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KRAUTH v. TELECARD

May 31, 1995

WALTER K. KRAUTH, JR., WILLIAM MILLER, DAVID E. LEGERE, Plaintiffs, against EXECUTIVE TELECARD, LTD., Defendant.


The opinion of the court was delivered by: ROBERT W. SWEET

 Sweet, D.J.

 The Defendant Executive Telecard, Ltd. ("EXTL" or the "Corporation") has moved to dismiss this action for lack of jurisdiction due to a lack of complete diversity between the parties. For the reasons discussed herein, the Defendant's motion is granted.

 Parties

 Plaintiff Walter K. Krauth, Jr. ("Krauth") is a resident of Jonesboro, Georgia. He and William Miller ("Miller"), a resident of Bayside, New York, and David E. Legere ("Legere"), a resident of Williamsburg, Virginia, formed the EXTL Shareholders Protective Committee, (the "Committee"), in September 1994 for the purpose of soliciting proxies for the election of a slate of directors opposed to those being proposed by management of EXTL.

 Defendant EXTL is a corporation incorporated in Delaware. The Corporation provides toll-free and related value-added telecommunication services to its customers. It uses both its own facilities and equipment and that of many third parties in countries around the world.

 EXTL has a single class of stock authorized, issued and outstanding -- common stock with a par value of $ .001. This common stock is registered pursuant to § 12(b) of the Exchange Act and is listed and traded on the NASDAQ -- National Market System. 12,345,362 shares of this common stock were outstanding as of January 31, 1995.

 EXTL's principal business is the provision of telecommunications services that enable customers, when placing phone calls within and between phone companies, to avoid high surcharges imposed by hotel switchboards. EXTL operates through agreements with over 60 Postal, Telegraph and Telephone Authorities ("PTTs") and other telecommunications administrations outside the United States to deliver these services. The agreements with PTTs authorize EXTL to install its own hardware and proprietary software at or near each of the PTTs' telephone-switching sites, thus allow EXTL customers to make calls from one country to another without necessarily having to be routed through the United States.

 In the United States, EXTL has offices in New York and Colorado. Abroad, EXTL maintains office space in France, Belgium, Hong Kong, Singapore, Argentina, Anguilla and Switzerland. The Corporation provides services in over fifty countries throughout the world.

 Facts and Prior Proceedings

 The facts and prior proceedings in this action are fully set forth in the opinions of October 24, 1994 (the "October 24 Decision"), Krauth v. Executive Telecard, 1994 WL 584556 (S.D.N.Y.) and December 13, 1994, Krauth v. Executive Telecard, 870 F. Supp. 543 (S.D.N.Y. 1994) in the first Krauth action, 94 Civ. 7337 (RWS); and May 8, 1995 in Krauth v. Executive Telecard, 95 Civ. 106 (the "Third Action"), familiarity with which is assumed. A review of the prior proceedings relevant to this motion follows:

 On October 7, 1994 EXTL commenced an action against Krauth, 94 Civ. 7282 (MHM), in this district and obtained an order to show cause which set down a date for hearing its motion for preliminary injunction and barred the distribution of proxies until after that hearing. On October 11, EXTL extended the date for its shareholders' meeting to October 28 and voluntarily dismissed its action.

 On October 12, the Committee commenced an action, Krauth I seeking to enjoin EXTL from soliciting proxies in violation of the Securities and Exchange Act of 1934. EXTL sought similar relief with respect to the Committee's proposed proxies, by way of a counterclaim, mirroring its original complaint. The parties were advised that the Court would consider the consolidation of a trial on the merits with the hearing on the preliminary injunctions. Expedited discovery proceeded.

 On October 18, an evidentiary hearing consolidated with the trial was held in the course of which the state law counterclaims against counterclaim defendant Mayer, aligned as a plaintiff, were severed.

 In Krauth I, Krauth challenged the EXTL proxy statement for omitting material information concerning the role of Richard O. Bertoli ("Bertoli") in the management and affairs of the company. Bertoli is a former advisor to the company and at that time and at present a convicted and incarcerated felon. Krauth also attacked the EXTL proxy solicitation for failing to include material facts concerning a proposed restructuring of EXTL.

 In the counterclaim, EXTL challenged the Krauth proxy statement for inaccurately describing EXTL's July 29, 1994 board meeting, failing to identify accurately the role of Theodore J. Mayer *fn1" ("Mayer"), including a deceptive chart and stating that the effect of the restructuring would be to remove assets from the jurisdiction of the United States.

 In the October 24 Opinion, the Court found that:

 
EXTL's proxy statement had failed to disclose the consultations between Bertoli and the corporate officers on pending issues of corporate management, including the proposed restructuring and the proxy contest, consultations which were conducted while Bertoli [was] serving a criminal sentence of obstructing an investigation into his conduct related to an alleged securities fraud. The omission violates Rule 14a-9, False and Misleading Statements, which charges: "No solicitation subject to this regulations shall be made by means of any proxy statement...containing any statement which, at the time and in light of the circumstances under which it is made, is false and misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading...." (emphasis added).

 Krauth, 1994 WL 584556 at *6.

 In finding a violation of Rule 14a-9, the Court stated that:

 
issues of management integrity are central to the election of directors, and the fact that certain of the current directors and officers chose to review corporate affairs, share confidential documents, and seek the advice of a person with Bertoli's criminal history is material to the discharge of their fiduciary obligations. (citations omitted).

 Id. at *7

 In concluding that Opinion, the Court stated that:

 
For the reasons discussed above, EXTL will be enjoined from soliciting proxies without disclosing the consultation by certain officers and directors with Bertoli concerning confidential and pending corporate matters. The Committee will be enjoined from soliciting proxies without clarifying the jurisdictional effect of the proposed spin-off. Leave is granted to make any further applications to obtain relief consistent with these findings and conclusions.

 All other challenges to the parties' respective proxy statements were not sustained. No appeals or motions for reconsideration were filed in that action. Judgment was entered on December 12, 1994.

 On November 2, 1994 there was a hearing on a letter motion requesting that the Court order Defendants to set a date for the next Annual Shareholders meeting. Prior to that hearing, Defendants set a meeting date of January 5, 1995. The motion was "denied as moot in view of the action taken by the defendants." Memo Endorsed Order, November 2, 1994.

 On December 7, pursuant to an order to show cause secured by the Committee, a hearing was held ...


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