Carlucci v. Han

• Decision Date: 01 November 2012
• Docket Number: No. 1:12cv451 (JCC/TCB).,1:12cv451 (JCC/TCB).
• Citation: 907 F.Supp.2d 709
• Parties: Frank C. CARLUCCI III, Plaintiff, v. Michael S. HAN, et al., Defendants.
• Court: U.S. District Court — Eastern District of Virginia

907 F.Supp.2d 709

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.

Nov. 1, 2012.

James Douglas Baldridge, Molly Theresa Cusson, 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 (“Mr. Han”) and Envion, Inc.'s (“Envion”) (collectively, “Defendants”) Motion to Strike [Dkt. 41] (the “Motion to Strike”) and Partial Motion to Dismiss [Dkt. 45] (the “Motion to Dismiss”). For the following reasons, the Court will grant Defendants' Motion to Strike and deny Defendants' Motion to Dismiss.

I. Background

This case arises out of allegations that Defendants engaged in securities fraud, in violation of federal and state law, as well as actual and constructive fraud. Federal jurisdiction in this case is based on federal question jurisdiction pursuant to 28 U.S.C. § 1331, diversity jurisdiction pursuant to 28 U.S.C. § 1332, and supplemental jurisdiction pursuant to 28 U.S.C. § 1367.

Defendant Envion, Inc. is a privately-held company. According to Plaintiff's Amended Complaint, Envion represents itself to the public as a technology company that holds the patent rights to a proprietary system utilizing a purportedly efficient, cost effective, and environmentally sensitive technology capable of recapturing energy by converting plastic waste into usable oil. ¹ (AC ¶ 9.) Defendant Michael S. Han is the founder, Chairman, and Chief Executive Officer (“CEO”) of Envion. Mr. Han allegedly “controls all aspects of Envion's business endeavors, including but not limited to, all dealings with potential investors and potential business partners, financial records, and matters relating to the intellectual property ...” (AC ¶ 3.) Plaintiff Frank Carlucci III (“Mr. Carlucci” or “Plaintiff”) is an investor in Envion.

A. Factual Background

In approximately 2003, Plaintiff Frank Carlucci III met Defendant Michael Han at the Regency Sport and Health Club, where they both regularly played tennis. (AC ¶ 12.) Thereafter, in early 2004, Mr. Han solicited an investment from Carlucci in his company, Envion, Inc. (AC ¶ 13.) Mr. 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.) Mr. 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 Mr. Carlucci's residence and the Regency Sport and Health Club in early 2004, Mr. Han allegedly made various misrepresentations and omissions of material fact relating to Envion and its business in order to induce Mr. Carlucci to invest in the company. (AC ¶ 14.) These alleged misrepresentations included the following: (1) that Mr. 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 Mr. 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 Mr. 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 Mr. 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 Mr. 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 Mr. 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 Mr. Carlucci had received on any investment. (AC ¶¶ 14(a)-(h).) Plaintiff's Amended Complaint alleges that Mr. Carlucci would only later learn that Mr. Han's representations were false at the time they were made. (AC ¶ 15.)

Unaware of the falsity of Mr. Han's statements, Mr. Carlucci thereafter “reasonably and justifiably” relied on Mr. Han's alleged misrepresentations and omissions of material fact in deciding to invest in Envion. (AC ¶ 16.) On March 4, 2004, in “direct and reasonable” reliance on the alleged misrepresentations, Mr. Carlucci made an investment in Envion in the amount of $500,000. ( Id.) The investment was in the form of a convertible promissory note, which Mr. Carlucci could convert at any time into Envion common stock. ( Id.)

Over the next several years, Mr. Han approached Mr. Carlucci for additional investments in Envion. (AC ¶ 17.) On each occasion, Mr. Han allegedly misrepresented the state of Envion's business, its specific business arrangements, its financial prospects, and the extent of its intellectual property ownership, portraying each in an exceedingly positive and favorable manner that Plaintiff alleges did not comport with the reality of Envion's situation at the time. ( Id.) For example, Mr. Han represented that Envion had exclusive patent rights in its critical technology and that Envion had many favorable business arrangements with foreign corporations that would generate substantial return on any investment that Mr. Carlucci made. ( Id.) From November 2004 through April 2010, in reliance on these alleged these alleged misrepresentations, Mr. Carlucci invested an additional $11,593,000 in Envion. (AC ¶¶ 17–18.) 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, i.e., equity in the company. (AC ¶ 19.)

In or around September and October 2010, Mr. Han approached Mr. Carlucci for an additional $20 million investment. (AC ¶ 20.) Through a series of face-to-face meetings at Mr. Carlucci's residence, Mr. Han allegedly made additional misrepresentations in order to induce Mr. Carlucci's investment, 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 Mr. 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,” Mr. 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 Mr. 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 in and exclusively for Envion's legitimate business purposes; and (6) that Envion owned the exclusive patent rights in its Envion Oil Generator technology. (AC ¶ 20(a)-(f).) It is alleged in the Amended Complaint that Mr. Carlucci would only later learn that each of these representations was false at the time they were made. (AC ¶ 21.)

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

Around the same time Mr. Carlucci made the $20 million investment, Mr. Han allegedly moved Envion from Washington, D.C. to Florida and purchased a home in Florida valued at $3.5 million.² (AC ¶ 24(a)-(c).) Mr. Han also allegedly provided himself with “very substantial” annual salary for his employment as Envion. This salary was not disclosed to Mr. Carlucci. Plaintiff states that, on information and belief, from information gained from the former Chief Financial Officer of Envion, who allegedly “worked closely with Mr. Han and was aware of the status of Envion's business dealings from 2009 through early 2011,” the amount of that annual salary is $5 million and that it was unilaterally awarded by Mr. Han to himself at a time when Envion was either insolvent or on the verge of insolvency. (AC ¶ 24(c).)

In August of 2011, Mr. Carlucci's prior investments were “rolled into” one convertible promissory note in the amount of $32,393,000 (hereinafter, the “August 2011 Note”).³ (AC ¶ 25.) Dated August 4, 2011, this convertible note accrues interest at 5%...