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GREENBERG v. CHRUST

April 26, 2002

STEVEN A. GREENBERG, PLAINTIFF
V.
STEVEN CHRUST, DEFENDANT.



The opinion of the court was delivered by: Robert W. Sweet, Judge.

OPINION

Sweet, D.J.,

Defendant Steven Chrust ("Chrust") has moved under Rule 12(b)6, Fed. R. Civ. P., to dismiss the complaint of plaintiff Steven A. Greenberg ("Greenberg") and alternatively to strike portions of the complaint. For the reasons set forth below, the motion is granted in part and denied in part.

Prior Proceedings

This action was commenced on November 14, 2001, by the filing of a complaint alleging causes of action for (1) common law fraud; (2) securities fraud; (3) negligent misrepresentations; and (4) breach of fiduciary duty.

The instant motion to dismiss was heard and marked fully submitted on January 23, 2002.

The Facts

The facts as set forth below are alleged in the complaint and in the submissions of the parties and do not represent findings by the Court.

Greenberg, a New York resident, was one of three founders of Worlds Acquisition Corp., a corporation formed in 1997 for the purpose of acquiring Worlds Inc. In December 1997, a three-way merger between Worlds Acquisition Corp., Worlds Inc. and Academic Computer Systems, Inc., was effected. The surviving corporation was called Worlds, Inc. Prior to and subsequent to the merger, Academic Computer Systems, Inc. was a publicly traded corporation, and as a result of the merger, the newly formed corporation began trading under the name Worlds, Inc. On November 9, 1999, Worlds, Inc. changed its name to Worlds.com. Greenberg was primarily responsible for structuring and negotiating the merger and arranging the financing related to the merger. Subsequent to the merger, and until December 31, 2000, he was the largest shareholder in Worlds.com. Currently, Greenberg owns approximately 2,000,000 shares of Worlds.com common stock.

Worlds.com is a 3-D entertainment portal using its proprietary technology to offer visitors a network of virtual, multi-user environments called "worlds." These worlds are on-line environments featuring animation, motion, and content where people can shop, interact with others, attend events, and be entertained. In support of this portal and its overall business strategy, Worlds.com designs and develops software, content, and related technology for the creation of interactive 3-D internet websites. Using its technology, Worlds.com creates its own internet sites as well as sites available through third party on-line service providers.

Chrust, a Connecticut resident, participated as an investor in the financing related to the merger. He was employed as the vice-chairman of Winstar Communications, Inc. ("Winstar"), a publicly traded company engaged in the telecommunications industry. In December 1998, Chrust contacted Greenberg to inquire about possible involvement with Worlds.com. Chrust claimed to be a co-founder of Winstar and told Greenberg that he was voluntarily leaving Winstar to pursue his long-time passion of working with smaller companies to aid in their growth through developing their business plan and assisting in their financing and business development.

Chrust and Greenberg met on at least six occasions between January 3, 1999 and April 8, 1999. Chrust made specific representations to Greenberg concerning his background and business acumen, including that (a) he voluntarily resigned his position as vice chairman and as a director of Winstar; (b) he successfully worked with small companies in the past and aided in their financing and development; and (c) he managed a hedge fund with a record of impressive growth in which he personally maintained substantial holdings. He represented to Greenberg that Worlds.com needed to install a new president and chief executive officer to replace the then-president and CEO, which search efforts he would undertake; the company needed a high level chief financial officer with certain specific experience, which search efforts he would also undertake; and he was capable of raising, and would raise, the necessary substantial capital to permit the company to pursue its business plan and objectives aggressively. As a result of these meetings and discussions, Greenberg developed a level of trust and confidence in Chrust.

Relying on Chrust's representations and demands, Greenberg agreed to transfer to the company 881,750 shares of common stock (then with a market value of $3,720,985) which he owned and which he alleges, at the time, represented over 4% of the total issued and outstanding stock in the company. Greenberg supported Chrust's appointment as chairman of the board of directors.

Chrust explicitly represented to Greenberg that his contribution of shares was to be used as part of Chrust's undertaking to retain a new president, chief executive officer, and chief financial officer for Worlds.com so that there would not be a dilutive effect on the existing outstanding common shares of Worlds.com. Furthermore, in connection with Chrust's representations, Greenberg entered into a voting trust agreement with other shareholders, proving that the shares held by Greenberg and others would be voted for Chrust's election to the board of directors of the company. The closing price of the Worlds.com shares on April 13, 1999, the date of Chrust's hire and Greenberg's 881,750 stock contribution, was $4.22 per share.

Chrust had been forced to resign as vice chairman and as a director of Winstar as a result of acts of misconduct and certain improprieties, and was not involved in successfully developing small companies and raising capital for their financing. Chrust had been associated, as an officer and/or director, with numerous companies whose businesses floundered, failed, or went bankrupt, including AMNEX Inc., Executone Information Services, Inc., Umagic Systems, Inc., E-Globe Inc., and FiberNet Telecom Group, Inc.

Following his appointment as chairman of the board, Chrust failed to recruit or hire a president, chief executive officer, or chief financial officer for the company for a considerable period of time after his retention. Within six months after Chrust became chairman, Worlds.com was rendered insolvent, as its short term liabilities exceeded its current assets, and in the one year period following his appointment, it experienced its greatest losses ever.

Chrust also allegedly engaged in numerous acts of misconduct and illegal activity, including: (1) causing false and misleading press releases concerning investments in Worlds.com; (2) causing false and misleading SEC filings to be filed; (3) suppressing certain information from the public in an effort to depress the stock price of Worlds.com to allow Chrust to purchase additional shares at reduced prices; (4) engaging in insider trading of Worlds.com stock; (5) causing false and misleading press releases to be issued regarding the Worlds.com's operations; and (6) failing to provide full disclosure regarding his affiliations with other publicly traded companies in compliance with federal securities laws.

The complaint refers to two written agreements, a March 23, 1999 agreement between SGC Advisory Services, Inc. ("SGC") and Worlds.com, under which SGC was retained as a consultant and Worlds.com became obligated to appoint Chrust as chairman of its board of directors, and an April 13, 1999 agreement pursuant to which Greenberg and two other Worlds.com shareholders agreed to vote for Chrust as a director of Worlds.com during the term of the consulting agreement and to contribute a portion of each such shareholder's Worlds.com stock back to the company. Chrust, in his individual capacity, is not a party ...


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