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From Securities Regulation Daily, January 6, 2014

Investor justifiably relied on translator's false representations

By Rodney F. Tonkovic, J.D.

Fraud claims under the securities laws were allowed to proceed after a district court found that an investor sufficiently alleged specific misrepresentations, justifiable reliance, and scienter. Claims brought against LightSpeed Environmental, Inc., (LightSpeed) under Securities Act Sec. 12(a)(2) were dismissed, however, because the plaintiff failed to allege that there was a public offering or that a prospectus existed. Breach of fiduciary duty and civil conspiracy claims were also dismissed (Wang v. LightSpeed Environmental, Inc., January 3, 2014, Cox, S.).

Background. According to LightSpeed's website, LightSpeed, in partnership with Unicell B.C.I. and A.S.G, was involved in the development of an electronic, zero-emission delivery vehicle called "Quicksider." Unicell B.C.I., A.S.G, and their CEOs, Roger J. Martin and David Tarrant, respectively, owned or controlled the majority of LightSpeed's voting shares. The plaintiff, Tonglin Wang, is a Chinese businessman who was interested in investing in a U.S.-entity to achieve a certain immigration status through a federal program.

In April 2011, Wang was introduced to two individuals regarding investing in the U.S. These individuals, who were in reality LightSpeed's agents, told Wang that they would serve as his advisers and translators. Wang was introduced to Tarrant in July 2011 and in a series of meetings, the defendants promoted LightSpeed as a viable investment with an equity value of $30 million, ownership of all legal rights to Quicksider, and having existing orders and a significant global market for Quicksider. These representations were repeated during several meetings in 2011 and 2012.

In late 2011, Wang signed a subscription agreement that disclosed risks related to LightSpeed's business, including the fact that it did not own or license any intellectual property. The subscription agreement was in English, which Wang does not read, speak, or understand. After signing the agreement, Wang wired $1 million to LightSpeed in exchange for 120,000 shares.

Wang eventually became suspicious of LightSpeed's viability, particularly after Martin sent him a letter that contradicted representations that had been made to him. Wang filed suit, claiming that the defendants conspired to defraud him into making a $1 million investment in LightSpeed, which he claimed further was a worthless shell company. Wang alleged that he relied exclusively on LightSpeed's agents for translation and business and legal advice. At the time, however, the two agents did not tell Wang that they were working for LightSpeed. Wang alleged further that LightSpeed, in contrast to what he was told, had no assets, employees, or intellectual property.

Section 12(a)(2) claims. The court first dismissed Wang's Sec. 12(a)(2) claim. Wang argued that the whether the offering was public or private was a factual issue, but the court found that the complaint's allegations were insufficient. According to the court, Wang failed to allege that there was a public offering, that a prospectus existed, or that there were any oral communications regarding a prospectus.

Fraud. Next, Wang alleged fraud under both the Securities Act and the Exchange Act. The court found that the complaint adequately pleaded fraud and consequently allowed Wang's controlling person claims to proceed. The court found that the complaint sufficiently alleged common law fraud for the same reasons.

The court first found that the complaint adequately alleged a specific misrepresentation. According to the court, Wang adequately specified the fraudulent statements, who made them, when and where they were made, and why they were fraudulent. The complaint similarly specified on a defendant-by-defendant basis the roles that each defendant allegedly played in the alleged misrepresentations and conspiracy.

The court then concluded that Wang sufficiently alleged justifiable reliance. The defendants argued that Wang could not establish justifiable reliance based on the written agreements that he signed, which warned that the investment was "speculative and risky." The court noted that while a party is generally bound by documents he signs, there is an exception for fraud. Here, when Wang asked LightSpeed's agents to translate the subscription agreement, they misrepresented its contents, which the court found sufficient to allege justifiable reliance.

Remaining claims. Because the plaintiff was able to allege justifiable reliance, the court concluded that Wang stated a claim for negligent misrepresentation. The court then found that Wang failed to sufficiently plead a breach of fiduciary duty claim because as written, the claim pleaded a derivative action. Finally, the court found that Wang sufficiently pleaded underlying claims allowing his civil conspiracy claim to go forward.

The case is No. 12-14283.

Attorneys: Benjamin F. Wu (Butzel Long, PC) for Tonglin Wang. Noah P. Hood (Miller, Canfield, Paddock & Stone) for LightSpeed Environmental, Inc., Unicell Body Co., Inc. and Unicell Ltd.

Companies: LightSpeed Environmental, Inc.; Unicell Body Co., Inc.; Unicell Ltd.

MainStory: TopStory FraudManipulation MichiganNews SecuritiesOfferings NewLawsuitsNews

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