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EMERGENT CAPITAL INVESTMENT MANGT. v. STONEPATH GROUP

April 16, 2002

EMERGENT CAPITAL INVESTMENT MANAGEMENT, LLC, PLAINTIFF,
V.
STONEPATH GROUP, INC. (PREVIOUSLY KNOWN AS NET VALUE HOLDINGS, INC.), ANDREW PANZO, AND LESS HANSEN, DEFENDANTS.



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

OPINION

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.

Facts

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 memorandum.

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 Hansen.

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 Brightstreet investment in determining whether to invest in NETV.

B. Non-Disclosure of Panzo's Prior History and Relationship with Appell

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 customers.

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.

In May 1996, Sector changed its name to Viragen Europe and its common stock was reverse split one for fourteen (1:14) Appel, through FAC, owned more than 300,000 shares of Viragen Europe, 200,000 of which were received as a finder's fee.

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 profit.

As of April 27, 2001, the shares of Viragen Europe were trading at $0.64 per share.

b. Eastwind Group

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 ...


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