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October 2, 2001


The opinion of the court was delivered by: Robert W. Sweet, United States District Judge.


This is a hard case because the E-commerce bubble blew up in the face of these investors, as it did with many others*fn1 and the defendants assisted in creating the bubble. However, the theories advanced by Emergent do not successfully overcome the market forces which caused the loss of their investment.

Prior Proceedings

On October 12, 2000, Emergent filed its complaint alleging a violation of Section 12 of the Securities Act of 1933 (First Claim for Relief), Rule 10(b)5 (Second Claim for Relief), section 20 of the Securities & Exchange Act of 1934 (Third Claim for Relief), common law fraud (Fourth Claim for Relief), negligent misrepresentation (Fifth Claim for Relief) and rescission (Sixth Claim for Relief) arising out of the purchase of NETV Series C convertible Preferred Stock (the "Stock") in March 2000 in a private placement of 166,667 shares undertaken by Emergent on the representation (alleged by Emergent) that the amount to be raised by the private placement of the stock was $20 million. Answers to the complaint were filed and discovery undertaken.

The defendants' motion was heard and marked fully submitted on June 13, 2001.

On May 9, 2001, Emergent filed the Second Action, alleging a violation of 10(b)5 arising out of a misrepresentation of an investment by Stonepath in, Inc. ("Brightstreet"). A first amended complaint was filed by Emergent on June 5, 2001, alleging the omission to set forth material facts relating to prior activities and associations of Panzo alleged to constitute a pattern of "pump and dump," as well as control of Stonepath by Howard Appel ("Appel") who had been barred from the securities industry by the National Association of Security Dealers ("NASD").

On June 20, 2001, Emergent moved to consolidate both actions. On July 9, 2001, the defendants in the Second Action moved pursuant to Rule 12(b)6 to dismiss the first amended complaint. Both of these motions were marked fully submitted on August 15, 2001.

The Facts

The facts as set forth below are taken from the parties' Local Rule 56.1 Statements and supporting affidavits with every inference favoring Emergent, the non-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)), and the first amended complaint which is for Rule 12(b)6 purposes accepted as true. In a hopeful effort to improve clarity, the facts on which the motion for summary judgment turns, relating to purchase of the Stock and the amount of the offering, will be set forth first, followed by the allegations concerning the relationships, omissions and misrepresentations, which are the subject of the Rule 12(b)6 motion to dismiss the first amended complaint in the Second Action.

The Parties

Emergent is a Delaware limited liability company that manages an investment fund. Ninety percent of Emergent's stock is owned by its two principals, Mark Waldron ("Waldron") and Daniel Yun ("Yun") who share the title of "Managing Member" or "Managing Partner" of Emergent.

Waldron and Yun had been employed by prominent Wall Street firms and were familiar with the securities market and private placements. Between January and March 2000, Emergent managed investments of between $5 and $7 million.

Stonepath is a Delaware corporation which as a start-up venture sought to provide services and capital investment to technology related businesses which had no history of profit but performed well. In early 2000, Stonepath was doing business as NETV and had acquired interests of a series of "portfolio" internet companies and sought to raise funds to execute its business plan. Panzo was chairman and chief executive officer of Stonepath and Hansen was the president and chief operating officer of NETV and a friend and former roommate of Waldron.

The Offering

The initial contact between Emergent and Stonepath occurred on January 20, 2000, at a meeting in Emergent's offices in New York where Stonepath representatives in attendance at the meeting stated that they were "seeking approximately $20 million in capital" in a private placement which would be memorialized by a written agreement or series of agreements. In February conversations it was suggested to Waldron that the size of the offering was contemplated to be between $20 and $25 million. No further representation, written or oral, was made as to the size of the offering, but Yun expected that the size of the transaction would be disclosed in the contract of purchase.

Prior to purchasing the Stock, Emergent reviewed a registration statement on Form S-1 which Stonepath filed with the Securities and Exchange Commission ("SEC") on February 7, 2000 in connection with the registration of other securities which had been previously issued by the company. This statement revealed a substantial accumulated deficit, no revenue, and its auditor's doubt about its ability to continue as a going concern.

Emergent received and reviewed a written term sheet generally outlining the terms and conditions of the proposed transaction. On February 22, 2000, Waldron executed a letter of intent to participate in a private placement with an investment of $2 million with the term sheet attached as an exhibit and returned it to Stonepath. A portion of the term sheet referred to an offering of not less than $20 million. A draft of the Stock Purchase Agreement was transmitted to Emergent by e-mail on March 1, 2000. No additional documents were requested by Emergent.

Emergent received a signature page for the final Stock Purchase Agreement on March 3, 2000 (the "Agreement"), which was not accompanied by the full document, but the signature page was executed by Waldron and Emergent funded the stock purchase by a $2 million payment for 166,667 shares of the Stock at a price of $12 per share. The amount of the offering was not contained in any writing but Emergent anticipated that the final written documents would incorporate the size of the offering.

After closing on the transaction, Emergent received a closing binder containing copies of the fully executed documents in the private placement which revealed that more investors were involved in the transaction than Waldron had anticipated and that the amount of the private placement was approximately $50 million. The Agreement contained an integration clause as follows:

This letter and the Letter Agreement and Summary of Terms annexed hereto sets forth the principal understanding of Emergent and the Company with respect to the Investment and is subject to the execution of definitive agreements by the parties participating in the Investment and the ...

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