Strategic Diversity, Inc. v. Alchemix Corporation

To rescind a contract on the basis of § 10(b) of the Securities and Exchange Act of 1934, common law fraud and negligent misrepresentation, plaintiff must demonstrate economic damages. To rescind a contract based on a state securities law claim in Arizona, economic damages need not be shown.

Strategic Diversity, Inc. (“Strategic”) invested $500,000 in start-up company Alchemix Corporation (“Alchemix”) in exchange for a security interest in Alchemix patents, a right to purchase shares from Alchemix when the investment was repaid, and a seat on the Alchemix board. Western Oil Sands (“Western”) and Alchemix Funding Group (“AFG”) both negotiated with Alchemix to invest in the company, contingent on buying Strategic out of its investment and Strategic relinquishing its security interest and rights in Alchemix. Strategic was bought out of their investment for $560,832 under the belief that AFG would be investing in Alchemix. Yet, both AFG and Western decided not to invest in Alchemix. Strategic filed a claim to rescind the contract, alleging Alchemix, among other things, had engaged in state and federal securities fraud, common law fraud and negligent misrepresentation. The district court granted summary judgment to Alchemix on all claims, and awarded Alchemix attorney’s fees. Strategic appealed to the Ninth Circuit. The Ninth Circuit remanded the district court decision that the fraud claims were time barred because Alchemix did not meet its burden of showing Strategic, as a reasonably diligent plaintiff would have discovered the facts constituting the violation within the statute of limitations. The Ninth Circuit also remanded the issue of rescission for the federal and state securities fraud claims. To prevail on the federal claim under § 10(b) of the Securities and Exchange Act, Strategic must show they suffered damages and that the damages were a result of not knowing Western had ceased its investment, however, they need not show damages for the state law claim. The Ninth Circuit affirmed the common law fraud and misrepresentation claims because Strategic was unable to show damages. The Ninth Circuit also vacated the attorney fees award because the other claims were remanded. AFFIRMED in part, REVERSED in part, VACATED in part, DISMISSED in part and REMANDED.