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Marshal T. Simpson Trust v. Invicta Networks, Inc.

United States District Court, D. Delaware

October 18, 2017

MARSHAL T. SIMPSON TRUST, et al.
v.
INVICTA NETWORKS, INC. et al.

          MEMORANDUM

          KEARNEY, J.

         Outside investors in Delaware corporations are entitled to accurate information concerning the corporation before the investment and in communications sent during the investment. But they cannot ignore warnings and then wait for years before filing suit challenging the truth of representations made several years ago. As shareholders of a Delaware corporation, they can seek the corporation's books and records and if rebuffed, file a summary lawsuit allowing expedited review of records which may assist in understanding ongoing operations. When finally filing suit for fraud and presumably based on facts provided by the corporation - voluntarily or involuntarily - the investors must plead facts showing us why they did not or could not have sued within the statute of limitations and describing their reliance on specific representations causing them to lose money. When the investors fail to meet these well-known pleading requirements and admit they can plead no further facts absent discovery, we must enter the accompanying Order dismissing their claims with prejudice.

         I. Alleged facts.

         On November 11, 2014, investors Marshal T. Simpson Trust, Donald S. Simpson Trust, and Christopher Boyd (collectively “Investors”) sued Invicta Networks, Inc. (“Invicta”), its board of directors William Esrey, Robert Hallman, R. James Woolsey (“Directors”), and Victor Sheymov as Invicta's, President, Chief Executive Officer and Chairman in the United States District Court for the Western District of Missouri alleging breach of fiduciary duty, negligence, fraud, and negligent misrepresentation.[1] The Simpson Trusts and Mr. Boyd allege they relied on misrepresentations made by Invicta, its Directors, and CEO Sheymov in deciding whether to invest in the company.[2]

         Invicta is a Delaware corporation with its principal place of business in Virginia.[3] Mr. Sheymov is a Virginia resident.[4] Invicta began as a computer security company and developed two security products, InvisiLAN and WizArmor.[5]

         A. Mr. Sheymov and Invicta's private placement memorandum followed by Donald Simpson's investment in January 2007.

         In July 2006, Invicta and Mr. Sheymov began soliciting investments from Marshal Simpson in Missouri.[6] On July 17, 2006, Invicta sent Marshal Simpson an email touting Invicta's InvisiLAN technology as “unhackable.”[7] Two days later, Mr. Sheymov sent a similar email to Marshal Simpson regarding InvisiLAN technology and attached an Executive Summary, an E-brochure, and Invicta's business plan.[8]

         Invicta's business plan promoted the InvisiLAN product as “unhackable;” claimed “numerous tests by [the] world's most capable attackers from governments and industry produced no penetrations;” “no attacker was able to penetrate beyond the first layer of InvisiLAN's multiple layers of protection;” and “several patents have been granted and more are pending and contemplated.”[9] Marshal Simpson shared the materials with Donald Simpson and Christopher Boyd.[10]

         On January 31, 2007, Invicta gave its private placement memorandum to Donald Simpson.[11] Invicta's private placement memorandum referred to two independent valuations, and attached unaudited financial statements, including summary balance sheets showing its projected total revenue, actual total liabilities, and expected equity contributions.[12]

         Based on the representations in Invicta's private placement memorandum, financial statements, and other solicitation documents provided to Marshal Simpson in 2006, Donald Simpson invested $400, 000 in Invicta in late January 2007.[13] In November 2014, the Investors allege representations in these documents are false.[14]

         B. Mr. Sheymov, Mr. Esrey, and Invicta's private placement memorandum and Marshal Simpson's and Mr. Boyd's investments in 2009.

         On June 27, 2008, Donald Simpson emailed Mr. Sheymov asking for an update on Invicta.[15] In response, Mr. Sheymov reported InvisiLAN “has been certified by the Russian government which makes sales prospects there good;” he “expected orders from them soon . . . progressing to significant numbers during the next year;” the United States government “agreed to buy a small complex of InvisiLAN, ” a sale he expected to complete within two to three weeks; and the United States government “expressed interest in a new InvisiLAN based product” which “we are in the process of rapidly developing” within several weeks.[16]

         Based on earlier materials he received and after Donald Simpson's investment, Marshal Simpson began discussions with Invicta about possible investment.[17] On December 27, 2008, Mr. Esrey emailed Marshal Simpson, stating Invicta “received the money from Russia” and a “mid western electric utility.”[18] In November 2014, the Investors allege the representations in the emails are false.[19]

         On January 13, 2009, Invicta sent Marshal Simpson and Mr. Boyd a private placement memorandum dated January 12, 2009 to solicit investors for the private offer and sale of the company's common stock.[20] The 2009 private placement memorandum stated “several test and pilot platform systems are being tested by various entities for specific applications;” “first shipping orders were made both domestically and internationally” which “may lead to significant increase in revenues in the next 12-24 months;” the development of computer security technology by a subsidiary of Invicta; and made representations about the value of Invicta based on independent valuations.[21]

         In January 2009, Marshal Simpson invested $150, 000 in Invicta and another $1, 000 in November 2009. Mr. Boyd invested $50, 000 in January 2009.[22] In November 2014, the Investors allege representations made in the 2009 private placement memorandum are false.[23]

         C. Invicta's 2011 and 2012 representations.

         In March 2011, Mr. Sheymov emailed Invicta shareholders, including Marshal Simpson, Donald Simpson, and Mr. Boyd, announcing Invicta's spin-off of two subsidiaries, Wiz Enterprises and CyPhone Technologies, Inc.[24] Mr. Sheymov represented stock certificates would be issued “at a later date, but your ownership record is in the companies' books.”[25] The Simpsons and Mr. Boyd never received stock certificates for the subsidiaries.[26]

         In late 2011, the Simpsons asked Mr. Sheymov for an update on Invicta. Mr. Sheymov responded on October 1, 2011 outlining the company's disappointing performance but did not disclose Invicta's security products previously touted as “unhackable” were compromised.[27] In a November 3, 2011 Bloomberg article, Mr. Sheymov admitted a group of college students hacked into one of Invicta's systems.[28]

         A year later, on November 1, 2012, Marshal Simpson asked Mr. Esrey “Is Invicta still in business?”[29] Mr. Esrey responded by forwarding Mr. Sheymov's October 1, 2011 email and directing all communication to Mr. Sheymov.[30] A few days later, Donald Simpson emailed Mr. Sheymov requesting Invicta's financial records.[31] Mr. Sheymov responded with the same October 1, 2011 email and, in response to the request for financial records, reported Invicta lacked money to pay for accounting services.[32]

         D. Mr. Sheymov's October 4, 2013 email.

         In May 2013, Marshal Simpson emailed Mr. Sheymov asking for an update on Invicta. Mr. Sheymov responded “not much has happened since the last update” and reported “various government agencies” offered money to companies to develop what Invicta already developed, and expressed frustration “we are just being ignored and nothing I can do about it [sic].”[33] Mr. Sheymov stated “I still think that under the circumstances the only feasible option is either to lease or to sell the company's intellectual property.”[34] Mr. Sheymov reported one European company is interested in leasing and he “hear[d]” Intel/McAfee “is still a possibility.”[35] Mr. Sheymov told Marshal Simpson he would let him know of any significant development.

         Several months passed, and Marshal Simpson emailed Mr. Sheymov with questions regarding Invicta and “press his case for a potential customer” for Invicta's products.[36] In November 2014, the Investors allege Mr. Sheymov “resisted these efforts.”[37] Marshal Simpson demanded a conference call with Mr. Sheymov to explain the status of the company.[38]

         Mr. Sheymov responded on October 4, 2013, stating “I am working on a sale of Invicta. There are no other activities at the company at this time.”[39] The Investors allege they did not discover, and could not have reasonably discovered, Defendants' malfeasance until Mr. Sheymov's October 4, 2013 email.[40] Investors allege Mr. Sheymov's representations from April 14, 2009 to October 4, 2013 were false, and made to either induce additional investments or guarantee continued ownership of Invicta shares.[41]

         E. Investors' abandoned demand for information.

         Before filing his complaint, Marshal Simpson made a Section 220[42] demand under Delaware law for Invicta's books and records.[43] Marshal Simpson revised and narrowed his Section 220 demand after Mr. Sheymov responded “the demand was too voluminous.”[44]According to the Investors, Mr. Sheymov did not respond to the 220 demand.[45] Inexplicably, Mr. Simpson abandoned his demand for records. Instead, the Investors filed suit in the United States District Court for the Western District of Missouri in November 2014 without the requested information.

         F. Transfer from Missouri to Delaware and Judge Robinson's dismissal of claims against the Directors.

         In Missouri, Directors Esrey, Hallman, and Woolsey moved to dismiss the breach of fiduciary duty and negligence claims against them and Mr. Esrey moved to dismiss the fraud and negligent misrepresentation claims against him. The Missouri district court granted the motion to dismiss in part, finding it did not have personal jurisdiction over Messrs. Hallman and Woolsey.[46] The Missouri district court then granted Plaintiffs' motion to transfer the case under 28 U.S.C. § 1406(a) to the District of Delaware.[47]

         After transfer, the Directors again moved to dismiss under Rule 12(b)(6) before Judge Robinson.[48] On April 19, 2017, Judge Robinson granted their motion dismissing the breach of fiduciary duty and negligence claims against Directors Esrey, Hallman, and Woolsey and the fraud and negligent representation claims against Mr. Esrey without prejudice.[49] Admitting they had no further information, the Investors never amended their complaint.

         On May 24, 2017, Judge Robinson ordered the Investors to serve Mr. Sheymov and move for default judgment against Invicta.[50] Upon reassignment, we granted the Investors' motion for default judgment and, after Invicta and Mr. Sheymov filed an unopposed motion to vacate default judgment, vacated the default judgment.[51] Invicta and Mr. Sheymov then moved to dismiss.

         II. Analysis[52]

         Invicta and Mr. Sheymov move to dismiss the Investors' breach of fiduciary duty and negligence claims[53] and the fraud and negligent misrepresentation claims.[54] Invicta and Mr. Sheymov argue Judge Robinson's April 19, 2017 Order dismissing the breach of fiduciary duty and negligence claims against Directors Esrey, Hallman, and Woolsey are law of the case and the fraud and negligent misrepresentation claims are time barred and fail to meet the specificity required by Federal Rules of Civil Procedure 9(b) and 8(a).

         A. Investors do not contest dismissal of their breach of fiduciary duty and negligence claims.

         Invicta and Mr. Sheymov argue Judge Robinson's memorandum opinion dismissing Directors Esrey, Hallman, and Woolsey from the breach of fiduciary duty and negligence claims is law of the case.[55] In her opinion, Judge Robinson found the negligence claim duplicative of the breach of fiduciary duty claim; the fiduciary duty claim is derivative; and the Investors failed to plead they made a demand or futility of demand required by Federal Rule of Civil Procedure 23.1. Judge Robinson dismissed the breach of fiduciary duty and duplicative negligence claim without prejudice. The Investors elected not to amend their complaint candidly telling us during oral argument of no additional facts available to them to amend.

         The Investors do not contest dismissal of their breach of fiduciary duty and negligence claims.[56]

         B. We dismiss the fraud and negligent misrepresentation claims.

         Invicta and Mr. Sheymov argue the Investors' fraud and negligent misrepresentation claims must be dismissed because they are time-barred and they fail to meet pleading standards of Rules 9(b) and 8(a). We agree.

         1. Investors' claims are time-barred under Delaware's choice-of-law rules.

         Invicta and Mr. Sheymov contend the law of four different states and their statutes of limitations could apply to the Investors' fraud and negligent misrepresentation claims:

• Delaware, where Invicta is incorporated, has a three-year statute of limitations;[57]
• Virginia, where Mr. Sheymov resides and the location of Invicta's principal place of business, has a two-year statute of limitations;[58]
• Kansas, where Donald Simpson and Mr. Boyd reside, has a two-year statute of limitations;[59] and • Missouri, where Marshal Simpson resides, has a five-year statute of limitations from the date a cause of action accrues which is either when the fraud is discovered or ten (10) years after the fraud takes place, whichever occurs first.[60]

         As a federal court sitting in diversity, we apply the choice-of-law rules of Delaware as the forum state.[61] “Under Delaware's choice-of-law rules, a statute of limitations is procedural, not substantive.”[62] Delaware law “generally determines whether an action is barred by the statute of limitations.”[63] Delaware's choice-of-law rules include a borrowing statute which modifies this general rule.[64] When a cause of action arises outside of Delaware, the borrowing statute applies the shorter of Delaware's statute of limitations and the statute of limitations of the place where the claim arose:

Where a cause of action arises outside of this State, an action cannot be brought in a court of this State to enforce such cause of action after the expiration of whichever is shorter, the time limited by the law of this State, or the time limited by the law of the state or country where the cause of action arose, for bringing an action upon such cause of action. ….[65]

         If the Investors' claims arose in Delaware, the borrowing statute does not apply; by its terms, the statute applies “where a cause of action arises outside this State.”[66] If the cause of action arose in Virginia or Kansas, a two-year statute of limitations applies and, under the borrowing statute, we would apply the shorter statute. If the cause of action arose in Missouri, we would apply Delaware's three-year statute of limitations because it is shorter than Missouri's five-year statute.

         The last investment made by Marshal Simpson occurred in November 2009, after making his initial January 2009 investment. Donald Simpson invested in January 2007 and Mr. Boyd invested in January 2009. Applying Delaware's three-year statute of limitations to the last investment, the complaint must have been brought by November 2012. Investors did not sue until November 2014. The Investors' fraud and negligent misrepresentation claims are time-barred unless tolled.

         2. Delaware's tolling doctrines do not apply as pleaded.

         The Investors argue the question of which state's statute of limitations applies is irrelevant because Delaware allows for tolling under the discovery rule. They allege the earliest possible date they could have discovered Defendants' fraud and misrepresentations occurred through Mr. Sheymov's October 4, 2013 email: “I am working on a sale of Invicta. There are no other activities at the company at this time.”

         We examine three tolling doctrines under Delaware law[67]: (1) inherently unknowable injuries; (2) fraudulent concealment; and (3) equitable tolling.[68] A plaintiff bears the burden of showing the statute of limitations is tolled, and “relief from the statute extends only until the plaintiff is put on inquiry notice.”[69] “No theory will toll the statute beyond the point where the plaintiff was objectively aware, or should have been aware, of facts giving rise to the wrong.”[70] Inquiry notice exists “when person person[s] of ordinary intelligence and produce [have facts sufficient to place them] on inquiry which, if pursued, would lead to the discovery of the injury.”[71] A plaintiff is “on inquiry notice if [he] is in possession of facts sufficient to make [him] suspicious, or that ought to make [him] suspicious.”[72] While the “plaintiff-friendly inferences” required of a Rule 12(b)(6) analysis applies to the timeliness of claims, it “does not govern assertion of tolling exceptions to the operation of a statute of limitations” . . . and a plaintiff “asserting a tolling exception must plead facts supporting the applicability of that exception.”[73]

“Inherently unknowable injuries” applies “where it would be practically impossible for a plaintiff to discover the existence of a cause of action.”[74] “No objective or observable factors may exist that might have put the plaintiffs on notice of an injury, and the plaintiffs bear the burden to show that they were ...


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