Eriksson v. Galvin

• Decision Date: 28 January 1980
• Docket Number: No. 74 Civ. 4031 (CHT).,74 Civ. 4031 (CHT).
• Citation: 484 F. Supp. 1108
• Parties: Sven ERIKSSON and Teleric, S.A., Plaintiffs, v. William GALVIN, Pierre Schoenheimer, Recognition Devices, Inc., Radix Organization, Inc. and Patricia LeLandais, Executrix for the Estate of Pierre J. LeLandais, Defendants.
• Court: U.S. District Court — Southern District of New York

484 F. Supp. 1108

Sven ERIKSSON and Teleric, S.A., Plaintiffs, v. William GALVIN, Pierre Schoenheimer, Recognition Devices, Inc., Radix Organization, Inc. and Patricia LeLandais, Executrix for the Estate of Pierre J. LeLandais, Defendants.

No. 74 Civ. 4031 (CHT).

United States District Court, S. D. New York.

January 28, 1980.

Mousaw, Vigdor, Reeves, Heilbronner & Kroll, Rochester, N. Y., for plaintiffs; Robert J. Pearl, Rochester, N. Y., of counsel.

Patrick J. Carr, New York City, for defendant Galvin.

Michael C. Devine, New York City, for defendants LeLandais, Schoenheimer and Radix.

OPINION

TENNEY, District Judge.

This is an action tried to the Court for alleged violations of sections 12(1), 12(2) and 17(a)(2) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77l(1), 77l (2) and 77q(a)(2), section 10(b) of the Securities Exchange Act of 1934 ("Securities Exchange Act"), 15 U.S.C. § 78j(b), New York General Business Law § 352-c, and other violations of state law. Such violations are alleged to have occurred on the sale by defendant Recognition Devices of certain of its common stock valued at $10,000 plus its $40,000 promissory note to plaintiff Sven Eriksson on September 13, 1973. However, it is necessary that we consider events occurring well prior to September 1973 in determining just what Eriksson's purpose, intent and knowledge were in making this "investment" in Recognition Devices.

Eriksson is a Swedish electronics engineer now living in Switzerland, who in 1956 started a company, Telekontroll, to manufacture and sell electronic "paging" equipment. In the summer of 1972 Eriksson learned of an inventor, Robert Lester in the United States who had invented "paging" or "localizing" equipment that used only ultrasonic, rather than electronic, transmissions. Lester referred to his system as Trakatron and had assigned it to his company, then named Recognition Devices — a company distinct from the defendant in this action. Eriksson had a friend in the United States, Sten Persson who was also an engineer, and it was Persson who brought Lester to Eriksson's attention. Thereafter, in the summer of 1972 Eriksson called Lester and had discussions with him since Eriksson was interested in using Trakatron in connection with his electronic paging system. Indeed, in early October 1972 Lester conferred with Eriksson at the offices of Telekontroll in Sweden with a view to developing a patent licensing agreement between Telekontroll and Recognition Devices whereby Telekontroll would manufacture the Trakatron systems for the European market with further provision for Telekontroll to manufacture in all other parts of the world. Telekontroll was also given a temporary right to build a prototype of Lester's ultrasonic locating system and in late 1972 or early 1973 did just that. Letter from Eriksson to Lester, dated December 12, 1972, Defendants' Exh. B.

Before any action was taken to formalize such an agreement, Lester and Recognition Devices had transferred the Trakatron and other patents together with the right to use the name "Recognition Devices" to a new company bearing the name RCDS Enterprises, Inc. ("RCDS"). This transfer arose out of the following circumstances. One of the investors in Lester's Recognition Devices was an individual named Sanford Bronstein, who was the president of Cedars of Lebanon Hospital in Miami, Florida. As a hospital president, Bronstein had come into contact with defendant William Galvin, who was in the hospital consulting field. Bronstein told Galvin about Recognition Devices and, at Bronstein's request, Galvin went to see Lester in the fall of 1972 after Lester's conference with Eriksson in Sweden. Galvin himself was looking for a project to invest in, and reported back to Bronstein that all that was needed was money, management and sales, but that in the company's present state it would be advisable to form a new company. Bronstein indicated he would support such a project by way of a contract to install the Trakatron system at Cedars of Lebanon Hospital. Galvin, not being a money-raiser, contacted defendant Pierre LeLandais, whom he had previously known and through whom he met defendant Pierre Schoenheimer, for the purpose of forming the new company and of raising additional money. LeLandais and Schoenheimer were the original managing directors of Radix Organization Inc. ("Radix"), which was in the business of originating, structuring and implementing corporate development programs.

Galvin, LeLandais and Schoenheimer met with Lester in January 1973. They explained that they had formed or were in the process of forming a new company, RCDS, which would purchase Recognition Devices' name, patents, and sales leads, and would hire Lester for one year. Lester, enthusiastic about the proposal, obtained approval of his board of directors, and on April 2, 1973 the transfer of assets to RCDS was effected. The consideration for the transfer was (a) 1500 shares of RCDS (i. e., 15% of the number of shares originally issued) and (b) cash payments not to exceed $200 million, of which $5000 was paid at the time of transfer plus: 10% of cumulative sales above $50,000 but under $1 million; 5% of next $1 million of sales; and 3% on sales over $2 million but not to exceed 30% when added to cost of sales. In addition, RCDS retained the name Recognition Devices, Inc., the services of Intersonics Corporation ("Intersonics," the new name of the old Recognition Devices, Inc.), and, more particularly, the services of Lester for a period of not less than 12 months for a fee of $2000 per month or 5% of sales, whichever was higher. Finally, the assets acquired by RCDS were to revert to Intersonics if Intersonics had not received at least $100,000 by the third anniversary date of the agreement. The patents transferred consisted of the Trakatron patent, two other issued patents, and four pending patents. The certificate of incorporation of RCDS Enterprises was amended on April 2, 1973 (the day of the purchase of the assets of the Lester company), and a certificate was filed on April 17, 1973; thereafter the company became known as Recognition Devices, Inc. ("RD").

At the time of the purchase of the Lester patents and for some months thereafter, those connected with RCDS and thereafter with RD appear to have been in error as to the capitalization of RCDS and, consequently, of RD. The original funding of RCDS of $25,000 was subscribed to by Galvin, Mrs. Galvin, Radix (i. e., LeLandais and Schoenheimer), and by Robert Feldstein and two other principals of Scientific Prototype Corporation ("Prototype") which, under Feldstein, was to prepare a prototype of the Trakatron system. Actually the Galvins and Radix went in on a 50/50 basis, but Radix allocated 426 of its 4250 shares to Prototype and the Galvins subscribed to 4250 shares equally. At $1 per share this accounted for $8500 of the initial funding. The balance was covered by $16,500 of 8% three year Subordinated Notes. With the transfer of 1500 shares to Intersonics, the total shares outstanding were 10,000, out of a total of 15,000 shares that it was mistakenly believed constituted the capital structure of the company. Actually, the certificate of incorporation authorized only the issuance of 200 shares of common stock. The defendants rectified this oversight as soon as it was discovered by amending the certificate.

There was no further solicitation of funds at the time of the initial $25,000 investment. It was contemplated, however, that at an appropriate time the company would attempt to raise an additional $250,000 from a group of sophisticated investors known to Radix. Indeed, one potential investor was on the scene prior to July 1973, but the deal fell through. The defendants hoped that the product could be developed and that the engineers at Prototype would construct a model that would, in turn, attract investors.

On May 1, 1973 the contract with Cedars of Lebanon Hospital and RD was signed. Exh. A to Plaintiffs' Exh. 2. It called for the sale and the installation of a Trakatron 300 (Locating) System, a purely ultrasonic system. Two phases were prescribed: Phase I, which involved a survey by RD of the hospital buildings, ultrasonic propagation studies, wiring diagrams, field testing and general planning as to equipment, was not to cost more than $50,000 and was to be completed by September 1, 1973; Phase II called for delivery by RD of the hardware and was to be completed by March 1, 1974. The estimated cost for Phase II was set at $187,500 or a total cost for both phases not to exceed $237,500.

In the spring of 1973 after the contract with Cedars of Lebanon had been signed, work was commenced on the preparation of a brochure to crystallize how RD was going to function in the market areas it was eventually going to enter. Both LeLandais and Galvin worked on this material, which was prepared in the office of Radix where RD was situated. The document was completed on the letterhead of RD late in June or early July 1973 and was entitled "History Current Operations & Business Plan For The Future." It was dated July 19, 1973 and marked "confidential." Plaintiffs' Exh. 2. It is referred to hereinafter as the "Report." Fifteen copies of this document were prepared. The Report consisted of (1) an introduction; (2) a general description of The Trakatron System and its applications including a more detailed description of Trakatron's first application to be installed at Cedars of Lebanon Hospital; (3) a description of the business acquired, i. e., the assets acquired from Intersonics and the contract for the services of Intersonics; (4) the business plan, including engineering and product development, marketing and sales, and finances; (5) budgeted operating expenses for the fiscal year 1973 showing total expenses of $115,150; (6) a description of management, including biographical data on Galvin, LeLandais, Schoenheimer, Feldstein, and...