Orgone Capital III, LLC v. Daubenspeck

• Citation: 912 F.3d 1039
• Decision Date: 07 January 2019
• Docket Number: No. 18-1815,18-1815
• Parties: ORGONE CAPITAL III, LLC, et al., Plaintiffs-Appellants, v. Keith DAUBENSPECK, et al., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

912 F.3d 1039

ORGONE CAPITAL III, LLC, et al., Plaintiffs-Appellants,

v.Keith DAUBENSPECK, et al., Defendants-Appellees.

No. 18-1815

United States Court of Appeals, Seventh Circuit.

Argued September 24, 2018

Decided January 7, 2019

Kenneth A. Wexler, Esq., Attorney, Wexler Wallace LLP, Chicago, IL, Todd S. Collins, Attorney, Berger & Montague, P.C., Philadelphia, PA, Kurt Olsen, Attorney, Klafter Olsen & Lesser, LLP, Washington, DC, for Plaintiffs–Appellants.

Peter Sean McDonnell, Chicago, IL, Pro Se.

M. Duncan Grant, Attorney, Pepper Hamilton LLP, Philadelphia, PA, Christopher B. Chuff, Attorney, Pepper Hamilton LLP, Wilmington, DE, for Defendant–Appellee Keith Daubenspeck.

Michael David Celio, Attorney, Gibson, Dunn & Crutcher LLP, Palo Alto, CA, Corey B. Rubenstein, Attorney, Loeb & Loeb LLP, Chicago, IL, for Defendants–Appellees Kleiner Perkins Caufield & Byers, Ray Lane, John Doerr.

Before Wood, Chief Judge, and Easterbrook and Brennan, Circuit Judges.

Brennan, Circuit Judge.

Hype and reality can be at odds. This contrast arises often in postmortems on once-fashionable, now-failed investment securities. Hype can raise investors' hopes and, in turn, capital contributions. But when hype accelerates an investment's market value beyond its actual worth, a financial bubble is formed.

Fisker Automotive, Inc. was such a bubble, bursting in 2013. Plaintiffs, all purchasers of Fisker securities between 2009 and 2012, assert various claims against defendants, each of whom played roles in Fisker's early-stage financing, for allegedly misleading investors regarding Fisker's intrinsic value and imminent collapse.¹ Illinois law provides remedies when securities are sold by means of deceptive and fraudulent practices. But like any civil action, such claims must be timely filed. Our review does not explore the cause of or the defendants' alleged roles in Fisker's failure. Rather, we decide whether plaintiffs' claims fall within the Illinois securities laws, and if so whether their claims are time-barred by Illinois's three-year statute of limitations for securities-based claims.

I

A

In 2008, Fisker, a manufacturer of luxury hybrid electric cars, began attracting substantial financing as part of a trend in venture capital investments toward green energy technology start-ups. Investor enthusiasm was spurred by a $528.7 million loan to Fisker from the U.S. Department of Energy, which offered direct financial support to manufacturers of clean energy vehicles and components. Under the loan's terms, the Energy Department advanced Fisker $192 million. The venture capital firm Kleiner Perkins Caufield & Byers, a defendant here and a controlling shareholder of Fisker, assisted with negotiating and securing the loan to Fisker. Plaintiffs characterize Kleiner Perkins as "politically-connected" and a "pioneering titan" of Silicon Valley's venture capital industry, known for its "hugely successful early backing of companies."

Support from the federal government and Kleiner Perkins were not the only factors sparking investor interest. Celebrities including tech-industry rainmakers and A-list movie stars invested in Fisker's future. Media outlets from Wall Street to Hollywood reported on these luminaries' investment in and association with Fisker. Further fueling the excitement was Fisker's public competition with another emerging player in the electric vehicle market, Tesla, Inc.

In 2009, before sales began on its first generation of vehicles, Fisker announced that beginning in 2012 or 2013 its second generation of vehicles would be built in Delaware. Delaware agreed to chip in $21.5 million in state subsidies and Vice President Joe Biden and Delaware Governor Jack Markell participated in Fisker's media unveiling of this economic collaboration. Riding this wave of publicity and contributions, Fisker secured funding from additional venture capital firms and high net worth investors. These investors included the five plaintiffs at bar, who collectively purchased over $10 million in Fisker securities. By 2011, institutional and individual investors had poured $1.1 billion into Fisker, betting on its revenue potential and sustainability values.

Fisker's rise was rapid and highly publicized. So was its fall. In late 2011, Fisker began selling its flagship automobile. By August 2012, it stopped all manufacturing operations to preserve cash, and in April 2013, Fisker laid off 75% of its remaining workforce. That same month, the U.S. Government seized $21 million in cash from Fisker to fulfill its first loan payment. In September 2013, the Energy Department put Fisker's remaining unpaid loan amount (approximately $168 million) out to bid at a public auction. In November 2013, Fisker filed for bankruptcy protection. The bubble had burst, and lawsuits followed.

B

On October 14, 2016, these plaintiffs filed a class action complaint against the defendants alleging fraud, fraudulent concealment of material information, breach of fiduciary duty, and negligent misrepresentation in connection with their purchases of Fisker securities. In the complaint, plaintiffs referenced a report released on April 17, 2013, by a private research firm, PrivCo, entitled "FISKER AUTOMOTIVE'S ROAD TO RUIN: How a ‘Billion-Dollar Startup Became a Billion-Dollar Disaster’." A press release accompanying this PrivCo Report opined Fisker may go down as "the most tragic venture capital-backed debacle in recent history" due to "[t]he sheer scale of investment capital and government loan money." The PrivCo Report claimed this money and capital was "squandered so rapidly and with so little to show for it that the wreckage is breathtaking." According to plaintiffs, the PrivCo Report was supported by over 11,000 pages of documents exposing Fisker's imminent bankruptcy and malfeasant management. The PrivCo Report also highlighted production and financial data plaintiffs claim defendants concealed.

Plaintiffs' original complaint also describes several congressional hearings held in April 2013, one week after the PrivCo Report was published. Those hearings included testimony from both government and Fisker officials as part of a congressional investigation of Fisker's impending failure and the loss of $192 million in taxpayer funds.

The complaint details how the PrivCo Report and congressional hearings "brought to light" and "revealed the defendants' alleged wrongdoings. Plaintiffs pleaded "[t]he investigations by PrivCo and Congress revealed fraud and breach of fiduciary duties by, among others, [the defendants], in connection with [d]efendants' scheme to induce [p]laintiffs and the Class to purchase Fisker Automotive Securities while concealing from them material adverse information." Plaintiffs also alleged that confidential documents disclosed by PrivCo and Congress "revealed" the defendants "knew, but failed to disclose to plaintiffs and the Class, material information" concerning Fisker's production delays. Quoting the PrivCo Report, plaintiffs claim defendants "kept Fisker's troubles secret" and concealed Fisker's cash crisis and mismanagement while attracting new investors. Plaintiffs alleged that defendants secured over $800 million through fraud by disseminating materially false and misleading information to rescue Kleiner Perkins from its "bad bet" on Fisker.

Defendants moved to dismiss plaintiffs' complaint as barred by Illinois's three-year statute of limitations, 815 ILL. COMP. STAT. 5/13(D), for securities-based claims. Defendants argued the notices provided by PrivCo and Congress occurred in April 2013, but plaintiffs waited more than three years to file their complaint in October 2016. The district court agreed and granted defendants' motion based upon plaintiffs' "straightforward factual disclosures" regarding the PrivCo Report and at the congressional hearings. To the district court, these disclosures demonstrated plaintiffs must at a minimum have known facts that, in the exercise of reasonable diligence, would have led to actual knowledge of their claims.

Although the district court dismissed plaintiffs' complaint as untimely, plaintiffs were granted leave to amend if they wished "to expressly contradict the court's conclusion about the dates that they learned of the facts that would lead them to their claims."

C

Plaintiffs accepted the district court's invitation and amended their complaint in three ways. First, they deleted all references to the PrivCo Report and congressional hearings. Second, they asserted Delaware rather than Illinois law controls this case under choice of law provisions within certain Fisker securities purchase agreements. Third, they claimed they first learned of the defendants' purported wrongdoing on December 27, 2013, after an action was brought in Delaware by separate investor plaintiffs against some of the same defendants here.²

Defendants moved again for dismissal and judgment on the pleadings under Federal Rule of Civil Procedure 12(b)(6) and (c). They argued plaintiffs' amended complaint suffers from the same infirmities as the original and that the lawsuit remains time-barred. The district court agreed, and concluded that plaintiffs' claims came under Illinois law, regardless of plaintiffs' contention that Delaware law should apply.

The district court also ruled that plaintiffs' amended complaint failed to cure the fundamental problem with their original complaint, which affirmatively pleaded plaintiffs had notice of their claims in April 2013. After the first dismissal, the court gave plaintiffs leave to amend to "expressly contradict" its finding that plaintiffs learned of facts in April 2013 that would lead them to their claims. But rather than rebut the court's finding, plaintiffs just deleted all references to the PrivCo Report or congressional hearings from their amended complaint. Because this information was not contradicted in the amended complaint, the court reaffirmed its previous conclusion that Illinois's three-year statute of...