Preview:

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND SALES ONLINE DIRECT, INC. v. MARC STENGEL, et al. : : : : : :

Civil Action No. WMN-00-1621

MEMORANDUM Before the Court are cross motions for preliminary injunction. Stengel's). Paper Nos. 22 (Plaintiff's) and 27 (Defendant The motions are fully briefed and an extensive

evidentiary hearing, stretching over several days, was held on the motions. Having considered all of the evidence and

pleadings presented by the parties, the Court determines that Plaintiff's motion will be denied and Defendant Stengel's motion will be granted in part and denied in part. Plaintiff Sales Online Direct, Inc. (SOLD) is a Delaware corporation that is engaged in various enterprises related to the on-line sale of "collectables" and memorabilia. The

company is publically held, with shares of its common stock traded on the NASDAQ Bulletin Board. Currently, about 80% of

the stock is owned by four individuals: approximately 40% by Greg and Richard Rotman, the President and Vice President, respectively, of SOLD (hereinafter, the Rotmans); and approximately 40% by Defendants Mark Stengel and Hannah Kramer, Mark Stengel's aunt. The remaining 20% of the stock

is held by about 4000 other small investors.

The total value

of the stock at the time it was originally issued was in excess of $30 million dollars. Since that time, the value of

the stock has fluctuated widely and it is now worth significantly less. The reason for the decline in value, as

with most of the issues addressed in this lawsuit, is the subject of profound disagreement among the parties. This lawsuit arises out of a series of transactions, including a "reverse merger," that led to the initial formation of SOLD. While the forms of the transactions were

somewhat complex, the primary aspects of the deal entailed, from the Rotmans's side, the contribution of "Rotman Auctions," a collectable auction business, and some inventory from another family business, and from the Stengel/Kramer side, the contribution of "World Wide Collectors Digest, Inc." (WWCD), a internet website dealing with collectables, along with some additional collectable inventory. The integration

of WWCD into the new business entity was originally anticipated to have occurred through a merger until it was discovered, on the eve of the closing of the transaction, that WWCD's corporate charter had lapsed for failure to pay corporate taxes. In lieu of a merger, WWCD was conveyed into

the new entity by a Bill of Sale of all of WWCD's assets. 2

Plaintiff alleges in the Complaint that Defendants Stengel and Kramer misrepresented the value of WWCD and the other inventory contributed to SOLD. These alleged

misrepresentations include, inter alia, the amount of web traffic on the WWCD website; the quality of the computer equipment used to host the site; WWCD's ownership of certain domain names that Stengel now represents as belonging to himself; and the value of the collectable inventory contributed. Plaintiff also alleges that, after the formation

of SOLD, Stengel failed to devote his time and energy in a manner consistent with the best interests of SOLD. In fact,

Plaintiff maintains that Stengel operated a business in direct competition with SOLD, "Whirl Winds Collaborative Designs," using the resources and employees of SOLD in conducting that business. The Complaint includes claims of both common law and securities fraud and seeks as a remedy both damages and rescission. Shortly after filing the Complaint, Plaintiff

filed the instant motion for a preliminary injunction, asking that the Court issue an order enjoining Defendants Kramer and Stengel from selling any of their SOLD stock until the final resolution of this litigation. Defendant Stengel responded

with a motion for preliminary injunction of his own, asking 3

that the Court enjoin Plaintiff from interfering or blocking his efforts to sell his stock. Apparently, Plaintiff has been

able, for the most part, to unilaterally prevent the Defendants' sale of stock without the requested injunctive relief by instructing its agents not to remove the "restricted" designation on Defendants' shares. When ruling on a request for a preliminary injunction, a district court must consider four factors originally set forth in Blackwelder Furniture Co. v. Seilig Manufacturing Co., 550 F.2d 189 (4th Cir. 1977). Those factors are:

(1) the likelihood of irreparable harm to the plaintiff if the preliminary injunction is denied, (2) the likelihood of harm to the defendant if the requested relief is granted, (3) the likelihood that the plaintiff will succeed on the merits, and (4) the public interest. Rum Creek Coal Sales, Inc. v. Caperton, 926 F.2d 353, 359 (4th Cir. 1991)(internal quotation marks omitted). After deciding

whether the plaintiff will suffer irreparable harm if an injunction is denied and determining the nature of the harm, if any, that defendant will suffer if the injunction is granted, the district court must balance these hardships 4

against one another. See Direx Israel, Ltd. v. Breakthrough Med. Corp., 952 F.2d 802, 812-13 (4th Cir. 1991). The result

of this balancing determines the degree to which the plaintiff must establish a likelihood of success on the merits. If the

balance of harms "tips decidedly in favor of the plaintiff," it is only necessary for the plaintiff to "raise[ ] questions going to the merits so serious, substantial, difficult and doubtful, as to make them fair ground for litigation and thus for more deliberate investigation." quotation marks omitted). Id. at 813 (internal

If, however, the balance of harms

is in equipoise or does not favor the plaintiff, the plaintiff must make a correspondingly higher showing of the likelihood of success. See id.

Plaintiff's claim that it will be harmed if the injunction is not granted is two-fold. First, it alleges that

the price of SOLD stock would be adversely affected were Defendants permitted to sell significant portions of their holdings. While there is some evidence of temporary dips in

the price of SOLD stock after Kramer sold small portions of her holdings, the evidence is not conclusive that additional sales would further and permanently depress the stock price. There have been dips in the price of the SOLD shares during periods when no shares were sold by Defendants. 5 The Court is

also well aware that internet related stocks, in general, have experienced wild fluctuations in price, many in a negative direction, during this same time period. Furthermore, as Defendants note, under SEC Rule 144, Defendants are expressly permitted, even as "insiders" or "affiliates," to periodically sell a certain percentage of their stock.1 At the time that these parties entered into the

subject transaction, they were undoubtedly aware that the SEC Rules would permit the sale of some stock, and that sales by insiders might have an effect on stock prices. Nonetheless,

the parties included no contractual limitations on insider sales, which they certainly could have done had they believed it necessary. The primary argument that Plaintiff advances for not allowing Defendants to sell any of its stock is to preserve the possibility of a rescission remedy. Were Defendants

allowed to sell their stock, Plaintiff argues that it would be

Rule 144, 17 C.F.R.

Download Sales Online Direct, Inc v Marc Stengel, et al.pdf

Maryland Law