Court Opinion

ID: 4417967
Source: CourtListenerOpinion
Date Created: 2019-07-18 16:02:59.681889+00
Date Added: 2024-06-11T14:23:24.837419
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

KENNETH E. CLARK,                           )
                                            )
       Plaintiff,                           )
                                            )
       v.                                   )      C.A. No. 2017-0839-JTL
                                            )
CHESTER C. DAVENPORT, CECE                  )
DAVENPORT BERKOWITZ, COREY                  )
DAVENPORT, ROBERT L. REISLEY,               )
JONATHAN FOTOS, GEORGETOWN                  )
BASHO INVESTORS, LLC, and ADAM J.           )
WRAY,                                       )
                                            )
       Defendants.                          )

                           MEMORANDUM OPINION

                            Date Submitted: May 2, 2019
                            Date Decided: July 18, 2019

Robert A. Penza, Christina M. Belitz, POLSINELLI PC, Wilmington, Delaware; Attorneys
for Plaintiff Kenneth E. Clark.

Andrew D. Cordo, F. Troupe Mickler IV, Hayley M. Lenahan, ASHBY & GEDDES, P.A.,
Wilmington, Delaware; Attorneys for Defendant Adam J. Wray.

David A. Felice, BAILEY & GLASSER, LLP, Wilmington, Delaware; Attorneys for
Defendant Corey Davenport.

LASTER, V.C.
       The plaintiff sued seven defendants for inducing him to make three investments in

a failed enterprise. Three of the defendants defaulted. Two settled. The remaining two

moved to dismiss the complaint pursuant to Rule 12(b)(6) for failing to state a claim on

which relief can be granted. One of the two remaining defendants moved for dismissal

pursuant to Rule 12(b)(2), contending that this court lacks personal jurisdiction over him.

The Rule 12(b)(6) motions are granted in part. The Rule 12(b)(2) motion is denied.

                          I.      FACTUAL BACKGROUND

       The facts are drawn from the amended complaint and the documents it incorporates

by reference. At this stage of the proceeding, the complaint’s allegations are assumed to be

true, and the plaintiff receives the benefit of all reasonable inferences.

A.     Basho And Georgetown

       Founded in 2008, Basho Technologies, Inc. (“Basho” or the “Company”) was a

privately held Delaware corporation. Basho specialized in distributed-systems database

software, which enables large companies to store and manage massive amounts of data

using cloud-based applications. By late 2013, many large businesses, including over one

third of the Fortune 50, were using Basho’s software. According to industry analysts,

Basho fell within a small cluster of companies best positioned to exploit this rapidly

expanding market segment.

       Along the way, Basho attracted the interest of defendant Chester Davenport, a

wealthy and successful attorney. The defendants in this case include two other members of

the Davenport family: Corey Davenport, Chester’s son, and CeCe Davenport Berkowitz,

Chester’s daughter. For clarity, this decision refers to the Davenports by their first names.
          Chester controlled non-party Georgetown Partners LLC and used it to make private-

equity-style investments. Both Corey and CeCe are employees of Georgetown.

          In February 2011, Georgetown invested in Basho through defendant Georgetown

Basho Investors, LLC, a special purpose vehicle that Chester also controlled. For

simplicity, this decision does not distinguish between Georgetown and the special purpose

vehicle.

          Georgetown purchased shares of Basho’s Series D preferred stock and obtained the

right to designate a member of Basho’s board of directors (the “Board”). Georgetown

designated Chester. In June 2012, Georgetown purchased shares of Basho’s Series F

preferred stock and received the right to designate a second member of the Board.

Georgetown designated defendant Robert Reisley, an associate and confidante of Chester’s

who was a member and officer of Georgetown.

          The Series F preferred stock carried blocking rights that prevented Basho from

raising equity capital without the consent of holders of a majority of the Series F shares.

As the holder of a majority of the Series F shares, Georgetown controlled the blocking

rights.

B.        Chester Takes Control.

          Chester wanted to force a near-term sale of Basho. He anticipated that Basho would

soon need additional capital. He planned to use Georgetown’s blocking rights to foreclose

third-party financing options, thereby forcing Basho into a cash crisis. Basho eventually

would turn to Georgetown, and Chester would insist on full control as the price for keeping

Basho afloat. Once in control, Chester would achieve a near-term sale.

                                              2
       Consistent with this plan, Georgetown blocked Basho from pursuing attractive

financing proposals from third parties. After failing to raise capital from other sources,

Basho turned to Georgetown. Rather than investing equity, Georgetown provided Basho

with a secured loan that authorized monthly draws of up to $1.5 million and a maximum

credit limit of $7.5 million.

       The loan was only a short-term financing solution, and Basho’s management team

expected to need more funding by the end of 2013. During 2013, Basho attempted to raise

equity from outside investors, but Georgetown interfered with the process. Basho’s CEO

resigned in frustration.

       Having cut off Basho’s other financing options and with the loan coming due,

Georgetown presented Basho with an offer to lead a Series G round that would raise a total

of $25 million. Georgetown would fund $10 million, but only $2.5 million would be new

money. The remaining $7.5 million would come from converting amounts due under the

secured loan. Georgetown had not yet lined up any other investors to participate in the

round. Georgetown wanted to close its part of the deal, then go into the market to find

investors.

       The terms of the Series G round were onerous. Among other things, the shares gave

Georgetown control over 65% of Basho’s voting power. Georgetown also would receive

the right to designate four of seven directors. But without other options, Basho accepted.

       The initial closing took place on January 23, 2014 (the “Series G Financing”).

Immediately after closing, Georgetown added defendant Jonathan Fotos to the Board. He

was a Georgetown employee and beholden to Chester. The Georgetown designees—

                                             3
Chester, Reisley, and Fotos—then led the Board through a series of resolutions that the

non-Georgetown directors had never seen before, much less discussed. One resolution

appointed Chester as Executive Chairman. Another established an Executive Committee

with the power to exercise all of the Board’s authority. Its members were Chester, Reisley,

and whoever became Basho’s CEO. The Board approved all of the resolutions.

       Effective March 10, 2014, Chester and Reisley hired defendant Adam Wray to serve

as Basho’s CEO. Wray also became a director and member of the Executive Committee.

Although Wray had experience working at technology firms, including as a CEO, he was

underqualified to lead Basho. Chester and Reisley nevertheless provided Wray with a

lavish compensation package that was out of step with market terms.

       After hiring Wray, the Executive Committee continued to manage Basho. The

Board did not convene a formal meeting for months. During this period, numerous key

personnel left the Company.

C.     Insider Transactions With Chester’s Affiliates

       Basho continued to need money. Davenport and his Georgetown colleagues thought

they would be able to find investors to fill out the remaining $15 million for the Series G

Financing, but they had little success. The punitive terms of the Series G Financing sparked

concern, and every investor who had previously shown interest in Basho declined to

participate. By mid-March 2014, Georgetown had managed to raise only $67,500 from

other investors.

                                             4
       To keep Basho going, Georgetown exercised warrants it had received in the Series

G Financing and paid $1.8 million for additional Series G shares. The date for exercising

the warrants had passed, but the Executive Committee extended it for Georgetown.

       Chester next paid an individual in China to refer investors to Basho. Those efforts

led to additional purchases of Series G shares totaling $2.5 million.

       Georgetown next engaged two investment banks to place the Series G shares. They

failed to generate any interest.

       After that, Chester resorted to funding Basho with insider loans. In April 2014, the

Executive Committee approved a $650,000 loan from Georgetown. In June, the Executive

Committee approved a loan of $1.5 million from Newport Beach Investors, LLC

(“Newport”), another entity that Chester controlled. In August, the Executive Committee

approved a second loan from Newport, this time in the amount of $250,000. In September,

the Executive Committee approved a third loan from Newport, this time in the amount of

$400,000.

       Basho’s difficulties in raising capital signaled to its business partners that it was

distressed. As a result, Basho lost significant strategic relationships, including with

companies such as Cluster Technologies, NEC, Xyratex Ltd., Seagate Technology LLC,

EMC Corporation, and Akamai Technologies, Inc.

D.     Clark’s October 2014 Investment

       In October 2014, Chester telephoned plaintiff Kenneth Clark about investing in

Basho. Clark was the founder and chairman of First Guaranty Mortgage Company, a

residential mortgage lender licensed in forty-four states. Clark had met Chester in 1988

                                             5
when First Guaranty merged with a savings and loan association that Chester partly owned.

Clark and Chester stayed in contact over the years, and Clark considered Chester a friend.

       For his part, Chester knew that Clark was in the process of selling First Guaranty to

a private equity firm, which meant Clark would have cash to deploy. Chester also knew

that Clark was not a professional investor and did not have any particular knowledge about

Basho or its industry.

       During a call with Clark on October 2, 2014, Chester spoke positively about Basho.

After the call, he sent Clark an email that attached an “Executive Summary.” The email

contained positive statements about Basho, the state of its business, and the market in

which it operated. The email did not mention other highly material facts about the

difficulties that Basho had encountered and the ongoing problems it faced.

       For example, Chester told Clark, “We have not raised capital from the [sic] Venture

Capital. Most of the capital has been raised By [sic] the insiders in the Company.” Although

technically true, Chester failed to mention that Basho had tried to raise money from venture

capital funds and failed miserably, or that the money raised from insiders included

repeated, emergency cash injections from Chester and his affiliates. By omitting the

negative information, Chester implied that Basho had not yet sought venture capital due to

the high level of participation by Basho’s insiders and their confidence in Basho.

       Chester also told Clark that as a result of the Series G Financing, Georgetown

“became the controlling shareholder of the Company and has 5 of the 7 board seats.”

Chester conveyed this message as part of his pitch that there was “a new sheriff in town”

who would take Basho to the next level. Chester’s statement was deceptive because

                                             6
Georgetown had been exercising control over Basho since before the Series G Financing,

which would have undermined the “new sheriff in town” narrative.

       Chester also represented in his October email: “We only have $8M of the G shares

that remain to be sold. We are offering those shares first to family and friends of GTP’s

Limited Partners.” This was deceptive. Georgetown was not offering the Series G shares

first to friends and family. Chester contacted Clark only after exhausting his other options.

       Chester even represented to Clark that Basho had “engaged Benchmark, a New

York investment banking firm to sell $50M-$60M of new securities valuing Basho closer

to the Values being given our competitors” and that he expected “the value of Basho will

be set in a range of $500M to $600M.” Benchmark never set a value for Basho in this

range. Given Basho’s condition at the time, Chester could not have reasonably expected

that Basho would receive that valuation.

       The complaint details other positive statements in Chester’s email that were

similarly misleading. In each case, Chester omitted closely related and highly material

negative information that was necessary to put the positive statement in context.

       The Executive Summary also contained false and misleading disclosures about

Wray. For example, it stated that “Wray is a cloud enterprise technology entrepreneur and

executive with more than 20 years of experience,” but cloud technologies did not become

a market segment until approximately 2009, and Wray had never been a cloud enterprise

technology “entrepreneur.”

       Wray’s bio also claimed that he had

                                             7
      led a variety of companies at different stages, holding positions of CEO,
      president, GM and product management. Most recently, Wray served as the
      CEO and president of Tier 3, where he led the company through nearly $20
      million in funding from venture capitalists and grew the company from a
      startup to an eight figure annual run-rate ($10M+) before selling the company
      to CenturyLink for several hundred million dollars.

Elsewhere, the Executive Summary represented that Wray and Basho CTO Dave McCrory

had “led VC-backed companies to successful M&A exits.” These statements were false.

Wray did not sell Tier 3 to CenturyLink. In fact, Wray admitted under oath in another

proceeding that Tier 3 replaced him as CEO in October 2012 and that his successor

accomplished the sale over a year later. Wray had not led any VC-backed companies to a

successful M&A exit.

      The complaint alleges that after speaking with Clark and sending this email,

“Chester put Clark in contact with Wray.” The complaint pleads a series of negative facts

that Clark was not told. It then alleges that “Wray did not provide Clark with any of this

material Basho history. On the contrary, Wray corroborated everything Chester had said,

and reinforced the message that Basho was postured for imminent success.”

      Based on his communications with Chester and Wray, Clark decided to invest. In

making his decision, Clark took into account his years of friendship with Chester and the

fact that Chester had always seemed to act honestly. He trusted Chester and believed that

he was receiving an inside view of Basho from the people who controlled it. Precisely

because Chester controlled Basho, Clark thought Basho was an ideal opportunity for a

passive investment, enabling him to focus on the sale of his mortgage-lending business.

                                            8
       On October 28, 2014, Clark invested $2 million in Basho in return for Series G

shares (the “October 2014 Investment”). Clark documented the investment by executing a

signature page to Basho’s Series G Senior Participating Preferred Stock Purchase

Agreement.

E.     Clark’s December 2014 Investment

       In December 2014, Chester again approached Clark and urged him to make an

additional investment in Basho. Wray also communicated with Clark about the investment.

Together, they claimed that (i) at least three investment funds were clamoring to fill out

the Series G round but that Chester was stalling them to facilitate investments by friends

like Clark, (ii) other investors in New York were considering the shares but Chester wanted

Clark to buy them, (iii) an aggressive ramp-up of Basho’s booking was expected for 2015,

(iv) Basho was close to claiming the dominant position in its market by the end of 2015,

and (v) Basho was on the verge of an enormously beneficial strategic partnership with

IBM.

       During these discussions, Wray represented to Clark that Basho expected to achieve

$32 million in bookings for 2015. Wray also represented that Basho was uniquely

positioned to achieve a strategic partnership with IBM because IBM owned The Weather

Company, an existing Basho client. According to Wray, Basho expected to announce its

strategic partnership with IBM on February 22, 2015, at the IBM Interconnect Conference.

       Neither Chester nor Wray identified any of the serious problems that Basho faced.

They did not disclose any of the negative information that they had failed to disclose in

connection with the October 2014 Investment, nor did they disclose additional problematic

                                            9
events that had taken place in the interim. Most notably, they never disclosed that an

outside director and co-founder of Basho (Earl Galleher) had filed a complaint seeking

books and records based on detailed allegations of serious fiduciary misconduct by Chester

and Georgetown.

      In reliance on Chester and Wray’s sanitized representations, Clark invested another

$500,000 in Basho. In exchange, he received additional Series G shares (the “December

2014 Investment”).

F.    Clark’s March 2016 Investment

      Fifteen months passed between the December 2014 Investment and Clark’s next

investment. During the intervening period, Basho completed the Series G round. The final

investment came from the Business Development Corporation of America (“BDCA”),

which invested $2 million of equity and loaned Basho $10 million in March 2015. But even

after the BDCA investment, Basho’s financial condition continued to deteriorate. In June

2015, the outside director and co-founder who had filed the books-and-records action

(Galleher) circulated a detailed memorandum expressing serious concerns about Basho and

requesting immediate Board action. In October 2015, Galleher circulated another detailed

memorandum raising additional concerns.

      During this period, Clark did not receive any meaningful information about Basho’s

situation. His principal contacts were Chester and Wray, but they did not disclose the

hardships Basho was facing, nor did they tell him about Galleher’s claims. For his part,

Clark did not pay significant attention to Basho, both because he trusted Chester, and

                                           10
because he was still focused on selling his mortgage business. That transaction closed in

October 2015.

       From time to time, Clark did check in with Chester and Wray. For example, on

February 17, 2016, Clark contacted Wray for an update. During their efforts to schedule a

call, Wray cited a conflict because of meeting with Raytheon regarding a “large gov pursuit

we’ve been chosen for.” Clark responded that Raytheon sounded like “huge upside

potential” and asked if “[e]verything [was] going well?” Wray wrote back:

       Yes, everything’s going great. The position we’ve staked out in IoT and Time
       Series is really starting to take hold w/ IBM, Cisco and others, including
       Akamai, Juniper and Wind River.

       On the Raytheon pursuit, it will be huge. We’ve been chosen by their
       Solipsys division to be the standard going forward for their DB over Oracle.
       That means we’re being baked into over 20 massive gov pursuits that they
       have w/ countries from US to Quatar [sic], plus becoming foundational to
       review existing clients for change out in next cycle. We should see some
       rather large upside this yr out of Raytheon, and growth to only continue from
       there (side note, their interest and review of our technology brought
       Lockheed Martin to the table to us as well, as they did a 6mo extensive review
       of the market and choose [sic] our distributed tech over everyone else).

       Exciting times for sure.

Wray did not mention that Basho was again desperate for capital. Nor did he mention

Galleher’s concerns.

       Instead, Chester and Wray approached Clark to participate in Basho’s Series H

round. After further discussions, Clark agreed to invest a total of $6 million with Chester

through a newly formed, special purpose vehicle named KEC Capital, LLC (“KECC”).

The joint investment reinforced Clark’s confidence in Basho, because he and Chester were

investing the additional funds together.

                                            11
       KECC committed to make the $6 million investment based on a letter of intent sent

to Basho on February 11, 2016 (the “Series H Letter of Intent”). It stated:

       We are interested in investing in Bash at a fully diluted total enterprise value
       of $45 million, which represents approximately 3x 2015 revenue of $14.97
       million. We expect that KECC will invest at least $6.0 million of primary
       capital onto the balance sheet (inclusive of the conversion of $1.0 of certain
       outstanding indebtedness), and would have the right to invest an additional
       $4.0 million on the same terms within 60 days after the initial closing. This
       valuation is based upon information that has been provided to us to date,
       including among other things, historical financial results, and projections that
       indicate that Basho has a path to achieving sustained cash flow positive
       results within 12 months of the close of this transaction.

Wray countersigned on behalf of Basho.

       The complaint alleges that the reference to “information that has been provided to

us to date” included analyses prepared collectively by Reisley, Fotos, and Corey. Based on

Fotos’s testimony in another proceeding, the complaint alleges that at the time Wray

countersigned the Series H Letter of Intent, Basho was “a company in collapse—a

complete failure.” The complaint alleges that the defendants, including Wray and Corey,

could not have believed that “Basho ha[d] a path to achieving sustained cash flow positive

results within 12 months of the close of” the Series H transaction.

       The Series H Letter of Intent contemplated KECC conducting due diligence before

closing. The record at this stage does not provide insight into what, if any, due diligence

KECC conducted.

       On March 15, 2015, the Series H round closed. KECC was credited with an

investment of $6 million, comprising $5 million in cash plus $1 million of loan forgiveness

from Georgetown (the “Series H Investment”). KECC borrowed the $5 million in cash

                                             12
from a third-party lender. Clark and Chester provided personal guarantees for the debt,

making them each jointly and severally liable for the full amount.

       Completing the Series H transaction required filing a restated certificate of

incorporation with the Secretary of State of Delaware that authorized the Series H preferred

stock. After the Series H transaction closed, Clark joined the Board.

G.     Basho’s Demise

       In July 2016, Clark learned from a Board presentation that Basho’s cash-burn rate

was alarmingly high, that its bookings were lagging, and that Basho needed cash

desperately. Having just made the Series H Investment based on projections which showed

that Basho would be cash-flow positive in twelve months without the need for any

additional cash, Clark demanded an explanation. Chester told Clark to “ask Adam.”

       In August 2016, Clark learned from Basho’s CFO that Chester had been advancing

funds to meet Basho’s working capital needs, that a further advance was needed to make

payroll, and that Basho had obtained an emergency loan of $900,000 from BDCA. Soon

afterwards, Clark learned that Basho was in default under the terms of its loan with BDCA

and had been discussing bankruptcy as an option.

       In September 2016, Clark learned that Basho was seeking another emergency loan

from BDCA to cover its cash needs for 60–90 days while it sought to sell the business.

BDCA extended the loan, but no buyer was found. In November, BDCA issued a formal

notice of default.

                                            13
       In December 2016, Wray reported to Basho’s directors that BDCA had

recommended that Basho file for bankruptcy. He also told the directors that BDCA thought

Clark was the only likely source of funds to enable Basho to make payroll.

       Faced with the loss of his entire investment, Clark loaned Basho $500,000 so it

could explore an emergency sale (the “December 2016 Loan”). To facilitate a sale, Clark

obtained the right to vote Georgetown’s shares and took over from Chester as Executive

Chairman. After no transaction materialized, Clark surrendered his right to vote

Georgetown’s shares and resigned as Executive Chairman.

       In July 2017, BDCA obtained an order from a court in the State of Washington that

placed Basho into receivership. Basho had ceased to be a going concern, and its equity was

worthless. As part of the liquidation, the receiver sold any claims that Basho might have

possessed against the defendants to entities affiliated with Galleher.

H.     Clark Brings This Litigation.

       Clark filed this action on November 21, 2017. Believing that Chester had defrauded

him with the assistance of other individuals who worked for Chester at Georgetown and

Basho, Clark sued Chester, Corey, CeCe, Reisley, Fotos, and Wray. He also sued

Georgetown.

       In Count I of the complaint, Clark asserted claims for breach of fiduciary duty

against Georgetown, Chester, Reisley, Fotos, and Wray in connection with the December

2014 Investment and the Series H Investment. When each challenged transaction took

place, Chester, Reisley, Fotos, and Wray were directors of Basho, Wray was its senior-

most officer, and Georgetown was its controlling stockholder.

                                             14
       In Count II of the complaint, Clark asserted claims for common law fraud against

Georgetown, Chester, Reisley, Fotos, Wray, CeCe, and Corey. He contended that the

defendants defrauded him in connection with the October 2014 Investment, the December

2014 Investment, and the Series H Investment.

       In Count III of the complaint, Clark asserted claims for negligent misrepresentation

against Georgetown, Chester, Reisley, Fotos, Wray, CeCe, and Corey. He contended that

the defendants misled him in connection with the October 2014 Investment, the December

2014 Investment, and the Series H Investment.

       In Count IV of the complaint, Clark asserted claims for aiding and abetting against

Reisley, Fotos, Wray, CeCe, and Corey. He contended that they knowingly participated in

the underlying torts asserted in Counts I, II, and III and, if not primarily liable, should be

secondarily liable.

       Clark’s complaint thus focused on the October 2014 Investment, the December

2014 Investment, and the Series H Investment. The complaint referenced the December

2016 Loan in each of the counts, but Clark clarified that he only included that transaction

as a source of additional damages, not as an independent instance of wrongdoing.

       Chester, CeCe, and Georgetown failed to respond to the complaint. Default

judgments were entered against them. Clark reached settlements with Fotos and Reisley,

and the claims against them were dismissed.

I.     The Motions To Dismiss

       The two remaining defendants—Wray and Corey—moved to dismiss the complaint.

Both contended that the complaint fails to state a claim on which relief can be granted.

                                             15
Corey additionally contended that this court cannot exercise jurisdiction over his person

for purposes of the claims asserted in the complaint.

       Ordinarily, a court must address issues of personal jurisdiction before considering

claims on their merits. In this case, however, Clark asserts that jurisdiction over Corey

exists under the conspiracy theory of jurisdiction. Evaluating this theory requires assessing

whether the complaint sufficiently pleads that Corey conspired to engage in tortious

activity that had a sufficient connection to the State of Delaware to support jurisdiction

over his person. It therefore makes sense to evaluate the claims first, because the viability

of the claims is an input in the jurisdictional analysis.

                         II.      THE RULE 12(b)(6) MOTION

       Wray and Corey have moved to dismiss the complaint pursuant to Rule 12(b)(6).

When considering this type of motion, the court (i) accepts as true all well-pleaded factual

allegations in the complaint, (ii) credits vague allegations if they give the opposing party

notice of the claim, and (iii) draws all reasonable inferences in favor of the plaintiff. Savor,

Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002). When applying this standard,

“dismissal is inappropriate unless the plaintiff would not be entitled to recover under any

reasonably conceivable set of circumstances susceptible of proof.” Id. at 897 (internal

quotation marks omitted).

A.     Count I: Breach Of Fiduciary Duty

       In Count I of the complaint, Clark asserted claims for breach of fiduciary duty in

connection with the December 2014 Investment and the Series H Investment. He did not

advance this theory as to the October 2014 Investment, because until that investment

                                              16
closed, he was not yet a stockholder and was not yet owed fiduciary duties. Wray is the

only remaining defendant for Count I.

       A claim for breach of fiduciary duty has only two formal elements: (i) the existence

of a fiduciary duty and (ii) a breach of that duty.1 For the first element, the complaint easily

clears the bar. When the events in question took place, Wray was a director and officer of

Basho and owed fiduciary duties to Basho and its stockholders in that capacity.

       The second element is more complicated. Clark has made clear that he is not

asserting claims for breach of fiduciary duty based on how Wray and his fellow fiduciaries

managed Basho. Instead, Count I asserts that the defendants breached their duties by failing

to disclose information to him when soliciting the December 2014 Investment and the

Series H Investment.

       Directors of a Delaware corporation owe two fiduciary duties: care and loyalty.

Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006). The “duty of disclosure is not an

independent duty, but derives from the duties of care and loyalty.” Pfeiffer v. Redstone,

965 A.2d 676, 684 (Del. 2009). The duty of disclosure arises because of “the application

in a specific context of the board’s fiduciary duties . . . .” Malpiede v. Townson, 780 A.2d
1075, 1086 (Del. 2001). Its scope and requirements depend on context; the duty “does not

exist in a vacuum.” Stroud v. Grace, 606 A.2d 75, 85 (Del. 1992). “When confronting a

       1
         See Beard Research, Inc. v. Kates, 8 A.3d 573, 601 (Del. Ch. 2010); accord Zrii,
LLC v. Wellness Acq. Gp., Inc., 2009 WL 2998169, at *11 (Del. Ch. Sept. 21, 2009) (citing
Heller v. Kiernan, 2002 WL 385545, at *3 (Del. Ch. Feb. 27, 2002)).

                                              17
disclosure claim, a court therefore must engage in a contextual[ly] specific analysis to

determine the source of the duty, its requirements, and any remedies for breach.” In re

Wayport, Inc. Litig., 76 A.3d 296, 314 (Del. Ch. 2013) (citing Lawrence A. Hamermesh,

Calling Off the Lynch Mob: The Corporate Director’s Fiduciary Disclosure Duty, 49

Vand. L. Rev. 1087, 1099 (1996)).

       Governing principles have been developed for commonly recurring scenarios, such

as when directors request stockholder action. A less common scenario involves a corporate

fiduciary who buys shares directly from or sells shares directly to a stockholder in a private

transaction. See Hamermesh, supra, at 1103. In this setting, the special facts doctrine

applies, and the fiduciary has a duty to disclose information to the stockholder counterparty

“only when a director is possessed of special knowledge of future plans or secret resources

and deliberately misleads a stockholder who is ignorant of them.” Lank v. Steiner, 224 A.2d
242, 244 (Del. 1966). If this standard is met, a duty to speak exists, and the director can be

held liable for failing to disclose material information. If this standard is not met, then the

director does not have a duty to speak and is liable only to the same degree as a non-

fiduciary would be. See Wayport, 76 A.3d at 315.

       It seems logical that once Clark had become a stockholder, then the private

transactions between Clark and Basho, which Chester and Wray facilitated, would

implicate the special facts doctrine. But neither side relied on this framework. In his

opening brief, Wray argued that the fiduciary-duty claim should be governed by the

framework announced in Malone v. Brincat, 722 A.2d 5 (Del. 1998). In his opposition,

Clark effectively agreed by articulating the governing principles as framed in Malone.

                                              18
       The Malone framework applies when a corporate fiduciary speaks outside of the

context of soliciting or recommending stockholder action, such as through “public

statements made to the market,” “statements informing shareholders about the affairs of

the corporation,” or public filings required by the federal securities laws. Malone, 722 A.2d

at 11. In that context, directors owe a duty to stockholders not to speak falsely:

               Whenever directors communicate publicly or directly with
               shareholders about the corporation’s affairs, with or without a
               request for shareholder action, directors have a fiduciary duty
               to shareholders to exercise due care, good faith and loyalty. It
               follows a fortiori that when directors communicate publicly or
               directly with shareholders about corporate matters the sine qua
               non of directors’ fiduciary duty to shareholders is honesty.

Id. at 10 (emphasis added). “[D]irectors who knowingly disseminate false information that

results in corporate injury or damage to an individual stockholder violate their fiduciary

duty, and may be held accountable in a manner appropriate to the circumstances.” Id. at 9

(emphasis added). “When the directors are not seeking shareholder action, but are

deliberately misinforming shareholders about the business of the corporation, either

directly or by a public statement, there is a violation of fiduciary duty.” Id. at 14 (emphasis

added). Breach “may result in a derivative claim on behalf of the corporation[,]” “a cause

of action for damages[,]” or “equitable relief . . . .” Id.

       This court has characterized the standard for evaluating a claim under Malone as

“similar to, but even more stringent than, the level of scienter required for common law

fraud.” Metro Commc’n Corp. BVI v. Advanced MobileComm Techs. Inc., 854 A.2d 121,

158 (Del. Ch. 2004). For a common law fraud claim, a plaintiff can show reckless

indifference, but Malone requires knowing misconduct. Id. at 158 n.88. Like common law

                                               19
fraud, a Malone claim requires “reasonable reliance.” Id. at 157–58. This court has

interpreted the Delaware Supreme Court as “set[ting] a high bar for Malone-type claims .

. . to ensure that our law was not discordant with federal standards and that our law did not

encourage a proliferation of disclosure claims outside the discretionary vote or tender

context by exposing directors to an additional host of disclosure claims . . . .” Id. at 158

(footnote omitted). Similar policy concerns do not exist for scenarios covered by the special

facts doctrine, where a fiduciary purchases or sells shares (or facilitates the purchase or

sale) in a direct transaction with a stockholder beneficiary. But to reiterate, Clark does not

view this as anything other than a Malone case, so that is the law that this decision applies.

       Other than contending that Malone provides the governing framework, Wray does

not make any arguments that are specifically directed at Count I. He is content to treat his

exposure under Malone as coextensive with his exposure for common law fraud, and he

saves his firepower for that count. Clark followed Wray’s lead by accepting the Malone

framework and not treating the claim for breach of fiduciary duty as subject to different

procedural or substantive rules.

       This decision accepts the parties’ framework for purposes of this case and treats the

claims for breach of fiduciary duty as rising or falling with the claims for common law

fraud in Count II. To the extent Count II states a claim based on either the December 2014

Investment or the Series H Investment, which are the only transactions challenged in Count

I, then Count I also states a claim as to those transactions.

                                              20
B.     Count II: Common Law Fraud

       In Count II of the complaint, Clark asserted claims for common law fraud based on

the October 2014 Investment, the December 2014 Investment, and the Series H Investment.

To plead a claim for fraud under Delaware law, a plaintiff must allege (i) a false statement,

generally of fact, (ii) the defendant’s knowledge or belief of its falsity or reckless

indifference to its truth, (iii) the defendant’s intention to induce action, (iv) reasonable

reliance, and (v) causally related damages. See Stephenson v. Capano Dev., Inc., 462 A.2d
1069, 1074 (Del. 1983).

       Particular aspects of a fraud claim must be pled “with particularity.” Ct. Ch. R. 9(b).

This means a plaintiff must allege “the circumstances of the fraud with detail sufficient to

apprise the defendant of the basis for the claim.” Abry P’rs V, L.P. v. F & W Acq. LLC, 891
A.2d 1032, 1050 (Del. Ch. 2006). The relevant circumstances are “the time, place, and

contents of the false representations; the facts misrepresented; the identity of the person(s)

making the misrepresentation; and what that person(s) gained from making the

misrepresentation.” Trenwick Am. Litig. Tr. v. Ernst & Young LLP, 906 A.2d 168, 207–08

(Del. Ch. 2006), aff’d sub nom. Trenwick Am. Litig. Tr. v. Billett, 2007 WL 2317768 (Del.

Apr. 14, 2007) (ORDER). A defendant’s state of mind, including the elements of

knowledge and intent, “may be averred generally.” Anglo Am. Sec. Fund, L.P. v. S.R. Glob.

Int’l Fund, L.P., 829 A.2d 143, 158 (Del. Ch. 2003). The same pleading standard applies

when a plaintiff attempts to plead a fraud claim based on material omissions. TransDigm

Inc. v. Alcoa Glob. Fasteners, Inc., 2013 WL 2326881, at *6 (Del. Ch. May 29, 2013).

                                             21
                The Anti-Reliance Argument

       As a threshold matter, Corey argues that Clark cannot assert any claims for fraud

because the agreements that governed his investments contained anti-reliance provisions.

They did not.

       “[M]urky integration clauses, or standard integration clauses without explicit anti-

reliance representations, will not relieve a party of its oral and extra-contractual

fraudulent representations.” Abry P’rs, 891 A.2d at 1059. For an anti-reliance defense to

succeed, the contract “must contain language that, when read together, can be said to add

up to a clear anti-reliance clause by which the plaintiff has contractually promised that it

did not rely upon statements outside the contract’s four corners in deciding to sign the

contract.” Kronenberg v. Katz, 872 A.2d 568, 593 (Del. Ch. 2004).

       Corey cites two contractual provisions. One recites that the representations and

warranties made in “Section 3” or “the Disclosure Schedule” will not be affected by any

investigation by the purchasers. This is not an anti-reliance provision that protects the

seller. It is a pro-sandbagging provision that protects the buyer. See Akorn, Inc. v. Fresenius

Kabi AG, 2018 WL 4719347, at *76–78 (Del. Ch.) (discussing sandbagging), aff’d, 2018
WL 6427137 (Del. Dec. 7, 2018) (ORDER).

       The other provision is a standard integration clause, which states that the agreement

“constitutes the entire agreement and understanding of the parties hereto with respect to

the subject matter hereof and supersedes all prior agreements and understandings relating

to such subject matter.” That is not an anti-reliance provision either. See Prairie Capital

III, L.P. v. Double E Hldg. Corp., 132 A.3d 35, 50 (Del. Ch. 2015).

                                              22
              Fraud In Connection With The October 2014 Investment

       The first transaction at issue in Count II is the October 2014 Investment. As to this

transaction, Count II fails to state a claim against Corey or Wray.

       The complaint contains detailed allegations about what Chester told Clark in

connection with the October 2014 Investment, both in a telephone call and in a subsequent

email. The complaint does not provide similar detail about any communications from

Corey or Wray.

       As to Corey, the complaint says nothing. It does not indicate that he communicated

with Clark in any way in connection with the October 2014 Investment.

       As to Wray, the complaint alleges only that “Chester put Clark in contact with

Wray.” After pleading a series of negative facts about Basho, the complaint alleges that

“Wray did not provide Clark with any of this material Basho history On the contrary, Wray

corroborated everything Chester had said, and reinforced the message that Basho was

postured for imminent success.” In a subsequent paragraph, the complaint alleges that

Wray understood that Clark was interested in making a passive investment and

“affirmatively reinforced the suitability of this approach.”

       In Metro Communication, this court held that a similarly framed allegation did not

satisfy the particularized pleading requirements of Rule 9(b). The plaintiff (Metro) alleged

that the managers of an LLC (Fidelity Brazil) had concealed the fact that representatives

of the LLC had paid bribes to government officials. The complaint alleged that after Metro

received a letter “regarding ‘activities of concern’ . . . that had been investigated, Metro

‘was assured by various representatives of [Fidelity Brazil], its members and managers that

                                             23
there was no cause for concern and that [Fidelity Brazil’s] business was continuing to

develop according to plans.’” 854 A.2d at 144 (alterations in original). This court held that

“[a]mong other deficiencies, this particular allegation does not even purport to identify any

specific statement by a specific defendant at a specific time.” Id. Although Clark’s

allegations at least name Wray, they are otherwise equally conclusory.

       The fraud claim against Corey and Wray based on the October 2014 Investment is

dismissed. Because this claim fails on the merits, this decision does not reach any of Corey

or Wray’s other grounds for dismissing this aspect of Count II.

              Fraud In Connection With The December 2014 Investment

       The second transaction at issue in Count II is the December 2014 Investment. As to

this transaction, the complaint fails to state a claim against Corey but does so against Wray.

       As to Corey, the complaint again says nothing. It does not indicate that he

communicated with Clark in any way in connection with the December 2014 Investment.

       As to Wray, the outcome is different. Wray made representations to Clark that fell

into three categories. The first consisted of factual claims about Basho’s fundraising

efforts. Wray told Clark that (i) at least three investment funds were clamoring to fill out

the Series G round but that Chester was stalling them to facilitate investments by friends

like Clark and (ii) other investors in New York were considering the shares but Chester

wanted Clark to buy them.

       The second category consisted of factual claims about Basho’s future prospects.

Wray told Clark that (i) an aggressive ramp-up of Basho’s booking was expected for 2015,

                                             24
(ii) Basho was close to claiming the dominant position in its market by the end of 2015,

and (iii) Basho expected to achieve $32 million in bookings for 2015.

       The third category concerned a strategic partnership with IBM. Wray represented

to Clark that Basho was on the verge of an enormously beneficial strategic partnership with

IBM. He explained that Basho was uniquely positioned to achieve a strategic partnership

with IBM because IBM owned The Weather Company, an existing Basho client. He also

reported that Basho expected to announce its strategic partnership with IBM on February

22, 2015, at the IBM Interconnect Conference.

       Wray argues that these statements were non-actionable opinions about future events.

The statements about the fundraising process and the IBM partnership, however, were not

about the future. These representations described the current state of Basho’s relationships

with its investors and with IBM. Wray’s argument does not apply to these categories.

       The statements about Basho’s future prospects were forward-looking, but that did

not mean Wray could say anything he wanted. So long as a party acts in good faith, errors

in estimates or mistaken predictions about future success will not be sufficient to support

a fraud claim. In re Genesis Health Ventures, Inc., 355 B.R. 438, 458 (Bankr. D. Del.

2006). “On the other hand, when a party makes false statements with an intent to deceive,

that party may be liable for fraud regardless of whether the statements expressed opinions,

estimates, or projections of the future.” Id. Wray’s conduct supports an inference that he

intended to deceive Clark, rendering his statements actionable at the pleading stage.

       Wray also claims that his statements about Basho’s prospects were non-actionable

puffery. “Puffery is a ‘vague statement’ boosting the appeal of a service or product that,

                                            25
because of its vagueness and unreliability, is immunized from regulation.” David A.

Hoffman, The Best Puffery Article Ever, 91 Iowa L. Rev. 1395, 1397 (2006). Under

Delaware law, a person’s optimistic statements about his “skills, experience, and

resources” are “mere puffery and cannot form the basis for a fraud claim.” Solow v. Aspect

Res., LLC, 2004 WL 2694916, at *3 (Del. Ch. Oct. 19, 2004). Wray’s statement that Basho

was uniquely positioned to achieve a strategic partnership with IBM was puffery. The

representations that IBM owned The Weather Company and that it was an existing Basho

client were statements of fact. Wray’s statements about the state of Basho’s negotiations

with IBM and an existing plan to announce the partnership on February 22, 2015, were

also statements of fact.

       Wray next contends that he cannot be liable for fraud because he did not participate

in the transaction personally and had nothing to gain from Clark’s investment. According

to Wray, an allegation that an officer was motivated to deceive a plaintiff about a

transaction with the company because of his position with the company is insufficient to

support personal liability for fraud. For this proposition Wray relies on two federal cases:

GSC Partners CDO Fund v. Washington, 368 F.3d 228 (3d Cir. 2004), and Kalnit v.

Eichler, 264 F.3d 131 (2d Cir. 2001). Both cases concerned what a plaintiff needed to plead

to support the “strong inference of fraudulent intent” required by the Private Securities

Litigation Reform Act of 1995 (the “PSLRA”). See GSC P’rs, 368 F.3d at 237–38; Kalnit,
264 F.3d at 138–39. Both cases recognized that for purposes of establishing a claim for

securities fraud, a plaintiff could not simply find a past disclosure that turned out to be

inaccurate, combine it with a drop in the stock price, and then include a generalized

                                            26
allegation about management’s desire for the corporation to appear profitable or for the

stock price to remain high. See GSC P’rs, 368 F.3d at 237–38; Kalnit, 264 F.3d at 138–39.

For purposes of a disclosure claim under the PSLRA, allegations of this type about

incentives that are “common to all corporate executives” are “too generalized to

demonstrate scienter.” Kalnit, 264 F.3d at 139. But the Kalnit court recognized that a

plaintiff could plead scienter by identifying specific conduct by the executives in question,

such as sales of shares. See id. at 141–42.

       This is not a securities fraud case governed by the PSLRA, and Clark need not plead

specific facts supporting a strong inference of scienter. Clark can plead knowledge and

intent generally. See Ct. Ch. R. 9(b) (“Malice, intent, knowledge and other condition of

mind of a person may be averred generally.”). Equally important, this is not a case in which

a plaintiff is alleging that an executive made false disclosures in public filings because he

generally wanted to keep the stock price high. The complaint alleges that Basho faced a

financial crisis, that Chester and Wray had exhausted other options, and that they

desperately needed to obtain a cash infusion from Clark. As the CEO, Wray had a

significant financial and reputational stake in keeping Basho solvent. Basho was his sole

source of income, and he stood to gain personally and professionally by keeping the lights

on. For a common law fraud claim, the complaint pleads facts sufficient to support an

inference of scienter. The complaint states a claim for fraud against Wray in connection

with the December 2014 Investment.

                                              27
              Fraud In Connection With The Series H Investment

       The third transaction at issue in Count II is the Series H Investment. Once again, the

complaint does not state a claim against Corey, but states a claim against Wray.

       As to Corey, the complaint alleges that Clark agreed to make the Series H

Investment based on representations made and conditions set forth in the Series H Letter

of Intent. That letter recited that Clark was investing based on a “total enterprise value of

$45 million,” which was “based upon information that has been provided to us to date,

including among other things, historical financial results, and projections that indicate that

Basho has a path to achieving sustained cash flow positive results within 12 months of the

close of this transaction.” The complaint alleges that Fotos, Reisley, and Corey prepared

the “information . . . provided . . . to date,” including the projections that showed “a path

to achieving sustained cash flow positive results within 12 months of the close of this

transaction.” Fotos testified in another proceeding that at this point, Basho was “a company

in collapse—a complete failure.” That testimony supports a reasonable inference Corey

could not have believed that Basho had a total enterprise value of $45 million or prepared

reasonable projections that would show Basho achieving cash-flow-positive results within

twelve months.

       As with the other aspects of the fraud claim, the complaint does not allege that Corey

made any statements directly to Clark. But that omission should not matter in this instance,

where the complaint supports a reasonable inference that Corey and the other Georgetown

representatives prepared the projections and other documents intending for them to be

provided to Clark. A party that is not the speaker can be held liable for a false statement

                                             28
“if the misrepresentation, although not made directly to the other, is made to a third person

and the maker intends or has reason to expect that its terms will be repeated or its substance

communicated to the other, and that it will influence his conduct in the transaction . . . .”

Restatement (Second) of Torts § 533 (Am. Law Inst. 1977). “If the misrepresentation is

made for the purpose of having it communicated, the maker is subject to liability.” Id. cmt.

d. For example, “one who, to aid a friend in selling his land, gives him for transmission to

a prospective purchaser a fraudulent misrepresentation as to the quantity or quality of the

land, is subject to liability to the purchaser under the rule stated in this Section.” Id. That

scenario would seem to apply, supporting a claim against Corey. But Clark has not

articulated this theory, so this decision does not adopt it. Clark has not argued another

theory by which Corey could be held liable, so the complaint fails once again to state a

claim against Corey.

       By contrast, the complaint states a claim for fraud against Wray. For one thing,

Wray signed the Series H Letter of Intent. Although different inferences can be drawn from

that fact, one reasonable inference is that Wray agreed with the valuation and validated the

view expressed in the letter that “Basho has a path to achieving sustained cash flow positive

results within 12 months of the close of this transaction.” The facts alleged in the complaint

support a reasonable inference that the valuation and the statement about the existence of

a path to sustained cash-flow-positive results were false.

       The complaint further alleges that on February 17, 2016, shortly after the Series H

Letter of Intent and before the Series H Investment closed, Clark contacted Wray to obtain

an update about the Company. Wray informed Clark that Basho had “been chosen for” a

                                              29
large government pursuit involving Raytheon and that based on Basho’s selection, its

technology was being “baked into over 20 massive [government] pursuits” in the United

States and in foreign countries, including Qatar. In reality, Basho’s business was failing

and it was desperate for capital. Some of Wray’s language was puffery, but the statements

that Basho had been chosen for a valuable venture with Raytheon and that its technology

was being incorporated in government pursuits were factual representations.

       Wray claims yet again that the complaint does not identify the fraud with

particularity, but in this case it does by citing the Series H Letter of Intent and Wray’s

February 2016 email. Wray again argues that he cannot be liable for fraud if he only stood

to gain because of his status as the CEO of Basho, but this decision has rejected that

argument as overly broad.

       There is one final wrinkle presented by the claim involving the Series H Investment:

Clark invested through KECC, rather than personally. According to the defendants, Clark

therefore lacks standing to sue for fraud because KECC made the investment and suffered

the injury. Perhaps KECC could sue, say the defendants, but not Clark.

       KECC was a special purpose entity formed for Clark to make the Series H

Investment jointly with Chester. The joint investment vehicle made Clark feel more

comfortable because he perceived Chester to be investing alongside him, and it therefore

can be regarded as part of the fraud. Clark personally secured and guaranteed the $5 million

loan used to fund 83% of the value of the investment and 100% of the new money. Clark

agreed to invest through KECC based on the misrepresentations and omissions cited in the

complaint. In Count II, Clark is suing to recover the losses that he personally suffered from

                                             30
forming KECC with Chester, obtaining and personally guaranteeing a loan for $5 million,

and investing the proceeds in Basho through KECC. Based on these allegations, Clark has

standing to bring a direct action against the individuals who fraudulently induced him to

suffer these losses. Indeed, it is reasonably inferable at this stage that the creation of KECC

and the joint investment through that entity were part of the scheme that led to Clark’s

losses.

          The complaint states a claim for fraud against Wray in connection with the

December 2014 Investment and the Series H Investment. Otherwise, Count II is dismissed.

C.        Count III: Negligent Misrepresentation

          In Count III of the complaint, Clark advances a claim for negligent

misrepresentation in connection with the October 2014 Investment, the December 2014

Investment, and the Series H Investment. This count fails to state a claim on which relief

can be granted.

          “[A]n equitable fraud or negligent misrepresentation claim lies only if there is

either: (i) a special relationship between the parties over which equity takes jurisdiction

(like a fiduciary relationship) or (ii) justification for a remedy that only equity can afford.”

Fortis Advisors LLC v. Dialog Semiconductor PLC, 2015 WL 401371, at *9 (Del. Ch. Jan.

30, 2015). When the special relationship involves allegations of fiduciary breach, then the

claim for equitable fraud is subsumed in the claim for breach of fiduciary duty. The latter

claim “confronts directly the implications of the fiduciary relationship, rendering [a claim

for equitable] fraud . . . redundant and superfluous.” Wayport, 76 A.3d at 327.

                                              31
       To the extent that Clark’s claim for negligent misrepresentation addresses the

December 2014 Investment and the Series H Investment, it fails as a matter of law. For

each of these claims, Clark has asserted a claim for breach of fiduciary duty, which is the

proper claim. Moreover, the claim for breach of fiduciary duty in this case invokes the duty

of disclosure as described in Malone, and this court has held that when Malone provides

the framework for a claim for breach of fiduciary duty, it displaces any claim for negligent

misrepresentation. Metro Commc’n, 854 A.2d at 130–31, 163.

       This analysis does not apply to the October 2014 Investment, where Clark does not

assert a claim under Malone because he was not yet a stockholder. For this claim, he argues

that he can sue Wray for negligent misrepresentation because Wray and Chester positioned

themselves as Clark’s primary conduits for information and exploited Clark’s relationship

of “trust” and “friendship” with Chester.

       Clark has not cited any cases that have grounded a negligent-misrepresentation

claim on allegations about friendship. Perhaps some set of facts might exist, but they would

require specific pleading to articulate why the friendship reached a level of trust and

confidence analogous to a familial or a fiduciary relationship, rather than “mere personal

friendship.” See, e.g., Beam v. Stewart, 845 A.2d 1040, 1050 (Del. 2004) (“Allegations of

mere personal friendship or a mere outside business relationship, standing alone, are

insufficient to raise a reasonable doubt about a director’s independence.”). If “mere

personal friendship” is insufficient to undermine the independence of an actual fiduciary,

it would likewise seem insufficient to convert an arm’s-length relationship into something

akin to a fiduciary one. In this case, Clark would need to bridge an additional conceptual

                                            32
gap by bringing Wray within the scope of the friendship. The complaint in this case alleges

only that Chester and Clark had an amicable professional acquaintance. The allegations

describe “mere personal friendship” that would not support a claim for negligent

misrepresentation against Chester, much less Wray.

D.     Count IV: Aiding And Abetting

       Count IV of the complaint asserts a claim for aiding and abetting the wrongdoing

asserted in Counts I, II, and III of complaint. Importantly, the primary actors who allegedly

engaged in wrongdoing in the other counts include Chester, who is the principal wrongdoer

identified in the complaint. The operative question for Count IV is generally whether it is

reasonably conceivable that Wray or Corey aided and abetted wrongdoing by Chester.

       Because of how the parties have approached Counts I, II, and III, Count II’s fraud

claim is the only primary claim requiring analysis. The elements of a claim for aiding and

abetting fraud are (i) an act of fraud by the primary actor, (ii) the secondary actor’s

knowledge of the primary actor’s conduct, (iii) substantial encouragement or assistance

from the secondary actor, and (iv) causally related damages. See Prairie Capital, 132 A.3d

at 63–64; Great Hill Equity P’rs IV, LP v. SIG Growth Equity Fund I, LLLP, 2014 WL
6703980, at *22–23 (Del. Ch. Nov. 26, 2014). Claims for aiding and abetting are “fact

intensive and ill-suited” for disposition on the pleadings. In re Good Tech. Corp. S’holder

Litig., 2017 WL 2537347, at *2 (Del. Ch. May 12, 2017) (ORDER).

                                             33
                     The October 2014 Investment

       The complaint states a claim for fraud against Chester in connection with the

October 2014 Investment. The operative question is whether the complaint sufficiently

pleads that Wray or Corey aided and abetted Chester’s fraud.

       The complaint does not plead facts to support an inference that Corey knowingly

participated in Chester’s fraud or conspired with Chester for purposes of the October 2014

Investment. The complaint tries to paint a picture of Corey working behind the scenes to

support Chester, and it cites an email that Corey sent to Chester, but its limited allegations

do not make it reasonably conceivable that Corey knowingly participated in the fraud.

       By contrast, the complaint supports a reasonable inference that Wray knowingly

participated in Chester’s fraud. The representations that Chester made to Clark included

false information about Wray’s background and experience. It is reasonably conceivable

that Wray provided the false information to Chester. It is also critical to remember when

assessing Wray’s alleged involvement that he was the CEO and senior executive of the

Company who reported directly to Chester and served together with Chester and Reisley

as part of the three-man Executive Committee that ran the Company. For purposes of

Chester’s efforts to raise money from Clark, Wray was as connected to Chester as anyone

could be. Count IV therefore states a claim against Wray for aiding and abetting Chester’s

fraud in connection with the October 2014 Investment.

       Wray contends that laches should bar Clark from asserting any claims involving the

October 2014 Investment. “[A]ffirmative defenses, such as laches, are not ordinarily well-

                                             34
suited for treatment on [a motion to dismiss]” unless “the complaint itself alleges facts

showing that [it was] filed too late.”2

       Clark filed his lawsuit on November 21, 2017, three years and a few weeks after the

October 2014 Investment closed. Ordinarily, the three-year statute of limitations would bar

the aiding-and-abetting claim. See Kraft v. WisdomTree Invs., Inc., 145 A.3d 969, 983 (Del.

Ch. 2016). Fraudulent concealment, however, will toll the statute of limitations. Primedia,

2013 WL 6797114, at *12.

       In this case, the complaint supports a reasonable inference that Clark was the victim

of an ongoing campaign of fraud that began with the October 2014 Investment and

continued thereafter. As a result, Clark did not learn of facts sufficient to put him on inquiry

notice until July 2016, after he joined the Board and received presentations about the true

state of affairs at Basho. The fraudulent statements that Chester and Wray made to Clark

in connection with the December 2014 Investment and the Series H Investment were

sufficient to lead Clark away from the truth, providing a basis for tolling. See In re Tyson

Foods, Inc. Consol. S’holder Litig., 919 A.2d 563, 585, 590 (Del. Ch. 2007). It is

reasonably conceivable that Clark’s claim against Wray for aiding and abetting fraud in

connection with the October 2014 Investment is timely. Because the complaint’s

       2
        In re Primedia, Inc. S’holders Litig., 2013 WL 6797114, at *12 (Del. Ch. Dec. 20,
2013) (first alteration in original) (first quoting Reid v. Spazio, 970 A.2d 176, 183 (Del.
2009); then quoting Kahn v. Seaboard Corp., 625 A.2d 269, 277 (Del. Ch. 1993)).

                                              35
allegations support a reasonable inference of timeliness, the limitations defense is not

suitable for pleading-stage disposition.

       Corey’s motion to dismiss Count IV is granted as to the October 2014 Investment.

Wray’s motion is denied.

                      The December 2014 Investment

       The complaint states claims for fraud against both Chester and Wray in connection

with the December 2014 Investment. The operative question is whether the complaint

sufficiently pleads that Corey aided and abetted their fraud. Once again, the complaint does

not plead any facts to support an inference that Corey was involved in any way with the

December 2014 Investment. Corey’s motion to dismiss Count IV is granted as to the

December 2014 Investment.

       This decision has held that Count II states a claim against Wray for purposes of the

December 2014 Investment, but the claim for secondary liability potentially has

independent significance. The complaint’s allegations regarding the December 2014

Investment support a reasonable inference that Chester and Wray agreed to work together

to induce Clark to invest as part of a common scheme. The complaint’s allegations

regarding the December 2014 Investment also support a reasonable inference that Wray

spoke with Clark as a form of knowing participation in Chester’s fraud. Count IV states a

claim against Wray.

                                            36
                     The Series H Investment

       The complaint states claims for fraud against Chester and Wray in connection with

the Series H Investment. The operative question is whether the complaint sufficiently

pleads that Corey aided and abetted their fraud.

       For purposes of aiding and abetting, the complaint supports a reasonable inference

that Corey knowingly gave substantial assistance to Chester and Wray by preparing the

financial statements and projections that supported an enterprise value for Basho of $45

million and the representation that Basho had a path to sustained cash-flow-positive results

within twelve months after the closing of the Series H Investment. The complaint’s

allegation about Corey’s involvement in the preparation of these materials is bolstered by

Corey’s public representations that he

       ●      oversaw Basho’s management;

       ●      participated in recruiting, selecting, and evaluating Basho’s executive
              personnel, including Basho’s CEO (Wray), CFO, and CTO;

       ●      played an instrumental role in devising Basho’s corporate strategy;

       ●      monitored management’s progress in executing the overall strategy;

       ●      oversaw Basho’s profit and loss statement;

       ●      regularly discussed roadmaps for new projects with management as well as
              customer needs;

       ●      tracked competitive market trends and guided Basho’s senior management
              with respect to those trends; and

       ●      assisted with business development and customer growth for Basho’s sales
              group.

Corey’s motion to dismiss the aiding-and-abetting claim as to the Series H Investment is

denied.
                                            37
       As with the claim for aiding and abetting against Wray in connection with the

December 2014 Investment, the claim potentially has independent significance in

connection with the Series H Investment. The allegations of the complaint again support a

reasonable inference that Chester and Wray agreed to work together to induce Clark to

invest as part of a common scheme. The complaint also supports a reasonable inference

that Wray’s interactions with Clark evidence his knowing participation in Chester’s fraud.

Count IV states a claim against Wray.

                        III.     THE RULE 12(b)(2) MOTION

       Corey has moved to dismiss the complaint pursuant to Rule 12(b)(2), claiming that

this court cannot exercise jurisdiction over him. To analyze a Rule 12(b)(2) motion, a

Delaware trial court applies a two-part test:

       First, the court must determine whether Delaware’s long arm statute, 10 Del.
C. § 3104(c), is applicable. If so, the court must decide whether subjecting
       the nonresident defendant to jurisdiction would violate due process. Under
       settled law, a nonresident defendant must have sufficient minimum contacts
       with the forum state such that the maintenance of the suit does not offend
       traditional notions of fair play and substantial justice.

Matthew v. Fläkt Woods Gp. SA, 56 A.3d 1023, 1027 (Del. 2012) (alteration and internal

quotation marks omitted). See generally Donald J. Wolfe, Jr. & Michael A. Pittenger,

Corporate and Commercial Practice in the Delaware Court of Chancery § 3.02 (2d ed. &

Supp. 2018).

       The Delaware Long-Arm Statute provides:

       As to a cause of action brought by any person arising from any of the acts
       enumerated in this section, a court may exercise personal jurisdiction over
       any nonresident, or a personal representative, who in person or through an

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         agent: (1) Transacts any business or performs any character of work or
         service in the State . . . .

10 Del. C. § 3104(c)(1). “[A] single transaction is sufficient to confer jurisdiction where

the claim is based on that transaction.” Crescent/Mach I P’rs, L.P. v. Turner, 846 A.2d
963, 978 (Del. Ch. 2000); accord LaNuova D & B S.p.A. v. Bowe Co., 513 A.2d 764, 768

(Del. 1986). Under the plain language of the Delaware Long-Arm Statute, forum-directed

activity can occur “through an agent.” 10 Del. C. § 3104(c). The statute is “broadly

construed to confer jurisdiction to the maximum extent possible under the Due Process

Clause.” Hercules Inc. v. Leu Trust & Banking (Bahamas) Ltd., 611 A.2d 476, 480 (Del.

1992).

         For purposes of the due process analysis, “[t]he well-established point of departure

is that certain minimum contacts must exist between a State and a nonresident defendant

before that State can exercise personal jurisdiction over him.” Moore v. Little Giant Indus.,

Inc., 513 F. Supp. 1043, 1048 (D. Del. 1981) (internal quotation marks omitted), aff’d, 681
F.2d 807 (3d Cir. 1982) (TABLE). The question is whether the defendant had sufficient

minimum contacts with Delaware such that “compelling it to defend itself in the State

would be consistent with the traditional notions of fair play and substantial justice.” Waters

v. Deutz Corp., 479 A.2d 273, 276 (Del. 1984) (internal quotation marks omitted).

         The Delaware Supreme Court has adopted what is known as the conspiracy theory

of jurisdiction. Fläkt Woods, 56 A.3d at 1027. Under this theory,

         a conspirator who is absent from the forum state is subject to the jurisdiction
         of the court, assuming he is properly served under state law, if the plaintiff
         can make a factual showing that: (1) a conspiracy to defraud existed; (2) the
         defendant was a member of that conspiracy; (3) a substantial act or

                                               39
       substantial effect in furtherance of the conspiracy occurred in the forum state;
       (4) the defendant knew or had reason to know of the act in the forum state or
       that acts outside the forum state would have an effect in the forum state; and
       (5) the act in, or effect on, the forum state was a direct and foreseeable result
       of the conduct in furtherance of the conspiracy.

Istituto Bancario Italiano SpA v. Hunter Eng’g Co., 449 A.2d 210, 225 (Del. 1982). The

theory “is based on the legal principle that one conspirator’s acts are attributable to the

other conspirators.” Fläkt Woods, 56 A.3d at 1027. Thus, “if the purposeful act or acts of

one conspirator are of a nature and quality that would subject the actor to the jurisdiction

of the court, all of the conspirators are subject to the jurisdiction of the court.” Istituto

Bancario, 449 A.2d at 222.

       By satisfying the elements for the conspiracy theory of jurisdiction, a plaintiff makes

the showing necessary to meet both prongs of the jurisdictional test. The first three Istituto

Bancario elements encompass the statutory prong by speaking to the requirements of the

Delaware Long-Arm Statute. The third Istituto Bancario element corresponds to the

statutory requirement that the defendant have transacted business or performed work in the

State. The first and second Istituto Bancario elements provide grounds for imputing the

jurisdiction-conferring act to the defendant under agency principles, because “conspirators

are considered agents for jurisdictional purposes.” Hercules, 611 A.2d at 481; accord

Carlton Invs. v. TLC Beatrice Int’l Hldgs., Inc., 1995 WL 694397, at *12 (Del. Ch. Nov.

21, 1995). The fourth and fifth Istituto Bancario elements speak to due process and whether

there are sufficient minimum contacts between the defendant and the forum such that the

defendant could reasonably anticipate being sued there. See Carlton Invs., 1995 WL
694397, at *12.

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         Here, the complaint states a claim against Corey for aiding and abetting fraud in

connection with the Series H Investment, satisfying the first and second elements of the

conspiracy test. Corey argues that the complaint did not plead the existence of a conspiracy,

but “the Court focuses on the substance instead of the form” of the plaintiff’s allegations,

and “allegations supporting a conspiracy theory of jurisdiction need not be framed as civil

conspiracy in the Complaint.” Matthew v. Laudamiel, 2012 WL 605589, at *7 (Del. Ch.

Feb. 21, 2012). A sufficiently pled claim for aiding and abetting satisfies this requirement.

See Benihana of Tokyo, Inc. v. Benihana, Inc., 2005 WL 583828, at *7 (Del. Ch. Feb. 4,

2005).

         The Series H Investment required both the filing of a restated certificate of

incorporation with the Delaware Secretary of State and the creation of a Delaware entity,

KECC. Each is sufficient to serve as a Delaware-directed act in satisfaction of the third

element. See Virtus Capital L.P. v. Eastman Chem. Co., 2015 WL 580553, at *14–15 (Del.

Ch. Feb. 11, 2015).

         Based on Corey’s deep involvement with Basho, his thorough knowledge of its

operations, and his sophistication as the holder of an MBA, it is reasonable to infer that

Corey had reason to know that the Series H Investment involved the filing of the restated

certificate of incorporation and the formation of a Delaware entity. Given this Delaware

nexus, it is therefore reasonable for him to be subject to the jurisdiction of the Delaware

courts for purposes of litigation involving the Series H Investment. See id.

         Corey has argued that Clark did not serve him pursuant to the Delaware Long-Arm

Statute, having instead attempted to effect service under 10 Del. C. § 3114. Corey argues

                                             41
that Clark should not be able to rely on the Delaware Long-Arm Statute to support personal

jurisdiction. But the analysis of personal jurisdiction under Rule 12(b)(2) assesses the

court’s power to exercise jurisdiction over the defendant. The question of whether the

defendant was validly served is a matter raised by a motion to dismiss under Rule 12(b)(5).

Corey did not move to dismiss on that ground.

                               IV.      CONCLUSION

       Corey’s motion to dismiss the complaint pursuant to Rule 12(b)(6) is granted in the

following respects:

    As to Counts II and III in their entirety.

    As to Count IV with respect to the October 2014 Investment and the December 2014

       Investment.

Corey was not named as a defendant in Count I. The Rule 12(b)(6) motion is otherwise

denied. The Rule 12(b)(2) motion is denied.

       Wray’s motion to dismiss the complaint pursuant to Rule 12(b)(6) is granted in the

following respects:

    As to Count III in its entirety.

    As to Counts I and II with respect to the October 2014 Investment.

The motion is otherwise denied.

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