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November 8, 1989


Milton I. Shadur, United States District Judge.

The opinion of the court was delivered by: SHADUR


 After taking extensive deposition and document discovery, defendants Alpern, Gilford and Holmes filed motions for summary judgment on both counts of the Complaint under Fed.R.Civ.P. ("Rule") 56(b). Handelsman and Wolfson responded with their own cross-motions for summary judgment. This Court's August 22, 1989 memorandum opinion and order (the "Opinion") (720 F. Supp. 1319) granted Alpern's summary judgment motion, dismissing him from this action with prejudice.

 Since then the other two cross-motions (one filed by remaining defendants Gilford and Holmes and the other by coplaintiffs Handelsman and Wolfson) have been fully briefed and are now ripe for decision. For the reasons stated in this memorandum opinion and order, both motions are denied.


 As described in the Opinion, this dispute arises out of an investment made by plaintiffs in Gridcomm. Because the Opinion dealt with issues different from those implicated here, it is useful to revisit the facts underlying plaintiffs' claims.

 Handelsman and Wolfson are private investors who (1) maintain a joint trading account for the purpose of trading stock and options and also (2) invest as partners in various private ventures. Before Gridcomm filed its application for relief under Chapter 11 of the Bankruptcy Code, that corporation was developing a technology that it hoped would permit the transfer of data from one computer to another across common AC power lines. Alpern is Chairman of Gridcomm's Board of Directors. Gilford is the securities firm that underwrote the securities offering by which Gridcomm went public in July 1985, and Holmes is its president and resident manager of its Chicago office.

 Some time before the end of 1985, Gridcomm arranged for International Microelectronic Products ("IMP") to design and produce a custom silicon chip for use in Gridcomm's products. Gridcomm's literature said those chips would permit reliable and cost-effective mass production of the Gridcomm products. As will be seen, difficulties encountered in the production of the chips figured prominently in Gridcomm's troubled life.

 IMP was originally scheduled to deliver a working custom chip on January 31, 1986. *fn2" When the chips finally arrived on February 26, Gridcomm found they were not usable and sent IMP back to the drawing board. At the same time it proceeded to design a circuit board that would make the chip unnecessary, and it began the delivery of products incorporating the circuit board in the late spring.

 Also in the spring of 1986, Gridcomm sent Alpern in search of additional working capital. Alpern turned to Gilford to raise short-term capital, in addition to discussing long-term financing with another broker-dealer, D.H. Blair & Co., Inc.

 Although the long-term financing was never completed and generated no funds for Gridcomm, Gilford's efforts to find short-term financing bore more fruit. Holmes arranged a meeting in early June with Handelsman and Wolfson to discuss Gridcomm and Gilford's view of Gridcomm's prospects. According to Handelsman, Holmes described Gridcomm's business and profit potential to them, telling them Gridcomm had a multi-million dollar backlog of orders and was trying to raise $ 1 million for working capital. Even though Handelsman and Wolfson had then received no written information about the corporation, they expressed an interest in investing in Gridcomm. Holmes told them that the investment was not available to them at that time because it was oversubscribed, *fn3" but he would communicate with them if an opportunity to invest arose.

 Within a week of that initial conversation, Holmes called Handelsman and told him a $ 250,000 investment in Gridcomm was available. Handelsman replied that he and Wolfson would make the investment. Holmes made no further representations about Gridcomm at the time.

 Shortly thereafter Wolfson called Holmes to inquire about the risks involved in the Gridcomm investment. According to Wolfson, Holmes said that a bank had lent money against some of Gridcomm's accounts receivable, that Gridcomm had a large backlog of orders, that the Handelsman-Wolfson investment would be repaid as soon as the $ 2 million in long-term financing was completed, that the only way the additional long-term financing would not be raised was if Gilford "went under," and that Gilford was so sure about the deal that it was putting its own pension money into the investment.

 Next Gridcomm sent Handelsman a letter dated June 9 (the "June 9 Letter"), which stated the terms of their agreement and included the following:

This letter, when signed below, will constitute an agreement pursuant to which you agree to provide [Gridcomm] a letter of credit ["LOC"] in the amount of $ 250,000.

 Under the terms of the June 9 Letter Gridcomm became obligated, in consideration for plaintiffs' investment, to deliver two-year warrants for the purchase of 25,000 shares of common stock (1,000 shares for each $ 10,000 of LOC funds) at an exercise price of $ 9 per share. Handelsman signed the June 9 Letter on behalf of his partnership with Wolfson, and on June 19 Alpern affixed his signature on behalf of Gridcomm.

 On June 23 Gridcomm received delivery from IMP of the second iteration of the custom chip and began testing it. Though the evidence fails to show precisely when Gridcomm determined that the new chip also failed to work, Gridcomm's technical management issued a July 8 report stating that conclusion.

 In the "June 27 Letter," sent after Handelsman and Wolfson had already committed themselves to their investment, Alpern wrote to Handelsman outlining a change in the nature of the consideration running from Handelsman and Wolfson. Instead of the LOC, Handelsman or Wolfson or both had asked that they be permitted to put up collateral sufficient to enable Gridcomm to obtain a $ 250,000 loan. *fn4"

 Handelsman signed the June 27 Letter. Before he did so, but after Holmes had made several telephone calls to the partnership asking when the investment proceeds would be forthcoming, Wolfson (on July 10) made a wire transfer of $ 250,000 -- as permitted by the revised arrangement requested by the Handelsman-Wolfson partnership -- to provide the collateral for the Gridcomm loan. Then, as already indicated, on October 1 Gridcomm filed its Chapter 11 petition in bankruptcy.

 Handelsman and Wolfson now assert several material facts had been omitted or misrepresented to them in the various conversations among the parties. They contend that Holmes made three affirmative misrepresentations during their meeting in early June:

2. that the financing package was fully subscribed; and
3. that Gridcomm had a multi-million dollar backlog of orders.

 Plaintiffs further say that Holmes made two more affirmative misrepresentations to Wolfson when Wolfson phoned Holmes a few days later:

1. that Gridcomm had plenty of accounts receivable; *fn5" and
2. that Gilford intended to place a later $ 2 million offering to provide long-term financing, and the only way this offering would not be completed would be if Gilford "went under."

 In addition, Plaintiffs assert three broad types of material omissions:

1. omissions as to Gridcomm's financial condition:
(a) failure to disclose Gridcomm's inability to obtain ...

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