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LINCOLN NAT'L LIFE INS. CO. v. A. DAVID SILVER

September 29, 1995

THE LINCOLN NATIONAL LIFE INSURANCE COMPANY, an Indiana Corporation, in its individual capacity and as assignee of the SANTA FE PRIVATE EQUITY FUND II, L.P., a New Mexico limited partnership, Plaintiff,
v.
A. DAVID SILVER, and ADS PARTNERS, L.P., a New Mexico limited partnership, Defendants.



The opinion of the court was delivered by: NORDBERG

 I. INTRODUCTION

 This dispute regarding Defendant A. David Silver's alleged mismanagement of two venture capital funds came before the Court for bench trial on August 16-20, 23-27, and September 30, 1993. The Court heard closing arguments on October 22, 1993. The parties have each submitted a memorandum of proposed findings of fact and conclusions of law. In addition, the parties have briefed to the Court the Defendants' Motion for a Directed Verdict. After first summarizing the case and then deciding several outstanding motions, the Court makes its findings of fact and conclusions of law pursuant to Fed. R. Civ. P. 52(a).

 A. Jurisdiction

 The Court has jurisdiction over this action under Section 1331 of the Judicial Code, 28 U.S.C. § 1331, Section 22 of the Securities Act of 1933, 15 U.S.C. § 77v, Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa, Section 1965 of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1965, and supplemental jurisdiction over Plaintiff's state law claims under 28 U.S.C. § 1367.

 B. Case Summary

 This case arises out of Defendant Silver's improper management of two venture capital funds, the Santa Fe Private Equity Fund ("SFPEF I") and the Sante Fe Private Equity Fund II ("SFPEF II"), each of which were limited partnerships run by a venture capital fund controlled by Silver, ADS Associates, Ltd. ("ADSA"), which controlled SFPEF I, and ADS Partners, Ltd. ("ADSP"), which controlled SFPEF II. SFPEF I was predominantly a computer industry fund. Its portfolio companies included Pathfinder Computer Centers (Pathfinder), Avant-Garde, which later merged with Family Achievement Software Company ("FASCO"), and Cipherlink Corporation ("Cipherlink"). Each of these three companies experienced severe cash problems and were on the verge of failing when Silver organized SFPEF II, which he touted as a health care fund. Plaintiff, the Lincoln National Life Insurance Company ("Lincoln"), was among SFPEF II's limited partners.

 Although SFPEF II was supposed to be a health care fund, and despite the fact that several of that fund's limited partners had declined to invest in SFPEF I, Silver invested more than seventy percent of the SFPEF II's first capital call in computer companies that were part of SFPEF I's portfolio, including the failing Pathfinder, Avant-Garde/FASCO, and Cipherlink. When the SFPEF II limited partners learned of the nature of the fund's investments, they requested Silver to refrain from continuing to invest in SFPEF I portfolio companies. He nevertheless persisted. The limited partners of the two funds removed Silver's management companies as their general partners on February 10, 1987 and had a receiver appointed for the Funds. In April 1988, the receiver for SFPEF II assigned to Lincoln all of SFPEF II's claims in this case.

 Lincoln's Second Amended Complaint, the pleading on which this action is now based, contains twenty-three counts which make claims against several individuals and entities, all of which save Silver and ADS Partners, Ltd. ("ADSP"), the managing general partner of SFPEF II, have been dismissed from this case. The following Counts were tried to the Court.

 In Counts VIII, IX and X, Lincoln, in its individual capacity, claims that Silver violated sections 1962(a), 1962(b), and 1962(c) of the Racketeer Influenced and Corrupt Organizations Act (RICO), Pub. L. 91-452, Title IX, § 901(a), 84 Stat. 941 (1970) (codified as amended at 18 U.S.C. §§ 1961-1968 (1988)).

 In Counts XI, XII, and XIII, Lincoln repeats its RICO claims as assignee of SFPEF II, claiming that Silver violated 18 U.S.C. §§ 1962(a), 1962(b), 1962(c).

 In Counts VI and VII respectively, Lincoln individually and as SFPEF II's assignee claims that Silver and ADSP breached fiduciary duties owed under N.M. Stat. Ann. §§ 54-2-9 and 54-1-21(A) (1978).

 In Count III, Lincoln, individually, claims that Silver and ADSP violated section 10(b) of the Securities Exchange Act of 1934, ch. 404, 48 Stat. 881 (1934) (codified as amended in scattered sections of 15 U.S.C. (1988)).

 In Count I, Lincoln, individually, claims that Silver and ADSP violated section 12(2) of the Securities Act of 1933, ch. 38 48 Stat. 74 (1993) (codified as amended in scattered sections of 15 U.S.C. (1988)).

 In Count IV, Lincoln, individually, claims that Silver and ADSP violated section 5/12 of the Illinois Securities Law of 1953 (codified as amended at S.H.A. 815 ILCS 5/1 - 5/19 (1993)).

 In Count XXI, Lincoln, individually, claims that Silver engaged in common law fraud.

 C. Defendants' Motion for a Directed Verdict

 At the close of the Plaintiff's case, the Defendants moved for a directed verdict. The motion is denied, for the reasons indicated in the Court's findings of fact and conclusions of law.

 D. Silver's Motion to Reopen the Evidence

 Silver moves, pursuant to Rules 59 and 60 of the Federal Rules of Civil Procedure, to reopen the evidence in this case so that the Court may consider a Pledge Agreement which is already, in fact, in evidence. The motion is denied. The proffered evidence is already part of the record. In addition, Silver's arguments accusing witness William Enloe and Plaintiff's counsel of wrongdoing are hereby ordered stricken.

 E. The Parties' Motions for Sanctions

 The parties have each requested sanctions against the other. These requests are denied.

 F. Summary of the Court's Findings

 Both parties were well represented at trial. Lincoln had the services of very capable counsel who represented their client in a thorough and professional way. Silver, a non-lawyer, represented himself pro se. He demonstrated remarkable skill in capably representing himself, with the assistance of his wife, despite the fact that, as the Court's findings of fact show, he had a weak case.

 In reaching its conclusion in this case, the Court has sought to draw reasonable inferences from the evidence, and has considered the parties' legal arguments. In the opinion of the Court, the evidence submitted at trial requires judgment for Plaintiff. The Court now makes its findings of fact and conclusions of law pursuant to Fed. R. Civ. P. 52(a).

 II. FINDINGS OF FACT

 A. The Parties

 The Lincoln National Corporation is the parent company of the Plaintiff in this case, The Lincoln National Life Insurance Company ("Lincoln"), and of Lincoln National Investment Management Company ("LNIMC"), which acted as Lincoln's agent through its then Vice President, Ivan Berk. Lincoln is an Indiana Corporation having its principal place of business in Fort Wayne, Indiana.

 Defendant A. David Silver ("Silver") is a venture capitalist who managed SFPEF I and SFPEF II through two limited partnerships formed under New Mexico law, ADS Associates, L.P. ("ADSA"), which was the managing general partner of SFPEF I, and ADS Partners, L.P. ("ADSP"), which was the managing general partner of SFPEF II. Silver resides in New Mexico. At all relevant times, the principal place of business for Silver, ADSA, ADSP, SFPEF I, and SFPEF II was 524 Camino del Monte Sol, Santa Fe, New Mexico.

 SFPEF I, or "Fund I", was organized as a limited partnership pursuant to the laws of the State of New Mexico in August of 1983. ADSA was SFPEF I's sole general partner until February 10, 1987, when it was removed by the limited partners. SFPEF II, or "Fund II", was organized as a limited partnership pursuant to the laws of the State of New Mexico in August of 1985. ADSP was the sole general partner of SFPEF II until February 10, 1987, when it was removed by the limited partners.

 In February 1987, after ADSA and ADSP were removed as general partners, the First Judicial District Court for the County of Santa Fe, New Mexico appointed John Clark ("Clark") to serve as the receiver for both funds.

 Lincoln filed this suit in September 1986 against Silver, ADSP, and other Defendants who have since been dismissed. Thereafter, several of the Silver-related entities went into bankruptcy.

 In May 1987, Clark filed for SFPEF I a bankruptcy petition pursuant to Chapter 7 of the Bankruptcy Code in the United States Bankruptcy Court for the District of New Mexico. In February 1988, ADSA and ADSP filed bankruptcy petitions pursuant to Chapter 7 of the Bankruptcy Code for SFPEF I in the United States Bankruptcy Court for the District of New Mexico. Silver has himself filed for bankruptcy protection as well.

 In April 1988, Clark, for SFPEF II, assigned to Lincoln all of SFPEF II's claims against Silver and ADSP as part of a settlement of claims against SFPEF II. (Stipulation of Facts P 11; Tr. at 821-22.) On April 21, 1988, the First Judicial District Court for the County of Santa Fe, New Mexico entered an order approving the assignment.

 In August, 1983, Silver, as managing partner of ADSA, formed SFPEF I for the purpose of investing in and providing venture capital to computer and other high-technology companies.

 As of December 31, 1984, Silver had invested approximately $ 10.5 million of SFPEF I's capital in eleven portfolio companies. The portfolio consisted of: Pathfinder Computer Centers ("Pathfinder"), Avant-Garde Publishing Corp. ("Avant-Garde"), which later merged with Family Achievement Software Company ("FASCO"), Cipherlink Corporation ("Cipherlink"), Gateway Computer (Gateway), Personal Diagnostics, Inc., Critichem, Mesa Diagnostics, Inc., Sonostics, NMR Imaging, Inc. ("NMR"), and Central Data Corporation. Of the $ 10.5 million invested, more than $ 4.7 million was invested in Pathfinder, Fund I's largest investment, and Avant-Garde. (Stipulation of Facts P 15.) *fn1" Silver's investments in Cipherlink and Gateway are also particularly relevant to this lawsuit.

 Pathfinder, a chain of retail stores which sold computer hardware and software to small and medium sized businesses, had been founded as a limited partnership in 1982 and was incorporated as a privately held Delaware Corporation on July 28, 1983. Silver was one of the company's founders, was the Chairman of its Board of Directors, and its Chief Executive Officer. (See Tr. at 56; Silver Dep. at 337-38; Pl.'s Ex. 20 at 20.) The company hired Steven A. Rork ("Rork") as President. He worked in that capacity from 1982 until April 1985, when he was demoted and later dismissed by Silver. (Tr. at 53-56, 74-75; Pl.'s Ex. 19 at 24.) Rork, Silver, and SFPEF I were Pathfinder's principal stockholders when it was incorporated. (Tr. at 54-55.)

 The Court finds that SFPEF I invested extensively in Pathfinder. As of December 31, 1984, SFPEF I had invested $ 3,003,396 in Pathfinder. (Pl.'s Ex. 2 at 2.) In the following year, between January 1, 1985 and July 31, 1985, SFPEF I invested another $ 1.6 million, making SFPEF I Pathfinder's single largest investor. (Stipulation of Facts P 22.)

 Avant-Garde was an Oregon corporation, incorporated in 1983, that designed and marketed software for the home personal computer market. (Stipulation of Facts P 25.) In January 1985, SFPEF I established Family Achievement Software Corporation ("FASCO"), which acquired 80 percent of Avant-Garde's stock. (Stipulation of Facts P 27.) Silver was FASCO's Chairman of the Board. (Tr. at 815-16; Silver Dep. at 338; Pl.'s Ex. 297 at 9.) The two companies merged in November of 1985. (Stipulation of Facts P 28.)

 Silver offered Verne Spangenberg ("Spangenberg") a position with FASCO in early 1985. (Tr. at 354-56.) Spangenberg was President and Chief Operating Officer of FASCO and Vice-President and Treasurer of Avant-Garde. *fn2" (TR. at 355; Pl.'s Exs. 259, 260.) Spangenberg planned to sell the viable Avant-Garde products, develop a new line of software products based on celebrity endorsements called "Achieveware", acquire other products and companies, and then take FASCO public. (Tr. at 356.)

 The Court finds that Silver, for SFPEF I, invested extensively in Avant-Garde/FASCO. As of December 31, 1984, SFPEF I had invested $ 1,745,177 in FASCO. (Pl.'s Ex. 2 at 2.)

 Cipherlink was incorporated in October 1983. (Pl.'s Ex. 34.) It listed a Los Angeles, California business address. (Id.) Silver was one of Cipherlink's directors. (Tr. at 1041.) Eric Lesin was the company's president from its inception until 1986, when it ceased operations. (Tr. at 1033.) The company developed a software program to perform data communications between different types of computers. (Tr. at 1033-34.)

 The Court finds that SFPEF I invested extensively in Cipherlink. As of December 31, 1984, SFPEF I had invested $ 1,250,000 in Cipherlink. (Pl.'s Ex. 2 at 2.) One year later, as of December 31, 1985, that investment had risen to $ 1,747,000. (Pl.'s Exs. 3, 4, 5 at 3.)

 Gateway operated a chain of computer systems houses through which it sold, serviced, and installed personal computer systems. (Pl.'s Ex. 6 at 16.) As of December 31, 1984, SFPEF I had invested $ 1,000,000 in Gateway. (Pl.'s Ex. 2 at 2.) Lincoln invested directly in Gateway as a co-investor with SFPEF I. (Pl.'s Ex. 6 at 16.)

 The Court finds that, by the Spring of 1985, when Silver started attempting to form SFPEF II, Pathfinder was operating at a loss and needed cash. (Silver Dep. at 260-63.) So did Avant-Garde, Cipherlink, Gateway, and NMR. (Silver Dep. at 267-68.) However, by June 30, 1985, all of SFPEF I's capital contributions had been paid in. (Stipulation of Facts P 32.) At that time, SFPEF I had only $ 460,000 in cash in its accounts, (id.), and could not meet the cash needs of its portfolio companies.

 The Court finds that after June 1985, SFPEF I's ability to invest in and support its portfolio companies had weakened so much that from August 1985 through December 1985, SFPEF I distributed only $ 452,525, which involved the investment of $ 396,500 in six portfolio companies, $ 6900 of which was invested in Pathfinder. (Pl.'s Ex. 299.) Similarly, SFPEF I's disbursements for all of 1986 totaled $ 25,830 in new investments, with $ 22,089 for Pathfinder. (Pl.'s Ex. 299.)

 C. The Financial Condition of the SFPEF I Portfolio Companies prior to the formation of SFPEF II

 The Court finds that from the last quarter of 1984 until, and through, August of 1985, Pathfinder experienced severe financial problems. Thus, at the time SFPEF II was formed, Pathfinder was on the verge of failing. As of August 1985, Pathfinder was in dire need of cash. The evidence in support of these conclusions was overwhelming. Some of the evidence may be summarized as follows:

 
1. At the time of its initial public offering ("IPO"), in November 1984, Pathfinder was not generating sufficient revenues to meet its operating expenses, including payroll, payroll taxes, and obligations to key suppliers. (Tr. at 56-57); Pl.'s Ex. 19.) It admitted and disclosed these facts in an S-1 form filed on November 21, 1984 with the Securities and Exchange Commission. (Pl.'s Ex. 19.)
 
2. IBM and Apple were the two largest lines of computers in 1984 and 1985. Pathfinder was unable to sell either line because of its poor financial condition. (Pl.'s Ex. 19 at 8; Tr. at 108.)
 
3. The net proceeds from Pathfinder's IPO amounted to $ 589,000. (Pl.'s Ex. 20 at 16; Tr. at 61.) These funds, when received, relieved Pathfinder's cash-flow problems for two weeks, after which the company returned to its "standard financial crisis." (Tr. at 61.)
 
4. As of December 31, 1984, as disclosed in Pathfinder's Form 10-K filed with the SEC in March of 1985, Pathfinder's accumulated deficit had grown from $ 589,000 to $ 2,365,000 in one year. Its gross profit decreased from 27.8 percent of sales to 17.6 percent in two years. (See Pl.'s Ex. 20 at 3, 14.)
 
5. Pathfinder's net loss for 1984 was approximately $ 1,684,000. The previous year's net loss was approximately $ 382,000. (Tr. at 61; Pl.'s Ex. 20 at 13.)
 
6. The accounting firm of Peat, Marwick, Mitchell & Co. ("Peat Marwick") prepared Pathfinder's audited financial statements, which were included in Pathfinder's 1984 10-K. In its Accountant's Report, Peat Marwick stated:
 
The magnitude of [certain of Pathfinder's] losses in relation to working capital and stockholders' equity, among other factors, indicate that the Company may be unable to continue in existence.
 
(Pl.'s Ex. 20 at F.2; Tr. at 67.)
 
8. Through March 31, 1985, Pathfinder continued to experience severe cash-flow problems and sustained a net loss of $ 665,502 over the first three months of 1985. (Pl.'s Ex. 23; Tr. at 68.)
 
9. Silver was acutely aware of Pathfinder's difficulties. He had received a copy of the firm's 10-K and had been told by Rork that the company's financial future was dismal. (Tr. at 67, 70-71.)
 
10. Silver told Rork to obtain a $ 500,000 to $ 750,000 bridge loan for Pathfinder. (Tr. at 77.) Rork failed to accomplish that mission, even though he contacted approximately 20 financial institutions. (Tr. at 77, 80-82.) Silver also attempted to get bridge financing for Pathfinder. (Tr. at 82; Pl.'s Exs. 110, 224.) Silver represented to Lloyds Bank that he was establishing a second fund from the same investors in SFPEF I and that the fund would be able to guarantee credit to Pathfinder. (Pl.'s Ex. 224.) Despite these representations, Lloyds denied Pathfinder's request for financing, telling Rork that Pathfinder fell "into every risk category there is, and the regulatory authorities such as the FDIC, state examiners, and national bank examiners would be flagged immediately" if Lloyds granted the requested loan. (Tr. at 86; Pl.'s Ex. 228.)
 
11. For the six months ended June 30, 1985, Pathfinder incurred a net loss of $ 1,584,199 and saw its accumulated deficit increase to $ 3,949,581. (Pl.'s Ex. 26.)
 
12. In a 10-Q Report filed with the SEC, Pathfinder's management indicated that if the company did not secure funding from SFPEF I, it would be unable to get funding from any other source, presenting "considerable risk as to whether the Company would be able to continue in existence." (Pl.'s Ex. 26.)
 
13. Silver terminated Rork at the end of August 1985. (Tr. at 86-87.) At the time Pathfinder still had cash-flow problems and had a financial condition described by Rork as "bleak". (Tr. at 87.) Rork believed that his Pathfinder stock was "worthless", (Tr. at 91), but tried to sell it back to Pathfinder as provided by a provision in his contract, (Tr. at 87). Silver told Rork that Pathfinder would not repurchase the stock because Pathfinder lacked the funds to do so. (Tr. at 88.)

 The Court finds that Avant-Garde/FASCO, like Pathfinder, experienced severe cash-flow and financial problems over the course of its existence and was in dire need of cash as of August 1985. (Pl.'s Exs. 30, 31; Tr. at 372-73, 398-99, 432-33.) Some of the evidence in support of these conclusions is summarized as follows:

 
1. For the fiscal year ended January 31, 1985, Avant-Garde's current liabilities exceeded its current assets by $ 464,591.
 
2. The company's auditors stated that:
 
In light of the current year loss and the Company's working capital position at January 31, 1985, if the Company is not successful in acquiring a substantial infusion of either debt or equity, it may not be able to continue in existence.
 
(Pl.'s Ex. 31 at Bates 0013997.)
 
3. Before coming to work at FASCO, Spangenberg evaluated Avant-Garde for Silver. He told Silver that the company's products were poor and that it was not being managed well. (Tr. at 351-52.) Spangenberg testified that Avant-Garde was "essentially moribund in late 1984, if not earlier, and dependent on cash." (Tr. at 372.)
 
4. In April 1985, FASCO submitted to Silver a business plan requiring an infusion of $ 1,195,000 in May; Silver approved the plan. (Tr. at 360-64; Pl.'s Ex. 261.) SFPEF I was unable to provide the funds, however. On April 19, 1985, Silver wrote Spangenberg to state that the fund could only provide $ 100,000 of FASCO's needed cash by June 30, 1985. (Pl.'s Ex. 262.) At that time, it was apparent that FASCO's business plan would not be met. (Tr. at 365.)
 
5. FASCO's failure to receive the required infusion of cash threatened its existence as a viable company. (See Tr. at 365.
 
6. Silver urged Spangenberg to obtain bridge financing for FASCO until funds from SFPEF II were available. (Tr. at 1407.) Spangenberg tried to do so but failed. (Tr. at 373.)
 
7. Nevertheless, on July 19, 1985, at a FASCO board meeting held at Silver's New York residence, Silver committed SFPEF I to provide FASCO with $ 1,130,000 in "bridge financing" over a four month period beginning in August of that year. (Tr. at 374; Pl.'s Ex. 273.) Silver did not deliver on this promise, however. (Tr. at 374.)

 The Court finds that Cipherlink was also experiencing crippling financial difficulties and that as of August 1, 1985, Cipherlink was in dire need of cash, needing approximately $ 3 million to meet its business plan. (Tr. at 1059.) Some of the evidence in support of these conclusions is recited as follows.

 
1. As of August 31, 1984, Cipherlink had an accumulated deficit of $ 621,529. (Pl.'s Ex. 34.)
 
2. Five months later, as of January 31, 1985, the deficit had more than doubled to $ 1,302,806.33, (Pl.'s Ex. 35), and the company's current liabilities exceeded its current assets by $ 22,655.38, (Id. (showing current assets of $ 150,950.55 and current liabilities of $ 173,605.93)).
 
3. Two months later, by March 31, 1985, Cipherlink had incurred another $ 260,275 in losses; its accumulated deficit had grown to $ 1,563,081.48. (Pl.'s Ex. 36.)
 
4. As of July 31, 1985, Cipherlink's accumulated deficit had grown to $ 2,083,249.89 and its current liabilities exceeded its current assets by $ 282,047.19 ($ 43,305.01 - $ 325,352.20). (Pl.'s Ex. 41.)

 The Court finds that several other Fund I companies were performing poorly by the end of December 1984. One Point, Sonostics, Personal Diagnostics, Critichem, and Mesa Diagnostics all showed signs of various degrees of poor performance. (See Pl.'s Exs. 44, 45, 54, 57, 61, 63, 64, 65, & 66.) Several of these companies operated at large net losses for the last fiscal year and had accumulated large deficits.

 D. Silver's Interests in the SFPEF I Portfolio Companies

 The Court finds that Silver had a critical personal interest in the success of SFPEF I and its portfolio companies. He had significant ownership interests in Pathfinder and Avant-Garde/FASCO, had guaranteed the obligations of several of the Fund I portfolio companies, and sought to preserve a perception of value in the Fund I companies in order to raise money for the second fund. The Court summarizes some of Silver's interests as follows.

 In addition to being Chairman of Pathfinder's Board of Directors, and its CEO, Silver had extensive personal interests in the success of Pathfinder. As of December 31, 1984, Silver owned 3.5 percent of Pathfinder's stock. ADSA owned 7.8 percent of the stock. SFPEF I owned 61.9 percent. (Pl.'s Ex. 20 at 22.)

 In addition to his ownership interests in Pathfinder, Silver had personally guaranteed a large amount of Pathfinder's debt. On July 20, 1984, Silver personally guaranteed certain of Pathfinder's obligations to ITT Commercial Finance Corporation ("ITT") under a credit agreement. (Pl.'s Ex. 220.) In addition, prior to Pathfinder's November 1984 IPO, Silver had personally guaranteed certain of Pathfinder's leases and accounts payable to vendors. These guarantees amounted to approximately $ 391,000 by September 30, 1984. (Pl.'s Ex. 19 at 27.) Five months later, in March 1985, Pathfinder agreed to pay Silver a fee of $ 4,617 per month in exchange for his guaranteeing various of Pathfinder's obligations. (Tr. at 89-91; Pl.'s Ex. 221.) After that agreement, Silver incurred further obligations on Pathfinder's behalf. In December 1985, Silver personally guaranteed $ 175,000 in obligations Pathfinder owed to Hewlett-Packard Co. (Pl.'s Ex. 239.) At that time, Silver's personal guarantees on behalf of Pathfinder were greater than $ 1 million. (Stipulation of Facts P 23.) In addition to the one million dollars that he personally guaranteed, Silver had caused SFPEF I to guarantee more than $ 1 million of Pathfinder's obligations before December 1985. (Stipulation of Facts P 24.)

 Similarly, Silver had extensive personal interests in Avant-Garde/FASCO. He was the controlling shareholder and Chairman of the Board of Directors of Avant-Garde, (Stipulation of Facts P 25; Pl.'s Ex. 297), and he was also a shareholder and Chairman of the Board of Directors of FASCO. (Pl.'s Ex. 297 at 9.) During various times, Silver personally guaranteed or caused SFPEF I to guarantee the obligations of FASCO. By December of 1985, these guarantees exceeded $ 250,000. (Stipulation of Facts P 29.)

 Silver was on the board of directors of both Cipherlink and Gateway.

 E. Silver's Plans for a Second Fund

 Before March 1985, Silver discussed forming a venture capital fund that would invest primarily in health care entities with Jesse Acker ("Acker"), who was to become a general partner in SFPEF II. (Acker Dep. of 9/10/90 at 23-24.) They both believed that the computer industry was softening and that health care would become a "very, very strong, dynamically growing market." (Acker Dep. of 9/10/90 at 24.) On that basis, and based on his belief that the proposed fund would be one of the first of its kind to be investing primarily in health care, Acker agreed to become Silver's co-general partner in the second fund. (Acker Dep. of 9/10/90 at 24.)

 The Court finds that, despite his professed intentions of investing primarily in health care companies, Silver planned to use funds from the second fund, SFPEF II, to help solve the problems of several SFPEF I portfolio companies, including Pathfinder, FASCO, and Cipherlink. Silver's intent, in this regard, is demonstrated by his representations to Rork at Pathfinder, Spangenberg at FASCO, and Eric Lesin at Cipherlink.

 Before he formed SFPEF II, Silver told Rork that SFPEF I was "tapped out" and would be unable to satisfy the company's cash needs. (Tr. at 73.) Silver told Rork to find bridge financing until Silver could obtain funds from SFPEF II to bail Pathfinder out of its cash shortage. (Tr. at 72, 1406.) According to Rork, Silver represented that the second fund "would be more or less the second coming." (Tr. at 72.) Silver told Rork not to discuss the fact that the second fund would be used to "bail out" Pathfinder. (Tr. at 72-73.)

  Similarly, Silver told Spangenberg that SFPEF I did not have any funds for the company, but that SFPEF II would be able to provide funds to FASCO. (Tr. at 1407.) Silver told Spangenberg to find interim financing until the SFPEF II funds were available. (Tr. at 1407.)

  Silver made the same type of representations to Eric Lesin, (Tr. at 1407), and to R&B Commercial Management ("R&B"), an investor in Cipherlink, ...


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