Summary
112. John Rendall had a dream to revolutionize the two industries in which he had worked:
bitumen extraction and aluminum production. That dream blinded him to impediments
to the fulfillment of that dream. When confronted with negative results, "he would
have a tendency to ignore that information or work around it or repeat the experiment
over and over and over again."Metcalf p. 221.
113. Collectively read, the press releases, shareholder letters, and other statements, which
Defendants disseminated on a virtually weekly basis, created the false impression that
Solv-Ex was on the verge of generating revenues from each of the three technical areas
described above. In fact, the evidence demonstrates that at the time these statements
were disseminated, Solv-Ex was in various stages of research and development with
respect to each of those three technologies, but that commercial exploitation of any of
them was never more than a theoretical possibility.
Conclusions of Law
1. At all times relevant to the complaint, Solv-Ex was registered with the Commission
pursuant to Section 12(g) of the Securities Exchange Act of 1934 ("Exchange Act").
2. At all times, Solv-Ex was required to file periodic reports with the Commission
pursuant to Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13
thereunder. 34
3. In enforcement actions the Commission "appears ... not as an ordinary litigant, but as
a statutory guardian charged with safeguarding the public interest in enforcing the
securities laws."SEC v. Management Dynamics, Inc., 515 F.2d 801, 808 (2 d Cir.
1975).
4. This enforcement action involves a pattern of statements issued by a public company
and its two key executive officers that created the misleading impression that each of
three technologies being developed by the company was a virtually unqualified success.
The pattern of these statements created in the mind of any reasonable investor the
expectation that commercial exploitation of the technologies, each with an attendant
substantial revenue stream, was not only assured, but would occur in the very near
future.
5. Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. õ
78j(b)] and Rule 10b-5 promulgated thereunder [17 C.F.R. 240.10b-5] and Section
17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. õ 77q(a)] prohibit
persons and entities from, among other things, making material misstatements or
omitting to state material facts in connection with the purchase or sale of any security.
Thomas Lee Hayen, 2 THE LAW OF SECURITIES REGULATION õ 13.2 p. 461 (3 d ed.).
6. A statement is material if a reasonable investor would consider it important in
determining whether to buy or sell a stock. Grossman v. Novell, Inc., 120 F.3d 1112,
1119 (10 th Cir. 1997). "Material facts include those ' which affect the probable future35
of the company and those which may affect the desire of investors to buy, sell, or hold
the company' s securities.' SEC v. Mayhew, 121 F.3d 44, 52 (2 d Cir. 1997) (quoting
SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2 d Cir. 1968)); see also Folger
Adam Co. v. PMI Indus., Inc., 938 F.2d 1529 (2 d Cir.), cert. denied, 502 U.S. 983
(1991). The statements of corporate officials are of particular importance to investors;
the investing public "justifiably places heavy reliance on the statements and opinions
of corporate insiders."In re Apple Computer Sec. Litig., 886 F.2d 1109, 1116 (9 th
Cir. 1989).
7. An omission is material if there is a "substantial likelihood" that either "the omitted fact
would have assumed actual significance" in the investment decision or "the omitted fact
would have been viewed by the reasonable investor as having significantly altered the
' total mix' of information made available."TSC Indus., Inc. v. Northway, Inc., 426
U.S. 438, 449 (1976).
8. Misrepresentations and omissions concerning the status and success of the development
of commercially feasible core technologies for a development stage company having no
revenue and no products are facially material. See Kaplan v. Rose, 49 F.3d 1363, 1374
(9 th Cir. 1994) (misleading to use term "successful" to describe test results generally
inconsistent with success); see also SEC v. International Chem. Dev. Corp., 469 F.2d
20, 26 (10 th Cir. 1972) (material omission that patents were not proven to be
commercially feasible). 36
9. A duty to disclose technical or developmental problems with a product may arise where
a company makes strongly optimistic or concrete statements about that product that
are in stark contrast to its internal reports. Glassman v. Computervision Corp., 90
F.3d 617, 635 (1 st Cir. 1996); Kaplan, 49 F.3rd at 1374 (defendant' s use of term
"successfully" to describe test results was inconsistent with common understanding of
the term without more information). The duty to speak the full truth thus arises when
Defendants make affirmative representations. Rubinstein v. Collins, 20 F.3d 160, 170
(5 th Cir. 1994).
10. Representations pertaining to future events can be the basis for a fraud prosecution
when the defendant knows there is no reasonable factual basis for the representation.
Bloomenthal and Wolff, 3D SECURITIES AND FEDERAL CORPORATE LAW õ 20:4 p.
20-5 (1999), citing inter alia, Holmes v. United States, 134 F.2d 125 (8 th Cir. 1943);
see also In re Medimmune, Inc. Sec. Litig., 873 F. Supp. 953 (D. Md. 1995). Even
though not misleading when made, a subsequent development may trigger a duty to
correct overly optimistic predictions. Backman v. Polaroid Corp., 893 F.2d 1405 (1 st
Cir. 1990); Kirby v. Cullinet Software, Inc., 721 F. Supp. 1444 (D. Mass. 1989).
11. The Defendants' statements included at least the following material misrepresentations:
that commercial-scale production of bitumen oil had begun on March 29 at the Solv-Ex
plant in Alberta, Canada; that the testing of a purportedly revolutionary 2700 ampere
electrolytic cell used for the production of metallic aluminum had been "successful" and37
was therefore going to be scaled up; and that an industrial mineral created from the by-product
of Solv-Ex' s bitumen extraction technology, TiO2S, had been shown to be
suitable for certain applications in the paint and plastics industries. Statements
regarding the potential for TiO2S in the paper industry were largely unproven and
therefore overly optimistic.
12. John Rendall was vested with the power to direct and control, and did so, all aspects
of Solv-Ex' s business and was therefore responsible for Solv-Ex' s misleading and
incorrect statements in the official filings. As a control person of Solv-Ex pursuant to
Section 20(a) of the Exchange Act, Mr. Rendall is directly liable for the company' s
reporting violations under Section 13(a) and the rules thereunder. See Lanza v. Drexel
& Co., 479 F.2d 1277, 1299 (2 d Cir. 1973) (persons who have actual authority to
direct the activities of the primary wrongdoer and have culpable participation in the
activities are control persons within the meaning of Section 20(a)). See also Arthur
Children' s Trust v. Keim, 994 F.2d 1390, 1396-97 (9 th Cir. 1993) (members of
management committee were control persons because they made major business
decisions affecting the venture).
13. Herbert Campbell was also a control person and had access to all of the negative tests
and consultants' caveats which he chose to largely ignore in drafting the press releases
which created a misleadingly optimistic picture of the prospects for each of the three
Solv-Ex technologies. 38
14. Mr. Campbell knew or should have known that the information in Solv-Ex' s filings was
false or misleading. Even had his role at Solv-Ex been limited to that of corporate
counsel, however, Mr. Campbell' s conduct would be recklessly violative of the federal
securities laws. Rubin v. Schottenstein, Zox & Dunn, 143 F.3d 263, 267 (6 th Cir.
1998) ("[T]here is nothing special about [the defendant' s] status as an attorney that
negates his Rule 10b-5 duty to disclose, a duty that ordinarily would devolve under
Rule 10b-5 upon a third party under these circumstances .... An accountant or lawyer,
for instance, who prepares a dishonest statement is a primary participant in a
violation.") (citing SEC v. Coffey, 493 F.2d 1304, 1315 (6 th Cir. 1974)).
15. When management and directors are parties to a securities fraud, the test as to
causation is whether the facts not disclosed or disclosed in a misleading fashion
significantly altered the total mix of information available. IIT, an Int' l Inv. Trust v.
Cornfeld, 619 F.2d 909 (2 d Cir. 1980). The false statements by the Defendants and
their failure to disclose the full test results and reports of their consultants significantly
altered the total mix. The Defendants' repeated issuance of press releases, which stated
only the positive aspects of such tests, misled the investing public.
16. Solv-Ex, Rendall, and Campbell used the means or instrumentalities of interstate
commerce to disseminate false and misleading statements.
17. Solv-Ex, Rendall, and Campbell knew, or were reckless in not knowing, several of the
material statements they issued were false and misleading. 39
18. Solv-Ex filed materially false periodic reports with the Commission, and filed reports
with the Commission that, in addition to the information expressly required to be
included in the report, failed to include such further material information as was
necessary to make the required statements, in the light of the circumstances under
which they were made, not misleading.
19. Solv-Ex, Rendall, and Campbell violated Section 10(b) of the Securities Exchange Act
of 1934 and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933.
20. Defendants rely on the "bespeaks caution" doctrine to shield their public statements.
The " bespeaks caution" doctrine should be applied cautiously since it provides an
incentive to misrepresent the truth. In re Donald J. Trump Casino Sec. Litig.-Taj
Mahal Litig., 7 F.3d 357, 371 (3 d Cir. 1993). The cautionary statements in the Solv-Ex
filings do not counterbalance the glowing projections in the Defendants' press
releases and broker conferences. Whirlpool Fin. Corp. v. GN Holdings, Inc., 873 F.
Supp. 111, 123-24 (N.D. Ill. 1995); In re Colonial Ltd. Partnership Litig., 854 F.
Supp. 64, 92-3 (D. Conn. 1994); In re First Am. Center Sec. Litig., 807 F. Supp. 326
(S.D.N.Y. 1992).
21. There is a reasonable likelihood that the Defendants will engage in future violations
unless enjoined.
22. The European "trading program" was never implemented and therefore the restricted
stock was never issued, thus no SEC reporting requirements were triggered. 40
All tendered Findings and Conclusions not incorporated herein are deemed Denied.
A Judgment consistent with these findings of fact and conclusions of law should be
drawn up by Plaintiff' s counsel and presented to the Court within twenty (20) days.
DATED at Albuquerque this 31 st day of March, 2000.
_______________________________
BRUCE D. BLACK
United States District Judge
Counsel for Plaintiff:
Julie K. Lutz, Andrew R. Shoemaker, Securities and Exchange Commission, Denver,
CO
Raymond Hamilton, Supervisory Assistant U.S. Attorney, Albuquerque, NM
Counsel for Defendants:
Richard H. Goldberg, John H. Tatlock, Friedlob Sanderson Raskin Paulson &
Tourtillott, Denver, CO |
