In re Lichtman

• Decision Date: 14 March 2008
• Docket Number: Bankruptcy No. 6:04-bk-02303-KSJ.,Adversary No. 6:04-ap-235.
• Citation: 388 B.R. 396
• Parties: In re Kevin Alan LICHTMAN, Rocio Monica Lichtman, Debtors. Prime Equity Fund, LP., et al., Plaintiffs, v. Kevin Alan Lichtman, Defendant.
• Court: U.S. Bankruptcy Court — Middle District of Florida

388 B.R. 396

In re Kevin Alan LICHTMAN, Rocio Monica Lichtman, Debtors Prime Equity Fund, LP., et al., Plaintiffs, v. Kevin Alan Lichtman, Defendant.

Bankruptcy No. 6:04-bk-02303-KSJ.

Adversary No. 6:04-ap-235.

United States Bankruptcy Court, M.D. Florida, Orlando Division.

March 14, 2008.

Kevin Alan Liehtman, Sanford, FL, pro se.

Matthew E. Miller, Law Offices of Matthew E. Miller, Washington, DC, Michael K. Spotts, Michael K. Spotts Law Offices PA, Stuart, FL, for plaintiffs.

MEMORANDUM OPINION ON COMPLAINT TO DETERMINE DICHARGEABILITY OF DEBT PUSUANT TO 11 U.S.C. § 523(A)(19)

KAREN S. JENNEMANN, Bankruptcy Judge.

The plaintiffs ¹ are a group of investors who purchased shares in a company called FinancialWeb.Com, Inc. ("FinancialWeb"). The debtor/defendant, Kevin Alan Lichtman, founded FinancialWeb with the help of his friend, Jack Cabasso. When the start-up company failed, the plaintiffs blamed Lichtman, at least in part, for their losses and now contend that any debt due to them by the debtor is not dischargeable pursuant to Bankruptcy Code² Section 523(a)(19). The plaintiffs assert claims³ of common law fraud and negligent misrepresentation arguing that Lichtman did not inform them of Cabasso's role as a founder/promoter of FinancialWeb, of Cabasso's prior criminal convictions, or of Cabasso's personal bankruptcy case. If Lichtman had disclosed these facts, the plaintiffs argue that they would never have purchased FinancialWeb stock or lost their money. In response, Lichtman, representing himself pro se, maintains he fully disclosed Cabasso's involvement in FinancialWeb and did not learn of Cabasso's criminal/bankruptcy history until after he was ousted from FinancialWeb.

Between 1991 and 1997, Lichtman, a stock broker with a Series 7 license, worked in the emerging "dot.com" industry researching stocks advertised for sale on the internet. He focused on small capital stocks, also known as "penny stocks." Lichtman first met Cabasso during this period. Lichtman was working at Continental Capital & Equity, Inc., when Cabasso sought Continental's assistance in promoting another business. Lichtman and Cabasso became friends.

Eventually, Lichtman left Continental⁴ to start his own company to design, develop, purchase, and manage internet-based business publications, providing a wide range of frequently updated, high quality financial information on user-friendly web sites. (Defendant's Exh. No. 4, p. 9). Lichtman discussed his ideas with Cabasso, who agreed to help find investors and to raise start-up capital. Lichtman focused on managing the new company and expanding its internet presences.⁵

Their initial efforts bore fruit. In February 1997, Lichtman and Cabasso founded FinancialWeb⁶ via a reverse merger⁷ into a public shell entity Cabasso located. (Plaintiffs' Exh. No. 301, Sub-Exh. A). Lichtman and Cabasso worked together to get FinancialWeb up and running. Lichtman was named as FinancialWeb's Chairman of the Board and President. He managed FinancialWeb's daily operations, website content, and product development. Cabasso held no formal position with the company and was not directly identified in any of the corporate documents or in any of FinancialWeb's early public filings.⁸ The Court assumes for the purpose of this ruling that Cabasso, who actively assisted Lichtman in starting FinancialWeb, was a promoter or control person, as those terms are contemplated in securities law.⁹

From its inception in March 1997, FinancialWeb lost money. Revenues never funded its operations. Rather, various investors, starting with Cabasso or his affiliated entities, infused millions of dollars of equity capital in exchange for stock on the hope the company eventually would succeed. However, like many other incipient dot.com businesses, FinancialWeb failed in June 2000.

Cabasso orchestrated the first wave of investment monies infused into Financial-Web. Cabasso acted as FinancialWeb's management and financial consultant through an entity called Alcott Simpson ("Alcott"). (Plaintiffs' Exh. 301, Sub-Exh. E and H). Through Alcott, Cabasso actively sought investment capital for FinancialWeb. In exchange for these efforts, Alcott and FinancialWeb executed an agreement under which Alcott would receive $10,000 per month and a number of shares in FinancialWeb. (Plaintiffs' Exh. 301, Sub-Exh. E). Alcott agreed to let these monthly payments accrue and assigned its FinancialWeb shares to two off-shore entities—Classic International Holdings ("Classic") and Stewart International ("Stewart"). Cabasso likely had an ownership interest in Alcott, Classic, and Stewart. Therefore, Cabasso may have indirectly invested the initial start-up monies and held an indirect interest in the FinancialWeb Shares later acquired by Classic and Stewart.

FinancialWeb initially issued approximately two million restricted shares. Lichtman received 1,850,000 of these initial shares,¹⁰ approximately 92.5 percent, but, in July 1997, Lichtman orally agreed to split his shares with Cabasso or with Cabasso's designees (the "Oral Agreement") in exchange for Cabasso's and Alcott's services. Lichtman testified that Cabasso deserved to receive half of the initial founder's shares because he took the risk in raising capital to start FinancialWeb.

The Oral Agreement was never reduced to writing. According to Lichtman, this was because, at inception, FinancialWeb was little more than an empty corporate shell and a business idea. In Lichtman's words, "half of nothing is still nothing," so it simply was not necessary to formalize the Oral Agreement in a writing.

Cabasso was effective in raising capital for FinancialWeb, investing at least $300,000 via three offshore entities: Rock Company ("Rock"),¹¹ Stewart,¹² and Classic (collectively, the "Offshore Entities").¹³ (Plaintiffs' Exh. No. 301, Sub-Exh. ¶) (March 27, 1997, fax from Lichtman instructing that 100,000 shares be issued to each of the Offshore Entities); (Plaintiffs' Exhibit 301, Sub-Exh. F) (Lichtman's agreement with Michael Macey, a banker in the Channel Islands, to issue these shares). Although the evidence is sparse, in all likelihood, Cabasso owned or had an ownership interest in the Offshore Entities. Cabasso was deposed in connection with this adversary proceeding, but, on the advice of counsel, declined to answer any questions regarding FinancialWeb, Alcott, Rock, Stewart, and Classic, asserting his Fifth Amendment privilege, because of charges pending against him in the New York County District Attorney's office. (Doc. No. 141, Deposition 1—Jack Cabasso—December 2, 2002). However, in at least one documented instance, mail was addressed to Rock, "care of Jack Cabasso, sole shareholder." (Doc. No. 150, Deposition 8—Scott Wilson—December 18, 2002, p. 98 l. 1-12). In other correspondence, Rock and Cabasso were discussed interchangeably. (Doc. No. 150, Deposition 8— Scott Wilson—December 18, 2002, p. 125 l. 20, p. 126 l. 1-13).

Cabasso also was effective in attracting new, unaffiliated investors. Cabasso convinced both Matt Schilowitz and Glenn Laken to invest substantial capital in FinancialWeb. Schilowitz entered into a consulting relationship with FinancialWeb to provide services very similar to those Cabasso was rendering through Alcott. Shilowitz also invested in FinancialWeb through two business entities—the Harmat Organization, Inc. ("Harmat") and Masada I, L.P. ("Masada"). Laken, an experienced commodities trader and money manager from Chicago, also invested in FinancialWeb, contributing approximately $400,000 in August 1998.

Cabasso lastly located an accountant, Jere Lane,¹⁴ who Lichtman later hired as FinancialWeb's outside accountant. Lane prepared audits of FinancialWeb for 1997 and 1998. Lane also may have assisted the accounting firm of Deloitte and Touche When the firm was later retained to prepare FinancialWeb's eventual filings with the Securities and Exchange Commission.

By late 1998, however, the fund raising efforts of Cabasso, Shilowitz, and Laken were not enough. FinancialWeb was experiencing severe cash problems. Lichtman withheld his own salary, juggled bills, and feared FinancialWeb would close. FinancialWeb was scrambling for investors and entered into yet another agreement with an investment bank, First American Investment Banking Corporation ("First American"), to raise capital. First American was owned, in part, by Frank. Musolino, who personally invested $500,000 in FinancialWeb in exchange for one million shares of stock. First American and Musolino were represented in the transaction with FinancialWeb by Peter Peterson ("Peterson"), who performed a due diligence examination of FinancialWeb. In the course of this review, in December 1998, Peterson learned of the Oral Agreement between Lichtman and Cabasso. (Doc. No. 136, p. 127, 1. 16 through p. 128, 1. 21). Lichtman made no effort to conceal the terms or existence of the Oral Agreement.

Laken, by September 1998, also brought a new investor to FinancialWeb—John Katsock Jr. (Doc. No. 135, pp. 41-42). Katsock, the spokesperson for the plaintiffs in this adversary proceeding, is a sophisticated businessman with a Series 7 license and experience in the securities trading industry. He was the managing director of a family-owned brokerage business trading in securities, stocks, bonds, future funds, and options, called Pinnacle Asset Management, Inc. ("Pinnacle"). (Doc. No. 135, pp. 37-38). Pinnacle, in turn, had approximately 1,000 to 1,500 retail brokerage customers and annual gross revenue of approximately $4 to $6 million. Katsock was the person who encouraged his customers, mostly relatives or friends of Katsock or their affiliated companies, to purchase FinancialWeb's stock. (Doc. No. 135, pp. 39-40). The plaintiffs are customers of Pinnacle who bought FinancialWeb shares on Katsock's advice and recommendation. Katsock purchased his first shares of FinancialWeb for himself or Pinnacle's clients in September...