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Idt Corporation v. Eglobe

March 21, 2001

IDT CORPORATION, PLAINTIFF,
v.
EGLOBE INC., CHRISTOPHER VIZAS AND DONALD H. SLEDGE, DEFENDANTS.



The opinion of the court was delivered by: Henry H. Kennedy, Jr. United States District Judge

MEMORANDUM OPINION

Plaintiff, IDT Corporation ("IDT") brings this action against defendants, eGlobe Inc., Christopher Vizas, and Donald Sledge (collectively "eGlobe"), alleging violations of federal securities laws as well as several state law claims. This dispute arises out of a warrant agreement, pursuant to which IDT obtained the right to purchase 500,000 shares of eGlobe common stock. IDT exercised this warrant, but eGlobe subsequently refused to remove a restrictive legend that appeared on the stock certificate and did not register the shares for resale. As a result IDT was unable to sell these shares on the open market. Despite requests that eGlobe register the shares for resale and take steps to remove the restrictive legend, such action was not taken, and IDT remained unable to sell the shares.

IDT subsequently filed this action alleging five state law claims and two federal claims, (1) securities fraud under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5, and (2) control person liability under Section 20(a) of the Securities Exchange Act of 1934, 5 U.S.C. § 78t. Two motions are currently pending. First, pursuant to Federal Rule of Civil Procedure 12(c), IDT moved for judgment on the pleadings with respect to Count III, breach of the warrant. Second, eGlobe moved to dismiss the federal claims under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim, and then to dismiss the remaining claims for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1). Upon consideration of the motions, the opposition thereto, and the record of the case, the court concludes that eGlobe's Rule 12(b)(6) motion to dismiss the federal claims should be granted and that eGlobe's Rule 12(b)(1) motion to dismiss the pendant claims should therefore be granted.

I. BACKGROUND

In February 1998, IDT and Executive Telecard, Ltd. ("EXTEL"), entered into an agreement in which IDT agreed to lend EXTEL $7,500,000. As partial consideration for this loan EXTEL gave IDT a Note (the "Note") in the loan amount and a warrant entitling IDT to purchase up to 500,000 shares of EXTEL's common stock (the "Warrant"). At about this same time IDT and EXTEL entered into a separate agreement, pursuant to which IDT provided carrier telephone service to EXTEL (the "Services Agreement"). In 1999 EXTEL changed its name to eGlobe.

The Warrant provided that stock certificates issued pursuant to the Warrant "shall be appropriately legended to the extent required by federal or state securities laws." Compl. at Ex. 3, ¶ 3.

The Warrant further provided that,

Upon a written request from Holder following exercise of this warrant in whole or in part, EXTEL shall take all reasonable steps necessary to file, as promptly as practicable and in any event within 30 days following EXTEL's receipt of such notice, a registration statement on Form S-3 under the Securities Act . . . to register for resale the shares of EXTEL Common Stock issued upon exercise of this Warrant. EXTEL shall take all reasonable steps necessary to cause such registration statement to become effective as promptly as practicable, and shall maintain the effectiveness of such registration statement. Id. ¶ 9.

In a letter dated January 11, 2000, IDT informed eGlobe that,

IDT hereby elects to exercise the Warrant in its entirety. . . . Furthermore, following the exercise of the Warrant, and in accordance with Section 9.9 of the Warrant, IDT hereby requests that eGlobe take all reasonable steps necessary to file a registration statement on Form S-3 under the Securities Act of 1933, as amended, to register for resale the shares of Common Stock issued upon exercise of the Warrant. Compl. at Ex. 4.

On January 14, 2000, eGlobe issued IDT a stock certificate representing IDT's ownership of 500,000 shares of eGlobe common stock. The stock certificate contained a restrictive legend stating that "[t]he shares represented by this certificate have not been registered under the Securities Act of 1933 . . . and may not be sold, transferred or assigned in the absence of an effective registration statement for these shares under the Securities Act of 1933 or an opinion of the Company's counsel that registration is not required under said Act." Compl. ¶ 14. On February 7, 2000, IDT requested that eGlobe's legal counsel issue a legal opinion instructing eGlobe's transfer agent to remove the restrictive legend by February 23, 2000, so that the shares would be freely transferable. IDT alleges that in a contemporaneous telephone conversation eGlobe's counsel agreed to this request, and assured IDT's general counsel that the requested legal opinion would be issued. However, this did not happen. eGlobe admits that during February 2000, the shares were not registered and eGlobe did not instruct the transfer agent to remove the legend. Answer ¶ 16, 18.

During this period in which the shares were not registered for resale and the restrictive legend was not removed, IDT alleges that various officers, directors, and major shareholders of eGlobe, sold significant amounts of eGlobe common stock for their own personal benefit. IDT further alleges that defendant Christopher Vargas, President, CEO, and a director of eGlobe, and defendant Donald Sledge, a director of eGlobe, caused eGlobe to prevent IDT from selling the shares it obtained when it exercised the Warrant. By preventing IDT from selling its shares, these defendants benefitted personally by concurrently selling their own shares throughout February 2000. IDT maintains that these actions constituted a fraudulent scheme within the meaning of Section 10(b) and Rule 10b-5.

As a result of its inability to sell the eGlobe common stock during February 2000, IDT asserts that it suffered damages of not less than $5,594,000. Furthermore, IDT also alleges that eGlobe has not paid $27,734 and $270,261 due under the Note and the Services Agreement respectively. In addition to these ...


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