493 F.3d 87 (2nd Cir. 2007), 05-5132, ATSI Communications, Inc. v. Shaar Fund, Ltd.

Docket Nº:05-5132-cv, 05-2593-cv.
Citation:493 F.3d 87
Party Name:ATSI COMMUNICATIONS, INC., a Delaware Corporation, Plaintiff-Appellant, v. The SHAAR FUND, LTD., Shaar Advisory Services, N.V., RGC International Investors, LDC, Rose Glen Capital Management, L.P., Corporate Capital Management, InterCaribbean Services Ltd., Citco Fund Svcs., Luc Hollman, Sam Levinson, Hugo Van Neutegem, Declan Quilligan, Wayne Bloc
Case Date:July 11, 2007
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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493 F.3d 87 (2nd Cir. 2007)

ATSI COMMUNICATIONS, INC., a Delaware Corporation, Plaintiff-Appellant,

v.

The SHAAR FUND, LTD., Shaar Advisory Services, N.V., RGC International Investors, LDC, Rose Glen Capital Management, L.P., Corporate Capital Management, InterCaribbean Services Ltd., Citco Fund Svcs., Luc Hollman, Sam Levinson, Hugo Van Neutegem, Declan Quilligan, Wayne Bloch, Gary Kaminsky, Steve Katznelson, Trimark Securities, Inc., Levinson Capital Management, and W.J. Langeveld, Defendants-Appellees,

Marshall Capital Services, LLC., Jesup & Lamont Structured Finance Group, MG Security Group, Inc., Crown Capital Corporation, John Does 1-50, Kenneth E. Gardiner, Nathan Lihon, and Sei Investment Co., Defendants.

ATSI Communications, Inc., a Nevada Corporation, Plaintiff-Appellant,

v.

Uri Wolfson, Defendant-Appellee,

Sam Levinson, Defendant.

Nos. 05-5132-cv, 05-2593-cv.

United States Court of Appeals, Second Circuit.

July 11, 2007

Argued: November 29, 2006.

Appeals from judgments of the United States District Court for the Southern District of New York (Lewis A. Kaplan, Judge), dismissing plaintiff ATSI Communications, Inc.'s complaints alleging, inter alia, securities fraud in violation of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 357 F.Supp.2d 712 (S.D.N.Y. 2005).

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Thomas I. Sheridan III (Andrea Bierstein, Melissa C. Welch, on the brief), Hanly Conroy Bierstein & Sheridan LLP, New York, NY, for ATSI Communications, Inc.

Jonathan M. Sperling (Amanda J. Gourdine, on the brief), Covington & Burling, New York, NY, for The Shaar Fund, Ltd., Shaar Advisory Services, N.V., Levinson Capital Management, Sam Levinson, and Uri Wolfson.

J. Kevin McCarthy (Joanne L. Monteavaro, on the brief), Wilmer Cutler Pickering Hale and Door LLP, New York, NY, for Rose Glen Capital Management, L.P., RGC International Investors, LDC, Wayne Bloch, Gary Kaminsky, and Steven Katznelson.

David G. Cabrales (W. Scott Hastings, Jeffrey A. Logan, on the brief), Locke Liddell & Sapp LLP, Dallas, TX; Cahill Gordon & Reindel LLP (Thorn Rosenthal, Janet A. Beer, on the brief), New York, NY, for Trimark Securities, Inc.

Michael J. Dell (Elaine Golin, on the brief), Kramer Levin Naftalis & Frankel LLP, New York, NY, for Citco Fund Services (Curaçao) N.V., InterCaribbean Services, Ltd., Hugo van Neutegem, Wim Langeveld, Luc Hollman, and Declan Quilligan.

Berkman, Henoch, Peterson & Peddy, P.C. (Ronald M. Terenzi, on the brief), Garden City, NY, for Corporate Capital Management.

Before: JACOBS, Chief Judge, WALKER and RAGGI, Circuit Judges.

JOHN M. WALKER, JR., Circuit Judge:

These appeals arise from judgments of the United States District Court for the Southern District of New York (Lewis A. Kaplan, Judge), dismissing plaintiff ATSI Communications, Inc.'s ("ATSI") complaints under Fed.R.Civ.P. 12(b)(6) in two separate actions arising from the same events. ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 357 F.Supp.2d 712 (S.D.N.Y. 2005). ATSI alleges that the defendants made misrepresentations in connection with securities transactions and engaged in market manipulation in violation of § 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, or were liable as control persons under § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). ATSI claims that the defendants fraudulently induced it to sell to them its convertible preferred stock. The defendants then aggressively short sold ATSI's common stock and converted the preferred stock to cover their short positions. The alleged consequence was a "death spiral" in the price of ATSI's stock and enormous profit for the defendants.

We affirm the judgments of the district court.

BACKGROUND

The following facts are taken from ATSI's complaints and supporting documents, which we must assume to be true in reviewing a Fed.R.Civ.P. 12(b)(6) dismissal. See Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000).

A. ATSI and Its Efforts to Raise Money

ATSI was founded in December 1993 and hoped to become a leading provider of retail communications services in Mexico in the wake of the deregulation and privatization in Latin America's telecommunications markets. It never turned a profit. By 1999, ATSI needed an infusion of capital to expand its U.S. customer base and

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further develop its telephone network in Mexico.

To raise money, ATSI issued four series of cumulative convertible preferred stock ("Preferred Stock"): Series B, C, D, and E. Each transaction included a Securities Purchase Agreement, a Certificate of Designation, and a Registration Rights Agreement. Each series included a risk-mitigating conversion feature that worked as follows. Upon conversion, a "Market Price" was calculated as the average of the lowest five closing bid prices during the ten-day period preceding the conversion date. The "Conversion Price" was calculated as the lesser of (1) the closing bid price on a trading day fixed by the Certificate of Designation and (2) the Market Price discounted by 17% to 22% depending upon the series. ATSI would then issue a number of shares of common stock equal to (1) the number of shares of Preferred Stock to be converted (2) multiplied by the Preferred Stock's stated value of $1,000 per share (3) divided by the Conversion Price. Because there is no limit on the number of common shares into which the Preferred Stock could convert, securities such as these are called "floorless" convertibles. The obvious inference from ATSI's sale of these securities is that these unfavorable terms were necessary to attract investors because ATSI was continuously losing money. In fact, ATSI acknowledged that in light of its financial condition, it might "not be able to raise money on any acceptable terms." American Telesource International, Inc., Annual Report (Form 10-K), at 16 (July 31, 2000).

1. Sales to the Levinson Defendants

On a "road show" in Dallas, Texas in March 1999, defendant Corporate Capital Management ("CCM") introduced ATSI executives to defendant Sam Levinson, the managing director of Levinson Capital and the Shaar Fund. Shaar Advisory Services, N.V. ("Shaar Advisory") served as executive officer and general partner of the Shaar Fund. Defendant Uri Wolfson controls the Shaar Fund. Collectively, Levinson, Levinson Capital, the Shaar Fund, and Shaar Advisory constitute the "Levinson Defendants."

During a May 1999 telephone conversation, CCM told ATSI that the Shaar Fund had invested in several strong, successful companies and that the Levinson Defendants were interested in ATSI's long-term growth. During a June meeting, Levinson told ATSI, inter alia, that the Levinson Defendants sought a long-term investment in ATSI and would not engage in any activity to depress its stock. ATSI claims that all of these representations were false and misleading because CCM and Levinson knew otherwise and the Levinson Defendants were actually market manipulators that profited at the expense of the companies in which they invested.

Over the next six months, ATSI entered into the following securities transactions with the Shaar Fund.

Transaction Date

of Preferred Shares Purchased

of Warrants Purchased

Total Purchase Price

July 2, 1999

2,000 Series B

50,000

$2,000,000

Sept. 24, 1999

500 Series C

20,000

$500,000

Feb. 22, 2000

3,000 Series D

150,000

$3,000,000

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The Securities Purchase Agreement for each transaction included written representations that:

1. The Shaar Fund was an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act of 1933; and

2. "Neither [the Shaar Fund] nor its affiliates nor any person acting on its or their behalf has the intention of entering, or will enter into, prior to the closing, any put option, short position, or other similar instrument or position with respect to the Common Stock [of ATSI] and neither [the Shaar Fund] nor any of its affiliates nor any person acting on its or their behalf will use at any time shares of Common Stock acquired pursuant to this Agreement to settle any put option, short position or other similar instrument or position that may have been entered into prior to the execution of this Agreement."

ATSI claims that these representations were false because (1) the Shaar Fund's net worth was not high enough to meet the requirements for being an accredited investor and (2) the Shaar Fund intended to engage, and did engage, in short selling and manipulation of ATSI's stock before, during, and after entering into these agreements.

The Registration Rights Agreement in each transaction contained a merger clause stating that:

There are no restrictions, promises, warranties, or undertakings, other than those set forth or referred to herein. This Agreement, the Securities Purchase Agreement, the Escrow Instructions, the Preferred Shares and the Warrants supersede all prior agreements and undertakings among the parties hereto with respect to the subject matter hereof.

The Registration Rights Agreements contemplated that the Shaar Fund would soon sell its converted common stock into the public markets. They required ATSI to use its "best efforts" to register the common stock to be issued upon conversion of the Preferred Stock within 90...

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