Adelman v. CGS Scientific Corporation, Civ. A. No. 71-1658.
| Citation | 332 F. Supp. 137 |
| Decision Date | 14 September 1971 |
| Docket Number | Civ. A. No. 71-1658. |
| Parties | Herbert ADELMAN v. CGS SCIENTIFIC CORPORATION et al. |
| Court | United States District Courts. 3th Circuit. United States District Court (Eastern District of Pennsylvania) |
Stuart Savett, Harold E. Kohn, P. A., Philadelphia, Pa., for plaintiff.
David P. Bruton, Philadelphia, Pa., for J. H. Clark.
Donald A. Scott, Philadelphia, Pa., for Arthur Andersen & Co.
Robert Lewis Seigle, Philadelphia, Pa., for Raymond F. McHugh, Jr.
Arthur E. Newbold, IV, Philadelphia, Pa., for Elliott L. Goldman.
Franklin Poul, Wolf, Block, Schorr & Solis-Cohen, Philadelphia, Pa., for CGS Scientific Corp., and Albert J. Feldman, Curtis J. Yamas, Gerald J. Wood, Reuben Wasserman and John W. Hurley.
FINDINGS OF FACT CONCLUSIONS OF LAW AND ORDER
This matter is before the Court to determine whether preliminary relief should issue pending a final determination of this case on the merits in connection with a civil action brought by plaintiff Herbert B. Adelman, who seeks rescission of an allegedly fraudulent contract of sale whereby the Crowell Corporation, of which he was a 20% owner, was sold to the Defendant CGS Scientific Corporation.
After hearings on July 9, 19 and 20, 1971, on plaintiff's motion for a preliminary injunction and appointment of a receiver or custodian of the Crowell Division of CGS Scientific Corporation, the Court makes the following:
FINDINGS OF FACT
2. The individual defendants Albert J. Feldman (Feldman), John H. Clarke (Clarke), Elliott L. Goldman (Goldman), Curtis J. Yamas (Yamas), Gerald J. Wood (Wood), and Raymond F. McHugh, Jr. (McHugh) are individuals residing in Pennsylvania. The defendant Reuben Wasserman (Wasserman), is an individual residing in Massachusetts. The defendant John W. Hurley (Hurley) is an individual residing in New York. The partnership defendant Arthur Andersen & Co. is a firm of certified public accountants with a place of business in Pennsylvania. The defendant CGS Scientific Corporation (CGS) is a Pennsylvania corporation with its principal place of business in Pennsylvania.
3. Adelman, prior to September 10, 1969, was the owner of twenty percent of the stock of the Crowell Corporation (Crowell). He was also the President of Crowell at an annual salary of $26,000.
4. The Crowell Corporation, now the Crowell Division of CGS Scientific Corporation, manufactured and continues to manufacture gummed tapes.
5. In an arbitration proceeding on September 10, 1969, between Adelman and the owners of the eighty percent interest of Crowell, it was stipulated that the value of Crowell was $1,600,000. Adelman was given the right to purchase or to cause to be purchased the other eighty percent interest in Crowell for $1,280,000 within thirty days. If this right was not exercised within thirty days, Adelman's twenty percent stock interest in Crowell could be purchased within the following thirty-day period for $320,000 by either the holders of the eighty percent stock interest, the Crowell Corporation, or a third party.
6. On October 8, 1969, Clarke was the President and Goldman was the Treasurer of CGS.
7. During the preliminary discussions between CGS and Adelman for the sale of Crowell to CGS, which took place prior to October 8, 1969, it is highly probable that: (a) Adelman received through the mail from Clarke, as President of CGS, an unpublished internal interim financial report of CGS consisting of the balance sheet and income statement for the three-quarter period of 1969; (b) Adelman, his attorney and Goodman were shown the Annual Report of CGS for the fiscal year ending August 31, 1969; (c) these unpublished figures of the Annual Report then appeared as the year-end figures in the 1969 Statement of CGS audited by Arthur Andersen & Co.
8. It is highly probable that plaintiff relied on representations as to the financial strength of CGS, its prospects for the future and the ability of CGS to raise the necessary cash to consummate the deal and that plaintiff at that time was also considering offers from other possible buyers of Crowell.
9. On October 8, 1969, Adelman negotiated the sale of Crowell to CGS:
(a) Pursuant to an agreement signed on October 8, 1969, between Adelman, and other stockholders of Crowell and CGS, CGS paid $1,280,000 in cash to the owners of the eighty percent stock interest of Crowell.
(b) In a separate agreement of the same date, October 8, 1969, CGS purchased Adelman's twenty percent stock interest in Crowell for $100,000 cash, plus twenty-five thousand shares of CGS common stock with a par value of $0.20 per share, plus additional shares of CGS common stock to be issued in each year from 1970 through 1974 computed from a formula set forth in the agreement, which formula was based on the net earnings of Crowell, the fiscal year base income and the average price of CGS common stock. Also, Adelman was to be given additional shares of CGS common stock, not to exceed 4,000 shares, which would be necessary to make so many of the 25,000 shares issued at closing as were held on November 30, 1970, equal to the value such shares which were then held would have if the price of CGS common on November 30, 1970 were twenty dollars per share.
10. At closing of the agreement mentioned in 9(b) above, Adelman, the President of Crowell, Goodman, the General Manager, and Donald Blevins (Blevins), the Production Foreman, executed employment agreements with CGS.
11. No warranties were made in the agreement, signed October 8, 1969, by CGS to Adelman with respect to the financial statements or financial condition of CGS. Adelman, however, made numerous warranties and the agreement provides that "* * * there are no representations, warranties, understandings or agreements with respect to such transactions other than those expressly set forth herein * * *."
12. The unpublished figures of the CGS annual report referred to in (7) above appeared as the year-end figures in the published 1969 Annual Report of CGS.
(a) The financial statements contained in the 1969 Annual Report for the fiscal periods ending August 31, 1969 and August 31, 1968 (restated) were prepared by Arthur Andersen & Co.
(b) Arthur Andersen & Co.'s report was dated October 3, 1969.
(c) The financial statement of CGS for the year ending August 31, 1969, showed:
1969 1968 (Restated)
Net Income $366,679.00 $161,558.00
Earnings Per
Common Share 0.53 0.30
13. From October 8, 1969 to June 1970, Crowell Corporation was operated as an autonomous subsidiary of CGS with Adelman as the President. In June 1970, Crowell Corporation was liquidated and its assets distributed to CGS. Adelman agreed to this liquidation in writing. Crowell is now operated as a division of CGS with Adelman as its Chief Executive Officer.
14. From the time of acquisition of Crowell, Adelman attended the meetings of the CGS Board of Directors by invitation. In September 1970 Adelman was elected a member of the CGS Board of Directors and remained in this capacity until March 1971. Adelman solicited proxies for the management slate headed by Curtis J. Yamas (Yamas) for President of CGS in March 1971.
15. Yamas was President and majority shareholder of United Scale Models until July 2, 1969, when this company was acquired by CGS.
16. In August 1970, Yamas, other Directors of CGS and Adelman learned of an unreported loss for 1969 by the Environmental Division of CGS, other indications of errors in the financial statements of CGS and evidence of financial manipulations in CGS.
17. On the basis of the information learned in (16) above, a special meeting of the Board of Directors of CGS was held on September 10, 1970. This meeting was attended by the entire Board, consisting of Clarke, Feldman, Goldman, Hurley, McHugh, Taylor, Wasserman, Wood and Yamas. Also present by invitation were representatives from Arthur Andersen & Co., Adelman, and Joseph M. Manko, Assistant Secretary and of counsel. Following a report on the preliminary findings by Arthur Andersen & Co. of financial misstatements, Clarke resigned and Yamas was elected as the new President of CGS.
18. Goldman resigned as Secretary and Treasurer of CGS on September 11, 1970.
19. A press release was issued on September 16, 1970 by CGS which stated that the interim results for the six-month period, ending February 28, 1970, and the nine-month period, ending May 30, 1970, as previously reported were overstated; the press release also said that the previously reported 1969 results might have been affected by the overstatement, and that for the fiscal year ending August 31, 1970 a substantial loss by CGS would be reported. These overstatements were attributed in the press release to "* * * a number of actions recently discovered by the Board, including improper record keeping, misallocation of expenses, and overestimates of the extent of completion on contracts in process in the company's Environmental Division."
20. At the Board of Directors' Meeting of CGS on September 23, 1970, Mr. Goldman resigned as a Director of CGS and Adelman was elected. Adelman was also elected a Vice-President of CGS at this time. The sale of one or more divisions of CGS, including Crowell, was discussed at this meeting. Also, Feldman, a director and corporate counsel of CGS, cautioned all present at the meeting against making any unauthorized disclosure to any private persons or against the transfer of any of the Company's securities owned by them until a public release had been made of the Company's financial statements for the preceding fiscal year.
21. On September 25, 1970, in conformity with similar actions of other directors of CGS, Adelman signed an agreement authorizing the transfer agents for CGS to block the transfer of all securities listed in his...
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