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From Securities Regulation Daily, April 11, 2017

Class-action fraud complaint penetrates ForceField’s motion to dismiss

By Anne Sherry, J.D.

A consolidated class action against ForceField Energies and individuals for stock manipulation, touting, and kickbacks—as well as misrepresentations and omissions—can proceed, although the Southern District of New York jettisoned some claims along the way. ForceField’s stock was delisted after its chairman was arrested for stock price manipulation; the SEC and prosecutors have brought actions against the defendants (In re ForceField Energy Inc. Securities Litigation, March 29, 2017, Buchwald, N.).

Scheme to defraud. The complaint that six defendant groups moved to dismiss alleges four primary schemes to defraud ForceField investors by artificially inflating ForceField’s stock price. Specifically, defendants allegedly purchased ForceField stock in order to manipulate its price and trading volume; authorized undisclosed, paid promotions touting ForceField’s stock; paid kickbacks to brokers and others to solicit investors in ForceField’s private placements; and improperly prevented shareholders of TransPacific Energy (TPE) from selling ForceField stock. (ForceField acquired a controlling interest in TPE in 2012).

The court noted at the outset of its ruling on this count of the complaint that it was improperly pleaded as a "hub-and-spoke" scheme liability claim. Because there is no conspiracy liability in a private right of action under Section 10(b) or Rule 10b-5, the court instead treated this count as alleging separate schemes on the part of four defendants: ForceField, its CEO and CFO, and the chairman. The complaint’s allegations involving fund transfers sufficed to state a claim against all four of these, not just the chairman. The complaint also adequately alleged that ForceField participated in the fraud by paying for or editing the articles at issue.

As to kickbacks, the court disagreed with the defendants’ argument that the complaint did not allege the involvement of anyone other than the chairman. According to the complaint, the kickbacks exceeded $800,000, and at least some of this was wired from ForceField bank accounts. The court did dismiss allegations of a scheme to prevent TPE shareholders from selling stock; even if the plaintiffs were able to draw allegations from the TPE shareholders’ complaint, those allegations were insufficient to establish scienter without some support for the conclusion that ForceField’s reason for refusing to reissue shares was pretext.

False and misleading statements. The court then turned to the first count of the complaint, for false and misleading statements in press releases, SEC filings, articles, proxy statements, and other statements. Because the court found the plaintiffs stated a claim for the manipulation, touting, and kickback schemes, it was not necessary to determine whether the same conduct violated Section 10(b) under an omission theory. Conversely, just as the complaint did not establish a strong inference of scienter on the claim ForceField prevented TPE shareholders from selling, it also did not establish that the failure to disclose this contract dispute was fraudulent or done with scienter.

ForceField did not secure dismissal of a claim that a proxy statement, while describing the executives’ prior business experience, omitted that three of them had been connected to fraudulent conduct in the past. The company argued that the executives’ backgrounds were publicly available, but this amounted to a truth-on-the-market defense that was premature at the motion-to-dismiss stage.

The complaint also stated a claim for false statements made by the Director of Investor Relations who touted ForceField. ForceField did not dispute that these statements were actionable and that it could be held liable for them, but the CEO and CFO defendants argued that the statements could not be imputed to them. The court disagreed. The statements by a then-Director of Investor Relations would be imputable to ForceField and by extension to its CEO and CFO. It also "defies credulity" not to believe that the CEO and CFO were aware of the IR director’s public statements. The court clarified that its conclusion did not rely on the group pleading doctrine, which pertains only to written, group-published statements.

The court dismissed claims taking issue with statements regarding business opportunities in Mexico, except with respect to the value of one contract. It also dismissed miscellaneous statements as either too generalized to be actionable, or non-actionable predictions of future performance. As to certain alleged misrepresentations regarding TPE, they were dismissed except to the extent the plaintiffs’ claim that ForceField failed to disclose the reason for a decline in TPE’s revenue.

The case is No. 15 Civ. 3020 (NRB).

Attorneys: Keith Robert Lorenze (The Rosen Law Firm, P.A.) for Beverly Brewer. David Alan Gehn (Gusrae Kaplan Nusbaum PLLC) and Martin Paul Russo (Kruzhkov Russo PLLC) for ForceField Energy Inc.

Companies: ForceField Energy Inc.

MainStory: TopStory Enforcement FraudManipulation NewYorkNews

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