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HARDING UNIV. v. CONSULTING SERVS. GROUP

September 29, 1998

HARDING UNIVERSITY, RICHARD GIBSON, W.W. McALLISTER III, and LOURAINE WILBORN TRUST, Plaintiffs,
v.
CONSULTING SERVICES GROUP, L.P., KURT VOLDENG, ROY MOORE, CHECKERS SIMON ROSNER, DAVID KNEE, SAM CHALABI, SANFORD HOLZER, HOLZER, HUM & JACOBY, L.L.P., THOMAS J. DWYER & ASSOCIATES, THOMAS J. DWYER, FISHMAN & MERRICK, P.C., and MATTHEW WAYNE, Defendants.



The opinion of the court was delivered by: BUCKLO

MEMORANDUM OPINION AND ORDER

 The plaintiffs, Harding University, Richard Gibson, W.W. McAllister, III, and Louraine Wilborn Trust ("plaintiffs"), sued Consulting Services Group, L.P. ("CSG"), Kurt Voldeng, Roy Moore, Checkers Simon Rosner, David Knee, Sam Chalabi, Sanford Holzer, Holzer, Hum & Jacoby, L.L.P. ("HHJ"), Thomas J. Dwyer, Thomas J. Dwyer & Associates, Fishman & Merrick, P.C., and Matthew Wayne ("defendants"), alleging violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), Sections 12(2) and 15 of the Securities Exchange Act of 1933, the Texas Securities Act, the Arkansas Securities Act, the Tennessee Blue Sky Law, breach of fiduciary duty, common law fraud, negligence, negligent misrepresentation, and professional negligence. *fn1" Mr. Knee moves to dismiss the complaint for failure to state a cause of action. Mr. Holzer and HHJ move to dismiss the complaint for lack of personal jurisdiction. For the following reasons, the motions are granted in part and denied in part.

 Background2

 Harding University is a not-for-profit association located in Arkansas. Mr. Gibson, Mr. McAllister, and Ms. Trust are residents of Texas.

 In January, 1996, the plaintiffs, through their agent, Joe Hurley, retained CSG to act as their investment advisor to select and recommend hedge funds for investment. (Comp. P 26). The plaintiffs allege that in December, 1995, CSG entered into an agreement with the Theta Group, L.L.C. ("Theta Group"), to recommend and promote the Theta Group to potential public investors as a suitable hedge fund investment. (Comp. P 24). The plaintiffs believe that the Theta Group agreed to compensate CSG for each party CSG induced to invest in the Theta Group. Id. CSG and its employees recommended that the plaintiffs invest in the Theta Group.

 The plaintiffs allege that, through telephone conversations with Mr. Hurley, CSG and its employees made a variety of misrepresentations regarding the Theta Group. (Comp. PP 27-28). Among the alleged misrepresentations were the profitability of the Theta Group and the amount of due diligence CSG performed. Id. The plaintiffs also allege that on January 17, 1996, CSG sent them various correspondence analyzing the Theta Group's performance history between January, 1993, and December, 1995. The plaintiffs believe CSG knew the correspondence was fictitious since the Theta Group did not exist in 1993, 1994, or 1995. (Comp. P 29).

 On February 22, 1996, the Theta Group sent Mr. Gibson the Theta Group Offering Memorandum. All of the plaintiffs eventually received a copy of the Theta Group's Offering Memorandum. (Comp. PP 30-31). The plaintiffs allege that the Offering Memorandum contained numerous material misrepresentations. Among the misrepresentations were the Theta Group's profitability and the qualifications of its employees. (Comp. P 32). Additionally, the plaintiffs allege the Offering Memorandum contained numerous material omissions, including the extent of the Theta Group's association with the Chicago Board Options Exchange ("CBOE") and previous CBOE rule violations by Theta Group employees. (Comp. P 36).

 The plaintiffs further allege that Checkers Simon Rosner is a partnership of certified public accountants that the Theta Group retained to provide accounting, auditing, and consulting services. (Comp. P 37). Checkers Simon Rosner allegedly conducted an examination of the Theta Group's January, 1993, to March, 1995 performance records to produce a document describing the Theta Group's profits. The plaintiffs allege the document contained entirely fictitious information since the Theta Group did not exist in 1993, 1994, and 1995. (Comp. PP 37-38).

 The plaintiffs state that in January, 1996, the Theta Group advised Mr. Hurley that David Knee and Sam Chalabi could provide favorable references for the Theta Group. (Comp. P 39). The plaintiffs allege that both Mr. Chalabi and Mr. Knee misrepresented that they invested in the Theta Group in 1995 and that their investments did well. (Comp. PP 40-41).

 Between February 29, 1996, and May 1, 1996, the plaintiffs invested $ 975,000 with the Theta Group. (Comp. PP 43-47). In June, 1996, the Theta Group retained Sanford Holzer and HHJ to provide accounting services. The plaintiffs allege the document HHJ produced contained entirely fictitious information. The document was distributed to Mr. Hurley and the plaintiffs in July, 1996. (Comp. PP 47-48).

 The plaintiffs allege that between March, 1996, and October, 1996, the Theta Group misrepresented that its monthly returns were positive when, in fact, the Theta Group's value decreased approximately 30% during that period. The plaintiffs believe that by December, 1996, the Theta Group fund lost 70% of the value it had in January, 1996. (Comp. PP 50-51).

 In December, 1996, the Securities and Exchange Commission filed suit against the Theta Group and its employees alleging various violations of the securities laws and seizing the Theta Group's investor funds. The plaintiffs believe they have lost approximately $ 650,000 of their initial $ 975,000 investment. (Comp. PP 54-55).

 David Knee

 David Knee moves to dismiss the plaintiffs' complaint for failure to state a claim. The plaintiffs claim that in January, 1996, Mr. Knee, a New York resident, telephonically spoke with Mr. Hurley and informed Mr. Hurley he invested in the Theta Group in 1995 and the investment did well. (Comp. P 40). The ...


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