IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

PREMIER CAPITAL MANAGEMENT, L.L.C., )

et. al., )

)

Plaintiffs, )

)

v. ) NO. 02 C 5368

)

LARRY COHEN, et al., ) JUDGE JOAN B. GOTTSCHALL

)

Defendants. )

COHEN'S, KIM'S AND TURCOTTE'S MEMORANDUM

OF LAW IN SUPPORT OF MOTION FOR SUMMARY JUDGMENT

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TABLE OF CONTENTS

I.INTRODUCTION..............................................................................................1-2

II.STATEMENT OF FACTS...................................................................................2

III.ARGUMENT.................................................................................................3

A. STANDARD FOR SUMMARY JUDGMENT................................................3

B. TURCOTTE, KIM AND COHEN ARE ENTITLED TO JUDGMENT IN THEIR 

FAVOR ON EACH OF THE COUNTS ASSERTING EITHER FEDERAL AND/OR 

VIRGINIA SECURITIES ACT VIOLATIONS AGAINST THEM AS 

"CONTROLLING PERSONS" BECAUSE THEY DID NOT "CONTROL" THE 

ALLEGED PRIMARY VIOLATOR NOR DID THEY “ACTIVELY PARTICIPATE” 

IN THE ALLEGED IMPROPER CONDUCT 

.....................................................................................................3-5

C. TURCOTTE, KIM AND COHEN ARE ENTITLED TO JUDGMENT IN THEIR 

FAVOR ON EACH OF THE COUNTS ASSERTING EITHER FEDERAL AND/OR 

VIRGINIA SECURITIES ACT VIOLATIONS BY THEM AS "CONTROLLING 

PERSONS" BECAUSE THEY ACTED IN GOOD FAITH 

....................................................................................................5-8

D. ADDITIONALLY OR IN THE ALTERNATIVE, THE FEDERAL SECURITIES 

LAW COUNTS AGAINST TURCOTTE AND KIM CANNOT BE MAINTAINED 

BECAUSE PLAINTIFFS DID NOT PURCHASE XENTEX STOCK IN A PUBLIC 

OFFERING 

..................................................................................................8-10

E. TURCOTTE, KIM AND COHEN ARE ENTITLED TO JUDGMENT IN THEIR 

FAVOR ON EACH OF THE COUNTS ASSERTING EITHER FEDERAL AND/OR 

VIRGINIA SECURITIES ACT VIOLATIONS BY THEM AS "CONTROLLING 

PERSONS" BECAUSE THERE HAS BEEN NO PRIMARY VIOLATION OF THE 

SECURITIES LAWS BY XENTEX 

.................................................................................................10-18

F. XEN INVESTORS CANNOT PREVAIL ON ITS CLAIMS BECAUSE IT HAS 

NO LOSSES FROM THE ALLEGED VIOLATION 

...................................................................................................18-19

1. Xen Investors Cannot Establish “Loss Causation” ..................................18-19

2. Xen Investors Did Not Suffer Any Economic Loss.......................................19

G. TURCOTTE IS ENTITLED TO SUMMARY JUDGMENT ON PLAINTIFFS’ 

NEGLIGENT MISREPRESENTATION CLAIM.......................................19-21

1. Turcotte Did Not Intend For Plaintiffs to Rely on the Financial Information 

He Prepared...................................................................................21

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2. Turcotte Owed No Duty to Provide Accurate Information to Plaintiffs..........21-22

3. Turcotte's Financial Statements Contained No False Information.....................22

H. PLAINTIFFS CANNOT ESTABLISH ANY OF THE ELEMENTS OF A CLAIM FOR 

COMMON LAW FRAUD AGAINST TURCOTTE AND KIM. .......................21-22

I. THE CLAIMS FOR BREACH OF FIDUCIARY DUTY AGAINST TURCOTTE AND

KIM MUST ALSO FAIL....................................................................22-24

IV. CONCLUSION........................................................................................24

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TABLE OF AUTHORITIES

Statutes

15 U.S.C.§77o..............................................................................................4-6

15 U.S.C.§77b(a)(10)........................................................................................9

15 U.S.C. §77l(b)...........................................................................................19

Va. Code §13.1-522(C)..............................................................................4-6, 11

Va. Code §13.1-522(A)....................................................................................12

Del. Code Ann. Tit. 8, § 102(b)(7)........................................................................25

Cases

Acme Propane, Inc. v. Tenexco, Inc., 844 F. 2d 1317, 1322 (7th Cir. 1988)................................18

Ambrosino v. Rodman & Renshaw, Incorporated, 972 F. 2d 776, 786 (7th Cir. 1992) ................18

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed2d (1986).....3

Arnold v. Soc’y for Sav. Bancorp., 650 A.2d 1270, 1287 (Del. 1994) ........................................25

Atocha Limited Partnership v. Witness Tree, LLC, 65 Va. Cir. 213, 2004 WL 1665009 at *7 (Va. 

Cir. Ct. July 16, 2004)................................................................................................ .4, 6, 12, 23

Bastian v. Petren Resources Corporation, 892 F.2d 680, 682 (7th Cir. 1990)............................20

Berson v. Hardiman, 1999 U.S. Dist. Lexis 14767, *24-25 (N.D. Ill. 1999)...............................18

Caremark, Inc. v. Coram Healthcare Corp., 113 F.3d 645, 648 (7th Cir. 1997).........................19

Dellastatious v. Williams, 242 F. 3d 191, 194 (4th Cir. 2001) .......................................... 4, 6, 7, 8

Dunn v. Ronbotics Corporation, 2003 WL 23697826 at **10-11 (E.D. Va. Feb 20, 2003) ........12

Ellis v. Sheahan, 412 F. 3d 754, 756 (7th Cir. 2005).....................................................20

First Indiana Bank v. Baker, 657 F. 2d 506, 508 (7th Cir. 1992),..................................................3

First Midwest Bank v. Stewart Title Guaranty Co., 218 Ill.2d 326, 335 (2006)..........................21

Flip Side Productions, Inc. v. Jam Productions, Ltd., 843 F.2d 1024, 1032 (7th Cir.), cert. denied, 

488 U.S. 909, 109 S.Ct. 261, 102 L.Ed.2d 249 (1988).................................................................3

Gasner v. Board of Supervisors of the County of Dinwiddie, VA, 103 F. 3d 351, 356 (4th Cir. 

1996)..............................................................................................................................12, 13-14

Goldstein v. Malcolm G. Fries & Associates, Inc., 72 F.Supp.2d 620, 627 (E.D. Va. 1999). 22-23

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Gustafson v. Aklloyd Company, Inc., 513 U.S. 561, 568, 115 S. Ct. 1061, 1068, 131 L. Ed. 2d 1 

(1995) ........................................................................................................................................9,

Halperin v. EBanker USA.COM, Inc., 295 F. 3d 352, 357 (2nd Cir. 2002)............................13, 14

Harden v. Raffensperger, Hughes & Co., Inc., 65 F.3d 1392, 1404 (7th Cir. 1994)...............13, 15

Harrison v. Dean Witter Reynolds, Inc., 974 F. 2d 873, 881 (7th Cir. 1992).................................4

Heartland Financial USA, Inc. v. Financial Institutions Capital Appreciation Partners, LLC, 

2002 WL 31819008, *8 (N.D. Ill. Dec. 12, 2002)...................................................12, 18

In reFlag Telecom Holdings, Ltd. Securities Litigation, 352 F. Supp. 2d 429, 457

(S.D. N.Y. 2005).........................................................................................................................4

Jackson National Life Insurance Company v. Kennedy, 741 A. 2d 377, 388 (Del. Ch. 1999)23-24

Metro Communication Corp. v. Advanced Mobilecomm Technologies, Inc., 854 A. 2d 121, 157 

(Del. Ch. 2004) .........................................................................................................................24

Lennon v. Christoph, 1997 WL 57150 at *23 (N.D.Ill. 1997) ....................................................10

Maher v. Durango Metals, Inc., 144 F. 3d 1302, 1305 (10th Cir. 1998)............................ 4, 11, 12

Malone v. Brincat, 722 A. 2d 5, 10 (Del. 1998).........................................................................24

Metro Communication Corp. at 157-58, citing Malone v. Brincat, 722 A. 2d 5, 10 (Del. 1998).23

MW Manufacturers, Inc. v. Friedman Corp., No. 97 C 8319, 1998 WL 417501, at *4 (N.D. Ill. 

July 21, 1998) ...........................................................................................................................22

Olkey v. Hyperion 1999 Term Trust, Inc., 98 F. 3d 2d 2, 4 (2d Cir. 1996)..............................9, 14

Rankow v. First Chicago Corp., 870 F.2d 356, 361 (7th Cir. 1989) ......................................21-22

Ricketts v. Adamson, 483 U.S.1,22, 107 S. Ct. 2680, 97 L. Ed. 2d 1 (1987).........................20

Rosenstein v. Standard & Poor’s Corp., 264 Ill. App. 3d 818, 823 (1st Dist. 1993)...................22

Savino v. C.P. Hall Co., 199 F. 3d 925, 934-35 (7th Cir. 1999)........................................20

S.E.C. v. First Jersey Securities, Inc., 101 F. 3d 1450, 1472 (2nd Cir. 1996).................................3

Santiago v. Lane, 894 F.2d 218, 221 (7th Cir.1990)......................................................................3

SEC v. Continental Tobacco Co. of S.C., 463 F.2d 137,159 (5th Cir. 1972)................................10

TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S. Ct. 2126, 2132, 48 L. Ed. 2d 757 

(1976) .......................................................................................................................................13

Teamsters Local 282 v. Angelos, 762 F. 2d 522, 530 (7th Cir. 1985) ..........................................18

Tolan and Son, Inc. v. KLLM Architects, Inc., 308 Ill. App. 3d 18, 27 (1st Dist. 1999) ..............21

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TriContinental Industries, Ltd. v. Price Waterhouse Coopers, LLP, 475 F.3d 824, 833-34 (7th 

Cir. 2007)..................................................................................................................................21

Valley Liquors, Inc. v. Renfield Importers, Ltd., 822 F.2d 656, 659 (7th Cir.), cert. denied, 484 

U.S. 977, 108 S.Ct. 488, 98 L.Ed.2d 486 (1987)..........................................................................3

Vannest v. Sage, Rutty & Co., 960 F. Supp. 651, 653-55 (W.D.N.Y. 1997)................................10

Waltree Ltd. v. Ing Furman Selz LLC, 97 F. Supp. 2d 464, 469 (S.D.N.Y. 2000)("§12(a)(2) 

..........................................................................................................................................................9

Weprin v. Peterson, 736 F. Supp. 1124, 1127 (N.D.Ga. 1988)...................................................10

Witness Tree, LLC, 65 Va. Cir. 213, 2004 WL 1665009 at *7 (Va. Cir. Ct. July 16, 2004)

...........................................................................................................3, 11, 12

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Defendants, Dr. LARRY COHEN ("Dr. Cohen"), Dr. WAN HEE KIM ("Dr. 

Kim") and MICHAEL TURCOTTE ("Mr. Turcotte"), collectively, "Movants", by their 

attorneys, BRYCEDOWNEY, LLC, submit the following Memorandum of Law In Support of 

their Motion for Summary Judgment on Counts I – VI, XII – XVI and XIX – XX of Plaintiffs' 

Third Amended Complaint.

I. INTRODUCTION

This case arises from venture capital investments made by Plaintiffs in Xentex 

Technologies, Inc, a corporate technology venture that had designed a unique laptop computer 

and intended to manufacture, market and sell it. Defendants Dr. Cohen and Dr. Kim served as 

members of the Board of Directors and as advisors to Xentex but were not employees or 

officers of the company. Mr. Turcotte was an employee and served in various accounting 

capacities reporting to the company’s senior management. Jeffrey A. Batio, Xentex’s 

founder, controlling shareholder and its CEO during periods relevant hereto, is not a party to 

this action nor is Joe Negler who was Xentex’s President and CEO for certain other periods 

related to this action. In addition, except by way of third party cross-complaint not addressed 

by this motion, Douglas Tucker, the Company’s principle legal advisor at its outside law firm 

and at other times pertinent hereto, President and Executive Vice President of Xentex is also 

not a defendant or a party to these proceedings. In this case Xen Investors, LLC ("Xen 

Investors"), TMB, LLC ("TMB") and Premier Capital Management, LLC ("Premier"), have 

filed a Third Amended Complaint ("Complaint"), attached hereto as Exhibit __, against 

defendants asserting claims under federal and/or state securities anti-fraud provisions, as well 

as other alleged common law violations. Plaintiffs (including notably Premier, who never 

purchased any stock or other securities in Xentex), assert claims against Dr. Cohen, Dr. Kim 

and Mr. Turcotte as follows:

Counts I and XII against Mr. Turcotte and Dr. Kim, respectively, for 

controlling person liability for an alleged violation by non-party Xentex of 

§12(2) of the Securities Act of 1933, 15 U.S.C. §77o, in connection with Xen 

Investors' stock purchase; Counts II, XIII and XIX against Mr. Turcotte, Dr. 

Kim and Dr. Cohen, respectively, for similar alleged controlling person 

liability under the Virginia Securities Act, Va. Code §13.1-522(C), in 

connection with Xen Investors' stock purchase; Counts III, XIV and XX 

against Mr. Turcotte, Dr. Kim and Dr. Cohen, respectively, for similar alleged 

controlling person liability under the Virginia Securities Act, Va. Code §13.1-

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522(c), in connection with TMB's June, 2001 loan to Xentex; Counts IV and 

XVI against Mr. Turcotte and Dr. Kim for common law fraud; Counts VI and 

XV against Mr. Turcotte and Dr. Kim for breach of fiduciary duty; and Count 

V against Mr. Turcotte asserting negligent misrepresentation and/or 

constructive fraud in connection with Mr. Turcotte's internal accounting for 

Xentex.

Plaintiffs, acknowledged investment experts and highly experienced in corporate 

investing, are seeking legal redress against Dr. Cohen and Dr. Kim, former Xentex directors, 

and Mr. Turcotte, its controller (but not its senior management) none of whom the undisputed 

facts show had virtually any personal involvement in the solicitation, negotiation or 

completion of the investments in question. In fact, the defendants lost all they had invested in 

Xentex both in terms of money and in terms of time, effort and personal prestige as well. 

Neither the law nor the facts support Plaintiffs’ attempts to hold the defendants personally 

liable for the investments that they made in Xentex and the Court should not permit the 

plaintiffs to continue this action at the extreme cost and prejudice to the defendants.

II. STATEMENT OF FACTS

A complete recitation of all material facts as to which Movants contend there is no

genuine issue is contained in Movants’ Statement of Uncontested Material Facts 

("Statement"), filed concurrently herewith, and incorporated herein. Citations to Movants' 

Statement are designated throughout this Memorandum as "(Fact #)", in reference to specific 

numbered paragraphs in Movants' Statement. To summarize briefly herein, beginning 

in or around November, 2000, Plaintiff Xen Investors, LLC ("Xen Investors") purchased 

stock in a start-up technology company, Xentex Technologies, Inc. ("Xentex"). (Facts 97--

103). Approximately one half year later, certain members and/or principals of Xen Investors 

formed Plaintiff TMB, LLC ("TMB"), for the expressed purpose of making an emergency 

additional investment in Xentex (Facts 112-113), which took the form of a $650,000 loan to 

Xentex in June, 2001. (Fact 119). Plaintiff Premier Capital Management, LLC ("Premier"), 

neither purchased stock in Xentex nor made any loan to Xentex, but capitalized on Xen 

Investors' purchase of Xentex stock by acting as an agent for Xentex, and receiving a 

commission, on this sale of stock to Xen Investors. (Fact 129). Plaintiffs are professional 

managed investment firms managed by experienced investment professionals and controlled 

by extremely sophisticated individuals (Facts 15-17). Plaintiffs had access to and retained 

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qualified legal and accounting professionals to render them legal and accounting advice with 

respect to their operations and investments (Facts 19-21). All of the risks associated with an 

investment in Xentex were fully and plainly disclosed to Plaintiffs in Xentex's written 

offering memorandum, prior to Xen Investors' and TMB's investments in Xentex. (Facts 74-

84).

III. ARGUMENT

A. STANDARD FOR SUMMARY JUDGMENT

Summary judgment is proper only if the record shows that there is no genuine issue as 

to any material fact and that the moving party is entitled to judgment as a matter of law.

Fed.R.Civ.P. 56(c). A genuine issue for trial exists only when "the evidence is such that a 

reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, 

Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed2d (1986). The court must view all 

evidence in a light most favorable to the nonmoving party, Valley Liquors, Inc. v. Renfield 

Importers, Ltd., 822 F.2d 656, 659 (7th Cir. 1987), cert. denied, 484 U.S. 977, 108 S.Ct. 488, 

98 L.Ed.2d 486 (1987), and draw all inferences in the nonmovant's favor. Santiago v. Lane, 

894 F.2d 218, 221 (7th Cir.1990). However, if the evidence is merely colorable, or is not 

significantly probative, summary judgment may be granted. Liberty Lobby, 477 U.S. at 249-

50, 106 S.Ct. at 2510-11; Flip Side Productions, Inc. v. Jam Productions, Ltd., 843 F.2d 1024, 

1032 (7th Cir.), cert. denied, 488 U.S. 909, 109 S.Ct. 261, 102 L.Ed.2d 249 (1988). "[O]nly 

disputes over facts that might affect the outcome of the suit under the governing law will 

properly preclude the entry of summary judgment." First Indiana Bank v. Baker, 657 F. 2d 

506, 508 (7th Cir. 1992), quoting Liberty Lobby, 477 U.S. at 248, 106 S. Ct. at 2510.

B. TURCOTTE, KIM AND COHEN ARE ENTITLED TO JUDGMENT

IN THEIR FAVOR ON EACH OF THE COUNTS ASSERTING EITHER 

FEDERAL AND/OR VIRGINIA SECURITIES ACT VIOLATIONS

AGAINST THEM AS "CONTROLLING PERSONS" BECAUSE THEY DID 

NOT "CONTROL" THE ALLEGED PRIMARY VIOLATOR NOR DID THEY 

“ACTIVELY PARTICIPATE” IN THE ALLEGED IMPROPER CONDUCT

In order to establish a prima facie case of "controlling person" liability, plaintiff must 

establish not only that there has been a primary violation, but that the alleged "controlling 

person" had "control" over the primary violator. S.E.C. v. First Jersey Securities, Inc., 101 F. 

3d 1450, 1472 (2nd Cir. 1996). This requirement of "control" applies to both the federal 1933 

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Act claims pursuant to 15 USC § 77o, and the VSA claims pursuant to Va. Code §13.1-

522(C); Id.; In re Flag Telecom Holdings, Ltd. Securities Litigation, 352 F. Supp. 2d 429, 457 

(S.D. N.Y. 2005)(federal); Maher v. Durango Metals, Inc., 144 F. 3d at 1304-05 (federal);

Dellastatious v. Williams, 242 F. 3d 191, 194 (4th Cir. 2001)(federal and VSA); Atocha

Limited Partnership v. Witness Tree, LLC, 65 Va. Cir. 213, 2004 WL 1665009 at *7 (Va. Cir. 

Ct. July 16, 2004)(VSA). The Seventh Circuit has construed “control” for purposes of the 

federal securities laws as requiring actual participation, or the actual exercise of control over 

the operations of the “person” in general, and “the power or ability to control the specific 

transaction or activity upon which the primary violation was predicated, whether or not that 

power was exercised.” Harrison v. Dean Witter Reynolds, Inc., 974 F. 2d 873, 881 (7th Cir. 

1992). "It is well accepted that merely alleging that a particular defendant is an officer or 

director of a company is not sufficient to allege control." In re Flag Telecom Holdings, Ltd. 

Securities Litigation at 457. See also Atocha Limited Partnership at *9 (a director is not 

automatically liable as a controlling person). Control means the practical ability to direct the 

actions of the people who issue or sell securities. Id. at 458. Under the VSA, “control” is 

“not couched in terms of control over the day-to-day operations or voting weights”, but the 

power to actually direct policies and management. Atocha Limited Partnership at *10.

Here, the evidence is undisputed that neither Mr. Turcotte, who was never a director of 

the company but an officer and employee, nor Dr. Kim, nor Dr. Cohen, who were outside 

directors, possessed the requisite “control” over Xentex to invoke liability for any

representation that may have been made by Xentex in connection with the investments in 

question. (Facts 27, 30-33, 42-47). At all times relevant hereto Batio was the controlling 

shareholder of Xentex by virtue of his extensive shareholdings. (Facts 22-23), Negler was 

the CEO of Xentex for most of the periods in question (with Batio and Tucker serving in that 

capacity for short periods preceding and following his tenure), (22-23, 25), Batio, Tucker and 

Negler actually prepared the Information Statement referenced by the Complaint (Facts 33, 

73) and Batio and Tucker also attended the meetings with plaintiffs at which their investment

was solicited (Facts 69, 71-73). Turcotte, though an officer of Xentex, was the in-house 

accountant reporting to Batio, Negler and Tucker, whose only responsibilities for Xentex 

were in the preparation of unaudited financial statements for internal use only. (Facts 52- 53). 

Turcotte neither exercised, nor had the power or ability to exercise, any “control” over the 

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business or management of Xentex generally, nor over Xentex’s transaction with Plaintiffs.

(Facts 46, 50, 56, 95).

Dr. Kim’s principal role at Xentex as a director and member of the Executive 

Committee was contributing his background in and standing with the Korean electronics 

industry and acting as Xentex’s liaison with Korean manufacturer KDS. (Fact No. 44). Dr. 

Kim had no participation whatever in the creation of the Information Statement and was not 

even aware of its existence until commencement of this action (Fact No. 41). Dr. Kim did not 

participate in any manner in the solicitation, negotiation or completion of Plaintiffs’ 

investments in Xentex and had only one social meeting with any of the principals of 

Plaintiffs, a luncheon at which nothing related to the Plaintiffs’ investment was discussed 

(Fact No. 40). 

Similarly, Dr. Cohen, as an outside director received all of his information regarding 

the business and progress at Xentex from Batio or Tucker. The record is void of any 

indication that he did do or could have done anything, other than serve as one of the directors 

of Xentex. (Facts 31 - 34). Like Dr. Kim, he had only a single social meeting with any of the 

Plaintiffs’ principles, a brief encounter with Mathieu Reyna at a shareholders meeting, at 

which social matters only were discussed, and which occurred approximately two years after 

Plaintiffs invested in Xentex. (Fact 35).

The record is undisputed that for purposes of the transactions with Plaintiffs, none of 

these defendants had any involvement or even prior knowledge of the transactions, much less, 

the ability to control Xentex. In order to establish these defendants’ “control” of Xentex for 

purposes of VSA 13.1-522(C) liability, Plaintiffs must, at a minimum, establish that they had 

the power to actually direct policies and management, and there is simply no evidence that 

they had the power or ability to do so. In fact, the undisputed evidence demonstrates that such 

“control” rested primarily with Batio, Negler and Tucker, and others who Plaintiffs have, 

inexplicably, not sought to name as defendants herein. (Facts 23-25, 33, 38, 73).

C. TURCOTTE, KIM AND COHEN ARE ENTITLED TO

JUDGMENT IN THEIR FAVOR ON EACH OF THE COUNTS

ASSERTING EITHER FEDERAL AND/OR VIRGINIA SECURITIES

ACT VIOLATIONS BY THEM AS "CONTROLLING PERSONS" 

BECAUSE THEY ACTED IN GOOD FAITH

Pursuant to 15 USC § 77o, the alleged “controlling person” is not liable for the 

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violation if he “acted in good faith and did not directly or indirectly induce the act or acts 

constituting the violation or cause of action.” 15 U.S.C. §77o. Similarly, VSA 13.1-522(C) 

allows control persons to avoid liability if they can demonstrate that they “did not know, and 

in the exercise of reasonable care could not have known, of the existence of the facts by 

reason of which the liability is alleged to exist.” Va Code §13.1-522(C). 

In Atocha Limited Partnership, defendants Song and Mesrobian were two of the six 

founding members of a limited liability corporation that formed to go into the restaurant 

business. Plaintiffs who invested in the corporation brought suit against the corporation and 

its founding members under the VSA, alleging that they were misled as to what percentage of 

ownership they would have in the company, and also misled as to the flawed business 

background and bankruptcy of Caraluzzi, another one of the founding members, whom the 

corporation employed to bring the project to fruition. In asserting claims against defendants 

as “controlling persons” pursuant to VSA §13.1-522(C), plaintiffs claimed that defendant 

Song had provided information in the offering memorandum knowing that the document

would be used to solicit investment, that he identified potential investors and actually solicited 

other investors, though not plaintiffs. The evidence showed that the wooing of investors, 

including creation of offering documents, was delegated to Caraluzzi, and there was “no

indication that this system was unreasonable or inadequate for purposes of vetting 

presentations to investors”, or that other founding members should have been more closely 

involved. The court found that based upon the foregoing, defendants satisfied Virginia’s 

“good faith” defense. 

Similarly, in Dellastatious v. Williams, 242 F. 3d 191 (4th Cir. 2001), the court 

affirmed summary judgment for defendants on plaintiffs' claims of controlling person liability 

under the Securities and Exchange Act and VSA 13.1-522 (C), finding for defendants on their 

“good faith” affirmative defense. The plaintiffs had invested in SurroundVision Advanced 

Imaging or “SAIL”, a company formed to finance the marketing of technology developed by 

SAIL’s parent company, LaserVision, for a camera system that created souvenirs for fans at 

sporting events. Defendant Gluck served as the President, CEO and a director of SAIL. 

Defendant Williams served as manager of SAIL, and defendant Kelly was an outside director. 

In October, 1997, Gluck invited plaintiff to become an equity investor in SAIL, and in 

November, 1997, provided plaintiff with offering documents regarding the sale of SAIL 

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securities (the “November Offering Memorandum”), which was a later draft of a prior 

offering memorandum that had been prepared by Gluck and Issac Cohen, who was 

LaserVision’s attorney. The evidence also demonstrated that sometime prior to November, 

1997, a director of LaserVision who had previously been a securities lawyer with the SEC, 

had criticized SAIL’s offering documents. The directors of SAIL had been told about these 

criticisms, but were also told that the criticisms were technical in nature, and had been 

corrected prior to issuance of the November Offering Memorandum. Relying at least in part 

on the November Offering Memorandum, plaintiffs invested over $260,000 in SAIL.

Plaintiffs in Dellastatious alleged that SAIL’s November Offering Memorandum was 

misleading in that it misrepresented the closeness of the relationship between SAIL and 

LaserVision (and that SAIL was really a shell operated by LaserVision), misrepresented 

SAIL’s projected revenues by grossly overstating them, and misrepresented the nature of 

SAIL’s assets. Plaintiffs sought to hold Williams and Kelly liable as control persons under 

Section 20 of the Securities and Exchange Act and VSA 13.1-522(C). The Fourth Circuit 

affirmed the Virginia district court’s entry of summary judgment for Williams and Kelly 

based upon the “good faith” affirmative defense applicable to both the federal and VSA 

“controlling person” liability provisions. Under the federal statute, the court “examine[s] 

what the defendants could have done under the circumstances to prevent the violation, and 

then ask whether the defendants-aware that they could take such measures-decided not to”, or 

in other words, to “determine if there is a genuine issue of fact regarding the defendants’ 

recklessness.” Id. at 194. On the VSA claims, the court looked at whether defendants could 

show that they acted reasonably under the circumstances. Id. at 195. The court found that 

that the evidence showed that Williams and Kelly acted reasonably and in good faith, and that 

it was reasonable for them to have delegated the creation and review of SAIL’s offering 

documents to SAIL’s officers and attorney, who was a securities lawyer and experienced in 

drafting offering documents, and also in delegating the raising of capital to Gluck, who was 

an entrepreneur experienced in raising capital for companies. There was no evidence that 

Williams or Kelly were aware of any irregularities in the offering documents that were sent to 

plaintiffs, and they were never charged with drafting or revising any of the documents before 

they were sent to plaintiffs. 

There is no meaningful factual distinction between the facts in the instant action and 

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that in Dellastatious, and like the defendants in Dellastatious, Mr. Turcotte, Dr. Kim and Dr. 

Cohen are entitled to summary judgment in their favor on all of the “controlling person” 

liability Counts asserted against them based upon their “good faith” and the reasonability of 

their actions under the circumstances. Mr. Turcotte, Dr. Kim and Dr. Cohen knew that 

Tucker, an officer and director of Xentex who was also Xentex’s counsel and a securities 

lawyer, was responsible for Xentex’s offering documents and participated in the sale of 

Xentex stock. (Facts 28, 30-34, 38, 57-61). They relied upon Tucker’s knowledge and 

expertise in these matters, and under the circumstances, acted reasonably (and certainly, in no 

way recklessly) in doing so. Neither Mr. Turcotte, nor Dr. Kim, nor Dr. Cohen were involved 

in or charged with the creation of the Information Statement, and they had no knowledge of 

any irregularities or alleged misstatements contained within the Information Statement.

(Facts 30-31, 33, 41, 54, 73). Moreover, to the extent that Plaintiffs base their claims upon 

alleged oral representations made by Batio and Tucker, undeniably Mr. Turcotte, Dr. Kim and 

Dr. Cohen could have no knowledge (or even the ability to acquire the knowledge) of what 

Batio and Tucker would state orally in their communications with potential investors. (Facts 

68-72, 94-95). In sum, the evidence establishes that Mr. Turcotte, Dr. Kim and Dr. Cohen 

acted reasonably under the circumstances with respect to Xentex’s offering documents, 

presentations to potential investors, and sales of stock by Xentex. They had no knowledge of 

any misrepresentations or omissions allegedly contained in the Information Statement, and 

undoubtedly, could have no knowledge, much less, any ability to act in response to, anything 

conveyed orally to Plaintiffs by Batio or Tucker. 

D. ADDITIONALLY OR IN THE ALTERNATIVE, THE FEDERAL 

SECURITIES LAW COUNTS AGAINST TURCOTTE

AND KIM CANNOT BE MAINTAINED BECAUSE PLAINTIFFS DID

NOT PURCHASE XENTEX STOCK IN A PUBLIC OFFERING

Mr. Turcotte and Dr. Kim are entitled to judgment in their favor on Counts I and XII 

against them, alleging that they are liable as controlling persons of Xentex pursuant to 15 

USC § 77o, for Xentex's alleged violations of §12(a)(2) of the Securities Act of 1933, § 

771(a)(2), because the Securities Act of 1933, § 771(a)(2), is inapplicable as a matter of law 

to the sale of Xentex stock to Xen Investors. Plaintiffs1assert in a conclusory fashion that 

1 While Movants refer to "Plaintiffs" collectively throughout this Memorandum and in connection with the 

purchase of Xentex stock, Movants except Premier Capital Management, LLC from the definition of "Plaintiffs", 

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"the securities were sold by means of a "prospectus," as that term is defined by the 

Securities Act of 1933, 15 U.S.C. § 77b(a)(10), because the securities were sold by means 

of the Information Statement, identified in Paragraph 29, which offered securities for sale." 

(Complaint at ¶150) Plaintiffs then plead "upon information and belief" that "the securities 

were sold to Plaintiffs in a public offering and did not qualify for any exemptions under the 

Securities Act of 1933", and further "upon information and belief", that "for purposes of 

Regulation D of the Securities Act of 1933, Xentex sold securities to more than 35 

"purchasers" in the same "offering" as Plaintiffs." (Complaint at ¶¶151-2) 

Liability under §12(a)(2) of the 1933 Act is based on misstatements in prospectuses, 

and is thus confined to documents related to public offerings by an issuer or its controlling 

shareholders. Gustafson v. Aklloyd Company, Inc., 513 U.S. 561, 568, 115 S. Ct. 1061, 1068, 

131 L. Ed. 2d 1 (1995); Olkey v. Hyperion 1999 Term Trust, Inc., 98 F. 3d 2, 4 (2d Cir. 

1996)(§12(a)(2) of the 1933 Act provides for liability for making a securities offering "by 

means of a prospectus or oral communication..."); Waltree Ltd. v. Ing Furman Selz LLC, 97 

F. Supp. 2d 464, 469 (S.D.N.Y. 2000)("§12(a)(2) encompasses a narrow category of 

transactions-public offerings of securities via a written prospectus). "A plaintiff may maintain 

a claim under §12(a)(2) only where it complains of misstatements in a prospectus or "oral 

communications that relate to a prospectus."" Waltree Ltd. at 469, quoting Gustafson, 513 

U.S. at 567-68, 115 S. Ct. 1061.

The undisputed evidence demonstrates that the Xen Investors acquired its stock in 

Xentex by means of a private placement or distinct transaction that involved Xen Investors 

alone, and not pursuant to a public offering, which Xentex never engaged in over the course 

of its history of equity funding and stock sales. (Facts 97-111). Xentex and Tucker, 

Xentex's Vice-Chairman and Executive Vice-President and a securities lawyer, were always 

careful to ensure that only accredited investors or investors who qualified for some other 

exemption invested in Xentex, and that Xentex took no money from anyone who was not an 

accredited investor. (Fact 57-61). Xentex always had investors complete and sign an 

and further, seek summary judgment as to all claims asserted against them by Premier, as Premier neither 

purchased any stock in Xentex nor engaged in any transaction with Xentex or Movants which may be deemed as 

involving the sale of "securities". The undisputed evidence demonstrates that Premier was not a purchaser, but 

was a "seller" of Xentex stock, and received a commission on the sale of Xentex stock to Xen Investors. (Facts 

125-129). Thus, Premier has no standing, or any factual or legal basis, for asserting any claims against Xentex 

or Movants herein. 

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"investor questionnaire" demonstrating that they were accredited investors, and never 

permitted anyone who didn't qualify for an exemption to purchase stock in Xentex. (Fact 61).

Prior to Xen Investors' acquisition of stock in Xentex, Xentex had engaged in only 

"four financing rounds". (Facts 78). By November 1, 2000, when Xen Investors was first 

introduced to Xentex, all of Xentex's "financing rounds" were "closed", and the last such 

"round" had occurred in December, 1999, nearly a full year beforehand. (Id.) 

Xen Investors was presented with the Information Statement, which clearly stated that 

any offer to sell was made pursuant to Regulation D of the Securities Act of 1933, which 

relates solely to private placements. (Fact 77, 107); Lennon v. Christoph, 1997 WL 57150 at 

*23 (N.D.Ill. 1997) (holding that a “private placement memorandum such as the one at issue 

here does not involve a public offering” and granting defendants judgment on a §12(2) claim). 

Xen Investors also purchased its Xentex shares through a Subscription Agreement, as opposed 

to a prospectus broadcast to investors in general. (Fact 106). In the Subscription Agreement, 

Xen Investors warranted and represented to Xentex that:

The Company has made available to the undersigned and as requested to any of 

the undersigned’s attorney, accountant, or Investor Representative, all 

documents that each of the foregoing have requested relating to an investment in 

the Company.

(Fact 106). This kind of access and information placed Xen Investors in a “privileged 

relationship” with Xentex, a relationship that is “substantially different” from the status of 

members of the public at large. SEC v. Continental Tobacco Co. of S.C., 463 F.2d 137,159 

(5th Cir. 1972); see Vannest v. Sage, Rutty & Co., 960 F. Supp. 651, 653-55 (W.D.N.Y. 1997) 

(court relied on a subscription agreement in determining that there was no public offering); 

see also Weprin v. Peterson, 736 F. Supp. 1124, 1127 (N.D.Ga. 1988) (subscription 

agreements and limitation of offering to qualified investors led to conclusion that there was no 

public offering).

Moreover, the undisputed evidence demonstrates that Xen Investors' acquisition of 

Xentex stock was not a part of any "offering" of Xentex stock. The Xen Investors/Copeland's 

acquisition of Xentex stock was a separate, unique and one-time or single "transaction" for 

Xentex. (Facts 97-106, 109-110). Xen Investors' investment in Xentex was pursuant to and 

part of a transaction unlike any other Xentex had ever been engaged in previously, or 

thereafter. Xen Investors first made an emergency loan to Xentex because of Xentex's 

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immediate insolvency and emergency need for money. (Fact 102, 109). Then, subject to due 

diligence, Xen Investors would convert that loan to equity under a particular set of 

circumstances, with certain non-dilution rights provided to them, warrants, and other 

particular circumstances and contingencies that were applicable only to them in this 

transaction. (Facts 98-100). It was not an "offering", but a "transaction", wherein Xen 

Investors' principal Robert Copeland made Xentex an offer, which was further negotiated by 

Xentex and Xen Investors. (Facts 104-106, 108, 111). It is also undisputed that Xen 

Investors itself was an "accredited investor". (Fact 106). The totality of evidence, which is 

undisputed, clearly demonstrates that Xen Investors did not acquire its shares in Xentex in a 

public offering, and therefore, the Securities Act of 1933 is wholly inapplicable as a matter of 

law, and Mr. Turcotte and Dr. Kim are entitled to judgment in their favor on Counts I and XII, 

respectively.

E. TURCOTTE, KIM AND COHEN ARE ENTITLED TO JUDGMENT 

IN THEIR FAVOR ON EACH OF THE COUNTS ASSERTING EITHER

FEDERAL AND/OR VIRGINIA SECURITIES ACT VIOLATIONS BY

THEM AS "CONTROLLING PERSONS" BECAUSE THERE HAS BEEN

NO PRIMARY VIOLATION OF THE SECURITIES LAWS BY XENTEX

Plaintiffs assert claims against Mr. Turcotte and Dr. Kim as "controlling persons", 

pursuant to §15 of the Securities Act, 15 U.S.C. §77o, for purposes of non-party Xentex's 

alleged violation of §12(a)(2) of the Securities Act of 1933, 15 U.S.C. §77l, in connection 

with Xen Inverstors' purchase of Xentex stock. Similarly, Plaintiffs assert claims against Mr. 

Turcotte, Dr. Kim and Dr. Cohen pursuant to §13.1-522(C) of the Virginia Securities Ac 

("VSA"), as "controlling persons" of Xentex for purposes of Xentex's alleged violation of the 

VSA, §13.1-522(A), in connection with Xentex's alleged sale of securities to Xen Investors 

as well as for the TMB Loan, allegedly by means of untrue statements of material fact 

and/or omissions. Under both the federal statutory claims asserted against Turcotte and Kim, 

and the Virginia statutory claims asserted against Turcotte, Kim and Cohen, for liability as 

controlling persons for alleged violations of the securities laws, Plaintiffs must first establish 

that the alleged primary violator – in this case, Xentex – is liable for the primary violation of 

these securities laws. 15 U.S.C. §77o ("Every person who ... controls any person liable under 

sections 77k or 77l....")(emphasis supplied); Virginia Securities Act, Va. Code §13.1-522(C) 

(liability for someone who controls "a person liable under subsection A or B of this 

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section....") (emphasis supplied); Maher v. Durango Metals, Inc., 144 F. 3d 1302, 1305 (10th

Cir. 1998)(a prima facie case for control person liability under §15 of the Securities Act of 

1933, for an alleged violation of §12(a)(2), requires that plaintiff establish a primary violation 

of §12(a)(2)); Heartland Financial USA, Inc. v. Financial Institutions Capital Appreciation 

Partners, LLC, 2002 WL 31819008, *8 (N.D. Ill. Dec. 12, 2002) (Judge Leinenweber) 

("Control person" liability is a derivative claim, "cognizable only where plaintiffs allege a 

"primary" violation of the securities laws."); Dunn v. Ronbotics Corporation, 2003 WL 

23697826 at **10-11 (E.D. Va. Feb 20, 2003)(no liability as a controlling person pursuant to 

VSA §13.1-522 (C) in the absence of a finding of a primary violation under §13.1-522(A) of 

the VSA); Atocha Limited Partnershipv. Witness Tree, LLC, 65 Va. Cir. 213, 2004 WL 

1665009 at *7 (Va. Cir. Ct. July 16, 2004)(liability under VSA §13.1-522 (C) on those able to 

control a seller is addressed only if it is first determined that there has been a violation of 

VSA §13.1-522 (A) by the alleged seller). Mr. Turcotte, Dr. Kim and Dr. Cohen are entitled 

to summary judgment in their favor on Counts I-III, XII-XIV and XIX-XX because the 

undisputed evidence establishes that there is no basis for any liability for a primary violation 

of the Securities Act of 1933 or the VSA.

Plaintiffs Cannot As A Matter Of Law Establish That Xentex Made Any Material 

Misrepresentations or Omissions

To establish liability under §12(2) of the Securties Act of 1933, plaintiff must prove: 

"(1) that defendant offered or sold a security; (2) by use of any means of communication in 

interstate commerce; (3) through a prospectus; (4) by making a false statement or omission 

of material fact; (5) the untruth of which was known by defendant but not known by 

plaintiff; and (6) that caused plaintiff's damages." Gasner v. Board of Supervisors of the 

County of Dinwiddie, VA, 103 F. 3d 351, 356 (4th Cir. 1996)(emphasis supplied). Likewise, a 

violation of VSA §13.1-522(A) requires the sale of a security "by means of an untrue 

statement of a material fact or any omission to state a material fact ...." Va. Code §13.1-

522(A)(emphasis supplied).2"A misrepresented or omitted fact is material if there is a 

substantial likelihood that a reasonable investor would have been caused by disclosure of the 

truthful fact to change his decision to purchase the security." Gasner at 356. "Disclosure of 

2 Because of the scarcity of Virginia case law interpreting the VSA, Virginia courts have utilized cases 

interpreting the Federal Securities Act of 1933 for guidance. Atocha Limited Partnershipv. Witness Tree, LLC, 

65 Va. Cir. 213, 2004 WL 1665009 at *5 (Va. Cir. Ct. July 16, 2004).

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the true facts or of the omitted fact must have been viewed by the reasonable investor as 

having significantly altered the "total mix" of information made available." Id., citing TSC 

Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S. Ct. 2126, 2132, 48 L. Ed. 2d 757 

(1976). See also Halperin v. EBanker USA.COM, Inc., 295 F. 3d 352, 357 (2nd Cir. 

2002)(allegedly fraudulent materials must be analyzed in their entirety to determine whether a 

reasonable investor would have been mislead, considering the total mix of information). 

Moreover, cautionary language, if sufficient, renders the alleged omissions or 

misrepresentations immaterial as a matter of law. Harden v. Raffensperger, Hughes & Co., 

Inc., 65 F.3d 1392, 1404 (7th Cir. 1994). Here, the total mix of information provided by 

Xentex, including the cautionary statements and explicit disclosures and warnings contained 

in the Information Statement, demonstrate that the alleged misrepresentations and omissions 

by Xentex could not, as a matter of law, have been material. 

In Gasner, investors sued the county and its development authority alleging securities 

fraud pursuant to §12(a)(2) of the Securities Act of 1933 and the VSA, in connection with 

defaulted bonds that were issued to finance construction and operation of an anaerobic 

composting facility. The investors alleged that the offering materials contained 

misrepresentations or omissions regarding whether anaerobic composting had been a proven 

technology, and whether the county had only a temporary permit to operate such a facility. 

The Court granted defendants' motion for summary judgment on the securities fraud counts, 

finding as a matter of law that defendants made no material misrepresentations or omissions 

in the offering statement, which was replete with cautionary language that negated the 

materiality of any of the alleged misrepresentations or omissions. Id. at 358. The offering 

statement included cautionary language that the Virginia Bio-Fuel Corporation or "VBFC", 

which was the private corporation engaged to construct and operate the facility, had no 

significant assets other than the operations contract with county, and had never operated a 

facility similar to the one to be built by the county. The offering memorandum further 

disclosed that there could be no guarantee that the building would be completed, or if 

completed, would function as intended as a solid waste facility or one with sufficient revenues 

to cover operating costs. Id. at 359. Based upon the total mix of information, including this 

cautionary language found in the offering memorandum, the court concluded that summary 

judgment was properly granted by the district court. Id. at 360. "Although the total mix of 

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the information available warned them of the high risks they were facing, the bond-holders 

nonetheless chose to purchase these bonds. They can hardly now claim that their losses were, 

pursuant to Rule 10(b)(5) and §12(2), the result of securities fraud committed by the 

appellees." Id. 

In Olkey, 98 F. 3d 2d at 2, 8 (2d Cir. 1996), a group of investors brought suit pursuant 

to §12(2) of the Securities Act, seeking damages for fraud in issuing and using prospectuses 

to market trusts formed to invest in mortgage backed securities. The investors alleged that the 

prospectuses misled investors by indicating that securities would be selected as to achieve a 

balance so that when interest rates rose and fell, the value and earnings of the trust would 

remain stable. Id. at 4. The plaintiffs further alleged that defendants failed to disclose the 

limitations of their hedging strategy, including its vulnerability to decreasing interest rates, 

and thus the prospectuses, and also the "roadshows" that defendants put on for potential 

investors, misrepresented the riskiness of the trusts. Id.

The district court in Olkey dismissed plaintiffs' claims pursuant to F. R. Civ. P. 

12(b)(6) on the grounds that the investment strategy and risks were fully revealed on the face 

of the prospectuses, and that reasonable investors would not have relied on oral assurances 

when they were contradicted by specific disclosures in the prospectuses. Id. at 4. The Second 

Circuit affirmed, finding that when the prospectuses were read as a whole, they informed 

prospective investors of the nature of the investment and the attendant risks: 

Since the plaintiffs' claims are contradicted by the disclosure of risk made on 

the face of each prospectus, no set of additional facts could prove the plaintiffs' 

claims. Representations made by the defendants at the roadshows are 

immaterial since they are contradicted by the plain and prominently displayed 

language in the prospectuses.

Id at 7. See also Halperin at 360-61 (2nd Cir. 2002)(the offering memoranda addressed the 

relevant risk, and included sufficient cautionary language that the investment involved 

substantial risks, and was suitable only for those who could sustain the lost of their entire 

investment: when read in their entirety, the offering memoranda did not only "bespeak 

caution, they shout it from the roof tops, so to speak.").

It is undisputed that both Xen Investors and TMB were provided with and read the 

Information Statement prior to making their alleged respective investments in Xentex. (Facts 

72, 74, 84-89). The total mix of information provided by Xentex, including the cautionary

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statements and explicit disclosures and warnings contained in the Information Statement, 

demonstrate that the other alleged misrepresentations and omissions by Xentex were 

immaterial as a matter of law. The disclaimers and warnings on the Information Statement 

clearly provided extensive cautionary language. (Facts 76-83). Sufficient cautionary 

language renders the alleged omissions or misrepresentations immaterial as a matter of law. 

Harden v. Raffensperger, Hughes & Co., Inc., 65 F.3d 1392, 1404 (7th Cir. 1994). The first 

two pages of the Information Statement contained the following:

The Shares offered hereby involve a high degree of risk. Investors should not 

invest any funds in this private placement unless they can afford to lose their 

entire investment. See “Risk Factors” generally, and “Risk Factors – Failure to 

Commence Operations,” particularly. (Information Statement, p. 1.)

Any estimates or projections as to events that may occur in the future are based 

upon the judgment of management of the company as of the date of this 

memorandum. Whether or not such estimates or projections are achieved will 

depend upon the achievement by the company of its overall business objectives 

and the future availability of funds...There can be no assurance that any of 

these projections will be attained. Actual results will vary from the projections 

and such variations may be material. (Information Statement, p. 2.)

This memorandum contains forward looking statements and financial 

projections that involve risks and uncertainties. Actual events and results 

could differ materially from those anticipated in these forward looking 

statements as a result of various factors. (Information Statement, p. 2.)

The Section of the Information Statement entitled "Business Strategy" further 

provides: 

Although the Company’s agreements with KDS provide the Company with

financing for product development, as well as for tooling and manufacturing of 

Voyager units, the Company expects to require an additional $5 – 10 million 

prior to the product launch, depending on the size of the Company’s 

advertising budget ........In the immediate future, the Company expects to 

begin contacting investment bankers and potential business partners (such as 

software and Internet service providers) to raise this amount on a private 

basis........However, there is no assurance that the Company will be able to 

obtain such financing on favorable terms or at all.

In addition, the section of the Information Statement clearly designating "RISK 

FACTORS", and called to a prospective investor's attention on the first page of the 

Information Statement, provided:

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The securities offered hereby are speculative and involve a high degree of risk, 

and should be purchased only by investors who can afford to sustain a total 

loss of their investment.....

The "Lack of Operating History" section provides:

Being a startup organization, the Company does not have any operating 

history, and has conducted no business to date other than matters related to its 

organization, the preliminary design and development of the Flip-Pad line, 

the raising of capital and establishing its strategic alliance with KDS. 

Although KDS is an established company with sales of over $500 million in 

1999, the Company must still develop its own operations. The intended 

business of the Company is subject to the risks inherent in the establishment of 

new business enterprise. Because the Company’s intended products and 

services have not been fully developed or tested, investors do not have 

access to all of the information in assessing their proposed investment that 

is available to the purchasers of securities of a computer hardware 

company with a history of operations. The Company’s profitability for 

the foreseeable future will depend primarily upon the successful 

development, manufacture and marketing of the Flip-Pad line of products, 

and there is no assurance that the Company will ever operate profitably. 

The Company can be expected to incur significant operating losses until 

its products are successfully marketed, if ever.

(emphasis supplied). The "Failure to Commence Operations" section, also specifically 

referenced on the first page of the Information Statement, provides:

Although the Company’s engineering team has developed working models

of its full-size PC product, there is no assurance that production models will 

ever be completed. Absent the commencement of profitable operations the 

Company’s accumulated deficit will continue to increase (and book value per 

share will continue to decrease) as operating expenses continue to be incurred. 

While KDS has agreed to pay for the remaining portion of the Voyager’s 

product development and tooling costs, the Company still requires a marketing 

budget and other operation funds. Unless the Company is able to raise 

additional capital, it is unlikely the Company will commence any significant 

marketing operations. See” – Significant Capital Requirements; 

Uncertainty of Additional Funding.: In such a case, and absent a sale of the 

entire Company, the Company is unlikely to recover any significant portion of 

its investment in the development of the Flip-Pad products. As a result, if a 

liquidation of the company were to occur, investors would likely lose their 

entire investment.

(emphasis supplied). (Facts 77-82). Thus, the risks inherent in Plaintiffs' investment in 

Xentex were fully and plainly disclosed in the written materials -- the Information Statement 

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– provided to them, and relied upon both by Xen Investors when it made its investment, as 

well as by TMB in connection with its $650,000 loan six months later. (Fact 121). 

Admittedly, Plaintiffs also knew that Xentex was insolvent (Fact 92-93), and was incapable of 

meeting its operating expenses for even one more month without the Plaintiffs infusion of 

capital. (Facts 90, 92-93). Xen Investors was specifically informed that its investment of 

$300,000 per month (for four months) was the minimum amount of funding Xentex needed 

just to cover its minimum expenses to keep its doors open, unless or until it could obtain 

additional funding achieve its goal of mass production and sales. (Id.). In light of the total

mix of information provided Plaintiffs, including the Information Statement and its explicit 

disclosure of Xentex's "Significant Capital Requirements" and the risk that the "Company 

can be expected to incur significant operating losses until its products are successfully 

marketed, if ever, Plaintiffs cannot now say that they were not aware of Xentex’s dire 

financial situation, or the risks they were taking in making their investments. 

Moreover, the undisputed evidence, including Xentex's agreements with KDS, its 

Korean manufacturer, demonstrate that the information contained in the Information 

Statement regarding present facts relating to the development, production, sales and servicing 

of the Voyager were true and accurate. (Fact 62-65). Plaintiffs assert that their claims are 

based upon the allegedly false or misleading statements that:

(1) that KDS had agreed to provide the necessary financing for the balance of 

product development for Voyager computers; (2) that Xentex had already 

received product financing of approximately $40 million from its contract 

manufacturer (KDS); (3) that KDS had agreed to open a Silicon Valley service 

depot to provide warranty and repair services for Voyager units; (4) that KDS 

was obligated to purchase a minimum of 13,100 Voyager units during the first 

year of production and 26,200 units during the second year of production; and 

(5) that Xentex had the present expectation of launching Voyager in the 

fourth quarter of 2000 and had the present expectation of beginning 

production and shipment of Voyagers in the first quarter of 2001, ....

The plain written disclosures in the Information Statement and the additional 

supporting documentation -- including the KDS agreements, which were provided to 

Plaintiffs prior to their investments in Xentex – demonstrate the truth of Xentex's 

representations regarding its present contractual arrangements with KDS. (Fact 62-65, 104-

105). These written disclosures must control over any alleged "oral variances" allegedly 

made by Batio or Tucker. Seventh Circuit law is clear that:

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"[t]he principle that the written statement controls the oral one is a staple of 

contract law, and we agree ... that it should be used in securities law as well." 

Consequently, when the issuer discloses the truth, an oral variance is not a 

legal cause for injury.” Id. As far as what the plaintiffs claim they were told 

about the risks of the investment, its profitability, and calling the letters of 

credit, and to the extent that the oral representations differ from the 

corresponding memorandum, the plaintiffs have not established a legal cause 

of injury.

Ambrosino v. Rodman & Renshaw, Incorporated, 972 F. 2d 776, 786 (7th Cir. 1992), quoting 

Teamsters Local 282 v. Angelos, 762 F. 2d 522, 530 (7th Cir. 1985). Written disclosures 

control over oral disclosures. Acme Propane, Inc. v. Tenexco, Inc., 844 F. 2d 1317, 1322 (7th

Cir. 1988)(a written declaration informing one party of an important fact dominates a contrary 

oral declaration, so in the law of securities a written disclosure trumps an inconsistent oral 

statement); Berson v. Hardiman, 1999 U.S. Dist. Lexis 14767, *24-25 (N.D. Ill. 1999)(Judge 

Pallmeyer)(written disclosures in private placement memorandum trump any alleged oral 

representations to the contrary). When there is a disparity between the allegations in the 

pleading and the written instrument, the written instrument controls. Heartland Financial 

USA, at *3 (warnings in private placement memorandum controlled over alleged statements to 

the contrary). In addition, the Information Statement itself provided in two separate places 

therein that:

No person has been authorized to make any representations or give any 

information with respect to the company or the shares other than the 

information contained herein and, if made or given, such representations or 

information must not be relied upon as having been authorized by the company 

or otherwise. Prospective investors should not rely on any information not 

contained in this memorandum.

(Facts 77, 83). Plaintiffs only other assertion regarding the allegedly false information 

provided by Xentex includes the claim that:

The Information Statement also included false and misleading financial 

statements, prepared by Xentex's in-house accountant and Chief Financial 

Officer, Turcotte. The financial statements were materially false and 

misleading because: (1) they drastically overstated the value of Xentex's 

assets by millions of dollars by falsely representing that Xentex had over $5.3 

million in total assets, including $4.25 million in tooling assets.

Complaint at ¶29. While the undisputed evidence from Turcotte, Xentex's "in-house" 

accountant and CFO, is that such financial statements were intended for internal distribution 

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only (Fact 51), and that he had no prior knowledge of any dissemination outside of Xentex's 

upper-management (Fact 52-53), the financial statement which Plaintiffs allege was attached 

to the Information Statement clearly designates on its face that it was "preliminary, unaudited 

and subject to change". (Facts 90-91). Moreover, the undisputed evidence demonstrates that 

the financial statement was accurate as of the date it was prepared, which is further 

corroborated by the KDS agreements, of which Plaintiffs were aware prior to their investment

in Xentex. (Fact 51, 62-65, 105). In sum, all of the written materials, taken together, 

provided Plaintiffs with truthful, current and accurate information regarding Xentex's 

contracts, other assets, overall financial picture, and the risks associated with an investment in 

Xentex. Any contrary assertions of "falsity" plaintiffs allude to are trumped by the written 

materials, and Plaintiffs were specifically warned in writing that any oral representations to 

the contrary were not authorized by Xentex and not to be relied upon, and in any event, were 

immaterial given the total mix of information provided Plaintiffs.3

F. XEN INVESTORS CANNOT PREVAIL ON ITS CLAIMS BECAUSE IT HAS 

NO LOSSES FROM THE ALLEGED VIOLATION

1. Xen Investors Cannot Establish “Loss Causation”

To establish a primary violation against Xentex under 15 U.S.C. § 77l(a)(2), Xen 

Investors must prove valid loss causation:

In an action described in subsection (a)(2) of this section, if the person who 

offered or sold such security proves that any portion or all of the amount 

recoverable under subsection (a)(2) of this section represents other than the 

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

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

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

be stated therein or necessary to make the statement not misleading, then such 

portion or amount, as the case may be, shall not be recoverable.

15 U.S.C. § 77l(b).

“Loss causation” requires Xen Investors to show that it was the very facts about which 

Xentex lied which caused its injuries. Caremark, Inc. v. Coram Healthcare Corp., 113 F.3d 

645, 648 (7th Cir. 1997). Dr. Kim and Mr. Turcotte are entitled to summary judgment if they 

can establish “that the decline in the value of the security is attributable in total to some . . . 

3 Additionally, Plaintiffs provide no evidence that any of the alleged statements were “false” or inaccurate or 

incomplete in any respect. Plaintiffs imply that the representations were false, simply because Xentex did not 

succeed in its goal of mass production and sales, and eventually filed for bankruptcy. However, Plaintiffs must 

do more than this to demonstrate that the statements made (or alleged omissions) were false at the time that they 

were made. 

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factor” other than the alleged false statement. Id. at 649-50. See also Bastian v. Petren 

Resources Corporation, 892 F.2d 680, 682 (7th Cir. 1990)(“if the facts had been as 

represented by the defendants,” but the value of the plaintiffs’ investment still declined, there 

is no loss causation.) Id. at 682. Here, the reason why Xen Investors’ (and all Xentex 

shareholders’) suffered a loss of their investment in Xentex was because KDS went into 

bankruptcy, and as a result, could not produce computers for Xentex. (Facts 140, 142). There 

is no nexus between Xen Investors’ loss of their investment and the alleged fraud.

2. Xen Investors Did Not Suffer Any Economic Loss.

In November 2002, the Virginia State Corporation Commission (“SCC”) commenced 

an investigation of Premier Capital and Reyna relating to their role in the sale of Xentex stock 

to Virginia investors. (Fact 136). As a result of this investigation, Reyna was ordered to 

make a rescission offer to seven Virginia investors, including Xen Investors. (Fact 137-138).

4

Reyna and Premier made the offer, but Xen Investors refused this offer to rescind its 

investment. (Fact 139). Xen Investors therefore either suffered no damages, or alternatively, 

failed to mitigate its damages, and cannot now seek to recover from Defendants. See e.g., 

Ricketts v. Adamson, 483 U.S.1, 22, 107 S. Ct. 2680, 97 L. Ed. 2d 1 (1987); Ellis v. Sheahan, 

412 F. 3d 754, 756 (7th Cir. 2005); Savino v. C.P. Hall Co., 199 F. 3d 925, 934-35 (7th Cir. 

1999). 

G. TURCOTTE IS ENTITLED TO SUMMARY JUDGMENT ON 

PLAINTIFFS’ NEGLIGENT MISREPRESENTATION CLAIM.

In Count V, Plaintiffs allege that Mr. Turcotte, Xentex’s in-house accountant, prepared 

false and misleading financial documents so as to induce Plaintiffs to invest in Xentex. 

Specifically, Plaintiffs claim that (1) through the course of his business and employment with

Xentex, Turcotte was in the business of supplying information for the guidance of others in 

their business dealings; (2) Turcotte negligently made statements to Plaintiffs that contained 

inaccurate information regarding Xentex’s financial condition and production capabilities; 

and (3) Turcotte provided the information to Plaintiffs to guide them in their investment

decisions, with the intent that Plaintiffs would act on those representations. (Compl., ¶¶ 81-

83.) Plaintiffs, however, cannot establish that Turcotte provided them with any information in 

4 VSA §13.1-522(D) provides that a plaintiff may not even maintain suit for a violation of §13.1-522 A, B, or C 

if before suit is brought any person liable by any of those provisions makes a written offer to refund the 

consideration paid and any loss due to any investment advice provided by such person. 

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which he believed they would rely and, more importantly, cannot establish that Turcotte owed 

any duty to communicate accurate information to them. Thus, summary judgment is 

warranted. 

To prevail on a claim for negligent misrepresentation, a plaintiff must prove (1) a false 

statement of material fact; (2) carelessness or negligence in ascertaining the truth of the 

statement by the party making it; (3) an intention to induce the other party to act; (4) action by 

the other party in reliance on the truth of the statement; (5) damage to the other party resulting 

from such reliance; and (6) a duty on the party making the statement to communicate accurate 

information. TriContinental Industries, Ltd. v. Price Waterhouse Coopers, LLP, 475 F.3d 

824, 833-34 (7th Cir. 2007), citing First Midwest Bank v. Stewart Title Guaranty Co., 218 

Ill.2d 326, 335 (2006). As stated above, Plaintiffs have shown no evidence to support such a 

claim.

1. Turcotte Did Not Intend For Plaintiffs to Rely on the Financial Information 

He Prepared.

The crux of Plaintiffs’ claim against Turcotte is that he made 

misrepresentations about the financial condition of Xentex through financial 

statements that were provided to Plaintiffs at the November 1, 2000 meeting. Simply 

because Plaintiffs were shown those financial statements does not establish that 

Turcotte intended for them to rely on those statements. Indeed, Turcotte testified that 

he prepared those documents for internal purposes only and had no knowledge that 

Batio or Tucker were going to give them to anyone. (Facts 52-53). Moreover, those 

statements were clearly designated as "preliminary, unaudited and subject to change" 

and Turcotte never disclosed them to anyone outside of Xentex and never gave them 

to any investor. (Id.). Importantly, Reyna acknowledged that the financial statements 

Plaintiffs were provided were unaudited. (Fact 91). 

2. Turcotte Owed No Duty to Provide Accurate Information to Plaintiffs.

Although Plaintiffs claim that Mr. Turcotte had some kind of duty to provide them 

with accurate information to “guide them in their business dealings,” their position is contrary 

to the law and the facts in this case. In determining whether a particular enterprise is in the 

business of supplying information for the guidance of others in their business transactions,

courts must undertake a “precise, case-specific inquiry.” Tolan and Son, Inc. v. KLLM 

Architects, Inc., 308 Ill. App. 3d 18, 27 (1st Dist. 1999), quoting Rankow v. First Chicago 

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Corp., 870 F.2d 356, 361 (7th Cir. 1989). To determine whether a defendant is in the 

business of supplying information for the guidance of others in their business transactions is:

whether the end product of the relationship between plaintiff is a 

tangible object (i.e., a product) which could be readily described in a 

contract or whether it is intangible. In short, if the intended end result

of the plaintiff defendant relationship is for the defendant to create a 

product, a tangible thing, then the defendant will not fit into the 

business of supplying information.

Id. at 28, quoting MW Manufacturers, Inc. v. Friedman Corp., No. 97 C 8319, 1998 WL 

417501, at *4 (N.D. Ill. July 21, 1998). Moreover, whether the information supplied is 

merely ancillary to the sale of a product or service or in connection with the sale, defendant 

will not be found to be in the business of supplying information for the guidance of others in 

their business dealings. Id., citing Rosenstein v. Standard & Poor’s Corp., 264 Ill. App. 3d 

818, 823 (1st Dist. 1993). Turcotte was an employee of Xentex, preparing financials 

statements of for internal use only, for Xentex's upper management, and for no one outside of 

this group. (Facts 46, 50, 52-53). Turcotte did not supply information to anyone outside of 

Xentex's upper-management, and clearly was not in the business of supplying information to 

Plaintiffs, whom he had never met, and was only vaguely aware of their existence. (Fact 51).

3. Turcotte's Financial Statements Contained No False Information

The financial statements Mr. Turcotte did prepare internally for Xentex were neither 

false, nor was Mr. Turcotte carelessness or negligent in ascertaining the truth. Turcotte's 

inclusion of the $4.25 Million for tooling as an asset was accurate, and ascertained directly 

from the KDS agreements, which at the time certain financial statements were prepared, were 

the only means or basis for assigning value to this asset. (Fact 51). When Mr. Turcotte 

believed he had obtained more precise information regarding the value of the tooling to date, 

he revised Xentex's financial statements accordingly. (Id.).

H. PLAINTIFFS CANNOT ESTABLISH ANY OF THE ELEMENTS OF A 

CLAIM FOR COMMON LAW FRAUD AGAINST TURCOTTE AND 

KIM

Under Virginia law, a plaintiff must prove that a defendant knowingly and 

intentionally made a false representation of a material fact, with the intent to mislead, and that 

the plaintiff reasonably relied on the representation to his or her detriment. Goldstein v. 

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Malcolm G. Fries & Associates, Inc., 72 F.Supp.2d 620, 627 (E.D. Va. 1999); Atocha Limited 

Partnership at *11. In a case that involves multiple defendants, a plaintiff cannot group all 

alleged wrongdoers together – he or she must prove specific circumstances of fraud for each 

individual defendant. Goldstein at 627. In the absence of a knowingly false representation, 

plaintiffs cannot prove a case for fraud. Atocha at *11.

Plaintiffs cannot present even a scintilla of evidence on even one of the requisite 

elements for establishing a claim for fraud. The undisputed evidence demonstrates that 

neither Mr. Turcotte nor Dr. Kim made any representations to Plaintiffs, much less, known 

false ones of material fact, and there is no evidence that Turcotte or Kim intended to mislead 

Plaintiffs in any respect. (Facts 35, 39-41, 51, 55-57, 73). Accordingly, Turcotte and Kim are 

entitled to summary judgment on Plaintiffs claims for common law fraud. 

I. THE CLAIMS FOR BREACH OF FIDUCIARY DUTY AGAINST TURCOTTE 

AND KIM MUST ALSO FAIL

In a vein similar to the alleged fraud claims, Plaintiffs' Complaint asserts that Mr. 

Turcotte and Dr. Kim owed a fiduciary duty to Plaintiffs to "act honestly, loyally and in good 

faith and fairness to Plaintiffs (Complaint at ¶88, 186), and that they allegedly breached their 

duties because they "allowed Xentex to make each of the misrepresentations made to 

Plaintiffs", as alleged elsewhere in Plaintiffs' Complaint, allegedly had the "ability to prevent 

Xentex from making the misrepresentations", and "continu[ed] to conceal the false nature of 

[Xentex's] earlier misrepresentations even though [they] knew [they] owed Plaintiffs a 

fiduciary duty." See Complaint at ¶89-92, 187-190. This Court has already ruled in its 

Memorandum Opinion and Order dated September 29, 2004, that while officers and directors 

generally owe a fiduciary duty to the shareholders of a corporation, "that duty does not 

emerge until after there is an actual director-shareholder relationship", and "to the extent that 

plaintiffs breach of fiduciary duty claims are based on defendants' conduct prior to plaintiffs' 

purchase of Xentex stock, those claims must be dismissed." Memorandum Opinion and 

Order dated September 29, 2004, at p. 8. 

To the extent that Plaintiffs attempt to plead a claim for breach of fiduciary duty after 

they became shareholders in Xentex, Plaintiffs appear to assert breach of the duty of 

disclosure. "While it is true that the directors of a Delaware corporation owe a fiduciary "duty 

of disclosure" to its stockholders when they seek stockholder action", See Jackson National 

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Life Insurance Company v. Kennedy, 741 A. 2d 377, 388 (Del. Ch. 1999), this is not the issue 

here, and Plaintiffs assert no other basis for any duty allegedly owed to them.

Delaware has recognized a claim for breach of fiduciary duty for issuing misleading 

disclosures to stockholders when those disclosures were not connected to a specific request 

for a discretionary voting or tendering decision, classifying such a claim as a species of the 

duty of loyalty. Metro Communication Corp. v. Advanced Mobilecomm Technologies, Inc., 

854 A. 2d 121, 157 (Del. Ch. 2004). In Malone v. Brincat, 722 A. 2d 5, 10 (Del. 1998), the 

Delaware Supreme Court recognized this claim, but "set a very high bar for plaintiffs seeking 

to prove a claim. In the Malone context, a plaintiff had to prove that the directors "knowingly 

disseminated false information". This level of proof is similar to, but even more stringent 

than, the level of scienter required for common law fraud." Metro Communication Corp. at 

157-58, citing Malone v. Brincat, 722 A. 2d 5, 10 (Del. 1998). 

Plaintiffs breach of fiduciary duty claims against Mr. Turcotte and Dr. Kim fail for the 

same reasons as their fraud claims. Absent from the evidence in this case is any indication 

that Mr. Turcotte or Dr. Kim made any representations to Plaintiffs, provided them with any 

false information, had any knowledge that someone else had provided false information, and 

finally, that either Mr. Turcotte or Dr. Kim possessed the requisite scienter or intent to 

mislead Plaintiffs, in any respect.

Finally, Xentex’s Amended and Restated Certificate of Incorporation insulates Dr. 

Kim from liability from any alleged breach of fiduciary duty. Article X of the Amended and 

Restated Certificate of Incorporation of Xentex contains the following exculpatory clause:

To the fullest extent permitted by the General Corporation Law of Delaware, 

as the same now exists or may be hereafter amended, a director of the 

Corporation shall not be liable to the Corporation or its stockholders for 

monetary damages for breach of fiduciary duty as a director. No amendment 

to or repeal of this Article X shall apply to or have any effect on the liability or 

alleged liability of any director of the Corporation for or with respect to any

acts or omissions of such director occurring prior to the effective date of such 

amendment or repeal.

(Fact 24).

Under Delaware law, a corporation’s certificate of incorporation may include “[a] 

provision eliminating or limiting the personal liability of a director to the corporation or its 

stockholders for monetary damages for breach of fiduciary duty as a director.” Del. Code 

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Ann. tit. 8, § 102(b)(7) (2007). “Claims alleging disclosure violations that do not otherwise 

fall within any exception are protected by Section 102(b)(7) and any certificate of 

incorporation provision . . . adopted pursuant thereto.” Arnold v. Soc’y for Sav. Bancorp., 650 

A.2d 1270, 1287 (Del. 1994) (affirming summary judgment in favor of directors on failure to 

disclose claim). As a result, the exculpatory clause shields Dr. Kim from liability for any 

alleged breach of fiduciary duty.

IV. CONCLUSION

For the foregoing reasons, Defendants, Dr. LARRY COHEN, Dr. WAN HEE KIM 

and MICHAEL TURCOTTE respectfully request that the Court grant their Motion for 

Summary Judgment on Counts I – VI, XII – XVI and XIX – XX of Plaintiffs' Third Amended 

Complaint.

LARRY COHEN, WAN HEE KIM, and 

MICHAEL TURCOTTE 

Defendants

By: _/s/Jeanne M. Hoffmann

One of Their Attorneys

Jeanne M. Hoffmann

BRYCEDOWNEY, LLC.

200 N. LaSalle Street, Suite 2700

Chicago, IL 60601

(312) 377-1501

CERTIFICATE OF SERVICE

I, Jeanne M. Hoffmann, an attorney, certify that on July 9, 2007, I electronically 

filed Defendants’ Cohen, Kim and Turcotte Memorandum of Law in Support of Motion 

for Summary Judgment with the Clerk of the United States District Court using the 

CM/ECF system, which will send electronic notification to all parties of record.

By: _/s/Jeanne M. Hoffmann

One of Their Attorneys

Jeanne M. Hoffmann

BRYCEDOWNEY, LLC.

200 N. LaSalle Street, Suite 2700

Chicago, IL 60601

(312) 377-1501

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