Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_07-cv-00929/USCOURTS-azd-2_07-cv-00929-3/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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WO 

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, 

v. 

Alchemix Corporation, an Arizona 

corporation; and Robert R. Horton and 

Cheryl Halota Horton, husband and wife, 

Medici Associates, LLC, a Delaware 

limited liability company, 

Defendants.

No. CV-07-00929-PHX-GMS

AMENDED FINDINGS OF FACT 

AND CONCLUSIONS OF LAW

On March 28, 2013, the issue of damages relating to Plaintiff Kenneth P. Weiss’s 

securities fraud claims was tried to the Court without a jury. (Doc. 269.) This Order 

constitutes the Court’s findings of fact and conclusions of law under Federal Rule of 

Civil Procedure 52(a). 

BACKGROUND 

 This case involves a $500,000 loan by Plaintiff Strategic Diversity, Inc. 

(“Strategic”) to Defendant Robert R. Horton’s company, Defendant Alchemix 

Corporation (“Alchemix”). Also at the center of this case is the subsequent and separate 

purchase by Weiss, the sole owner of Strategic, of 250,000 shares of Alchemix stock at 

the price of $1.00 per share. In their operative Amended Complaint (the “Complaint”) 

both Weiss and Strategic bring claims for equitable relief and damages. 

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FINDINGS OF FACT 

I. Strategic’s Note with Alchemix

 Horton is the founder and CEO of Alchemix, an alternative fuels start-up 

company. (Doc. 203, Final Pretrial Order ¶ B(1)(c)–(d).) Sometime after their first 

meeting, Horton offered Weiss an investment opportunity with Alchemix. (Id. at 19:7–9.) 

On July 2, 2001, Weiss’s investment company, Strategic, agreed to loan $500,000 to 

Alchemix. Strategic and Alchemix consummated the loan through a Convertible 

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

convertible to stock at a price of $2.00 per share. (Doc. 127-2, Ex. 1.) In exchange for 

consummating the Note, Strategic was given a security interest in Alchemix’s patents and 

Weiss was given a seat on Alchemix’s Board of Directors (the “Board”) until the Note 

was repaid. (Doc. 127-4, Ex. 18 at 90; Doc. 129-2, Ex. B at ALCHX00156 ¶ 4.) The 

agreements provided that the security interest and Weiss’s seat on the Board endured 

“until the Note [h]as been satisfied or converted” into stock. (Doc. 127-2, Ex. 2; Doc. 

129, Ex. B at ALCHX00156 ¶ 4.) 

 In addition, the Note granted Alchemix the right to prepay its debt after one year. 

The conditions on Alchemix’s right to prepay were that Alchemix had to: (1) give 

Strategic thirty days advanced written notice before prepayment; (2) pay a $10,000 

prepayment penalty; and (3) during the notice period, give Strategic the option to convert 

the Note into 250,000 shares of Alchemix stock at the lower of $2.00 per share or such 

price as offered to other investors at the time. (Doc. 127-2, Ex. 1 at 2–3.) Alchemix 

further provided Strategic with a Stock Purchase Warrant, whereby Alchemix was 

required to obtain Strategic’s consent before increasing the number of capitalized shares 

beyond 40 million because of the dilutive nature of such an increase in shares. (See Doc. 

129-2, Ex. B at ACLHX00165 ¶ 4c.) 

II. Western’s Investment in Alchemix 

 Approximately one year later, in the Spring and Summer of 2002, Horton sought 

to raise additional capital to develop Alchemix’s technology. (See Doc. 127-4, Ex. 15, 

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June 11, 2002 Board Minutes at ALCHX00605–04; Doc. 203, Final Pretrial Order ¶ 

B(1)(i).) In cooperation with Horton, a group of investors called the Alchemix Funding 

Group (“AFG”) sought to obtain additional investment capital for Alchemix through 

additional sales of stock. Horton, however, began investment discussions with Western 

Oil Sands (“Western”), a large Canadian energy company. In June 2002, Horton and 

Alchemix received an investment proposal from Western. 

 Horton initially met with Western’s Chairman and CEO, Guy Turcotte, on June 

12, 2002. (Doc. 224, Jury Trial Tr. at 147:10–148:1.) On June 17, 2002, Western sent a 

Memorandum of Understanding (the “Memorandum”) which described the terms of the 

investment and a wire transfer of $3 million to Horton. (Id. at 148:2–6.) The 

Memorandum granted Western 1.5 million shares of Alchemix stock at a price of $2.00 

per share. (Doc. 127-2, Ex. 9, Memorandum at SDI000080.) The Memorandum further 

granted Western the “right to purchase” up to an additional $33 million in Alchemix 

stock in the subsequent months conditioned on Alchemix meeting benchmarks. (Id.) The 

Memorandum referred to these rights to purchase stock as “options.” (Id.) Alchemix 

consummated the Western investment on June 18, 2002. (Doc. 203, Final Pretrial Order ¶ 

B(1)(n).) 

 On June 18, 2002, Horton announced the Western investment and sent the 

Memorandum to Weiss and the rest of the members of the Board. (Doc. 203, Final 

Pretrial Order ¶ B(1)(m).) On June 24, 2002, Horton contacted Weiss to discuss 

Western’s investment. Horton told Weiss that Western was a multibillion dollar Canadian 

company with expertise in energy and would be a good strategic partner for Alchemix. 

(Doc. 224, Jury Trial Tr. at 42:24–43:3.) 

 Alchemix decided to repay the Note from Strategic, including the early payment 

penalty. Strategic elected to waive the 30-day notice provision. In the subsequent weeks, 

Weiss and his executive assistant, Arthur Hagopian, worked with Alchemix’s CFO, 

Richard Armstrong, to execute a series of documents reflecting the repayment of the Note 

to Strategic, Strategic’s relinquishment of its security interest in Alchemix’s patents and 

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Weiss’s resignation from the Board. (See Pls. Exs. 7–10, 13–14, 17; Doc. 129-3, Ex. G at 

SDI000069.) On July 2, 2002, Strategic accepted $560,832 from Alchemix as repayment 

of principal, interest, and prepayment penalties under the Note. (Pls. Ex. 10; Doc. 136-12, 

Ex. K.) Weiss formally resigned from the Board on July 11, 2002. (Doc. 203, Final 

Pretrial Order ¶ B(1)(t).) Finally, on August 5, 2002, Strategic released its security 

interest in Alchemix’s patents. (Pls. Ex. 19.) 

III. Weiss’s Stock Purchase From Medici

In late June or early July 2002, Horton made an offer to sell shares at a favorable 

price to members of AFG for their ultimately unused efforts to raise investment capital 

for Alchemix. (Doc. 224, Jury Trial Tr. at 107:25–108:21.) In conjunction with that offer, 

Horton offered Alchemix stock held by his holding company, Medici Associates, LLC 

(“Medici”), to Weiss at the same price of $1.00 per share. (Id. at 45:16–46:5.) Weiss 

accepted Horton’s offer to invest in Alchemix. On July 8, 2002, Weiss signed a 

subscription agreement and purchased 250,000 shares of Alchemix stock for $250,000 

from Medici. (Pls. Exs. 15, 17; Doc. 127-2, Ex. 11 (Subscription Agreement); Doc. 203 

(Final Pretrial Order) ¶¶ 1(r)–(s).) Weiss’s stock purchase from Medici was wholly and 

entirely separate from Strategic’s Note to Alchemix. 

IV. Western’s Decision Not to Exercise its Options 

 Three to four weeks after their initial meeting on June 12, 2002, Turcotte informed 

Horton that Western’s Board of Directors had decided that Western would not invest 

further in any ventures outside of their immediate projects. (Doc. 224, Jury Trial Tr. at 

176:1–11; Doc. 127-4, Ex. 19 (Gregory Depo.) at 50:9–13.) Turcotte further told Horton 

that Western would not exercise its options to purchase Alchemix shares, though Western 

would retain its initial investment of $3 million. (Doc. 224, Jury Trial, Tr. at 184:24–

185:2; 244:3–245:9.) 

 Immediately after Western’s decision was communicated to him, Horton convened 

a meeting with the Board to apprise it of the development. (Id. at 185:21–25.) Horton did 

not inform Weiss because Weiss was no longer on the Board and Alchemix had 500 other 

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shareholders. (Id. at 186:1–4.) Horton did not contact Weiss at any time after that 

meeting to inform him of Western’s decision. (Id. at 186:20–25.) 

 In late 2005, Weiss met with Horton to discuss his investment in and the corporate 

health of Alchemix since he had not received regular updates as a shareholder of the 

company. (Id. at 57:4–19.) It was at this meeting that Weiss first learned from Horton that 

Western had not exercised its options. (Id. at 58:11–13.) 

V. The Complaint and Summary Judgment 

 On May 7, 2007, Weiss and Strategic brought suit against Alchemix, Robert and 

Cheryl Horton, and Medici. In their Complaint, Plaintiffs alleged the following counts: 1) 

federal securities fraud (15 U.S.C. § 78j and Rule 10b-5); 2) state securities fraud in 

violation of the Arizona Securities Act (the “ASA”) (A.R.S. § 44-1991); 3) common law 

fraud; 4) statutory fraud (A.R.S. § 44-1521, et seq.); 5) negligent misrepresentation; 6) 

mistake/rescission; 7) failure of condition precedent; 8) equitable restitution; and 9) 

punitive damages. (Doc. 54.) Plaintiffs requested the Court to provide the equitable relief 

of (1) reinstating Strategic’s Note to Alchemix and its security interest in Alchemix’s 

patents; (2) reinstating Weiss to the Board; and (3) voiding Weiss’s purchase of 

Alchemix stock and restoring all consideration given by Weiss for that stock. (Id. at 21.) 

Plaintiffs further requested compensatory and actual damages, interest, punitive damages, 

and taxable costs and reasonable attorneys’ fees incurred in this action. (Id.) 

 Initially, the Court dismissed the statutory fraud claim (count four) as time-barred. 

(Doc. 29 at 1; Doc. 148 at 7 n.4.) The Court then granted summary judgment to 

Defendants on all of Plaintiffs’ remaining claims. (Doc. 148 at 19.) To the extent that 

Plaintiffs’ federal and state securities fraud claims were based on Horton’s omission 

regarding Western’s investment, the Court held that those claims were barred under the 

statute of limitations. (Id. at 8.) 

 To the extent Plaintiffs’ fraud claims were not time-barred, the Court held that 

they failed because Plaintiffs had not demonstrated economic loss or other injury. (Id. at 

13.) At the outset, the Court made clear that although Plaintiffs alleged that the stock 

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purchase was part of a two-pronged, but single “debt-equity swap,” the undisputed facts 

demonstrated that Alchemix’s repayment of the Note to Strategic was separate from 

Weiss’s purchase of the 250,000 shares from Horton. (Id. at 5.) Strategic could not have 

entered into a “debt-equity swap” as Weiss obtained the equity rather than Strategic and 

Strategic made the Note rather than Weiss. Accordingly, Weiss’s purchase of the 250,000 

shares must have been separate from Strategic’s accepting repayment of the Note 

 Defendants had a unilateral right to pay off the Note to Strategic one year from 

origination. That right to prepayment was based on three conditions as described above. 

Defendants did not fulfill the conditions of notifying Strategic thirty days in advance and 

providing Strategic the option to convert the Note into shares of Alchemix stock. 

Plaintiffs, however, did not prove that Strategic suffered injury as a result. They conceded 

to the lack of injury at oral argument. Further, Weiss, the owner of Strategic, purchased 

Alchemix shares after the Note was prepaid by Defendants. Plaintiffs also did not prove 

that Weiss was somehow damaged by the purchase price of Alchemix stock of $1.00 per 

share. Thus, the Court held that Plaintiffs failed to show injury. 

 As to the Plaintiffs’ equitable claims, the Court first held that there was no claim 

for rescission based on mutual mistake because there was no mistake of fact. (Id. at 17.) 

Although it is not clear that Arizona recognizes a claim for failure of condition precedent, 

that claim also failed as a matter of law because the conditions were fulfilled. (Id. at 18). 

Upon accepting repayment, Strategic was required to release its security interest in 

Alchemix’s patents and Weiss was required to resign from the Board. Finally the 

equitable restitution/unjust enrichment claim failed because Plaintiffs failed to show any 

element of “impoverishment” or injury as discussed above. (Id.) 

VI. Appeal

 Plaintiffs appealed all of the Court’s rulings including the grant of summary 

judgment to Defendants. (Doc. 152 at 1.) The Ninth Circuit did not address the Court’s 

dismissal of the statutory fraud claim (count four). It affirmed judgment for Defendants 

as to Plaintiffs’ state law claims of common law fraud (count three), negligent 

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misrepresentation (count five), mutual mistake (count six), failure of a condition 

precedent (count seven), and unjust enrichment (count eight), but reversed and remanded 

the federal and state securities fraud claims (counts one and two) for consideration under 

a “rescissionary measure of damages.” Strategic Diversity, Inc. v. Alchemix Corp., 666 

F.3d 1197, 1211 (9th Cir. 2012). 

 Those claims were apparently reversed as to both Strategic’s and Weiss’s claims. 

The Ninth Circuit did not address this Court’s determination that Strategic could show no 

damage and that the transaction between Strategic, Weiss and the Defendants could not 

have been a “debt-equity swap” as the transactions were between separate parties.1

Instead, the Ninth Circuit determined that while Weiss could tender his 250,000 shares to 

rescind his purchase of Alchemix stock, it would not be possible to return to Strategic the 

rights it had received from Alchemix pending the complete repayment of its Note which 

occurred in June 2002. These rights included Strategic’s security interests in Alchemix’s 

intellectual property and right to name a director, Weiss, to the Board. The Ninth Circuit 

reasoned: 

Although Weiss stands ready to tender the 250,000 shares of Alchemix for 

the consideration he offered ($250,000) . . . . The Note has long since 

expired, coming due in July 2006. We doubt that Weiss’s demand for his 

seat on the Alchemix Board is even possible when there does not appear at 

present to be an existing board. In addition, true rescission would also 

involve the unfurling of security interests that are currently held as 

collateral on other debts. 

(Id. at 1207–08.) 

 While the panel opinion did not explain why Weiss could not tender the stock to 

rescind his stock purchase, it apparently held that because tender was impossible for both 

Weiss and Strategic neither was entitled to rescission, but both might be entitled to the 

 

1

 As discussed above, the Note was between Strategic and Alchemix while the Stock Purchase Agreement was between Weiss and Medici. 

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equitable remedy of rescissionary damages upon reconsideration by this Court.2 

 Nevertheless, on remand, Strategic acknowledged that it had no claims against the 

Defendants. Thus, regardless of whether the Ninth Circuit reversed this Court’s holding 

sub silentio that, as a matter of law, Alchemix’s repayment of the Note to Strategic and 

Weiss’s subsequent purchase of Alchemix stock from Medici could not have been a debt 

equity swap, Weiss’s tender of the stock as a condition of the rescission which he sought 

was no longer either difficult or impossible. As the Ninth Circuit noted, the only facts 

that made tender impossible arose from Strategic’s request to rescind Alchemix’s 

repayment and reinstate its Note and security interest. (Id.) Once that request was 

dropped, tender of the stock for the amount claimed became possible because, as it noted 

in its opinion, Weiss could still tender his stock3

 as a condition precedent to rescission. 

 In fact, during a status conference after remand, Plaintiff’s counsel agreed that 

Strategic no longer had a remedy and the remaining issue was whether Horton and/or 

Alchemix made a misrepresentation or omission that caused Weiss to invest in Alchemix. 

(March 2, 2012, Hearing Tr. at 5:20–6:17, 7:5–9, 10:16–18.) Plaintiff’s counsel also 

agreed that there was no difficulty with a rescission remedy as to Weiss’s investment. 

(Id.) Rescission is the only claim Weiss sought for the stock purchase in his Complaint, 

 

2

 On appeal, Plaintiffs continued to assert that the repayment of the Note to 

Strategic and the subsequent stock purchase by Weiss constituted a debt-equity swap that inextricably combined the interests of Weiss and Strategic as it related to the Defendants. (Opening Brief of Plaintiffs-Appellants, 2010 WL 6415455, *21) (“As noted above, the 

gravamen of the District Court’s errors in this matter was its conclusion that the 

repayment of the Note and concurrent purchase of Alchemix stock ‘must have been 

separate’ and unrelated transactions.”). The undisputed facts, however, were actually to the contrary. 

The Ninth Circuit may not have observed that this Court held that the transaction 

could not have involved a debt-equity swap as a matter of law. Thus, the Ninth Circuit 

may not have perceived any need to offer explanation as to how the transaction could 

have constituted a debt-equity swap and thus why it would not have been possible for Weiss to tender his stock as a necessary condition to rescinding his stock purchase, even if tender would have been difficult at best for Strategic in its attempt to rescind Alchemix’s repayment of its Note. 

3

 As this Court is aware or can recall, Weiss has not yet tendered his Alchemix stock to the Defendants. 

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(see Doc. 54 (Compl.) at 21), and hence, the only claim to which he is entitled. The 

Ninth Circuit’s opinion that the Plaintiffs could seek rescissionary damages as opposed to 

rescission was explicitly based on its assumption that Weiss could no longer tender the 

stock he had received from Medici. Strategic Diversity, 666 F.3d at 1208. 

VII. Trial on Remand 

 After remand, the issue of fact of whether Horton made a material 

misrepresentation or omission to Weiss in relation to Weiss’s stock purchase from Medici 

was tried to a jury. (Docs. 209, 211.) At trial, the Court granted judgment as a matter of 

law against Strategic because, as Plaintiffs conceded, Strategic did not have a claim for 

damages in this case. (Doc. 211.) Because the remaining relief requested by Weiss was 

equitable relief that depended on the resolution of certain issues of fact the jury verdict 

consisted of answers to several special interrogatories in a special verdict form. 

 On August 30, 2012, the jury found that (1) Horton made a misrepresentation or 

omission of fact to Weiss in connection with the sale of 250,000 shares of Alchemix 

stock to Weiss; (2) the misrepresentation or omission was material to Weiss’s decision to 

purchase the shares; (3) Weiss justifiably relied on the misrepresentation or omission in 

making the decision to purchase the shares; (4) the misrepresentation or omission caused 

Weiss to purchase the shares; (5) Weiss should not have discovered the facts underlying 

the misrepresentation or omission prior to discovering it on May 7, 2005; and (6) Horton 

learned that Western was not going to exercise its options before Weiss purchased shares 

on July 8, 2002. (Doc. 218, Jury Verdict.) 

 On December 3, 2012, the Court denied the Defendants’ Motion for Judgment 

Renewed and Motion for New Trial. (Doc. 248.) At the Plaintiffs’ request the Court 

conducted a bench trial on March 28, 2013, regarding damages. (Doc. 269.) 

VIII. Value of Alchemix Stock in Years Subsequent to the Omission 

At trial and the subsequent hearing, evidence was introduced from which the 

Court makes the following findings. The value of Alchemix stock for the period 

following Horton’s omission in July 2002 is opaque. There is no evidence of additional 

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sales of Alchemix stock until 2006. In September 2003, Horton had taken the position 

that Alchemix stock was “worthless” because there was no market for the stock at the 

time. (Doc. 224, Jury Trial Tr. at 267:4–13.) Horton testified that not obtaining the 

additional investment from Western was “bad news” for Alchemix. (Id. at 185:12.) 

Horton testified, however, that six months after Western’s decision, Alchemix formed a 

joint venture with a large mining and minerals processing company in which the 

company contributed $2 million, which may have brought value to Alchemix stock. (Id.

at 264:5–10.) 

 During the period after late 2005 when Weiss discovered Horton’s omission, 

Horton sold Alchemix stock to a few private investors at the price of $2.00 per share. 

(Bench Trial Tr. at 164:13–15.) In the fall of 2006, Horton sold shares to a wealthy 

widow, Mary Menk, a shareholder whom Horton had known for a long time. (Id. at 

177:17–25.) Menk approached Horton to purchase shares for herself and as a gift for her 

employee, Patricia Townsend. (Id. at 178:1–9.) In the fall of 2008, Horton sold shares to 

another shareholder, Paul Schilling, a senior citizen and “big supporter” of Horton. (Id. at 

177:12–178:23.) Because of the “collapse of the gas market” in 2008, Schilling knew that 

Horton “needed some help” and was willing to invest in Alchemix to help it through 

difficult times. (Id.) Schilling purchased 100,000 shares at the price of $2.00 per share. 

(Id. at 165:19–24.) 

 In addition to these sales to individuals, Alchemix entered into a partnership with 

Diversified Energy Corporation (“Diversified”), a company that invests in a diversified 

portfolio of energy technologies. (Id. at 178:13–19.) In April 2006, Alchemix executed a 

stock purchase agreement with Diversified. (Id.) The agreement was for a purchase of 2.5 

million shares of Alchemix stock at the price of $2.00 per share (Id. at 164:21–165:2.) 

Diversified provided a $600,000 down payment and $4.4 million via promissory note. 

(Id. at 178:20–179:3.) Alchemix purchased also an unspecified number of shares of 

Diversified stock. (Id. at 182:9–11.) Around the same time, the parties entered into a 

management consulting, marketing, and advocacy arrangement. (Id. at 181:17–20.) 

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Alchemix paid Diversified $1.5 million in exchange for Diversified’s assistance in 

demonstrating Alchemix’s technology, obtaining access to government funding, and 

soliciting the Department of Energy. (Id. at 179:4–180:25.) Alchemix paid Diversified 

$18,500 and $83,330 per month for these services pursuant to two separate agreements. 

(Id. at 182:12–25.) In the fall of 2012, Alchemix and Diversified unwound and rescinded 

the entire arrangement and both parties divested their stock investment in the respective 

companies. (Id. at 184:2–16.) Diversified retains a limited license to use Alchemix’s 

Hydromax technology in the United States that it received in connection with these 

dealings, for which Diversified does not pay fees to Alchemix. (Id. at 184:21–23.) 

CONCLUSIONS OF LAW 

I. Federal Securities Fraud Claim 

 “The elements of a private action under Rule 10b–5 are (1) a material 

misrepresentation or omission by the defendant; (2) scienter; (3) a connection between 

the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon 

the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Janus 

Capital Group, Inc. v. First Derivative Traders, ____ U.S. ____, ____, n.3, 131 S.Ct. 

2296, 2301, n.3, 180 L.Ed.2d 166 (2011) (citing Stoneridge Investment Partners, LLC v. 

Scientific-Atlanta, Inc., 552 U.S. 148, 157 (2008)). Rescission is an available remedy for 

federal securities fraud claims. See Ah Moo v. A.G. Becker Paribas, Inc., 857 F.2d 615, 

623 (9th Cir. 1988) (internal citations omitted).

 In a 10b-5 action, the Court must consider “whether the plaintiff has shown some 

causal connection between the fraud and the securities transaction in question.” In re 

Daou Sys., Inc., 411 F.3d 1006, 1025 (9th Cir. 2005). The causation requirements 

comprised of both reliance and proximate cause or “loss causation.” Id. To establish 

transaction causation, the plaintiff must show that but for the material misrepresentation 

or omission, he would not have engaged in the transaction. Stoneridge, 552 U.S. at 171. 

To establish the necessary elements of loss a party must show both economic loss and 

loss causation. To prove loss causation, the plaintiff must demonstrate that the 

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defendant’s deceptive acts proximately caused the plaintiff’s loss. Dura Pharm., Inc. v. 

Broudo, 544 U.S. 336, 346 (2005). 

When evaluating evidence as to loss causation, the Supreme Court has held that 

“to touch upon a loss is not to cause a loss.” Dura Pharm., 544 U.S. at 336 (emphasis in 

original); see Metzler Inv. GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049, 1064 (9th 

Cir. 2008) (“Loss causation requires more.”). Yet, a plaintiff is not required to show “that 

a misrepresentation was the sole reason for the investment’s decline in value” in order to 

establish loss causation. Daou Sys., 411 F.3d at 1025 (citation omitted) (emphasis in 

original). “[A]s long as the misrepresentation is one substantial cause of the investment’s 

decline in value, other contributing forces will not bar recovery under the loss causation 

requirement” but will play a role “in determining recoverable damages.” Id. 

 Although the jury found transaction causation based on a special interrogatory in 

the jury verdict form, Plaintiff did not request that the jury answer an interrogatory as to 

whether Defendants’ acts caused Weiss to suffer economic losses. Thus, the Court is left 

to determine loss causation based on the evidence in the record. On appeal, the Ninth 

Circuit noted that Weiss’s request for relief “does not relieve [him] of demonstrating loss 

causation.” Strategic Diversity, 666 F.3d at 1209 (citing 15 U.S.C. § 78bb (limiting 

recovery to damages “on account of the act complained of”)). 

 One manner in which Weiss may establish loss causation is by proving that the 

price of his shares declined after the facts underlying Horton’s omission or 

misrepresentation became known, otherwise known as a “fraud on the market” theory.

Metzler, 540 F.3d at 1062. Weiss purchased 250,000 Alchemix shares at the price of 

$1.00 per share. To recover damages based on a “fraud on the market” theory, the 

relevant time period during which Weiss must show loss is soon after he and/or other 

investors learned of the omission. Weiss did not provide sufficient evidence at trial that 

the share price declined soon after it was revealed to him or other investors that Western 

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had decided not to exercise its options.4

 A decline in stock price is not the only method through which Weiss may show 

loss causation. “With a privately held company, a comparison of market stock price to 

establish loss causation has less relevance because market forces will less directly affect 

the sales prices of shares of a privately held company.” WPP Luxembourg Gamma Three 

Sarl v. Spot Runner, Inc., 655 F.3d 1039, 1053 (9th Cir. 2011) cert. denied, 132 S. Ct. 

2713, 183 L. Ed. 2d 68 (2012) (internal citations omitted). In these cases, plaintiffs more 

commonly prove loss causation by showing that a misrepresentation or omission caused 

them to engage in a transaction and that the revelation of the truth is directly related to 

their economic loss. Id. (citing Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 

F.3d 940, 949 (9th Cir. 2005)). 

 In Livid Holdings, the plaintiff purchased several million dollars’ worth of shares 

in a closely-held company based on an offering memorandum authored by the 

defendants. The memorandum stated that a large private equity fund-raising had been 

completed when only a fraction of it had, in fact, been completed. 416 F.3d at 944–45. 

The company then entered bankruptcy proceedings at which time the plaintiff discovered 

that the memorandum was false. Id. at 950–51. The Ninth Circuit held that the plaintiff 

had pled loss causation because the defendants’ alleged misrepresentation concealed the 

company’s financial situation and “[a]s a result of its dire financial situation, [the 

company] eventually went bankrupt, which caused [the plaintiff] to lose the entire value 

of its investment in [the company].” 416 F.3d at 949. The court did not require the 

plaintiff to allege variation in the stock price to plead loss causation, holding that 

“[u]nder these circumstances, Dura is not controlling.” Id. at 949 n.2. Rather, to find that 

 

4

 Weiss contends that Horton’s “anecdotal testimony” of a “handful of isolated sales to private individuals in 2006 and 2008” and “opaque” sales of stock to Diversified 

Energy in 2007 do not provide reliable evidence upon which to conclude that the price of Alchemix shares remained at or above $2.00 per share after 2005. (Doc. 276 at 3.) But it 

is Weiss’s burden to prove, if at all, that his shares declined in value below $1.00 per share after it became apparent that Western was not going to make further investments in Alchemix. See Metzler, 540 F.3d at 1062. It is not sufficient to carry such a burden by attacking the reliability of Defendants’ evidence. 

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loss causation was properly pled, the court relied upon the reduction in value of the 

plaintiff’s investment as a result of the truth concealed by the misrepresentation. 

 Weiss has not established that Western’s decision not to exercise its options was a 

“substantial cause of [his] investment’s decline in value.” Daou Sys., 411 F.3d at 1025. 

The company in Livid Holdings had a “negative net worth” of several hundreds of 

thousands of dollars and the unsuccessful private equity fund raising was the decisive 

blow to its financial viability. 416 F.3d at 947. The company went bankrupt soon after 

plaintiff invested in it based on the misrepresentation regarding the company’s 

fundraising. Id. at 949. Weiss, conversely, did not present sufficient evidence to show 

that in July 2002 or soon thereafter, his investment in Alchemix was reduced in value as a 

result of Western’s decision not to exercise its options. 

 The jury found that Horton omitted to inform Weiss that Western would not 

exercise its options before Weiss purchased Alchemix stock. Although it is possible that 

the value of Alchemix stock declined as a result of Western’s decision, Weiss did not 

show that it declined below $1.00 a share at the time he purchased it for that price. Three 

weeks before Weiss purchased 250,000 shares of Alchemix stock, Western purchased 1.5 

million shares for $2.00 per share. Even if Western decided not to exercise its subsequent 

options, it had just invested $3 million in the enterprise. Therefore, it is also possible that 

Weiss received an advantageous price per share and that even if the stock declined in 

value, it was not to a level below $1.00 per share. Thus, Weiss did not show that he was 

harmed by the omission. 

 Nor did Weiss show that the value of the stock declined below $1.00 per share 

soon after he purchased it in July 2002. Weiss points to Horton’s testimony that he 

considered Alchemix stock to be worthless as of September 2003 insofar as there was no 

market for the stock. Weiss further contends that because Western decided not to exercise 

its options, Alchemix was not able to build a demonstration plant to prove the 

commercial viability of its Hydromax technology, which Horton estimated would cost 

$35 million to build. Western’s decision was, according to Horton, “bad news” for 

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Alchemix as an early-stage technology company. As a result, Weiss argues, Alchemix 

could not conduct business operations, raise operating revenues, or attract additional 

investors, ultimately reducing the value of Weiss’s investment to a penny per share. 

 Alchemix did not attract another investment capable of funding its Hydromax 

technology in order to develop revenue. But Weiss did not show that it was not possible 

for Alchemix to attract investment and that therefore Western’s decision not to invest was 

damaging to Alchemix’s financial viability and as a result, to Weiss’s stock value. In fact, 

Weiss testified that six months after Western’s decision, Alchemix formed a joint venture 

with a large mining and minerals processing company in which the company contributed 

$2 million. Further, Weiss did not provide evidence that he could not have resold his 

shares for at least $1.00 per share. 

 Although the jury found that Weiss relied upon Horton’s assurances regarding 

Western’s investment and that Weiss would not have invested otherwise, “establishing 

‘loss causation’ is a more difficult task.” Daou Sys., 411 F.3d at 1025. Weiss has not 

carried his burden prove loss causation and thus may not get rescission for securities 

fraud pursuant to 10b-5. 

II. State Securities Fraud Claim 

In his Complaint, Weiss alleged that in making material misrepresentations or 

omissions regarding the Western investment, Defendants violated the ASA. This statute 

states, in relevant part, 

A. It is a fraudulent practice and unlawful for a person, in connection with a 

transaction or transactions within or from this state involving an offer to 

sell or buy securities, or a sale or purchase of securities, . . . directly or 

indirectly to do any of the following: 

1. Employ any device, scheme or artifice to defraud. 

2. Make any untrue statement of material fact, or omit to state any 

material fact necessary in order to make the statements made, in the 

light of the circumstances under which they were made, not 

misleading. 

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3. Engage in any transaction, practice or course of business which 

operates or would operate as a fraud or deceit. 

A.R.S. § 44-1991(A). Weiss alleged that Defendants violated all three of these 

subsections.5

 Rescission is an available remedy under the ASA: 

A sale or contract for sale of any securities to any purchaser in violation of . 

. . [Section 44-1991] is voidable at the election of the purchaser, and the 

purchaser may bring an action . . . to recover the consideration paid for the 

securities, with interest, taxable court costs and reasonable attorney fees, 

less the amount of any income received by dividend or otherwise from 

ownership of the securities, on tender of the securities purchased . . . . 

A.R.S. § 44-2001(B) (emphasis added). 

 A. Joint and Several Liability 

Pursuant to the ASA, “an action brought under § 44-2001 . . . may be brought 

against any person, including any dealer, salesman or agent, who made, participated in or 

induced the unlawful sale or purchase, and such persons shall be jointly and severally 

liable to the person who is entitled to maintain such action.” A.R.S. § 44-2003. The relief 

requested in this action, however, is rescission, not damages. “The contractual remedy of 

rescission abrogates the contract and undoes it from the beginning; that is, not merely to 

release the parties from further obligation to each other in respect to the subject of the 

contract, but to annul the contract and restore the parties to the relative positions which 

they would have occupied if no such contract had ever been made.” Hall v. Read Dev., 

Inc., 229 Ariz. 277, 285, 274 P.3d 1211, 1219 (Ct. App. 2012), review denied (Aug. 28, 

2012), as amended (Apr. 26, 2012). (internal quotation marks and citation omitted). As 

rescission is primarily a remedy between principals, an agent that “was not a party to the 

contract and received nothing from the other party, . . . is subject only to an action of 

 

5

 The Complaint alleges that Defendants “made untrue statements of material fact, 

or omitted to disclose material facts, which, in light of the circumstances under which they occurred, were materially misleading, and Defendants further employed a device, scheme or artifice to defraud Plaintiffs in connection with said transactions, or otherwise 

engaged in a course or practice which operated as a fraud and deceit upon Plaintiffs within the meaning of A.R.S. § 44-1991.” (Doc. 54 ¶ 41.) 

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tort,” not an action for rescission. Restatement (Second) of Agency § 348 (1958). Weiss 

purchased the 250,000 shares of Alchemix stock from Medici, Horton’s personal holding 

company and paid $250,000 to that entity. The contract was between Weiss and Medici. 

Thus, if Weiss succeeds on his claim, Medici is the party liable for restoring the 

consideration Weiss paid for Alchemix stock. 

 B. Loss Causation 

 Arizona’s loss causation requirement is contained in Section 44–2082(E). That 

Section “requires any plaintiff who brings an action to ‘recover damages’ for a violation 

of Section 44-1991(A)(1) or (A)(3) to prove ‘that the act or omission of the defendant 

alleged to violate the section under which the private action is brought caused the loss.’” 

Grand, 214 Ariz. at 27. Section 44–2082(E), however, “does not apply to a rescission 

claim.” Id. at 24. “If tender is possible, proof of proximate cause is not required for 

traditional rescission relief.” Id. at 24, 28. Id. 

 Further, Weiss has not proven a claim under subsections (A)(1) or (A)(3) to which 

the loss causation requirement attaches.6

 He has proven a claim under subsection (A)(2) 

insofar as the jury found that Horton made a material omission to Weiss regarding 

Western’s investment. That subsection does not require a plaintiff to show loss causation. 

Grand, 214 Ariz. at 25. 

 Although Weiss does not have to prove loss causation under subsection (A)(2), 

Defendants retain a “loss causation affirmative defense provided in § 44-1991(B).” 

Grand, 214 Ariz. at 24. The affirmative defense is stated as follows: 

 

6

 “The subsections of § 44–1991(A) address different violations, and it is not 

unreasonable for the legislature to require different proof for each.” Id. at 26. Liability under subsections (A)(1) or (A)(3) must be premised on more than just an omission of material fact. See Red River Res., Inc. v. Mariner Sys., Inc., CV 11-02589-PHX-FJM, 

2012 WL 2507517, *10 (D. Ariz. June 29, 2012) (“To permit liability under § 44– 1991(A)(1) or (3) solely on the basis of misstatements and omissions would conflate the 

three subsections.”). “Manipulative conduct must be distinct from omissions and 

misrepresentations under state law as well in order to give meaning to every provision of § 44–1991(A).” Id. (citing Grand v. Nacchio, 225 Ariz. 171, 175–76, 236 P.3d 398, 402–

03 (2010) (“We ordinarily do not construe statutes so as to render portions of them superfluous.”)). Weiss did not prove that Defendants employed a scheme to defraud or 

engaged in a transaction or course of business which would operate as a fraud. 

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B. In a private action brought pursuant to subsection A, paragraph 2 of this 

section or § 44-1992, if the person who offered or sold the security proves 

that any portion or all of the amount recoverable under subsection A, 

paragraph 2 of this section or § 44-1992 represents an amount other than 

the depreciation in value of the subject security resulting from the part of 

the prospectus or oral communication, with respect to which the liability of 

the person is asserted, not being true or omitting to state a material fact 

required to be stated or necessary to make the statement not misleading, 

then the amount shall not be recoverable. 

A.R.S. § 44-1991(B) (emphasis added). In other words, if a defendant proves that a 

plaintiff’s stock did not decline in value as a result of the defendant’s omission, then the 

plaintiff is not entitled to rescission. 

 Arizona courts have not addressed the issue of whether the affirmative defense 

applies to claims for rescission based on subsection (A)(2). Unlike the loss causation 

requirement in Section 44–2082(E) which language limits it to claims for damages, the 

affirmative defense in Section 44-1991(B) refers to “the amount recoverable” which 

suggests that it is not so limited. In Grand, the court referred to that difference in 

statutory language between “damages” and “the amount recoverable” to determine that 

Section 44–2082(E) applied only to claims for damages. See 214 Ariz. at 24 (“This 

difference in language shows the legislature’s intent to distinguish between a claim for 

damages and a claim for rescission.”). Here, the “amount recoverable” is the 

consideration Weiss paid for Alchemix stock. Although it is possible Arizona courts 

would find an affirmative defense unavailable for a rescission claim “if the defendant’s 

intentional fraud can be understood as inducing a transaction that the plaintiff would not 

have entered at any price if he had known the truth,” Id. at 25, the Court assumes without 

holding that an affirmative defense is available in this case. 

 1. Waiver of Affirmative Defense 

 Weiss contends that Defendants have waived their affirmative defense because 

Defendants did not assert it in their Answers, (see Doc. 63, Alchemix and Horton Ans. at 

6–8; Doc. 64, Medici Ans. at 9–10), raise it in the Parties’ Joint Pretrial Order, (see Doc. 

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193 at 6–12), or raise it through the filing of a supplemental Final Pretrial Memorandum 

pursuant to Fed. R. Civ. P. 26(a)(3)(B). The Federal Rules of Civil Procedure control the 

timing of the assertion of defenses and when waiver occurs. Han v. Mobil Oil Corp., 73 

F.3d 872, 877 (9th Cir. 1995) (citations omitted). Rule 8(c) requires affirmative defenses 

to be pleaded in the answer. The Ninth Circuit has held, however, that a defendant’s 

failure to raise an affirmative defense in its answer does not necessarily waive the 

defense. Owens v. Kaiser Foundation Health Plan, Inc., 244 F.3d 708, 713 (9th Cir. 

2001); see Han, 73 F.3d at 877–78. The defense may be raised later if the delay in raising 

it does not prejudice the plaintiff. Owens, 244 F.3d at 713 (allowing an affirmative 

defense for the first time in a motion for judgment on the pleadings); Camarillo v. 

McCarthy, 998 F.2d 638, 639 (9th Cir. 1993) (allowing an affirmative defense for the 

first time in a motion for summary judgment). That is because “[t]he purpose of Rule 8(c) 

is simply to guarantee that the opposing party has notice of any additional issue that may 

be raised at trial so that he or she is prepared to properly litigate it.” Hassan v. U.S. Postal 

Serv., 842 F.2d 260, 263 (11th Cir. 1988) (citing Blonder-Tongue Labs., Inc. v. Univ. of 

Illinois Found., 402 U.S. 313, 350 (1971)); see In re Sterten, 546 F.3d 278, 285 (3d Cir. 

2008). 

 Defendants first raised the Section 44-1991(B) affirmative defense in their trial 

brief filed on the day of the bench trial. (Doc. 267 at 4.) But Defendants did not waive 

their defense. There was no unfair surprise to Weiss as a consequence of Defendants’ 

failure to plead specifically this defense. Weiss already had the burden to prove loss 

causation at trial to establish that he was entitled to damages under his federal securities 

fraud claim. Similarly, Defendants had to establish a lack of loss causation to prove their 

affirmative defense against Weiss’s state securities fraud claim. See § 44-1991(B); see 

also Sterten, 546 F.3d at 285 (holding that defendant did not waive its defense because 

the analysis involved in proving plaintiff’s claim and defendant’s defense were 

substantially similar). Weiss argued that his Alchemix stock never recovered from the 

impact of Alchemix losing the Western investment and put on evidence to prove that his 

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stock declined in value. Defendants proffered evidence that the stock was worth more 

than $1.00 per share for a period of years after Weiss learned of Horton’s omission. It 

was not unexpected to Weiss for Defendants to do so. The Court does not find any 

prejudice from allowing Defendants to argue their affirmative defense. 

 2. Value of Alchemix Stock After Horton’s Omission 

 At trial, the jury found that Horton had made a material omission to Weiss 

regarding Western’s investment. Therefore, Defendants have the burden to show that 

Weiss’s Alchemix stock did not depreciate in value below $1.00 per share as a result of 

the subject of the omission: Western’s decision not to exercise its options. See A.R.S. § 

44-1991(B). 

 Defendants have not carried their burden. Defendants proffered sales of stock 

several years after Horton’s omission to show that the value of Alchemix stock was 

greater than $1.00 per share.7

 But these isolated sales took place several years after 

Horton’s omission. Further, the stock sales to individuals were based on Horton’s 

personal relationships and the third sale to Diversified was in the context of other 

agreements through which Alchemix remitted to Diversified much of the funds Alchemix 

received. They do not rebut Horton’s statement in September 2003 that at the time, the 

stock did not have value. Although that statement was not sufficient for Weiss to prove 

loss causation, it is relevant to Defendants’ affirmative defense. 

 

7

 Horton testified about three sales of stock that he made to private individuals and an entity between 2006 and 2008 at $2.00 per share. In the fall of 2006, Horton sold 

Alchemix stock to Mary Menk, a wealthy shareholder whom Horton had known for a 

long time. Menk contacted Horton to purchase shares for herself and her employee, Patricia Townsend. In the fall of 2008, Horton sold Alchemix stock to a senior citizen 

and supporter of Horton, Paul Schilling. Due to the decline in the gas market in 2008, Schilling wanted to help Horton by investing in Alchemix to get it through tough times. Further, as part of a partnership, Diversified agreed to purchase $5 million worth of shares in Alchemix at $2.00 per share in April 2006. The Diversified purchase was completed in the context of terms and conditions, and other agreements including Alchemix’s purchase of Diversified stock, a consulting agreement through which Alchemix paid Diversified $1.5 million in fees, and a licensing arrangement for Alchemix’s Hydromax technology without royalty fees. 

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 Defendants did not provide a valuation of Alchemix stock as of July 2002 or 

shortly thereafter to show that Weiss’s stock did not decline in value as a result of 

Horton’s omission. Because Defendants did not prove their affirmative defense, Weiss is 

entitled to rescission of his stock purchase under Section 44–1991(A)(2). 

 C. Tender 

“[T]ender of the securities purchased” is a required element of Weiss’s ASA claim 

for rescission. See A.R.S. § 44-2001(B). As mentioned above, Weiss has not yet tendered 

his shares of Alchemix stock to Medici. In light of Plaintiffs’ renunciation of Strategic’s 

claims after remand, tender is possible even acknowledging the Ninth Circuit’s apparent 

acceptance of the Plaintiffs’ characterization of the two transactions as being intertwined. 

Because Weiss seeks only rescission in his claim, tender is possible, and tender is a 

requirement to rescission, and because Weiss has not yet tendered his stock, he has not 

established his claim. In fairness, however, the Ninth Circuit’s opinion may have led 

Weiss to think he was obliged to prove and recover only rescissionary damages, even 

after Strategic confirmed the dismissal of its claims and tender became possible for 

Weiss. The Court proceeded on that assumption in granting Weiss’s request for a 

damages hearing. 

 After considering the equities, the Court does not see the fairness in permitting 

Weiss to both retain the stock and recover damages that would virtually be the value that 

he paid for the stock. On the other hand, the Court sees no fairness in denying Weiss’s 

claims in light of the confusion over the requirement to tender. In light of the multiple 

permutations that Weiss made of his own case up to this stage of the litigation, the Court 

will provide Weiss thirty days to tender his stock. If he does, he will have established his 

claim for the reasons detailed above, and be entitled to judgment for the restoration of the 

$250,000 consideration he paid for the stock. If he does not, the Defendants will prevail 

on all of Plaintiff’s claims. 

D. Prejudgment Interest 

 The ASA provides for the recovery of “consideration paid for the securities, with 

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interest” if a “contract for sale of any securities to any purchaser” is found to be in 

violation of Section 44-1991. A.R.S. § 44–2001(A). “The general rule in Arizona is that 

a liquidated claim entitles its holder to prejudgment interest.” Trimble v. Am. Sav. Life 

Ins. Co., 152 Ariz. 548, 557, 733 P.2d 1131, 1140 (Ct. App. 1986). “[I]f one accepts the 

evidence and can calculate exactly the amount of damages without relying on the opinion 

or discretion of a judge or jury, the claim is liquidated.” Scottsdale Ins. Co. v. Cendejas, 

220 Ariz. 281, 288, 205 P.3d 1128, 1135 (Ct. App. 2009) (citing Canal Ins. Co. v. Pizer,

183 Ariz. 162, 164, 901 P.2d 1192, 1194 (Ct. App.1995)). Further, a claim is liquidated if 

“the amount of damages can be computed with exactness.” Interstate Markings, Inc. v. 

Mingus Constructors, Inc., 941 F.2d 1010, 1014 (9th Cir. 1991) (applying Arizona law). 

A good faith dispute over liability will not defeat a recovery of prejudgment interest on a 

liquidated claim. Id. 

 Weiss’s claim for rescission may be liquidated once he tenders his stock, which is 

a prerequisite to rescission. A.R.S. § 44-2001(B). As of yet, Weiss has not tendered his 

stock to Defendants. Because of the lack of tender, no interest is accruing on that amount. 

Such a result is not inequitable in this case because Weiss did not bring this claim until 

2007, two years after he discovered in 2005 that Horton had made an omission in 2002. 

When he did bring the claim he erroneously characterized the two separate transactions 

underlying his claims as a “debt-equity swap.” That mischaracterization made it seem to 

the Ninth Circuit as though a rescission remedy was not possible. It was only after 

remand that Weiss acknowledged Strategic did not have a claim for damages or 

rescission and clarified that a rescission remedy was practical as to Weiss, making tender 

a possibility for the first time. Yet, insofar as the Court is aware he has never tendered the 

stock to Medici. In light of the relief Weiss sought, the lack of any right to rescind the 

repayment of the Strategic Note, and the lack of tender, it is not appropriate to award 

prejudgment interest to Weiss, and the Court declines to do so. 

 E. Punitive Damages 

 Arizona law permits an award of punitive damages “to punish the wrongdoer and 

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to deter others from emulating his conduct.” Linthicum v. Nationwide Life Ins. Co., 150 

Ariz. 326, 330, 723 P.2d 675, 679 (1986) (internal citations omitted). Punitive damages 

are allowed in equity in order “to facilitate judicial administration, to deter misconduct, 

and to completely serve justice” which approach “comports with the Arizona policy of 

providing complete relief to injured parties.”8

 Medasys Acquisition Corp. v. SDMS, P.C., 

203 Ariz. 420, 424, 55 P.3d 763, 767 (2002) (internal citations omitted). 

 Defendants contend that punitive damages are not an available remedy under the 

ASA. The statute states that the purchaser of securities “may bring an action . . . to 

recover the consideration paid for the securities, with interest, taxable court costs and 

reasonable attorney fees, less the amount of any income received by dividend or 

otherwise from ownership of the securities . . . .” § 44-2001(A). Nevertheless, § 44-2005 

states that “[n]othing in this article shall limit any statutory or common law right of any 

person in any court for any act involved in the sale of securities.” Punitive damages are a 

common law remedy in Arizona. See Wyatt v. Wehmueller, 167 Ariz. 281, 285, 806 P.2d 

870, 874 (1991). Further, Arizona courts have held that “if a party has pursued a course 

of conduct knowing that it created a substantial risk of significant harm to others and its 

conduct was guided by evil motives, punitive damages should be available to punish such 

behavior.” Medasys Acquisition, 203 Ariz. at 424 (internal quotation marks omitted) 

(collecting Arizona cases). Consequently, punitive damages are an available remedy for 

Weiss’s ASA claim. 

 Defendants further assert that the Court previously denied Weiss’s claim for 

 

8

 The Arizona Supreme Court sitting en banc has held that punitive damages are awardable on an equitable claim if a plaintiff proves “the alteration of one’s position to his prejudice.” Medasys Acquisition, 203 Ariz. at 423 (internal alterations and citations 

omitted). Because Weiss relied on Horton’s misrepresentation and/or omission and 

altered his position by investing in Alchemix, the remedy of punitive damages is available to him. Nevertheless, even in the context of an equitable claim, the critical 

inquiry is “whether such an award [of punitive damages] is appropriate to penalize a party for outwardly aggravated, outrageous, malicious, or fraudulent conduct that is 

coupled with an evil mind.” Id. at 424 (internal quotation marks and citations omitted). 

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punitive damages and the Ninth Circuit did not disturb that decision upon appeal. The 

Ninth Circuit did not address the availability of punitive damages when remanding 

Weiss’s securities fraud claims but because it reversed as to those claims, the Court 

assumes that it sub silentio reversed the denial of punitive damages. See Strategic 

Diversity, 666 F.3d at 1211. Thus, punitive damages are still available as a common law 

remedy in this case. 

 Punitive damages are awarded only “in the most egregious of cases, where a 

plaintiff proves by clear and convincing evidence that the defendant engaged in 

reprehensible conduct and acted with an evil mind.” Medasys Acquisition, 203 Ariz. at 

424 (internal quotation marks and alterations omitted) (citing Linthicum v. Nationwide 

Life Ins. Co., 150 Ariz. 326, 331–32, 723 P.2d 675, 680–81 (1986)). Clear and 

convincing evidence means “that which may persuade that the truth of the contention is 

highly probable.” Thompson v. Better-Bilt Aluminum Prods. Co., 171 Ariz. 550, 557, 832 

P.2d 203, 210 (1992) (internal quotation marks and citations omitted). “While the 

necessary ‘evil mind’ may be inferred, it is still this ‘evil mind’ in addition to outwardly 

aggravated, outrageous, malicious, or fraudulent conduct which is required for punitive 

damages.” Linthicum, 150 Ariz. at 331. 

 The court empaneled the jurors to answer factual predicates necessary to the 

Court’s consideration of equitable relief. At trial, the Parties did not request the jury to 

determine, by special interrogatory, whether Horton acted with an evil mind in making an 

omission to Weiss. (See Docs. 191 (Pl.’s Proposed Verdict Form), 194 (D.’s Proposed 

Verdict Form).) At the hearing before the bench trial on damages, Weiss’s counsel 

acknowledged that the issue of punitive damages was for the Court to resolve. 

(September 21, 2012, Hearing Tr. at 6:25–7:3.) Therefore, the Court will determine 

whether punitive damages are warranted based on the facts ascertained at trial. 

 There is insufficient evidence that Horton had a malicious intent to secure Weiss’s 

investment and then deny him a return. Even assuming that Horton knew prior to the time 

that Weiss purchased the stock that Western had decided not to exercise its options and 

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that he should have disclosed that information to Weiss, there is no evidence that he 

withheld that information with an evil hand. Western made the $3 million dollar 

investment on June 18, 2002; only three weeks prior to Weiss’s investment. The 

Memorandum contained the option but not the obligation for Western to purchase up to 

an additional $33 million of stock over time, and was distributed to Weiss and all 

members of the Board on the same date of June 18. 

 Weiss does not challenge Horton’s testimony that Horton learned as early as three 

to four weeks after June 18 that Western would not exercise its options. It is thus 

possible, sufficient to support the jury’s verdict, that Horton could have been aware 

Western would not exercise its options before Weiss purchased his stock. The Court 

assumes that the jury concluded either that Horton had represented to Weiss that Western 

would exercise its options or that he should have informed Weiss about Western’s 

decision not to do so. Even still, Weiss testified that he received a copy of the 

Memorandum from Horton on June 18 that specified that the additional investment was 

merely an option held by Western. Further, Weiss does not question Horton’s testimony 

that he informed members of the Board about Western’s decision shortly after it was 

made and that Weiss was not a member of the Board at this time, but simply one 

shareholder among five hundred others. 

 Weiss points to Horton’s other conduct with Alchemix investors to show that 

Horton engaged in egregious conduct warranting punitive damages. For example, Horton 

did not inform Alchemix investors that some of his earlier ventures had not succeeded 

financially and had filed for bankruptcy, a fact he did not disclose on his annual reports to 

the Arizona Corporation Commission. (See Doc. 224, Jury Trial Tr. at 147:5–150:16.) 

Weiss also asserts that Horton misled the Court at trial when Horton contended that the 

so-called “China deal” was a legitimate current project contributing value to Alchemix 

stock. Nevertheless, such conduct, even if less than forthcoming, is not relevant to 

whether Horton had an “evil mind” at the time he made the omission to Weiss. 

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an “evil mind” when omitting to inform Weiss about Western’s decision not to exercise 

its options. See Dawson v. Withycombe, 216 Ariz. 84, 112, 163 P.3d 1034, 1062 (Ct. 

App. 2007) (finding that although the defendant made fraudulent statements to the 

plaintiff there was “little if any indication of any ‘evil motive’ on [the defendant’s] part 

when he made the misrepresentation.”). To the extent that Weiss argues that Defendants’ 

fraudulent conduct by itself may justify an award of punitive damages, that argument 

“extends this concept beyond the basis for punitive damages.” Id. As the Arizona 

Supreme Court has stated, “punitive damages are not recoverable in every fraud case, 

even though fraud is an intentional tort.” Rawlings v. Apodaca, 151 Ariz. 149, 162, 726 

P.2d 565, 578 (1986). Punitive damages are not warranted in this case. 

CONCLUSION 

Because Weiss did not show that Horton’s omission caused Weiss’s loss in 

relation to his Alchemix stock, he failed to prove his federal securities fraud claim under 

10b-5. Upon tender of the Alchemix stock to Medici, however, Weiss may prevail on his 

state securities fraud claim under the ASA because loss causation is an affirmative 

defense pursuant to Section 44-1991(A)(2) and Defendants did not prove that Weiss did 

not suffer economic loss as a result of Horton’s omission. Plaintiffs will be granted 

rescission of the stock purchase upon tender. If Weiss does not accomplish tender within 

thirty days, he will retain his stock and Defendants will prevail on all of his claims. Even 

if Weiss prevails, however, he is denied prejudgment interest and punitive damages. 

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IT IS THEREFORE ORDERED that Plaintiff Weiss shall have thirty (30) days

in which to tender his 250,000 shares of Alchemix stock to Medici and apprise this Court 

that he has done so. If within fourteen (14) days after the notice has been filed, Medici 

has not challenged the existence or adequacy of Weiss’s tender, the Court shall enter 

judgment against Medici. Should this Court not receive notice of Weiss’s tender within 

thirty (30) days of the date of this Order, then this suit will be dismissed with prejudice, 

with Weiss possessing his Alchemix stock, but no judgment against the Defendants. 

 Dated this 28th day of August, 2013. 

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