United States District Court, D. Minnesota
MEMORANDUM AND ORDER
A. MAGNUSON UNITED STATES DISTRICT JUDGE
matter is before the Court on Defendant Lawrence C.
Blaney's Motion to Dismiss. For the following reasons,
the Motion is denied.
Jeffrey Mack and Lawrence Blaney were officers of a
now-defunct corporation, Digiliti Money Group, Inc. (Compl.
(Docket No. 1) ¶ 2.) Digiliti was a financial technology
company, providing small banks, credit unions, and other
financial services companies with software and technology for
mobile banking services. (Id. ¶ 17.) Mack was
Digitili's CEO, President, and Chair of the Board of
Directors. (Id. ¶ 14.) Blaney was
Digitili's Executive Vice President of Sales.
(Id. ¶ 15.)
alleges that Digitili fraudulently inflated its revenue in
order to appear profitable, so that the company could attract
outside investors. (See id. ¶ 1.) Specifically,
the SEC contends that Mack and Blaney developed a scheme to
offer side agreements to Digitili's biggest customer,
referred to in the pleadings as Customer Number 1. These side
agreements allowed the customer to cancel preexisting
contracts with Digitili without any payment or penalty.
(Id. ¶¶3-4.) Because the side agreements
were not disclosed, it appeared to auditors and members of
the public that the customer had non-revocable contracts.
Thus, Digitili recognized revenue from the contracts, even
though the contracts could be, and ultimately were,
cancelled. (Id. ¶ 4.)
October 2016, Digitili attempted a public offering. Because
Digitili did not achieve its revenue targets for the previous
quarter, however, the public offering was unsuccessful.
(Id. ¶ 31.) After this failure, Blaney
communicated with the customer, attaching a new contract with
a total price of nearly $400, 000. The email stated that the
customer could terminate the contract “without any
obligation to pay or without any penalty.”
(Id. ¶ 32.) Blaney told Mack that he valued the
contract at nearly $400, 000 “to make sure we hit our
number.” (Id. ¶ 33.) The customer signed
the contract, but the terms of the email were not disclosed
in the contract or provided to Digitili's finance and
accounting department. (Id. ¶ 35.) Although the
customer executed the contract on October 21, 2016, Blaney
dated the contract September 30, 2016, so that the contract
could be included in Digitili's third-quarter revenue.
(Id. ¶ 37.) Digitili's SEC forms and
revenue statements included the revenue from this contract,
though accounting rules prohibit a company from claiming
revenue from contracts that are cancellable without payment
the initial offering failure, Digitili raised more than $7
million in a private placement of convertible notes in late
2016 and early 2017. (Id. ¶ 54.) Digitali
provided its financial statements and SEC-required financial
forms to potential investors, all of which contained the
overstated revenue figures. (Id.) At the same time,
Digitali was preparing another public offering, but was
nearly $1 million short of its 4th-quarter revenue targets.
Blaney told Mack that Digitili would “probably need to
do a similar deal [with Customer Number 1] to hit the Q4
number.” (Id. ¶ 59.) Three days later,
Blaney again emailed the customer, proposing a new contract
worth $800, 000 that could be canceled without payment or
penalty. (Id. ¶ 60.) Blaney emailed proposed
cancellation language to Mack, who sent it on to the
customer. (Id. ¶ 62.) When the customer
requested that terms in the email be included in the new
contract, Blaney replied that Digitili “cannot put this
in the amendment as [the auditors] wouldn't let us take
any revenue which is what this is about.” (Id.
¶ 66.) He assured the customer that “[a]n email is
a binding agreement and you have the agreement via email from
our CEO.” (Id.) The customer signed the new
contract, with a total price of $870, 000. (Id.
¶ 67.) Again, Blaney pre-dated the contract, which was
signed on January 31, 2017, to a date within the previous
quarter, December 16, 2016. (Id. ¶ 70.) The
contract price allowed Digitili to reach its revenue targets.
completed the public offering on March 10, 2017, and the
company was listed on the Nasdaq. In April, the customer
sought to cancel the October 2016 contract. Blaney asked the
customer to postpone any cancellation until June, and further
asked the customer not to let Digitili's finance and
accounting department know about its intent to cancel the
contracts. (Id. ¶¶ 92-93.) The same day,
Blaney and Mack communicated about sending the customer a
third contract, worth approximately $1 million, because
Digitili was once again behind on its revenue targets.
(Id. ¶ 94.) The customer initially declined to
execute the new contract, but after Mack proposed giving the
customer shares of Digitili stock, the customer agreed.
(Id. ¶¶ 98-100.) The customer signed a
$550, 000 contract on April 26, 2017, but Blaney again
back-dated it to March 23, 2017. (Id. ¶¶
101-02.) Digitili issued first-quarter financial statements
containing the inflated revenue figures and issued press
releases that falsely stated Digitili's revenue.
customer cancelled all of its new contracts in July 2017,
causing Digitili to write off more than $1.8 million.
(Id. ¶ 121.) The scheme was uncovered after
Digitili terminated Mack and Blaney and discovered emails
related to the side agreements. (Id. ¶ 7.)
Digitili was forced to re-state its financial reports and
filings, and eventually went out of business. (Id.
¶¶ 124, 126.)
Complaint contains 15 counts, all alleging either substantive
or aiding-and-abetting violations of various securities laws.
Blaney seeks dismissal of the counts alleging violations of
§ 17(a)(1)-(3) of the Securities Act of 1933 and
accompanying rules, and those alleging violations of
§§ 10(b) and 13(a) of the Securities Exchange Act
of 1934 and accompanying rules. He does not move to dismiss
three counts alleging violations of Exchange Act §
13(b)(5) and its rules.
survive a motion to dismiss under Rule 12(b)(6), a complaint
need only “contain sufficient factual matter, accepted
as true, to ‘state a claim to relief that is plausible
on its face.'” Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly,
550 U.S. 544, 570 (2007)); see also Fed.R.Civ.P.
12(b)(6). A claim bears facial plausibility when it allows
the Court “to draw the reasonable inference that the
defendant is liable for the misconduct alleged.”
Iqbal, 556 U.S. at 678. When evaluating a motion to
dismiss under Rule 12(b)(6), the Court must accept plausible
factual allegations as true. Gomez v. Wells Fargo Bank,
N.A., 676 F.3d 655, 660 (8th Cir. 2012). But
“[t]hreadbare recitals of the elements of a cause of
action, supported by mere conclusory statements, ” are
insufficient to support a claim. Iqbal, 556 U.S. at
first argues that the Complaint is replete with “group
pleading” so that he does not know how he is alleged to
have participated in the fraud. But the Complaint outlines
specifically Blaney's conduct, as discussed above: he
sent multiple emails to both the customer and Mack, setting
up and carrying out the alleged fraudulent scheme. This is
not group pleading.
complains that the Complaint is a “shotgun”
pleading because the counts incorporate all of the factual
allegations. A shotgun pleading is one which is so
scattershot that a defendant cannot discern what facts are
connected to what cause of action. Here, the causes of action
all sound in securities fraud, so all factual ...