George K. Baum Advisors, L.L.C., Plaintiff,
Sprint Spectrum, L.P., Defendant.
MEMORANDUM AND ORDER
J. THOMAS MARTEN, JUDGE
In 2006 and 2007, Crossroads Wireless, a local telecommunication company, attempted to acquire sufficient capital to permit it to partner with Sprint Spectrum, L.P., by providing rural roaming services. Pursuant to a contract with Crossroads, plaintiff George K. Baum Advisors (GKBA) helped to market Crossroads to potential investors. After Crossroads failed in 2008, a number of investors sued GKBA alleging fraudulent and negligent misrepresentation. GKBA ultimately settled these actions, and has brought the present action seeking indemnification from Sprint under a separate contract. Both parties have filed motions for summary judgment, and the court finds that the indemnification is not available under the separate Sprint-GKBA contract. Even if such indemnification were authorized under the contract, the court finds that GKBA’s marketing involved conduct which was unlawful under the Securities Exchange Act of 1934, and that Kansas law would preclude indemnifying GKBA for its own illegal conduct.
Summary judgment is proper where the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show there is no genuine issue as to any material fact, and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). In considering a motion for summary judgment, the court must examine all evidence in a light most favorable to the opposing party. McKenzie v. Mercy Hospital, 854 F.2d 365, 367 (10th Cir. 1988). The party moving for summary judgment must demonstrate its entitlement to summary judgment beyond a reasonable doubt. Ellis v. El Paso Natural Gas Co., 754 F.2d 884, 885 (10th Cir. 1985). The moving party need not disprove plaintiff's claim; it need only establish that the factual allegations have no legal significance. Dayton Hudson Corp. v. Macerich Real Estate Co., 812 F.2d 1319, 1323 (10th Cir. 1987).
In resisting a motion for summary judgment, the opposing party may not rely upon mere allegations or denials contained in its pleadings or briefs. Rather, the nonmoving party must come forward with specific facts showing the presence of a genuine issue of material fact for trial and significant probative evidence supporting the allegation. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986). Once the moving party has carried its burden under Rule 56(c), the party opposing summary judgment must do more than simply show there is some metaphysical doubt as to the material facts. "In the language of the Rule, the nonmoving party must come forward with 'specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (quoting Fed.R.Civ.P. 56(e)) (emphasis in Matsushita). One of the principal purposes of the summary judgment rule is to isolate and dispose of factually unsupported claims or defenses, and the rule should be interpreted in a way that allows it to accomplish this purpose. Celotex Corp. v. Catrett, 477 U.S. 317 (1986).
Findings of Fact
The Sprint Strategic Roaming Alliance or Strategic Rural Alliance (SRA), was designed to expand Sprint’s wireless coverage footprint in rural areas by entering into agreements with rural telephone companies (telcos). Under its SRA Program, Sprint would contract with rural wireless providers (RWPs) “and engage them to have spectrum that they could use to build out coverage to Sprint's specifications.” The Program would allow Sprint to “have arrangements where the customer experience, when they were in those areas that were not owned by Sprint, were built out by these entities, would look and feel virtually the same as if they were in a network area that was actually owned and operated by Sprint or one of its affiliates.” George K. Baum & Co. (GKBC) hired Tracy Smith on November 10, 2003. Under her employment contract, Smith was to receive bonuses based on a set percentage of the fees generated through her engagements. The same contract provided that Smith would obtain and maintain a Series 7 securities license. It is uncontroverted that Smith never obtained or maintained the license. She was not licensed to offer or sell securities, and was not a registered investment advisor.
It is unclear who actually employed Smith. Based on the depositions of Smith and Jon Baum, the plaintiff contends that Smith was employed by GKBA. Sprint, on the other hand, has submitted objective evidence in the form of W2 statements showing that Smith was paid by GKBC.
On December 30, 2003 Sprint and George K. Baum Advisors (GKBA) entered into an engagement letter agreement under which GKBA would locate and qualify potential SRA candidates.
Section 1 of this agreement spells out the “Services to be Rendered” by GKBA to Sprint, which included identifying and financially prequalifying prospective candidates, and serving as an exclusive point of contact for candidates proposing and negotiating SRA agreements. GKBA served as Sprint’s “exclusive point of contact” between Sprint and RWPs seeking to participate in the SRA.
In the fall of 2005, one potential SRA candidate, Chickasaw Wireless, based in Oklahoma, proposed an SRA Agreement which would cover parts of a five-state territory. On November 21, 2005, GKBA entered into a capital placement engagement letter with Chickasaw.
Section 1 of the GKBA-Chickasaw engagement provides for “Services to be Rendered” by GKBA to Chickasaw. As “Capital Placement Services, ” GKBA agreed to: (1) develop a list of interested and qualified prospective investors; (2) help Chickasaw in preparing evaluation materials to be used in discussions with investors; (3) arrange meetings with investors; (4) advise Chickasaw in its discussions with investors and negotiating the timing, structure and pricing of a capital placement; (5) evaluate capital placement transactions proposed by investors; (6) assist in negotiating agreements relating to capital placement; and (7) assist the company with financial issues related to the consummation of a capital placement. On July 25, 2012, Tracy Smith signed an affidavit in which she declared under oath that beginning in 2005 and until late 2008, GKBA performed each of these services GKBA was Chickasaw’s agent with respect to the services performed under the November 21, 2005, capital placement engagement.
From 2003-2005, Sprint pursued an SRA Program that, it envisioned, would include at least 20 to 25 SRA Agreements with RWPs. However, in early 2006, Sprint and another wireless carrier, Alltel, began negotiations for an expanded roaming agreement which would cover a large portion of the SRA footprint which had been targeted by GKBA and Sprint in their 2003 engagement. The Alltel agreement would potentially reduce the geographic area available for GKBA to seek SRA candidates from 25 million Points of Presence (POPs) to 6-7 million. The Alltel agreement would also overlap parts of the SRA territory being proposed by Chickasaw in Kansas, Missouri, Arkansas and Texas.
After the Alltel deal was disclosed to GKBA, Tracy Smith told Sprint that she could not deliver the remaining 6-7 million SRA POPs in separate agreements with rural telephone companies, and proposed covering the remaining POPs with one big rural wireless carrier.
On July 27, 2006, Sprint’s executive management approved negotiation of a single SRA contract with an entity to be formed by Chickasaw—“SRA Corp.”—that would cover the remaining POPs available for SRA coverage in the lower 48 states. “SRA Corp.” was ultimately incorporated as “Crossroads Wireless, Inc.” in October 2006. According to GKBA, “Chickasaw was the entity that created the idea for Crossroads.”
On September 7, 2006, GKBA and Sprint signed a new engagement agreement. Section 1 outlines the GKBA’s performance obligations, which included identifying and financially prequalifying prospective SRA candidates and serving as the primary point of contact for candidates proposing and negotiating SRA agreements.
Before entering into the new agreement, Sprint performed an analysis of GKBA’s value to Sprint. It concluded that it was more cost effective to use GKBA’s services rather than trying to separately negotiate with rural telcos.
Section 1 does not include any statement or reference to any services by GKBA regarding capitalizing SRA Corp., Crossroads or any other entity.
The plaintiff concedes there is no express reference to SRA Corp. or Crossroads, but argues that the engagement could be interpreted that way, in its general provision that GKBA would provide “general business and advisory services.” The court finds that this overstates GKBA’s responsibilities, as the agreement actually states only that “Sprint acknowledges and accepts that GKBA intends to provide investment banking, capital placement and acquisition advisory services” to SRA Corp. The Agreement carefully limited GKBA’s responsibilities, providing that “Nothing in this Agreement is intended to obligate or commit [GKBA] or any of its affiliates to provide any services other than as set out above.”
Sprint knew that GKBA was later engaged by Crossroads to raise capital, but there is no evidence indicating that it knew of, or approved, the terms of the agreement between GKBA and Crossroads. Sprint knew that Crossroads was a greenfield entity that would require significant capital, including capital from rural telcos.
The Engagement also contains a “merger clause” stating that the Agreement “constitutes the entire agreement, and supersedes all prior agreements and understandings (both written and oral) of the parties hereto with respect to the subject matter hereof, and cannot be amended or otherwise modified except in writing executed by the parties hereto.”
Section 6 of the Engagement, titled “Scope of Responsibility” states:
Neither Sprint nor any of its affiliates . . . shall be liable to GKB . . . for any claim, loss, damage, liability, cost or expense suffered by GKB or any other such person arising out of or relating to Sprint’s engagement of GKB hereunder except for a claim, loss or expenses that arises from or to the extent that it is based upon any action or failure to act by Sprint . . . .
Section 7, titled “Hold Harmless, ” provides:
Sprint agrees to indemnify, defend and hold harmless GKB and any of its affiliates... from and against any losses, claims or proceedings, damages, judgments, assessments, investigation costs, settlement costs, fines, penalties, arbitration awards, liabilities, costs, fees and expenses (collectively, “Losses”) (I) relating to or arising out of any act or omission between Sprint and any RWP, or (ii) otherwise relating to or arising out of the engagement of GKB under this Agreement or related to performance under the Strategic Roaming Agreements or conduct in connection therewith. To the extent that such Losses result from the bad faith, willful misconduct or gross negligence of GKB in performing the services that are the subject of this Agreement, Sprint shall not be required to indemnify, defend or hold harmless GKB for the Losses.
Section 5, titled “Certain Restrictions, ” contained restrictions against GKBA providing investment banking services to other wireless carrier or rural wireless providers proposing an SRA relationship with Sprint. Section 5 contained a “carve out” acknowledging GKBA’s intent to provide investment banking services to “SRA Corp.”:
Notwithstanding the foregoing, Sprint acknowledges and accepts that GKB intends to provide investment banking, capital placement and acquisition advisory services ... to a certain to-be-formed RWP, hereafter referred to as “SRA Corp”, in connection with SRA Corp.’s efforts to pursue the execution and performance of a Strategic Roaming Agreement with Sprint for approximately six million (6, 000, 000) SRA Market POPs in the lower forty-eight (48) states.
The Engagement contained a “Schedule of Fees” to be paid to GKBA, including an “Initial Engagement Fee” an “Initial Retainer Fee”, “Monthly Retainer Fee”, “Strategic Roaming Agreement Fee” and a $500, 000 “Success Fee.” The “Success Fee” was payable to GKB “upon SRA Corp. obtaining the necessary rural telephone ownership interest in each of the regional operating entities as stipulated in the SRA Corp. Strategic Roaming Agreement.” The agreement provided that Crossroads should raise $100 million by May 15, 2007, $150 million by August 31, 2007, $250 million by November 15, 2007, and $800 million by February 15, 2008. The plaintiff also notes that under the agreement, Sprint had the right to approve the RWP investors in Crossroads. However, there is no evidence Sprint was ever asked to approve any investors in Crossroads.
The “Success Fee” created an incentive for GKBA to obtain the requisite rural telecom interest, but the provision did not create any affirmative obligations or requirements on GKBA. Under the “Success Fee” provision, it was not GKBA’s responsibility to ensure that “SRA Corp.” satisfied its contractual obligation to obtain local telco ownership as mentioned in the SRA Agreement; it was SRA Corp.’s obligation.
These success based-fees, which were based on milestones SRA Corp. had to achieve, were never paid to GKBA.
On December 13, 2006, GKBA entered into a capital placement engagement with Crossroads. GKBA agreed
to jointly with Brown Brothers Harriman ... serve as the Company’s exclusive co-placement agent and co-financial advisor with respect to a possible ‘Capital Placement” ... involving qualified lenders ... investors ... or contributing local exchange carriers or other wireless operators ... for the purpose of properly capitalizing the Entities and funding the Company’s proposed establishment of an integrated wireless communications operation.
Under Section (1) of this agreement, “Capital Placement” was defined to include
any purchase or other acquisition of any of the securities of [Crossroads] by any investor or strategic partner, including . . . equity or equity linked securities, as commonly defined, including without limitation common stock, preferred stock, membership interests, and derivatives thereof . . . (‘Equity Securities’) [and] Capital, in any form, from Strategic Partners that is contributed in exchange for equity or equity linked securities.
Among these “Capital Placement Services” GKBA agreed to provide to Crossroads were: (1) developing a list of prospective lenders, investors or strategic partners that GKBA believed would be interested and financially qualified; (2) assisting Crossroads in preparing evaluation materials containing relevant business and financial aspects of the company to be utilized in discussions with prospective lenders, investors, or strategic partners; (3) contacting and arranging meetings with prospective lenders, investors, or strategic partners; (4) advising the company as to strategy and tactics for initiating discussions with prospective lenders, investors, or strategic partners and negotiating the timing, structure and pricing of a capital placement and potentially participating in such discussions and negotiations; (5) evaluating capital placement transactions proposed by lenders, investors, or strategic partners; (6) assisting in negotiating agreements relating to capital placement; and (7) assisting the company with financial issues related to the consummation of a capital placement.
Section 3 addressed “Fees for Capital Placement Services.” These Fees include a “placement fee” equal to 4.50% of any equity contribution from local exchange carriers or other wireless operators.
GKBA received at least $3 million in capital placement fees from Crossroads under the December 13, 2006 engagement, based on the amount of money invested by rural telcos.
The agreement stated that it did not oblige GKBA to buy any securities from Crossroads or to place them with other entities. Section 7 acknowledged GKBA’s separate contract with Sprint:
[Crossroads] acknowledges that GKB is currently engaged by Sprint ... for the purpose of assisting Sprint in entering into Strategic Roaming Agreements with rural wireless providers and agrees that any actions taken or advice or opinions given by GKB relating to the establishment of a Strategic Roaming Agreement by and between Sprint and [Crossroads] are for the sole benefit of Sprint. [Crossroads] further acknowledges that it has been made aware of these matters and agrees to waive any and all claims against GKB relating to potential conflicts of interest arising therefrom.
Crossroads employed Latham and Watkins as its securities counsel, and employed broker-dealer Brown Brothers Harriman (BBH) to help raise capital. BBH constructed a financial model for Crossroads, based on inputs from Tom Riley of Crossroads and Tracy Smith of GKBA.
According to the plaintiff, Smith’s input was simply “administrative and clerical, ” but the evidence fails to establish this fact as uncontroverted. There is evidence that Smith reviewed, edited, and commented on information in the Crossroads capitalization tables.
On or about February 15, 2007, Sprint and Crossroads entered into an SRA Agreement with an effective date of February 15, 2007. Section 22.214.171.124 of this agreement required Crossroads, within twelve months, to have sold or transferred a sufficient number of equity interests in the Company such that at least 25% of the outstanding equity interests in the Company would be owned by local telco partners.
Beginning in at least March 2007, GKBA began to distribute a document titled “Investor Information Packet” to potential investors in Crossroads. GKBA distributed these packets on behalf of Crossroads.
At least five versions of the packets were distributed to potential investors. One bore the name and logo of George K. Baum & Company, and on the front cover instructed recipients to “Please direct all inquiries to: Tracy L. Smith, Principal.” Subsequent versions contained the name and logo of George K. Baum Advisors, but still instructed recipients to “Please direct all inquiries to: Tracy L. Smith, Principal.” According to Matt Blain, an analyst at GKBA, the ...