## Facts

- Douglas R. Colkitt, chairman and principal shareholder of a NASDAQ-traded company (NMFS), sought financing and used his unregistered NMFS shares as the conversion source.
- Colkitt and Berckeley Investment Group, Ltd., an offshore financing entity, executed an Offshore Convertible Securities Purchase Agreement in May 1996.
- Berckeley paid $2,000,000 for 40 convertible debentures, which Berckeley could later convert into Colkitt’s unregistered NMFS shares.
- The number of shares deliverable upon conversion was determined by a floating-price formula tied to the market price with a 17% discount in Berckeley’s favor.
- The transaction was structured to fit Regulation S’s offshore safe harbor from Securities Act § 5 registration requirements, including a contractual restriction against resale into the United States during the then-applicable restricted period.
- The parties’ relationship deteriorated after Colkitt accused Berckeley of short selling NMFS stock to depress the price and increase the number of shares due on conversion.
- When Berckeley delivered conversion notices, Colkitt delivered only a small fraction of the requested shares; it was undisputed he failed to perform as promised.
- Colkitt asserted defenses and counterclaims alleging material misrepresentations and violations of federal securities laws, seeking to avoid the contract under Exchange Act § 29(b).
- The district court granted summary judgment for Berckeley on liability, rejected Colkitt’s securities-law defenses, and awarded $2,611,075.52 in damages.
- Colkitt appealed, challenging the securities-law analysis and the damages calculation.

## Issues

1. Whether Exchange Act § 29(b) permitted Colkitt to void or rescind the agreement based on alleged violations of Securities Act § 5, Exchange Act § 10(b)/Rule 10b-5, and Regulation S.
2. Whether the Regulation S-based structure rendered the agreement an unlawful unregistered distribution or otherwise illegal on its face.
3. Whether a sophisticated insider who participated in structuring the transaction could rely on alleged securities-law illegality to excuse his own nonperformance.
4. Whether genuine disputes of material fact about alleged short selling or downstream resales precluded summary judgment on liability or affected remedies.
5. Whether the district court correctly calculated contract damages under the agreement’s conversion formula and assumed conversion/sale timing and prices.

## Decision

- The Third Circuit affirmed in part, reversed in part, and remanded.
- It affirmed summary judgment as to Colkitt’s breach and largely rejected his securities-law-based defenses, including § 29(b) rescission.
- It treated the agreement as facially lawful because it was drafted to qualify for Regulation S and did not, by its terms, require illegal conduct.
- It held the record did not establish the type of clear, necessary securities-law violation that would void the contract under § 29(b).
- It reversed in part because aspects of the damages calculation depended on contested assumptions requiring further proceedings, and remanded for recalculation consistent with the appellate guidance.

## Legal Principles

- Exchange Act § 29(b) voids only contracts whose formation or necessary performance violates the Exchange Act or an SEC rule; it does not void a facially lawful contract merely because of alleged, speculative, or unproven future violations.
- A contract structured around an SEC exemption (including Regulation S), and containing terms consistent with that exemption (such as restricted-period non-resale provisions), is not per se illegal under Securities Act § 5.
- Allegations that a counterparty may have engaged in improper trading activity do not automatically make the underlying financing agreement void under § 29(b) absent a showing that illegality was required by the contract’s terms or unavoidable in performance.
- In evaluating illegality-based defenses, courts may consider the defendant’s sophistication and participation in the transaction structure when assessing whether securities laws should excuse contractual nonperformance.
- Even where liability is established as a matter of law, damages premised on market-based assumptions may require fact-specific proof and may be remanded when the calculation depends on disputed predicates.

## Conclusion

The court held that Colkitt’s undisputed failure to deliver shares constituted breach and that § 29(b) did not permit him to avoid a Regulation S-structured agreement that was lawful on its face and did not require illegal conduct, but it remanded for further proceedings to address errors or disputed assumptions affecting the damages award.


Berckeley Investment Group, Ltd. v. Colkitt, 455 F.3d 195 (3d Cir. 2006)