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

> United States Bankruptcy Court, D. Massachusetts · April 17, 2009 · 404 B.R. 593

URL: https://www.frixlaw.com/law-library/cases/2028516

## Case

- **Full name:** In Re ACCESS CARDIOSYSTEMS, INC., Debtor. Access Cardiosystems, Inc., North American Enterprises, Inc., John Moriarty and Associates, John J. Moriarty, Richard F. Connolly, Jr., and Joseph R. Zimmell, Plaintiffs, Official Committee of Unsecured Creditors of Access Cardiosystems, Inc., Plaintiffs-Intervenors, v. Randall Fincke, Defendant
- **Court:** United States Bankruptcy Court, D. Massachusetts
- **Decided:** April 17, 2009
- **Citations:** 404 B.R. 593; 2009 Bankr. LEXIS 1025; 2009 WL 1044869
- **Precedential status:** Published
- **Opinion:** Opinion by Boroff
- **Judges:** Henry J. Boroff
- **Cited by:** 21 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/2028516

## How later opinions describe it (automated extraction)

- stating courts consider oral representations that contradict written material as an additional factor
- observing that a “duty to disclose” requirement “is found in both common-law fraud and negligent representation” claims

## Opinion text

MEMORANDUM OF DECISION
HENRY J. BOROFF, Bankruptcy Judge.
Before the Court, after trial on the question of liability only,
2
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
*609
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”)
3
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.
4
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.
5
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.
6
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
7
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.
8
Other individuals — including
*610
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.
9
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.
10
Baletsa eventually left his position as president of Access in April 2001.
11
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.
12
According to Michael Elefante, Access’s corporate counsel,
13
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,
*611
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.
14
On July 13, 2001, Moriarty made a second investment
15
of $1,000,000 in Access.
16
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,
17
orders from and good distribution network in Europe, and Fincke’s purported plan to
*612
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.
18
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.
19
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
20
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,
21
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.
22
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
*613
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.
23
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.
*614
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
24
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,
25
but did not disclose the receipt of the First Philips Letter.
*615
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.
26
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”
27
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.
28
On October 30, 2002, Zimmell made a $1,000,000 investment, followed by two additional $500,000 investments in November and December.
29
*616
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,
30
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.
31
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.
32
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
*617
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.
33
Trial Tr. day 5, 149.
Access also began to fall into arrears on its rent.
34
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)
35
— 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
*618
with Access entirely if the price were increased.
36
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
*619
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”),
37
which had been prepared, at least in part, by Bounty.
38
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)
*620
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).
39
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
*621
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
*622
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
*623
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
*624
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
*625
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
*626
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
*627
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
*628
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.
*629
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
*630
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”).
*631
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
*632
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.”
*633
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
*634
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
*635
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
*636
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
*637
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.
*638
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
60
To recover for fraud under Massachusetts law, a plaintiff must prove, by a
*639
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.
*640
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
*649
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
*650
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.
*652
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 p

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/2028516. Public record. Not legal advice.