Strategic Diversity, Inc v. Alchemix Corp

Filing 279

AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW - IT IS THEREFORE ORDERED that Plaintiff Weiss shall have thirty (30) days in which to tender his 250,000 shares of Alchemix stock to Medici and apprise this Court that he has done so. If within fourt een (14) days after the notice has been filed, Medici has not challenged the existence or adequacy of Weiss's tender, the Court shall enter judgment against Medici. Should this Court not receive notice of Weiss's tender within thirty (30 ) days of the date of this Order, then this suit will be dismissed with prejudice, with Weiss possessing his Alchemix stock, but no judgment against the Defendants. (See document for further details). Signed by Judge G Murray Snow on 8/28/13. (LAD)

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1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 10 Strategic Diversity, Inc., a Massachusetts corporation; and Kenneth P. Weiss, an unmarried man, No. CV-07-00929-PHX-GMS AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW Plaintiffs, 11 12 v. 13 Alchemix Corporation, an Arizona corporation; and Robert R. Horton and Cheryl Halota Horton, husband and wife, Medici Associates, LLC, a Delaware limited liability company, 14 15 16 Defendants. 17 18 19 20 21 22 23 24 25 26 27 28 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). BACKGROUND 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 1 2 I. Strategic’s Note with Alchemix 3 Horton is the founder and CEO of Alchemix, an alternative fuels start-up 4 company. (Doc. 203, Final Pretrial Order ¶ B(1)(c)–(d).) Sometime after their first 5 meeting, Horton offered Weiss an investment opportunity with Alchemix. (Id. at 19:7–9.) 6 On July 2, 2001, Weiss’s investment company, Strategic, agreed to loan $500,000 to 7 Alchemix. Strategic and Alchemix consummated the loan through a Convertible 8 Promissory Note (the “Note”), payable after five years at ten-percent interest, or 9 convertible to stock at a price of $2.00 per share. (Doc. 127-2, Ex. 1.) In exchange for 10 consummating the Note, Strategic was given a security interest in Alchemix’s patents and 11 Weiss was given a seat on Alchemix’s Board of Directors (the “Board”) until the Note 12 was repaid. (Doc. 127-4, Ex. 18 at 90; Doc. 129-2, Ex. B at ALCHX00156 ¶ 4.) The 13 agreements provided that the security interest and Weiss’s seat on the Board endured 14 “until the Note [h]as been satisfied or converted” into stock. (Doc. 127-2, Ex. 2; Doc. 15 129, Ex. B at ALCHX00156 ¶ 4.) 16 In addition, the Note granted Alchemix the right to prepay its debt after one year. 17 The conditions on Alchemix’s right to prepay were that Alchemix had to: (1) give 18 Strategic thirty days advanced written notice before prepayment; (2) pay a $10,000 19 prepayment penalty; and (3) during the notice period, give Strategic the option to convert 20 the Note into 250,000 shares of Alchemix stock at the lower of $2.00 per share or such 21 price as offered to other investors at the time. (Doc. 127-2, Ex. 1 at 2–3.) Alchemix 22 further provided Strategic with a Stock Purchase Warrant, whereby Alchemix was 23 required to obtain Strategic’s consent before increasing the number of capitalized shares 24 beyond 40 million because of the dilutive nature of such an increase in shares. (See Doc. 25 129-2, Ex. B at ACLHX00165 ¶ 4c.) 26 II. Western’s Investment in Alchemix 27 Approximately one year later, in the Spring and Summer of 2002, Horton sought 28 to raise additional capital to develop Alchemix’s technology. (See Doc. 127-4, Ex. 15, -2- 1 June 11, 2002 Board Minutes at ALCHX00605–04; Doc. 203, Final Pretrial Order ¶ 2 B(1)(i).) In cooperation with Horton, a group of investors called the Alchemix Funding 3 Group (“AFG”) sought to obtain additional investment capital for Alchemix through 4 additional sales of stock. Horton, however, began investment discussions with Western 5 Oil Sands (“Western”), a large Canadian energy company. In June 2002, Horton and 6 Alchemix received an investment proposal from Western. 7 Horton initially met with Western’s Chairman and CEO, Guy Turcotte, on June 8 12, 2002. (Doc. 224, Jury Trial Tr. at 147:10–148:1.) On June 17, 2002, Western sent a 9 Memorandum of Understanding (the “Memorandum”) which described the terms of the 10 investment and a wire transfer of $3 million to Horton. (Id. at 148:2–6.) The 11 Memorandum granted Western 1.5 million shares of Alchemix stock at a price of $2.00 12 per share. (Doc. 127-2, Ex. 9, Memorandum at SDI000080.) The Memorandum further 13 granted Western the “right to purchase” up to an additional $33 million in Alchemix 14 stock in the subsequent months conditioned on Alchemix meeting benchmarks. (Id.) The 15 Memorandum referred to these rights to purchase stock as “options.” (Id.) Alchemix 16 consummated the Western investment on June 18, 2002. (Doc. 203, Final Pretrial Order ¶ 17 B(1)(n).) 18 On June 18, 2002, Horton announced the Western investment and sent the 19 Memorandum to Weiss and the rest of the members of the Board. (Doc. 203, Final 20 Pretrial Order ¶ B(1)(m).) On June 24, 2002, Horton contacted Weiss to discuss 21 Western’s investment. Horton told Weiss that Western was a multibillion dollar Canadian 22 company with expertise in energy and would be a good strategic partner for Alchemix. 23 (Doc. 224, Jury Trial Tr. at 42:24–43:3.) 24 Alchemix decided to repay the Note from Strategic, including the early payment 25 penalty. Strategic elected to waive the 30-day notice provision. In the subsequent weeks, 26 Weiss and his executive assistant, Arthur Hagopian, worked with Alchemix’s CFO, 27 Richard Armstrong, to execute a series of documents reflecting the repayment of the Note 28 to Strategic, Strategic’s relinquishment of its security interest in Alchemix’s patents and -3- 1 Weiss’s resignation from the Board. (See Pls. Exs. 7–10, 13–14, 17; Doc. 129-3, Ex. G at 2 SDI000069.) On July 2, 2002, Strategic accepted $560,832 from Alchemix as repayment 3 of principal, interest, and prepayment penalties under the Note. (Pls. Ex. 10; Doc. 136-12, 4 Ex. K.) Weiss formally resigned from the Board on July 11, 2002. (Doc. 203, Final 5 Pretrial Order ¶ B(1)(t).) Finally, on August 5, 2002, Strategic released its security 6 interest in Alchemix’s patents. (Pls. Ex. 19.) 7 III. Weiss’s Stock Purchase From Medici 8 In late June or early July 2002, Horton made an offer to sell shares at a favorable 9 price to members of AFG for their ultimately unused efforts to raise investment capital 10 for Alchemix. (Doc. 224, Jury Trial Tr. at 107:25–108:21.) In conjunction with that offer, 11 Horton offered Alchemix stock held by his holding company, Medici Associates, LLC 12 (“Medici”), to Weiss at the same price of $1.00 per share. (Id. at 45:16–46:5.) Weiss 13 accepted Horton’s offer to invest in Alchemix. On July 8, 2002, Weiss signed a 14 subscription agreement and purchased 250,000 shares of Alchemix stock for $250,000 15 from Medici. (Pls. Exs. 15, 17; Doc. 127-2, Ex. 11 (Subscription Agreement); Doc. 203 16 (Final Pretrial Order) ¶¶ 1(r)–(s).) Weiss’s stock purchase from Medici was wholly and 17 entirely separate from Strategic’s Note to Alchemix. 18 IV. Western’s Decision Not to Exercise its Options 19 Three to four weeks after their initial meeting on June 12, 2002, Turcotte informed 20 Horton that Western’s Board of Directors had decided that Western would not invest 21 further in any ventures outside of their immediate projects. (Doc. 224, Jury Trial Tr. at 22 176:1–11; Doc. 127-4, Ex. 19 (Gregory Depo.) at 50:9–13.) Turcotte further told Horton 23 that Western would not exercise its options to purchase Alchemix shares, though Western 24 would retain its initial investment of $3 million. (Doc. 224, Jury Trial, Tr. at 184:24– 25 185:2; 244:3–245:9.) 26 Immediately after Western’s decision was communicated to him, Horton convened 27 a meeting with the Board to apprise it of the development. (Id. at 185:21–25.) Horton did 28 not inform Weiss because Weiss was no longer on the Board and Alchemix had 500 other -4- 1 shareholders. (Id. at 186:1–4.) Horton did not contact Weiss at any time after that 2 meeting to inform him of Western’s decision. (Id. at 186:20–25.) 3 In late 2005, Weiss met with Horton to discuss his investment in and the corporate 4 health of Alchemix since he had not received regular updates as a shareholder of the 5 company. (Id. at 57:4–19.) It was at this meeting that Weiss first learned from Horton that 6 Western had not exercised its options. (Id. at 58:11–13.) 7 V. The Complaint and Summary Judgment 8 On May 7, 2007, Weiss and Strategic brought suit against Alchemix, Robert and 9 Cheryl Horton, and Medici. In their Complaint, Plaintiffs alleged the following counts: 1) 10 federal securities fraud (15 U.S.C. § 78j and Rule 10b-5); 2) state securities fraud in 11 violation of the Arizona Securities Act (the “ASA”) (A.R.S. § 44-1991); 3) common law 12 fraud; 4) statutory fraud (A.R.S. § 44-1521, et seq.); 5) negligent misrepresentation; 6) 13 mistake/rescission; 7) failure of condition precedent; 8) equitable restitution; and 9) 14 punitive damages. (Doc. 54.) Plaintiffs requested the Court to provide the equitable relief 15 of (1) reinstating Strategic’s Note to Alchemix and its security interest in Alchemix’s 16 patents; (2) reinstating Weiss to the Board; and (3) voiding Weiss’s purchase of 17 Alchemix stock and restoring all consideration given by Weiss for that stock. (Id. at 21.) 18 Plaintiffs further requested compensatory and actual damages, interest, punitive damages, 19 and taxable costs and reasonable attorneys’ fees incurred in this action. (Id.) 20 Initially, the Court dismissed the statutory fraud claim (count four) as time-barred. 21 (Doc. 29 at 1; Doc. 148 at 7 n.4.) The Court then granted summary judgment to 22 Defendants on all of Plaintiffs’ remaining claims. (Doc. 148 at 19.) To the extent that 23 Plaintiffs’ federal and state securities fraud claims were based on Horton’s omission 24 regarding Western’s investment, the Court held that those claims were barred under the 25 statute of limitations. (Id. at 8.) 26 To the extent Plaintiffs’ fraud claims were not time-barred, the Court held that 27 they failed because Plaintiffs had not demonstrated economic loss or other injury. (Id. at 28 13.) At the outset, the Court made clear that although Plaintiffs alleged that the stock -5- 1 purchase was part of a two-pronged, but single “debt-equity swap,” the undisputed facts 2 demonstrated that Alchemix’s repayment of the Note to Strategic was separate from 3 Weiss’s purchase of the 250,000 shares from Horton. (Id. at 5.) Strategic could not have 4 entered into a “debt-equity swap” as Weiss obtained the equity rather than Strategic and 5 Strategic made the Note rather than Weiss. Accordingly, Weiss’s purchase of the 250,000 6 shares must have been separate from Strategic’s accepting repayment of the Note 7 Defendants had a unilateral right to pay off the Note to Strategic one year from 8 origination. That right to prepayment was based on three conditions as described above. 9 Defendants did not fulfill the conditions of notifying Strategic thirty days in advance and 10 providing Strategic the option to convert the Note into shares of Alchemix stock. 11 Plaintiffs, however, did not prove that Strategic suffered injury as a result. They conceded 12 to the lack of injury at oral argument. Further, Weiss, the owner of Strategic, purchased 13 Alchemix shares after the Note was prepaid by Defendants. Plaintiffs also did not prove 14 that Weiss was somehow damaged by the purchase price of Alchemix stock of $1.00 per 15 share. Thus, the Court held that Plaintiffs failed to show injury. 16 As to the Plaintiffs’ equitable claims, the Court first held that there was no claim 17 for rescission based on mutual mistake because there was no mistake of fact. (Id. at 17.) 18 Although it is not clear that Arizona recognizes a claim for failure of condition precedent, 19 that claim also failed as a matter of law because the conditions were fulfilled. (Id. at 18). 20 Upon accepting repayment, Strategic was required to release its security interest in 21 Alchemix’s patents and Weiss was required to resign from the Board. Finally the 22 equitable restitution/unjust enrichment claim failed because Plaintiffs failed to show any 23 element of “impoverishment” or injury as discussed above. (Id.) 24 VI. Appeal 25 Plaintiffs appealed all of the Court’s rulings including the grant of summary 26 judgment to Defendants. (Doc. 152 at 1.) The Ninth Circuit did not address the Court’s 27 dismissal of the statutory fraud claim (count four). It affirmed judgment for Defendants 28 as to Plaintiffs’ state law claims of common law fraud (count three), negligent -6- 1 misrepresentation (count five), mutual mistake (count six), failure of a condition 2 precedent (count seven), and unjust enrichment (count eight), but reversed and remanded 3 the federal and state securities fraud claims (counts one and two) for consideration under 4 a “rescissionary measure of damages.” Strategic Diversity, Inc. v. Alchemix Corp., 666 5 F.3d 1197, 1211 (9th Cir. 2012). 6 Those claims were apparently reversed as to both Strategic’s and Weiss’s claims. 7 The Ninth Circuit did not address this Court’s determination that Strategic could show no 8 damage and that the transaction between Strategic, Weiss and the Defendants could not 9 have been a “debt-equity swap” as the transactions were between separate parties.1 10 Instead, the Ninth Circuit determined that while Weiss could tender his 250,000 shares to 11 rescind his purchase of Alchemix stock, it would not be possible to return to Strategic the 12 rights it had received from Alchemix pending the complete repayment of its Note which 13 occurred in June 2002. These rights included Strategic’s security interests in Alchemix’s 14 intellectual property and right to name a director, Weiss, to the Board. The Ninth Circuit 15 reasoned: 16 17 18 19 20 21 22 23 24 Although Weiss stands ready to tender the 250,000 shares of Alchemix for the consideration he offered ($250,000) . . . . The Note has long since expired, coming due in July 2006. We doubt that Weiss’s demand for his seat on the Alchemix Board is even possible when there does not appear at present to be an existing board. In addition, true rescission would also involve the unfurling of security interests that are currently held as collateral on other debts. (Id. at 1207–08.) While the panel opinion did not explain why Weiss could not tender the stock to rescind his stock purchase, it apparently held that because tender was impossible for both Weiss and Strategic neither was entitled to rescission, but both might be entitled to the 25 26 27 1 28 As discussed above, the Note was between Strategic and Alchemix while the Stock Purchase Agreement was between Weiss and Medici. -7- 1 equitable remedy of rescissionary damages upon reconsideration by this Court.2 2 Nevertheless, on remand, Strategic acknowledged that it had no claims against the 3 Defendants. Thus, regardless of whether the Ninth Circuit reversed this Court’s holding 4 sub silentio that, as a matter of law, Alchemix’s repayment of the Note to Strategic and 5 Weiss’s subsequent purchase of Alchemix stock from Medici could not have been a debt 6 equity swap, Weiss’s tender of the stock as a condition of the rescission which he sought 7 was no longer either difficult or impossible. As the Ninth Circuit noted, the only facts 8 that made tender impossible arose from Strategic’s request to rescind Alchemix’s 9 repayment and reinstate its Note and security interest. (Id.) Once that request was 10 dropped, tender of the stock for the amount claimed became possible because, as it noted 11 in its opinion, Weiss could still tender his stock3 as a condition precedent to rescission. 12 In fact, during a status conference after remand, Plaintiff’s counsel agreed that 13 Strategic no longer had a remedy and the remaining issue was whether Horton and/or 14 Alchemix made a misrepresentation or omission that caused Weiss to invest in Alchemix. 15 (March 2, 2012, Hearing Tr. at 5:20–6:17, 7:5–9, 10:16–18.) Plaintiff’s counsel also 16 agreed that there was no difficulty with a rescission remedy as to Weiss’s investment. 17 (Id.) Rescission is the only claim Weiss sought for the stock purchase in his Complaint, 18 19 20 21 22 23 24 25 26 27 2 On appeal, Plaintiffs continued to assert that the repayment of the Note to Strategic and the subsequent stock purchase by Weiss constituted a debt-equity swap that inextricably combined the interests of Weiss and Strategic as it related to the Defendants. (Opening Brief of Plaintiffs-Appellants, 2010 WL 6415455, *21) (“As noted above, the gravamen of the District Court’s errors in this matter was its conclusion that the repayment of the Note and concurrent purchase of Alchemix stock ‘must have been separate’ and unrelated transactions.”). The undisputed facts, however, were actually to the contrary. The Ninth Circuit may not have observed that this Court held that the transaction could not have involved a debt-equity swap as a matter of law. Thus, the Ninth Circuit may not have perceived any need to offer explanation as to how the transaction could have constituted a debt-equity swap and thus why it would not have been possible for Weiss to tender his stock as a necessary condition to rescinding his stock purchase, even if tender would have been difficult at best for Strategic in its attempt to rescind Alchemix’s repayment of its Note. 3 28 As this Court is aware or can recall, Weiss has not yet tendered his Alchemix stock to the Defendants. -8- 1 (see Doc. 54 (Compl.) at 21), and hence, the only claim to which he is entitled. The 2 Ninth Circuit’s opinion that the Plaintiffs could seek rescissionary damages as opposed to 3 rescission was explicitly based on its assumption that Weiss could no longer tender the 4 stock he had received from Medici. Strategic Diversity, 666 F.3d at 1208. 5 VII. Trial on Remand 6 After remand, the issue of fact of whether Horton made a material 7 misrepresentation or omission to Weiss in relation to Weiss’s stock purchase from Medici 8 was tried to a jury. (Docs. 209, 211.) At trial, the Court granted judgment as a matter of 9 law against Strategic because, as Plaintiffs conceded, Strategic did not have a claim for 10 damages in this case. (Doc. 211.) Because the remaining relief requested by Weiss was 11 equitable relief that depended on the resolution of certain issues of fact the jury verdict 12 consisted of answers to several special interrogatories in a special verdict form. 13 On August 30, 2012, the jury found that (1) Horton made a misrepresentation or 14 omission of fact to Weiss in connection with the sale of 250,000 shares of Alchemix 15 stock to Weiss; (2) the misrepresentation or omission was material to Weiss’s decision to 16 purchase the shares; (3) Weiss justifiably relied on the misrepresentation or omission in 17 making the decision to purchase the shares; (4) the misrepresentation or omission caused 18 Weiss to purchase the shares; (5) Weiss should not have discovered the facts underlying 19 the misrepresentation or omission prior to discovering it on May 7, 2005; and (6) Horton 20 learned that Western was not going to exercise its options before Weiss purchased shares 21 on July 8, 2002. (Doc. 218, Jury Verdict.) 22 On December 3, 2012, the Court denied the Defendants’ Motion for Judgment 23 Renewed and Motion for New Trial. (Doc. 248.) At the Plaintiffs’ request the Court 24 conducted a bench trial on March 28, 2013, regarding damages. (Doc. 269.) 25 VIII. Value of Alchemix Stock in Years Subsequent to the Omission 26 At trial and the subsequent hearing, evidence was introduced from which the 27 Court makes the following findings. The value of Alchemix stock for the period 28 following Horton’s omission in July 2002 is opaque. There is no evidence of additional -9- 1 sales of Alchemix stock until 2006. In September 2003, Horton had taken the position 2 that Alchemix stock was “worthless” because there was no market for the stock at the 3 time. (Doc. 224, Jury Trial Tr. at 267:4–13.) Horton testified that not obtaining the 4 additional investment from Western was “bad news” for Alchemix. (Id. at 185:12.) 5 Horton testified, however, that six months after Western’s decision, Alchemix formed a 6 joint venture with a large mining and minerals processing company in which the 7 company contributed $2 million, which may have brought value to Alchemix stock. (Id. 8 at 264:5–10.) 9 During the period after late 2005 when Weiss discovered Horton’s omission, 10 Horton sold Alchemix stock to a few private investors at the price of $2.00 per share. 11 (Bench Trial Tr. at 164:13–15.) In the fall of 2006, Horton sold shares to a wealthy 12 widow, Mary Menk, a shareholder whom Horton had known for a long time. (Id. at 13 177:17–25.) Menk approached Horton to purchase shares for herself and as a gift for her 14 employee, Patricia Townsend. (Id. at 178:1–9.) In the fall of 2008, Horton sold shares to 15 another shareholder, Paul Schilling, a senior citizen and “big supporter” of Horton. (Id. at 16 177:12–178:23.) Because of the “collapse of the gas market” in 2008, Schilling knew that 17 Horton “needed some help” and was willing to invest in Alchemix to help it through 18 difficult times. (Id.) Schilling purchased 100,000 shares at the price of $2.00 per share. 19 (Id. at 165:19–24.) 20 In addition to these sales to individuals, Alchemix entered into a partnership with 21 Diversified Energy Corporation (“Diversified”), a company that invests in a diversified 22 portfolio of energy technologies. (Id. at 178:13–19.) In April 2006, Alchemix executed a 23 stock purchase agreement with Diversified. (Id.) The agreement was for a purchase of 2.5 24 million shares of Alchemix stock at the price of $2.00 per share (Id. at 164:21–165:2.) 25 Diversified provided a $600,000 down payment and $4.4 million via promissory note. 26 (Id. at 178:20–179:3.) Alchemix purchased also an unspecified number of shares of 27 Diversified stock. (Id. at 182:9–11.) Around the same time, the parties entered into a 28 management consulting, marketing, and advocacy arrangement. (Id. at 181:17–20.) - 10 - 1 Alchemix paid Diversified $1.5 million in exchange for Diversified’s assistance in 2 demonstrating Alchemix’s technology, obtaining access to government funding, and 3 soliciting the Department of Energy. (Id. at 179:4–180:25.) Alchemix paid Diversified 4 $18,500 and $83,330 per month for these services pursuant to two separate agreements. 5 (Id. at 182:12–25.) In the fall of 2012, Alchemix and Diversified unwound and rescinded 6 the entire arrangement and both parties divested their stock investment in the respective 7 companies. (Id. at 184:2–16.) Diversified retains a limited license to use Alchemix’s 8 Hydromax technology in the United States that it received in connection with these 9 dealings, for which Diversified does not pay fees to Alchemix. (Id. at 184:21–23.) CONCLUSIONS OF LAW 10 11 I. Federal Securities Fraud Claim 12 “The elements of a private action under Rule 10b–5 are (1) a material 13 misrepresentation or omission by the defendant; (2) scienter; (3) a connection between 14 the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon 15 the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Janus 16 Capital Group, Inc. v. First Derivative Traders, ____ U.S. ____, ____, n.3, 131 S.Ct. 17 2296, 2301, n.3, 180 L.Ed.2d 166 (2011) (citing Stoneridge Investment Partners, LLC v. 18 Scientific-Atlanta, Inc., 552 U.S. 148, 157 (2008)). Rescission is an available remedy for 19 federal securities fraud claims. See Ah Moo v. A.G. Becker Paribas, Inc., 857 F.2d 615, 20 623 (9th Cir. 1988) (internal citations omitted). 21 In a 10b-5 action, the Court must consider “whether the plaintiff has shown some 22 causal connection between the fraud and the securities transaction in question.” In re 23 Daou Sys., Inc., 411 F.3d 1006, 1025 (9th Cir. 2005). The causation requirements 24 comprised of both reliance and proximate cause or “loss causation.” Id. To establish 25 transaction causation, the plaintiff must show that but for the material misrepresentation 26 or omission, he would not have engaged in the transaction. Stoneridge, 552 U.S. at 171. 27 To establish the necessary elements of loss a party must show both economic loss and 28 loss causation. To prove loss causation, the plaintiff must demonstrate that the - 11 - 1 defendant’s deceptive acts proximately caused the plaintiff’s loss. Dura Pharm., Inc. v. 2 Broudo, 544 U.S. 336, 346 (2005). 3 When evaluating evidence as to loss causation, the Supreme Court has held that 4 “to touch upon a loss is not to cause a loss.” Dura Pharm., 544 U.S. at 336 (emphasis in 5 original); see Metzler Inv. GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049, 1064 (9th 6 Cir. 2008) (“Loss causation requires more.”). Yet, a plaintiff is not required to show “that 7 a misrepresentation was the sole reason for the investment’s decline in value” in order to 8 establish loss causation. Daou Sys., 411 F.3d at 1025 (citation omitted) (emphasis in 9 original). “[A]s long as the misrepresentation is one substantial cause of the investment’s 10 decline in value, other contributing forces will not bar recovery under the loss causation 11 requirement” but will play a role “in determining recoverable damages.” Id. 12 Although the jury found transaction causation based on a special interrogatory in 13 the jury verdict form, Plaintiff did not request that the jury answer an interrogatory as to 14 whether Defendants’ acts caused Weiss to suffer economic losses. Thus, the Court is left 15 to determine loss causation based on the evidence in the record. On appeal, the Ninth 16 Circuit noted that Weiss’s request for relief “does not relieve [him] of demonstrating loss 17 causation.” Strategic Diversity, 666 F.3d at 1209 (citing 15 U.S.C. § 78bb (limiting 18 recovery to damages “on account of the act complained of”)). 19 One manner in which Weiss may establish loss causation is by proving that the 20 price of his shares declined after the facts underlying Horton’s omission or 21 misrepresentation became known, otherwise known as a “fraud on the market” theory. 22 Metzler, 540 F.3d at 1062. Weiss purchased 250,000 Alchemix shares at the price of 23 $1.00 per share. To recover damages based on a “fraud on the market” theory, the 24 relevant time period during which Weiss must show loss is soon after he and/or other 25 investors learned of the omission. Weiss did not provide sufficient evidence at trial that 26 the share price declined soon after it was revealed to him or other investors that Western 27 28 - 12 - 1 had decided not to exercise its options.4 2 A decline in stock price is not the only method through which Weiss may show 3 loss causation. “With a privately held company, a comparison of market stock price to 4 establish loss causation has less relevance because market forces will less directly affect 5 the sales prices of shares of a privately held company.” WPP Luxembourg Gamma Three 6 Sarl v. Spot Runner, Inc., 655 F.3d 1039, 1053 (9th Cir. 2011) cert. denied, 132 S. Ct. 7 2713, 183 L. Ed. 2d 68 (2012) (internal citations omitted). In these cases, plaintiffs more 8 commonly prove loss causation by showing that a misrepresentation or omission caused 9 them to engage in a transaction and that the revelation of the truth is directly related to 10 their economic loss. Id. (citing Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 11 F.3d 940, 949 (9th Cir. 2005)). 12 In Livid Holdings, the plaintiff purchased several million dollars’ worth of shares 13 in a closely-held company based on an offering memorandum authored by the 14 defendants. The memorandum stated that a large private equity fund-raising had been 15 completed when only a fraction of it had, in fact, been completed. 416 F.3d at 944–45. 16 The company then entered bankruptcy proceedings at which time the plaintiff discovered 17 that the memorandum was false. Id. at 950–51. The Ninth Circuit held that the plaintiff 18 had pled loss causation because the defendants’ alleged misrepresentation concealed the 19 company’s financial situation and “[a]s a result of its dire financial situation, [the 20 company] eventually went bankrupt, which caused [the plaintiff] to lose the entire value 21 of its investment in [the company].” 416 F.3d at 949. The court did not require the 22 plaintiff to allege variation in the stock price to plead loss causation, holding that 23 “[u]nder these circumstances, Dura is not controlling.” Id. at 949 n.2. Rather, to find that 24 4 25 26 27 28 Weiss contends that Horton’s “anecdotal testimony” of a “handful of isolated sales to private individuals in 2006 and 2008” and “opaque” sales of stock to Diversified Energy in 2007 do not provide reliable evidence upon which to conclude that the price of Alchemix shares remained at or above $2.00 per share after 2005. (Doc. 276 at 3.) But it is Weiss’s burden to prove, if at all, that his shares declined in value below $1.00 per share after it became apparent that Western was not going to make further investments in Alchemix. See Metzler, 540 F.3d at 1062. It is not sufficient to carry such a burden by attacking the reliability of Defendants’ evidence. - 13 - 1 loss causation was properly pled, the court relied upon the reduction in value of the 2 plaintiff’s investment as a result of the truth concealed by the misrepresentation. 3 Weiss has not established that Western’s decision not to exercise its options was a 4 “substantial cause of [his] investment’s decline in value.” Daou Sys., 411 F.3d at 1025. 5 The company in Livid Holdings had a “negative net worth” of several hundreds of 6 thousands of dollars and the unsuccessful private equity fund raising was the decisive 7 blow to its financial viability. 416 F.3d at 947. The company went bankrupt soon after 8 plaintiff invested in it based on the misrepresentation regarding the company’s 9 fundraising. Id. at 949. Weiss, conversely, did not present sufficient evidence to show 10 that in July 2002 or soon thereafter, his investment in Alchemix was reduced in value as a 11 result of Western’s decision not to exercise its options. 12 The jury found that Horton omitted to inform Weiss that Western would not 13 exercise its options before Weiss purchased Alchemix stock. Although it is possible that 14 the value of Alchemix stock declined as a result of Western’s decision, Weiss did not 15 show that it declined below $1.00 a share at the time he purchased it for that price. Three 16 weeks before Weiss purchased 250,000 shares of Alchemix stock, Western purchased 1.5 17 million shares for $2.00 per share. Even if Western decided not to exercise its subsequent 18 options, it had just invested $3 million in the enterprise. Therefore, it is also possible that 19 Weiss received an advantageous price per share and that even if the stock declined in 20 value, it was not to a level below $1.00 per share. Thus, Weiss did not show that he was 21 harmed by the omission. 22 Nor did Weiss show that the value of the stock declined below $1.00 per share 23 soon after he purchased it in July 2002. Weiss points to Horton’s testimony that he 24 considered Alchemix stock to be worthless as of September 2003 insofar as there was no 25 market for the stock. Weiss further contends that because Western decided not to exercise 26 its options, Alchemix was not able to build a demonstration plant to prove the 27 commercial viability of its Hydromax technology, which Horton estimated would cost 28 $35 million to build. Western’s decision was, according to Horton, “bad news” for - 14 - 1 Alchemix as an early-stage technology company. As a result, Weiss argues, Alchemix 2 could not conduct business operations, raise operating revenues, or attract additional 3 investors, ultimately reducing the value of Weiss’s investment to a penny per share. 4 Alchemix did not attract another investment capable of funding its Hydromax 5 technology in order to develop revenue. But Weiss did not show that it was not possible 6 for Alchemix to attract investment and that therefore Western’s decision not to invest was 7 damaging to Alchemix’s financial viability and as a result, to Weiss’s stock value. In fact, 8 Weiss testified that six months after Western’s decision, Alchemix formed a joint venture 9 with a large mining and minerals processing company in which the company contributed 10 $2 million. Further, Weiss did not provide evidence that he could not have resold his 11 shares for at least $1.00 per share. 12 Although the jury found that Weiss relied upon Horton’s assurances regarding 13 Western’s investment and that Weiss would not have invested otherwise, “establishing 14 ‘loss causation’ is a more difficult task.” Daou Sys., 411 F.3d at 1025. Weiss has not 15 carried his burden prove loss causation and thus may not get rescission for securities 16 fraud pursuant to 10b-5. 17 II. State Securities Fraud Claim 18 In his Complaint, Weiss alleged that in making material misrepresentations or 19 omissions regarding the Western investment, Defendants violated the ASA. This statute 20 states, in relevant part, 21 22 23 A. It is a fraudulent practice and unlawful for a person, in connection with a transaction or transactions within or from this state involving an offer to sell or buy securities, or a sale or purchase of securities, . . . directly or indirectly to do any of the following: 24 1. Employ any device, scheme or artifice to defraud. 25 2. Make any untrue statement of material fact, or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. 26 27 28 - 15 - 3. Engage in any transaction, practice or course of business which operates or would operate as a fraud or deceit. 1 2 3 A.R.S. § 44-1991(A). Weiss alleged that Defendants violated all three of these 4 subsections.5 Rescission is an available remedy under the ASA: 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 A sale or contract for sale of any securities to any purchaser in violation of . . . [Section 44-1991] is voidable at the election of the purchaser, and the purchaser may bring an action . . . to recover the consideration paid for the securities, with interest, taxable court costs and reasonable attorney fees, less the amount of any income received by dividend or otherwise from ownership of the securities, on tender of the securities purchased . . . . A.R.S. § 44-2001(B) (emphasis added). A. Joint and Several Liability Pursuant to the ASA, “an action brought under § 44-2001 . . . may be brought against any person, including any dealer, salesman or agent, who made, participated in or induced the unlawful sale or purchase, and such persons shall be jointly and severally liable to the person who is entitled to maintain such action.” A.R.S. § 44-2003. The relief requested in this action, however, is rescission, not damages. “The contractual remedy of rescission abrogates the contract and undoes it from the beginning; that is, not merely to release the parties from further obligation to each other in respect to the subject of the contract, but to annul the contract and restore the parties to the relative positions which they would have occupied if no such contract had ever been made.” Hall v. Read Dev., Inc., 229 Ariz. 277, 285, 274 P.3d 1211, 1219 (Ct. App. 2012), review denied (Aug. 28, 2012), as amended (Apr. 26, 2012). (internal quotation marks and citation omitted). As rescission is primarily a remedy between principals, an agent that “was not a party to the contract and received nothing from the other party, . . . is subject only to an action of 24 25 5 26 27 28 The Complaint alleges that Defendants “made untrue statements of material fact, or omitted to disclose material facts, which, in light of the circumstances under which they occurred, were materially misleading, and Defendants further employed a device, scheme or artifice to defraud Plaintiffs in connection with said transactions, or otherwise engaged in a course or practice which operated as a fraud and deceit upon Plaintiffs within the meaning of A.R.S. § 44-1991.” (Doc. 54 ¶ 41.) - 16 - 1 tort,” not an action for rescission. Restatement (Second) of Agency § 348 (1958). Weiss 2 purchased the 250,000 shares of Alchemix stock from Medici, Horton’s personal holding 3 company and paid $250,000 to that entity. The contract was between Weiss and Medici. 4 Thus, if Weiss succeeds on his claim, Medici is the party liable for restoring the 5 consideration Weiss paid for Alchemix stock. 6 B. Loss Causation 7 Arizona’s loss causation requirement is contained in Section 44–2082(E). That 8 Section “requires any plaintiff who brings an action to ‘recover damages’ for a violation 9 of Section 44-1991(A)(1) or (A)(3) to prove ‘that the act or omission of the defendant 10 alleged to violate the section under which the private action is brought caused the loss.’” 11 Grand, 214 Ariz. at 27. Section 44–2082(E), however, “does not apply to a rescission 12 claim.” Id. at 24. “If tender is possible, proof of proximate cause is not required for 13 traditional rescission relief.” Id. at 24, 28. Id. 14 Further, Weiss has not proven a claim under subsections (A)(1) or (A)(3) to which 15 the loss causation requirement attaches.6 He has proven a claim under subsection (A)(2) 16 insofar as the jury found that Horton made a material omission to Weiss regarding 17 Western’s investment. That subsection does not require a plaintiff to show loss causation. 18 Grand, 214 Ariz. at 25. 19 Although Weiss does not have to prove loss causation under subsection (A)(2), 20 Defendants retain a “loss causation affirmative defense provided in § 44-1991(B).” 21 Grand, 214 Ariz. at 24. The affirmative defense is stated as follows: 22 6 23 24 25 26 27 28 “The subsections of § 44–1991(A) address different violations, and it is not unreasonable for the legislature to require different proof for each.” Id. at 26. Liability under subsections (A)(1) or (A)(3) must be premised on more than just an omission of material fact. See Red River Res., Inc. v. Mariner Sys., Inc., CV 11-02589-PHX-FJM, 2012 WL 2507517, *10 (D. Ariz. June 29, 2012) (“To permit liability under § 44– 1991(A)(1) or (3) solely on the basis of misstatements and omissions would conflate the three subsections.”). “Manipulative conduct must be distinct from omissions and misrepresentations under state law as well in order to give meaning to every provision of § 44–1991(A).” Id. (citing Grand v. Nacchio, 225 Ariz. 171, 175–76, 236 P.3d 398, 402– 03 (2010) (“We ordinarily do not construe statutes so as to render portions of them superfluous.”)). Weiss did not prove that Defendants employed a scheme to defraud or engaged in a transaction or course of business which would operate as a fraud. - 17 - 6 B. In a private action brought pursuant to subsection A, paragraph 2 of this section or § 44-1992, if the person who offered or sold the security proves that any portion or all of the amount recoverable under subsection A, paragraph 2 of this section or § 44-1992 represents an amount other than the depreciation in value of the subject security resulting from the part of the prospectus or oral communication, with respect to which the liability of the person is asserted, not being true or omitting to state a material fact required to be stated or necessary to make the statement not misleading, then the amount shall not be recoverable. 7 A.R.S. § 44-1991(B) (emphasis added). In other words, if a defendant proves that a 8 plaintiff’s stock did not decline in value as a result of the defendant’s omission, then the 9 plaintiff is not entitled to rescission. 1 2 3 4 5 10 Arizona courts have not addressed the issue of whether the affirmative defense 11 applies to claims for rescission based on subsection (A)(2). Unlike the loss causation 12 requirement in Section 44–2082(E) which language limits it to claims for damages, the 13 affirmative defense in Section 44-1991(B) refers to “the amount recoverable” which 14 suggests that it is not so limited. In Grand, the court referred to that difference in 15 statutory language between “damages” and “the amount recoverable” to determine that 16 Section 44–2082(E) applied only to claims for damages. See 214 Ariz. at 24 (“This 17 difference in language shows the legislature’s intent to distinguish between a claim for 18 damages and a claim for rescission.”). Here, the “amount recoverable” is the 19 consideration Weiss paid for Alchemix stock. Although it is possible Arizona courts 20 would find an affirmative defense unavailable for a rescission claim “if the defendant’s 21 intentional fraud can be understood as inducing a transaction that the plaintiff would not 22 have entered at any price if he had known the truth,” Id. at 25, the Court assumes without 23 holding that an affirmative defense is available in this case. 24 1. Waiver of Affirmative Defense 25 Weiss contends that Defendants have waived their affirmative defense because 26 Defendants did not assert it in their Answers, (see Doc. 63, Alchemix and Horton Ans. at 27 6–8; Doc. 64, Medici Ans. at 9–10), raise it in the Parties’ Joint Pretrial Order, (see Doc. 28 - 18 - 1 193 at 6–12), or raise it through the filing of a supplemental Final Pretrial Memorandum 2 pursuant to Fed. R. Civ. P. 26(a)(3)(B). The Federal Rules of Civil Procedure control the 3 timing of the assertion of defenses and when waiver occurs. Han v. Mobil Oil Corp., 73 4 F.3d 872, 877 (9th Cir. 1995) (citations omitted). Rule 8(c) requires affirmative defenses 5 to be pleaded in the answer. The Ninth Circuit has held, however, that a defendant’s 6 failure to raise an affirmative defense in its answer does not necessarily waive the 7 defense. Owens v. Kaiser Foundation Health Plan, Inc., 244 F.3d 708, 713 (9th Cir. 8 2001); see Han, 73 F.3d at 877–78. The defense may be raised later if the delay in raising 9 it does not prejudice the plaintiff. Owens, 244 F.3d at 713 (allowing an affirmative 10 defense for the first time in a motion for judgment on the pleadings); Camarillo v. 11 McCarthy, 998 F.2d 638, 639 (9th Cir. 1993) (allowing an affirmative defense for the 12 first time in a motion for summary judgment). That is because “[t]he purpose of Rule 8(c) 13 is simply to guarantee that the opposing party has notice of any additional issue that may 14 be raised at trial so that he or she is prepared to properly litigate it.” Hassan v. U.S. Postal 15 Serv., 842 F.2d 260, 263 (11th Cir. 1988) (citing Blonder-Tongue Labs., Inc. v. Univ. of 16 Illinois Found., 402 U.S. 313, 350 (1971)); see In re Sterten, 546 F.3d 278, 285 (3d Cir. 17 2008). 18 Defendants first raised the Section 44-1991(B) affirmative defense in their trial 19 brief filed on the day of the bench trial. (Doc. 267 at 4.) But Defendants did not waive 20 their defense. There was no unfair surprise to Weiss as a consequence of Defendants’ 21 failure to plead specifically this defense. Weiss already had the burden to prove loss 22 causation at trial to establish that he was entitled to damages under his federal securities 23 fraud claim. Similarly, Defendants had to establish a lack of loss causation to prove their 24 affirmative defense against Weiss’s state securities fraud claim. See § 44-1991(B); see 25 also Sterten, 546 F.3d at 285 (holding that defendant did not waive its defense because 26 the analysis involved in proving plaintiff’s claim and defendant’s defense were 27 substantially similar). Weiss argued that his Alchemix stock never recovered from the 28 impact of Alchemix losing the Western investment and put on evidence to prove that his - 19 - 1 stock declined in value. Defendants proffered evidence that the stock was worth more 2 than $1.00 per share for a period of years after Weiss learned of Horton’s omission. It 3 was not unexpected to Weiss for Defendants to do so. The Court does not find any 4 prejudice from allowing Defendants to argue their affirmative defense. 2. 5 Value of Alchemix Stock After Horton’s Omission 6 At trial, the jury found that Horton had made a material omission to Weiss 7 regarding Western’s investment. Therefore, Defendants have the burden to show that 8 Weiss’s Alchemix stock did not depreciate in value below $1.00 per share as a result of 9 the subject of the omission: Western’s decision not to exercise its options. See A.R.S. § 10 44-1991(B). 11 Defendants have not carried their burden. Defendants proffered sales of stock 12 several years after Horton’s omission to show that the value of Alchemix stock was 13 greater than $1.00 per share.7 But these isolated sales took place several years after 14 Horton’s omission. Further, the stock sales to individuals were based on Horton’s 15 personal relationships and the third sale to Diversified was in the context of other 16 agreements through which Alchemix remitted to Diversified much of the funds Alchemix 17 received. They do not rebut Horton’s statement in September 2003 that at the time, the 18 stock did not have value. Although that statement was not sufficient for Weiss to prove 19 loss causation, it is relevant to Defendants’ affirmative defense. 20 21 22 23 24 25 26 27 7 Horton testified about three sales of stock that he made to private individuals and an entity between 2006 and 2008 at $2.00 per share. In the fall of 2006, Horton sold Alchemix stock to Mary Menk, a wealthy shareholder whom Horton had known for a long time. Menk contacted Horton to purchase shares for herself and her employee, Patricia Townsend. In the fall of 2008, Horton sold Alchemix stock to a senior citizen and supporter of Horton, Paul Schilling. Due to the decline in the gas market in 2008, Schilling wanted to help Horton by investing in Alchemix to get it through tough times. Further, as part of a partnership, Diversified agreed to purchase $5 million worth of shares in Alchemix at $2.00 per share in April 2006. The Diversified purchase was completed in the context of terms and conditions, and other agreements including Alchemix’s purchase of Diversified stock, a consulting agreement through which Alchemix paid Diversified $1.5 million in fees, and a licensing arrangement for Alchemix’s Hydromax technology without royalty fees. 28 - 20 - 1 Defendants did not provide a valuation of Alchemix stock as of July 2002 or 2 shortly thereafter to show that Weiss’s stock did not decline in value as a result of 3 Horton’s omission. Because Defendants did not prove their affirmative defense, Weiss is 4 entitled to rescission of his stock purchase under Section 44–1991(A)(2). 5 C. Tender 6 “[T]ender of the securities purchased” is a required element of Weiss’s ASA claim 7 for rescission. See A.R.S. § 44-2001(B). As mentioned above, Weiss has not yet tendered 8 his shares of Alchemix stock to Medici. In light of Plaintiffs’ renunciation of Strategic’s 9 claims after remand, tender is possible even acknowledging the Ninth Circuit’s apparent 10 acceptance of the Plaintiffs’ characterization of the two transactions as being intertwined. 11 Because Weiss seeks only rescission in his claim, tender is possible, and tender is a 12 requirement to rescission, and because Weiss has not yet tendered his stock, he has not 13 established his claim. In fairness, however, the Ninth Circuit’s opinion may have led 14 Weiss to think he was obliged to prove and recover only rescissionary damages, even 15 after Strategic confirmed the dismissal of its claims and tender became possible for 16 Weiss. The Court proceeded on that assumption in granting Weiss’s request for a 17 damages hearing. 18 After considering the equities, the Court does not see the fairness in permitting 19 Weiss to both retain the stock and recover damages that would virtually be the value that 20 he paid for the stock. On the other hand, the Court sees no fairness in denying Weiss’s 21 claims in light of the confusion over the requirement to tender. In light of the multiple 22 permutations that Weiss made of his own case up to this stage of the litigation, the Court 23 will provide Weiss thirty days to tender his stock. If he does, he will have established his 24 claim for the reasons detailed above, and be entitled to judgment for the restoration of the 25 $250,000 consideration he paid for the stock. If he does not, the Defendants will prevail 26 on all of Plaintiff’s claims. 27 D. Prejudgment Interest 28 The ASA provides for the recovery of “consideration paid for the securities, with - 21 - 1 interest” if a “contract for sale of any securities to any purchaser” is found to be in 2 violation of Section 44-1991. A.R.S. § 44–2001(A). “The general rule in Arizona is that 3 a liquidated claim entitles its holder to prejudgment interest.” Trimble v. Am. Sav. Life 4 Ins. Co., 152 Ariz. 548, 557, 733 P.2d 1131, 1140 (Ct. App. 1986). “[I]f one accepts the 5 evidence and can calculate exactly the amount of damages without relying on the opinion 6 or discretion of a judge or jury, the claim is liquidated.” Scottsdale Ins. Co. v. Cendejas, 7 220 Ariz. 281, 288, 205 P.3d 1128, 1135 (Ct. App. 2009) (citing Canal Ins. Co. v. Pizer, 8 183 Ariz. 162, 164, 901 P.2d 1192, 1194 (Ct. App.1995)). Further, a claim is liquidated if 9 “the amount of damages can be computed with exactness.” Interstate Markings, Inc. v. 10 Mingus Constructors, Inc., 941 F.2d 1010, 1014 (9th Cir. 1991) (applying Arizona law). 11 A good faith dispute over liability will not defeat a recovery of prejudgment interest on a 12 liquidated claim. Id. 13 Weiss’s claim for rescission may be liquidated once he tenders his stock, which is 14 a prerequisite to rescission. A.R.S. § 44-2001(B). As of yet, Weiss has not tendered his 15 stock to Defendants. Because of the lack of tender, no interest is accruing on that amount. 16 Such a result is not inequitable in this case because Weiss did not bring this claim until 17 2007, two years after he discovered in 2005 that Horton had made an omission in 2002. 18 When he did bring the claim he erroneously characterized the two separate transactions 19 underlying his claims as a “debt-equity swap.” That mischaracterization made it seem to 20 the Ninth Circuit as though a rescission remedy was not possible. It was only after 21 remand that Weiss acknowledged Strategic did not have a claim for damages or 22 rescission and clarified that a rescission remedy was practical as to Weiss, making tender 23 a possibility for the first time. Yet, insofar as the Court is aware he has never tendered the 24 stock to Medici. In light of the relief Weiss sought, the lack of any right to rescind the 25 repayment of the Strategic Note, and the lack of tender, it is not appropriate to award 26 prejudgment interest to Weiss, and the Court declines to do so. 27 E. Punitive Damages 28 Arizona law permits an award of punitive damages “to punish the wrongdoer and - 22 - 1 to deter others from emulating his conduct.” Linthicum v. Nationwide Life Ins. Co., 150 2 Ariz. 326, 330, 723 P.2d 675, 679 (1986) (internal citations omitted). Punitive damages 3 are allowed in equity in order “to facilitate judicial administration, to deter misconduct, 4 and to completely serve justice” which approach “comports with the Arizona policy of 5 providing complete relief to injured parties.”8 Medasys Acquisition Corp. v. SDMS, P.C., 6 203 Ariz. 420, 424, 55 P.3d 763, 767 (2002) (internal citations omitted). 7 Defendants contend that punitive damages are not an available remedy under the 8 ASA. The statute states that the purchaser of securities “may bring an action . . . to 9 recover the consideration paid for the securities, with interest, taxable court costs and 10 reasonable attorney fees, less the amount of any income received by dividend or 11 otherwise from ownership of the securities . . . .” § 44-2001(A). Nevertheless, § 44-2005 12 states that “[n]othing in this article shall limit any statutory or common law right of any 13 person in any court for any act involved in the sale of securities.” Punitive damages are a 14 common law remedy in Arizona. See Wyatt v. Wehmueller, 167 Ariz. 281, 285, 806 P.2d 15 870, 874 (1991). Further, Arizona courts have held that “if a party has pursued a course 16 of conduct knowing that it created a substantial risk of significant harm to others and its 17 conduct was guided by evil motives, punitive damages should be available to punish such 18 behavior.” Medasys Acquisition, 203 Ariz. at 424 (internal quotation marks omitted) 19 (collecting Arizona cases). Consequently, punitive damages are an available remedy for 20 Weiss’s ASA claim. 21 Defendants further assert that the Court previously denied Weiss’s claim for 22 23 24 25 26 27 8 The Arizona Supreme Court sitting en banc has held that punitive damages are awardable on an equitable claim if a plaintiff proves “the alteration of one’s position to his prejudice.” Medasys Acquisition, 203 Ariz. at 423 (internal alterations and citations omitted). Because Weiss relied on Horton’s misrepresentation and/or omission and altered his position by investing in Alchemix, the remedy of punitive damages is available to him. Nevertheless, even in the context of an equitable claim, the critical inquiry is “whether such an award [of punitive damages] is appropriate to penalize a party for outwardly aggravated, outrageous, malicious, or fraudulent conduct that is coupled with an evil mind.” Id. at 424 (internal quotation marks and citations omitted). 28 - 23 - 1 punitive damages and the Ninth Circuit did not disturb that decision upon appeal. The 2 Ninth Circuit did not address the availability of punitive damages when remanding 3 Weiss’s securities fraud claims but because it reversed as to those claims, the Court 4 assumes that it sub silentio reversed the denial of punitive damages. See Strategic 5 Diversity, 666 F.3d at 1211. Thus, punitive damages are still available as a common law 6 remedy in this case. 7 Punitive damages are awarded only “in the most egregious of cases, where a 8 plaintiff proves by clear and convincing evidence that the defendant engaged in 9 reprehensible conduct and acted with an evil mind.” Medasys Acquisition, 203 Ariz. at 10 424 (internal quotation marks and alterations omitted) (citing Linthicum v. Nationwide 11 Life Ins. Co., 150 Ariz. 326, 331–32, 723 P.2d 675, 680–81 (1986)). Clear and 12 convincing evidence means “that which may persuade that the truth of the contention is 13 highly probable.” Thompson v. Better-Bilt Aluminum Prods. Co., 171 Ariz. 550, 557, 832 14 P.2d 203, 210 (1992) (internal quotation marks and citations omitted). “While the 15 necessary ‘evil mind’ may be inferred, it is still this ‘evil mind’ in addition to outwardly 16 aggravated, outrageous, malicious, or fraudulent conduct which is required for punitive 17 damages.” Linthicum, 150 Ariz. at 331. 18 The court empaneled the jurors to answer factual predicates necessary to the 19 Court’s consideration of equitable relief. At trial, the Parties did not request the jury to 20 determine, by special interrogatory, whether Horton acted with an evil mind in making an 21 omission to Weiss. (See Docs. 191 (Pl.’s Proposed Verdict Form), 194 (D.’s Proposed 22 Verdict Form).) At the hearing before the bench trial on damages, Weiss’s counsel 23 acknowledged that the issue of punitive damages was for the Court to resolve. 24 (September 21, 2012, Hearing Tr. at 6:25–7:3.) Therefore, the Court will determine 25 whether punitive damages are warranted based on the facts ascertained at trial. 26 There is insufficient evidence that Horton had a malicious intent to secure Weiss’s 27 investment and then deny him a return. Even assuming that Horton knew prior to the time 28 that Weiss purchased the stock that Western had decided not to exercise its options and - 24 - 1 that he should have disclosed that information to Weiss, there is no evidence that he 2 withheld that information with an evil hand. Western made the $3 million dollar 3 investment on June 18, 2002; only three weeks prior to Weiss’s investment. The 4 Memorandum contained the option but not the obligation for Western to purchase up to 5 an additional $33 million of stock over time, and was distributed to Weiss and all 6 members of the Board on the same date of June 18. 7 Weiss does not challenge Horton’s testimony that Horton learned as early as three 8 to four weeks after June 18 that Western would not exercise its options. It is thus 9 possible, sufficient to support the jury’s verdict, that Horton could have been aware 10 Western would not exercise its options before Weiss purchased his stock. The Court 11 assumes that the jury concluded either that Horton had represented to Weiss that Western 12 would exercise its options or that he should have informed Weiss about Western’s 13 decision not to do so. Even still, Weiss testified that he received a copy of the 14 Memorandum from Horton on June 18 that specified that the additional investment was 15 merely an option held by Western. Further, Weiss does not question Horton’s testimony 16 that he informed members of the Board about Western’s decision shortly after it was 17 made and that Weiss was not a member of the Board at this time, but simply one 18 shareholder among five hundred others. 19 Weiss points to Horton’s other conduct with Alchemix investors to show that 20 Horton engaged in egregious conduct warranting punitive damages. For example, Horton 21 did not inform Alchemix investors that some of his earlier ventures had not succeeded 22 financially and had filed for bankruptcy, a fact he did not disclose on his annual reports to 23 the Arizona Corporation Commission. (See Doc. 224, Jury Trial Tr. at 147:5–150:16.) 24 Weiss also asserts that Horton misled the Court at trial when Horton contended that the 25 so-called “China deal” was a legitimate current project contributing value to Alchemix 26 stock. Nevertheless, such conduct, even if less than forthcoming, is not relevant to 27 whether Horton had an “evil mind” at the time he made the omission to Weiss. 28 There is not clear and convincing evidence in the record that Horton operated with - 25 - 1 an “evil mind” when omitting to inform Weiss about Western’s decision not to exercise 2 its options. See Dawson v. Withycombe, 216 Ariz. 84, 112, 163 P.3d 1034, 1062 (Ct. 3 App. 2007) (finding that although the defendant made fraudulent statements to the 4 plaintiff there was “little if any indication of any ‘evil motive’ on [the defendant’s] part 5 when he made the misrepresentation.”). To the extent that Weiss argues that Defendants’ 6 fraudulent conduct by itself may justify an award of punitive damages, that argument 7 “extends this concept beyond the basis for punitive damages.” Id. As the Arizona 8 Supreme Court has stated, “punitive damages are not recoverable in every fraud case, 9 even though fraud is an intentional tort.” Rawlings v. Apodaca, 151 Ariz. 149, 162, 726 10 P.2d 565, 578 (1986). Punitive damages are not warranted in this case. CONCLUSION 11 12 Because Weiss did not show that Horton’s omission caused Weiss’s loss in 13 relation to his Alchemix stock, he failed to prove his federal securities fraud claim under 14 10b-5. Upon tender of the Alchemix stock to Medici, however, Weiss may prevail on his 15 state securities fraud claim under the ASA because loss causation is an affirmative 16 defense pursuant to Section 44-1991(A)(2) and Defendants did not prove that Weiss did 17 not suffer economic loss as a result of Horton’s omission. Plaintiffs will be granted 18 rescission of the stock purchase upon tender. If Weiss does not accomplish tender within 19 thirty days, he will retain his stock and Defendants will prevail on all of his claims. Even 20 if Weiss prevails, however, he is denied prejudgment interest and punitive damages. 21 /// 22 /// 23 /// 24 /// 25 /// 26 /// 27 /// 28 - 26 - 1 IT IS THEREFORE ORDERED that Plaintiff Weiss shall have thirty (30) days 2 in which to tender his 250,000 shares of Alchemix stock to Medici and apprise this Court 3 that he has done so. If within fourteen (14) days after the notice has been filed, Medici 4 has not challenged the existence or adequacy of Weiss’s tender, the Court shall enter 5 judgment against Medici. Should this Court not receive notice of Weiss’s tender within 6 thirty (30) days of the date of this Order, then this suit will be dismissed with prejudice, 7 with Weiss possessing his Alchemix stock, but no judgment against the Defendants. 8 Dated this 28th day of August, 2013. 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 27 -

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