Individual dismissed as plaintiff in securities fraud suit against Face It CEO

By Elizabeth Alt | Jun 12, 2018

SAN DIEGO – The U.S. District Court for the Southern District of California granted a motion to dismiss an individual plaintiff who alleged fraud and elder abuse.

On May 29, Judge Cynthia Bashant wrote the court order granting dismissal on all the individual claims brought by Melcher Family Limited Partnership, noting that Carl Melcher could not bring individual claims because the company, not him individually, signed the agreement with Face It.

Melcher Family Limited Partnership (MFLP) and founder Carl Melcher sued Lance Fried, who was the chief executive officer for Face It, over claims of federal and state securities fraud, breach of fiduciary duty, common law fraud, elder abuse and rescission of contract. Melcher created MFLP in 1989 and claims that Face It committed fraud by not telling him that the company would be bought when it asked him to buy back his shares for half of what he paid.

Melcher, 80, is one of the limited partners for MFLP, who purchased 30.87 percent of the stock for Face It in 2011 for $3 million dollars. Face It was “a privately held social engagement and mobile customer care solution provider” of which MFLP was the only outside investor in the company, as all other shares were held by Face It’s founders, the order states.

Melcher claims that Face It proposed he buy back the MFLP shares when Face It began to struggle and Melcher refused to invest any more. Melcher’s complaint states MFLP bought its shares back for $1.5 million in 2013, signing a redemption agreement.

The day after Melcher signed the agreement, Five9 purchased Face It for $10 million. Melcher claims that Face It never told him about the potential buyout, and that he only learned about it in 2016 when he filed suit.

Face It moved to dismiss Melcher as a plaintiff, arguing that “the only party with standing to bring a claim is MFLP, the entity which bought and then sold the stock,” the order states.

The court agreed, dismissing Melcher’s individual claims. 

“The redemption agreement demonstrates that the sale of stock at issue was between Face It and MFLP—not Melcher… even if Melcher is the general partner of MFLP, the only parties to the redemption agreement are MFLP and Face It. Melcher cannot bring in his individual capacity claims belonging to the partnership,” the order states.

Melcher’s individual claims were dismissed and the court order stated Melcher must file his second amended complaint by June 12.

U.S. District Court for the Southern District of California case number 3:16-cv-02440-BAS-BGS

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