a July 29, 2014 meeting

of Covis . . . S.á.r.l.’s board of directors” stated that “Covis Holdings had achieved adjusted

EBITDA of $51.8 million in just the first two quarters of 2014.” Id. The presentation noted that

this adjusted EBITDA was $18.4 million greater than the 2014 annual plan had anticipated through

the first two quarters of 2014; the annual plan had anticipated an adjusted EBITDA of $33.5 million

through the first two quarters of 2014. Id. The presentation “further noted that the company had

‘cash on hand of $63.4mm and total liquidity of $98.4mm inclusive of $35.0mm undrawn

revolving.’” Id. The presentation listed Mitchell as an attendee and was “prepared in the same

month that Mitchell provided the Valuation to Lickteig, and before Defendants finalized their

agreement with Lickteig.” Id. ¶ 39.

The complaint also alleges “on information and belief” that “in June 2014, Defendants

valued the pharmaceutical products acquired from GSK at $750 million to $1 billion, which would

have implied a far greater TEV than the $466 million provided in the Valuation.” Id. ¶ 40. And,

“[o]n further information and belief, Covis Holdings’ actual adjusted EBITDA for 2013 was millions

of dollars higher than the $62.2 million reported to Lickteig in the Valuation.” Id.

Lickteig alleges that “Defendants also misrepresented what they believed to be the

appropriate EBITDA multiple for Covis Holdings.” Id. ¶ 41. Although Defendants used 7.5 as the

EBITDA multiple in the Valuation, the complaint alleges that “Mitchell told a colleague in October

2014 that a ‘reasonable multiple’ for Covis Holdings would be ‘8-12X’ EBITDA.” Id.

Moreover, the complaint alleges that in addition to affirmatively misrepresenting the value of

the Profit Interests, Defendants failed to inform Lickteig of additional material facts. One such

allegedly material omission was that Defendants “were actively engaged in discussions to sell Covis

Holdings or its pharmaceutical assets for substantially more than the TEV that they provided to

Lickteig in the Valuation.” Id. ¶ 43. One day after Lickteig agreed in principal to sell his Profit

Interests but before the parties signed the Separation Agreement, Jim Lenehan, the chairman of the

board of directors of Covis Pharma and a Cerberus appointee, wrote to Brett Ingersoll, a Cerberus

employee, that “there may be an interesting offer coming quickly.” Id. ¶ 44. Lenehan also wrote

that “hopefully negotiations with former [management] has [sic] concluded.” Id. ¶ 45 (brackets

omitted).

Lickteig further alleges that Defendants concealed that “on information and belief, in July

2014, a potential purchaser valued Covis Holding’s assets at $950 million.” Id. ¶ 47. And the

complaint alleges “[o]n further information and belief” that “Defendants’ management prepared a

board presentation in July 2014 reporting that two bidders were heavily engaged to purchase Covis

Holdings.” Id. Moreover, “on August 7, 2014, Mitchell sent an internal email entitled ‘Acquisition

Update’ in which he confirmed that Defendants expected an offer ‘by the end of this or early next

week,’ and ‘will need to move quickly if the buyer plans to provide a compelling offer.’” Id.

(brackets omitted).

After the parties executed the Separation Agreement, “Defendants continued to pursue a

sale, targeting a valuation of more than $1 billion.” Id. ¶ 48. On February 12, 2015, Covis Holdings

“executed a letter of intent to sell substantially all of its assets to Concordia Healthcare, Inc.

(‘Concordia’).” Id. “On March 9, 2015, Defendants publicly announced that Concordia had

purchased substantially all of Defendants’ assets for $1.2 billion.” Id.

B. Procedural History

Lickteig filed the complaint that initiated this case on June 4, 2019. Dkt No. 1. The

complaint alleges four claims for relief. First, the complaint asserts a cause of action against all

Defendants because they allegedly made false or misleading statements of material fact in violation

of section 10(b) of the Exchange Act of 1934, 15 U.S.C. § 78j(b), (“Section 10(b)”) and rule 10b-5

promulgated thereunder, 17 C.F.R. § 240.10b-5 (“Rule 10b-5”). Compl. ¶¶ 50-56. Second, the

complaint asserts a cause of action against Defendants Cerberus and Covis Holdings for control

person liability in violation of section 20(a) of the Exchange Act, 15 U.S.C. § 78t, (“Section 20(a)”)

based on the same false or misleading statements of material fact asserted in the first cause of action.

Compl. ¶¶ 57-61. Third, the complaint asserts a cause of action against all Defendants because they

made false or misleading statements of material fact in violation of the Iowa Uniform Securities Act,

Iowa Code § 502.509(3). Compl. ¶¶ 62-72. Finally, the complaint asserts a cause of action against

Defendants Cerberus and Covis Holdings for control person liability in violation of Iowa Code §

502.A7 based on the same false or misleading statements of material fact asserted in the third cause

of action. Compl. ¶¶ 73-77.

Defendants filed their motion to dismiss for failure to state a claim and for lack of personal

jurisdiction as to Defendant Mitchell on September 20, 2019. Dkt Nos. 34-36. Lickteig

subsequently filed an opposition, Dkt No. 37-38, and Defendants filed a reply, Dkt No. 39.

II. DISCUSSION

A. Rule 12(b)(6) Motion

1. Legal Standard

A complaint must contain “a short and plain statement of the claim showing that the pleader

is entitled to relief.” Fed. R. Civ. P. 8(a)(2). A defendant may nonetheless move to dismiss a

plaintiff’s complaint for “failure to state a claim upon which relief can be granted.” Fed. R. Civ. P.

12(b)(6). “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.’” Iqbal, 556 U.S. at 678

(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial plausibility when

the plaintiff pleads factual content that allows the court to draw the reasonable inference that the

defendant is liable for the misconduct alleged.” Id. (citing Twombly, 550 U.S. at 556). It is not

enough for a plaintiff to allege facts that are consistent with liability; the complaint must “nudge[]”

claims “across the line from conceivable to plausible.” Twombly, 550 U.S. at 570. “To survive

dismissal, the plaintiff must provide the grounds upon which his claim rests through factual

allegations sufficient ‘to raise a right to relief above the speculative level.’” ATSI Commc’ns, Inc. v.

Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (quoting Twombly, 550 U.S. at 555).

Determining whether a complaint states a plausible claim is a “context-specific task that

requires the reviewing court to draw on its judicial experience and common sense.” Iqbal, 556 U.S.

at 679 (citation omitted). The court must accept all facts alleged in the complaint as true and draw

all reasonable inferences in the plaintiff’s favor. Burch v. Pioneer Credit Recovery, Inc., 551 F.3d 122, 124

(2d Cir. 2008) (per curiam). However,

“[t]hreadbare recitals of the elements of a cause of action, supported by mere

conclusory statements, do not suffice.” A complaint must therefore contain more

than “naked assertions devoid of further factual enhancement.” Pleadings that contain

“no more than conclusions . . . are not entitled to the assumption of truth” otherwise

applicable to complaints in the context of motions to dismiss.

DeJesus v. HF Mgmt. Servs., LLC, 726 F.3d 85, 87-88 (2d Cir. 2013) (brackets omitted) (quoting Iqbal,

556 U.S. at 678-79). Thus, a complaint that offers “labels and conclusions” or “naked assertions”

without “further factual enhancement” will not survive a motion to dismiss. Iqbal, 556 U.S. at 678

(brackets omitted) (citing Twombly, 550 U.S. at 555, 557).

Securities fraud claims are also subject to the heightened pleading requirements of Federal

Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act (“PSLRA”). Rule 9(b)

requires that “in alleging fraud or mistake, a party must state with particularity the circumstances

constituting fraud or mistake.” Fed. R. Civ. P. 9(b). To satisfy this requirement, the complaint must

“(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3)

state where and when the statements were made, and (4) explain why the statements were

fraudulent.” ATSI, 493 F.3d at 99 (citation omitted). “Allegations that are conclusory or

unsupported by factual assertions are insufficient.” Id. (citation omitted). Furthermore, under the

PSLRA, securities fraud plaintiffs alleging an untrue statement of material fact or an omission of a

material fact necessary to make statements not misleading must specify “each statement alleged to

have been misleading, the reason or reasons why the statement is misleading, and, if an allegation

regarding the statement or omission is made on information and belief, the complaint shall state

with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). A plaintiff must

therefore “do more than say that the statements . . . were false and misleading; [she] must

demonstrate with specificity why and how that is so.” Rombach v. Chang, 355 F.3d 164, 174 (2d Cir.

2004).

In determining the adequacy of a claim under Rule 12(b)(6), a court is generally limited to

“facts stated on the face of the complaint.” Goel v. Bunge, Ltd., 820 F.3d 554, 559 (2d Cir. 2016)

(quotation omitted). However,

[i]t is well established that a pleading is deemed to include any written instrument that

is attached to it as an exhibit or is incorporated in it by reference. And even if the

plaintiff chooses not to attach an instrument to the complaint or to incorporate it by

reference, if it is one upon which the plaintiff solely relies and which is integral to the

complaint, the court may take the document into consideration in deciding the

defendant’s motion to dismiss.

Lynch v. City of New York, 952 F.3d 67, 79 (2d Cir. 2020) (citations and alterations omitted); see

also Fed. R. Civ. P. 10(c) (“A copy of a written instrument that is an exhibit to a pleading is a part of

the pleading for all purposes.”). “The term written instrument generally refers to a legal document

that defines rights, duties, entitlements, or liabilities, such as a statute, contract, will, promissory

note, or share certificate.” Lynch, 952 F.3d at 79 (quotation omitted). Hence, the “the types of

exhibits incorporated within the pleadings by Rule 10(c) . . . consist[] largely of contracts, notes, and

other writings on which a party’s action or defense is based.” Id. (quotation and alterations omitted).

For a document to be integral to a complaint, “the plaintiff must have (1) ‘actual notice’ of the

extraneous information and (2) ‘relied upon the documents in framing the complaint.’” DeLuca v.

AccessIT Grp., Inc., 695 F. Supp. 2d 54, 60 (S.D.N.Y. 2010) (quoting Chambers, 282 F.3d at 153)

(brackets omitted).

The Court has considered the Contribution and Separation Agreements in deciding this

motion to dismiss because they are integral to Lickteig’s complaint. Both are contracts upon which

the Lickteig’s claim is based. Moreover, both are cited extensively in the complaint; thus, the Court

concludes both that Lickteig had actual notice of the content of both agreements and relied upon

them in framing the complaint. The Court has not considered the other documents submitted both

in support of and opposition to Defendants motion to dismiss. See generally Fierro Decl.; Matteo

Decl. The Court cannot conclude that any of these documents are integral to the complaint.

Therefore, the Court has not considered them on this motion to dismiss.

2. Application

a. Statute of Limitations

i. Legal Standard

“The statute of limitations is an affirmative defense as to which Defendants carry the

burden of showing that [Lickteig] failed to plead timely claims.” DoubleLine Capital LP v. Odebrecht

Fin., Ltd., 323 F. Supp. 3d 393, 435 (S.D.N.Y. 2018) (citing Staehr v. Hartford Fin. Servs. Grp., 547 F.3d

406, 425 (2d Cir. 2008) (“The lapse of a limitations period is an affirmative defense that a defendant

must plead and prove.”)). Accordingly, dismissal of the complaint based on the statute of

limitations at the pleading stage “is warranted only if ‘it is clear from the face of the complaint, and

matters of which the court may take judicial notice, that the plaintiff’s claims are barred as a matter

of law.’” Id. (quoting Conopco, Inc. v. Roll Int’l, 231 F.3d 82, 86 (2d Cir. 2000)).

Claims sounding in fraud that are brought under the Securities Exchange Act “must be filed

within the earlier of five years from the alleged violation or two years ‘after discovery of the facts

constituting the violation.’” Charles Schwab Corp. v. Bank of Am. Corp., 883 F.3d 68, 94 (2d Cir. 2018)

(quoting 28 U.S.C. § 1658(b)); see also Iowa Code § 502.509(10)(b) (same as to Iowa state law causes

of action).

Defendants’ statute of limitations defense turns on when a reasonably diligent plaintiff

would have discovered the fraud alleged in the complaint. “‘When the circumstances would suggest

the probability that a violation of the securities laws has occurred—a situation sometimes called

‘storm warnings’—courts deem the plaintiff on inquiry notice and assume that a reasonable person

in his or her shoes would conduct further investigation into the potential violation.’” DoubleLine

Capital, 323 F. Supp. 3d at 436 (quoting Fed. Hous. Fin. Agency for Fed. Nat’l Mortg. Ass’n v. Nomura

Holding Am., Inc., 873 F.3d 85, 119 (2d Cir. 2017)) (alterations omitted). The information must be

“‘specific enough to provide an ordinary investor with indications of the probability (not just the

possibility) of’ a violation.” Fed. Housing Fin. Agency, 873 F.3d at 120 (quotation omitted). Before the

Supreme Court’s decision in Merck & Co. v. Reynolds, 559 U.S. 633 (2010), “such inquiry notice

would trigger the running of the statute of limitations.” DoubleLine Capital, 323 F. Supp. 3d at 436

(citing Staehr, 547 F.3d at 426).

In Merck, however, the Supreme Court held that “the statute of limitations period does not

begin to run until the plaintiff actually learns of the violation or ‘a reasonably diligent plaintiff would

have discovered the facts constituting the violation, including scienter—irrespective of whether the

actual plaintiff undertook a reasonably diligent investigation.’” Id. (quoting City of Pontiac Gen. Emps.’

Ret. Sys. v. MBIA, Inc., 637 F.3d 169, 174 (2d Cir. 2011)). “The point at which inquiry notice is

triggered is still relevant.” Id. (citing Merck, 559 U.S. at 653 (“In determining the time at which

‘discovery’ of [the facts constituting the violation] occurred, terms such as ‘inquiry notice’ and ‘storm

warnings’ may be useful to the extent that they identify a time when the facts would have prompted

a reasonably diligent plaintiff to begin investigating.”)). “Nonetheless, the clock does not start to

tick on the statute of limitations until ‘such a reasonable investor conducting such a timely

investigation would have uncovered the facts constituting a violation.’” Id. (quoting City of Pontiac,

637 F.3d at 174). “A plaintiff is deemed to have discovered the facts constituting the violation only

after ‘a reasonably diligent plaintiff would have sufficient information to adequately plead its claim in

a complaint.’” Id. (quoting Schwab, 883 F.3d at 94) (alterations omitted).

ii. Application

Defendants have not met their burden to show that Lickteig’s claim is untimely.4

Defendants argue that the March 2015 sale of the Covis Enterprise’s assets to Concordia for $1.2

4 As noted above, the Court has not considered the documents submitted by Defendants in support of their motion to

dismiss, except for the Contribution Agreement. Some of the facts Defendants rely on to argue that Lickteig’s claim is

untimely are not “clear from the face of the complaint and matters of which the court may take judicial notice” and thus

the Court cannot consider them at this stage. Conopco, 231 F.3d at 86.

billion was a “storm warning” that would have put a reasonable investor on inquiry notice.

However, the Court cannot conclude at the pleading stage that the mere fact that the Covis

Enterprise sold its assets for $1.2 billion would have put a reasonable investor on inquiry notice of

the probability that any of Defendants statements were false or misleading. That the Covis

Enterprise sold its assets for $1.2 billion “does not, on its face, indicate . . . misconduct” and is

“consistent with a perfectly innocent explanation,” namely that Concordia placed greater value on

the Covis Enterprise’s pharmaceutical assets than the Covis Enterprise had internally. Fed. Hous.

Fin. Agency v. Nomura Holding Am., Inc., 60 F. Supp. 3d 479, 503 (S.D.N.Y. 2014), aff’d, 873 F.3d 85

(2d Cir. 2017).5 Hence, this information would not have “prompted a reasonably diligent plaintiff to

begin investigating” the Covis Enterprise. Merck, 559 U.S. at 653.

Because the sale of the Covis Enterprise’s assets to Concordia would not have prompted a

reasonably diligent plaintiff to begin investigating, the fact that different plaintiffs had made

allegations against similar defendants in another case, see Brown v. Cerberus Capital Mgmt., L.P., No. 15

CIV. 9022 (GBD), 2016 WL 7377271 (S.D.N.Y. Dec. 12, 2016), aff’d, 703 F. App’x 11 (2d Cir.

2017), does not render Lickteig’s claims untimely. The Court cannot conclude that a reasonable

plaintiff would have discovered the facts alleged in the Brown plaintiffs’ federal complaint. The mere

existence of civil litigation against a defendant for similar infractions is not necessarily enough to put

“a reasonable investor of ordinary intelligence” on inquiry notice where the lawsuit “received no

publicity whatever (not even in niche publications) and that did not, at least based on the record

before [the Court], result in published or broadly disseminated opinions within the relevant time

period.” Staehr, 547 F.3d at 435. Hence, Defendants have not carried their burden to show that a

5 Indeed, in their memorandum of law, Defendants argue that “[t]he Concordia transaction occurred during a short-lived

and unprecedented acquisition-driven boom in the specialty pharmaceuticals market.” Memorandum of Law in Support

of Motion to Dismiss (“Mem.”), Dkt No. 35, at 7 n.4. Although the Court does not accept this fact as true, it is

illustrative of the fact that there may have been reasonable explanations other than fraud for the disparity between the

valuation provided to Lickteig and the sale price to Concordia; specifically, the value of the Covis Enterprise’s assets may

have tripled during a price bubble.

“reasonable investor conducting . . . a timely investigation” would have discovered the facts based

on the Brown plaintiff’s filing. City of Pontiac, 637 F.3d at 174. As that is the only basis on which

Defendants ask the Court to dismiss Lickteig’s claims as time barred, their motion to dismiss is

denied on this ground.

b. Section 10(b) Claim

Lickteig has plausibly pleaded that two of Defendants’ statements violated Section 10(b) and

Rule 10b-5 Under Section 10(b) and Rule 10b-5, it is unlawful to “make any untrue statement of a

material fact or to omit to state a material fact necessary in order to make the statements made, in

light of the circumstances under which they were made, not misleading[.]” 17 C.F.R. § 240.10b–

5(b); see also 15 U.S.C. § 78j(b). To survive a defendant’s motion to dismiss a Section 10(b) claim, a

plaintiff must plausibly plead “(1) a material misrepresentation or omission; (2) scienter, i.e., a

wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance; (5)

economic loss; and (6) loss causation.” Kleinman v. Elan Corp., plc, 706 F.3d 145, 152 (2d Cir. 2013)

(quoting Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005)) (alterations omitted). Defendants

challenge Lickteig’s complaint with respect to the first and second elements.

i. Material Misstatement or Omission

A. Legal Standard

Both affirmative misrepresentations and omissions can be actionable under Section 10(b). A

defendant’s statement is actionable if it “affirmatively created an impression of a state of affairs that

differed in a material way from the one that actually existed.” In re Alstom SA Sec. Litig., 406 F. Supp.

2d 433, 453 (S.D.N.Y. 2005). Where a company does not have an obligation to speak but chooses

to do so anyway, it assumes “a duty to be both accurate and complete.” Caiola v. Citibank, N.A.,

N.Y., 295 F.3d 312, 331 (2d Cir. 2002); see also In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347,

366 (2d Cir. 2010) (explaining that once a corporation makes “a disclosure about a particular topic,

whether voluntary or required, the representation must be complete and accurate” (quotation

omitted)). Ultimately, companies “can control what they have to disclose under [Section 10(b) and

Rule 10b-5] by controlling what they say to the market.” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S.

27, 45 (2011).

Omissions can also be actionable under Section 10(b). A plaintiff can state a claim for

Section 10(b) liability based on an omission when the omission is “in contravention of an affirmative

legal disclosure obligation” or the information that is not disclosed is “necessary to prevent existing

disclosures from being misleading.” Litwin v. Blackstone Grp., L.P., 634 F.3d 706, 715-16 (2d Cir.

2011). With respect to the second category, the key is the “presence of a prior statement that

otherwise is or will become materially misleading” as a result of the omission. DoubleLine Capital LP

v. Construtora Norberto Odebrecht, S.A., 413 F. Supp. 3d 187, 206 (S.D.N.Y. 2019); see also SEC v.

Gabelli, 653 F.3d 49, 57 (2d Cir. 2011) (holding that “literally true statements that create a materially

misleading impression,” or “so-called ‘half-truths,’” can be actionable as securities fraud), rev’d and

remanded on other grounds, 568 U.S. 442 (2013).

To incur liability, misrepresentations or omissions must also be material. “At the pleading

stage, a plaintiff satisfies the materiality requirement of Rule 10b-5 by alleging a statement or

omission that a reasonable investor would have considered significant in making investment

decisions.” Caiola, 295 F.3d at 329 (quotation omitted). “To be actionable, a misrepresentation

must be one of existing fact, and not merely an expression of opinion, expectation, or declaration of

intention.” In re Moody’s Corp. Sec. Litig., 599 F. Supp. 2d 493, 507 (S.D.N.Y. 2009) (quotation

omitted). “Statements of ‘hope, opinion, or belief about the company’s future performance’ are not

actionable.” Id. (quoting San Leandro Emergency Med. Grp. Profit Sharing Plan v. Philip Morris Cos., 75

F.3d 801, 811 (2d Cir. 1996)). However, optimistic statements “may be actionable upon a showing

that the defendants did not genuinely or reasonably believe the positive opinions they touted . . ., or

that the opinions imply certainty.” Lapin v. Goldman Sachs Grp., Inc., 506 F. Supp. 2d 221, 239

(S.D.N.Y. 2006) (citation omitted).

B. Application

i. Covis Holdings’ Adjusted EBITDA for 2013

Lickteig’s allegation that Covis Holdings Adjusted EBITDA for 2013 was higher than $62.2

million cannot serve as the basis for a securities fraud claim. Lickteig alleges that on “information

and belief, Covis Holdings’ actual adjusted EBITDA for 2013 was millions of dollars higher than the

$62.2 million reported to Lickteig in the Valuation.” Compl. ¶ 40. Lickteig has failed to plead “why

and how” this statement was “false and misleading.” Carpenters Pension Tr. Fund of St. Louis v. Barclays

PLC, 750 F.3d 227, 236 (2d Cir. 2014). Lickteig has not pleaded any particularized facts on which

his “information and belief” that Covis Holdings’ adjusted EBITDA for 2013 was millions of dollars

higher than $62.2 million. And “it is well-settled that barebones allegations based on ‘information

and belief,’ without more, are insufficient to support a securities fraud claim.” Doscher v. Sobel & Co.,

LLC, No. 14 CIV. 646 RMB, 2015 WL 774695, at *5 (S.D.N.Y. Feb. 11, 2015) (citing First Capital

Asset Mgmt., Inc. v. Satinwood, Inc., 385 F.3d 159, 179 (2d Cir. 2004)). Therefore, because Lickteig has

failed to allege the particularized facts upon which his “information and belief” rests, this statement

cannot serve as a basis for securities fraud liability.

ii. The $750 Million to $1 Billion Valuation

For much the same reasons, Lickteig’s allegation that Defendants failed to disclose that they

“valued the pharmaceutical products acquired from GSK at $750 million to $1 billion” cannot serve

as the basis for securities fraud liability. Compl. ¶ 40. In the complaint, Lickteig provides no facts

to support his assertion—again, “on information and belief”—that Defendants in fact valued the

pharmaceutical products acquired from GSK between $750 million to $1 billion. And in the

absence of particularized facts justifying Lickteig’s belief that this valuation ever existed, it cannot

serve as a basis for liability.

In his opposition, Lickteig clarifies that his “information and belief . . . is based on an

appellate brief that the Brown plaintiffs filed in April 2019[.]” Opp. at 15. But “it is axiomatic that

the [c]omplaint cannot be amended by the briefs in opposition to a motion to dismiss.” O’Brien v.

Nat’l Prop. Analysts Partners, 719 F. Supp. 222, 229 (S.D.N.Y. 1989) (citations omitted). The appellate

brief in the Brown plaintiffs’ suit is not attached to the complaint, incorporated in the complaint by

reference, or integral to the complaint. See Lynch, 952 F.3d at 79. Therefore, the Court cannot

consider this statement of the source of Lickteig’s information and belief. Consequently, because

there are no allegations in the complaint sufficient to explain the source of Lickteig’s “information

and belief,” this statement also cannot form the basis for a securities fraud liability claim.6

iii. Potential Offers to Purchase the Covis Enterprise in the Summer of 2014

Defendants’ alleged failure to disclose that they were engaged in negotiations to sell Covis

Holdings is also not actionable. Lickteig alleges that Defendants failed to disclose that “they were

actively engaged in discussions to sell Covis Holdings or its pharmaceutical assets for substantially

more than the TEV that they provided to Lickteig in the Valuation.” Compl. ¶ 43. However, the

Exchange Act does not “create an affirmative duty to disclose any and all material information,”

Matrixx Initiatives, 563 U.S. at 44, and “[d]isclosure of an item of information is not required . . .

simply because it may be relevant or of interest to a reasonable investor.” Resnik v. Swartz, 303 F.3d

147, 154 (2d Cir. 2002). Rather, disclosure is only required “when necessary to make . . . statements

made, in light of the circumstances under which they were made, not misleading.” Matrixx Initiatives,

563 U.S. at 44 (quotation omitted).

Lickteig has not alleged any statements by Defendants that created a duty to disclose that

they were engaged in negotiations with potential purchasers, as Lickteig has alleged in the complaint.

The allegation that Defendants were engaged in merger negotiations does not make the financial

information set forth in the Valuation, or the Valuation itself, false or misleading. Indeed, the

Valuation was entirely backward looking; it was based only on the 2013 Adjusted EBITDA and the

6 The same is true of Lickteig’s allegation that “in July 2014, a potential purchaser valued Covis Holdings’s assets at $950

million.” Compl. ¶ 47.

TEV/EBITDA multiple. Defendants’ failure to disclose negotiations with potential purchasers did

not render these figures false or misleading. Although Lickteig may have considered this

information relevant, that is not enough to make a statement false or misleading under the PSLRA.

Therefore, because the allegation that Defendants were engaged in merger negotiations does not

render any of Defendants’ statements false or misleading, these statements cannot form the basis for

a securities fraud claim.

iv. The TEV/EBIDTA Multiple

Although the foregoing statements are not actionable, the complaint adequately alleges that

the use of 7.5 as the TEV/EBIDTA multiple in the Valuation can serve as the basis for a securities

fraud claim. The Contribution Agreement required Covis Management to purchase Lickteig’s Profit

Interests at their “Fair Market Value,” which was to be determined “in good faith by the Board of

Managers, taking into account all relevant factors[.]” Compl. ¶ 29. In the Valuation, Defendants

valued the Covis Enterprise using an EBITDA multiple of 7.5. Id. ¶ 41. Yet in October 2014,

Mitchell told a Cerberus employee via email that a “reasonable multiple” would be “8-12X”

EBIDTA. Id.

Drawing all reasonable inferences in favor of Lickteig, the Court cannot conclude that

Defendants’ use of 7.5 as the EBITDA multiple in the Valuation was not misleading. Granted, the

selection of an EBITDA multiple may be characterized as a matter of opinion. See, e.g., In re Salomon

Analyst Level 3 Litig., 373 F. Supp. 2d 248, 251-52 (S.D.N.Y. 2005). However, “liability for making a

false statement of opinion may lie if . . . ‘the speaker did not hold the belief she professed[.]’” Tongue

v. Sanofi, 816 F.3d 199, 210 (2d Cir. 2016) (quoting Omnicare, Inc. v. Laborers Dist. Council Const. Indus.

Pension Fund, 575 U.S. 175, 186 (2015)). Moreover, Defendants represented in the contract that they

would determine the fair market value of Lickteig’s shares in good faith. Based on Mitchell’s

subsequent statement, it is plausible that he actually believed that the range of reasonable EBITDA

multiples was between 8 and 12 when he presented the Valuation to Lickteig. And if Mitchell did

not actually believe that 7.5 was within the range of reasonable EBITDA multiples, it is also

plausible to infer that that Defendants chose 7.5 as an EBITDA multiple in bad faith, rendering

their contractual representation that they would value Lickteig’s Profit Interests in good faith false or

misleading.

The choice of EBITDA multiple was material because it factored directly into the Valuation.

Furthermore, Lickteig had a right to contest the valuation of his shares under the Contribution

Agreement. See Ex. A to Contribution Agreement at 4, § 4. Lickteig chose not to exercise that right,

but he may have acted differently if Mitchell had disclosed that 7.5 was outside what he considered

to be a reasonable range of EBITDA multiples. Consequently, Lickteig has plausibly alleged that the

use of 7.5 as the EBITDA multiple in the Valuation is an actionable basis for a securities fraud

claim.

To be sure, the allegations in the complaint are also consistent with a more benign version of

events, in which Defendants genuinely believed that the lower EBITDA multiples they quoted to

Lickteig were appropriate but had, months later, sharply raised the EBITDA multiple that they

believed was appropriate. However, at the pleading state, the Court must draw reasonable

inferences in favor of the non-moving party. See Iowa Pub. Emps.’ Ret. Sys. v. Merrill Lynch, Pierce,

Fenner & Smith Inc., 340 F. Supp. 3d 285, 313 (S.D.N.Y. 2018) (“The parties’ dispute on this issue

amounts to a battle of competing inferences . . . [But] [o]n a motion to dismiss, the Court must

draw ‘all reasonable inferences in the plaintiff’s favor.’”) (quoting Doe v. Columbia Univ., 831 F.3d 46,

48 (2d Cir. 2016)). And because the facts in the complaint are consistent with Lickteig’s theory of

liability—that Defendants lowballed the company’s EBITDA multiple because doing so meant that

they had to pay Lickteig less for his Profit Interests—the Court cannot dismiss his claim as a matter

of law.

v. Adjusted EBITDA for 2014

Lickteig has also plausibly alleged that Defendants’ statement in the Valuation that Covis

Holdings’ projected Adjusted EBITDA for 2014 was $68.5 million was misleading. That is because

Lickteig has plausibly alleged that Defendants knew that their projected EBITDA was running

ahead of their projections for 2014 but deliberately chose not to update the $68.5 million figure in

the Valuation to account for that fact. Lickteig alleges that “Defendants knew that the estimated

2014 Adjusted EBITDA of $68.5 million that [Defendants] provided to Lickteig in the Valuation . . .

was grossly understated.” Compl. ¶ 38. The factual basis for this assertion is a July 29, 2014 slide

deck, allegedly prepared for the Board of Directors of Covis S.á.r.l, which lists adjusted EBITDA as

$51.8 million. Id. Allegedly, “[t]he presentation further stated that this adjusted EBITDA was $18.4

million ahead of the 2014 annual plan of $33.5 million.” Id. Those allegations are sufficient to raise

an inference that Defendants knew that their projected EBIDTA for 2014 in the Valuation was

misleadingly low.

Even if Defendants’ statement about their 2014 projected Adjusted EBITDA liability falls

within the PSLRA’s definition of a forward-looking statement, the safe harbor provision does not

protect Defendants from liability. “[A] defendant is not liable” for a forward-looking statement

under the PSLRA “if the forward-looking statement is identified and accompanied by meaningful

cautionary language or is immaterial or the plaintiff fails to prove that it was made with actual

knowledge that it was false or misleading.” Slayton v. Am. Exp. Co., 604 F.3d 758, 766 (2d Cir. 2010)

(emphases and citation omitted).7 Lickteig does not allege that the projection of Adjusted EBITDA

for 2014 was accompanied by meaningful cautionary language.

7 A “forward-looking statement” under the PSLRA includes “a statement containing a projection of revenues, income

(including income loss), earnings (including earnings loss) per share, . . . or other financial items[.]” 15 U.S.C. § 78u-

5(i)(1)(A). Defendants argue that “[p]rojected EBITDA . . . [is a] forward looking statement[] within the meaning of the

PSLRA.” In re Fairway Grp. Holdings Corp. Sec. Litig., No. 14 CIV. 0950 LAK AJP, 2015 WL 4931357, at *27 (S.D.N.Y.

Aug. 19, 2015), report and recommendation adopted, 2015 WL 5255469 (S.D.N.Y. Sept. 9, 2015). Lickteig responds that the

projection of Adjusted EBITDA for 2014 should have incorporated prior results for the first half of 2014 and that the

safe harbor rule “does not apply to statements that incorporate both prior results and a projection of future

Moreover, the Court cannot conclude at this stage that the 2014 Adjusted EBITDA figure in

the Valuation was immaterial. Although the 2014 Adjusted EBITDA played no direct role in

Mitchell’s calculation of TEV, a reasonable investor in Lickteig’s shoes might have decided to

exercise his right to contest the fair market value of his shares as provided for in the Contribution

Agreement if Defendants disclosed a higher 2014 Adjusted EBITDA figure. Consequently, the

Court cannot conclude at the pleading stage that the 2014 Adjusted EBITDA figure was immaterial

as a matter of law.

Finally, construing the facts in the light most favorable to Lickteig, the allegations in the

complaint are sufficient to raise an inference that Defendants had actual knowledge that their

projected Adjusted EBITDA for 2014 was misleading. As alleged, the presentation suggests that at

the beginning of 2014, Defendants projected that their Adjusted EBITDA would be approximately

$67 million. That is because the presentation projected that the “2014 annual plan” projected that

Covis Holdings’ Adjusted EBITDA would be $33.5 million through the first two quarters of 2014.

However, at the time of the presentation—mere weeks after Defendants had projected that

Adjusted EBITDA would be $68.5 million in the Valuation—Defendants allegedly projected that

EBITDA was running nearly $20 million above the projection in the annual plan for 2014. That is

sufficient to raise a reasonable inference that Defendants actually knew that the $68.5 million figure

quoted in the Valuation was misleadingly low. Thus, drawing all reasonable inferences in favor of

Lickteig, he has sufficiently alleged that the projection of Adjusted EBITDA in the Valuation was

misleading.8

performance.” Opp. at 14 (citing Sgalambo v. McKenzie, 739 F. Supp. 2d 453, 478-79 (S.D.N.Y. 2010)). The Court need

not decide whether the safe harbor rule provision applies because, even if it does, the Court concludes that Lickteig’s

allegations give rise to a reasonable inference that Defendants actually knew that the projection was false.

8 To the extent that the complaint asserts that the “implied” 2014 EBITDA multiple of 6.8 in the Valuation is

actionable, the Court disagrees. The implied EBITDA figure for 2014 was apparently derived by dividing TEV, which

was calculated using 2013 Adjusted EBITDA and the TEV/EBITDA multiple, by projected, adjusted EBITDA for

2014. That is why the 2014 EBITDA figure was implied: It was calculated mechanically based on the other figures in

the Valuation. Hence, the Court concludes that Defendants’ statement of the implied 2014 EBITDA multiple was

immaterial as a matter of law.

ii. Scienter

A. Legal Standard

No defendant may be held liable for securities fraud unless Plaintiff has stated “with

particularity facts giving rise to a strong inference that the defendant acted with the required state of

mind.” 15 U.S.C. § 78u-4(b)(2)(A). The Supreme Court has explained that the “PSLRA requires

plaintiffs to state with particularity both the facts constituting the alleged violation, and the facts

evidencing scienter, i.e., the defendant’s intention to deceive, manipulate, or defraud.” Tellabs, Inc. v.

Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007) (quotation omitted). “In addition to intent,

recklessness is a sufficiently culpable mental state for securities fraud in this circuit.” ECA Local 134

IBEW Joint Pension Tr. of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 198 (2d Cir. 2009) (citation

omitted).

In the Second Circuit, a plaintiff may plead scienter either “(a) by alleging facts to show that

defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute

strong circumstantial evidence of conscious misbehavior or recklessness.” Kalnit v. Eichler, 264 F.3d

131, 138-139 (2d Cir. 2001) (quotation omitted). A plaintiff alleging scienter via recklessness must

allege “conscious recklessness—i.e., a state of mind approximating actual intent, and not merely a

heightened form of negligence.” Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 106 (2d Cir. 2015)

(quotation omitted).

An “inference of scienter must be more than merely plausible or reasonable—it must be

cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs, 551

U.S at 314. If a fraudulent inference is not “at least as compelling” as a nonfraudulent one, it must

be rejected, even in a “close case.” Slayton, 604 F.3d at 777. An inference of scienter need not be

“irrefutable, i.e., of the ‘smoking-gun’ genre, or even the most plausible of competing inferences.”

Tellabs, 551 U.S. at 324 (quotation omitted); see also City of Pontiac Gen. Emps.’ Ret. Sys. v. Lockheed

Martin Corp., 875 F. Supp. 2d 359, 372 (S.D.N.Y. 2012) (“[A]t the motion to dismiss stage, a tie on

scienter goes to the plaintiff.”). In sum, “[t]he inquiry on a motion to dismiss is as follows: ‘When

the allegations are accepted as true and taken collectively, would a reasonable person deem the

inference of scienter at least as strong as any opposing inference?’” In re Scottish Re Grp. Sec. Litig.,

524 F. Supp. 2d 370, 383 (S.D.N.Y. 2007) (quoting Tellabs, 551 U.S. at 326).

B. Application

Lickteig has adequately pleaded scienter with respect to the two statements that he has

adequately alleged were false or misleading. The Court has already discussed why, drawing all

inferences in favor of Lickteig, it cannot conclude that Defendants did not have actual knowledge

that their projected Adjusted EBITDA for 2014 was misleading. Therefore, Lickteig has adequately

alleged scienter with respect to that statement.

Lickteig has also alleged facts that raise an inference of scienter with respect to Defendants’

projection of the 2013 EBITDA multiple that is cogent and at least as compelling as any competing

inference. Lickteig has plausibly pleaded that Defendants had both the motive and opportunity to

commit fraud by lowballing their estimate of the 2013 EBITDA multiple. Defendants’ motive for

doing so is clear: A lower EBITDA multiple meant that Defendants were required to pay Lickteig

less for his Profit Interests than they would have if the EBITDA multiple were higher. And

Lickteig’s decision to redeem his Profit Interests presented an opportunity for Defendants to

defraud Lickteig by choosing a low EBITDA multiple. Lickteig’s allegations also give rise to a

compelling inference that Defendants engaged in conscious misbehavior by providing a low estimate

of the EBITDA multiple. At bottom, the allegations in the complaint raise the question: Why

would Defendants’ estimate of a reasonable EBITDA multiple change drastically in a matter of

months? Defendants may well have a compelling answer to that question. But Lickteig has met his

burden at the pleading stage to allege facts that create an inference of scienter that is at least as

compelling as any alternative inference.9

Defendants incorrectly insist that the district court and Second Circuit’s decisions in the

Brown litigation weigh in favor of dismissal. It is true that the Brown plaintiffs asserted claims for

securities fraud against a similar set of defendants. See Brown, 2016 WL 7377271, at *1. However,

the Brown plaintiffs relied on different alleged misstatements and different theories of fraud. See id.

at *2-3. The Brown plaintiffs relied on two theories of fraud. Id. at *2. The first theory of fraud was

based on a set of “‘extra-contractual’ statements” by two individuals who were named as defendants

in Brown but are not named as defendants in this lawsuit. Id. at *3. The second theory of fraud was

that Defendants terminated them in bad faith to prevent their profit interests from vesting. Id.

These claims—and the facts the Brown plaintiffs alleged in their complaint in support of them—have

nothing to do with Lickteig’s allegations in this case. Therefore, both Judge Daniels’ decision in

Brown and the Second Circuit’s affirmance of his decision are plainly distinguishable.10

c. Release

i. Legal Standard

The release in the Separation Agreement does not preclude Lickteig’s claims. Section 2 of

the Separation Agreement states that Lickteig waives all claims against the Covis Enterprise,

including claims under the “laws, statutes, and/or regulations of the States of North Carolina, Iowa,

or any other state and the United States.” Id. at 1-2, § 2. However, under section 29(a) of the

Exchange Act (“Section 29(a)”), “[a]ny condition, stipulation, or provision binding any person to

waive compliance with any provision of this chapter or of any rule or regulation thereunder . . . shall

9 Because the Court has concluded that Lickteig has adequately pleaded scienter, it need not decide whether the Iowa

Uniform Securities Act requires a plaintiff to plead scienter to plausibly plead a claim. See Doud v. Toy Box Dev. Co., LLC,

798 F.3d 709, 715 (8th Cir. 2015) (declining to decide whether the Iowa Uniform Securities Act requires a plaintiff to

plead scienter because plaintiff had adequately pleaded scienter).

10 Because Defendants’ only argument for dismissal of Lickteig’s claims for control person liability under state and

federal law is that Lickteig has not plausibly alleged that a primary violation of Section 10(b), see Mem. at 13 n.7, the

Court likewise declines to dismiss Lickteig’s control person liability claims.

be void.” 15 U.S.C. § 78cc(a).11 “This antiwaiver provision generally invalidates blanket releases of

liability that accompany the purchase or sale of securities.” Pasternack v. Shrader, 863 F.3d 162, 171

(2d Cir. 2017). “Accordingly, [courts] do not give effect to contractual language purporting to be a

general waiver or release of securities-fraud liability altogether.” Id. (quotation and alterations

omitted); see also id. (“The statutory framework of the 1933 and 1934 Acts compels the conclusion

that individual securityholders may not be forced to forego their rights under the federal securities

laws due to a contract provision.” (quotation omitted)).

However, this does not mean that plaintiffs can never waive securities fraud claims. Section

29(a) only forbids “enforcement of agreements to waive ‘compliance’ with the provisions of the

statute.” Id. at 172 (quotation omitted). “A release signed in the context of negotiations to settle an

alleged securities violation cannot be said to ‘waive compliance’ with the securities laws; the

aggrieved party receives an agreed remedy for an alleged securities violation, and that remedy

satisfies ‘compliance’ with the securities laws.” Id. Therefore, “as a general principle, whenever a

party offers consideration to another in order to remedy an alleged violation of the securities laws,

acceptance of that offer in exchange for a release of securities-fraud claims is tantamount to

establishing ‘compliance’ with the securities laws. Such contracts do not run afoul of § 29(a).” Id. at

172-73.

Thus, the question is whether an agreement to release claims seeks to satisfy a pre-existing

securities claim or waive future compliance with the securities laws. Where the execution of the

release “ha[s] nothing to do with satisfaction of a pre-existing securities claim,” Section 29(a) voids

the release. Id. at 173. A corollary of this principle is that a putative plaintiff must know that she

might have a viable securities claim before she can release it. Otherwise, it follows a foritori that the

11 Section 502.509(12) of the Iowa Uniform Securities Act similarly states: “A condition, stipulation, or provision

binding a person purchasing or selling a security or receiving investment advice to waive compliance with this chapter or

a rule adopted or order issued under this chapter is void.”

putative plaintiff’s release has nothing to do with the satisfaction of a pre-existing securities claim

and is therefore voided by Section 29(a).

ii. Application

Lickteig’s claims are not barred by his release. The Separation Agreement states that Lickteig

“shall not be entitled to the consideration set forth in Section 4 of this Separation Agreement” if he

did not return a signed Separation Agreement by August 22, 2014. Id. at 6, § 14(A). Rather, the

Separation Agreement provided consideration for Lickteig’s Profit Interests. Moreover, there is no

indication that Lickteig contemplated that he had a securities fraud claim at the time he signed the

release. Indeed, Lickteig signed the release as part of the same transaction on which his claim for

securities fraud is premised. For that reason, it is highly implausible—if not impossible—that the

release had anything “to do with satisfaction of a pre-existing securities claim.” Pasternack, 863 F.3d at

173 (emphasis added). Accordingly, the release does not bar Lickteig’s securities fraud claim in this

case.

B. Rule 12(b)(2) Motion

1. Legal Standard

Defendants move to dismiss Lickteig’s claims against Defendant Dean Mitchell for “lack of

personal jurisdiction.” Fed. R. Civ. P. 12(b)(2). On a motion to dismiss pursuant to Rule 12(b)(2),

the “plaintiff bears the burden of demonstrating personal jurisdiction over a person or entity against

whom it seeks to bring suit.” Penguin Grp. (USA) Inc. v. Am. Buddha, 609 F.3d 30, 34 (2d Cir. 2010)

(citing In re Magnetic Audiotape Antitrust Litig., 334 F.3d 204, 206 (2d Cir. 2003) (per curiam)); see also

Bank Brussels Lambert v. Fiddler Gonzalez & Rodriguez, 171 F.3d 779, 784 (2d Cir. 1999) (“When

responding to a Rule 12(b)(2) motion to dismiss for lack of personal jurisdiction, the plaintiff bears

the burden of establishing that the court has jurisdiction over the defendant.” (citation omitted)).

To defeat a jurisdiction-testing motion, the plaintiff’s burden of proof “varies depending on the

procedural posture of the litigation.” Dorchester Fin. Sec., Inc. v. Banco BRJ, S.A., 722 F.3d 81, 84 (2d

Cir. 2013) (quoting Ball v. Metallurgie Hoboken-Overpelt, S.A., 902 F.2d 194, 197 (2d Cir. 1990)). At the

pleading stage—and prior to discovery—a plaintiff need only make a prima facie showing that

jurisdiction exists. Id. at 84-85; see also Eades v. Kennedy, PC Law Offices, 799 F.3d 161, 167-68 (2d Cir.

2015) (“In order to survive a motion to dismiss for lack of personal jurisdiction, a plaintiff must

make a prima facie showing that jurisdiction exists.”) (quoting Licci ex rel. Licci v. Lebanese Canadian

Bank, SAL, 732 F.3d 161, 167 (2d Cir. 2013)).

If the court considers only pleadings and affidavits, the plaintiff’s prima facie showing “must

include an averment of facts that, if credited by the ultimate trier of fact, would suffice to establish

jurisdiction over the defendant.” In re Terrorist Attacks on September 11, 2001, 714 F.3d 659, 673 (2d

Cir. 2013) (quoting Chloe v. Queen Bee of Beverly Hills, LLC, 616 F.3d 158, 163 (2d Cir. 2010)

(quotation marks omitted)). Courts may rely on materials outside the pleading in considering a

motion to dismiss for lack of personal jurisdiction. See DiStefano v. Carozzi N. Am., Inc., 286 F.3d 81,

84 (2d Cir. 2001). “The allegations in the complaint must be taken as true to the extent they are

uncontroverted by the defendant’s affidavits.” MacDermid, Inc. v. Deiter, 702 F.3d 725, 727 (2d Cir.

2012) (quoting Seetransport Wiking Trader Schiffarhtsgesellschaft MBH & Co., Kommanditgesellschaft v.

Navimpex Centrala Navala, 989 F.2d 572, 580 (2d Cir. 1993)). If the parties present conflicting

affidavits, however, “all factual disputes are resolved in the plaintiff’s favor, and the plaintiff’s prima

facie showing is sufficient notwithstanding the contrary presentation by the moving party.”

Seetransport Wiking, 989 F.2d at 580 (citations omitted).

2. Application

The Court does not have personal jurisdiction over Mitchell. Lickteig’s sole argument that

the Court has personal jurisdiction over Mitchell is that “[t]he Separation Agreement contains a

forum selection clause requiring Lickteig to consent to the ‘sole jurisdiction of the federal and state

courts of New York.’” Opp. at 24 (quoting Separation Agreement at 5, § 12).12 However, Mitchell

is not a signatory to the Separation Agreement. “It is well established that, generally, a party who is

not a signatory to a contract cannot be held liable for breaches of that contract.” MBIA Ins. Corp. v.

Royal Bank of Can., 706 F. Supp. 2d 380, 396 (S.D.N.Y. 2009) (collecting cases applying New York

law). Lickteig nonetheless argues that Mitchell is bound by the Separation Agreement because he is

so “‘closely related’ to” its execution that it was “‘foreseeable’ that [he would] be bound by it.” Opp.

at 25 (quoting Nanopierce Techs., Inc. v. Southridge Capital Mgmt. LLC, No. 02 Civ. 0767(LBS), 2003 WL

22882137, at *5 (S.D.N.Y. Dec. 4, 2003)).

The Court does not have jurisdiction over Mitchell based on the Separation Agreement’s

forum-selection clause. Lickteig points to allegations in the complaint concerning Mitchell’s

conduct with respect to the Separation Agreement and the claims at issue in this case. See id.

(“[Mitchell] was the chairman of the board of directors of Covis S.á.r.l., which was the wholly owned

subsidiary of Covis Holdings that held the rights to the pharmaceutical products purchased from

GSK on which the Covis Enterprise’s value was based.” (citing Compl. ¶¶ 15, 17, 22)); id. (“Acting

as Defendants’ agent, [Mitchell] provided Lickteig with the Valuation and had all conversations with

Lickteig regarding Defendants’ purchase of this Profit Interests.”) (citing Compl. ¶¶ 30-32)).

Crucially, however, Mitchell undertook these actions in his corporate capacity. “Jurisdiction

over a corporation’s board member, officer or employee, in his or her individual capacity, must be

premised on the defendant’s own personal contacts with the forum, and not the acts and/or

contacts carried out by the defendant in his or her corporate capacity.” In re Terrorist Attacks on Sept.

11, 2001, 718 F. Supp. 2d 456, 471 (S.D.N.Y. 2010) (collecting cases), vacated and remanded in part on

other grounds, 714 F.3d 109 (2d Cir. 2013); see also Giuliano v. Barch, No. 16 CV 0859 (NSR), 2017 WL

12 The Separation Agreement contains a choice of law provision stating that “any and all matters arising directly or

indirectly [from the Separation Agreement] shall be governed under the laws of the State of New York.” Separation

Agreement at 5, § 12. Therefore, the Court applies New York law to its construction of the Separation Agreement.

1234042, at *12 n.24 (S.D.N.Y. Mar. 31, 2017) (“The Court notes that to subject Defendants, . . .

none of whom happen to live in New York . . . to personal jurisdiction in New York . . . in their

individual capacity . . . based upon a single contract signed in their official capacity . . . would not . . .

‘comport with traditional notions of fair play and substantial justice,’ and therefore fails to satisfy the

[requirements of the] Due Process Clause.” (quoting Int’l Shoe Co. v. State of Wash., Office of

Unemployment Comp. & Placement, 326 U.S. 310, 316 (1945))). The complaint does not allege any acts

Mitchell undertook in his individual capacity that would subject him to the jurisdiction of this Court.

The Court therefore does not have personal jurisdiction over Mitchell based on the forum-selection

clause. And because Lickteig has failed to make any other allegations with respect to why the Court

has personal jurisdiction over Mitchell, he has failed to meet his burden to make a prima facie

showing that the exercise of such jurisdiction would be proper. Accordingly, Defendants’ motion to

dismiss the claims against Mitchell for lack of personal jurisdiction is granted.

III. CONCLUSION

For the foregoing reasons, Defendants’ Rule 12(b)(6) motion is GRANTED in part and

DENIED in part. Lickteig has adequately alleged a claim for securities fraud and control person

liability with respect to the two statements the Court identified in its discussion. Therefore,

Defendants’ motion to dismiss is denied as to those statements. The motion is granted as to all

other of Defendants’ statements identified in the complaint. Defendants’ Rule 12(b)(2) motion to

dismiss for lack of personal jurisdiction as to Defendant Dean Mitchell is also GRANTED. The

Court grants Lickteig leave to replead if he so chooses. See Cruz v. TD Bank, N.A., 742 F.3d 520,

523 (2d Cir. 2013) (“[I]t is the usual practice upon granting a motion to dismiss to allow leave to

replead.” (citation omitted)). Any amended complaint must be filed no later than thirty days from

the date of this order.

The Clerk of Court is directed to terminate the motion pending at Dkt No. 34 and to

remove the name of Defendant Dean Mitchell from the caption of this case.

SO ORDERED.

Dated: April 26, 2020

GRE . WOODS

United States District Judge

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