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Stafford Investments, LLC v. Vito

May 14, 2009

STAFFORD INVESTMENTS, LLC
v.
ROBERT A. VITO



The opinion of the court was delivered by: Juan R. Sánchez, J.

MEMORANDUM AND ORDER

Plaintiff Stafford Investments, LLC, and Defendant Robert A. Vito ask me to overturn a jury verdict which found Vito breached an investment contract with John Stafford Jr. and John Stafford III but awarded no damages and found the Staffords were entitled to rescission and awarded no damages. I find a consistent reading of the seemingly inconsistent verdict, and will deny both motions.

FACTS*fn1

Vito is an entrepreneur who invented an "unbreakable" lock, called Autolock, for automobiles and then boats. He founded Lawman Armor Company to market the device, but retained personal control of the patents which he licensed to Lawman. Lawman hired Robert Martin and Donald A. Milne III of Corporate Equities Group (CEG) to find private financing for Lawman and issued a first private placement memorandum*fn2 to raise $1 million to begin production of the Autolock.

Joshua Smith and Humbert Powell, both well-regarded entrepreneur investors, joined the Board of Lawman in response to CEG's solicitation. Martin, Milne, and directors Smith and Powell learned in April 1999 Vito was involved in litigation stemming from a bankruptcy of a company he had owned earlier, Elcom Technologies Corporation. During a limousine ride from Powell's office to a dinner party celebrating the closing of the first round of financing for Lawman, Powell produced an article from the April 1999 issue of Forbes magazine detailing Vito's role in the failure and bankruptcy of Elcom.*fn3 N.T. 1/13/09 p.m., 91:4-5. Milne testified*fn4 both Powell and Smith showed concern and discussed the timing of disclosing the litigation. Martin testified Vito explained the Elcom litigation sufficiently to satisfy the Board, but that he (Martin), Smith, and Powell believed the next Private Placement Memorandum needed to disclose the litigation.

Lawman solicited a second financing tranche with the Private Placement Memorandum dated July 1, 1999. The Private Placement Memorandum included the representation "[n]either Lawman or any of its officers, directors or shareholders is currently engaged in any litigation involving the Company. Further, there is no pending or threatened litigation involving Lawman or any of its officers, directors or shareholders." Ex. 16 at 25.

Charlestown, LLC, an investment entity controlled by Stafford Jr. and Stafford III, invested in Lawman in response to the Private Placement Memorandum.*fn5 In return, Vito offered the group two seats on the Board. Stafford Jr. and Stafford III joined the Board at a special meeting on October 20, 1999.

The next summer, the Staffords purchased 300,000 shares of Lawman stock directly from Vito for $1,050,000. The contract for that purchase incorporated by reference the July 1, 1999 Private Placement Memorandum and a July 22, 1999 Addendum.*fn6 Ex. 78 at 2. The contract also represented the buyers "had the further opportunity to obtain any information which [the Staffords] deemed necessary to evaluate [their] investment in the securities and to verify the accuracy of the information otherwise provided . . . ." N.T. 1/12/09 p.m., 127:22-25.

The relationship between the Staffords and Lawman soured. In 2004, the Staffords filed a five-count*fn7 Complaint against Vito, alleging a violation of Section 10(b) of the Exchange Act of 1934, 15 U.S.C. § 78j; a violation of the Pennsylvania Securities Act, 70 Pa. C. S. § 201-1; breach of contract, and common law fraud, based on Vito's failure to disclose the Elcom litigation which was ongoing when the Staffords purchased the 300,000 shares from Vito in July 2000.*fn8

Stafford III testified if he had seen the Elcom allegations before investing in Lawman, he "would not have invested." N.T. 1/13/09 a.m., 49:8. Stafford III testified the Elcom bankruptcy would not have meant anything to him but the accusation of fraud would have "meant everything." N.T. 1/12/09 p.m., 111:4-5. Stafford III claimed Vito never divulged the existence of the Elcom litigation to him. Stafford III stated, "There's no crime in being associated with a company that goes bankrupt. . . . [B]ut when you're accused of fraud . . . and beyond fraud you're talking about using assets of the company for your own use, bad faith . . . that's what would have stopped me from making the investment." N.T. 1/12/09 p.m., 110:19-111:2.

Trial testimony primarily addressed two questions: when the Staffords learned of the Elcom litigation and who added the representation there was no pending or threatened litigation to the July 1, 1999 Private Placement Memorandum.

The Staffords had three opportunities to learn more about the Elcom litigation. The first was during due diligence conducted by Martin A. Fiascone, a Stafford investing partner. Fiascone testified he searched the state criminal and civil dockets for adverse information but did not search the federal dockets, which would have revealed the Elcom litigation. Fiascone, who has since parted litigiously from the Staffords, testified Vito told him he (Vito) had worked for Elcom, was involved in a dispute with his successors at Elcom, and there was some sort of bankruptcy filing. N.T. 1/14/09 a.m., 10:7-10. Fiascone stated he told Stafford III "[t]here was a dispute and that the people that had acquired . . . Elcom had filed for bankruptcy. . . . Dispute in bankruptcy means to me litigation." N.T. 1/14/09 a.m., 11:18-22.

The second mention of the Elcom litigation was in a July 22, 1999 letter Vito sent the Staffords welcoming them to the Board of Lawman. The July 22 letter asks the Staffords for their biographies to share with the other Directors. Vito wrote, "As we discussed, in as much as you and your father will be serving on the Board of Directors and as an Addendum to Lawman's Private Placement Memorandum, I have attached the detailed biographies of the Board of Directors, Management team and Company advisors for your review." Ex. 130 at 3. Buried in the Addendum is information about the bankruptcy of a corporation founded by Board member Joshua I. Smith and reference to the Elcom litigation in the center of Vito's one paragraph biography:

From September 1993 to March 1997, Mr. Vito served as Chief Executive Officer and Director of Elcom Technologies Corporation, a start-up technology company. In March 1998, one year after Mr. Vito's departure from the Company when he was no longer an Officer or Director and under different management, Elcom commenced reorganization proceedings under chapter 11 of the bankruptcy code. About six months later, the company ceased business operations.

Ex. 130 at 5.

The third discussion of Elcom occurred before an October 20, 1999 special meeting of the Lawman Board, during which Stafford Jr. and Stafford III were elected to the Board. Powell testified, "Rob disclosed everything and anything he could on Elcom because at the meeting before we had the board meeting, that was completely discussed. We want full disclosure on everything to the Staffords so that they know what it is because we had just learned of it."*fn9 N.T. 1/14/09 a.m., 102:20-25. Powell stated Vito gave the Staffords a copy of the Forbes article. Powell also stated the Staffords did not ask Lawman to buy back their stock. N.T. 1/14/09 a.m., 101:17-18.

Blessey confirmed Powell's testimony and recalled, "[O]ne of the Staffords asked the question as to whether or not that litigation would have any effect on Lawman, and the response was, from Mr. Vito, it would not." N.T. 1/14/09 p.m., 20:15-17. Vito testified he told the Staffords about the Elcom litigation.

Both Staffords testified there was no discussion of the Elcom litigation at the October 1999 Board meeting. Stafford III stated, "[I]f I had known that at that time, I pretty much would have flipped out." 1/12/09 p.m., 65:8-10. The minutes of the meeting, taken by Joseph A. Bobrowski, chief financial officer and secretary of Lawman, do not record a discussion of Elcom. Powell and Blessey said the discussion took place before the board meeting and Bobrowski's notes began.

The Staffords also attempted to prove fraud or intentional misrepresentation in the drafting of the Private Placement Memorandum, which they argue was designed to fraudulently induce them to invest in Lawman. Their theory was Vito intentionally misled them about the Elcom litigation by omitting it from the Private Placement Memorandum. Vito argued the drafting lawyers made the representation about no litigation by mistake.

Testimony was inconclusive as to who actually drafted the July Private Placement Memorandum.*fn10 Martin testified Blessey produced a first draft of the Private Placement Memorandum. N.T. 1/13/09 p.m., 64:11-15. Bobrowski exchanged drafts of the Private Placement Memorandum with Robert W. Cleveland, Esq., at Klehr, Harrison, Harvey, Branzburg& Ellers LLP.*fn11

On July 6, 1999, Bobrowski wrote Brian Shanahan, Esq., also of Klehr, Harrison:

I want to thank you and Bob Cleveland for completing Lawman's $3.5 million Private Placement Memorandum and Subscription documents. Please review the documents thoroughly to assure that all of the changes, comments, and modifications have been properly addressed in the documents. If we do not hear from you by Friday July 9th, we will assume that the documents are satisfactory and require no changes.

Ex. 55.

Cleveland testified to drafting errors in the final Private Placement Memorandum which suggested to him it had been changed after the draft was produced by Klehr, Harrison. Cleveland stated the last Klehr, Harrison draft did not include the disputed "Litigation" section. The Litigation section in the January private placement memorandum stated, "Neither the Company nor any of its officers, directors or shareholders are currently engaged in any litigation involving the Company, nor has any such litigation been threatened." Ex. 2 at 17. Cleveland testified the litigation section in the final Private Placement Memorandum was erroneously drafted because it was overly broad, for example it would have encompassed an officer's traffic tickets. N.T. 1/13/09 p.m., 25:7. Cleveland also testified he did not draft or add the line in the Private Placement Memorandum which states "[t]his memorandum has been prepared by Klehr, Harrison. . . ." Ex. 16 at iii.

Through Cleveland's testimony, the Staffords established that two copies of the Private Placement Memorandum, one numbered 54 and one numbered 81, contained different wording for the sections describing the management and potential joint ventures for Lawman. Ex.s 16 and 17 at 5 and 28. Cleveland testified neither was a final product of Klehr, Harrison.

On June 29, 1999, Vito sent Milne a copy of the Private Placement Memorandum for the second round of financing and demanded any comments within 24 hours or the Private Placement Memorandum would be sent to the printer without them. Martin wrote to Vito on July 1, 1999, "This is very unprofessional and unacceptable behavior for any corporation." Ex. 24 at 2. Martin reprimanded Vito for failing to obtain the Board's approval before printing the Private Placement Memorandum. Martin identified several deficiencies in Vito's handling of the Private Placement Memorandum, focusing on the lack of Board involvement. Martin faxed a copy of the letter to Joshua Smith and stated he had also sent a copy to Powell. Martin's fax to Smith suggests Vito produced the final draft, referring to "all the problems and the confusion and the things that weren't acceptable and the outlandish things that Bob Vito had decided to do on his own." N.T. 1/13/09 p.m., 76:22-24.

Milne testified he believed Vito created the Private Placement Memorandum. N.T. 1/14/09 a.m., 75:6-7. He testified, "I'm pretty sure, Bob Vito wrote his own private placement and then sent it to Bob Blessey for review and I think Bob Blessey laughed at it." 1/14/09 a.m., 65:19-22. On July 1, 1999, Blessey faxed Milne, Martin and Powell, stating, "I will not ...


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