Healey v. Chelsea Resources Ltd.

• Decision Date: 24 April 1990
• Docket Number: No. 88 Civ. 6957 (RLC).,88 Civ. 6957 (RLC).
• Citation: 736 F. Supp. 488
• Parties: John A. HEALEY, Plaintiff, v. CHELSEA RESOURCES LTD., Dominick & Dominick Securities, Inc. and Dominick & Dominick, Inc., Defendants.
• Court: U.S. District Court — Southern District of New York

736 F. Supp. 488

John A. HEALEY, Plaintiff, v. CHELSEA RESOURCES LTD., Dominick & Dominick Securities, Inc. and Dominick & Dominick, Inc., Defendants.

No. 88 Civ. 6957 (RLC).

United States District Court, S.D. New York.

April 24, 1990.

Whitman & Ransom, New York City (Michael S. Press, Michael G. Carey, Philip M. Smith, of counsel), for plaintiff.

Cadwalader, Wickersham & Taft, New York City (Gregory M. Petrick, of counsel) for defendants Dominick & Dominick Securities, Inc. and Dominick & Dominick, Inc.

ROBERT L. CARTER, District Judge.

"O accurst craving for gold." — Virgil, Aeneid, Bk. III, 1. 57

This case arises out of an ill-fated attempt to resurrect a historical Montana gold mine, the Spotted Horse. Investorturned-plaintiff John A. Healey alleges violations of § 12(2) of the Securities Act of 1933 (the "1933 Act"), 15 U.S.C. § 77l(2), § 10(b) of the Securities Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, C.F.R. § 240.10b-5, common law fraud and negligent misrepresentation, and seeks rescission, damages, and punitive damages. Discovery in this case is complete and defendants Dominick & Dominick Securities, Inc. ("Dominick Canada"), a Canadian corporation, and Dominick & Dominick, Inc. ("Dominick U.S."), a United States corporation, now move for summary judgment against plaintiff pursuant to Rule 56, F.R. Civ.P.¹

I.

The Spotted Horse is located in Fergus County, Montana, near the town of Lewiston, and has a past history nearly as tumultuous as its present.² It was discovered in 1881, and, apparently between 1884 and 1894, was a successful and productive gold mine with a mill to treat the ore on premises.³ Beginning in 1895, the mine went through an unstable period and changed hands eight times in seven years, often through foreclosure. In 1902, the mill burned down and the mine was closed until 1910, at which time further production was attempted. The Spotted Horse was abandoned in 1935.

In 1968, the Blue Range Mining Company acquired the Spotted Horse from a Lewiston bank and began rehabilitation. In 1972, Viking, a company engaged in mining activity, acquired an option on the Spotted Horse and, in conjunction with its partner Johns Manville Corporation, made considerable improvements to the mine. After Johns Manville Corporation's withdrawal from the project, Viking entered into an operating agreement with another corporation, but eventually went into bankruptcy. In 1982, Cimmarron Exploration Inc. acquired the rights to the Spotted Horse, and in 1985, entered into an agreement with Chelsea Resources Ltd. ("Chelsea"), a publicly traded Canadian company, whereby Chelsea would develop and finance production at the mine, and in return receive a share of the profits pursuant to an agreed upon formula.

Shortly after acquiring an interest in the mine, Chelsea commissioned Neil D.S. Westoll & Associates Ltd., under the direction of Dr. Neil D.S. Westoll, to prepare a report on the Spotted Horse (the "Westoll Report"). This forty page report which was released in November, 1986, covers the history, geology, and operation of the mine, sets forth a recommended exploration program and budget, and gives estimates on the amount of gold to be mined and its value after deduction of production costs. Dr. Westoll certified that the report was the result of his personal professional judgment and that he did not own or expect to receive any interest in the Spotted Horse or Chelsea.

In the Spring of 1987, Robert C. Wong, Vice-Chairman and a director of Dominick Canada, became familiar with Chelsea and the Spotted Horse. In June, 1987, Wong visited the Spotted Horse, and met with Westoll and various Chelsea executives. Thereafter, Wong prepared a four-page report (the "Wong Report") for distribution to his retail clients consisting of three pages of text and a one page projection of profits and losses. The Wong Report's conclusion was that "at current market prices, the common shares of Chelsea Resources Ltd. appear to be significantly undervalued and are strongly recommended for investors seeking a substantial capital gains opportunity in a rapidly developing, junior gold company...."

By August, 1987, Chelsea needed additional capital to carry out its business plan for the Spotted Horse. After attempting unsuccessfully to secure investment from other sources, it contacted Anthony Field, a Dominick Canada Vice-President,⁴ and on August 21, 1987, contracted with Dominick Canada to be the exclusive agent for a private placement of Chelsea securities. Under the agreement, Dominick Canada had exclusive agency for 21 days to place privately 500,000 units of Chelsea securities at $3.25 (Cdn.) per unit. Each unit consisted of one common share of Chelsea and one common share purchase warrant exercisable within one year at $3.50 (Cdn.). The agreement provided that Chelsea would pay Dominick Canada's legal and accountancy charges incurred in the placement, and that Chelsea would make available full and complete disclosure of all material facts and give Dominick Canada access to all corporate and operating records.

Chelsea represented to Dominick Canada that it needed the money to pay a debt of approximately $1.6 million (Cdn.) to New-fields Minerals, a Canadian corporation engaged in gold mining exploration and development, to pay some debts to the Clark family, directors and controlling shareholders of Newfields Minerals, to pay some other small debts, and to finish the mill and the mine. At this time, Chelsea estimated that it needed to spend approximately $600,000 to $700,000 on the Spotted Horse to put it in operation. Apparently unable to wait for the Dominick Canada private placement to be finished, Chelsea obtained a short-term loan for $1,075,000 (Cdn.) on September 8, 1987, from a group of investors to whom it paid a substantial interest rate.

On September 11, 1987, Field called plaintiff at his home in New York in an attempt to sell him some units of the Chelsea private placement. Plaintiff is a successful professional investor who invests in and provides professional financial consultations to resource companies, including gold mining operations. Field had received plaintiff's name from a mutual acquaintance and knew that he had previously invested in ventures similar to the Spotted Horse.

The initial telephone conversation between plaintiff and Field was fairly short. Field outlined the basic terms of the placement, went over highlights of the Wong and Westoll reports, emphasized that the Westoll report was made by a qualified independent geologist, and stated that the mine would be in production any day, producing a very high grade of gold. The day after the first phone conversation, plaintiff received a packet from Field containing the Wong report, Chelsea's 1986 Annual report, two Chelsea press releases and three status reports on the Spotted Horse. Also included in this packet was a summary of the offering, prepared by Dominick Canada, which stated that the purpose of the money was to "repay loans to Newfields Minerals Inc. and related parties." Some of the materials received by plaintiff suggest that the mill and mine are, or are nearly, complete, and that production could begin at any time. The Westoll report arrived separately a day or two later, and Healey telephoned Westoll and discussed it with him personally.

Over the next day or two, plaintiff and Field had a couple of very short telephone conversations for the purpose of arranging a meeting which took place on September 14, 1987, at the Toronto airport. At this meeting, which was less than an hour in length, Field gave plaintiff written projections of profit and loss, cash flow, and operating costs and expenses for the Spotted Horse. Field also offered to set up a meeting between plaintiff and senior Chelsea management, and such meeting took place on September 18, 1987, between plaintiff and Brian McAlister, President of Chelsea, and Michael Scholz, Chelsea's solicitor. At this meeting, McAlister provided plaintiff with a handwritten report of Chelsea's cash position as of September 30, 1987, showing a surplus of almost one million dollars.

By October 6, 1987, plaintiff apparently was seriously contemplating a sizable investment in Chelsea, and on this date met with McAlister, Fernando Nuflo-Moya, Chairman of the Board of Chelsea, and Westoll. The topic of this meeting was a large proposed investment in Chelsea by a third company, City Resources Ltd. Healey was against the proposed investment by City Resources Ltd. because it would dilute his proposed investment and he made a number of other suggestions for Chelsea to raise more cash. Plaintiff introduced a number of other investors to Chelsea, but none of the introductions culminated in any investment. On October 13, 1987, plaintiff purchased 500,000 units for $1,625,000 (Cdn.), and on October 14, 1987, was invited to join the Chelsea's board of directors and attended his first board meeting.

At the December 9, 1987 board meeting, plaintiff first learned that accounts payable and employee withholding taxes had not been paid, and that the Spotted Horse had not been fully winterized. By this time plaintiff suspected that he did not know Chelsea's true financial picture and expressed concern that the board was receiving inadequate financial information.

Plaintiff's concern was apparently well founded. Beginning in late 1987, Chelsea's problems worsened and it struggled to stay afloat. The Spotted Horse began having production problems in mid-December due to freezing weather conditions and the unwinterized state of the facility. Lack of funds continued to plague Chelsea but in February it managed to secure a $2,520,000 (Cdn.) investment from Northgate Exploration Ltd. Despite this investment, Chelsea's finances continued to deteriorate and, in April, its bank refused to extend any further credit.

On May 18, 1988, plaintiff resigned...