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Orgone Capital III, LLC v. Daubenspeck

United States District Court, N.D. Illinois, Eastern Division

July 20, 2017

ORGONE CAPITAL III, LLC, DAVID BURNIDGE, LINCOLNSHIRE FISKER, LLC, KENNETH A. STEEL, JR., and ROBERT F. STEEL, individually and on behalf of a class of all those similarly situated, Plaintiff,
v.
KEITH DAUBENSPECK, PETER MCDONNELL, KLEINER PERKINS CAUFIELD & BYERS, RAY LANE, and JOHN DOERR, Defendants.

          MEMORANDUM OPINION AND ORDER

          REBECCA R. PALLMEYER United States District Judge

         Plaintiffs are investors in Fisker Automotive (“Fisker”), a manufacturer of electric cars. In this suit, Plaintiffs claim that Fisker's controlling shareholder, Kleiner Perkins Caufield & Byers (“Kleiner Perkins, ” or “KP”), committed securities fraud by concealing critical information from investors in an attempt to shore up the company-and KP's investment-with infusions of outside funding. To achieve that goal, Plaintiffs allege, Kleiner Perkins and two of its principal partners, Ray Lane and John Doerr (jointly, “Kleiner Perkins Defendants”) exercised Kleiner Perkins' control of Fisker's board to retain the Chicago-based investment banking firm Advanced Equities Inc. (“AEI”) to market Fisker's stock to AEI's customer base. Plaintiffs claim that the Kleiner Perkins Defendants, through AEI, issued misleading information about the state of the company to prospective investors, failing to disclose that the company was facing a liquidity crisis after the federal government froze further draw-downs of a crucial Department of Energy loan. Plaintiffs purport to represent a class of investors who purchased Fisker's securities through AEI, and who lost their investments when the company essentially shuttered operations in 2012.

         The Kleiner Perkins Defendants, none of whom are residents of Illinois, have moved to dismiss the complaint for lack of personal jurisdiction and because the statute of limitations on Plaintiffs' claims has run. The two other defendants in the case, AEI principals Keith Daubenspeck and Peter McDonnell, join the statute of limitations theory. For the reasons below, Defendants' motion is granted and the complaint is dismissed without prejudice.

         BACKGROUND

         Plaintiffs' complaint is accepted as true for purposes of a motion to dismiss, W. Bend Mut. Ins. Co. v. Schumacher, 844 F.3d 670, 675 (7th Cir. 2016), and the facts below are accordingly drawn from it.

         Fisker Automotive was an electric car start-up which, for several years following 2008, was immensely successful in attracting venture capital investment and a loan of more than $500 million from the United States Department of Energy (“DoE”). (Compl. [1-1], at ¶ 2.) But Fisker abruptly shut down operations in 2012, in what Plaintiffs characterize as “the largest venture[-]capital-backed debacle in U.S. history.” (Id.) Plaintiffs, investors in Fisker, claim that this failure was not a run-of-the-mill collapse, but rather the result of fraud, breaches of fiduciary duty, and civil conspiracy. (Id. ¶ 1.)

         In short, as more fully described below, Plaintiffs allege that Defendants knew that Fisker's costs were far greater than had been anticipated and that it was incapable of meeting its production schedule, yet Defendants concealed that information as they continued to seek investment capital. The extent of the malfeasance was not widely known until 2013, when a series of events made Fisker's woes public. (Id. ¶ 4.) On April 17, 2013, PrivCo, a private market research firm, released a report entitled “Road to Ruin, ” in which it exposed Fisker's catastrophic financial situation based on thousands of pages of documents which PrivCo had obtained through Freedom of Information Act requests. (Id.) A week later, Congress held the first of several hearings investigating Fisker's use of taxpayer-backed loan funds awarded by the DoE, discussed further below. (Id.) Five months after that, on September 17, 2013, a qui tam complaint filed in federal court in the Southern District of New York against Fisker-brought by its former Chief Financial Officer, Eric Weidner-was unsealed. (Id. ¶ 5.)

         These three revelations painted a grim picture of Fisker's operations. In April 2010, the company secured a $528.7 million loan from the DoE, but the loan application was based on an enormous understatement of the costs associated with producing Fisker's two automobiles: the Karma, a luxury vehicle, and the Nina, a lower-cost sedan. (Compl. ¶¶ 2, 5.) Fisker's executives and financial backers had known since December 2009 that the reported costs were dramatically below what it actually cost to produce the vehicles, but they concealed that information from the DoE and from its investors to secure additional funds. (Id. ¶ 5.)

         Plaintiffs' allegations in this suit are not against Fisker, but against its primary venture-capital backers, Kleiner Perkins Caufield & Byers and its principals, and the principals of a Chicago-based investment banking firm, Advanced Equities Inc.; each set of Defendants had a member on Fisker's board and allegedly withheld information about the state of the company in an effort to protect Kleiner Perkins' investment. (Id. ¶¶ 4, 6).

         Plaintiffs purport to represent the class of buyers who purchased Fisker securities through AEI between August 19, 2009 and September 26, 2012. (Compl. ¶ 1.) In this case, filed in October 2016, Plaintiffs have named the following Defendants:

• Keith Daubenspeck, the co-founder and principal of AEI, and a Fisker board member
• Peter McDonnell, senior managing director of AEI
• Kleiner Perkins Caufield & Byers
• Ray Lane, a managing partner of Kleiner Perkins, and a Fisker Board member
• John Doerr, a managing partner Kleiner Perkins

(Id. ¶ 4.) AEI is not itself a defendant. (See id.)

         The complaint alleges that Fisker's board of directors, which included Daubenspeck (of AEI) and Lane (of Kleiner Perkins), concealed information about Fisker's production costs from DoE and Plaintiffs. (Id. ¶ 5.) After Fisker secured the DoE loan, Plaintiffs claim that all of the Defendants knew, but failed to disclose, that the production schedule of one of the vehicles, the Karma, was repeatedly delayed due to faulty parts and engineering changes, and that Fisker had concealed that fact from the DoE. (Id. ¶ 6.) Worse, Fisker executives actively lied to the DoE by reporting in a March 2011 presentation that it had begun production of the Karma when it had not. (Id.) DoE discovered the lie just three months later, and froze the loan in June 2011. (Id.) Plaintiffs allege that all of these facts-including DoE's freezing of the loan-were not disclosed publicly, or to Plaintiffs. (Id. ¶ 8.)

         By October 2011, Fisker was in a cash crisis, resulting from the mismanagement of the Karma's launch and the supply chain (id.), compounded by the DoE loan funds drying up. Grant Thornton, an auditor retained by DoE at that time, discovered that Fisker owed $120 million to its suppliers, primarily because Fisker had ordered several hundred million dollars in useless parts. (Id.) In early November, the company was on the brink of insolvency, but DoE refused to resume funding under the loan. (Id.)

         According to Plaintiffs, Defendants not only concealed the cash crisis from outside investors (Compl. ¶ 8), but sought to plug the hole with additional outside investments. (Id. ¶ 11.) Kleiner Perkins, and its partners Lane and Doerr, exercised their effective control of Fisker to retain AEI to find outside investors. (Id. ¶ 38.) According to the complaint, AEI not only sold preferred stock of Fisker, but also created specialized investment products that allowed smaller-dollar investors to purchase an interest in Fisker, which gave AEI itself a controlling stake in the company: though individual investors owned the shares of AEI's investment vehicles, AEI retained the right to vote the shares. (Id. at ¶ 1.) Daubenspeck directed AEI's activities as placement agent for Fisker's securities, and issued false statements in his role as a Fisker board member. (Id. ¶¶ 26-28). McDonnell was responsible for AEI's marketing efforts on Fisker securities. (Id. ¶ 31.) According to the complaint, all Defendants knew about and failed to disclose Fisker's calamitous financial state, and nevertheless successfully raised more than $500 million through sales of Fisker's securities between September 2011 and September 2012, when the company was forced to essentially shutter operations. (Id. ¶ 11.) It was this act-raising hundreds of millions of dollars in capital while failing to disclose the company's financial status in the offering documents-that Plaintiffs allege subjects the Kleiner Perkins Defendants and the individual AEI Defendants, Daubenspeck and McDonnell, to liability. (Id. ¶¶ 10-13.)

         This is not the first case arising from Fisker's fallout. In December 2013, a few months after the qui tam complaint was unsealed, Fisker investors filed three lawsuits in the United States District Court of Delaware against many of the same defendants here (only Doerr was omitted), alleging claims for securities fraud under the Securities Act of 1933 and the Securities Exchange Act of 1934. (KP Defs.' Mem. in Supp. of Mot. to Dismiss [hereinafter “KP Defs.' Br.”] [45], at 3-4.) Those actions were consolidated as In re Fisker Automative Holdings, Inc. Shareholder Litigation, No. 13-cv-2100-SLR. The plaintiffs survived a motion to dismiss, In re Fisker Auto. Holdings, Inc. S'holder Litig., No. Civ. 13-2100-SLR, 2015 WL 6039690 (D. Del. Oct. 15, 2015), and that case remains pending in discovery. In the case in this court, Plaintiffs assert common-law tort claims under Delaware law: negligent misrepresentation, fraud, fraudulent concealment, breach of fiduciary duty, aiding and abetting breach of fiduciary duty (this count against KP, Doerr, and McDonnell only), and civil conspiracy. (See generally Compl.) The court does not know to what extent this action is a mirror image of the Delaware case; Defendants have not attempted to stay or consolidate this case with it. See Cent. States, Se. & Sw. Areas Pension Fund. v. Paramount Liquor Co., 203 F.3d 442, 444 (7th Cir. 2000) (discussing “first filed” doctrine).

         Instead, the Kleiner Perkins Defendants have moved to dismiss the complaint, arguing that the court lacks personal jurisdiction and that the claims against them are barred by the statute of limitations.[1] Daubenspeck and McDonnell, the AEI partners, joined the statute of limitations argument. (Daubenspeck Mot. to Join KP Def.'s Mot. [47]; McDonnell Mot. to Dismiss [49].) Plaintiffs broadly claim that jurisdiction is appropriate because all Defendants transacted business in the State of Illinois through AEI (Compl. ¶ 15), and that all Defendants committed tortious acts within the State of Illinois by “disseminating and/or causing to be disseminated to Plaintiffs and the Class the materially false and misleading information alleged herein through AEI's headquarters in Illinois.” (Id. ΒΆ 16.) The complaint does not allege that these documents were drafted in Illinois, nor that Kleiner Perkins, Doerr or Lane knew that the documents would be distributed to Illinois residents in particular. Instead, ...


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