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LANGNER v. STEPHEN L. BROWN

January 30, 1996

JAY B. LANGNER, Plaintiff,
v.
STEPHEN L. BROWN, S.L. BROWN & COMPANY, INC., CARL D. GLICMAN, JEFFREY J. STEINER, IRVING LEVINE, JONATHAN A. MARSHALL, JOHN GREENBAUM, AND THE FRANKLIN HOLDING COMPANY, Defendant.



The opinion of the court was delivered by: SAND

 This action arises out of Plaintiff Jay Langner's contention that Franklin Holding Corporation is being operated in the interest of its officers, directors and controlling shareholders to the detriment of the company and all the other shareholders. In his complaint, plaintiff seeks to enjoin defendants' alleged violations of both the Investment Company Act of 1940 ("the 1940 Act"), 15 U.S.C. §§ 80(a) et seq., and the Securities Exchange Act of 1934 (the 1934 Act"), 15 U.S.C. §§ 78 et seq., and seeks equitable relief under New York common law. In response to plaintiff's allegations, defendants move for an order dismissing the Amended Complaint on the grounds of, inter alia, lack of standing, failure to state a claim upon which relief can be granted, failure to plead with the requisite particularity, and failure to make demand upon the Board of Directors as to purported derivative claims. The Court grants defendants' motion in part and denies it in part.

 BACKGROUND

 Franklin Holding Corporation ("FKL") is a publicly-owned non-diversified, closed-end investment company. Organized in 1987 under the laws of Delaware, FKL is registered to do business in the state of New York and is listed on the American Stock Exchange. The outstanding common shares of FKL are held by approximately 800 shareholders of record. Of those 800, more than 50% own odd lots of less than 100 shares. Of the 842,198 common shares outstanding, plaintiff Jay Langner is the record holder of 5351 common shares. Members of his family own additional shares which with plaintiff's holdings aggregate 38,727 shares. Prior to June 28, 1990, plaintiff served on FKL's Board of Directors. On that date, Langner was not renominated to continue as a director.

 FKL's board is now composed of six directors. Defendant Stephen Brown ("Brown") has been Chairman and Chief Executive Officer of FKL since October 1986. As of June 30, 1995, Brown was the beneficial owner of 31.1% or 262,145 shares of common stock of FKL, which include 250,000 shares owned by defendant SLB. SLB is a private investment firm in which Brown is a controlling shareholder, owning or controlling by agreement more than 70% of its shares. For over seven years, SLB has allegedly shared office space with FKL, using its facilities, telephone number and sharing the same personnel without obligation or expense on the part of SLB.

 FKL's five other defendant directors include Carl Glickman ("Glickman"), Irving Levine ("Levine"), Jonathan Marshall ("Marshall"), Jeffrey Steiner ("Steiner"), and John Greenbaum ("Greenbaum"). *fn1"

 
Glickman
 
Levine
 
Defendant Levine has served as a director of FKL since March 1990 garnering annual director fees of between $ 12,000 to $ 18,000. Levine's primary business affiliation is with the Copley Fund and Copley Financial Services of which he is founder, president and treasurer. As Levine serves on FKL's Board, so too does Brown serve on Levine's Copley Board.
 
Marshall
 
Defendant Marshall has served as a director of FKL since 1987 and as a member of its Compensation Committee, Audit Committee, and Executive Committee. For his services, Marshall has been paid annual director fees of $ 12,000 to $ 18,000 per year from 1991 through 1994.
 
Steiner
 
Likewise, defendant Steiner has garnered similar director fees since accepting a seat on the Board in 1987. Steiner's ownership stake in FKL totals 1.4%. In addition, Steiner also owns 11.7% of Brown's SLB and serves as a director on the Board of co-defendant and co-director Levine's Copley Financial Services Board.
 
Greenbaum
 
Defendant Greenbaum was Vice President of both FKL and Brown's SLB from March 1988 to September 1994. In addition to his duties as a officer, he served as a director of FKL from 1992 to 1994, earning annual pay between $ 72,225 and $ 105,133. At FKL's annual shareholders meeting on August 16, 1994, Greenbaum was not renominated as a director and therefore stepped down from the Board of FKL. However, two months later, on October 13, 1994, he was re-appointed as a sixth director.

 Plaintiff Langner asserts that Brown has assured through stock ownership that only his close friends and business associates be placed on the Board. In addition to this claim, plaintiff asserts that for the six years from 1989 through 1994, the individual defendants have caused FKL to report total net investment losses in excess of $ 5.1 million while defendant Brown has received in excess of $ 1.9 million in compensation and all executive officers received in excess of $ 3.8 million in compensation.

 In addition to these claims, plaintiff's complaint details a 65% drop in investment income, a 300% increase in investment losses, an inability to successfully deregister as an investment company and acquire operating companies over a six year period, self-dealing art transactions, payment of excessive compensation and professional fees, and overstating the value of a principal asset.

 In response to plaintiff's allegations, defendants move for an order dismissing the Amended Complaint on the grounds of, inter alia, lack of standing, failure to state a claim upon which relief can be granted, failure to plead with the requisite particularity, and failure to make demand upon the Board ...


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