IN THE UNITED STATES DISTRICT COURT

 FOR THE EASTERN DISTRICT OF PENNSYLVANIA

BRUCE W. MAJER, et al. : CIVIL ACTION

:

v. :

:

SONEX RESEARCH, INC., et al. : NO. 05-606

MEMORANDUM AND ORDER

McLaughlin, J. January 31, 2008

This case involves the claims of Bruce W. Majer, Allen

W. Fortna, and the Hermitage Partnership (“Hermitage”), against

Sonex Research, Inc. (“Sonex”) and four affiliated individuals: 

Roger D. Posey, Jim Z.I. Williams, George E. Ponticas, and Andrew

A. Pouring. The plaintiffs invested in Sonex through a private

placement in 2004. They allege that the defendants

misrepresented Sonex’s financial and personnel situation while

soliciting the plaintiff’s investment. The plaintiffs claim that

their investments are now worthless, and have alleged that the

defendants’ actions constitute fraud in violation of federal

securities law, Pennsylvania securities law, and common law. In

addition, the plaintiffs make state law claims of negligent

misrepresentation, breach of contract, and rescission of their

subscription agreements.

On July 17, 2006, the Court granted the individual

defendants’ motion to dismiss for failure to state a claim upon

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In considering the defendants’ motion to dismiss, the 1

Court must accept the allegations in the amended complaint as

true and draw all reasonable inferences in favor of the

plaintiffs. Miller Yacht Sales, Inc. v. Smith, 384 F.3d 93, 97

(3d Cir. 2004); In re Rockefeller Ctr. Props., Inc., Sec. Litig.,

311 F.3d 198, 215 (3d Cir. 2002).

2

which relief can be granted. The Court concluded that the

plaintiffs’ allegation of misrepresentation and omissions failed

to state a claim under the federal and state securities laws and

under the common law. Majer v. Sonex Research, Inc., No. 05-606,

2006 WL 2038604, at *8, *13 (E.D. Pa. July 19, 2006). 

The plaintiffs have amended their complaint and added

detail to their allegations. These additional details do not add

enough to state a claim, and the Court will dismiss with

prejudice the amended complaint for failure to state a claim

under which relief can be granted. 

I. Facts 

The plaintiffs allege the following facts in the

amended complaint. 

1

Sonex, founded in 1980, is an engineering research and

development firm that holds patented technology for in-cylinder

control of ignition and combustion in various kinds of engines. 

The company went public in the mid-1980s, but remained a small

operation, with only one office/warehouse in Annapolis, Maryland

and a small staff. By the late 1980s, Sonex’s focus had narrowed

Case 2:05-cv-00606-MAM Document 59 Filed 02/01/08 Page 2 of 47
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into studying the effects of changes in the chemical and fuel

disbursement characteristics within the combustion chamber. 

Am. Compl. ¶¶ 21-22, 24, 40.

Defendant Andrew Pouring, a former aerospace

engineering professor, co-founded Sonex and at the time of the

filing of the amended complaint served as its Chairman, Chief

Executive Officer, and President. Defendant George Ponticas is a

Certified Public Accountant. Sonex hired him as its Comptroller

and Assistant Secretary in 1987, and he because the Chief

Financial Officer and Secretary in 1991. Id. ¶¶ 22-23, 25.

In 2003, Pouring and Ponticas hired Global Equity

Consultants (“Global”), led by Jim Rose, to help reposition

Sonex’s business from a research and development firm to a fullservice firm that brought the technologies it developed to

market. Id. ¶¶ 26, 29. 

On Global’s recommendation, Sonex hired Roger Posey as

President in 2004. Rose had known Posey in the context of a

sound-dampening project for one of Posey’s prior employers. 

According to Posey’s CV, he had experience in industrial

operations and with the commercialization of innovative

technologies. He had expertise in noise and vibration control,

an area that Sonex was eager to pursue. Id. ¶¶ 30-31.

Sonex knew that Posey had recently worked as a sales

representative for BRD Noise and Vibration Control (“BRD”). 

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Despite the overlap in BRD’s and Sonex’s interest in noise

control products, Sonex did not ask Posey to make any

representations about his prior employment in his employment

agreement. The law firm of Winderweedle, Haimes, Ward & Woodman,

P.A., of Orlando, Florida (“the Winderweedle firm”) represented

Posey during his employment negotiations with Sonex. Posey’s

employment agreement with Sonex contained a covenant not to

compete with Sonex during his employment or for a period of time

after the termination of his employment. Id. ¶¶ 34-35, 37.

The press release announcing Posey’s hiring stated:

We are delighted to have Roger join Sonex as our President. 

Roger brings a wealth of management and industry turnaround 

experience to Sonex and with his efforts we look forward to 

profitable growth as we continue to provide products to the 

marketplace. At our 2003 Shareholder Meeting in September, 

we announced the Company was focusing on business repositioning, strengthening its internal capabilities, and 

planning for growth. Roger will play a major role in the 

continuing implementation of this strategy.

Id. ¶¶ 38.

Sonex experienced cashflow difficulties in its

transition from a research and development firm to a

commercialization firm. Pouring, Ponticas, and Posey all agreed

to defer portions of their salary and looked for ways to raise

short-term and long-term capital. They were motivated by their

desire to recoup their deferred income, protect the value of

their stock holdings, and keep Sonex afloat. Id. ¶¶ 42-43.

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Posey sought out a long-time friend and colleague to

help in the effort to raise cash: Jim Z.I. Williams, president

of E.I. Williams Steel Division (“EIW”) of Toronto, Canada, a

manufacturer of noise control products. Williams offered to try

to arrange a $40 million capital investment by a group of

Canadian investors. Williams said that he had a personal

relationship with Fred Hunter, a prominent Toronto businessman

who Williams thought would be interested in Sonex. Williams

cautioned, though, that any financing would not be available

until, at the earliest, the summer of 2004, which was four months

away. Id. ¶¶ 45-47.

In February of 2004, Pouring, Ponticas, Posey, and

Williams decided to pursue a private placement of equity marketed

to individuals. The private placement allowed Sonex to raise

cash while avoiding SEC and state regulatory requirements

associated with public offerings. They wrote a plan called

“Business Content 2004" (hereafter “the Business Plan”) to be

used as a solicitation piece for the private placement. Sonex

also hired the Winderweedle firm, which had represented Posey in

his employment negotiations with Sonex, to prepare documents and

to counsel Sonex on the private placement. Id. ¶¶ 50-53.

The defendants developed a set of talking points

emphasizing two themes to appeal to investors: the first

focused on new noise and vibration control technologies,

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including a cutting-edge process called active noise concealment. 

The second message emphasized Sonex's long-term prospects. The

defendants agreed to overstate and exaggerate the prospect of the

long-term financing Williams was seeking; they knew that the

financing was speculative, but that the best way to entice the

private placement investors was to assure them that it was

imminent. Id. ¶¶ 53-54.

The defendants solicited potential investors by telling

them that: 1) Sonex was poised to become a leader in active

noise concealment, and that Posey would be able to implement the

Business Plan because of his expertise in active noise

concealment and his experience with firms developing innovative

technologies; 2) to achieve that, Canadian investors led by Fred

Hunter had committed up to $43 million in loans that were

expected to close during the summer of 2004; 3) Sonex sought a

short-term capital infusion as a bridge until the financing

closed, and was looking to raise a few hundred thousand dollars

through a private placement; 4) the company had entered into a

strategic alliance with EIW to serve as exclusive United States

distributor of EIW's noise control products, which had already

led to a purchase order of $200,000 and other qualified sales

leads; 5) once the financing arrived, Sonex would implement the

business plan and all shareholders would reap the benefits. Id.

¶¶ 55, 59.

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Despite what the defendants told potential investors,

Sonex never had a strategic alliance with EIW, a set of qualified

sales leads, or a $200,000 purchase order. Williams said he

would consider the arrangement, but never committed to it. The

$200,000 purchase order was for a referral Posey had made to EIW;

the order was with EIW directly, not with Sonex. Posey and

Williams discussed treating this as Sonex's order, should the

exclusive distributor arrangement ever materialize. Williams

admitted that once he learned, in March of 2004, that Posey had a

restrictive covenant with BRD and had refused to furnish it to

Sonex, he did not further consider the strategic alliance,

because he believed that Posey's covenant would prevent Sonex

from entering a distribution agreement for EIW's products. Id.

¶¶ 62-64.

Around February of 2004, Posey approached Bruce Majer,

a former colleague living in Pennsylvania, to solicit his

investment. Majer spoke to Posey, Rose, Pouring, Ponticas, and

Williams over the next several months, and received the business

plan. Id. ¶¶ 67-68. 

Majer was concerned that Sonex had hired Global and the

Winderweedle firm without sufficient cash flow to compensate

them. Posey told Majer in several conversations in the spring of

2004 that both firms had agreed to accept stock in lieu of cash

for all services. Sonex's Form 10-KSB for fiscal year 2003,

Case 2:05-cv-00606-MAM Document 59 Filed 02/01/08 Page 7 of 47
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published around April 2004, stated that Sonex had agreed to pay

1,000,000 shares to an unidentified law firm, and that Sonex had

agreed to pay the firm a cash retainer by June 30, 2004. Posey

assured Majer that the Winderweedle firm had agreed to accept

only stock as payment for its services going forward. Majer did

not question this representation. Id. ¶ 69-70.

Majer expressed concern to others at Sonex and received

reassurance. In the spring of 2004 Williams told Majer that the

Canadian financing would come through and that it was only a

matter of time. Majer asked Posey whether he had a restrictive

covenant from his former employer that might affect his work at

Sonex. Posey acknowledged that he had such a covenant, but said

that it was not implicated by his Sonex employment. In addition,

Posey told Majer that the covenant had been reviewed by his

attorney, Lipson, and was inapplicable. Id. ¶¶ 72-73. 

Contrary to Posey's representation, Lipson had not

reviewed Posey's covenant with BRD. Lipson, concerned about the

status of Posey's restrictive covenant after reviewing Sonex's

business plan, asked Posey for a copy of his employment agreement

with BRD, which Posey refused to provide. Lipson then advised

Sonex that it should not go through with the private placement

and accept money from investors. Sonex disregarded this advice

and proceeded with the private placement. Id. ¶ 74-78.

Case 2:05-cv-00606-MAM Document 59 Filed 02/01/08 Page 8 of 47
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On February 23, 2004, Majer traveled to Sonex's office

in Annapolis to tour the facility and meet with Pouring,

Ponticas, Posey, and Rose. They discussed the business plan and

the private placement, reviewing the talking points: Posey's

qualifications; the imminent Canadian financing; the strategic

alliance with EIW and the $200,000 purchase order; and the

Winderweedle firm's acceptance of stock in lieu of cash. Based

on these representations, Majer was impressed with Sonex. He

told friends, family members, and colleagues that he was

considering an investment, and referred those who expressed

interest to the defendants. Id. ¶ 79-82.

The defendants arranged a series of investor meetings

at a hotel conference center in Plymouth Meeting, Pennsylvania,

on February 27, 2004, March 26, 2004, and in early April, 2004. 

Posey and Rose led the meetings. They described the company,

explained the investment terms, presented a Power Point of the

Business Plan, and left a copy of the Business Plan with the

prospective investors. They discussed the major talking points:

Posey's ability to implement the business plan and his experience

with active noise concealment technology; the strategic alliance

with EIW; the imminence of the Canadian financing; and the

stock-payment arrangement with the Winderweedle firm. Majer

attended all three meetings; Fortna attended the first two

Case 2:05-cv-00606-MAM Document 59 Filed 02/01/08 Page 9 of 47
The plaintiffs do not attach copies of the subscription 2

agreements to their amended complaint. Sonex, Pouring, and

Ponticas attached copies to their original motion to dismiss. 

The United States Court of Appeals for the Third Circuit has held

that although “[a]s a general matter, a district court ruling on

a motion to dismiss may not consider matters extraneous to the

pleadings, . . . an exception to the general rule is that a

document integral to or explicitly relied upon in the complaint

may be considered without converting the motion to dismiss into

one for summary judgment.” In re Burlington Coat Factory Sec.

Litig., 114 F.3d 1410, 1426 (3d Cir. 1997) (internal quotations

omitted). This approach was recently confirmed by the United

States Supreme Court, which held that courts analyzing motions to

dismiss claims under the PSLRA must examine the complaint in its

entirety, as well as documents incorporated into the complaint by

reference or matters of which a court may take judicial notice. 

Tellabs v. Makor Issues & Rts., Ltd., 127 S. Ct. 2499, 2509

(2007). 

The subscription agreements form the basis for the

plaintiffs’ claims of rescission and breach of contract. In

addition, they are intimately involved with the plaintiffs’ other

claims. For example, in order to succeed with their claims of

material omissions, the plaintiffs need to show the absence of

statements from the materials with which they concede they were

provided. The Court will consider the subscription agreements. 

10

meetings; Hermitage representatives came to all three meetings. 

Id. ¶¶ 83-86. 

Majer purchased 1.2 units of private placement equity

(240,000 shares of common stock and a warrant to purchase an

additional 240,000 shares). Around April 21, 2004, he wired

$60,000 to Sonex and delivered a completed and signed

subscription agreement and a confidential purchaser

questionnaire. Id. ¶ 88. 2

Allen Fortna bought 1.4 units (280,000 shares of common

stock and a warrant to purchase 280,000 more). Around April 28,

2004, he delivered a check for $70,000 to Sonex, along with a

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completed and signed subscription agreement and a confidential

purchase questionnaire. Id. ¶ 89. 

William P. McKinney, George McClennen, Donald E. Wynne, Alan

S. Lurty, Jay Feinschil, and Jeffrey J. Craighead formed

Hermitage, a Pennsylvania partnership, to make their investment. 

Through it, they bought 0.9 units (180,000 shares of common stock

and a warrant to purchase an additional 180,000). Hermitage

delivered a check for $45,000 to Sonex in July 2004, along with a

completed and signed subscription agreement and a confidential

purchase questionnaire. Id. ¶ 90.

Majer and Fortna's subscription agreements are dated

April 21, 2004. Hermitage's subscription agreement is dated July

2, 2004. In those agreements, the plaintiffs represented and

warranted that they were "capable of evaluating the merits and

risks of an investment in the Units," that they had "read and

understood the Company Information [defined in the agreements to

include Sonex's Annual Report on Form 10-KSB for the year ending

December 31, 2003]," that in connection with their review, they

had "consulted with such independent legal counsel, accountants

and other advisers considered appropriate to assist [them] in

evaluating [their] proposed investment in the Company," and that

they had: 

taken full cognizance of and underst[ood]:

A) the Company's Annual Report on Form 10-KSB for the year

ended December 31, 2003; . . .

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Hereafter Defs’. Br. 3

The Court will consider the 2003 Form 10-KSBs for two 4

reasons. First, these forms are essentially incorporated into

the subscription agreements, which the Court has already

explained it will consider. Second, when considering a motion to

dismiss in a securities action, a court may “take judicial notice

of properly authenticated public disclosure documents filed with

the SEC.” Oran v. Stafford, 226 F.3d 275, 289 (3d Cir. 2000). 

The court in Oran took judicial notice of such documents even

though they had not been included in the complaint. 

12

C) the Company's business plan entitled "Business Content

2004"; 

D) the form of the warrant;

E) this Subscription Agreement;

F) that there are substantial risk factors to be considered

in connection with an investment in the Units, including

without limitation those set forth in the Company

Information; 

G) that the Units constitute a speculative investment and

involve a high degree of risk, including the loss of the

subscriber's entire investment in the Company; and 

H) that there are substantial restrictions of the

transferability of the shares of Common Stock and the

Warrants . . . accordingly, the undersigned may be required

to hold the shares of Common Stock and the Warrants

comprising the Units indefinitely and it may not be possible

for an investor to liquidate an investment in the Company. 

Defs’. Mot. to Dismiss Complaint Exs. 2-A, 2-B, and 2-C at 5, 10.3

The 2003 Form 10-KSB that the plaintiffs warranted that

they had "taken full cognizance of and understood" in the

subscription agreements included the following disclosures: 

4

Since its inception in 1980, the company has generated

cumulative net losses of approximately $23 million and

anticipates continuing to incur operating losses for the

foreseeable future. . . . 

Operating funds have been raised primarily through the sale 

of equity securities. . . . 

 

Case 2:05-cv-00606-MAM Document 59 Filed 02/01/08 Page 12 of 47
This form was not attached to the complaint, but, like 5

the Form 10-KSB, forms the basis for many of the plaintiffs’

claims. The defendants attached it to their original motion to

dismiss as Exhibit 4, and the Court will consider it.

13

The continued deferral of portions of current wages by the

Company's officers cannot be expected to continue

indefinitely, and the Company will be required to pay

amounts outstanding as soon as cash flow permits. . . . 

 

[A]s of January 1, 2004, the Company's chief financial

officer is no longer deferring any portion of his current

salary. . . . 

 

[Sonex has a] history of operating losses. . . . 

 

[Sonex's] prospects beyond [approximately June 30, 2004] are

dependent upon its ability to enter into significant funded

contracts . . . or secure a major capital infusion. . . . 

 

The[] uncertainties [of] . . . the Company's ability to

generate sufficient revenue and ultimately achieve

profitable operations . . . raise substantial doubt about

the Company's ability to continue as a going concern. . . . 

 

The agreement with new legal counsel also requires the

Company to remit a cash retainer of $50,000 by June 30,

2004. 

Id. Ex. 1 at 15, 16, 35-36, 41.

With $175,000 of the private placement money, Sonex

paid operating expenses, including the salaries of the officers. 

During the weeks following the investments, the investors'

confidence waned. Am. Compl. ¶¶ 91. 

Sonex's Form 10-QSB, filed with the SEC in August of

2004, revealed that Sonex had agreed to pay the Winderweedle firm

in cash, and that the firm had sent invoices to Sonex in May 2004

and a default notice for $102,000 in June of 2004. Given the 5

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Winderweedle firm's role in both the private placement and the

Canadian financing, the investors were concerned both with the

short-term financing and the long-term capital investment. Id.

¶¶ 96-98.

The Form 10-QSB explained that Sonex disputed the

Winderweedle firm’s fees and had engaged separate counsel on a

pro bono basis. The form stated that Sonex "believes that the

amounts invoiced by [Winderweedle] are far in excess of what is

reasonable based on the limited services requested by the Company

and the limited work product produced by [Winderweedle]." It

described Sonex's demand for return of the common stock issued to

Winderweedle, and Sonex's reservation of rights against the firm. 

The form concluded: "While the outcome of this dispute is

uncertain and may have an adverse effect on the Company's

financial condition, management believes that the Company has a

defensible position. Accordingly, no liability for any amounts

related to this dispute has been recorded in the accompanying

financial statements as of June 30, 2004." Def’s. Mot. Ex. 4 at

15.

By late in the summer of 2004, the Canadian financing

still had not arrived. When the plaintiffs pressed Williams, he

told them that the financing deal was dead by the time Hermitage

made its investment in Sonex. Ponticas had always been skeptical

about the financing. Posey, Williams, and Rose met with Hunter

Case 2:05-cv-00606-MAM Document 59 Filed 02/01/08 Page 14 of 47
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before the plaintiffs made their investments, and Hunter said he

would consider only an initial investment of $1.5 to $2 million,

not the $43 million promoted to the plaintiffs. In about March

of 2004, Ponticas and Williams disagreed about how to use the

financing proceeds: Ponticas wanted to pay off Sonex's

liabilities, but Williams wanted to use the money for Sonex's new

business ventures. Williams told the other defendants that the

use proposed by Ponticas would "kill the deal." Am. Compl. ¶¶

101-05.

In early April of 2004, the defendants held a

conference call with Fred Hunter, who said that he had been

delayed in considering the financing because of restrictions

imposed by the Patriot Act. After Hunter hung up, Ponticas said

that he thought the Patriot Act was an excuse and that the

financing would not come through. At a later board meeting, in

June of 2004, Williams said that he was not prepared to

facilitate a direct loan from the Canadian investors to Sonex. 

Rather, the loan would be made directly to Williams or to EIW,

which would re-lend the funds to Sonex at a higher interest rate,

and only if Sonex agreed to escrow the loan proceeds, use the

proceeds only for specified purposes acceptable to Williams (not

for paying down Sonex's debts), and to grant Williams a

substantial amount of stock and warrants. Rose and Lipson

objected to those terms, and Lipson pointed out that Williams

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would be breaching his fiduciary duty as a Sonex director if he

took the loan on such personally advantageous terms. Id. ¶¶

106-10.

In July of 2004, after Sonex had received the check

from Hermitage, but before it deposited the check, Rose met with

Ponticas and Pouring and told them that he and Lipson both

believed that the check could not be lawfully deposited and

needed to be returned to Hermitage. This was necessary, Rose

said, because the investors had never been told that: the

financing had been speculative and was now dead; Posey had a

restrictive covenant with BRD and refused to furnish it to Sonex,

which cast doubt on his ability to lead the company; and that

Sonex had a cash obligation to the Winderweedle firm and was now

in default. Sonex ignored Rose’s advice and deposited the check. 

Id. ¶¶ 111-12.

In October of 2004, Sonex announced that Posey was

stepping down as President and CEO. About two weeks later Sonex

announced that Posey was leaving the Board of Directors. The

formal announcements did not include a reason for Posey's

departure, but the plaintiffs learned that there was a conflict

with BRD, Posey's previous employer, about his restrictive

covenant, which prohibited him from competing with BRD in the

area of sound-dampening and noise management. While the

defendants were soliciting the plaintiffs by stressing Posey's

Case 2:05-cv-00606-MAM Document 59 Filed 02/01/08 Page 16 of 47
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qualifications, the defendants knew or should have known that

Posey could not implement the business plan and that if BRD ever

pressed the matter, Posey would be forced to resign. Id. ¶¶

114-16.

If Sonex had been as the defendants represented, the

securities that the plaintiffs purchased would have been well

worth what they had paid. Because Sonex was so far from what the

defendants represented it to be, the plaintiff's securities are

essentially worthless. On December 9, 2004, the plaintiffs

demanded that Sonex return their investments. The plaintiffs

tendered the equity they had purchased in exchange for a refund

of their money. Sonex, through Pouring and Ponticas, denied

their request. Id. ¶¶ 117-19. 

II. The Amended Complaint and the Motions to Dismiss

The amended complaint contains six counts: Count One,

violation of § 10(b) of the Securities Exchange Act of 1934 and

17 C.F.R § 240.10b-5(b), (collectively, “Rule 10b-5"); Count Two,

violation of the Pennsylvania Securities Act (“PSA”); Count

Three, fraudulent misrepresentation; Count Four, negligent

misrepresentation; Count Five, rescission; and Count Six, breach

of contract. 

Sonex, Pouring, and Ponticas have filed a motion to

dismiss the amended complaint, arguing that the amended complaint

Case 2:05-cv-00606-MAM Document 59 Filed 02/01/08 Page 17 of 47
Posey is pro se. He purported to move to dismiss the 6

amended complaint on behalf of both himself and Sonex. Sonex is

represented by separate counsel, and the court will consider

Posey’s motion only as to himself.

18

fails to state a claim upon which relief can be grated. Posey

also filed a motion to dismiss the amended complaint for failure

to state a claim.6

The Court will grant the motions to dismiss for failure

to state a claim. The Court concludes that the allegations of

misrepresentations and omissions fail under the standards for

claims of securities fraud under Rule 10b-5, the PSA, and

Pennsylvania common law. The plaintiffs have not demonstrated

that the defendants had scienter, that the misrepresentations and

omissions were material, or that the misrepresentations and

omissions were the proximate cause of the plaintiffs’ losses. 

The plaintiffs’ allegations of negligent misrepresentation,

breach of contract, and rescission also fail to state a claim. 

The defendants request an order by the Court directing

Sonex to issue share certificates to the plaintiffs for the

shares they purchased. The Court will issue this order.

III. Analysis

A. 10b-5 Claims

Section 10(b) of the Securities Exchange Act of 1934

forbids the use or employment of any deceptive device in

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connection with the purchase or sale of any security. 15 U.S.C.

§ 78j(b) (2000). Rule 10b-5 forbids the making of any “untrue

statement of a material fact” or the omission of any material

fact needed to make the statements not misleading. 17 C.F.R. §

240.10b-5 (2004).

Courts have implied a private damages action from the

statute and the rule, and Congress has imposed statutory

requirements on that private action. The basic elements of the

action are: 1) a material misrepresentation or omission, 2)

scienter, 3) a connection with the purchase or sale of a

security, 4) reliance on the misrepresentation, 5) economic loss,

and 6) loss causation –- a causal connection between the material

misrepresentation and the loss. Dura Pharm. v. Broudo, 544 U.S.

336, 341-42 (2005). 

Rule 10b-5 claims are governed by the Private

Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4

(“PSLRA”). The PSLRA heightened the pleading requirements in

private securities actions. In re Rockefeller Ctr. Props., Inc.

Sec. Litig., 311 F.3d 198, 217 (3d Cir. 2002). It requires

securities plaintiffs to specify with particularity at the outset

of litigation all facts upon which they base their allegations or

upon which they form their belief (if an allegation is made on

information and belief). 15 U.S.C. § 78u-4(b)(1)(B). They must

“specify each statement alleged to have been misleading [and] the

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reason or reasons why the statement is misleading.” In re NAHC,

Inc. Sec. Litig., 306 F.3d 1314, 1328 (3d Cir. 2002) (quoting In

re Advanta Corp. Sec. Litig., 180 F.3d 525, 530 (3d Cir. 1999)).

 To survive a motion to dismiss, the misstatements or

omissions alleged by a plaintiff must be material to the

reasonable investor. There must be a “substantial likelihood

that, under all the circumstances, the [statement or omission]

would have assumed actual significance in the deliberations of

the reasonable shareholder.” In re Aetna, Inc. Sec. Litig., 34

F. Supp. 2d 935, 945 (E.D. Pa. 1999) (quoting TSC Indus., Inc. v.

Northway, Inc., 426 U.S. 438, 449 (1976)). The issue is whether

there is a substantial likelihood that the disclosure would have

been viewed by the reasonable investor as having significantly

altered the “total mix” of information available to that

investor. Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988);

Shapiro v. UJB Fin. Corp., 964 F.2d 272, 280 n.11 (3d Cir. 1992)

(citations omitted). 

“[V]ague and general statements of optimism constitute

no more than puffery and are understood by reasonable investors

as such. . . . Such statements, even if arguably misleading, do

not give rise to a federal securities claim because they are not

material.” Advanta, 180 F.3d at 538.

The PSLRA also heightened the standard for pleading

scienter. 15 U.S.C. § 78u-4(b)(2). With respect to each act or

Case 2:05-cv-00606-MAM Document 59 Filed 02/01/08 Page 20 of 47
Because the plaintiffs did not make out their claims on 7

scienter or materiality, the Court did not address loss causation

in its previous opinion. The Court will address loss causation

in this decision.

21

omission, a plaintiff must: 1) specify each statement alleged to

have been misleading and the reasons why it is misleading; and 2)

state with particularity facts giving rise to a strong inference

that the defendant acted with the required state of mind. Id.,

Tellabs v. Makor Issues & Rts., Ltd., 127 S. Ct. 2499, 2508

(2007). According to the Tellabs Court, the strong inference

standard unequivocally raised the bar for pleading scienter. The

inference must be more than merely reasonable or permissible. 

The Court held that a complaint will survive only if a reasonable

person would deem the inference of scienter cogent and at least

as compelling as any opposing inference that could be drawn from

the facts alleged. Id. at 2509.

In its earlier decision the Court concluded that the

plaintiffs failed to adequately allege materiality or scienter

for any of the defendants’ alleged misrepresentations. The 7

plaintiffs’ allegations failed to alter the total mix of

information available to investors when considered with the

subscription agreements that the plaintiffs signed, in which they

warranted that they had read and understood Sonex’s 2003 Form 10-

KSB. The only allegations of motive in the complaint were

allegations that Pouring, Ponticas, and Posey had deferred

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22

portions of their salaries and income and were motivated by a

desire to recoup that deferred income and ensure their personal

well-being going forward. An officer’s desire to reap the

financial rewards of a successful transaction is not sufficient

motive to survive a motion to dismiss. The plaintiffs

allegations did not give rise to a strong inference of scienter. 

The Court discussed four claims of misrepresentation in

its earlier decision. 

The first two claims of misrepresentation dealt with

the defendants’ promotion of Posey as uniquely qualified to

implement Sonex’s business plan when he was subject to a

restrictive covenant with a former employer that would force him

to resign. The Court observed that Posey’s qualifications had

not been misstated just because he was subject to a restrictive

covenant and that Posey’s declaration that he had such a covenant

made it impossible for the plaintiffs to argue that nondisclosure

of the covenant was a material omission. In addition, the

statements that the defendants made about Posey’s qualifications

constituted puffery.

The third claim addressed the defendants’

representations that a loan from Canadian investors was imminent

when in fact it was speculative and had no realistic chance of

being consummated. The Court held that an allegation that the

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23

defendants “knew” that the financing was speculative or tenuous

was insufficient as an allegation of scienter.

The fourth alleged misrepresentation dealt with the

defendants’ statements that the Winderweedle firm had agreed to

accept payment in stock rather than in cash, when in fact the fee

agreement required cash payment, the company had agreed to pay a

cash retainer of $50,000, and the law firm had invoiced the

company for $102,000 for services rendered. The Court pointed to

the disclosure in Sonex’s 2003 Form 10-KSB, which the plaintiffs

warranted that they read and understood in their subscription

agreements, that the agreement with Winderweedle required a cash

retainer. Sonex’s 2004 Form 10-QSB disclosed that Sonex disputed

the $102,000 bill. The Court held that Sonex’s obligation to pay

the Winderweedle bill was not material because it was contingent

upon Sonex’s success or failure in disputing the bill. 

In addition, the 2003 Form 10-KSB disclosed that Sonex

was in financially unstable position: the company was operating

at a loss, it would continue to operate at a loss for the

foreseeable future, and the plaintiffs might lose their

investments. Given the magnitude of Sonex’s problems, the

disputed Winderweedle bill would not have altered the total mix

of available information. 

The Court will now address the allegations in the

amended complaint. The allegations fit into four categories,

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24

three of which are the same as those used by the Court in its

previous opinion: Posey’s unique qualifications to lead Sonex

and his covenant with BRD; the Canadian financing; and the

relationship with the Winderweedle firm. The new allegation

involves the strategic alliance with Williams’s company EIW and

the purchase order and sales leads that resulted.

1. Materiality

The Supreme Court requires the Court to consider these

allegations in the context of the “total mix” of information

available to a reasonable investor at the time of investment. 

Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988). In this

case, as discussed in the Court’s previous opinion and above, the

total mix includes the disclosures plaintiffs received from Sonex

in their 2004 subscription agreements. The plaintiffs signed the

agreements, representing that they were “capable of evaluating

the merits and risk of an investment,” that they had “read and

understood the Company Information [including the Annual Report

on Form 10-KSB for 2003],” and that they had “consulted with such

independent legal counsel, accountants and other advisers

considered appropriate to assist [them] in evaluating [their]

proposed investment in the Company.” Def’s. Mot. Ex. 2-A, Ex. 2-

B, Ex. 2-C at pp. 5, 10. 

Case 2:05-cv-00606-MAM Document 59 Filed 02/01/08 Page 24 of 47
25

The 2003 Form 10-KSB disclosed that Sonex was in a

financially tenuous position: it was operating at a loss and it

would continue to operate at a loss for the foreseeable future. 

“Management recognizes that the Company’s history of operating

losses, level of available funds, and revenue from current and

future contracts, in relation to projected expenditures, raise

substantial doubt as to the Company’s ability to commence

generation of significant revenues from the commercialization of

the [proprietary technology] and ultimately achieve profitable

operations.” Id. Ex. 1 at 4. 

The amended complaint fleshes out the details of the

plaintiffs’ allegations, but none of the allegations would so

alter the “total mix” of information to state a claim under the

PSLRA. 

a. Posey’s Qualifications and the Covenant Not

to Compete 

The allegations regarding Posey’s qualifications and

the non-compete agreement are mostly repeated from the first

complaint. As discussed in the Court’s previous opinion, Posey

disclosed that he had a restrictive covenant. The plaintiffs

have added details about Posey’s experience and an allegation

that the defendants failed to disclose legal advice from Lipson

that Sonex should not proceed with the private placement, in part

because of Posey’s restrictive covenant. Lipson had never seen

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26

the covenant. His advice to Sonex was based only upon what he

thought might be in the covenant, and Sonex’s decision to proceed

despite this advice does not rise to the level of materiality

required by the PSLRA. Am. Compl. ¶¶ 76-77. 

b. The Canadian Financing and the EIW Strategic

Alliance 

The plaintiffs allege that the both the Canadian

financing and the EIW strategic alliance were dead at the time

the defendants represented that the financing was “imminent” and

the strategic alliance was a “done deal.” Am. Compl. ¶¶ 81, 87,

126.

As discussed in the Court’s previous decision,

representations about possible events that are contingent on the

actions of a third party are immaterial. In re Rockefeller Ctr.

Props., 184 F.3d at 290; In re CDNow Sec. Litig., 138 F. Supp. 2d

624, 632 (E.D. Pa. 2001). In addition, the timeline of events

laid out in the amended complaint belies the plaintiffs’

allegation that the defendants knew that the Canadian financing

was dead before the plaintiffs invested. Between February and

April of 2004, Fred Hunter, the leader of the Canadian group,

told the defendants that he would consider an initial investment

of $1.5 to $2 million, not $43 million, and in early April he

told the defendants that he had been delayed in considering and

committing to the financing because of the Patriot Act. In

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27

October of 2004, the plaintiffs allege, “it became apparent that

the financing would not be consummated.” Am. Compl. ¶¶ 102, 106,

57. 

Plaintiffs Majer and Fortna invested in Sonex in April

of 2004; plaintiff Hermitage in July of 2004. Although the

Patriot Act problems and the scaling back of the investment were

signs that the financing was in trouble, the allegations in the

amended complaint do not lead to the conclusion that the

financing was “dead” when the plaintiffs invested. The

subscription agreements signed by the plaintiffs disclosed

Sonex’s tenuous financial position, and financing contingent on

the decision of another outside group of investors does not

change the total mix of information available. 

The strategic alliance with EIW, like the Canadian

financing, is a contingent event. In addition, phrases like

“strategic alliance” or “strategic partner” are promotional

language that often constitutes puffery. See Winer Family Trust

v. Queen, No. 05-3622, 2004 WL 2203709 at *8 (E.D. Pa. Sept. 27,

2004) (“Queen’s characterization of Smithfield as Pennexx’s

‘strategic partner’ is immaterial puffery that is inactionable

under the securities laws”). 

The plaintiffs emphasize the importance of the alliance

with EIW to Sonex’s business plan, which included references to

“qualified sales leads” from EIW and the $200,000 purchase order. 

Case 2:05-cv-00606-MAM Document 59 Filed 02/01/08 Page 27 of 47
28

The amended complaint states that Posey had referred a potential

customer to EIW, and that that customer had placed a $200,000

order with EIW. Posey and Williams discussed the possibility of

attributing that order to Sonex in the event they reached an

agreement where Sonex became EIW’s exclusive distributor in the

United States, but they never reached a deal. Like the Canadian

investments, Sonex’s strategic alliance with EIW and the leads it

received never materialized, but at the time the plaintiffs

signed their subscription agreements, it was a possibility. A

projection of $200,000 in income in the 4th quarter of 2004, in

the face of $23 million in cumulative operating losses, does not

change the total mix of information that the plaintiffs had, and

is not material. Am. Compl. ¶¶ 60-64. 

c. The Winderweedle Firm

The plaintiffs’ allegations about the Winderweedle firm

are largely the same in the amended complaint as they were in the

first complaint. The plaintiffs claim that the defendants told

them that Winderweedle had agreed to accept stock in lieu of cash

for all services. As discussed in the Court’s previous opinion,

the materiality of this representation is negated by the

disclosure in Sonex’s 2003 Form 10-KSB that “the agreement with

the new legal counsel . . . requires the Company to remit a cash

retainer of $50,000 by June 30, 2004.” Defs’. Mot. Ex. 1 at 41. 

Case 2:05-cv-00606-MAM Document 59 Filed 02/01/08 Page 28 of 47
29

The claim from Winderweedle that Sonex was in default

could only have been material to Hermitage, because Majer and

Fortna signed their subscription agreements before Winderweedle

sent the invoices to Sonex. Sonex disputed Winderweedle’s bill,

and did not record liability for any amounts related to the

dispute, which it believed was “defensible.” As discussed in the

previous opinion, Sonex’s dispute over the bill makes the

obligation contingent, and a disputed liability of $102,000 does

not alter the total mix of available information. 

The plaintiffs’ allegations do not rise to the level of

materiality required to state a claim under the PSLRA. 

2. Scienter 

Since the Court dismissed the plaintiffs’ first

complaint, the United States Supreme Court and the United States

Court of Appeals for the Third Circuit have issued opinions that

address the pleading requirements of the PSLRA. These decisions

clarify the stringent standard for pleading scienter. “The

Court’s Tellabs decision removes any doubt the PSLRA’s scienter

pleading requirement is a significant bar to litigation . . . .” 

Globis Capital Partners, L.P., v. Stonepath Group, Inc., No-06-

2560, 2007 WL 1977236, at *3 (3d Cir. July 10, 2007). 

In Tellabs, Inc. v. Makor Issues & Rts., Ltd., the

Supreme Court held that an inference of scienter in a securities

Case 2:05-cv-00606-MAM Document 59 Filed 02/01/08 Page 29 of 47
30

fraud complaint must be more than just “reasonable” under the

PSLRA; it must be “cogent and at least as compelling as any

opposing inference one could draw from the facts alleged.” 127

S. Ct. 2499, 2510 (2007). The Court outlined a three-step

process for considering motions to dismiss under § 10(b): A

district court must accept all factual allegations as true, as

with any motion to dismiss. Then the court considers the

complaint in its entirety, including documents incorporated into

the complaint by reference, and examines whether all of the facts

alleged, taken collectively, give rise to a strong inference of

scienter. Finally, the court considers plausible opposing

inferences to determine whether the pleaded facts meet the

PSLRA’s strong inference standard. Id. at 2509. 

The United States Court of Appeals for the Third

Circuit cited the Tellabs pleading standards in its recent

decision in Winer Family Trust v. Queen, 503 F.3d 319 (3d Cir.

2007). The plaintiffs appealed the district court’s dismissal of

their complaint, claiming that the court had inappropriately

resolved disputed facts. The court of appeals affirmed the

district court’s decision, finding that the district court had

accepted the plaintiffs’ alleged facts as true. Viewing those

facts holistically, “a reasonable person would not deem the

inference of scienter as cogent and at least as compelling as any

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31

non-culpable inference based upon the omitted facts.” Id. at

330.

Winer Family Trust adds clarity to a line of cases

addressing scienter in the Third Circuit by applying the Tellabs

test. A previous case in the Third Circuit had held that

plaintiffs “may establish a ‘strong inference’ that the

defendants acted with scienter either by alleging facts that

constitute strong circumstantial evidence of conscious

misbehavior or recklessness.” GSC Partners CDO Fund v.

Washington, 368 F.3d 228, 239 (3d Cir. 2004). In Tellabs, the

Supreme Court specifically reserved the question of whether

recklessness could give rise to civil liability under Rule 10b-5. 

The Court said that although every court of appeals that has

considered the issue has held that a plaintiff may meet the

scienter requirement by showing that the defendant acted

intentionally or recklessly, the question of whether recklessness

satisfies the scienter requirement was not presented in Tellabs. 

127 S. Ct. at 2507 n.3. 

In Winer Family Trust, the United States Court of

Appeals for the Third Circuit affirmed the district court’s

finding that the pleaded facts failed to support the requisite

strong inference of reckless conduct, much less intentional

conduct. The court of appeals said that, “[s]tated differently,

Winer’s purported inference, that the statements . . . were

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32

knowingly false, was not as compelling or as strong as the

opposing inference cited by the District Court. Thus, Winer’s

inference is neither cogent, nor compelling, nor strong in light

of competing inferences.” 503 F.3d at 331. In the Third

Circuit, a plaintiff’s purported inference that a defendant’s

actions were reckless or intentional is compared against any nonculpable inference and must be cogent and at least as compelling

as that inference in order to satisfy the scienter requirement.

The facts supporting motive and opportunity to commit

fraud must be stated with particularity. In re Advanta Corp.

Sec. Litig., 180 F.3d 525, 535 (3d Cir. 1999). A plaintiff must

allege the “who, what, when, where and how” of the events at

issue to establish scienter; allegations that the defendants

“knew” or “must have known” that statements were fraudulent are

insufficient. GSC Partners, 368 F.3d at 239. Motives that are

common to most directors and officers do not give rise to a

strong inference of scienter. “In every corporate transaction,

the corporation and its officers have a desire to complete the

transaction, and officers will usually reap financial benefits

from a successful transaction. Such allegations alone cannot

give rise to a strong inference of fraudulent intent.” Id. at

237.

To support a charge of recklessness, a statement must

be a material misrepresentation or omission that is “an extreme

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33

departure from the standards of ordinary care, and which presents

a danger of misleading buyers or sellers that is either known to

the defendant or is so obvious that the actor must have been

aware of it. Id. at 239.

a. Posey’s Covenant Not to Compete

As discussed above, the plaintiffs have added claims

that Posey represented that the covenant had been reviewed by his

attorney, Lipson, when in fact it had not, and that Lipson

advised Sonex not to proceed with the private placement because

of the potential problems with the covenant. The plaintiffs

claim that Posey’s purposes, while selfish, also included a

motive to benefit the corporation by raising funds from the

plaintiffs. Am. Compl. ¶¶ 76-77.

Even interpreting the facts as alleged in the light

most favorable to the plaintiffs, the inference that defendant

Posey was trying to get a job and avoid conflict with his

potential employer is more compelling than the plaintiffs’

proposed inference that Posey was trying to benefit Sonex by

raising money from the plaintiffs through a fraudulent scheme. 

Tellabs, 127 S. Ct. at 2504. 

Lipson never reviewed Posey’s covenant not to compete

with BRD, although he represented both Posey (in his employment

negotiations with Sonex) and Sonex itself (in its pursuit of the

private placement). Am. Compl. ¶ 74. His advice to Sonex not to

Case 2:05-cv-00606-MAM Document 59 Filed 02/01/08 Page 33 of 47
34

proceed with the private placement was based on a document he had

never seen. Sonex’s decision to disregard its attorney’s advice,

when the attorney had never seen the document in question, does

not rise to the level of scienter needed for fraud under the

PSLRA. Under Tellabs, even assuming that the allegation is true,

all the facts as alleged do not give rise to an inference of

scienter that is cogent and compelling as any opposing inference

that could be drawn. Nor does it rise to the level of “an

extreme departure from the standard of care” as required by the

recklessness standard laid out in GDO Partners. Id. at 239.

b. The Strategic Alliance With EIW

The plaintiffs add a claim about a “strategic alliance”

with Williams’s Canadian firm, EIW, and a putative purchase order

for $200,000. The plaintiffs allege that the Sonex business plan

fraudulently promoted a strategic alliance between Sonex and EIW. 

The Business Plan stated that the two companies “have allied in

order to execute a private label arrangement” and that the

alliance would facilitate EIW’s “gracious feeding of qualified

sales leads to Sonex” including a purchase order for $200,000 to

be executed in the fourth quarter of 2004. Am. Compl. ¶ 60. 

Language in the Business Plan like “strategic alliance” and

“sales leads” are classic puffing statements which are immaterial

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35

to a scienter analysis. See Winer Family Trust v. Queen, 2004 WL

2203709 at *8 (E.D. Pa. Sept. 27, 2004). 

Defendant Williams acknowledged in August 2004 that the

agreement had never been finalized and that the purchase order

was placed with EIW rather than directly with Sonex. The

Business Plan was prepared in the spring of 2004, before the 

plaintiffs signed their Subscription Agreements. The plaintiffs

seek an inference that the individual defendants knew prior to

Williams’s disclosure that the alliance had not been completed

and that they either consciously or recklessly kept this fact

from the plaintiffs. The plaintiffs do not plead specific facts

sufficient to support this inference. Am. Compl. ¶¶ 62, 63, 68,

83-85. 

c. The Canadian Financing

The plaintiffs allege that the Canadian investor, Fred

Hunter, considered an initial investment of $1.5 to $2 million,

not the $43 million that the defendants claimed. According to

the plaintiffs, Hunter expressed concern about completing the

financing because of new regulations in the Patriot Act, and

defendant Ponticas wondered whether his hesitation was really due

to the regulations and that he did not think the financing would

come through. An initial investment amount does not give rise to

an inference that the total investment amount will be the same,

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36

and a deal is not “dead” just because one director thinks it will

not come through. Am. Compl. ¶ 106. 

The plaintiffs also allege that a Sonex director,

Williams, breached his duty of loyalty to the company by

proposing that the Canadian investment should be made directly to

him or to his company, EIW, which would lend the money to Sonex

at a higher interest rate and under unattractive conditions. The

claims that detail Williams’s breach of fiduciary duty do not

allege injuries to the plaintiffs, but rather to Sonex itself. 

This is not a derivative suit; injuries to Sonex must be claimed

by Sonex, not the plaintiff investors. Sonex never accepted

Williams’s proposal to pursue financing on those terms. Am.

Compl. ¶¶ 108, 110. 

d. The Winderweedle Firm

As discussed above, the plaintiffs add little new

information to their allegations about Sonex’s arrangements with

the Winderweedle law firm. The plaintiffs reiterate their claims

about Sonex’s cash obligations to the firm and add the claim that

Sonex’s attorney (Lipson) and its investment advisor (Rose)

recommended that the company not proceed with the private

placement because the financing was “dead,” Posey had a

restrictive covenant, and Sonex had a cash obligation to the

Winderweedle firm. Am. Compl. ¶¶ 77, 112. 

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37

The cash obligation and timing allegations were

addressed in the Court’s dismissal of the complaint. Assuming

that the plaintiffs’ allegation that Sonex disregarded the advice

of their advisers is true, this decision does not rise to the

level of recklessness required for scienter. All of these

allegations have been addressed above; none of the facts

associated with them lead to an inference of fraud that is more

compelling than an opposing inference.

The plaintiffs have not satisfied the PSLRA’s scienter

standard for the claims that they have added to their amended

complaint. 

3. Loss Causation

The defendants also argue that the amended complaint

should be denied because the plaintiffs have not pleaded facts

sufficient to establish loss causation.

In Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005),

the United States Supreme Court held that a private plaintiff

claiming securities fraud must prove that the defendant’s fraud

caused an economic loss. The Court overturned the United States

Court of Appeals for the Ninth Circuit, which had held that a

plaintiff could establish loss causation by showing that the

price on the purchase date was inflated because of a

misrepresentation. Id. at 340. The Court held that an inflated

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38

purchase price alone was not sufficient to proximately cause the

relevant economic loss. Id. at 342.

The United States Court of Appeals for the Third

Circuit held, even before Dura, that an investor seeking to

satisfy the loss causation element must establish that the

alleged misrepresentations proximately caused the decline in the

security’s value. Semarenko v. Cendant Corp., 223 F.3d 165, 185

(3d Cir. 2000). 

Dura was a fraud-on-the-market case, but its analysis

is broadly applicable. The Court noted that when a purchaser

resells shares for a lower price than the one she paid, the lower

price “may reflect, not the earlier misrepresentation, but

changed economic circumstances, changed investor expectations,

new industry-specific or firm-specific facts, conditions, or

other events, which taken separately or together account for some

or all of that lower price.” Dura, 544 U.S. at 343. The Court

cautioned that the securities statutes deter fraud by providing

private rights of action, but are not meant to “provide investors

with broad insurance against market losses.” 

 The plaintiffs’ amended complaint contains one

allegation with respect to loss causation: “if Sonex had been as

the defendants represented, the securities purchased by

Plaintiffs would have been well worth what they paid for them. 

Because Sonex was far from what defendants represented it to be,

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39

the securities are essentially worthless.” Am. Compl. ¶ 118. As

in Dura, the plaintiffs allege that they relied on erroneous

information and omissions and therefore paid more than the actual

value of the securities. 

This allegation does not show proximate cause of

economic loss. The Dura Court noted that “the logical link

between the inflated share purchase price and any later economic

loss is not invariably strong,” pointing to other factors such as

a shift in the economy, changes in the industry or the firm, and

revised investor expectations. Dura, 544 U.S. at 342. 

An examination of the plaintiffs’ allegation of loss

causation, even at the motion to dismiss stage, must consider

these other factors. In this case, the plaintiffs were warned in

writing about the tenuous nature of Sonex’s finances, and they

signed statements warranting that they understood those warnings. 

Sonex’s representations about itself included that it was

operating at a loss and would continue to operate at a loss for

the foreseeable future, and that its senior employees had

foregone their salaries. In addition, there were significant

specific restrictions on the stock the plaintiffs purchased: it

was restricted stock and could not be sold for a minimum of two

years, and the subscription agreements limited the stock’s

transferability, warning that “the undersigned may be required to

hold the shares . . . indefinitely and it may not be possible for

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40

an investor to liquidate an investment in the Company.” The

value of the plaintiffs’ stock, at the time that they purchased

it, included the risk that liquidation of the stock might never

be possible. Defs’. Mot. Ex. 2-A, 2-B, 2-C at ¶ III(e)(1).

The plaintiffs emphasize that Dura was a fraud-on-themarket case and that their case against Sonex is not. They cite

a case from the Ninth Circuit, Livid Holdings Ltd. v. Salomon

Smith Barney, Inc., 416 F.3d 940 (9th Cir. 2005), as parallel to

their own. In Livid, the plaintiffs alleged that the defendants

misrepresented whether or not the proceeds of a private equity

sale had been received. There was general cautionary language in

the offering memorandum received by the plaintiffs that stated

that “the Company may have undergone . . . management changes,

ownership changes and business strategy changes.” Livid, 416

F.3d at 945. The court held that the cautionary language was

insufficient warning and that the defendant’s misrepresentation

concealed the company’s dire financial situation, causing the

plaintiff to lose the entire value of its investment. Id. at

949.

The language in the offering memorandum at issue in

Livid is far more general than the warnings Sonex included in its

2003 Form 10-KSB and the subscription agreements signed by the

plaintiffs. Those warnings covered Sonex’s past operating

losses, its current and potential future financial problems, the

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41

constraints on its management from liquidity problems, the

prospect that it might never be able to implement its business

plan, and the fact that the shares the plaintiffs were purchasing

might not be transferable. When the plaintiffs signed the

subscription agreements, they warranted that they understood

“that the Units constitute a speculative investment and involve a

high degree of risk, including the loss of the subscriber’s

entire investment in the Company.” Defs’. Mot. Ex. 1 at 16; Ex.

2-a, 2-b, 2-c at § III(e)(I). In Livid, the court held that the

defendants had concealed the “true nature” of the company. Sonex

disclosed its true nature to the defendants in the written

materials they were given prior to investing. 

The Dura court observed that although the pleading

rules are not meant to impose a great burden on a plaintiff, it

should not prove burdensome for a plaintiff who has suffered an

economic loss to provide a defendant with some indication of the

loss and the causal connection that the plaintiff asserts. Dura,

544 U.S. at 347. The Court cautioned that allowing a plaintiff

to forgo giving any indication of the economic loss and proximate

cause would transform a private securities action into a “partial

downside insurance policy.” Id. at 347-48. 

The plaintiffs’ allegations do not establish that the

misrepresentations of the defendants proximately caused their own

economic loss. The plaintiffs took on a high degree of risk by

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42

investing in a faltering company. They knew that Sonex was in

financial trouble, that Sonex employees were forgoing their

salaries, and that investors might never be able to sell their

shares in the company. These specific warnings, which the

plaintiffs warranted they had read and understood when they

signed their subscription agreements, make it impossible for the

plaintiffs to establish, on the facts alleged in the amended

complaint, that the defendants caused their economic losses. The

plaintiffs decided to invest despite these warnings, and their

economic losses are theirs to bear. 

The plaintiffs have not stated a claim under Rule 10b5. Their pleadings on materiality, scienter, and loss causation

were insufficient. Therefore, the Court will dismiss Count One,

the plaintiffs’ federal securities law claims.

B. Other Fraud Claims

The Court will also grant the motions to dismiss Counts

Two and Three, the allegations of violations of the Pennsylvania

Securities Act (“PSA”) and fraudulent misrepresentation. 70 Pa.

C. S. §§ 1-401(a), 501(a). The PSA, like Rule 10b-5, prohibits

false statements and omissions of material fact in connection

with the sale of securities in Pennsylvania. The elements of a

claim of fraudulent misrepresentation or omission under

Pennsylvania law are: 1) a representation or omission; 2) which

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43

is material to the transaction at hand; 3) made or concealed

falsely, with knowledge of its falsity or recklessness as to

whether it is true or false; 4) with the intent of misleading

another into relying on it; 5) justifiable reliance on the

misrepresentation; and 6) the resulting injury was proximately

caused by the reliance. Gibbs v. Ernst, 647 A.2d 882, 889 (Pa.

1994).

The elements of common law fraud are “almost identical”

to the elements of Rule 10b-5 claims and claims under the PSA. 

Sunquest Info Sys., Inc. v. Dean Witter Reynolds, Inc., 40 F.

Supp. 2d 644, 659 (W.D. Pa. 1999). The plaintiffs’ claims under

these doctrines fail for the same reason their 10b-5 claims fail.

C. Negligent Misrepresentation

The Court will dismiss Count Four, the plaintiffs’

allegation of negligent misrepresentation. Under Pennsylvania

law, the elements of a negligent misrepresentation claim are: 1)

a misrepresentation of material fact, 2) made under circumstances

in which the misrepresenter ought to have known of its falsity;

3) made with an intent to induce another to act on it; 4) which

results in an injury to the party acting in justifiable reliance

on the misrepresentation. Gilmour v. Bohmueller, 2005 WL 241181

at *3 (E.D. Pa. Jan. 27, 2005). The plaintiffs say that if the

misrepresentations in the amended complaint were not made

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44

knowingly or recklessly, they were made negligently, with a lack

of reasonable care. Am. Compl. ¶¶ 154, 158. They restate their

claims from the fraud section of the amended complaint, but, as

in the fraud section, the plaintiffs do not plead facts to

support their contention that the defendants made

misrepresentations with the intent to induce the plaintiffs to

act on them. Therefore, the negligent misrepresentation claim is

dismissed.

D. Rescission and Breach of Contract

The Court will dismiss Counts Five and Six, Rescission

and Breach of Contract. 

The plaintiffs allege that the subscription agreements

require that the defendants deliver stock certificates to the

plaintiffs. The defendants have not delivered the stock

certificates, and the plaintiffs seek rescission of the

subscription agreements and specific performance compelling the

immediate delivery of the stock certificates. Under Maryland

law, which governs the subscription agreements, rescission is a

“radical remedy.” Cutler v. Sugarman Org., Ltd., 596 A.2d 105,

110 (Md. 1991). This remedy, and the specific performance

requested in the breach of contract claim, are unnecessary

because the defendants have agreed to transfer the share

certificates to the plaintiffs. The defendants have requested an

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45

order by the court directing Sonex to issue share certificates to

the plaintiffs for the shares they purchased. The Court will

grant this request.

An appropriate Order follows. 

Case 2:05-cv-00606-MAM Document 59 Filed 02/01/08 Page 45 of 47
As explained in the Memorandum, the Court considered 8

Posey’s Motion only as to himself, and not to Sonex, because

Sonex is represented by separate counsel.

 IN THE UNITED STATES DISTRICT COURT

 FOR THE EASTERN DISTRICT OF PENNSYLVANIA

BRUCE W. MAJER, et al. : CIVIL ACTION

:

v. :

:

SONEX RESEARCH, INC., et al. : NO. 05-606

ORDER

AND NOW, this 31st day of January, 2008, upon

consideration of the Motion to Dismiss Plaintiffs’ Amended

Complaint for Failure to State a Claim Upon Which Relief Can Be

Granted as to Defendants Sonex, Pouring, and Ponticas (Docket No.

41), the Motion to Dismiss Plaintiffs’ Amended Complaint for

Failure to State a Claim Upon Which Relief Can Be Granted as to

Defendants Sonex and Roger D. Posey (Docket No. 48), the 8

Supplemental Memoranda of Law in Further Support of the Motion to

Dismiss Plaintiffs’ Complaint as to Defendants Sonex, Pouring,

and Ponticas, the responses to all of the above documents, and

the replies thereto, it is HEREBY ORDERED that:

1. Sonex, Ponticas, and Pouring’s motion to dismiss

for failure to state a claim is GRANTED.

2. Posey’s motion to dismiss for failure to state a

claim is GRANTED.

Case 2:05-cv-00606-MAM Document 59 Filed 02/01/08 Page 46 of 47
2

3. Sonex, Ponticas, and Pouring’s request for an order

to transfer the share certificates to the plaintiffs is GRANTED.

Sonex shall issue and transfer share certificates to each

plaintiff representing the shares that each plaintiff purchased

pursuant to the subscription agreements. 

4. This case is dismissed with prejudice. The case is

CLOSED. 

BY THE COURT:

/s/ Mary A. McLaughlin

MARY A. McLAUGHLIN, J.

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