Grifco Inc (GFCI)

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By: trinityz1
28 Mar 2007, 04:05 PM EDT
Msg. 33495 of 33519
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(long) GFCI response to RR:

UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK (FOLEY SQUARE)
__________________________________________


ROBINSON REED, INC. AND FFC3 APS, : Case No. 1:07-cv-00584-PAC
:
Plaintiffs, : ECF
vs. :
:
GRIFCO INTERNATIONAL, INC., :
:
Defendant. :
:
__________________________________________:
MEMORANDUM OF DEFENDANT GRIFCO INTERNATNIONAL, INC.
IN SUPPORT OF REMOVAL AND MOTION TO DISMISS AND/OR STRIKE
PLAINTIFFS’ PLEADINGS IN OPPOSITION FOR LACK OF STANDING
I. PROCEDURAL HISTORY
On January 25, 2007, Defendant Grifco International Inc. filed its Notice of
Removal of a civil action from the Supreme Court of the State of New York, County of
New York, pursuant to 28 U.S.C. Section 1331, 1441 and 1446.
A. New York State Action.
On December 15, 2006, Plaintiffs Robinson Reed, Inc. and FFC3 ApS, who are
off-shore hedge funds and financial advisors domiciled in Cyprus and Denmark, filed this
action against Defendant, a non-reporting Pink Sheet company, in the Supreme Court of
the State of New York, County of New York, in the Supreme Court of New York, Index
No. 604288/06, alleging a default on a $1,500,000 loan. With penalties and interest,
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Plaintiffs claim over $3,366,000 due on the original loan. A true and correct copy of the
New York State Law Complaint was attached to the Notice of Removal as Exhibit A.
B. 10b-5 Demand Letter to Defendant’s California Agent
On or about January 16, 2007, Defendant received a copy of a demand letter
(hereinafter the “Demand Letter”) written on behalf of the Plaintiffs demanding payment
of the same debt principal as alleged in the New York Court State Action against
Defendant’s alleged agent Andy Baum of Avondale Capital Partners, Inc., 256 South
Robertson Blvd., Beverly Hills, CA 90211 (collectively “Baum”). A true and correct
copy of the Demand Letter was attached to the Notice of Removal as Exhibit B.
In the Demand Letter, Plaintiffs allege inter alia that Baum violated
Section 10(b) of the Securities Act and Rule 10b-5 in connection with the $1,500,000
loan to defendant “based upon representations regarding the business operations and
financial condition of Grifco” and that Baum negotiated “specific deal points” concerning
the Grifco Loan. See, Notice of Removal, Exhibit B, Paragraph 1 and numbered subparagraphs
2 and 3.
C. Choice of Federal Court Versus New York State Court
Defendants argues in its Notice of Removal, that removal of the New York State
Court Action has now become necessary because the resolution of the Securities Act
fraud claims invoke federal question jurisdiction pursuant to 28 U.S.C. 1331 as they
relate to actionable securities fraud in the making of the Grifco Loan which contains
“toxic” financing conditions commonly used by off-shore hedge funds with small
undercapitalized companies like Defendant.
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Defendant argues further in its Notice of Removal that Plaintiffs have voluntarily
interposed Baum as a necessary party in the litigation of the Grifco Loans since the
alleged Securities Act fraud claims include Baum and other agents who helped negotiate
the Grifco Loan. These agents, include but are not limited to, Mads Ulrich (one of the
principals of Plaintiff FFC3 APS) acting through First Fidelity Capital, Inc. and an
affiliated brokerage company based in Lausanne, Switzerland which helped underwrite
the Grifco Loan. See, Notice of Removal, Exhibit C.
D. Notice of Removal Filed 9 Days After Receipt of 10b-5 Demand Letter
On January 25, 2007, Defendant filed its Notice of Removal with this court, 9
days after receiving notice of the 10b-5 Demand Letter to its California agent.
E. Plaintiffs’ Opposition to Remand
Plaintiffs argue that Defendant waived its right to remove to this court since it did
not timely file a notice of removal in the first 30 days and that subsequent notice of the
10b-5 Securities fraud claims against Baum should be disregarded.
F. Defendant’s Motion to Dismiss and/or Strike for Lack of Standing
Defendant has moved to dismiss and/or strike Plaintiffs’ pleadings in opposition
to removal on the grounds that it lacks “standing” under U.S.C.A. Const., Art. 3, Section
2, cl. 1, since it has not suffered an “injury-in-fact” having fatally admitted to syndicating
out the Securities purchase with Defendant to over 60 investors.
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II. ISSUES
At issue is whether this court should dismiss and/or strike the pleadings in
opposition to removal filed by Plaintiffs Robinson Reed and FFC3 for lack of standing on
the grounds that they do not have a personal stake in the controversy having admitted to
syndicating out the Securities purchase with Defendant Grifco International, Inc. to over
60 plus investors who are indispensable parties. U.S.C.A. Const. Art. 3, Sect. 2, cl. 1
At issue is whether Defendant Grifco International, Inc. should be granted removal
to this court from New York State Court state under the removal statute and/or pursuant
to a binding contractual forum selection provision executed by the parties.
At issue is whether Plaintiffs Robinson Reed and FFC3 intentional concealed of
their intent to pursue 10b-5 fraud claims against a dual agent bars them from arguing that
Defendant Grifco somehow waived removal when the concealment was designed and
calculated to “lull” Defendant Grifco into believing that only state law claims were being
adjudicated.
III. RELEVANT FACTS
A. Grifco
Defendant Grifco International, Inc., is a public company whose share trade on the Pink
Sheet, LLC under the trading symbol “GFCI.PK”. Defendant Grifco is a manufacturer of
tools for the oil and gas industry.
In November 2004, Defendant Grifco (which was then a private company) began
trading on the Pink Sheets after completing a “reverse merger” with a public company
formerly known as Litfibre, Inc. Defendant Grifco is non-reporting issuer with the U.S.
Securities and Exchange Commission.
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B. Offshore Syndication and Bridge Loan Financing
In the summer of 2005, Defendant Grifco needed bridge loan financing. Defendant
Grifco was introduced to Plaintiffs FFC3 and Robinson Reed through Andy Baum who
was the principal of a Los Angeles, CA consulting firm. At first Plaintiff FFC3 and its
principal Mads Ulrich proposed acting as the syndicator of an offshore Regulation S
offering to provide the bridge financing. As negotiations continued, Plaintiff FFC3 then
introduced Defendant Grifco to Plaintiff Robinson Reed stating that both of them would
provide the bridge loan financing. Throughout this process, Baum assisted the parties in
negotiating a final deal earning himself a finder’s fee of $150,000 from the bridge
financing proceeds.
C. Securities Purchase
On September 1, 2005, Defendant Grifco and Plaintiffs FFC3 and Robinson Reed
entered into a ten year Note and Warrant Purchase Agreement (the “Agreement”). The
Agreement set-forth the terms of a convertible promissory note in an amount up to
$2,000,000 which was convertible into shares of Defendant Grifco. (See, Agreement,
Art. I, Section 1.1(a).
Pursuant to the Agreement, Defendant Grifco was required to issue to Plaintiffs
FFC3 and Robinson Reed, a total of 11,150,000 shares of its common stock as a “pledge”
and to register shares of its common stock with the U.S. Securities and Exchange
Commission.
D. Securities Act of 1933 Exemption from Registration
The parties acknowledge in the Agreement that all of the shares, warrants and
shares upon conversion of the warrants (collectively the “securities”) were being issued
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in reliance upon the exemption from securities registration afforded by Section 4(2) of
the U.S. Securities Act of 1933, as amended, and the rule and regulations thereunder
including Regulation D and Regulation S. Ibid.
E. Opinion Letter
As a condition of closing, an expert opinion letter (the “Opinion Letter”) was
issued by Levy & Boonshoft, P.C., Attorneys at Law, 477 Madison Avenue, New York,
NY opining on the legality of the issuance of the securities to Plaintiffs under the
Agreement.
In haec verba, the Opinion Letter stated:
“Assuming that all of the Purchasers’ representations and warranties in the
Purchase Agreement are complete and accurate, the offer, issuance and sale of the Notes
and the Warrants and the offer, issuance and sale of the Common Stock issuable upon
conversion of the Notes and the exercise of the Warrants are exempt from the registration
requirements of the Securities Act of 1993, as amended.” See, Legal Opinion Letter,
Paragraph 7, page 3, Exhibit 1.
E. Plaintiffs’ Representations and Warranties
The representations and warranties of Plaintiffs FFC3 and Robinson Reed (this is
the “Purchasers”) in the Agreement referred to in the Legal Opinion, are set forth in haec
verba as follows:
* * * * *
Section 2.2 Representations and Warranties of the Purchasers. Each of the
Purchasers hereby represents and warrants to the Company with respect solely to itself and not
with respect to any other Purchaser as follows as of the date hereof and as of each Closing Date:
(a) Organization and Standing of the Purchasers. Ifthe Purchaser is an entity,
such Purchaser is a corporation, limited liability company or partnership duly incorporated or
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organized, validly existing and in good standing under the laws of the jurisdiction of its
incorporation or organization.
(b) Authorization and Power. Each Purchaser has the requisite power and
authority to enter into and perform the Transaction Documents and to purchase the Securities
being sold to it hereunder. The execution, delivery and performance of the Transaction
Documents by each Purchaser and the consummation by it of the transactions contemplated
hereby have been duly authorized by all necessary corporate or partnership action, and no further
consent or authorization of such Purchaser or its Board of Directors, stockholders, or partners, as
the case may be, is required. When executed and delivered by the Purchasers, the other
Transaction Documents shall constitute valid and binding obligations of each Purchaser
enforceable against such Purchaser in accordance with their terms, except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation,
conservatorship, receivership or similar laws relating to, or affecting generally the enforcement
of, creditor's rights and remedies or by other equitable principles of general application.
(c) No Conflict. The execution, delivery and performance of the Transaction
Documents by the Purchaser and the consummation by the Purchaser of the transactions
contemplated thereby and hereby do not and will not (i) violate any provision of the Purchaser's
charter or organizational documents, (ii) conflict with, or constitute a default (or an event which
with notice or lapse of time or both would become a default) under, or give to others any rights
of termination, amendment, acceleration or cancellation of, any agreement, mortgage, deed of
trust, indenture, note, bond, license, lease agreement, instrument or obligation to which the
Purchaser is a party or by which the Purchaser's respective properties or assets are bound, or (iii)
result in a violation of any federal, state, local or foreign statute, rule, regulation, order,
judgment or decree (including federal and state securities laws and regulations) applicable to the
Purchaser or by which any property or asset of the Purchaser are bound or affected, except, in all
cases, other than violations pursuant to clauses (i) or (iii) (with respect to federal and state
securities laws) above, except, for such conflicts, defaults, terminations, amendments,
acceleration, cancellations and violations as would not, individually or in the aggregate,
materially and adversely affect the Purchaser's ability to perform its obligations under the
Transaction Documents.
(d) Acquisition for Investment. Each Purchaser is purchasing the Securities
solely for its own account and not with a view to or for sale in connection with distribution. Each
Purchaser does not have a present intention to sell any of the Securities, nor a present
arrangement (whether or not legally binding) or intention to effect any distribution of any of the
Securities to or through any person or entity; provided, however, that by making the
representations herein, such Purchaser does not agree to hold the Securities for any minimum or
other specific term and reserves the right to dispose of the Securities at any time in accordance
with Federal and state securities laws applicable to such disposition. Each Purchaser
acknowledges that it (i) has such knowledge and experience in financial and business matters
such that Purchaser is capable of evaluating the merits and risks of Purchaser's investment in the
Company, (ii) is able to bear the financial risks associated with an investment in the Securities
and (iii) has been given full access to such records of the Company and the Subsidiaries and to
the officers of the Company and the Subsidiaries as it has deemed necessary or appropriate to
conduct its due diligence investigation.
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(e) Rule 144. Each Purchaser understands that' the Securities must be held
indefinitely unless such Securities are registered under the Securities Act or an exemption from
registration is available. Each Purchaser acknowledges that such person is familiar with Rule
144 of the rules and regulations of the Commission, as amended, promulgated pursuant to the
Securities Act ("Rule 144"), and that such Purchaser has been advised that Rule 144 permits
resales only under certain circumstances. Each Purchaser understands that to the extent that Rule
144 is not available, such Purchaser will be unable to sell any Securities without either
registration under the Securities Act or the existence of another exemption from such registration
requirement.
(f) General. Each Purchaser understands that the Securities are being offered
and sold in reliance on a transactional exemption from the registration requirements of federal
and state securities laws and the Company is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments and understandings of such Purchaser
set forth herein in order to determine the applicability of such exemptions and the suitability of
such Purchaser to acquire the Securities. Each Purchaser understands that no United States
federal or state agency or any government or governmental agency has passed upon or made any
recommendation or endorsement of the Securities. Commencing on the date that the Purchasers
were initially contacted regarding an investment in the Securities, none of the Purchasers has
engaged in any short sale of the Common Stock and will not engage in any short sale of the
Common Stock prior to the consummation of the transactions contemplated by this Agreement.
(g) No General Solicitation. Each Purchaser acknowledges that the Securities
were not offered to such Purchaser by means of any form of general or public solicitation or
general advertising, or publicly disseminated advertisements or sales literature, including (i) any
advertisement, article, notice or other communication published in any newspaper, magazine, or
similar media, or broadcast over television or radio, or (ii) any seminar or meeting to which such
Purchaser was invited by any of the foregoing means of communications. Each Purchaser, in
making the decision to purchase the Securities, has relied upon independent investigation made
by it and has not relied on any information or representations made by third parties.
(h) Accredited Investor. Each Purchaser is an "accredited investor" (as
defined in Rule 501 of Regulation D), and such Purchaser has such experience in business and
financial matters that it is capable of evaluating the merits and risks of an investment in the
Securities. Such Purchaser is not required to be registered as a broker-dealer under Section 15 of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and such Purchaser is
not a broker-dealer. Each Purchaser acknowledges that an investment in the Securities is
speculative and involves a high degree of risk.
(i) Certain Fees. Except as disclosed on Schedule 2.2(i) attached hereto, the
Purchasers have not employed any broker or finder or incurred any liability for any brokerage or
investment banking fees, commissions, finders' structuring fees, financial advisory fees or other
similar fees in connection with the Transaction Documents.
G) Independent Investment. No Purchaser has agreed to act with any other
Purchaser for the purpose of acquiring, holding, voting or disposing of the Securities purchased
hereunder for purposes of Section 13(d) under the Exchange Act, and each Purchaser is acting
independently with respect to its investment in the Securities.
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(k) Residency. The Purchaser is a resident of the jurisdiction set forth
immediately below such Purchaser's name on the signature pages hereto.
(1) Foreign Buyer. The Purchaser is not a "U.S. person" as defined under
Rule 902(0) of Regulation S under the Securities Act. The Purchaser is not acquiring the
Securities for the account or benefit of any U.S. person.
(m) Offshore Transaction. The document effecting this purchase and sale has
been executed by the Purchaser outside the "United States" (as defined in Rule 902(P) of
Regulation S). The Purchaser is acquiring the Securities in an "offshore transaction" (as defined
in Rule 902(i) of Regulation S). The Securities were not offered to the Purchaser in the United
States and at the time of execution of this Agreement and the time of any offer to the Purchaser
to purchase the Securities hereunder, the Purchaser was physically outside of the United States.
* * * * *
See, Exhibit 2, Note and Warrant Purchase Agreement dated September 1, 2005, Section
2.2 passim, pages 12-15.
III. ARGUMENT
A. Lack of Standing
“Standing” under Art. 3, Section 2, cl. 1 of the U.S. Constitution is a threshold
jurisdictional issue that must be addressed before deciding a case on the merits. Friends
of Gateway v. Slater, 257 F.3d 74 (2nd Cir. 2001) cert den. 534 U.S. 1128. To have
“standing” a party must have suffered an “injury-in-fact” and standing cannot be inferred,
but must affirmatively appear in the record. ; Gully v. National Credit Union Admin. Bd.,
341 F. 3d 155 (2nd Cir. 2003). The party invoking federal jurisdiction bears the burden of
establishing the elements of standing. Ibid.
Plaintiffs Robinson Reed and FFC3 have admitted to Jim Dial, President and CEO
of Defendant Grifco that they have syndicated the Securities purchase in Defendant
Grifco to over 60 persons. See, Declaration of Jim Dial. At one time, Plaintiffs
Robinson Reed and FFC3 demanded that Defendant Grifco immediately send them
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$500,000 so they could placate the demands of these 60 persons some of whom were
presented by attorneys. See, Declaration of Jim Dial.
Plaintiffs Robinson Reed and FFC3 lack standing because they have not suffered an
injury-in-fact. U.S.C.A. Const. Art. 3, Section 2, Cl. Plaintiffs Robinson Reed and FFC3
have failed to join the 60 persons to whom they syndicated the securities purchase in
Defendant Grifco and these persons are indispensable parties because they are the ones
who have suffered an injury-in-fact.
This court should not proceed without the joinder of these indispensable parties so
as not to impair their rights and to further the public interest in rendering a complete,
consistent and efficient settlement of the controversies. Fed. Rules Civil. Proc., Rule
19(b), 28 U.S.C.A. See, Ente Nazionale Idrocarburi v. Prudential Securities Group, Inc.,
744 F. Supp. 450 (SDNY 1990); Friends of Gateway v. Slater, 257 F.3d 74 (2nd Cir.
2001) cert den. 534 U.S. 1128; Gully v. National Credit Union Admin. Bd., 341 F. 3d
155 (2nd Cir. 2003); and New York Public Interest Research Group v. Whitman, 321 F.
3d 316 (2nd Cir. 2003). Further, the court must address any jurisdictional standing
question first before deciding the merits of Plaintiffs Robinson Reed and FFC3
opposition to the removal from New York state court. See, Friends of Gateway v. Slater,
supra.
B. Contractual Right to Enforce Forum Selection and Removal
Although the Agreement contains a New York choice of law provision (see
Agreement, Art. VII, Section 7.9), it is the Note that contains a consent to the “exclusive
jurisdiction of the United States District Court sitting in the Southern District of New
York and the courts of the State of New York located in New York county for the
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purpose of any suit, action or proceeding arising out of or relating to this Note”. (See,
Note, Art. IV, Section 4.4)
The parties entered into an express contractual forum selection provision. Under
New York law, specific performance of a contractual provision is a species of equitable
relief. Restatement (Second) of Contracts Section 359. This contractual right is
independent of removal.
The right to remove actions from state to federal court is governed by Section 1441
of Title 28 of the U.S. Code, the general removal statute. The statute permits removal
only when the federal court would have had original jurisdiction of the action had the
plaintiff brought it in federal rather than state court. Thus, cases raising federal questions
and cases involving diversity of citizenship may be removed to federal court.
If the initial complaint doesn’t meet this litmus test, the case may still be removed if
an amended pleading or other filing subsequently provides grounds for removal. For
example, if a plaintiff sues a defendant for common law fraud in state court, but in a later
amended complaint adds a claim under federal securities law, the defendant then has
another 30 days in which to file a notice of removal.
Here, Defendant filed its Notice of Removal on January 25, 2007, only 9 days after
receiving notice of the Demand Letter on January 17, 2007 (the same day it was written).
There is no nice way of saying it, but Plaintiffs’ and its counsel actively concealed their
intent to sue Defendants’ agent in California for 10b-5 securities fraud when they filed
the New York State court action.
Whether this conduct falls under Rule 11, general principles of fraudulent
concealment, or just plain notions of fairness, Plaintiffs should be estopped from taking
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advantage of this fraud. No citation is necessary for the general principle that how to
deal with such matters is left to the sound discretion of this court.
Alternatively, the court may grant removal of the 10b-5 securities fraud claims and
remand all matters in which State law predominates.
C. 10b-5 Claims
Section 10(b) of the Securities Exchange Act makes it “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 U.S. Securities Exchange Commission may prescribe. 15 U.S.C.A.
Section 78j. The Supreme Court has explained that the phrase “in connection with” in
Section 10(b) should be “construed ‘not technically and restrictively, but flexibly to
effectuate [the statute’s] remedial purpose. SEC v. Zandford, 535 U.S. 813, 819 (2002)
quoting Affiliated Ute Citizens v. Untied States, 406 U.S. 128 (1972).
The Supreme Court has held that there are six elements that a plaintiff must allege
and prove in order to prevail in a Rule 10b-5 action:
1. The defendant made a "material misrepresentation or omission";
2. the defendant acted with "scienter," or a "wrongful state of mind" (typically understood
to mean that the defendant intended to make the material misrepresentation or omission,
or acted with recklessness in making the misrepresentation or omission);
3. the material misrepresentation or omission was made "in connection with the
purchase or sale of a security";
4. the plaintiff who was allegedly victimized by the fraud relied upon the material
misrepresentation or omission;
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5. the plaintiff suffered an economic loss as a result of the alleged fraud; and
6. the plaintiff can allege and prove "loss causation," which means that the
allegedly fraudulent misrepresentation or omission caused the plaintiff's economic loss.
See, Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005).
At the case at hand, Plaintiffs Robinson Reed and FFC3 committed 10b-5 fraud
when they purchased Securities from Defendant Grifco all the time falsely representing
and warranting that as “Purchasers” they were acquiring the Securities for their own
account without a view towards distribution” knowing that this representation was both
false and material to the issuance of the Securities to them based on an exemption from
registration under Section 4(2) of the Act and Regulation D and S promulgated
thereunder.
It should be noted that the 2nd Circuit has made it clear that the pledge of
securities (e.g. the pledge of 11,150,000 shares of the common stock of Defendant Grifco
to Plaintiffs Robinson Reed and FFC3) constitute a purchase or sale of securities under
10(b). See, Chemical Bank v. Arthur Andersen & Co., 726 F. 2d 930, 939 (2d Cir. 1984)
and Mallis V. Federal Deposit Insurance Corp., 568 F. 2d 824, 830 (2d Cir. 1977).
This 10b-5 fraud entitles Defendant Grifco to demand rescission of the Securities
purchase Agreement with Plaintiffs Robinson Reed and FFC3 the salutary effect of which
is to render “null and void” the toxic penalties and interest provisions in the Agreement
which total over $2,000,000 on a $1,200,000 investment. See, Declaration of Jim Dial.
D. Necessity for Special Master or Equity Receiver
Through their own admissions, we know that Plaintiffs syndicated the Securities to
over 60 investors. Payment of monies due these 60 investors from the Defendant should
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not be left up to chance. One could not reasonably trust Plaintiffs to perform this
fiduciary function after misleading the court into thinking that they were the real parties
in interest.
The appointment of an equity receiver or special master rests in the sound
discretion of the court and a remedy often granted to the SEC in enforcement
proceedings. With the appointment of an equity receiver or special master in place,
Defendant Grifco can pay into the registry of the court the monies due the 60 investors.
Each of these investors of course should submit proof of claims and comply with U.S
Patriot Act’s anti-money laundering and terrorist financing provisions.
IV. CONCLUSION
Defendant submits that Plaintiffs’ lack of constitutional standing is fatal.
Accordingly, Plaintiffs’ pleadings in opposition to removal should be dismissed and/or
stricken. Plaintiffs then have the “Hobson Choice” to bring in the 60 plus investors to
whom they syndicated the Securities as party plaintiffs since they are the real parties in
interest. The 10b-5 securities fraud claims should be removed to federal court whereupon
disposition all other matters wherein New York state law predominates may be remanded
to the extent necessary.
Respectfully submitted,

ALAN C. LIPPEL, ESQ.
By:__________________________
Alan C. Lippel, Esq.
Attorney for Defendant
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Attorney for Defendant
Alan C. Lippel, Esq.
79 Main Street
Hackensack, NJ 07601
201-487-6969 (tel)
212-233-1230 (tel) and 212-619-6743 (fax)

Of Counsel:
Herman Wun, Esq.
26 Broadway, 25th Floor
New York, NY 10004
212-509-8809 (Tel)
212-809-6422 (Fax)
TO: CLERK OF THE COURT
UNITED STATES DISTRICT
COURT FOR THE SOUTHERN
DISTRICT OF NEW YORK
500 Pearl Street
New York, NY 10007

Attorney for Plaintiffs
Eric O’Connor, Esq.
Sheppard, Mullin, Richter & Hampton LLP
30 Rockefeller Plaza, Suite 2400
New York, NY 10112
212-332-3800 (Tel)
212-332-3888 (Fax)