Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_07-cv-00929/USCOURTS-azd-2_07-cv-00929-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:78m(a) Securities Exchange Act

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NOT FOR PUBLICATION

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Strategic Diversity, Inc., a Massachusetts

corporation; and Kenneth P. Weiss, an

unmarried man, 

Plaintiffs, 

vs.

Alchemix Corporation, an Arizona

corporation; Robert R. Horton and Cheryl

Halota Horton, husband and wife; Medici

Associates, LLC, a Delaware limited

liability company, 

Defendants. 

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No. CV-07-929-PHX-GMS

ORDER

Pending before the Court are Defendants’ Motion for Summary Judgment or Partial

Summary Judgment in the Alternative (Dkt. # 120) and Plaintiffs’ Motion for Partial

Summary Judgment (Dkt. # 128). For the following reasons, Defendants’ Motion is granted

and Plaintiffs’ Motion is denied as moot. 

BACKGROUND

I. The Loan

On July 2, 2001, Kenneth P. Weiss (“Weiss”) agreed that his company, Strategic

Diversity, Inc. (“Strategic Diversity”), would loan $500,000 to Alchemix Corporation

(“Alchemix”), an alternative fuels start-up company. The Loan was consummated by a

Convertible Promissory Note (the “Note” or “Loan”), payable after five years at ten-percent

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interest, or convertible to stock at a price of $2.00 per share. (Dkt. # 127, Ex. 1.) To secure

the Loan, Strategic Diversity was given a lien against Alchemix’s patents and Weiss was

given a seat on the Alchemix Board of Directors until the Loan was repaid. (Dkt. ## 54 at ¶

14, 127, Ex. 18 at 90; 129 Ex B at ALCHX 00156 ¶ 4.) As the Amended Complaint

specifically provides, “Weiss was . . . appointed as a Member of the Board of Directors of

Alchemix until such time as the loan had been fully repaid.” (Dkt # 53 at ¶ 14.) See

Bellefonte Re-Ins. Co. v. Argonaut Ins. Co., 757 F.2d 523, 528–29 (2d Cir. 1985) (“A party’s

assertion of fact in a pleading is a judicial admission by which it normally is bound

throughout the course of the proceeding); see also Nat. Coal. Gov. of Union of Burma v.

Unocal, Inc., 176 F.R.D. 329 (C.D. Cal. 1997) ([P]laintiffs are bound by all factual assertions

in the complaint because such assertions constitute judicial admissions.”). Weiss’s deposition

testimony also indicates that his right to have a seat on the Board would end when the Loan

was repaid. (Dkt. # 127, Ex. 18 at 90.) The agreements giving rise to these rights further

provide that Strategic Diversity’s lien on Alchemix patents and Weiss right to a seat on the

Alchemix Board only continued “until the Note [h]as been satisfied or converted” into stock.

(Dkt. ## 127, Ex. 2; 129, Ex B at ALCHX 00156 ¶ 4.) See Invitrogen Corp. v. Employers Ins.

Co. of Wausau, 2007 WL 841413 at * 6 (D. Ariz. Mar. 15, 2007) (holding that a written

agreement can be interpreted as a matter of law when its meaning is plain on its face) (citing

Long v. City of Glendale, 208 Ariz. 319, 328, 93 P.3d 519, 528 (Ct. App. 2004)).

In addition to these rights afforded to the Plaintiffs, the Loan also gave Alchemix the

right to prepay its debt anytime after one-year. There were only three conditions on

Alchemix’s right to prepayment: (1) Alchemix had to give Strategic Diversity thirty-days

advanced written notice before paying off the Loan; (2) Alchemix had to pay a $10,000

prepayment penalty; and (3) during the thirty-day notice period, Alchemix had to give

Strategic Diversity the option to convert the Loan into 250,000 shares of Alchemix stock at

the lower of $2.00 per share or such price offered to other investors. (Dkt. # 127, Ex. 1 at

2–3.) Around the time that the Loan was finalized, Alchemix also gave Strategic Diversity

a Stock Purchase Warrant, whereby Alchemix was required to get Strategic Diversity’s

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Though Plaintiffs object to ¶ 17 of Defendants’ Statement of Facts on other grounds,

they do not object to the fact that Weiss would have waived his non-dilution rights and

shared his security interest in Alchemix’s patents if the agreement with AFG had gone

forward.

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consent before increasing the number of capitalized shares beyond 40,000,000, since

increasing the number of shares might otherwise dilute the value of Weiss’s investment. (See

Dkt. # 129, Ex. B at ACLHX00165 ¶ 4c.)

II. Alchemix Funding Group

To raise additional capital for its operations, Alchemix sought other investments

beyond the Loan from Strategic Diversity. (See Dkt. # 127 at Ex. 7.) In June 2002, Alchemix

entered into negotiations with an investment consortium known as Alchemix Funding Group

(“AFG”). (Id.) Though Weiss never participated in AFG’s negotiations with Alchemix, he

later joined the group and offered to loan $500,000 to Alchemix on the same terms and

conditions as the other members of AFG. (See Dkt. # 135 at 4.) As part of this agreement,

Weiss indicated that he would waive his non-dilution rights and share his security interest

with the other members of the investment consortium. (See Dkt. # 141 at ¶ 17.)1

 The

agreement with AFG, however, never materialized. On June 18, 2002, Alchemix’s founder

and CEO, Robert R. Horton, (“Horton”) canceled the AFG proposal in favor of another

investment proposal received from Western Oil Sands (“Western”). (Dkt. # 141 ¶ 18.)

After the investment with AFG fell through, Alchemix’s executive vice president

suggested that Horton offer Alchemix shares, then held by Medici Associates LLC

(“Medici”), to AFG members in recognition of the consortium’s efforts to raise funds. (Dkt.

# 141 ¶ 21.) After the suggestion was met with approval, members of AFG were given the

opportunity to purchase Alchemix shares for $1.00 per share. (Dkt. # 141 ¶¶ 25–26.)

According to Defendants, Horton offered Strategic Diversity the right to purchase up to

390,000 shares of stock held by Medici based on Weiss’ participation in AFG. Plaintiffs,

however, assert that Horton offered the 390,000 shares as a “sweetener” to induce Weiss and

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Throughout the briefing both parties refer to Strategic Diversity and Weiss

interchangeably. Nevertheless, while it is unclear from the parties’ briefing whether Weiss

or Strategic Diversity purchased the 250,000 shares, the parties stipulated at oral argument

that Weiss purchased the shares rather than Strategic Diversity.

3

Weiss and Strategic Diversity do not assert that they were damaged by giving up their

anti-dilution rights. (see Dkt. # 128 at 3, n. 2.) Instead, they specifically note that “the claims

in the instant litigation do not involve the Stock [Purchase] Warrant . . . .” (Id.) 

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Strategic Diversity to give up certain rights under the Loan. Regardless, Weiss, not Strategic

Diversity, ultimately purchased 250,000 shares of Alchemix stock from Medici.2

 (See id.)

III. Western’s Investment and Horton’s Alleged Misstatements

Around this same time, Alchemix and Western went forward with their investment.

The terms of the investment provided that Western would have the option to purchase up to

$36,000,000 in Alchemix shares. (Dkt. # 127, Ex. 9.) The investment, however, would also

potentially increase the number of outstanding Alchemix shares beyond the 40,000,000

permitted by Weiss’s Stock Purchase Warrant. Accordingly, Horton and Alchemix sought

Strategic Diversity’s consent to waive its anti-dilution rights.3

 (See Dkt. # 129, Ex. C; 129

at ¶ 7.) In pursuing Strategic Diversity’s consent, Horton also sought both to repay the Loan

and to obtain additional concessions of Plaintiffs’ rights under the Loan. Plaintiffs assert that

Alchemix wanted them to waive the Loan’s prepayment restrictions, prepayment penalties,

and Strategic Diversity’s right to make additional advances to Alchemix. (Dkt. # 141 at ¶ 9.)

In seeking these concessions, Horton allegedly told Weiss that Western was going to invest

$36,000,000 and that Western would only go through with its investment if Weiss resigned

from his seat on the Board of Directors and released Strategic Diversity’s security interest

in Alchemix’s patents. (Id.)

The agreement between Western and Alchemix, however, did not require any

investment beyond the initial $3,000,000. (Dkt. # 127, Ex. 9.) According to the

Memorandum of Understanding (the “Memorandum”) between Western and Alchemix,

Western merely had the option to invest an additional $33,000,000. (Id.) The Memorandum

further did not indicate that Western required Weiss to make any of the alleged concessions.

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(Id.) After these terms were decided upon, Horton faxed the entire Memorandum to the

Alchemix Board. Weiss received the Memorandum on June 18, 2002. (Dkt. # 129 at ¶ 6.)

And, contrary to Plaintiffs’ assertion that the terms of the Memorandum are irrelevant, the

Memorandum’s terms are relevant to the extent they indicate when Plaintiffs received notice

of Horton’s alleged misstatements. 

IV. Repayment of the Loan & Stock Purchase

On July 2, 2001, exactly one year after the origination of the Loan, Alchemix paid

Weiss $560,832—the amount due under the Loan, including principal, interest, and the

prepayment penalty. (Dkt. # 141 at ¶ 9.) While Plaintiffs assert that the Loan was not repaid

in full and that the $10,000 penalty was never paid, this assertion is not supported by the

allegations in the Amended Complaint and the record. The Amended Complaint provides that

“on or about July 2, 2002, Alchemix caused payment to be made to [Strategic Diversity] in

the amount of $560,832 in payment of the amount of principal and interest then due under

the terms of the . . . Note.” (Dkt. # 54 at ¶ 21.) Plaintiffs’ own documentation further

provides that the prepayment penalty was also paid. (See Dkt. # 136, Ex. K at 2–3.) Just four

days before Alchemix repaid the Loan, Weiss sent Alchemix a letter specifying that the

amount due included $10,000 above the loan balance due. (Id.) Plaintiffs include no

admissible facts calling full repayment into question.

Next, Weiss purchased 250,000 shares of Alchemix stock. These were the shares, held

by Medici, which Horton apparently offered to members of AFG. (Dkt. # 129 at ¶ 6.) And,

although Plaintiffs allege that the stock purchase was part of a two-pronged, but single “debtequity swap,” the undisputed facts provide that repayment of the Loan to Strategic Diversity

was separate from Weiss’s purchase of the 250,000 shares. Here, Strategic Diversity could

not have entered into a “debt-equity swap” as Weiss obtained the equity rather than Strategic

Diversity and Strategic Diversity made the Loan rather than Weiss. Accordingly, Weiss’s

purchase of the 250,000 shares must have been separate from Strategic Diversity’s accepting

repayment of the Note. Regardless, after Alchemix repaid the Loan and Weiss purchased the

stock, Weiss tendered his resignation from the Alchemix Board and released Strategic

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Diversity’s security interest in Alchemix’s patents—all of which were required when the

Loan was repaid.

Around this time, Western sent representatives to Arizona to interview Alchemix’s

personnel and review its operations. (Dkt. # 129 at ¶ 14.) Shortly thereafter, Western elected

not to exercise its option to further invest in Alchemix. (Id.) Strapped for cash, Alchemix

dissolved its Board of Directors in 2003. (See Dkt. # 129 at ¶ 16.) Plaintiffs, however, claim

that they did not learn that Western chose not to go forward with additional investment until

December 2006. (Id.) 

V. The Glenn Action

Throughout the preceding events, Horton was an individual defendant in a securities

fraud action then-pending in the Maricopa County Superior Court, entitled Glenn v. Horton

(the “Glenn Action”). (Dkt. # 141 at ¶ 49.) The Glenn Action alleged fraud, securities fraud,

and other claims related to Horton’s involvement with another company. (Id.) The Glenn

Action and the current case are largely unrelated, but both Plaintiffs here and the plaintiffs

in the Glenn Action were represented by the same legal counsel, James O. Ehinger of the

Jennings Strouss & Salmon law firm. (Id.) And, although Plaintiffs allege that the two actions

involve similar allegations and investment schemes, Plaintiffs provide no independent facts

to support these allegations. (Dkt. # 141 at ¶ 49.) See Keenan v. Allan, 91 F.3d 1275, 1279

(9th Cir. 1996) (holding that the Court need not “scour the record in search of a genuine issue

of triable fact[;]” instead the Court relies on “the nonmoving party to identify with reasonable

particularity the evidence that precludes summary judgment”) (internal quotations omitted).

Throughout the aforementioned transactions, Horton never disclosed to Weiss or

Western that he was being sued for securities fraud. Hence, Weiss asserts that he never

would have agreed to the July 2002 stock purchase had he known that Horton was involved

in the Glenn Action. (Dkt. # 129 at ¶ 19).

VI. The Allegations & Motions for Summary Judgment

On May 7, 2007, Strategic Diversity and Weiss (collectively “Plaintiffs”) brought suit

against Alchemix, Horton, his wife Cheryl Horton, and Medici (collectively “Defendants ”).

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The Court dismissed Count 4 of the Amended Complaint (statutory fraud) in an

Order filed on March 31, 2008. (Dkt. # 29.)

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(Dkt. # 1.) In their Amended Complaint, Plaintiffs bring forth two distinct types of claims

arising out of the July, 2002 transactions: (1) fraud-based claims under both federal and state

law and (2) restitutionary claims arising in equity. (Dkt. # 54.) Plaintiffs’ fraud-based claims

consist of federal securities fraud, state securities fraud under Arizona law, common law

fraud, and negligent misrepresentation (Counts 1, 2, 3, and 5 of the Amended Complaint).

(Id.) The restitutionary claims include mistake, failure of a condition precedent, and equitable

restitution (Counts 6, 7, and 8 of the Amended Complaint).4

 (Id.) 

These claims are all premised on Horton’s alleged misrepresentations and omissions,

which Plaintiffs claim induced them to accept repayment of the Loan and purchase $250,000

worth of Alchemix stock. Horton’s alleged misstatements include: (1) Western would “invest

. . . [$36,000,000] into Alchemix;” (2) Western required the release of [Strategic Diversity’s]

security interest in the Alchemix patents as a condition to making those investments;” (3)

Western “required Weiss to resign from his seat on the Board of Directors as a condition to

making that investment;” (4) Western’s “ investment would make the stock that Weiss was

being offered in Alchemix significantly more valuable than [Strategic Diversity’s] secured

loan;” (5) “the $1.00/share price at which the Alchemix stock was being offered to Weiss

represented a fifty (50%) discount from the stock’s then-current $2.00/share ‘market value;’”

and (6) “Horton’s failure to disclose [the Glenn Action].” (Dkt. # 54 at ¶ 30.) On July 31,

2009, the parties brought competing Motions for Summary Judgment with respect to

Plaintiffs’ claims for relief and Defendants’ affirmative defenses. (Dkt. ## 120, 128.)

LEGAL STANDARD

Summary judgment is appropriate if the evidence, viewed in the light most favorable

to the nonmoving party, shows “that there is no genuine issue as to any material fact and that

the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c). Substantive law

determines which facts are material, and “[o]nly disputes over facts that might affect the

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outcome of the suit under the governing law will properly preclude the entry of summary

judgment.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); see Jesinger v. Nev.

Fed. Credit Union, 24 F.3d 1127, 1130 (9th Cir. 1994). In addition, the dispute must be

genuine, that is, the evidence must be “such that a reasonable jury could return a verdict for

the nonmoving party.” Anderson, 477 U.S. at 248.

The moving party “bears the initial responsibility of informing the district court of the

basis for its motion, and identifying those portions of [the record] which it believes

demonstrate the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477

U.S. 317, 323 (1986). However, the moving party need not disprove matters on which the

opponent has the burden of proof at trial. Id. at 323. Then, the burden is on the nonmoving

party to establish a genuine issue of material fact. Id. at 322–23. The nonmoving party “may

not rest upon the mere allegations or denials of [the party’s] pleadings, but . . . must set forth

specific facts showing that there is a genuine issue for trial.” Fed. R. Civ. P. 56(e); see

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586–87 (1986). 

DISCUSSION

Summary judgement is appropriate with respect to Plaintiffs’ fraud-based claims --

either because the claims are barred by the statute of limitations or because Plaintiffs fail to

show cognizable damages. Similarly, Plaintiffs’ equitable claims are either not cognizable

or fail as a matter of law.

I. Plaintiffs’ Fraud-Based Claims

Plaintiffs’ fraud-based claims are premised on Horton’s alleged misrepresentations

and omissions, which they claim induced them to acceptrepayment ofthe Loan and purchase

$250,000 worth of Alchemix stock. Here, the statute of limitations bars Plaintiffs federal and

state securities claims to the extent that those claims are based on Horton’s alleged

misrepresentations about Western’s investment. To the extent that Plaintiffs’ fraud based

claims are not barred by the statute of limitations, these claims fail because Plaintiffs have

not provided any evidence of damages. 

A. Plaintiffs’ Federal Securities Claim & Statute of Limitations

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Plaintiffs’ first cause of action is for federal securities fraud under Section 10(b) of

the Securities and Exchange Act of 1934. See 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5(b)

(1998). SEC Rule 10b-5, promulgated under the authority of the Exchange Act, provides: 

It shall be unlawful for any person . . . (a) To employ any

device, scheme, or artifice to defraud, 

(b) To make any untrue statement of a material fact or omit to

state a material fact necessary in order to make the statements

made, in light of the of the circumstances under which they were

made, not misleading, or

(c) To engage in any act, practice, or course of business which

operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

To establish a valid claim under Rule 10b-5, Plaintiffs must satisfy five elements: “(1) a

material misrepresentation or omission of fact, (2) scienter, (3) a connection with the

purchase or sale of a security, (4) transaction and loss causation, and (5) economic loss.” In

re Daou Sys. Inc., Sec. Litig., 411 F.3d 1006, 1014 (9th Cir. 2005) (citing Dura Pharms., Inc.

v. Broudo, 544 U.S. 336 (2005)). “[E]xpressions of intent[] or statements concerning future

events,” however, do not constitute actionable fraud “unless such were made with the present

intention not to perform.” See Arnold & Assoc. v. Misys Healthcare Sys., 275 F. Supp.2d

1013, 1027 (D. Ariz. 2003) (internal citations omitted). 

Claims asserted under Section 10(b) must also be brought within the earlier of two

years after “discovery of the facts constituting the violation” or five years after the violation

occurs. 28 U.S.C. § 1658. “[E]ither actual or inquiry notice can start the running of the statute

of limitations on a federal securities fraud claim.” Betz v. Trainer Wortham & Co., 519 F.3d

863, 874 (9th Cir. 2008). With respect to inquiry notice, the Ninth Circuit has adopted the

“inquiry-plus-reasonable-diligence standard.” Id. at 877. Under this test, a defendant must

demonstrate that “there exists sufficient suspicion of fraud to cause a reasonable investor to

investigate the matter further.” Id at 876. The facts constituting inquiry notice “must be

sufficiently probative of fraud—sufficiently advanced beyond the stage of a mere suspicion

. . . to incite the victim to investigate.” Id. at 876 (quoting Fujisawa Pharm. Co. v. Kapoor,

115 F.3d 1332, 1335 (7th Cir. 1997)). Once the Court determines that an investor has inquiry

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notice, the second part of the test asks when, “in the exercise of reasonable diligence,” should

the investor have “discovered the facts constituting the alleged fraud.” Id. The answer to this

question “tells [the Court] when the statute of limitations began to run.” Id.

District courts, however, are to exercise caution before determining that a securities

claim is barred as a matter of law. In Betz, the Ninth Circuit noted that “the defendant bears

a considerable burden in demonstrating, at the summary judgment stage, that the plaintiff’s

claim is time barred.” Id. at 877 (citing SEC v. Seaboard Corp., 677 F.2d 1301, 1310 (9th

Cir. 1982)). A defendant’s burden is particularly difficult when the plaintiff alleges that a

defendant made additional misstatements or false assurances that impeded the plaintiff’s

ability to discover the fraud. Id. Yet, contrary to Plaintiffs’ assertion that “inquiry notice” is

always a question for the fact-finder, summary judgment is appropriate when the

“uncontroverted evidence irrefutably demonstrates that a plaintiff discovered or should have

discovered the fraudulent conduct.” Id. (citing Gray v. First Winthrop Corp., 82 F.3d 877,

881 (9th Cir. 1996)). The court in Betz endorsed two Ninth Circuit cases that “resolved by

summary judgment the question of whether a securities plaintiff had sufficient notice of

alleged fraud to trigger the statute of limitations.” See id. at 878 n. 4. In one of these cases,

Volk v. D.A. Davidson & Co., 816 F.2d 1406, 1412 (9th Cir. 1987), the Ninth Circuit granted

summary judgment where the undisputed facts demonstrated that the defendant had sent

plaintiffs correspondence containing information that contradicted the defendant’s previous

misstatements. See also In re Am. Funds Sec. Litig., 556 F. Supp.2d 1100 (C.D. Cal. 2008).

With respect to the alleged misrepresentations about the Western investment,

Defendants meet the “considerable burden” of demonstrating that the statute of limitations

began to run more than two years before Plaintiffs filed their claim. Here the undisputed facts

indicate that Horton’s alleged misstatements about Western’s Investment occurred prior to

June 5, 2002, when Weiss sent Alchemix a letter indicating his willingness to waive

Plaintiffs’ rights under the Loan. (Dkt. # 135, Ex. G at SDI000071.) It is further undisputed

that Weiss received the Memorandum that provided the terms of Western’s investment on

June 18, 2002. (Dkt. # 141 at ¶ 41.) Like the correspondence in Volk, the Memorandum

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contradicted Defendants’ alleged misstatements. See 816 F.3d at 1412. Where Plaintiffs

claim that Horton told them that Western would invest thirty-six million dollars, the

Memorandum made clear that any investment beyond three million dollars was optional.

(Dkt. # 127, Ex. 9.) In addition, whereas Plaintiffs argue that Horton told them Western

required a release of Plaintiffs’ security interest and Weiss’s seat on the Board, the

Memorandum was silent as to their alleged requirements. (Dkt. #141 at ¶ 41.) Based on the

contents of the Memorandum, Plaintiffs also had reason to question the accuracy of Horton’s

alleged statements about the value of Alchemix stock, at least as far as the value was tied to

the amount of the investment that Western was supposedly obliged to make to Alchemix. In

addition, Plaintiffs do not allege or provide any evidence to suggest that the Memorandum

failed to incorporate the complete agreement between Western and Alchemix. Hence, the

Memorandum created “sufficient suspicion of fraud to cause a reasonable investor to

investigate the matter further.” Betz, 519 F.3d at 876.

Having found that Plaintiffs were on inquiry notice of the alleged wrongdoing, the

Court also finds that, had they exercised reasonable diligence, they would have discovered

the alleged fraud. Indeed, the “inquiry notice and reasonable diligence tests tend to merge in

this case because of . . . what was . . . disclosed” by the June 2002 Memorandum. See Am.

Funds, 556 F. Supp.2d at 1110. If Weiss had “exercise[d] reasonable diligence” and

contacted either Western or Horton, he would have been able to determine whether Horton’s

alleged statements were actually false. Unlike the plaintiffs in Betz, who demonstrated that

the defendant made additional misstatements or false assurances that impeded their ability

to discover fraud, Plaintiffs here provide no evidence that Horton impeded any investigation.

Although the Amended Complaint asserts that Horton “continued . . . to conceal the true

facts” underlying his alleged misrepresentations and omissions (Dkt. # 54 at ¶ 35), Plaintiffs

do not present any evidence to support this claim. In fact, the only available evidence

suggests that Defendants actually alerted Weiss to the alleged fraud by sending him the

Memorandum. Because Defendants meet both prongs of the Betz inquiry notice test,

Plaintiffs claims of federal securities fraud are barred, at least to the extent that these claims

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To the extent that Plaintiffs’ federal and state securities claims are based on Horton’s

alleged failure to disclose that he was a Defendant in the Glenn Action, the Court need not

decide whether these claims are barred by the statute of limitations because the Court grants

summary judgment on these claims due to Plaintiffs’ failure to provide evidence of any injury

or damages suffered as a result of this alleged omission. 

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are based on Horton’s alleged misrepresentations about Western’s investment into Alchemix.

The statute of limitations began to run on June 18, 2002; therefore, because Plaintiffs did not

bring their claims until May 7, 2007, these claims are barred.

B. Plaintiffs’ State Securities Claim & Statute of Limitations

To the extent that Plaintiffs’ Arizona securities claim concerns alleged misstatements

about Western’s investment, these claims are also barred by the statute of limitations. A

person commits securities fraud under Arizona law when he or she, in connection with the

a sale of securities, “make[s] any untrue statement of material fact, or omit[s] to state any

material fact necessary in order to make the statements made, in light of the circumstances

under which they were made, not misleading.” Ariz. Rev. Stat. § 44-1991(A)(2). The statute

of limitations for this type of claim is “two years after discovery of the fraudulent practice

on which the liability is based, or after the discovery should have been made by the exercise

of reasonable diligence.” Ariz. Rev. Stat. § 44-2004(B). As with federal securities fraud,

Arizona Courts have held that summary judgment is proper when it is undisputed that a

plaintiff discovered or should have “discovered . . . the misrepresentation of material facts.”

See Aaron v. Fromkin, 196 Ariz. 224, 228, 994 P.2d 1039, 1043 (Ct. App. 2000).

Plaintiffs discovered or should have discovered Horton’s alleged misrepresentations

and omissions more than four years before they brought suit. As previously discussed,

Plaintiffs knew or should have known that Western was not required to go forward with its

investment in Alchemix when they received the Memorandum in June 2002. Accordingly,

these claims are barred, at least to the extent that they are based on Horton’s alleged

misstatements about Western’s investment.5

C. Plaintiffs Fraud Based Claims Only Survive Summary Judgment to the

Extent that Plaintiffs Can Demonstrate an Injury or Damages. 

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To the extent that Plaintiffs’ fraud-based claims are not barred by the statute of

limitations, Plaintiffs’ claims fail because Plaintiffs have not alleged any facts demonstrating

that they were somehow injured by accepting repayment of the Loan and purchasing

Alchemix stock. Each of Plaintiffs fraud-based claims, require that a plaintiff demonstrate

economic loss, or some other injury. See In re Daou Sys. Inc., Sec. Litig., 411 F.3d at 1014

(citing Dura Pharms., 544 U.S. at 336) (noting that a plaintiff must prove economic loss to

prevail on a federal securities claim) Grand v. Nacchio 222 Ariz. 498, 500, 217 P.3d 1203

(Ct. App. 2009) (observing that Arizona securities law requires an injury before a litigant can

bring a private cause of action for rescission or monetary damages); Staheli v. Kauffman, 122

Ariz. 380, 383, 595 P.2d 172, 175 (1979) (holding that plaintiff bears burden of showing an

injury or damages to prevail under a theory of common-law fraud); St. Joseph’s Hops. and

Med. Ctr. v, Reserve Life Ins. Co., 154 Ariz. 307, 312, 742 P.2d 808, 813 (1987)

(recognizing damages as an element of an Arizona negligent misrepresentation claim). 

As a preliminary matter, Plaintiffs’ argument that they do not need to demonstrate that

they were injured because they are seeking rescission rather than monetary damages is

without merit. (See Dkt. # 135 at 12.) Under Arizona law, a securities claimant “may rescind

the sale, despite having suffered no loss.” Grand, 214 Ariz. at 24, 417 P.3d at 778. A

plaintiff, however, must still demonstrate a cognizable injury before a court will grant

rescission. See, e.g., Nacchio, 222 Ariz. at 500, 217 P.3d at 1205 (noting that “a purchaser

injured by a violation of [Arizona Securities Law] may bring a private cause of action for

rescission or damages.”). Moreover, the notion that Plaintiffs merely seek rescission of the

stock purchase and reinstatement of the Loan, rather than monetary damages, contradicts the

Amended Complaint. (See Dkt. # 54 at ¶¶ 37, 48, 49, 56, 72, 89, 90–93.)

Regardless, the crux of Plaintiffs’ argument is that Horton’s statements induced them

to accept repayment of the Loan and give up certain rights to which they were otherwise

entitled. The facts, however, demonstrate that Plaintiffs were not damaged or otherwise

injured by Horton’s alleged misstatements. It is undisputed that Defendants had the unilateral

right to pay off the Loan to Strategic Diversity after one year from the time the Loan

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originated. There were only three conditions on Alchemix’s right to prepayment: (1)

Alchemix had to give Strategic Diversity thirty-days advanced written notice before paying

off the Loan; (2) Alchemix had to pay a $10,000 prepayment penalty if the Loan was repaid

less than two years from the date the Loan was originated; and (3) during the thirty-day

notice period, Alchemix had to give Strategic Diversity the option to convert the Loan into

250,000 shares of Alchemix stock at the lower of $2.00 per share or such price offered to

other investors. (Dkt. # 127, Ex. 1 at 2–3.)

Plaintiffs realized all of the rights to which they were entitled under the prepayment

provisions of the Loan. The Loan was paid on July 2, 2002, exactly one year after the Loan

originated. (Dkt. # 54 at ¶ 21.) When it paid off the principal and interest due under the Loan,

Alchemix also paid the $10,000 prepayment penalty. (Dkt. # 136, Ex. K at 2–3.) And, while

Strategic Diversity did not exercise its right to convert the Loan into stock, Plaintiffs offer

no evidence that Strategic Diversity was damaged by opting for the Loan repayment in lieu

of electing the stock option. In addition, Weiss ultimately purchased 250,000 shares—the

same number of shares to which Strategic Diversity was entitled under its conversion right.

(Dkt. # 141 at 35.) And, while Strategic Diversity may have given up its independent right

to convert the Loan into stock in lieu of receiving repayment of the Loan, Plaintiffs do not

provide any evidence of how giving up thisright caused some form of injury or damages. At

oral argument, Plaintiffs further conceded that Strategic Diversity was not damaged by

accepting repayment of the Loan. See Tr. of Oral Arg. 32 (Dec. 11, 2009) (conceding that

“Strategic Diversity would [only] have a damage claim” if the Court determined that

Plaintiffs’ right to a seat on the Alchemix Board would continue after the Loan was repaid).

And, while Plaintiffs allege that they were somehow damaged or injured by giving up

the right to thirty-days advanced-written notice, they do not present any evidence or

explanation of these damages. Here, it is unclear what injury Plaintiffs’ suffered due to

waiving these rights; moreover, at oral argument, Plaintiffs conceded that Strategic Diversity

was not damaged by giving up its right to advanced-written notice under the Note. See Tr.

of Oral Arg. 32.

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Horton filed bankruptcy on September 2, 2003. (Dkt. # 136, Ex. H at ¶ 3.) The

bankruptcy court issued its decision on December 14, 2004. (Id. at 19.)

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Plaintiffs have also failed to produce any evidence that Weiss was somehow damaged

by the $1.00 purchase price. All of the evidence before the Court indicates that the stock was

worth at least $1.00 per share when Weiss purchased it in 2002. As noted, Western purchased

1,500,000 shares of Alchemix stock for $ 2.00 per share just weeks before Weiss bought his

shares. (Dkt. # 141 at ¶ 30; Dkt. # 127, Ex. 6 at 2.) Around the same time, members of AFG

also purchased Alchemix stock from Medici for $1.00 per share. 

Furthermore, Plaintiffs’ allusion to statements from Horton’s 2004 personal

bankruptcy case is insufficient to create a material issue of fact with respect to the value of

Alchemix stock in July 2002.6

 At one point during his bankruptcy case, Horton apparently

asserted that Alchemix stock was basically worthless. (See Dkt. # 135 at 12.) Plaintiffs,

however, have not provided the Court with the deposition or declaration in which Horton

made this statement; therefore, the Court declines to consider it. To the extent that this

assertion could be considered, it is not clear how an asserted value of Alchemix stock in 2004

is relevant to the value of Alchemix stock in 2002. Further, is unclear when Horton made this

alleged statement about the value of Alchemix stock, but at the earliest, this statement

occurred at the start of Horton’s bankruptcy case in September of 2003. Plaintiffs fail to

explain how the alleged value of Alchemix stock in September 2003 has any bearing on the

value of the stock fourteen months earlier when Weiss purchased it. Moreover, the

bankruptcy court rejected Horton’s assertion and determined that Alchemix stock still had

value. (Dkt. # 136, Ex. H at 5–6.) In finding that the stock still had value, the Horton

bankruptcy court observed that several investors paid at least $1.00–$2.00 for Alchemix

stock in the time period leading up to Horton’s bankruptcy case. (Id.)

In their Responsive Memorandum, Plaintiffs assert for the first time that they were

damaged because Horton induced Weiss to waive Strategic Diversity’s anti-dilution rights

and the right to make further advances to Alchemix. (Dkt. # 135 at 12.) Both of these rights

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are independent from the rights provided in the Loan Agreement. Because Plaintiffs’ entire

case is based on alleged misrepresentations that induced them to accept repayment of the

Loan and give up rights arising in connection with the Loan, it is unclear how these two

independent rights are relevant to their case. (See Dkt. # 54) Regardless, these claims are not

properly before the Court because Plaintiffs never alleged in their Amended Complaint that

they were injured or damaged by giving up Strategic Diversity’s non-dilution rights or by

relinquishing its right to make further advances to Alchemix. See Pickern v. Pier 1 Imps.

Inc., 457 F.3d 963, 969 (9th Cir. 2006) (holding that rasing claims for the first time in

response to a motion for summary judgment will not preclude summary judgment). In fact,

Plaintiffs specifically noted in their Motion for Partial Summary Judgment that Weiss’s antidilution rights under the Stock Purchase Warrant are not at issue in this case. (See Dkt. # 128

at 3, n. 2.) Because Plaintiffs fail to provide any evidence of damages or some other injury,

summary judgement is appropriate with respect to Plaintiffs’ fraud-based claims. 

II. Plaintiffs’ Equitable Claims 

Aside from their fraud-based claims, Plaintiffs assert that they are entitled to

rescission based on three theories of restitution: (1) rescission for mutual mistake; (2) failure

of a condition precedent; and (3) equitable restitution. (Dkt. # 54.) Summary Judgement is

also granted with respect to each of these claims. 

A. Rescission for Mutual Mistake

Under Arizona law, a party may seek rescission of a contract where there has been a

mistake as to the material aspects of the agreement. Nelson v. Rice, 198 Ariz. 563, 566, 12

P.3d 238, 241 (Ct. App. 2000). An agreement may be rescinded on the ground of a mutual

mistake as to a “‘basic assumption on which both parties made the contract.’” Renner v.

Kehl, 150 Ariz. 94, 97, 722 P.2d 262, 265 (1986) (quoting Restatement (Second) of Contracts

§ 152 cmt. b (1979)). Arizona law has also recognized rescission with respect to unilateral

mistakes. Balmer v. Gagnon, 19 Ariz.App. 55, 57, 504 P.2d 1278, 1280 (Ct. App. 1973). In

Balmer, the Arizona Court of Appeals noted that a “unilateral mistake induced by

misrepresentation or contract ambiguity . . . is a ground” for rescission. Id.

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Plaintiffs allege that their decision to give up rights under the Loan and purchase

Alchemix stock was predicated on four mistaken assumptions: upon the understanding (1)

that Western “had agreed to invest . . . [$36,000,000] in Alchemix;” (2) that the “investment

was conditioned upon [Strategic Diversity’s] release of its security interest in the Alchemix

patents and Weiss’s resignation form the Alchemix Board of Directors;” (3) that the “stock

being offered to Weiss was more valuable than [Strategic Diversity’s] secured loan;” and (4)

that the “stock was being offered to Weiss at a discount of one-half its fair market value.”

(Dkt. # 54 at ¶ 73.) 

Plaintiffs’ claim, however, fails because there was no mistake of fact with respect to

Plaintiffs’ alleged false assumptions. First, the facts demonstrate that Weiss knew or should

have known that Western was not obligated to invest $36,000,000 when he agreed to

purchase Alchemix stock in July 2002. (Dkt. # 141 at ¶ 41.) The facts also indicate that

Plaintiffs were required to release the security interest and relinquish Weiss’s seat on the

Board upon repayment of the Note. (Dkt. ## 54 at ¶ 14, 127, Ex. 18 at 90.) In addition, there

also is no material dispute about the value of Alchemix stock at the time Weiss purchased

the 250,000 shares. Plaintiffs present no evidence to suggest that the stock was worth any

less than the price Western and others paid for it. Finally, Plaintiffs conceded at oral

argument that Strategic Diversity was not impacted by any alleged mistake. See Tr. of Oral

Arg. 32. Accordingly, summary judgment is appropriate with respect to Plaintiffs’ claim for

mistake.

B. Failure of a Condition Precedent

It is unclear whether Arizona law recognizes “failure of a condition precedent” as a

separate cause of action. All of the Arizona cases cited in the briefs suggest that “failure of

a condition precedent” is an affirmative defense to contract formation rather than a separate

and distinct claim for relief. See, e.g., Angle v. Marco Builders, 128 Ariz. 396, 399–400, 626

P.2d 126, 129–30 (1981). In fact, Plaintiffs cite no Arizona authority to support their claim

that “failure of a condition precedent” provides an independent ground for relief. 

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Nevertheless, even if “failure of a condition precedent” is a separate cause of action

in Arizona, Plaintiffs’ claim fails as a matter of law. Here, Plaintiffs argue that their decision

to give up rights under the Loan and purchase Alchemix stock was “conditioned upon the

understanding that a new investor would be investing up to . . . [$36,000,000] into Alchemix”

and that the investment required “the release of [Strategic Diversity’s] security interest . . .

and Weiss’s resignation from the . . .Board . . . . ” (Dkt. # 54 at ¶ 81.) Again, the facts

provide that each of these alleged conditions was fulfilled. As previously discussed, Western

had the option to invest up to $36,000,000 into Alchemix. Weiss was also required to release

the security interest in Alchemix’s patents and resign form the Board upon repayment of the

Note. (Dkt. # 141 at 41). Accordingly, summary judgment is appropriate with respect to this

claim for “failure of a condition precedent.” 

C. Equitable Restitution/Unjust Enrichment

Plaintiffs argue that their claim for “equitable restitution” is a species of unjust

enrichment. To maintain a claim for unjust enrichment under Arizona law, Plaintiffs must

establish five elements: “(1) an enrichment; (2) an impoverishment; (3) a connection between

the enrichment and the impoverishment; (4) absence of justification for the enrichment and

the impoverishment; and (5) an absence of a remedy provided by law.” Guardian Bank v.

Hamlin, 182 Ariz. 627, 630, 898 P.2d 1005, 1008 (1995) (citing City of Sierra Vista v.

Cochise Enter. Inc., 144 Ariz. 375, 381, 697 P.2d 1125, 1131 (Ct. App. 1984)). 

Plaintiffs, however, fail to provide any facts that to support each of these elements.

Specifically, Plaintiffs fail to show any impoverishment. As previously discussed, Plaintiffs

have failed to show any injury or damages in this case. At oral argument, Plaintiffs’ counsel

conceded that Strategic Diversity was not unjustly impoverished by giving up its rights under

the Loan. See Tr. of Oral Arg. 32. Plaintiffs also have not provided any facts to demonstrate

that Weiss was unjustly impoverished. Here, the evidence indicates that Alchemix stock was

worth at least $1.00 per share in 2002 when Weiss purchased it. Furthermore, to the extent

that Weiss argues that he was unjustly impoverished because he was induced to give up

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rights existing under the Loan, the facts demonstrate that the Defendants had the right to

prepay the Loan and that Weiss did not lose any benefit to which he was were entitled.

III. Defendants Other Arguments for Summary Judgment & Plaintiffs Motion

for Partial Summary Judgment are Denied.

Because the Court grants Defendants’ Motion for Summary Judgment, there is no

need to consider Defendants’ other arguments for summary judgment. Furthermore, as none

of Plaintiffs claims survive summary judgment, Plaintiffs’ Motion is denied as moot.

Having determined that Defendants are entitled to summary judgment, IT IS

THEREFORE ORDERED:

(1) Defendants’ Motion for Summary Judgment (Dkt. # 120) is GRANTED.

(2) Plaintiffs’ Motion for Partial Summary Judgment (Dkt. # 135) is DENIED.

(3) Defendants’ requests for judicial notice (Dkt. ## 126, 145) are DENIED.

(4) Directing the Clerk of the Court to TERMINATE this action.

 DATED this 4th Day of January, 2010.

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