Opinion ID: 2758887
Heading Depth: 2
Heading Rank: 2

Heading: The Series A Preferred Stock Transaction

Text: According to the Management Group, Gorman’s mismanagement and profligate spending caused Westech to experience severe financial distress from 2005 to 2011, particularly a rapid decline in net capital in 2011. Because of the nature of Westech’s business, the crisis could have been fatal: the company was required to maintain minimum capital levels by its counterparties, clearing houses, and its regulator, the Financial Industry Regulatory Authority (“FINRA”). As a result, the company needed an infusion of capital. Gorman disputes this account of events. He alleges that Westech raised capital in 2011, not because of financial distress, but instead because of his desire to expand the sales base of the business and to acquire other broker-dealers. 5 Nonetheless, the parties do not dispute that the company issued a new series of Series A Preferred stock and Series A Convertible Notes in the fall of 2011. Four primary groups of investors bought these shares: (1) James J. Pallotta (“Pallotta”), 5 In his affidavit, Gorman states that: “In the months leading up to the Series A Preferred offering, Westech had sufficient capital reserves to satisfy FINRA’s regulatory requirements and the requirements of APEX Clearing Corporation. In addition to its cash on hand, Westech also had access to a $1 million letter of credit if it needed capital reserves. We planned to use the additional capital raised by the issuance of Series A Preferred Stock for growth and expansion, whether internally or by acquisition.” App. to Appellee’s Answering Br. and Cross-Appellant’s Opening Br. at B882-83. Halder disputes these assertions in his affidavit. See App. to Appellant’s Reply Br. and Cross-Appellant’s Answering Br. at AR161. 5 a friend and long-time client of Gorman’s; (2) James B. Fellus (“Fellus”), who had been a consultant to Westech but became CEO after the transaction, and members of Fellus’ family; (3) a group of Westech employees, including Halder; and (4) Gorman himself. Investor Investment Shares Pallotta $2M 80 (preferred only) Fellus $600,000 cash + $1M note6 64 (preferred and notes) Employees $2M 81 (preferred and notes)7 Gorman $1.8M 72 (preferred and notes)