The Dallas Court of Appeals upheld a trial court’s $8,251,008 judgment in a securities fraud case where investors in an artificial intelligence software company claimed misrepresentation and breach of fiduciary duty.
The decision ended plaintiff Michael O’Donnell’s attempt to get a new trial.
Appellate counsel for the defendant/appellant, John M. Frick of Reid Dennis Frick in Frisco, argued plaintiffs did not conclusively establish elements of their claims, and that the trial court erred by denying the defendant’s motion for new trial.
O’Donnell founded Pepperwood Fund II GP LLC, allegedly to raise cash from investors for a controlling interest in Behavioral Recognition Systems Inc. (BRS).
The three named plaintiffs—Roo Investment Fund II LLC, Brent Brunnemer and Dr. Mitchell Allen Greg—entered into separate agreements to invest in BRS. According to their complaint, O’Donnell allegedly misrepresented how their investments would be used.
The plaintiffs asserted Pepperwood Fund II would buy enough preferred and common stock in BRS from its owner, Ray Davis, to get controlling interest. The plaintiffs allegedly later learned, however, that O’Donnell had already purchased controlling interest.
Plaintiff counsel, Jamil N. Alibhai and Toni L. Anderson of Munsch Hardt Kopf & Harr, noted in the appellees’ brief that the U.S. Department of Justice indicted Davis for securities fraud and wire fraud in late 2017. The Securities and Exchange Commission then filed a civil action against Davis and BRS.
“Prior to his indictment and the SEC complaint, Davis recognized that BRS was in a dire financial situation and that O’Donnell could help by soliciting investors,” Alibhai and Anderson claimed told the court.
O’Donnell was offered a $5 million finder’s fee, a sum the plaintiffs called a kickback, if he found a buyer willing to pay $15 million or more for BRS stock, the plaintiffs alleged.
“It took O’Donnell less than a month to ‘find’ a buyer,” Alibhai and Anderson noted, and O’Donnell was paid the $5 million.
After the plaintiffs executed their investment agreements, O’Donnell transferred Pepperwood Fund assets to Omni AI Inc., an entity O’Donnell controlled. He offered appellees options to either exchange their limited partnership interests for shares in Omni or get a refund of their investment, plus 10% interest.
Roo Investment and Brunnemer refused both options. Greg agreed to both, exchanging half his interest for Omni AI shares requesting the return of his capital plus interest for the other half.
“Greg received no payment despite his demands for same from O’Donnell,” the court noted in the memorandum opinion authored by Justice Nancy Kennedy.
Appearing before Dallas County 95th District Court pro se, O’Donnell was compelled to respond to discovery requests within seven days, and 36 requests for admissions were deemed admitted. The subsequent motion for summary judgment by plaintiffs was granted on claims of violations of the Texas Securities Act and breach of fiduciary duty, awarding damages to each plaintiff.
Addressing O’Donnell’s defenses, the appeals court first ruled in the defendant’s argument the trial court when it relied on deemed admissions to support summary judgment.
“O’Donnell does not assert, and the record does not imply, he asked to withdraw the deemed admissions in his response or at the hearing. Instead, he waited until the motion for new trial to request withdrawal of the deemed admissions,” the opinion states.
For that reason, O’Donnell waived his right to challenge the deemed admissions and the trial court did not err by refusing to withdraw the deemed admissions and denying a request for new trial, the appeals court concluded.
Frick, who represented O’Donnell on appeal, argued his client was not the “seller,” as defined in the securities act, when he sold plaintiffs shares in the company.
The court ruled the term seller is broader than the company and can include a person. The court also accepted plaintiffs’ evidence of O’Donnell’s financial interest—the referral agreement under which O’Donnell admitted his company got a $5 million finder’s fee.
Frick did not respond to a request for comment.
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