`HOBBS & TOWNE CAPITAL III, LLC,
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`Plaintiff
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`v.
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`GADGET SOFTWARE, INC.,
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`DAN CRAIN, RABINDRA SONI,
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`and MAXWELL RIGGSBEE, JR.,
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`Defendants.
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`Civil Action No. __________
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`Case 2:20-cv-01966-JDW Document 1 Filed 04/20/20 Page 1 of 23
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`IN THE UNITED STATES DISTRICT COURT FOR THE
`EASTERN DISTRICT PENNSYLVANIA
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`
`
`COMPLAINT
`
`Plaintiff Hobbs & Towne Capital III, LLC, by and through its undersigned counsel,
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`hereby files this complaint against Defendant Gadget Software, Inc. and its founders/officers,
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`Dan Crain, Rabindra Soni and Maxwell Riggsbee, Jr. in their individual capacities, and alleges as
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`follows:
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`PRELIMINARY STATEMENT
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`1.
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`Plaintiff Hobbs & Towne Capital III, LLC (“HTC”) brings this action to recover
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`the $570,000 it invested into Defendant Gadget Software, Inc. (“Gadget”) in exchange for
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`2,749,639 shares of Series A Preferred stock and 2,749,639 shares of Common stock in Gadget.
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`HTC’s decision to invest was made in strict reliance upon numerous material misrepresentations
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`made by Gadget by and through its founders/officers, Dan Crain, Rabindra Soni and Maxwell
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`Risgbee, Jr. (hereinafter collectively referred to as “the Individual Defendants”) in solicitation
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`meetings and private offering materials issued by them regarding the proposed investment in
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`their software company. Specifically, during the Fall of 2017, Gadget and the Individual
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`Defendants represented that Gadget’s software product was already on the market; that it had
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`Case 2:20-cv-01966-JDW Document 1 Filed 04/20/20 Page 2 of 23
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`secured several specific and significant customer contracts, and had numerous other customers
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`“in the pipeline”; that Gadget had already secured $10 million in funding; and that HTC’s money
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`would be used for sales and engineering and not existing debts. The Individual Defendants
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`further represented that because they would soon be opening up the Series B round of funding,
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`their Series A investment would significantly increase in value.
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`Over time, it became clear that these representations were—as one Defendant admitted—
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`lies. Gadget’s product was not market-ready; Gadget had not secured, nor was it close to
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`securing, contracts with any customers; HTC’s funds were intended and needed to pay for
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`outstanding payroll tax liabilities, not sales or engineering; and Defendants had only secured
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`$8 million in initial funding.
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`Based on these misrepresentations, HTC asserts claims for violations of Securities
`
`Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. §§ 78a, et seq., and Rule 10b-5(a)
`
`promulgated thereunder by the Securities Exchange Commission, 17 C.F.R. § 240.10b5;
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`violations of the Pennsylvania Securities Act of 1972 (“Pennsylvania Securities Act”),
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`70 Pa. Stat. Ann. §§ 1-101, et seq.; and common law fraud, negligent misrepresentation, and
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`breach of contract.
`
`PARTIES
`
`2.
`
`Plaintiff HTC is a limited liability company organized and existing under the laws
`
`of the Commonwealth of Pennsylvania with its principal place of business located at 1288 Valley
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`Forge Road, Suite 91, Valley Forge, Pennsylvania 19482.
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`3.
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`Defendant Gadget is a Delaware corporation with its principal place of business at
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`58 Park Place, Second Floor, Newark, New Jersey 07102.
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`Case 2:20-cv-01966-JDW Document 1 Filed 04/20/20 Page 3 of 23
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`4.
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`Defendant Dan Crain (“Crain”) is an individual who, upon information and belief,
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`resides at 33 Van Blarcom Lane, Wycoff, NJ 07481. Crain is a co-founder and past CEO of
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`Gadget.
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`5.
`
`Defendant Rabindra Soni (“Soni”) is an individual who, upon information and
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`belief, resides at 101 Pickney Street, Boston, MA 02114. Soni is a co-founder and, upon
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`information and belief, the current CEO and Executive Chairman of the Board of Gadget.
`
`6.
`
`Defendant Maxwell Riggsbee, Jr. (“Riggsbee”) is an individual who, upon
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`information and belief, resides at 160 Summit Street, Englewood, NJ 07631. Riggsbee is a co-
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`founder and, upon information and belief, the current Chief Product Officer of Gadget.
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`JURISDICTION AND VENUE
`
`7.
`
`Jurisdiction exists by virtue of a federal question pursuant to 28 U.S.C. § 1331
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`because certain of these claims involve violations of the Securities Exchange Act of 1934
`
`(“Exchange Act”). The court has jurisdiction over the remaining state law claims by virtue of
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`supplemental jurisdiction. 28 USC § 1367.
`
`8.
`
`Venue is proper in this judicial district under 28 USC § 1391, as it is the judicial
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`district in which a substantial part of the events or omissions giving rise to the claims occurred.
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`9.
`
`As alleged in greater detail below, Gadget and the Individual Defendants solicited
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`an investment from HTC by misleading and fraudulent means and caused damage to HTC within
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`this judicial district.
`
`FACTS
`
`10.
`
`Gadget is a software development company that is in the process of developing a
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`new mobile device software technology. The new product will purportedly be able to transform
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`PDF documents into a more user-friendly, interactive format. The technology will also
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`Case 2:20-cv-01966-JDW Document 1 Filed 04/20/20 Page 4 of 23
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`supposedly offer a new medium for publishing the reformatted data on mobile devices, allowing
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`others to view the content from their own mobile devices.
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`11.
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`In order to fund this project, Defendants issued and sold security interests in the
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`company to various investors including Plaintiff through private placements, under Rule 506(b)
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`of Regulation D, a “safe harbor” under Section 4(a)(2) of the Securities Act of 1933.
`
`12.
`
`HTC was introduced to Gadget through Defendant Rabindra Soni, Gadget’s then
`
`Chairman of the Board, in the summer of 2017, when Soni told Andrew Towne, one of HTC’s
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`managing members, that HTC had a unique opportunity to get into a tech deal with big potential.
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`Defendant Soni said that he had invested in the same management team of Defendants Crain and
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`Riggsbee twice before and both ventures were very successful. Defendant Soni told Towne that
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`he would instruct Defendant Crain, Gadget’s CEO, to open up the “Series A” investment round
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`to get HTC the same terms as other Series A investors who had purchased stock the prior fall.
`
`13.
`
`In September 2017, Defendant Crain solicited HTC’s Towne by telephone to
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`invest in Gadget’s software business.
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`14.
`
`On September 27, 2017, HTC executed and returned to Gadget the Non-
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`Disclosure Agreement required by Gadget to disclose the proposed investment details.
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`15.
`
`At that time, Crain represented to Towne that Gadget had recently closed a Series
`
`A investment round, but that it would reopen the round to permit HTC to invest under the same
`
`terms if it did so promptly.
`
`16.
`
`Defendants Crain, Soni and Riggsbee hosted several telephone conferences with
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`HTC to extoll the capabilities of its software for use in a mobile environment, to inform of
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`Gadget’s penetration into the relevant markets and to solicit HTC to invest in Gadget.
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`Case 2:20-cv-01966-JDW Document 1 Filed 04/20/20 Page 5 of 23
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`17.
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`On October 2, 2017, HTC members Andy Towne, John McInerney and Wes
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`Goldstein participated in a video-conference with Defendants Crain (Co-Founder and then CEO)
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`and Riggsbee (Co-Founder and Chief Product Officer). During that meeting, Riggsbee
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`demonstrated the capabilities of the Gadget software product. Crain gave an overview of
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`Gadget’s market position and finances using various Power Point presentation slides.
`
`18.
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`Following that session, Mr. Towne requested by email that Gadget provide a copy
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`of the “Presentation Deck,” the Power Point presentation of information regarding Gadget’s
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`software product shown to HTC during the video-conference call. Towne also requested copies
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`of “the financial materials from the [Series A] round asap, so we can review and move things
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`forward.”
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`19.
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`On October 4, 2017, Gadget forwarded to Mr. Towne at HTC a copy of the
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`“Presentation Deck” used by Defendants during their October 2, 2017 video-conference. A true
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`and correct copy of the Presentation Deck is attached hereto as Exhibit A.
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`20.
`
`Through these meetings and in the presentation materials, Defendants Crain and
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`Riggsbee portrayed the product as fully tested and on the market. Defendants Crain and
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`Riggsbee further represented that the company had won contracts with major corporations
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`including GE Aviation, Siemens, and the “Dummies” book series, and had numerous other
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`prospects named as either “opportunities” or “in the pipeline.” (See Exhibit A at pages 12 and
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`15). The Presentation Deck showed images of Gadget’s product in actual use with these
`
`customer names. (See Exhibit A at page 20.)
`
`21.
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`During their October 2, 2017 presentation to HTC, Defendants Crain and
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`Riggsbee represented that Gadget was “first to market” with a “three-year head start” on its
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`Case 2:20-cv-01966-JDW Document 1 Filed 04/20/20 Page 6 of 23
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`competition, and that it offered the “only content platform in existence.” See Exhibit A at page
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`21. These statements confirmed that the product was complete and being sold.
`
`22.
`
`In seeking to secure HTC’s investment during the October 2, 2017 presentation to
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`HTC, Defendants Crain and Riggsbee also outlined the specific needs that HTC’s money would
`
`fulfill. They specifically represented that HTC’s investment would be used for sales and
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`engineering.
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`23.
`
`Gadget’s Presentation Deck stated that future cash raised would be used 75% for
`
`sales and 25% for engineering. This not only reiterated Crain’s and Riggsbee’s promise to use
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`HTC’s investment for sales and engineering, but also implied that most of the costs of
`
`engineering the product had already been incurred—further solidifying Gadget’s promise that the
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`product development was complete. See Exhibit A at page 22.
`
`24.
`
`Gadget’s Presentation Deck also advertised its prior success in raising capital,
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`noting as of the October 2, 2017 presentation to HTC that it had raised $10 million and was
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`targeting $20 million for the next financing round. See Exhibit A at page 22.
`
`25.
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`On information and belief, Soni (as Chairman of the Board and the individual
`
`responsible for soliciting HTC’s investment) was aware that these representations were being
`
`made to HTC at the time and, indeed, assisted in the pitch.
`
`26.
`
`On October 4, 2017, Gadget’s Chief Financial Officer also forwarded to Mr.
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`Towne and others at HTC copies of the Series A closing documents which had been signed by
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`the investors participating in the Series A round, including an Investors’ Rights Agreement,
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`Right of First Refusal and Co-Sale Agreement, Common Stock and Series A Preferred Stock
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`Purchase Agreement, and Voting Agreement (hereinafter, “the Series A Closing Documents”).
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`Case 2:20-cv-01966-JDW Document 1 Filed 04/20/20 Page 7 of 23
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`27.
`
`The Series A Closing Documents reflected that the Series A investors obtained
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`their preferred and common stock positions in Gadget as of November 18, 2016.
`
`28.
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`The Closing Documents articulated unique benefits to holders of Series A
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`Preferred Stock. For example, holders of Series A Preferred Stock were, “exclusively and as a
`
`separate class,” “entitled to elect” a board director. Further, the agreements forbid any
`
`subsequent sale of stock “unless all holders of Series A Preferred Stock [were] allowed to
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`participate in such transaction.”
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`29.
`
`The Closing Documents also clarified that any subsequent holder of Series A
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`Preferred Stock was required to sign and “become a party to” the original documents.
`
`30.
`
`Specifically, the § 7.1(a) of the Voting Agreement stated:
`
`Notwithstanding anything to the contrary contained in this Agreement, if
`the Company issues additional shares of Series A Preferred Stock after the
`date of this Agreement, as a condition to the issuance of such shares the
`Company will require that any purchaser of shares of Series A Preferred
`Stock become a party to this Agreement by executing and delivering (i)
`the Adoption Agreement attached to this Agreement as Exhibit A, or (ii) a
`counterpart signature page to this Agreement agreeing to be bound by and
`subject to the terms of this Agreement as an Investor and Stockholder
`hereunder. In either event, each such person will thereafter be deemed an
`Investor and Stockholder for all purposes under this Agreement.
`
`
`Similarly, § 6.9 of the Investor Rights Agreement stated:
`
`31.
`
`Notwithstanding anything to the contrary contained in this Agreement, if
`the Company issues additional shares of the Company’s Series A
`Preferred Stock after the date of this Agreement, any purchaser of such
`shares of Series A Preferred Stock may become a party to this Agreement
`by executing and delivering an additional counterpart signature page to
`this Agreement, and thereafter will be deemed an “Investor” for all
`purposes hereunder. No action or consent by the Investors will be required
`for such joinder to this Agreement by such additional Investor, so long as
`such additional Investor has agreed in writing to be bound by all of the
`obligations as an “Investor” hereunder.
`
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`Case 2:20-cv-01966-JDW Document 1 Filed 04/20/20 Page 8 of 23
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`32.
`
`Gadget filed a Form D with the SEC in connection with this initial sale of
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`securities. The Form D claimed an exemption under Rule 506(b), and recorded November 18,
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`2016, as the first sale date and December 5, 2016, as the accession date.
`
`33.
`
`34.
`
`Gadget represented on its Form D that this sale of securities raised $10,690,438.
`
`Based on the Individual Defendants’ foregoing representations, HTC agreed to
`
`invest $570,000 Gadget.
`
`35.
`
`On December 21, 2017—more than thirteen months after Gadget’s prior sale of
`
`securities to the other Series A investors—HTC tendered its wire transfer to Gadget in the
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`amount of $570,000 in exchange for 2,749,639 shares of Series A Preferred stock and 2,749,639
`
`shares of Common stock in Gadget.
`
`36.
`
`Later that day, Gadget issued Share Certificates in favor of HTC for those shares.
`
`(True and correct copies of the Share Certificates are attached hereto as Exhibit B.)
`
`37.
`
`Gadget never sent HTC any of the Series A Closing Documents to be executed by
`
`HTC. Therefore, HTC never became a party to any of the Series A Closing Documents.
`
`38.
`
`On information and belief, Gadget never sought or received the consent of the
`
`initial Series A investors to authorize the sale of further securities to HTC.
`
`39.
`
`Unlike other Series A investors, HTC was never offered the opportunity to
`
`appoint a member of Gadget’s Board of Directors.
`
`40.
`
`Gadget never inquired regarding whether HTC was an accredited investor such
`
`that it would qualify to purchase the private offering exempt from registration as required under
`
`Section 506(c).
`
`41.
`
`Gadget never filed a Form D with the SEC associated with its sale of securities to
`
`HTC.
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`Case 2:20-cv-01966-JDW Document 1 Filed 04/20/20 Page 9 of 23
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`42.
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`After issuing Share Certificates to HTC, Gadget failed and refused to provide
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`updated financial statements and Series A Closing Documents to HTC to .
`
`43.
`
`In an apparent effort to reassure HTC of the value of its investment, Defendant
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`Crain provided HTC with an updated Presentation Deck by email dated February 1, 2018,
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`approximately six weeks after HTC’s shares were issued by Gadget.
`
`44.
`
`In that Presentation Deck, Gadget made more specific representations as to the
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`customers it had “won,” specifically naming Hella, Ingersoll Rand, PTC, Siemens, Wiley and
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`Woodbridge Foam. It also listed many others, including Air France/KLM, Applied Materials,
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`Bayer, and Volkswagon, as “75%” “in the pipeline.”
`
`45.
`
`Five months later, Crain sent an email to all investors, including HTC, to inform
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`them that he was stepping down as CEO of Gadget effective immediately. Crain’s email further
`
`explained that Gadget was redirecting its sales focus from business-to-business markets in
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`education and publishing to more revenue-driven content industries. Crain’s email promised
`
`improved revenues in 2018.
`
`46.
`
`Although Crain stepped down as CEO, he reportedly remained on Gadget’s Board
`
`of Directors. Co-Founder and Chairman of the Board, Defendant Soni, assumed the position of
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`CEO.
`
`47.
`
`Like Crain before him, Soni failed and refused to provide HTC with financial
`
`statements and other information concerning HTC’s investment, including signed Series A
`
`Closing Documents or updates regarding how HTC’s funds were being used by Gadget.
`
`48.
`
`On March 14, 2019, Soni solicited additional investments from HTC and its other
`
`original Series A investors. Gadget required these original investors to provide additional cash
`
`as part of a bridge loan, in contributions proportionate to their original investments, explaining
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`Case 2:20-cv-01966-JDW Document 1 Filed 04/20/20 Page 10 of 23
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`that unless HTC invested an additional $45,929.20, “all [of its] previous investment [would] be
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`converted to common stock.”
`
`49.
`
`This demand by Gadget was not supported by any contractual obligation since
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`HTC never became a party to the Series A Closing Documents.
`
`50.
`
`HTC’s John McInerney visited Gadget’s offices in Newark, NJ on May 14, 2019
`
`to learn more about the product and offer suggestions for marketing. At that time, Mr.
`
`McInerney discovered what he related to Soni as extremely poor sales and marketing efforts.
`
`51.
`
`Shortly thereafter, Soni admitted to Mr. Towne that Gadget’s representations
`
`made regarding the success of the product prior to HTC’s investment were patently false, as
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`enumerated herein.
`
`52.
`
`Soni admitted that Gadget had never secured customer relationships with GE
`
`Aviation, Siemens, the “Dummies” book series, or any of the customers identified in either of the
`
`Presentation Decks upon which HTC relied in making its investment. In fact, none of these
`
`entities were customers.
`
`53.
`
`Soni further admitted that Gadget was never “75%” of the way to securing further
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`customer contracts with Air France/KLM, Applied Materials, Bayer, Volkswagon, or any of the
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`other companies identified on its second Presentation Deck.
`
`54.
`
`HTC discovered that Gadget’s stock valuation had not increased as it should have;
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`instead, Gadget has been unable to attach any value to the HTC’s shares.
`
`55.
`
`Gadget never intended to use HTC’s investment for sales and engineering.
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`Instead, HTC discovered that Gadget used HTC’s money to pay outstanding payroll tax
`
`liabilities incurred in 2018, prior to HTC’s investment. Indeed, none of HTC’s cash went to fund
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`sales or engineering of the software product.
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`Case 2:20-cv-01966-JDW Document 1 Filed 04/20/20 Page 11 of 23
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`56.
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`HTC discovered that Gadget had not raised $10 million in its first round of
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`investing. In fact, Gadget had raised only $8 million.
`
`57.
`
`HTC discovered that Gadget’s profit and loss statement for the calendar year 2018
`
`showed that Gadget earned no ordinary income, despite representing to HTC in 2017 that its
`
`products were on the market with active sales.
`
`58.
`
`None of the Individual Defendants ever endeavored to correct or clarify the false
`
`and/or misleading statements made to HTC beforehand.
`
`59.
`
`Having discovered its investment rested on a series of untruths, HTC demanded
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`the return of its investment, but was informed that Gadget did not have the cash or obligation to
`
`redeem HTC’s shares.
`
`60.
`
`Gadget’s representations of fact as alleged above were materially false and/or
`
`misleading.
`
`61.
`
`HTC relied to its detriment on the aforementioned misrepresentations made by
`
`Defendants Soni, Crain, and Riggsbee when placing its investment.
`
`62.
`
`Defendants Soni, Crain, and Riggsbee, individually and on behalf of Gadget,
`
`knew that their representations of fact as alleged above were false and/or misleading and that
`
`HTC would rely upon them in making its investment.
`
`63.
`
`If Gadget and its product had been as represented, the securities would have been
`
`worth substantially more. Because they were not, however, the securities are essentially
`
`worthless.
`
`64.
`
`As a result of its detrimental reliance upon the Individual Defendants’ false and/or
`
`misleading statements of fact, HTC has been damaged in the amount of $570,000.
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`65.
`
`HTC has been further damaged by the loss of use of its funds for 40 months as of
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`the date of the filing this complaint, and accordingly, it is entitled to interest on its investment.
`
`66.
`
`Defendants’ fraudulent conduct was willful and egregious, thereby entitling HTC
`
`to an award of punitive damages.
`
`COUNT I
`Violation of Section 10b of the Securities Exchange Act of 1934
`v. All Defendants
`
`HTC incorporates by reference the allegations set forth in paragraphs 1 through
`
`67.
`
`66 above as if set forth at length herein.
`
`68.
`
`Under Section 10(b) of the Exchange Act, it is unlawful for any person to “use or
`
`employ, in connection with the purchase or sale of any security … any manipulative or deceptive
`
`device or contrivance in contravention of such rules and regulations as the [SEC] may
`
`prescribe.” 15 U.S.C. § 78j(b).
`
`69.
`
`Under rules that the SEC promulgated to implement the Exchange Act, it is illegal
`
`for a person 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 the light of the circumstances under which
`
`they were made, not misleading . . . in connection with the purchase or sale of any security.”
`
`17 C.F.R. § 240.10b-5(b).
`
`70.
`
`Defendants’ offer and sale of stock to HTC is subject to the anti-fraud
`
`requirements of Rule 10b-5.
`
`71.
`
`Defendants violated Rule 10b-5 by selling securities to HTC based on
`
`misrepresentations and omissions of material fact, including the following:
`
`a. That the product was “first to market” with a “three-year head start” on its
`
`competition and that it offered the “only content platform in existence.”
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`In fact, the product was not complete, on the market, or in production.
`
`Gadget’s profit and loss statement for the calendar year 2018 confirms that
`
`Gadget earned no ordinary income, despite representing to HTC in 2017
`
`that its products were on the market with active sales.
`
`b. That Gadget had secured customer relationships with GE Aviation,
`
`Siemens, and the “Dummies” books series. In fact, Gadget had no such
`
`customer relationships prior to the offering to HTC.
`
`c. That Gadget was close to securing contracts with Air France/KLM,
`
`Applied Materials, Bayer, Volkswagon and other companies. In fact,
`
`Gadget was never close to securing any contracts with any of the
`
`identified companies.
`
`d. That HTC’s investment would be used for sales and engineering. Instead,
`
`Gadget used HTC’s money to pay outstanding payroll tax liabilities
`
`incurred in 2017. None of HTC’s cash went to sales or engineering of the
`
`software product.
`
`e. That Gadget had raised $10 million in support of the software. In fact, it
`
`had raised only $8 million.
`
`72.
`
`These inaccurate, incomplete, and/or misleading prior disclosures required the
`
`Defendants to make a corrective statement, but none did.
`
`73.
`
`HTC relied on these statements—whether misrepresented or concealed—when
`
`making its decision to invest in Gadget. Indeed, HTC’s misrepresentations and material
`
`omissions were the primary basis for HTC’s decision to invest in Gadget.
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`74.
`
`The facts that Defendants misrepresented and omitted would have been important
`
`to reasonable investors making investment decisions.
`
`75.
`
`All of the foregoing misstatements and omissions concern central matters of
`
`Gadget’s business and future prospects. On information and belief, since the Individual
`
`Defendants are all high-ranking financial officers within Gadget, they were privy to confidential
`
`information concerning Gadget’s finances, business, operations, performance, current position,
`
`and future prospects. Accordingly, when Individual Defendants made those false statements and
`
`omissions, they either knew that the facts as misrepresented or concealed were false or
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`misleading, or were reckless with respect to whether such facts were misleading.
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`76.
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`Indeed, Defendants—as Soni later admitted—lied to HTC in order to induce the
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`company to invest in Gadget’s securities.
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`77.
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`HTC, as a direct and proximate result of Defendants’ wrongdoing, purchased
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`stock worth significantly less than what it paid.
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`78.
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`If Gadget and its product had been as represented, the securities would have been
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`worth substantially more. Because they were not, however, the securities are essentially
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`worthless.
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`WHEREFORE, HTC respectfully requests that the Court enter judgment in its favor and
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`against All Defendants on Count I.
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`COUNT II
`Violation of Section 20(a) of the Securities Exchange Act
`v. Defendants Soni, Craig, and Riggsbee
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`79.
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`HTC incorporates by reference the allegations set forth in paragraphs 1 through
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`
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`78 above as if set forth at length herein.
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`Case 2:20-cv-01966-JDW Document 1 Filed 04/20/20 Page 15 of 23
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`80.
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`Section 20(a) of the Exchange Act extends liability to individuals “who, directly
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`or indirectly, control[] any person liable” under Section 10b-5. 15 U.S.C. § 78t(a).
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`Implementing regulations define “control” as “the possession, direct or indirect, of the power to
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`direct or cause the direction of the management and policies of a person, whether through the
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`ownership of voting securities, by contract, or otherwise.” 17 C.F.R. § 240.12b-2.
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`81.
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` Each of the Individual Defendants was a controlling person of Gadget within the
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`meaning of Section 20(a) of the Exchange Act at the time of wrongdoing. Specifically, Robert
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`Soni is a co-founder and served as Chairman of the Board during the company’s initial
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`fraudulent acts—a role which, on information and belief, he retains. Further, Soni currently
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`serves as CEO and Executive Chairman of the Board of Gadget. Dan Crain is a co-founder and
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`past CEO of Gadget. And Maxwell Riggsbee is also co-founder and the current Chief Product
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`Officer of Gadget.
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`82.
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`In their respective high-level capacities, each of the Individual Defendants
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`participated in Gadget’s management and were involved in Gadget’s day-to-day operations from
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`positions of high authority. On information and belief and by virtue of their positions, each had
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`the power to control or influence the particular transactions giving rise to the securities violations
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`as alleged herein, and exercised the same.
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`83.
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` As alleged herein, each of the Individual Defendants actively participated and
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`collaborated in the sale of securities at issue in the case, and actively participated in inducing
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`HTC to invest in the company.
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`84.
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`On information and belief, as high-level executives of Gadget, each of the
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`Individual Defendants was privy to, and had regular access to, Gadget’s confidential and
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`Case 2:20-cv-01966-JDW Document 1 Filed 04/20/20 Page 16 of 23
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`proprietary information, its business, operations, financial statements, performance, financial
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`condition, growth, and future prospects.
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`85.
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`As such, each of the Individual Defendants had the power to influence and
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`control, and did influence and control, directly or indirectly, Gadget’s decision-making,
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`including the content and dissemination of the false statements that induced HTC to invest
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`$570,000 into the company.
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`86.
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`Upon information and belief, each of the Individual Defendants, because of his
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`position of control and authority as an executive officer of Gadget, had access to the adverse
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`undisclosed information alleged herein concerning Gadget’s business, operations, and financial
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`statements, and knew or recklessly disregarded that these adverse undisclosed facts rendered the
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`representations made by or about Gadget materially false or misleading.
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`87.
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`By virtue of their positions as controlling persons of Gadget, each of the
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`Individual Defendants—to the extent they are not primarily liable for the aforementioned
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`fraudulent misrepresentations and omissions—is liable to the plaintiff pursuant to Section 20(a)
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`of the Exchange Act, jointly and severally with Gadget.
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`88. WHEREFORE, HTC respectfully requests that the Court enter judgment in its
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`favor and against All Individual Defendants on Count II.
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`COUNT III
`Pennsylvania Securities Law Violation
`v. All Defendants
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`HTC incorporates by reference the allegations set forth in paragraphs 1 through
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`89.
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`88 above as if set forth at length herein.
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`Case 2:20-cv-01966-JDW Document 1 Filed 04/20/20 Page 17 of 23
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`90.
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`Like Rule 10b-5, the Pennsylvania Securities Act (“PSA”) prohibits false
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`statements and omissions of material fact in connection with the sale of securities in
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`Pennsylvania. 70 Pa. C. S. §§ 1-401(a), 501(a).
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`91.
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`By offering and selling securities to HTC in Pennsylvania, Defendants are subject
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`to the anti-fraud requirements of the PSA.
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`92.
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`Defendants violated the anti-fraud provisions of the PSA by making the false
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`statements and omissions set forth above.
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`93.
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`HTC relied on these statements—whether misrepresented or omitted—when
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`making its decision to invest in Gadget. Indeed, Defendants’ misrepresentations and material
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`omissions were the primary basis for HTC’s decision to invest in Gadget.
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`94.
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`The facts that Defendants misrepresented and omitted would have been important
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`to reasonable investors making investment decisions.
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`95. When making those false statements and omissions, Defendants either knew that
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`the facts as misrepresented or concealed were false or misleading, or were reckless with respect
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`to whether such facts were misleading.
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`96.
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`The inaccurate, incomplete, and/or misleading prior disclosures required the
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`Defendants to make a corrective statement, but none did.
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`97.
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`Indeed, Defendants—as Soni later admitted—lied to HTC in order to induce the
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`company to invest in Gadget’s securities.
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`98.
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`HTC, as a direct and proximate result of Defendants’ wrongdoing, purchased
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`stock worth significantly less than what it paid.
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`99.
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`HTC, as a direct and proximate result of Defendants’ wrongdoing, purchased
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`stock worth significantly less than what they paid.
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`Case 2:20-cv-01966-JDW Document 1 Filed 04/20/20 Page 18 of 23
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`100.
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`If Gadget and its product had been as represented, the securities would have been
`
`worth substantially more. Because Gadget was not as represented, however, the securities are
`
`essentially worthless.
`
`WHEREFORE, HTC respectfully requests that the Court enter judgment in its favor and
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`against All Defendants on Count III.
`
`COUNT IV
`Common Law Fraud
`v. All Defendants
`
`101. HTC incorporates by reference the allegations set forth in paragraphs 1 through
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`100 above as if set forth at length herein.
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`102.
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`“[T]he traditional elements of common law fraud under Pennsylvania law are
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`(1) misrepresentation of a material fact, (2) scienter, (3) intent to induce action, (4) justifiable
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`reliance, and (5) damage as a proximate result.” Scott v. Fred Beans Chevrolet of Limerick, Inc.,
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`183 F. Supp. 3d 691, 699 (E.D. Pa. 2016).
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`103.
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`In selling the securities to HTC, the Individual Defendants, both individually and
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`in their capacities as agents and authorized representatives of Gadget, made false and misleading
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`statements and material omissions set forth above.
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`104. HTC relied on these statements—whether misrepresented or concealed—when
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`making its decision to invest in Gadget. Indeed, the Defendants’ misrepresentations and material
`
`omissions were the primary basis for HTC’s decision to invest in Gadget.
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`105. The facts that the Defendants