Heller v. Goldin Restructuring Fund, L.P.

• Decision Date: 22 December 2008
• Docket Number: No. 07 CIV. 3704 (RJS).,07 CIV. 3704 (RJS).
• Citation: 590 F.Supp.2d 603
• Parties: Lloyd J. HELLER, Plaintiff, v. GOLDIN RESTRUCTURING FUND, L.P., Goldin Capital Partners, L.P., Goldin Capital Management, L.P., Goldin Associates, L.L.C., Harrison J. Goldin, David Pauker, and Lawrence J. Krule, Defendants.
• Court: U.S. District Court — Southern District of New York

590 F.Supp.2d 603

Lloyd J. HELLER, Plaintiff, v. GOLDIN RESTRUCTURING FUND, L.P., Goldin Capital Partners, L.P., Goldin Capital Management, L.P., Goldin Associates, L.L.C., Harrison J. Goldin, David Pauker, and Lawrence J. Krule, Defendants.

No. 07 CIV. 3704 (RJS).

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

December 22, 2008.

COPYRIGHT MATERIAL OMITTED

Adam C. Mayes and John Halebian, Lovell Stewart & Halebian LLP, New York, NY, for Plaintiff.

Michael Barry Carlinsky, Quinn Emanuel Urquhart Oliver & Hedges LLP, New York, NY, for Defendants.

OPINION AND ORDER

RICHARD J. SULLIVAN, District Judge:

Plaintiff Lloyd J. Heller ("Heller" or "Plaintiff") brings this action against Defendants Goldin Restructuring Fund, L.P. ("Goldin Fund" or the "Fund"); Goldin Capital Partners, L.P. ("Goldin Partners"), the Fund's general partner; Goldin Capital Management, L.P. ("Goldin Management"), the Fund's manager; Goldin Associates, L.L.C. ("Goldin Associates"), a financial and strategic advice firm associated with the Fund; and individual defendants Harrison J. Goldin ("Harrison"), David Pauker ("Pauker"), and Lawrence J. Krule ("Krule"), who are the principals of Goldin Partners. (Compl. ¶ 1.)¹ Heller brings a common law claim for breach of fiduciary duty, as well as a statutory claim for a violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (the "Exchange Act"), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder.

Before the Court is Defendants' motion to dismiss the Complaint pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure and Sections 21D and 21E of the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4(b) (the "PSLRA"). For the reasons that follow, Defendants' motion is granted in part and denied in part.

I. BACKGROUND

A. Facts²

Plaintiff Heller is a New York resident and the president of H. Heller & Co., a "plastics raw materials manufacturing business." (Compl. ¶ 11.) Although experienced in "broker discretionary" accounts, Heller labels himself an "investing neophyte." (Id.) Defendants are a set of interrelated individuals and entities involved or associated with managing and operating the Goldin Fund. (Id. ¶ ¶ 11-18.)³ The instant case arises out of events surrounding Heller's capital commitment to the Goldin Fund, which resulted in the loss of $443,769 in cash. (Id. ¶ 73.)

1. The Goldin Fund's Objectives and Formation

The Goldin Fund was an investment fund established in 2004 to invest in distressed and underperforming companies. (Id. ¶ ¶ 12, 22.) To finance this plan, the Fund intended to raise capital commitments of $200 million, which it would use to manage a diverse portfolio of eight to twelve investments, making individual investments of up to a maximum of 20% of committed capital in each underperforming company. (Id. ¶ 24.) These investment objectives were intended to ensure "a measure of risk diversification." (Id.)

Goldin Partners, the Fund's general partner, planned to raise the $200 million in a two-stage process. (Id. ¶ 25.) Initially, it would seek capital commitments until the "First Closing Date," the date on which the Fund would close on these initial investors' capital commitments and commence its operations. (Id.) After the "First Closing Date," Goldin Partners would continue to seek additional capital commitments from new and existing investors until the "Final Closing Date," when the Fund would close on these subsequent commitments and no longer accept any further capital commitments. (Id.) Investors would be locked into their capital commitments from the time the Fund closed on their commitment until three years after the Final Closing Date, and would be required to make cash contributions as called on by the Fund during that time. (Id.)

Plaintiff alleges that "prospective investors greeted the Fund with a marked lack of enthusiasm." (Id. ¶ 26.) By the originally planned First Closing Date of July 31, 2004, the Fund had raised less than $40 million of the $200 million target. (Id.) As a result, Defendants chose to delay the First Closing Date, and thereby the commencement of the Fund's operations, by six months, until January 31, 2005. (Id. ¶ 27.) The Fund failed to raise any additional capital during these additional months, and by February 2005, the Goldin Fund had still only raised approximately $40 million, well short of its goal of raising $200 million in capital commitments. (Id. ¶ 28.)

2. Heller's Investment in the Goldin Fund

Heller and Harrison first met socially in January 2005. Heller subsequently met with all three individual Defendants on February 1, 2005, to discuss investing in the Goldin Fund (the "February 1 Meeting" or the "Meeting"). (Id. ¶ 29.) At the February 1 Meeting, the individual Defendants made various oral representations about the Goldin Fund, and also provided Heller with a set of written documents describing the Fund (the "Solicitation Documents"). (Id. ¶ 33.) The Solicitation Documents included, inter alia, the Fund's Confidential Offering Memorandum, dated June 2004 (the "Offering Memorandum"); an unexecuted draft of the Fund's Amended and Restated Limited Partnership Agreement, dated June 8, 2004 (the "Draft LP Agreement"); a printed presentation on the Fund in the form of a slideshow, dated January 2005 (the "Presentation"); and the Fund's Subscription Documents (the "Subscription Documents"), including a Subscription Agreement. (Id.)⁴

During the February 1 Meeting, the individual Defendants explained the Goldin Fund's investment objectives, particularly emphasizing the Fund's targeted $200 million capitalization and goal of achieving portfolio diversification. The individual Defendants made these representations orally (id. ¶¶ 30-31) and through the written materials provided to Heller. For example, the first paragraph of the first page of the Offering Memorandum provided that "[t]he Fund is seeking to raise capital commitments of $200 million, which will be used to make individual investments, each up to a maximum of 20% of committed capital." (See id. ¶ 35; see also Defs.' Mem. Ex. A. at 1.) The Offering Memorandum later expanded on the Fund's investment objectives, highlighting the Fund's goal of achieving portfolio diversification with its $200 million capital commitment. (See Compl. ¶ 36; see also Defs.' Mem. Ex. A. at 10.) The Presentation began by noting the Fund's "Target $200M in invested capital," and addressed portfolio diversification in a later slide entitled "Investment Objectives," which stated that the Fund's objectives included, inter alia, "[b]uild[ing] a portfolio with specific limits on single-company and industry concentration" and "[c]omplet[ing] 8-12 transactions during a 3-year investment period, with an average investment of $15-25 million and a minimum investment of $5 million." (Compl. ¶¶ 37-38.)

Plaintiff alleges that—in conjunction with these written and oral representations concerning the Fund's capitalization and investment goals—the individual Defendants made several material misrepresentations and omissions at the February 1 Meeting. Specifically, Plaintiff alleges that the individual Defendants, inter alia, (1) failed to disclose that the Fund had been unable to raise more than $40 million in capital commitments (id. ¶ 40); (2) did not disclose that the Fund had managed to raise only this amount even after engaging in lengthy and prolonged fund raising efforts, and that therefore, the Fund was unlikely to "be rescued by additional investors" (id. ¶¶ 40, 50-52, 82); (3) failed to explain the possible effect that such a capital shortfall would have on the Fund's ability to diversify its portfolio and meet its other stated investment objectives (id ¶¶ 44-47, 82); (4) misrepresented that a prominent investor and businessman had committed approximately $40 million to the Goldin Fund (id. ¶¶ 42-43, 82); (5) misled Heller into believing that he would lose the opportunity to invest in the Fund if he did not do so immediately, when, in fact, the Fund would actually remain open to new capital commitments for at least another nine to twelve months after the February 1 Meeting (id. ¶¶ 53-54, 82); and (6) did not reveal that the Securities and Exchange Commission had investigated Harrison in the 1970s (id. ¶¶ 56-62, 82).⁵

"Relying on the truth and completeness" of Defendants' written and oral representations, Heller purchased a limited partnership interest in the Goldin Fund with a capital commitment of $1 million "shortly after" the February 1 Meeting. (Id. ¶ 64.) Heller did not learn about the Fund's undercapitalization until he received a letter and accompanying financial statement from Harrison, dated August 15, 2005, disclosing that the Fund had been operating during the first quarter of 2005 with capital commitments totaling only $40,750,000—"barely 20% of the Fund's $200 million target." (Id ¶ 68.)

3. The Goldin Fund's Subsequent Investment and Heller's Losses

By June 2005, approximately five months after the actual First Closing Date of January 30, 2005, the Goldin Fund still possessed only $40 million in capital commitments. (Id. ¶ 66.) In that same month, the Fund decided to invest $15 million in a medical spa company. (Id. ¶ 67.) In November 2005, the Fund invested an additional $2 million more into the company, for a total investment of $17 million. (Id.) By so doing, Defendants invested 42% of the Goldin Fund's total capital commitment in a single venture. (Id.) The Fund did not make any other investments during this time period.

On March 24, 2006, nine months after the initial investment in the medical spa company, the Goldin Fund sold the company to another investor. (Id. ¶ 71.) In this sale, the Fund's entire investment in the medical spa company was effectively lost, apart from a residual equity stake in the acquirer, an amount valued at "zero to ten percent" of the original investment. (Id.)

Heller, after making...