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Investor Had No Basis for Securities Fraud Suit So Court May Impose Sanctions
Description Appeals court upheld the dismissal of a securities fraud suit brought by investor a in start-up airline that went bankrupt. The airline made proper warnings about income projections. Since the investor had no reasonable basis for the suit, the court could impose sanctions for having brought the suit.
Topic Securities Law
Key Words Misrepresentation; Rule 10b-5; Sanctions
C A S E   S U M M A R Y
Facts Mercury, a company that sells fuel to airlines, contacted Sun Jet, a start-up airline, about the possibility of investing. Mercury was sent a Private Placement Memorandum, which included financial projections as of May 30, and a statement that the projections would not be updated. Mercury invested $500,000 on August 15. It was not sent the new financials from Sun Jet that indicated a significant decline in prospects as of June 30. Mercury received that information on September 17. On October 1, Mercury gave Sun Jet $1 million in credit to buy fuel. In less than a year, Sun Jet was bankrupt. Mercury sued Sun Jet's major officers for Rule 10b-5 violations, violations of state securities law, misrepresentation, negligence, conspiracy, and breach of fiduciary duty. The district court dismissed the suit and imposed sanctions on Mercury. Mercury appealed.
Decision Affirmed. Sun Jet's failure to update its income projections did not violate Rule 10b-5 since its materials specifically warned about the accuracy of projections and stated that they would not be updated. Furthermore, Mercury chose to lend Sun Jet $1 million in fuel credit after it received the updated financials in the ordinary course of business. That belies the claim that those projections were critical to its decisions to invest. The court was within its discretion in awarding Sun Jet its reasonable attorney fees and expenses ($203,641) as a sanction for improper purpose against Mercury for bringing the suit since there was no reasonable basis for the suit.
Citation Mercury Air Group, Inc. v. Mansour, 2001 WL 864 (5th Cir., 2001)

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