Ethanex Complaint

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS

ERIC C. RAJALA, as Bankruptcy Trustee for )
ETHANEX ENERGY, INC., )
Plaintiff,
v.
LOUIS W. ZEHIL,
Serve: 116 Strong Branch Drive
Ponte Verda Beach, FL 32082-3841
STRONG BRANCH VENTURES IV, LP,
Serve: Registered Agent:
The Corporation Trust Co.
Corporation Trust Center
1209 Orange Street
Wilmington, DE 19801
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Case No. 08-CV-2638 KHV/DJW
DEMAND FOR JURY TRIAL
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CHESTNUT CAPITAL PARTNERS D, LLC,
Serve: Registered Agent:
The Corporation Trust Co.
Corporation Trust Center
1209 Orange Street
Wilmington, DE 19801
MCGUIRE WOODS, LLP,
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Serve: 1 James Center
901 E. Cary Street
Richmond, VA 23219-4030
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Defendants.
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COMPLAINT
COMES NOW Plaintiff, Eric Rajala, as bankruptcy Trustee for Ethanex Energy, Inc.
("Ethanex"), by and through the undersigned counsel, and for his Complaint against the
Defendants, alleges as follows:
Case 2:08-cv-02638-CM-DJW Document 1 Filed 12/17/08 Page 1 of 26
Nature ofthe Case
1. Defendant Louis W. Zehil ("Zehil") was a partner in the law firm of McGuire
Woods, LLP ("McGuire Woods"). Defendants Zehil and McGuire Woods were retained to
represent Ethanex in the process of becoming a public company and raising capital for the
development of ethanol manufacturing plants. As explained in further detail below, Zehil used
his position as a partner of McGuire Woods, and acting through two entities created and
controlled by him, Defendants Strong Branch Ventures IV, LLP and Chestnut Capital Partners II,
LLC, to perpetrate a fraudulent scheme in which Zehil unlawfully came into possession of
unrestricted securities of Plaintiff Ethanex. Zehil then unlawfully sold these securities at great
profit and at great harm to Ethanex. At all relevant times, Defendant Zehil was the former
outside legal counsel and corporate secretary of Ethanex Energy, Inc. In late February 2007,
Defendant Zehil was charged with criminal violations of United States securities laws in the U.S.
District Court for the Southern District of New York arising out of the Ethanex transaction and
several similar transactions.
Parties
2. Eric C. Rajala is the Trustee for Ethanex Energy, Inc., a corporation organized
under the laws of the State of Nevada. Ethanex Energy, Inc. is currently in bankruptcy in the
U.S. Bankruptcy Court for the District of Kansas, Case No. 08-20645-7. For purposes of this
pleading, Trustee Rajala and Ethanex Energy, Inc. may be referred to herein collectively as
"Ethanex." As the Trustee for Ethanex, Rajala has the right to prosecute this action on behalf of
the Ethanex bankruptcy estate and, as Trustee for Ethanex, Rajala has rights of Ethanex as a
former client of Defendants Zehil and McGuire Woods.
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3. While in operation, Ethanex's corporate headquarters were located in Basehor,
Kansas. Ethanex's business plan included designing and developing ethanol plants.
4. Defendant Louis W. Zehil is a resident of Ponte Verde Beach, Florida and was
admitted to practice law in the State of New York in 1995. Between April 2004 and his
resignation in February 2007, Zehil was a partner of the law firm McGuire Woods, LLP and
worked primarily in its offices in Jacksonville, Florida and New York, New York.
5. Defendant Strong Branch Ventures IV, LLP ("Strong Branch") is a Delaware
limited partnership having its place of business at Zehil's Ponte Verda Beach, Florida house.
Strong Branch was formed in January 2005 by Zehil and his spouse, Cara Zehil. Defendant
Zehil controlled Strong Branch, had sole authority over the entity's actions, and along with his
spouse, was the sole beneficiary of the entity's activities.
6. Defendant Chestnut Capital Partners II, LLC ("Chestnut") is a Delaware limited
liability company having its place of business at Zehil's Ponte Verda Beach, Florida house.
Chestnut was formed in August 2005 by Zehil and his spouse, Cara Zehil. At all times,
Defendant Zehil controlled Chestnut, had sole authority over the entity's actions and, along with
his spouse, was the sole beneficiary of the entity's activities.
7. Defendant McGuire Woods, LLP is a multinational law firm, organized as a
limited liability partnership under Virginia law. McGuire Woods' principle offices are in
Richmond, Virginia. In correspondence concerning Ethanex, Zehil referred to himself as
working from McGuire Woods' office in New York, New York, and Jacksonville, Florida.
8. In performing legal services for Ethanex, Zehil was assisted by several McGuire
Woods attorneys, including Nova D. Harb, Jonathan Sacks and Andrew H. Slaughter.
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9. In his dealings with Ethanex, Defendant Zehil was acting in his capacity as a
partner of Defendant McGuire Woods. McGuire Woods billed Ethanex for the time Zehil
devoted to his duties as outside general counsel and as corporate secretary to Ethanex. In all,
Ethanex paid McGuire Woods more than $350,000.00 for legal services and expenses.
10. At all times, Defendant McGuire Woods had the ability, right, obligation and duty
to control and monitor Defendant Zehil's actions as an attorney and partner in McGuire Woods.
11. Defendant McGuire Woods had, and has, full knowledge of all matters known to
Zehil.
12. Because of Zehil's ownership and complete control over all affairs of Strong
Branch and Chestnut, Zehil's knowledge, intent and conduct is chargeable to Strong Branch,
Chestnut, and McGuire Woods as a matter of federal and Kansas law. Because of Zehil' s
complete domination of Strong Branch and Chestnut, and Zehil's use of these entities as part of a
fraudulent and illegal scheme, the separate existence of these entities should be disregarded and
they should be deemed as a matter of law to be one and the same as Defendant Zehil, as
necessary to achieve an adequate remedy for the wrongs committed against Ethanex.
13. At the time of filing of this Complaint, the Plaintiff lacks specific information as
to the role played by Defendant Zehil's spouse, Cara Zehil, in the illegal scheme alleged herein,
and her retention of the unlawful profits obtained by the Defendants. Plaintiff respectfully
reserves leave to join Cara Zehil as a defendant in this action upon receipt of more specific
information concerning such facts during the discovery process.
Jurisdiction and Venue
14. Federal subject matter jurisdiction exists under 28 U.S.c. 1332. There is
complete diversity between the parties. As set forth above, the Plaintiff is a corporation
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organized under the laws of Nevada and has its principle place of business in Kansas. Defendant
Zehil is a resident and citizen of Florida. Defendants Strong Branch and Chestnut are organized
under the laws of the State of Delaware and have their principle place of business in Florida.
Defendant McGuire Woods is organized under the laws of the State of Virginia and has its
principle place of business in the State of Virginia. As set forth above, Defendant Zehil obtained
illegal and unlawful profits in excess of eight million dollars, and the conduct of the Defendants
has resulted in at least an equal amount of damage to the Plaintiff. Therefore, the amount in
controversy exceeds $75,000.00.
15. Subject matter jurisdiction is also proper based upon the general federal question
28 U.S.C. 1331, in that the claims set forth below include Defendants' jurisdiction provided in
violations of lO(b) of the 1934 Securities Exchange Act, 15 U.S.c. 78j and SEC Rule IOb-5,
17 C.F.R. 240.10b-5, propagated thereunder, and 16b of the Securities Exchange Act, 78j
U.S.C. 78p (b). 28 U.S.C. 1331 and 15 U.S.C. 78aa grant this Court subject matter
jurisdiction over a claim or controversy arising under the 1934 Securities Act, and the Court may
entertain all other claims pursuant to 28 U.S.C. 1367, in that all such claims arise as part of the
same case or controversy between the parties.
16. Each of the Defendants is subject to personal jurisdiction pursuant to K.S.A. 60
308(b)(2), in that their unlawful and tortious acts have caused, and were reasonably anticipated
to cause, economic injury within the State of Kansas. Defendants Zehil and McGuire Woods
purposefully availed themselves of the privilege of doing business in Kansas with regard to the
representation of Plaintiff.
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17. Venue is proper in this district pursuant to 28 U.S.c. 1391(a) and (b), in that a
substantial part of the events and omissions giving rise to the claims, and a substantial part of the
property which is the subject ofthis litigation, is situated in this District.
Facts Common to All Counts
18. In Defendant Zehil' s practice of law, he specialized in representing small
companies seeking to raise capital by becoming publicly traded. A typical structure for such a
transaction would be for Zehil to arrange for his client to merge with a small publicly traded
company. After the merger, Zehil's client would be the surviving entity and the name of the
publicly traded company would be changed to that of his client. In order to raise capital, at or
prior to the merger, Zehil would enlist investors through a private placement transaction.
Typically, these companies would enter into a transaction referred to as a "Private Investment in
Public Entity" ("PIPE") solicitation at the time of the reverse merger, or shortly thereafter, to
generate financing for the newly-merged public company.
19. A PIPE Private Placement is a private investment in securities of a public entity.
In a PIPE transaction, a company typically offers unregistered, restricted shares to investors at a
discount to the market price or anticipated market price for the securities. Investors typically
enter into a registration rights agreement, which obligates the company to register the shares with
the SEC in the future so that the shares may be resold on the public markets.
20. In the usual course of a PIPE transaction, the stock issued to the PIPE investors is
not freely tradable because it is not yet registered with the United States Securities and Exchange
Commission (the "SEC"). Consequently, all shares issued in a PIPE transaction are required to
bear restrictive legends until such time as those shares are registered with the SEC and the SEC
declares the registration statements for those securities effective.
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21. Defendant McGuire Woods was aware of, supported, and profited from
Defendant Zehil' s specialized practice in PIPE transactions and the Ethanex PIPE offering. By
way of example, in September 2005, McGuire Woods co-sponsored a conference/marketing
presentation, at which Zehil was a featured speaker, on the use of such reverse mergers and PIPE
transactions to raise capital for small and start-up business.
The Ethanex Transaction
22. Armistead Energy, Inc. retained McGuire Woods and Zehil as its counsel. That
relationship was documented by a June 15,2006 engagement letter on McGuire Woods'
stationary, personalized to Defendant Zehil, and showing McGuire Woods' Jacksonville, Florida,
address. In the engagement letter, Zehil stated that he would be the partner with general and
primary responsibility for the representation, but that he would be assisted by other McGuire
Woods attorneys and staff. McGuire Woods agreed and promised as follows: "[to] advise the
Company [Armistead] in connection with, and the scope of our engagement and duties to the
Company will relate to, an equity financing and possible reverse merger and related fmancing
transactions and matters incident thereto. The Company may limit or expand our representation
from time to time, provided that any substantial expansion must be agreed by us."
23. On July 17,2006, Armistead filed the necessary paperwork with the Delaware
Secretary of State to change its name to "Ethanex Energy North America, Inc."
24. Following the PIPE transaction format which Zehil had successfully used for
other small companies, Zehil and McGuire Woods prepared a private placement memorandum
and registration rights agreement on behalf of Ethanex Energy North America, Inc. The plan of
the PIPE offering was that the shares of Ethanex Energy North America, Inc. that were sold
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pursuant to the PIPE offering would be converted to shares of a surviving publicly traded entity,
and then registered with the SEC for resale to the public.
25. In the Ethanex PIPE offering, investors subscribed to purchase 20 million units of
the PIPE securities. Each unit consisted of one share of class B common stock and a warrant to
purchase one share of class B common stock for a period of five years at an exercise price of
$1.50 per share. The investors in the offering collectively purchased 20 million units for a total
consideration of $20,000,000, or one dollar per unit.
26. On August 3, 2006, Ethanex Energy North America, Inc. closed the subscription
period for the PIPE Offering.
27. On August 3, 2006, subscribers to the Ethanex PIPE offering entered into a
Registration Rights Agreement. Under the Registration Rights Agreement, Ethanex North
America, Inc. promised the shareholders that it would file a registration statement, allowing the
public sale of the securities, no later than 120 days after the merger with the public company and
would use its best efforts to cause the registration to become effective within 120 days from the
registration filing date. Under the terms of the Registration Rights Agreement, the company
agreed to pay liquidated damages to the shareholders if the registration was not completed in a
timely manner.
28. The Subscription Agreement signed by the Ethanex PIPE investors, which was
prepared by Zehil and McGuire Woods, required each investor to state that "the investor has no
present intention of selling" the securities that would be acquired through the PIPE offering and
that such securities would bear appropriate legends concerning the restrictions on transferability
of those shares until the registration of those shares became effective.
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29. As planned in the PIPE offering, Ethanex Energy, Inc. merged with a publicly
traded company known as New Inverness Exploration Company on August 21, 2007, with
Ethanex the surviving entity. Although publicly traded, New Inverness was an unsuccessful
mineral exploration company and was little more than a corporate shell.
30. On September 1, 2006, Ethanex North America, Inc. merged into Ethanex
Energy, Inc,. with Ethanex Energy, Inc., the Plaintiff, as the surviving entity. Thus the units sold
(subscribed) by Ethanex North America, Inc. in the Ethanex PIPE offering became shares of the
publicly traded entity, Ethanex Energy, Inc. (referred to herein as "Plaintiff' or "Ethanex").
Zehil and McGuire Woods continued to represent Ethanex.
31. In the Ethanex PIPE offering, Defendant Zehil caused Strong Branch to purchase
750,000 units and caused Chestnut to also purchase 750,000 units of the PIPE offering.
32. On September 1, 2006, Zehil and McGuire Woods issued an opinion letter on
McGuire Woods' letterhead to the transfer agent for the Ethanex shares, an entity called "Island
Stock Transfer" of St. Petersburg, Florida. That letter, which was dated August 31, 2006,
directed Island Stock Transfer to issue shares to Strong Branch and Chestnut without the
restrictive endorsement which was required on the shares by the terms of the PIPE offering and
federal and state securities laws. As a result, Strong Branch and Chestnut were issued shares that
were on their face freely transferable without notice to the purchaser that the transfer was
unlawful because there was no effective registration of the Ethanex PIPE shares.
33. Defendant Zehil, acting as "attorney in fact" for Strong Branch and Chestnut,
exercised the warrants issued with each unit, resulting in Strong Branch and Chestnut each
owning 1,500,000 shares of Ethanex stock, for a total of 3,000,000 shares. Upon information
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and belief, based upon the calculations performed by the SEC, Zehil (through the shells Strong
Branch and Chestnut) paid a combined price of$3,750,000 for these shares.
34. Defendant Zehil directed the transfer agent to send the Ethanex shares purchased
by Strong Branch and Chestnut to his attention at the New York office of McGuire Woods.
35. Between September 11,2006 and November 10,2006, Zehil caused Strong
Branch and Chestnut to unlawfully sell their three million shares of Ethanex stock to the
investing public for approximately $12.3 million, obtaining a profit of approximately $8.55
million dollars.
36. Although Zehil was the corporate secretary of Ethanex at the time of the sale,
neither Zehil nor McGuire Woods filed any disclosure of Zehil' s ownership or sales of Ethanex
stock held in the name of Chestnut and Strong Branch.
37. On January 3, 2007, Ethanex filed a Form SB-2, an SEC-mandated registration
statement, to obtain an effective registration of the shares sold in the Ethanex PIPE offering.
Once the registration was effective, the shares would be freely transferable. However, this
registration statement did not become effective as of that date and there was no registration
statement on file, or effective, when Zehil caused Chestnut and Strong Branch to sell their three
million shares of Ethanex in September and November of 2006.
38. As counsel for Ethanex, Zehil and McGuire Woods were responsible for
reviewing and preparing Ethanex's January 3, 2007 Form SB-2. That form SB-2 was materially
incorrect in several respects, including failing to disclose that Strong Branch and Chestnut had
already unlawfully sold their Ethanex shares or that Strong Branch and Chestnut had, because of
Zehil's actions, been issued shares of Ethanex stock which did not bear the restrictive
endorsement.
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39. At the time Zehil and McGuire Woods issued the false opinion letter allowing the
Ethanex shares to be issued to Strong Branch and Chestnut on an unrestricted basis, Zehil had
already used his position at McGuire Woods to conduct very similar frauds in PIPE transactions
for several other companies, including Gran Tierra Energy, Inc. in January, 2006; Foothills
Resources, Inc. in April, 2006; MMC Energy, Inc. in May, 2006; and Alternative Energy
Sources, Inc. in June, 2006. In each of these transactions, Zehil and McGuire Woods issued a
false opinion letter to the transfer agent allowing Zehil to receive unrestricted shares of the
company and make unlawful profits from the sale ofthe shares. As later determined by the SEC,
in each instance Zehil had used Strong Branch and/or Chestnut to disguise the transactions.
40. In February, 2007, before the Ethanex stock registration was deemed effective by
the SEC, Ethanex was made aware of Zehil's unlawful activities.
41. On February 22,2007, Ethanex fired Zehil and McGuire Woods as outside
counsel and corporate secretary. McGuire Woods thereafter returned Ethanex's client files and
withdrew as Ethanex's counsel.
42. On or about February 28,2007, criminal charges were commenced against
Defendant Zehil in the United States District Court for the Southern District of New York,
alleging felony violations of federal securities laws.
43. As a result of Zehil and McGuire Woods' unlawful conduct, Ethanex was
required to obtain replacement counsel and temporarily suspend its effort to finalize the
registration of the Ethanex stock with the SEC. Excluding the preparation of this litigation by
the undersigned counsel, Ethanex spent approximately $96,463.71 in legal fees and costs in
connection with the investigation and the continuing work needed to remedy the injury caused by
Zehil's and McGuire Woods' misconduct.
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44. By order of the SEC, the registration of the Ethanex PIPE shares became effective
on July 6,2007. However, during the summer of 2007, the over the counter price for Ethanex
shares had dropped well below the PIPE offering price and well below the price at which Zehil
had sold and garnered his unlawful profits. The price of Ethanex shares, as adjusted for a reverse
I: 10 stock split, has never recovered to the PIPE transaction price.
45. Because of the delay in obtaining SEC approval of the registration of the Ethanex
stock caused by Defendants' conduct, Ethanex was required to, and did, pay approximately
$592,000.00 in liquidated damages to eligible shareholders pursuant to the terms of the
Registration Rights Agreement.
46. When Ethanex terminated its counsel relationship with McGuire Woods, McGuire
Woods' attorneys, under the direction of defendant Zehil, were working on several contracts and
negotiations which were important to Ethanex's business. As a result of the termination of the
attorney-client relationship, Ethanex had to suspend negotiations on these transactions. The
resulting delay caused Ethanex to incur additional legal fees and to be unable to complete such
contracts.
47. The conduct ofZehil and McGuire Woods caused irreparable and substantial
harm to Ethanex's operations and ability to operate as a going concern.
48. Ethanex filed for bankruptcy in March 27,2008 and has ceased business
operations.
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COUNT I
Violation of Section lOeb) of the Exchange Act and Rule IOb-5
(All Defendants)
49. Plaintiff hereby alleges and incorporates each and every allegation set forth in
paragraphs 1 through 48 of this Complaint as though fully set forth herein.
50. As set forth herein, Defendant Zehil, McGuire Woods, Strong Branch and
Chestnut, directly or indirectly, knowingly or recklessly, by use ofthe means or instrumentality
of interstate commerce, or of the mails, or of the facilities of a national security exchange in
connection with the purchase and sale of securities: (a) have employed schemes and artifices to
defraud Ethanex and others; (b) have made untrue statements of material fact, and have omitted
and failed to state material facts necessary in order to make statements made, in light of the
circumstances under which they were made, not misleading; and (c) have engaged in
transactions, acts, practices and courses of business which operated or would operate as a fraud
or deceit upon purchasers of securities.
51. Pursuant to the PIPE offering, in August 2006, Ethanex sold securities to
Defendant Zehil, acting through Defendants Strong Branch and Chestnut.
52. Defendant Zehil did not disclose that when he acquired the securities he intended
to follow the same fraudulent scheme he had employed with the prior transactions in order to
unlawfully obtain unrestricted shares of the securities.
53. Defendant Zehil and McGuire Woods then concealed this fraud in preparing a
fraudulent SEC Form SB-2 registration statement which did not reveal that Zehil, Strong Branch
and Chestnut had already sold their shares and had fraudulently obtained share certificates which
did not bear the necessary restriction.
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55. Defendants Zehil, McGuire Woods, Strong Branch and Chestnut's fraud was
material to the transaction in that Ethanex was not willing to violate the law by selling restricted
securities as unrestricted securities and would not have sold the securities to Zehil, Chestnut and
Strong Branch had it been aware of the truth.
56. Defendants Zehil, McGuire Woods, Strong Branch and Chestnut obtained an
unlawful gain in that they were able to obtain the Ethanex shares at the price discounted in light
of their unregistered status, yet received shares which did not bear the restriction on
transferability required by that unregistered status. Defendants Zehil, Strong Branch and
Chestnut capitalized on the fraud by selling these unrestricted Ethanex shares before the Ethanex
PIPE stock was legitimately on the market, thereby reaping extraordinary profits.
57. As a result of the conduct of Defendants Zehil, McGuire Woods, Strong Branch
and Chestnut, Ethanex was damaged as set forth above.
58. By reason of the foregoing, Defendants Zehil, McGuire Woods, Strong Branch
and Chestnut, directly or indirectly have violated Section lOeb) of the Exchange Act [15 U.S.C.
78J(b)] and Rule 10 B-5 [17 C.F.R. 240.10 B-5].
WHEREFORE, Plaintiff Eric C. Rajala, as Trustee in Bankruptcy for Ethanex Energy,
Inc., respectfully prays that the Court enter judgment against Defendants for actual damages,
punitive damages, prejudgment interests, costs, attorney's fees and such other relief as the Court
deems proper, including but not limited to all relief available pursuant to Section 1O(b) of the
Exchange Act [15 U.S.C. 78J(b)] and Rule 10 B-5 [17 C.F.R. 240.10 B-5].
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COUNT II
Violation of K.S.A. 17-12a501
(All Defendants)
60. As set forth herein, Defendant Zehil, McGuire Woods, Strong Branch and
Chestnut, directly or indirectly, knowingly or recklessly, by use of the means or instrumentality
of interstate commerce, or of the mails, or of the facilities of a national security exchange in
connection with the purchase and sale of securities: (a) have employed schemes and artifices to
defraud Ethanex and others; (b) have made untrue statements of material fact, and have omitted
and failed to state material facts necessary in order to make statements made, in light of the
circumstances under which they were made, not misleading; and (c) have engaged in
transactions, acts, practices and courses of business which operated or would operate as a fraud
or deceit upon purchasers of securities.
61. Pursuant to the Subscription Agreement, Ethanex sold securities to Defendant
Zehil, acting through Defendants Strong Branch and Chestnut.
62. Defendant Zehil did not disclose that when he acquired the securities he intended
to follow the same fraudulent scheme he had employed with the prior transactions in order to
unlawfully obtain unrestricted shares of the securities.
63. Defendant Zehil and McGuire Woods then concealed this fraud in preparing a
fraudulent SEC Form SB-2 registration statement, which did not reveal that Zehil, Strong Branch
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65. Defendants Zehil, McGuire Woods, Strong Branch and Chestnut's fraud was
material to the transaction in that Ethanex was not willing to violate the law by selling restricted
securities as unrestricted securities and would not have sold the securities to Zehil, Chestnut and
Strong Branch had it been aware of the truth.
66. Defendants Zehil, McGuire Woods, Strong Branch and Chestnut obtained an
transferability required by that unregistered status. Defendants Zehil, Strong Branch and
Chestnut capitalized on the fraud by selling these unrestricted Ethanex shares before the Ethanex
PIPE stock was legitimately on the market, thereby reaping extraordinary profits.
67. As a result of the conduct of Defendants Zehil, McGuire Woods, Strong Branch
and Chestnut, Ethanex was damaged as set forth above.
68. By reason of the foregoing, Defendants Zehil, McGuire Woods, Strong Branch
and Chestnut, directly or indirectly have violated KS.A. Section 17-l2a50l and Ethanex is
entitled to the remedies provided by KS.A. l7-l2a509(c), including return of all revenue
received, actual damages, interest, costs and reasonable attorney's fees.
deems proper, including but not limited to all remedies provided by KS.A. l7-l2a509(c).
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COUNT III
Violation of Section 16(b) of the Exchange Act
(All Defendants)
70. As set forth herein, Defendant Zehil and McGuire Woods were outside counsel
and corporate secretary of Ethanex.
72. In August, 2006, Defendant Zehil, acting in his capacity as partner at McGuire
Woods and as outside counsel and corporate secretary of Ethanex, purchased three million shares
of Ethanex through Defendants Strong Branch and Chestnut for a total price of $3,750,000.
73. Between September 11, 2006 and November 10, 2006, Defendant Zehil sold his
shares of Ethanex stock for a total of $12,300,000.
74. Defendant Zehil's purchase and sale of Ethanex stock were made within a six
month period and are therefore considered a "short swing" transaction covered by Section 16(b)
of the Securities Exchange Act, 15 V.S.c. 78p(b).
75. Defendant Zehil, through Defendants Strong Branch and Chestnut, obtained an
illegal short swing profit from the sale of Ethanex stock in an amount believed to be $8,550,000.
76. Pursuant to Section 16(b) ofthe Securities Exchange Act, 15 V.S.c. 78p(b), the
profits obtained by Zehil, Strong Branch and Chestnut in this short swing transaction shall inure
to and be recoverable by Ethanex, as a matter oflaw.
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deems proper, including but not limited to all relief available pursuant to 15 U.S.C. 78p(b).
COUNT IV
Fraud
(All Defendants)
78. As set forth in greater detail above, pursuant to the Subscription Agreement,
Ethanex sold securities to Defendant Zehil, acting through Defendants Strong Branch and
Chestnut.
79. Defendant Zehil and McGuire Woods did not disclose that when Zehil acquired
the securities, he intended to follow the same fraudulent scheme he had employed with the prior
transactions in order to unlawfully obtain unrestricted shares of the securities.
80. Defendants Zehil and McGuire Woods then concealed this fraud in preparing a
fraudulent SEC Form SB-2 registration statement, which did not reveal that Zehil, Strong Branch
8!. Zehil, McGuire Woods, Strong Branch and Chestnut's fraud was material to the
transaction in that Ethanex was not willing to violate the law by selling restricted securities as
unrestricted securities and would not have sold the securities to Zehil, Chestnut and Strong
Branch had it been aware of the truth.
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82. Defendant Zehil, McGuire Woods, Strong Branch and Chestnut obtained an
transferability required by that unregistered status.
83. Ethanex did not, nor could it have discovered by the exercise of reasonable
diligence, the knowledge that the Defendants had defrauded it as described above.
84. Defendants Zehil and McGuire Woods, and Defendants Chestnut and Strong
Branch as an instrumentality of Zehil, were each under an obligation and duty to communicate
truthful information to Ethanex, in that McGuire Woods and Zehil had been retained as counsel
and business advisors to Ethanex with regard to the transactions alleged herein.
85. Defendants intended that Ethanex rely upon their obligation to speak the truth in
accepting Defendants' guidance as to those transactions.
86. Ethanex justifiably relied upon Defendants, in that not only were Defendants
Zehil and McGuire Woods Ethanex's counsel and fiduciaries, but also in that Defendant
McGuire Woods and Zehil touted themselves as being a respectable, powerful and ethical law
firm and one of the largest law firms in the United States.
87. Ethanex has been injured by Defendants' fraud as set forth above.
88. Defendants' fraud, actions and omissions were done in a willful, wanton and
malicious manner in complete recklessness of the harm visited upon Ethanex, and in complete
abrogation of the special duties as the counsel to Ethanex. As a result, punitive damages should
be awarded to punish the Defendants and deter others from similar conduct.
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deems proper.
COUNT V
Tortious Interference with Business Expectancies
(All Defendants)
90. Ethanex had a reasonable business expectancy that it would complete the PIPE
transaction and that its securities would be promptly and lawfully available for sale in the public
markets as alleged above.
91. Defendants had knowledge of these expectancies, and indeed Defendant Zehil and
McGuire Woods fostered these expectancies as the counsel selected and hired by Ethanex to
complete these transactions.
92. Defendants, through their deliberate conduct and illegal activities, referenced
herein, interfered with those business expectancies and prevented the timely effective registration
of the Ethanex securities.
93. But for the conduct of the Defendants, Ethanex was reasonably certain to have
been able to register its stock in a timely fashion and to enjoy the anticipated benefit of the
effective registration in a timely fashion and with an unblemished record.
94. Defendants acted without justification and in plain and conscious disregard of the
law, in interfering with this expectation.
95. As a direct and proximate result of the wrongful acts and omissions of the
Defendants, Plaintiffs have been injured and damaged as set forth herein.
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96. Defendants' actions and/or omissions were done in a willful, wanton and
malicious manner, in direct contravention not only of federal securities law, but also of the
fiduciary duties of counsel to Ethanex. As a result, punitive damages should be awarded to
punish the Defendants and deter others from similar conduct.
deems proper.
COUNT VI
Negligent Supervision
(Defendant McGuire Woods)
98. In addition to, or in the alternative to, McGuire Woods' responsibility for the
conduct of Zehil as a partner in the firm, McGuire Woods had an independent duty to Ethanex,
as a client of the firm, to exercise reasonable care and competence with respect to the firm's
work and its dealings associated with the Ethanex PIPE offering. Such duty included a duty to
exercise reasonable care and competence in supervising and monitoring the conduct of its
partner, Defendant Zehil.
99. McGuire Woods was negligent, in that it failed to exercise reasonable care or
competence in supervising and monitoring its partner Zehil in a series of transactions, including
the Ethanex transaction, in which McGuire Woods and Defendant Zehil issued false and
fraudulent opinion letters, on McGuire Woods stationary, without adequate control or
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supervision over his actions and without any effective steps taken by McGuire Woods to prevent
Zehil from committing the wrongful acts alleged herein.
100. For a law firm of McGuire Woods' stature, size, and claimed competence, the
danger to clients of a rogue partner in the securities law field must have been apparent and the
failure to take steps which would have prevented Zehil's activities, or lead to the discovery of
such activities before they injured Ethanex, was unreasonable, negligent and a breach of
McGuire Woods' duties to its clients.
101. As a direct result of McGuire Woods' failure to exercise the proper degree of
care, it caused injury to the client, Ethanex, because as a direct and proximate result of such
negligence Zehil was permitted to unlawfully purchase and sell unrestricted shares of Ethanex
stock, and manipulate the market for such stock, causing Ethanex damages as set forth herein.
malicious manner, in direct contravention not only of federal securities law but also ofthe
fiduciary duties as counsel to Ethanex. As a result, punitive damages should be awarded to
Inc., respectfully prays that the Court enter judgment against Defendant McGuire Woods for
actual damages, punitive damages, prejudgment interests, costs, attorney's fees and such other
relief as the Court deems proper.
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COUNT VII
Breach of Fiduciary Duty
(Defendants McGuire Woods and Zehil)
104. As counsel and corporate secretary for Ethanex, Zehil and McGuire Woods owed
to Ethanex the highest degree of loyalty, good faith and honest dealing.
105. Zehil and McGuire Woods encouraged Ethanex to trust in their honesty and
ability.
106. Ethanex did, in fact, rely upon McGuire Woods and Zehil's honesty, good faith
and integrity in retaining Zehil and McGuire Woods as Ethanex's counsel for the PIPE
transaction and as general corporate counsel and corporate secretary.
107. Zehil and McGuire Woods betrayed the trust placed in them by Ethanex and
breached their fiduciary duties to Ethanex by abusing their role to engage in illegal activities and
self dealing to the detriment of Ethanex as set forth herein
108. Zehil and McGuire Woods' conduct caused Ethanex injuries as described herein.
malicious manner, in direct contravention not only of federal securities law but also of the
fiduciary duties of counsel to Ethanex. As a result, punitive damages should be awarded to
110. As a result of Zehil and McGuire Woods' breach of fiduciary duty, Zehil and
McGuire Woods should be deemed to have forfeited all right to any fee paid by Ethanex for the
legal work performed by Zehil or McGuire Woods.
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Inc., respectfully prays that the Court enter judgment against Defendants McGuire Woods and
Zehil for actual damages, punitive damages, prejudgment interests, costs, attorney's fees and
such other relief as the Court deems proper.
COUNT VIII
Conspiracy
(Defendants Strong Branch and Chestnut)
112. To the extent that Strong Branch and Chestnut may claim to be separate legal
entities from Defendant Zehil, or claim to be not directly responsible for Zehil's conduct as their
owner, manager and agent, a claim which Ethanex very strongly disputes, then Strong Branch
and Chestnut should be held to have conspired with Zehil to undertake the unlawful transactions
described herein.
113. To the extent that Strong Branch and Chestnut had any separate legal existence
from Defendant Zehil, Defendants Strong Branch and Chestnut agreed and willingly participated
in the fraudulent scheme concerning the wrongful issuance of unrestricted securities, and
unlawful sale of such securities, as described in this Complaint.
114. As co-conspirators of Zehi1, Defendants Strong Branch and Chestnut are equally
liable as Zehi1 to Ethanex for all claims stated herein, which are incorporated by reference as if
fully set forth herein.
115. At the current time it is not known whether there are additional co-conspirators,
including Cara Zehil or any persons associated with McGuire Woods or any other party
24
associated with this transaction. Plaintiffs respectfully reserve the right to add such parties as
their identity and role in the conspiracy may become known during the course of discovery.
Inc., respectfully prays that the Court enter judgment against Defendants Strong Branch and
Chestnut for actual damages, punitive damages, prejudgment interests, costs, attorney's fees and
such other relief as the Court deems proper.
Conclusion
Inc., respectfully prays that the Court enter judgment against the Defendants for actual damages,
deems proper, including but not limited to all remedies provided for by federal and Kansas
statute.
Demand for Jury Trial
Plaintiff requests trial by jury on all issues so triable.
Determination of Place of Trial
Plaintiff requests that trial ofthis matter be held in the United States District Court for the
District of Kansas, Kansas City Division.
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Respectfully submitted,
EDGAR LAW FIRM LLC
__
, KS Fed. #70270
1032 Pennsylvania Ave.
Kansas City, Missouri 64105
Telephone: (816) 531-0033
Facsimile: (816) 531-3322
#19121
1032 Pennsyl ania Ave.
Kansas City, Missouri 64105
Telephone: (816) 531-0033
Facsimile: (816) 531-3322
ATTORNEYS FOR PLAINTIFF
26

Ethanex Complaint

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Ethanex Complaint

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IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF KANSAS

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