Insurance Consultants of Am. v. Southeastern Ins.
| Decision Date | 21 August 1990 |
| Docket Number | Civ. A. No. 89-3389. |
| Citation | 746 F. Supp. 390 |
| Court | U.S. District Court — District of New Jersey |
| Parties | INSURANCE CONSULTANTS OF AMERICA, INC., EMPLOYEE PENSION PLAN; Albert and Flora Lechter; Bernard E. Koff; Murray and Carole Novick; Gary Schaedel; L. Arne Skilbred; Profit-Sharing Trust for Marprowear Corp.; Ira Coleman; John A. Roberts Co. Inc. Retirement Plan; Frank P. Farinella, Jr.; The Spitz Trust; Zarrow, Zarrow & Klien; Donald C. Works, Jr.; Kenneth M. Reichle, Jr.; Stateline Management Pension Fund; Malt Products Corporation; and J.W. Pierson Company Pension Plan, Plaintiffs v. SOUTHEASTERN INSURANCE GROUP, INC.; Robert A. Beck II; Ronald M. Prupis; Leonard Bellezza; Byron L. Sparber; William D. Lipkind; Neil L. Prupis; Stephen E. Lampf; Paul M. Petigrow; Ernest J. Sabato; William Paulus, Jr.; Harry Olstein; Frederick C. Mezey; Joseph S. Littenberg; Linda F. Burton; Lynn K. Day; Carl B. Shible; Deloitte Haskins & Sells; Lampf, Lipkind, Prupis & Petigrow; Richard Roe, Inc. and John Doe, Defendants. |
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Theodore L. Abeles, Sills, Cummis, Zuckerman, Radin, Tischman, Epstein & Gross, Newark, N.J., for plaintiffs.
Michael M. Rosenbaum, Budd, Larner, Gross, Rosenbaum, Greenberg & Sade, Short Hills, N.J., for defendants Bellezza, Sabato, Olstein, Mezey and Paulus.
L. Bruce Puffer, Shanley & Fisher, Morristown, N.J., for defendant Deloitte Haskins & Sells.
Matthew P. Boylan, Mary Jo Reich, Lowenstein, Sandler, Kohl, Fisher & Boylan, Roseland, N.J., for defendant Lampf, Lipkind, Prupis & Petigrow.
Bradley S. Hartman, Litman, Muchnick, Wasserman & Hartman, Hollywood, Fla., for defendant Shible.
Jules Rossi, Long Branch, N.J., Jay Starkman, Steel, Hector & Davis, Miami, Fla., for defendant Beck.
Stephen E. Lampf, William D. Lipkind, Neil L. Prupis and Paul M. Petigrow, Lampf, Lipkind, Prupis & Petigrow, West Orange, N.J., pro se.
David M. Feinberg, Feinberg, Feinberg & Trisch, Rahway, N.J., for defendant Littenberg.
Byron L. Sparber, Squire, Sanders & Dempsey, Miami, Fla., pro se.
Ronald M. Prupis, Fisher Island, Fla., pro se.
Lynn K. Day, Coral Springs, Fla., pro se.
Linda F. Burton, Fort Lauderdale, Fla., pro se.
The plaintiffs in this action are a group of investors who invested and lost substantial sums of money in the private offering (the "Private Offering") of securities in a high-risk business venture called the Southeastern Insurance Group, Inc. ("SIG"). In an effort to recoup some or all of their investment, the plaintiffs initiated this lawsuit alleging violations of various federal and state securities laws, the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. ("RICO") as well as common law fraud, negligence and other claims against a large group of individuals involved in the Private Offering and the subsequent operation of SIG.
Presently before the court are the individual and consolidated motions of the defendants for summary judgment pursuant to Fed.R.Civ.P. 56 or to dismiss pursuant to Fed.R.Civ.P. 9(b) and 12(b)(6) as to the federal claims and to dismiss the state claims for lack of pendent jurisdiction.1
For the reasons which follow, summary judgment is granted as to the federal securities law claims on the ground that the plaintiffs failed to comply with the applicable statute of limitations. The direct RICO claim, which is predicated upon the same facts as the securities fraud claims, is dismissed because the plaintiffs have not alleged the existence of a pattern of racketeering activity with regard to the conduct of the defendants prior to the Private Offering. The state law claims pendent to those federal claims are dismissed for lack of pendent jurisdiction.
The motions to dismiss the derivative RICO claim and the state law claims pendent thereto are denied. However, the plaintiffs are directed to file an amended pleading setting forth the derivative RICO claim in a separate count pursuant to Fed. R.Civ.P. 10(b).
The plaintiffs are alleged to be shareholders of SIG. The Class Action and Derivative Complaint and Demand for Jury Trial was filed on 10 August 1989, amended on 11 August 1989 to add substantive allegations and amended a second time on 26 June 1990 to add additional plaintiffs (the "Second Amended Complaint"). Plaintiffs Ira Coleman ("Coleman") and Insurance Consultants of America, Inc. Employee Pension Plan ("ICA") verified the Second Amended Complaint. Although the defendants claim certain plaintiffs did not invest in SIG (LLPP Brief at 1 n. 2), there is no reason to believe Coleman and ICA did not invest in SIG. The Second Amended Complaint constitutes an affidavit.
Defendant SIG was an insurance holding company organized in 1982 under Florida law. At the time relevant to this action, SIG was engaged primarily in the surety insurance and reinsurance businesses2 through subsidiaries which were incorporated in Florida or New Jersey. Id., ¶¶ 28-34. At least three wholly-owned subsidiaries of SIG obtained certifications from federal or state authorities to act as surety insurers and reinsurers.3
At the time this action was commenced, most of the operating subsidiaries of SIG had been placed in rehabilitation or had their authorizations revoked. Id., ¶ 60. On 5 January 1990, SIG filed a bankruptcy petition in the Southern District of Florida and a bankruptcy trustee was appointed on behalf of SIG. Directors' Brief at 25, Ex. C. On 7 June 1990, the trustee obtained permission from the bankruptcy court to retain plaintiffs' counsel to represent the estate of SIG in its derivative claims.4
Defendant Lampf, Lipkind, Prupis & Petigrow ("LLPP") is a law firm located in West Orange, New Jersey. The named partners of LLPP are defendants Stephen E. Lampf ("Lampf"), William D. Lipkind ("Lipkind"), Neil L. Prupis ("N. Prupis") and Paul M. Petigrow ("Petigrow") (collectively the "LLPP Defendants"). The LLPP Defendants are alleged to have actively solicited the plaintiffs to purchase shares of SIG securities in the Private Offering and to have acted as counsel to SIG in connection with the Private Offering.5
In addition to their affiliation with LLPP, Lipkind and N. Prupis were directors and executive officers of SIG and its subsidiaries. Lipkind acted as general counsel of SIG and SCI-NJ and was a member of SIG's steering committee. N. Prupis served as assistant secretary, executive vice president and general counsel of SIG and president of SCI-NJ. Second Amended Complaint, ¶¶ 16-17.
Defendant Ronald M. Prupis ("R. Prupis"), the brother of N. Prupis, was the chairman of the board of directors, chief executive officer and an executive vice president of SIG. Other directors and officers or controlling persons of SIG include defendants Robert A. Beck II ("Beck"), Leonard Bellezza ("Bellezza"), Byron L. Sparber ("Sparber"), Ernest J. Sabato ("Sabato"), William Paulus, Jr. ("Paulus"), Harry Olstein ("Olstein"), Frederick C. Mezey ("Mezey"), Carl B. Shible ("Shible") and Joseph S. Littenberg ("Littenberg"). Defendants Linda F. Burton, Lynn K. Day are alleged to be officers of SIG or its subsidiaries, but not directors. Id., ¶¶ 12-15, 18-25.
Defendant Deloitte Haskins & Sells ("DHS") is a New York accounting firm which certified the consolidated financial statements of SIG and its subsidiaries at the time of the Private Offering.
The plaintiffs purchased SIG securities pursuant to a Private Placement Memorandum ("PPM"), dated 30 April 1986, and an Investment Questionnaire and Subscription Agreement (the "Subscription Agreement") executed by the individual plaintiffs in connection with their investments in SIG. Lipkind Cert., Exs. 1 & 2.
A subscription unit of SIG ("Unit") consisted of four hundred shares of ten-cent-par common stock at $187 per share and fifteen ten-year, subordinated, callable debentures in the principal amount of $10,000 bearing an interest rate of 12% per annum. The common stock of SIG was unregistered and there was no public market for the shares. The Private Offering consisted of 134 Units. Each Unit had a subscription price of $224,800. Certain investors were allowed to purchase fractional Units, with the permission of SIG.
The closing of the Private Offering occurred on 11 August 1986 (the "Closing Date") at which time the entire subscription of SIG securities was issued to qualified investors. The Private Offering aggregated in excess of $30,000,000. The proceeds of the Private Offering were used as follows: approximately $800,000 to legal, accounting, financial advisory, printing and other fees and expenses associated with the Private Offering, approximately $1,788,000 to principal and interest obligations on an existing promissory note of SIG, approximately $27,000,000 to the capital of SRC and approximately $535,000 as the working capital of SIG. Second Amended Complaint, ¶ 52; Lipkind Cert., ¶ 10.
LLPP acted as an advisor to SIG and its subsidiaries in connection with the Private Offering. Nearly all of the investors in the SIG Private Offering were clients of the LLPP firm. The LLPP Defendants are alleged to have participated in the drafting of the PPM and to have offered the Units of SIG to the individual plaintiffs pursuant to oral and written representations and the PPM.
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