Ross v. Rothstein

Filing 32

MEMORANDUM AND ORDER denying plaintiff/counterclaim defendant Mr. Rosss motion for order permitting the deposit into court of Infinity Energy Resource, Inc. Certificate No. 3278 representing 77,310 shares of Infinitys common stock 24 . IT IS FURTH ER ORDERED BY THE COURT THAT Mr. Ross, no later than August 5, 2013, shall issue such instructions, make such requests and take such actions within his power, competence and authority to cause Infinitys stock transfer agent to reissue Infinity Energy Resource, Inc. Certificate No. 3278 without the restrictive legend. Thereafter, Mr. Ross shall promptly, and no later than Friday, August 9, 2013, move the court for permission to deposit that certificate with the court. Signed by District Judge John W. Lungstrum on 7/19/2013. (ses)

IN THE UNITED STATES DISTRICT COURT
DISTRICT OF KANSAS
Stanton E. Ross,
Plaintiff/Counterclaim Defendant,
v.

Case No. 13-CV-2101

Adam Rothstein,
Defendant/Counterclaimant.
MEMORANDUM & ORDER
Plaintiff Stanton E. Ross is the Chief Executive Officer of and a substantial shareholder
in Infinity Energy Resources, Inc. (“Infinity”). Mr. Ross filed a petition in state court against
defendant Adam Rothstein asserting claims of fraudulent misrepresentation, violations of the
Kansas Consumer Protection Act and defamation arising out of a $210,000 short-term loan
made by Mr. Rothstein to Mr. Ross. According to the petition, the parties’ promissory note was
secured by shares of common stock of Infinity and further obligated Mr. Ross to pay interest on
the loan by the transfer of an additional 15,000 shares of common stock of Infinity.

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subsequent forbearance agreement executed by the parties obligated Mr. Ross to transfer 50,000
shares of common stock of Infinity (out of the shares initially pledged) in consideration for Mr.
Rothstein’s forbearance. At that time, according to the petition, the parties also executed a
superseding pledge agreement whereby Mr. Ross agreed, as partial security for his timely
performance under the note, to grant Mr. Rothstein a security interest in 77,310 shares of
common stock of Infinity.

Mr. Rothstein removed the petition to federal court on the basis of diversity jurisdiction
and, thereafter, asserted numerous counterclaims against Mr. Ross including claims for breach
of contract predicated on the parties’ secured promissory note as well as the subsequent
forbearance and pledge agreements. Shortly after the filing of his counterclaims, Mr. Rothstein
filed a motion for preliminary injunction seeking the delivery and transfer to Mr. Rothstein of an
aggregate total of 142,310 shares of Infinity common stock constituting security, interest and
consideration with respect to the loan. At the conclusion of the hearing on the motion, the
parties reached an agreement as to the resolution of the motion which was memorialized by the
court in an order dated April 15, 2013.
With respect to the 77,310 so-called “Pledged Shares” of Infinity stock, the order requires
Mr. Ross to:
issue such instructions, make such requests and take such actions within his
power, competence and authority as record holder of such shares as CEO,
president and chairman of Infinity and, as may be necessary or appropriate to
cause Computershare, Infinity’s stock transfer agent to issue one or more
certificates evidencing said 77,310 Pledged Shares to be [issued] in Mr.
Rothstein’s name, free and clear of any improper, unnecessary, and/or expired
legends or restrictions, and filed under seal with the court . . . to be held by the
court until further order or final judgment of the court directing their disposition.
Mr. Ross now moves the court under Federal Rule of Civil Procedure 67 for an order permitting
the deposit into court of Infinity Energy Resource, Inc. Certificate No. 3278 representing 77,310
shares of Infinity’s common stock. Notwithstanding Mr. Ross’s stated (but unverified) efforts to
ensure that the shares be issued without any legends or restrictions, Certificate No. 3278
contains a legend as to the stock’s restricted status:
TRANSFER OF THIS CERTIFICATE IS RESTRICTED
SEE LEGEND ON REVERSE SIDE.
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A copy of the reverse side of the certificate is not in the record before the court. The parties
appear to agree, however, that the restrictive legend forbids resale under Securities and
Exchange Commission (SEC) Rule 144, 17 C.F.R. § 230.144. While Mr. Ross will not take a
position as to whether the Rule 144 restrictive legend is appropriate, he states that he will not
object to or otherwise oppose the court’s order requiring the removal of the restrictive legend
and suggests that such an order would be the most efficient way to move the process forward.
In his motion, then, Mr. Ross requests both that he be permitted to deposit the restricted stock
certificate with the court and that the court should exercise its power to remove the legend by
further order. Mr. Rothstein, in turn, opposes the motion in light of the stock’s restricted status;
urges that the restrictive legend is clearly not required by Rule 144; and asks the court to order
the removal of the legend.
Under Section 5 of the Securities Act of 1933 (“Securities Act”), all sales of securities
must be made pursuant to a registration statement or qualify for an exemption from the
registration requirement. S.E.C. v. Gordon, 2013 WL 1632696, at *2 (10th Cir. Apr. 17, 2013)
(citing 15 U.S.C. § 77e(a)). Rule 144 provides an exemption from the registration requirement.
Among other things not pertinent here, the rule imposes a holding period of six months for
resales of restricted securities of publicly held companies. 2 Thomas Lee Hazen, The Law of
Securities Regulation § 4.29 at 28, 33 (6th ed. 2009).1 Restricted securities are defined in Rule
144 as including those securities acquired directly or indirectly from an issuer (or from an
affiliate of the issuer) in a non-public offering. Kearl v. Rausser, 293 Fed. Appx. 592, 595 (10th

1

A one-year holding period applies to resale of restricted securities of companies that are not
required to file periodic reports under the 1934 Act. Hazen, supra, § 4.29 at 33.
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Cir. Sept. 17, 2008) (citing 17 C.F.R. § 230.144). Once the six-month holding period has
expired, there are no restrictions whatsoever on non-affiliate resales. Hazen, supra § 4.29 at 3839; § 4.29 at 4 (Supp. 2013) (citing 17 C.F.R. § 230.144(e)).
It is undisputed that the securities at issue here are “restricted” securities for purposes of
Rule 144 and, according to the allegations in Mr. Ross’s petition, Infinity is a publicly held
company.

Clearly, then, a six-month holding period applies to the Pledged Shares.

For

purposes of determining the length of time that pledged securities have been held, the Rule
explains:
Securities which are bona-fide pledged by an affiliate of the issuer when sold by
the pledgee, or by a purchaser, after a default in the obligation secured by the
pledge, shall be deemed to have been acquired when they were acquired by the
pledgor, except that if the securities were pledged without recourse they shall be
deemed to have been acquired by the pledgee at the time of the pledge or by the
purchaser at the time of purchase.
17 C.F.R. § 230.144(d)(3)(iv). In this case, the Pledged Shares were the subject of a bona-fide
pledge by Mr. Ross, clearly an affiliate of Infinity and there has been a default in the obligation
secured by the pledge. Pursuant to this provision, then, the Pledged Shares were acquired by
Mr. Rothstein for purposes of Rule 144 at the time that Mr. Ross acquired the shares as the loan
was “with recourse.” Because Mr. Ross pledged the shares in March 2012, he presumably
owned the shares by that time. This is corroborated by a June 4, 2013 letter from Infinity’s
counsel to Infinity’s transfer agent in which Infinity’s counsel states that Mr. Ross owned the

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shares in excess of one year. Mr. Rothstein, then, acquired the Pledged Shares at least by March
2012.2
The court concludes, then, that Mr. Rothstein has held the Pledged Shares beyond the sixmonth holding period required by Rule 144. Moreover, because Mr. Rothstein is a non-affiliate
of Infinity (and has never been an affiliate of Infinity), he is permitted to resell the Pledged
Shares without any further restrictions. Hazen, supra § 4.29 at 38-39; § 4.29 at 4 (Supp. 2013)
(citing 17 C.F.R. § 230.144(e)). Any restrictions on transferring the shares, then, are improper.
For this reason, the court denies Mr. Ross’s motion for permission to deposit Certificate No.
3278 with the court as that certificate contains a restrictive legend. Once Mr. Ross has caused
the certificate to be reissued without the restrictive legend, he may refile his motion.

IT IS THEREFORE ORDERED BY THE COURT THAT plaintiff/counterclaim
defendant Mr. Ross’s motion for order permitting the deposit into court of Infinity Energy
Resource, Inc. Certificate No. 3278 representing 77,310 shares of Infinity’s common stock (doc.
24) is denied.

IT IS FURTHER ORDERED BY THE COURT THAT Mr. Ross, no later than
August 5, 2013, shall issue such instructions, make such requests and take such actions within
his power, competence and authority to cause Infinity’s stock transfer agent to reissue Infinity
Energy Resource, Inc. Certificate No. 3278 without the restrictive legend. Thereafter, Mr. Ross

2

Even if the loan were without recourse, Mr. Rothstein would be deemed to have acquired the
Pledged Shares in March 2012, the time of the pledge. 17 C.F.R. § 230.144(d)(3)(iv).
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shall promptly, and no later than Friday, August 9, 2013, move the court for permission to
deposit that certificate with the court.

IT IS SO ORDERED.

Dated this 19th day of July, 2013, at Kansas City, Kansas.

s/ John W. Lungstrum
John W. Lungstrum
United States District Judge

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