Black v. Finantra Capital, Inc.

• Decision Date: 08 August 2005
• Docket Number: Docket No. 03-9206.
• Citation: 418 F.3d 203
• Parties: Herbert BLACK, Plaintiff-Appellant, v. FINANTRA CAPITAL, INC., Robert D. Press, Maynard J. Hellman, and Alyce B. Schreiber, Defendants-Appellees, Charles Litt, Arthur J. Press, Evaldo F. Dupuy, Thomas W. Dwyer, and Vern E. Landeck, Defendants.
• Court: U.S. Court of Appeals — Second Circuit

418 F.3d 203

Herbert BLACK, Plaintiff-Appellant, v. FINANTRA CAPITAL, INC., Robert D. Press, Maynard J. Hellman, and Alyce B. Schreiber, Defendants-Appellees, Charles Litt, Arthur J. Press, Evaldo F. Dupuy, Thomas W. Dwyer, and Vern E. Landeck, Defendants.

Docket No. 03-9206.

United States Court of Appeals, Second Circuit.

Argued October 18, 2004.

Decided August 8, 2005.

Christopher Lovell, New York, N.Y. (Frederick W. Gerkens, III, Christopher J. Gray, Lovell Stewart Halebian LLP, of counsel), for Plaintiff-Appellant.

Jerry D. Bernstein, New York, N.Y. (Harris N. Cogan, Jordana Cooper, Blank Rome LLP, of counsel), for Defendants-Appellees Finantra Capital, Inc., Robert D. Press, and Alyce B. Schreiber.

W. Todd Boyd, Miami, FL (Boyd & Greene LLC, of counsel), for Defendant-Appellee Maynard J. Hellman.

Before OAKES, SACK and PARKER, Circuit Judges.

OAKES, Senior Circuit Judge.

A jury awarded Herbert Black $1,011,362.63 in compensatory damages on his federal securities fraud claim against defendants Finantra Capital, Inc. ("Finantra") and Robert Press, Finantra's chief executive officer and chairman of the board, for violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and concomitant Rule 10b-5.¹ Black claimed that Finantra and Press had failed to disclose their scheme to inflate Finantra's stock price when they personally solicited him to privately purchase nearly ten percent of Finantra's outstanding stock at a discount to the market price.

The United States District Court for the Southern District of New York (Rakoff, J.), upon considering the defendants' Rule 50(b) motion for judgment as a matter of law for several months after the jury verdict, overturned the verdict and entered judgment in defendants' favor. See Black v. Finantra Capital, Inc., 286 F.Supp.2d 339 (S.D.N.Y.2003). The district court held that, although it had initially believed there was a jury issue on reliance, upon considering defendants' motion, it was convinced defendants had indisputably proven that Black had not materially relied on the artificially inflated market price of the stock, because Black's own testimony contained professions that the market price had not played a key role in his decision to purchase the stock. See id. at 342. In so holding, the district court rejected Black's alternative argument that because he was deceived by a material omission in a face-to-face transaction, he had proven reliance on the omission by his testimony that he would never have invested had he known of Finantra's manipulation of the stock price. See id.; see also Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972).

Black now appeals this grant of judgment notwithstanding the verdict. He also appeals two of the district court's pre-trial rulings — the Rule 12(b)(6) dismissal of Securities Act of 1933 Section 12(a)(2) claims and all claims against two Finantra directors, Maynard Hellman and Alyce Schreiber, and the subsequent denial of Black's motion for leave to file a second amended complaint reinstating the dismissed claims against Hellman and Schreiber.

An examination of the record and relevant case law convinces us that the district court erred in granting defendants' Rule 50(b) motion. There was sufficient evidence to support the jury's finding that defendants did not prove that Black did not rely on the market price; therefore, we reverse and remand for reinstatement of the verdict. However, we affirm the district court's pre-trial rulings.

I. Background

At trial, the jury heard evidence that Black purchased Finantra stock while Finantra had a scheme in place to manipulate its stock price.

Between December 1999 and February 2000, Robert Press, acting on behalf of Finantra, and David Horlington, a friend of Black's, personally solicited Black to make a direct private purchase of restricted shares from Finantra. Finantra was, at the time of the events in question, in the business of consumer finance, leasing, and accounts receivable factoring.² Press told Black that Finantra was a great opportunity, that it needed capital to close upcoming deals, and that it was prepared to sell Black restricted shares at a significant discount to the market price. After his initial December meeting with Press and Horlington, Black decided not to invest. However, Press and Horlington later asked Black to reconsider, and he relented, signing a stock purchase agreement on February 15, 2000, to purchase 1,599,900 shares of Finantra stock at $2.50 per share.³ The transaction closed on March 6, 2000, when Black wire transferred the sum of $3,977,250 into an escrow account controlled by Maynard Hellman, Finantra's counsel and a member of its board.

Black and his expert witness, Robert W. Lowry, a former examiner with the Securities and Exchange Commission ("SEC"), testified that between at least December 1999 and April 2000, defendants Finantra and Press were manipulating and artificially inflating the price of Finantra stock. Black testified that Press admitted to him, during a March 2001 breakfast meeting, that Finantra had engaged in a "support operation" to achieve and maintain a stock price above the $4.00 share price necessary for Finantra's stock to be promoted to trade on The NASDAQ SmallCap Market platform. Lowry's testimony described the manipulation scheme in which Finantra, or Finantra affiliates and insiders, sold unregistered Finantra shares at below-market prices and then used the proceeds to purchase Finantra stock on the market at high prices, essentially dissipating Finantra's capital in order to buy back its own stock at an inflated price.

Lowry also testified that the broker executing Finantra's buybacks was "marking the close" by making those purchases at the end of the day, a manipulative device that maintained Finantra's reported closing share price at an artificially high level. The proceeds raised by sales of Finantra's unregistered stock were wired from a trust account controlled by Maynard Hellman to various nominee accounts maintained by Finantra at the brokerage firm Glenn Michael Financial, Inc., and were then used to buy back its shares on the open market. Finantra's accounts at Glenn Michael Financial were those of "dummy" corporations affiliated with, and in some cases having the same addresses as, Press and Finantra.

Contrary to SEC regulation, no disclosure was made of Finantra's buy-back purchases. According to Lowry's testimony, Finantra was also making undisclosed promotional payments to brokerages, such as Salomon Grey Financial and Growth Capital I, to promote the price of the stock. Finantra failed to publicly disclose that it was buying back its stock until August 2000, when it belatedly filed its June 2000 Form 10-Q.⁴

Black testified that defendants also failed to disclose their stock-price manipulation when they personally solicited his investments. Black claims the omission deceived him into making the decision to purchase Finantra stock and that he would never have purchased Finantra stock had he known of the manipulation, the buy-back plan, or the stock promotion payments.⁵ (See Tr. 59, 60.)

Black also testified that he was aware that, at the time of his purchase, the stock was "trading roughly at about $3.50 or $3.25 or $3.75" and that he was prepared to buy stock "off the market, restricted for a period of time, for three months or six months maximum for $2.50 a share. And I thought it was a fair deal on the basis of — I thought it was a fair deal on the basis of where the price was trading." (Tr. 44-45.) Black also testified that the discount played a role in his decision to purchase:

Q. At the time that you signed the document [i.e., the purchase agreement], was the price you were paying $2.50 per share a discount to the public price of Finantra?

A. Yes.

Q. What role did this discount play in your decision to make this purchase?

A. Well, it encouraged me that I was making a good deal.

(Tr. 50.)

However, Black's testimony also contained professions that he relied on things other than market price in coming to his investment decision. Defendants contend that the only conclusion that a reasonable juror could draw from this conflicting evidence is that there was in fact no reliance on market price. The portions of the transcript to which the defendants refer in support of this argument are as follows:

On cross-examination by defendants' counsel, Black testified:

Q. Mr. Black, with respect to the market price of the stock of Finantra at the time you were making the decision to buy the shares, was the market price significant to you in your decision to buy the shares?

A. Yes, but in proportion to other things. I didn't make the decision solely and wholly because of the market price.

(Tr. at 103.)

Defendants' counsel then sought to impeach the above trial testimony with questions regarding Black's deposition testimony:

Q. Do you recall the following [deposition] questions being asked and giving the following answers:

"Q: Well, you mentioned the stock was trading at $3.50 or $3.35 at the time?

"A: Yeah, I know.

"Q: Were there any discussions concerning the market price of the stock; do you recall?

"A: Not really. I just felt that number one that the concept was terrific. I felt the potential was there. I trusted and do trust Horlington, and do trust Bob Press. And this was a great opportunity to get in with young people who know what they are doing.

"Q: So is it fair to say just by way of summary that the market price of the stock at the time that you invested was not a significant factor to you?

Mr. Gray [plaintiff's counsel]: I object to the form.

"Q: Well, significant. Did you consider it?

"A: Well, it wasn't significant. What was significant was the potential that the company had because the market price is not really relevant when you can't sell the stock for six months or three months; it...