In re Crazy Eddie Securities Litigation
| Decision Date | 20 January 1993 |
| Docket Number | No. 87 CV 33,88 CV 3481.,87 CV 33 |
| Citation | 812 F. Supp. 338 |
| Parties | In re CRAZY EDDIE SECURITIES LITIGATION. OPPENHEIMER-PALMIERI FUND, L.P., Entertainment Marketing, Incorporated, and Elias Zinn, Plaintiffs, v. PEAT MARWICK MAIN & CO., KMG Main Hurdman, 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, and Carl G. Zimel, Defendants. |
| Court | U.S. District Court — Eastern District of New York |
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Sirota & Sirota (Howard B. Sirota, of counsel), Milberg, Weiss, Bershad, Specthrie & Lerach, Pomerantz, Levy, Haudek, Block & Grossman, Stull, Stull & Brody, Lowey, Dannenberg, Bemporad, Brachtl & Selinger, P.C., Kaufman, Malchman, Kaufman & Kirby, Law Offices of Harvey Greenfield, Christopher Lovell, P.C., Law Offices of Joseph H. Weiss, Abbey & Ellis, New York City, for class plaintiffs.
Milbank Tweed Hadley & McCloy (C. Stephen Howard, Suzanne Toes, of counsel), Los Angeles, Ca, New York City, for plaintiff Oppenheimer-Palmieri Fund Ltd.
Folkenflik & McGerity (Max Folkenflik, Margaret McGerity, of counsel), New York City, for plaintiffs Entertainment Marketing Inc. and Elias Zinn.
Cadwalader, Wickersham & Taft (Howard R. Hawkins, Jr., of counsel), New York City, for plaintiff Crazy Eddie, Inc.
Shearman & Sterling (Joseph McLaughlin, of counsel), New York City, for defendants Peat Marwick Main & Co. and KMG Main Hurdman.
Kaye, Scholer, Fierman, Hays & Handler (Steven Glassman, of counsel), New York City, for defendant Oppenheimer & Co., Inc.
Davis, Markel & Edwards (Thomas J. Sweeney, III, of counsel), New York City, for defendant Peat Marwick Main & Co.
Weil, Gotshal & Manges (Dennis J. Block, of counsel), New York City, for defendants Salomon Bros. Inc., Bear Stearns & Co., and Wertheim Schroder & Co., Inc.
Wilson Elser Moskowitz Edelman & Dicker (Richard Oelsner, of counsel), New York City, for defendants Penn and Horowitz, J. Liebman & Co., Gary Perlmutter and Mark Halperin.
Hoffman & Pollok, New York City, for defendants Jacob Tambor, Sasson Cohen and Zazy International Corp.
Rosenman & Colin, New York City, for defendants Leonard Rubin, Richard Portnoy and Wren Distributing Co.
Warner & Joselson (Jonathon D. Warner, Sheryl L. Bregman, of counsel), New York City, for defendant Sam E. Antar.
Beldock Levine & Hoffman (Brian E. Maas, of counsel), New York City, for defendant Isaac Kairey.
Leader & Berkon (Frederick D. Berkon, of counsel), New York City, for defendants Eddie Antar, Solomon E. Antar, Edmond Levy, William H. Saltzman, Steve Pasquariello, and Carl G. Zimel.
David M. Rubin, New York City, for defendant Abraham Grinberg.
Morgan, Lewis & Bockius (Kevin T. Rover, of counsel), New York City, for defendant David V. Panoff.
Kelley, Drye & Warren (John P. Marshall, of counsel), New York City, for defendant James H. Scott, Jr.
Eddie Antar, defendant pro se.
Eddie Gindi, defendant pro se.
Jean Cocchiara, defendant pro se.
Kathleen Morin, defendant pro se.
David Neiderbach, defendant pro se.
Arnold Spindler, defendant pro se.
Hellring Lindeman Goldstein & Siegal (Stephen L. Dreyfuss, Matthew E. Moloshok, of counsel), Newark, NJ, for defendants Danielle Antar, Deborah Rosen Antar, Gabrielle Antar, Simone Antar, Nicole Antar and Noelle Antar.
Law Offices of Raoul Lionel Felder, P.C., New York City, for defendant Deborah Rosen Antar.
Gersten, Savage, Kaplowitz & Curtin, New York City, for defendants Michelle Antar, Rose Antar, Rose M. Antar, Rori Antar, Sam A. Antar, Sam M. Antar, Allen Antar, Adam Kuszer, Benjamin Kuszer, Ellen Kuszer, Simon Kuszer and Lillian Rosen.
Kostelanetz Ritholz Tigue & Fink, New York City, for defendants Rose Antar and Sam M. Antar.
This civil litigation arises from the allegedly fraudulent and negligent conduct of Eddie Antar and his relatives and the officers, directors, auditors, underwriters, employees, and vendors of the consumer electronics retailer Crazy Eddie, Inc. ("Crazy Eddie") (now in bankruptcy).
The various complaints in the case have alleged, in summary, that from 1980 through 1987, Eddie Antar, founder of Crazy Eddie, together with numerous relatives and associates, engaged in a series of spectacularly bold schemes designed falsely to portray Crazy Eddie as a thriving commercial enterprise so that investors would buy shares in it and those shares would sell at an inflated price. According to the proposed amendment to the class action complaint in In re Crazy Eddie Sec. Litig. (the "Class Complaint"), Eddie Antar realized cash proceeds of $72,245,649, his father Sam M. Antar realized $16,857,332, and other family members and associates realized lesser amounts. In this opinion the court refers to this series of schemes collectively as the "Crazy Eddie Fraud."
The court addresses three motions. The class plaintiffs move to amend their complaint. Their proposed complaint, styled as the "Fourth Supplemental Amended and Consolidated Complaint," newly alleges that defendants Peat Marwick Main & Co. and KMG Main Hurdman (now merged and referred to collectively as "Peat Marwick") violated sections 1962(c) and 1962(d) of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961 et seq., and makes additional changes to reflect previous rulings of this court.
Plaintiffs Entertainment Marketing, Inc. and Elias Zinn move to amend their complaint (the "EMI/Zinn Complaint"). The proposed complaint (i) adds a RICO claim against Peat Marwick and other individual defendants, (ii) broadens the previously asserted claim of common law fraud to en-compass Peat Marwick and adds a demand for punitive damages, (iii) broadens the negligence claims to encompass certain individual defendants, (iv) eliminates one claim, and (v) drops certain defendants from other claims.
Peat Marwick cross-moves for summary judgment on the negligence and negligent misrepresentation claim alleged in the EMI/Zinn Complaint.
Numerous memoranda and orders of this court have recounted the facts of this litigation. The court assumes familiarity with its previous published memoranda and orders dated December 30, 1988, Bernstein v. Crazy Eddie, Inc., 702 F.Supp. 962 (E.D.N.Y.1988); June 16, 1989, In re Crazy Eddie Sec. Litig., 714 F.Supp. 1285 (E.D.N.Y.1989); June 19, 1990, In re Crazy Eddie Sec. Litig., 740 F.Supp. 149 (E.D.N.Y.1990); September 19, 1990, In re Crazy Eddie Sec. Litig., 747 F.Supp. 850 (E.D.N.Y.1990); March 6, 1991, In re Crazy Eddie Sec. Litig., 135 F.R.D. 39 (E.D.N.Y.1991); May 1, 1992, In re Crazy Eddie Sec. Litig., 792 F.Supp. 197 (E.D.N.Y.1992) (the "May 1992 Order"); and September 4, 1992, In re Crazy Eddie Sec. Litig., 802 F.Supp. 804 (E.D.N.Y.1992) (the "September 1992 Order").
The court considers together the motions of the class plaintiffs and the EMI/Zinn plaintiffs to add RICO claims against Peat Marwick.
The substance of these claims is that Alphonse Ferrara, the former Peat Marwick partner who supervised or substantially participated in that firm's audit of Crazy Eddie financial statements for the years ending 1985, 1986 and 1987, knew about or deliberately disregarded obvious evidence of material misrepresentations in Crazy Eddie financial statements and intentionally concealed fraud from its directors, underwriters, and investors.
The two complaints allege, in substance, the following.
(a) Failure to investigate discovered inventory fraud in 1985. In the course of Ferrara's first annual audit in 1985, he learned that Crazy Eddie inventory tickets and count sheets at three separate stores were physically altered, inflating the company's inventory by more than $1 million. He spoke to Eddie Antar who explained that the alterations must have been made by a disgruntled employee and not by management. Ferrara accepted this explanation, adjusted the inventory to reverse the effect of the known alterations, and took no further steps to ascertain whether the fraud was wider than the known alterations.
Ferrara failed to broaden the scope of Peat Marwick's inventory audit in 1986, despite his discovery of attempted fraud the year before. As a result, according to the EMI/Zinn Complaint, Ferrara overlooked a scheme devised by Eddie Antar to overstate Company inventory by $12 to $14 million.
(b) Active concealment of the Zazy scheme in 1986. On March 5, 1987 Crazy Eddie's counsel, James Purcell of Paul Weiss Rifkind Wharton & Garrison, was informed by individuals at Salomon Brothers Inc that an anonymous telephone caller had told them of "theft at the highest levels of Crazy Eddie management" involving the three members of Crazy Eddie's "Office of the President" and Zazy International ("Zazy"). Plaintiffs would later learn of a variety of fraudulent transactions, including theft of Company inventory, perpetrated by Crazy Eddie and Zazy.
Purcell asked Ferrara and James H. Scott, Jr., a Columbia Business School professor who then headed the Crazy Eddie Audit Committee, thoroughly to investigate the Zazy transactions. Purcell memorialized these conversations in a contemporaneous "Office Memorandum" discovered shortly before the EMI/Zinn plaintiffs sought leave of the court to amend their complaint.
Peat Marwick had not yet started its 1987 audit and could easily have designed the audit to examine the Zazy transactions. It did not.
According to minutes of a meeting of the Crazy Eddie Audit Committee on June 8, 1987, appended to the EMI/Zinn Complaint, "representatives" of Peat Marwick, alleged to include Ferrara, reported that Peat Marwick had investigated allegations of "irregularities with respect to sales by the Company to Zazy's" and that it had "no reason to believe that any irregularities had occurred." Ferrara...
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