Reardon v. Lightpath Technologies Inc.

The remedy of rescission is supposed to return the investors to their position before the alleged fraud. The testimony does not raise a genuine issue of material fact as to the investors' alleged damages under a rescission remedy.

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Click here for the full text of this decision FACTS:In this complex securities fraud case, 45 plaintiffs appealed from an adverse summary judgment. Appellants, shareholders in Lightpath Technologies Inc., a technology company, brought suit against the company and others asserting a number of fraud-based claims, including common law fraud, statutory fraud under 27.01 of the Texas Business and Commerce Code, securities fraud under the Texas Securities Act, negligent misrepresentation and breach of fiduciary duty. The trial court disposed of all claims by granting summary judgment on both traditional and no-evidence grounds. HOLDING:Affirmed. The shareholders challenge the trial court’s disposition of their fraud-based claims. They assert that the company’s representations fraudulently induced them to consent to a transaction that dispossessed them of a part of their ownership in the company in exchange for a type of share, “the E share,” the value of which depended upon the company’s achievement of certain milestones based on the company’s stock price and pretax income. The shareholders allege that the company misrepresented and failed to disclose material facts that would have shown the shareholders that the E shares were highly unlikely to convert to shares of Class A common stock because Lightpath was highly unlikely to achieve the necessary milestones. The primary issue on appeal is if there is a genuine issue of material fact as to whether Lightpath represented that the post-IPO value of its E shares would be 5 dollars per share. The Investors assert that there is, based on the proxy solicitation letter that Lightpath sent the investors regarding the IPO (the proxy letter). The proxy statement enclosed with the proxy letter accurately stated the milestones that had to be met before any of the E shares would convert into A shares. It also stated that on Sept. 30, 2000, all E shares not previously converted into A shares would be redeemed by Lightpath for $.00001 per share. The court examines the letter’s terms and concludes that there is no genuine issue of material fact as to whether the proxy letter contains a representation that E shares would have a $5 per share value after the IPO. The court finds that the proxy letter states that the units to be sold in the IPO will consist of one A share and two warrants to purchase A shares, priced at $5 per unit, and that the anticipated IPO would generate $8 million to $9.2 million depending on sale of the over-allotment. In the sentence that the investors claim constitutes a representation that the E shares would have a value of 5 dollars per share, the court finds instead that the proxy letter states, based on an IPO price of $5 per unit, “the post-IPO market valuation is estimated at $33 – 34.2 Million depending upon the sale of the over-allotment.” As a matter of law, the court holds, this statement is not a representation that the E shares will be worth $5 per share. But the shareholders further argue that that Lightpath founder Leslie Danziger had admitted at her deposition that Lightpath made such a representation. The court finds that Danziger had testified, in answer to leading questions, that the proxy letter stated that the E shares would have a value of $5 per share. But the court also points out that, although Danziger signed the proxy letter, her testimony more than five years later does not add words to the document. Furthermore, the court holds that her admissions are not binding on Lightpath as a judicial admission, and they are conclusory statements about the proxy letter that do not raise a genuine issue of material fact. Therefore, the court holds that the trial court correctly granted summary judgment as to the alleged misrepresentation by Lightpath in the proxy letter that the E shares would have a post-IPO value of $5 per share. The court therefore agrees with the trial court’s conclusion that the shareholders failed to produce evidence that they suffered damages and finds that there is no genuine issue of material fact as to whether the shareholders suffered recoverable damages. OPINION:Kem Thompson Frost, J.; Anderson, Hudson, and Frost, JJ.

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