Leisure Founders, Inc. v. CUC Intern., Inc.

• Decision Date: 31 August 1993
• Docket Number: No. 92-2879-Civ.,92-2879-Civ.
• Citation: 833 F. Supp. 1562
• Parties: LEISURE FOUNDERS, INC. and Kenneth V. Knight, Plaintiffs, v. CUC INTERNATIONAL, INC.; E. Kirk Shelton; and Stuart Bell, Defendants.
• Court: U.S. District Court — Southern District of Florida

833 F. Supp. 1562

LEISURE FOUNDERS, INC. and Kenneth V. Knight, Plaintiffs, v. CUC INTERNATIONAL, INC.; E. Kirk Shelton; and Stuart Bell, Defendants.

No. 92-2879-Civ.

United States District Court, S.D. Florida.

August 31, 1993.

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Barton S. Sacher, Hornsby, Sacher, Zelman & Stanton, P.A., Miami, FL, for plaintiffs.

Bruce Berman, Weil, Gotshal & Manges, Miami, FL, for defendants.

ORDER

MARCUS, District Judge.

THIS CAUSE comes before the Court upon Defendants' motion to dismiss and motion to stay proceedings pending resolution of a parallel action in state court for rescission of contract filed by Defendants. (D.E. 19). The Verified Complaint alleges claims for breach of contract, fraud, civil theft (Fla. Stat. §§ 812.014 and 772.11), conspiracy to commit fraud and civil theft, violations of Florida Securities and Investor Protection Act (Fla.Stat. § 517.211), violations of § 10(b) of the Securities and Exchange Act, 15 U.S.C. § 78j(b) and S.E.C. Rule 10b-5, 17 C.F.R. § 240.10b-5, a derivative claim for controlling person liability under § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), and a claim for injunctive relief.

Defendants move to dismiss each of these claims (with the exception of the claims for breach of contract and injunctive relief) for failure to state a claim upon which relief can be granted. Because we find that the federal claims (and the parallel Florida securities law claim) do state a cause of action for fraud "in connection with the purchase or sale of a security," and because Plaintiff has articulated a colorable claim for fraudulent inducement which is not barred by Florida's economic loss rule, Defendants' motion to dismiss must be DENIED IN PART. However, because Florida's civil theft statute only provides relief where the claim is independent of the contractual relationship, and because Plaintiffs have failed to plead a conspiracy to commit fraud with the requisite particularity, Defendants' motion to dismiss must be GRANTED IN PART.

The Verified Complaint alleges that Plaintiffs Leisure Founders, Inc. ("Leisure") and its principal Kenneth Knight entered into a contract on or about October 15, 1992 with Defendant CUC International, Inc. ("CUC"), through its agents Defendants E. Kirk Shelton and Stuart Bell to introduce CUC to a company called Leaguestar plc ("Leaguestar"), which CUC sought to acquire. Knight owned 337,005 shares (or approx. 4.9%) of Leaguestar, which holdings — according to Plaintiffs' account — made him the "swing" or controlling shareholder, since the remaining common stock was held by two rival groups, the insiders (48.9%) and the institutional investors (46.2%), neither of whom held a majority of shares.

In return for this introduction and facilitation of negotiations, the following consideration was to be provided:

(a) Leisure was to be compensated approximately $1 million (adjusted up or down depending on the closing price of the deal) as a commission,

(b) plus $100,000 in "unaccountable expenses."

In addition, the contract provided that Knight would be offered

(c) a consulting position with Leaguestar after its acquisition at a salary of $250K per year; and

(d) 30,000 options to acquire Leaguestar stock at the closing price of the deal (which was $27 7/8); and 17% of any increases in EBIT (Earnings Before Interest Expense and Taxes) over the next two years.

This compensation was over and above what Knight would receive for the sale of his block of shares (about $9.5 million). Further, the compensation was, by the terms of the contract, not dependent on any particular level of services rendered by Knight and Leisure as the contract recited that any closing on the deal would evidence sufficient consideration. The total value of the package was in excess of $5 million. Plaintiffs maintain that the sole purpose of the contract was to induce Knight to sell his shares and to cause the other shareholders thus to follow suit.

Leaguestar was acquired by CUC on December 11, 1992 through a purchase of 100% of its stock for $70 million cash, apparently after Knight's arranging of meetings and other efforts, after a prior cash plus stock offer was rejected. According to the Complaint, on December 15, 1992 CUC informed Knight and Leisure that it would not compensate them for items (a)-(d) above, but would instead pay "less than a fourth" of the value of that compensation package. Defendants filed an action for rescission in state court (which Plaintiffs removed and which was subsequently remanded), and later, Plaintiffs filed this action.

I. Motion to Dismiss Counts II, III and IV for Securities Fraud Violations

The central issue presented by the motion is whether the complaint states a claim for violation of section 10(b) of the Securities and Exchange Act and S.E.C. Rule 10(b)-5. To state a claim under § 10(b) and Rule 10(b)-5, the complaint must allege material misstatements or omissions indicating an intent to deceive or defraud "in connection with the purchase or sale of any security." See 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5; Superintendent of Ins. of New York v. Bankers Life and Casualty Co., 404 U.S. 6, 12 92 S.Ct. 165, 169, 30 L.Ed.2d 128 (1971). Because the alleged fraud in failing to perform a contract with Plaintiffs does "touch" the sale of securities, see Superintendent of Insurance of New York, 404 U.S. at 12-13, 92 S.Ct. at 169, the motion to dismiss the federal securities claims and the Florida securities claim¹ must be denied.

Plaintiffs argue that the nexus requirement for a 10(b)-5 claim is fulfilled since Knight would not have sold his shares without the inducement of the side-deal where he allegedly served as facilitator of the takeover of Leaguestar by CUC, and then as advisor to the acquired company, in exchange for cash and stock options. Since the side-deal consideration was fraudulently offered, Plaintiffs argue, a fraud "in connection with" the purchase or sale of securities was committed. Defendants, on the other hand, urge us to follow the narrower rule of construction of the "in connection" requirement articulated by several courts, which suggests that the requirement "mandates that the alleged fraud concern the fundamental nature of securities; namely the characteristics and attributes that would induce an investor to buy or sell the particular securities." Citibank, N.A. v. K-H Corp., 745 F.Supp. 899, 903 (S.D.N.Y.1990) (emphasis added); see also, Abrash v. Fox, 805 F.Supp. 206 (S.D.N.Y. 1992) ("Even when there is a clear causal connection between the misrepresentations and the investment decision, there is no securities law violation unless the misrepresentations or omissions involved in a securities transaction pertain to the securities themselves."). To this end, Defendants argue that although the fraud is alleged to have proximately caused the sale, it did not concern the nature or value of the securities themselves, and therefore would not satisfy the "in connection with" requirement as interpreted by the cases narrowly construing that phrase.

The problem with the Defendants' position is threefold: in the first place, the Defendants' narrow reading of the "in connection with" requirement cannot be easily reconciled with the broad construction of the nexus requirement as enunciated by the United States Supreme Court in Superintendent of Ins. of New York v. Bankers Life and Casualty Co., supra. In the second place, the narrow reading cannot be reconciled with the broad and unqualified phrase, "in connection with," employed by Congress in the statute itself. In the third place, this case cannot be fairly distinguished from those which Plaintiffs argue stand for a broad construction of the requirement. See e.g., S.E.C. v. Drysdale Securities, Inc., 785 F.2d 38, 42 (2d Cir.1986), cert. denied, 476 U.S. 1171, 106 S.Ct. 2894, 90 L.Ed.2d 981 (1986); A.T. Brod & Co. v. Perlow, 375 F.2d 393 (2d Cir.1967). And finally, the cases cited by the Defendant for support arise in a meaningfully different factual matrix from that presented here. See e.g., Hunt v. Robinson, 852 F.2d 786, 787 (4th Cir.1988); Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930 (2d Cir.1984), cert. denied, 469 U.S. 884, 105 S.Ct. 253, 83 L.Ed.2d 190 (1984); R.H. Damon & Co. v. Softkey Software Products, Inc., 811 F.Supp. 986 (S.D.N.Y.1993); Abrash v. Fox, supra; Citibank, N.A. v. K-H Corp., supra.

The Supreme Court, in Superintendent of Insurance of New York v. Bankers Life and Casualty Co., 404 U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971), held that a section 10(b) claim was stated where an insurance company was tricked by controlling shareholders into selling treasury bonds for a certificate of deposit which was never delivered. The defendant-shareholders were alleged to have previously purchased 100% of the insurance company's stock with the assets of the same insurance company by essentially "kiting" a $5,000,000 check from a bank at which the shareholders had no funds on deposit. They then caused the same bank to issue another check in the same amount with which they purchased a certificate of deposit issued to the insurance company. The certificate of deposit was never delivered to the insurance company, and instead was negotiated as collateral for a loan to cover the second check. Although the insurance company's investment assets had been entirely depleted, its books reflected only the sale of the treasury bonds and the purchase of the certificate of deposit. The Supreme Court, in finding that a claim for violation of section 10(b) was stated, made the broad pronouncement that

since there was a "sale" of a security and since fraud was used "in connection with" it, there is redress under § 10(b), whatever might be available as a remedy under state law.

Superintendent of Insurance, 404 U.S. at 12, 92 S.Ct. at 169.

For the purposes of this motion, we must accept Plaintiffs' theory that part of...