DAYTONA BEACH — A $25 million investment that went awry for a Florida company recently ended with an appeal before Florida's Fifth District Court of Appeal.
According to the appeals court's June 9 decision, J.P. Morgan Securities LLC filed an appeal against Geveran Investments Limited, Lighting Science Group Corporation and Pegasus Capital Advisers.
A businessman and investor, Fredrick Halvorsen, predicted a positive adjustment toward the LED lighting industry and suggested that his employer, Geveran, invest in LSG, who had begun to develop LED products.
Before investing in LSG, Halvorsen wanted to find a company who was not yet publicly traded but had planned to be soon. J.P. Morgan also helped LSG with offers and investments prior to Geveran purchasing $25 million worth of shares.
During the research phase, Halvorsen pointed out in April 2011 that LSG had plans for an initial public offering (IPO) within a year and was on track to earn more money in July and have positive revenue by December. He added that LSG’s new LED feature along with its partnership with Home Depot would cause it to be more valuable. Geveran ended up buying 6,250,000 shares of LSG at $4 each for a total of $25 million.
Before agreeing with the investment, LSG filed an S-1/A with the U.S. Securities and Exchange Commission to prepare for its IPO. But the SEC raised multiple issues with the form, including LSG’s explanation that categorized unsold inventory as “research and development” instead of a manufacturing expense of “cost of goods sold.”
The SEC followed up with a second letter that outlined the same concerns.
Before the subscription agreement was signed, a J.P Morgan employee, Madhukar Namburi, allegedly sent Halvorsen an email that did not include the portion about LSG’s “disappointing gross margins.” He allegedly said it was because he wasn’t clear on how accurate the numbers were.
But in a separate email, he reportedly said he was upset that the April gross margins were 3 to 6 percent after the company allegedly had told Halvorsen it would be approximately 9 percent.
Still, LSG followed up with the SEC’s letters and said that the company bought raw materials and supplies for the purpose of research and development. So it did not have to classify it as “unsold.” The company said that the unsold materials were $2 million in 2009 and $445,000 in 2008.
Namburi allegedly said that “investors” would need to know about the SEC’s concerns, but Geveren reportedly was not included in that conversation. The “misstatements” for 2008 and 2009 were said to allegedly not have impacted investors considering that LSG’s revenue changed greatly during that time.
Still, the SEC responded and asked for more information on how LSG categorizes expenses like research and development and how it labeled its obsolete goods. LSG couldn’t offer that evidence, so the SEC suggested that all of LSG's obsolete goods be considered “cost of goods sold.”
LSG responded with statements that the financial records for 2008 and 2009 would be “restated” and would be a part of the 2010 10-K form. That subsequently resulted in the originally reported gross profits moving from $4,069,993 to the restated gross profits being $448,110 in 2008.
For 2009 the originally reported gross profits changed from $6,621,977 to the restated amount of $2,495,867.
The company allegedly said it only restated the amounts for those years in hopes of receiving a quicker approval of the S-1/A form.
It was said that Halvorsen allegedly had no response to the changes, but instead he continued to encourage the investment until he realized that LSG was looking for money from other investors. He reportedly tried to shift Geveran’s investment to more advantageous terms but he was unsuccessful, so he took legal action in the trial court.
Namburi filed a motion to dismiss, which the lower court denied. Both sides motioned for summary judgment. The court allowed partial summary judgment for Geveran’s claims of violations under the Florida Securities and Investor Protection Act (FSIPA).
The FSIPA has made it illegal to “obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made… not misleading,” according to the opinion.
The appeals court decided to reverse and remand the trial court’s denial of J.P. Morgan’s motion to dismiss Geveran’s claims. It also reversed the summary final judgment against the rest of the defendants. The appeals court said there are “genuine issues of material fact” when it comes to LSG’s false statements.
The court remanded the case for further proceedings.