In re Haven Industries, Inc.

• Decision Date: 29 November 1978
• Docket Number: No. 76 Civ. 2626.,MDL No. M21-18,76 Civ. 2626.
• Citation: 462 F. Supp. 172
• Parties: In re HAVEN INDUSTRIES, INC. Securities Litigation. Christine LEMMELIN et al., Plaintiffs, v. HAVEN INDUSTRIES, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

462 F. Supp. 172

In re HAVEN INDUSTRIES, INC. Securities Litigation Christine LEMMELIN et al., Plaintiffs, v. HAVEN INDUSTRIES, INC., et al., Defendants.

MDL No. M21-18, No. 76 Civ. 2626.

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

November 29, 1978.

Sarapas, Madaus, Price & Arakelian, Worcester, Mass., for plaintiffs; Robert Martin, Worcester, Mass., of counsel.

Wagner, McNiff & DiMaio, New York City, for defendants Brown's, Berger, Wagner, Kaufman and DiMaio.

Goldstein, Shames, Hyde, Wirth, Bezahler & Cahill, New York City, for National Sugar, Federated Communications Corp., Bilger, Schiffman, Corbin, Airport Services, Oil Resources, and Liederman; Jeffrey I. Klein, New York City, of counsel.

Salon, Silver, McCabe & Sidel, Boston, Mass., for Carpentier; Thomas F. Heffernon, Boston, Mass., of counsel.

James P. Del Guercio by John Y. Chu, Asst. Gen. Counsel, Beverly Hills, Cal., for City National Bank, Kyman City National Bank of Los Angeles.

D'Amato, Costello & Shea, New York City, for Bezahler; Richard McGahren, New York City, of counsel.

Irell & Manella, Los Angeles, Cal., for Green; Louise Wheeler, Los Angeles, Cal., of counsel.

Gifford, Woody, Carter & Hays, New York City, for Harris Upham & Co.; Sheila Maura Kahoe, New York City, of counsel.

Mountain, Dearborn & Whiting, Worcester, Mass., for Oftring & Co., Oftring; Charles B. Swartwood, III, Worcester, Mass., of counsel.

Brown, Rudnick, Freed & Gesmer, Boston, Mass., for Buchalter; Lawrence M. Levy, Boston, Mass., of counsel.

Davis, Polk & Wardwell, New York City, for Ernst & Ernst; Dale L. Matschullat, New York City, of counsel.

OPINION

GAGLIARDI, District Judge.

This litigation consists of two actions which, by order of the Judicial Panel on Multidistrict Litigation, have been assigned to this court for coordinated pretrial proceedings pursuant to 28 U.S.C. § 1407. In re Haven Industries, Inc., MDL Docket No. 246 (J.P.M.L. June 9, 1976). The action captioned as Lemmelin v. Haven Industries, Inc., 76 Civ. 2626 (LPG) was commenced in the United States District Court for the District of Massachusetts in August, 1975 by forty-eight plaintiffs seeking compensatory and punitive damages against thirty-four defendants. Plaintiffs, purchasers of the stock of Haven Industries, Inc. ("Haven")¹ and related corporations, allege a nationwide conspiracy to create a market for Haven stock and to inflate its value artificially in violation of § 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j(b); Rule 10b-5, 17 C.F.R. § 240.10b-5; and § 17(a) of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. § 77q(a). Jurisdiction is premised upon § 27 of the 1934 Act, 15 U.S.C. § 78aa, and § 22(a) of the 1933 Act, 15 U.S.C. § 77v. Various defendants have moved to dismiss the complaint pursuant to Rules 12(b) and 9(b) Fed.R.Civ.P., or, in the alternative, for summary judgment pursuant to Rule 56, Fed.R.Civ.P.

Statement of Facts

The material facts, as set forth in the amended complaint and the parties' affidavits, are as follows. Plaintiffs purchased shares in Haven and its related companies over the six-year span from 1968 to 1974 through various brokerage firms.² Defendant Donald Liederman became Haven's president, director and controlling shareholder in 1968 when Haven was a "bankrupt shell" corporation (Amended Complaint, p. 13). Count I of the amended complaint alleges that Liederman conspired with, among others, the brokerage firms from which plaintiffs purchased their Haven stock to sell large amounts of the worthless stock at artificially inflated prices. After causing Haven to issue large amounts of stock to these brokerage firms at little or no charge and selling large amounts of Haven and related company stock to the public through nominees, Liederman allegedly met with the principals and registered representatives of the defendant brokerage firms and induced them to sell Haven stock to their customers on the basis of false, "inside" information. Customers, including the plaintiffs, were told that "the broker had inside information directly from Liederman as President that a wonderful development was about to take place in Haven's business, that when this information became public knowledge the price of Haven stock would go much higher and that the buyer would, therefore, make a lot of money." (Id., p. 14). In fact, there was no real market for Haven stock and the brokerage firms maintained its price level by reporting sales at higher prices and by selling the stock back and forth between each other. (Id.). Public disclosure to the effect that the "wonderful development" in question had not taken place would eventually be made, the artificial price support would be withdrawn and Haven stock would collapse in value. After a suitable delay during which the brokerage firms assured the plaintiffs that their potential losses were due only to temporary market conditions, a new "wonderful development" would be fabricated and the cycle would be repeated. (Id.). Despite fluctuations in the rigged market price, Haven was insolvent, its stock was worthless and defendants allegedly knew this to be so. (Id.).

In inducing plaintiffs to purchase the stock of Haven and its related companies from 1968 through 1974, the following false "inside" information was disclosed to plaintiffs: 1) that National Hospital Inc. ("National Hospital"), a corporation controlled by Liederman, was about to consummate a favorable merger with American Medicare Corporation ("American Medicorp") which would make National Hospital's stock very valuable; 2) that Haven was to acquire the notes of a valuable company known as Recreational Vehicles, Inc. ("RVI") in return for the sale of Brown's Limousine Services, Inc., ("Brown's"), a Haven subsidiary; 3) that Haven and Oil Resources, Inc. ("Oil Resources"), a Liederman-controlled corporation, were to acquire the stock of Barco of California, Inc. ("Barco"); 4) that Haven was about to sell its stock in the National Sugar Refining Company ("National Sugar"), a Haven subsidiary, for a price which would increase the value of Haven stock from $4.00 to $5.00 per share; 5) that Airport Services, Inc. ("Airport"), Haven's subsidiary, had acquired worldwide marketing rights to the G.R. Valve, a gas-saving device for automobiles; and 6) that Haven was about to acquire Media Creations, Ltd. ("Media"), a profitable business engaged in the production of television commercials. (Id., pp. 15-16). Each of these tips was allegedly false or misleading as described in detail below.³

The defendants made sales of National Hospital stock to some of the plaintiffs by telling them that Haven's president had informed them that National Hospital was about to sell nine hospitals to American Medicorp and that the sale would greatly increase the value of National Hospital stock. Liederman subsequently disclosed this information publicly in April 1969. In April, 1971, however, Liederman announced that only five hospitals had been sold and that the proceeds of this sale, $16,000,000 in American Medicorp debentures, equaled less than $3.00 per share of National Hospital stock. (Id. p. 16).

As to the tip concerning Haven's sale of Brown's to RVI for RVI's valuable notes, plaintiffs allege that several of the individual defendants conspired to acquire Brown's assets for themselves and for RVI. Although Haven disclosed that the sales price for Brown's assets was $580,000, consisting of a $425,000 non-interest bearing convertible note and a $155,000 9% note due in September, 1972, Haven purportedly failed to disclose to plaintiffs that RVI was a "shell" created by defendant Liederman and that RVI had no assets with which to pay any portion of the principal amount and interest. Plaintiffs further contend that on March 29, 1972, RVI compelled Haven to convert the $425,000 note into 223,684 shares of RVI stock. Defendants Robert Green and Co., Inc. ("Green") and J. L. Schiffman and Co., Inc. ("Schiffman"), registered broker-dealers, allegedly maintained an inflated market for RVI shares and Haven incurred a $300,000 loss as a result of the conversion. On April 5, 1972, defendants Liederman and Alvin Schwartz, an officer and director of both RVI and Brown's, initiated an agreement between Haven and Brown's pursuant to which no inter-company transactions would be permitted for two years thereby preventing Brown's from paying to Haven any debts owned by RVI. (Id., pp. 16-18).

Plaintiffs also allege that Brown's prospectus of December 31, 1972 prepared by defendant law firm Wagner, Kaufman & DiMaio ("Wagner"), contained several misstatements and omissions. While that prospectus stated that defendant Schwartz had agreed to purchase 405,000 RVI shares from Haven and others, it allegedly failed to disclose that Schwartz had agreed simultaneously to sell those shares to nominees for defendants Schwartz and Liederman and that these persons planned to resell the shares publicly at an inflated market price of $1.25 per share in conjunction with a planned public offering of Brown's stock. In 1972, Haven allegedly agreed to sell 150,000 of its shares to Schwartz for $37,500 on condition that Schwartz resell his RVI shares to the nominees for eventual public resale. Haven did not disclose the existence of this agreement until its proxy statement of August 31, 1973, at which time it falsely disclosed that the agreement had been reached in March 1973 and omitted Schwartz's name in order to conceal his identity. Defendant Wagner, a New York law firm which acted as counsel to Brown's and RVI, knew of the scheme to resell these shares and induced defendant Paul Gerstner to act as escrow agent for Schwartz and his nominees. (Id., pp. 18-20).

Plaintiffs charge Haven and defendant Donald Bezahler, the corporation's secretary-treasurer, with falsely disclosing in Haven's August 31, 1973 Proxy Statement that Haven exchanged the $155,000 9% note it had received as part...