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NORWOOD VENTURE CORP. v. CONVERSE INC.

April 3, 1997

NORWOOD VENTURE CORP., Plaintiff, against CONVERSE INCORPORATED, APOLLO INVESTMENT FUND, L.P., APPOLLO CAPITAL MANAGEMENT INC., as General Partner of APOLLO ADVISORS, L.P., LION ADVISORS, L.P., LION CAPITAL MANAGEMENT INC., as General Partner of LION ADVISORS, L.P., GILBERT FORD, MICHAEL C. BELL, DONALD J. CAMACHO, LEON D. BLACK, MICHAEL S. GROSS, JOSHUA J. HARRIS, and JACK A. GREEN, Defendants.


The opinion of the court was delivered by: BAER

 Hon. Harold Baer, Jr., District Judge:

 Plaintiff brought this cause of action against defendants after a business deal between the two soured. Defendants now move to dismiss plaintiff's claims. Defendants motion is granted; while plaintiff sufficiently pleads scienter, it failed to adequately plead loss causation. Supplemental jurisdiction is declined and plaintiff's state law claims are also dismissed.

 I. Background

 This cause of action arises out of the sale of Apex One ("Apex") to Converse on May 18, 1995. Apex was a sports apparel company that suffered from continuous cash flow problems. After attempting to raise capital through two private placements in which Prudential Equity Investors III, L.P., Dominion Income Management Corp., Norwood Venture Corp. ("Norwood"), Exeter Venture Lenders, L.P. and Bessemer Venture Partners Apex One *fn1" invested in Apex, Apex still lacked the capital to timely produce products for its trade cycle in 1993 and 1994. Consequently, Apex's Board of Directors decided to sell the company by early 1995. Shortly thereafter, Bear Stearns & Co., Inc. ("Bear Stearns") acting on behalf of Apex, contacted Apollo *fn2" which had expressed an earlier interest in a Converse/Apex transaction, and confirmed that Converse would be interested in acquiring Apex.

 During the course of negotiations, Apex made it clear to defendants that Apex's most important consideration was the need for adequate funding on an immediate and ongoing basis to ensure Apex's 1995 trade cycle including, among other things, $ 6 million to pay Apex creditors. Defendants assured Apex that they could and would provide Apex with this funding. The final transaction, which closed on April 28, 1995 provided that Converse would purchase the former plaintiffs' as well as Norwood's Apex securities in exchange for Converse notes, warrants and other consideration (the "Securities Purchase Agreement" or "SPA"). Some parties received both notes and warrants; Norwood, however, received only notes.

 After the closing, Apex discovered that defendants Apollo and Converse planned a bond issue later that June in order to finance the purchase of Apex's securities. However, the bond issue never got off the ground after Converse reported first that its earnings for the second quarter of 1995 would be "flat" in comparison to the second quarter earnings of 1994, and then subsequently announced that it would actually lose $ 6 to $ 8 million in the second quarter of 1995.

 In mid- to late- July, Converse and Apollo representatives met to implement a reverse integration plan of Apex and Converse, and according to plaintiff "schemed methodically to circumvent bankruptcy laws that could have prevented the rape of Apex's assets." Comp. P 92. On August 4, 1995, defendant Joshua J. Harris, *fn3" without knowledge of any Apex executive, ordered several dozen tractor trailers to Apex's warehouses in New Jersey to remove over $ 10 million worth of inventory housed there. On September 14, 1995, Apex filed for bankruptcy protection.

 On November 18, 1995, the date Norwood's first interest payment on the notes was due, Converse defaulted and notified the former plaintiffs and Norwood of claims against them for contractual indemnification based on breaches of representations and warranties contained in the SPA, and that it planned to set off those claims against the interest payments due under the notes. The former plaintiffs and Norwood responded on February 6, 1996 by commencing an action against Converse in New York state court seeking a declaration that Converse had no valid claim for indemnification or right of set-off. Converse counterclaimed for indemnification and asserted a fraud claim against Prudential and Michael Lewis. *fn4"

 On May 17, 1996, the parties commenced two separate actions in this Court. In the instant case, Norwood alleges that in connection with Converse's purchase of its Apex securities, each of the defendants, either directly or as a control person, violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and that the defendants (except for Leon D. Black and Jack A. Green) committed common law fraud and deceit, and negligent misrepresentation.

 For the reasons stated below, Converse's motion to dismiss the federal securities fraud claim is granted and plaintiff's common law claims are dismissed without prejudice.

 II. Discussion

 A. Standard of Review


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