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FISK v. SUPERANNUITIES

June 10, 1996

AVERILL H. FISK, Plaintiff, against SUPERANNUITIES, INC., et al., Defendants.


The opinion of the court was delivered by: KAPLAN

 LEWIS A. KAPLAN, District Judge.

 Plaintiff purchased 50,000 shares of a start-up company, defendant SuperAnnuities, Inc. ("SuperAnnuities"), for $ 100,000. SuperAnnuities failed, and plaintiff now seeks damages against it and four of its former directors pursuant to Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5 (1995), and Section 12(2) of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. § 77 l (2), and on common law theories. Plaintiff claims that he was defrauded because the prospectus (1) did not disclose that SuperAnnuities would dilute the book value of its shares by issuing stock in exchange for the services of comedians who would pitch its products, (2) falsely stated that the officers and directors would not be compensated for their services in selling SuperAnnuities' shares, and (3) failed to disclose other "suspicious facts." He asserts in addition that he was induced to buy shares in part by an alleged oral promise by SuperAnnuities' chief executive officer that the promisor never had any intention of keeping.

 The individual defendants move to dismiss pursuant to FED. R. CIV. P. 9(b) and 12(b)(6).

 Facts

 The Court accepts the well pleaded factual allegations of the complaint and the reasonable inferences therefrom as true for purposes of this motion. Inasmuch as the complaint refers extensively to, and bases its claims upon the contents of, SuperAnnuities' Confidential Private Placement Memorandum (the "PPM") and its 1994 financial statements, those documents also are properly considered on this motion. E.g., San Leandro Emergency Medical Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 808-09 (2d Cir. 1996).

 In early 1994, SuperAnnuities was a start-up venture. It planned to sell annuities and other complex insurance products through the use of "infomercials" featuring well-known comedians. (Cpt PP 13, 14, 19(b)) Its founder and chief executive officer was defendant Raymond L. Dirks. (Id. P 12)

 In or about February 1994, SuperAnnuities was conducting an offering of up to four million shares of common stock. (Id.) At about that time, plaintiff was introduced to Dirks, who asked plaintiff to purchase shares. Dirks allegedly told plaintiff that the proceeds of the offering would be used principally to start operations and conduct test marketing and that the company would finance further operations through a subsequent public offering for which it supposedly had a firm underwriting commitment. (Id. PP 14-15) Plaintiff was interested, but initially not at the $ 2 asking price. Dirks, however, allegedly promised that if plaintiff bought 50,000 shares for $ 2 per share, Dirks would have plaintiff placed on SuperAnnuities' board of directors and plaintiff then would receive an additional 50,000 shares for nominal or no additional consideration. (Id. P 16-17)

 The PPM

 At about the same time, plaintiff received the PPM and an Executive Summary. Insofar as is relevant to plaintiff's claims, the PPM made the following statements:

 Dilution

 In the Use of Proceeds section of the PPM and in the summary thereof, SuperAnnuities indicated that it intended to use the proceeds of the offering for preliminary marketing efforts, including the preparation and production of preliminary infomercials. (PPM, Herman Aff. Ex. A (hereinafter "PPM"), at 3-4, 11) The PPM further indicated that the company expected that the net proceeds of the offering would satisfy its financing needs for six to twelve months, depending upon the amount of proceeds, and warned in another section that SuperAnnuities would be "wholly-dependent upon the net proceeds of this offering to initiate operations." (Id. at 11, 6) Nevertheless, it specifically cautioned:

 
"The allocation of net proceeds of this offering set forth above represents the Company's best estimates based upon its present plans, certain assumptions regarding general economic and industry conditions and the state of its business plan. If any of these factors change, the Company may find it necessary or advisable to reallocate some of the proceeds within the above described categories or to use portions thereof." (Id. at 11)

 The PPM went on to describe the anticipated role of the comedians in the company. It indicated that SuperAnnuities would establish an Advisory Board of well known comedians to advise it on various matters. The members of the Advisory Board would be eligible to participate in an Advisory Board Stock Purchase Plan, which set aside two million shares of common stock for purchase by them at prices to be fixed by the board of directors. (Id. at 21-22) The PPM disclosed also that members of the Advisory Board were expected to render other services to the company, such as appearing in infomercials, for which they would be compensated. (Id. at 22) It did not indicate whether such compensation was expected to be in the form of cash, stock or other consideration.

 Compensation for Sale of Shares

 Plaintiff alleges that the PPM represented that officers and directors of SuperAnnuities were not to be compensated for the sale of shares, but that Dirks and his wife, nevertheless, were paid $ 190,500 in commissions. (Cpt P 37-38) He contends that the PPM's statement concerning sales compensation either was false or misleading. (Id. PP 37, 39)

 The summary at the beginning of the PPM stated that:

 
"The Shares will be offered by executive officers and directors of the Company who will receive no compensation for the sale of these securities. The Company, however, reserves the right to sell Shares through any licensed broker/dealers that are members of the National Association of Securities Dealers, Inc. ('NASD') and to pay such broker/dealers a ten percent cash commission for Shares sold by them." (PPM. at 3)

 Elsewhere, it stated that Dirks was the founder of a firm that was "a division of RAS Securities Corp., a New York-based investment banking firm." (Id. at 18) Nowhere did it indicate that RAS Securities Corp. was a licensed broker-dealer. *fn1"

 Subsequent Events

 Plaintiff purchased 50,000 shares of SuperAnnuities common stock on or about February 17, 1994. (Cpt P 27)

 On or about September 1, 1994, plaintiff received the company's financial statements for the period August 23, 1993 through June 30, 1994, a notice of annual meeting, and a proxy statement. (Id. P 28) These are said to have alerted plaintiff to the defendants' alleged fraud. (Id. P 29)

 First, the proxy statement showed that plaintiff had not been nominated for election to the board of directors. (Id. PP 42-43)

 Second, the financial statements supposedly showed that 3,440,000 shares were issued to individuals in lieu of cash for services, thus supposedly exposing the falsity of the alleged representations of how the comedians would be paid for their services and the failure to ...


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