Strategic Diversity, Inc., a Massachusetts corporation; and Kenneth P. Weiss, an unmarried man, Plaintiffs,
Alchemix Corporation, an Arizona corporation; and Robert R. Horton and Cheryl Halota Horton, husband and wife, Medici Associates, LLC, a Delaware limited liability company, Defendants.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
G. MURRAY SNOW, District Judge.
On March 28, 2013, the issue of damages relating to Plaintiff Kenneth P. Weiss's securities fraud claims was tried to the Court without a jury. (Doc. 269.) This Order constitutes the Court's findings of fact and conclusions of law under Federal Rule of Civil Procedure 52(a).
This case involves a $500, 000 loan by Plaintiff Strategic Diversity, Inc. ("Strategic") to Defendant Robert R. Horton's company, Defendant Alchemix Corporation ("Alchemix"). Also at the center of this case is the subsequent and separate purchase by Weiss, the sole owner of Strategic, of 250, 000 shares of Alchemix stock at the price of $1.00 per share. In their operative Amended Complaint (the "Complaint") both Weiss and Strategic bring claims for equitable relief and damages.
FINDINGS OF FACT
I. Strategic's Note with Alchemix
Horton is the founder and CEO of Alchemix, an alternative fuels start-up company. (Doc. 203, Final Pretrial Order ¶ B(1)(c)-(d).) Sometime after their first meeting, Horton offered Weiss an investment opportunity with Alchemix. ( Id. at 19:7-9.) On July 2, 2001, Weiss's investment company, Strategic, agreed to loan $500, 000 to Alchemix. Strategic and Alchemix consummated the loan through a Convertible Promissory Note (the "Note"), payable after five years at ten-percent interest, or convertible to stock at a price of $2.00 per share. (Doc. 127-2, Ex. 1.) In exchange for consummating the Note, Strategic was given a security interest in Alchemix's patents and Weiss was given a seat on Alchemix's Board of Directors (the "Board") until the Note was repaid. (Doc. 127-4, Ex. 18 at 90; Doc. 129-2, Ex. B at ALCHX00156 ¶ 4.) The agreements provided that the security interest and Weiss's seat on the Board endured "until the Note [h]as been satisfied or converted" into stock. (Doc. 127-2, Ex. 2; Doc. 129, Ex. B at ALCHX00156 ¶ 4.)
In addition, the Note granted Alchemix the right to prepay its debt after one year. The conditions on Alchemix's right to prepay were that Alchemix had to: (1) give Strategic thirty days advanced written notice before prepayment; (2) pay a $10, 000 prepayment penalty; and (3) during the notice period, give Strategic the option to convert the Note into 250, 000 shares of Alchemix stock at the lower of $2.00 per share or such price as offered to other investors at the time. (Doc. 127-2, Ex. 1 at 2-3.) Alchemix further provided Strategic with a Stock Purchase Warrant, whereby Alchemix was required to obtain Strategic's consent before increasing the number of capitalized shares beyond 40 million because of the dilutive nature of such an increase in shares. ( See Doc. 129-2, Ex. B at ACLHX00165 ¶ 4c.)
II. Western's Investment in Alchemix
Approximately one year later, in the Spring and Summer of 2002, Horton sought to raise additional capital to develop Alchemix's technology. ( See Doc. 127-4, Ex. 15, June 11, 2002 Board Minutes at ALCHX00605-04; Doc. 203, Final Pretrial Order ¶ B(1)(i).) In cooperation with Horton, a group of investors called the Alchemix Funding Group ("AFG") sought to obtain additional investment capital for Alchemix through additional sales of stock. Horton, however, began investment discussions with Western Oil Sands ("Western"), a large Canadian energy company. In June 2002, Horton and Alchemix received an investment proposal from Western.
Horton initially met with Western's Chairman and CEO, Guy Turcotte, on June 12, 2002. (Doc. 224, Jury Trial Tr. at 147:10-148:1.) On June 17, 2002, Western sent a Memorandum of Understanding (the "Memorandum") which described the terms of the investment and a wire transfer of $3 million to Horton. ( Id. at 148:2-6.) The Memorandum granted Western 1.5 million shares of Alchemix stock at a price of $2.00 per share. (Doc. 127-2, Ex. 9, Memorandum at SDI000080.) The Memorandum further granted Western the "right to purchase" up to an additional $33 million in Alchemix stock in the subsequent months conditioned on Alchemix meeting benchmarks. ( Id. ) The Memorandum referred to these rights to purchase stock as "options." ( Id. ) Alchemix consummated the Western investment on June 18, 2002. (Doc. 203, Final Pretrial Order ¶ B(1)(n).)
On June 18, 2002, Horton announced the Western investment and sent the Memorandum to Weiss and the rest of the members of the Board. (Doc. 203, Final Pretrial Order ¶ B(1)(m).) On June 24, 2002, Horton contacted Weiss to discuss Western's investment. Horton told Weiss that Western was a multibillion dollar Canadian company with expertise in energy and would be a good strategic partner for Alchemix. (Doc. 224, Jury Trial Tr. at 42:24-43:3.)
Alchemix decided to repay the Note from Strategic, including the early payment penalty. Strategic elected to waive the 30-day notice provision. In the subsequent weeks, Weiss and his executive assistant, Arthur Hagopian, worked with Alchemix's CFO, Richard Armstrong, to execute a series of documents reflecting the repayment of the Note to Strategic, Strategic's relinquishment of its security interest in Alchemix's patents and Weiss's resignation from the Board. ( See Pls. Exs. 7-10, 13-14, 17; Doc. 129-3, Ex. G at SDI000069.) On July 2, 2002, Strategic accepted $560, 832 from Alchemix as repayment of principal, interest, and prepayment penalties under the Note. (Pls. Ex. 10; Doc. 136-12, Ex. K.) Weiss formally resigned from the Board on July 11, 2002. (Doc. 203, Final Pretrial Order ¶ B(1)(t).) Finally, on August 5, 2002, Strategic released its security interest in Alchemix's patents. (Pls. Ex. 19.)
III. Weiss's Stock Purchase From Medici
In late June or early July 2002, Horton made an offer to sell shares at a favorable price to members of AFG for their ultimately unused efforts to raise investment capital for Alchemix. (Doc. 224, Jury Trial Tr. at 107:25-108:21.) In conjunction with that offer, Horton offered Alchemix stock held by his holding company, Medici Associates, LLC ("Medici"), to Weiss at the same price of $1.00 per share. ( Id. at 45:16-46:5.) Weiss accepted Horton's offer to invest in Alchemix. On July 8, 2002, Weiss signed a subscription agreement and purchased 250, 000 shares of Alchemix stock for $250, 000 from Medici. (Pls. Exs. 15, 17; Doc. 127-2, Ex. 11 (Subscription Agreement); Doc. 203 (Final Pretrial Order) ¶¶ 1(r)-(s).) Weiss's stock purchase from Medici was wholly and entirely separate from Strategic's Note to Alchemix.
IV. Western's Decision Not to Exercise its Options
Three to four weeks after their initial meeting on June 12, 2002, Turcotte informed Horton that Western's Board of Directors had decided that Western would not invest further in any ventures outside of their immediate projects. (Doc. 224, Jury Trial Tr. at 176:1-11; Doc. 127-4, Ex. 19 (Gregory Depo.) at 50:9-13.) Turcotte further told Horton that Western would not exercise its options to purchase Alchemix shares, though Western would retain its initial investment of $3 million. (Doc. 224, Jury Trial, Tr. at 184:24-185:2; 244:3-245:9.)
Immediately after Western's decision was communicated to him, Horton convened a meeting with the Board to apprise it of the development. ( Id. at 185:21-25.) Horton did not inform Weiss because Weiss was no longer on the Board and Alchemix had 500 other shareholders. ( Id. at 186:1-4.) Horton did not contact Weiss at any time after that meeting to inform him of Western's decision. ( Id. at 186:20-25.)
In late 2005, Weiss met with Horton to discuss his investment in and the corporate health of Alchemix since he had not received regular updates as a shareholder of the company. ( Id. at 57:4-19.) It was at this meeting that Weiss first learned from Horton that Western had not exercised its options. ( Id. at 58:11-13.)
V. The Complaint and Summary Judgment
On May 7, 2007, Weiss and Strategic brought suit against Alchemix, Robert and Cheryl Horton, and Medici. In their Complaint, Plaintiffs alleged the following counts: 1) federal securities fraud (15 U.S.C. § 78j and Rule 10b-5); 2) state securities fraud in violation of the Arizona Securities Act (the "ASA") (A.R.S. § 44-1991); 3) common law fraud; 4) statutory fraud (A.R.S. § 44-1521, et seq.); 5) negligent misrepresentation; 6) mistake/rescission; 7) failure of condition precedent; 8) equitable restitution; and 9) punitive damages. (Doc. 54.) Plaintiffs requested the Court to provide the equitable relief of (1) reinstating Strategic's Note to Alchemix and its security interest in Alchemix's patents; (2) reinstating Weiss to the Board; and (3) voiding Weiss's purchase of Alchemix stock and restoring all consideration given by Weiss for that stock. ( Id. at 21.) Plaintiffs further requested compensatory and actual damages, interest, punitive damages, and taxable costs and reasonable attorneys' fees incurred in this action. ( Id. )
Initially, the Court dismissed the statutory fraud claim (count four) as time-barred. (Doc. 29 at 1; Doc. 148 at 7 n.4.) The Court then granted summary judgment to Defendants on all of Plaintiffs' remaining claims. (Doc. 148 at 19.) To the extent that Plaintiffs' federal and state securities fraud claims were based on Horton's omission regarding Western's investment, the Court held that those claims were barred under the statute of limitations. ( Id. at 8.)
To the extent Plaintiffs' fraud claims were not time-barred, the Court held that they failed because Plaintiffs had not demonstrated economic loss or other injury. ( Id. at 13.) At the outset, the Court made clear that although Plaintiffs alleged that the stock purchase was part of a two-pronged, but single "debt-equity swap, " the undisputed facts demonstrated that Alchemix's repayment of the Note to Strategic was separate from Weiss's purchase of the 250, 000 shares from Horton. ( Id. at 5.) Strategic could not have entered into a "debt-equity swap" as Weiss obtained the equity rather than Strategic and Strategic made the Note rather than Weiss. Accordingly, Weiss's purchase of the 250, 000 shares must have been separate from Strategic's accepting repayment of the Note
Defendants had a unilateral right to pay off the Note to Strategic one year from origination. That right to prepayment was based on three conditions as described above. Defendants did not fulfill the conditions of notifying Strategic thirty days in advance and providing Strategic the option to convert the Note into shares of Alchemix stock. Plaintiffs, however, did not prove that Strategic suffered injury as a result. They conceded to the lack of injury at oral argument. Further, Weiss, the owner of Strategic, purchased Alchemix shares after the Note was prepaid by Defendants. Plaintiffs also did not prove that Weiss was somehow damaged by the purchase price of Alchemix stock of $1.00 per share. Thus, the Court held that Plaintiffs failed to show injury.
As to the Plaintiffs' equitable claims, the Court first held that there was no claim for rescission based on mutual mistake because there was no mistake of fact. ( Id. at 17.) Although it is not clear that Arizona recognizes a claim for failure of condition precedent, that claim also failed as a matter of law because the conditions were fulfilled. ( Id. at 18). Upon accepting repayment, Strategic was required to release its security interest in Alchemix's patents and Weiss was required to resign from the Board. Finally the equitable restitution/unjust enrichment claim failed because Plaintiffs failed to show any element of "impoverishment" or injury as discussed above. ( Id. )
Plaintiffs appealed all of the Court's rulings including the grant of summary judgment to Defendants. (Doc. 152 at 1.) The Ninth Circuit did not address the Court's dismissal of the statutory fraud claim (count four). It affirmed judgment for Defendants as to Plaintiffs' state law claims of common law fraud (count three), negligent misrepresentation (count five), mutual mistake (count six), failure of a condition precedent (count seven), and unjust enrichment (count eight), but reversed and remanded the federal and state securities fraud claims (counts one and two) for consideration under a "rescissionary measure of damages." Strategic Diversity, Inc. v. Alchemix Corp., 666 F.3d 1197, 1211 (9th Cir. 2012).
Those claims were apparently reversed as to both Strategic's and Weiss's claims. The Ninth Circuit did not address this Court's determination that Strategic could show no damage and that the transaction between Strategic, Weiss and the Defendants could not have been a "debt-equity swap" as the transactions were between separate parties. Instead, the Ninth Circuit determined that while Weiss could tender his 250, 000 shares to rescind his purchase of Alchemix stock, it would not be possible to return to Strategic the rights it had received from Alchemix pending the complete repayment of its Note which occurred in June 2002. ...