Carlucci v. Han

• Decision Date: 07 August 2012
• Docket Number: No. 1:12cv451 (JCC/TCB).,1:12cv451 (JCC/TCB).
• Citation: 886 F.Supp.2d 497
• Parties: Frank C. CARLUCCI III, Plaintiff, v. Michael S. HAN, et al., Defendants.
• Court: U.S. District Court — Eastern District of Virginia

886 F.Supp.2d 497

Frank C. CARLUCCI III, Plaintiff,
v.
Michael S. HAN, et al., Defendants.

No. 1:12cv451 (JCC/TCB).

United States District Court,
E.D. Virginia,
Alexandria Division.

Aug. 7, 2012.

[886 F.Supp.2d 506]

James Douglas Baldridge, Molly Theresa Geissenhainer, Venable LLP, Washington, DC, for Plaintiff.

Jeremy David Engle, Steptoe & Johnson LLP, Washington, DC, for Defendants.

AMENDED MEMORANDUM OPINION
JAMES C. CACHERIS, District Judge.

This matter is before the Court on Defendants Michael Han (“Han”) and Envion, Inc.'s (“Envion”) (collectively, “Defendants”) Motion to Dismiss (the “Motion”) [Dkt. 10]. For the following reasons, the Court will grant Defendants' Motion.

I. Background

This case arises out of allegations that Defendants engaged in securities fraud.

A. Factual Background

In approximately 2003, Plaintiff Frank Carlucci III (“Carlucci”) met Defendant Michael Han at the Regency Sport and Health Club, where they both regularly played tennis. (Compl. ¶ 12.) Shortly thereafter, in early 2004, Han solicited an investment from Carlucci in his company, Defendant Envion, Inc. (Compl. ¶ 13.) Han described Envion as a “technology company” that would “bring technology [he] owned to the United States that his uncle had developed in Korea.” (Id.) Han described that technology as “a patented process involving the conversion of plastic waste into oil.” (Id.)

Through a series of telephone calls and face-to-face meetings at Carlucci's residence and the Regency Sport and Health Club, Han allegedly made misrepresentations and omissions of material fact relating to Envion. (Compl. ¶ 14.) These alleged misrepresentations included the following: (1) that Han and Envion owned the exclusive patent rights in their Envion Oil Generator technology, which formed the foundation for Envion's business and success; (2) that Han had lined up the investment banking house, Allen & Company, to raise funds for Envion and that Allen & Company would be an equity investor in the company; (3) that Han had communicated with numerous other investors who were interested in investing in Envion, including Warren Buffet, Bill Gates, Dow Chemical, Morgan Stanley, and Goldman Sachs; (4) that, along with Han, Envion was run by a number of “seasoned and highly regarded executives with extensive track records of success in the energy, technology, and finance industries, as well as the public sector”; (5) that Han was negotiating a lucrative arrangement with Waste Management Company pursuant to which Waste Management would purchase rights to use Envion's technology; (6) that Han was negotiating a lucrative arrangement with Allied Republic, another waste management company and a competitor of Waste Management; (7) that Envion had a backlog of orders for its Oil Generator product; and (8) that for each of these reasons, Envion would provide the best return Carlucci had received on any investment. (Compl. ¶¶ 14(a)-(g).) On March 4, 2004, in reliance on these alleged misrepresentations, Carlucci made an investment in Envion in the amount of $500,000. (Compl. ¶ 16.) The investment was in the form of a convertible promissory note, which Carlucci could convert at any time into Envion common stock. (Id.)

Over the next several years, Han approached Carlucci for additional investments in Envion. (Compl. ¶¶ 17–19.) On each occasion, Han allegedly misrepresented

[886 F.Supp.2d 507]

Envion's business prospects. (Compl. ¶ 17.) For example, Han represented that Envion had exclusive patent rights in its critical technology and that Envion had many favorable business arrangements that would generate an enormous return on any investment that Carlucci made. (Id.) From November 2004 through April 2010, Carlucci invested an additional $11,593,000 in Envion. (Compl. ¶ 18.) Each investment was evidenced by a convertible promissory note that accrued interest in the range of 8% to 10% annually and could be converted at any time into Envion common stock. (Compl. ¶ 19.)

In or around September and October 2010, Han approached Carlucci for a $20 million investment. (Compl. ¶ 20.) Through a series of face-to-face meetings at Carlucci's residence, Han allegedly made additional misrepresentations to Carlucci, which included the following: (1) that Envion had a “done deal with Gazprom,” one of the world's largest gas companies, pursuant to which Gazprom would invest millions in Envion in exchange for a 49% ownership interest and Han would become the CEO of Gazprom's wholly-owned waste disposal subsidiary (which would fully utilize Envion's technology); (2) that Envion was close to a “deal” with Petrobas, a Brazilian energy company, which consisted of two parts: (i) an off-take agreement, under which Envion would provide Envion Oil Generators to Petrobas; and (ii) a joint venture, under which Petrobas would invest “substantial sums of money” in Envion; (3) that, because a sizeable investment from Gazprom was a “done deal,” Carlucci would get his investment back “in three weeks”; (4) that Envion had a “backlog of 2,000 orders” for its Envion Oil Generators; (5) that Carlucci's $20 million investment would be used exclusively for two purposes: (i) for Envion to buy out Han's uncle, who was becoming anxious to realize an immediate return on his investment in Envion, and (ii) as investment capital for Envion's legitimate business purposes; and (6) that Envion owned the exclusive patent rights in its Envion Oil Generator technology. (Compl. ¶¶ 20(a)-(f).)

Han also assured Carlucci that “Envion would be the best return [he] would receive on any investment,” possibly up to “50 times” the amount he had invested. (Compl. ¶ 22.) To support this representation, Han had previously presented Carlucci with a projection of the return he would receive. ( Id.) In connection with Han's solicitation of the $20 million investment, Carlucci asked if the projection was still valid. In response, Han allegedly stated “Yes, it is.” (Id.) According to Carlucci, no cautionary language, qualifications, or conditions accompanied the projection. ( Id.) In reliance on these alleged misrepresentations, Carlucci invested $20 million in Envion, as evidenced by a convertible promissory note dated October 10, 2010. (Compl. ¶ 23.) The note accrued interest at an annual rate of 8% and could be converted at any time into Envion common stock. ( Id.)

Around the same time Carlucci made the $20 million investment, Han allegedly moved Envion from Washington, D.C. to Florida and purchased a home in Florida valued at $3.5 million. (Compl. ¶¶ 24(a)-(b).) Carlucci also alleges on information and belief that Han provided himself with a $5 million salary. (Compl. ¶ 24(c).)

In August of 2011, Carlucci's prior investments were “rolled into” one convertible promissory note in the amount of $32,393,000 (hereinafter, the “August 2011 note”).¹ (Compl. ¶ 25.) In connection with

[886 F.Supp.2d 508]

the issuance of the August 2011 note, Han and Carlucci had several face-to-face meetings at Carlucci's residence, the Regency Sport and Health Club, and at Carlucci's office in Washington, D.C. (Compl. ¶ 26.) During these meetings, Han allegedly reasserted that Carlucci would receive a return on his investment of possibly 50 times the amount invested due to the “done deal” with Gazprom and other deals that he had obtained or was in the process of obtaining, including that with Petrobas. (Compl. ¶ 26(a).) Han also repeated that Envion owned the exclusive patent rights in its Envion Oil Generator technology. (Compl. ¶ 26(c).) Han allegedly assured Carlucci that his investment had been used exclusively for Envion's legitimate business purposes, including the “buy out” of Han's uncle. (Compl. ¶ 26(b).) And finally, Han allegedly represented that former President Bill Clinton had agreed to affiliate himself with Envion, possibly as a member of its board of directors, and that former President George W. Bush was interested in investing in Envion. (Compl. ¶ 27.)

Carlucci alleges that each of the representations Han made was false, and that Han knew or should have known that they were false at the time he made them. (Compl. ¶¶ 15, 17, 21, 28.) He further alleges that he reasonably relied on each of Han's misrepresentations and omissions of material fact in deciding to invest in Envion. (Compl. ¶¶ 15, 17, 21, 28.)

Carlucci began to suspect that Han's representations were false and/or that he had omitted material facts in March 2012. (Compl. ¶ 30.) Specifically, an energy consultant who traveled with Han to Brazil informed Carlucci that Envion had no joint venture with Petrobas, and that there was no reasonable basis for concluding that a joint venture would materialize. (Compl. ¶ 31.) This information caused Carlucci to engage in further investigation of Han and Envion. (Compl. ¶ 32.) As a result of that investigation, Carlucci learned that (1) Defendants did not own the exclusive patent rights in the Envion Oil Generator technology; (2) Defendants did not use Carlucci's $20 million investment to buy out Han's uncle or for legitimate business purposes; rather Han used the funds to move the company to Florida and to buy a house; (3) Envion had not reached any “deal” with Gazprom or Petrobas; (4) on information and belief, Envion did not have a backlog of 2,000 orders for its Oil Generator product; (5) none of the high-profile investors, such as Warren Buffet and Bill Gates, had invested in Envion; (6) former President Bill Clinton had no affiliation with Envion nor had former President George W. Bush expressed an interest in investing in Envion; and (7) Envion was on the brink of insolvency. (Compl. ¶¶ 32(a)-(g).)

Upon learning this information, Carlucci requested that Han allow an accountant to audit Envion's books, records, and intellectual property. (Compl. ¶ 33.) Han allegedly refused, and instead responded that he was too busy. (Id.) Carlucci alleges that as a direct and proximate result of Defendants' conduct, he has been damaged in an...