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IN RE TELECARD

January 31, 1996

In Re EXECUTIVE TELECARD, LTD. SECURITIES LITIGATION


The opinion of the court was delivered by: BRIEANT

 Brieant, J.

 This action under Section 10(b) of the Securities Exchange Act of 1934 arises out of the purchase of the common stock of Executive Telecard, Ltd. ("EXTL") by a putative class of purchasers that bought EXTL at allegedly inflated prices during the period of October 28, 1991, through October 27, 1994. By Notice of Motion dated May 15, 1995, defendant Goldstein, Karlewicz & Goldstein ("GKG") moved for an order pursuant to Rules 9(b) and 12(b)(6) of the F.R.Civ.P. dismissing those aspects of the complaint that are barred by the applicable statute of limitations and that are not pleaded with requisite particularity. Defendant Richard Bertoli, Pro Se, by Notice of Motion dated June 24, 1995, moved for an order dismissing Count's II and III as against him as being time barred and not pleaded with particularity as required by Rule 9(b).

 EXTL was formed in 1987 as a wholly-owned subsidiary of a company currently known as Residual Corporation, which until February 1994, was called International 800 Telecom Corporation. Residual was then and now is in the business of providing "800" number telephone service outside the United States, and EXTL was formed to provide a credit card calling service over the network that Residual had established. EXTL became a public company in March 1989 by way of a dividend in kind on Residual's common stock, and is now engaged in providing world-wide telephone calling services within and between foreign countries and territories. Certain of the Director Defendants of EXTL are also officers and/or directors of Residual.

 In January 1989, EXTL and Residual entered into a ten-year agreement ("Management Agreement"), under which Residual was to provide to EXTL all offices, personnel, and other facilities for EXTL's general administrative functions, except legal, accounting, advertising, and stockholder relations. In exchange for these services, EXTL agreed to pay Residual 10% of EXTL's gross revenues from its calling services business.

 Plaintiffs allege that in EXTL's audited financial statements for the 1991, 1992, 1993, and 1994 fiscal years defendant GKG falsely presented the Company's financial condition by:

 
(i) Failing to disclose that EXTL advanced "substantial monies" to Residual so Residual could satisfy its obligations under the Management Agreement.
 
(ii) Improperly recording the account receivable from Residual as an asset of EXTL although it was uncollectible.
 
(iii) Failing to disclose that Residual was in poor financial condition and unable to bear the financial burden of rendering the services required of it.
 
(iv) Failing to establish a loss reserve for the supposedly uncollectible receivable from Residual.
 
(v) Failing to disclose that EXTL was, paying its own administrative costs in view of Residual's financial inability to do so, and failing to reflect such costs as expenses of EXTL.

 GKG's alleged liability is predicated on its publication of unqualified audit opinions, where GKG expressly certified to the investing public that (1) its audits of EXTL's annual financial statements were conducted pursuant to Generally Accepted Auditing Standards ("GAAS"); and (2) such financial statements fairly presented EXTL's financial position in conformity with Generally Accepted Accounting Principles ("GAAP"). Plaintiffs allege that EXTL's financial statements violated GAAP in numerous respects and, as a result, painted a distorted and unjustly positive picture of EXTL's financial condition. In particular, Plaintiff's allege that EXTL's financial statements failed to reflect the fact that EXTL's largest debtor, Residual Corporation, was in dangerously poor financial condition, and therefore the account receivable by EXTL from Residual was not likely to be repaid.

 Since the motion is directed essentially to the face of the complaint, the Court must assume that the opinion letter of GKG was knowingly false. However, GKG moves for dismissal based on its claim that the statute of limitations had expired prior to the commencement of this action.

 In Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 115 L. Ed. 2d 321, 111 S. Ct. 2773 (1991), the Supreme Court held that the limitations period for civil claims under Section 10(b) of the Securities Exchange Act of 1934 is that found in Section 9(e) of the Exchange Act, 15 U.S.C. ยง 78(I)(e) which provides:

 
No action shall be maintained to enforce any liability . . . unless brought within one year after the discovery of the facts constituting the violation and ...

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