## Facts

- Douglas R. Colkitt, a major shareholder of EquiMed, Inc. and National Medical Financial Services Corp., sought nontraditional financing using “convertible or exchange” transactions secured by his stock.
- GFL Advantage Fund, Ltd. loaned Colkitt $3,000,000 under a note allowing GFL, after specified waiting periods, to exchange principal for National Medical shares held by Colkitt at a discount to market price; a later note provided similar exchange rights secured by EquiMed stock.
- The notes gave GFL contractual rights to demand delivery of shares upon time-based and other conditions, and permitted GFL to sell shares obtained through exchange, including through short-selling strategies.
- After the contractual waiting periods elapsed, GFL demanded delivery of shares; Colkitt did not deliver the shares as required.
- GFL sued for breach of contract. Colkitt asserted counterclaims and defenses alleging GFL’s short-selling and trading constituted federal securities fraud and market manipulation warranting rescission or avoidance of the notes.

## Issues

1. Whether short-selling and related trading, without evidence of deceptive conduct, can constitute market manipulation actionable under § 10(b) and Rule 10b-5.
2. Whether Colkitt produced sufficient evidence of manipulation (including scienter and causation) to survive summary judgment on his securities-law counterclaims and defenses.
3. Whether the notes were enforceable and whether Colkitt’s failure to deliver shares entitled GFL to summary judgment on its contract claims.

## Decision

- The Third Circuit affirmed the district court’s grant of summary judgment for GFL on its contract claims and the dismissal of Colkitt’s securities-law counterclaims.
- The court held Colkitt failed to produce evidence from which a reasonable factfinder could conclude GFL engaged in actionable securities fraud or market manipulation.
- With no viable securities-law defense, the notes were enforced as written and Colkitt’s non-delivery of shares constituted breach.

## Legal Principles

- Market manipulation under § 10(b) and Rule 10b-5 requires “deceptive or manipulative conduct,” such as injecting inaccurate information into the market or creating a false impression of supply and demand.
- Short-selling, even if extensive and profit-motivated, is not inherently manipulative absent deceptive conduct or a fictitious market appearance.
- A securities-fraud claim requires competent evidence of a manipulative act (or misstatement/omission), scienter, and causation; an intent to profit from price declines is not, by itself, proof of intent to deceive.
- Contractual obligations in stock-secured exchange-note financing are enforceable according to their terms absent a substantiated legal basis (such as proven securities-law violations) to rescind or avoid performance.

## Conclusion

The Third Circuit enforced the stock-secured exchange notes and rejected securities-manipulation counterclaims because allegations of aggressive short-selling, without evidence of deceptive conduct creating a false market, were insufficient to defeat summary judgment or to avoid contractual performance.


GFL Advantage Fund, Ltd. v. Colkitt, 272 F.3d 189 (3d Cir. 2001)