Suit brings fraudulent inducement, mutual and unilateral mistake causes of action, alleging plaintiff’s former GC was “induced” to modify documents, resulting in windfall for defendants

Valerus Compression Services LP filed a suit against Guggenheim Corporate Funding LLC and three Guggenheim principals on June 17, alleging the defendants “induced” Valerus’ former general counsel Dawn Born Cunningham into modifying paperwork on some warrants. Warrants give the holder the right to purchase securities. Valerus alleges in the petition that the changes will cause Valerus’ founders and employees to lose some ownership value in the company. “If the modifications are allowed to stand, Valerus’s founders and its employees, who are compensated with shares in the company, will lose much of the value they should have owned in Valerus, and Defendants will reap an additional windfall — a windfall the Defendants have described as equivalent to winning the lottery,” Houston-based Valerus alleges in the petition filed in the 234th District Court in Houston. In Valerus Compression Services, LP v. Guggenheim Corporate Funding LLC, et al., the defendants include Guggenheim and three of its principals: Orpheus Holdings LLC, Stellar Funding Ltd. and Orpheus Funding LLC, all of New York City. Valerus alleges in the petition that it issued three warrants in 2006 to the defendants as part of Guggenheim’s consideration for arranging a financing for Valerus in 2006. But in 2009, Valerus alleges in the petition, the defendants “induced” Cunningham, who was Valerus’ GC at the time, into agreeing to changes in the warrants by “intentionally leading Ms. Cunningham to believe incorrectly that they were fixing a drafting error in the warrants and clarifying the parties’ original contractual intent.” Valerus notes that Cunningham was “in the midst of a personal health crisis” at the time. Valerus alleges in the petition that Cunningham was “understandably distracted” during the time period leading up to the execution of the amended warrants in April 2009. Valerus brings several causes of actions against the defendants: violation of the Texas Securities Act; statutory fraud in the sale of stock; common law fraud and fraudulent inducement; demand for rescission due to failure of consideration; demand for rescission due to mutual mistake; demand for rescission due to unilateral mistake; and demand for reformation due to mistake. Valerus seeks rescission or rescissionary damages, actual damages plus interest, attorneys’ fees, punitive damages and reformation. Valerus alleges that if the modified warrants are not rescinded, the value of shares held by certain limited partners, including company founders, employees, family and friends who had invested in the company, would be diluted by about $11 million and would represent a “completely unearned windfall” for the defendants at the expense of Valereus’ original limited partners. A call to Guggenheim Corporate Funding was not returned, but Jeffrey Kelley, a media relations contact at affiliate Guggenheim Partners, says all of the defendants have no comment on the allegations in the petition. Karl Stern, a partner in Vinson & Elkins in Houston who represents Valerus, declines comment on the allegations in the petition but notes that Valerus is not making a claim against Cunningham. Attempts to reach Cunningham by telephone and e-mail were unsuccessful. In response to a request for Cunningham's contact information, Stern writes in an e-mail, “Dawn Cunningham has asked me to let you know she is aware of the suit and has no comment.”

-- Brenda Sapino Jeffreys

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