details of this collaboration in at least eight other public companies.
Appel was also a founder, investor, controlling person and a lender of
NETV and/or Stonepath. Appel introduced Rozel International, a British
Virgin Islands company ("Rozel"), to Panzo. Rozel as of January 20,
2000, owned more than 20% of NETV's stock and is also a substantial
shareholder, creditor and/or borrower along with one or more of Appel's
entitles in at least twelve public companies.
The first amended complaint alleges that Appel controls and is a
beneficial owner of Rozel, that between October 31, 2000 and March 6,
2001, Rozel sold at least one million shares of NETV/Stonepath. As set
forth more fully in paragraphs 63 through 66, the relationships between
Appel and Panzo, NETV and Rozel were concealed.
Summary Judgment is Appropriate
Rule 56(c) of the Federal Rules of Civil Procedure provides that a
motion for summary judgment may be granted when "there is no genuine
issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law." Summary judgment "is properly regarded not
as a disfavored procedural shortcut, but rather as an integral part of
the Federal Rules as a whole, which are designed `to secure the just,
speedy and inexpensive determination of every action.'" Celotex Corp. v.
Catrett, 477 U.S. 317, 327 (1986). The Second Circuit has repeatedly
noted that "as a general rule, all ambiguities and inferences to be drawn
from the underlying facts should be resolved in favor of the party
opposing the motion, and all doubts as to the existence of a genuine issue
for trial should be resolved against the moving party." Brady v. Town of
Colchester, 863 F.2d 205, 210 (2d Cir. 1988) (citing Celotex Corp. v.
Catrett, 477 U.S. 317, 330 n. 2 (1986) (Brennan, J., dissenting)); see
Tomka v. Seiler Corp., 66 F.3d 1295, 1304 (2d Cir. 1995); Burrell v. City
Univ., 894 F. Supp. 750, 757 (S.D.N.Y. 1995). If, when viewing the
evidence produced in the light most favorable to the non-movant, there is
no genuine issue of material fact, then the entry of summary judgment is
appropriate. See Burrell, 894 F. Supp. at 758 (citing Binder v. Long
Island Lighting Co., 933 F.2d 187, 191 (2d Cir. 1991)).
For a dispute to be genuine, there must be more than "metaphysical
doubt." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,
586 (1986). "If the evidence is merely colorable, or is not significantly
probative, summary judgment may be granted." Anderson, 477 U.S. at 249-50
Materiality is defined by the governing substantive law. "Only disputes
over facts that might affect the outcome of the suit under the governing
law will properly preclude the entry of summary judgment. Factual
disputes that are irrelevant or unnecessary will not be counted."
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). "[T]he mere
existence of factual issues — where those issues are not material
to the claims before the court — will not suffice to defeat a
motion for summary judgment." Quarles v. General Motors Corp.,
758 F.2d 839, 840 (2d Cir. 1985). "One of the principal purposes of the
summary judgment rule is to isolate and dispose of factually unsupported
claims or defenses. Celotex, 477 U.S. at 323-24. In view of the facts
presented here and the motion for summary judgment, it is appropriate to
grant judgment under Rule 56.
The Complaint Alleging Misrepresentation in the Size of the
Offering is Dismissed
At the outset, the claim based on Section 12 of the Securities Act of
(the "'33 Act"), 15 U.S.C. § 771, is dismissed, since the Stock
was sold not by prospectus but by private placement. Gustafson v. Alloyd
Co., Inc., 513 U.S. 561 (1995). ESI Montgomery County, Inc. v. Montenay
Int'l Corp., 899 F. Supp. 1061 (S.D.N.Y. 1995), noted that the
distinction drawn in Gustafson is to determine not which types of
securities are exempt from Section 12(a)(2) but, rather, which
transactions are exempt from the statute. Id. at 1064. To similar effect
is WRT Energy Sec. Litig., No. 93 Civ. 3610, 1997 WL 576023, *4-5
(S.D.N.Y. Sept. 15, 1997), where this Court held specifically that the
Supreme Court's Gustafson decision concluded that the intent of Congress
and the design of the statute required that Section 12(a)(2) liability be
limited to public offerings and that plaintiffs have standing under
Section 12(a)(2) of the 1933 Act only if they purchase their securities
in a public offering rather than in a private transaction or in the
secondary market. Id. (citing Glamorgan Coal Corp. v. Ratner's Group,
PLC, 1995 WL 406167 *2 (S.D.N.Y. July 10, 1995); ESI Montgomery, 899 F.
Supp. at 1064-65; Komanoff v. Mabon Nugent & Co., 884 F. Supp. 848, 857
(S.D.N Y 1995). Given this authority, liability for untrue statements
under Section 12(a)(2) made in either a written prospectus or in oral
communications relating thereto is limited to public offerings and
summary judgment on Emergent's first count is appropriate. Emergent does
not contend otherwise.
The remaining claims for violation of Rule 10(b)5, Section 20 of the
Securities & Exchange Act of 1934 (the "'34 Act"), common law fraud,
negligent representation and rescission turn on the facts as set forth
above. Federal securities law and applicable common law standards
regarding securities fraud, common law fraud and negligent
misrepresentation require a plaintiff to demonstrate justifiable reliance
upon the alleged misrepresentation that forms the basis of the plaintiff's
action. Brown v. E.F. Hutton Group, 735 F. Supp. 1196, 1199 (S.D.N.Y.
1990) (claim under Section 10(b) requires priority reliance); AUSA Life
Ins. Co. v. Ernst & Young, 206 F.3d 202, 208 (2d Cir. 2000) (common law
fraud and negligent misrepresentation claims require proof of reliance).
The question is whether or not the verbal statements made concerning the
size of the offering could be justifiably relied upon in view of all the
facts and the merger clause in the Stock Purchase Agreement.
The Stock Purchase Agreement contains 29 separate representations and
warranties and 16 separate covenants in favor of the series C
purchasers, including Emergent. There is no representation as to the size
of the offering. Waldron reviewed the draft stock Purchase Agreement
prior to closing and knew that no written representation regarding the
size of the Offering was ever made. Emergent has asserted that it
expected the size of the offering to be described in the Agreement, yet
Emergent proceeded with the transaction, executed the Stock Purchase
Agreement and funded its $2 million investment without requesting or
receiving any representation in that regard.
Even if an integration
clause is general, a fraud claim will not stand where the clause was
included in a multi-million dollar transaction that was executed
following negotiations between sophisticated business people and a fraud
defense is inconsistent with other specific recitals in the contract.
Manufacturer's Hanover Trust Co. v. Yanakas, 7 F.3d 310, 316 (2d Cir.
1993); Citibank, N.A. v. Plapinger, 66 N.Y.2d 90, 94-95, 495 N.Y.S.2d 309,
311-12, 485 N.E.2d 974-976-77 (1985). The integration clause, the entire
the sophistication and knowledge of the parties must be
considered in order to assess the reasonableness of a party's reliance.
Harsco Corp. v. Segui, 91 F.3d 337, 345 (2d Cir. 1996) (a fraud claim
could not proceed where allegations of fraud were directly contradicted
by written documents which were the product of arms-length negotiations
by sophisticated parties).
In evaluating justifiable reliance, the plaintiff's sophistication and
expertise is a principal consideration. Granite Partners, L.P. v. Bear
Stearns & Co., Inc., 17 F. Supp.2d 275, 291 (S.D.N.Y. 1998); Schaifer
Nance & Co., Inc. v. Estate of Andy Warhol, 119 F.3d 91, 98 (2d Cir.
1997); Giannacopoulos v. Credit Suisse, 37 F. Supp.2d 626, 633 (S.D.N.Y.
1999); Belin v. Weissler, 1998 WL 391114, *5 (S.D.N.Y. July 14, 1998).
Moreover, the sophisticated investor such as Emergent must show that he
or she has made an independent inquiry into all available information.
Giannacopoulos, 37 F. Supp.2d at 632-33; Granite Partners, 17 F. Supp.2d
at 290. As the Second Circuit noted on this point:
Put another way, if the plaintiff "has the means of
knowing, by the exercise of ordinary intelligence, the
truth, or the real quality of the subject of the
representation, he must make use of those means, or he
will not be heard to complain that he was induced to
enter into the transaction by misrepresentations."
Schlaifer, 119 F.3d at 98 (quoting Mallis v. Bankers Trust Co.,
615 F.2d 68, 80 (2d Cir. 1980)).
In Belin, as here, plaintiff Belin attempted to avoid the effect of an
integration clause in a written contract to purchase a limited
partnership interest on the basis that the clause was general and did not
specifically disclaim the representation at issue. Belin, 1998 WL 39114,
*6. Moreover, the information which Belin contended was misrepresented to
him, the amount of an insurance policy on Broadway actor Tommy Tune, was
readily ascertainable had Belin asked to see the insurance police prior
to closing on his investment. Id. at *5.
Emergent had access to financial information and other information
concerning Stonepath and represented and warranted that it "has had the
opportunity to ask questions and receive answers from the Company
concerning the transactions . . . and to obtain therefrom any additional
information necessary to make an informed decision regarding an
investment in the Company."
The authority cited by Emergent does not support reasonable reliance in
this case. For instance, in International Motor Sports Group, Inc., 1999
WL 619663 (S.D.N.Y. August 16, 1999) the court noted that when the
contract states that the defendant makes no representations other than
those contained in another, more exhaustive clause of the contract, a
fraud claim may be precluded. Id. at *6. The Stock Purchase Agreement
includes extensive representations, warranties and covenants from
Stonepath in favor of the investors, and is the product of extensive
negotiation and review by sophisticated investors. Emergent cannot
maintain a fraud action by avoiding the plain terms of its contract.
Finally, and most critically, Emergent has not established loss
causation. As the Second Circuit noted in Citibank, N.A. v. K-H Corp.,
968 F.2d 1489, 1495 (2d Cir. 1992), loss causation requires a plaintiff
to establish that the misrepresentation was the cause of the actual loss
suffered. To establish loss causation, a plaintiff must show that the
economic harm that it suffered occurred as a result of the alleged
misrepresentations. Id., see also Bennett v. United States Trust Co. of
770 F.2d 308, 314 (2d Cir. 1985) ("but for" allegations
relating to transaction causation do not establish the proximate cause of
the plaintiff's loss).
In order to meet its burden of proving causation, Emergent cannot
bootstrap the "but for" or transaction causation onto the loss causation
requirement. As with the plaintiff in Marbury Management v. Kohn,
629 F.2d 705 (2d Cir. 1980), Emergent must show that the
misrepresentation caused the loss. Yun's statement regarding the
inability to link the alleged decline of the share price to the alleged
change in the size of the offering is dispositive. No evidence of loss
causation has been presented.
Emergent's rescission claim, based on the mistake, is also deficient.
Under New York law, a remedy for mistake is available only where "a
mistake of both parties at the time [the] contract was made as to a basic
assumption on which the contract was made has a material effect on the
agreed exchange of performances." Hartford Fire Ins. v. Federated Dept.
Stores, 723 F. Supp. 976, 994 (S.D.N.Y. 1989) (citing Gerard v. Almouli,
746 F.2d 936, 938 & n. 2 (2d Cir. 1984) (quoting Restatement (Second) of
Contract § 152(1)). "The `mutual mistake' must be as to the very
nature of the subject sold — for example, where what both parties
believed to be a barren cow turns out to be a calf.'" In re the Leslie
Fay Cos., Inc. Sec. Litig., 918 F. Supp. 749 (S.D.N.Y. 1996) (citing
Sherwood v. Walker, 33 N.W. 919 (Mich. 1887)). In a securities
transaction, where the parties were not mistaken as to the subject of
their exchange — the purchase of stock — mistakes regarding
the terms of the sale do not warrant restitution. Leslie Fay, 918 F.
Supp. at 749; see also The Indep. Order of Foresters v. Donaldson, Lufkin
& Jenrette Inc., No. 95 Civ. 2568, 1997 WL 563348, *7 (S.D.N.Y. Sept. 9,
1997), aff'd in part, rev'd in part on other grounds, 157 F.3d 933 (2d
Cir. 1998) (where investor claims mistake, not as to essential term of
the contract — for example, what it bought — but a mistake as
to products' performance — "this is not the kind of mistake
cognizable under this cause of action").
Here, the record shows, at best, a unilateral mistake on Emergent's
part regarding the size of the offering. In order to prevail on this
theory, the party asserting the mistake must at least meet the same
requirements that he would have had to meet had both parties been
mistaken. Foresters, 157 F.3d at 939 ("as a basic proposition, a contract
is made voidable by either unilateral or mutual mistake only where the
asserted mistake concerns a `basic assumption on which the contract was
made.'") (citing Restatement (Second) of Contracts, § 152 and §
In Foresters, 157 F.3d 933, the Second Circuit upheld the lower
court's dismissal of an aggrieved investor's claim of unilateral mistake
on ground the securities contract signed by the investor expressly
disavowed any legal effect for representations made outside of the
agreement. Foresters, 157 F.3d at 940. "Given the fact that . . . the
contract here expressly disavowed any legal effect for representations
made in the Brochures or Portfolio, they could not have constituted
`basic assumptions' as to which contract-avoiding mistakes could have
been made — either by [the plaintiff] or by the parties mutually."
Id. In this case, the equitable remedy for mistake is not available as a
matter of law. Where, as here, the final documents memorializing the
transaction do not confirm the alleged verbal representation concerning
the size of the offering, no mistake could have occurred. Foresters, 157
F.3d at 940. Moreover, since Emergent can attribute no portion of its
losses to the alleged mistake, as
a matter of law, the mistake cannot be
material to the transaction, thus defeating Emergent's final claim.
The Merger Clause and Absence of Loss Causation Require Dismissal
of the First Amended Complaint
On a Rule 12(b)(6) motion to dismiss, the factual allegations of the
complaint are presumed to be true and all factual inferences must be
drawn in the plaintiffs' favor and against the defendants. See Scheuer
v. Rhodes, 416 U.S. 232, 236 (1974); Cosmas v. Hassett, 886 F.2d 8, 11
(2d Cir. 1989); Dwyer v. Regan, 777 F.2d 825, 828-29 (2d Cir. 1985).
Accordingly, the factual allegations set forth in the first amended
complaint do not constitute findings of fact by the Court. They are
presumed to be true for the purpose of deciding the present motion to
A court may not dismiss a complaint unless the movant demonstrates if
"`it is clear that no relief could be granted under any set of facts that
could be proved consistent with the allegations.'" H.J., Inc. v.
Northwestern Bell Tel. Co., 492 U.S. 229, 249-50 (1989) (citation
omitted); Hishon v. King & Spalding, 467 U.S. 69, 73 (1984); Conley v.
Gibson, 355 U.S. 41, 45-46 (1957).
In its first amended complaint, Emergent alleges the falsity of the
representation that NETV had invested $14 million in Brightstreet and
that it relied on that representation. This allegation follows the
discovery of the falsity by reviewing the NETV SEC filing on May 11,
2000. While Stonepath has resisted conceding the falsity of the Brochure
by suggesting that "Investment" in the Brochure was on different
valuation basis than required by the SEC, for Rule 12(b)6 purposes, and
probably in fact, the Brochure and its representation were false.
However, no mention of the Brochure appeared in Emergent's initial
complaint, thus undercutting its reliance allegation.
The dispositive issue, however, as it was with the allegation of the
size of the offering, is the effect of the merger clause. It will either
be read out of the transaction, or it will bar the representation outside
of the Agreement. For the reasons set forth above, the merger clause is
controlling and bars a cause of action based upon the misrepresentation
with respect to Brightstreet. That the Brightstreet misrepresentation was
in writing perhaps only fortifies the need to include it in the Stock
Purchase Agreement if it is to be a foundation for reliance.
Emergent's amended complaint also fails to establish the loss causation
pleading requirement. In order to plead loss causation, as required in
both the common law and Federal Securities law theories identified in the
amended complaint, the plaintiff must establish that the
misrepresentations were the cause of the actual loss suffered. Citibank,
N.A. v. K-H Corp., 968 F.2d 1489, 1495 (2d Cir. 1992). Mere allegations
that the plaintiff would not have entered into the transaction if the
misrepresentations had not occurred are plainly insufficient to establish
the proximate cause of the plaintiff's loss. Bennett v. U.S. Trust Co. of
New York, 770 F.2d 308, 314 (2d Cir. 1985). With respect to the claims
relating to non-disclosure of Panzo's past investment activity, the
plaintiff must establish a causal connection between the omission and the
injury. Tucker v. Arthur Andersen & Co., 67 F.R.D. 468, 479 (S.D.N.Y.
To establish loss causation in a non-disclosure claim, the Court must
assess the market impact which arises from the non-disclosure, rather
than the non-disclosure
itself. Wolfson v. Solomon, 54 F. R. D. 584, 592
(S.D.N.Y. 1972). This Court concluded in Unterberg Harris Private Equity
Partners L.P. v. Xerox Corp., 995 F. Supp. 437, 442 (S.D.N.Y. 1998), that
disclosure of the allegedly concealed information could not be the
proximate cause of the loss. Id. at 440-41.
Emergent does not allege a disclosure of the information regarding
Panzo's prior investments ever occurred. Unlike the plaintiff in
Unterberg, Emergent does not aver that any of the information allegedly
concealed was disclosed to the market or that a decline in Stonepath's
share price resulted. The only reasonable inference from the amended
complaint is that all of the information recited about Panzo was
available to the market — and Emergent — before Emergent
Emergent relies on the Second Circuit opinion in Suez Equity
Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, to argue that a
specific causal link between the alleged misrepresentations and the
alleged injury need not be pled if the fraud effects the "investment
quality" of the securities. Contrary to Emergent's argument, in Suez the
Second Circuit did not intend to excuse a plaintiff from pleading
traditional loss causation. Suez, 250 F.3d at 96 ("in sum, to escape
dismissal of a securities fraud complaint, the plaintiff must demonstrate
that the fraud caused the plaintiff to engage in the transaction and that
also caused the harm actually suffered").
The allegations at issue in Suez are more detailed than the allegations
concerning Panzo's prior investment history set forth in the amended
complaint. Emergent fails to aver a connection between Panzo's past
investments and the performance of Stonepath's stock. In contrast, the
plaintiff in Suez directly linked the misrepresentations concerning the
principal's personal and financial background to a decline in the stock
through his mismanagement of the company. Id. As a result of these
specific factual allegations, the Second Circuit concluded that loss
causation was pled because the plaintiff alleged that the defendants'
misrepresentations regarding the principal's background induced a
disparity between the transaction price and the true investment quality
of the securities at the time of the transaction. Id. at 98.
Emergent also points to paragraph 67 of the amended complaint in an
effort to establish that it has satisfied the loss causation requirement
with respect to Panzo's past investment history. None of the allegations
set forth in this paragraph, or elsewhere in the amended complaint,
establish the actual occurrence of any improper activity on the part of
Panzo or anyone else who is identified in the amended complaint. The
pleading is silent as to any actions on the part of Panzo that have
directly resulted in a decline in Stonepath's stock price.
While Emergent pled that the statements and omissions were a "proximate
cause of Emergent's economic loss and the decrease in the value of NETV's
common shares," there are no facts in the amended complaint from which
loss causation could be inferred.
Finally, with respect to Emergent's allegations concerning Stonepath's
investment in Brightstreet, there are no facts alleged from which it
could be inferred that the decline in Stonepath's common stock is
attributable to a representation in a brochure that the Brightstreet
investment was $14 million when, in fact, the investment was $4 million.
On the authority cited above, this failure is fatal to
The Motion to Consolidate is Granted
Whatever tactical purpose motivated Emergent to start the Second
Action, the identity of parties and subject matter requires
consolidation. The consolidated action will bear the initial file number
and caption. The Second Action will be dismissed as well as the complaint
in the Initial Action for the reasons already set forth.
Leave is granted to file an amended complaint in the consolidated
action within twenty (20) days or within such other period as the parties
may agree. Failing such a filing, both actions will be dismissed.
The Stonepath motion for summary judgment in the initial action is
granted. Its motion to dismiss the first amended complaint in the Second
Action for failure to state a claim is also granted with leave granted to
Emergent's motion for consolidation is granted, and the actions will
proceed under the initial file number and caption.
It is so ordered.