Greenberg Traurig of New York v. Moody, No. 14-02-00581-CV (TX 9/30/2004)
| Decision Date | 30 September 2004 |
| Docket Number | No. 14-02-00581-CV.,14-02-00581-CV. |
| Parties | GREENBERG TRAURIG OF NEW YORK, P.C., Appellant v. ROBERT MOODY, JR., HARRY J. BRISCOE, ROBERT H. WILLIAMS, AND BRUCE PAYETTE, Appellees. |
| Court | Texas Supreme Court |
On Appeal from the 405th District Court, Galveston County, Texas, Trial Court Cause No. 99CV0471.
Reversed and Rendered, in Part, and Reversed and Remanded, in Part.
Panel consists of Justices YATES, FOWLER, and FROST.
This is a double appeal of a complex securities fraud and conspiracy case in which a jury rendered a multi-million-dollar verdict in favor of three Texas investors and against a New York law firm. A fourth investor recovered nothing. The trial court reduced the amounts of the jury awards for the successful plaintiffs and entered final judgment against the law firm. All parties appeal. At issue are statutory claims alleging violations of state securities laws, conspiracy, common-law fraud, and statutory fraud. The resolution of many of these issues turns on the conflicts-of-law analysis. We find the trial court should have applied New York law instead of Texas law to the fraud-based claims. After reviewing the issues raised under applicable law, we reverse and render, in part, and reverse and remand, in part.
Appellees and cross-appellants Robert Moody, Jr., Harry J. Briscoe, Robert H. Williams, and Bruce Payette, the plaintiffs in the trial court (collectively, the "Investors"), are Texans who invested in a food technology venture known as Integrated Food Technologies Corporation ("IFT"). The Investors based their claims in this case on their investments in this failed enterprise.
Appellant Greenberg Traurig of New York, P.C. ("Greenberg Traurig"), one of several defendants in the trial court, is a national law firm, based in New York. IFT retained Greenberg Traurig to perform various legal services on its behalf. The Greenberg Traurig attorneys who were principally involved in this legal representation, Robert Kirshenberg and Stephen Weiss, were originally named as defendants. These individual attorneys successfully challenged the trial court's jurisdiction over them and the claims against them were dismissed due to lack of personal jurisdiction.
IFT is a Delaware corporation formed to "design, develop, and market biotech indoor aquaculture production and processing facilities," which essentially entailed raising fish in technologically-advanced tank facilities. IFT had two facilities in operation, one located in Pennsylvania and one in Maine. The Pennsylvania facility served as IFT's headquarters.
IFT's founder, Jack Summers ("J. Summers"), professed to be an international marketing strategist with a history of marketing food technology systems and products. J. Summers was IFT's Chairman and Chief Executive Officer ("CEO"). His son, Robert Summers ("R. Summers") was Director of Operations for IFT.
In 1995, Robert Kirshenberg was a litigation associate in Greenberg Traurig's New York office. Kirshenberg, who owned a very small amount of stock in IFT, approached J. Summers about the possibility of Greenberg Traurig representing IFT. Although no attorney-client relationship resulted at that time, the following year IFT retained Greenberg Traurig as its corporate counsel. In November 1996, Greenberg Traurig agreed to represent IFT "in connection with both the Company's general corporate affairs and a proposed initial public offering, together with other attendant corporate and [Securities and Exchange Commission] matters."
A public offering requires securities to be registered with a governmental agency. Both registered and unregistered securities have disclosure requirements to potential investors; however, registered securities also require audited financial statements. The accounting firm of Arthur Andersen began serving as IFT's independent auditor in mid-1996, but very shortly thereafter decided to discontinue the relationship. One of Greenberg Traurig's first duties once retained to represent IFT in the fall of 1996 was to try to convince Arthur Andersen to reconsider its decision to withdraw as independent auditor for IFT. Arthur Andersen had agreed in June 1996 to audit IFT's financial statements as of March 31, 1996. However, in October 1996, Arthur Andersen resigned as IFT's independent auditor, stating that J. Summers had failed to disclose a recent judgment against him in Mississippi for conversion of corporate funds. Despite Greenberg Traurig's efforts to convince the accounting firm to stay on board as IFT's independent auditor, Arthur Andersen would not reconsider its decision to terminate its relationship with the company.
IFT also asked the recently-retained Greenberg Traurig to assist the company's management in preparing for an annual shareholders meeting to be held on November 23, 1996. Greenberg Traurig helped edit the script of the presentation IFT's management would make at the shareholders meeting. With regard to the Arthur Andersen matter, Greenberg Traurig suggested that the IFT board tell the shareholders, "We have encountered some difficulty with the Andersen group and are exploring a number of ways to proceed with them or another big 6 firm." No mention was made of the Mississippi judgment or the reason Arthur Andersen terminated its relationship with IFT.
By the end of 1996, IFT had hired a new independent auditor—the accounting firm of Parente, Randolph, Orlando, Carey & Associates ("Parente Randolph")—to complete the audit originally begun by Arthur Andersen. In January 1997, IFT also hired the law firm of Gross, McGinley, LeBarre & Eaton ("Gross McGinley"), apparently replacing Greenberg Traurig, as the company's corporate counsel. Greenberg Traurig, however, continued to represent IFT in a trademark litigation matter.
About that time, issues arose as to whether IFT's stock had been issued in compliance with securities laws. A company like IFT could begin with the private placement of unregistered shares of stock to an unlimited number of accredited investors and a limited number of unaccredited investors, and later undertake an initial public offering to register the shares and sell them publicly. In a letter to Parente Randolph, dated February 24, 1997, Gross McGinley, IFT's new corporate counsel, opined that IFT stock "may have been issued without compliance with or exemption from securities registration or disclosure acts." IFT asked Gross McGinley to take action to bring the company into compliance with securities laws.
In the spring of 1997, IFT's financial statements for the fiscal year ending March 31, 1996, were issued disclosing IFT's past noncompliance with securities law, and stating the "ultimate outcome in this matter cannot be determined at this time." Due to these securities compliance issues, it appeared that IFT might need to present a rescission offer to existing shareholders in order to bring IFT into compliance with the securities laws. This remedial action stemmed from J. Summers' sales of IFT shares in violation of a permanent injunction the Securities and Exchange Commission ("SEC") had issued against him in 1981,1 enjoining him from selling unregistered securities.2 These developments prompted IFT to again seek legal advice, this time from Ellsworth, Wiles & Chaplain ("Ellsworth Wiles"), a Philadelphia law firm retained in May 1997, to serve as IFT's "securities attorneys in connection with a rescission offer to some or all of IFT's stockholders."
These developments were significant because any sales in violation of the SEC permanent injunction against J. Summers would not only raise serious compliance issues, but also would jeopardize IFT's plans for an initial public offering. Within a few months, Ellsworth Wiles concluded that IFT would have to make a rescission offer to current shareholders. In a July 7, 1997 memorandum, attorney Gerald Chalphin of Ellsworth Wiles suggested that IFT should set aside more than $16 million to cover the cost of the rescission offer. Greenberg Traurig denied any knowledge of Ellsworth Wiles' estimate for the rescission offer.
In mid-October 1997, the investment banking firm of Donaldson, Lufkin & Jenrette ("DLJ") was engaged to underwrite an initial public offering for IFT. In late October 1997, appellee Robert Moody, Jr., an accredited investor, toured IFT's facility in Pennsylvania as a prospective investor in the company. J. Summers urged Moody to purchase IFT stock, telling him that DLJ was about to underwrite an initial public offering. In mid-October 1997, J. Summers sent Moody copies of draft IFT financial statements for 1997, stating, "We do not expect any major changes." A few days later, IFT's new auditors, Cogen Sklar, L.L.P., sent a draft auditor's report to R. Summers. Note 16 of the report indicated that IFT stock "may have been issued without compliance with or exemption from certain securities registration or disclosure acts." Cogen Sklar further explained it was "unable to express, and we do not express, an opinion on the financial statements." Within a few more days, J. Summers sent Moody selected pages from Cogen Sklar's draft auditor's report. The bottom of each page sent to Moody stated: "The accompanying notes are an integral part of these financial statements." However, J. Summers excluded the page containing the notes from the pages he gave Moody. Thus, Moody did not receive the pages from the report stating that the stock had not been issued in compliance with securities regulations. On October 29, 1997, after touring IFT's Pennsylvania facility and meeting with J. Summers, Moody purchased $600,000 in IFT shares.3 Greenberg Traurig was not involved in, and claimed to know nothing about,...
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