Kimberlin v. Ciena Corporation

1998 WL 603234 (1998)

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Nature of the Case

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Facts

P is a New York investment banker who owns controlling or sole interests in three of the other four plaintiffs -- Spencer Trask Holdings, Inc., a New York-based venture capital firm; INNO Co., a New York-based investment company; and Kevin Kimberlin L.P., a limited partnership set up by P to hold D stock. Laura McNamara, the fifth plaintiff, is a managing director of Spencer Trask. D is a manufacturer of fiber optic technology incorporated in Delaware and based in Maryland. D's technology enables current users of fiber optic technology to expand their bandwidth without the expense of installing new fiber optic cable. P provided Ciena with $190,000 in seed capital pursuant to a stock purchase agreement, plus a $300,000 letter of credit. At the same time, D and Spencer Trask entered into a Private Placement Agreement for a future capitalization effort. In April 1994 D issued its first series of preferred stock (Series A). Spencer Trask did not underwrite the Series A issue as specified in the Placement Agreement. Sevin Rosen Funds, a larger venture capital firm, handled the Series A offering. Sevin Rosen installed defendant Patrick Nettles as director and CEO of D in February 1994. As compensation for failing to use Spencer Trask D agreed to modify the Placement Agreement so that D would offer its Series B preferred stock through Spencer Trask. If D did not use Spencer Trask to underwrite the Series B offering, Spencer Trask would receive a warrant for 150,000 shares of Series A stock. P purchased (partially for himself, partially for INNO) 421,520 shares of Series A preferred stock. In December 1995, D issued the Series B preferred stock offering. It was made through Charles River Ventures, another venture capital firm. D forwarded the stock warrant provided for in the liquidated damages clause. A settlement was reached on February 10, 1995, which terminated the Placement Agreement and gave P a warrant for 300,000 shares of Series B Stock. In addition, the Series B offering, which closed on December 22, 1994, without P and INNO (both holders of Series A shares), was reopened that same day to allow P to purchase 131,733 shares of Series B preferred stock. Because of a well-known deal with Sprint, D needed a Series C preferred stock offering. Although the monthly reports and the business plan were apparently distributed to the major investors, P did not receive this information until he had a phone conversation sometime in early November with Dr. Nettles. P complained of the lack of information. On October 13, 1995, the board agreed to pursue a third round of capital financing. All the Series A and B holders were called to determine their interest in participating in the Series C. P was told his prorata share (based on his percentage of Series A & B stock) would be 68,437 shares. P informed D that he would take his full prorata portion of Series C. On November 2, 1995, D had put together a tentative list of prior investors' participation which indicated an expected purchase by the prior investors of $7.25 M - $ 11..5 M, but which had next to P's name nothing but question marks. Weiss, Peck, and Greer were the lead investors in the Series C round, and a term sheet was circulated. P claims he never received this term sheet. P was not included in the mailing. D used a target amount of $10 M which was a prorata share for P of 72,533 shares. P send a fax to purchase his prorata share (which, including his warrants, he calculated at 6.035%) of the entire Series C offering (not just the portion reserved for the existing investors), which he calculated as 251,526 shares, not the 72,533 already discussed. P claims that D told him that changing the stock allocations at that point would destroy the financing scheme and that if he insisted he would get nothing at all. P was assured that he would get the 72,533 shares of Series C. A copy of the Sprint contract had been executed and a copy was given out to some of the Series C investors, but not to P. Bessemer Ventures, one of the existing investors, would receive an additional $1 M of Series C stock, thus raising the entire Series C to its final amount of $26 M. P signed and returned the signature page for the Series C agreement, which closed on December 21, 1995. Ps sued D and contend that D breached its contractual duties under both the Series B agreement and the Series B Warrants. P also alleges that Ds violated the federal securities laws by misrepresenting or withholding material information. D has also filed two counterclaims against P, claiming that his purchase of Series C stock should be rescinded because of his filing of the instant lawsuit. Both parties moved for summary judgment.