Greenwald v. Odom

• Decision Date: 09 February 2012
• Docket Number: No. A11A1553.,A11A1553.
• Citation: 723 S.E.2d 305,314 Ga.App. 46,12 FCDR 476
• Parties: GREENWALD v. ODOM et al.
• Court: Georgia Court of Appeals

12 FCDR 476

314 Ga.App. 46

723 S.E.2d 305

GREENWALD

v.ODOM et al.

No. A11A1553.

Court of Appeals of Georgia.

Feb. 9, 2012.

Sims, Moss, Kline & David, Jerry L. Sims, Atlanta, for appellant.

Womble, Carlyle, Sandridge & Rice, John G. Despriet, Mark Alan Rogers, Atlanta, James Connelly, for appellees.

BARNES, Presiding Judge.

This is a securities fraud action in which the trial court granted summary judgment in favor of three corporate officers of Verso Technologies, Inc., a now-defunct telecommunications company, on all of the claims brought against them by E.K. Greenwald in connection with his purchase of Verso stock and stock warrants in 2007. Greenwald appeals from the order granting summary judgment, contending that there are genuine issues of material fact over whether the defendants made actionable misrepresentations and omissions in connection with his purchase of the stock and stock warrants. For the reasons discussed below, the trial court did not err in granting summary judgment to the defendants on Greenwald's claims pertaining to an alleged oral misrepresentation made about accounts payable and certain alleged omissions in the stock subscription materials. But the trial court erred in granting summary judgment to the defendants on Greenwald's claims pertaining to alleged oral misrepresentations about a revenue forecast and about the future sale of one of Verso's divisions. In light of this error, we vacate in part the trial court's order granting summary judgment, and we remand for the trial court to determine two issues raised by the defendants but not ruled upon in the court below: whether Greenwald's expert testimony regarding causation was admissible and, if so, whether it established a genuine issue of material fact on the issue of loss causation.

On appeal from the grant of summary judgment, we view the evidence, and all reasonable conclusions and inferences drawn from it, in the light most favorable to the nonmoving party. Matjoulis v. Integon Gen. Ins. Corp., 226 Ga.App. 459(1), 486 S.E.2d 684 (1997). So viewed, the record shows that Verso Technologies, Inc., was a publicly traded telecommunications company that specialized in “providing next-generation network solutions to carriers, enterprises, governments and government related entities.” Verso had a history of operating losses and made efforts to raise additional capital through private stock subscriptions in the summer of 2007.

The Purchase Transaction. In August 2007, Greenwald purchased restricted stock and stock warrants in Verso through a private subscription for the price of $2,040,000 (the “Purchase Transaction”). At the time of the Purchase Transaction, Steven A. Odom was Verso's chair and chief executive officer, Mark Dunaway was its chief operating officer, and Martin Kidder was its chief financial officer.

The Offering Documents. Before the Purchase Transaction, Kidder assisted in preparing a Confidential Information Memorandum , a Subscription Agreement, and a Subscriber Questionnaire (collectively, the “Offering Documents”) which he then furnished to Greenwald and other potential private investors. Section 9 of the Subscription Agreement provided:

This Subscription Agreement contains the entire agreement of the parties with respect to the matters set forth herein and there are no representations, covenants or other agreements except as stated or referred to herein or as are embodied in the Offering Documents. (Hereinafter, the “Merger Clause.”)

Notably, however, a separate section of the Subscription Agreement, entitled “Reliance,” stated:

The Company [Verso] has made available to the Subscriber [Greenwald] the opportunity to ask questions of, and receive answers from the Company with respect to the activities of the Company as described in the Offering Documents, and otherwise to obtain any additional information, to the extent that the Company possesses the information or could acquire it without unreasonable effort or expense, necessary to verify the accuracy of the information contained in the Offering Documents. The Subscriber ... is entering into this Subscription Agreement relying solely on the facts and terms set forth in the Offering Documents or as contained in documents or answers to questions so furnished to the Subscriber, and neither the Company nor its representatives have made any other representations or provided any other information of any kind or nature, whether written or verbal, to induce the Subscriber to enter into this Subscription Agreement or in connection with the Subscriber's investment in the Securities. (Hereinafter, the “Reliance Clause.”)

The Subscription Agreement also required Greenwald to expressly acknowledge certain risks. Among other things, the Subscription Agreement stated that the purchase of the securities was a speculative investment and involved a high degree of risk; that there was no market for the securities, currently or in the foreseeable future; that Verso's operations were dependent on its ability to secure additional financing; and that there were “no existing arrangements with respect to such financing.”

Similarly, the Confidential Information Memorandum contained several pages articulating risks associated with the purchase. The risk factors included that Verso's common stock might be delisted from NASDAQ; Verso might be unable to fund future growth; Verso had a history of losses and might not be profitable in the future; Verso's need to invest in research and development could harm its operating results; Verso's focus on emerging markets could make achievement of its sales goals more difficult; and Verso derived from channel distribution partners a substantial amount of its revenues, which might decline significantly if any major partner were to cancel or delay a purchase of Verso's products.

Finally, the Confidential Information Memorandum incorporated by reference several financial documents, including Verso's Form 10–K report to the Securities and Exchange Commission (“SEC”) for the year ending December 2006 and its Form 10–Q reports to the SEC for the quarters ending March 31, 2007 and June 30, 2007.

The August 20, 2007 Meetings. After receiving the Offering Documents, on August 20, 2007, Greenwald met separately with COO Dunaway and with CEO Odom to obtain additional information about Verso's business prospects and the investment opportunity presented by the private offering. The two meetings were held in Atlanta at Verso's offices. According to Greenwald, three material oral misrepresentations were made to him during the August 20, 2007 meetings: (a) a misrepresentation by Dunaway regarding a 2008 revenue forecast; (b) a misrepresentation by Odom regarding the future sale of Verso's NetPerformer division in the fourth quarter of 2007; (c) and a misrepresentation by Odom regarding the aging status of Verso's accounts payable. Each of these alleged misrepresentations will be discussed in turn.

(a) The 2008 Revenue Forecast. During Greenwald's meeting with Dunaway, a 2008 revenue forecast was presented to Greenwald that was written on a whiteboard with information broken down quarter by quarter, customer by customer, and contract by contract. According to Greenwald, in response to his questions about the revenue forecast, Dunaway represented that it was based on “contracts in hand,” and that these existing contracts added up to $75 million in revenue for Verso that was “essentially baked in” even if no additional sales were made in 2008. Based on this representation, Greenwald believed that although Verso had never had a profitable quarter, it would be able to “get on [its] feet” and turn its financial situation around.

Deposition testimony, however, painted a different picture concerning what formed the basis for the 2008 revenue forecast presented to Greenwald. In his deposition, CFO Kidder testified that Verso's revenue forecasts were prepared by Verso's “finance group” under his supervision, with the forecast information then circulated to senior management, including Dunaway. Kidder testified that the revenue forecasts were not based “on contracts for sales in hand.” Rather, the forecasts were based merely on “pipeline information,” or “ opportunities that are in play,” which encompassed “opportunities that the sales folks are pursuing ... [that] are at various stages of completion and have various probabilities.”

(b) The Future Sale of NetPerformer. During his separate meeting with Odom, Greenwald expressed his concern over the fact that Verso had certain large long-term debt obligations coming due in 2008. Odom responded that Verso's payment of these long-term debt obligations would be “taken care of” through the sale of Verso's NetPerformer division in the fourth quarter of 2007 for the purchase price of $20 million to $25 million. According to Odom, the NetPerformer division was “state of the art.” He indicated that Verso was currently in negotiations with a specific unnamed buyer over the terms of the sale of the NetPerformer division, that the sale was “all but a done deal,” and that a second unnamed buyer was “standing in the wings” if for any reason the deal did not go through with the first buyer. Greenwald knew that if Verso did not address its long-term debt obligations it likely would go bankrupt, but he believed that Verso would meet its obligations based upon the representations of Odom regarding the imminent sale of the NetPerformer division.

Again, deposition testimony painted a different picture of the status of the future sale of the NetPerformer division. In his deposition, Odom testified that he did not believe that there were any negotiations with a specific buyer over the sale of the NetPerformer division in August 2007. Moreover, Odom testified that by no later than mid-August 2007, Verso had discovered significant hardware failures in the NetPerformer product such that additional re-engineering work would need...