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FIH, LLC v. Foundation Capital Partners, LLC

United States District Court, D. Connecticut

March 30, 2016

FIH, LLC, Plaintiff,
v.
FOUNDATION CAPITAL PARTNERS LLC, f/k/a FOUNDATION MANAGING MEMBER LLC; DEAN BARR; JOSEPH MEEHAN; and JOSEPH ELMLINGER, Defendants.

RULING ON DEFENDANTS’ MOTIONS TO DISMISS

JANET BOND ARTERTON, U.S.D.J.

This is an action brought by Plaintiff FIH, LLC against Defendants Foundation Capital Partners, LLC (“Foundation”), Dean Barr, Joseph Meehan, Thomas Ward, and Joseph Elmlinger, alleging: violations of § 10(b) of the Security Exchange Act, 15 U.S.C. § 78j(b) (Count I); violations of the Connecticut Uniform Securities Act (“CUSA”), Conn. Gen. Stat. §§ 36b-29(a), (c) (Count II); intentional misrepresentation (Count III); fraudulent inducement (Count IV); negligent misrepresentation (Count V); and unjust enrichment (Count VI), all arising out of FIH’s investment in Foundation on the basis of representations by the individual defendants that FIH now claims to have been false or misleading. Defendants Barr [Doc. # 46], Ward [Doc. # 47], Meehan [Doc. # 51], and Elmlinger [Doc. # 49] each move to dismiss. Oral argument was held on February 9, 2016. For the following reasons, Defendants’ motions are granted in part and denied in part.

Table of Contents

I. Facts Alleged ............................................................................................................... 4

A. Defendants’ Alleged Representations ............................................................................ 5

1. Barr’s Skills, Experience and Contacts ...................................................................... 5

2. Barr and Meehan’s Relationship ................................................................................ 7

3. The Pipeline and Expectations regarding Performance ......................................... 7

4. Barr’s Personal Spending ............................................................................................ 9

B. FIH’s Investment ........................................................................................................... 10

C. Project Activity Logs ..................................................................................................... 10

D. Project Soothsayer and Emails ..................................................................................... 11

E. Evidence of Misrepresentations ................................................................................... 12

1. Barr’s Skills, Experience and Contacts .................................................................... 12

2. Barr and Meehan’s Relationship .............................................................................. 14

3. The Pipeline and Expectations regarding Performance ....................................... 15

4. Barr’s Personal Spending .......................................................................................... 16

F. Request for Rescission ................................................................................................... 18

II. Discussion ................................................................................................................. 19

A. Securities and Exchange Act § 10(b) (Count I) ......................................................... 20

1. Liability for Misrepresentations .............................................................................. 22

a. Due Diligence Materials, Portfolio Model, General Partner Forecast ......... 22

b. Other Statements ................................................................................................ 26

2. Materially False/Misleading ..................................................................................... 27

a. Barr’s Skills, Experience and Contacts ............................................................. 28

b. The Pipeline and Expectations Regarding Performance ............................... 32

i. Misrepresentations ............................................................................................. 33

ii. Omissions ........................................................................................................ 37

iii. Materiality of Misrepresentations and Omissions ...................................... 41

c. Barr and Meehan’s Relationship ........................................................................... 47

d. Barr’s Personal Spending ................................................................................... 50

i. Salary Draw .......................................................................................................... 50

ii. Emerald Investment ....................................................................................... 51

iii. In the Control Room ...................................................................................... 52

3. Reasonable Reliance .................................................................................................. 54

4. Scienter ....................................................................................................................... 55

a. Pipeline Continues to Expand & Pipeline has Become Increasingly Active 58

b. Project Apex ........................................................................................................ 58

c. Nothing FIH Needed to Know .............................................................................. 58

d. No Threat to Barr and Meehan’s Ability to Work Together ......................... 60

5. Loss Causation ........................................................................................................... 60

B. State Law Claims ............................................................................................................ 63

1. CUSA, Conn. Gen. Stat. §§ 36b-29(a) and (c) (Count II) .................................... 64

2. Intentional and Negligent Misrepresentation and Fraudulent Inducement (Counts III, IV & V)............................................... 65

3. Unjust Enrichment (Count VI) ............................................................................... 66

III. Conclusion ................................................................................................................ 68

I. Facts Alleged[1]

Plaintiff alleges the following facts in its Amended Complaint [Doc. # 43]. Foundation was founded in 2009 by Defendants Dean Barr and Joseph Meehan as a startup company. (Am. Compl. ¶ 29.) The company’s “business plan was to make three to four yearly minority investments of up to 25% in the management companies of large, well-established hedge funds.” (Id. ¶ 28.) Foundation “asserted to potential investors that it expected to raise $4, 000, 000, 000 to pursue this type of investment and that it was to yield substantial returns.” (Id.)

Dean Barr served as the managing partner and managing principal of Foundation (id. ¶ 20); Joseph Meehan was a partner, managing principal and the Chief Operating Officer (id. ¶ 21); Thomas Ward was a partner, principal, manager, and Head of Distribution (id. ¶ 22); and Joseph Elmlinger was a partner, principal, and Head of Risk Structuring (id. ¶ 23).

In September 2013, FIH, an investment company, was introduced to Foundation. (Id. ¶ 37.) “The initial call between the representatives of FIH and Foundation took place in October 2013.” (Id.) Over the next five months, “Foundation, through the individual defendants, engaged in extensive communications with representatives of FIH to persuade them to make a substantial investment in Foundation. (Id. ¶ 38.) Among these communications were: (1) Preliminary Due Diligence Materials “drafted and/or approved by the individual defendants, ” prepared as of September 2013 and February 2014 (id. ¶ 40); (2) phone calls, emails and meetings; (3) a Portfolio Model (id. ¶ 77); and (4) a General Partner Forecast (id. ¶ 78; see Forecast, Ex. D to Barr Mot. to Dismiss). In these communications, Defendants made a number of representations to Plaintiff that Plaintiff now alleges were false or misleading. These representations are outlined below.

A. Defendants’ Alleged Representations

1. Barr’s Skills, Experience and Contacts

Many of the representations alleged to have been made by Defendants to FIH concerned Barr’s experience, skills, and contacts in the investment industry. These statements include the following:

• “The principals . . . have deep experience launching and managing investment businesses. Collectively, the team has over 100 years of experience in the alternative investment industry, having built/managed a number of successful asset management businesses, managed nearly $1 trillion in assets, and participated in dozens of growth capital investments. The principals believe that these experiences in successfully building alternative investment firms will enable [Foundation] to enjoy a strong start and long term success.” (Due Diligence Sept. 2013 at 6; Due Diligence Feb. 2014 at 6).
• “[Foundation’s] team maintains extensive relationships with leading managers, prime brokers and operations/administrative servicing professionals that will assist the firm with deal sourcing and execution.” (Due Diligence Sept. 2013 at 26; Due Diligence Feb. 2014 at 26.)
• “The Investment Manager plans to source deals directly through personal relationships and direct contact with targeted leading managers in the alternative investment industry. The firm’s partners maintain close working relationships with prime brokerage firms, investment banks, key funds-of-funds, and strategic limited partners who represent some of the world’s largest investors in hedge funds. . . . The firm will use the extensive experience and relationships Mr. Barr cultivated at Citi Alternative Investments . . . . [Foundation] will use his background and experience in its discussions surrounding investment opportunities [with] Large Hedge Fund Managers.” (Due Diligence Sept. 2013 at 26; Due Diligence Feb. 2014 at 26.)

The Due Diligence Materials additionally asserted that “[a] third party diligence group was retained to conduct professional and personal background checks on the managing principals of the General Partner, ” and its findings “validated the work history and achievements of Mr. Barr and Mr. Meehan.” (Due Diligence Sept. 2013 at 14; Due Diligence Feb. 2014 at 14.) Furthermore, the Materials stated, the third party found “no negative legal or personal judgments involving these principals.” (Due Diligence Sept. 2013 at 14; Due Diligence Feb. 2014 at 14.) Barr similarly asserted on December 4, 2013, [2]during a meeting at which all of the individual defendants were present, that there was nothing “FIH needed to know about [his] background or personality” and no other matters concerning him that FIH should know about before proceeding with an investment. (Am. Compl. ¶ 91.)

2. Barr and Meehan’s Relationship

Several of Defendants’ alleged representations to FIH concerned Barr’s relationship with Meehan. The Due Diligence Materials for example, stated that “Mr. Barr and Mr. Meehan have known each other for 16 years, meeting through family relationships in 1997, ” and “[b]oth have worked closely together since the concept for Foundation Capital Partners was created in 2007.” (Due Diligence Sept. 2013 at 13; Due Diligence Feb. 2014 at 13.) The Materials additionally asserted that the partners did “not believe they ha[d] any potential conflicts of interest with [Foundation].” (Due Diligence Sept. 2013 at 14; Due Diligence Feb. 2014 at 14.) In the lead-up to Barr’s divorce from Meehan’s wife’s sister, Barr and Meehan each represented to FIH, in separate phone calls on December 5, 2013, that “their relationship as brothers in law” posed no “threat to their ability to work together.” (Am. Compl. ¶¶ 83-84.)

3. The Pipeline and Expectations regarding Performance

FIH also alleges that Defendants made a number of representations to it concerning investments in Foundation’s pipeline and Defendants’ expectations about Foundation’s performance. These include the following statements:

• As of September 2013:
o The Due Diligence Materials indicated that fifteen projects were in Foundation’s pipeline, “including those with which the firm is in active discussions” (Projects Delta, Lake, California, and Corvette, and Funds Nos. 5-15). (Due Diligence Sept. 2013 at 27.)
• December 2, 2013:
o Barr circulated to FIH a document “drafted and/or approved by the individual defendants, ” entitled “[Foundation] Portfolio Model, ” which showed that “Foundation would close on four hedge fund GP minority interest transactions by June 30, 2014.” (Am. Compl. ¶ 77.)
o The Portfolio Model “indicated Projects Lake and Granite would close by March of 2014 and Projects California and Corvette by June 2014.” (Id.)
• December 19, 2013:
o Director of Mergers and Acquisitions, Hall O’Donnell emailed to FIH, copying Defendants Barr, Meehan, and Elmlinger, a document entitled “Project Foundation General Partner Forecast, ” which “was drafted and/or approved by the individual defendants.” (Id. ¶ 78.) The document showed that Foundation “was in a position to close on four deals [Projects Lake, Granite, California, and Corvette] by June 30, 2014.” (Id.; see Forecast at 8.)
• December 30, 2013:
o In an email to FIH, Barr stated: “Starting Jan 5th, we have four possible transactions in the works” (Dec. 30 Email, Ex. E to Barr Mot. to Dismiss [Doc. # 46]), referring to Projects Bronco, Corvette, Lake, and Centaur (Am. Compl. ¶ 72).
• January 22, 2014:
o In an email to FIH, on which Meehan was copied, Barr reported: “We had a comprehensive call with a $5 bn London based Hedge Fund” (Project Apex) and “[w]e have a ‘green light’ to pursue a deal. . . . I believe we can move expeditiously on this deal.” (Jan. 22, 2014 Email, Ex. F to Barr Mot. to Dismiss; Am. Compl. ¶ 73.)
• As of February 2014:
o In an email to FIH, on which Meehan was copied, Barr stated: “We have some reasonably good intel that suggests that [the] offer [for Project Pilot] would be given serious consideration. Our pipeline continues to expand with real, immediate deals.” (Feb. 3, 2014 Email, Ex. G to Barr Mot. to Dismiss; Am. Compl. ¶ 74.)
o The Due Diligence Materials represented: “[Foundation] expects to close on three to four transactions each year.” (Due Diligence Feb. 2014 at 4; see also Due Diligence Sept. 2013 at 4.)
o According to the Due Diligence Materials, “the current representative [Foundation] pipeline . . . has become increasingly active in recent months . . . .” (Due Diligence Feb. 2014 at 27; see also Due Diligence Sept. 2013 at 27.)
o The Due Diligence Materials showed fourteen projects in the pipeline, [3]“including those with which the firm is in active discussions” (Projects Lake, Apex, Corvette, Granite, Breakout, Pilot, Centaur, Pound, Tensor, Mainstay, Yale, Halo, Gun, and Bronco). (Due Diligence Feb. 2014 at 27.)
o The Due Diligence Materials represented that non-disclosure agreements (“NDAs”) were signed in Projects Apex, Granite, Lake, and Centaur. (Id.)

4. Barr’s Personal Spending

Finally, a number of Defendants’ representations pertained to Barr’s spending habits and their likely effect, if any, on Foundation.

In January 2014, FIH read a news article which stated that Barr had lost a $1 million investment in a deep sea treasure hunting fraud. (Am. Compl. ¶ 103.) “Concerned about Barr’s judgment, FIH inquired of Barr whether the story was true.” (Id.) In an email dated January 16, 2014, Barr responded that his “investment was $200, 000, ” and “[t]he $1 million number represents other investors in the hoax.” (Jan. 16 Email, Ex. I to Barr Mot. to Dismiss.)

Several days later, on January 20, 2014, Barr emailed FIH, copying Defendants Meehan, Ward, and Elmlinger, to ask if FIH was “comfortable with allowing the Partners to make the monthly Jan. salary draw and conduct normal business travel as needed.” (Jan. 20 Email, Ex. B to Barr Mot. to Dismiss; Am. Compl. ¶ 93.) According to FIH, “[i]n making that request, Barr effectively was representing to FIH that Barr’s request to draw his salary was fiscally responsible and in the company’s best interests.” (Am. Compl. ¶ 93.)

On February 20, 2014, “at a dinner in a Greenwich, Connecticut restaurant . . . Meehan and Elmlinger assured FIH’s representative that there were strong spending controls in place, ” stating: “You’re looking at the control room. Nothing happens without us” and “[w]e will not spend your money foolishly.” (Id. ¶¶ 99-101.)

B. FIH’s Investment

FIH ultimately invested $6.75 million in Foundation. (Id. ¶ 3.) The investment was made in four phases, the last of which took place on February 27, 2014. (Id. ¶ 109.) “The final transaction entailed: (1) FIH’s direct purchase from Foundation of an interest in Foundation for $3 [m]illion; (2) FIH’s direct purchase from Foundation of a previous investor’s interest in Foundation for a planned $4.2 [m]illion, of which $2.1 [m]illion was paid; (3) FIH’s purchase of another previous investor’s interest for $1.15 [m]illion; and (4) FIH’s purchase of some of Barr’s interest in Foundation for $500, 000.” (Id.)

After FIH invested in Foundation, however, it obtained information from several sources indicating that some of the representations that had been made by Defendants to FIH were untrue. These sources included: (1) Project Activity Logs; (2) Project Soothsayer; and (3) Emails from Meehan and Elmlinger. Each of these sources is described below.

C. Project Activity Logs

On March 4, 2014, FIH received copies of internal Foundation documents entitled “Project Activity Logs.” (Id. ¶¶ 143, 144.) The Logs “listed hedge fund targets in Foundation’s pipeline under three categories: Live Deals, Prospects, and Dead Projects.” (Id. ¶ 143.) “For each hedge fund target, the Project Activity Log was updated to reflect the progress in columns named ‘recent activity/notes, ’ ‘next steps’ and ‘process milestones.’” (Id.) “The Project Activity Logs served as an internal diary of the progress made by Foundation on each of the targets to date and also catalogued the historical progress with each target to date.” (Id.) “Thus, each Project Activity Log version built upon the previous version and added additional information but did not delete prior progress notes.” (Id.) The Logs “were distributed to Foundation’s employees-including the individual defendants-for discussion at weekly meetings to discuss movement on the pipeline as demonstrated in the Project Activity Logs.” (Id.) The Log FIH received on March 4, 2014 was dated March 3, 2014, and it “included historical information on all of Foundation’s prospects up to that date.” (Id. ¶ 144.)

D. Project Soothsayer and Emails

On March 14, 2014, ten days after FIH received the Project Activity Logs, Meehan and Elmlinger contacted FIH and made “oral statements . . . to the effect that Barr was dishonest, incompetent, and a disaster to Foundation who must be removed if Foundation was to survive.” (Id. ¶ 115.) They promised to provide FIH with a written “briefing” explaining why Barr needed to be removed from the company. (Id.) On March 21, 2014, Meehan emailed FIH, copying Elmlinger, stating: “I am finishing my stab at the previously mentioned briefing. Elm[linger] has landed, and I have debriefed him. He will take a thorough read and will add and edit where necessary.” (Id. ¶ 116.)

On March 28, 2014, FIH received a package bearing the return address of Joseph Elmlinger which contained “183 pages of emails printed out from both Meehan’s and Elmlinger’s Microsoft Outlook accounts, ” “covering a period from February 19, 2012 to March 26, 2014, ” which supported Meehan’s and Elmlinger’s allegations about Barr’s character and performance. (Id. ¶¶ 121, 124; see Soothsayer Emails, Ex. D to Am. Compl.; Mar. 26-27 Emails, Ex. E to Am. Compl.) On April 1, 2014, FIH additionally received the written “briefing” promised by Meehan and Elmlinger. (Id. ¶ 119.) Entitled “Project Soothsayer, ” the document “spelled out in detail, ” for ten pages, “the writers’ belief in the fundamental dishonesty, lack of experience, business contacts and appallingly poor business and personal judgment of Barr and detail[s] those qualities’ disastrous effect on Foundation’s performance in the past and its prospects for the future.” (Id. ¶¶ 122-23; see Project Soothsayer, Ex. C to Am. Compl.)

E. Evidence of Misrepresentations

Project Soothsayer, the package of emails delivered to FIH by Meehan/Elmlinger, and the Project Activity Logs included a number of statements that FIH claims demonstrate the falsity of Defendants’ prior assertions to FIH regarding Barr’s skills, experience, and contacts; Barr and Meehan’s relationship; the pipeline and Defendants’ expectations regarding ...


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