Opinion ID: 3020349
Heading Depth: 7
Heading Rank: 1

Heading: Material issues of fact exist regarding

Text: Berckeley’s intent to resell unregistered shares and its status as an underwriter At the outset, we examine whether there is sufficient evidence in the record to create a material issue of fact that Berckeley made a misrepresentation in paragraph 2.5 of the Agreement. Colkitt bases his Section 10(b) claim on the argument that Berckeley intentionally misrepresented in Paragraph 2.5 of the Agreement that all subsequent sales of converted shares would be made in accordance with the 18 We will examine the misrepresentation and scienter issues as part of our resolution of the Section 29(b) claim, and we will consider separately the causation prong in part IV.C, infra. 30 registration requirements of the Securities Act of 1933.19 To ultimately prove a misrepresentation, Colkitt must demonstrate 19 In the District Court, the primary argument advanced by Colkitt to establish that Berckeley violated Section 10(b) was that Berckeley had engaged in short selling in violation of the Agreement. The District Court determined that Berckeley did not engage in short selling, and Colkitt has not advanced this issue on appeal. We note that our recent decision in GFL Advantage Fund, 272 F.3d at 202, addressed the effect of short sales in a nearly identical financing transaction that Colkitt entered into with GFL. We held that GFL’s short selling did not support Colkitt’s Section 10(b) claim. In rejecting Colkitt’s argument that the short selling constituted market manipulation, we stated that “[t]he fact that these short sales may have contributed to a decline in the stocks’ prices is not evidence of deceptive or manipulative conduct, for there is no reason to believe these prices were depressed artificially.” Id. at 207. We concluded that “short selling, even in large volumes, is not in and of itself unlawful and therefore cannot be regarded as evidence of market manipulation.” Id. at 209. We further explained: “That short selling may depress share prices, which in turn may enable traders to acquire more shares for less cash (or in this case, for less debt), is not evidence of unlawful market manipulation, for they simply are natural consequences of a lawful and carefully regulated trading practice.” Id. at 209-10. Rather, short selling could only form a basis for a Section 10(b) claim if done “in conjunction with some other deceptive practice that either injected inaccurate information into the market or otherwise artificially affected the price of the stock.” Id. at 207. 31 that, at the time Berckeley entered into the Agreement, it intended to violate federal securities laws by reselling unregistered shares of NMFS stock back into the United States without entitlement to an exemption. Colkitt’s theory breaks down into two discrete subissues as to which he must point to a dispute of material fact: (1) that there is evidence in the record that Berckeley intended at the time the Agreement was executed to sell shares back into the United States without registering them, and (2) Berckeley was aware at the time of the Agreement that it would be reselling the shares as an “underwriter,” i.e., the company knew that it was not entitled to an exemption from the registration requirement under Section 4(1) of the Securities Act of 1933. (1) There is sufficient evidence that Berckeley intended to resell NMSF shares back into the United States without registering them We first examine whether there is evidence in the record that Berckeley intended at the time it entered into the Agreement with Colkitt to resell unregistered NMSF shares back into the United States. On the basis of three affidavits, two judicial admissions, and the structure of the deal itself, we conclude that there is sufficient evidence to create a material issue of fact that Berckeley intended to resell NMSF shares back into the United States without registering them. The first affidavit was submitted by Martin Douglas Ho, Berckeley’s Connecticut-based investment advisor. Ho participated in negotiating and closing the transaction between Berckeley and Colkitt, and he also was involved in the delayed 32 conversion and attempted conversions of the debentures. (App. at 1173.) Ho stated in his supplemental affidavit that he sought legal advice and provided investment advice in connection with the transaction. Regarding the advice he provided to Berckeley, Ho stated the following: After thoroughly investigating the appropriateness and legality of the transaction, I advised Berckeley that, pursuant to the terms of the Agreement and subject Debentures, and applicable federal securities laws, including Regulation S promulgated under the Securities Act of 1933, and exemptions therefrom, after the expiration of 40 days and certainly after the expiration of 100 days – the initial restricted period – Berckeley was permitted to sell the common stock of National Medical in the United States that was to be delivered by Colkitt. I, on behalf of Berckeley, sought and obtained legal advice which confirmed my understanding of Regulation S and related exemptions and my advice to Berckeley regarding the transaction and its ability to resell the converted shares in the United States after the expiration of 40 days or, in this case, commencing after the initial restricted period under the Agreement. (App. at 1175 (emphasis added).) Specifically referencing Paragraph 2.5 of the Agreement, which is at the crux of the dispute between the parties, Ho stated the following: 33 All of the representations contained in Paragraph 2.5 were true and correct at the time that they were made by Berckeley and continue to be true and correct in that, among other things, Berckeley intended to sell the converted shares pursuant to an exemption from registration and, in good faith, believed that it could do so based upon the advice it obtained from me as well as its counsel. No shares were sold prior to the Restricted Period. The only shares of Colkitt’s that were ever sold were the approximately 18,320 shares he converted in November 1996. No securities violation can be alleged as to this sale. (App. at 1176-77 (emphasis added).) Berckeley directors Milton Morales and Carlos Mijares also submitted supplemental affidavits. Those affidavits, which were identical, provided the following pertinent averments: Prior to executing the Agreement, Berckeley was advised by Mr. Ho that he conducted a complete investigation as to the appropriateness and legality of the transaction, that, pursuant to the terms of the Agreement and Debentures, and applicable federal securities laws, including Regulations promulgated under the Securities Act of 1933, and exemptions therefrom, the transactions did not violate any laws and, that after the expiration of 100 days – the initial restricted period – Berckeley was permitted to sell 34 the common stock of National Medical in the United States that was to be delivered by Colkitt.