Robinson v. Glynn

349 F.3d 166 (4th Cir. 2003)

Purchase the Printed Copy at bsmsphd.com

Nature of the Case

To access this section all you need to do is click here and register.

Facts

D and his associates contacted P, a businessman with no prior telecommunications experience, in an effort to raise capital for GeoPhone. GeoPhone was a limited liability company. In July 1995, P agreed to loan D $1 million so that D could perform a field test of the GeoPhone system and the CAMA technology. P and D executed a 'Letter of Intent,' in which P pledged to invest up to $25 million in GeoPhone, LLC if the field test indicated that CAMA worked in the GeoPhone system. Engineers hired by D performed the field test, but, apparently with D's knowledge, they did not use CAMA in the test. Nevertheless, D allegedly told P that the field test had been a success. Consistent with the Letter of Intent, P and D executed an 'Agreement to Purchase Membership Interests in GeoPhone' P agreed to convert his $1 million loan and his $14 million investment into equity and subsequently to invest the additional $10 million. They also entered into an 'Amended and Restated GeoPhone Operating Agreement.' This detailed the capital contribution, share ownership, and management structure of GeoPhone. P received 33,333 of GeoPhone's 133,333 shares. On the back of the share certificates, a restrictive legend referred to the certificates as 'shares' and 'securities.' It also specified that the certificates were exempt from registration under the Securities Act of 1933, and stated that the certificates could not be transferred without proper registration under the federal and state securities laws. A seven-person board of managers that was authorized to manage GeoPhone's affairs. Two of the managers were to be appointed by P with the remaining five appointed by D and his brother. The agreement vested management of GeoPhone in P and D based on each member's ownership share. P was named GeoPhone's treasurer, and he was appointed to the board of managers and the company's executive committee. D served as GeoPhone's chairman and was intimately involved in the company's operations and technical development. By April 1996, P sued D alleging breach of fiduciary duty, fraud, and conversion from D's mismanagement of GeoPhone funds. They settled the state court action, and entered into a 'Membership Interest Purchase Agreement.' P purchased all of Glynn's shares in GeoPhone. In 1998, P allegedly learned for the first time that the CAMA technology had never been implemented in the GeoPhone system - not even in the field test that had provided the basis for P's investment. P then filed suit in federal court, claiming violation of the federal securities laws, specifically § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The district court granted summary judgment to D because it found that P's membership interest in GeoPhone, LLC did not constitute a security under the federal securities laws. P appealed.