IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

PREMIER CAPITAL MANAGEMENT, L.L.C., et

al.

Plaintiffs,

v.

LARRY COHEN, et al.,

Defendants.

)

)

)

)

)

)

)

)

)

LARRY COHEN, et al.

Third-Party Plaintiffs,

v.

DOUGLAS TUCKER,

Third-Party Defendant.

)

)

)

)

)

)

)

)

Case No. 02 C 5368

Judge Joan B. Gottschall

DOUGLAS TUCKER,

Cross-Claimant/Fourth-Party

Plaintiff,

v.

PREMIER CAPITAL MANAGEMENT, L.L.C. and

MATHIEU REYNA,

Cross-Defendant/Fourth-Party

Defendant,

)

)

)

)

)

)

)

)

)

)

)

)

MEMORANDUM OF LAW IN SUPPORT

OF DEFENDANT BRIAN FLANAGAN’S

MOTION FOR SUMMARY JUDGMENT

LARRY COHEN, et al.,

Counterclaimants/Cross-Claimants,

v.

PREMIER CAPITAL MANAGEMENT, L.L.C.

and MATHIEU REYNA,

Counterdefendants/Cross-Defendants.

)

)

)

)

)

)

)

)

)

)

Case: 1:02-cv-05368 Document #: 394 Filed: 07/09/07 Page 1 of 34 PageID #:5123
-iTABLE OF CONTENTS

Page

Factual Background ....................................................................................................................1

Standard of Review.....................................................................................................................4

Argument....................................................................................................................................5

I. Flanagan is Entitled to Judgment as a Matter of Law on the Federal and

State Securities Law Claims Stemming from Xen Investors’ $1.2 Million

Investment (Counts VII and VIII). ...................................................................................5

A. Flanagan Is Not a Control Person. ........................................................................5

1. Flanagan Did Not Exercise General Control Over Xentex.........................5

2. Flanagan Did Not Have the Power or Ability to Control the

Alleged Fraud...........................................................................................8

B. Flanagan Acted in Good Faith..............................................................................9

C. There Was No Primary Violation of the Securities Laws by Xentex. ..................11

1. The Alleged Misrepresentations Were Not Material................................11

2. Xen Investors Did Not Suffer Any Economic Loss. ................................12

3. Plaintiffs Cannot Establish Loss Causation. ............................................13

II. Flanagan is Entitled to Judgment as a Matter of Law on Xen Investors’

Federal Securities Law Claim (Count VII) for Additional Reasons. ...............................14

A. Xen Investors Did Not Purchase Shares Through a Public Offering....................14

B. Xen Investors’ Claims Are Barred by the Statute of Limitations.........................15

III. Flanagan is Entitled to Judgment as a Matter of Law on Plaintiffs’ Breach

of Fiduciary Duty Claim (Count X). ..............................................................................17

A. Flanagan Did Not Owe a Fiduciary Duty to Any of the Plaintiffs at the

Time of the Alleged Fraud. ................................................................................17

B. Plaintiffs Have Not Suffered a Unique Harm......................................................18

C. The Exculpatory Clause in Xentex’s Amended and Restated Certificate of

Incorporation Insulates Flanagan from Liability for Alleged Breach of

Fiduciary Duty. ..................................................................................................20

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-iiIV. Flanagan is Entitled to Judgment as a Matter of Law on Plaintiffs’ Fraud

Claim (Count XI)...........................................................................................................21

A. Flanagan’s Telephone Call with Reyna Does Not Support a Claim for

Actual Fraud.. ....................................................................................................21

B. No Evidence Exists That Can Support a Finding That Flanagan

Committed Constructive Fraud...........................................................................22

V. Flanagan Is Entitled To Judgment as a Matter of Law on TMB’s Virginia

Securities Act Claim (Count IX)....................................................................................24

Conclusion................................................................................................................................25

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-iiiTABLE OF AUTHORITIES

Page(s)

Cases

Adams v. Kinder-Morgan, Inc.,

340 F.3d 1083 (10th Cir. 2003)........................................................................................6

Anadarko Petroleum Corp. v. Panhandle E. Corp.,

545 A.2d 1171 (Del. 1988)............................................................................................21

Arnlund v. Smith,

210 F. Supp. 2d 755 (E.D. Va. 2002).............................................................................21

Arnold v. Soc’y for Sav. Bancorp.,

650 A.2d 1270 (Del. 1994)............................................................................................20

Atocha Ltd. P’ship v. Witness Tree, LLC,

65 Va. Cir. 213 (2004).............................................................................................5, 6, 9

Badger v. Boulevard Bancorp, Inc.,

970 F.3d 410 (7th Cir. 1992) .........................................................................................16

Bastian v. Petren Res. Corp.,

892 F.2d 680 (7th Cir. 1990) ...................................................................................13, 14

Blair Constr., Inc. v. Weatherford,

485 S.E.2d 137 (Va. 1997) ............................................................................................23

Bokat v. Getty Oil Co.,

262 A.2d 246 (Del. 1970)..............................................................................................18

Caremark, Inc. v. Coram Healthcare Corp.,

113 F.3d 645 (7th Cir. 1997) .........................................................................................13

Cohn v. Knowledge Connections, Inc.,

585 S.E.2d 578 (Va. 2003) ............................................................................................23

Craig v. First Am. Capital Res., Inc.,

740 F. Supp. 530 (N.D. Ill. 1990) ....................................................................................6

Dellastatious v. Williams,

242 F.3d 191 (4th Cir. 2001) ...............................................................................9, 10, 11

Dennis v. Gen. Imaging, Inc.,

918 F.2d 496 (5th Cir. 1990) ...........................................................................................6

Dodds v. Cigna Sec., Inc.,

Case: 1:02-cv-05368 Document #: 394 Filed: 07/09/07 Page 4 of 34 PageID #:5126
-iv12 F.3d 346 (2d Cir. 1993) ............................................................................................15

Donohoe v. Consol. Operating & Prod. Corp.,

982 F.2d 1130 (7th Cir. 1992) ........................................................................... 5, 6, 9, 10

Donovan v. ABC-NACO, Inc.,

2002 U.S. LEXIS 12797 (N.D. Ill. Jul. 12, 2002).........................................................6, 9

Dura Pharms., Inc. v. Broudo,

544 U.S. 336 (2005)................................................................................................12, 13

Eden v. Weight,

578 S.E.2d 769 (Va. 2003) ............................................................................................23

Ell v. Moss,

39 Va. Cir. 8 (1995) ......................................................................................................22

Elster v. Am. Airlines,

100 A.2d 219 (Del. Ch. 1953) .......................................................................................18

Fujisawa Pharm. Co. v. Kapoor,

115 F.3d 1332 (7th Cir. 1997) .......................................................................................12

Gasner v. Bd. of Supervisors of County of Dinwiddie, Va.,

103 F.3d 351 (4th Cir. 1996) .........................................................................................12

Gottlieb v. McKee,

107 A.2d 240 (Del. Ch. 1954) .......................................................................................11

Harden v. Raffensperger, Hughes & Co., Inc.,

65 F.3d 1392 (7th Cir. 1995) .........................................................................................11

Harrison v. Dean Witter Reynolds, Inc.,

974 F.2d 873 (7th Cir. 1992) ...........................................................................................5

Henning v. Kyle,

56 S.E.2d 67 (Va. 1949)................................................................................................21

Herm v. Stafford,

663 F.2d 669 (6th Cir. 1981) .........................................................................................15

In re Caremark Int’l Inc. Deriv. Litig.,

698 A.2d 959 (Del. Ch. 1996) .......................................................................................25

In re Salomon Smith Barney Mut. Fund Fees Litig.,

441 F. Supp. 2d 579 (S.D.N.Y. 2006)............................................................................13

In re Tyco Int’l, Ltd. Multidistrict Litig.,

2004 U.S. Dist LEXIS 20733 (D.N.H. Oct. 14, 2004)......................................................6

Case: 1:02-cv-05368 Document #: 394 Filed: 07/09/07 Page 5 of 34 PageID #:5127
-vKaufman v. Motorola, Inc.,

1999 U.S. Dist LEXIS 6303 (N.D. Ill. Apr. 7, 1999) ...................................................6, 9

Kauthar SDN BHD v. Sternberg,

149 F.3d 659 (7th Cir. 1998) .........................................................................................16

Kuczmanski v. Gill,

302 S.E.2d 48 (Va. 1983) ..............................................................................................21

Lambert v. Downtown Garage, Inc.,

53 S.E.2d 714 (Va. 2001) ..............................................................................................21

Massey v. Merrill Lynch & Co.,

464 F.3d 642 (7th Cir. 2006) .........................................................................................18

Metge v. Baehler,

762 F.2d 621 (8th Cir. 1985) ...........................................................................................7

McGowan v. Sears, Roebuck & Co.,

722 F. Supp. 1069 (S.D.N.Y. 1989).................................................................................5

Norris v. Mitchell,

495 S.E.2d 809 (Va. 1998) ............................................................................................23

Pereira v. Cogan,

2001 U.S. Dist LEXIS 2461 (S.D.N.Y. Mar. 13, 2001)..................................................20

Prime Leasing, Inc. v. Kendig,

332 Ill. App. 3d 300 (1st Dist. 2002) .............................................................................17

Pugh v. City of Attica,

259 F.3d 619 (7th Cir. 2001) ...........................................................................................4

Ruffin-Thompkins v. Experian Info. Solutions, Inc.,

422 F.3d 603 (7th Cir. 2005) ...........................................................................................4

Sanders Confectionery Prods., Inc. v. Heller Fin., Inc.,

973 F.2d 474 (6th Cir. 1992) ........................................................................................17

Sanders v. Devine,

1997 Del. Ch. LEXIS 131 (Del Ch. Sept. 24, 1997).......................................................17

Schlifke v. Seafirst Corp.,

866 F.2d 935 (7th Cir. 1989) .......................................................................................4, 7

Searls v. Glasser,

64 F.3d 1061 (7th Cir. 1995) .........................................................................................12

Secon Serv. Sys., Inc. v. St. Joseph Bank & Trust Co.,

Case: 1:02-cv-05368 Document #: 394 Filed: 07/09/07 Page 6 of 34 PageID #:5128
-vi855 F.2d 406 (7th Cir. 1988) ...........................................................................................4

Spicer v. Chicago Bd. Options Exch., Inc.,

1992 U.S. Dist. LEXIS 18796 (N.D. Ill. Dec. 9, 1992) ....................................................7

Starr v. !hey, Inc.,

2003 U.S. Dist. LEXIS 8698 (N.D. Ill. May 21, 2003) ....................................................6

Tate v. Colony House Builders, Inc.,

508 S.E.2d 597 (Va. 1999) ............................................................................................23

Treganza v. Great Am. Commc’ns Co.,

12 F.3d 717 (7th Cir. 1993) ...........................................................................................16

Tooley v. Donaldson, Lufkin & Jenrette, Inc.,

845 A.2d 1031 (Del. 2004)............................................................................................18

Walker v. Cardinal Sav. & Loan Ass’n,

690 F. Supp. 494 (E.D. Va. 1988)....................................................................................5

Wal-Mart Stores, Inc. v. J.A. Fielden Co.,

440 F. Supp. 2d 523 (W.D. Va. 2006)............................................................................23

Weiss v. Leewards Creative Crafts, Inc.,

1993 Del. Ch. LEXIS 73 (Apr. 29, 1993) ......................................................................17

Whirlpool Fin. Corp. v. GN Holdings, Inc.,

67 F.3d 605 (7th Cir. 1995) .....................................................................................15, 16

Winn v. Aleda Constr. Co.,

315 S.E.2d 193 (Va. 1984) ............................................................................................21

Statutes

15 U.S.C. § 77d(2)....................................................................................................................14

15 U.S.C. § 77l(a)(2).................................................................................................................15

15 U.S.C. § 77l(b).....................................................................................................................13

15 U.S.C. § 77m............................................................................................................ 15, 16, 17

15 U.S.C. § 77o ............................................................................................................. 5, 7, 9, 15

Del. Code Ann. Tit. 8, § 102(b)(7) (2007) .................................................................................20

Va. Code Ann. § 13.1-522(c) ............................................................................................ 5, 9, 24

Va. Code Ann. § 13.1-522(d) ....................................................................................................13

Va. Code Ann. § 13.1-501...........................................................................................................5

Case: 1:02-cv-05368 Document #: 394 Filed: 07/09/07 Page 7 of 34 PageID #:5129
-viiOther

Fed R. Civ. P. 56(c).....................................................................................................................4

17 C.F.R § 230.501(a)(8). .........................................................................................................15

17 C.F.R. § 230.502(a)..............................................................................................................15

17 C.F.R. § 230.502(b)..............................................................................................................15

17 C.F.R. § 230.502(c)..............................................................................................................15

17 C.F.R. § 230.502(d)..............................................................................................................15

17 C.F.R. § 230.506 ..................................................................................................................14

17 C.F.R. § 230.506(b)(1).........................................................................................................14

17 C.F.R. § 230.506(b)(2).........................................................................................................15

Case: 1:02-cv-05368 Document #: 394 Filed: 07/09/07 Page 8 of 34 PageID #:5130
MEMORANDUM OF LAW IN SUPPORT OF DEFENDANT

BRIAN FLANAGAN’S MOTION FOR SUMMARY JUDGMENT

Plaintiffs attempt to hold an outside director liable for securities fraud arising from an

“Information Statement” he had no role in preparing and from a meeting with potential investors

he did not attend and of which he was not aware. Plaintiffs also try to hold this outside director

liable for fraudulently inducing them to enter into a loan that he personally had spoken out

against at a board of directors meeting just days earlier because, in his words, the company could

get better terms “from a loan shark in Cicero.” Because no reasonable jury could return a verdict

in Plaintiffs’ favor on these facts and the evidentiary record generated during discovery, the

outside director is entitled to summary judgment.

Factual Background

Xentex Technologies, Inc. (“Xentex”) was a start-up technology company whose primary

business purpose was to develop, manufacture, and market laptop computers with a folding

screen. (Statement ¶ 1.) The computer was the brainchild of Jeff Batio (“Batio”), who founded

Xentex in 1996. (Id. ¶ 21.) At all relevant times, Batio owned a controlling share of Xentex’s

stock. (Id. ¶ 26.)

Xentex did not plan to manufacture computers itself. (Id. ¶ 22.) Rather, Xentex

contracted with a Korean company called Korean Data Systems, Ltd. (“KDS”) to manufacture

the computers. (Id.) In 2000 and 2001, the business of Xentex was devoted to working with

KDS to develop its first product – the Voyager computer. (Id. ¶ 23.)

As a start-up computer company, Xentex did not have any revenue and had to raise

capital from investors to fund the design and manufacture of the Voyager and the day-to-day

operations of the company. (Id. ¶ 24.) This case arises from Xentex’s efforts to raise money

from a group of investors in Virginia Beach, Virginia.

On November 1, 2000, Batio, Doug Tucker (“Tucker”), and a third person associated

with Xentex met with Bobby Copeland, his son Todd Copeland, Mathieu Reyna (“Reyna”), and

others at Bobby Copeland’s office in Virginia Beach to demonstrate a prototype of the computer

KDS was developing. (Id. ¶¶ 47-49.) The meeting was arranged by Reyna’s investment

company, plaintiff Premier Capital Management, L.L.C. (“Premier Capital”). (Id. ¶ 47.) At this

meeting, Batio and Tucker distributed an Information Statement with financial statements

attached to it. (Id. ¶ 50.) Plaintiffs allege that the Information Statement and financial

statements contained multiple misrepresentations and that Batio and Tucker made a number of

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-2-

oral misrepresentations at the November 1 meeting. (Third Am. Compl. ¶ 29.) As a result of

this meeting, the Copelands agreed to lend Xentex $300,000 to get the company through the next

month while they performed additional diligence to determine whether to make a larger

investment. (Statement ¶¶ 73-77.) The Copelands formed plaintiff Xen Investors, L.L.C. (“Xen

Investors”) to make the investments. (Id. ¶ 2.)

Following the November 1 meeting, Todd Copeland and Reyna visited Xentex’s offices

in California for the purpose of conducting additional research on Xentex. (Id. ¶ 78.) At this

meeting, Tucker provided Todd Copeland with copies of Xentex’s agreements with key

suppliers, including KDS, and other documents relating to Xentex’s financial condition. (Id. ¶

83.) After this meeting, Xen Investors agreed to make a further investment in Xentex. (Id. ¶¶

86, 90, 92.) All told, Xen Investors purchased 400,000 shares of Xentex stock for a total

investment of $1.2 million (which total includes the initial $300,000 loan). (Id. ¶ 95.)

Defendant Brian Flanagan (“Flanagan”) did not attend the November 1 meeting or even

know about it beforehand. (Id. ¶ 63.) He did not create or participate in the creation the

Information Statement or the accompanying financial statements. (Id. ¶ 64.) Plaintiffs have

admitted that Flanagan did not personally attend the November 1 meeting, did not personally

present Plaintiffs with an offer to invest in Xentex, and did not personally have any direct oral or

written communications with Plaintiffs until after they had purchased their first shares of stock in

Xentex. (Id. ¶ 65.) Prior to this litigation, Flanagan had never met the Copelands in person and

had at most two telephone conversations with them. (Id. ¶ 111.) Bobby Copeland admits that

Flanagan did not say anything untrue in the first call, and the second took place a year after Xen

Investors made its decision to invest. (Id.)

Flanagan did not play any role in soliciting investors for Xentex or in the November 1

presentation. (Id. ¶¶ 63, 96.). Because Xen Investors cannot point to any direct involvement by

Flanagan in the alleged fraud, it seeks to hold Flanagan liable for its $1.2 million loss as a

“control person” of Xentex. (Third Am. Compl. ¶¶ 103-05.) After extensive discovery, the only

facts that Xen Investors can even arguably cite in support of this theory are that Flanagan loaned

Xentex $500,000, held 10 shares of Xentex stock, and was a member of the company’s Board of

Directors. (Statement ¶¶ 39-43.) This was not enough to give Flanagan any real ability to

control the company, because Batio, as majority shareholder, had the authority to remove any

Director or the entire Board of Directors. (Id. ¶¶ 26, 28.) In addition, prior to the time Flanagan

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-3-

joined the Board of Directors, the Board had delegated most decision-making authority to an

Executive Committee. (Id. ¶¶ 31-35.) Flanagan attended his first Board meeting on October 18,

2000, only two weeks before the meeting in Virginia Beach. (Id. ¶ 43.)

The only direct act of Flanagan that forms the basis of any of Plaintiffs’ claims is a

telephone call between Flanagan and Reyna shortly before June 4, 2001, which allegedly

induced plaintiff TMB, LLC (“TMB”) to loan Xentex $650,000. (Third Am. Compl. ¶ 31(e).)

In the spring of 2001, KDS continued its work on the development and production of the

Voyager. (Statement ¶ 115.) However, Xentex still needed money to pay expenses, so Batio and

Tucker approached Todd Copeland about providing additional funding. (Id. ¶ 117.) Todd

Copeland provided Xentex with $100,000, and then Batio, Tucker, and the individuals associated

with TMB negotiated terms for a larger loan. (Id. ¶¶ 117-19.) On May 29, 2001, the day before

the telephone conversation between Reyna and Flanagan, Xentex’s Board of Directors discussed

the loan proposal. (Id. ¶¶ 123, 125.) The proposal was so unfavorable to Xentex that Flanagan

spoke out against the loan, calling the terms “atrocious” and stating that Xentex could get better

terms “from a loan shark in Cicero.” (Id. ¶ 125.) The Board rejected the proposal, and Flanagan

considered the issue to be closed. (Id.) According to Reyna’s version of events (which Flanagan

accepts only for purposes of summary judgment), the day after the Board meeting, he called

Flanagan, and Flanagan told him that the “company was fine,” “the computers were coming,”

and “everything was in place to launch this product.” (Id. ¶¶ 114(c), 126.) Flanagan did not

have the impression that Reyna was seeking information to determine whether to make the loan,

and Flanagan did intend to induce TMB to make the loan. (Id. ¶ 126.) After the Board meeting

and Reyna’s telephone call with Flanagan, Batio and Tucker renegotiated the terms of the loan,

and TMB and Xentex executed the loan documents on June 4, 2001. (Id. ¶¶ 127-30.) Flanagan

was unaware of these negotiations, did not play any role in the execution of the loan, and did not

learn that the loan had been executed until months later. (Id. ¶ 136.)

In the spring of 2002, Xentex collapsed because its supplier, KDS, unexpectedly went

into receivership before it could manufacture any production models of the Voyager. (Id. ¶¶

139-40.) As a result, Xen Investors lost its $1.2 million investment, and Xentex did not repay

TMB’s $650,000 loan. (Id. ¶¶ 95, 138.)

Plaintiffs have sued Tucker in Illinois state court and filed an adversary action in Batio’s

individual bankruptcy proceeding stemming from these investment losses. (Id. ¶ 149.) Plaintiffs

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-4-

filed this suit on March 30, 2002, against the peripheral players associated with Xentex,

including Flanagan. Plaintiffs assert five causes of action against Flanagan for losses arising

from these two investments: (1) a control person liability claim under the Securities Act of 1933

(the “1933 Act”) relating to Xen Investors’ initial stock purchase (Count VII), (2) a control

person liability claim under the Virginia Securities Act (“VSA”) relating to Xen Investors’ initial

stock purchase (Count VIII), (3) a control person liability and aiding and abetting claim under

the VSA relating to the TMB loan (Count IX), (4) a claim for breach of fiduciary duty (Count

X), and (5) a claim for actual and constructive fraud (Count XI).

As set forth below, Flanagan is entitled to judgment as a matter of law on all five counts.

Standard of Review

Summary judgment is proper “if the pleadings, depositions, answers to interrogatories,

and admissions on file, together with the affidavits, if any, show 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). In determining whether summary judgment is appropriate, district courts view the

evidence in the light most favorable to the non-moving party. See, e.g., Schlifke v. Seafirst

Corp., 866 F.2d 935, 937 (7th Cir. 1989). However, the party with the burden of proof

(Plaintiffs here) may not rest on their pleadings, but rather must affirmatively demonstrate that

there is a genuine issue of material fact that necessitates a trial. See, e.g., Ruffin-Thompkins v.

Experian Info. Solutions, Inc., 422 F.3d 603, 607 (7th Cir. 2005). Plaintiffs cannot point to the

“mere existence of some alleged factual dispute between the parties” because “the requirement is

that there be no genuine issue of material fact.” Id. (emphasis in original). A genuine issue of

material fact exists only if “the evidence is such that a reasonable jury could return a verdict for

the nonmoving party.” Pugh v. City of Attica, 259 F.3d 619, 625 (7th Cir. 2001). Thus, to defeat

summary judgment, Plaintiffs must “produce more than a scintilla of evidence to support” their

claims. Secon Serv. Sys., Inc. v. St. Joseph Bank & Trust Co., 855 F.2d 406, 419 (7th Cir. 1988).

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Argument

I. Flanagan is Entitled to Judgment as a Matter of Law on the Federal and State

Securities Law Claims Stemming from Xen Investors’ $1.2 Million Investment

(Counts VII and VIII).

A. Flanagan Is Not a Control Person.

Xen Investors has asserted claims against Flanagan under the 1933 Act (Count VII) and

the VSA (Count VIII) for losses arising from its initial stock purchase. To prevail on these

claims, Xen Investors must establish that Flanagan meets the definition of a control person. See

15 U.S.C. § 77o; Va. Code Ann. § 13.1-522(c). As demonstrated below, Flanagan’s standing at

Xentex did not rise to the level of a control person. As a result, he is entitled to judgment as a

matter of law on Xen Investors’ federal and state securities law claims.

In order to establish control person liability, Xen Investors must show that Flanagan had

“‘the practical ability to direct the actions of the people who issue or sell the securities.’”

Donohoe v. Consol. Operating & Prod. Corp., 982 F.2d 1130, 1138 (7th Cir. 1992) (citation

omitted). The Seventh Circuit has adopted a two-prong test for determining control person

liability under federal law: the plaintiff must show that the defendant (1) “actually exercised

general control over the operations of the entity principally liable,” and (2) “possessed the power

or ability to control the specific transaction or activity upon which the primary violation was

predicated.” Id.; see also Harrison v. Dean Witter Reynolds, Inc., 974 F.2d 873, 881 (7th Cir.

1992). Xen Investors cannot demonstrate either prong of this test.

1

1. Flanagan Did Not Exercise General Control Over Xentex.

Undisputed facts demonstrate that Flanagan did not “exercise[] general control over the

operations of [Xentex].” Donohoe, 982 F.2d at 1138. At all relevant times, Batio owned a

majority of Xentex’s common stock. (Statement ¶ 26.) Under the company’s Bylaws and

Amended and Restated Certificate of Incorporation, this gave Batio the power to remove any

Director or the entire Board of Directors. (Id. ¶ 28.) The Amended and Restated Certificate of

1 The VSA defines control as “the possession, directly or indirectly, of the power to direct or cause the direction of

the management and policies of a person, whether through the ownership of voting securities, by contract, or

otherwise.” Va. Code Ann. § 13.1-501. Because this language is similar to federal law, Virginia courts hold that

“federal cases concerning control are informative.” Atocha Ltd. P’ship v. Witness Tree, LLC, 65 Va. Cir. 213, 225

(2004); see also McGowan v. Sears, Roebuck & Co., 722 F. Supp. 1069, 1072-73 (S.D.N.Y. 1989). However, in at

least one case interpreting Va. Code Ann. § 13.1-522(c), the district court held that a plaintiff must “prove the

defendants’ culpable conduct,” Walker v. Cardinal Sav. & Loan Ass’n, 690 F. Supp. 494, 500 (E.D. Va. 1988), a

standard stricter than that adopted by the Seventh Circuit. See Harrison, 974 F.2d at 876-81.

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Incorporation further empowered Batio to adopt, amend, or repeal the company’s Bylaws and

take any action that could be taken at any stockholder meeting without a meeting, without prior

notice, and without a vote. (Id.) Batio was CEO of Xentex from March 2000 through October

2000 and from March or April 2001 through the time Xentex filed for bankruptcy. (Id. ¶ 27.)

During his time as CEO, Batio had general supervision, direction, and control of the business and

affairs of the corporation, subject to the control of the Board and the Executive Committee. (Id.

¶ 30.)

In May 2000, the Board (on which Flanagan did not yet sit) formed an Executive

Committee. (Id. ¶ 32.) This committee, composed of Batio, Tucker, and Kim, possessed wide

latitude in making decisions for Xentex without board approval. (Id. ¶¶ 32, 34.) The Executive

Committee could remove any Officer, fill a vacancy in any office, and control the CEO and

Executive Vice President. (Id. ¶ 35.) Under the company’s Bylaws, the Executive Committee

had all of the authority of the Board of Directors, with certain exceptions. (Id. ¶ 34.) A quorum

for Executive Committee meetings required two of the three members, meaning that any two

members of the Executive Committee could make decisions for the company. (Id. ¶ 36.)

Flanagan never served on or attended any meeting of the Executive Committee. (Id. ¶ 37.)

As this Court previously noted, “Flanagan’s status as a member of the Board of Directors

is insufficient to state a control person claim.” (Mem. Op. & Order [Docket No. 87] at 23.)

2

However, the Court ruled that Plaintiffs had “allege[d] a bit more,” namely, that Flanagan

“‘actively participated in and controlled decisions of the Board of Directors (general control).’”

(Id.) While this allegation may have been sufficient to survive a motion to dismiss, the

undisputed facts show a completely different picture. Flanagan attended only one Board meeting

prior to the November 1 meeting in Virginia Beach. (Statement ¶ 43.) That Board meeting took

place on October 18, 2000 (id.), exactly two weeks prior to the November 1 meeting. Xen

2 This ruling is consistent with the general rule in this District that “a plaintiff may not premise control person

liability solely upon status within the company.” Starr v. !hey, Inc., 2003 U.S. Dist. LEXIS 8698, at *16 (N.D. Ill.

May 21, 2003); see also Donovan v. ABC-NACO, Inc., 2002 U.S. Dist. LEXIS 12797, at *16 (N.D. Ill. Jul. 12,

2002) (defendants’ status as directors not enough to establish they were control persons); Kaufman v. Motorola, Inc.,

1999 U.S. Dist. LEXIS 6303, at *49 (N.D. Ill. Apr. 7, 1999) (a director is not automatically liable as a control

person); Craig v. First Am. Capital Res., Inc., 740 F. Supp. 530, 537 (N.D. Ill. 1990) (allegation that defendant

controlled acts of company by virtue of his position as officer and director insufficient); see also Atocha Ltd. P’ship,

65 Va. Cir. at 225 (a director is not automatically liable as a control person); accord, e.g., Adams v. Kinder-Morgan,

Inc., 340 F.3d 1083, 1108 (10th Cir. 2003); Dennis v. Gen. Imaging, Inc., 918 F.2d 496, 509-10 (5th Cir. 1990); In

re Tyco Int’l, Ltd. Multidistrict Litig., 2004 U.S. Dist. LEXIS 20733, at *52-53 (D.N.H. Oct. 14, 2004).

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Investors can point to no fact to show that Flanagan’s participation in that Board meeting was no

different than that of any other director of any other corporation. To hold otherwise would

contravene the general rule that status as a director does not automatically make one a control

person and would extend control person liability to all corporate directors.

In their most recent complaint, Plaintiffs also allege that Flanagan exercised general

control over the operations of Xentex by virtue of his $500,000 loan. (Third Am. Compl. ¶

104(l)-(m).) This is insufficient to create a genuine issue of material fact regarding Flanagan’s

status as a control person. Persuasive influence or financial interdependence is not enough to

show control. See, e.g., Spicer v. Chicago Bd. Options Exch., Inc., 1992 U.S. Dist. LEXIS

18796, at *6 (N.D. Ill. Dec. 9, 1992) (fact that defendant supplied two-thirds of violating entity’s

business did not establish ability to control). For instance, in Metge v. Baehler, the Eighth

Circuit rejected the plaintiffs’ argument that the company’s primary lender was a control person

under 15 U.S.C. § 77o. 762 F.2d 621, 631-32 (8th Cir. 1985). The plaintiffs there argued that

the lender had the ability to foreclose on loans whenever the company was delinquent on

payment and cited several other factors showing the lender’s involvement with the company, id.

at 631, but the court affirmed summary judgment because the facts suggested only the

“potential” for influence over some of the company’s business decisions, not that the lender

“actually exercised control over the operation of the corporation in general.” Id. at 632. In

Schlifke v. Seafirst Corporation, the Seventh Circuit followed Metge to hold that the fact that a

lender “extended a loan to a company to finance its investment programs and took measures to

secure its loans does not establish actual exercise of control.” 866 F.2d 935, 949 (7th Cir. 1989);

see also, e.g., Sanders Confectionery Prods., Inc. v. Heller Fin., Inc., 973 F.2d 474, 486 (6th Cir.

1992) (“Extending a loan to a company and taking measures to secure that loan do not amount to

actual control.”). An interest as a creditor or shareholder alone cannot confer control person

status, as virtually every director has a financial stake in the company he or she serves.

Discovery conducted since the Court’s ruling has demonstrated that Flanagan’s note did

not give any undue influence over company affairs. Flanagan participated in the affairs of

Xentex as an outside director, and in meetings of the Board, Flanagan had the same voting power

as any other Director of the company. (Statement ¶ 44.) Flanagan never threatened to call his

note in exchange for any type of action by Xentex, by any member of the Board of Directors, or

any member of Xentex’s management team. (Id.) In fact, Flanagan extended the term of his

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note on multiple occasions in 2000 and 2001 and did not demand or receive any consideration in

exchange. (Id.)

2. Flanagan Did Not Have the Power or Ability to Control the Alleged

Fraud.

Even if Plaintiffs could point to more than a scintilla of evidence showing that Flanagan’s

general control over Xentex – which they cannot – there is no genuine issue with respect to

Flanagan’s “power or ability to control the specific transaction or activity upon which the

primary violation was predicated.” Donohoe, 982 F.2d at 1138.

Plaintiffs admit that Flanagan did not personally attend the November 2000 meeting, did

not personally present Plaintiffs with an offer to invest in Xentex, and did not personally have

any direct oral or written communications with Plaintiffs until after they had purchased their first

shares of stock in Xentex. (Statement ¶ 65.) Plaintiffs also admit that Flanagan did not

personally make any of the alleged oral misrepresentations at the November 2000 meeting or in

the weeks and months thereafter. (Id. ¶ 66.)

Flanagan did not create or have any role in the creation of the Information Statement.

(Id. ¶ 64.) Flanagan did not create or help create the financial statements attached to the

Information Statement. (Id.) Flanagan did have any knowledge that the Information Statement

was being presented to potential investors or to Xen Investors. (Id.) Flanagan had not even seen

the Information Statement prior to this litigation. (Id.)

As stated above, Flanagan attended his first Board meeting on October 18, 2000 (id. ¶

43), just two weeks before the meeting in Virginia Beach. At the October 18 Board meeting, the

Board was not presented with and did not discuss any document entitled “Information

Statement,” any prospectus, or any private placement memorandum. (Id.) Other than a letter to

stockholders, the Board did not discuss any other information to be distributed to investors. (Id.)

The Board did not discuss any particular investors that representatives of Xentex had met with or

planned to meet with, nor did anyone at the meeting mention any potential investors in Virginia

Beach, Virginia. (Id.)

Flanagan did not attend the November 1 meeting. (Id. ¶ 63.) He did not prepare or play

any role in the preparation of the presentation given at the November 1 meeting. (Id.) Flanagan

was not present in California when Todd Copeland and Reyna were performing due diligence on

the company. (Id. ¶ 80.) Flanagan did not play any role in soliciting investors generally. (Id. ¶

96.)

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This case is virtually identical to Kaufman v. Motorola, Inc., where the Court granted a

corporate director’s motion for summary judgment, on the ground that the director attended

management board meetings two to three times per year and received monthly documents

describing the company’s operating results but was not responsible for the allegedly false

securities filing and public statements made by the company. 1999 U.S. Dist. LEXIS 6303, at

*47-50 (N.D. Ill. Apr. 7, 1999).

After extensive discovery, the only fact to which Xen Investors can point is Flanagan’s

membership in the Board of Directors. Because this is not sufficient to make Flanagan a control

person, see, e.g., Donovan, 2002 U.S. Dist. LEXIS 12797, at *16; Atocha Ltd. P’ship, 65 Va.

Cir. at 225, Flanagan is entitled to judgment as a matter of law on Counts VII and VIII.

B. Flanagan Acted in Good Faith.

Even if Xen Investors can create a genuine issue of material fact regarding Flanagan’s

status as a control person – which they cannot – good faith is a defense to control person

liability. Donohoe v. Consol. Operating & Prod. Corp., 30 F.3d 907, 912 (7th Cir. 1994);

Dellastatious v. Williams, 242 F.3d 191, 194-95 (4th Cir. 2001). Under section 15 of the 1933

Act, Flanagan cannot be held liable as a control person if he “had no knowledge of or reasonable

ground to believe in the existence of the facts by reason of which the liability of the controlled

person is alleged to exist.” 15 U.S.C. § 77o. Under the VSA, Flanagan cannot be held liable as a

control person if “he 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 Ann. §

13.1-522(c).

To hold Flanagan liable as a control person, Xen Investors must demonstrate that

Flanagan acted recklessly; negligence alone is insufficient. Donohoe, 30 F.3d at 912. Summary

judgment is appropriate on the good faith defense if the undisputed facts demonstrate that the

defendant did not act recklessly. Id.

3

3

In Dellastatious, the plaintiff argued that the good faith defense under the VSA “is stricter than its federal

counterpart because it requires defendants to prove that they were not negligent, as opposed to not reckless.” 242

F.3d at 195. The Fourth Circuit assumed, without deciding, that defendants must show that they acted reasonably in

order to satisfy the VSA’s good faith defense. Id. Because the language of both statutes is so similar, there is no

reason that liability of directors under the VSA should be more expansive than federal law. In any event, because

the facts of the case at bar are so similar to Dellastatious, Flanagan is entitled to summary judgment even under the

standard applied by the Dellastatious court.

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The Seventh Circuit upheld summary judgment based on the good faith defense in

Donohoe, 30 F.3d at 912-13. The plaintiffs in that case alleged that the defendants lured them

into investing in a project to drill oil wells on land in which the defendants knew there was not

any oil. Id. The defendants were principals and shareholders in and controlled the

administrative and finance functions the company. Id. at 909, 912. However, they relied on the

superior technical expertise of a third principal and shareholder, id. at 912, who, it turned out,

“defrauded everyone.” Id. at 909. To determine if there is a genuine issue of material fact

regarding a defendant’s recklessness, courts must “examine what the defendant[] could have

done under the circumstances to prevent the violation, and then ask whether the defendant[] –

aware that [he] could take such measures – decided not to.” Id. at 912.

The seminal case on good faith under the VSA is Dellastatious, 242 F.3d at 194-97. In

that case, the district court granted summary judgment in favor of two outside directors. Id. at

192-93. Like Flanagan, the directors were on the board because they invested in the company.

Id. at 196. Like Flanagan, they had delegated responsibility for the creation and review of the

company’s offering documents to experienced corporate officers, a certified public accountant,

an attorney with experience in drafting offering documents. Id. Like Flanagan, they only had a

“tangential relationship” to the company’s efforts to raise capital, where not aware of any

irregularities in the materials sent to the plaintiff, were never charged with drafting or revising

any of the documents submitted to the plaintiffs, and never met or communicated with the

plaintiff. Id. at 197. The Fourth Circuit held that no jury could infer that the directors acted in

bad faith and affirmed the district court’s decision to grant summary judgment in their favor. Id.

In this case, Flanagan did not know and had no reason to know about the Information

Statement or the meeting in Virginia Beach. Flanagan attended his first meeting of the Board

just two weeks before the November 1 meeting. (Statement ¶¶ 43, 48.) The Board did not

review or discuss the Information Statement or any specific investors that the company was

soliciting. (Id. 43.) Flanagan did not take any role in fundraising at Xentex. (Id. ¶ 96.) Instead,

as an outside director, Flanagan relied on Tucker, an experienced securities lawyer, and Barack

Ferrazzano, the company’s primary outside counsel, to make sure Xentex’s offering memoranda

complied with all applicable securities laws. (Id.) Under Dellastatious, Flanagan’s reliance is

reasonable as a matter of law and entitles him to summary judgment. 242 F.3d at 196 (holding

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that it was reasonable for directors to delegate the creation and review of offering documents to

company’s officers and attorney).

C. There Was No Primary Violation of the Securities Laws by Xentex.

1. The Alleged Misrepresentations Were Not Material.

Xen Investors alleges that Xentex made multiple false statements of material fact in the

Information Statement and in oral statements during and after the November 1 meeting. (Third

Am. Compl. ¶ 29.). “‘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. 1995) (citation omitted).

The Information Statement contains open and obvious cautionary language (Statement ¶¶

54-56), perhaps best exemplified on the first page of the text of the Information Statement, which

states, in bold print, that “[t]he Shares offered hereby involve a high degree of risk” and that

“[i]nvestors should not invest any funds in this private placement unless they can afford to

lose their entire investment.” (Id. ¶ 54.)

The Information Statement and accompanying financial statements also disclosed

Xentex’s precarious financial condition. The financial statements stated that Xentex had

overdrawn its bank account by more than $60,000, had accounts payable of nearly $800,000, and

had a current liability of $1.8 million (id. ¶ 59), and the Information Statement stated that the

company would “spend all, or substantially all, of its cash on hand over the next 30 days.” (Id. ¶

56(d).)

The Information Statement also contains “‘substantive’” cautionary language specifically

“‘tailored’” to the statements that Xen Investors is challenging here. Harden, 65 F.3d at 1404

(citation omitted). For instance, Plaintiffs allege that the Information Statement falsely stated

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.” (Third Am. Compl. ¶ 29(a)(5).) Language to this effect is found in a section

of the Information Statement listing Xentex’s “short term objectives.” (Statement ¶ 55.) Two of

the objectives are “[t]o commence pre-launch sales/marketing activities by the fourth quarter of

2000” and “[t]o begin production and shipment of the Voyager Flip-Pad in the first quarter of

2001.” (Id.) However, this section expressly states that “there can be no assurance that the

Company will be able to accomplish any or all of these goals.” (Id. (emphasis added).)

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The Information Statement also includes a section entitled “RISK FACTORS” that

prospective investors should “carefully consider” in analyzing the offer. (Id. ¶ 56) Among other

things, this portion of the Information Statement states that “the Company’s intended products . .

. have not been fully developed or tested,” and that while the company had “developed working

models” of the computer, “there is no assurance that production models will ever be

completed.” (Id. ¶ 56(a), (b) (emphasis added).)

Xen Investors also alleges that the Information Statement made false statements

regarding Xentex’s agreements with KDS. (Third Am. Compl. ¶ 29(a)(1)-(4).) According to the

Court’s ruling on September 27, 2004, these “are not ‘soft’ predictions but, rather, alleged

misstatements of then-existing fact.” (Mem. Op. and Order [Docket No. 163] at 7.) Xen

Investors cannot, however, rest its case “on a few isolated passages in the lengthy [Information]

Statement” and “disregard[] the ‘total mix’ of available information.” Gasner v. Bd. of

Supervisors of County of Dinwiddie, Va., 103 F.3d 351, 358 (4th Cir. 1996) (affirming summary

judgment on claim under Section 12(2) of 1933 Act); see also, e.g., Searls v. Glasser, 64 F.3d

1061, 1066 (7th Cir. 1995) (statement is material if “the information would have been viewed by

the reasonable investor to have significantly altered the total mix of information.”). Rather, the

Court should consider the statements “in the full context in which they were made.” Gasner, 103

F.3d at 358. Taken in its entirety, the Information Statement contains more than enough

cautionary language (see Statement ¶¶ 54-56) to adequately “warn[] them of the high risks they

were facing.” Id. at 360.

4

2. Xen Investors Did Not Suffer Any Economic Loss.

“A private plaintiff who claims securities fraud must prove that the defendant’s fraud

caused an economic loss.” Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 338 (2005). Premier

Capital arranged the meeting between Xentex and the Copelands (Statement ¶ 47), signed a

commission agreement under which it would earn a 10 percent commission on funds it raised for

Xentex (including Xen Investors’ investment) (id. ¶¶ 68, 71), and took an active role in locating

investors for Xentex. (Id. ¶¶ 97-100.) In November 2002, the Virginia State Corporation

4 Moreover, Tucker made copies of the actual KDS agreements available for Todd Copeland and Reyna to review

during their due diligence trip to California. (Statement ¶¶ 83-84.) No reasonable investor would view these

statements (summaries of the KDS agreements) as significantly altering the total mix of information made available

when they had more complete information (copies of the agreements themselves) in their possession.

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Commission (“SCC”) commenced an investigation of Premier Capital and Reyna relating to their

role in the sale of Xentex stock to Virginia investors. (Id. ¶ 141.)

5 As a result of this

investigation, the SCC ordered Premier Capital and Reyna to make a offer of rescission to seven

Virginia investors, including Xen Investors. (Id. ¶ 143.) In December 2004, Premier Capital and

Reyna sent Xen Investors an offer to rescind its investment in Xentex and to refund Xen

Investors the full amount of its investment. (Id. ¶ 144.) Xen Investors refused this offer, even

though Reyna had enough money to repay it. (Id. ¶¶ 145-46.) Xen Investors therefore suffered

no damages. In the alternative, to the extent it suffered any loss, Xen Investors either failed to

mitigate its damages or was the contributing cause of its own damages. Under the Virginia

securities act, Xen Investors’ claim is expressly barred by Va. Code Ann. § 13.1-522(d).

3. Plaintiffs Cannot Establish Loss Causation.

To establish a primary violation against Xentex, Xen Investors must prove valid loss

causation. See 15 U.S.C. § 77l(b); see also, e.g., In re Salomon Smith Barney Mut. Fund Fees

Litig., 441 F. Supp. 2d 579, 588 (S.D.N.Y. 2006) (“Congress added an express loss causation

provision to § 12 of the 1933 Act through the adoption of the Private Securities Reform Act of

1995.”). “Transaction causation” requires Xen Investors to show that it would not have invested

if Xentex stated truthfully the material facts at the time of sale, while “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).

Flanagan is entitled to summary judgment if he can establish “that the decline in the value of the

security is attributable in total to some . . . factor” other than the alleged false statement. Id. at

649-50; see generally Dura Pharms., 544 U.S. at 342 (loss causation is “a causal connection

between the material misrepresentation and the loss”).

In the leading Seventh Circuit case of Bastian v. Petren Resources Corporation, the

plaintiffs, who invested $600,000 in oil and gas limited partnerships, alleged that offering

memoranda misrepresented the defendants’ competence and integrity and that they would not

have invested had it not been for the misrepresentations. 892 F.2d 680, 682 (7th Cir. 1990). The

plaintiffs lost their investment because the price of oil declined drastically after they invested.

5

In this investigation, the SCC alleged that Premier Capital and Reyna offered and sold unregistered shares of

Xentex stock, failed to properly register with the SCC, made material omissions and misrepresentations in the

officer and sale of Xentex stock, and made false and misleading statements in the course of the SCC’s investigation.

(Statement ¶ 142.)

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Id. at 684. In other words, the cause of their loss “was unrelated to the competence and honesty

of the defendants.” Id. To prove valid loss causation, it is not enough for a plaintiff to prove the

cause of why the it entered into the transaction; the plaintiffs must also prove “the cause of the

transaction’s turning out to be a losing one.” Id. In other words, “if the facts had been as

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

would be no loss causation. Id. at 682.

The reason why the transaction in this case “turn[ed] out to be a losing one” was because

KDS went into receivership and, as a result, could not produce computers for Xentex to sell.

(Statement ¶ 139.) This bears no nexus to the alleged fraud. Suppose, for example, that KDS

did agree to open a Silicon Valley service depot to provide warranty and repair services. (Third

Am. Compl. ¶ 29(a)(3).) This would not have prevented KDS’s financial problems or helped

KDS produce computers. As the Seventh Circuit stated in Bastian, “[n]o social purpose would

be served by encouraging everyone who suffers an investment loss because of an unanticipated

change in market conditions to pick through offering memoranda with a fine tooth comb in the

hope of uncovering a misrepresentation.” 892 F.2d at 685.

II. Flanagan is Entitled to Judgment as a Matter of Law on Xen Investors’ Federal

Securities Law Claim (Count VII) for Additional Reasons.

A. Xen Investors Did Not Purchase Shares Through a Public Offering.

The 1933 Act does not apply to “transactions by an issuer not involving any public

offering.” 15 U.S.C. § 77d(2). Under Rule 506 of Regulation D, the offer and sale of a security

is deemed not to be a public offering within the meaning of 15 U.S.C. § 77d(2) if it (1) satisfies

the terms and conditions of 17 C.F.R. §§ 230.501 and 230.502 and (2) “[t]here are no more than

or the issuer reasonably believes that there are no more than 35 purchasers of securities from the

issuer.” 17 C.F.R. § 230.506.

The undisputed facts demonstrate that the offering to Xen Investors meets the general

conditions of 17 C.F.R. §§ 230.501 and 230.502. See 17 C.F.R. § 230.506(b)(1). First, there

were no other offers six months prior and six month subsequent to November 2000 that could be

integrated with the offering to Xen Investors. Compare 17 C.F.R. § 230.502(a) with Statement ¶

93. Second, because Xen Investors was an accredited investor, Xentex did not have an

obligation to furnish any information set forth under Rule 502. Compare 17 C.F.R. § 230.502(b)

with Statement ¶ 89. Third, Xentex did not use general solicitation or advertising to market the

securities offered to Xen Investors. Compare 17 C.F.R. § 230.502(c) with Statement ¶ 25(d).

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Fourth, the offering to Xen Investors was restricted, and the securities could not be resold

without registration under the Act. Compare 17 C.F.R. § 230.502(d) with Statement ¶ 53.

The undisputed facts also demonstrate that there were no more than 35 purchasers of

securities in the offering to Xen Investors. See 17 C.F.R. § 230.506(b)(2). This offering only

involved one investor – Xen Investors. Xentex considered the transaction with Xen Investors to

be its own discrete offering. (Statement ¶ 93.) Batio and Tucker met with representatives of

Xen Investors privately. (Id.) The parties negotiated the transaction privately. (Id.) The terms

offered to Xen Investors differed from the terms contained in Xentex’s previous private

placement memoranda, and Xentex did not solicit other investors to purchase stock on the same

terms offered to Xen Investors. (Id.) In fact, the securities issued to Xen Investors contained

features not granted to any previous or subsequent investors, including anti-dilution protection,

rights to Board information, and warrants conditioned on fundraising goals for Premier Capital.

(Id.) Bobby Copeland signed a subscription agreement warranting that Xen Investors was an

accredited investor and completed an investor questionnaire stating that all of Xen Investors’

partners were accredited investors. (Id. ¶¶ 88-89.) Xen Investors thus qualifies as an accredited

investor. See 17 C.F.R. § 230.501(a)(8). Consistent with Xentex’s conscious decision not to

make any public offerings of securities and the steps Barack Ferrazzano had taken to ensure

there were no public offerings of Xentex stock in 2000 and 2001 (Statement ¶ 25), the

documentation relating to this transaction clearly states that the placement was made pursuant to

Regulation D of the 1933 Act. (Id. ¶¶ 53, 72, 87, 92.)

B. Xen Investors’ Claims Are Barred by the Statute of Limitations.

The primary violation that forms the basis of Xen Investors’ control person liability claim

against Flanagan arises out of 15 U.S.C. § 77l(a)(2). (Third Am. Compl. ¶ 102.) A cause of

action under 15 U.S.C. § 77l(a)(2) must be brought within one year “after the discovery of the

untrue statement or the omission, or after such discovery should have been made by the exercise

of reasonable diligence.” 15 U.S.C.§ 77m. The one-year statute of limitations contained in 15

U.S.C. § 77m also applies to actions brought under 15 U.S.C. § 77o. See, e.g., Dodds v. Cigna

Sec., Inc., 12 F.3d 346, 349 n.1 (2d Cir. 1993); Herm v. Stafford, 663 F.2d 669, 679 (6th Cir.

1981).

“[I]nquiry notice is sufficient to begin the limitations clock.” Whirlpool Fin. Corp. v. GN

Holdings, Inc., 67 F.3d 605, 609 (7th Cir. 1995). Facts that put a victim on inquiry notice “can

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fall short of actual proof of fraud.” Fujisawa Pharm. Co. v. Kapoor, 115 F.3d 1332, 1335 (7th

Cir. 1997). Rather, the statute of limitations begins to run “‘when the victim of the alleged fraud

became aware of facts that would have led a reasonable person to investigate whether he might

have a claim.’” Whirlpool Fin. Corp., 67 F.3d at 609 (quoting Treganza v. Great Am. Commc’ns

Co., 12 F.3d 717, 718 (7th Cir. 1993)).

Xen Investors alleges that the Information Statement contained “multiple untrue

statements of material fact,” which fall into two major categories: (1) misrepresentations

regarding the company’s agreements with KDS and (2) misrepresentations regarding the

development of the Voyager computer. (Third Am. Compl. ¶ 29(a).) Tucker made the KDS

agreements available to Todd Copeland during his trip to California on November 14, 2000.

(Statement ¶¶ 83-84.) Following his trip, Tucker sent the stack of due diligence documents,

including the KDS agreements, to Xen Investors’ attorney. (Id.) If the Information Statement

had misrepresented KDS’s contractual obligations, Todd Copeland should have discovered those

misrepresentations during that trip, and Xen Investors’ attorney should have discovered them

shortly thereafter. See, e.g., Badger v. Boulevard Bancorp, Inc., 970 F.3d 410, 411-12 (7th Cir.

1992) (affirming summary judgment pursuant to 15 U.S.C. § 77m where plaintiffs were

sophisticated business people, were represented by law firm and accounting firm, and had access

to company’s business records); accord Kauthar SDN BHD v. Sternberg, 149 F.3d 659, 670-71

(7th Cir. 1998) (affirming summary judgment on statute of limitations grounds where plaintiff

had access to financial information that would have disclosed existence of allegedly undisclosed

finder’s fee).

There is no dispute that Xentex did not mass produce computers in the first quarter of

2001. As a result, assuming that Xen Investors was told that computers would be mass produced

in the first quarter of 2000, they should have known of the misrepresentation at the beginning of

2001, when mass produced computers did not arrive. See, e.g., Whirlpool Fin. Corp., 67 F.3d at

609-10 (discrepancies between projections and actual results sufficient to put plaintiff on inquiry

notice).

Bobby Copeland was on notice of the alleged fraud prior to March 30, 2001. On January

1, 2001, Xentex sent a letter to shareholders informing them of “disappointments and difficult

decisions” in the previous year, including “delays in the development schedule” due to switching

microprocessor suppliers and “significant revisions” to its video design, and that the first

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motherboards for the design would not be ready until early January 2001. (Statement ¶ 105.)

According to Bobby Copeland, this letter contradicted everything that he purportedly learned

about tooling the previous November. (Id.) On or about March 15, 2001, Bobby Copeland

received a memorandum that “raised eyebrows” because it conflicted with representations that

Batio and Tucker had made to him. (Id. ¶ 106.) By this time, Bobby Copeland had lost

confidence in the ability of Xentex to operated in a fiduciary manner. (Id.) Clearly, if Xen

Investors were told the things it alleges it were told in November 2000, it was on notice of the

alleged fraud by the first of January 2001, and no later than mid-March. Xen Investors did not

file their complaint until March 30, 2002. Having failed to file their complaint within the oneyear time limit, Xen Investors federal securities claim against Flanagan is barred by the one-year

statute of limitations. 15 U.S.C. § 77m.

III. Flanagan is Entitled to Judgment as a Matter of Law on Plaintiffs’ Breach of

Fiduciary Duty Claim (Count X).

A. Flanagan Did Not Owe a Fiduciary Duty to Any of the Plaintiffs at the Time

of the Alleged Fraud.

Corporate directors owe a fiduciary duty to the corporation and its shareholders. See

Gottlieb v. McKee, 107 A.2d 240, 243 (Del. Ch. 1954).

6

They do not owe a fiduciary duty to

prospective shareholders. See Anadarko Petroleum Corp. v. Panhandle E. Corp., 545 A.2d

1171, 1172 (Del. 1988) (finding that directors owe no fiduciary duties prior to the date of

distribution of the stock interests, since until the distribution date plaintiff was not considered a

shareholder); Sanders v. Devine, 1997 Del. Ch. LEXIS 131, at *16 (Sept. 24, 1997) (finding, as a

matter of law, that there is no fiduciary duty for disclosures made in connection with a stock

offering when plaintiff was not a stockholder at the time the prospectus was issued); see also

Weiss v. Leewards Creative Crafts, Inc., 1993 Del. Ch. LEXIS 73, at *8-9 (Apr. 29, 1993)

(finding that a fiduciary duty was conditioned on the closing of the offer).

In this case, Batio and Tucker handed out the Information Statement to representatives of

what would later become Xen Investors on November 1, 2000. (Statement ¶¶ 48, 50.) Xen

Investors signed a letter of intent with Xentex and provided Xentex with an initial loan of

$300,000 on November 10, 2000. (Id. ¶ 74.) That loan was later converted into stock on

6 Under Illinois choice-of-law principles, Plaintiffs’ fiduciary duty claim is governed by the law of the state of

incorporation, Prime Leasing, Inc. v. Kendig, 332 Ill. App. 3d 300, 314 (1st Dist. 2002), which in this case is

Delaware. (Statement ¶ 1.)

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November 22, 2000. (Id. ¶ 86.) The first stock certificate for Xen Investors is dated November

21, 2000. (Id. ¶ 95.) Thus, Flanagan did not owe Xen Investors a fiduciary duty on the date the

alleged fraud occurred.

The telephone call between Reyna and Flanagan took place the day after the May 29,

2001, Board meeting. (Id. ¶ 114(c), 126.) TMB executed the promissory note on June 4, 2001.

(Id. ¶ 130.) Even then, the note did not make TMB a shareholder, but stated that Xentex would

issue stock to TMB at a later time. (Id. ¶ 134.) In fact, TMB was never a shareholder of the

company, as the shares were issued to the individual members of TMB. (Id.) Thus, Flanagan

did not owe TMB a fiduciary duty on the date the alleged fraud occurred, or at any other time.

B. Plaintiffs Have Not Suffered a Unique Harm.

The Seventh Circuit recognizes the well-established corporate law principle that

shareholders of a corporation may not maintain actions at law in their own names to redress an

injury to the corporation. See, e.g., Massey v. Merrill Lynch & Co., 464 F.3d 642, 645 (7th Cir.

2006). To determine whether Plaintiffs’ claims are derivative or direct, the Court should look to

the state of incorporation, id., in this case Delaware. (Statement ¶ 1.)

A derivative suit is a suit brought by a shareholder on behalf of the corporation alleging

harm to the corporation. See, e.g., Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031,

1036 (Del. 2004). In determining whether a suit is derivative or individual, the Delaware

Supreme Court has developed a two-pronged test, which asks (1) “who suffered the alleged

harm” and (2) “who would receive the benefit of any recovery or other remedy.” Id. at 1033. In

a derivative suit, it is the corporation that is alleged to have suffered harm, and any recovery

must go to the corporation. Id. A shareholder can always bring an individual suit for “injuries

affecting his or her legal rights as a stockholder,” but in an individual suit any recovery goes to

the shareholders. Id. The prime example of a derivative claim is a claim that directors have

mismanaged the corporation. See Tooley, 845 A.2d at 1037-38 (summarizing Elster v. Am.

Airlines, Inc., 100 A.2d 219, 222 (Del. Ch. 1953)); Bokat v. Getty Oil Co., 262 A.2d 246, 249

(Del. 1970).

In contrast, to maintain an individual claim, a shareholder must show that the director

breached a duty owed to the shareholder and that the shareholder “can prevail without showing

an injury to the corporation.” Tooley, 845 A.2d at 1039. In other words, a shareholder’s unique

harm “must be independent of any injury to the corporation. Id.

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In its September 2004 order, the Court ruled that “[i]f the facts do not support a finding

that plaintiffs suffered a unique harm, defendants may move for summary judgment on that

basis.” (Mem. Op. and Order [Docket No. 163] at 7.) To prove a unique harm, Plaintiffs must

show that “knowingly made false misrepresentations directly to plaintiffs to induce their

investment in Xentex.” (Id.) In essence, in order to show unique harm, Plaintiffs must show that

Flanagan made misrepresentations directly to them. The undisputed facts show that Flanagan

did not make any alleged misrepresentations directly to Plaintiffs as shareholders.

Prior to this litigation, Flanagan had never met or communicated in writing with Bobby

Copeland. (Statement ¶ 110.) According to Bobby Copeland, he and Flanagan spoke on two

occasions prior to this lawsuit – he admits that Flanagan did not tell him anything false in the

first conversation, and the second conversation took place more than a year after Xen Investors’

initial investment. (Id.) Similarly, Todd Copeland has never met or communicated in writing

with Flanagan. (Id. ¶ 113.) The only time Todd Copeland spoke with Flanagan was in 2002,

more than a year after Xen Investors’ initial investment. (Id.)

Prior to this litigation, Flanagan had never met Reyna. (Id. ¶ 114.) In his deposition,

Reyna recalled three telephone conversations with Flanagan, including a telephone call in May

or June 2001 in which Reyna contends that Flanagan told him that allege that Flanagan told him

that the “company was fine,” “the computers were coming,” and “everything was in place to

launch this product.” (Id. ¶ 114(c).) This telephone call is the only direct communication

between Flanagan and any representative of Plaintiffs alleged to be fraudulent. (Third Am.

Compl. ¶ 31(e).)

However, at the time of this conversation, TMB was not a shareholder of Xentex. This

conversation allegedly took place the day after the May 29, 2001, Board meeting. (Statement ¶

126.) TMB did not execute the loan documents until June 4, 2001. (Id. ¶ 130.) And, as

discussed in more detail in Section IV below, Flanagan did not knowingly make any false

misrepresentation to Reyna.

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C. The Exculpatory Clause in Xentex’s Amended and Restated Certificate of

Incorporation Insulates Flanagan from Liability for Alleged Breach of

Fiduciary Duty.

Article X of the Second 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.

(Statement ¶ 29.)

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 Ann. tit. 8, § 102(b)(7) (2007). Such a provision may not, however, eliminate or

limit a director’s liability for (1) breach of the director’s duty loyalty, (2) acts or

omissions not in good faith or intentional or knowing misconduct, (3) unlawful dividends

or stock purchases, and (4) self-dealing. Id. Exculpatory clauses are “premised on the

rationale that shareholders should have the ability to contract with the corporation and its

directors, via the articles of incorporation, regarding the directors’ liability to the

corporation or the shareholders” and the notion that allowing corporations to shield

directors from suit would encourage “qualified individuals to serve as corporate

directors.” Pereira v. Cogan, 2001 U.S. Dist. LEXIS 2461, at *33-34 (S.D.N.Y. Mar. 13,

2001). “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). In this case, Plaintiffs have not alleged – much less uncovered

any facts to suggest – that Flanagan has breached the duty of loyalty, acted in bad faith,

or engaged in intentional or knowing misconduct or self-dealing. The facts discussed in

Section I.B above show that Flanagan acted in good faith. As a result, the exculpatory

clause shields him from liability for breach of fiduciary duty. Id. at 1286-89 (affirming

summary judgment in favor of directors on failure to disclose claim).

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IV. Flanagan is Entitled to Judgment as a Matter of Law on Plaintiffs’ Fraud Claim

(Count XI).

A. Flanagan’s Telephone Call with Reyna Does Not Support a Claim for Actual

Fraud.

TMB brings a claim for actual fraud arising from the telephone call between Reyna and

Flanagan. (Compl. ¶ 145.) To establish a claim for actual fraud under Virginia law, TMB must

show (1) a false representation, (2) of a material fact, (3) made intentionally or knowingly, (4)

with the intent to mislead, (5) reliance by the party mislead, and (6) resulting damage to the party

misled. See, e.g., Winn v. Aleda Constr. Co., 315 S.E.2d 193, 195 (Va. 1984). The plaintiff

carries the burden of proving each element by clear and convincing evidence. Id. Flanagan is

entitled to judgment as a matter of law on TMB’s actual fraud claim for four independent

reasons.

First, there was no false representation of material fact. An alleged misrepresentation

“must be of an existing fact, and not the mere expression of an opinion. The mere expression of

an opinion, however strong and positive the language may be, is no fraud.” Lambert v.

Downtown Garage, Inc., 553 S.E.2d 714, 717 (Va. 2001) (internal quotations omitted).

According to Reyna’s deposition testimony, Flanagan told Reyna that the “company was fine,”

“the computers were coming,” and “everything was in place to launch this product.” (Statement

¶ 114(c).) Even assuming for purposes of summary judgment that Flanagan made these

statements, they would not constitute fraud under Virginia law. See, e.g., Lambert, 553 S.E.2d at

717 (defendant’s “statement that the vehicle was in ‘excellent’ condition cannot be viewed as

anything more than an opinion”); see also, e.g., Arnlund v. Smith, 210 F. Supp. 2d 755, 767-68

(E.D. Va. 2002) (statements referencing a “classic turnaround situation” not actionable);

Kuczmanski v. Gill, 302 S.E.2d 48, 50 (Va. 1983) (general statement that house was in “excellent

condition” could not support action for fraud); Henning v. Kyle, 56 S.E.2d 67, 69 (Va. 1949)

(“good condition”).

Second, even assuming, arguendo, that Flanagan made these statements to Reyna and

that they were untrue, Flanagan would not have made the statements knowing they were untrue.

At the Board meeting on May 29, 2001, Kim reported that KDS was on schedule to commence

manufacturing in July. (Statement ¶ 124.) The Board also discussed the best uses of 20 to 30

prototype computers that it expected to receive shortly. (Id.) If anything, Flanagan reported

what he learned from the Board meeting a day earlier and, thus, did not make the statements to

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Reyna knowing they were untrue (even assuming they were untrue). See, e.g., Ell v. Moss, 39

Va. Cir. 8, 19 (1995) (representation that structure was “well built” not fraudulent when

defendant did not know of any flaws in the building process).

Third, Flanagan did not intend to mislead Reyna. Flanagan did not have the impression

that Reyna was asking for Flanagan’s view of the company’s progress as a whole. (Statement ¶

126.) Flanagan did not have the impression that Reyna was asking for his view of the company’s

progress, that Reyna was seeking information from him to determine whether to make the loan,

or that Reyna was seeking his advice. (Id.) In fact, objecting to the high yield of the proposed

loan, Flanagan spoke out against it at the May 29 Board meeting, calling the terms of the loan

“atrocious” and stating that the company could get better terms “from a loan shark in Cicero.”

(Id. ¶ 125.)

Fourth, TMB did not rely on Flanagan’s alleged statements. Todd Copeland funded

$100,000 of the loan before the telephone call even took place. (Id. ¶ 121.) Reyna put another

$500,000 into an escrow account before the telephone call took place. (Id. ¶ 122.) Thus, TMB

could not have relied on Flanagan’s alleged statements because it had already made the decision

to fund and in fact had funded the loan before the telephone call took place. Once the Board

rejected the loan, Reyna worked with Tucker to restructure the loan’s terms. (Id. ¶ 128-29.) At

3:53 a.m. on May 31, Tucker e-mailed Reyna explaining that the Board of Directors had turned

down the loan proposal and thanking Reyna for spending time with him that night creating a new

one. (Id. ¶ 129.) In the e-mail, Tucker stated that the new loan structure “will be much better

and will not require Xentex board approval.” (Id.) Further underscoring the fact that Flanagan

did not intend to induce Reyna to make the loan, Flanagan did not have any role in renegotiating

the terms of the loan, did not have any role in the actual execution of the loan, and did not even

know about the new loan proposal until approximately October 2001. (Id. ¶ 136.)

B. No Evidence Exists That Can Support a Finding That Flanagan Committed

Constructive Fraud.

Plaintiffs also bring a claim for constructive fraud, alleging that Flanagan (a) negligently

made false representations of material fact in the Information Statement and the accompanying

financial statements and (b) innocently or negligently failed to disclose alleged facts concerning

Xentex’s ability to produce computers and financial condition. (Third Am. Compl. ¶ 146.)

To prevail on a constructive fraud theory, Plaintiffs must prove by clear and convincing

evidence that Flanagan innocently or negligently made false representations of material fact upon

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which they relied to their detriment. See, e.g., Eden v. Weight, 578 S.E.2d 769, 773-74 (Va.

2003). The alleged misrepresentations “must relate to a present or pre-existing fact, not

statements involving promises or future events, unless the evidence shows an intent not to fulfill

such promise when made.” Id. at 773; see also Tate v. Colony House Builders, Inc., 508 S.E.2d

597, 600 (Va. 1999) (“mere expressions of opinion” and “representations predicated upon future

events or promises cannot form the basis of an action for constructive fraud”); accord, e.g., WalMart Stores, Inc. v. J.A. Fielden Co., 440 F. Supp. 2d 523, 528-29 (W.D. Va. 2006) (same). A

finding of constructive fraud requires evidence that a defendant has “represented as true what is

really false, in such a way as to induce a reasonable person to believe it, with the intent that the

person will act upon this representation.” Blair Constr., Inc. v. Weatherford, 485 S.E.2d 137,

138 (Va. 1997). The difference between actual and constructive fraud is that actual fraud

requires that the defendant make a false statement of fact and know that it is was false, and

constructive fraud requires that the defendant make a false statement of fact without knowing it

is false, but in either case the defendant must act with intent that the person rely on the

representation.

Flanagan is entitled to judgment as a matter of law on the constructive fraud claim

stemming from the Information Statement and the accompanying financial statements (Third

Am. Compl. ¶ 146(a)) because Flanagan did not personally make any of the representations in

those documents.

Flanagan is entitled to judgment as a matter of law on the constructive fraud claim

stemming from alleged omissions of fact (Third Am. Compl. ¶ 146(b)) because “concealment, in

general, can only give rise to a claim of actual fraud.” Cohn v. Knowledge Connections, Inc.,

585 S.E.2d 578, 581 n.2 (Va. 2003). To withstand summary judgment on a concealment theory,

Plaintiffs must present some “evidence of a knowing and deliberate decision not to disclose a

material fact.” Norris v. Mitchell, 495 S.E.2d 809, 812 (Va. 1998). Xen Investors cannot show

that Flanagan intentionally concealed any facts pertaining to its initial investment decision

because Flanagan was not actually aware the November 1 meeting was taking place. (Statement

¶ 63.) Even after the November 1 meeting, there was no ongoing duty on Flanagan’s part to

keep this group of investors informed of Xentex’s financial condition and the status of the

computers because Flanagan’s interactions with this group of investors was so limited (id. ¶¶

107-14), others at Xentex had taken on the role of communicating with them (id. ¶¶ 101-04), and

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one of the individuals associated with Plaintiffs – Reyna – was personally involved in raising

money for Xentex and knew or should have known as much about the company’s affairs as

Flanagan. (Id. ¶ 97.) TMB cannot show that Flanagan intentionally concealed any facts

pertaining to its decision to loan Xentex $650,000 because Flanagan was personally against the

loan and thought the loan was rejected by the Board of Directors (Id. ¶ 125.) The loan was later

restructured by Batio, Tucker, and Reyna without the involvement of Flanagan or the Board. (Id.

¶ 128-29, 136.)

V. Flanagan Is Entitled To Judgment as a Matter of Law on TMB’s Virginia Securities

Act Claim (Count IX).

TMB also advances a claim against Flanagan under the VSA (Count IX). Specifically,

TMB alleges that Flanagan is derivatively liable for the purported misrepresentations in

Paragraphs 31 and 32 of the Third Amended Complaint because he “directly and indirectly

controlled Xentex.” (Third Am. Compl. ¶ 127.) This claim fails for the same reasons discussed

in Sections I.A and I.B above.

TMB also allege that Flanagan “materially aided” Xentex in making the purported

misrepresentations in Paragraphs 31 and 32 of the Third Amended Complaint. (Id.) As an

threshold matter, TMB cannot state a valid claim against Flanagan for materially aiding Xentex

because he was not an “employee,” “investment advisor,” “investment advisor representative,”

or “agent” of Xentex. Va. Code Ann. § 13.1-522(c). Moreover, TMB bases this allegation on

six facts (Third Am. Compl. ¶ 127(a)(f)), which are contradicted by undisputed facts individually

and fail to support a claim for aiding and abetting collectively. First, Flanagan did not materially

aid Xentex because of the reasons stated in Paragraph 105 – as alleged in Paragraph 127(a) – for

the same reasons discussed in Section I.A.2 above. Second, Flanagan did not materially aid

Xentex in making the statements in Paragraphs 31(b), (c), (d), (f), and (g) – as alleged in

Paragraph 127(b) and (d). Plaintiffs admit that Flanagan did not personally make any of these

statements (Statement ¶ 67.) The only people from Xentex that TMB communicated with about

the loan were Batio and Tucker. (Id. ¶¶ 116-17, 119, 127.) Flanagan was not a party to these

communications and thus did not have personal knowledge of whatever information Batio and

Tucker provided to the individual members of TMB. In the time leading up to the TMB loan,

Batio and Tucker actually informed Todd Copeland and Reyna about glitches in and adjustments

that needed to be made to the computer. (Id. ¶ 120.) Plus, Flanagan spoke out against the loan

that TMB now accuses him of inducing them to make. (Id. ¶ 125.) Third, Flanagan cannot be

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liable for “personally utter[ing] . . . false statements” to Reyna – as alleged in Paragraph 127(c) –

for the same reasons discussed in Section IV above. Fourth, contrary to the allegations in

Paragraph 127(e), Flanagan had very few conversations with any individuals associated with

Plaintiffs and did not believe that these individuals were turning to him for information regarding

Xentex. (Id. ¶¶ 108, 111-14, 126.) Fifth, Flanagan did not have the “ability to control” the

misrepresentations in Paragraphs 31 and 32 “because his duties as a top-ranking company

official necessarily involved general oversight and direction of Xentex” – as alleged in Paragraph

127(f). Again, as discussed in Sections I.A and I.B above, Flanagan’s status as a outside director

did not give him the ability to control the fundraising activities that had appropriately been

delegated to others in the corporation.

Conclusion

Xentex is in bankruptcy. So is Batio. Plaintiffs have thus attempted to recoup their

losses from several peripheral actors connected to Xentex, including outside directors like

Flanagan, in this lawsuit. However, “mishaps within a corporation do not alone entitle a plaintiff

to bring suit against directors in their personal capacities,” and “service as director of a

corporation should not be a journey through liability land mines.” Dellastatious, 242 F.3d at

196. For this reason and those stated above, the Court should grant summary judgment in

Flanagan’s favor on all counts.

Dated: July 9, 2007 Respectfully submitted,

/s/ David L. Hanselman, Jr.____________

Alan S. Rutkoff, P.C.

David L. Hanselman, Jr.

Michael D. Arnold

McDermott Will & Emery LLP

227 West Monroe Street

Chicago, Illinois 60606

Telephone: (312) 372-2000

Facsimile: (312) 984-7700

Attorneys for Defendant Brian Flanagan

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CERTIFICATE OF SERVICE

I, Michael D. Arnold, an attorney of record in this case, hereby certify that, on this 9th

day of July, 2007, I caused a copy of the foregoing instrument to be served electronically upon

all counsel of record in this action pursuant to the Court’s General Order on Electronic Case

Filing (“ECF”), which will send notification of and copies of such filing to all counsel of record

who are registered as ECF users, and by electronic mail, pursuant to Federal Rule of Civil

Procedure 5(b)(2)(D), upon the following:

Douglas J. Tucker

dtucker@quarles.com

Quarles & Brady LLP

500 West Madison Street

Suite 370

Chicago, Illinois 60661

/s/ Michael D. Arnold __

Michael D. Arnold

CHI99 4839174-3.052317.0014

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