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The Unsecured Convertible Note, The FINRA CMA, The Pro Se Plaintiff, The Federal Complaint, and the Legal Clinic
August 17, 2021
We got someone buying an unsecured convertible note that is not a securities offering and is dependent upon a timely approval by FINRA of a pending Continuing Membership Application. An unsecured note is often worth the paper that it's written on, if that. FINRA hardly does anything timely. FINRA CMAs are notorious for ramblin', amblin', and taking far more time than anyone involved ever expected. On top of all of that, we got a pro se Plaintiff filing his Complaint in one of the nation's most sophisticated federal courts. What could possibly go wrong?
The Pitch
Likely sometime in 2016, Stephen Inglis purportedly proposed a fabulous investment opportunity to Jerome Dewald whereby the latter would purchase a membership in the broker-dealer known as the Richman Group Securities. Jerome W. Dewald, Plaintiff, v. Black Tusk Global, LLC, Broad Pine Capital, LLC, and Stephen Inglis, Defendants (Memorandum Order and Opinion, United States District Court for the Southern District of New York, 19-CV-06388)
http://brokeandbroker.com/PDF/DewarldOpOrdSDNY210813.pdf As part of the pitch by Inglis, Dewald alleged that he was led to "believe that there were other investors but Plaintiff was never made aware of any other investors. at Page 3 of the SDNY Opinion/Order
August 2016 Note
On August 16, 2016, Plaintiff executed a $22,500 unsecured convertible promissory note, whereby his investment would immediately be converted into a membership interest in a successor to the Richman Group. At the time of the August 2016 agreement, that successor was represented as likely being Broad Pine LLC. As the Note was drafted and executed, it specified that:
"the offer and sale of the Convertible Note have not been registered under the Securities Act," and that Plaintiff "is an 'accredited investor' within the meaning of Rule 501 of Regulation D under the Securities Act." Id. at 2-3. Inglis personally guaranteed the Note on behalf of Black Tusk. . . .
at Page 2 of the SDNY Opinion/Order
In the event that 30 to 45 days transpired after a Continuing Membership Application ("CMA") was filed with the Financial Industry Regulatory Authority ("FINRA"), and said application did not "close" or, in the alternative, the CMA was withdrawn, the Note represented that Plaintiff would be fully repaid his $22,500.
December 2018 Dissolution for Tax Loss
Did Dewald have a lawyer review this deal before signing off and handing over the bucks? I don't know and the SDNY Opinion/Order doesn't say. In any event, here's how thing supposedly unfolded:
[O]n April 23, 2018, Inglis, on behalf of Black Tusk, and Plaintiff executed a subscription agreement that granted Plaintiff a 14.0625 percent membership interest in Broad Pine. Id. ¶ 21; id. Ex. C ("Subscription Agreement"). Pursuant to the Subscription Agreement, Plaintiff's purchased interest in Broad Pine was executed through the "conversion and surrender" of the Note. Subscription Agreement ¶ 1. Plaintiff nonetheless alleges that "Inglis breached the terms of the Note by failing to perform any of the terms outlined therein and allegedly converted Plaintiff's funds into membership interest in Broad Pine." Compl. ¶ 22. Moreover, "Plaintiff was never provided any documentation evidencing his membership interest in Broad Pine." Id. ¶ 23. "When Plaintiff would ask about the status of the entity and progress being made, Inglis would placate Plaintiff explaining what stage of the process they were supposedly in." Id. ¶ 24.
Id. Ex. D; see also id. ¶ 25. According to Plaintiff, "[p]ursuant to the terms of the Note, Defendant was to return all monies to Plaintiff," but has not done so. Id. ¶ 26On December 30, 2018, Plaintiff received an email from Inglis that stated: On December 21st AI Capital filed a form BD withdrawal with FINRA, so there is no longer any reason for [Broad Pine] to continue. I decided it was best to dissolve [Broad Pine] before the end of 2018 so those who committed capital can realize the tax loss. There are no contingent liabilities to the Members. No taxes were ever filed nor K-1s issued, and I am happy to provide any additional details or records you may need.
at Page 2 of the SDNY Opinion/Order
July 2019 SDNY Complaint
Dewald, representing himself pro se, filed a Complaint on July 10, 2019, and asserted:
at Page 3 of the SDNY Opinion/Order1) violation of Section 10(b) of the Exchange Act and Rule 10b-5; 2) violation of Section 20(a) of the Securities Act by Inglis; 3) Violation of Sections 5 and 12(a)(1) of the Securities Act; 4) Violation of Section 15 of the Securities Act by Inglis, and under state law for 5) Breach of Contract; 6) Breach of the Covenant of Good Faith and Fair Dealing; and 7) Common Law Fraud
Motion to Dismiss: Fraud Pled Without Specificity
Pursuant to their Motion to Dismiss, Defendants argued that Dewald had failed to plead fraud with particularity as required per Federal Rules of Civil Procedure 9(b), and that his allegations were little more than mere recitations of the required elements to plead the cited cause of action. Agreeing with Defendants' position, SDNY dismissed the fraud causes of action, noting in part that:
[W]ith respect to his claim for securities fraud, Plaintiff broadly alleges that Defendants made "false or misleading statement of fact and fail[ed] to disclose material information," Compl. ¶ 3, and made "untrue statements of material fact and omitted material facts necessary in order to make the statements made . . . not misleading, id. ¶ 30. These allegations, insofar as they are unsupported by any facts specific to the challenged transaction, are conclusory. Nowhere does the Complaint "specify each statement alleged to have been misleading," 15 U.S.C. § 78u-4(b)(1), let alone why any such statements were false or misleading were made, or why such statements would be material to a reasonable investor. In short, the Court cannot determine from the Complaint what alleged misrepresentations were made by Defendants to induce Plaintiff into entering this transaction, nor whether these misrepresentations relate to his execution of the 2016 Note, the 2018 Subscription Agreement, neither, or both.
at Page 6 of the SDNY Opinion/Order
Motion to Dismiss: Out of Control
In equally swift if not dismissive fashion, SDNY dismissed Dewald's Section 20(a) claim that Inglis should be found liable as a control person because there was no showing of any "primary violation" by a "controlled" person -- hence, this "derivative" cause of action whereby a control person is held accountable for the violation of a controlled person requires proof that a controlled person violated the law, which was not demonstrated to the Court's satisfaction.
Motion to Dismiss: Means of Interstate Commerce
As to Dewald's claims that Defendants sold unregistered securities in violation of federal law, the Defendants countered that there had been no showing that they were required to register the cited securities or that interstate commerce was involved in the transaction at issue. Concerning the adequacy of Dewald's allegations demonstrating the use of interstate commerce in connection with the offer/sale of Broad Pine Capital's shares, SDNY found that the Complaint:
provides no detail as to how Defendants solicited Plaintiff or other investors for this transaction, or the manner in which the transaction was effectuated. Absent some detail about how Defendants used the channels of interstate commerce to sell Broad Pine securities, such a "[t]hreadbare recital[] of [an] element[] of a cause of action," does not suffice to state a claim, Iqbal, 556 U.S. at 678; see Cobalt, 857 F. Supp. 2d at 358 (finding that testimony that defendant's representative "solicited investors" failed to establish that defendant "made calls or used other means of interstate commerce"). Indeed, none of the allegations or documents incorporated into the Complaint indicate that any relevant conduct took place outside of the state of New York. Nor do they permit such an inference. Plaintiff's Section 5 claim must therefore be dismissed.
at Page 8 of the SDNY Opinion/Order
Legal Clinic
Having stripped Dewald of his federal claims, SDNY declined to exercise supplemental jurisdiction over the remaining state claims of breach and fraud. Rather than dismiss Dewald's Complaint with prejudice, SDNY gave the pro se Plaintiff a chance to cure the pleading deficiencies via an amended Complaint. In an abundance of fairness, the Court advises that:
at Page 10 of the SDNY Opinion/OrderShould Plaintiff need assistance, he may wish to consult the New York Legal Assistance Group's legal clinic for pro se litigants, by visiting its website at nylag.org/pro-se-clinic/ or by calling (212) 659-6190. This clinic, which is neither part of nor run by the Court, assists pro se litigants with federal civil cases.