The opinion of the court was delivered by: JAMES H. ALESIA
Before the court is defendant David C. Sabin's motion to dismiss the Complaint for failure to state a claim upon which relief can be granted, FED. R. CIV. P. 12(b)(6), and for failure to plead fraud with the required specificity, FED. R. CIV. P. 9(b).
Plaintiff Martha Williams's Complaint alleges three separate counts against the defendant, David Sabin. Count One alleges a violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Counts Two and Three are pendent state law claims against the defendant, alleging common law fraud and breach of fiduciary duty. The complaint seeks compensatory damages and court costs under all counts, and punitive damages under Counts Two and Three.
Defendant arranged for the funding for Stylemaster through individuals and entities related to him, and from a venture capital firm. Plaintiff owned over 50% of the stock of Stylemaster subsequent to this funding.
Plaintiff had a line of molded plastic storage products designed and placed into production. Stylemaster's gross sales in its first year of operations were $ 1,500,000, and $ 5,600,000 in the following twelve months. Stylemaster also manufactured parts and products for Glacier Water Systems, in addition to its line of plastic storage products.
Subsequent to the investment in Stylemaster by parties related to defendant, he controlled Stylemaster's financial and accounting activities. Plaintiff alleges that, during 1993, Glacier Water Systems failed to pay Stylemaster balances due for goods purchased by Glacier Water Systems, despite representations made to the contrary by defendant to plaintiff and various lenders. By the middle of 1993, Stylemaster's growth, coupled with the adverse effect on Stylemaster's cash position due to defendant's transactions, led to cash flow problems for Stylemaster.
Because of Stylemaster's need for cash, plaintiff alleges that defendant persuaded her to agree to a merger of Stylemaster into Glacier Holdings. The merger, which occurred and became effective on October 13, 1993, included an exchange by plaintiff of her Stylemaster stock for stock in Glacier Holdings. After the merger, plaintiff owned under 5% of the stock of Glacier Holdings as opposed to her greater than 50% ownership of Stylemaster prior to the merger. Plaintiff claims that she agreed to the merger based on defendant's false assertions that Glacier Holdings had arranged to obtain cash through a loan to be followed by a public offering. Following the merger, Glacier Holdings did not attempt to raise cash through borrowing or a public offering. Rather, plaintiff alleges that in November 1993 defendant revealed a plan to raise funds for Glacier Holdings by selling Stylemaster to a third party.
Prior to plaintiff's approval of the merger, it is alleged, defendant represented to plaintiff that he would obtain an opinion of a qualified third party that the merger was fair to Stylemaster, Glacier Holdings, and their respective shareholders.
On about October 4, 1993, prior to the October 13, 1993, merger date, defendant allegedly received drafts of two letters from Deloitte & Touche, outside auditors of both Stylemaster and Glacier Holdings. The letters pointed to significant discrepancies in the records of both Stylemaster and Glacier Holdings requiring substantial year-end adjustments to both companies' financial statements. Although the letters were addressed to the Boards of Directors of Stylemaster and Glacier Holdings, plaintiff asserts that defendant concealed the letters from the directors and shareholders of Stylemaster, including plaintiff, until November 1993 when plaintiff received a copy of the letters from a Glacier Holdings employee. After receipt of the Deloitte & Touche letters, plaintiff began an investigation into defendant's accounting activities. Among plaintiff's contentions are that defendant fraudulently reported Stylemaster's assets in collateral reports furnished to LaSalle National Bank, Stylemaster's secured lender. Also, plaintiff claims that false journal entries and refusal by defendant to post credits to the accounts of customers of Stylemaster and Glacier Holdings resulted in an overstatement of the assets and profits of both companies.
Defendant's efforts to sell Stylemaster were unsuccessful. Stylemaster and Glacier Holdings' other subsidiaries ran out of cash in the first quarter of 1994. Stylemaster's assets were sold in a bankruptcy sale in May 1994. During the second quarter of 1994, Glacier Holdings sold the assets of its other subsidiaries and ceased to do business.