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Sawabeh v. Brody, et al., 11-civ-4164 (S.D.N.Y.; Dec. 16, 2011)

Sawabeh v. Brody, et al., 11-civ-4164 (S.D.N.Y.; Dec. 16, 2011)

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Court declines to dismiss securities fraud and contract claims brought by acquiror based on allegedly undisclosed liabilities. This is a 'companion' lawsuit to Eagle v. Moran, where the parties are fighting about, among other things, plaintiff's LinkedIn account.
Court declines to dismiss securities fraud and contract claims brought by acquiror based on allegedly undisclosed liabilities. This is a 'companion' lawsuit to Eagle v. Moran, where the parties are fighting about, among other things, plaintiff's LinkedIn account.

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Published by: Venkat Balasubramani on Dec 24, 2011
Copyright:Attribution Non-commercial

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07/10/2013

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UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW
YORK
._--------------------------------------------------
)(
SAWABEH INFORMATIONSERVICES CO. and EDCOMM, INC.,OPINION AND ORDERPlaintiffs,
11
Civ. 4164 (SAS)-
against-
CLIFFORD BRODY, LINDA EAGLE
and
DAVID
SHAPP,Defendants
.
_--------------------------------------------------
)(
SHIRA A. SCHEINDLIN, U.S.D.J.:I. INTRODUCTION
Sawabeh Information Services Company ("Siscom") and its whollyowned subsidiary Edcomm, Inc. ("Edcomm") (collectively "plaintiffs") bring thisaction against former Edcomm officers and shareholders, Clifford Brody, LindaEagle and David Shapp ("defendants") arising out
of
the October 11, 2011 sale
of
all
of
the outstanding shares
of
Edcomm from defendants to Siscom (the"transaction") pursuant to the parties' stock purchase Term Sheet (the "TermSheeC). Five months after the transaction, defendants identified -for the firsttime -two documents imposing significant potential liabilities
on
Edcomm: (1) a
1
Case 1:11-cv-04164-SAS Document 44 Filed 12/16/11 Page 1 of 60
 
2008 agreement transferring all of Edcomm’s intellectual property (“IP”) to Brody(the “IP Agreement”); and (2) a 1995 employment agreement between Edcommand Brody entitling Brody to substantial severance pay (the “EmploymentAgreement”) (collectively the “Brody Agreements”). Plaintiffs question theauthenticity of the Brody Agreements, and allege that if they are authentic, theyraise serious concerns regarding the integrity of the transaction.Plaintiffs allege the following causes of action arising out of thetransaction and subsequently-disclosed Brody Agreements: (1) securities fraud based on defendants’ misrepresentation of certain material facts concerning thetransaction; (2) securities fraud based on defendants’ failure to disclose certainmaterial information concerning the transaction; (3) fraudulent inducement basedon defendants’ misrepresentations and omissions concerning the transaction; (4)common law fraud based on defendants’ misrepresentations and omissionsconcerning the transaction; (5) breach of contract based on defendants’ failure toinform Siscom of certain Edcomm liabilities under the Term Sheet; (6) breach of the covenant of good faith based on defendant’s failure to inform Siscom of certainEdcomm liabilities; (7) a declaration that defendants be held personally liable for any of Edcomm’s liabilities of which defendants failed to inform Siscom; (8)rescission of the IP Agreement inasmuch as it was a sham transaction intended to2
Case 1:11-cv-04164-SAS Document 44 Filed 12/16/11 Page 2 of 60
 
turn Edcomm into a shell company; (9) a permanent injunction against defendants’enforcement of the IP Agreement; (10) a declaration that Edcomm is the owner of all the IP identified in the IP Agreement; (11) a declaration that Siscom has nofurther obligations under the Employment Agreement based on Brody’s conduct;(12) a permanent injunction against defendants’ enforcement of the EmploymentAgreement; (13) breach of fiduciary duty based on defendants’ creation of inauthentic documents and their interference with Siscom’s management of Edcomm; (14) breach of fiduciary duty based on defendants entering into the IPAgreement and failure to disclose the Employment Agreement; (15) negligentmisrepresentation based on defendants’ negligence in failing to discover and/or disclose the Brody Agreements; and (16) unfair competition based on defendants’misappropriation of Edcomm’s IP through inauthentic or otherwise unenforceabledocuments.Defendants now move to dismiss the Complaint on the followinggrounds:
 first 
, the Court should dismiss counts (1), (2), (3), (4) and (15) — thefraud counts — because (a) defendants made no false representations; (b) plaintiffshave failed to plead facts giving rise to a strong inference that defendants actedwith scienter; (c) plaintiffs could not have reasonably relied on the allegedmisrepresentations; (d) the alleged misrepresentations caused no losses; and (e) the3
Case 1:11-cv-04164-SAS Document 44 Filed 12/16/11 Page 3 of 60

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