Opinion ID: 1214506
Heading Depth: 1
Heading Rank: 2

Heading: Procedural history of the civil action

Text: On September 4, 1991, the State of Nevada, ex rel. the Secretary of State and Securities Division, filed a civil complaint against Fullerton (both individually and d/b/a Fullerton Design), Crescent Products Corporation d/b/a Fullerton Design, Zip Nut, Inc., and various Does, and later, Bennett. [1] The complaint alleged claims for relief based upon: (1) the offer and sale of unregistered securities, in violation of NRS 90.460; (2) unlawfully transacting business as a broker-dealer and unlawfully transacting business as a sales representative, in violation of NRS 90.310; and (3) fraud committed by Fullerton in the offer and sale of securities, in violation of NRS 90.570. The complaint sought: injunctive relief against the respondents and the named corporations enjoining them and Fullerton's agents from transferring or dissipating the assets of the named corporations; the appointment of a temporary receiver who would assume control of the corporate assets (including, presumably, the patent rights), and the benefits received from respondents' activities; rescission of all agreements with the investors together with restitution of the investors' funds; and civil penalties of $2,500 for each instance of a securities act violation, together with costs and fees. The parties stipulated to a temporary restraining order and the appointment of Matthew Callister, Esq. as receiver of all corporate and individual defendants' assets. Callister thereafter took possession of Fullerton and Bennett's personal papers, questioned them regarding their sources of income and expenditures, and took control of all personal and corporate bank accounts, requiring respondents to also give him monthly financial reports. According to statements made by the criminal prosecutor during oral arguments on the motion resulting in the present appeal, Callister informed the respondents one week after the filing of the civil complaint that a criminal investigation of their activities was pending. [2] On September 12, 1991, a hearing was held on the State's motion for a permanent injunction. Garrett Sutton and John Schell represented the defendants below. A complete transcript of this hearing is not available in the record, but according to the respondents' brief, the State's witnesses included a sheriff's deputy who had recorded a conversation with Fullerton, showing that Fullerton had sold First Phoenix stock without disclosing either the assignment to Crescent Products or the federal injunction. According to the respondents' brief, John Schell testified on the defendants' behalf that he had advised Fullerton that sales of First Phoenix stock did not violate the Utah injunction, and that Fullerton was not required to apprise the First Phoenix investors of either the Utah injunction or the assignment to Crescent Products since neither posed a risk to the investors. Schell, who described himself as a commercial securities attorney, also testified that Fullerton held the patent rights, was the sole owner of Crescent Products, and would own the controlling interest in the newly formed Zip Nut, Inc., which Schell testified was the corporation into which Fullerton's assets, Crescent Products and First Phoenix would be placed  giving the First Phoenix investors a share of a larger pie. Schell had enough confidence in the newly formed Zip Nut, Inc. to invest in the new corporation himself, after full disclosure of the Utah litigation and all assignments, and also testified that, while he would have structured the First Phoenix offering differently had he been acting as Fullerton's counsel at the time, he saw nothing illegal about it. On September 17, 1991, District Judge Stone entered a preliminary injunction against the defendants, enjoining them from engaging in any further transactions in violation of Nevada's securities laws and ordered the appointment of Callister as receiver over all of the defendant corporations' assets. The court order noted that the federal action pending in Utah also involved the zip nut patent at issue here, and that Fullerton had acted in blatant violation of the federal court's order when he dissolved his original corporation and created a new corporation from which he sold stock based upon his rights in the patent at issue. On October 24, 1991, a hearing was held for the purpose of receiving a status report from Callister. At this hearing, the district court judge stated that he did not consider Fullerton to be a thief, but simply not a very good businessman and further indicated his intention to sign an order which, among other things, would allow[] zip nut to go forward with the licensing, manufacture, [and] distribution of the product, apparently under the operative control of investor/attorney John Schell. Thereafter, Judge Stone entered the promised consent order on October 24, 1991, requiring, among other things, a reorganization plan to be sent to all shareholders of First Phoenix which, according to appellant's opening brief, merged most of Fullerton's corporations into Zip Nut, Inc. and allowed all of the investors to become shareholders in the new corporation. The consent order also dismissed the complaint, without prejudice, against Zip Nut, Inc., and released Zip Nut, Inc. from the receivership. A subsequent hearing was held on November 7, 1991, at which the judge reiterated that I don't think Mr. Fullerton is a crook, I think he is a lousy businessman, but he has not intentionally tried to deprive anything of anybody [sic], and that's the bottom line here. On November 12, 1991, a stipulation and settlement agreement was filed in the Utah action, which called for the reinstatement of Fullerton Inc. and the forfeiture and relinquishment by Fullerton of his stock in that entity, followed by the changing of the name of Fullerton Inc. to a name not implying any connection with Fullerton or the rights covered by the agreement. Appellant notes that the Utah settlement agreement did not cancel the assignment of patent rights to Fullerton Zip Nut, Inc., which Fullerton had recorded on January 13, 1983. Thus, it is not entirely clear how the resolution of the Utah matter would affect the rights of the Nevada litigants. In any event, its eventual dismissal seems to have indicated that Zip Nut, Inc. could go forward with its marketing of the product, as in the words of Callister, in his grand jury testimony, that [Utah] lawsuit ha[d] ... been resolved. On November 15, 1991, Judge Stone entered a second consent order approving Zip Nut, Inc.'s offer (which, according to the appellant's brief was for Zip Nut, Inc. to accept subscription agreements from First Phoenix, Inc. investors and to accept the assignment of patent rights for the zip nut after the Utah federal litigation was dismissed), and, among other things, dismissing without prejudice the complaint and receivership as to Fullerton Design, First Phoenix, and Crescent Products upon their merger into Zip Nut, Inc. The receivership was maintained over Fullerton and Bennett, requiring Callister's approval before either could vote any shares or assign any interests. Judge Stone later signed an affidavit (filed in the criminal proceedings) describing the intended effect of the two consent orders and the factual findings necessary to support them: 3. After extensive hearings, conferences with the attorneys, review of many documents, affiant determined that a prima facie showing of fraud by Robert Fullerton in his dealings with the First Phoenix investors did not exist. On two occasions, affiant made statements to this effect in open court to the assembled attorneys and investors. 4. The foregoing finding was essential to continue the civil proceedings in the manner they were conducted. This determination that there was no fraud necessarily led to the court orders consolidating the several corporate entities into Zip Nut, Inc., allowing Robert Fullerton to retain a majority ownership interest in Zip Nut, Inc., and the election offered to the First Phoenix investors to accept stock in Zip Nut, Inc. or a promissory note by Zip Nut, Inc. in an amount equal to their investment plus interest.[ [3] ] 5. If the State of Nevada or any other party to the civil action had proffered prima facie evidence of fraud, affiant would not have proceeded with the case in the manner above-described. The Deputy Attorney General in the civil case told me on at least one occasion in chambers that no criminal action would be filed by the State in this matter. If the State of Nevada had informed affiant that it was going to proceed with a criminal prosecution of Robert Fullerton for the same acts and conduct which was alleged in the civil action, affiant would have taken measures to stay the civil action to ensure against a conflict in the proceedings. In an affidavit filed March 29, 1993, the Deputy Attorney General who handled the civil case against respondents disputes Judge Stone's statement that Stone was told no criminal action would be taken. This affidavit refers to a December 6, 1991, application and order submitted by Callister and signed by Judge Stone which stated that criminal charges may be brought. However, respondents allege it was this reference to the possibility of criminal charges which prompted Judge Stone to inquire about the matter. On December 6, 1991, an order was entered in the Utah action, adopting the terms of the stipulation and settlement that had been filed therein and dismissing that action, contingent upon the terms of the settlement agreement, and declaring the December 1988 dissolution of Fullerton Inc., to be invalid. [4]