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NM IQ LLC v. McVEIGH

December 8, 2004.

NM IQ LLC, ARI GOTTESMAN, GAL KAPLAN, 2b VENTURES LLC, BACK BAY CAPITAL PARTNERS LLC, MICHAEL KAGAN, ISRAEL SEED LIMITED PARTNERS III ISRAEL, and ISRAEL SEED LIMITED PARTNERS III CAYMAN Plaintiffs,
v.
PATRICK S. McVEIGH, LAWRENCE S. WINKLER, and RAY CLEEMAN, Defendants.



The opinion of the court was delivered by: JOHN KEENAN, Senior District Judge

OPINION and ORDER

INTRODUCTION

  This case arises out of a merger transaction (the "Acquisition") between plaintiff NM IQ LLC ("NM IQ") and the now-bankrupt OmniSky Corporation ("OmniSky"). NM IQ commenced an action in New York State Court against OmniSky and three of its officers, alleging fraud, fraudulent inducement and mutual mistake. The court dismissed these claims for lack of standing and failure to state a cause of action. Upon leave of the court, seven members of NM IQ were added as plaintiffs. These plaintiffs then filed an amended complaint alleging the same claims against OmniSky and two of the officers. Again, the court dismissed for failure to state a cause of action.

  Prior to filing their amended complaint in the state court, the same plaintiffs commenced an action in this Court against the original three OmniSky officers. This action added claims under Sections 10(b) and 20(a) of the Securities Exchange Act ("1934 Act") to the common law fraud, fraudulent inducement and mutual mistake claims before the state court. Defendants have moved to dismiss under Fed.R.Civ.P. 12(b)(6) and 9(b) on grounds of res judicata, statute of limitations, failure to state claims and failure to plead fraud with sufficient particularity. For the reasons that follow, the Court finds the State Court dismissals preclusive of Plaintiffs' claims before this Court. Defendants' motion is therefore granted. FACTUAL BACKGROUND

  The Complaint alleges the following facts. OmniSky Corporation ("OmniSky") was a wireless technology company that offered service for use on handheld mobile devices. (Compl. ¶ 20). These services permitted subscribers to access the Internet, send and receive e-mail, and conduct e-commerce transactions. (Id.). At the time of the events giving rise to the Complaint, Defendant Patrick S. McVeigh ("McVeigh") was OmniSky's chairman and chief executive officer; defendant Lawrence S. Winkler ("Winkler") was chief financial officer; and defendant Ray Cleeman ("Cleeman") was vice president of finance and treasurer. (Id.).

  In October 2000, one month after OmniSky's initial public offering, OmniSky representatives commenced discussions with representatives of technology companies Nomad, Inc. and Nomad LTD (collectively "Nomad") concerning a possible acquisition. (Id. ¶¶ 22-25). Defendants McVeigh and Cleeman, along with then-president Barak Berkowitz ("Berkowitz"), were the primary negotiators for OmniSky. (Id. ¶ 25). Jacob Davidson ("Davidson"), a founder of Nomad and beneficial interest-holder in plaintiffs 2bVentures LLC ("2b") and Back Bay Capital Partners LLC ("Back Bay"), was the primary spokesman for Nomad. (Id. ¶ 25). In anticipation of the Acquisition, the seven non-NM IQ plaintiffs, who collectively owned 94% of Nomad, created NM IQ and transferred their interests to the new entity. (Id. ¶ 12). NM IQ was formed for the sole purpose of effecting the merger transaction with OmniSky. (Id.).

  Three representations by Defendants during the merger negotiations form the basis of Plaintiffs' claims. The first involved OmniSky's ability to fund itself going forward. In October and November 2000, Cleeman provided Davidson with eight reports by Wall Street analysts. (Id. ¶ 30). The analysts' consensus was that OmniSky had sufficient on-hand cash, would not need additional funding until late in 2001 and would achieve profitability by 2003. (Id. ¶ 31). Plaintiffs also allege that McVeigh represented to Davidson during a November 16, 2000 meeting that OmniSky had sufficient capital under its current business model to continue funding its own and Nomad's operations into 2002. (Id. ¶ 26(a)). While Plaintiffs made allegations concerning OmniSky's ability to fund itself in the state action, their Memorandum of Law states that these allegations are not before this Court. (Pl. Mem. of Law at 32-33).

  The second representation also involves the Wall Street analysts' reports. Four of the reports estimated that OmniSky would generate between 220,000 and 225,000 subscribers by the end of 2001. (Id. ¶ 43). Plaintiffs allege that Cleeman represented that he and OmniSky adopted the reports and that they accurately represented OmniSky's financial condition. (Id. ¶ 34). Plaintiffs claim that they relied on these reports in their determination to enter into the merger with OmniSky. (Id. ¶ 37). The third representation involved a statement by McVeigh to Davidson at the November 16, 2000 meeting that OmniSky "had secured a commitment from Verizon to invest an additional $20 million in funding." (Id. ¶ 26(b)). Plaintiffs allege that they relied on this commitment because they assumed that Verizon, a well-capitalized investor in technology ventures, had conducted extensive independent due diligence. (Id. ¶ 28). Plaintiffs also believed, and Defendants allegedly represented, that Verizon's name recognition would attract other investors to OmniSky. (Id. ¶¶ 27, 28(c)).

  During the second week of November 2000, Defendants attended an offsite meeting of OmniSky's senior executives. (Id. ¶ 29). Plaintiffs allege that they knew nothing of this meeting at the time. (Id.). At this meeting, an OmniSky vice president gave a presentation (the "Presentation") that included an agenda and timetable for revising the budget downward. (Id. ¶ 29, 39). This Presentation scheduled revised budget figures for a subsequent presentation on December 11, 2000. (Id. ¶ 42). The Presentation also stated subscriber projections of 158, 688 by the end of 2001, a 30% decrease from the estimates in the Wall Street reports. (Id. ¶¶ 41, 44).

  After the November Presentation, Plaintiffs allege that OmniSky prepared documents containing the revised subscriber projection and planning budget cuts. (Id. ¶ 45). According to spreadsheets allegedly prepared for a December 11 presentation, OmniSky planned budget cuts of $3.5 million at the end of 2000 and $32 million from 2001 operating expenses to compensate for lower-than-expected subscriber totals. (Id. ¶ 50).

  On November 21, 2000, after one month of negotiations, Plaintiffs and OmniSky executed an agreement in principle (the "Letter of Intent") setting forth the terms for OmniSky's acquisition of Nomad. (Id. ¶¶ 6, 51). Plaintiffs allege that Defendants did not disclose the reduction in subscriber projections or the proposed budget cuts at this time. (Id. ¶ 51). The Letter of Intent provided that OmniSky would pay Nomad's shareholders 2.5 million shares of unregistered OmniSky common stock, followed by payments of 600,000 and 400,000 shares approximately six months and one year after the acquisition. (Id. ¶ 52).

  Cleeman faxed documents for the closing of the acquisition to Davidson on December 30, 2000. (Id. ¶ 55). Davidson asked Cleeman whether OmniSky would meet the subscriber targets in the Wall Street reports. (Id. ¶ 56). To Davidson's surprise, Cleeman responded — deceitfully, Plaintiffs allege — that he did not know the status of those projections. (Id. ¶ 57). Davidson then contacted Berkowitz, who allegedly gave assurances that OmniSky "was on track to meet its projections." (Id. ¶ 58). Davidson signed the acquisition documents on December 30. (Id.). The remaining plaintiffs executed a Share Exchange Agreement on January 3, 2001, and OmniSky announced the acquisition on the following day. (Id.). Defendants provided another report by Wall Street analyst Morgan Stanley Dean Witter on the date of the announcement. (Id. ¶ 61). This report supported earlier representations as to OmniSky's financial condition and subscriber estimates in excess of 220,000 for the end of 2001. (Id.).

  At an offsite meeting with OmniSky management on January 15-16, 2001, before the acquisition closed, Davidson was "shocked" to learn that OmniSky had not met its subscriber targets and was setting much lower goals. (Id. ¶ 62). Nevertheless, Plaintiffs claim that the "financial entanglement" of OmniSky and Nomad "made it virtually impossible" to cancel the deal prior to closing. (Id.). Plaintiffs explain that "[i]n November 2000, the Nomad Businesses had a ready source of investment to continue their operations, but had instead taken an infusion of capital from OmniSky as part of the Acquisition upon signing the [Letter of Intent]." (Id.). Plaintiffs also note that all sides had already signed the Share Exchange Agreement prior to the closing. (Id.).

  On January 18, 2001, Plaintiffs closed the sale of Nomad to OmniSky on the terms of the Share Exchange Agreement, which followed the terms of the Letter of Intent. (Id. ¶ 67). At the closing, Plaintiffs executed lock-up agreements that incorporated terms in the Share Exchange Agreement. (Id. ¶ 70). Under these agreements, Plaintiffs were permitted to sell their shares of OmniSky stock after time periods ranging from 180 to 330 days. (Id. ¶ 70). In March 2001, McVeigh allegedly advised Davidson that OmniSky was in a liquidity crisis. (Id. ¶ 73). On July 15, 2001, a meeting was held to discuss Project Northstar, a reevaluation of OmniSky's business in light of its financial difficulties. (Id. ¶ 82). This meeting included discussions of various scenarios along with the amount of additional funding required and the date through which OmniSky could operate under the given scenario. (Id. ¶ 87). Possibilities included the closing of OmniSky's European operations, receipt of the promised $20 million from Verizon or both. (Id. ¶ 88-91). Plaintiffs allege that during this meeting, Cleeman made a presentation not distributed in hard copy to the participants. (Id. ¶ 93). Cleeman allegedly stated that if Verizon invested the $20 million, OmniSky would survive, and if Verizon did not invest, OmniSky would file for bankruptcy protection. (Id.).

  During the week of September 11, 2001, Davidson attended a meeting at which he was advised that OmniSky had failed to secure the $20 million from Verizon, to cut sufficient costs and to raise sufficient revenue. (Id. ¶ 95). On September 21, 2001, Winkler reported to the OmniSky Board of Directors that OmniSky had failed to raise additional capital and would run out of cash by December. (Id. ¶ 96). Trading in OmniSky common stock was suspended in late 2001, and OmniSky filed for bankruptcy in December 2001. (Id. ¶ 97) PROCEEDINGS IN STATE COURT

  On December 5, 2001, Plaintiff NM IQ filed a complaint ("Initial Complaint") in New York State Supreme Court, New York County, against OmniSky, McVeigh, Winkler and Cleeman. (Tarnofsky Affd., Exh. O). The Initial Complaint asserted fraud, fraudulent inducement and mutual mistake claims in connection with the Acquisition. This Complaint, inter alia, alleged misrepresentations as to OmniSky's ability to fund itself and the Verizon investment, but did not address the subscriber projections. The defendants moved to dismiss. On January 3, 2003, Justice Karla Moskowitz (the "State Court") issued a non-final order granting the motion. NM IQ LLC v. OmniSky Corp., Index No. 605806/01 (N.Y. Sup. Ct. N.Y. Co. Jan. 3, 2003) ("January 2003 Order") (Tarnofsky Affid., Exh. P). At the threshold, the State Court determined that NM ...


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