Opinion ID: 783603
Heading Depth: 3
Heading Rank: 3

Heading: Phansalkar's Work, Directors' Compensation, and Disloyalties

Text: 26 In 1999, Phansalkar introduced AW to two opportunities. The first was an opportunity to raise funds for Zip Global Network, Ltd. (Zip), a company based in India that was developing a payphone network there. AW accepted the opportunity and raised approximately $10 million for Zip from AW partners and from outside investors. The Zip Transaction closed in September 1999. As a result of the transaction, AW received a cash fee and stock warrants. AW also received the right to designate two directors to the Zip Board of Directors. Technically, this right belonged to an entity called AW Zip, LLC, which AW had created for the purpose of pooling funds for the transaction, and which was managed by AW partners. Through AW Zip, LLC, AW selected Phansalkar as one of its two designees. 27 As a Zip director, Phansalkar received 40,000 options to purchase shares of Zip (the Zip Options), and 600 shares of Zip Telecom Holdings, Ltd. (the Zip Shares). 5 He received the Zip Options on October 15, 1999, and the Zip Shares in early 2000. The district court found that Phansalkar served on the Zip Board, and received the Zip Options and the Zip Shares, as a representative of AW. See Phansalkar II, at , 2001 WL 1524479 at -18. 28 In violation of firm policy with regard to Directors' Compensation, Phansalkar did not report to AW his receipt of either the Zip Options or the Zip Shares. See id. at , 2001 WL 1524479 at . In deciding whether Phansalkar's non-disclosure amounted to fraud, the court below found it important that Phansalkar had given Loretta Loomie (Loomie), an AW employee, a copy of the Minutes of the Zip Board of Directors Meeting for October 15, 1999 (the Minutes), which included a reference to Phansalkar's Zip Options (but not his Zip Shares). The Minutes were kept in an unlocked file cabinet in a hallway in AW's office. In addition, Loomie testified at trial that she was aware of the grant of the Zip Options to Phansalkar. Based on these facts, the court found that, although Phansalkar failed to disclose the Zip Options and the Zip Shares, AW did not show that he intentionally concealed either of them. See id. at , 2001 WL 1524479 at .
29 The second opportunity to which Phansalkar introduced AW in 1999 was an opportunity to complete two projects for Osicom. AW undertook: (1) to lead a $7.5 million private placement of newly-issued shares of Osicom common stock, and (2) to identify and recruit independent directors and managers for Osicom and its affiliates. AW created FIBR Holdings, LLC (FIBR) to pool funds for the private placement, and completed the transaction in December 1999. As a result, AW earned $300,000 in cash fees and a carried interest of 20 percent of FIBR's ultimate profit. FIBR received the right to designate one member to the Osicom Board of Directors; it designated Phansalkar. 30 As an Osicom director, Phansalkar received options to purchase 35,000 Osicom shares (the 35,000 Osicom Options) and $3,000 in directors' fees (the Osicom Directors' Fees). He received the 35,000 Osicom Options on January 6, 2000 and the Osicom Directors' Fees for meetings attended in the spring of 2000. Just as the district court had found with regard to the Zip Options and Zip Shares, the district court found that Phansalkar received the 35,000 Osicom Options and the Osicom Directors' Fees as a representative of AW, and that Phansalkar failed to disclose those Options and Fees to AW. See Phansalkar II, at -58, 2001 WL 1524479 at -19. Again, the court found that AW did not establish that Phansalkar intentionally concealed this compensation. See id. at , 2001 WL 1524479 at .
31 In early 2000, Phansalkar worked on a private placement of stock for Sorrento, an Osicom affiliate. That deal closed on March 1, 2000. AW invested $1.5 million in the private placement, half of which came from funds that belonged to AW partners and half of which came from funds borrowed by AW; the latter were personally guaranteed by Andersen and Weinroth. Phansalkar invested $60,000. AW also raised $6.5 million from outside investors through an entity AW created, Sorrento Holdings, LLC. 32 As a result of the Sorrento deal, AW received a fee of $1.95 million, which it chose to take in additional Sorrento stock, and a carried interest of 20% on the profit earned on the investment of Sorrento Holdings, LLC. AW also received warrants and/or options for identifying candidates to serve as officers and directors for Sorrento. Andersen was appointed to the Sorrento Board of Directors; Phansalkar was appointed to the Sorrento Advisory Board. 33 Andersen was granted 100,000 Sorrento options as a member of the Sorrento Board of Directors; Phansalkar was granted 300,000 Sorrento options as a member of the Sorrento Advisory Board (the Sorrento Options). The district court found that Andersen was aware of the grant to Phansalkar because (1) Andersen knew of the relevant option plan (he participated by telephone in a Sorrento Board meeting at which the Board approved the Sorrento Option Plan), and (2) Andersen received a copy of the Plan, which stated that Phansalkar would receive 300,000 options. See Phansalkar II, at , 2001 WL 1524479 at . The court also found that it was reasonable for Phansalkar to believe that Andersen knew that Phansalkar had been granted 300,000 Sorrento options. See id. 34 The district court made a specific finding that Phansalkar eventually received only 100,000 options from Sorrento, not the 300,000 options he was initially granted. See id. at , n.17, 2001 WL 1524479 at , n.17; Phansalkar III, at , 2002 WL 1402297 at -8.
35 In the spring and summer of 2000, AW coordinated the private placement of shares of Sync Research, Inc. (Sync), and a subsequent merger of Sync with a business unit of Osicom (the Networks Access unit). AW created Entrada Holdings, LLC, to pool funds for the private placement. The merger was completed in or around August 2000, after Phansalkar had left AW and joined Osicom. The merged entity became Entrada Networks. AW's compensation for its work on the private placement and the merger consisted of a cash fee (equal to a percentage of the investment by Entrada Holdings, LLC in the private placement) and a 20% carried interest on the profits earned by Entrada Holdings, LLC. 36 On May 19, 2000, before the merger, Sync filed a document with the Securities and Exchange Commission (SEC) that stated that Sync intended to appoint Phansalkar to the Entrada Networks board after the merger. On June 15, 2000, after Phansalkar had agreed to join Osicom, Osicom granted Phansalkar options to purchase 50,000 shares of still-prospective Entrada Networks (the 50,000 Entrada Options). In August 2000, after the merger was completed, Osicom appointed Phansalkar to the Entrada Networks Board, and granted him another 100,000 Entrada Networks options (the 100,000 Entrada Options). 37 The district court found that Phansalkar secured his Entrada Networks Board seat in or around April 2000, while still employed by AW, even though he was not officially appointed until August 2000. See Phansalkar II, at , , 2001 WL 1524479 at -8, . The district court found that Phansalkar failed to disclose this fact to AW and failed to attempt to secure an Entrada Networks Board seat for AW. See id. at , 2001 WL 1524479 at . The court also found that, in April 2000, Phansalkar failed to disclose to AW that Sync had offered to place an AW designee on its board, and that Phansalkar had declined the offer. See id. 38 Notwithstanding these disloyalties, the district court rejected AW's contention that all of the Entrada Options belonged to AW, or would have belonged to AW, absent Phansalkar's omissions as an AW employee. See id. at -66, 2001 WL 1524479 at . First, the district court found that neither set of options was granted to Phansalkar in his capacity as an AW employee, and hence that neither set belonged to AW. See id. Second, the court found that AW had failed to prove that it would have received any of the Entrada Options directly, had AW known of and accepted the offer for a seat on the Sync board, or had Phansalkar sought to secure a seat for AW on the still-prospective Entrada Networks board. See Phansalkar III, at , 2002 WL 1402297 at -10. 3. Phansalkar's Investment Opportunities 39 Phansalkar took advantage of three Investment Opportunities made available to him at AW. The first of these, and the most significant in the context of this litigation, was Phansalkar's investment in Millenium Cell. a. Millenium Cell 40 In late 1998, AW began working on MCEL and committed to raise $1 million in equity to develop a small unit of a corporation that was working on a concept for using sodium borohydride as a source for hydrogen fuel. Andersen, Weinroth, Brumberger, and Rawlings were all among the original investors in MCEL; each invested in his individual capacity. Phansalkar declined the opportunity to invest at that time. 41 In December 1999, Andersen and Weinroth again offered Phansalkar the opportunity to invest in MCEL; they offered to sell him up to $100,000 worth of their own equity interests. Andersen and Weinroth made the offer on terms very favorable to Phansalkar, i.e., at the same price paid by the original investors. The district court found that Andersen and Weinroth made this offer to encourage Phansalkar to stay at the firm. See Phansalkar II, at , 2001 WL 1524479 at -13. The court also found that Phansalkar was offered the opportunity to purchase [the] MCEL Shares at a discounted price, and he clearly thought this offer was a `good deal.' Id. at , 2001 WL 1524479 at . 6 Phansalkar invested $60,000 in MCEL in or around February 2000, and delivered one check in the amount of $30,000 to Andersen and one check in the amount of $30,000 to Weinroth. Andersen and Weinroth deposited the checks in their personal checking accounts. 42 At the time of Phansalkar's investment, MCEL was preparing for an Initial Public Offering (IPO) and had not yet issued any common stock certificates. Phansalkar helped AW find private investors for MCEL in May 2000 and assisted in the solicitation of underwriters for the IPO. 43 Prior to the IPO, the equity interests in MCEL were specified in shares of stock; each owner's interest was memorialized in AW's internal schedules regarding MCEL (the MCEL Ownership Schedules). Those Ownership Schedules show that Phansalkar owned 637,902 shares of MCEL in the spring of 2000. The MCEL IPO eventually occurred on August 9, 2000. 44 The district court also found that Phansalkar sold 252,000 of his 637,902 MCEL Shares to Arthur Kowaloff (Kowaloff), a friend of his. See id. at , 2001 WL 1524479 at . Phansalkar testified that he made a co-investment with Kowaloff, that Kowaloff paid Phansalkar $25,000, for a 25/60 share of Phansalkar's interest in MCEL. See id. AW was not aware of this until May 2000, when Phansalkar (along with all other MCEL investors) was asked to identify designees to whom he wished to transfer portions of his MCEL Shares. 7 b. Sorrento 45 As discussed above, in early 2000 Phansalkar contributed $60,000 to AW's investment in the Sorrento private placement (AW's investment totaled $1.5 million). Only AW partners were permitted to participate in the $1.5 million investment. Phansalkar believed that the investment was a bargain. See Phansalkar III, at , 2002 WL 1402297 at . 46 Phansalkar had not received shares of Sorrento stock or any other return on his $60,000 investment in Sorrento, at the time of the district court's third and final decision in this action. The return on the investment was not to be paid out until AW repaid the $750,000 it had borrowed to fund the investment, because that loan was secured by the stock that AW had purchased. See id. at -25, 2002 WL 1402297 at -9. c. Headway 47 In 2000, Andersen was offered an opportunity to buy one million shares in Headway at a price much lower than market price. Andersen was given this opportunity as a director of Headway. See Andersen Test., Joint Appendix at A 308-309. Andersen offered to share this investment opportunity with the other AW partners, without any vesting requirement. Phansalkar invested $50,000. In August 2000, AW delivered 44,000 shares of Headway common stock to Phansalkar in return for Phansalkar's $50,000 investment. Phansalkar apparently sold those shares thereafter and made a $40,000 profit. See Phansalkar III, at , 2002 WL 1402297 at .