The opinion of the court was delivered by: Robert W. Sweet, U.S. District Judge
Defendants Stonepath Group, Inc. ("Stonepath"), previously known as Net
Value Holdings, Inc. ("NETV"); Andrew Panzo ("Panzo"); and Lee Hansen
("Hansen") have moved pursuant to Fed.R.Civ.P. 12(b)(6) to dismiss
the second amended complaint of plaintiff Emergent Capital Investment
Management LLC ("Emergent").
For the following reasons, that motion is granted.
The facts underlying this dispute were described in greater detail in
Emergent Capital Investment Management v. Stonepath Group, Inc.,
165 F. Supp.2d 615 (S.D.N.Y. 2001), familiarity with which is presumed.
The facts below are taken
from Emergent's second amended complaint.
The second amended complaint that is the subject of defendants' motion
to dismiss is the fourth complaint in this lawsuit to recover Emergent's
investment in Stonepath through a March 2000 private placement
transaction. The third complaint was dismissed by this Court on October
3, 2001, under Federal Rules 56 and 12(b)(6). Emergent was given a
limited right to replead the motion dismissed under Rule 12(b)(6).
At issue are the events and representations leading up to a March 3,
2000 transaction in which Emergent purchased $2 million in NETV stock, at
approximately $12 per share. Following this purchase, the price of NETV
shares fell below $1. Emergent claims that several misrepresentations or
omissions induced it to make this investment. First, it claims that
Stonepath stated that it had invested $14 million in an e-commerce
company when it had only invested $4 million. Second, Emergent claims
that Stonepath never revealed the close connections between NETV and a
man who has been barred from the securities industry for life.
A. Investments in Brightstreet
Emergent and Stonepath initially met at a meeting in Emergent's New
York offices on January 20, 2000. Hansen, who is alleged to have been a
"close friend" of one of Emergent principals, Mark Waldron ("Waldron"),
solicited and arranged for the meeting. Stonepath representatives stated
at the meeting that they sought approximately $20 million in capital in a
private placement that would be memorialized in a written agreement or
series of agreements.
At the meeting, Panzo and Hansen orally represented to the two
principals of Emergent, Waldron and Daniel Yun ("Yun"), that NETV had
invested approximately $17 million in seven e-commerce companies. They
represented that of the seven, the largest investment was $14 million,
which NETV had paid for a 12% equity interest in Brightstreet.com, Inc.
("Brightstreet"). At the meeting, Panzo and Hansen gave Waldron and Yun a
document entitled, Net Value Holdings, Smart Seed Capital (the
"Brochure"), which listed seven companies in which NETV had made
investments. The Brochure stated that NETV invested $14 million in
Brightstreet for a 12% ownership interest. Emergent alleges that the
brochure was intended to take the place of a private placement
At a meeting in July 2000, defendants again represented in writing and
orally to Emergent that the amount of NETV's investment in Brightstreet
was $14 million. Panzo and Hansen gave Yun and Waldron a document
entitled Net Value Holdings, Building and Accelerating Technology
Businesses, confirming this representation.
In April 2001, Panzo stated under oath that the investment in
Brightstreet was $14 million.
In fact, according to its 1999 Form 10-K, NETV had invested only $4
million or less in Brightstreet, not $14 million as the defendants
represented. The form, signed by Panzo and Hansen, was filed with the SEC
on May 11, 2000. NETV's 2000 Form 10-K also affirmed that the amount was
$4 million. That form, filed on April 2, 2001, was signed by Panzo and
A $14 million investment in Brightstreet would have been NETV's largest
asset. Emergent alleges that the investment "related directly to the
value of NETV and therefore to the value and the price of the shares"
they purchased. Emergent claims that Waldron and Yun relied on this
misrepresentation, and that Waldron and Yun specifically discussed the
investment in determining whether to invest in NETV.
B. Non-Disclosure of Panzo's Prior History and Relationship with
Emergent claims that it relied on Panzo's "experience, judgment,
management, business skills, character and honesty" in assessing the
merits of its investment in Stonepath. At the time of purchase, Emergent
was not aware of NETV's and Panzo's purported relationship with Howard
M. Appel, who was barred for life by the National Association of Security
Dealers ("NASD") from the securities industry in or about August 1991 as
a result of his sale of unregistered shares of common stock to
1. Panzo's Relationship with Appel
In 1992 and 1993, Panzo was employed as an executive vice president by
HMA Investments ("HMA"), a company in which Appel was the principal.
Panzo testified in an April 25, 2001 deposition that he left HMA after
learning of Appel's "sordid past." Since leaving HMA in 1993, Panzo has
collaborated with Appel as a promotor, investor in, and/or founder of
various companies, most of which culminated in a merger between a public
shell corporation and a private operating corporation. Emergent alleges
that Appel would usually arrange for Panzo to become a director of the
public company, because Appel could not become a director without
disclosing his troubles with the NASD. Both Appel and Panzo would own
substantial amounts of shares in the public companies and subsequently
sell them for large profits. Emergent alleges that in every
collaboration, the shares of the subject companies subsequently became
virtually worthless, and in at least two instances the companies in
question filed for protection under the Bankruptcy Code.
a. Sector Associates and Viragen
Emergent alleges that Appel achieved control over Sector Associates
Ltd. ("Sector") and installed Panzo as president and as one of two
directors of the company by November 1993.
In September 1995, Sector had no operations of its own and was a public
shell. On or about September 20, 1995, Sector entered into a reverse
merger agreement with Viragen Scotland Ltd. ("VSL"), a private company,
and its largest shareholder, Viragen, Inc. ("Viragen"), whereby Sector
would acquire 100% of the stock in VSL in exchange for its distribution
to Viragen of newly issued convertible preferred shares of Sector
representing approximately 94% of the outstanding capital stock of Sector
after the acquisition.
On or about November 3, 1995, FAC Enterprises, Inc. ("FAC"), Appel's
wholly owned company, purchased 1,569,510 shares of Sector's common stock
from the company, and more than five million warrants exercisable at
$0.43 per share for a total purchase price of $350,000. He did this with
the consent and approval of Panzo as Sector's president and director. FAC
then owned 48.3% of Sector's common shares.
Emergent alleges that Appel also arranged for Panzo through his company
American Maple Leaf Corporation ("AML") to receive 35,000 shares of
Sector for little or no consideration.
The reverse merger closed in December 1995. Subsequent to the closing,
FAC received additional free common shares representing 3% of the common
shares of Sector after the acquisition, as a finder's fee, pursuant to an
agreement dated November 7, 1995.
FAC sold its shares of Viragen Europe in 1996 and 1997 at a profit of
several million dollars. Panzo also sold his shares at a substantial
As of April 27, 2001, the shares of Viragen Europe were trading at
$0.64 per share.
On January 25, 1995, Appel and Panzo caused Sector to make an equity
investment of $500,000 in Eastwind Group Inc. ("Eastwind") in exchange
for 200,000 common shares plus certain warrants. Eastwind had no
operations at that time.
As a result of the investment, Emergent alleges that Panzo was placed
on the board of directors of Eastwind. In addition, Eastwind entered into
a voting trust agreement with Panzo's company, AML, and Appel's company,
FAC. By the agreement, AML and FAC jointly were entitled to elect one
member of Eastwind's board of directors. Finally, Eastwind entered into
an Investment Bank Advisor Agreement with AML and FAC, pursuant to which
FAC received 40,000 Eastwind common shares and Panzo received 10,000
shares for unspecified consulting services. FAC and AML subsequently
received an additional 100,000 shares of Eastwind common stock plus
warrants to purchase an additional 100,000 shares pursuant to that
agreement. Those warrants were subsequently exercised. AML and FAC thus
received 250,000 common shares of Eastwind, while Sector, which invested
the initial $500,000, received only 200,000 shares.
Emergent alleges that Panzo and Appel, through AML and FAC, sold all or
substantially all of their Eastwind ...