Berckeley Investment Group, Ltd. v. Colkitt

455 F.3d 195 (3d Cir. 2006)

Purchase the Printed Copy at bsmsphd.com

Nature of the Case

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

Facts

Douglas Colkitt, M.D. (D), is the Chairman of the Board and principal shareholder of National Medical Financial Services Corporation (NMFS). NMFS shares were traded on the NASDAQ stock exchange. D sought lenders who would be willing to lend him money in exchange for the right to convert his unregistered shares of NMFS stock. D entered into an agreement with P. P purchased 40 convertible debentures from D at $50,000 per debenture. Each debenture represented an unsecured loan for a one-year term, which also obligated D to pay to P six percent interest on a quarterly basis. P was entitled under the Agreement to convert its debentures into NMFS shares. Upon demand, D would issue unregistered shares of NMFS at a 17% discount off the then-prevailing market price of the stock. P was entitled to convert up to one-half of the principal amount into unregistered NMFS shares 100 days after the closing of the Agreement, and the remaining principal amount 120 days after the closing date. the Agreement was entered into pursuant to Regulation S of the Securities Act of 1933, 17 C.F.R. §§ 230.901-.04, and that it would be 'governed by and interpreted according to the law of the State of New York.' The current law established a 40-day restricted period on resales. The agreement specifically provided that P could not resell until 40 days. P warranted that all subsequent offers or sales of the debentures or shares would be undertaken in accordance with the registration requirements of the 1933 Securities Act. D represented that he would 'take no action, including but not limited to the further sale of securities pursuant to Regulation S of NMFS that are held by D, that will affect in any way the running of the Restricted Period or the ability of P to freely resell the debentures or the Shares in accordance with applicable securities laws and this Agreement. D agreed to place 300,000 shares of NMFS stock in escrow to cover the $2,000,000 amount. P wired $2 million to D. The agreement stated that D had relied on his attorneys for establishing compliance with federal securities law. In 1997, the Regulation S restriction period was changed to one year. After the 100-day period, P began making demands to convert the debentures into NMFS stock. D failed to comply with the conversion demands. D finally converted 18,230 shares but refused to convert any additional shares. D refused to make required quarterly interest payments that were due on the debentures under the Agreement and to repay the balance due on the Debentures at the end of the term. P sued D. D contends that under §29(b) of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78cc(b), he was allowed to rescind the agreement because it violated Rule 10b-5 as well as Section 5 of the 1933 Act and Section 10(b) of the Exchange Act. The District Court found in favor of P on cross-motions for summary judgment. The Court awarded damages in the amount of $2,611,075.52. D appealed.