George K. Baum Advisors, LLC v. Sprint Spectrum, L.P.
Filing
198
MEMORANDUM AND ORDER granting 122 defendant's Motion for Summary Judgment; and denying 124 plaintiff's Motion for Partial Summary Judgment. Signed by District Judge J. Thomas Marten on 10/21/2013. (mss)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
George K. Baum Advisors, L.L.C.,
Plaintiff,
vs.
Case No. 11-2442-JTM
Sprint Spectrum, L.P.,
Defendant.
MEMORANDUM AND ORDER
In 2006 and 2007, Crossroads Wireless, a local telecommunication company,
attempted to acquire sufficient capital to permit it to partner with Sprint Spectrum, L.P.,
by providing rural roaming services. Pursuant to a contract with Crossroads, plaintiff
George K. Baum Advisors (GKBA) helped to market Crossroads to potential investors.
After Crossroads failed in 2008, a number of investors sued GKBA alleging fraudulent and
negligent misrepresentation. GKBA ultimately settled these actions, and has brought the
present action seeking indemnification from Sprint under a separate contract. Both parties
have filed motions for summary judgment, and the court finds that the indemnification is
not available under the separate Sprint-GKBA contract. Even if such indemnification were
authorized under the contract, the court finds that GKBA’s marketing involved conduct
which was unlawful under the Securities Exchange Act of 1934, and that Kansas law would
preclude indemnifying GKBA for its own illegal conduct.
Summary judgment is proper where the pleadings, depositions, answers to
interrogatories, and admissions on file, together with affidavits, if any, show there is no
genuine issue as to any material fact, and that the moving party is entitled to judgment as
a matter of law. Fed.R.Civ.P. 56(c). In considering a motion for summary judgment, the
court must examine all evidence in a light most favorable to the opposing party. McKenzie
v. Mercy Hospital, 854 F.2d 365, 367 (10th Cir. 1988). The party moving for summary
judgment must demonstrate its entitlement to summary judgment beyond a reasonable
doubt. Ellis v. El Paso Natural Gas Co., 754 F.2d 884, 885 (10th Cir. 1985). The moving party
need not disprove plaintiff's claim; it need only establish that the factual allegations have
no legal significance. Dayton Hudson Corp. v. Macerich Real Estate Co., 812 F.2d 1319, 1323
(10th Cir. 1987).
In resisting a motion for summary judgment, the opposing party may not rely upon
mere allegations or denials contained in its pleadings or briefs. Rather, the nonmoving
party must come forward with specific facts showing the presence of a genuine issue of
material fact for trial and significant probative evidence supporting the allegation.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986). Once the moving party has carried
its burden under Rule 56(c), the party opposing summary judgment must do more than
simply show there is some metaphysical doubt as to the material facts. "In the language
of the Rule, the nonmoving party must come forward with 'specific facts showing that
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there is a genuine issue for trial.'" Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475
U.S. 574, 587 (1986) (quoting Fed.R.Civ.P. 56(e)) (emphasis in Matsushita). One of the
principal purposes of the summary judgment rule is to isolate and dispose of factually
unsupported claims or defenses, and the rule should be interpreted in a way that allows
it to accomplish this purpose. Celotex Corp. v. Catrett, 477 U.S. 317 (1986).
Findings of Fact
The Sprint Strategic Roaming Alliance or Strategic Rural Alliance (SRA), was
designed to expand Sprint’s wireless coverage footprint in rural areas by entering into
agreements with rural telephone companies (telcos). Under its SRA Program, Sprint would
contract with rural wireless providers (RWPs) “and engage them to have spectrum that
they could use to build out coverage to Sprint's specifications.” The Program would allow
Sprint to “have arrangements where the customer experience, when they were in those
areas that were not owned by Sprint, were built out by these entities, would look and feel
virtually the same as if they were in a network area that was actually owned and operated
by Sprint or one of its affiliates.”
George K. Baum & Co. (GKBC) hired Tracy Smith on November 10, 2003. Under her
employment contract, Smith was to receive bonuses based on a set percentage of the fees
generated through her engagements. The same contract provided that Smith would obtain
and maintain a Series 7 securities license. It is uncontroverted that Smith never obtained
or maintained the license. She was not licensed to offer or sell securities, and was not a
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registered investment advisor.
It is unclear who actually employed Smith. Based on the depositions of Smith and
Jon Baum, the plaintiff contends that Smith was employed by GKBA. Sprint, on the other
hand, has submitted objective evidence in the form of W2 statements showing that Smith
was paid by GKBC.
On December 30, 2003 Sprint and George K. Baum Advisors (GKBA) entered into
an engagement letter agreement under which GKBA would locate and qualify potential
SRA candidates.
Section 1 of this agreement spells out the “Services to be Rendered” by GKBA to
Sprint, which included identifying and financially prequalifying prospective candidates,
and serving as an exclusive point of contact for candidates proposing and negotiating SRA
agreements. GKBA served as Sprint’s “exclusive point of contact” between Sprint and
RWPs seeking to participate in the SRA.
In the fall of 2005, one potential SRA candidate, Chickasaw Wireless, based in
Oklahoma, proposed an SRA Agreement which would cover parts of a five-state territory.
On November 21, 2005, GKBA entered into a capital placement engagement letter with
Chickasaw.
Section 1 of the GKBA-Chickasaw engagement provides for “Services to be
Rendered” by GKBA to Chickasaw. As “Capital Placement Services,” GKBA agreed to: (1)
develop a list of interested and qualified prospective investors; (2) help Chickasaw in
preparing evaluation materials to be used in discussions with investors; (3) arrange
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meetings with investors; (4) advise Chickasaw in its discussions with investors and
negotiating the timing, structure and pricing of a capital placement; (5) evaluate capital
placement transactions proposed by investors; (6) assist in negotiating agreements relating
to capital placement; and (7) assist the company with financial issues related to the
consummation of a capital placement. On July 25, 2012, Tracy Smith signed an affidavit in
which she declared under oath that beginning in 2005 and until late 2008, GKBA performed
each of these services
GKBA was Chickasaw’s agent with respect to the services performed under the
November 21, 2005, capital placement engagement.
From 2003-2005, Sprint pursued an SRA Program that, it envisioned, would include
at least 20 to 25 SRA Agreements with RWPs. However, in early 2006, Sprint and another
wireless carrier, Alltel, began negotiations for an expanded roaming agreement which
would cover a large portion of the SRA footprint which had been targeted by GKBA and
Sprint in their 2003 engagement. The Alltel agreement would potentially reduce the
geographic area available for GKBA to seek SRA candidates from 25 million Points of
Presence (POPs) to 6-7 million. The Alltel agreement would also overlap parts of the SRA
territory being proposed by Chickasaw in Kansas, Missouri, Arkansas and Texas.
After the Alltel deal was disclosed to GKBA, Tracy Smith told Sprint that she could
not deliver the remaining 6-7 million SRA POPs in separate agreements with rural
telephone companies, and proposed covering the remaining POPs with one big rural
wireless carrier.
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On July 27, 2006, Sprint’s executive management approved negotiation of a single
SRA contract with an entity to be formed by Chickasaw—“SRA Corp.”—that would cover
the remaining POPs available for SRA coverage in the lower 48 states. “SRA Corp.” was
ultimately incorporated as “Crossroads Wireless, Inc.” in October 2006. According to
GKBA, “Chickasaw was the entity that created the idea for Crossroads.”
On September 7, 2006, GKBA and Sprint signed a new engagement agreement.
Section 1 outlines the GKBA’s performance obligations, which included identifying and
financially prequalifying prospective SRA candidates and serving as the primary point of
contact for candidates proposing and negotiating SRA agreements.
Before entering into the new agreement, Sprint performed an analysis of GKBA’s
value to Sprint. It concluded that it was more cost effective to use GKBA’s services rather
than trying to separately negotiate with rural telcos.
Section 1 does not include any statement or reference to any services by GKBA
regarding capitalizing SRA Corp., Crossroads or any other entity.
The plaintiff concedes there is no express reference to SRA Corp. or Crossroads, but
argues that the engagement could be interpreted that way, in its general provision that
GKBA would provide “general business and advisory services.” The court finds that this
overstates GKBA’s responsibilities, as the agreement actually states only that “Sprint
acknowledges and accepts that GKBA intends to provide investment banking, capital
placement and acquisition advisory services” to SRA Corp. The Agreement carefully limited
GKBA’s responsibilities, providing that “Nothing in this Agreement is intended to obligate
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or commit [GKBA] or any of its affiliates to provide any services other than as set out
above.”
Sprint knew that GKBA was later engaged by Crossroads to raise capital, but there
is no evidence indicating that it knew of, or approved, the terms of the agreement between
GKBA and Crossroads. Sprint knew that Crossroads was a greenfield entity that would
require significant capital, including capital from rural telcos.
The Engagement also contains a “merger clause” stating that the Agreement
“constitutes the entire agreement, and supersedes all prior agreements and understandings
(both written and oral) of the parties hereto with respect to the subject matter hereof, and
cannot be amended or otherwise modified except in writing executed by the parties
hereto.”
Section 6 of the Engagement, titled “Scope of Responsibility” states:
Neither Sprint nor any of its affiliates . . . shall be liable to GKB . . . for any
claim, loss, damage, liability, cost or expense suffered by GKB or any other
such person arising out of or relating to Sprint’s engagement of GKB
hereunder except for a claim, loss or expenses that arises from or to the
extent that it is based upon any action or failure to act by Sprint . . . .
Section 7, titled “Hold Harmless,” provides:
Sprint agrees to indemnify, defend and hold harmless GKB and any of its
affiliates... from and against any losses, claims or proceedings, damages,
judgments, assessments, investigation costs, settlement costs, fines, penalties,
arbitration awards, liabilities, costs, fees and expenses (collectively, “Losses”)
(I) relating to or arising out of any act or omission between Sprint and any
RWP, or (ii) otherwise relating to or arising out of the engagement of GKB
under this Agreement or related to performance under the Strategic Roaming
Agreements or conduct in connection therewith. To the extent that such
Losses result from the bad faith, willful misconduct or gross negligence of
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GKB in performing the services that are the subject of this Agreement, Sprint
shall not be required to indemnify, defend or hold harmless GKB for the
Losses.
Section 5, titled “Certain Restrictions,” contained restrictions against GKBA
providing investment banking services to other wireless carrier or rural wireless providers
proposing an SRA relationship with Sprint. Section 5 contained a “carve out”
acknowledging GKBA’s intent to provide investment banking services to “SRA Corp.”:
Notwithstanding the foregoing, Sprint acknowledges and accepts that GKB
intends to provide investment banking, capital placement and acquisition
advisory services ... to a certain to-be-formed RWP, hereafter referred to as
“SRA Corp”, in connection with SRA Corp.’s efforts to pursue the execution
and performance of a Strategic Roaming Agreement with Sprint for
approximately six million (6,000,000) SRA Market POPs in the lower
forty-eight (48) states.
The Engagement contained a “Schedule of Fees” to be paid to GKBA, including an
“Initial Engagement Fee” an “Initial Retainer Fee”, “Monthly Retainer Fee”, “Strategic
Roaming Agreement Fee” and a $500,000 “Success Fee.” The “Success Fee” was payable
to GKB “upon SRA Corp. obtaining the necessary rural telephone ownership interest in
each of the regional operating entities as stipulated in the SRA Corp. Strategic Roaming
Agreement.”
The agreement provided that Crossroads should raise $100 million by May 15, 2007,
$150 million by August 31, 2007, $250 million by November 15, 2007, and $800 million by
February 15, 2008. The plaintiff also notes that under the agreement, Sprint had the right
to approve the RWP investors in Crossroads. However, there is no evidence Sprint was
ever asked to approve any investors in Crossroads.
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The “Success Fee” created an incentive for GKBA to obtain the requisite rural
telecom interest, but the provision did not create any affirmative obligations or
requirements on GKBA. Under the “Success Fee” provision, it was not GKBA’s
responsibility to ensure that “SRA Corp.” satisfied its contractual obligation to obtain local
telco ownership as mentioned in the SRA Agreement; it was SRA Corp.’s obligation.
These success based-fees, which were based on milestones SRA Corp. had to
achieve, were never paid to GKBA.
On December 13, 2006, GKBA entered into a capital placement engagement with
Crossroads. GKBA agreed
to jointly with Brown Brothers Harriman ... serve as the Company’s exclusive
co-placement agent and co-financial advisor with respect to a possible
‘Capital Placement” ... involving qualified lenders ... investors ... or
contributing local exchange carriers or other wireless operators ... for the
purpose of properly capitalizing the Entities and funding the Company’s
proposed establishment of an integrated wireless communications operation.
Under Section (1) of this agreement, “Capital Placement” was defined to include
any purchase or other acquisition of any of the securities of [Crossroads] by
any investor or strategic partner, including . . . equity or equity linked
securities, as commonly defined, including without limitation common stock,
preferred stock, membership interests, and derivatives thereof . . . (‘Equity
Securities’) [and] Capital, in any form, from Strategic Partners that is
contributed in exchange for equity or equity linked securities.
Among these “Capital Placement Services” GKBA agreed to provide to Crossroads were:
(1) developing a list of prospective lenders, investors or strategic partners that GKBA
believed would be interested and financially qualified; (2) assisting Crossroads in
preparing evaluation materials containing relevant business and financial aspects of the
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company to be utilized in discussions with prospective lenders, investors, or strategic
partners; (3) contacting and arranging meetings with prospective lenders, investors, or
strategic partners; (4) advising the company as to strategy and tactics for initiating
discussions with prospective lenders, investors, or strategic partners and negotiating the
timing, structure and pricing of a capital placement and potentially participating in such
discussions and negotiations; (5) evaluating capital placement transactions proposed by
lenders, investors, or strategic partners; (6) assisting in negotiating agreements relating to
capital placement; and (7) assisting the company with financial issues related to the
consummation of a capital placement.
Section 3 addressed “Fees for Capital Placement Services.” These Fees include a
“placement fee” equal to 4.50% of any equity contribution from local exchange carriers or
other wireless operators.
GKBA received at least $3 million in capital placement fees from Crossroads under
the December 13, 2006 engagement, based on the amount of money invested by rural
telcos.
The agreement stated that it did not oblige GKBA to buy any securities from
Crossroads or to place them with other entities. Section 7 acknowledged GKBA’s separate
contract with Sprint:
[Crossroads] acknowledges that GKB is currently engaged by Sprint ... for
the purpose of assisting Sprint in entering into Strategic Roaming
Agreements with rural wireless providers and agrees that any actions taken
or advice or opinions given by GKB relating to the establishment of a
Strategic Roaming Agreement by and between Sprint and [Crossroads] are
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for the sole benefit of Sprint. [Crossroads] further acknowledges that it has
been made aware of these matters and agrees to waive any and all claims
against GKB relating to potential conflicts of interest arising therefrom.
Crossroads employed Latham and Watkins as its securities counsel, and employed
broker-dealer Brown Brothers Harriman (BBH) to help raise capital. BBH constructed a
financial model for Crossroads, based on inputs from Tom Riley of Crossroads and Tracy
Smith of GKBA.
According to the plaintiff, Smith’s input was simply “administrative and clerical,”
but the evidence fails to establish this fact as uncontroverted. There is evidence that Smith
reviewed, edited, and commented on information in the Crossroads capitalization tables.
On or about February 15, 2007, Sprint and Crossroads entered into an SRA
Agreement with an effective date of February 15, 2007. Section 4.1.3.1 of this agreement
required Crossroads, within twelve months, to have sold or transferred a sufficient number
of equity interests in the Company such that at least 25% of the outstanding equity interests
in the Company would be owned by local telco partners.
Beginning in at least March 2007, GKBA began to distribute a document titled
“Investor Information Packet” to potential investors in Crossroads. GKBA distributed these
packets on behalf of Crossroads.
At least five versions of the packets were distributed to potential investors. One bore
the name and logo of George K. Baum & Company, and on the front cover instructed
recipients to “Please direct all inquiries to: Tracy L. Smith, Principal.” Subsequent versions
contained the name and logo of George K. Baum Advisors, but still instructed recipients
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to “Please direct all inquiries to: Tracy L. Smith, Principal.” According to Matt Blain, an
analyst at GKBA, the packets identified Smith because “she was the one managing the
capital raise” from rural telephone companies.
Each of the packets contained a Capitalization Table which stated that a $26 million
equity contribution by Chickasaw to Crossroads was “complete” or “funded” in September
2006 or at “opening.” However, Chickasaw never made or completed a $26 million equity
contribution to Crossroads. An audited balance sheet for Crossroads dated December 31,
2007 showed an equity contribution by Chickasaw of no more than $7 million, and
investment in Crossroads of less than $1 million. As of March 31, 2007, Crossroads’s total
assets consisted of $982 in cash and Crossroads had no assets prior to that time.
The “Capitalization Table” in each of the Investor Information Packets distributed
to potential investors in Crossroads contained representations regarding a $56 million loan
agreement with the United States Department of Agriculture’s Rural Utility Service (“RUS”
or “RDUP”). The Capitalization Table in the first version of the Investor Information Packet
states that $56 million in RUS debt is “complete.”
Crossroads did not have a loan agreement with RUS in the amount of $56 million.
Instead, the loan agreement was between RUS and a wholly-owned subsidiary of
Chickasaw Wireless known as Poplar PCS. Neither Poplar PCS nor the $56 million RUS
loan were ever transferred to Crossroads.
In total $72,853,900 was invested in Crossroads by rural telcos for the purchase of
Series A, B and C preferred stock. GKBA invoiced Crossroads at least $3,002,463 for
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“capital placement fees” for the sale of Crossroads Series A, B, and C preferred stock. The
sale of Crossroads’s stock to local telephone companies was the sale of equity securities.
Tracy Smith was the lead person for GKBA, and she solicited investors on behalf of
Crossroads. The plaintiff argues that Smith simply served as a “subject-matter expert” on
the issue, and has denied that Smith sold or solicited securities. As the court explains more
fully below, the plaintiff’s evidence fails to support this conclusion. While she may indeed
have acted as an expert on the issues, plaintiff’s evidence does not controvert the evidence
showing that Smith helped to market Crossroads. Smith herself concedes that she gave
glowing descriptions of similar opportunities, and the other witnesses cited by GKBA have
admitted to lacking any direct knowledge of Smith’s role.
The term “subject-matter expert” does not appear to have been used during the
marketing of Crossroads, was not used in the GKBA-Crossroads Agreement, and was not
revealed to potential investors. Rather, the Agreement describes GKBA as Crossroads’s
“capital placement agent.”
Tracy Smith and GKBA identified and created a list of potential telco investors to
whom the investor packets would be sent. They also contacted prospective investors and
invited them to meetings. The meeting invitations directed:
All communications, inquires, and requests for information regarding the
Company, or any possible transaction, should be directed to Tracy Smith.
Under no circumstances should the management, directors, or any employee
of the Company or any of their respective affiliates be contacted directly.
Smith and GKBA attended most or all of the meetings with potential investors and
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participated in most of the conference calls. Smith and GKBA also assisted Crossroads in
preparing materials to be utilized in discussions with prospective investors.
GKBA authored portions of the Investor Information Packets, and then compiled
and put together the packet. Smith and GKBA distributed the investor packets and
participated in presentations to telcos that ultimately invested in Crossroads.
Tracy Smith and GKBA communicated with potential investors in person, by email,
telephone, fax and letter, and some of those investors ultimately bought stock in
Crossroads. Smith and GKBA presented investors with material information. Smith
testified that she provided information to potential investors, including what was “the
most important thing to them,” information about the geographic relationship between the
service maps of Sprint and Crossroads.
Smith and GKBA communicated with potential investors regarding the amount and
terms of their investment. Smith recommended the Crossroads investment to potential
investors and asked them to invest. Sprint supports this factual conclusion with the
testimony of Smith herself, as well as two local telco officers who were solicited by her,
Dale Jones and Craig Wilbert.
The plaintiff attempts to controvert the last point by suggesting that Smith’s
deposition indicated only that she observed that current SRAs were doing well, and that
Jones had stated simply that Smith had “supported” investment, which GKBA asserts “falls
short of recommending” it. (Dkt. 150, at 13).
The court finds the fact is uncontroverted. Asked directly if she had recommended
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Crossroads, Smith responded
I — I didn’t work for them [it is unclear in context whether Smith means the
potential investors or Crossroads] – for them, but I — I — if — I don’t know
that I never said if asked, if one of them came up to me and said what I
thought. I think my pat answer was, well, the current SRAs are doing fabulous.
The SRAs that were signed – which they all knew. And, in fact, I would
invite them to meetings to talk about their SRAs, and they also provided
inputs on their actually — operational metrics that they were achieving. So
I believe I would say, well, the current SRAs are doing extremely well.
(Emphasis added). Asked if she ever discouraged any potential investor from buying stock
in Crossroads, Smith was far less equivocal, stating simply, “Not that I recall.” Smith thus
does not disavow making any recommendation, and admits she told investors existing
SRAs were “doing fabulous” and “extremely well.”
The plaintiff’s attempt to limit the effect of Jones’s testimony is also without merit.
Jones was asked if Smith had recommended Crossroads, and responded that he could not
remember “her exact words, but ...” (Emphasis added). Jones was then asked if he
understood that Smith supported the investment, and he responded, “Oh, absolutely.”
Jones was also asked about the purpose of the meetings with Smith, and whether
“she was asking Tri-County to invest in Crossroads?” Jones responded: “Yeah. That was
the purposes of her being there, I believe.”
Finally, it may be noted that plaintiff does not even attempt to find any ambiguity
in the testimony of Wilbert, who directly states that Smith solicited his investment, and
suggested it was a good investment.
Accordingly, the court finds that Smith contacted rural telephone company officers
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with the recommendation that they invest in Crossroads.
Smith and GKBA assisted in negotiating agreements with telcos leading to a capital
placement, and distributed term sheets which directed recipients to call Smith if they had
any questions, comments or concerns. Smith and GKBA sent subscription documents to
be signed by potential investors.
GKBA received the completed and signed subscription documents. GKBA sent
invoices to Crossroads investors requesting payments to fund their investment.
Crossroads, as the issuer, filed a Uniform Form D (Notice of Sale of Securities
Pursuant to Regulation D) with state securities administrators for the Series B Preferred
Offering, identifying George K. Baum & Company and Brown Brothers as parties to be
given a commission for the solicitation of purchasers in connection with the sale of
securities in the offering.
The Nebraska Department of Banking and Finance questioned the offering of
Crossroads’s securities in Nebraska and sought information regarding what entity was
involved in the offering of such securities. In response, counsel for Crossroads wrote that
the offer and sale of securities in Nebraska was made by George K. Baum & Company, not
Brown Brothers as had been indicated on the Form D.
Counsel for Crossroads sent correspondence to the Mississippi Secretary of State
stating the offer and sale of securities in Mississippi was made by George K. Baum &
Company, not Brown Brothers as had been indicated on the Form D.
GKBA has provided evidence in the form of a June 2007 meeting agenda, which lists
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Tracy Smith, Bob Paige of BBH, and two Sprint employees as scheduled to present at a
information meeting. Another agenda indicates that another meeting was scheduled for
Nashville, Tennessee. There is, however, nothing at all to indicate who actually appeared,
or what was said. There is evidence that Sprint employees attended two informational
meetings with potential Crossroads investors. The evidence indicates that the Sprint
employees attended for the limited purposes of discussing the SRA program in general,
Sprint’s coverage strategy, and existing SRA relationships. Sprint employees did not
participate in the part of the meeting during which GKBA pitched the Crossroads
investment opportunity, nor were they asked to do so.
While some telephone companies purchased Crossroads stock, it was ultimately
unable to raise significant capital, and entered bankruptcy in the spring of 2009.
On April 10, 2009, multiple Crossroads investors filed a lawsuit against GKBA and
GKBC in the Circuit Court of Jackson County, Missouri, styled McCormack-Missouri
Wireless, et al. v. George K. Baum Advisors, LLC, et al. On or about March 21, 2010, a Third
Amended Petition was filed in the McCormack-Missouri lawsuit by fifteen Crossroads
investors, asserting claims against GKBA, GKBC, George K. Baum Holdings, Inc., Tracy
Smith, Jonathan Baum, five other officers or directors of GKBA, and other defendants. The
plaintiffs asserted claims against GKBA, GKBC, Tracy Smith and Jon Baum for fraud and
negligent misrepresentation, and against all of the Baum defendants for violations of the
Missouri Securities Act, R.S.Mo. § 409.5-509, money had and received, unjust enrichment,
and conspiracy. The plaintiffs alleged the Baum defendants made material
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misrepresentations in order to induce and solicit the plaintiffs’ investments in Crossroads,
including the following misrepresentations: (1) that Chickasaw Wireless had completed a
$26 million equity contribution to Crossroads; (2) that Crossroads had a $56 million loan
with RUS or RDUP that was “complete” or “approved.”
On September 29, 2009, Crossroads investor Salina-Spavinaw Telephone Company,
Inc. filed a lawsuit against GKBA, Tracy Smith, Jonathan Baum, and other non-Baum
defendants in the District Court of Tulsa County, Oklahoma. Salina-Spavinaw asserted
claims against Tracy Smith and GKBA for fraud and negligent misrepresentation, and
against Smith, GKBA, and Jon Baum for violations of the Oklahoma Uniform Securities
Act. The plaintiff alleged the Baum defendants made various misrepresentations in order
to induce Salina-Spavinaw to invest in Crossroads, including: (1) that Chickasaw Wireless
had completed a $26 million equity contribution to Crossroads; (2) that certain amounts of
RUS loan debt was either “complete” or “approved” and not “pending;” and (3) that assets
of Poplar PCS were to be owned/contributed to Crossroads Wireless but were not.
On September 15, 2010, Crossroads investor Arvig Enterprises filed a lawsuit against
GKBC, GKBA, George K. Baum Holdings, Inc. and Tracy Smith in Otter Tail County
Minnesota, later removed to the United States District Court for the District of Minnesota.
Arvig alleged that Tracy Smith and the Baum corporate defendants violated the Minnesota
Securities Act by selling Crossroads securities to Arvig by means of untrue statements of
material fact or the omission of material facts. Arvig also asserted a claim against Tracy
Smith and the Baum corporate defendants for negligent misrepresentation, alleging that
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these defendants supplied false information, and made various misrepresentations in order
to induce Arvig to invest in Crossroads, including: (1) that Crossroads had closed on PCS
spectrum licenses encompassing nearly 8.8 million POPs; (2) that spectrum licenses already
acquired by Crossroads included “Poplar PCS Spectrum Licenses;” (3) that Chickasaw had
capitalized Crossroads by contributing $26 million of “equity” and that this amount was
“funded” and “complete;” (4) that Crossroads had already closed in November 2007 on $9
million of RDUP financing; (5) that as of December 31, 2007 Crossroads total invested
capital was $176.8 million.
On March 13, 2009, Commnet Supply, LLC, a supplier to Crossroads, filed a lawsuit
against Tracy Smith, GKBA, and other defendants in the District Court of Oklahoma
County, Oklahoma. Commnet asserted claims against Tracy Smith and GKBA for
promissory estoppel, tortious interference with contract, tortious interference with
prospective economic advantage, negligent misrepresentation, and civil conspiracy or
aiding and abetting liability. The Commnet lawsuit is still pending.
GKBA settled MicCormack-Missouri on June 11, 2010 for $9 million, Arvig on January
19, 2011 for $650,000, and Salina-Spavinaw on July 19, 2011 for $750,000.
On January 18, 2011, five months after settling McCormack-Missouri, and only one
day before mediation in Arvig, GKBA sent a written demand for indemnity to Sprint.
GKBA did not notify Sprint of its intent to seek indemnity until January 2011.
Around the time the first investor lawsuit was filed against GKBA, Tracy Smith called
Sprint to give a “heads up” that a lawsuit had been filed and told Sprint “don’t worry
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about it, we don’t think it’s real or has any substance.” Smith told Sprint the lawsuits were
“a nuisance,” and that the lawsuits were “frivolous” and “frustrating.”
On June 3, 2009, GKBA demanded that Chickasaw indemnify it for the investor
lawsuits pursuant to an indemnity provision in the November 21, 2005 GKB-Chickasaw
capital placement engagement.
In McCormack-Missouri and Salina Spavinaw, GKBA asserted claims against
Chickasaw for indemnification. In a sworn discovery response, GKBA stated:
All claims asserted against GKB Advisors in the instant action or the
Underlying Actions relate back to actions taken by GKB Advisors pursuant
to the directions provided by Chickasaw Defendants and obligations arising
under the certain letters of engagement executed between GKB Advisors or
BBH and Chickasaw Defendants.
GKBA confirmed that the sworn discovery responses were true and correct as of January
21, 2013. GKBA also stated that the investors’ claims “arose as a result of GKB Advisors’
engagement with Chickasaw.” It represented:
[T]he indemnification sought by GKB Advisors is related to settlements and
legal fees paid in response to claims made by investors in Crossroads (other
than Chickasaw) based on alleged misrepresentations in the Investor
Information Packets distributed to investors pursuant to the GKB Advisors
Letter Agreements [with Chickasaw].
....
The plaintiffs’ claims in the Underlying Actions each arise ‘in connection’ or
‘as a result of’ GKB Advisors engagement with Chickasaw to assists (sic) in
its capitalization related to the SRA with Sprint.
GKBA further stated that the investor lawsuits were “in connection with [GKBA’s]
engagement with Chickasaw Defendants.” According to GKBA, “all of [its] actions ... were
20
performed for the benefit of Crossroads,” and that in its spectrum licensing and capital
services, “[t]he relationship of the parties was crystal clear: Chickasaw was the principal
and GKB Advisors was the agent.” GKBA further stated that its engagements with Sprint
and Chickasaw were totally separate and independent of one another:
The evidence is simply undisputed on the point that, in connection with the
SRA process, GKB Advisors represented Sprint and only Sprint. Instead,
GKB Advisors' engagement with Chickasaw related to totally separate and
independent activities: (1) helping it acquire spectrum licenses; and (2)
helping it raise capital. That’s it.
GKBA is seeking indemnity from Sprint for defense costs and settlement payments
(losses) incurred in the four underlying lawsuits. None of the underlying plaintiffs brought
a cause of action against GKBA under the Securities Exchange Act, or under any federal
securities law.
Conclusions of Law
1. Application of Section 7
The initial question before the court is the correct construction of the Sprint-GKBA
Agreement and the effect of its indemnification clause. This court has previously
recognized that under Kansas law the proper interpretation of a written contract
is a question of law and whether an ambiguity exists in a written instrument
is a question of law to be decided by the court. Courts should not strain to
create an ambiguity where, in common sense, there is none. To be
ambiguous, a contract must contain provisions or language of doubtful or
conflicting meaning, as gleaned from a natural and reasonable interpretation
of its language. Where a contract is complete and unambiguous on its face,
the court must determine the parties' intent from the four corners of the
21
document, without regard to extrinsic or parole evidence.
Warkentine v. Salina Public Schools, 921 F.Supp.2d 1127, 1131 (2013) (citations and internal
quotations omitted). In addressing this issue, parol evidence is inadmissible to the extent
that it attempts to “prove the meaning of a contract that is unambiguous on its face.”
United States v. Ailsworth, 927 F. Supp. 1438, 1446 (D. Kan. 1996).
Both parties agree their contract is free from ambiguity, but reach markedly different
interpretations. In its motion for partial summary judgment, GKBA argues that Section 7
of the Agreement clearly contemplates that Sprint hold GKBA harmless for any losses
incurred in assisting Crossroads’ capitalization program.1 Sprint, in its motion for summary
judgment, contends that Section 7 contains no such authorization.
In addition, both parties argue that giving effect to the Section cited by their
opponent would render their own preferred Section meaningless. Thus Sprint argues that
GKBA’s broad interpretation of Section 7(ii) (that indemnity applies even if Sprint has no
fault at all) would directly conflict with the plain language of Section 6 (Sprint has no
liability “except for a claim, loss or expense that arises [due to] any action ... by Sprint”).
(Dkt. 130, at p. 36). GKBA argues that if the indemnification rights offered in Section 7 is
interpreted to incorporate the requirement of fault by Sprint, then Section 7(ii) is
1
GKBA’s partial summary judgment motion addresses only the threshold
question of the application of Section 7's indemnification provision. The motion does
not address additional defenses asserted by Sprint, including whether the misconduct
cited in the state securities claims involved bad faith, wilful misconduct, or gross
negligence by GKBA, whether GKBA settled those suits in bad faith, and whether
GKBA gave reasonable notice of the actions and settlements to Sprint.
22
superfluous since Section 7(i) already provides for indemnity. (Dkt. 150, at 30).
The court finds neither argument is dispositive. Section 6 applies to lawsuits directly
between the parties. Section 7, dealing explicitly with indemnification, is properly the
controlling provision governing GKBA’s claims for its settlement of third party litigation.
At the same time, as addressed below, the court’s construction of the Agreement does not
eliminate any clause in Section 7, since that provision is restricted to losses incurred by
GKBA for services required under the Agreement, and not additional responsibilities
voluntarily undertaken by GKBA on behalf of Crossroads. The Sprint-GKBA contract did
not obligate GKBA to help Crossroads meet the 25% contract, it only required
SRA/Crossroads to meet that goal. Read as a whole, the contract is unambiguous, and
offers no indemnification under the facts of the case.
Citing general indemnity cases involving “arising from” language, GKBA argues
that it need only show a general relationship to the Sprint contract. See, e.g., Pestock v. State
Farm Auto Ins. Co., 674 P.2d 1062, 1063 (Kan. App. 1984); Missouri Pac. RR v. Kansas Gas &
Elec. Co., 862 F.2d 796, 799 (10th Cir. (Kan.) 1988) (citing Fontenot v. Mesa Petroleum, 791 F.2d
1207, 1214 (5th Cir. 1986)). GKBA argues that this standard is met here, because its contract
with Sprint provided an incentive, in the form of the Success Fee that was payable when
Crossroads reached a certain capitalization. In addition, it contends that its contract with
Sprint called for it to act as Sprint’s primary point of contact. And it cites an extensive
portion of the deposition testimony of a former Sprint executive as to what Sprint and
GKBA meant in their plans for Crossroads and SRA Corp. (Dkt. 129, at 14-16).
23
However, while Section 7 does have broad “arising” language typical of ordinary
indemnity agreements, it still is grounded on the Sprint-GKBA contract. Section 7
indemnifies GKBA for losses “relating to or arising out of the engagement of GKB under this
Agreement or related to performance under the Strategic Roaming Agreements or conduct
in connection therewith.”2 (Emphasis added). In addition, the indemnification clause
further provides that there will be no indemnification for losses which arise due to “the bad
faith, willful misconduct or gross negligence of GKB in performing the services that are the
subject of this Agreement.” (Emphasis added).
The court finds no ambiguity in the contract, which provides for indemnity only for
those acts by GKBA performing services that were “the subject” of the Sprint-GKBA
contract, that is, if the actions of GKBA arose from its “engagement” with Sprint. An
“engagement” means “[a] contract or agreement characterized by exchange of mutual
promises.” BLACK’S LAW DICTIONARY. See, e.g., Oppenheimer v. Harriman nat. Bank & Trust,
301 U.S. 206, 213 (1937) (recognizing in construction of banking statute that “all pecuniary
liabilities and obligations of the bank ... is a well-recognized meaning of the word
‘engagement’”).
Accordingly, the court construes and gives effect to the entire contract, and
concludes that indemnification is supported when the conduct arises from GKBA’s
engagement under the contract, or its performance of services were subject to that
2
GKBA has not asserted that the losses arose out of or in connection with any
Roaming Agreement.
24
agreement. The Sprint-GKBA contract did not contain mutual promises as to the GKBA’s
actions in marketing Crossroad’s stock to local telcos. GKBA did not oblige itself to helping
Crossroads/Chickasaw raise capital, and Sprint did not promise to pay for such efforts.
As GKBA repeatedly admitted in the state securities litigation, the actions cited by
the plaintiffs in those cases were taken pursuant to its contract with Chickasaw, not its
contract with Sprint. In the words of GKBA, its actions on behalf of Chickasaw-Crossroads,
“(1) helping it acquire spectrum licenses; and (2) helping it raise capital” were “totally
separate and independent activities” from its obligations to Sprint.
The Sprint-GKBA agreement permitted those activities, it did not require them.
Towards that end, it authorized a success fee which was triggered when the new SRA
Corp. obtained the necessary capitalization, but this obligation belonged to SRA Corp., not
GKBA. And while the 2006 agreement between Sprint and GKBA provided that the latter
was a “point of contact,” this explicitly applied only to rural telephone companies seeking
new SRA agreements with Sprint. In sum, GKBA’s solicitation of investments in
Crossroads was not an obligation of its contract with Sprint, but an activity it assumed
voluntarily for independent consideration from Chickasaw-Crossroads.
Moreover, not only does the Sprint-GKBA contract fail to indicate affirmatively that
such activities are covered under Section 7, the court finds that GKBA fails to meet the
additional standard of clarity required under Kansas law for parties seeking indemnity for
one’s own fault. Under Kansas law, agreements in which one party agrees to indemnify
another for the indemnitee’s own negligence or wrongful conduct are disfavored.
25
Contractual language in such cases is “strictly construed against the party relying on
them,” and the intent to indemnify must be expressed in “clear and unequivocal
language.” Zenda Grain & Supply v. Farmland Indus., 20 Kan.App.2d 728, 732-33, 894 P.2d
881 (1995). See also Cason v. Geis Irrigation, 211 Kan. 406, Syl. ¶ 1, 507 P.2d 295 (1973).
“Exculpation of liability for one's own negligence is subject to strict construction and
expression by clear and unequivocal language.” Elite Professionals v. Carrier Corp., 16
Kan.App.2d 625, Syl. ¶ 3, 827 P.2d 1195 (1992).
In Butters v. Consolidated Transfer & Warehouse, 212 Kan. 284, Syl ¶ 2, 510 P.2d 1269
(1973, the Kansas Supreme Court wrote:
It is a general rule that a contract of indemnity will not be construed to
indemnify the indemnitee against losses resulting from his own negligent
acts unless such intention is expressed in clear and unequivocal terms, or
unless no other meaning can be ascribed thereto, and mere general broad and
seemingly all-inclusive language in the indemnifying agreement is not
sufficient to impose liability for the indemnitee's own negligence.
In response to Sprint’s argument, the plaintiff relies on the decision of the Tenth
Circuit in Neustrom v. Union Pacific Railway, 156 F.3d 1057 (10th Cir. 1998). In Neustrom, the
court gave effect to an indemnification clause in an agreement between a railroad and a
defoliant-spraying contractor. The agreement at issued contained a broad general
indemnification clause, with an exception: “However, the Contractor shall not indemnify
the Railroad Company when the loss is caused by the sole negligence of the Railroad
Company.” The court reasoned this exception defeated the contractor’s argument that no
indemnification should be required under Kansas law, observing:
26
The “sole negligence” provision carves out from the otherwise inclusive
indemnification the lone circumstance where the indemnity clause does not
apply, and that is when the injury or death was caused solely by Union
Pacific's negligence. This shows that the parties clearly focused on
negligence, including Union Pacific's negligence. The “sole negligence”
phrase directly implies that all other kinds of negligence, e.g., joint
negligence, are included within the meaning of the phrase “any and all
liability, loss, damages, claims, demands, costs and expenses of whatsoever
nature.” Any other reading would make the “sole negligence” language of
the clause meaningless and superfluous.
156 F.3d at 1063 (footnote omitted).
GKBA stresses that the last sentence of Section 7 here provides:
To the extent that such Losses result from the bad faith, willful misconduct
or gross negligence of GKB in performing the services that are the subject of
this Agreement, Sprint shall not be required to indemnity, defend or hold
harmless GKB for the Losses.
According to GKBA, this implies that other forms of misconduct by GKBA do fall within
the indemnification requirement.
The court finds that Neustrom is not controlling here. First, as that court stressed, the
broad indemnification clause at issue there, with its inclusion of all losses “of whatsoever
nature,” was unambiguously broad, and “otherwise inclusive” of all forms of fault. 156
F.3d at 1063. Given such language, to read the indemnity as precluding claims for joint
negligence would render the “sole negligence” carve-out meaningless.
In contrast, in the present action it is not unambiguously clear that GKBA’s conduct
otherwise falls within Section 7. As noted above. Section 7 provides that the obligation to
indemnify GKBA arises for GKBA’s actions performing services “that are the subject of this
contract,” that is, the Sprint-GKBA contract. Here, the capital-marketing services which
27
created GKBA’s liability in the state actions were those pursuant to an entirely separate
contract with an entirely different party. Those services were permitted by, but not
required by the Sprint-GKBA contact, and certainly were not the “subject” of the contract.
Second, as the Tenth Circuit noted, the use of term “sole negligence” demonstrated
that the “the parties clearly focused on negligence,” the particular form of fault at issue in
the underlying claim. Here, there is nothing in Section 7 which would demonstrate that
Sprint and GKBA actively considered negligent misrepresentations by GKBA in
performing actions on behalf of Crossroads.
Finally, the Kansas public policy against indemnification for one’s own fault was
minimized in Neustrom because the underlying action by the injured railroad worker
asserted fault by both the railroad and the contractor. In the present case, by contrast, there
is no suggestion whatsoever of fault on the part of Sprint.
Given Kansas public policy, the party seeking indemnification for its own negligence
must point to something more than “broad and seemingly all-inclusive language” which
typifies standard indemnification language. Zenda Grain, 894 P.2d at 887 (quotation
omitted). The indemnification clause must “express[] in clear and unequivocal terms an
intent to shield [the indemnitee] from the responsibility for its own negligence.” Id. at 888.
The Zenda Grain court cited Corral v. Rollins Protective Services, 240 Kan. 678, 732 P.2d
1260, 1263 (1987) as illustrative of the language necessary to overcome the judicial disfavor
of indemnification for one’s own fault. In Corral, the Kansas Supreme Court enforced a
limitation of liability clause which restricted the exposure of Rollins, a fire alarm company,
28
“irrespective of cause or origin, results, directly or indirectly to persons or property from
performance or nonperformance of obligations imposed by this Agreement or from
negligence, active or otherwise, of Rollins.” 240 Kan. at 680-81 (emphasis added). A party
seeking indemnification for its own fault must demonstrate an equivalent level of certainty.
See Zenda Grain, 894 P.2d at 888. (“to protect itself from its own negligence, malfeasance,
or mismanagement, an entity must employ language similar to the clause in Corral”).
GKBA seeks indemnification from Sprint for actions which, by its own admission,
were “totally separate and independent” from its objections to Sprint. Its argument for
indemnification rests on a series of inferences which is not supported in the language of the
contract; thus the claim would fail even if GKBA was without fault in the underlying
actions. Because GKBA seeks indemnification for its own misconduct, a higher standard
applies, and even “seemingly all-inclusive language” is insufficient. Certainly the SprintGKBA contract contains no language comparable to Corral which expressly states that
Sprint will pay GKBA losses caused by GKBA’s own negligence. The court finds that Sprint
is not obliged to indemnify GKBA for the consequences of its separate and independent
capital raising activities.
2. Indemnification and Public Policy
Sprint argues that even if Section 7 were otherwise construed to cover GKBA’s losses
in the state securities litigation, indemnity should be barred under Kansas public policy.
That is, it contends that no indemnification is appropriate because, in marketing the
29
Crossroads stock, Smith was selling securities without registering as a broker, and thus she
and GKBA were acting illegally and in violation of Section 15(a)(1) of the Securities
Exchange Act of 1934. The Exchange Act requires all persons acting as brokers to register
with the SEC. 15 U.S.C. § 78o(a)(1). In turn, a broker is defined as anyone “engaged in the
business of effecting transactions in securities for the account of others.” 15 U.S.C. §
78c(a)(4). Sprint argues that courts have generally refused to permit indemnification for
losses caused by illegal conduct. See Wilshire Oil v. Riffe, 409 F.2d 1277, 1283 (10th Cir. 1969).
GKBA argues that the Sprint’s public policy argument can have no application here
because it is not seeking indemnification for losses caused by violations of the Exchange
Act. In addition, it argues factually that it did not violate the Exchange Act because it was
not selling or effecting transactions in securities and thus was not a broker. This issue, it
argues is “inherently fact-intensive,” and is inappropriate for summary judgment given its
contention that Smith and GKBA acted only as the “subject-matter expert” as a “member
of Crossroads’ larger ‘team.’” (Dkt. 150, at 42). GKBA also argues that the federal policy
precluding indemnification applies only against intentional or reckless conduct, and thus
cannot affect the present action for indemnification under Kansas law.3 Finally, stressing
that a violation of Section 15(a) of the Exchange Act contains no scienter requirement,
3
GKBA argues that Sprint “inaccurately states Kansas law, because illegal
conduct would necessarily include negligent conduct, and even Sprint acknowledges
that Kansas law allows a party to receive indemnity for its own negligence.” (Dkt. 150,
at 47). GKBA provides no authority for its equating negligence with illegality, and it
may be that GKBA here means “might’ or “could” rather than “would necessarily.” As
indicated below, Sprint accurately states Kansas law.
30
GKBA argues that the federal policy precluding indemnity is limited, and has no
application where the underlying violation involves simple negligence.
The court rejects each of these arguments. First, the court finds that Smith and
GKBA were engaged in the sale of securities, and accordingly that Smith’s failure to
register as a broker violated Section 15(a) of the Exchange Act.4 Under 15 U.S.C. § 78c(a)(4),
the term “broker” is defined as “any person engaged in the business of effecting
transactions in securities for the account of others.” The determination of whether a specific
individual is a broker is fact-intensive. See Sun River Energy v. Nelson, 2013 WL 1222391, *5
(D. Col. 2013). Nevertheless, in an appropriate case, summary judgment may be granted
determining that a person has acted as a broker for purposes of § 78c. See SEC v. George, 426
F.3d 786 (6th Cir. 2005) (affirming summary judgment in favor of the SEC in a
civil-enforcement action).
In determining whether a person has acted as a “broker” for purposes of the
Exchange Act, courts consider a number of factors, including whether the defendant
(1) actively solicited investors, (2) advised investors as to the merits of an
investment, (3) acted with a certain regularity of participation in securities
transactions, (4) received commissions or transaction-based remuneration,
(5) worked as an employee of the issuer, and (6) sold securities of other
4
Sprint also argues that GKBA’s involvement in selling securities is
independently demonstrated by its admission that, absent the settlements, it would
likely have been found liable in the state securities litigation. According to Sprint, the
sale of securities is an essential element in each of the respective state securities statute.
GKBA has filed a surreply asserting that the relevant statutes do not necessarily require
proof of the sale of a security. The court need not resolve the issue because it determines
that the uncontroverted facts otherwise clearly establish that GKBA did participate in
the sale of securities for purposes of the Exchange Act.
31
issuers, may support the conclusion that a person acted as a broker.
SEC v. Sky Way Global, 2010 WL 50508509, *1 (M.D. Fla. 2010) (citations, internal quotations
omitted).
The definition of “broker” employed by § 78c(a)(4) is broad, and includes acts which
generally serve to encourage investors to purchase securities. See George, 426 F.3d at 793-94
(6th Cir. 2005) (defendant who regularly and actively “encouraged people to invest” in
securities was a broker, even though not directly employed by seller); SEC v. Deyon, 977
F.Supp. 510 (D. Me. 1997) aff’d, 201 F.3d 428 (1st Cir. 1998) (defendants “actively sought to
effect securities transactions” and thus were brokers when they “solicited investors by
phone and in person” and “distributed documents and ... sales circulars in the hope that
potential investors would deposit their money”); In re Kemprowski & the Cambridge
Consulting Co., Exchange Act Release No. 34–35058,1994 WL 684628 (Dec. 8, 1994)
(defendants ostensibly employed as “independent consultants” for “public relations”
services” were brokers where they “contacted potential investors directly and through
registered representatives at registered broker-dealers, and recommended that potential
investors purchase Astro stock”).
The uncontroverted facts establish that GKBA entered into a capital placement
engagement with Crossroads, under which it agreed to act (along with Brown Brothers
Harriman) as a “co-placement agent and co-financial advisor with respect to a possible
‘Capital Placement’” with the goal of “funding the Company’s proposed establishment of
an integrated wireless communications operation,” including helping with the “purchase
32
or other acquisition of any of [Crossroads’s] securities.” GKBA agreed to identify
prospective lenders and investors, arrange for meetings with them, and help with the
resulting negotiations. In exchange, GKBA received over $3 million in fees for its services,
fees which were calculated on the basis of the 4.5% of the investments it obtained.
In fulfilling these obligations, GKBA began to distribute investor information
packets, of which it prepared five different versions. The initial version of this packet
carried the name of “George K. Baum & Company” on the front cover; later versions
identify “George K. Baum Advisors.” Both versions direct inquiries to “Tracy L. Smith,
Principal.” Tracy Smith was listed as the contact person because “she was the one
managing the capital raise.”
The information packets contained a “Capitalization Table” stating that Chickasaw’s
$26 million equity contribution was “complete” or “funded” in September 2006, when in
fact Chickasaw never made or completed that contribution. The balance sheet for
December 31, 2007 showed that Chickasaw had contributed less than $7 million. The
packets also claimed that Crossroads held a $56 million loan agreement with the United
States Department of Agriculture’s Rural Utility Service, which was untrue.
Rural telcos invested nearly $73 million in Crossroads, and GKBA invoiced
Crossroads at least $3,002,463 for “capital placement fees” in connection with the sale of
Crossroads Series A, B, and C preferred stock. The sale of Crossroads’s stock to local telcos
was the sale of equity securities.
The uncontroverted facts establish that Tracy Smith was the lead person from GKBA
33
in soliciting investors for Crossroads, and that Smith solicited investors on behalf of
Crossroads.
GKBA and Smith identified and created a list of potential investors, and contacted
prospective telco investors and invited them to meetings about Crossroads. Invitees were
instructed that
All communications, inquiries, and requests for information regarding the
Company, or any possible transaction, should be directed to Tracy Smith.
Under no circumstances should the management, directors, or any employee
of the Company or any of their respective affiliates be contacted directly.
GKBA and Smith attended most or all of the meetings with potential investors and
participated in most of the conference calls, aided Crossroads in preparing materials to be
utilized in discussions with investors, and distributed the packets. They also presented
investors with information that was material and important to their decision to invest in
Crossroads, and communicated with potential investors in person, by email, telephone, fax
and letter, and discussed the amount and terms of their proposed investment. Smith
recommended the Crossroads investment to potential investors and asked them to invest.
Smith and GKBA assisted in negotiating agreements with telcos leading to a capital
placement, distributed term sheets to potential investors and directed recipients to call
Smith if they had any questions, comments or concerns regarding the content of the terms
sheets. Smith and GKBA sent subscription documents to be signed by potential investors.
GKBA received the completed and signed subscription documents, and sent invoices to
Crossroads investors requesting payments to fund their investment.
34
Crossroads, as the issuer, prepared official documents which formally name George
K. Baum & Company and Brown Brothers as parties to be given a commission for the
solicitation of purchasers in connection with the sale of securities in the offering. Counsel
for Crossroads later specifically and formally represented that George K. Baum &
Company, not Brown Brothers, was the party involved in the sale of its securities.
Based upon the uncontroverted facts, the court concludes that Smith and GKBA
were engaged in the sale of securities for purposes of the Exchange Act. Similarly, the court
finds that GKBA’s contention that Smith could not be a broker because she was a “subjectmatter expert” is without merit. GKBA cites no authority for the proposition that a
“subject-matter expert” is mutually exclusive to the term “broker,” as if a person may be
either but not both.5
GKBA does argue that one of Sprint’s experts, Bryan Mick, has testified to the effect
that “whether the a party engaged in the sale or solicitation of the sale of securities ‘can be
a grey area.’” (Dkt. 150, at 42, 50). But while the conclusion in a given case “can be”
uncertain, that does not mean it always is. While GKBA merely references Mick’s testimony
in the argument portion of its Response, it does not independently cite to or present that
testimony to the court, nor does it indicate whether Mick ultimately agrees that Smith’s
actions fall within that “grey area.”
The plaintiff also points to testimony by Jon Baum, Ken Lund, and Smith herself, but
5
Although not a lawyer, the Bard recognized that it is substance, not a name, that
is significant: “What’s in a name? That which we call a Rose By any other name would
smell as sweet.” Romeo and Juliet, Act II, scene ii, line 43.
35
the court finds that GKBA has failed to demonstrate a factual controversy. Smith does
repeatedly state she was a “subject matter expert,” but (as noted earlier) the cited testimony
otherwise does not disagree with the direct testimony of Crossroads investors who have
stated that Smith contacted them for the purpose of recommending the investment. Asked
directly, Smith refused to state that she did not recommend Crossroads. Rather, she
admitted that she told investors that similar opportunities were “fabulous.”
The other witnesses cited by GKBA similarly portray Smith as a “subject matter
expert,” but this testimony suffers from two flaws. First, those witnesses admit to having
no independent knowledge of what Smith told investors, they were simply repeating what
Smith told them. More importantly, as indicated above, Smith’s status as a “subject-matter
expert” does not preclude her acting as a broker for purposes of the Exchange Act.6
Next, the court rejects the plaintiff’s contention that Sprint’s public policy argument
is inapplicable because the underlying securities actions were restricted to state blue sky
laws, and asserted no claim under the Exchange Act. The public policy defense remains
appropriate because GKBA asserts a claim for indemnification under Kansas law, and
Kansas public precludes such a claim for illegal conduct. See Herrman v. Folkerts, 202 Kan.
116, 120, 446 P.2d 834 (1968) (“an insurance policy is void as against public policy if its
6
The same result holds true for GKBA’s argument that it could not have sold
securities, because it was merely “a member of Crossroads’ larger ‘team,’” which
included an investment banking firm and outside counsel. (Dkt. 150, at 42). But Section
15(a)’s definition of a “broker” is deliberately broad, SEC v. Aronson, No. 11-7033, *7
(S.D.N.Y. Aug. 6, 2013), and GKBA cites no authority for the proposition that a person
who otherwise engages in selling a security is excluded from the statute because he or
she is a part of a larger “team.”
36
intent is to indemnify the insured against liability for his criminal acts”); Loscher v. Hudson,
39 Kan.App.2d 417, 182 P.3d 25 (2008) (indemnity against the consequences of an illegal act
is invalid); Thomas v. Benchmarck, 36 Kan.App.2d 409, 446-47, 140 P.3d 438 (2006) (under
Kansas law, “an insurance policy violates public policy and is, therefore, void if it is
intended to indemnify an insured against liability for his or her criminal acts”). See also
Seiffer v. Topsy’s Intern., Inc., 487 F.Supp. 653, 708 (D. Kan. 1980) (noting that under federal
securities law “one cannot insure himself against his own reckless, willful or criminal
misconduct”). Acting as a broker in the sale of securities without registration is unlawful
conduct. SEC v. Martino, 255 F.Supp2d. 268, 283 (S.D.N.Y. 2003).
Kansas law provides that “contracts in contravention of public policy are void and
unenforceable” Loscher, 39 Kan.App.2d at 429, 182 P.3d at 35. Here, GKBA’s actions in
marketing the Crossroads securities without registration was illegal and contrary to public
policy. Even though the same actions may have given rise to claims for negligence, those
claims are grounded in underlying unlawful conduct, and indemnification is contrary to
public policy. Because the indemnification claim is grounded in the same nexus of fact as
the states securities actions, i.e., GKBA’s marketing of the Crossroads securities, the court
finds that indemnification is not supported under Kansas law.
Finally, the court rejects GKBA’s argument that federal policy is not implicated
when the underlying securities violations involve simple negligence. Of the cases cited by
37
plaintiff,7 Globus v. Law Research merely expresses a general rule that “one cannot insure
himself against his own reckless, wilful or criminal misconduct.” 418 F.2d at 1288. The case
is otherwise explicitly dicta, with the court taking care to stress that “it is important to
emphasize at the outset that at this time we consider only the case where the underwriter
has committed a sin graver than ordinary negligence.” Id.8
7
Globus v. Law Research Serv., 418 F.2d 1276, 1288 (2d Cir. 1969); Maryville
Academy v. Loeb Rhoades & Co, 530 F.Supp. 1061, 1070 (D. Ill. 1981), Cambridge Fund v.
Abella, 501 F. Supp. 598, 618 (S.D.N.Y. 1980); In re Olympia Brewing Co. Securities
Litigation, 674 F.Supp. 597 (N.D. Ill. 1987).
8
In fact, the court’s reasoning in Globus supports the conclusion that claims tied
to a negligent failure to register as a broker under Section 15(a) of the Exchange Act are
not subject to indemnification. In finding that the underwriter seeking indemnity from
the issuer, who had actual knowledge of material false statements, could not obtain
indemnification, the court observed:
Civil liability under section 11 [of the 1933 Act, 15 U.S.C. § 77k,]
and similar provisions was designed not so much to compensate the
defrauded purchaser as to promote enforcement of the Act and to deter
negligence by providing a penalty for those who fail in their duties....
Thus, what Professor Loss terms the ‘in terrorem effect’ of civil liability, 3
Loss, [Securities Regulation,] 1831 [(1969)], might well be thwarted if
underwriters were free to pass their liability on to the issuer.... Cases
upholding indemnity for negligence in other fields are not necessarily
apposite. The goal in such cases is to compensate the injured party. But
the Securities Act is more concerned with prevention than cure.
418 F.2d at 1288-89. The regulatory function of Section 15(a) is similar, acting as a
“safeguard of the public interest ... integrally linked with Section 15(b) of the Act, and
together they form part of the regulatory scheme for the long-range protection of
investors.” Blaise D’Antoni & Assoc. v. SEC, 290 F.2d 688, 689 (5th Cir. 1961). See also
Eastside Church of Christ v. National Plan, Inc., 391 F.2d 357, 362 (5th Cir.) (the
requirement of broker registration under Section 15(a) “is of the utmost importance in
effecting the purposes of the Act”), cert. denied, 393 U.S. 913 (1968); Celsion Corp. v.
Stearns Management, 157 F.Supp.2d 942, 947 (N.D.Ill. 2001) (all provisions of the 1934 Act
serve the common purpose of avoiding market manipulation, and Section 15(a) both
38
Cambridge Fund only recognizes the general rule that there is no indemnification for
intentional or reckless securities violations, and does not directly address whether such a
claim is available for negligent violations. Olympia Brewing similarly cites the general rule
that indemnification is not available for persons who intentionally violate securities laws
(language which GKBA quotes), but then explicitly observes that “the courts have differing
views on whether indemnity is available if the defendant's liability is based solely on
negligence,” and indeed ultimately concludes that the defendant in that action was not
entitled to indemnity for mere negligence, in part because “[a]lowing a brokerage firm to
avoid secondary liability merely by showing ignorance would contravene the
congressional intent to protect the public.” 674 F.Supp. at 613. Similarly, while Maryville
does cite the general rule, it also explicitly recognizes the numerous post-Globus decisions
precluding indemnification for negligence claims.9
The court is persuaded that federal law precludes indemnification for violations of
Section 15(a), even if the underlying action does not assert intentional misconduct. In
Eichenoltz v. Brennan, 52 F.3d 478, 484-85 (5th Cir. 1995), the court directly held that
indemnification was not available for losses due to claims asserting the negligent violation
of securities laws. The court concluded:
The public depends upon an underwriter's investigation and opinion, and it
relies on such opinions when investing. Denying claims for indemnification
“enforce[s] discipline over those who may engage in the securities business and ...
establishes necessary standards with respect to training, experience, and records”).
9
GKBA fails to note these portions of Olympia Brewing and Maryville in its brief.
39
would encourage underwriters to exhibit the degree of reasonable care
required by the 1933 and 1934 Acts.
Id. at 485.
In Gould v. American-Hawaiian Steamship Co., 387 F.Supp. 163, 167 (D. Del. 1974), the
court stressed that cases which had permitted indemnity involved claims arising under
Sections 10(b) or 17(a), and thus merely stood for the proposition that “one joint tortfeasor
whose conduct has been of limited culpability should be entitled to shift his loss to another
joint tortfeasor whose conduct has been deliberately fraudulent.” The court refused to
permit indemnification alleging negligent misconduct arising under Section 14(a), with its
broad remedial purpose and which “reaches negligent as well as deliberately deceptive
conduct.”10 Id. at 168 Thus, “[t]o allow indemnity to those who have breached
responsibilities squarely placed upon them by the statute would vitiate the remedial
purposes” of the statute. Id.
Other courts have reached similar conclusions. See Laventhol, Krekstein, Horwath &
Horwath v. Horwitch, 637 F.2d 672, 676 (9th Cir.1980) (“permitting indemnity would
undermine the statutory purpose of assuring diligent performance of duty and deterring
negligence”); Odette v. Shearson, Hammill & Co., 394 F.Supp. 946, 956 (S.D.N.Y.1975) (finding
that “the public policy objections to indemnification” cited in Globus were “broad enough
to cover negligent misconduct” under Section 12(2) of the 1933 Act, 15 U.S.C. § 77l(2));
10
Similarly, Section 15(a) of the Exchange Act, 15 U.S.C. § 78o(a), prohibits the
sale of securities by an unregistered broker, regardless of scienter. SEC v. Randy, 38
F.Supp.2d 657, 668 (N.D.Ill. 1999).
40
Adalman v. Baker, Watts, & Co., 599 F.Supp. 752, 755 (D.Md.1984), (indemnification
permitted only if shifting loss to a partly who is “significantly more liable”), aff’d in part and
rev'd in part on other gds., 807 F.2d 359 (4th Cir.1986); In re Crazy Eddie Sec. Litig., 740 F.Supp.
149, 151 (E.D.N.Y.1990) (following Adalman and dismissing indemnification claim by
negligent accounting firm against third party defendants).
Kansas law precludes enforcement of agreements which would give indemnity for
the commission of illegal acts, or which would contravene public policy. Loscher, 39 Kan.
App.2d at 428-29. Here, the underlying actions of GKBA in marketing Crossroads reflect
conduct which was illegal under federal securities law, and indemnification for such
conduct is contrary to federal public policy. The court finds that GKBA may not obtain
indemnification from Sprint under the facts of the case..
IT IS ACCORDINGLY ORDERED this 21st day of October, 2013, that the plaintiff’s
Motion for Partial Summary Judgment (Dkt. 124) is denied: the defendant’s Motion for
Summary Judgment (Dkt. 122) is granted
s/ J. Thomas Marten
J. THOMAS MARTEN, JUDGE
41
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