Houston-based Valerus Compression Services LP filed a suit against Guggenheim Corporate Funding LLC and three Guggenheim principals on June 17, alleging the defendants “induced” Valerus’ former general counsel Dawn Born Cunningham into modifying paperwork on some warrants. Warrants give the holder the right to purchase securities. Valerus alleges in the petition that the changes will cause Valerus’ founders and employees to lose some ownership value in the company. “If the modifications are allowed to stand, Valerus’s founders and its employees, who are compensated with shares in the company, will lose much of the value they should have owned in Valerus, and Defendants will reap an additional windfall — a windfall the Defendants have described as equivalent to winning the lottery,” Valerus alleges in the petition filed in the 234th District Court in Houston. In Valerus Compression Services LP v. Guggenheim Corporate Funding LLC, et al. , the defendants include Guggenheim and three of its principals: Orpheus Holdings LLC, Stellar Funding Ltd. and Orpheus Funding LLC, all of New York City. Valerus alleges in the petition that it issued three warrants in 2006 to the defendants as part of Guggenheim’s consideration for arranging a financing for Valerus in 2006. But in 2009, Valerus alleges in the petition, the defendants “induced” Cunningham, who was Valerus’ GC at the time, into agreeing to changes in the warrants by “intentionally leading Ms. Cunningham to believe incorrectly that they were fixing a drafting error in the warrants and clarifying the parties’ original contractual intent.” Valerus notes that Cunningham was “in the midst of a personal health crisis” at the time. Valerus alleges in the petition that Cunningham was “understandably distracted” during the time period leading up to the execution of the amended warrants in April 2009. Valerus brings several causes of actions against the defendants: violation of the Texas Securities Act; statutory fraud in the sale of stock; common-law fraud and fraudulent inducement; demand for rescission due to failure of consideration; demand for rescission due to mutual mistake; demand for rescission due to unilateral mistake; and demand for reformation due to mistake. Valerus seeks rescission or rescissionary damages, actual damages plus interest, attorneys’ fees, punitive damages and reformation. Valerus alleges that if the modified warrants are not rescinded, the value of shares held by certain limited partners, including company founders, employees, family and friends who had invested in the company, would be diluted by about $11 million and would represent a “completely unearned windfall” for the defendants at the expense of Valerus’ original limited partners. A call to Guggenheim Corporate Funding was not returned, but Jeffrey Kelley, a media relations contact at affiliate Guggenheim Partners, says all of the defendants have no comment on the allegations in the petition. Karl Stern , a partner in Vinson & Elkins in Houston who represents Valerus, declines comment on the petition but notes that Valerus is not making a claim against Cunningham. Attempts to reach Cunningham by telephone and e-mail were unsuccessful. In response to a request for Cunningham’s contact information, Stern writes in an e-mail, “Dawn Cunningham has asked me to let you know she is aware of the suit and has no comment.”
No En Banc Rehearing
On June 17, the 5th U.S. Circuit Court of Appeals refused en banc rehearing of Fisher, et al. v. University of Texas. Bert Rein, a partner in Wiley Rein in Washington, D.C., represents plaintiffs Abigail Fisher and Rachel Michalewicz in the suit, two white applicants who allege racial consideration by UT admissions officials disadvantaged them when the school denied them admission in 2008. Rein says his client will decide whether to appeal to the U.S. Supreme Court within the next 90 days. On Jan. 18, a three-judge panel of the 5th Circuit affirmed the constitutionality of the University of Texas at Austin’s consideration of race in its 2008 admissions process. Chief Judge Edith Jones penned a dissenting opinion, which judges E. Grady Jolly , Edith B. Clement , Priscilla Owen and Jerry E. Smith joined. Jones wrote that the panel opinion in Fisher does not comport with the U.S. Supreme Court’s 2003 decision in Grutter v. Bollinger , which held that the admissions policies of the University of Michigan School of Law, which considered race as one factor for admission, were constitutional, since the school had a compelling government interest in obtaining educational benefits that flow from a diverse student body. Fisher “gives a green light to all public higher education institutions in this circuit, and perhaps beyond, to administer racially conscious admissions programs without following the narrow tailoring that Grutter requires. Texas today is increasingly diverse in ways that transcend the crude White/Black/Hispanic calculus that is the measure of the University’s race conscious admissions program,” Jones wrote. Patricia “Patti” Ohlendorf , vice president for legal affairs at UT, did not return a telephone call seeking comment. Rein says, judging by the 9-7 split on whether to rehear the case en banc, “We may conclude that Grutter is not easy to understand.” Michael Rosman , general counsel at the Center for Individual Rights, a D.C. advocacy group that has represented the plaintiff in Grutter , says the 5th Circuit split regarding the rehearing “increases the odds that the Supreme Court will grant cert” and “indicates there is a strong division, strong enough that Judge Jones thought it significant enough to write a dissent.”
