Stolzoff v. Waste Systems International, Inc.

Citations: 58 Mass. App. Ct. 747; 792 N.E.2d 1031Docket: No. 01-P-68

Court: Massachusetts Appeals Court; August 7, 2003; Massachusetts; State Appellate Court

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Between March 1995 and February 1997, five out-of-state plaintiffs invested in Waste Systems International, Inc., a Massachusetts-based company, ultimately incurring approximately one million dollars in losses due to the company's poor performance. In March 1999, they filed a lawsuit against the company, its founders, an executive officer, and the investment bankers involved during their investment period, alleging a scheme of fraud characterized by misrepresentations and omissions that influenced their decisions to purchase and hold stock. 

The court, responding to motions to dismiss and for summary judgment from the defendants, ruled against the plaintiffs' claims of fraud, misrepresentation, and violations of the Uniform Securities Act and G. L. c. 93A. The facts summarized are primarily derived from the plaintiffs' extensive amended complaint and unverified documents from the defendants, with the narrative favoring the plaintiffs' perspective for the purpose of the motions.

Key players in the investment included Martin Stolzoff and David Wilstein, who were the initial investors and maintained communication with the company and investment bankers, influencing the involvement of three additional plaintiffs who are family members of Wilstein. The company, founded in 1990 by Richard Rosen and Robert Davis, focused on landfill remediation during the relevant investment period. The investment banking services were provided by several entities, collectively referred to as the Sachem defendants, with Ronald Koenig, Stanley Hollander, and Jay Matulich holding significant roles in both the investment entities and the company's board. Matulich, in particular, served on the board and held executive positions during the time the plaintiffs invested.

In January 1995, Hollander and Matulich, acting as placement agents for the company, approached Stolzoff as a potential investor and subsequently solicited Wilstein. They informed both men of an impending landfill remodeling project in Fairhaven, Massachusetts, emphasizing the company's potential for substantial revenue through its proprietary technology. They provided company literature and a private placement memorandum that included risk disclosures. Stolzoff and Wilstein were assured that they would be kept informed about the company’s operations and that Matulich would serve as a director, prompting both to invest significantly on March 28, 1995.

The Fairhaven landfill mining project, launched on April 19, 1995, faced numerous issues, including complaints from local residents about odors and dust, operational challenges, and regulatory violations such as exposed refuse and improper soil management. The project struggled to recover valuable materials and was suspended in August 1995. The Department of Environmental Protection issued a “cease excavation” order in September 1995, leading to lawsuits from area residents in November 1995. Throughout this period, Stolzoff and Wilstein were misled about the project's success, with assurances that it was proceeding well and generating unexpected revenues, despite the eventual disclosure of issues in the company's 1995 annual report.

From May 1995 to March 1996, the company communicated plans for additional landfill remodeling projects, claiming contracts with municipalities and predicting stock values of $15 to $20 per share. However, these claims were misleading, as the company had only preliminary agreements to explore feasibility, with no permits or financial benefits established for these projects.

Management difficulties arose shortly after the April 19, 1995, groundbreaking of the Fairhaven project when cofounder Davis submitted his resignation letter, effective August 1995, due to dissatisfaction with management and concerns over the company's viability. Davis was aware of cofounder and president Rosen's misappropriation of funds as early as February 1995, with most defendants becoming aware by mid-1995. CFO Rivkin learned of Rosen's actions in May 1995 but, along with Matulich and Koenig, chose not to act, fearing negative impacts on stock prices following Davis's resignation. The board implemented a spending limit on Rosen in July 1995, authorized an audit in January 1996, formed a special committee to investigate in March 1996, and ultimately forced Rosen to resign at the end of March 1996, appointing Strauss as his replacement.

By July 1996, the company was involved in arbitration regarding Rosen's financial misconduct and sought to prevent public disclosure of potentially damaging information. Davis's resignation was not publicly announced until a footnote in the November 1995 prospectus, with Stolzoff and Wilstein learning of it later under misleading pretenses. Rosen's resignation was publicly announced, but the reasons were not disclosed until nearly a year later when it was acknowledged to be at the board's request. During discussions in spring 1996, Matulich presented the resignation as mutually agreed due to the company's evolving needs.

Stolzoff and Wilstein received several key documents, including a confidential private placement memorandum and a Form S-1 registration statement, which outlined the risks associated with investing in the company. These documents indicated a high risk for potential investors, noting that the company had not yet successfully developed or sold any waste-treatment systems or completed landfill remodeling projects, faced regulatory challenges, and was highly dependent on its founders for success.

The February 17, 1995, private placement memorandum highlighted that the departure of either founder, Davis or Rosen, would adversely impact the company. Subsequent documents from June and September 1995 only noted the potential negative effect of Rosen's departure, with no mention of Davis. The court analyzed the plaintiffs' claims, concluding that most common-law tort claims were time-barred, while others were deemed nonactionable or inadequately pleaded. Specifically, fraud and misrepresentation claims are subject to a three-year statute of limitations. The plaintiffs engaged in twenty-nine stock purchases between March 1995 and February 1997, filing suit on March 26, 1999. Most claims, except for eight purchases, were considered time-barred unless the fraudulent concealment doctrine applied. The motion judge ruled that the limitations period was not tolled, citing written risk disclosures and a decline in stock price as indications that the plaintiffs should have been aware of their claims. The judge interpreted these disclosures as contradictory to the plaintiffs' reliance on other statements, suggesting they should have exercised greater diligence. However, the court found a material fact issue regarding whether the statute of limitations was tolled due to the defendants’ alleged affirmative acts of deception, which could have concealed the true status of the Fairhaven project and induced the plaintiffs to invest. The plaintiffs became aware of significant issues with the Fairhaven project in May 1996 when they received the 1995 annual report, while the defendants claimed the plaintiffs had sufficient means to detect the alleged fraud well before that date.

Stolzoff and Wilstein reside in California and did not engage with Massachusetts newspapers or the Massachusetts Department of Environmental Protection, limiting their ability to uncover issues at the Fairhaven site. Defendants argue that the plaintiffs had the means to detect fraud due to their awareness of declining stock prices and risk disclosures in company documents. However, these disclosures did not reveal specific adverse events that had occurred, creating a factual question regarding whether the plaintiffs' common-law tort claims are time-barred.

The motion judge considered the substance of the claims, concluding that the plaintiffs' fraud and misrepresentation claims failed because the alleged misrepresentations were either non-factual, not material, or the plaintiffs could not have reasonably relied on them. Claims by Wilstein’s nephews and those against Strauss and the Sachem entities were deemed inadequately pleaded under Massachusetts civil procedure rules.

To establish fraud, a plaintiff must demonstrate that a defendant made a false representation of material fact with knowledge of its falsity, intending to induce reliance, and that the plaintiff reasonably relied on this representation to their detriment. Misrepresentations must pertain to factual matters rather than opinions or future conditions; however, statements of opinion may be actionable if the speaker has superior knowledge or if the opinion implies knowledge of supporting facts. The judge found that the risk disclosures contradicted pre-purchase communications that suggested the landfill mining process was proven, rendering reliance on those statements unreasonable.

Plaintiffs’ claims of fraud and misrepresentation are upheld against the defendants' summary judgment motion, based on several key points. After their initial stock purchases in March 1995, Stolzoff and Wilstein received ongoing written updates and engaged with company insiders regarding the company’s performance and investments. They assert that this information influenced their decisions to buy additional stock and retain their existing shares. 

Four main categories of information were involved: 1) the status of the Fairhaven project, where defendants allegedly misrepresented the project's success, knowing it faced significant issues; these statements could be interpreted as factual rather than mere opinions. 2) Information about landfill remodeling contracts, where plaintiffs were informed of won contracts, which should be seen as factual claims rather than future promises, given the context and the defendants’ superior knowledge of potential project viability. 

The June and September 1995 corporate documents disclosed risks but did not clarify that previously presented risks had materialized, thus not rendering plaintiffs’ reliance unreasonable as a matter of law. The determination of the reasonableness of plaintiffs’ reliance on these statements is left for a fact finder to decide at trial.

Revenue projections related to the Fairhaven project were made despite the defendants knowing that remodeling activities at the site were stalled and that there were only preliminary agreements for other projects. This knowledge placed the defendants in a position of superior knowledge, as the projected revenue was likely to be adversely affected by these circumstances. Public disclosures from June and September 1995 warned of uncertainties regarding customer interest and profitability, yet did not disclose the actual operational issues that could mislead investors about the Fairhaven project's status. Consequently, plaintiffs’ reliance on representations of the project's success was not unreasonable in a legal context. 

Conversely, statements about future stock value were deemed inherently speculative and not actionable due to the multitude of factors influencing stock prices, of which the defendants could not be said to possess superior knowledge. 

Regarding management issues, plaintiffs made stock purchase and retention decisions without knowledge of cofounder Davis's departure and cofounder Rosen's misconduct. When they did inquire about these departures, they received misleading information. The defendants argued they had no obligation to disclose this information; however, a duty to disclose arises under certain circumstances, including when there is a relationship of trust or when nondisclosure makes previous statements misleading. The duty to disclose became relevant when specific inquiries about the founders' departures were met with misleading responses. The materiality of these nondisclosures and the plaintiffs’ reliance on the information given to them is subject to factual determination.

Claims by the Wilstein nephews were dismissed for failing to meet the specificity required under Massachusetts Rule of Civil Procedure 9(b) concerning fraud claims. However, the dismissal was deemed unwarranted since the plaintiffs alleged reliance on information shared by Wilstein, who intended to recommend investment based on the defendants' communications.

Wilstein's fraud allegations possess significant specificity. If the complaint fails to clarify that Wilstein acted as an agent for his relatives or that his brother acted for the Wilstein nephews in their account purchases, the court should allow amendments to the complaint. All claims against Strauss were dismissed due to insufficient detail in the fraud claim, specifically regarding his role in preparing misleading materials and making misrepresentations about Rosen's departure; however, the court favors granting leave to amend these claims to serve justice. Claims against the Sachem entities were also dismissed on similar grounds, which was deemed erroneous since misrepresentations made by Matulich, Koenig, and Hollander occurred within their employment scope, and the plaintiffs had identified the specific entities involved as investment bankers during the relevant periods.

All plaintiffs asserted claims under G. L. c. 93A, and dismissing these claims was incorrect, particularly because viable claims for fraud and negligent misrepresentation exist. Claims by Stolzoff and Wilstein under the Uniform Securities Act were also noted, focusing on transactions from March and August 1995; while claims under G. L. c. 110A. 410 (a)(2) and (6) were acknowledged, the claim against CGI was dismissed due to lack of supporting allegations. The court found it was an error to grant Hollander's motion to dismiss based on personal jurisdiction since the motion had been withdrawn. The judgment against CGI is affirmed, while the dismissal of claims against other defendants is vacated, and the matter is remanded for further proceedings. The company's bankruptcy filing on January 11, 2001, automatically stayed the appeal, but the stay was lifted on October 23, 2002. The procedural history indicates the plaintiffs filed their initial complaint in March 1999, followed by an unverified amended complaint in June 1999, amid various defense motions shortly thereafter.

Hollander initially filed a motion to dismiss for lack of personal jurisdiction under Mass. R.Civ. P. 12(b)(1) but later withdrew it, although the judge still granted it. Other defendants, excluding Rosen and Davis, moved to dismiss under Mass. R.Civ. R 12(b)(6), arguing that the plaintiffs failed to demonstrate actionable misrepresentations or omissions, and that many claims were time-barred by the three-year statute of limitations. The company and Strauss alternatively sought summary judgment under Mass. R.Civ. R 56, submitting seven unverified documents they claimed were publicly available, including stock purchase summaries, stock price data, and excerpts from various company documents, most referenced in the amended complaint. Limited discovery had occurred at this point. The plaintiffs opposed the motions with brief affidavits but did not request a continuance under rule 56(f). The judge granted summary judgment on the grounds that the plaintiffs’ claims, even if not time-barred, lacked legal sufficiency. On appeal, neither the bankrupt company nor Davis filed briefs, and the plaintiffs acknowledged that the judge's rationale applied to claims against Rosen and Davis as well. Some defendants on appeal argued that the plaintiffs had agreed to treat all rule 12(b) motions as rule 56 motions, emphasizing the plaintiffs' failure to provide verified submissions. Conversely, the plaintiffs argued that the judge focused solely on the legal sufficiency of their claims, warranting review under rule 12(b)(6). The court decided to treat the submissions as part of the summary judgment record, including the plaintiffs' affidavits, and aimed to determine if the defendants proved there were no genuine issues of material fact. The company was previously known as Zoe Capital Corp., underwent a reverse merger to become BioSafe International, and later merged again. Additional defendants included Sachem Financial Consultants, Ltd., with ICG as a subsidiary of MicroCap Financial Services, in which Koenig and Hollander were primary shareholders. Hollander served as ICG's president and CEO, while Matulich was the senior vice-president.

The relevant Sachem entities acted as the placement agent for the company’s private placement of stock in March 1995 and subsequent Regulation S offerings in late 1995 and mid-1996, receiving substantial compensation including six-figure fees, shares, warrants for additional stock at favorable prices, and a one-year consulting arrangement. A January 10, 1996, press release indicated that landfill agreements would generate approximately $500 million in revenue. Stock prices from June 1995 to March 1996 showed a significant decline, with a list of thirty stock purchases noted. Under General Laws c. 260, if a party liable for a personal action fraudulently conceals the cause of action, the statute of limitations is tolled until discovery by the aggrieved party. However, the plaintiffs failed to demonstrate a fiduciary relationship with the defendants, negating the applicability of this rule. Assuming the statute began to run at the time of the alleged concealment, the plaintiffs' filing on March 26, 1999, fell within the three-year limitations period. The company’s stock began trading on NASDAQ on November 13, 1995. The court reversed a summary judgment on statute of limitations grounds, stating that the triggering event for the limitations period could not be determined as a matter of law. Liability for false information in business transactions requires proof of justifiable reliance and failure to exercise reasonable care. The defendants did not dispute the fraud allegations, allowing the analysis to focus solely on fraud. The company initiated arbitration against Rosen for misappropriations, seeking to restrict pleadings due to concerns over adverse effects on stock price. Additionally, disclosures in prior memoranda indicated that the loss of key personnel would adversely affect the company, impacting the summary judgment decision. To establish a claim under G. L. c. 110A. 410 (a)(2), a plaintiff must demonstrate that the defendant was a ‘seller,’ made a material misstatement or omission, and acted negligently regarding that misstatement or omission.

Liability under 410 (a)(2) of the Uniform Securities Act is limited to individuals who solicit purchases for their own financial benefit or that of the securities owner. The defendants—Koenig, Hollander, and Matulich—served as officers of Sachem, the seller of securities in the March 1995 private placement, making them liable under 410(6) if Sachem is found liable under 410 (a)(2). Similarly, Rosen, Davis, and Matulich, also officers, are subject to liability under 410(6) contingent upon the company’s liability under 410 (a)(2). The criteria for identifying actionable material misstatements align with common-law claims, but 410 (a)(2) additionally allows for claims based on material omissions, which differ from fraud claims that require a duty to disclose. Notably, the plaintiffs did not allege CGI's involvement in the private placement or the sale of Davis's stock as an agent or broker-dealer, nor did they claim that CGI controlled the defendants named in the 410 (a)(2) claims. CGI began providing investment banking services to the company only in September 1995, after the relevant transactions had occurred.