Blackmon v. Nexity Financial Corp.

• Decision Date: 22 September 2006
• Docket Number: 1041796.
• Citation: 953 So.2d 1180
• Parties: Burt BLACKMON v. NEXITY FINANCIAL CORPORATION et al.
• Court: Alabama Supreme Court

953 So.2d 1180

Burt BLACKMON v. NEXITY FINANCIAL CORPORATION et al.

1041796.

Supreme Court of Alabama.

September 22, 2006.

John D. Saxon and Stephen J. Austin of John D. Saxon, P.C., Birmingham; and Stephen E. Hudson of Kilpatrick Stockton, LLP, Atlanta, Georgia, for appellant.

Lee H. Zell and Matthew F. Carroll of Balch & Bingham, LLP, Birmingham, for appellees.

SEE, Justice.

This is a securities-fraud case. After Burt Blackmon purchased stock in Nexity Financial Corporation ("Nexity"), he sued Nexity and its directors and officers, alleging that they had misrepresented and failed to disclose material facts when he purchased his stock. The trial court entered a summary judgment in favor of Nexity and its directors and officers. Blackmon appeals; we affirm.

I. Facts and Procedural History

Nexity was incorporated in 1999 as a Delaware corporation. Nexity is a holding company that owns Nexity Bank; Nexity Bank operates banks in various cities in Alabama. In January 2000, Nexity Bank started its Internet banking operations, and by February 2000 Nexity Bank was operating primarily as an "Internet bank."

By the end of 1999, Nexity had incurred a net operating loss of $5,657,287, and it decided to raise capital through a private offering of its stock. In connection with the private stock offering, Nexity issued a private offering memorandum ("POM"), dated March 8, 2000. The POM described the stock offering, Nexity's business, and the risks associated with the investment. Nexity supplied potential investors with copies of the POM.

At $5 per share, Nexity sought to raise between $15,000,000 and $25,000,000 through the private stock offering. The POM states that the offering would terminate no later than May 30, 2000, unless Nexity extended the deadline by written notice to the subscribers to the stock.

The POM includes Nexity's financial statement for the period from March 12, 1999 (the incorporation date), through December 31, 1999, which shows a net operating loss of $5,657,287. Nexity did not disclose in the POM its budget for the year 2000, nor did it state how close it was coming to that budget as of the issuance date of the POM. As of May 2000, Nexity's budget showed a loss of $637,990; in actuality, Nexity had incurred a net operating loss of $2,465,385 as of May 2000.

The POM contains several positive forward-looking statements. For example, the POM stated that the "use of the Internet ... is expected to continue to grow ... [and] the number of Internet users is expected to increase from 29.2 million in July 1997 to 232 million in 2001," and that "[Nexity] believes the number of electronic banking households will grow substantially in the next several years." It further asserted that "[Nexity] believe[s] that only a relatively small number [of banks] have the capability to transact banking business over the Internet" and that "[t]he growth of the Internet and the speed, flexibility and convenience it offers may provide [Nexity] with a competitive advantage over traditional banks."

The POM states that words such as "believe" and "expect" identify forward-looking statements and that such statements "are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such statements." The POM also contains the following warning at the beginning, in boldfaced type: "An investment in [Nexity] involves a high degree of risk." It also states in boldfaced type that the investors should "consider [Nexity's] prospects in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies in the new and rapidly evolving market for electronic financial services such as banking." The POM further states that Nexity will require each potential investor to represent, prior to the purchase of stock, that "he or she recognizes that this investment is highly speculative and that it could result in a total loss of his or her investment."

The POM sets forth nine pages of "risk factors." The POM points out that Nexity had a limited operating history, with a net operating loss for the year 1999. The POM states that Nexity has been engaged in Internet banking since only February 2000. The POM advises the investors to "consider [Nexity's] prospects in light of the risks, expenses, and difficulties frequently encountered by companies in their early stages of development, particularly companies in the new and rapidly evolving market for electronic financial services such as banking." The POM also warned that Nexity did not intend to pay dividends "in the foreseeable future" and that Nexity did not expect "to realize a profit during its initial years of operation."

The POM further cautions that "demand and market acceptance for Internet banking are subject to a high level of uncertainty" and that "there can be no assurance that Internet banking will become widespread ... [or] that the usage trends currently experienced will continue to be realized for electronic banking or commerce." The POM points out that "[b]ecause the market for Internet banking is new and evolving, it is difficult to predict the future growth rate" and that "[i]f the market does not continue to grow," Nexity could be adversely affected. The POM warns that Nexity may not have identified or considered all of its present and future competitors. The POM states that "[m]any of [Nexity's] competitors have substantially greater financial resources than Nexity."

The POM also warns that Nexity may have to raise additional capital "through public or private financings," which, it warns, may be on terms unfavorable to Nexity. Although Nexity "anticipates that [it] may seek additional capital through a public offering of its common stock sometime in the latter part of 2000," the POM states, "no decision regarding such offer has been made ... [and] [t]here is no assurance that a public offer can be made on terms ... acceptable to Nexity." Thus, the POM points out that Nexity's stock might not be traded publicly and that if it is not the investors "will be limited in their ability to resell shares."

On May 30, 2000, Nexity issued its first supplement to the POM ("the supplement"). The supplement advised the investors that the offering was extended to June 15, 2000, instead of May 30, 2000. The supplement also lowered the minimum offering to $10,000,000. Nexity allowed investors the opportunity to cancel their stock subscriptions up until June 5, 2000.

Blackmon received the supplement; he chose not to cancel his subscription of Nexity stock, and on May 31, 2000, he signed a subscription agreement.¹ Blackmon purchased 150,000 shares of Nexity stock for a total purchase price of $750,000. Before Blackmon purchased the Nexity stock, he spoke with an officer of Nexity, Ken Vassey, about the prospect of Nexity's conducting an initial public offering ("IPO"). Blackmon testified at his deposition that Vassey expressed optimism that an IPO would occur. However, Blackmon admitted that no one promised him that Nexity would conduct an IPO.

Before purchasing the Nexity stock, Blackmon also spoke with Nexity's president David Long, and its chief executive officer, Greg Lee, regarding the supplement. He specifically asked them why Nexity had extended the offering and lowered the amount of the minimum offering. Blackmon testified at his deposition that they told him that Nexity lowered the minimum amount to be raised from the offering to $10,000,000 in order to "break escrow" and to have access to that amount immediately rather than having to wait for $15,000,000 to be raised. Blackmon testified that they assured him that Nexity expected to receive $15,000,000 by June 15, 2000. However, he also testified that he understood from the supplement that Nexity might not raise $15,000,000.

At some point before his purchase, Blackmon inquired generally about how Nexity was doing. Blackmon testified at his deposition that Lee told him in general terms that "Nexity was doing fine and things were progressing as per their plans." Blackmon further testified that he understood the comment to refer to Nexity's "general strategic plan that they had within the bank" and that he did not receive any details about the strategic plan. He also testified that he believed Nexity had a budget or financial information that was not included in the POM. However, he did not ask to see Nexity's budget, its model, or a financial statement before his purchase.

Nexity closed its offering on June 15, 2000; it raised approximately $11,000,000. Lee and Long testified that the minutes of the August 16, 2000, meeting of Nexity's board of directors reflect that the private stock offering was closed as of June 15, 2000. The minutes also reflect that the board of directors authorized additional investors to join until September 15, 2000. However, both Lee and Long testified that Nexity did not sell any additional shares after June 15, 2000.

Blackmon claimed that Nexity offered a "side deal" to potential institutional investors during the period of the stock offering. He described the "side deal" as Nexity's offer, made to institutional investors, i.e., banks, that had purchased Nexity stock, of an opportunity also to purchase loan participations. He explained that institutional investors would gain returns from loan participations and earn back the purchase price of their stock. Blackmon testified that Nexity did not offer a similar opportunity to individual investors. Blackmon admitted that, even if Nexity had offered individual investors the opportunity, however, he could not have participated in it.

Nexity did not conduct an IPO in late 2000, and, for that year, it incurred a net operating loss of approximately $5,400,000.²

On November 20, 2002, Blackmon sued Nexity, Lee, Long, and Nexity's directors, John J. Moran, Randy K. Dolyniuk, John W. Collins, and Denise N. Slupe (collec...