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J.P. Morgan Securities, LLC v. Geveran Investments Ltd.

Florida Court of Appeals, Fifth District

June 9, 2017

J.P. MORGAN SECURITIES, LLC, MADHUKAR NAMBURI and ESTEBAN SCHRECK, Appellants,
v.
GEVERAN INVESTMENTS LIMITED, LIGHTING SCIENCE GROUP CORPORATION, PEGASUS CAPITAL ADVISORS, L.P., PEGASUS CAPITAL, LLC, PEGASUS CAPITAL ADVISORS GP, LLC, PCA LSG HOLDINGS, LLC, et al., Appellees. And LIGHTING SCIENCE GROUP CORP., RICHARD WEINBERG, GREGORY KAISER AND PEGASUS CAPITAL ADVISORS, L.P. Appellants,
v.
GEVERAN INVESTMENTS LIMITED, J.P. MORGAN SECURITIES, LLC, PEGASUS CAPITAL ADVISORS, L.P., PEGASUS CAPITAL, LLC, PEGASUS CAPITAL ADVISORS, GP, LLC, PCA LSG HOLDINGS, LLC, et al., Appellees.

         NOT FINAL UNTIL TIME EXPIRES TO FILE MOTION FOR REHEARING AND DISPOSITION THEREOF IF FILED

         Appeal from the Circuit Court for Orange County, Alice Blackwell, Judge.

          Mayanne Downs and Rachael M. Crews, of Gray Robinson, P.A., Orlando, and Adam Balin, James I. McClammy, Amelia T.R. Starr and Christopher Ratcliffe Le Coney, of Davis Polk & Wardwell, LLP, New York, NY, for Appellants, J.P. Morgan, et al. [1]

          Thomas A. Zehnder and David B. King, of King, Blackwell, Zehnder & Wermuth, P.A., Orlando, and Bruce S. Rogow and Tara A. Campion, of Bruce S. Rogow, PA, Fort Lauderdale, for Appellee, Geveran Investments Limited.

          Barry Richard of Greenberg Traurig, P.A., Tallahassee, Alan T. Dimond, David A. Coulson and Ian M. Ross, of Greenberg Traurig, P.A., Miami, for Appellee, Lighting Science Group Corporation. [2]

          Daniel S. Newman, P.A., of Broad and Cassel, Miami, Counsel for Amicus Curiae The Florida Securities Dealers Association, Inc.

          Nicholas A. Shannin, of The Shannin Law Firm, Orlando, and Jonathan K. Youngwood, Kavitha S. Sivashanker and Stephen A. O'Connor, of Simpson Thacher & Bartlett LLP, New York, NY, Attorneys for Amicus Curiae Securities Industry and Financial Markets Association.

          No Appearance for other Appellees.

          Barry Richard of Greenberg Traurig, P.A., Tallahassee, Alan T. Dimond, David A. Coulson and Ian M. Ross, of Greenberg Traurig, P.A., Miami, and, for Appellants, Lighting Science Group Corporation, et al.

          Bruce S. Rogow and Tara A. Campion of Bruce S. Rogow, P.A., Ft. Lauderdale, Thomas A. Zehnder and David B. King, of King, Blackwell, Zehnder & Wermuth, P.A., Orlando, for Appellee, Geveran Investments Limited.

          COHEN, C.J.

         Lighting Science Group Corp., et al.[3] ("LSG") and J.P. Morgan Securities, LLC, Madhukar Namburi, and Esteban Schreck[4] ("J.P. Morgan") (collectively, "defendants") appeal the trial court's entry of summary final judgment in favor of Geveran Investments Limited ("Geveran"). The parties stipulated to final judgment and the dismissal of their additional claims and affirmative defenses for the purposes of appealing the trial court's entry of partial summary judgment on Geveran's claim under the Florida Securities and Investor Protection Act ("FSIPA"), sections 517.011-32, Florida Statutes (2012). The final judgment awarded Geveran $25 million in rescissory damages under section 517.221(3)(a), Florida Statutes (2012), along with $6, 752, 280 in prejudgment interest; $4, 456, 787.40 in attorneys' fees; and $469, 061.93 in costs: a total recovery of $36, 678, 129.33, for which the defendants are jointly and severally liable.

         The defendants argue that the trial court erred in entering summary judgment in Geveran's favor because genuine issues of material fact exist as to Geveran's entitlement to relief. We agree and reverse and remand this case for further proceedings. We also find that the court erred in denying J.P. Morgan's motion to dismiss Geveran's claims against Namburi and Schreck because the complaint failed to allege facts sufficient to establish that they acted as agents of the seller, LSG. Therefore, on remand the trial court is directed to dismiss LSG's claims against Namburi and Schreck.

         LSG is a Delaware corporation with executive offices in Satellite Beach, Florida, and is controlled by Pegasus Capital Advisors, L.P., a U.S.-based private equity fund. LSG originally focused on selling high-end, made-to-order lighting, but in 2010, LSG shifted its business model to designing, manufacturing, and marketing light-emitting diode ("LED") light products, including replacement bulbs and fixtures, for retail and commercial customers.[5] Geveran is an international investment company, one of several companies within the Fredriksen Group, organized under the laws of Cyprus. Geveran employed Fredrick Halvorsen, a Norwegian businessman and investor, to identify investment opportunities on its behalf.[6]

         Halvorsen anticipated a "massive shift towards LED lighting" and sought out investment opportunities within the green-energy industry for Geveran. Halvorsen specifically sought "pre-IPO" investments-companies that were not publicly traded on major stock exchanges but that were planning on becoming publicly traded in the near future.[7]

         Prior to Geveran's investment, J.P. Morgan agreed to work as a placement agent and underwriter for LSG. Under the terms of the agreement, J.P. Morgan agreed to "assist the Company [LSG] in soliciting and receiving an offer from the Purchasers to purchase Securities."[8] At Halvorsen's request, J.P. Morgan communicated Geveran's interest in investing in LSG.

         Halvorsen met with representatives of LSG, including LSG's director Richard Weinberg and CFO Gregory Kaiser, along with representatives from J.P. Morgan, including Namburi and Schreck, and representatives of Pegasus in Florida on April 4, 2011, to discuss a possible investment. Halvorsen sat through multiple presentations, including presentations by Weinberg and Namburi, about LSG's finances. Halvorsen also heard a presentation about LSG's initiatives to improve its gross profit margin.[9] Halvorsen reviewed various financial projections and LSG's 2010 form 10-K, [10] which was filed with the SEC on April 1, 2011.

         Halvorsen prepared his own analysis of LSG in an email dated April 28, 2011. He noted that LSG had a planned IPO within the next twelve months and was on pace to begin earning money in July and to have positive cash flow by December. He also noted a general shift toward LED lighting and LSG's recent distribution agreement with Home Depot, which would expand LSG's retail sales. He noted, however, that the investment was contingent on LSG shifting its manufacturing base from the United States to Mexico and that the IPO required LSG to continue to improve its earnings.

         Geveran relied on Halvorsen's expertise and presentations from LSG and J.P. Morgan for its due diligence review. Geveran ultimately agreed to purchase 6, 250, 000 shares of LSG at $4 per share: a total investment of $25 million. The agreement certified that the 2010 form 10-K provided to Halvorsen complied with all relevant laws and that the financial statements included therein complied with generally accepted accounting principles ("GAAP"). Halvorsen signed the subscription agreement with LSG on behalf of Geveran on May 10, 2011.[11]

         Prior to signing the agreement, LSG had filed a form S-1/A with the SEC in anticipation of making a re-IPO in the summer of 2011. In response, the SEC sent LSG a fax on April 28, 2011, raising several concerns with LSG's S-1/A, including concerns with note five of its financial statements regarding inventories. In note five, LSG explained that because it was in an early stage of development, it classified its obsolete, unsold inventory as "research and development" rather than a cost of manufacturing-a "cost of goods sold." The SEC's letter noted the SEC's view, expressed in ASC section 420-10-S99-3, that these costs should be included in cost of goods sold.[12] A copy of the SEC's letter was emailed to Namburi and Schreck, among many others, moments after it was received. Halvorsen, however, was not provided the letter.[13] On May 3, the SEC sent a similar letter to LSG, this time taking issue with LSG's 2010 form 10-K-the same form 10-K referenced in the subscription agreement signed a week later and provided to Halvorsen. The second letter raised the same concerns as the previous letter, and Namburi and Schreck were again sent a copy of the letter soon after it was received.

         The day before the subscription agreement was signed, Namburi forwarded Halvorsen an email that he had received from Kaiser containing information about LSG's April sales. Namburi had deleted the section of the email showing disappointing gross margins for LSG. Namburi later claimed that he deleted the numbers because he was unsure of their accuracy. In a separate email, Namburi expressed frustration to Kaiser that the April gross margins were around 3-6% when they had informed Halvorsen the margins would be around 9%.

         On May 12, after the subscription agreement had been signed, LSG responded to the SEC letters by explaining that its policy in 2008 and 2009 had been to purchase raw materials and supplies for research and development but to classify those materials as "obsolete" along with any unsold inventory-meaning LSG did not distinguish between materials actually used for research and development and unsold product. LSG initially claimed that only $2 million in 2009 and $445, 000 in 2008 needed to be reclassified from research and development to cost of goods sold. Days later, LSG sent an additional letter to the SEC providing a materiality analysis based on Staff Accounting Bulletin 99.[14] The analysis concluded that the misstatements were not material because they had no impact on "any trends related to revenue, earnings, or EBITDA [earnings before interest, tax, depreciation, and amortization]" and would not have affected investors because LSG's business and revenue had significantly shifted since 2008 and 2009. LSG's accountant, McGladrey and Pullen, LLP, ("McGladrey") agreed with this determination and prepared a similar SAB 99 analysis. McGladrey had identified the accounting problem in 2009 and conducted a SAB 99 analysis that likewise concluded that no restatement was necessary.

         The SEC responded on June 2 by asking for additional information and a more detailed explanation of how LSG decided to classify certain expenses as research and development or cost of goods sold and how LSG valued its obsolete goods. LSG was not able to provide data to justify its more limited restatement, leading the SEC to request that all of the amount of obsolete goods be reclassified as cost of goods sold. On June 16, LSG filed a form 8-K, [15] indicating that the 2008 and 2009 financial statements would need to be restated and included in the amended 2010 form 10-K. An amended form 10-K for 2010 soon followed. The results of the restatement were:

Originally Reported Gross Profits ($) Originally Reported Gross Margins (%)

Restated Gross Profits ($) Restated Gross Margins (%)

2008

$ 4, 069, 993 19.6%

$ (448, 110)[16] (2.2)%

2009

$ 6, 621, 977 21.1%

$ 2, 495, 867 8.0 %


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