(Cyrus Hodes v. Mohammad Amad Mostaque, et al., No. 2024-0015-JTL, Del. Chanc.)
(Hodes’ answering brief available. Document #46-240501-029B.)
The answering brief was filed April 19.
In his complaint in the Delaware Chancery Court, Cyrus Hodes says he and defendant Mohammad Amad Mostaque created Stability AI together. Hodes says he contributed “countless hours” working on various projects and was given 15% stake in the company. But Hodes alleges that all the while, Mostaque was secretly shifting Stability’s focus to become a novel and valuable text-to-image company and “duped” Hodes into selling his share in the company for $100.
Hodes names Mostaque, Stability AI and Stability AI LTD. Hodes alleges claims for fraud in the inducement, negligent misrepresentation, breach of fiduciary duty, unjust enrichment and quantum meruit. Hodes seeks judgment in his favor, recission or an award of rescissory damages, an award of damages and an order directing disgorgement of profits based on misconduct.
‘Windfall’
In a March 6 opening brief in support of the motion to dismiss, the defendants say: “Having demanded to extricate himself from all associations with the Company, and having initiated and facilitated the resulting arm’s-length sale of his Company stock, Plaintiff now asks this Court to undo this transaction and reward him with a windfall from the Company’s later success.”
(Defendants’ opening brief available. Document #46-240501-028B.)
Hodes has not sufficiently pleaded any facts that suggest a false representation or that defendants intended to induce Hodes’ conduct nor that he relied on any such statements, the defendants say. Hodes cherry-picks statements Mostaque made about the direction of the company. “But none of the alleged misrepresentations dissolves Plaintiff’s own choice and the self-proclaimed reasons for that choice,” Hodes tells the court.
Any puffery statements made by Mostaque do not rise to the level required for liability, the defendants say. The defendants argue that Hodes had every opportunity to learn about and investigate the company’s efforts at developing a text-to-image generator. The defendants say they had no obligation or duty to disclose the company’s direction or efforts to Hodes, who was hired and received his shares as a contractor.
And because Hodes approached Mostaque about selling his shares, there can be no reliance on statements he received, the defendants argue.
“Plaintiff simply pleads no particularized, contemporaneous facts that the alleged misrepresentations were made with knowledge of their falsity, i.e., that at the time the statements were made, Mostaque had no intention of pivoting or focusing any of the Company’s efforts on climate change (in October 2021) or EleutherAI (in May 2022). Plaintiff instead relies on conclusory statements, unsupported by specific, well-pleaded facts, about Mostaque’s state of mind,” the defendants contend.
‘Shocking Swindle’
In an April 19 answering brief, Hodes says, “This is an action to remedy a shocking swindle.”
There were actionable misrepresentations made to him about the direction of the company before the sale of his 1 million shares. Hodes says the defendants’ represented that the company was shifting to climate change. Yet Hodes says that when he sold his shares the company was already in the process of finalizing a massive capital infusion for its Stable Diffusion artificial intelligence. Internal documents show that the defendants forecasted a value of $100 million or even higher in the weeks ahead, Hodes says.
Hodes rejects the claim that the statements were mere puffery. These were not “vague, aspirational comments” but “concrete lies” about the company’s direction and potential future value. The company had already purchased the “sophisticated computer processors” required for Stable Diffusion. The defendants’ comments were knowingly false when they were made, Hodes tells the court.
The only possible explanation for Mostaque’s rush to sale is that the defendants were misstating the future viability of the company, Hodes says. Hodes also says there is sufficient evidence that he relied on the statements. Given his limited insight into the company’s operations and prospects, Hodes says he reasonably relied on the statements Mostaque made.
Counsel
Hodes is represented by Avi Weitzman, Jennifer Conn, Jackson Herndon and Sarah Kim of Paul Hastings LLP in New York and Raymond J. DiCamillo, Kelly E. Farnan and Craig K. Ferrere of Richards, Layton & Finger PA in Wilmington, Del.
The defendants are represented by Kenneth E. Lee, Chad P. Albert and Allison S. Markowitz of Levine Lee LLP in New York and David E. Wilks of Wilks Law LLC in Wilmington.
(Additional document available. Complaint. Document #46-240501-030C.)