KENNETH E. CLARK, Plaintiff,
CHESTER C. DAVENPORT, CECE DAVENPORT BERKOWITZ, COREY DAVENPORT, ROBERT L. REISLEY, JONATHAN FOTOS, GEORGETOWN BASHO INVESTORS, LLC, and ADAM J. WRAY, Defendants.
Submitted: May 2, 2019
A. Penza, Christina M. Belitz, POLSINELLI PC, Wilmington,
Delaware; Attorneys for Plaintiff Kenneth E. Clark.
D. Cordo, F. Troupe Mickler IV, Hayley M. Lenahan, ASHBY
& GEDDES, P.A., Wilmington, Delaware; Attorneys for
Defendant Adam J. Wray.
A. Felice, BAILEY & GLASSER, LLP, Wilmington, Delaware;
Attorneys for Defendant Corey Davenport.
plaintiff sued seven defendants for inducing him to make
three investments in a failed enterprise. Three of the
defendants defaulted. Two settled. The remaining two moved to
dismiss the complaint pursuant to Rule 12(b)(6) for failing
to state a claim on which relief can be granted. One of the
two remaining defendants moved for dismissal pursuant to Rule
12(b)(2), contending that this court lacks personal
jurisdiction over him. The Rule 12(b)(6) motions are granted
in part. The Rule 12(b)(2) motion is denied.
facts are drawn from the amended complaint and the documents
it incorporates by reference. At this stage of the
proceeding, the complaint's allegations are assumed to be
true, and the plaintiff receives the benefit of all
Basho And Georgetown
in 2008, Basho Technologies, Inc. ("Basho" or the
"Company") was a privately held Delaware
corporation. Basho specialized in distributed-systems
database software, which enables large companies to store and
manage massive amounts of data using cloud-based
applications. By late 2013, many large businesses, including
over one third of the Fortune 50, were using Basho's
software. According to industry analysts, Basho fell within a
small cluster of companies best positioned to exploit this
rapidly expanding market segment.
the way, Basho attracted the interest of defendant Chester
Davenport, a wealthy and successful attorney. The defendants
in this case include two other members of the Davenport
family: Corey Davenport, Chester's son, and CeCe
Davenport Berkowitz, Chester's daughter. For clarity,
this decision refers to the Davenports by their first names.
controlled non-party Georgetown Partners LLC and used it to
make private-equity-style investments. Both Corey and CeCe
are employees of Georgetown.
February 2011, Georgetown invested in Basho through defendant
Georgetown Basho Investors, LLC, a special purpose vehicle
that Chester also controlled. For simplicity, this decision
does not distinguish between Georgetown and the special
purchased shares of Basho's Series D preferred stock and
obtained the right to designate a member of Basho's board
of directors (the "Board"). Georgetown designated
Chester. In June 2012, Georgetown purchased shares of
Basho's Series F preferred stock and received the right
to designate a second member of the Board. Georgetown
designated defendant Robert Reisley, an associate and
confidante of Chester's who was a member and officer of
Series F preferred stock carried blocking rights that
prevented Basho from raising equity capital without the
consent of holders of a majority of the Series F shares. As
the holder of a majority of the Series F shares, Georgetown
controlled the blocking rights.
Chester Takes Control.
wanted to force a near-term sale of Basho. He anticipated
that Basho would soon need additional capital. He planned to
use Georgetown's blocking rights to foreclose third-party
financing options, thereby forcing Basho into a cash crisis.
Basho eventually would turn to Georgetown, and Chester would
insist on full control as the price for keeping Basho afloat.
Once in control, Chester would achieve a near-term sale.
with this plan, Georgetown blocked Basho from pursuing
attractive financing proposals from third parties. After
failing to raise capital from other sources, Basho turned to
Georgetown. Rather than investing equity, Georgetown provided
Basho with a secured loan that authorized monthly draws of up
to $1.5 million and a maximum credit limit of $7.5 million.
loan was only a short-term financing solution, and
Basho's management team expected to need more funding by
the end of 2013. During 2013, Basho attempted to raise equity
from outside investors, but Georgetown interfered with the
process. Basho's CEO resigned in frustration.
cut off Basho's other financing options and with the loan
coming due, Georgetown presented Basho with an offer to lead
a Series G round that would raise a total of $25 million.
Georgetown would fund $10 million, but only $2.5 million
would be new money. The remaining $7.5 million would come
from converting amounts due under the secured loan.
Georgetown had not yet lined up any other investors to
participate in the round. Georgetown wanted to close its part
of the deal, then go into the market to find investors.
terms of the Series G round were onerous. Among other things,
the shares gave Georgetown control over 65% of Basho's
voting power. Georgetown also would receive the right to
designate four of seven directors. But without other options,
initial closing took place on January 23, 2014 (the
"Series G Financing"). Immediately after closing,
Georgetown added defendant Jonathan Fotos to the Board. He
was a Georgetown employee and beholden to Chester. The
Georgetown designees- Chester, Reisley, and Fotos-then led
the Board through a series of resolutions that the
non-Georgetown directors had never seen before, much less
discussed. One resolution appointed Chester as Executive
Chairman. Another established an Executive Committee with the
power to exercise all of the Board's authority. Its
members were Chester, Reisley, and whoever became Basho's
CEO. The Board approved all of the resolutions.
March 10, 2014, Chester and Reisley hired defendant Adam Wray
to serve as Basho's CEO. Wray also became a director and
member of the Executive Committee. Although Wray had
experience working at technology firms, including as a CEO,
he was underqualified to lead Basho. Chester and Reisley
nevertheless provided Wray with a lavish compensation package
that was out of step with market terms.
hiring Wray, the Executive Committee continued to manage
Basho. The Board did not convene a formal meeting for months.
During this period, numerous key personnel left the Company.
Insider Transactions With Chester's
continued to need money. Davenport and his Georgetown
colleagues thought they would be able to find investors to
fill out the remaining $15 million for the Series G
Financing, but they had little success. The punitive terms of
the Series G Financing sparked concern, and every investor
who had previously shown interest in Basho declined to
participate. By mid-March 2014, Georgetown had managed to
raise only $67, 500 from other investors.
Basho going, Georgetown exercised warrants it had received in
the Series G Financing and paid $1.8 million for additional
Series G shares. The date for exercising the warrants had
passed, but the Executive Committee extended it for
next paid an individual in China to refer investors to Basho.
Those efforts led to additional purchases of Series G shares
totaling $2.5 million.
next engaged two investment banks to place the Series G
shares. They failed to generate any interest.
that, Chester resorted to funding Basho with insider loans.
In April 2014, the Executive Committee approved a $650, 000
loan from Georgetown. In June, the Executive Committee
approved a loan of $1.5 million from Newport Beach Investors,
LLC ("Newport"), another entity that Chester
controlled. In August, the Executive Committee approved a
second loan from Newport, this time in the amount of $250,
000. In September, the Executive Committee approved a third
loan from Newport, this time in the amount of $400, 000.
difficulties in raising capital signaled to its business
partners that it was distressed. As a result, Basho lost
significant strategic relationships, including with companies
such as Cluster Technologies, NEC, Xyratex Ltd., Seagate
Technology LLC, EMC Corporation, and Akamai Technologies,
Clark's October 2014 Investment
October 2014, Chester telephoned plaintiff Kenneth Clark
about investing in Basho. Clark was the founder and chairman
of First Guaranty Mortgage Company, a residential mortgage
lender licensed in forty-four states. Clark had met Chester
in 1988 when First Guaranty merged with a savings and loan
association that Chester partly owned. Clark and Chester
stayed in contact over the years, and Clark considered
Chester a friend.
part, Chester knew that Clark was in the process of selling
First Guaranty to a private equity firm, which meant Clark
would have cash to deploy. Chester also knew that Clark was
not a professional investor and did not have any particular
knowledge about Basho or its industry.
a call with Clark on October 2, 2014, Chester spoke
positively about Basho. After the call, he sent Clark an
email that attached an "Executive Summary." The
email contained positive statements about Basho, the state of
its business, and the market in which it operated. The email
did not mention other highly material facts about the
difficulties that Basho had encountered and the ongoing
problems it faced.
example, Chester told Clark, "We have not raised capital
from the [sic] Venture Capital. Most of the capital
has been raised By [sic] the insiders in the
Company." Although technically true, Chester failed to
mention that Basho had tried to raise money from venture
capital funds and failed miserably, or that the money raised
from insiders included repeated, emergency cash injections
from Chester and his affiliates. By omitting the negative
information, Chester implied that Basho had not yet sought
venture capital due to the high level of participation by
Basho's insiders and their confidence in Basho.
also told Clark that as a result of the Series G Financing,
Georgetown "became the controlling shareholder of the
Company and has 5 of the 7 board seats." Chester
conveyed this message as part of his pitch that there was
"a new sheriff in town" who would take Basho to the
next level. Chester's statement was deceptive because
Georgetown had been exercising control over Basho since
before the Series G Financing, which would have
undermined the "new sheriff in town" narrative.
also represented in his October email: "We only have $8M
of the G shares that remain to be sold. We are offering those
shares first to family and friends of GTP's Limited
Partners." This was deceptive. Georgetown was not
offering the Series G shares first to friends and family.
Chester contacted Clark only after exhausting his other
even represented to Clark that Basho had "engaged
Benchmark, a New York investment banking firm to sell
$50M-$60M of new securities valuing Basho closer to the
Values being given our competitors" and that he expected
"the value of Basho will be set in a range of $500M to
$600M." Benchmark never set a value for Basho in this
range. Given Basho's condition at the time, Chester could
not have reasonably expected that Basho would receive that
complaint details other positive statements in Chester's
email that were similarly misleading. In each case, Chester
omitted closely related and highly material negative
information that was necessary to put the positive statement
Executive Summary also contained false and misleading
disclosures about Wray. For example, it stated that
"Wray is a cloud enterprise technology entrepreneur and
executive with more than 20 years of experience," but
cloud technologies did not become a market segment until
approximately 2009, and Wray had never been a cloud
enterprise technology "entrepreneur."
bio also claimed that he had
led a variety of companies at different stages, holding
positions of CEO, president, GM and product management. Most
recently, Wray served as the CEO and president of Tier 3,
where he led the company through nearly $20 million in
funding from venture capitalists and grew the company from a
startup to an eight figure annual run-rate ($10M) before
selling the company to CenturyLink for several hundred
the Executive Summary represented that Wray and Basho CTO
Dave McCrory had "led VC-backed companies to successful
M&A exits." These statements were false. Wray did
not sell Tier 3 to CenturyLink. In fact, Wray admitted under
oath in another proceeding that Tier 3 replaced him as CEO in
October 2012 and that his successor accomplished the sale
over a year later. Wray had not led any VC-backed companies
to a successful M&A exit.
complaint alleges that after speaking with Clark and sending
this email, "Chester put Clark in contact with
Wray." The complaint pleads a series of negative facts
that Clark was not told. It then alleges that "Wray did
not provide Clark with any of this material Basho history. On
the contrary, Wray corroborated everything Chester had said,
and reinforced the message that Basho was postured for
on his communications with Chester and Wray, Clark decided to
invest. In making his decision, Clark took into account his
years of friendship with Chester and the fact that Chester
had always seemed to act honestly. He trusted Chester and
believed that he was receiving an inside view of Basho from
the people who controlled it. Precisely because Chester
controlled Basho, Clark thought Basho was an ideal
opportunity for a passive investment, enabling him to focus
on the sale of his mortgage-lending business.
October 28, 2014, Clark invested $2 million in Basho in
return for Series G shares (the "October 2014
Investment"). Clark documented the investment by
executing a signature page to Basho's Series G Senior
Participating Preferred Stock Purchase Agreement.
Clark's December 2014 Investment
December 2014, Chester again approached Clark and urged him
to make an additional investment in Basho. Wray also
communicated with Clark about the investment. Together, they
claimed that (i) at least three investment funds were
clamoring to fill out the Series G round but that Chester was
stalling them to facilitate investments by friends like
Clark, (ii) other investors in New York were considering the
shares but Chester wanted Clark to buy them, (iii) an
aggressive ramp-up of Basho's booking was expected for
2015, (iv) Basho was close to claiming the dominant position
in its market by the end of 2015, and (v) Basho was on the
verge of an enormously beneficial strategic partnership with
these discussions, Wray represented to Clark that Basho
expected to achieve $32 million in bookings for 2015. Wray
also represented that Basho was uniquely positioned to
achieve a strategic partnership with IBM because IBM owned
The Weather Company, an existing Basho client. According to
Wray, Basho expected to announce its strategic partnership
with IBM on February 22, 2015, at the IBM Interconnect
Chester nor Wray identified any of the serious problems that
Basho faced. They did not disclose any of the negative
information that they had failed to disclose in connection
with the October 2014 Investment, nor did they disclose
additional problematic events that had taken place in the
interim. Most notably, they never disclosed that an outside
director and co-founder of Basho (Earl Galleher) had filed a
complaint seeking books and records based on detailed
allegations of serious fiduciary misconduct by Chester and
reliance on Chester and Wray's sanitized representations,
Clark invested another $500, 000 in Basho. In exchange, he
received additional Series G shares (the "December 2014
Clark's March 2016 Investment
months passed between the December 2014 Investment and
Clark's next investment. During the intervening period,
Basho completed the Series G round. The final investment came
from the Business Development Corporation of America
("BDCA"), which invested $2 million of equity and
loaned Basho $10 million in March 2015. But even after the
BDCA investment, Basho's financial condition continued to
deteriorate. In June 2015, the outside director and
co-founder who had filed the books-and-records action
(Galleher) circulated a detailed memorandum expressing
serious concerns about Basho and requesting immediate Board
action. In October 2015, Galleher circulated another detailed
memorandum raising additional concerns.
this period, Clark did not receive any meaningful information
about Basho's situation. His principal contacts were
Chester and Wray, but they did not disclose the hardships
Basho was facing, nor did they tell him about Galleher's
claims. For his part, Clark did not pay significant attention
to Basho, both because he trusted Chester, and because he was
still focused on selling his mortgage business. That
transaction closed in October 2015.
time to time, Clark did check in with Chester and Wray. For
example, on February 17, 2016, Clark contacted Wray for an
update. During their efforts to schedule a call, Wray cited a
conflict because of meeting with Raytheon regarding a
"large gov pursuit we've been chosen for."
Clark responded that Raytheon sounded like "huge upside
potential" and asked if "[e]verything [was] going
well?" Wray wrote back:
Yes, everything's going great. The position we've
staked out in IoT and Time Series is really starting to take
hold w/ IBM, Cisco and others, including Akamai, Juniper and
On the Raytheon pursuit, it will be huge. We've been
chosen by their Solipsys division to be the standard going
forward for their DB over Oracle. That means we're being
baked into over 20 massive gov pursuits that they have w/
countries from U.S. to Quatar [sic], plus becoming
foundational to review existing clients for change out in
next cycle. We should see some rather large upside this yr
out of Raytheon, and growth to only continue from there (side
note, their interest and review of our technology brought
Lockheed Martin ...