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BLOCK v. FIRST BLOOD ASSOCIATES

July 12, 1990

STANLEY B. BLOCK, JOHN C. BLAZIER, JOSEPH A. CLEMENTS, DAN W. DELONEY, WYATT C. DELONEY, RALPH DIORIO, ROBERT A. EPSTEIN, CHARLES B. FILLEMAN, GLENNA AND ROBERT GOODACRE, JOE E. GOODWIN, SARAH GRACE, EDMOND J. HARRIS, WESLEY H. HOCKER, ROMAN HOUGHT, W.R. JACOBSEN, ROBERT L. JORDAN, TED KOTCHEFF, FRANK H. KUSH, DAVID LAMAN, HURDLE PAGE195 H. LEA, DAVID D. MAYTAG, DOYLE E. MONTGOMERY, HENRY NOBEL, RON MALLER, WILLIAM H. PLUMMER, ROBERT P. ROCHE, EDWARD E. ROTENBERRY, WALTER ROTENBERRY, MICHAEL J. SCARFIA, BILL R. SPARKS, AND LEWIS F. WOOD, PLAINTIFFS,
v.
FIRST BLOOD ASSOCIATES, A. FREDERICK GREENBERG, RICHARD M. GREENBERG, ANABASIS INVESTMENTS, N.V., CAROLCO PICTURES, INC., GOLDSCHMIDT, FREDERICKS & OSHATZ, BARRY I. FREDERICKS, HENRY J. GOLDSCHMIDT, LAWRENCE E. GOLDSCHMIDT, MICHAEL P. OSHATZ, LEONARD A. MESSINGER, SANFORD J. SCHLESINGER, EDWARD I. SUSSMAN, MARK A. MEYER, AND TOUCHE ROSS & CO., DEFENDANTS.



The opinion of the court was delivered by: Sweet, District Judge.

OPINION

Prior Proceedings

The original complaint in this action was filed on November 17, 1986. Following various discovery proceedings and pretrial conferences, on July 9, 1987 a previous motion on behalf of defendants Andrew Vajna ("Vajna"), Mario Kassar ("Kassar"), Carolco Pictures, Inc. ("Carolco") and Anabasis Investments, N.V. ("Anabasis") to dismiss the complaint was denied.

On July 6, 1988 a further motion to dismiss on behalf of Vajna and Kassar was granted, a motion by Block for class certification was denied, a motion to retransfer the action to the United States District Court for the Central District of California was denied, and motions for summary judgment were denied.

On July 14, 1989 the complaint was amended to include claims against Touche and against Goldschmidt, Fredericks & Oshatz and its partners Barry I. Fredericks, Henry J. Goldschmidt, Lawrence E. Goldschmidt, Michael P. Oshatz, Leonard A. Messinger, Sanford J. Schlesinger, Edward I. Sussman and Mark A. Meyer for violation of § 10(b) of the Securities Exchange Act of 1934 (the "Act") and Rule 10b-5 promulgated thereunder; common law fraud and deceit; negligence and malpractice; negligent misrepresentation; breach of contract against Anabasis and Carolco; and breach of fiduciary duty against the Partnership and the Greenbergs.

These motions followed in the fall of 1989 and by agreement of the parties were argued and submitted on March 16, 1990.

The Amended Complaint

According to the amended complaint, defendant First Blood, a limited partnership, was formed in July 1981 under the laws of the State of New York for the purported purpose of acquiring all right, title and interest in the Sylvester Stallone film, "First Blood," i.e., "Rambo I." Complaint ¶ 6. In September 1982, First Blood agreed to acquire the motion picture from Anabasis. Soon after, First Blood and other defendants offered to investors twenty-eight units of limited partnership interests at $200,000 per unit, with fractional units available, by means of a private placement offering memorandum (the "Memorandum"). Complaint ¶¶ 12-13. According to the Memorandum, the limited partnerships were to share in ninety-eight percent of the net profits, losses and cash flow of First Blood. Complaint ¶ 13.

The complaint alleges that First Blood did not in fact acquire all of the rights to the film and indeed failed to acquire the rights necessary for the limited partnership to earn a profit from the distribution and other uses of the film. Complaint ¶¶ 14-23. Block claims that because of the undisclosed failure to acquire all of the rights to the film, First Blood could under no circumstances earn a profit, thus prompting the Internal Revenue Service to disallow the tax deductions claimed by the plaintiff, which occurred in October 1987 on grounds that the Partnership investment was a tax-motivated rather than profit-motivated transaction. Complaint ¶¶ 24-25.

Although the film was a "huge success," plaintiffs claim to have spent an additional $41,669 in interest and expenses and received less than $11,000 in distributions on each $200,000 limited partnership unit. Complaint ¶ 21. Plaintiffs seek recovery from some or all defendants of the amounts invested in and expended on account of the investment in First Blood, the amount of additional taxes, interest and penalties due, monies due and owing as a result of revenues generated by the film and punitive damages.

The Touche Report Allegations

The complaint alleges that (1) the Touche Report was false and misleading because Touche did not analyze the projections in the manner represented in the report, i.e., that it did not read the Memorandum, check the computation of the projections, challenge the internal consistency of the projections and inquire into factors that might influence the financial results, (2) the Report failed to disclose that there was virtually no possibility that the investors would realize a profit no matter how successful the movie was, that the assumption that investors would realize a profit was unreasonable and not objective, and that due to the unlikelihood of ever achieving a profit, the tax benefits in the projection would be disallowed, (3) the projections contained in the Report were inherently false because they were not based upon the most likely results, and (4) the Report and engagement violated professional ethical rules and Touche internal guidelines. Complaint ΒΆΒΆ ...


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