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RAND v. ANACONDA-ERICSSON

August 30, 1985

MICHAEL M. RAND, JOHN COSTELLO, STEVEN J. COSTELLO, GREGORY T. FRESE, EDWARD LAVIN, PETER A. MILANO, and VINCENT F. SERVELLO, Plaintiffs,
v.
ANACONDA-ERICSSON, INC., ERICSSON, INC., L.M. ERICSSON TELEPHONE CO., NORDIC AMERICAN BANK, CITIBANK, N.A., PRICE-WATERHOUSE & CO., SULLIVAN & CROMWELL, RICHARD HOWE, RICHARD G. LYON, L. STANTON TOWNE, TELECOM EQUIPMENT CORP., and STEPHEN R. COHEN, Defendants.



The opinion of the court was delivered by: NEAHER

MEMORANDUM AND ORDER

NEAHER, District Judge.

 Plaintiffs are seven shareholders of the bankrupt Teltronics Services, Inc. They seek to represent a class of all such shareholders to redress various claims stemming from Teltronics' business relationships with defendant L.M. Ericsson Telephone Co. (Ericsson or Ericsson defendants).

 The allegations of the present complaint are familiar to the Court. They involve the same series of events which furnished the basis for the litigation in Teltronics Services, Inc. and Edward M. Beagan v. Anaconda -Ericsson, Inc., et al., 587 F. Supp. 724 (E.D.N.Y. 1984), aff'd 762 F.2d 185 (2d Cir. 1985), except that no claims are raised on behalf of Edward M. Beagan, Teltronics' founder, former president and substantial stockholder. In brief, plaintiffs claim that through a conspiracy originating with the Ericsson defendants, all of the defendants contributed to a plot to bankrupt Teltronics after the corporation would not succumb to takeover efforts.

 According to the present complaint, from which the facts hereinafter related are derived, the friction between Teltronics and Ericsson, a Swedish based manufacturer of telephone equipment, began in 1978 when Teltronics, Ericsson's New York distributor of "interconnect" telephone equipment, opened an office to compete with Ericsson New England, a subsidiary Ericsson distributor. At about this time, one Gerald Tsai, a financier, sought to purchase 20% of Teltronics' stock and thereby represented a substantial source of alternative financing. Teltronics' then current method of financing equipment purchases was through a security agreement in which Ericsson held a secured interest in the revenues generated by the leases of equipment to Teltronics' customers. Defendant Nordic American Bank (Nordic), which is an affiliate of Ericsson, and defendant Citibank supplied the money through notes, which contained an acceleration clause and the payment of which Ericsson guaranteed. The key component or aspect of the security agreement is illustrated in the allegations of § 47 of the complaint, viz.,

 
"47. Under the terms of the Loan Agreement, Teltronics was required to purchase a specific dollar amount of Ericsson's telephone equipment. If Teltronics failed to make purchases in the designated amount, Teltronics' loan repayment schedule under the Loan Agreement could be accelerated by Ericsson. Thus, in addition to assigning a security interest in its leases to Ericsson for the loan guarantees under the Loan Agreement, Teltronics was also required to buy telephone equipment from Ericsson in a dollar amount which far exceeded the amount of the loan which Ericsson guaranteed. For example, under the terms of the Loan Agreement with Nordic, Teltronics was required
 
during the 12-month period commencing on the date of each Loan hereunder, Borrower (Teltronics) shall purchase from Guarantor (Ericsson USA) telephone switch equipment having an aggregate purchase price of not less than 175% of the amount of such Loan.'"

 Plaintiffs add that this arrangement permitted Ericsson to overcharge Teltronics for equipment that was not state of the art.

 Concerned about Tsai's offer and the decrease in prices caused by Teltronics' competition in New England, Ericsson expressed interest in acquiring equity in Teltronics. In exchange for Teltronics' foregoing financing opportunities from Tsai, Ericsson agreed to provide debt financing for Teltronics' sales of Ericsson equipment. This offer was made only after Ericsson had insisted that Teltronics withdraw from New England, had refused to furnish vital "support" letters, by which Ericsson would have guaranteed service of the equipment, and had demanded that its loans to Teltronics not be used in the New England operation.

 Apparently Ericsson's new business methods were having a sufficient effect that from December 1978 until February 1979 Teltronics and Ericsson discussed Ericsson's purchase of Teltronics stock. Teltronics, however, was opposed to Ericsson's acquiring a controlling interest.

 In February 1979 the specter of a catastrophe loomed when Teltronics learned that the "ASB100" a machine intended to replace Ericsson's obsolete line of mechanical equipment, was a failure. As a result, Teltronics proposed a joint venture with Ericsson to develop a new product line, for which Ericsson would furnish a $25 million dollar loan. Alternatively, Teltronics would have to locate a new supplier to serve its substantial client base. Negotiations continued, and at this juncture plaintiffs reason that Ericsson, facing Teltronics' undesirable competition in New England and the possibility that Teltronics would engage a new supplier, thus cutting Ericsson out of the Northeastern United States market, had two choices: purchase Teltronics' shares at market prices or bankrupt the corporation through the security interest in the equipment leases. After choosing the latter option, according to plaintiffs, Ericsson continued to negotiate, assertedly in bad faith, while it set in motion the events which would secure Teltronics' demise.

 In January 1979, by letter to Nordic, Ericsson told the bank that if Teltronics did not make an interest payment of $230,000 due on February 28, 1979, the bank should charge Ericsson's account. During this same period, Ericsson assured Teltronics that as long as negotiations continued, financing would be forthcoming, so much so, that Ericsson agreed to a moratorium of principal and interest payments until March 31, 1979.

 The due date of the interest payment also coincided with an exchange between defendant Price-Waterhouse & Co., Ericsson's accountants, and Blonder, Seymour and Shapss, Teltronics' accountants, who represented that they would give Teltronics an "unqualified" or "clean" opinion in the March 31, 1979 10-K filing with the Securities and Exchange Commission (SEC). As the complaint explains, this opinion placed an obstacle in Ericsson's way:

 
"70. "* * * A 'clean' or 'unqualified' opinion would have resulted in at least a doubling of Teltronics' lines of credit. Indeed Sterling National Bank had already agreed to increase its loan commitment to Teltronics from $ 1,000,000 to $2,000,000. And it would also have ensured receipt by Teltronics of a $ 3,000,000 loan committed to Teltronics by Toshiba, a major Japanese trading company, in January 1979.
 
"71. Price-Waterhouse asked Blonder, Seymour whether they were aware that certain notes and interest payments were coming due for Teltronics, including the interest payment of $230,000 on the Nordic note which, Price-Waterhouse stated was due March 31, 1979. Blonder, Seymour told Price-Waterhouse that it still felt Teltronics would have no difficulty arranging adequate financing to meet commitments.'
 
"72. Price-Waterhouse by its telephone call was attempting to coerce Teltronics' accountants into withdrawing its unqualified opinion. If Price-Waterhouse had been successful in intimidating Teltronics' accountants into withdrawing their unqualified opinion, Teltronics' stock would have fallen (a result desired by Ericsson) and any increase in Teltronics' lines of credit would have evaporated."

 In response, Ericsson allegedly hatched the fabrication of a non-existent bank default concerning the February 28, 1979 interest payment. This plan had been accelerated from March 31, 1979 in part to prevent Teltronics from publicly announcing that the ASB100 was an incurable failure, and thus an embarrassment to Ericsson's reputation in the industry. On February 28, 1979 defendant Richard Lyon, a member of the defendant law firm of Sullivan & Cromwell, told Nordic not to charge Ericsson's account because Ericsson wanted Teltronics to be in default. The grace period to make the interest payment extended to March 5, 1979, when an attorney for Ericsson telephoned Teltronics to inquire whether the interest payment had been made. Teltronics, of course, had not made the payment and only then realized that Ericsson's prior assurances were no longer reliable.

 Efforts to gather the necessary cash proved futile. Plaintiffs claim that because Teltronics had until March 31, 1979 to pay the interest, on the basis of Ericsson's representations, it could easily have sought assistance from other telephone equipment manufacturers that had already offered financing. This time period was unavailable because Nordic had declared a default according to plan. Ericsson paid Nordic $4,945,360.63. In response, Citibank accelerated its loans to Teltronics and on March 7, 1979 received a check from Ericsson for $3,008,632.10. The following press release, disseminated over the Dow Jones Wire Service, announced the event:

 
"L.M. Ericsson Telecommunications says it filed Teltronics suit.
 
'NY -DJ - LM Ericsson Telecommunications, Inc. announced that it commenced an action against Teltronics Services, Inc. to recover $4.9 million which Ericsson as guarantor of Teltronics indebtedness had paid to Nordic American Bank, Inc.
 
'As part of that action, Ericsson had filed a motion seeking to attach certain Teltronics assets.
 
'That motion will be heard on March 9th in New York State Supreme Court in Queens County where the action was filed.
 
'On March 5th Ericsson said it declared Teltronics to be in default under a security agreement between them and today notified certain customers of Teltronics - whose leases are subject to the security agreements - that payment should be made to Ericsson.
 
'1:43 p.m. S.T. March 6, 1979."

 Complaint § 111.

 As a result of these events, Teltronics' stock plunged from $9 per share to $1 a share, causing the SEC to suspend its trading and leaving the corporation unable to find a source of financing. Customers cancelled $6 million in contracts, creditors demanded immediate payment of $2 million, accounts receivable not pledged to Ericsson refused to pay $3 million, and five banks offset $1 million in cash deposits. By September 1979 Ericsson had also persuaded creditors, of which it was the largest, to place Teltronics in involuntary bankruptcy.

 Prior to that event, Ericsson had established its New York division on March 6, 1979, which recruited Teltronics' employees and solicited its former accounts. In June Ericsson interfered with Teltronics' attempt to salvage itself through a merger with Stromberg-Carlson, a division of General Dynamics. Teltronics also made a second attempt at revival in August through agreements with defendant Telecom Equipment Corp., of which defendant Cohen is chairman of the board. Teltronics assigned a long term office lease to Telecom in exchange for $50,000, $10,000 per month for 66 months, and a total of 3200 feet of space. Teltronics also became the exclusive sales representative for Telecom on a commission basis, servicing some 500 former accounts. On learning of this arrangement, Ericsson threatened to cut off Telecom's supply of parts needed to repair the equipment used by the aforementioned 500 accounts. Allegedly, Cohen joined the conspiracy when he acceded to Ericsson's demands, as conveyed by the attorneys, and then evicted Teltronics from the building.

 In sum, plaintiffs conclude that this was but one example of a pattern Ericsson followed to take over its subsidiary distributors for a modest amount. Allegedly, formerly independent businesses in Florida, Philadelphia, and Boston had been acquired in this manner.

 Teltronics' litigation has been catalogued and summarized elsewhere. Teltronics, supra, 587 F. Supp. at 727-29; 762 F.2d at 187-88. On this motion for summary judgment, the Court will treat only the claims raised by plaintiffs.

 At the outset, plaintiffs assert that defendants violated the Racketeer Influence and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1962(a), (b), (c), 1964(c). As predicate felonies to support a pattern of racketeering activity, they allege securities fraud, bankruptcy fraud, wire fraud, mail fraud, obstruction of justice, and obstruction of a criminal investigation by the SEC. Complaint § 103. *fn1"

 
"There can be little doubt that Fed.R.Civ.P. 9(b), which requires that allegations of fraud specify 'with particularity' the circumstances of the alleged fraud, applies to fraud allegations in civil RICO complaints."

 Haroco v. American Nat. Bank, etc., 747 F.2d 384, 405 (7th Cir. 1984), aff'd 473 U.S. 606, 105 S. Ct. 3291, 87 L. Ed. 437 (1985)(per curiam).

 
"In order to allege mail fraud [or any other fraud], [plaintiffs] must state such matters as the time, place, and contents of the purported false representations. Additionally, [they] must 'specify in what respect each of the statements were false and misleading, and the factual ...

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