Host America Corporation provides foodservice management and energy and electrical services.
The original class action lawsuit was filed seeking to pursue remedies under the Securities Exchange Act of 1934 against Defendants Host America, EnergyNSync and certain of their officers and directors.
The Complaint alleges that from May 12, 2004 to June 15, 2005, the Company often announced agreements to install their LightMasterPlus product or perform other energy saving services for various companies. The Company claims that the LightMasterPlus "efficiently runs your lighting systems by reducing kilowatt consumption yet maintaining visible light. It also allows for fully automated dimming or accent lighting throughout your building.”
On July 12, 2005, the first day of the Class Period, Host America filed a Form 8-K with the SEC, and issued a press release titled “Host America's Energy Division Announces Wal-Mart Transaction Ten Store First-Phase for LightMasterPlus.” Market reaction to this announcement, unlike reactions to previous announcements in 2004 and 2005 regarding potential contracts for installing LightMasterPlus, was drastic. Trading volume increased from 41,000 trades on July 11, 2005, to 13,813,100 on July 12, 2005. Furthermore, the Company’s stock, which opened at $4.25 on July 12, 2005 prior to the announcement, closed at $6.35, after reaching a high of $7.47. Over the next eight trading days, volume reached a high of approximately 32,569,600 shares on July 18, 2005, and the Company’s stock price reached a high of $16.88 on July 19, 2005.
The Complaint alleges that the above statements in the July 12, 2005 Form 8-K and press release were false and misleading because they misrepresented the nature of the “Wal-Mart Transaction” as one whereby the Company had a firm commitment by Wal-Mart to purchase the Company’s LightMasterPlus for installation in Wal-Mart stores. The true facts, which were not disclosed, are that Wal-Mart was not a customer of the Company’s in connection to purchasing the LightMasterPlus and that the “Wal-Mart Transaction” was limited to a test installation unrelated to any commitment by Wal-Mart to install the LightMasterPlus in any of its facilities on a permanent basis. In fact, Wal-Mart had made no commitment to purchase or install the LightMasterPlus outside of the test installation. As a result, Defendants had no basis for stating that the test installation was a “first-phase roll-out” or that “the next phase will involve a significant number of stores.” Moreover, Defendants lacked any basis for stating that the Wal-Mart test installation was a “major event for our company.” In fact, such test installations in the past had resulted in no future customer relationship and no actual purchases of the LightMasterPlus by the party solicited for the test demonstration.
On July 22, 2005, trading of Host America securities was halted, pending SEC review. In halting trading, the SEC cautioned brokers, dealers, shareholders, and prospective purchasers that they "should carefully consider the foregoing information along with all other currently available information, and any information subsequently issued by the company," the SEC statement read. At the time trading was halted, Host America stock was priced at $13.92 per share, down from $16.88 on July 19, 2005.
As summarized by the Company’s FORM 10-Q for the quarterly period ended September 30, 2007, in August 2005 and September 2005, twelve putative class action Complaints were filed in the United States District Court for the District of Connecticut, naming as Defendants the Company, Geoffrey W. Ramsey, and David J. Murphy. One or more of the Complaints also named Gilbert Rossomando, Peter Sarmanian, Roger D. Lockhart and EnergyNsync, Inc. On September 21, 2005, as amended on September 26, 2005, the Court issued a Consolidation and Scheduling Order, consolidating the actions under the caption, In re Host America Securities Litigation, Civil Action No. 05-cv-1250 (VLB). On February 12, 2007, lead Plaintiffs filed an amended Consolidated Complaint for Violations of the Securities Laws, which named as Defendants Host, Geoffrey W. Ramsey, David J. Murphy, Peter Sarmanian and Roger D. Lockhart, and purported to be brought on behalf of all persons who purchased the publicly traded securities of the Company from July 12, 2005 to September 1, 2005. In general, Plaintiffs alleged that the Company’s July 12, 2005 press release contained materially false and misleading statements regarding Host America’s commercial relationship with Wal-Mart. The Complaint alleged that the statements harmed the purported class by artificially inflating the price of Host America’s securities through close of trading on July 22, 2005, and that certain Defendants personally benefited from the inflated price by selling stock during the alleged class period. Plaintiffs sought unspecified damages based on alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and under Section 20A.
On March 27, 2007, all Defendants filed motions to dismiss the Class Action. The Company was also named as a nominal Defendant in two shareholder derivative actions filed in the United States District Court for the District of Connecticut. The captions of those actions were Michael Freede v. Geoffrey Ramsey, et al., Civil Action No. 05-01326 (JBA)(filed August 19, 2005) and Joella W. Cheek v. Geoffrey Ramsey, et al., Civil Action No. 05-01326 (JBA)(filed September 13, 2005). The Plaintiffs did not make presuit demand on the Board of Directors. By order dated October 20, 2005, the court consolidated the derivative actions, and administratively consolidated that action with the Class Action under the caption, In re Host America Securities Litigation, Civil Action No. 05-cv-1250 (VLB). On June 22, 2006, the Plaintiffs filed a Verified Amended Derivative Complaint, which named as Defendants Geoffrey Ramsey, David Murphy, Anne Ramsey, Peter Sarmanian, Gilbert Rossomando, Roger Lockhart, Host America directors C. Michael Horton, Nicholas M. Troiano, Patrick J. Healy, and John D’Antona, and the Company as a nominal Defendant. The Verified Amended Derivative Complaint was based on substantially the same allegations as the Class Action Consolidated Complaint. It asserted causes of action for breach of fiduciary duty, gross negligence, abuse of control, gross mismanagement, breach of contract, unjust enrichment, and insider trading. The Complaint sought an unspecified amount of damages and other relief purportedly on behalf of shareholders. On March 27, 2007, all Defendants filed motions to dismiss the Federal Derivative Action. On May 22 and 23, 2007, the Company and its past and present directors and officers named as Defendants in the Class and Derivative Actions and the Plaintiffs filed agreements to settle and fully resolve all claims against the Host America Defendants in both actions. On October 18 and 19, 2007, the District Court granted preliminary approval of the Class and Derivative settlements. The Court scheduled fairness hearings on the settlements for January 28, 2008.
According to a press release dated February 1, 2008, EnerLume Energy Management Corp., formerly known as Host America Corporation, announces that on January 28, 2007 the Honorable Vanessa L. Bryant, United States District Court Judge for the District of Connecticut, granted final approval of the settlement of the consolidated federal securities class action that arose out of allegations stemming from a press release issued by the Company on July 12, 2005. As previously described in the Company’s current report on Form 8-K filed on October 19, 2007, under the class action settlement, all claims against the Company and its past and present officers and directors named as Defendants have been dismissed with prejudice, in exchange for payment to the Class of $2,450,000, $1,700,000 of which has been paid by insurance. In addition to the insurance proceeds, the Company has contributed $200,000 and has entered into an unsecured term note for the balance at a rate of 7.5% per annum which shall be due and payable in full on April 18, 2008. Separately, the Court took under advisement the settlement of the related stockholders derivative action, pursuant to which Host America’s (now EnerLume’s) Board of Directors has agreed to implement certain specified therapeutic corporate governance policies and procedures and to provide for payment of $140,000 for the shareholder Plaintiffs’ attorney fees and costs, which is funded by the Company’s insurance proceeds.
On March 7, 2008 the court entered its Final Judgment and Order of Dismissal approving the settlement, awarding attorneys' fees and expenses in the amount of 20% and $140,000, respectively. The case continues against a single former director of the company.
On June 12, 2008 the judge denied Plaintiffs' motion for approval of settlement with the director Defendant, citing that "parties have failed to present sufficient facts to enable the Court to evaluate whether the settlement with the only remaining defendant is fair. The parties have also not cited any legal authority for the proposition that the class need not be given notice of the settlement when the notice of the prior settlement stated that the litigation would continue as to [the defendant]".
Plaintiffs again failed to obtain settlement approval by the judge on September 25, 2008, still presenting insufficient evidence for evaluation of fairness. In a rare twist, the judge also noted that the "Defendant has not produced any evidence outside of his affidavit to demonstrate his inability to pay more than $550,000 in settlement. The Defendant has not produced any evidence to show how the Host America stock his family owned was held or sold." According to Stanford Law School Professor Michael Klausner, individuals, particularly outside directors, historically have paid out-of-pocket in less than 7% of class actions. The case was set to go to trial beginning in December 2008.
An October 30, 2008 order vacating earlier orders regarding jury selection was entered. The parties have entered a tentative agreement of settlement, which the judge has approved. Fairness hearings were set for February 26, 2009. Two separate agreements, one between the Company and its covered officers and directors, and the other with an individual director, will provide $3 million in relief to harmed investors.
On March 3, 2009 the judge entered an order granting final approval of the Lockhart settlement between the class and the Host America director. The settlement, funded out-of-pocket, provides $550,000 to the class, less fees and expenses of approximately $115,000.
