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BERMAN v. ENTERTAINMENT MKTG.

October 17, 1995

MORTON BERMAN, on behalf of himself and all others similarly situated, Plaintiff, against ENTERTAINMENT MARKETING, INC. and ELIAS ZINN, Defendants.


The opinion of the court was delivered by: GLEESON

 JOHN GLEESON, United States District Judge:

 Plaintiff Morton Berman, a purchaser of securities of defendant Entertainment Marketing, Inc. ("EMI"), filed this class action against EMI and its president, defendant Elias Zinn, on October 14, 1988. Three years after the litigation commenced, EMI, then operating under a different name, filed for bankruptcy, and the action proceeded against defendant Zinn alone. The plaintiff and Zinn have since negotiated a settlement agreement, which has been submitted to this Court for approval.

 BACKGROUND

 The complaint alleges that defendants made misstatements and omissions of fact in violation of the federal securities laws during the seven months between May 20 and December 16, 1987 ("the Class Period"). Plaintiff asserted that these statements artificially inflated the market price of EMI securities, to the detriment of those who purchased the securities during the Class Period.

 EMI is a distributor of wholesale electronic equipment based in Houston, Texas. During the Class Period, defendant Zinn was president of EMI and owned 25% of its common stock. In 1986, after EMI had experienced significant growth, Zinn decided to expand the company into the cable television home shopping business. The thrust of plaintiff's claims is that Zinn and EMI made excessively optimistic and intentionally misleading statements about the new venture and the profits it was expected to bring to EMI. *fn1" Defendants maintained that all statements made about the future profitability of EMI and its subsidiaries were simply projections made in good faith and in clearly conjectural language. In addition, they pointed out repeated instances during the Class Period when Zinn disclosed EMI's losses and poor sales figures to the public, and the fact that Zinn, the single largest shareholder in EMI, did not sell any of his holdings in the company during the Class Period.

 By order dated January 18, 1990, the following class of plaintiffs was certified:

 
All persons who purchased securities of EMI between May 20, 1987, the date on which the defendants issued a false and misleading statement and December 16, 1987, the date following the release of EMI's results for the third quarter of 1987 (the "Class Period").

 EMI subsequently changed its name to KLH Computers, Inc. ("KLH"), and on April 28, 1992, KLH filed for bankruptcy in the Northern District of Texas. This filing resulted in an automatic stay of the instant action as to KLH. See 11 U.S.C. § 362(a). Plaintiff asserts that he knew at this point that he could not obtain any recovery against KLH, because its liabilities far exceeded its assets.

 Both Zinn and EMI/KLH were substantial shareholders in an unrelated company, Crazy Eddie, Inc. ("Crazy Eddie"). In 1987, they and other investors brought actions for securities fraud against Crazy Eddie. These actions were consolidated in one proceeding in this district, which was captioned In re Crazy Eddie Securities Litigation, 87 CIV 0033 (EHN) ("Crazy Eddie Litigation"). In February 1993, the Crazy Eddie Litigation was settled for $ 60 million as to all defendants except Eddie Antar. KLH received $ 6.5 million of that settlement and Zinn recovered $ 950,000. On April 6, 1993, the Honorable Thomas C. Platt, who was then presiding over this case, issued a temporary restraining order prohibiting Zinn from transferring the $ 950,000 out of New York. In a subsequent order dated May 7, 1993, Chief Judge Platt continued the temporary restraining order as a preliminary injunction. *fn2" The sum is now in the possession of Max Folkenflik, Esq., who represented KLH in the Crazy Eddie Litigation.

 Meanwhile, the Securities and Exchange Commission ("SEC") brought an action against Eddie Antar, captioned SEC v. Eddie Antar and Michael Antar, 89 CIV 3173 (NHP) ("SEC v. Antar "), which is now pending in the District of New Jersey. The action seeks to collect, for the benefit of defrauded Crazy Eddie shareholders, monies that the Antar brothers secreted in foreign bank accounts and other places. *fn3" If the SEC is successful in that litigation, the shareholders, one of whom is defendant Zinn, will be entitled to share in the recovery. *fn4"

 Discovery has consisted of document review and depositions, and is complete. Plaintiff examined approximately 100,000 pages of corporate records and conducted depositions of EMI's present and former top management. Plaintiff's attorney estimates that he has expended over $ 300,000 of billable time on the case, either performing discovery or marshaling the evidence in support of the application for injunctive relief which Chief Judge Platt granted in 1993. *fn5"

 Over a period of more than two years that began during the litigation with the KLH bankruptcy trustee, the parties have been attempting to negotiate a settlement. Zinn's attorney intended initially to allow the case to proceed to trial, as he considered it highly defensible. However, the 1993 order enjoining Zinn from transferring the $ 950,000 from the Crazy Eddie Litigation deprived him of control of what were essentially his only remaining assets. This financial pressure, which subsequent motion practice was unable to alleviate, eventually influenced Zinn to attempt to settle the case. A prior agreement was reached on January 24, 1994, but was subsequently abandoned. Discussions resumed several months later and led to the instant agreement.

 The parties have stated that they were encouraged to reach this agreement by the uncertainties and delays of litigation, and by the fear that Zinn's few remaining holdings would be further depleted over time by his other creditors. In particular, plaintiff was driven by a concern that Zinn would file for bankruptcy in Texas, an event that would have divested plaintiff of the leverage he had achieved through the attachment of the $ 950,000. All parties have indicated that considerations ...


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