Access Cardiosystems, Inc. v. Fincke (In Re Access Cardiosystems, Inc.)

MEMORANDUM OF DECISION

HENRY J. BOROFF, Bankruptcy Judge.

Before the Court, after trial on the question of liability only,

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is the “Third Amended Complaint” (the “Complaint”) filed by Access Cardiosystems, Inc. (“Access”), four of its individual investors (the “Investors”), and the corporate entities through which several of those investments were made (together, the “Plaintiffs”) against Randall Fincke, former Access shareholder, officer, and director. The Plaintiffs accuse Fincke of breach of fiduciary duty, fraud, negligent misrepresentation, and securities fraud under Massachusetts securities laws. Fincke responds with counterclaims against the Plaintiffs for breach of fiduciary duty, breach of contract, promissory estoppel, and declaratory judgment. The following constitute the Court’s findings of fact and conclusions of law on liability under these claims, pursuant to

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Federal Rule of Bankruptcy Procedure 7052.

I. FACTS AND TRAVEL OF THE CASE

Access Cardiosystems, Inc. filed a voluntary petition seeking relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code” or the “Code”)

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on February 8, 2005. From 2000 to 2004, Access developed, marketed, and sold a portable automated external defibrillator (the “Access AED” or “AED”). The present controversy stems from a pre-petition suit filed in the Massachusetts Superior Court by Access and the Investors against Fincke, one of Access’s founders, former stockholder, and former Access director and officer.

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The allegations underlying the Plaintiffs’ claims and Fincke’s counterclaims require a step back, nine years from the time of this writing, to the year 2000, beginning with the actions of Randall Fincke.

Fincke describes himself as driven by a mission to expand market access to automated electronic defibrillation technology.

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Trial Tr. day 1, 1+S.

His work experience certainly lends credence to this claim. By the year 2000, Fincke had worked with several medical device companies on various AED products and was the named inventor on twelve patents in the defibrillator field.

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And, in the early part of that year, Fincke was focused on the development of a new AED product. Simultaneous with his burgeoning idea, however, Fincke was embroiled in litigation brought by his former employer, Zoll Medical (“Zoll”). Zoll alleged that Fincke, in conjunction with Cadent Medical (a company founded by Fincke after leaving Zoll; “Ca-dent”), had misused

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Zoll’s intellectual property and violated a noncompetition agreement.

Although the litigation was a highly contentious affair, Fincke continued to work on developing the new AED, individually and not through Cadent. In early 2000, Gregory Baletsa agreed to assist Fincke in forming a business framework to develop the new product and invested $50,000 of his own funds as the initial capital for the venture.

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Other individuals — including

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Kyle Bowers, an electrical engineer, and David Barash, a former emergency room physician — were recruited to assist in developing the technology. They, like Fincke and Baletsa, understood that compensation for much of their initial work would come later, in the form of stock in the to-be-formed corporation that would produce, market, and sell the final product.

In June 2000, the litigation between Zoll, Cadent, and Fincke finally came to an end. The Plaintiffs allege that Fincke represented to one or more of them that the judgment was a “vindication,” as Zoll had not prevailed on a majority of the counts against him. Zoll

did

prevail on other counts, however, and a $650,000 judgment was issued against Fincke personally, later paid by Cadent. The litigation having ended, Cadent was sold to an unrelated third party (Cardiac Sciences), and Fincke was free to pursue his new endeavor.

On July 5, 2000, Fincke and Baletsa incorporated their new business under the name “Acelex,” later changing the name to Access Cardiosystems, Inc.

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Baletsa was initially named as the company’s president, with Fincke acting as the vice president and treasurer. In conjunction with the incorporation of Access, Baletsa and Fincke executed a stockholders agreement (the “Stockholders Agreement”), which contained various restrictions on the transfer of stock and allowed Access to buy back stock in the event a stockholder’s employment was terminated. At that time, Baletsa and Fincke were the only officers, directors, and stockholders in Access — Fincke held approximately 85% of the outstanding shares.

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Baletsa eventually left his position as president of Access in April 2001.

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Fincke remained Access’s sole director, president, and treasurer until early 2003.

Access’s initial funding in early 2000 was not sufficient to sustain the company. Between January and June 2001, Fincke advanced an additional $325,000 of his own money to fund Access’s operations.

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According to Michael Elefante, Access’s corporate counsel,

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he and Jack Carucci, Access’s original accountant, discussed whether these funds should be considered debt or equity in the new company. Ultimately, it was decided that $2,000 of Fincke’s investments would be characterized as an investment in the company’s stock and the remaining amount characterized as loans to Access.

Trial Tr, day 8,

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37.

Beginning in August 2001, and continuing through September 2003, Fincke withdrew sums of money from Access. These payments were reflected on Access’s books and records as payments on his loan account. By the time of trial, a substantial portion of Fincke’s loans to Access had been repaid; only $43,465 of Fincke’s $325,000 investment remained outstanding.

Fincke did not keep his work at Access a secret. He discussed the new company and the Access AED with various friends, some of whom expressed interest in making investments in Access to ensure its success. Plaintiffs John J. Moriarty and Richard F. Connolly, Jr. were particularly interested in Fincke’s plans for the company, and they became the first outside investors to fund Access’s operations.

Moriarty’s and Fincke’s families had long been close friends, even sharing a ski lodge together for some time. Moriarty characterized his conversations with Fincke regarding Access as “discussion[s] ... in [the] driveway” — informal discussions about the progress of the company.

Trial Tr. day 6, 85.

Moriarty had been aware of the Zoll litigation and knew it had concluded; when told that Fincke had won 14 out of 17 counts, he “mistakenly took that as a victory.”

Trial Tr. day 6,

¿4-Moriarty testified that before he advanced any funds to Access, he first asked whether there were any “problems like the last time” (presumably referring to the Cadent litigation).

Trial Tr. day 6, 8b-85.

Having received assurances that there were not, Moriarty wrote a personal check to Access for approximately $50,000 sometime between March and June 2001.

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On July 13, 2001, Moriarty made a second investment

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of $1,000,000 in Access.

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According to Moriarty, he relied on several representations by Fincke in making this second investment, namely: the approval for sale of the Access AED in Europe,

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orders from and good distribution network in Europe, and Fincke’s purported plan to

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use a contract manufacturer to build the product.

Trial Tr. day 8, 88-89.

And Moriarty made an additional $500,000 investment in Access in December 2001.

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Fincke also discussed Access and its progress with Connolly during 2001. Connolly was aware of Moriarty’s investments in Access,

Trial Tr. day 9, 8,

and expressed an interest in helping the company by providing an additional investment. Fincke responded positively. According to Connolly, Fincke also told him that he did not need a lot of money, just enough to “get him over the ... existing hump.... ”

Trial Tr. day 9, 8.

Further, Fincke allegedly said the Access AED was mature, stable, and very well received in Europe and told Connolly that he had developed a sales force to cover the European market. Connolly testified that Fincke also explained that product manufacturing would be outsourced to a company in Concord, Massachusetts.

Trial Tr. day 9, 16.

Like Moriarty, Connolly was aware of the Zoll litigation, but not privy to the details.

Trial Tr. day 9, 8-9.

Following his discussions with Fincke, Connolly invested $500,000 in Access in November 2001.

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By the turn of the year, the Access AED had advanced considerably. A provisional Patent Application in the United States had been filed to cover the Access AED technology; Access had completed its ISO 9000 certification

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and was awaiting approval to market and sell its products in Europe; and the European market was responding positively to the Access AED even before formal approval.

In

February 2002, Access began signing distribution agreements (the “Distribution Agreements”) with various European distributors (the “European Distributors”) and continued working to verify and validate the manufacturing process for the AED.

Trial Tr. day 5, 96.

In April 2002, Moriarty and Connolly each invested an additional $300,000 in Access,

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and the Access AED received European approval for marketing and sales shortly thereafter.

As sales in Europe began to get underway, Access was in need of additional capital to purchase raw materials needed to build the AEDs. Both Moriarty and Connolly provided additional funds in spring 2002.

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And, by the early summer of that year, Access was eager to solicit further investments to help fund production needed to fill the European orders. Connolly began speaking with his close friend, James Radley, about Access during spring

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2002. In June, Moriarty provided Access with a further investment of $300,000, and Fincke met with Radley to discuss the possibility of an even larger investment.

According to Radley, Fincke represented at their first meeting that the Access AED was a unique product and in great demand; that a good distribution system was in place in Europe with shipping having already started or about to start; and that FDA approval was soon forthcoming. Radley also alleges that Fincke told him the product was stable and essentially “ready to go.” The need for additional funding, Fincke explained, was due in part to delays in obtaining final FDA approval. Radley testified that Fincke told him also that the additional funding was needed just to “get over the hump” and that $2 million would be sufficient to get the company to the point of self-sustainability.

Trial Tr. day 9, 70.

Following this meeting, Radley invested $2 million in Access.

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Despite Fincke’s reported optimism regarding Access’s financial future, Radley conceded that, at the time he made the investment, he was aware that Access was having problems with working capital and that the company was not financially stable.

Trial Tr. day 9, 160-161.

In July 2002, before Access obtained FDA approval to market and sell the Access AED in the United States, Fincke received a letter from John Vodopia, an attorney representing Philips Electronics (“Philips”) (the “First Philips Letter”).

Def’s Ex.

2J. In the letter, dated July 30, 2002, Vodopia referenced nine patents owned by Philips and claimed that “based on [Philips’s] investigations,” it believed the soon-to-be-released Access AED infringed on at least one of the nine patents. The letter did not detail which of the listed patents were believed to be infringed, nor did it describe which features of the Access AED Philips was referencing in support of its alleged infringement claims. Access’s patent counsel, Mark Pandiscio, testified that he did not think Philips had actually seen a physical Access AED device at the time its attorney sent the First Philips Letter.

Trial Tr. day 6, 17-18.

The letter concluded by stating that Philips was prepared to grant licenses to Access “on reasonable terms and conditions.”

According to Fincke, upon receiving the letter, he immediately forwarded it to Ele-fante, who then forwarded the letter to Pandiscio.

Trial Tr. day 1, 91.

But Ele-fante testified that he was not aware of this letter.

Trial Tr. day 8, 88.

Regardless of how it arrived at Pandiscio’s office, Pandiscio did eventually receive the letter and obtained copies of the listed patents to get a sense of their volume. He then spoke with Fincke and (according to Fincke) Elefante as well, and they decided that Pandiscio would follow up with Philips. In an effort to avoid a lengthy review of the more than 200 claims included in the patents, it was agreed that Pandiscio would ask Philips to clarify the specific nature of its infringement claims. Pandis-cio could not recall if Elefante participated in the discussions that took place upon receipt of the letter, but did recall Fincke’s involvement in the decision.

Trial. Tr. day 6, lk-16.

On September 9, 2002, Pan-discio responded to Vodopia, acknowledging receipt of the First Philips Letter, requesting a clarification of the specific patents and claims alleged to be infringed, and asking for proposed licensing terms.

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The letter reflects that it was copied to both Fincke and Elefante.

Def.’s Ex. 25.

Fincke testified that, in addition to deciding how best to respond to Philips’s initial letter, he began reviewing the referenced patents himself. After that review, Fincke says, he concluded that there were no serious infringement issues, with the possible exception of a decal used on the Access AED electrodes. According to Fincke, he and Pandiscio discussed the results of Fincke’s review and his decision to remove the potentially problematic decal — an issue then tasked to John Rice

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at Access.

Trial. Tr. day 7, 77.

No further response was received from Philips until the following year.

Pandiscio testified that Fincke never asked him for a formal opinion as to whether the Access AED infringed any of Philips’s listed patents or any other patents. He did recall that Rice contacted him regarding Access’s concern with the decal and that Fincke told him they were considering changing the labeling to avoid any infringement issues. According to Pandiscio, Rice asked his opinion on whether that change would solve the problem. (Pandiscio’s response to Rice’s inquiry was not elicited at trial.)

Trial Tr. day 6, 18.

Elefante says that he was not involved in this process and gave no instruction to Fincke or others at Access regarding the re-design of the AED to avoid infringement.

Trial Tr. day

8, 35.

Access received FDA approval for market and sale of the Access AED in the United States in August 2002.

PL’s Ex. 61t.

On August 30, Pandiscio filed a Non-Provisional Patent Application for the Access AED (the “'645 Application”) and an International Patent Application (the “PCT Application”) covering the Access AED technology. Sales in Europe formally began shortly thereafter.

Almost immediately, working capital constraints at Access began taking their toll. Access was having difficulty from the start buying enough parts to fill the European orders and was struggling to pay its past-due accounts with vendors. It was evident that Access would need a substantial cash infusion to pay for the necessary raw materials. Fincke, together with Ele-fante and Access’s management team, began to prepare an investor letter and business plan to be used in soliciting additional investments.

Trial Tr. day 7, 7.

The business plan, dated October 2002 (the “Business Plan”), detailed various aspects of Access’s business, past performance, and predicted performance.

Pl.’s Ex.

107. While Fincke did not prepare all portions of the Business Plan, he contributed to the content and approved the Business Plan prior to its dissemination. The Business Plan was divided into several sections and included information relative to pricing, domestic and international sales, marketing, distribution, competition, regulatory status, manufacturing, and capital needs. In addition, both the Business Plan and the Investor Letter contained a section entitled “Risk Factors,” prepared by Elefante and approved by Fincke, which contained twelve enumerated paragraphs. Each document also contained a section titled “Litigation.” Both the Risk Factors and Litigation sections disclosed a patent-infringement lawsuit brought by Cardiac Sciences,

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but did not disclose the receipt of the First Philips Letter.

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Section twelve (titled “Financial Projections”) referenced financial spreadsheets attached to the Business Plan, consisting of a Projected Monthly Cash Flow and a Projected Monthly Balance Sheet, which included various assumptions and projections related to Access’s performance and finances from September 2002 to December 2003.

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The Financial Projections section also included a list of factors that could negatively affect Access’s ability to achieve the projections and assumptions upon which the spreadsheets were based.

Each of the then extant investors — Connolly, Moriarty, and Radley — received a copy of the Business Plan and the financial spreadsheets.

Trial Tr. day 7, 7.

Joseph Zimmell also received copies of these materials in association with his interest in possibly making an investment in Access. Zimmell was introduced to Access through David Barash in summer 2002, and he met with Fincke in fall 2002 to learn about the company and to do “due diligence.”

Trial Tr. day 9,

JO. Zimmell testified that he and Fincke discussed general information regarding Access, including financial and “people” information, with an eye toward evaluating Access’s prospects of becoming successful. He testified that he was told Access Was doing business in Europe and would soon be selling in the United States.

Trial Tr. day 9,

JJ-J&

Zimmell did not review Access’s books and records (a task he viewed as “absurd”), but did state that he was not denied the opportunity to review those records and was provided with all of the documents and information he requested.

Trial Tr. day 9, 61.

He testified to receiving an “offering memorandum”

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and other presentation material at his meeting with Fincke and said he was told that the memorandum was undergoing revision.

Trial Tr. day 9, US.

Zimmell testified that he saw the Business Plan and the Investor Letter prior to making his investment and that everything in those documents was material to his decision to invest. He reviewed the financial projections as well as the assumptions that underlay the projections, and was afforded sufficient information from Access to review those assumptions.

Trial Tr. day 9, 55.

Following his meeting with Fincke, Zimmell invested $2 million in three tranches.

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On October 30, 2002, Zimmell made a $1,000,000 investment, followed by two additional $500,000 investments in November and December.

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In addition to Zimmell’s investments in late 2002, Access also obtained a $500,000 working capital line of credit from Middle-sex Bank, partly guaranteed by the United States Small Business Administration and personally guaranteed by Fincke. The line of credit was secured by a first priority lien on all of Access’s assets.

Def. ’s Ex. 18; Pi’s Ex. 12.

But notwithstanding these new cash infusions, things were still not going well. By the end of 2002, the European Distributors, some of whom had pre-paid for units, began to express frustration with Access. Some complained of late shipments, others that the units contained various problems and defects. Kyle Bowers testified to speaking with one European distributor, Arthur Dolby,

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during October or November 2002. Dolby complained,

inter alia,

of batteries not working properly in the Access AEDs and Access’s failure to provide satisfactory responses to previous complaints. Bowers said he reported the conversation to Fincke, but did not remember Fincke’s reaction.

Trial Tr. day 7, 181-132.

By December, Kivex, another European distributor, was growing impatient with Access’s alleged failure to ship units with Danish voice and text as requested. In an email sent to Fincke and other Access management personnel in late December, Jasper Nielsen at Kivex gave Access an ultimatum — either commit to a firm shipment date in 2002 or refund amounts Ki-vex had prepaid in February.

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PI. ’s Obj.-to Ex.

A

Many of the problems with the European Distributors stemmed from Access’s inability to obtain enough raw materials to build the AEDs. Despite the investments made at the end of 2002, Access still found itself struggling to pay down past-due accounts with key vendors during the first part of 2003. Bowers testified that Access was particularly dysfunctional from January through June 2003 owing to a large amount of debt, difficulty in obtaining parts, and design changes necessitated by changes in parts.

Trial Tr. day 7, 187, 149.

According to Bowers, Access was in “crisis mode” from the time shipments commenced.

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Trial. Tr. day 7, 149.

Grosberg likewise testified that Access was virtually insolvent in January 2003, unable to pay vendors and procure necessary parts and supplies,

Trial Tr. day 5, 145,

and Elefante testified that this “technical[] insolven[cy]” continued into summer 2003.

Trial Tr. day 8, 4-9-

Overdue accounts left unpaid eventually led to vendors refusing to provide additional parts or extend additional credit to Access.

For example, in early 2003, Access was forced to change its control board manufacturer from MSL to NuVisions on account of its failure to pay MSL. MSL not

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only refused to manufacture any additional boards until Access’s past-due account was paid, but eventually drafted upon a letter of credit guaranteed by Moriarty.

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Trial Tr. day 5, 149.

Access also began to fall into arrears on its rent.

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In a March 27, 2003 email, Fincke asked Moriarty to speak with Bound Tree, a domestic distributor, regarding Access’s financial position.

Def.’s Ex. 39.

In that email, Fincke noted that Access would need $500,000 to purchase materials necessary to manufacture April units. He also referenced a forthcoming $250,000 investment from Moriarty in late March that would be used to begin the purchase of parts. Problems with vendors were highlighted by Fincke’s statement that Access was “working every avenue possible with second source vendors to find additional methods to get the April material purchased and product produced with as much deferred cash expenses as possible.”

Access was also facing complaints from European Distributors regarding un-shipped accessories and AEDs with specific languages they had requested. Nielsen sent another email in early February 2003 to Fincke and others at Access with complaints on behalf of Kivex.

Pl.’s Obj.-to Ex. 5.

Noting that Access was taking a “very long time to deliv[er] just a standard order, which is not very promising for the future,” he requested an explanation and “promisefd]” to no longer pre-pay for orders.

Kivex was not the only distributor to voice complaints. According to Michael Grosberg, Access’s controller, other European Distributors were also upset that they were not receiving full shipment of their orders and that Access failed to provide them with the proper clinical units and accessories.

Trial Tr. day 5, 14-0.

On February 14, 2003, Barry Kleg-erman, a sales manager and key member of Access’s management team, sent an email to Fincke, Bounty, and others at Access detailing certain distributor frustrations. According to that email, three distributors — Boundtree, Criticare, and Mortara (Italy)

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— had relayed “specific issues regarding unpredictable AED shipments, unconfirmed AED orders in our system, unavailable or backordered accessories without a firm ship date, paying upon delivery, and being an administrative nightmare to work with.” In addition, Klegerman also stated that, in light of the problems they were experiencing, a recently-proposed price increase was not well received by the three distributors— each said they would stop doing business

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with Access entirely if the price were increased.

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PL’s Ex. 103.

Grosberg further testified that, as of March 2003, business relationships with “key” European Distributors were “very stressed,” primarily because of delivery problems and the lack of Access AEDs containing requested features. According to Grosberg, distributors were beginning to hold back payments for goods that were actually shipped, as well as ordering below their quotas and threatening to stop orders altogether or cancel their contracts.

Trial Tr. day 5, H.1.

At trial, Fincke acknowledged that he was aware of the European Distributors’ complaints, and he agreed that problems with Access AEDs had been reported, including units going on and off and batteries going flat. But Fincke contended that Access was investigating the problems and working to develop the requested features. He knew that European Distributors had difficulties getting responses to phone calls and emails and that they viewed Access as a difficult company with which to conduct business. And Fincke conceded that certain distributors were threatening to stop ordering or filling their contract quotas unless the various issues were promptly addressed.

Trial Tr. day 1, 115-117.

To add to Access’s woes, the Philips situation resurfaced early in 2003. On February 28, Philips responded to Pandis-cio’s September 2002 letter via email, requesting a meeting to discuss Philips’s intellectual property claims against Access (the “Second Philips Letter”).

Def.’s Ex. 35.

On March 4, 2003, Pandiscio forwarded that email to both Fincke and Elefante.

Pl.’s Ex. 108; Def.’s Ex. 35.

On the same date, Pandiscio sent an email to Vodopia, copied to both Fincke and Elefante, thanking him for the response and assuring him that his email had been forwarded to Access.

Pl.’s Ex. 25; Def.’s Ex. 108.

On March 26, 2003, Pandiscio emailed Fincke and Elefante again, noting that they needed to decide how to respond to Philip’s proposal for a meeting.

Def.’s Ex. 59.

After receiving a follow-up phone call from Vodopia, Pandiscio sent another email to Fincke and Elefante on April 2.

PL’s Ex. 5.

He reported that Vodopia had informed him that after reviewing the Access manual and examining the Access AED, Philips believed there were some infringement problems. Vodopia wanted meet with Access representatives to discuss Philips’s claims. Again, neither Fincke nor Elefante responded, and no meeting was scheduled.

Despite the many setbacks, Access continued to work toward improving its situation. During March 2003, Access made two critical new hires. Jay Bounty, consultant to Access since summer 2002, came

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to work full time as Access’s chief financial officer. William Nawn was also hired in March 2003 to oversee manufacturing at Access. Both individuals had extensive experience in their respective areas of expertise. But Access’s cash problems overshadowed those hopeful gains, and Ele-fante and Fincke began negotiations with the Investors to secure additional financing for the company.

In connection with those negotiations, during the early part of March 2003, the Investors received a document titled “Access CardioSystems Company Overview” (the “Company Overview”),

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which had been prepared, at least in part, by Bounty.

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Def.’s Ex.

33. Fincke also contributed content to the Company Overview, and he reviewed and approved the final document.

Gen. Slip.

¶¶

57-59.

The Company Overview summarized various aspects of company operations, including Access’s financial position as of March 2003. It outlined several “Key Accomplishments,” “Issues,” and “Current Initiatives to Address Issues.” Included among the “accomplishments” were: (1) the hiring of Jay Bounty as CFO on a full-time basis; (2) the hiring of William Nawn as vice president of manufacturing; (3) a 1,500 unit per month order rate; and (4) “product manufacturing stability.”

The identified “Issues” included, among others: (1) Access’s outstanding debt of $1 million aged at over 90 days; (2) a poor credit rating that resulted in lost sales; and (3) a concern that the lack of available parts could reduce shippable units, requiring additional investments totaling $500,000 in April. Among the initiatives listed to address the issues, the Company Overview highlighted: (1) outside manufacturing of all boards and (2) a new pricing plan, including a price increase effective March 1 that was expected to raise the average selling price of the Access AEDs.

The Company Overview also contained more detail related to important company matters, including discussions regarding a revised budget and forecast, the order backlog, manufacturing, sales management, the price increase, and accounts payable and receivable. Attached to the Company Overview was a spreadsheet detailing Access’s projected monthly cash requirements. Many parts of this document form the basis of the Complaint, discussed in more detail below.

On March 13, 2003, Fincke sent an email to the Investors listing several financing options to be discussed in an upcoming conference call.

Pl.’s Ex. IS.

In the email he stated:

There are four financing options to consider:

1. Raise $2 million ($1 million in March; $500K in April; $500K in May)

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and use positive operating cash flows to service outstanding debt (paying down the SBA loan in June and the outstanding investor loans beginning in July). This is the model we discussed this morning.

2. Raise $1 million in March and cut operating costs immediately by 25%. Scale back orders, production and shipments to 1,500 in March and April and 2,000 in May and June. Use positive operating cash flows to service outstanding debt (both investor and SBA) beginning in July.

3. Raise $3.5 million in March and use $2.3 million of this amount to service SBA and investor loans in Q2 (beginning in April).

4. Seek 3rd party equity investment from corporate partnerships.

Attached to the email were two financial spreadsheet models correlating to options 1 and 3 (the $2 million and $3.5 million investments, respectively).

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Following the conference call, Zimmell communicated a proposal from the Investors to Fincke and Access, offering an additional $2 million investment, contingent upon several changes to company governance and the conversion of outstanding debt to equity in Access.

Trial Tr. day 9,

J.9. On March 25, 2003, Radley sent an email to Fincke (and copied to Elefante) summarizing that proposal.

PL’s Exs. 67, 100, 109.

He wrote:

Basically, the proposal that was presented to you by Joe Zimmell and discussed by us today represents that we are prepared to provide up to $2,000,000 if, and as soon as, you accept the following terms of agreement.

1. We would provide immediately, as an investment in cash, $1,000,000 at a price of $.75 per share, and an additional $1,000,000 ($500,000 in April and $500,000 in May) on the same terms.

2. We believe that the current debt level is very detrimental to the financial structure of the company and that meeting the obligations of the debt instruments will be putting a significant cash strain on the company at a time when cash is desperately needed for other operational priorities. Therefore, we would be willing to convert the company’s debt obligations due to us to stock at an adjusted conversion price of $.75 per share, on a non-dilutive basis.

The conversion of this debt to equity would not only rid the company of its current debt, but could be very important in positioning the company for any one of several options down the road.

3. The company would establish a formal corporate governance structure, including but not limited to:

A Board of Directors including members of the investment group that would meet on a regular basis.

A Corporate Charter and set of ByLaws.

Regular Financial Reports provided to the directors and investors at intervals to be agreed upon.

Regular operational reports and reviews.

We are all very interested in and committed to the success of this company, and understand that there are many hurdles and challenges yet to be conquered. We believe that putting the company in a solid financial condition at this time is critical in order to allow you

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and others within the company to focus on the those [sic] other challenges that will move the company forward on a time table that among other things minimizes the possibility that we might not be able to take advantage of the current “window of opportunity” that exists in the market place.

We also believe that what we have proposed is fair and equitable to all parties concerned, and that its implementation would resolve a number of current problems and uncertainties.

On March 27, Elefante sent an email to Fincke which analyzed the impact of the March 25th proposal on Fincke’s percentage ownership and discussed the effect of different company valuations.

PI. ’s Ex. IS.

He concluded the email by stating:

In reviewing the situation it seems to me that it imperitive [sic] to reach a deal with the investors, get the additional investment and go forward. There is lots of momentum, but it will be lost without enough funds to operate comfortably. In fact, the success you are having on sales makes the problem even worse in the short term. To ramp up to meet the demand, you need even more cash.

After discussing the Investors’ proposal with Fincke, Elefante responded to them by email on March 28.

Pi’s Exs. Ik, 15; Def.’s Ex. k0.

He wrote:

Gentlemen, on behalf of Access and Randall I would like to thank you for your March 25th proposal. After our discussion this morning, Access has the following reply:

Your governance proposals are acceptable. Access will move promptly to increase the Board from its current single member to a larger group, including [Radley and Moriarty].

Your proposal to invest $2.0 million by purchasing common stock at $.75 per share is acceptable. In light of the fact that it is nearly April, we propose that the first $1.5 million investment be made immediately with the balance of $500,000 in May.

We agreed that the outstanding debt to JMA will remaining [sic] outstanding as debt. The first payment of interest and principal on the debt will be postponed to July 15, 2003.

The debt outstanding to [Radley, Connolly and Zimmell] will be amended to be convertible into common stock at the price of $.75 per share at the option of either the Company or the holder at any time after July 1, 2003. We hope to be able to repay the debt as planned, but want to leave the option to convert. The first payment of interest and principal on the debt will be due July 15, 2003.

Please let Randall know whether this is acceptable to you. If it is, we will move quickly to put together the necessary corporate action to carry it out....

Shortly thereafter, on March 31, 2003, Elefante sent the Investors a form of letter agreement incorporating what he understood to be the agreed-upon terms for the financing. He noted, however, that Fincke had not yet had a chance to review the letter agreement and specifically reserved Fincke’s right to comment.

Pi’s Ex. 16.

More than simply “willing” to convert the outstanding debt to equity, as Radley indicated in the March 25 proposal, the Investors appear to have seen the conversion as a necessary element of the transaction. Fincke, however, was reluctant to relinquish his majority equity interest in Access, and Jay Bounty suggested revised terms for conversion that were

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more favorable to the company.

40

PL’s Ex. 17.

Later that same day, Elefante again emailed the Investors and Fincke, setting forth Bounty’s suggested revision:

As you know from our discussion on Friday, Access would prefer to pay off the notes rather than to convert them to equity. If operations go as per budget, the Company expects to be able to generate the cash to pay the notes and operate successfully. Instead of having the notes convertible into stock at the option of either party, the Company proposes that it have the sole option to convert after July 1st at $.75 per share. The note holder would acquire the option to convert if the Company defaulted on its obligation to pay the note as amended. If the Company is able to make its obligations to the note holders, the notes would be paid as provided. Please let me know if you agree with this modification.

Pl.’s Ex. 17.

Ultimately, this counterpro-posal was not accepted.

Discussions continued during the next week, as the parties worked toward a common understanding regarding the financing terms.

See PL’s Exs. 19, 20; Def.’s Ex. US.

Misunderstandings and the inability to reach a conclusion on final terms began to create tension between the parties. For example, in an email from Ele-fante to Fincke, sent a few days later on April 11, 2003, Elefante reported:

Randall, I spoke with a very unhappy John Moriarty this afternoon. His message is: make a deal with your investors or face a very hostile group with a lot of leverage.

John is willing to consider changes in the terms to deal with your concerns. For example, the company might have the right to redeem some of the stock in the future at a price which got the investors a reward, but capped their return. Another idea would be to be to give the company the right to reprice the deal if a binding offer from a third party was received within some specified period at a higher valuation.... That would protect the company against the risk that the deal undervalues the company. It would also strengthen the deal for the new investor. It would also provide an objective valuation....

Another option might be to raise less from the investor group and get their agreement to a stock offering to a third party....

I am concerned that the company and the investors agreed to a deal two weeks ago at $.75. We later discovered that there was a misunderstanding about what was intended. However, I think the company should let the investors know that it is willing to go forward with the deal that was agreed to and which was set forth in the documents I sent out on March 31st. Even if the offer is rejected, I think it is important to make it.

I am very concerned that if the company walks away from the investors, it will face litigation from them and be in no position to raise money from other sources. The rights the investors have as note holders (including the right to approve increases in the number of au

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thorized shares) puts them in a position to frustrate your efforts to bring in other investors....

Def.’s Ex. 46.

According to Moriarty, he was truly “unhappy,” as reported by Ele-fante, because he was continuing to hear about problems at the company after he had made an additional capital investment.

Trial Tr. day 6, 111.

Then, on April 14, 2003, Radley sent an email to Fincke purporting to withdraw his participation in the offer; he wrote:

On March 25, 2003 I sent you an e-mail outlining a plan for refinancing the existing debt of Access CardioSystems and the infusion of additional capital, all with the intention of improving the financial condition of the company and providing cash with which to move the company ahead on a more sound basis than has been possible until now.

It has been four weeks since that presentation with numerous conversations, including a meeting at your office on March 28th and there has been no affirmative response on your part to accept or reject that offer.

It is not reasonable to expect that an offer to make such a sizeable financial commitment should remain valid for an extended period of time. Therefore I am giving you this formal “notice of withdrawal” of my offer to participate in that proposed plan.

Apparently you have some other plan in mind, and I wish you the best of luck in putting it in place....

In the meantime, I expect that you will honor the commitment you have with respect to the $2,000,000 note originally due to Eastern Casualty Insurance Company which has been assigned to North Enterprises, Inc. At the moment you are in arrears in the amount of $40,0000 in interest payments through March, and the first payment of principal plus interest is due in a few days. Please let me know what your intentions are with regard to meeting this obligation.

Def.’s Ex. 48; Pi’s Ex. 27.

Radley testified that he wrote the letter because the Investors were becoming frustrated with Fineke’s delay in accepting their proposal.

Trial Tr. day 9, 78-79.

Contemporaneous with the negotiations between Access and the Investors, Bounty and Fincke were also exploring potential investment opportunities with outside investment firms. Several prospects expressed interest.

41

By mid-April, discussions with one firm, Summit Partners (“Summit”), progressed to the point where Summit provided Access with a term sheet relative to a potential investment in the company (the “Summit Term Sheet”).

42

Pi’s Ex. 69.

Upon learning that Access had received the Summit Term Sheet, Ele-fante sent a letter to the Investors on April 18.

Pi’s Ex. 71.

In the letter, he stated:

As you know, Access has had discussions with some potential venture capital investors about putting additional capital in the company. Randall received from Summit Partners this afternoon the enclosed Term Sheet concerning a potential investment of $5,000,000 by Summit in the company. The enclosed Term Sheet involves an investment of $5,000,000 at a post money valuation of $28,000,000. Summit has orally informed Randall that it is willing to make an investment of $8,000,000 on the same

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terras, with the extra $3,000,000 available to pay down the company’s obligations to existing note holders.

The receipt of the Summit offer is good news, but certainly complicates everything. Randall wanted to be sure you knew what was going on and would very much like your thoughts about how best to respond. He is meeting with representatives of two other venture capital firms tomorrow and may receive an additional offer.

The Summit offer certainly has the potential for providing the company with the capital necessary to accelerate its progress. It also could enable Access to repay its obligations to the initial investor group....

But despite initial interest from outside investors and the receipt of the Summit Term Sheet, no agreement with them was reached. The parties have asserted and intimated differing reasons for why additional progress was not made toward outside funding. Fincke alleges that the Investors essentially sabotaged the process and locked out any additional investors; the Investors assert that Fincke’s mismanagement of Access would have made a successful due diligence process unlikely. The more likely reason, at least where the Summit investment is concerned, was that offered at trial by Elefante. He opined that Access was in such financial jeopardy that it simply would not have been able to stay in operation long enough to fulfill the term sheet’s conditions and close the deal.

Trial Tr. day 8, 5k-

The additional financing from the Investors finally closed on April 25, 2003 (the “April 2003 Transaction”).

Pi’s Ex. 110.

Until this time, the Investors had been primarily debt investors, with no ownership or control of the company, except in accordance with the equity conversion options and Zimmell’s equity investment. Through the April 2003 Transaction, certain of the Investors’ original notes were converted to stock and the Investors purchased additional stock at $.628 per share as follows:

Radley: $2,000,000 investment plus accrued interest converted to stock; $500,000 in new shares purchased Moriarty: $250,000 in new shares purchased

Connolly: $875,000 previous investment plus interest converted to stock; additional $500,000 in new shares purchased Zimmell: $500,000 in new shares purchased

The total new investment under the April 2003 Transaction was $1,750,000 (exclusive of the advance $250,000 invested by Moriarty in late March).

The April 2003 Transaction also brought changes to Access’s corporate structure. A formal Board of Directors (the “Board”) was established, and the number of directors was increased to five, with Fincke, Moriarty, Zimmell, and Radley formally voted as members of the Board.

43

The first Board of Directors meeting was held on April 25, 2003 (the “April Board Meeting”). At the first and subsequent Board meetings, held approximately once a month, the Board members were given presentations and various documents describing company finances and operations.

In addition to the presentation and other materials, Access management personnel

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also attended the Board meetings, with the exception of the meeting held in November 2003. Management would speak to the Board on their various areas of responsibility at Access and would answer questions raised by Board members.

Trial Tr. day 2, 120; day 5, 26-28, 58.

Among the documents given to the investors were “Key Performance Indicators,” or “KPIs”

44

— financial spreadsheets containing various data on company performance. The KPIs were accompanied by narrative descriptions of various aspects of company operations and finances. The narratives contained general company information and summaries of the financial data contained in the KPIs. Both the KPIs and the associated narratives included actual company results and projections.

The April 2003 Transaction left Fincke as a minority shareholder in Access. Afterward, Moriarty and Elefante discussed the need for Fincke to have employment protection in light of his now-minority position. Moriarty felt that such protection was fair in light of the changed circumstances.

45

Trial. Tr. day 6, 113, 118.

At the Board meeting held in May 2003 (the “May Board Meeting”), Moriarty raised the need for Fincke to have a protective employment agreement. The other Board members agreed, and decided that Ele-fante would work with Radley to draft and negotiate the agreement.

Trial Tr. day 6, 118-119.

No deadline for concluding negotiations or executing an employment agreement was discussed, and an employment agreement was never executed. In fact, neither a draft nor a proposed employment agreement was even sent to Fincke, despite Elefante having forwarded at least two proposed drafts to Radley for his review.

46

Radley says the agreement “just sort of fell by the wayside,”

Trial Tr. day 9, 161,

and Fincke testified that he took no steps personally to expedite the process or advance negotiations after the May Board Meeting,

Trial Tr. day 7, 108.

Immediately following the influx of cash from the April 2003 Transaction, Access experienced a brief period of seeming improvement. The ability to purchase more raw materials contributed to Access’s success in manufacturing 100 units in one particular day in May, the highest manufacturing rate ever achieved at the company. And, at the May Board Meeting, it was reported to the Board that the cash model showed the possibility of paying down old payables in full without the need for an additional cash infusion.

Pl.’s Exs. 61, 77.

June, however, produced mixed results. Access saw its highest revenue, but struggled to bring in new orders at the rate expected. Part of the shortfall was attributable to resistance to the price increase, and Bounty reported that Access made revisions to the list prices and distributor

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transfer prices based on negative distributor feedback.

Def.’s Ex.

30.

Long-term problems at Access continued to fester. Capital constraint quickly re-reared its head and the downward spiral of financial difficulties continued. Fincke testified that the Board had directed him to use the money received from the April 2003 Transaction to purchase raw materials in lieu of immediately paying down overdue accounts payable. The manufacture of more Access AEDs was then expected to generate accounts receivable whose proceeds would be used to pay down outstanding debts to vendors and other creditors over time.

Trial Tr. day 1, 122.

Eventually, the focus on procuring raw materials tied up the company’s capital in both inventory and accounts receivable. Fincke testified that he foresaw this problem, expressed his concern to the Investors and the Board, and was told that the Investors were committed to financing the company’s receivables in order to free up additional cash.

Trial Tr. day 1, 122-123; day 7, 24-25.

According to Grosberg, a number of contingent liabilities, of which he was previously unaware, also began to threaten Access’s finances.

Trial Tr. day 5, 134.

In addition to the looming threat from Philips (to whom a response to its request for a meeting still had not been made), the company was facing ongoing and threatened lawsuits brought by ex-employees claiming promised stock options, temporary agency providers and consultants demanding overdue payment, and an eviction action brought by the landlord. According to Elefante, Access was once again technically insolvent.

Trial Tr. day 8, 4.9.

Furthermore, the outstanding accounts payable continued to wreak havoc on Access’s ability to obtain parts. One manufacturer, the sole-source component manufacturer of a part necessary to build the AED control boards, decided to cease shipping parts until the invoices for prior shipments — totaling roughly $150,000 — were paid in full. According to Grosberg, Fincke instructed a redesign of the AED rather than payment of the overdue amount, and also instructed Access employees to find the needed part in the interim through a broker market instead of through the original equipment manufacturer. Grosberg testified that the Access employees were unable to find the part through third party vendors. And, in discussions with other Access managers, they concluded that qualification of a comparable part would take too long. Eventually, he testified, the managers decided to pay the original manufacturer, enraging Fincke when he was informed of the payment after the fact.

Trial Tr. day 5, 137-138.

As Access continued to use the recently invested working capital to build AED units, it saw its accounts receivables grow. In the materials sent to the Board prior to the Board meeting scheduled for June 27, 2003 (the “June Board Meeting”), Access was projecting $2.5 million “invested” in accounts receivable and inventory. According to Bounty’s email sent with those documents, the company was looking to the June Board Meeting “to discuss with the investor group ways to access some of this cash to help manage the working capital requirements of the business and insure a steady flow of material through the manufacturing group.”

Def.’s Ex. 30.

At the June Board Meeting, the financial discussion focused on the cash model projections through September 2003, assuming shipment and average selling price goals were reached. According to the presentation materials, and based on those assumptions, Access was predicting sufficient cash flow for July and August, although, as Bounty’s email indicated, the

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company was beginning to point to a need for a working capital line of credit.

In addition to the Board’s directive to put the April 2003 Transaction funds toward building product, the Board also directed Fincke to refrain from making any additional changes to the product and to “freeze” the product design.

Trial Tr. day 9, 81.

Product changes were thereafter necessitated, however, by safety concerns, lack of available parts, customer complaints, and requests for specific features. And, in fact, a series of product changes implemented during the summer 2003 were particularly disruptive.

During that summer, Access bid on a project out of El Paso, Texas (the “El Paso Project”) which required a change in the AED’s algorithm.

47

Fincke’s testimony suggested that the change was not unduly disruptive to the manufacturing process,

Trial Tr. day 1, 129-180,

but both Nawn and Bowers testified that the change required extensive testing,

Trial Tr. day 5, 71; day 7, 14.1.

In fact, according to the Plaintiffs, the product changes necessitated by the El Paso Project led to a six to eight week shutdown on the manufacturing floor.

The El Paso Project, however, was not the only factor prompting product changes during the summer of 2003. Both Bowers and Nawn testified that during the same time period, they were incorporating product features the European Distributors were insisting upon prior to taking any additional shipments.

Trial Tr. day 5, 29; day 7, 142.

And, according to Bowers, they were also working on a solution to some AEDs’ occasional inability to detect a low battery — a very serious issue for a product not in regular use, and an issue the European Distributors had been raising for some time.

Trial Tr. day 7, 180.

Although shipments did not stop entirely during July, they dropped off considerably — documents produced at trial show that slightly more than 400 units shipped that month, 1,100 less than planned.

48

PI. ’s Ex. 34-

Meanwhile, back at Philips, its representatives tired of awaiting a response from Fincke relative to their request for a meeting to discuss the patent infringement allegations. In late June of 2003, Philips filed a complaint for patent infringement against Access (the “Philips Complaint”).

Pl.’s Ex. 111.

That spurred the hoped-for meeting, which Fincke attended in New York with Pandiscio and Elefante. At the meeting, Fincke requested that Philips withdraw the lawsuit while they continued their discussions, and he expressed a willingness to consider possible licensing terms. According to Pandiscio, Philips refused to withdraw the suit, at least partly because it had been filed to “get [Access’s] attention.”

Trial Tr. day 6, 21.

On June 25, 2003, the Board was notified of the Philips Complaint by an email from Bounty.

Def.’s Ex. 30.

By letter dated July 16, 2003, Elefante also advised the

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Board of the Philips Complaint and related the events that had transpired following its filing.

Def.’s Ex. 65.

In the letter, Ele-fante informed the Board that he, Fincke, and Pandiscio had attended a meeting with Philips and stated that, although a license was one possible resolution, the license fee proposed by Philips was excessive. He also stated that Access believed a number of the infringement claims were meritless, either because the Access AED did not infringe or because the patents were invalid. Elefante noted the large expense such litigation could entail and explained that they were looking for counsel to assist with the litigation. He concluded by requesting a meeting with the Board within the week.

As Elefante noted in his letter to the Board, it was obvious that Access needed to hire litigation counsel. It was agreed that Elefante would meet with Attorney John Montgomery at the law firm of Ropes & Gray to discuss possible representation.

PI. ’s Ex. 32.

And, by the end of July, Ropes

&

Gray was retained to handle the Philips litigation on Access’s behalf.

Def. ’s Ex. 65.

Fincke testified that Elefante was thereafter the “point person” for the Board at meetings with Ropes & Gray, that Fincke did not dictate the litigation strategy, that strategy discussions with Ropes & Gray were conducted with assistance from Ele-fante, and that he himself received information on the litigation from Elefante, as did the Board.

Trial Tr. day 1, 96-97.

Fincke acknowledged that he participated in meetings with Ropes & Gray, but said that Elefante was the lead in those interactions — “In general, Mike Elefante hired them, worked with them, and did the communication to the board as well as to myself.”

Trial Tr. day 1, 185.

Fincke further testified that no long-term strategy was developed during the summer of 2003. He did recall a specific strategy meeting at Ropes & Gray, but said the only concrete decisions made regarded some preliminary product modifications Ropes & Gray suggested to avoid some of the alleged infringement claims.

Trial. Tr. day 1, 101.

Elefante’s memory was different. He testified that it was Fincke who gave instructions related to the course of the litigation and determined its strategy; and, according to Elefante, Fincke adopted an “aggressive posture” regarding the litigation.

Trial Tr. day 8,

Elefante acknowledged, however, that following the filing of the Philips Complaint, he communicated with the Board relative to litigation matters on a regular basis, updating the members on the Philips issues as well as other legal issues during 2003.

Trial Tr. Day 8, Jp9.

By August 2003, events at Access were going from bad to worse. The European Distributors were not entirely satisfied with Access, Philips had formally filed suit, the poor July performance left Access once again desperate for cash, and members of Access’s management team began speaking with Board members directly out of concern for the way events were unfolding at the company. According to Elefante, Grosberg came to him in late summer 2003, questioning whether the entirety of available information was provided to Board members. Elefante advised him to speak directly to the Board.

Trial Tr. day 9, 56.

Grosberg testified that when he acted on that advice, Fincke subsequently approached him in his office and asked him not to speak again directly to Board members, claiming that Grosberg did not have all of the available information and might say something misleading. Grosberg testified that he received a telephone call from Fincke that evening on his home telephone repeating that request.

Trial Tr. day 5, 128-129.

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Around the same time, David Barash and Gleason Gallagher

49

contacted Connolly to express their concerns over Access management issues.

Trial Tr. day 9, 11-12.

Connolly related that conversation to Radley,

Trial Tr. day 9, 29,

who met with Barash and Gallagher in September to further discuss matters.

Trial Tr. day 9, 86.

According to Radley, at that meeting, Bar-ash and Gallagher told him that Fincke was withholding information from the Board. After that, Radley began talking directly with others on the management team. He testified to speaking with Nawn during the fall regarding the feasibility of achieving the projected shipments and said he was told by Nawn that the projections could not be met.

Trial Tr. day 9, 86-87.

He related a conversation with Grosberg where he was told that supplier difficulties, overdue payables, and product changes requiring FDA documentation were slowing down production.

Trial Tr. day 9, 89.

In an email from Bounty to the Board members sent in late August of 2003, it was made clear that additional funding was imperative to maintain operations.

Pl.’s Ex. SJh Pi’s Obj.-to Ex. 21.

In his email, Bounty requested further loans from the Investors, stating that $750,000 was needed to meet the “immediate short-term cash requirement.” Then, in September, sales plunged to 241 new orders and accounts payable remained at $1.3 million aged over 90 days; without additional working capital, Access was simply unable to pay vendors and acquire sufficient parts.

Meanwhile, Summit had continued to express some degree of interest in making an investment in Access. In late September, Summit made a presentation to the Board, but the Board ultimately decided not to accept its proposal. Moriarty testified that the Board made that decision because Access was not meeting projections, was having problems selling units, and continued to have problems with distributors and suppliers. After discussing the situation with Radley, the Investors decided that it might be more prudent to wait a year and propose something based on how Access was performing at that time. According to Moriarty, after the meeting with Summit, he believed that Access could not have survived a due diligence review.

Trial Tr. day 6, 116.

Radley also noted in his testimony that he was personally concerned that Summit was or would be given false information by Fincke. Radley then met with Bounty and they drafted a counterproposal that included a projected valuation of Access based on Access achieving certain sales volumes.

Trial Tr. day 9, 182.

According to Radley, this was an internal document and no formal proposal was taken to Summit. Instead, he talked to Michael Balmuth, Access’s contact at Summit, regarding a framework for his suggested proposal. Although, according to Radley, Balmuth thought the idea was reasonable, Summit “[took] a pass.”

Trial Tr. day 9, 185.

Ultimately, in September and October, the Investors provided more funds to finance Access’s operations.

But even this additional capital did not solve all of Access’s troubles. The company continued to deal with the European Distributors’ complaints and their deteriorating business relationships.

50

Some of

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the European Distributors — Kivex, Dolby, and Schiller — expressed their dissatisfaction with Access during the fall of 2003 by way of nearly identical emails, each dated September 5, 2003, detailing many of these concerns.

Pl.’s Ex. 35, Pl.’s Obj.-to Exs. 12, 13, 20.

In those emails, they each stated:

I have recently returned from a meeting of the ... European Distributors ... held to discuss the long outstanding and very problematic issues we have all experienced with Access CardioSystems and its products over the last 12 months.... [Kivex/Dolby/Schiller] requests that you and your Board of Directors give immediate attention to these issues and provide a written agreement to start all necessary corrective actions to clear up these discrepancies as well as to set up measures to prevent any reoccurrences and we give you 10 working days to respond.

This is a prerequisite to us accepting further shipments, placing further orders and for us to continue promoting and selling Access CardioSystem’s [products.] ... [T]he correction of the listed failures and non-conformances are imperative and remains our greatest concern. This has been brought to your attention and that of your colleagues on more than one occasion.... [Kivex /Dolby/Shiller] want you to agree to a fair pricing policy and in return we will accept an increase of no more than a

5%

price on the 1st January 2004 and will then consider an increase in line with the published U.S. inflation figures on the 1st of January in subsequent years and not before.

We wish to end this period of uncertainty that has existed in relation to pricing and most routine business matters. Your staff must improve its customer awareness and learn the rules of business administration and provide the common courtesy of a prompt reply to any communication.

We would like to continue working with Access CardioSystems, in good faith, to our common benefit. [H]owever should a positive reply not be forthcoming within the 10 working days requested we will have no alternative but to seek a solution through the legal process.

We ask that you copy these concerns to your fellow shareholders and have sent a copy to your legal council requesting the same and asking for acknowledgment of receipt from your Board and their Shareholders....

Attached to each email was an appendix outlining the problems the distributors wanted addressed, from a list of technical faults to specific business changes they were seeking (including changes in communication, pricing, documentation, and time commitments for the shipment of certain accessories).

51

Matters were finally brought to a head at the Board meeting held on November 28, 2003 (the “November Board Meeting”).

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Based on the other Board members’ growing concern with Fincke’s management, exacerbated by missed projections and the continual capital shortages, the Board formally voted to remove Fincke as president and CEO. They offered him instead the position of chief technology officer and non-executive chairman of the board, with no reduction in his pay or benefits. While Fincke acknowledged that there was some disagreement during the meeting as to Access’s performance, he testified that he was surprised by the Board’s action.

Trial. Tr. day 7, 88-89.

Immediately following the November Board Meeting, Moriarty sent a fax to Elefante reporting what had transpired. In that fax, Moriarty also advised Elefante that the Investors had agreed to loan more funds to Access on terms similar to those in the original promissory notes.

PI. ’s Ex. 81.

Elefante then drafted the minutes of the November Board Meeting to reflect the Board’s decision.

Pursuant to the Board vote, Radley was officially interim President and expected to take over day-to-day operations. But the Plaintiffs concede that Fincke continued to act as president and CEO until the end of December. In fact, a very limited number of employees even knew that Fincke was formally no longer president and CEO of Access. Instead, Fincke continued to run the company in the same manner as he had previously.

52

Moriarty testified that he spoke with Fincke in December 2003 and that Fincke told Moriarty he wanted to move on and did not want to serve as Access’s chief technical officer.

Trial Tr. day 6, 99.

Elefante also testified to speaking with Fincke a number of times following the November Board Meeting. According to Elefante, Fincke at first indicated that he might be willing to move on upon some basis that was fair, but later indicated that he wanted to enter into some form of negotiation with the company.

Trial Tr. day 8, 58.

In early December, a problem with the Access AED was discovered by internal testing procedures and shipment of the product ceased while Access employees searched for the cause. Bowers testified that the relevant problems were soon identified and corrected and shipments resumed.

Trial Tr. day 8, 30.

Then, on December 18, another problem with the

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Access AED was identified and a recall involving 143 units was issued; again, the company focused on determining the root cause. Soon after, while the problem remained unsolved, Fincke left for vacation from Christmas through the New Year. During that period, Bowers testified, Access personnel again believed they had resolved the problem and were able to resume shipments.

Def. ’s Ex. 86.

On January 5, 2004, John McElhinney, Fincke’s personal attorney, sent a proposed employment agreement to the Board on behalf of Fincke.

PL’s Ex. 47.

The proposed agreement provided that Fincke would resign as an employee retroactive to January 1, 2004. McElhinney also forwarded a draft of a new stockholders agreement. The proposed agreements contemplated that Fincke would continue to be employed by Access as a consultant (at an increased rate of pay that would increase further throughout 2004); that Access would reimburse him for up to $50,000 in tuition and expenses should Fincke decide to enroll in an MBA or similar type of program; and that Fincke would have a say in certain specified “Major Decisions” at Access. The proposed agreements were met with initial silence from the Board.

Also on January 5, the Board had arranged an off-site meeting for Access management scheduled through January 7. Radley testified that Fincke was invited to the meeting, but declined to attend. According to Radley, on January 7, while the meeting was ongoing, one of the management employees received a phone call from another Access employee who reported that Fincke was taking files and equipment from the company’s offices. After being informed of the substance of the telephone call, Radley said, he called Access employee Maureen Demoura and instructed her to deactivate Fincke’s key card, which she did.

Tñal Tr. day 9, 101-108.

Fincke argues that this de-activation constituted a “lock-out.”

Trial Tr. day 7, 92.

Radley disagrees, claiming that key-card access was only required to gain entry to the rear door of the building and that Fincke could still enter Access premises through the front door.

Trial Tr. day 9, 166-168.

Meanwhile, upon his return from vacation, Fincke learned that AED units had resumed shipment following the December 18 recall. On January 6, 2004 (one day prior to the alleged “lock-out”), Fincke sent an email to Bounty, McElhinney, and Elefante expressing concern with the resumption of shipments and urging a review of the problem by Access management.

PL’s Ex. 87.

He sent a subsequent email to Radley on January 8, urging the immediate recall of the 100 units that had shipped while he was away.

PL’s Ex. 51.

Radley wrote back on the same day, stating that Access had reviewed the situation and that everything was under control.

PI. ’s Ex. 87.

On January 9, 2004, Elefante responded to McElhinney’s January 5 proposed employment agreement.

PL’s Ex. 88.

In the letter to McElhinney, Elefante claimed that the Board, as well as Connolly, had met and reached several conclusions. He first asserted that Fincke had declined the chief technology officer position and had left the company. In addition, Elefante stated that the Board had done an “assessment of the business and intend[ed] to conduct an independent audit of the company,” and, “after meeting with the management team and assessing the situation, they d[id] not believe that there [was] a constructive role for Randall as an employee.” He also wrote that if no agreement could be reached, the Board would “take formal action to terminate Randall’s employment.”

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Further, Elefante referenced Fincke’s proposed stockholder agreement, noting that the “parties already have a Stockholders’ Agreement dated July 7, 2000.”

53

Elefante stated that the agreement provided for termination of a “Primary Stockholder” with or without cause and that the shareholder’s stock was then required to be offered to Access at “Book Value Price.” Elefante wrote that Access would refrain from exercising the option to force such a repurchase, if “an acceptable agreement [were] reached.”

Finally, Elefante noted that “[t]he Board group and investors agree that in light of Randall’s changed role, it may be unfair to expose him personally to the obligations of Access’s lease and the Middlesex Bank loan. If there is an agreement on separation on acceptable terms ... the Board will undertake diligent efforts to obtain his release from such obligations and will hold him harmless from any cost or loss arising from those guarantees.” The letter concluded with a request for a response by January 16, 2004.

On January 12, 2004, Fincke again wrote to Radley with a list of possible underlying causes of the December failed tests of the AED and again urged a recall of the units shipped subsequent to the December 18 recall.

PI. ’s Ex. 52.

He also noted that it might be necessary to contact the FDA. On the same day, Radley responded, informing Fincke that he would review the letter and give it to the manufacturing team. The next day, January 13, Fincke sent an email to Radley, Bounty, and a representative of the FDA; attached to the email was a letter expressing his concern regarding the shipment of potentially faulty AED units and also disclosing his recent employment termination. On January 15, Radley sent a letter to the FDA regarding the concerns raised in Fincke’s January 13 letter, essentially asserting that Fincke was simply a disgruntled employee. On January 26, 2004, Fincke sent emails to Moriarty, Radley, and the FDA to which he attached a document purporting to represent results from product testing he was independently conducting.

Also on January 26, 2004, Radley sent a letter to Fincke regarding the “Purchase of Access CardioSystems, Inc. Stock.” In that letter, he expressed Access’s intention to repurchase Fincke’s stock pursuant to the Stockholder’s Agreement; he stated:

Access CardioSystems, Inc. believes that your employment with the Company ended on or before January 7, 2004 as a result of your rejection of the position offered to you by the Board of Directors. To the extent you contend, or it is determined, that your employment ended on or before December 27, 2003, this letter is being sent pursuant to Section 4.01 of the Stockholders Agreement. Because you did not make an offer pursuant to Section 4.01(a) of the Stockholders Agreement, Access CardioSystems, Inc., pursuant to Section 4.01(b) of the Stockholders Agreement hereby notifies you of its intention to purchase all the Access CardioSystems, Inc. Stock owned by you.

To the extent you contend that you were employed after December 27, 2003, Access CardioSystems, Inc. reserves its right to re-notify you of its intention to purchase all the Access CardioSystems, Inc. Stock owned by you in accordance

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with the Stockholders Agreement within thirty (30) days of receiving an offer from you (or after the offer is deemed to have been made under subsection (a)) to sell your shares of Stock pursuant to Section 4.01.

The purchase price of the stock being purchased from you shall be the Book Value Price (“Price”) determined in accordance with Article 5 of the Agreement. The Price shall be the price per share based upon the net book value of the Company (the “Book Value”) as of the last day of the fiscal quarter ended on or most recently before your termination of employment. The Book Value was negative $4,428,000.00 on September 30, 2003. This yields a negative Price. The Price that the Stockholders will pay is therefore $1.00.

Pursuant to Section 4.03 of the Stockholders Agreement, the Closing of the purchase and sale of your Access Car-dioSystems, Inc. Stock shall be completed at 5:00 p.m. on February 5, 2004....

PL’s Ex. 91.

On February 26, 2004, Radley sent a second, and substantially similar letter to Fincke, represented as a “re-notification” of Access’s intent to repurchase Fincke’s stock in Access for $1.00.

54

Pl.’s Ex. 92.

Almost four months later, on June 14, 2004, Fincke, though his attorney, sent a letter to Access assert ownership of and control over Access’s Intellectual Property.

Def.’s Ex. 105.

The Plaintiffs responded by filing the first complaint in this action on July 6, 2004 in the Massachusetts state court.

Access continued to ship product for a large part of 2004. In October 2004, however, Access was forced to recall a majority of its units and the company ceased operations. On February 8, 2005, Access filed a petition for relief in this Court under Chapter 11 of the Bankruptcy Code, and continued to operate thereafter as a Debtor-in-Possession — although the company was (and is) no longer manufacturing or selling AEDs.

55

The present controversy was thereafter removed to this Court. Since then, this Court has determined on the parties’ motions for partial summary judgment that Access is and was the true owner of the intellectual property underlying the Access AED, and ordered Fincke to assign his interest therein to Access.

See Access I,

340 B.R. 127 . A trial was conducted to determine the question of liability on the various other claims and counterclaims made by the parties. Thirteen witnesses testified over nine days of trial and 234 exhibits were ultimately admitted into the record. Following trial, the parties were given the opportunity to submit proposed findings of fact and conclusions of law, which both parties have done.

II. POSITIONS OF THE PARTIES

The Complaint sets forth eight claims against Fincke; five of the original counts await a ruling.

56

Those counts are: Count

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II, brought by Access and the Investors: breach of fiduciary duty;

57

Count TV, brought by Access and the Investors: fraud; Count V, brought by Access and the Investors: negligent misrepresentation; Count VI, brought by the Investors: securities fraud under Mass. Gen. Laws ch. 110A, § 410(a)(2); and Count VIII: Objection to Allowance of Fincke’s Alleged Claims. In his answer to the Complaint (the “Answer”), Fincke generally denied the Plaintiffs claims and put forth several counterclaims: Counterclaim I, against Access: breach of contract; Counterclaim II, against the Investors: breach of contract; Counterclaim III, against Access and the Investors: promissory estoppel; Counterclaim IV, against the Investors: breach of fiduciary duty; Counterclaim VI,

58

against Access: wrongful discharge; and Counterclaim VII, against Access: declaratory judgment.

59

A. Counts IV, V, and VI — Fraud, Negligent Misrepresentation, and Section 410(a)(2)

The Investors’ claims for common-law fraud, negligent misrepresentation and securities fraud under Mass. Gen. Laws ch. 110A, § 410(a)(2) (“ § 410(a)(2)”) are predicated on Fincke’s alleged misrepresentations and material omissions made in connection with their investments. According to the Investors, Fincke misrepresented various facts that were material to their decisions to invest in Access. In addition to Fincke’s purported oral representations, the Investors claim that the Company Overview, distributed prior to the April 2003 Transaction, contained several affirmative misstatements that Fincke knew or, in the exercise of reasonable care, should have known were false and misleading. These representations involved statements regarding product stability, profitability, order rates, and average sales price. In addition, the Investors claim that Fincke intentionally omitted material information involving problems with key distributors and customers; problems and delays involving manufacturing and product shipments; the extent of working capital needed; and the existence of the Philips lawsuit.

The Plaintiffs also assert that Fincke’s continuing misrepresentations and failures to disclose were either intentional or negligent misrepresentations upon which the Board relied in making decisions regarding Access and which prevented the Investors from effectively evaluating stated projections and adequately judging the company’s financial status. And, more generally, the Plaintiffs conclude that all of the projections presented to the Investors and the Board were misleading, either because they failed to account for extant, and undisclosed, negative circumstances or because they were simply devoid of reason.

Fincke raises several defenses to the Plaintiffs various misrepresentation and

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material omission allegations. First, he claims that all material information

was

disclosed to the Investors and the Board through either oral communications, written communications — such as the KPIs, narratives, and Board meeting presentations — or both. And, where certain information was not initially disclosed — such as that relating to the Philips litigation and the problems with the European Distributors — disclosure was made when the matters became material.

To the extent that projections were not met, Fincke claims that the projections themselves do not give rise to a cause of action under any of the legal theories asserted by the Plaintiffs, because they were not “facts,” nor were they guarantees of future events. Additionally, Fincke says that the projections and other statements regarding Access’s status were reasonably based, as they were the product of consideration and deliberation between various members of the Access’s management team. As such, according to Fincke, none of the statements or projections may form the basis for liability for fraud, negligent misrepresentation, or securities fraud under § 410(a)(2).

B. Count II — Breach of Fiduciary Duty

The Plaintiffs’ breach of fiduciary duty claims against Fincke generally fall into three categories. First, the Plaintiffs aver that Fincke breached his fiduciary duty to Access through his alleged misrepresentations and failures to disclose to the Board Access’s need for additional working capital, inability to meet projections, manufacturing problems, and long-term difficulties with the European Distributors. The Plaintiffs contend that Fincke’s behavior was self-serving in that he sought to protect his position and status at the company by deliberately hiding negative information from the Board. According to the Investors, had they known the nature and extent of the company’s underlying problems, they would have taken corrective action, preventing Access’s ultimate demise.

In response, Fincke says that he and the management team disclosed all material information to the Board, evidenced by the various materials sent to the Investors and presented at Board meetings, including the KPIs, narratives, and presentation materials produced during trial. As for his failure to disclose either the Philips litigation or the problems with the European Distributors, Fincke argues that when, and to the extent that, such matters became material, the Board

was

informed.

Second, the Plaintiffs argue that Fincke breached his fiduciary duties by withdrawing funds and repaying a large portion of his personal loans to Access without the knowledge or prior approval of the Board, at a time when Access was in desperate need of cash. Fincke argues that the withdrawals from Access’s account were in good faith, were documented and were, he believed, solely for legitimate company expenses — i.e., salary payments and reimbursements for company expenses incurred on his personal credit cards. Thus, he argues, the payments were not in breach of his fiduciary duties to either Access or the Investors.

Finally, according to the Investors, Fincke delayed acceptance of the Investors’ proposed financing terms in the spring of 2003 to the detriment of the company. To the extent that the delay in receiving the additional capital contributed to Access’s inability to manufacture AEDs that in turn would produce additional working capital, the Investors say that Fincke is to blame. According to the Investors, Fincke’s delay was fueled by his desire to remain Access’s majority share

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holder and his futile attempts to obtain outside investments that would allow him to do so. Through this self-interested behavior, they argue, he placed his personal gain above the interests of Access in breach of his fiduciary duty of loyalty.

Fincke says that the delay in accepting the Investors’ financing proposals during the spring of 2003 was not motivated by self-interest, although he has conceded his desire to maintain his majority stock position. Rather, Fincke says that he, along with other management team members, were discussing and considering other financing offers during that time, which financing may have ultimately been better for the company.

Furthermore, and more generally in rebuttal to their fiduciary duty claims, Fincke argues that the Plaintiffs’ allegations related to his management of the company are undercut by the fact that they allowed Fincke to retain control over Access for more than a month after they voted to remove him as president. Fincke asserts that, as of the November Board Meeting, the Investors had full knowledge of the information and circumstances that, they claim, demonstrate multiple instances of Fincke’s fiduciary violations — yet they allowed Fincke to retain control. Therefore, according to Fincke, the Investors’ actions belie the severity of the allegations being asserted in this litigation.

C. Count VIII — Objection to Allowance of Fincke’s Claims

To the extent that Fincke is successful on any of his Counterclaims, the Plaintiffs argue that he cannot recover any amounts awarded, as he failed to file a proof of claim in Access’s main bankruptcy case. Furthermore, the Plaintiffs say that his failure to seek a declaration that his Counterclaims constitute an informal proof of claim in the main case precludes any recovery. Fincke responds by arguing that the Answer, containing Fincke’s Counterclaims, constitutes an informal proof of claim. And since the Answer was filed prior to the deadline for the filing of claims in the main case, any judgment awarded should be appropriately treated as a claim under Access’s Confirmed Plan.

D. Counterclaims

1.

Counterclaims I, II, III, IV and VII

— Breach

of Contract, Promissory Estoppel, Breach of Fiduciary Duty, and Wrongful Discharge

On the basis of several legal theories, Fincke argues that the Investors and Access are liable for damages as a result of their failure to provide him with a binding employment agreement. He insinuates that, in exchange for agreeing to relinquish majority control over Access by consummating the April 2003 Transaction, he was promised an employment agreement that would provide “protection” for him in his minority position. If the Court were not to find adequate consideration in exchange for the promised employment agreement, Fincke alternatively argues, under a promissory estoppel theory, that he acted to his detriment in reliance on the Board’s assurance that an employment agreement would be negotiated, thus leading to liability for failure to execute an agreement. Fincke also argues that the Investors and the Board breached their fiduciary duties owed to him by retaliating against him for raising his product safety concerns. This retaliation, according to Fincke, was evidenced both by their failure to continue amicable negotiations regarding the employment agreement and negative statements about Fincke’s management made to the press that Fincke says were untrue and damaged Access’s reputation.

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In addition, Fincke argues that the oral promise to execute an employment agreement altered his employment relationship, such that he no longer remained at Access as an “at-will” employee and could only be terminated for just cause. According to Fincke, he was “locked out” of the company without just cause in retaliation for his expressed concern and reports to the FDA regarding product safety issues. This conduct by Access and its Board, according to Fincke, constituted wrongful termination under Massachusetts law.

The Plaintiffs dispute the existence of a meaningful or legally binding employment contract between the parties. While they acknowledge that the Board discussed drafting and negotiating an agreement, they note that no agreement was actually reached and that, prior to leaving Access, Fincke did not assert his right to such an agreement during the months following the April 2003 Transaction. Furthermore, according to the Plaintiffs, Fincke’s decision to formally leave Access was his own and, at any rate, the Board

did

have just cause for Fincke’s termination. The Plaintiffs summarily deny that Fincke’s alleged product safety concerns were a reason for his dismissal. In fact, according to the Plaintiffs, Fincke contrived the safety concerns for his own retaliatory motives.

2.

Counterclaim VII

— Declaratory

Judgment

Fincke seeks a ruling that the Stockholders Agreement is unenforceable. He argues that Access’s attempt to purchase his stock for $1.00 was a retaliatory act designed to punish him for reporting safety concerns to the FDA. As evidence of this motive, Fincke notes that the Plaintiffs first asserted Access’s stock repurchase rights under the agreement following his voicing of those safety concerns and his presentation of a proposed employment agreement and revised stockholder agreement to the Board. Because, according to Fincke, the decision to exercise rights under the Stockholders Agreement was in retaliation for his reported product safety concerns and additionally motivated by a desire to avoid severance negotiations, this Court should use its equitable powers to declare the agreement unenforceable.

The Plaintiffs argue that Access’s exercise of its rights under the Stockholder Agreement was lawful and legitimate and was not an effort to avoid further negotiations. Instead, the Plaintiffs say Fincke’s proposed employment agreement, accompanied by the revised stockholder agreement, contained patently outrageous and unacceptable terms and conditions and was not a reasonable offer. Furthermore, the Plaintiffs argue that equity does not lie in Fincke’s favor on this point, as the Stockholder Agreement was originally drafted during the start-up phase of the company, during a time when Fincke held control over Access. Thus, according to the Plaintiffs, there is no inequity in enforcing the agreement and holding Fincke to his own terms.

III. DISCUSSION

A. Fraud, Negligent Misrepresentation, and Section 410(a)(2)

1.

Overview

a. Fraud

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To recover for fraud under Massachusetts law, a plaintiff must prove, by a

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preponderance of the evidence,

Compagnie De Reassurance D’Ile De France v. New England Reinsurance Corp.,

57 F.3d 56 , 72 (1st Cir.1995), that: (1) the defendant made a statement; (2) “the statement was knowingly false;” (3) the defendant “made the false statement with the intent to deceive;” (4) “the statement was material to the plaintiffs’ decision;” (5) “the plaintiffs reasonably relied on the statement;” and (6) “the plaintiffs were injured as a result of their reliance.”

Kenda Corp. v. Pot O’Gold Money League,

329 F.3d 216, 225 (1st Cir.2003) (quoting

Turner v. Johnson & Johnson,

809 F.2d 90, 95 (1st Cir.1986));

see also Damon v. Sun Co., Inc.,

87 F.3d 1467, 1471-72 (1st Cir.1996) (quoting

Barrett Assocs., Inc., v. Aronson,

190 N.E.2d 867, 868 , 346 Mass. 150 (1963)).

b.

Negligent Misrepresentation

Unlike a claim for fraud, liability for negligent misrepresentation may arise where the defendant makes a false statement, but has no knowledge of its falsity.

61

Marram v. Kobrick Offshore Fund, Ltd.,

442 Mass. 43 , 809 N.E.2d 1017 , 1031 n. 25 (2004). To prevail on a claim for negligent misrepresentation, the plaintiff must prove that the defendant: (1) “in the course of his business, ... supplie[d] false information for the guidance of others in their business transactions;” and (2) failed to “exercise reasonable care or competence in obtaining or communicating the information.”

Marram, 809

N.E.2d at 1031 n. 25. The plaintiff must also demonstrate: (1) justifiable reliance on the information and (2) a pecuniary loss incurred as a result of that reliance.

Marram,

809 N.E.2d at 1031 n. 25;

see also Damon,

87 F.3d at 1479 ;

Briggs v. Carol Cars,

407 Mass. 391 , 553 N.E.2d 930, 933 (1990);

Danca v. Taunton Sav. Bank,

385 Mass. 1 , 429 N.E.2d 1129, 1133 (1982);

Snyder v. Sperry & Hutchinson Co.,

368 Mass. 433 , 333 N.E.2d 421 (1975);

Twin Fires,

2002 WL 31875204 , at *25.

c.

Section bl0(a)(2)

“[Fjormally known as the Uniform Securities Act and commonly known as the Massachusetts Blue Sky Law,”

Twin Fires,

2002 WL 31875204 , at *31, Mass.

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Gen. Laws Ann. e. 110A, § 410(a)(2) (2008) provides, in pertinent part:

Any person who ... offers or sells a security by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading, the buyer not knowing the untruth or omission, and who does not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of the untruth or omission, is liable to the person buying the security from him....

Section 410(a)(2) creates “civil liability for sales [of securities] by means of fraud or misrepresentation.”

Marram,

809 N.E.2d at 1025 (quoting L. Loss, Commentary on the Uniform Securities Act, draftsmen’s commentary to § 410(a), at 147 (1976)). “While not imposing strict liability on the seller for untrue statements or omissions, it holds the seller to the heavy burden of proof ‘that he did not know, and in the exercise of reasonable care could not have known, of the untruth or omission,”’

Marram,

809 N.E.2d at 1026; Mass. Gen. Laws Ann. c. 110A, § 410(a)(2). Section 410(a)(2) creates a “strong incentive for sellers of securities to disclose fully all material facts about the security” and “ ‘provide[s] a heightened deterrent against sellers who make misrepresentations by rendering tainted transactions voidable at the option of the defrauded purchaser,’ regardless of the actual cause of the investor’s loss.”

Marram,

809 N.E.2d at 1026 (citing

Casella v. Webb,

883 F.2d 805, 809 (9th Cir.1989) (interpreting § 12(2) of the Securities Act of 1933)).

A plaintiff may recover under § 410(a)(2)

62

when: (1) the defendant offers or sells a security;

63

(2) in Massachusetts; (3) by (a) making any untrue statement of a material fact; or (b) omitting to state a material fact necessary to make the statement not misleading; (4) the plaintiff did not know of the untruth or omission; and (5) the defendant (a) knew, or (b) in the exercise of reasonable care, would have known, of the untruth or omission.

Mar-ram,

809 N.E.2d at 1026. Once the plaintiff has demonstrated that the defendant has made an untrue statement of material fact or omitted a material fact necessary to make a statement not misleading, the burden shifts to the defendant to demonstrate either that the plaintiff knew of the falsity or omission or that the defendant did not know and could not, in the exercise of reasonable care, have known of the falsity or omission.

See Adams,

838 F.Supp. at 688 (“The ‘seller’ bears ‘the burden of persuasion in establishing his lack of negligence.’ As such, ‘[t]he seller is exculpated if he proves that he did not know, or, in the exercise of reasonable care, could not

*641

have known of the untruth or omission.’ ”) (discussing § 410(a)(2) and § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77i(2)) (quoting

Davis v. Avco Fin. Servs., Inc.,

739 F.2d 1057 , 1068 (6th Cir.1984);

Ernst & Ernst v. Hochfelder,

425 U.S. 185 , 209 n. 27, 96 S.Ct. 1375 , 47 L.Ed.2d 668 (1976)).

2.

Elements

That these three causes of action have common elements is clear&emdash;an unsurprising fact given that § 410(a)(2) is founded upon traditional common-law notions of actionable misrepresentations. For each of the fraud, negligent misrepresentation, and § 410(a)(2) claims, the plaintiff must

at least

prove: (1) that the defendant made a misstatement or omission of fact; (2) that the misstatement or omission was material; and (3) that the defendant either knew, or through the exercise of reasonable care, could have known, that the statement was either false or misleading on account of an omission.

64

a.

Falsity

i. Affirmative Misrepresentations

It is axiomatic that a defendant will not be liable for an affirmative false statement if the statement is, in actuality,

not false.

Thus, if the plaintiff fails to demonstrate the falsity of the statement, assuming that it is not misleading on the account of an omission (see below), no fraud, negligent misrepresentation, or § 410(a)(2) claim will lie.

65

For an affirmative statement to be actionable, it gen

*642

erally must be one of fact — something “susceptible of knowledge,”

Zimmerman v. Kent,

31 Mass.App.Ct. 72 , 575 N.E.2d 70, 75 (1991) — generally not a statement of opinion, judgment, belief, expectation, or prediction.

66

Under certain circumstances, however, statements of opinion, belief, prediction, or future intention may be actionable. For example, such a statement may be actionable where “the speaker ‘knew that the prediction [opinion, judgment, expectation, or future intention] was false when it was made.”

Pearce v. Duchesneau Group,

392 F.Supp.2d 63, 74 (D.Mass.2005) (quoting

Lawson v. Affirmative Equities, Co., L.P.,

341 F.Supp.2d 51, 65 (D.Mass.2004)) (citing

Starr v. Fordham,

420 Mass. 178, 187 , 648 N.E.2d 1261, 1267 (1995));

see also Kenda,

329 F.3d at 226 .

67

And forecasts may be actionable if “they are not reasonably based on, or are inconsistent with, the facts at the time the forecast is made.”

Glassman v. Computervision Corp.,

90 F.3d 617, 627 (1st Cir.1996).

68

Such unsupported or contradicted statements are “affirmative misrepresentations,” because they are false misrepresentations of what the speaker knows to be true (or knows he doesn’t know to be true). Standing alone, however, optimistic predictions are not false misrepresentations simply because they do not come to fruition.

Suna v. Bailey,

107 F.3d 64, 69 (1st Cir.1997) (plaintiffs needed to “show that statements made were more than tempered predictions about the future that later proved incorrect”);

Serabian v. Amoskeag Bank Shares, Inc.,

24 F.3d 357 , 363 & n. 7 (1st Cir.1994);

In re Boston Tech. Inc. Sec. Litig.,

8 F.Supp.2d 43, 54 (D.Mass.1998).

ii. Omissions

Failure to disclose material information may also give rise to liability

*643

under common-law and securities fraud theories. There are two circumstances where omissions may be actionable. The first is where the defendant fails to disclose material information

when the defendant has a legal duty to do so.

The Massachusetts Supreme Judicial Court (the “SJC”) has long adhered to the “rule of nonliability for

bare nondisclosure,” Kannavos v. Annino,

356 Mass. 42 , 247 N.E.2d 708, 711 (1969); a defendant is not liable for simple failure to disclose material information. Instead, liability for a material omission arises only where the defendant was under a duty to disclose the information.

Milton v. Van Dorn Co.,

961 F.2d 965 , 968 & n. 4 (1st Cir.1992) (citing

Royal Bus. Group, Inc. v. Realist, Inc.,

933 F.2d 1056, 1064 (1st Cir.1991);

Nei v. Burley,

388 Mass. 307 , 446 N.E.2d 674, 676 (Mass.1983)).

69

Statutes or regulation under the state and federal securities laws impose specific duties to disclose certain types of information,

see, e.g., Cooperman v. Individual, Inc.,

171 F.3d 43, 50 (1st Cir.1999) (quoting

Shaw v. Digital Equip. Corp.,

82 F.3d 1194, 1204 (1st Cir.1996));

Guerra v. Teradyne, Inc.,

No. Civ.A. 01-11789-NG, 2004 WL 1467065 , at *6 n. 4 (D.Mass. Jan.16, 2004) (citing

Roeder v. Alpha Indus., Inc.,

814 F.2d 22, 26-27 (1st Cir.1987));

Boston Tech.,

8 F.Supp.2d at 53 n. 8, and a pre-existing fiduciary relationship may also give rise to a specific disclosure duty.

The second type of culpable omission is one that renders an otherwise accurate statement misleading. Accurate statements of past events, standing alone, are rarely held to be misleading, and a duty to disclose does not arise merely because circumstances have changed or might change in the future.

See, e.g., Suna v. Bailey,

107 F.3d at 68 (accurate statements about past performance, even if present circumstances are less rosy, do not give rise to liability);

Serabian,

24 F.3d at 361 ;

In re Cytyc,

2005 WL 3801468 , at *25;

Guerra,

2004 WL 1467065 , at *13-14;

Boston Tech.,

8 F.Supp.2d at 54, 59, 61-62 . Instead, a duty to disclose information related to an earlier statement generally arises only where the original statement was misleading

at the time it was made. Colby,

817 F.Supp. at 213 (discussing

Backman v. Polaroid Corp.,

910 F.2d 10, 16-17 (1st Cir.1990));

Guerra,

2004 WL 1467065 , at *6, 10.

Thus, a defendant may remain silent and choose not to disclose material information absent an independent duty to do so. But both common-law fraud and misrepresentation, as well as the securities laws, compel full and accurate disclosure if the defendant volunteers information.

*644

When a defendant chooses to speak, all material information necessary to make the statement not misleading must also be divulged.

70

If the statement is one of opinion, prediction, or forecast, the failure to disclose known facts that contradict the bases for the statement may be actionable.

71

However, where a statement relates to this so-called “soft information” (opinion, prediction, forecast, and the like), the alleged material omission itself must relate to “hard” information.

Shaw, 82

F.3d at 1210 n. 21 (“It bears reemphasizing that the plaintiffs’ claim is sustainable only to the extent it relates to the nondisclosure of “hard” material information, as opposed to “soft” information in the nature of projections.”) (citing

In re VeriFone Sec. Litig.,

784 F.Supp. 1471, 1482 (N.D.Cal.1992),

aff'd,

11 F.3d 865 (9th Cir.1993)).

This obligation to ensure that a statement is not misleading does not require disclosure of every relevant, or even material, piece of information. Disclosure must, of course, be “complete and accurate,”

Lucia v. Prospect Street High Income Portfolio, Inc.,

36 F.3d 170, 175 (1st Cir.1994);

Backman,

910 F.2d 10 at 16 , but that “does not mean that by revealing one fact about a product, one must reveal all others that, too, would be interesting, market-wise, but means only such others, if any, that are needed so that what was

*645

revealed would not be ‘so incomplete as to mislead.’ ”

Backman,

910 F.2d at 16 (quoting

SEC v. Texas Gulf Sulphur Co.,

401 F.2d 833 , 862 (2d Cir.1968));

see also, Romani v. Shearson Lehman Hutton,

929 F.2d 875, 879 (1st Cir.1991) (plaintiffs’ allegations that defendants failed to disclose a recessionary period in the industry were insufficient predicate for liability because the defendant had disclosed the high risks associated with the investment in a meaningful way).

Given the basic principles governing liability for both affirmative misrepresentations and culpable omissions, case law has consistently held that allegations of mismanagement, without more, are insufficient to state a claim for common-law fraud, negligent misrepresentation, or securities fraud.

72

That is, a plaintiff does

not

state a claim for fraud or misrepresentation by simply asserting that the defendant failed to disclose poor management practices; “poor management is a risk that every investor takes.”

Fitzer v. Security Dynamics Techs., Inc.,

119 F.Supp.2d 12, 33-34 (D.Mass.2000). Instead, the plaintiff must prove either that the defendant made a false statement regarding certain management or business practices,

73

or made a misleading statement by discussing management while failing to disclose inconsistent material

74

information regarding that management.

75

b.

Materiality

Whether the allegation is one of affirmative misrepresentation or culpa

*646

ble omission, liability for fraud, negligent misrepresentation, or securities fraud will only arise when the statement or omission relates to material information.

The mere fact that an investor might find information interesting or desirable is not sufficient to satisfy the materiality requirement. Rather,

information is “material” only if its disclosure would alter the “total mix” of facts available to the investor and “if there is a substantial likelihood that a reasonable shareholder would consider it important” to the investment decision.

Milton,

961 F.2d at 969 (emphasis added) (quoting

Basic, Inc. v. Levinson,

485 U.S. 224, 231-32 , 108 S.Ct. 978 , 99 L.Ed.2d 194 (1988)).

76

This standard for materiality obtains under both the common-law and Massachusetts securities laws.

Id.

(materiality analysis is same under both Massachusetts common law and Federal securities law);

Adams v. Hyannis Harborview, Inc.,

838 F.Supp. 676, 687 (D.Mass.1993) (“this standard of materiality applies generally throughout the federal and Massachusetts securities laws”);

Eagle Fund, Ltd. v. Sarkans,

63 Mass.App.Ct. 79 , 823 N.E.2d 783, 788 (2005).

77

The inquiry is an objective one, looking to whether a reasonable person would have found the information material.

Milton,

961 F.2d at 970 .

Assessing the materiality of predictions or forecasts can be complex, requiring a close analysis of the nature of the statements and the circumstances under which they were made. While projections and financial targets

may

be “material to any sensible evaluation of [a] company’s performance,”

In re Cytyc,

No. Civ. A. 02-12399-NMG, 2005 WL 3801468 , at *23 (D.Mass. March 2, 2005) (quoting

Orton v. Parametric Tech. Corp.,

344 F.Supp.2d 290, 302 (D.Mass.2004)), generalized forecasts are usually not actionable, because, among other reasons, they are “inherently difficult and unreliable ... and are not likely to be ‘material’ to investors.”

Colby v. Hologic, Inc.,

817 F.Supp. 204, 211 (D.Mass.1993);

see also Carney v. Cambridge Tech. Partners, Inc.,

135 F.Supp.2d 235, 245 (D.Mass.2001) (“[CJourts in the First Circuit generally have declined to impose liability for so-called ‘forward looking statements’ ... because these courts regard such statements as unlikely, as a matter of law, to be material to a reasonable investor.”). Similarly, statements or omissions related to future events may or may not be material, depending on the context. The First Circuit has emphasized the fact-based inquiry required to determine materiality in such circumstances:

If an alleged omission involves speculative judgments about future events, ... materiality “will depend at any given time upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity.”

Milton,

961 F.2d at 969 -70 (quoting

Basic,

485 U.S. at 238 , 108 S.Ct. 978 );

see also Rand v. Cullinet Software, Inc.,

847 F.Supp. 200, 205 (D.Mass.1994).

Closely related to general forecasts and predictions are those statements that amount to no more than “corporate puffery” — “optimistic, vague projections of

*647

future success.”

Priest v. Zayre Corp.,

Civ. A. No. 86-2411-Z, 1987 WL 10741 , at *2 (D.Mass. May 1,1987). Mere puffery is not actionable, since the statements are “so vague [and] so lacking in specificity ... that no reasonable investor could find them important to the total mix of information available.”

Brumbaugh, v. Wave Sys. Corp.,

416 F.Supp.2d 289, 250, 256-57 (D.Mass.2006) (citing, quoting

Shaw,

82 F.3d at 1213, 1217 ).

78

“The more specific, definite or concrete the outward statement is, however, the greater the likelihood the statement is material and not mere puf-fery.”

Cytyc,

2005 WL 3801468 , at *13 (citing

Gross v. Summa Four, Inc.,

93 F.3d 987, 995 (1st Cir.1996);

Computervision,

90 F.3d at 635-36 ).

79

Even where more specific statements of “soft” information constitute more than mere puffery, sufficient caution

*648

ary language may render a statement immaterial — a principle often referred to as the “bespeaks caution” doctrine.

[The bespeaks caution doctrine] embodies the principle that when statements of “soft” information, such as forecasts, estimates, opinions, or projections are accompanied by cautionary disclosures that adequately warn of the possibility that actual results or events may turn out differently, the ‘soft’ statements may not be materially misleading under the securities laws. In short, if a statement is couched in or accompanied by prominent cautionary language that clearly disclaims or discounts the drawing of a particular inference, any claim that the statement was materially misleading because it gave rise to that very inference may fail....

Shaw,

82 F.3d at 1213 .

80

Cautionary language alone cannot give carte blanche to misstate or materially misrepresent hard facts, and the bespeaks caution doctrine is limited to alleged misrepresentations dealing with “soft” information.

Romani,

929 F.2d at 879 ;

see also Blatt v. Muse Techs., Inc.,

2002 WL 31107537 , 2002 U.S. Dist. LEXIS 18466 , Fed. Sec. L. Rep. (CCH) P 92004 (D.Mass.2002). Furthermore, the cautionary language must be “sufficiently related to the subject matter” of the statement; boilerplate warnings will not suffice.

Cy-tyc,

2005 WL 3801468 (quoting

In re Focus Enhancements, Inc. Sec. Litig.,

309 F.Supp.2d 134, 162 (D.Mass.2001)).

c.

Reliance

To recover for common-law fraud or negligent misrepresentation,

81

a plaintiff must also demonstrate reasonable or justifiable reliance on the material misrepresentation or omission.

82

Whether a plaintiffs reliance is reasonable or justi

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fied, especially in the securities context, is influenced by several factors, including:

(1) The sophistication and expertise of the plaintiff in financial and securities matters; (2) the existence of long standing business or personal relationships; (3) access to the relevant information; (4) the existence of a fiduciary relationship; (5) concealment of the fraud; (6) the opportunity to detect the fraud; (7) whether the plaintiff initiated the stock transaction or sought to expedite the transaction; and (8) the generality or specificity of the misrepresentations.

Kennedy,

814 F.2d at 804 (quoting

Zobrist v. Coal-X, Inc.,

708 F.2d 1511 (10th Cir.1983) (§ 10(b) claim)). Courts also consider whether allegedly misleading oral statements are clearly contradicted by written materials.

Id.; see also Marram,

809 N.E.2d at 1031.

But the plaintiff has no independent duty to investigate the truth of every statement. A plaintiff is generally entitled to rely on a statement presented as fact, unless the statement is so “preposterous or palpably false” that no rebanee on it would be reasonable or justified.

Snyder,

333 N.E.2d at 429 ;

Kenda,

329 F.3d at 227 ;

Damon,

87 F.3d at 1480 (quoting

Roadmaster Indus., Inc. v. Columbia Mfg. Co.,

893 F.Supp. 1162, 1176 (D.Mass.1995));

Kannavos,

247 N.E.2d at 712-13 .

Just as predictions or forecasts may be immaterial, a plaintiffs reliance on such “soft” statements may be unreasonable or unjustified as well. As the First Circuit explained,

[Predictions ... are actionable only if the forecast might affect a “reasonable investor” in contemplating the value of a corporation’s stock.... While [predictive] statements may convey the company’s desire for profitable performance in the future, [where] they do not convey any

promises

about future performance and do not project specific numbers that the company will

certainly

attain[, n]o reasonable investor would have read the[ ] statements, especially [when] they are accompanied by cautionary language, as promises or guarantees of future performance.

Suna v. Bailey,

107 F.3d at 70 (emphasis added) (quoting

Colby,

817 F.Supp. at 211 );

see also id.

at 72 (a reasonable purchaser of securities would not reasonably rely upon or be mislead by “optimistic predictions of future potential.”);

Computervision,

90 F.3d at 626 (“Forecasts are not guarantees of, or insurance policies for, a firm’s future performance, nor are they

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understood as such by reasonable investors.”)-

Most importantly, where a plaintiff basis a claim for fraud on a written statement, the plaintiff cannot successfully demonstrate

any

reliance without first establishing that the plaintiff actually read the allegedly false or misleading statement.

See, e.g., Wells v. Monarch Capital Corp.,

1991 WL 354938 , at *12 (D.Mass. Aug. 23, 1991) (where plaintiff did not state that he read any of the documents that were allegedly false, plaintiff failed to establish reliance and fraud claim was dismissed).

d.

Knowledge of Falsity and Intent to Deceive

Finally, in order to recover for fraud under Massachusetts common law, the plaintiff must establish the defendant’s knowledge of the statement’s falsity and the defendant’s intent to deceive, often referred to as the scienter requirement under analogous provisions of the federal securities law.

83

See Massaro,

559 F.Supp. at 1079 (knowledge requirement for fraud claims under Massachusetts common law treated as parallel to the scienter requirement found in federal securities laws). Scienter may be proved by showing that “the defendants consciously

intended to defraud,” Aldridge v. A.T. Cross Corp.,

284 F.3d 72, 82 (1st Cir.2002) (emphasis added), by showing that the defendant “knew the statements were false when [the defendant] made them ...,”

Massaro,

559 F.Supp. at 1077 (citing

SEC v. MacDonald,

699 F.2d 47 (1st Cir.1983)), or by demonstrating that the defendant, in making the statement, “acted with a high degree of recklessness” as to the truth of the matter.

Id.

Similarly, where liability is predicated on an omission of material information, a defendant may be liable for reckless failure to disclose; as the First Circuit explained, this standard requires the plaintiff to prove that the defendant made:

a highly unreasonable omission, involving not merely simple, or even inexcusable, negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious the actor must have been aware of it.

Greebel v. FTP Software, Inc.,

194 F.3d 185, 198 (1st Cir.1999) (quoting

Sundstrand Corp. v. Sun Chem. Corp.,

553 F.2d 1033, 1045 (7th Cir.1977)) (additional citations omitted).

But there can be no “fraud by hindsight.”

Mississippi Pub. Employees’ Ret. Sys. v. Boston Scientific Corp.,

523 F.3d 75, 90 (1st Cir.2008);

Suna v. Bailey,

107 F.3d at 71 ;

Serabian,

24 F.3d at 367 ;

Greenstone v. Cambex Corp.,

975 F.2d 22, 25-26 (1st Cir.1992);

DiLeo v. Ernst & Young,

901 F.2d 624, 627 (7th Cir.1990);

Guerra,

2004 WL 1467065 , at *25 (quoting

In re Galileo Corp. S’holders Litig.,

127 F.Supp.2d 251, 261 (D.Mass.2001)). That is, the plaintiff may not rely on:

allegations that assert no more than that because something eventually went wrong, defendants must have known about the problem earlier. “[A] plaintiff may not simply contrast a defendant’s past optimism with less favorable actual results, and then contendí ] that the dif

*651

ference must be attributable to fraud.’ ”

Shaw,

82 F.3d at 1223 (quoting

DiLeo v. Ernst & Young,

901 F.2d 624, 627 (7th Cir.1990)).

Boston Scientific,

523 F.3d at 90 ;

see also Romani,

929 F.2d at 880 (fraud claim could not be based on plaintiffs “spec-ulat[ion] that defendants committed fraud based solely on the partnership’s failure to be as profitable as the offering materials indicated was possible”).

3.

Analysis

The Plaintiffs allege that Fincke made various affirmative misrepresentations, materially misleading statements, and complete omissions of material information that give rise to liability for fraud, negligent misrepresentation, and securities fraud under § 410(a)(2). “In this circuit, securities fraud cases are ‘decided by a statement-by-statement analysis in which the inquiry made is restricted to the immediate context of each statement.’ ”

Blatt v. Muse Tech., Inc.,

Nos. Civ.A. 01-11010-DPW, Civ.A. 01-12173, 2002 WL 31107537 , at *6 (D.Mass. Aug. 27, 2002) (quoting

Carney,

135 F.Supp.2d at 243 ).

84

a.

General Allegations

The Investors raise several general allegations of fraud and misrepresentation in both the Complaint and the Plaintiffs’ post-trial brief. The Court characterizes these claims as “general” in nature, because the Investors neglected, at times, to specify which transactions or investments were affected by the alleged misrepresentations, which specific documents contained the alleged misrepresentations, or

how

specific statements were false or misleading. They preferred instead to rely on more general, and at times grandiose, claims of wrongdoing. The general allegations of fraud or misrepresentation involve representations or omissions related to projections, problems with vendors caused by overdue payables, the Philips litigation, and the Cadent litigation.

i. Projections

In the Plaintiffs’ post-trial brief, the Investors assert:

Fincke’s representations to the Investors ..., which they relied upon, were knowingly false, because of the following:

A. There was inadequate basis, at any time, for the sales or income projections Fincke provided.

B. There was inadequate basis, at any time, for the manufacturing projections Fincke provided.

85

Apart from their obvious hyperbole, these types of allegations do little to assist the Court in evaluating the Investors’ claims. Nonetheless, because the Investors have provided a modicum of supporting examples related to these particular claims, the Court will analyze each to the extent possible given the lack of specificity.

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A. SALES AND INCOME PROJECTIONS

Even if the Investors had identified with the requisite specificity

which

sales and income projections and which investment transactions the allegation refers to, the Court finds that they have nonetheless failed to demonstrate that sales or income projections generally lacked an inadequate basis. Instead, the Court finds that the weight of the evidence supports Fincke’s contention that, while perhaps overly optimistic, the sales and income figures were not false representations of Fincke’s actual beliefs regarding what Access could achieve,

see In re PDI Sec.,

No. Civ.A. 02-211(GEB), 2006 WL 3350461 , at *4 (D.N.J. Nov. 16, 2006) (plaintiff must show a lack of sincere belief) (collecting cases), nor were they unreasonable in light of the information known to Fincke and the circumstances in which they were generated.

In re Cambrex Corp. Sec. Litig,

No. 03-CV-4896(WJM), 2005 WL 2840336 , at *13 (D.N.J. Oct. 27, 2005) (“a plaintiff must not only allege the statements are false, but must also allege why there is no reasonable basis for the forecasts.”)

Sales and income projections were contained in various documents presented to the Investors, primarily spreadsheets accompanied by narrative descriptions of information contained in the spreadsheets. Two types of financial spreadsheets were maintained at Access. Early in his employment as a contractor at Access, Jay Bounty created the Financial Forecast Model, which he continued to maintain as the company’s CFO.

Trial Tr. day 2, 15-17.

The Financial Forecast Model contained various data entries that were linked such that the inputted data — both actual results and estimates — would affect projected financial outcomes.

Trial Tr. day 2, 23.

The Financial Forecast Model was stored on Bounty’s computer, and data could only be entered by Bounty, Gros-berg, or Fincke. Bounty testified that the Financial Forecast Model was updated regularly with actual data as it became available. Actual results were ascertained from Access’s books and records or from management personnel who oversaw different aspects of the company.

86

Trial Tr. day 2, 20.

There was no coherent evidence that any of the actual numbers were false,

87

and there was no indication that figures in the spreadsheet were changed without Bounty’s knowledge prior to the distribution of information from the model

*653

to the Investors or the Board.

Trial Tr. day 2, 32-33.

Grosberg assisted Bounty with the creation of the Financial Forecast Model and also maintained his own financial forecasting model to track Access’s weekly cash flow (the “Cash Flow Model”).

Trial Tr. day 2, 59.

The purpose of the Cash Flow Model was to assist managers in running the company and to generate a weekly cash requirement report. Similar to the Financial Forecast Model, the Cash Flow Model relied upon a series of linked variables, including certain assumptions, and would be updated and maintained with actual results on a regular basis.

Trial Tr. day 2, 54-

Bounty testified that he and Grosberg regularly reviewed and discussed both financial models; they discussed financial matters and cash flow at least weekly, working to ensure adequate cash was available to support the business and make payroll.

Trial Tr. day 2, 59-60.

The Financial Forecast Model was used not only for internal assessments of Access’s actual and projected performance, but also provided the basis for information provided to the Investors. Bounty would use the Financial Forecast Model to create KPIs (spreadsheets containing Access’s “key performance indicators”) and related narratives summarizing critical financial, sales, and manufacturing results and projections that would be provided to the Investors and, later, the Board. According to Bounty, “the role of the KPIs was to advise the Board and the management of the company with how well the company performed for that particular period of time against the projection for that period of time.”

Trial Tr. day 2, 53.

In addition to gathering actual data related to company performance, Bounty and Grosberg worked with Fincke and Access managers to obtain the company projections that underlay the assumptions and determined outcomes in the Financial Forecast Model.

Trial Tr. day 2, 23.

Bounty testified that actual and projected sales figures were received from Fincke and members of the Access sales team; manufacturing information was obtained from Fincke and others responsible for manufacturing, such as Nawn and Rice and projected shipments were based on estimates from manufacturing personnel, although Fincke was also intimately involved in providing shipping estimates.

Trial Tr. day 2, 81-82.

In addition, Gros-berg noted that the projected average selling price that went into the Cash Flow Model was updated almost daily as information was received from Fincke and other members of the sales team.

Trial Tr. day 5, 12A-125.

The projections, once made, were not static; they were revised at the impetus of Bounty, Grosberg, Fincke, or other Access personnel when circumstances changed or clarification of the assumptions was required. Fincke reviewed all assumptions and projections prior to release of the financial information (through KPIs and the related narratives) to the Investors or the Board.

Trial Tr. day 2, 30-31.

Bounty recalled that Fincke would at times review the financial models, make notations, and request that changes be made to some of the underlying numbers.

Trial Tr. day 2, 23.

Grosberg testified likewise. In fact, according to Grosberg, although he could not remember details of a specific instance, Fincke would instruct him to change projected numbers in the models, resulting, Grosberg said, in cash inputs larger than he originally anticipated.

Trial Tr. day 5, 125-27.

Grosberg could not recall a specific time when changes were made to projections or assumptions at Fincke’s behest, but testified that there were times when “we believed, for instance, that we may not be

*654

able to for a period of four weeks, for instance, ship any product. I would present that to Mr. Fincke and Mr. Fincke would say, ‘No, you’ll put 500 in, 500 in, 500 in, 500 in an Excel model.’ ”

Trial Tr. day 5, 126.

Not only was Grosberg unable to point to the document where this change was allegedly made, but he also did not clarify who the “we” were that believed shipments would be halted for four weeks. In light of this lack of specificity, the Court is unable to credit this portion of Grosberg’s testimony as referring to a specific event.

Grosberg further testified that Fincke was not only intimately involved with the preparation of the cash projections, but would also edit the projections, particularly with respect to revenue. Grosberg said Fincke’s revisions would always show a cash requirement less than what Grosberg believed was necessary to run the company. He claimed that he would be instructed by Fincke to “back into” predetermined cash requirements, necessitating changes to the Cash Flow Model required to reach the target number. Again, he could not recount a specific instance, document, or transaction associated with this general recollection.

Fincke described the process by which he would create the projections provided to Bounty and Grosberg as a collaborative process between himself and other Access management personnel. According to Fincke, projected sales numbers were prepared with input from various sales personnel, including Klegerman, Heer, and Ide. The Court found Fincke’s testimony on this subject credible and consistent with both Bounty’s and Grosberg’s testimony that projected figures were obtained from both Fincke and the sales team.

88

The Investors have not directed the Court’s attention to discrepancies between the sales projections contained in the financial models and information gathered from the sales team to assess sales prospects.

Based on the testimony and documents in evidence, the Court concludes that the Investors have not demonstrated that Fincke falsely provided projected sales figures that he believed were unobtainable; nor have they shown that the sales projections lacked a reasonable basis.

See PDI Sec.,

2006 WL 3350461 , at *4;

Cambrex,

2005 WL 2840336 , at *13. Rather, the assumptions regarding sales that were incorporated into the financial models and presented to the Board through KPIs and financial spreadsheets were based on information from various Access employees with relevant knowledge. While Fincke may have contributed to the formulation of the sales numbers, there is no evidence that he disregarded contrary evidence that would have identified the projected sales figures as unreasonable at the time they were entered into financial models or presented to the Investors.

See Computervi

*655

sion,

90 F.3d at 629 (plaintiffs have duty to plead factual allegations sufficient to allow inference that defendants did not consider data).

Likewise, the Investors have failed to carry their burden regarding allegations that the financial information and projections were unreasonable or false representations of Fincke’s then present belief.

See PDI,

2006 WL 3350461 , at *4. The testimony with regard to the financial models showed that other highly qualified individuals were involved in all aspects of the financial forecasting — from formulating the assumptions, to gathering and entering actual and projected data, through maintaining and updating the Financial Forecast and Cash Flow Models. In fact, the testimony with regard to the integrity in the development and maintenance of Access’s financial forecasting models outweighed any credence the Court could give to generalized, non-specific claims that Fincke revised projections, assumptions, or other factors in the model to achieve predetermined misleading or unreasonable results for presentation to the Investors or to the Board.

B. MANUFACTURING PROJECTIONS

The Investors also assert that there was an inadequate basis for the manufacturing projections presented to the Investors and the Board. With the exception of the Company Overview, discussed below, the Investors did not identify which documents they allege were false or misleading on account of manufacturing projections. Instead, they assert that manufacturing was consistently projected to produce and ship 2000 units per month (or 100 units per day).

89

The Investors claim that this projection was misleading or false and that “all projections provided by Fincke to the Plaintiffs based on this capacity were knowingly false statements of material fact....”

But the Plaintiffs’ allegation that all manufacturing forecasts were premised on consistent production of 100 units per day is significantly overstated. The Business Plan, dated October 18, 2002, disclosed that manufacturing was, at that time, producing units at a rate of 125 to 200 units per

week,

with a goal of reaching 250 per week in November, 300 per week in December and 425 per week thereafter— none of these projections equate to production of 100 units per day.

Pl.’s Ex. 107.

During early March 2003, when Fincke began discussions with the Investors regarding additional funding, Fincke clearly anticipated in the projections and assumptions underlying the financial models that Access could achieve a higher level of production, reaching 100 units per day or more.

90

But subsequent manufacturing projections were revised, at times downward and at other times upward, as the company gained more experience and additional in

*656

formation became available.

91

This is consistent with the testimony of several witnesses to the effect that manufacturing and shipping estimates included in the financial models and given to the Investors and the Board were not static, but were based on information received from several sources, including Fincke and other manufacturing employees. As Rice testified, although Fincke generally wanted Access to produce 100 units per day, “clearly we could only produce so many, so he accepted what we produced.” There simply was not a constant projection of 100 unit per day shipments, as the Investors have alleged.

See Computervision,

90 F.3d at 634-635 (finding no liability for securities fraud where defendant’s document did not say what plaintiffs asserted it did).

Nonetheless, given that many of the projections did contemplate Access’s ability to ultimately achieve that level of production, the Court will examine the Investors’ claims in this regard more closely. The Investors first attempt to support their fraud and misrepresentation claims regarding manufacturing projections by arguing that Fincke failed to present evidence that supported the reasonableness of the manufacturing goals. It is the Investors’ burden, however, to demonstrate that Fincke’s projections were unreasonable or lacked an adequate basis in the information available to Fincke at the time the projections were provided.

See PDI,

2006 WL 3350461 , at *4.

Next, in support of their contention that the 100 unit per day goal was unreasonable or inadequately supported, the Investors allege that Fincke was advised by “numerous management employees” that Access could not achieve production of 100 units per day. Nawn, Rice, and Bowers each testified that they believed the 100 unit per day manufacturing goal could not be maintained

given the resources available

during the time their opinions were expressed.

Trial Tr. day 5, 20-22, 102-103; day 7, 139-1U0.

Understanding the testimony in context, however, is essential to determining whether Fincke’s projected manufacturing figures were so unreasonable as to give rise to claims for fraud or misrepresentation.

Manufacturing the Access AED was a somewhat complicated affair, involving a

*657

combination of both in-house assembly and partial manufacturing of control boards by contract manufacturers. Generally, Access would buy raw parts for the units from suppliers, which they would “kit up” (i.e., gather together certain components); the kits were then sent to contract manufacturers to build the boards to a specified level; the partially completed boards would be returned to Access and tested; Access employees would complete the final assembly; the units were put through more test operations; and, assuming passage of final testing, the AED would be shipped or placed in inventory.

Several factors complicated the manufacturing process. For example, the AEDs could be configured in a variety of ways depending on customer specifications.

92

Most significant, however, were manufacturing problems caused by lack of raw materials and by product changes prompted by safety concerns or customer demand. Capital constraints often led to shortages of raw materials required for assembly of the “kits” sent to the control board manufacturers. Absent a control board, an Access AED could obviously not be built. In addition, changes to the product would result in manufacturing delays or slow-downs as the changes were being introduced or previously completed units were reconfigured to incorporate the changes.

Given the level of disruptions associated with these complications, Nawn believed that Access would not be able to manufacture 100 units per day.

Trial Tr. day 5, 20-21.

He discussed his opinion with Fincke on several occasions, expressing the difficulty of producing 100 units per day due to the lack of parts, product changes, and sales configurations. Nawn testified that, when he communicated this opinion, Fincke would reiterate that 100 units per day remained the goal.

Trial Tr. day 5, 22-23.

Bowers and Rice similarly testified to telling Fincke more than once that the 100 units per day level could not be achieved without more people and investment into production.

Trial Tr. day 5, 102-103; day 7, 139-HO.

While it was clear from the testimony that manufacturing at Access suffered from a variety of difficulties, this testimony does not inform on the question of whether Fincke’s projections as to

future

production levels were unreasonable. None of the testimony sufficiently demonstrated the inadequacy or unreasonableness of the 100 unit per day projection if sufficient resources were available.

93

*658

Fincke continually anticipated, in connection with additional investments, that those adequate resources would be made available, allowing the company to increase production levels and ship more units. He clearly overestimated the degree to which additional funding and revenues would improve the availability of raw materials and did not foresee the degree to which product changes necessitated by safety or customer concerns would slow production in the future, but these failures of foresight are not the stuff of which fraud and misrepresentation claims are made.

While management concerns regarding manufacturing communicated to Fincke

*659

raise questions about the sincerity of his optimism, the underlying causes of management’s concerns — primarily raw material shortages and product

changes

— were disclosed to the Investors and Board. See

In re Trump Hotels S’holder Derivative Litig.,

Nos. 96 Civ. 7820 DAB, 96 Civ. 8527 DAB, 2000 WL 1371317 , *14 (S.D.N.Y. Sept. 21, 2000) (disclosure of underlying problems or risks precludes claim that more disclosure was required). The Court concludes that the Investors have failed to establish, by a preponderance of the evidence, that the projections of

future

manufacturing levels were unreasonable, false or misleading.

C. EUROPEAN DISTRIBUTORS

The Investors claim that the problems with the European Distributors caused them not to meet their contractual mínimums, “which were a basis for sales and revenue projections provided to the Investors and Board members.” They further state that “the poor relationship with the European Distributors made all of the projections provided by Fincke substantially and materially misleading.” Bounty, Grosberg and Fincke, however, testified that sales projections were based on information obtained from various sales employees, including Fincke.

Trial Tr. day 1, 86; day 2, 111; day 5, 121-125.

It does not appear that the mínimums contained in the distribution contracts were the sole basis on which projected sales were based — in fact, the Investors did not show how the contractual mínimums related to the projected sales orders. In short, there is no evidence that any expected downturn in European orders were ignored in providing expected order rates and the Investors have not even directed the Court’s attention to any evidence showing how order rates were actually affected by the alleged failure of European Distributors to place orders.

94

The fraud, negligent misrepresentation, and securities fraud claims based on these assertions thus fail.

See, e.g., PDI,

2006 WL 3350461 , at *3.

D. PROJECTIONS OR GOALS?

In their post-trial Brief, the Plaintiffs say that “none of the documents provided to the Plaintiffs on which they relied indicated that the projections, assumptions, and statements were merely goals.” The Investors insist that the projections generally, and the 100 unit per day projection particularly, were really just “goals,” which Fincke did not expect to achieve. Relying on testimony given by Nawn and Rice, the Investors draw a distinction between goals and forecasts or predictions. Nawn and Rice both testified that a “goal” represents a level of achievement in production or sales the company would

like

to reach, while predictions or forecasts required more supporting data.

Trial Tr., day 5,19-50, 117.

For example, according to Nawn, the 100 unit per day or 2,000 units per month production level was a consistent “goal,” but was not a basis for projected shipment estimates he gave to Fincke.

95

Trial Tr. day 5, 20-22.

Gros-

*660

berg, Bowers, and Rice also testified that they could not recall Fincke ever informing the Board that the 2000 unit per month projection was a “goal.”

96

Trial Tr. day 5, 105, 151-152; day 7, 139-UO.

The Investors claim that they were never informed that the projections were simply goals, and therefore the projections were false or misleading because they were presented as projections that Access expected to actually achieve. The Court does not find, however, that general company goals were used in lieu of reasonably formulated projections where the goals and the projections did not coincide. As previously explained, the projections included in the financial models were provided through more extensive and collaborative analysis. And where those projections coincided with purported “goals,” the Court finds that those figures were used because Fincke actually believed Access could achieve those goals at that time.

See PDI,

2006 WL 3350461 , at *4. The Court finds that Fincke did not represent company “goals” as legitimate projections without an adequate basis for doing so. Instead, he attempted to provide reasonably-based projections of Access’s expected performance.

ii. Problems with Vendors and Suppliers

In the Complaint, the Investors allege that they, and later the Board, were not apprised of problems arising from Access’s failure to timely pay suppliers and vendors — such as the necessity to obtain parts from alternate suppliers that were more costly, had unreliable lead times, or lacked appropriate upfront qualification by the technical team, resulting in unnecessary delay and modification to the product.

*661

But the Investors have not pointed to any specific statements that were false or misleading related to problems arising from Access’s overdue accounts payable. Furthermore, the Court finds that those difficulties were adequately disclosed to the Investors.

Computervision,

90 F.3d at 626 .

At no time during Fincke’s tenure at Access did the company have sufficient working capital to fund its operations. The lack of cash handicapped every aspect of the company, especially its ability to obtain raw materials required to produce enough AEDs to satisfy orders and generate more cash. And, as Access began accruing overdue accounts payable to suppliers, the ability to obtain additional parts to continue manufacturing became ever more restricted. These problems were well known to Access employees, Fincke, the Investors, and the Board. Regardless of whether Fincke, the Investors, or the Board maintained an optimistic outlook on the future, the looming cash constraints were obvious to all. As Moriarty explained:

[T]here was a constant need for additional working capital.... It seemed like an endless requirement for discussion about working capital, but it was always interspersed with the good news first.... We didn’t focus on the bad news that came later, and we focused on whether or not we were going to put in some more money.

Trial Tr. day 6, 131.

At various times during trial, the Investors professed ignorance of the severity of Access’s problems meeting its accounts payable. Moriarty testified that, as of April 2003, he was unaware of the extent of problems with the vendors and was not aware that vendors were refusing to ship parts due to Access’s non-payment or that suppliers were changed to acquire new parts.

Trial Tr. day 6, 106-109.

The Court finds, however, that Moriarty was made aware of the severity of the problem by at least the end of March 2003 — MSL had drafted on its letter of credit guaranteed by him, he had discovered that Access was behind in its rent, and in the March 27, 2003 email from Fincke, he was made aware of the fact that second source vendors were being solicited to obtain additional parts.

Trial Tr. day Ip,

64-65, 97-98; day 5, 149. Moreover, his deposition testimony contradicted his assertions at trial. At his deposition, Moriarty testified that, at the time he invested additional funds in March 2003, he knew that “[Fincke] was having horrible times with suppliers ... to the point where they wouldn’t ship him anything [and] he would have to clean up these credit issues to move forward.”

Trial Tr. day 6, 108-109.

The other Investors were also made aware of the extent of Access’s debt to its suppliers and other vendors. Shortly after Access began shipping product domestically and internationally, relationships with its vendors and suppliers quickly became strained as the overdue accounts grew. This situation was disclosed in the Business Plan distributed in October of 2002, which stated:

Access at September 30, 2002 had accounts payable of $1,770,383, including substantial amounts owed to the suppliers of components for its products. The suppliers may suspend shipments to Access or insist upon COD payment terms. The suspension of shipments could prevent Access from manufacturing units. The imposition of COD payments terms could strain the cash resources of Access.

Pi’s. Ex. 107.

And, in addition to the disclosure in the email to Moriarty noted above, the Company Overview distributed in March 2003

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contained numerous references to the depth of Access’s problems with vendors caused by its failure to pay on its severely past-due accounts. The Company Overview stated that, at the end of February 2003, Access had accounts payable of $1.85 million aged at over 100 days, that Access was “unable to procure raw materials ... due to significant past due balances and credit issues with certain key parts vendors ...,” which “led to many of the production difficulties” at Access.

In short, the Investors were well aware that Access’s precarious financial situation had resulted in problems with various vendors. Fincke made no affirmatively false representations in this regard, nor did he omit this material information in statements made to the Investors in connection with their Investments. For these reasons, the Court finds that the Investors have failed to establish liability for fraud, misrepresentation or securities fraud on this basis.

iii. Investment Required

The Investors generally allege that Fincke misrepresented or made false statements regarding the amount of money Access needed to become cash flow positive. In connection with the initial investments made by Moriarty and Connolly in 2001, the Investors say that Fincke represented to them that the amounts loaned would be adequate to support Access until it could generate sufficient cash to fund its operations. The Investors claim that this was an affirmative misrepresentation because, in an email to several Access management employees on May 31, 2002, Fincke characterized Moriarty’s investment as “bridge funding” that would “be minimal for our short-term needs while we continue to hold further rapid buildup of product quantities.” He also noted that he was speaking with other investors, who, he anticipated, would be capable of providing more long-term funding.

PI. ’s Ex. 2.

At this time, however, each of Moriarty and Connolly was aware that the other was investing in Access. And, in the spring of 2002, Connolly had begun discussions with Radley regarding a potential investment in Access, evidencing his understanding that Access was looking for additional investments. Given the close pre-existing relationships between Fincke, Moriarty, and Connolly, coincident with Radley’s interest in a possible investment at the time Fincke sent the referenced email, the Court concludes that Moriarty and Connolly were not misled into believing that Access would require no additional investments to sustain operations. While Fincke may have maintained an optimistic view that the funds would see Access through to self-sustainability, the ultimate failure of the company to reach positive cash flow as a result of the initial investments does not, without more, give rise to liability for any statements Fincke may have made to the effect that he believed that the funds would be sufficient.

See Computervision,

90 F.3d at 626 ;

Polin v. Conductron Corp.,

552 F.2d 797, 805 (8th Cir.1977) (Even though “defendants’ roseate economic anticipations were doomed, ... economic prognostication, though faulty, does not, without more, amount to fraud.”).

In the fall of 2002, Fincke is alleged to have again falsely represented that the additional investments made at that time would be sufficient and that no additional investment would be needed. The Investors have failed to demonstrate, however, that any such representation was known to be false when made. First, such a representation, necessarily invoking a belief as to how events would unfold in the future, is not one of fact, but of prediction. The mere fact that the anticipated outcome

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did not come to fruition is insufficient to establish its falsity when made.

See, e.g., Computervision,

90 F.3d at 626 ;

Polin,

552 F.2d at 804 . Furthermore, there is no indication that Fincke did

not

believe the funds would be sufficient, nor have the Investors demonstrated that Fincke lacked a reasonable basis for any such statement.

See PDI,

2006 WL 3350461 , at *4;

Cambrex,

2005 WL 2840336 , at *13.

And nothing in the Business Plan distributed to the Investors in the fall of 2002 conclusively stated or ensured that the investments at that time would certainly be sufficient. The Business Plan clearly described Access as “an early stage company in a precarious financial position,” and described in much detail the risks attending an investment in the company. Among the risks associated with investing in the company, the Business Plan stated:

1. Access is an early stage company with no prior experience and limited resources. There can be no assurance that Access will be able to successfully execute its business plan.

2. Access has operated to date on investor capital and borrowed funds. Through September 30, 2002 it experienced an operating loss of $6,029,680. The investment by investors sought by this offering is required to enable Access to operate until cash generated by operations is sufficient to cover its operating costs. There can be no assurance that Access will reach cash break-even with the funds provided by this offering. If it does not, Access will exhaust its cash. Access has no sources of additional funds and in such event might have to cease operations.

3. Access at September 30, 2002 had accounts payable of $1,770,383, including substantial amounts owed to the suppliers of components for its products. The suppliers may suspend shipments to Access or insist upon COD payment terms. The suspension of shipments could prevent Access from manufacturing units. The imposition of COD payments terms could strain the cash resources of Access.

5. Access is indebted to certain investors in the aggregate amount of $4,600,000. Access is in arrears in its obligations to such investors, entitling them to demand payment in full of their notes. Access does not have the ability to make such payments and would have to cease operations or seek bankruptcy protection in such event.

Pi’s Ex. 107.

The Business Plan clearly disclosed that “if Access is unable to generate cash flow within the period forecast, ... Access will be required to seek additional investors or cease operations.” Thus, to the extent the Investors believed their investments in the fall of 2002 would be sufficient to support the company until it achieved independent viability, that belief was clearly contradicted by the Business Plan upon which they claimed to have relied in making their investments.

97

See Computervision,

90 F.3d at 626 (warnings and risks disclosed could, standing alone, preclude securities fraud claim);

Polin,

552 F.2d at 805 (disclosure of contingencies and risks regarding projections undermined securities fraud claim).

The Court rules that the Investors have not demonstrated that Fincke made an affirmative, material misrepresentation regarding the amount of money needed to

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make Access cash-flow positive. Thus, they have failed to establish liability for fraud, negligent misrepresentation, or securities fraud on that basis.

iv. Philips Litigation and Intellectual Property

According to the Investors, Fincke’s failure to disclose the receipt of the First and Second Philips Letters prior to the Investors’ loan and equity investments made in 2001 and 2002 and in conjunction with the April 2003 Transaction constitutes fraud, negligent misrepresentation, and securities fraud under § 410(a)(2). The Investors argue that knowledge of these communications would have impacted their willingness to lend money to Access and would also have been material to their review of the assumptions underlying the financial projections.

Because the Philips matter was not discussed at all in the documents provided to the Investors, the Court must determine whether Fincke had a duty to disclose the receipt of the First and Second Philips Letters.

The Business Plan distributed to the Investors in the fall of 2002 made affirmative statements regarding intellectual property litigation; it stated: “Access is a defendant in a patent infringement claim brought by Cardiac Sciences, Inc.... The cost of litigation may have a material adverse impact on Access, even if Access prevails ...,” and, further, that “Access has been advised by its patent counsel that its product does not infringe any patents known to him-”

PL’s Ex. 107.

Although the last sentence is followed immediately by a warning that the “opinion” of patent counsel is not assured to be correct in all respects, these two sections give the misleading impression that the Cardiac Sciences litigation was the only

known

threat to Access’s Intellectual Property.

But, although the omission of Access’s receipt of the First Philips Letter rendered the statement misleading, the Court finds that the threat of actual litigation was too attenuated at that time to render the omission

material.

As Pandiscio testified, as of the fall of 2002, Philips had not seen an actual Access AED,

Trial Tr. day 6, Up-15,

and Philips did not respond to Pandiscio’s request for more specificity regarding the nature of its alleged infringement claims. In fact, Philips did not raise the issue again for several months. The Court therefore concludes that the omission was not material in light of the indefinite and ambiguous nature of the infringement asserted during the fall of 2002.

The Investors also argue that Fincke’s failure to disclose the receipt of the First and Second Philips Letters in the Company Overview and in conjunction with the April 2003 Transaction constitutes a culpable omission. They argue that the information was material as the Philips litigation raised potential risks and costs of litigation that were not included in any projections provided to the Investors.

Unlike the Business Plan, the Company Overview did not broach the subject of intellectual property litigation. Therefore, Fincke did not have a duty to disclose the Philips correspondence. Furthermore, to the extent the Investors argue that the projected budget failed to account for possible litigation costs, the Court finds that the information possessed by Fincke as of March 2003 was not sufficiently concrete to establish that the projected figures were unreasonable on account of any failure to include anticipated litigation costs related to the Philips matter. As with the first letter, the Second Philips Letter lacked specificity and merely requested a meeting with Access representatives. In fact, despite Elefante’s testimony that he would

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have disclosed the Philips litigation had he known of the First and Second Philips Letters, the Court notes that he

did

receive copies of the correspondence and apparently did not actually find the matter particularly pressing at the time the Company Overview was drafted. Because the Philips matter had not yet reached a level of materiality necessary for disclosure, Fincke did not act unreasonably, recklessly, or fraudulently in failing to disclose the Philips correspondence.

The Investors further argue that Fincke affirmatively misled the Investors after the lawsuit was filed by misrepresenting the gravity of the Philips litigation and the ability of Access to defend or design around the alleged infringements. This claim fails for several reasons. First, the Investors fail to specify which transaction was connected with the allegedly misleading information, as a result of which they suffered damages. Instead, the arguments raised by the Investors sound in breach of duties owed to them or the company, and not in fraud or misrepresentation in connection with a specific transaction.

Second, the Investors did not show that any statements Fincke allegedly made regarding the Philips matter were actually false or misleading. Moriarty testified that Fincke told him the lawsuit was “nothing” and that Access “had stuff on Philips,” indicating that Access’s litigation position was strong. According to Moriarty, Fincke expressed Access’s “need to fight them [Philips].”

Trial Tr. day 6, 92, 9k..

Connolly testified that, after learning that Philips had filed a complaint, Fincke told him that Access could “handle virtually anything,” and would be able to re-engineer the Access AED to eliminate any legitimate infringement issues.

Trial Tr. day 9, SI.

Radley testified that Fincke told him such lawsuits were “normal,” he thought the claims were inconsequential, and Access could design around any infringement issues.

Trial Tr. day 9, 98.

Elefante testified that Fincke took an “aggressive posture” toward the Philips matter.

Trial Tr. day 8, k7.

He said Fincke did not believe the Access AED infringed some of the Philips intellectual property claims, thought that some of the Philips patents were invalid, and insisted that the proposed licensing revenues were too high.

98

Trial Tr. day 8, k5-k6.

He also, testified, however, that Fincke seemed willing to get expert advice regarding the appropriate level of royalties that might resolve the issue.

Trial Tr. day 8, k6.

Even assuming that all of this testimony were true — i.e., that Fincke led the strategy with Philips, that Fincke wanted to aggressively defend against the infringement claims, at least in part, and that Fincke resisted Philips’s proposed licensing terms — the Investors have failed to prove that Fincke’s stated position was a

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false representation of his present intention or that it was unreasonable based on information at his disposal. To the extent that the Investors claim his strategy was ultimately unsuccessful (which they have not shown, as no testimony as to the outcome of the litigation was provided), that argument is nothing more than an allegation of mismanagement, which does not, standing alone, give rise to liability for fraud or misrepresentation.

In one respect, however, Fincke did make a material and false statement regarding Access’s Intellectual Property. The Business Plan plainly stated that: “Access has been advised by its patent counsel that its product does not infringe any patents known to him....” Although this statement is followed by the warning that this “opinion” may turn out to be incorrect, that warning cannot cure the obvious falsity of this clear representation of fact. Neither Pandiscio nor any other attorney had given a formal opinion related to the Access Intellectual Property. Fincke testified at trial that he discussed the claims referenced in the First Philips Letter with Pandiscio and related his personal conclusion that the Access AED did not infringe any of Philips’s patents.

Trial Tr. day S, 90-91.

But this is a far cry from receiving “advice” from counsel on the matter. And his review, unlike the statement included the Business Plan, was limited to Philips’s patents, and not the universe of potential infringement problems in the AED field. As a sophisticated inventor with knowledge of the patenting process and experience with handling intellectual property claims, Fincke knew, or at the very least, should have known, that no such opinion had been formally given.

The Court finds that the statement was also material. Investments in companies developing new medical devices are necessarily fraught with the risk that competitors will assert patent infringement claims. By affirmatively representing that a professional in the patent field has reviewed and preliminarily passed muster on the patent soundness of the intellectual property, the risk of those claims is, in the eye of a reasonable investor, greatly reduced. Such a statement would “alter the mix of total information available,” and is highly material to an investor in the medical device field.

The Court therefore concludes that Fincke is liable for fraud, negligent misrepresentation, and securities fraud under § 410(a)(2) for making a false statement of material fact (that the Access AED’s patent was reviewed by patent counsel and that Access had been advised by that counsel that it infringed on no other patent known to that counsel). The question of damages, if any, remains, however, to be decided during the damages phase of trial.

v. Cadent Litigation

The Investors assert that Fincke’s failure to disclose the outcome of the Ca-dent litigation — namely, the judgment against him personally — is actionable, as the information would have been material to their decisions to invest in Access. The Plaintiffs further imply that Fincke’s alleged representation of the judgment as a “vindication,” — owing to the fact that he prevailed on a majority of the counts against him — -was misleading for failure to disclose the outcome of the remaining claims. Regardless of whether Fincke ever represented that the verdict was a vindication, the Court finds that the bare non-disclosure of the personal judgment against him does not constitute a material omission under Massachusetts common law or § 410(a)(2).

The Plaintiffs have pointed to no case law that would suggest that Fincke had a duty to disclose the outcome of the Cadent

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litigation. Any representation to Moriarty that the verdict was a vindication could be, in a subjective sense, literally true. Furthermore, at the time the alleged statement was made, Fincke was not seeking an investment from Moriarty and any discussion regarding the lawsuit was one between Mends. The Court finds that the statement was not a misleading statement that gave rise to a duty to correct.

Similarly, the failure to disclose this information to the other Investors, who were not aware of the Cadent litigation at the time their investments were made, does not give rise to liability. The Investors have pointed to no legal basis that would give rise to a duty to disclose the outcome. Silence, absent a duty to disclose, is not actionable. Even assuming its materiality, Fincke was not obliged to disclose the Cadent litigation and its outcome, and his failure to do so does not amount to fraud, negligent misrepresentation, or securities fraud.

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b.

The Company Overview

A large portion of the Complaint centered around allegedly false and misleading statements made in the Company Overview distributed to Investors in March of 2003, although little testimony related to the document was elicited at trial. Nonetheless, the Court has reviewed the allegations originally made by the Investors, and finds them unsupported.

The Investors say that they relied on information contained in the Company Overview in making their offer for additional investments that eventually culminated in the April 2003 Transaction. According to the Investors, they “soon discovered ... that [the Company Overview] was riddled with false and materially misleading (a) statements concerning the company’s achievements, and (b) projections based on the company’s purported achievements.” For each alleged false or misleading statement, the Investors may not rely on bare allegations that statements were false, but must specify which statements they claim are false or misleading,

how

the statement was false or misleading and that the statement (or omission) was material.

See PDI,

2006 WL 3350461 , at *3 (“When the plaintiff challenges a forward-looking statement made by the defendant, plaintiffs mere usage of catchwords or bold assertions that defendant’s statement was false or misleading because the defendant knew it to be false or misleading cannot lend support to plaintiffs claim.”);

Loan v. FDIC,

717 F.Supp. 964, 967 (D.Mass.1989)

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(“Merely claiming that a statement is untrue does not make it so. A plaintiff has an obligation to explain what is untrue about each of the challenged statements .... ”).

With regard to several of the allegedly false statements contained in the Company Overview, the Plaintiffs failed to explain how the statements were misleading or false. As such, they do not give rise to liability for fraud, negligent misrepresentation, or securities fraud under § 410(a)(2).

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For other allegedly false or misleading statements, however, the Investors provided some evidentiary support, which the Court considers at more length.

The Investors allege that two statements in

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