Strategic Diversity, Inc. v. Alchemix Corporation

I. Background

A. The Initial Investment

In April 2001, Kenneth P. Weiss met Robert Horton. Weiss expressed interest in investing in Horton’s alternative fuels start-up company, Alchemix Corporation. At the direction of his accountant, Weiss set up Strategic Diversity, Inc., (“Strategic”) to handle his investments. In Strategic’s first venture, Weiss sought to invest $500,000 in Alchemix and requested certain collateral to secure his investment. Approxi- mately two weeks later, the parties arrived at an agreement.

In a seven-page agreement signed on July 2, 2001, Strate- gic agreed to invest $500,000 in Alchemix. The agreement incorporated the following: (1) a convertible promissory note (“Note”) in the amount of $500,000.00; (2) security interests in Alchemix’s patents and intellectual property rights; and (3) a warrant which included a provision that ensured capitaliza- tion of the company could not exceed 40 million shares (“Warrant”).

The Note was to be paid after five years at an interest rate of ten percent per year compounded monthly. Under the terms of the Note, Weiss had the option of converting the Note to 250,000 shares of stock at a price of $2 or such price as…

Opinion by Judge HUG; Concurrence by Judge RAWLINSON.

ORDER

The Opinion filed December 2, 2011, slip op. 20613, is withdrawn. It may not be cited as precedent by or to this court or any district court of the Ninth Circuit. Appellees’ petition for panel rehearing is DENIED.

OPINION

This appeal concerns the maintenance of a suit for rescission under section 10(b) of the Securities and Exchange Act of 1934 by plaintiffs-appellants Kenneth Weiss and his wholly-owned corporation Strategic Diversity, Inc. The district court granted summary judgment to defendants-appel *1202 lees Robert Horton, Alchemix Corporation, and Medici Associates on all claims and awarded the defendants attorneys’ fees. We affirm in part, reverse in part, vacate the attorneys’ fee award, and remand.

I. Background

A. The Initial Investment

In April 2001, Kenneth P. Weiss met Robert Horton. Weiss expressed interest in investing in Horton’s alternative fuels start-up company, Alchemix Corporation. At the direction of his accountant, Weiss set up Strategic Diversity, Inc., (“Strategic”) to handle his investments. In Strategic’s first venture, Weiss sought to invest $500,000 in Alchemix and requested certain…

concurring in part:

I join the majority opinion’s conclusion that this case should be remanded to allow the district court to apply Merck & Co. v. Reynolds, — U.S. -, 130 S.Ct. 1784 , 176 L.Ed.2d 582 (2010) to the statute of limitations determination. I also agree that the remand requires vacatur of the attorneys’ fee award. Finally, I concur in the affirmance of the district court’s rulings on Kenneth Weiss’s and Strategic Diversity’s state law claims of common law fraud, negligent misrepresentation, mutual mistake, failure of a condition precedent and unjust enrichment.

However, I expressly decline to join the majority’s analysis concluding in its holding that “a rescissionary measure of damages is available to Weiss.” Majority Opinion, pp. 1207-09. Weiss and Strategic Diversity never sought rescissionary *1212 damages. In fact, they expressly represented that they “were not seeking recovery of damages based on a decline in the value, or misrepresentation regarding the value, of the stock purchased.... ” Opening Brief of Plaintiffs-Appellants, p. 38. “[T]he only remedy sought by [Strategic Diversity and Weiss] was rescission of the stock purchase ...” Id. See also Plaintiffs’…