SCAM EXPU.,this is the canouse brothers
HYPERDYNAMICS v. SOUTHRIDGE CAPITAL MGT.
699 S.E.2d 456 (2010)
HYPERDYNAMICS CORPORATIONv.SOUTHRIDGE CAPITAL MANAGEMENT, LLC, et al.
No. A10A0362.
Court of Appeals of Georgia.
July 16, 2010.
Edmond & Lindsay, Michael E. Perez, Charles M. Cork III, Mark F. Dehler, Decatur, for appellant.
Mark E. Grantham , Anthony D. Lehman, Atlanta, for appellees.
Schklar, Ney & Heim, Edwin J. Schklar, William B. Ney, Atlanta, amici curiae.
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BERNES, Judge.
This case explores the breadth of Georgia's Long Arm Statute. Appellant Hyperdynamics Corporation filed the instant lawsuit against various resident and nonresident corporate defendants, alleging that they had fraudulently induced Hyperdynamics to engage in a predatory financing scheme causing it injury. The trial court dismissed the action as to the nonresident defendants after concluding that they fell outside of the reach of the trial court's personal jurisdiction. Hyperdynamics appeals, arguing that the trial court misconstrued Georgia's Long Arm Statute. Because we conclude that jurisdiction in Georgia is proper over the nonresidents under the theory of conspiracy jurisdiction, we reverse.
I. Burden of Proof and Standard of Review
A defendant moving to dismiss for lack of personal jurisdiction bears the burden of proving the absence of jurisdiction. To meet that burden, the defendant may raise matters not contained in the pleadings. However, when the outcome of the motion depends on unstipulated facts, it must be accompanied by supporting affidavits or citations to evidentiary material in the record. Further, to the extent that defendant's evidence controverts the allegations of the complaint, plaintiff may not rely on mere allegations, but must also submit supporting affidavits or documentary evidence.
(Citation omitted.) Yukon Partners v. Lodge Keeper Group, 258 Ga.App. 1, 2, 572 S.E.2d 647 (2002). When examining and deciding jurisdictional issues on a motion to dismiss, a trial court "has discretion to hear oral testimony or to decide the motion on the basis of affidavits and documentary evidence alone pursuant to OCGA § 9-11-43(b)." (Citation and punctuation omitted.) Scovill Fasteners v. Sure-Snap Corp., 207 Ga.App. 539, 539-540, 428 S.E.2d 435 (1993). See Alcatraz Media v. Yahoo! Inc., 290 Ga.App. 882, 884(1), 660 S.E.2d 797 (2008). If the trial court conducts an evidentiary hearing, it may resolve disputed factual issues, and we will show deference to those findings. See Alcatraz Media, 290 Ga.App. at 886(2), 660 S.E.2d 797; McLendon v. Albany Warehouse Co., 203 Ga.App. 865, 866(1), 418 S.E.2d 130 (1992). On the other hand, where, as here, a motion is resolved based solely upon written submissions,1 "the reviewing court is in an equal position with the trial court to determine the facts and therefore examines the facts under a non-deferential standard," Scovill Fasteners, 207 Ga.App. at 540, 428 S.E.2d 435,
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and we resolve all disputed issues of fact in favor of the party asserting the existence of personal jurisdiction. Alcatraz Media, 290 Ga.App. at 884(1), 660 S.E.2d 797.
II. The Parties
This case arises out of a private placement venture capital financing transaction. The plaintiff in the underlying action, appellant Hyperdynamics, is a Delaware corporation with its principal place of business in Texas. The defendants in the underlying action consist of four groups of both residents and nonresidents that, for the purposes of this opinion, will be referred to collectively as the "Canouse Defendants," the "Hicks Defendants," the "Sims Defendants," and the "Valentine Defendants."
(A) The Canouse Defendants. The Canouse Defendants consist of four brothers, Joseph C. Canouse, John C. Canouse, James P. Canouse, and Jeffrey Canouse, all of whom are Georgia residents, as well as several companies which they are alleged to own and/or control: J.P. Carey Securities, Inc., J.P. Carey Asset Management LLC, Cache Capital (USA), L.P.; and Carpe Diem Ltd. All of the conduct attributed to the Canouse Defendants in this opinion occurred in Georgia, unless otherwise stated. The Canouse Defendants have not challenged personal jurisdiction and are not parties to the instant appeal.
(B) The Hicks Defendants. The "Hicks Defendants" consist of Stephen Hicks, a Canadian citizen residing in Connecticut; Southridge Capital Management LLC ("Southridge"), a Delaware limited liability company with its principal place of business in Ridgefield, Connecticut, of which Hicks is managing director; Sovereign Partners, L.P. ("Sovereign"), a fund organized as a Delaware limited partnership; and various entities within a complex multi-tiered offshore business structure that were created at the direction of Hicks: Livingstone Asset Management Ltd. ("Livingstone"), an international business company; Terrapin Trading LLC ("Terrapin"), an offshore entity organized as a Cayman Islands limited liability company; Dominion Capital Fund, Ltd. ("Dominion"), an offshore fund organized as a Nassau, Bahamas international business company; and Minglewood Capital, LLC ("Minglewood"), a Cayman Islands limited liability company. None of the Hicks Defendants is registered to conduct business in Georgia.
The record shows that Hicks directed and controlled the Hicks Defendants as to the transaction at issue in this case, through a series of advisor agreements, subadvisor agreements, and powers of attorney.2 The Hicks Defendants successfully challenged personal jurisdiction over them in the trial court and are parties to the instant appeal.
(C) The Sims Defendants. The Sims Defendants consist of David Sims, a South African citizen residing in Tortola, British Virgin Islands, as well as entities owned and/or controlled by Sims: Beacon Capital Management, Ltd. ("Beacon"), an offshore holding company and investment advisor organized as a British Virgin Islands limited partnership; Falcon Secretaries, Ltd. ("Falcon"), a British Virgin Islands international business company; and Navigator Management, Ltd. ("Navigator"), a British Virgin Islands international business company.3
The Sims Defendants acted as the sole officer or director to most, if not all, of the Hicks Defendants within the multi-tiered offshore structure.4 The Sims Defendants successfully challenged personal jurisdiction
[ 699 S.E.2d 461 ]
over them in the trial court and are also parties to the instant appeal.
(D) The Valentine Defendants. The Valentine Defendants consist of Mark Valentine,5 a Canadian citizen residing in Florida, and certain entities which he controlled and/or was affiliated: Thomson Kernaghan & Co., Ltd., a brokerage firm with Valentine as chairman; Canadian Advantage L.P.; and VMH Ltd. Hyperdynamics alleges that the Valentine Defendants directed and/or participated in the Hyperdynamics transaction by executing trades and by the movement of funds and proceeds between and among the Defendants' accounts at Thomson Kernaghan. Hyperdynamics also alleges that Canadian Advantage L.P. provided some of the funding to Wellington in the Hyperdynamics financing transaction at issue in this case. The Valentine Defendants are in default and are not parties to the instant appeal.
III. The Allegations
(A) The Conspiracy. Hyperdynamics alleges that the resident and nonresident defendants have a longstanding business relationship and have, using the complex multi-tiered offshore financial structure created at the direction of Hicks, conspired to engage in fraud and market manipulation involving toxic convertible financing transactions6 with companies seeking private placement investors. According to Hyperdynamics, the collective Defendants have used this offshore financial structure to conceal both the true identity of, and the relationship between, the Defendants when preying upon unsuspecting businesses seeking financing. The Defendants are alleged to enter into toxic convertible financing agreements with the then-present intent to surreptitiously use short sales7 and naked short sales8 to manipulate the value of the company's stock by driving the price downward, and to then acquire a majority position in the company upon the conversion of the investor's preferred securities to common stock. In support of this allegation, Hyperdynamics [ 699 S.E.2d 462 ]
points to the undisputed testimony that the transaction involved in this case did, in fact, involve toxic convertible financing. In addition, Valentine admitted that he had been involved in several toxic convertible financing transactions involving the Canouse Defendants. Hyperdynamics also identified at least 35 other companies in which Hyperdynamics claims one or more of the Canouse Defendants, one or more of the Hicks Defendants, one or more of the Sims Defendants, and one or more of the Valentine Defendants invested, and claims that they each involved toxic convertible financing. Finally, Hyperdynamics filed sworn affidavits from three separate corporate executive officers who alleged that they had also been subject to a common scheme involving various combinations of these Defendants engaging in unlawful toxic convertible financing transactions. Specifically, the corporate executives stated that their respective companies had entered into financial transactions with the Defendants, and that their respective companies each fell victim to fraud and market manipulation in a fashion similar to that which has been alleged in this case.
(B) The Offshore Structure. The complaint alleges that in or about early 1999, Stephen Hicks concocted a scheme to manipulate the market in thinly capitalized companies. In furtherance of this alleged scheme, Hicks directed the creation of the multi-tiered offshore structure, consisting of numerous layers of Cayman Island and Bahamian entities, designed both to conceal the identities of the parties involved and to undermine the enforcement of United States securities laws.9 In support of this allegation, Hyperdynamics has presented documentary evidence produced during discovery that confirmed that the offshore investment structure was "designed to protect [the Hicks Defendants'] respective assets from the risk of certain liabilities that may arise out of their investment in certain [s]ecurities under applicable laws" and that "by implementing a tiered investment structure, [the Hicks Defendants] and their investments may potentially avoid underwriter liability that could arise under the United States securities laws."10 Further, one of the attorneys involved in creating the offshore entities at Hicks's direction testified that the multi-tiered structure provided "flexibility . . . in the event that an investment did not perform as expected and in the event that that resulted in litigation, perhaps initiated by the company which issued the security, rather than defend against the litigation, you walk away."
The Hicks Defendants engaged the Sims Defendants to provide offshore officer and director services for each entity in the multi-tiered offshore structure. Through a series of contractual advisor agreements, subadvisor agreements, and powers of attorney, the offshore officers and directors were then authorized to accept direction from Hicks, generally in his capacity as managing director of Southridge.11
[ 699 S.E.2d 463 ]
The Canouse Defendants allegedly conspired with the Hicks Defendants and the Sims Defendants to identify and fraudulently induce companies into the predatory investment scheme, and the Valentine Defendants allegedly executed trades and money transfers in furtherance of the scheme. (C) The Hyperdynamics Transaction. In 1999, Hyperdynamics, a publicly traded corporation, engaged the services of the Canouse Defendants in order to facilitate its attempt to find investors who would provide it with capital in connection with a proposed private stock offering. Hyperdynamics and the Canouse Defendants, specifically J.P. Carey Securities, Inc., entered into an "Engagement Agreement" by which the Canouse Defendants agreed to act as a consultant to Hyperdynamics for the purpose of introducing Hyperdynamics to up to 25 potential investors. The Engagement Agreement expressly provided that any potential investor introduced by the Canouse Defendants would be an "accredited investor[]" as that term is defined in Regulation D of the federal securities regulations. See 17 CFR § 230.501(a). The funding was to be achieved through an initial $2 million convertible preferred stock purchase, and a subsequent $5 million equity line.
The Canouse Defendants forwarded to the Hicks Defendants and the Valentine Defendants information related to Hyperdynamics' investor needs and its business plan. The Canouse Defendants included a letter in which they stated that they had "a big interest in this deal," and therefore "only sent it to [Hicks] and Mark Valentine to participate." The Canouse Defendants subsequently provided Hyperdynamics with the names of five potential investors, including "The Atlantis Fund"; "Cache Capital"; "Carpe Diem"; "Wellington LLC"; and "The GPS America Fund."12 All of the potential investors presented to Hyperdynamics by the Canouse Defendants were either owned and/or controlled by the Canouse Defendants and/or the Hicks Defendants, a fact allegedly unknown to Hyperdynamics. Hyperdynamics alleges that the Canouse Defendants intentionally concealed their relationship to the two potential investors in which they had a financial interest, namely Cache Capital (USA), L.P. and Carpe Diem Ltd. Hyperdynamics further alleges that the Canouse Defendants intentionally concealed the fact that, in the case of Wellington, the funds that were to be invested were being funneled through several offshore entities, and that Wellington was created for the sole purpose of this financial transaction. Finally, Hyperdynamics alleges that the Canouse Defendants made no effort to ensure that the potential investors, including Wellington, were in fact accredited investors.
Hyperdynamics thereafter entered into negotiations with Cache, Carpe Diem, and Wellington. During the negotiations, Hicks dictated the proposed terms regarding the financial transaction to the Canouse Defendants, who then compiled those terms into a term sheet.13 At Hicks's request, the Canouse Defendants then submitted the term sheet to Hyperdynamics, as well as to the Georgia attorney who had been retained by the Canouse Defendants to draft the transaction documents. Hyperdynamics' lawyer also relayed desired transaction terms to the Georgia lawyer. Throughout the negotiation process, all communications from the Hicks Defendants were transmitted to the Georgia attorney through the Canouse Defendants.
Hyperdynamics ultimately entered into Subscription Agreements for an aggregate $3 million worth of convertible preferred stock with Cache, Carpe Diem, and Wellington. The Georgia attorney finalized the Subscription
[ 699 S.E.2d 464 ]
Agreements and the supporting documentation for each entity, including a Registration Rights Agreement, a Warrant Agreement, an Escrow Agreement, a Certificate of Designation, and an Opinion of Counsel. At the request of the Canouse Defendants, the Georgia attorney then submitted the documents via e-mail directly to the Hicks Defendants. Sims, on behalf of the Sims Defendants and Wellington, executed the signature pages for the Wellington Subscription Agreement and supporting documents and forwarded them both by fax and by Federal Express to the Georgia attorney. Joseph Canouse executed the Subscription Agreements on behalf of Cache and Carpe Diem. The Georgia attorney then sent the Subscription Agreements to Hyperdynamics.14
In conjunction with the execution of the documents, the Hicks Defendants instructed the Sims Defendants to conduct certain wire transfers in and among the offshore entities to fund the transaction, and the instructions were then passed on to the Valentine Defendants. Money related to the financial transaction was also wired out of Cache's bank account located in Georgia.
Hyperdynamics alleges that the Subscription Agreements and supporting documents drafted by the Georgia attorney at the direction of the Canouse Defendants and Hicks Defendants and executed by the Sims Defendants contained a fraudulent statement regarding Wellington's accredited investor status15 and that, in fact, Wellington was not an accredited investor.16 Hyperdynamics has submitted deposition testimony which could support a finding that the Defendants were aware that the statement was false at the time that it was allegedly made, and further that the Canouses did nothing to verify that Wellington was an accredited investor. Hyperdynamics further alleges that it had agreed to enter into the financial transaction in reliance upon the Canouse Defendants' representation that each of the potential investors was in fact an accredited investor.
According to the complaint, immediately following the execution of the Subscription Agreements, and in direct violation of specific terms contained within those agreements, the collective Defendants engaged in a massive campaign of overselling and short-selling Hyperdynamics common stock that was designed to manipulate the market for Hyperdynamics securities downward, into a "death spiral," and that it did, in fact, depress the value of Hyperdynamics' securities. They then allegedly covered some or all of their short sales by converting a portion of the Hyperdynamics preferred stock into common stock. Hyperdynamics also alleges that the Defendants repeatedly and intentionally violated the selling limitation contained within the Subscription Agreement17 with respect to the conversion shares.18
Hyperdynamics asserts that the allegedly unlawful sales by Wellington were directed and controlled by the Hicks Defendants, the Sims Defendants, and the Valentine Defendants. The alleged unlawful sales by Cache and Carpe Diem were directed and controlled by the Canouse Defendants and the Valentine Defendants.
Hyperdynamics further alleges that the collective Defendants knowingly, wilfully and deliberately coordinated their alleged illegal selling tactics in an effort to manipulate the market for Hyperdynamics securities and
[ 699 S.E.2d 465 ]
maximize their profits, and that they were motivated by an intent and desire to own a majority of Hyperdynamics common shares of stock and take over control of Hyperdynamics. Prior to that happening, Hyperdynamics suspended all conversion requests made by the Defendants of their preferred stock into common stock.19
Finally, Hyperdynamics alleges the collective Defendants engaged in a coordinated effort to conceal the allegedly unlawful trades. In support of this allegation, Hyperdynamics contends that the Hicks Defendants and the Sims Defendants have given false explanations for known trade discrepancies and that the Canouse Defendants fraudulently "doctored" trading records. And Hyperdynamics points to the collective Defendants' alleged discovery abuses as evidence of the continuing nature of the alleged conspiracy.
Hyperdynamics sued the collective Defendants alleging against one or all of them claims of breach of contract; fraud; negligent misrepresentation; misfeasance; malfeasance, and breaches of fiduciary duties; unjust enrichment, restitution, and disgorgement; fraudulent conveyance; indemnification; tortious interference with contracts; conversion; violations of the Georgia Securities Act of 1973; violations of the Georgia Racketeer Influenced and Corrupt Organizations (RICO) Act, OCGA § 16-14-1 et seq.; civil conspiracy; personal liability and alter ego; and has pled entitlement to punitive damages and attorney fees. IV. Analysis
Hyperdynamics contends that the collective Defendants engaged in a conspiracy to defraud Hyperdynamics by inducing it to enter into a contract through fraud and concealment, the intention of which was to covertly take over majority ownership of Hyperdynamics. Hyperdynamics further contends that the conspiracy among the resident and nonresident Defendants offered sufficient connection to Georgia to confer jurisdiction over the Hicks Defendants and the Sims Defendants. We agree.
Georgia courts will exercise long arm jurisdiction over nonresident defendants when (A) the nonresident has committed, in person or through an agent, one of the acts set forth in the Georgia Long Arm Statute, OCGA § 9-10-91; and (B) the exercise of jurisdiction comports with due process. Innovative Clinical, etc. Svcs. v. First Nat. Bank, etc., 279 Ga. 672, 673, 620 S.E.2d 352 (2005); Gust v. Flint, 257 Ga. 129, 130, 356 S.E.2d 513 (1987).
(A) The Georgia Long Arm Statute authorizes the exercise of personal jurisdiction over a nonresident defendant "as to a cause of action arising from any of the acts [or] omissions . . . if in person or through an agent, he . . .: (1)[t]ransacts any business within this state;20 [or] (2)[c]ommits a tortious
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act or omission within this state[.]" OCGA § 9-10-91(1), (2). Admittedly, the question as to whether either the Hicks Defendants or the Sims Defendants, independently, committed in Georgia any of the necessary acts set forth above is a close one.
Georgia recognizes, and this Court has expressly adopted, the concept of conspiracy jurisdiction. Rudo v. Stubbs, 221 Ga.App. 702, 703-704(1)(a), 472 S.E.2d 515 (1996).21 "A conspiracy is a combination of two or more persons to accomplish an unlawful end or to accomplish a lawful end by unlawful means." (Citation and punctuation omitted.) U.S. Anchor Mfg. v. Rule Indus., 264 Ga. 295, 297(1), 443 S.E.2d 833 (1994). See Cook v. Robinson, 216 Ga. 328, 328(1), 116 S.E.2d 742 (1960). The theory of conspiracy jurisdiction is based upon the notion that the acts of one conspirator in furtherance of a conspiracy may be attributed to the other members of the conspiracy. See Insight Technology v. FreightCheck, 280 Ga.App. 19, 24(1)(a), 633 S.E.2d 373 (2006) ("In all cases, a person who maliciously procures an injury to be done to another, whether an actionable wrong or a breach of contract, is a joint wrongdoer and may be subject to an action either alone or jointly with the person who actually committed the injury.") (punctuation and emphasis omitted). See generally Cook, 216 Ga. at 329(4), 116 S.E.2d 742; Savannah College of Art, etc. v. School of Visual Arts, etc., 219 Ga.App. 296, 297, 464 S.E.2d 895 (1995). Likewise, under the theory of conspiracy jurisdiction, the in-state acts of a resident co-conspirator may be imputed to a nonresident co-conspirator so as to satisfy the specific contact requirements of the Georgia Long Arm Statute. See Rudo, 221 Ga.App. at 703(1)(a), 472 S.E.2d 515. See also Dixie Homecrafters v. Homecrafters of America, No. 1:08-CV-0649-JOF, 2009 WL 596009, at *7 (II)(B) (N.D.Ga. March 5, 2009). Accord Textor v. Bd. of Regents of Northern Illinois Univ., 711 F.2d 1387, 1392-1393(I)(C) (7th Cir.1983); Gemini Enterprises v. WFMY Television Corp., 470 F.Supp. 559, 564-565 (M.D.N.C.1979); Mandelkorn v. Patrick, 359 F.Supp. 692, 694-697(I) (D.D.C.1973); Istituto Bancario Italiano v. Hunter Engineering Co., 449 A.2d 210, 222-226(III)(A), (B) (Del.1982).
Significantly,
