Bernstein v. Crazy Eddie, Inc.

Decision Date30 December 1988
Docket NumberNo. 87 C 33.,87 C 33.
PartiesVivian G. BERNSTEIN, as custodian for Jamie A. Bernstein, Karen Kaun, Duncan Hoffman, John Papastamatakis, and Lawrence Lyon, individually and on behalf of all others similarly situated, Plaintiffs, v. CRAZY EDDIE, INC., Eddie Antar, Sam Antar, Mitchell Antar, Eddy Antar, Sam E. Antar, Solomon E. Antar, David V. Panoff, Isaac Kairey, Steve Pasquariello, William H. Saltzman, James H. Scott, Jr., Edmond Levy, Carl G. Zimel, David Pardo, Peat Marwick Main & Co., Oppenheimer & Co., Inc., Wertheim & Co., Inc., Bear Stearns & Co., Inc., and Salomon Brothers, Inc., Defendants. CRAZY EDDIE, INC., Third-party Plaintiff, v. Allen ANTAR, Jean Cocchiara, Eddie H. Gindi, Abraham Grinberg, and Kathleen G. Morin, Third-party Defendants.
CourtU.S. District Court — Eastern District of New York

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Rabin & Sirota (Howard B. Sirota, of counsel), New York City, for plaintiff Kaun.

Stull, Stull & Brody (Jules Brody, of counsel), and Joseph H. Weiss, New York City, for plaintiff Bernstein.

Milberg, Weiss, Bershad, Specthrie & Lerach (David J. Bershad, of counsel), New York City, for plaintiff Hoffman.

Abbey & Ellis (Arthur Abbey, of counsel), New York City, for plaintiff Papastamatakis.

Joseph J. Tabacco, Jr., New York City, for plaintiff Lyon.

Akin, Gump, Strauss, Hauer & Feld (David A. Donohue, of counsel), Washington, D.C., Pryor, Cashman, Sherman & Flynn (James A. Janowitz, of counsel), New York City, for defendant and third-party plaintiff Crazy Eddie, Inc.

Kronish, Lieb, Wiener & Hellman (Justin N. Feldman, of counsel), New York City, for defendant Eddie Antar.

Gersten, Savage, Kaplowitz & Zuckerman (Marvin Gersten, of counsel), New York City, for defendants Sam Antar and Mitchell Antar and third-party defendant Allen Antar.

Friedman & Kaplan (Bruce S. Kaplan, of counsel), New York City, for defendants Eddy Antar, Sam E. Antar, Solomon E. Antar, Isaac Kairey, Edmond Levy, Steven Pasquariello, and Carl G. Zimel and third-party defendant Eddie H. Gindi.

Morrison, Cohen & Singer (Peter H. Morrison, of counsel), New York City, for defendant Panoff.

William H. Saltzman, New Rochelle, N.Y., pro se.

Kelley, Drye & Warren (John P. Marshall, of counsel), New York City, for defendant Scott.

St. John, Oberdorf, Williams, Edington & Curtin (Michael Lampert, of counsel), Newark, N.J., for defendant Pardo.

Shearman & Sterling (Joseph T. McLaughlin, of counsel), New York City, for defendant Peat Marwick Main & Co.

Kaye, Scholer, Fierman, Hayes & Handler (Steven Glassman, of counsel), New York City, for defendant Oppenheimer & Co., Inc.

Weil, Gotshal & Manges (Dennis J. Block, of counsel), New York City, for defendants Salomon Bros., Inc., Bear Stearns & Co., Inc., and Wertheim & Co., Inc.

Shatzkin & Reiss (Howard R. Shatzkin, of counsel), New York City, Eisenberg & Tanchum (David M. Rubin, of counsel), New York City, for third-party defendant Grinberg.

MEMORANDUM AND ORDER

NICKERSON, District Judge.

Plaintiffs, purchasers of the common stock of defendant Crazy Eddie, Inc. (Crazy Eddie), brought this action against Crazy Eddie and various of its former officers, directors, accountants, and underwriters. The consolidated and amended complaint (the complaint) asserts claims under the Securities Act of 1933 (the Securities Act), 15 U.S.C. § 77a et seq. (1982 & Supp. IV 1986), the Securities Exchange Act of 1934 (the Exchange Act), 15 U.S.C. § 78a et seq. (1982 & Supp. IV 1986), the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961 et seq. (1982 & Supp. IV 1986), and state law.

The complaint alleges, inter alia, that the defendants made or aided and abetted the making of materially false and misleading statements and omissions in connection with three public offerings of Crazy Eddie securities and with the sale of Crazy Eddie securities in general, causing plaintiffs to purchase the securities at a higher price than they would have paid if the truth about Crazy Eddie had been known. Plaintiffs seek to represent themselves and purchasers (except defendants) of Crazy Eddie securities between March 20, 1985 and January 18, 1988 (the Class Period). Various defendants now move to dismiss the complaint for failure to state a claim or for failure to plead fraud with particularity.

Crazy Eddie cross-claimed against defendants Eddie Antar, Sam Antar, Mitchell Antar, Eddy Antar, Sam E. Antar, Solomon E. Antar, David V. Panoff, Isaac Kairey, Steve Pasquariello, William H. Saltzman, James H. Scott, Jr., Edmond Levy, Carl G. Zimel, and David Pardo (the individual defendants), all former officers or directors of Crazy Eddie, for violations of RICO, breach of their fiduciary duties of loyalty and care, and indemnification. Crazy Eddie also cross-claimed against Peat Marwick Main & Co. (Peat Marwick), its former accountant, for breach of contract and of its duty of due care. The cross-claim defendants move to dismiss or stay the cross-claims.

In addition, Crazy Eddie impleaded Allen Antar, Jean Cocchiara, Eddie H. Gindi, Abraham Grinberg, and Kathleen G. Morin, all former employees, for civil conspiracy under RICO and state law and for indemnification. The third-party defendants move to dismiss the third-party complaint and to disqualify Crazy Eddie's counsel.

I. THE COMPLAINT

For purposes of the motions to dismiss, the court assumes the truth of the facts pleaded.

Crazy Eddie, a corporation founded by Eddie Antar and controlled by the Antar family, first sold shares to the public in September 1984. Between that time and November 1987, although not in all cases throughout that period, the individual defendants were directors or officers of Crazy Eddie. During that period, defendant Peat Marwick and its predecessor KMG Main Hurdman certified the financial statements that Crazy Eddie filed with the Securities and Exchange Commission (SEC) and disseminated to the public.

Crazy Eddie made three public offerings of securities underwritten by defendants Oppenheimer & Co., Inc., Wertheim & Co., Inc., Bear, Stearns & Co., Inc., and Salomon Brothers, Inc. (the Underwriters), during the Class Period. In March of 1985 and March of 1986, Crazy Eddie offered shares of common stock; in June of 1986, it offered convertible subordinated debentures.

From 1984 through November 1987, defendants fostered the erroneous impression that Crazy Eddie was a rapidly growing firm. The company reported dramatically increasing sales from year to year. The June 1986 prospectus for the offering of convertible subordinated debentures represented that between 1982 and 1986 Crazy Eddie's earnings per share increased from $.05 to $.96, its net sales from $98.2 million to $262.3 million, and its net income from $0.5 million to $13.2 million.

The same prospectus stressed the rapid increase in the number of and sales volume of its retail stores. Crazy Eddie repeatedly emphasized not only its acquisition of new outlets but also the growth of "same store" sales (i.e., sales in stores owned in the previous fiscal year). For example, the Annual Report to Shareholders for the fiscal year ended March 2, 1986 stated that "same store" sales rose 17% over the previous year.

Between October 20, 1986 and October 27, 1987, defendants Eddie Antar, David Panoff, Sam E. Antar, Solomon E. Antar, and Salomon Brothers, Inc., made open market sales of a total of 3,090,900 shares at prices ranging from $18.50 per share on the first date to $2.13 per share at the end of that period. When Eddie Antar made the largest single sale of 1,500,000 shares on November 10, 1986, Crazy Eddie issued a press release stating that he sold the shares solely in anticipation of a rise in the federal capital gains tax.

On December 23, 1986, Eddie Antar unexpectedly resigned as President of Crazy Eddie. Although the company's announcement stated that he would remain as Chairman of the Board and Chief Executive Officer, he resigned as Chief Executive Officer for unspecified "personal reasons" only 17 days later, on January 9, 1987. Rumors circulated in the financial press that he was seriously ill. Rather than dispel these rumors, defendants "permitted the market-place to perceive that Crazy Eddie had been abandoned by Antar," exacerbating a decline in the price of Crazy Eddie securities.

On January 6, 1987, three days before Antar's resignation, Crazy Eddie announced that its "same store" sales decreased 9% during December 1986. In contrast, its competitors'"same store" sales increased 11% to 25%. Having declined to $11.50 per share by December 31, 1986, after Antar's resignation as President, the price of Crazy Eddie's stock now plummeted to $8.00 per share.

On April 10, 1987, as business continued to deteriorate, Crazy Eddie adopted a "poison pill" to repulse hostile takeover attempts. Nonetheless, a dissident shareholder, Entertainment Marketing, Inc., waged a successful proxy fight to wrest control of the company from the Antar family. On November 6, 1987, the shareholders elected an entirely new Board of Directors and dismissed virtually every former officer.

In November 1987, Crazy Eddie announced that a physical inventory taken at the direction of new management had revealed an estimated inventory shortfall of $45 million. On January 19, 1988, the company announced that it was writing off $65 million from inventory. Its net worth, reported at $93 million on March 1, 1987, was now only $7 million.

The difference between the rosy picture of Crazy Eddie's fortunes painted by defendants and the bleak truth uncovered by new management is due to various fraudulent practices of the individual defendants. They inflated Crazy Eddie's net income, inventory figures, and per store sales figures through a series of improper financial reporting practices. For example, they treated wholesale transactions as...

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