Wednesday, November 11, 2009 3:40:49 PM
LOOK OUT WALL STREET..... DAVID AND GOLITIH
PROPOSED SPECIAL LITIGATION COUNSEL
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1. agreements.
2. Subsequently, after signing the Transaction Documents, Cobalis learned that YAGI/Cornell had shorted the shares of many of its contract partners in other PIPE agreements.
3. YA’s representative Angelo, Engler and Gonzalez also had this information and misled Cobalis thereby causing detrimental reliance.
If YA’s representatives had spoken the truth and fulfilled YA’s fiduciary UNITED STATES BANKRUPTCY COURT
FOR THE CENTRAL DISTRICT OF CALIFORNIA
(SANTA ANA DIVISION)
In re
COBALIS CORP., a Nevada corporation,
Debtor.
_______________________________
COBALIS CORP., a Nevada corporation,
Plaintiff,
vs.
CORNELL CAPITAL PARTNERS, LP,
YORKVILLE ADVISORS, LLC, and,
YA GLOBAL INVESTMENTS, LP,
Defendants. )
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Case No. 8:07: 12347-TA
Adversary No. 09:09-ap- _________
Chapter 11 Proceeding
COMPLAINT
Plaintiff, COBALIS CORP. (“Cobalis”), through its undersigned counsel, respectfully represents and alleges:
COMMON ALLEGATIONS
A. Subject Matter Jurisdiction and Venue
4. This Verified Complaint brought on by adversary proceeding arises in and relates to Bankruptcy Case No. 8:07-12347-TA which was commenced by the filing of an involuntary Chapter 7 petition on August 1, 2007 by Defendant, YA Global Investments, L. P. (“YAGI”) f/k/a Cornell Capital Partners, L P (“Cornell”), against Cobalis.
5. The Court has jurisdiction to adjudicate the issues raised in this adversary proceeding pursuant to 28 U.S.C. § 1334.
6. This action is a core proceeding under 28 U.S.C. § 157(b)(2)(A)(b)(C)(K) and (O).
7. Venue in this judicial district is appropriate under 28 U.S.C. § 1409(a) and/or (c) because Debtor’s bankruptcy case is pending in this Court.
8. YAGI, on January 28, 2008 field a proof of claim in this case in the amount of $3,000,000 designated as Claim No. 6.
B. The Parties
9. Cobalis is and at all relevant times herein was a corporation formed and organized in the State of Nevada and duly authorized and qualified to transact business in the State of California.
10. Defendant, YAGI, is,upon information and belief the successor to Cornell, organized under the laws of Delaware and was at all relevant times herein conducting business in the State of California.
11. Upon information and belief Cornell is organized under the laws of Delaware and was at all relevant times herein duly authorized and qualified to conduct business in the State of California.
12. Yorkville Advisors LLC (“YA”) is a consultancy that arranges for financings for public companies using a technique known as Private Investment in Public Equities (“PIPE”). YA describes itself in its own press release as “tailor[ing] its financings according to each company’s need….” http://www.newswiretoday.com/news/57066/
C. Underlying Transactions Between the Parties
13. On or about December 20, 2006, Cobalis entered into a Securities Purchase Agreement with Cornell whereby Cornell agreed to purchase up to $3,850,000 of convertible debentures (the “Debentures”) from Cobalis which could be converted into Cobalis’ common stock. The transaction set forth above is considered a PIPE transaction as commonly referred to in the securities industry.
14. YAGI and its predecessor Cornell are one of the largest (if not the largest) investors in PIPE transactions and entered into over 300 transactions with publicly traded companies.
15. The Securities Purchase Agreement provided that the Debentures would be funded as follows:
a. $2,500,000 within 3 days of the execution of the Securities Purchase Agreement (the “First Closing”);
b. $675,000 on the date the registration statement was filed (the “Second Closing”) with the Securities and Exchange Commission (the “SEC”); and,
c. $675,000 within 3 days from the date that the registration statement was declared effective by the SEC (the “Third Closing”).
16. In addition to the Securities Purchase Agreement and the Debentures, the following documents were executed on December 20, 2006, and are collectively referred to as the “Transaction Documents”):
a. Warrants A through D (each document referred to individually as the “A Warrants” through “D Warrants” and referred to collectively as the “Warrants”) which were 4 separate warrant agreements with different strike prices and terms.
b. A Stock Pledge Agreement (the “Pledge Agreement”) in which shares held by insiders were pledged as collateral.
c. An Irrevocable Transfer Agent Instructions (the “Transfer Agent Instructions”); and
d. A Security Agreement (the “Security Agreement”) which provided for a security interest in all of the assets of Cobalis and the filing of a UCC-1 which occurred on December 20, 2006, when YAGI filed same with the Secretary of State of Nevada.
17. Under the terms of the Debentures, no repayment was due until December 19, 2008.
18. The Transaction Documents, prepared by YAGI, provided that they are all to be interpreted according to the laws of the State of New Jersey.
19. Inherent in every contract entered into under New Jersey law is the obligation of parties thereto to act in good faith as to the performance of their contracts.
20. Upon information and belief, at no time prior to December 20, 2006, did YAGI, Cornell or any of its/their affiliates or agents own any of Cobalis’ shares.
21. Upon information and belief, at no time subsequent to December 20, 2006, did YAGI, Cornell or any of their affiliates or agents purchase any of Cobalis shares, from any entity, other than under the terms of the Securities Purchase Agreement, Debenture Agreement and “A” Warrants.
22. Upon information and belief, at no time prior to December 20, 2006 did YAGI, Cornell or any of their affiliates or agents sell shares of Cobalis’ stock.
23. On December 20, 2006, Cornell/YAGI filed a UCC-1 financing statement with the Secretary of State of Nevada against substantially all of the assets of Cobalis.
24. On or about April 3, 2006, Gryphon Master Fund L. P. (“Gryphon”) obtained a judgment against Cobalis in the amount of $1,600,000, set forth in a public document, an 8-K, filed with the SEC and viewable on www.sec.gov.
25. Upon information and belief, this information became known to YA and subsequently to Cornell/YAGI during the due diligence period as such was public information and filed approximately 7 months before the Transaction Documents were executed.
26. On or about April 23, 2007, Gryphon sought to enforce its judgment and engaged the services of the Sheriff of Orange County, California, to levy against the assets of Cobalis.
27. In the next several days, Cobalis by and through its President Chaslav Radovich, (“Radovich”) and other members of its management contemporaneously informed YAGI, through its Managing Director, Craig Engler (“Engler”), of the aforesaid development that affected the assets of Cobalis covered under the Security Agreement and YAGI’s UCC-1 filing in Nevada.
28. Upon receipt of such information from Cobalis regarding the acts of Gryphon to enforce its judgment on the assets of Cobalis, YAGI declared that Cobalis was in default under its Transaction Documents and gave Cobalis 15 days’ notice to cure.
29. On or about August 1, 2007, before the expiration of the time period to cure the default, YAGI filed the involuntary Chapter 7 Petition against Cobalis in this Court.
30. Upon information and belief, on several occasions YAGI converted a portion of the Debentures and immediately thereafter YAGI engaged in short selling shares of Cobalis which significantly drove the share price downward.
31. Upon information and belief, the following occurred:
a. From May 22 through June 4, 2007 (9 trading days), 2,948,700 shares were traded into the market which drove the stock price down from $1.01 to $0.47, a decline of 53%.
b. From July 5 to July 11, 2007 (5 trading days), 2,924,500 of shares were traded into the market which drove the stock price down from $0.31 to $0.13 or 58%.
c. From July 20 to July 30, 2007 (7 trading days), 989,100 of shares were traded into the market which drove the stock price down from $0.17 to $0.14 or 18%.
32. Upon information and belief, the overall result of trading activities by YAGI and/or the short selling that occurred resulted in the decrease of the share price of Cobalis from $1.01 on May 22, 2007 to $0.11 on July 10, 2007. This amounted to a reduction in share price of approximately 90%.
33. Upon information and belief, at all times during these trades, YAGI knew the impact of its trading activities would result in the substantial decline of the share price of Cobalis’ stock.
34. This massive selling of Cobalis stock by YAGI prevented Cobalis’ ability to go to private and institutional investors to raise additional capital to satisfy its obligations to YAGI.
35. Cobalis, under the terms of the Debentures, had the right, at any time after the initial registration of YAGI’s free-trading shares in or about April 2007, to redeem same, partially or entirely, by tendering funds to YAGI plus a premium depending on the price of Cobalis’ stock at the time of payment.
36. Upon repayment of the Debentures, any and all pledged security would be returned to Cobalis or to other shareholders who pledged shares to YAGI.
37. Upon information and belief, during the due diligence and structuring period prior to the execution of the Transaction Documents, YA acquired actual knowledge that:
a. Cobalis was a developmental company engaged in developing its over-the-counter pharmaceutical product “Prehistin” and awaiting FDA approval;
b. Cobalis’ sole ability to repay the Debentures was conditioned on its ability to raise additional funds through the sale of stock;
c. That Cobalis had represented to YAGI (and the public-at-large) that there was no ability for Cobalis to generate sales revenues for the foreseeable future. See 8-K filed with the SEC September 30, 2006 (less than 90 days prior to the execution of the Transaction Documents).
38. Upon information and belief, YA was not registered with the SEC in 2006, 2007 and 2008.
39. Upon information and belief, in 2006 none of the employees of YA who were responsible for the delivery of professional services to Cobalis were, licensed by any governmental or financial industry regulatory authority to provide financial services in the States of California and/or New Jersey.
40. Upon information and belief, YA arranged for YAGI and/or Cornell to provide long term investment funding to Cobalis in the best interests of Cobalis.
41. The relationship of YA to Cobalis was that of fiduciary to principal.
42. Cobalis paid YA four hundred and fifteen thousand dollars ($415,000) from December 2006 through April 2007 for its services rendered in December of 2006.
43. When the Securities Purchase Agreement was executed on December 20, 2006, the share price of Cobalis’ stock was valued at $0.75 per share at closing.
44. Upon information and belief, after the Transaction Documents were executed but before YAGI received its free-trading registered shares in April thru July 2007, YAGI and/or its agents or affiliates short sold shares of Cobalis’ stock.
45. Upon information and belief, as YAGI is an expert in the securities and financial services industry, the sole expectation of YAGI was that by short selling the shares of Cobalis would result in a decline of the stock price which would benefit the short seller, YAGI. Thereafter, Cornell or YAGI would be able to acquire the replacement shares for less than the short sale price and therefore profit from the decline in the stock price.
46. The below chart shows the accumulation by YAGI of Cobalis shares:
Date Certificate # $ Amount # of Shares Price Per Share
3/23/07 9448 $25,000 33,025 $0.76
4/10/07 9466 25,000 36,539 0.68
4/12/07 9467 500,000 730,780 0.68
4/24/07 9499 999,999 1,333,333 0.75
7/13/07 9544 170,000 1,524,664 0.11
7/19/07 195,000 1,748,879 0.11
9/27/07 79,809 1,505,823 0.05
9/28/07 32,191 607,385 0.05
10/16/07 9587 67,000 1,607,143 0.04
3/12/08 9635 52,500 2,375,566 0.02
4/3/08 9637 60,000 2,343,750 0.03
4/18/08 9641 22,049 1,055,000 0.02
TOTAL $2,154,748 13,901,887 0.15
47. The below chart shows the closing price of Cobalis stock at the end of each of the following months next to the total trading volume.
Month ending Close Total Sh. Trading Vol.
December 2006 0.71 407,400
January 2007 0.74 565,100
February 2007 1.02 1,235,900
March 2007 0.80 924,000
April 2007 1.18 3,382,900
May 2007 0.72 3,712,700
June 2007 0.35 2,147,600
July 2007 0.16 8,919,800
48. As set forth above, YAGI converted the Debentures in April thru July 2007 in which the average monthly volume of number of Cobalis shares traded increased by 4 to 10 times the average of the prior 3 months trading volume.
49. No registered, free-trading shares of Cobalis were issued by the Transfer Agent to YAGI until March 23, 2007.
50. Upon information and belief, all sales of Cobalis’ stock by YAGI prior to March 23, 2007 were short sales since neither YAGI nor Cornell owned any free-trading, registered shares of Cobalis’ stock previously.
51. Upon information and belief, from April 2007 through July 2007, YAGI short sold over five million of shares of Cobalis’ stock with the intent of driving the price as close to zero as possible which resulted in the closing price reaching the low point of $0.02 on January 24, 2008.
52. The selling, upon information and belief, of large blocks of Cobalis shares by YAGI from April through July 2007, at continually lower prices per share, prevented Cobalis from selling its stock to raise funds to redeem the Debentures.
53. The Securities Purchase Agreement states in its ¶ 2(a):
(a) Investment Purpose. Each Buyer is acquiring the Convertible Debentures and, upon conversion of Convertible Debentures, the Buyer will acquire the Conversion Shares then issuable, for its own account for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof, except pursuant to sales registered or exempted under the Securities Act; provided, however, that by making the representations herein, such Buyer reserves the right to dispose of the Conversion Shares at any time in accordance with or pursuant to an effective registration statement covering such Conversion Shares or an available exemption under the Securities Act. [Emphasis added.]
54. After reading but before executing the Transaction Documents on December 20, 2006, (the “Interval Period”), Cobalis’ President Charles Radovich (“Radovich”) obtained representations from Engler, an authorized agent of YAGI, clarifying the specific meaning and understanding of the above provision.
55. During this Interval Period, YAGI’s authorized representatives, Engler, Mark Angelo (“Angelo”) and David Gonzalez, Esq. (“Gonzalez”) represented to Radovich that YAGI would not engage in short selling of the shares of Cobalis, or otherwise sell shares of Cobalis in any manner that would be incompatible with the aforesaid ¶ 2(a): Investment Purpose.
56. Radovich was also told by Engler, Angelo and Gonzalez, that Cornell and YAGI had never engaged in the short selling of shares acquired by Cornell or YAGI under a Securities Purchase Agreement or Debenture in a similar PIPE transaction.
57. Cobalis would not have signed these documents if Radovich had been told it had been the prior practice of Cornell/YAGI to short shares of securities obtained through PIPE transactions.
58. Cobalis would not have signed the Transaction Documents on December 20, 2006 if YAGI’s practice of selling huge amounts of shares into the market was disclosed as it was a foreseeable and inevitable consequence that the selling of large blocks of shares would lead to a drastic decline in the share price of Cobalis and thereby prevent Cobalis from raising additional funds from the sale of shares to be used to redeem the Debentures.
Count I
AGAINST YAGI AND CORNELL
BREACH OF CONTRACT BY PREVENTION OF PERFORMANCE
59. Cobalis incorporates by reference the allegations contained in paragraphs 1. through 55. of this Complaint as if fully set forth herein.
60. Radovich repeatedly informed representatives of Cornell and/or YAGI that Cobalis was relying on their representations that Cornell and/or YAGI would not: (i) sell short the shares of Cobalis during the duration of the term of the Debentures; and, (ii) that YAGI and Cornell had never sold short the shares of other entities from which it had purchased securities under a similar PIPE agreements.
61. Upon information and belief, YAGI intended that Cobalis would rely on the aforesaid representations in an effort to induce Cobalis into entering into the Transaction Documents.
62. Cobalis relied upon the said misrepresentations to its subsequent detriment by entering into the Transaction Documents.
63. If YAGI had not made the aforesaid false representations, Cobalis would not have entered into the Transaction Documents.
64. Cobalis seeks a finding and determination by this Court that because of YAGI's subsequent short selling and/or other selling of Cobalis’ shares in 2007 and 2008, it prevented Cobalis from selling shares at historical prices to redeem the Debentures.
WHEREFORE, Plaintiff seeks the application of the New Jersey case law to the aforesaid facts resulting in a finding and determination that YAGI by the use of equitable fraud induced Cobalis to enter into the subject agreements and then breached its contract with Cobalis by engaging in a pattern of conduct to prevent Cobalis from redeeming its Debentures and demands thereby entitling Cobalis to: (i) rescission of all of the Transaction Documents leaving the parties as this Court finds them; (ii) an Order excusing Cobalis from performance under all of the Transaction Documents by reason of YAGI’s prevention of performance; (iii) an Order disallowing in its entirety YAGI’s proof of claim with prejudice; (iv) a permanent injunction against YAGI from enforcing its UCC-1 filing in Nevada against Cobalis; (v) the award of costs; and, (vi) such further relief as the Court deems just and proper.
Count II
AGAINST YAGI AND CORNELL
BREACH OF CONTRACT
65. Cobalis incorporates by reference the allegations contained in paragraphs 1. through 55. of this Complaint as if fully set forth herein.
66. Under the terms of the Debentures, no monetary payment whatsoever was due from Cobalis to YAGI until December 20, 2008.
67. Cobalis timely honored each and every request of YAGI for the conversion of shares and the registration thereof as required by the terms of the Debentures.
68. YAGI sent to Cobalis notices of putative acts of default under the terms of the Debentures dated July 23, 2007 (first notice) and July 25, 2007 (second notice). Said notices were grounded exclusively in allegations that Cobalis had putatively defaulted under the terms of its Debentures by reason of the acts of Gryphon to levy assets of Cobalis that were the subject of the UCC-1 filing in Nevada by YAGI. Cobalis never granted a security interest in any of its assets at any time to Gryphon.
69. Nonetheless, Gryphon, without the knowledge or consent of Cobalis, made a UCC-1 filing with the Secretary of State of California in or about May 2007 against the personalty of Cobalis.
70. Gryphon in June and July 2007 engaged the services of the Sheriff of Orange County, California, to levy or otherwise encumber the assets of Cobalis as may be found within said county.
71. Instead of seeking a temporary restraining order or similar relief against Gryphon, which YAGI was free to seek, without any need for the involvement or consent of Cobalis or any other entity, YAGI instead sent notices of default to Cobalis.
72. The first notice informed Cobalis that it had until August 7, 2008 to cure its alleged default.
73. Even if the intent of YAGI was to give Cobalis only until August 7, 2007 to cure, YAGI filed its Chapter 7 petition against Cobalis on August 1, 2007. This unilateral truncation of the time to cure as set forth in the Debentures and both of the aforesaid notices of default were acts of bad faith as they lulled Cobalis into believing that it had until August 7th to take action to protect its interests.
74. The notices issued and YAGI’s act of filing an Involuntary Chapter 7 were acts of bad faith since:
a. YAGI knew about Gryphon's judgment dated April 3, 2006 when it entered into the Transaction Documents on December 20, 2006;
b. Cobalis did nothing subsequently that in any way could be construed as affecting YAGI's UCC-1 filing to the detriment of YAGI.
c. Cobalis never granted any security interest in its assets to Gryphon.
d. Cobalis gave prompt notice to YAGI of said improper acts of Gryphon to levy assets covered under YAGI's UCC-1 filing.
e. Remedies available to YAGI, such as a Temporary Restraining Order or preliminary/permanent injunction against Gryphon, would not have damaged Cobalis in any manner.
f. The notices sent by YAGI to Cobalis were acts of equitable fraud since the assets under the Pledge Agreement and Security Agreement were immune to any acts by Gryphon contrary to the misrepresentations of YAGI; it was the intention of YAGI that Cobalis would rely upon the misrepresentations of law by YAGI; and, in fact, Cobalis did rely on these misrepresentations to its detriment by not opposing the involuntary Bankruptcy petition and exercising its rights under 11 USC §303(i).
75. YAGI’s conduct constitutes bad faith and a breach of contract for which Cobalis has sustained substantial damages in an amount to be proven at trial.
WHEREFORE, Plaintiff demands: (i) judgment against Defendants, YAGI and Cornell, jointly and severally, for compensatory damages sustained as a result of their breach of contract by acting in bad faith; (ii) an Order excusing Cobalis from redeeming the Debentures and excusing all of its obligations under the Transaction Documents leaving the parties as this Court finds them; (iii) an Order disallowing YAGI’s proof of claim by reason of YAGI’s prior fraud and breach of contract; (iv) a permanent injunction enjoining YAGI from enforcing its UCC-1 filing against Cobalis; (v) an accounting by YAGI of everything that has occurred regarding the sale of the stock and repayment of the debt pursuant to the Transaction Documents; (vi) the award of costs; and, (vii) such further relief as the Court deems just and proper.
Count III
AGAINST YAGI AND CORNELL
BREACH OF CONTRACT - ACCUMULATING
MORE THAN 4.99% OF COBALIS’ SHARES AT ONE TIME
76. Cobalis incorporates by reference the allegations contained in paragraphs 1. through 55. of this Verified Complaint as if set forth herein.
77. The Securities Purchase Agreement and § 4(b)(i) of the Debenture, limits YAGI to the conversion of the Debentures so that at any one time YAGI would not own more than 4.99% of Cobalis’ shares.
78. On July 13, and 19, 2007, the Transfer Agent issued share certificates totaling 3,272,000 registered, free-trading shares of Cobalis to YAGI.
79. On July 30, 2007, YAGI transferred these shares to CEDE and Company.
80. On July 30, 2007, the total number of authorized and issued shares of Cobalis was 46 million shares.
81. Thus on July 30, 2007, YAGI was the beneficial owner of 7.1% of the total issued and outstanding shares of Cobalis.
82. This plain breach of the Securities Purchase Agreement damaged Cobalis in an amount presently unknown but to be proven at trial.
WHEREFORE, Plaintiff demands: (i) judgment against Defendants, YAGI and Cornell, jointly and severally, for damages sustained by Cobalis as a result of their breach of contract; (ii) an Order excusing Cobalis from redeeming the Debentures and excusing all of its obligations under the Transaction Documents, and leaving the parties as this Court finds them; (iii) an Order disallowing YAGI’s proof of claim by reason of YAGI’s fraud and prior breach of contract; (iv) a permanent injunction enjoining YAGI from enforcing its UCC filing against Cobalis; (v) an accounting by YAGI of everything that has occurred regarding the sale of the stock and repayment of the debt pursuant to the Transaction Documents; (vi) the award of costs; and, (vii) such further relief as the Court deems just and proper.
Count IV
AGAINST YAGI AND CORNELL
SECURITIES FRAUD for VIOLATION OF SEC Rule 10-b-5
83. Cobalis incorporates by reference the allegations contained in paragraphs 1 through 55. of this Complaint as if fully set forth herein
84. A private damages cause of action lies against the buyer of a security under SEC Rule 10b-5, codified at 17 C.F.R. § 240.10b-5.
85. YAGI bought Debentures from Cobalis on December 20, 2006, and thereafter under the terms of the Transaction Documents.
86. YAGI converted a portion of the dollar value of the Debentures into registered and free-trading shares of Cobalis in 2007 and 2008.
87. Upon information and belief, YAGI intentionally did not inform Cobalis that if YAGI purchased the Debentures, that YAGI intended to short sell Cobalis’ stock both before and after YAGI received registered the free-trading shares of Cobalis under the terms of the Debentures.
88. In December 2006, before the Transaction Documents were executed, David Andreeson (“Andreeson”), and Engler, an authorized representative of YAGI, stated to Radovich that it was not the intention of YAGI to short sell shares of Cobalis.
89. The representation was repeated during a three hour dinner at a restaurant known as the Argyle-Four Seasons Aviara, located at 7447 Batiquitos Drive Carlsbad, CA 92011.
90. Attending the dinner in Carlsbad were Gerald Yakatan, Brian Connelly, Radul Radovich, Radovich, Ernest Armstrong, Craig Engler and Andreeson.
91. After receiving the Transaction Documents prepared by YAGI, but before signing same, separately and in addition to inquiries made during the said meeting , Cobalis through its President, Radovich, directly asked Engler, Angelo and Gonzalez whether YAGI would sell shares of Cobalis short.
92. Angelo also reassured Radovich in late December 2006 before the Transaction Documents were executed, that Cornell or YAGI would not sell large blocks of Cobalis’ shares into the market.
93. During early December 2006, Angelo specifically stated that Cornell and/or YAGI would not short Cobalis’ stock and Cornell desired a long-term relationship with Cobalis.
94. Radovich was informed by Engler, Gonzalez and Angelo, that YAGI or Cornell had never engaged in short sales with any of the other entities with which it had entered into a PIPE agreement.
95. In each of the above instances, Radovich was told by Engler that in no event would YAGI ever sell Cobalis stock short if Cobalis delivered its Debentures to YAGI.
96. If YAGI’s authorized representatives had not stated, on or before December 20, 2006 and prior to the end of the rescission period, that it would not short the stock of Cobalis after entering into the Transaction Documents, Cobalis would not have executed the Transaction Documents.
97. YA and YAGI had an affirmative obligation to inform Cobalis about the risk that YAGI would sell shares of Cobalis short as this was an essential and material fact, which if known to Cobalis, would dispositively have ended all negotiations.
98. It was essential to Cobalis’ decision to have the material information about the likelihood of short selling and the anticipated magnitude of the said short selling in terms of the ability of Cobalis to sell additional shares to repay the Debentures and otherwise fund its operations.
99. YA and YAGI had affirmative obligations to disclose this risk to Cobalis, but failed to do so.
100. On February 23, 2007, the Radovichs owned 11 million shares and the share price of Cobalis on that date was $1.10.
101. On August 22, 2007, after YAGI, upon information and belief, had sold short over five million shares, the share price was $0.06. Thus the decline in the total value of the Radovichs’ shares was approximately $11,440,000, which equals a 95% decline.
102. YAGI and Cornell’s misconduct constitutes violations of SEC Rule 10-b(5) by engaging in acts, practices or courses of business which operated or would operate as a fraud or deceit.
103. By reason of their actions alleged herein, said Defendants each violated § 10-b of the Exchange Act of 1934 [15 U.S.C.§ 78j(b) and Rule 10b-5 thereunder [C.F.R. § 240.10b-5]]
WHEREFORE, Plaintiff demands: (i) judgment against Defendants YAGI and Cornell jointly and severally, for damages sustained as a result of violation of Rule 10b-5 of the Securities and Exchange Act of 1934; (ii) an Order excusing Cobalis from redeeming the Debentures and excusing all of its obligations under the Transaction Documents; (iii) an Order disallowing YAGI’s proof of claim by reason of YAGI’s fraud and prior violation of 10-b-(5); (iv) a permanent injunction against YAGI from enforcing its UCC-1 filing against Cobalis; (v) an Order for rescission of the Transaction Documents; (vi) an accounting by YAGI of everything that has occurred regarding the sale of the stock and repayment of the debt pursuant to the Transaction documents; (vii) the disgorgement of all of the proceeds of subject short sales; (vii) the award of costs; and, (viii) such other and further relief as the Court deems just and proper. Cobalis also seeks a bench trial to prove compensatory and punitive damages.
Count V
AGAINST YA
EQUITABLE FRAUD AND BREACH OF FIDUCIARY OBLIGATIONS
104. Cobalis incorporates by reference the allegations contained in paragraphs 1. through 55. of this Complaint as if fully set forth herein.
105. YA in 2006 provided consulting services to Cobalis to obtain debt and equity financing on the best possible terms for Cobalis.
106. Cobalis paid YA, in late 2006 and early 2007, $415,000 for its advisory services to Cobalis for, inter alia, the preparation and execution of the Transaction Documents.
107. The relationship of YA to Cobalis was that of fiduciary to principal.
108. Radovich was told by YA’s authorized representatives Angelo, Engler and Gonzalez that YAGI/Cornell would not short sell or otherwise sell Cobalis shares during the term of the Debenture which ended in December 2008.
109. Radovich was also told by Angelo, Engler and Gonzalez on behalf of YA that YAGI/Cornell had never sold short any of the shares of entities with which it had entered into PIPE responsibilities owed to Cobalis, Cobalis would not have executed the Transaction Documents.
WHEREFORE, Cobalis therefore seeks the disgorgement of the $415,000 that it paid to YA plus prejudgment interest thereon at the statutory rate in New Jersey which is 8% per annum, plus an award of its costs.
PRAYER FOR RELIEF
WHEREFORE, Cobalis prays for judgment on its Verified Complaint against YAGI as follows:
On the First to Fifth Counts, relief as set forth supra.
On All Counts:
1. For costs of suit herein incurred; and
2. For such other and further relief as the Court deems just and proper.
Santa Ana, California
Dated: November 11, 2009
Levey, Filler, Rodriguez, Kelso & DeBianchi, LLP
By:
David Filler, Esq. (Pending Application Pro Haec Vice)
Proposed Special Litigation Counsel
COBALIS CORP. a Nevada corporation
PROPOSED SPECIAL LITIGATION COUNSEL
.
1. agreements.
2. Subsequently, after signing the Transaction Documents, Cobalis learned that YAGI/Cornell had shorted the shares of many of its contract partners in other PIPE agreements.
3. YA’s representative Angelo, Engler and Gonzalez also had this information and misled Cobalis thereby causing detrimental reliance.
If YA’s representatives had spoken the truth and fulfilled YA’s fiduciary UNITED STATES BANKRUPTCY COURT
FOR THE CENTRAL DISTRICT OF CALIFORNIA
(SANTA ANA DIVISION)
In re
COBALIS CORP., a Nevada corporation,
Debtor.
_______________________________
COBALIS CORP., a Nevada corporation,
Plaintiff,
vs.
CORNELL CAPITAL PARTNERS, LP,
YORKVILLE ADVISORS, LLC, and,
YA GLOBAL INVESTMENTS, LP,
Defendants. )
)
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Case No. 8:07: 12347-TA
Adversary No. 09:09-ap- _________
Chapter 11 Proceeding
COMPLAINT
Plaintiff, COBALIS CORP. (“Cobalis”), through its undersigned counsel, respectfully represents and alleges:
COMMON ALLEGATIONS
A. Subject Matter Jurisdiction and Venue
4. This Verified Complaint brought on by adversary proceeding arises in and relates to Bankruptcy Case No. 8:07-12347-TA which was commenced by the filing of an involuntary Chapter 7 petition on August 1, 2007 by Defendant, YA Global Investments, L. P. (“YAGI”) f/k/a Cornell Capital Partners, L P (“Cornell”), against Cobalis.
5. The Court has jurisdiction to adjudicate the issues raised in this adversary proceeding pursuant to 28 U.S.C. § 1334.
6. This action is a core proceeding under 28 U.S.C. § 157(b)(2)(A)(b)(C)(K) and (O).
7. Venue in this judicial district is appropriate under 28 U.S.C. § 1409(a) and/or (c) because Debtor’s bankruptcy case is pending in this Court.
8. YAGI, on January 28, 2008 field a proof of claim in this case in the amount of $3,000,000 designated as Claim No. 6.
B. The Parties
9. Cobalis is and at all relevant times herein was a corporation formed and organized in the State of Nevada and duly authorized and qualified to transact business in the State of California.
10. Defendant, YAGI, is,upon information and belief the successor to Cornell, organized under the laws of Delaware and was at all relevant times herein conducting business in the State of California.
11. Upon information and belief Cornell is organized under the laws of Delaware and was at all relevant times herein duly authorized and qualified to conduct business in the State of California.
12. Yorkville Advisors LLC (“YA”) is a consultancy that arranges for financings for public companies using a technique known as Private Investment in Public Equities (“PIPE”). YA describes itself in its own press release as “tailor[ing] its financings according to each company’s need….” http://www.newswiretoday.com/news/57066/
C. Underlying Transactions Between the Parties
13. On or about December 20, 2006, Cobalis entered into a Securities Purchase Agreement with Cornell whereby Cornell agreed to purchase up to $3,850,000 of convertible debentures (the “Debentures”) from Cobalis which could be converted into Cobalis’ common stock. The transaction set forth above is considered a PIPE transaction as commonly referred to in the securities industry.
14. YAGI and its predecessor Cornell are one of the largest (if not the largest) investors in PIPE transactions and entered into over 300 transactions with publicly traded companies.
15. The Securities Purchase Agreement provided that the Debentures would be funded as follows:
a. $2,500,000 within 3 days of the execution of the Securities Purchase Agreement (the “First Closing”);
b. $675,000 on the date the registration statement was filed (the “Second Closing”) with the Securities and Exchange Commission (the “SEC”); and,
c. $675,000 within 3 days from the date that the registration statement was declared effective by the SEC (the “Third Closing”).
16. In addition to the Securities Purchase Agreement and the Debentures, the following documents were executed on December 20, 2006, and are collectively referred to as the “Transaction Documents”):
a. Warrants A through D (each document referred to individually as the “A Warrants” through “D Warrants” and referred to collectively as the “Warrants”) which were 4 separate warrant agreements with different strike prices and terms.
b. A Stock Pledge Agreement (the “Pledge Agreement”) in which shares held by insiders were pledged as collateral.
c. An Irrevocable Transfer Agent Instructions (the “Transfer Agent Instructions”); and
d. A Security Agreement (the “Security Agreement”) which provided for a security interest in all of the assets of Cobalis and the filing of a UCC-1 which occurred on December 20, 2006, when YAGI filed same with the Secretary of State of Nevada.
17. Under the terms of the Debentures, no repayment was due until December 19, 2008.
18. The Transaction Documents, prepared by YAGI, provided that they are all to be interpreted according to the laws of the State of New Jersey.
19. Inherent in every contract entered into under New Jersey law is the obligation of parties thereto to act in good faith as to the performance of their contracts.
20. Upon information and belief, at no time prior to December 20, 2006, did YAGI, Cornell or any of its/their affiliates or agents own any of Cobalis’ shares.
21. Upon information and belief, at no time subsequent to December 20, 2006, did YAGI, Cornell or any of their affiliates or agents purchase any of Cobalis shares, from any entity, other than under the terms of the Securities Purchase Agreement, Debenture Agreement and “A” Warrants.
22. Upon information and belief, at no time prior to December 20, 2006 did YAGI, Cornell or any of their affiliates or agents sell shares of Cobalis’ stock.
23. On December 20, 2006, Cornell/YAGI filed a UCC-1 financing statement with the Secretary of State of Nevada against substantially all of the assets of Cobalis.
24. On or about April 3, 2006, Gryphon Master Fund L. P. (“Gryphon”) obtained a judgment against Cobalis in the amount of $1,600,000, set forth in a public document, an 8-K, filed with the SEC and viewable on www.sec.gov.
25. Upon information and belief, this information became known to YA and subsequently to Cornell/YAGI during the due diligence period as such was public information and filed approximately 7 months before the Transaction Documents were executed.
26. On or about April 23, 2007, Gryphon sought to enforce its judgment and engaged the services of the Sheriff of Orange County, California, to levy against the assets of Cobalis.
27. In the next several days, Cobalis by and through its President Chaslav Radovich, (“Radovich”) and other members of its management contemporaneously informed YAGI, through its Managing Director, Craig Engler (“Engler”), of the aforesaid development that affected the assets of Cobalis covered under the Security Agreement and YAGI’s UCC-1 filing in Nevada.
28. Upon receipt of such information from Cobalis regarding the acts of Gryphon to enforce its judgment on the assets of Cobalis, YAGI declared that Cobalis was in default under its Transaction Documents and gave Cobalis 15 days’ notice to cure.
29. On or about August 1, 2007, before the expiration of the time period to cure the default, YAGI filed the involuntary Chapter 7 Petition against Cobalis in this Court.
30. Upon information and belief, on several occasions YAGI converted a portion of the Debentures and immediately thereafter YAGI engaged in short selling shares of Cobalis which significantly drove the share price downward.
31. Upon information and belief, the following occurred:
a. From May 22 through June 4, 2007 (9 trading days), 2,948,700 shares were traded into the market which drove the stock price down from $1.01 to $0.47, a decline of 53%.
b. From July 5 to July 11, 2007 (5 trading days), 2,924,500 of shares were traded into the market which drove the stock price down from $0.31 to $0.13 or 58%.
c. From July 20 to July 30, 2007 (7 trading days), 989,100 of shares were traded into the market which drove the stock price down from $0.17 to $0.14 or 18%.
32. Upon information and belief, the overall result of trading activities by YAGI and/or the short selling that occurred resulted in the decrease of the share price of Cobalis from $1.01 on May 22, 2007 to $0.11 on July 10, 2007. This amounted to a reduction in share price of approximately 90%.
33. Upon information and belief, at all times during these trades, YAGI knew the impact of its trading activities would result in the substantial decline of the share price of Cobalis’ stock.
34. This massive selling of Cobalis stock by YAGI prevented Cobalis’ ability to go to private and institutional investors to raise additional capital to satisfy its obligations to YAGI.
35. Cobalis, under the terms of the Debentures, had the right, at any time after the initial registration of YAGI’s free-trading shares in or about April 2007, to redeem same, partially or entirely, by tendering funds to YAGI plus a premium depending on the price of Cobalis’ stock at the time of payment.
36. Upon repayment of the Debentures, any and all pledged security would be returned to Cobalis or to other shareholders who pledged shares to YAGI.
37. Upon information and belief, during the due diligence and structuring period prior to the execution of the Transaction Documents, YA acquired actual knowledge that:
a. Cobalis was a developmental company engaged in developing its over-the-counter pharmaceutical product “Prehistin” and awaiting FDA approval;
b. Cobalis’ sole ability to repay the Debentures was conditioned on its ability to raise additional funds through the sale of stock;
c. That Cobalis had represented to YAGI (and the public-at-large) that there was no ability for Cobalis to generate sales revenues for the foreseeable future. See 8-K filed with the SEC September 30, 2006 (less than 90 days prior to the execution of the Transaction Documents).
38. Upon information and belief, YA was not registered with the SEC in 2006, 2007 and 2008.
39. Upon information and belief, in 2006 none of the employees of YA who were responsible for the delivery of professional services to Cobalis were, licensed by any governmental or financial industry regulatory authority to provide financial services in the States of California and/or New Jersey.
40. Upon information and belief, YA arranged for YAGI and/or Cornell to provide long term investment funding to Cobalis in the best interests of Cobalis.
41. The relationship of YA to Cobalis was that of fiduciary to principal.
42. Cobalis paid YA four hundred and fifteen thousand dollars ($415,000) from December 2006 through April 2007 for its services rendered in December of 2006.
43. When the Securities Purchase Agreement was executed on December 20, 2006, the share price of Cobalis’ stock was valued at $0.75 per share at closing.
44. Upon information and belief, after the Transaction Documents were executed but before YAGI received its free-trading registered shares in April thru July 2007, YAGI and/or its agents or affiliates short sold shares of Cobalis’ stock.
45. Upon information and belief, as YAGI is an expert in the securities and financial services industry, the sole expectation of YAGI was that by short selling the shares of Cobalis would result in a decline of the stock price which would benefit the short seller, YAGI. Thereafter, Cornell or YAGI would be able to acquire the replacement shares for less than the short sale price and therefore profit from the decline in the stock price.
46. The below chart shows the accumulation by YAGI of Cobalis shares:
Date Certificate # $ Amount # of Shares Price Per Share
3/23/07 9448 $25,000 33,025 $0.76
4/10/07 9466 25,000 36,539 0.68
4/12/07 9467 500,000 730,780 0.68
4/24/07 9499 999,999 1,333,333 0.75
7/13/07 9544 170,000 1,524,664 0.11
7/19/07 195,000 1,748,879 0.11
9/27/07 79,809 1,505,823 0.05
9/28/07 32,191 607,385 0.05
10/16/07 9587 67,000 1,607,143 0.04
3/12/08 9635 52,500 2,375,566 0.02
4/3/08 9637 60,000 2,343,750 0.03
4/18/08 9641 22,049 1,055,000 0.02
TOTAL $2,154,748 13,901,887 0.15
47. The below chart shows the closing price of Cobalis stock at the end of each of the following months next to the total trading volume.
Month ending Close Total Sh. Trading Vol.
December 2006 0.71 407,400
January 2007 0.74 565,100
February 2007 1.02 1,235,900
March 2007 0.80 924,000
April 2007 1.18 3,382,900
May 2007 0.72 3,712,700
June 2007 0.35 2,147,600
July 2007 0.16 8,919,800
48. As set forth above, YAGI converted the Debentures in April thru July 2007 in which the average monthly volume of number of Cobalis shares traded increased by 4 to 10 times the average of the prior 3 months trading volume.
49. No registered, free-trading shares of Cobalis were issued by the Transfer Agent to YAGI until March 23, 2007.
50. Upon information and belief, all sales of Cobalis’ stock by YAGI prior to March 23, 2007 were short sales since neither YAGI nor Cornell owned any free-trading, registered shares of Cobalis’ stock previously.
51. Upon information and belief, from April 2007 through July 2007, YAGI short sold over five million of shares of Cobalis’ stock with the intent of driving the price as close to zero as possible which resulted in the closing price reaching the low point of $0.02 on January 24, 2008.
52. The selling, upon information and belief, of large blocks of Cobalis shares by YAGI from April through July 2007, at continually lower prices per share, prevented Cobalis from selling its stock to raise funds to redeem the Debentures.
53. The Securities Purchase Agreement states in its ¶ 2(a):
(a) Investment Purpose. Each Buyer is acquiring the Convertible Debentures and, upon conversion of Convertible Debentures, the Buyer will acquire the Conversion Shares then issuable, for its own account for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof, except pursuant to sales registered or exempted under the Securities Act; provided, however, that by making the representations herein, such Buyer reserves the right to dispose of the Conversion Shares at any time in accordance with or pursuant to an effective registration statement covering such Conversion Shares or an available exemption under the Securities Act. [Emphasis added.]
54. After reading but before executing the Transaction Documents on December 20, 2006, (the “Interval Period”), Cobalis’ President Charles Radovich (“Radovich”) obtained representations from Engler, an authorized agent of YAGI, clarifying the specific meaning and understanding of the above provision.
55. During this Interval Period, YAGI’s authorized representatives, Engler, Mark Angelo (“Angelo”) and David Gonzalez, Esq. (“Gonzalez”) represented to Radovich that YAGI would not engage in short selling of the shares of Cobalis, or otherwise sell shares of Cobalis in any manner that would be incompatible with the aforesaid ¶ 2(a): Investment Purpose.
56. Radovich was also told by Engler, Angelo and Gonzalez, that Cornell and YAGI had never engaged in the short selling of shares acquired by Cornell or YAGI under a Securities Purchase Agreement or Debenture in a similar PIPE transaction.
57. Cobalis would not have signed these documents if Radovich had been told it had been the prior practice of Cornell/YAGI to short shares of securities obtained through PIPE transactions.
58. Cobalis would not have signed the Transaction Documents on December 20, 2006 if YAGI’s practice of selling huge amounts of shares into the market was disclosed as it was a foreseeable and inevitable consequence that the selling of large blocks of shares would lead to a drastic decline in the share price of Cobalis and thereby prevent Cobalis from raising additional funds from the sale of shares to be used to redeem the Debentures.
Count I
AGAINST YAGI AND CORNELL
BREACH OF CONTRACT BY PREVENTION OF PERFORMANCE
59. Cobalis incorporates by reference the allegations contained in paragraphs 1. through 55. of this Complaint as if fully set forth herein.
60. Radovich repeatedly informed representatives of Cornell and/or YAGI that Cobalis was relying on their representations that Cornell and/or YAGI would not: (i) sell short the shares of Cobalis during the duration of the term of the Debentures; and, (ii) that YAGI and Cornell had never sold short the shares of other entities from which it had purchased securities under a similar PIPE agreements.
61. Upon information and belief, YAGI intended that Cobalis would rely on the aforesaid representations in an effort to induce Cobalis into entering into the Transaction Documents.
62. Cobalis relied upon the said misrepresentations to its subsequent detriment by entering into the Transaction Documents.
63. If YAGI had not made the aforesaid false representations, Cobalis would not have entered into the Transaction Documents.
64. Cobalis seeks a finding and determination by this Court that because of YAGI's subsequent short selling and/or other selling of Cobalis’ shares in 2007 and 2008, it prevented Cobalis from selling shares at historical prices to redeem the Debentures.
WHEREFORE, Plaintiff seeks the application of the New Jersey case law to the aforesaid facts resulting in a finding and determination that YAGI by the use of equitable fraud induced Cobalis to enter into the subject agreements and then breached its contract with Cobalis by engaging in a pattern of conduct to prevent Cobalis from redeeming its Debentures and demands thereby entitling Cobalis to: (i) rescission of all of the Transaction Documents leaving the parties as this Court finds them; (ii) an Order excusing Cobalis from performance under all of the Transaction Documents by reason of YAGI’s prevention of performance; (iii) an Order disallowing in its entirety YAGI’s proof of claim with prejudice; (iv) a permanent injunction against YAGI from enforcing its UCC-1 filing in Nevada against Cobalis; (v) the award of costs; and, (vi) such further relief as the Court deems just and proper.
Count II
AGAINST YAGI AND CORNELL
BREACH OF CONTRACT
65. Cobalis incorporates by reference the allegations contained in paragraphs 1. through 55. of this Complaint as if fully set forth herein.
66. Under the terms of the Debentures, no monetary payment whatsoever was due from Cobalis to YAGI until December 20, 2008.
67. Cobalis timely honored each and every request of YAGI for the conversion of shares and the registration thereof as required by the terms of the Debentures.
68. YAGI sent to Cobalis notices of putative acts of default under the terms of the Debentures dated July 23, 2007 (first notice) and July 25, 2007 (second notice). Said notices were grounded exclusively in allegations that Cobalis had putatively defaulted under the terms of its Debentures by reason of the acts of Gryphon to levy assets of Cobalis that were the subject of the UCC-1 filing in Nevada by YAGI. Cobalis never granted a security interest in any of its assets at any time to Gryphon.
69. Nonetheless, Gryphon, without the knowledge or consent of Cobalis, made a UCC-1 filing with the Secretary of State of California in or about May 2007 against the personalty of Cobalis.
70. Gryphon in June and July 2007 engaged the services of the Sheriff of Orange County, California, to levy or otherwise encumber the assets of Cobalis as may be found within said county.
71. Instead of seeking a temporary restraining order or similar relief against Gryphon, which YAGI was free to seek, without any need for the involvement or consent of Cobalis or any other entity, YAGI instead sent notices of default to Cobalis.
72. The first notice informed Cobalis that it had until August 7, 2008 to cure its alleged default.
73. Even if the intent of YAGI was to give Cobalis only until August 7, 2007 to cure, YAGI filed its Chapter 7 petition against Cobalis on August 1, 2007. This unilateral truncation of the time to cure as set forth in the Debentures and both of the aforesaid notices of default were acts of bad faith as they lulled Cobalis into believing that it had until August 7th to take action to protect its interests.
74. The notices issued and YAGI’s act of filing an Involuntary Chapter 7 were acts of bad faith since:
a. YAGI knew about Gryphon's judgment dated April 3, 2006 when it entered into the Transaction Documents on December 20, 2006;
b. Cobalis did nothing subsequently that in any way could be construed as affecting YAGI's UCC-1 filing to the detriment of YAGI.
c. Cobalis never granted any security interest in its assets to Gryphon.
d. Cobalis gave prompt notice to YAGI of said improper acts of Gryphon to levy assets covered under YAGI's UCC-1 filing.
e. Remedies available to YAGI, such as a Temporary Restraining Order or preliminary/permanent injunction against Gryphon, would not have damaged Cobalis in any manner.
f. The notices sent by YAGI to Cobalis were acts of equitable fraud since the assets under the Pledge Agreement and Security Agreement were immune to any acts by Gryphon contrary to the misrepresentations of YAGI; it was the intention of YAGI that Cobalis would rely upon the misrepresentations of law by YAGI; and, in fact, Cobalis did rely on these misrepresentations to its detriment by not opposing the involuntary Bankruptcy petition and exercising its rights under 11 USC §303(i).
75. YAGI’s conduct constitutes bad faith and a breach of contract for which Cobalis has sustained substantial damages in an amount to be proven at trial.
WHEREFORE, Plaintiff demands: (i) judgment against Defendants, YAGI and Cornell, jointly and severally, for compensatory damages sustained as a result of their breach of contract by acting in bad faith; (ii) an Order excusing Cobalis from redeeming the Debentures and excusing all of its obligations under the Transaction Documents leaving the parties as this Court finds them; (iii) an Order disallowing YAGI’s proof of claim by reason of YAGI’s prior fraud and breach of contract; (iv) a permanent injunction enjoining YAGI from enforcing its UCC-1 filing against Cobalis; (v) an accounting by YAGI of everything that has occurred regarding the sale of the stock and repayment of the debt pursuant to the Transaction Documents; (vi) the award of costs; and, (vii) such further relief as the Court deems just and proper.
Count III
AGAINST YAGI AND CORNELL
BREACH OF CONTRACT - ACCUMULATING
MORE THAN 4.99% OF COBALIS’ SHARES AT ONE TIME
76. Cobalis incorporates by reference the allegations contained in paragraphs 1. through 55. of this Verified Complaint as if set forth herein.
77. The Securities Purchase Agreement and § 4(b)(i) of the Debenture, limits YAGI to the conversion of the Debentures so that at any one time YAGI would not own more than 4.99% of Cobalis’ shares.
78. On July 13, and 19, 2007, the Transfer Agent issued share certificates totaling 3,272,000 registered, free-trading shares of Cobalis to YAGI.
79. On July 30, 2007, YAGI transferred these shares to CEDE and Company.
80. On July 30, 2007, the total number of authorized and issued shares of Cobalis was 46 million shares.
81. Thus on July 30, 2007, YAGI was the beneficial owner of 7.1% of the total issued and outstanding shares of Cobalis.
82. This plain breach of the Securities Purchase Agreement damaged Cobalis in an amount presently unknown but to be proven at trial.
WHEREFORE, Plaintiff demands: (i) judgment against Defendants, YAGI and Cornell, jointly and severally, for damages sustained by Cobalis as a result of their breach of contract; (ii) an Order excusing Cobalis from redeeming the Debentures and excusing all of its obligations under the Transaction Documents, and leaving the parties as this Court finds them; (iii) an Order disallowing YAGI’s proof of claim by reason of YAGI’s fraud and prior breach of contract; (iv) a permanent injunction enjoining YAGI from enforcing its UCC filing against Cobalis; (v) an accounting by YAGI of everything that has occurred regarding the sale of the stock and repayment of the debt pursuant to the Transaction Documents; (vi) the award of costs; and, (vii) such further relief as the Court deems just and proper.
Count IV
AGAINST YAGI AND CORNELL
SECURITIES FRAUD for VIOLATION OF SEC Rule 10-b-5
83. Cobalis incorporates by reference the allegations contained in paragraphs 1 through 55. of this Complaint as if fully set forth herein
84. A private damages cause of action lies against the buyer of a security under SEC Rule 10b-5, codified at 17 C.F.R. § 240.10b-5.
85. YAGI bought Debentures from Cobalis on December 20, 2006, and thereafter under the terms of the Transaction Documents.
86. YAGI converted a portion of the dollar value of the Debentures into registered and free-trading shares of Cobalis in 2007 and 2008.
87. Upon information and belief, YAGI intentionally did not inform Cobalis that if YAGI purchased the Debentures, that YAGI intended to short sell Cobalis’ stock both before and after YAGI received registered the free-trading shares of Cobalis under the terms of the Debentures.
88. In December 2006, before the Transaction Documents were executed, David Andreeson (“Andreeson”), and Engler, an authorized representative of YAGI, stated to Radovich that it was not the intention of YAGI to short sell shares of Cobalis.
89. The representation was repeated during a three hour dinner at a restaurant known as the Argyle-Four Seasons Aviara, located at 7447 Batiquitos Drive Carlsbad, CA 92011.
90. Attending the dinner in Carlsbad were Gerald Yakatan, Brian Connelly, Radul Radovich, Radovich, Ernest Armstrong, Craig Engler and Andreeson.
91. After receiving the Transaction Documents prepared by YAGI, but before signing same, separately and in addition to inquiries made during the said meeting , Cobalis through its President, Radovich, directly asked Engler, Angelo and Gonzalez whether YAGI would sell shares of Cobalis short.
92. Angelo also reassured Radovich in late December 2006 before the Transaction Documents were executed, that Cornell or YAGI would not sell large blocks of Cobalis’ shares into the market.
93. During early December 2006, Angelo specifically stated that Cornell and/or YAGI would not short Cobalis’ stock and Cornell desired a long-term relationship with Cobalis.
94. Radovich was informed by Engler, Gonzalez and Angelo, that YAGI or Cornell had never engaged in short sales with any of the other entities with which it had entered into a PIPE agreement.
95. In each of the above instances, Radovich was told by Engler that in no event would YAGI ever sell Cobalis stock short if Cobalis delivered its Debentures to YAGI.
96. If YAGI’s authorized representatives had not stated, on or before December 20, 2006 and prior to the end of the rescission period, that it would not short the stock of Cobalis after entering into the Transaction Documents, Cobalis would not have executed the Transaction Documents.
97. YA and YAGI had an affirmative obligation to inform Cobalis about the risk that YAGI would sell shares of Cobalis short as this was an essential and material fact, which if known to Cobalis, would dispositively have ended all negotiations.
98. It was essential to Cobalis’ decision to have the material information about the likelihood of short selling and the anticipated magnitude of the said short selling in terms of the ability of Cobalis to sell additional shares to repay the Debentures and otherwise fund its operations.
99. YA and YAGI had affirmative obligations to disclose this risk to Cobalis, but failed to do so.
100. On February 23, 2007, the Radovichs owned 11 million shares and the share price of Cobalis on that date was $1.10.
101. On August 22, 2007, after YAGI, upon information and belief, had sold short over five million shares, the share price was $0.06. Thus the decline in the total value of the Radovichs’ shares was approximately $11,440,000, which equals a 95% decline.
102. YAGI and Cornell’s misconduct constitutes violations of SEC Rule 10-b(5) by engaging in acts, practices or courses of business which operated or would operate as a fraud or deceit.
103. By reason of their actions alleged herein, said Defendants each violated § 10-b of the Exchange Act of 1934 [15 U.S.C.§ 78j(b) and Rule 10b-5 thereunder [C.F.R. § 240.10b-5]]
WHEREFORE, Plaintiff demands: (i) judgment against Defendants YAGI and Cornell jointly and severally, for damages sustained as a result of violation of Rule 10b-5 of the Securities and Exchange Act of 1934; (ii) an Order excusing Cobalis from redeeming the Debentures and excusing all of its obligations under the Transaction Documents; (iii) an Order disallowing YAGI’s proof of claim by reason of YAGI’s fraud and prior violation of 10-b-(5); (iv) a permanent injunction against YAGI from enforcing its UCC-1 filing against Cobalis; (v) an Order for rescission of the Transaction Documents; (vi) an accounting by YAGI of everything that has occurred regarding the sale of the stock and repayment of the debt pursuant to the Transaction documents; (vii) the disgorgement of all of the proceeds of subject short sales; (vii) the award of costs; and, (viii) such other and further relief as the Court deems just and proper. Cobalis also seeks a bench trial to prove compensatory and punitive damages.
Count V
AGAINST YA
EQUITABLE FRAUD AND BREACH OF FIDUCIARY OBLIGATIONS
104. Cobalis incorporates by reference the allegations contained in paragraphs 1. through 55. of this Complaint as if fully set forth herein.
105. YA in 2006 provided consulting services to Cobalis to obtain debt and equity financing on the best possible terms for Cobalis.
106. Cobalis paid YA, in late 2006 and early 2007, $415,000 for its advisory services to Cobalis for, inter alia, the preparation and execution of the Transaction Documents.
107. The relationship of YA to Cobalis was that of fiduciary to principal.
108. Radovich was told by YA’s authorized representatives Angelo, Engler and Gonzalez that YAGI/Cornell would not short sell or otherwise sell Cobalis shares during the term of the Debenture which ended in December 2008.
109. Radovich was also told by Angelo, Engler and Gonzalez on behalf of YA that YAGI/Cornell had never sold short any of the shares of entities with which it had entered into PIPE responsibilities owed to Cobalis, Cobalis would not have executed the Transaction Documents.
WHEREFORE, Cobalis therefore seeks the disgorgement of the $415,000 that it paid to YA plus prejudgment interest thereon at the statutory rate in New Jersey which is 8% per annum, plus an award of its costs.
PRAYER FOR RELIEF
WHEREFORE, Cobalis prays for judgment on its Verified Complaint against YAGI as follows:
On the First to Fifth Counts, relief as set forth supra.
On All Counts:
1. For costs of suit herein incurred; and
2. For such other and further relief as the Court deems just and proper.
Santa Ana, California
Dated: November 11, 2009
Levey, Filler, Rodriguez, Kelso & DeBianchi, LLP
By:
David Filler, Esq. (Pending Application Pro Haec Vice)
Proposed Special Litigation Counsel
COBALIS CORP. a Nevada corporation
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