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May 2011

Houston Trial Team Prevails in Alleged Fraudulent Stock Sale Case Before Houston Federal Court Jury

Houston Partner Barry Flynn and Senior Counsel Heidi Gumienny won a take-nothing judgment in a jury trial in federal court in a lawsuit alleging fraud in the sale of stock in a start-up company known as LaserShield Systems, Inc.  LaserShield manufactures and sells in-home "Plug and Go" security systems that are marketed primarily to apartments residents and small businesses.  In this lawsuit, two investors, Banyan Investors, L.P. and Frank Gruen, sued Lasershield and its placement agent for misrepresentations allegedly made in the sale of its Series E offering of stock, asserting causes of action under the Texas Security Act, statutory fraud, common law fraud, negligent misrepresentation and breach of fiduciary duty, and seeking rescission of their $2.25 million stock transaction.  At the time of the Series E offering, LaserShield was on the verge of selling its products in stores nationwide and hoped to make an initial public offering.  However, due to a handful of large retailers going out of business or closing retail stores, such as Circuit City, Home Depot and CompUSA, LaserShield did not achieve its goal of becoming a national company in the time period it had anticipated.  Prior to trial, Plaintiffs settled with LaserShield's placement agent, which had made certain misrepresentations to Plaintiffs, including the representation that the Series E offering was oversubscribed. 

Trial took place in Judge Ewing Werlein, Jr.'s court in the Southern District of Texas, with a twelve person jury.  During trial, Plaintiffs agreed to dismiss their breach of fiduciary duty claim on the basis that a Texas corporation does not owe a fiduciary duty to its shareholders, and their negligent misrepresentation claim.  Gordon & Rees was able to show that the private placement memorandum that accompanied the Series E offering contained numerous statements that the investment was marketed only to accredited investors, that the investment was risky and uncertain, that it had no value on paper, that the investors could lose all of their money, and that there were no guarantees the company would be successful or go public.  Finally, it was shown that Plaintiffs were both accredited investors who were experienced in investing in several similar start-up companies and that they were well aware that risk was inherent in investing in such private companies. 

Liability questions were submitted for both LaserShield and the placement agent, and the jury answered all liability questions in the negative.  Based on the jury's answers, the Court issued a take-nothing final judgment against Plaintiff.

The Gordon & Rees defense team also consisted of Partner Glenn LeMay and Senior Counsel Brian Martin.

Barry G. Flynn
Glenn R. Lemay