JJR, LLC v. Turner

58 N.E.3d 788

405 Ill.Dec. 527

JJR, LLC; Blair Fredrich Ira and Blair Friedrich as owner-beneficiary, Daniel C. Idzal, Jaimie Kline, Anne K. Morningstar 2006 Revocable Trust, Leslie Morningstar Irrevocable Trust USAD 12–11–98, Madison R. Morningstar Revocable Trust DTD 118–90, Barbara Kline Herman, John Morningstar 5–21–75 Trust, Molly Gerbaz 5–21–75 Trust, Pemaquid Point Investment Company, LLC, Special People In Need, The Schweppe Foundation, Gary H. Kline, Gary H. Kline Ira Rollover and Gary H. Kline as owner-beneficiary, Joseph R. and Martha M. Membrino, Russ M. Herman, Andrew E. Kline Sep Ira and Andrew E. Kline as owner-beneficiary, Theresa L. Kline Ira and Theresa L. Kline as owner-beneficiary, Negar Alimamaghani, Massad & Massad Investments, Ltd., Thomas E. Callahan, Frank W. Brazitas, David B. Scott, Peter Craig Wood, R.H. Strickler, Duncan W. Campbell, Hopkins Investment Limited Partnership, The Chase Foundation of Virginia, DS & S Chase, LLC, The Stuart F. Chase 2001 Revocable Trust, The D. Sumner Chase, III 2001 Irrevocable Trust, Stuart F. Chase, James L. Jessup, Jr., Plaintiffs–Appellants,

v.Willliam J. TURNER, Signature Capital LLC, Signature Capital Securities LLC, William G. Fraine, Stephen A. Cone, Jon Guyatt and Hugh E. Sawyer, Defendants–Appellees.

No. 1–14–3051.

Appellate Court of Illinois, First District, Fourth Division.

June 30, 2016.

Elizabeth Hoskins Dow and Kimberly A. Fladhammer, both of Bailey & Glasser, LLP, of Joliet, and James R. Swanson and Alysson L. Mills, both of Fishman Haygood Phelps Walmsley Willis & Swanson, LLP, of New Orleans, Louisiana, for appellants.

Michael I. Leonard and Ethan E. White, both of Leonard Law Offices, Inc., of Chicago, for appellees.

OPINION

Justice COBBS delivered the judgment of the court, with opinion.

¶ 1 This case arises from a dispute between plaintiffs, JJR, LLC, et al., and defendants William J. Turner, et al., which involved defendants' alleged inducement of plaintiffs to invest in Eggs Overnight, Inc. (Eggs), a start-up company, based on allegedly false statements and misrepresentations. Plaintiffs collectively invested $4.61 million in Eggs and claimed $7,989,595.98 in damages. Signature Capital Securities, LLC, and Signature LLC were defaulted by the court and a judgment was entered against them for $7,989,595.98. A bench trial resulted in a finding in favor of Turner, the remaining defendant. Plaintiffs appeal contending that: (1) the circuit court failed to address their claim alleging violation of section 12(H) of the Illinois Securities Law of 1953 (815 ILCS 5/12(H) (West 2010)); (2) reliance is not an element of a section 12(H) claim; (3) with respect to their subsection (F) and subsection (G) claims, reliance is determined at the time of irrevocable investment; (4) the circuit court misassessed the testimony regarding reliance; and (5) neither boilerplate risk disclosures nor the roll-out schedule cured the executive summary's numerous, specific, and emphatic misrepresentations. For the reasons that follow, we affirm.

¶ 2 BACKGROUND

¶ 3 On December 29, 2010, plaintiffs filed a 10 count complaint against defendants alleging, inter alia, that defendants violated sections 12(F), (G), and (H) of the Illinois Securities Law (815 ILCS 5/12(F), (G), (H) (West 2010)), committed common-law fraud, and committed negligent misrepresentation. The case proceeded to a bench trial. At trial, Turner testified that he was a principal in defendant Signature Capital, a venture capital firm, and in Signature Capital, LLC (collectively, Signature). As part of his duties in Signature, Turner was the exclusive placement agent to find investors to purchase $25 million of preferred stock offerings for Eggs. The initial offering took place between December 2007 and April 2008 and was referred to as the “Series A” offering or the “bridge financing period.” The investments during this period were actually bridge loans made to Eggs through convertible promissory notes. However, at Eggs' election, these convertible promissory notes would automatically be converted into stock. Investors did not have the option to cash out their loans. When the notes were converted, those people who had invested during the bridge financing period would also have the opportunity to purchase additional stock at a 20% discounted rate. The promissory notes expressly stated that the securities that would be issuable when the note was converted would not be registered under state or federal law. The majority of plaintiffs invested during this initial period.

¶ 4 During the bridge financing period, the only official written document that was available was the executive summary, which was drafted by the Eggs management team.¹ The executive summary is a 46–page document that gives an overview of the Eggs business plan. It describes its service of using reusable and “trackable” shipping containers and its business strategy of appealing to companies that ship high value or damaged goods. The executive summary included, among other things, diagrams of the Eggs shipping containers and a chart detailing the multi-phase roll-out schedule. The chart indicates that the “Smart Shell” tags with the Global Positioning System (GPS) and Radio Frequency Identification (RFID) technology would be available sometime between January and June 2009.

¶ 5 Plaintiffs allege that several statements in the executive summary were false or misleading. As many of the allegedly false statements are similar and repetitive, the following are examples excerpted from the executive summary:

“Eggs service offering is: * * * the first to use embedded hybrid GPS/Cellular technology to track containers; the first to use embedded RFID technology to monitor container wear and shock levels as well as unauthorized container openings.”

“Eggs Value–Added Capabilities Provide * * * [a] [s]ophisticated and proprietary Internet-based transaction processing, tracking and monitoring system.”

“Embedded inside the Egg Safe container is a hybrid of state-of-the art GPS and Cellular technologies (Smart Shell) for container tracking and state-of-the art based RFID technology for monitoring container heat and shock levels as well as unauthorized openings for every container throughout its journey from shipper location to end recipient.”

“MARKET VALIDATION: The company has already achieved proof-of-concept of its damage, resistant reusable container technology and its end-to-end logistics transit.”

¶ 6 Notably, the first page of the executive summary included cautionary language that stated: “THESE MATERIALS INCLUDE OR MAY INCLUDE CERTAIN STATEMENTS, ESTIMATES AND FORWARD–LOOKING PROJECTIONS OF THE COMPANY WITH RESPECT TO THE ANTICIPATED FUTURE PERFORMANCE OF THE COMPANY. SUCH STATEMENTS, ESTIMATES AND FORWARD–LOOKING PROJECTIONS REFLECT VARIOUS ASSUMPTIONS OF MANAGEMENT THAT MAY OR MAY NOT PROVE TO BE CORRECT AND INVOLVE VARIOUS RISKS AND UNCERTAINTIES. PLEASE CONTACT US FOR FURTHER INFORMATION.”

¶ 7 Additionally, during the bridge financing period, the Eggs team, along with Turner, traveled to several cities to solicit investors at in-person meetings. Plaintiffs similarly allege that oral statements made at the meetings and statements in the PowerPoint presentation given at the meetings, were false or misleading. The same PowerPoint presentation was also attached to some personal e-mails Turner sent to potential investors. Examples of the PowerPoint slides with allegedly false representations are detailed below.

“EGGS, A UNIQUE BUSINESS CONCEPT * * *

• Holistic Solution—EGGS' Proprietary, Reusable, Containers linked with GPS Technology–Driven Supply Chain Logistics Service

* * *

LEVERAGING PROPRIETARY TECHNOLOGY * * * Reusable ‘SMARTSafe’ Container

• Shock resistant ‘Outers' (Plastic Corrugated)

• Mass-customized ‘Inners'

• Global tracking (GPS/Cellular)

• Monitoring–Shock, temperature & un-authorized opening (RFID)

* * *

Eggs, A Breakthrough

• We have invented a patented, reusable container that virtually eliminates damage from shock and dramatically reduces source waste because it is reuseable

• Our Egg Safe ContainerTM is technically sophisticated and self-diagnostic with real time tracking and product monitoring capability”

¶ 8 Additionally, the PowerPoint presentation contained a written disclosure, which stated:

“This document is not a prospectus for the purpose of a securities offering. It is furnished for information only. No representation or warranty is made by Eggs as to the accuracy or completeness of such information and nothing contained in the summary is or shall be, relied on as a promise or representation as to the future.”

¶ 9 Plaintiffs further contend that Turner sent e-mails to potential investors that contained allegedly false and misleading information. These e-mails were sent between December 2007 and September 2008. Plaintiffs allege numerous false representations in the e-mails. Only relevant excerpts from various e-mails are reproduced below.

“EGGS SMARTSafe containers have, embedded inside, a hybrid combination of state of the art GPS and Cellular technology for container tracking and state of the art based RFID technology for monitoring of container heat and shock levels, as well as unauthorized openings for EVERY container throughout its journey from shipper location to end recipient.” (December 4, 2007).

“EGGS has strong Intellectual Property, with 7 patents granted/applied for, both technology and methods patents, as well as several more patents soon to be submitted.” (December 4, 2007).

“EGGS is a first mover, GREEN–TO–THE–EXTREME, breakthrough product-shipper service, offering damage resistant, real time tracked, and ‘real time enough’ monitored (heat, shock, and unauthorized openings) reusable, shock resistant, highly patented containers to be used to transport highly damaged and high value goods in the parcel industry.” (December 12, 2007).

“State-of-the-art and novel use of GPS–cellular–RFID technology is heavily deployed in the EGGS

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