Robert W. Mills, Esq. (#062154)
Gilmur R. Murray, Esq. (#111856)
Derek G. Howard, Esq. (#118082)
THE MILLS LAW FIRM
300 Drake's Landing, Suite 155
Greenbrae, CA 94904
Telephone: (415) 464-4770
Attorneys for Plaintiff Dwight E. Wininger
On Behalf of Himself and All Others Similarly Situated
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
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DWIGHT E. WININGER, On Behalf of v. SI MANAGEMENT L.P., a Limited |
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Case No. 97-CV-1622 COMPLAINT |
1. Plaintiff DWIGHT E. WININGER is a Limited Partner in Synthetic Industries, L.P. On March 21, 1997, the General Partner of Synthetic Industries, L.P. mailed a proxy solicitation to plaintiff WININGER and his fellow Limited Partners. In violation of Securities and Exchange Commission (SEC) Rule 14a-3, no proxy statement was filed with the SEC or mailed to plaintiff WININGER or to the other Limited Partners on or before the date on which the proxy solicitation was mailed to plaintiff WININGER. In violation of SEC Rule 14a-6, the proxy solicitation was not filed with the SEC. In violation of SEC Rule 14a-9, the proxy solicitation omitted to state material facts necessary in order to make other statements in the solicitation not false or misleading. The material facts which the proxy solicitation omitted to state include material facts about the interests and conflicts of the individuals who control Synthetic Industries, L.P. and who are responsible for the proxy solicitation.
2. Accordingly, plaintiff seeks injunctive and declaratory relief, on behalf of himself and all the other Limited Partners of Synthetic Industries, L.P., requiring the General Partner to (1) file a proxy statement with the SEC and send it to the Limited Partners; (2) file the proxy solicitation with the SEC; (3) inform the SEC about the General Partner's violations of SEC regulations; (4) send a corrective disclosure which discloses all material facts to the Limited Partners; and (5) inform the Limited Partners about the General Partner's violations of SEC regulations.
3. This court has jurisdiction under 15 U.S.C. Section 78aa. Venue lies in this district under 15 U.S.C. Section 78aa because defendants mailed a proxy solicitation to the plaintiff's home, which is located in this district, and to the residences of other Limited Partners located in this district.
4. Plaintiff DWIGHT E. WININGER ("Plaintiff") resides in Danville, California. Plaintiff is a Limited Partner in Synthetic Industries, L.P. ("the Partnership"). Synthetic Industries, L.P. is a Limited Partnership organized under the laws of Delaware and subject to the registration and reporting requirements of the federal securities laws. Plaintiff owns one-half of one unit in the Partnership, based on a capital contribution of $50,000. There are approximately 1850 Limited Partners ("the Limited Partners") in the Partnership. The Partnership, capitalized in 1987 with approximately $78,000,000 contributed by the Limited Partners, was created by Integrated Resources Inc. for the purpose of acquiring all of the stock of Synthetic Industries, Inc. ("the Company"), increasing the Company's value, and then realizing that increased value through a sale of the Company and a complete liquidation of the Partnership. As alleged more fully below, the Partnership has at all relevant times owned a controlling interest in the Company's stock.
5. Defendant SI MANAGEMENT L.P. ("the General Partner"), a limited partnership organized under the laws of the State of Delaware, is the sole General Partner of Synthetic Industries, L.P.
6. Defendant SYNTHETIC MANAGEMENT G.P., a General Partnership organized under the laws of the State of Georgia, is the sole General Partner of defendant SI MANAGEMENT L.P.
7. The General Partners of SYNTHETIC MANAGEMENT G.P. are five Delaware corporations: defendant CHILL INVESTMENTS, INC., defendant BECKMAN INVESTMENTS, INC., defendant FREED INVESTMENTS, INC., defendant KENNER INVESTMENTS, INC., and defendant WRIGHT INVESTMENTS, INC.
8. Defendant CHILL INVESTMENTS, INC. is the Managing General Partner of SYNTHETIC MANAGEMENT G.P. Defendant LEONARD CHILL is the sole director and stockholder of defendant CHILL INVESTMENTS, INC. and is the Chief Executive Officer of the Company. Defendant CHILL signed the March 21, 1997 proxy solicitation attached as Exhibit A hereto.
9. Defendant JON P. BECKMAN is the sole director and stockholder of defendant BECKMAN INVESTMENTS, INC.
10. Defendant W. WAYNE FREED is the sole director and stockholder of defendant FREED INVESTMENTS, INC.
11. Defendant RALPH KENNER is the sole director and stockholder of defendant KENNER INVESTMENTS, INC.
12. Defendant W. GARDNER WRIGHT is the sole director and stockholder of defendant WRIGHT INVESTMENTS, INC.
13. Defendants CHILL, BECKMAN, FREED, KENNER, and WRIGHT are henceforth referred to as the "Individual Defendants." The Individual Defendants, and their corporate General Partners of SYNTHETIC MANAGEMENT, G.P., are collectively referred to as the "Management Defendants." At all times since April 22, 1993, the Management Defendants have controlled SI MANAGEMENT L.P., the sole General Partner of the partnership, and, by virtue of the partnership's ownership of the stock of the Company, the Company as well.
14. Defendant CHILL is President, Chief Executive Officer, and a director of the Company. Defendant FREED is "Vice President -- Market Development" of the Company. Defendant KENNER is "Vice President -- Manufacturing" of the Company. Defendant WRIGHT is "Vice President -- General Manager -- Carpet Backing Division" of the Company. Defendant BECKMAN is a former executive officer and director of the Company and is now a consultant to the Company.
15. Defendant CHILL's annual salary is $270,163. In addition to his salary, defendant CHILL received $104,651 in bonuses and other compensation in the fiscal year ending on September 30, 1995. Defendant FREED's annual salary is $161,544. In addition to his salary, defendant FREED received $34,165 in bonuses and other compensation in the fiscal year ending on September 30, 1995. Defendant KENNER's annual salary is $154,731. In addition to his salary, defendant KENNER received $48,752 in bonuses and other compensation in the fiscal year ending on September 30, 1995. Defendant WRIGHT's annual salary is $249,803. In addition to his salary, defendant WRIGHT received $74,547 in bonuses and other compensation in the fiscal year ending on September 30, 1995.
16. Defendant BECKMAN has a consulting agreement with the Company, under which he receives $125,000 per year and is required to provide the Company with 20 hours of consultation per month.
17. Plaintiff brings this action as a mandatory class action pursuant to Rule 23 of the Federal Rules of Civil Procedure, on behalf of himself and each of the other Limited Partners of the Partnership other than defendants, their agents, and all persons acting in concert with them. Each of the non-excluded Limited Partners is similarly situated to plaintiff. All the claims in this complaint are properly maintainable as a class action for the reasons that follow.
18. Class action treatment is essential for, and provides a fair and efficient method of, adjudicating the claims alleged in this complaint, which affect a large number of the Limited Partners who reside in various states around the country and whose joinder would be impracticable. This class action provides an effective method of enforcing the rights of all the class members without unnecessary expense or duplication.
19. This case meets the requirements of Federal Rule of Civil Procedure 23(a). There are approximately 1850 Limited Partners living in many states throughout the country, making the class members so numerous that joinder of all members is impractical. In addition, there are questions of law and fact common to the class. These include a determination of whether defendants violated SEC regulations and should be enjoined to comply with SEC regulations. The claims and defenses of the class representative are typical of those of the class. These include plaintiff's claims that defendants violated SEC regulations. The class representative and class counsel will fairly and adequately protect the interests of the class.
20. In addition, the class meets the prerequisites of Federal Rule of Civil Procedure 23(b)(1). The prosecution of separate actions by or against individual members of the class would create a risk of inconsistent or varying adjudications with respect to individual members of the class which would establish incompatible standards of conduct for defendants. All of the class members are Limited Partners in the same Partnership. An injunction requiring defendants to comply with SEC regulations and make full disclosure and the other relief sought in this complaint will affect all Limited Partners alike. Adjudications with respect to individual members of the class would as a practical matter be dispositive of the interests of the members of the class who are not parties to the adjudications, or such adjudications would substantially impair or impede the ability of the members of the class who are not parties to the adjudications to protect their interests.
21. The class also meets the prerequisites of Federal Rule of Civil Procedure 23(b)(2) in that the parties opposing the class have acted and refused to act on grounds generally applicable to the class, thereby making final injunctive relief or corresponding declaratory relief with respect to the class as a whole appropriate.
22. The class also meets the prerequisites of Federal Rule of Civil Procedure 23(b)(3) in that questions of law and fact common to members of the class predominate over any questions affecting only individual members and a class action is superior to other available methods for the fair and efficient adjudication of the controversy.
23. For purposes of 15 U.S.C. Section 78u-4(a)(2)(A)(iv), the class period is March 21, 1997, through the present, and into the future, until the conclusion of this litigation.
24. The Partnership presently owns approximately two-thirds of the stock of Synthetic Industries, Inc. ("the Company"), a corporation which is subject to the registration and reporting requirements of the federal securities laws. This controlling interest in the Company is the Partnership's only substantial asset.
25. The Management Defendants control the General Partner and the Partnership. By virtue of their control of the Partnership and the majority interest in the Company held by the Partnership, the Management Defendants have controlled and continue to control the Company. A sale of the Company stock held by the Partnership as a block would result in a transfer of control of the Company from the Management Defendants and threatens their positions with the Company and the benefits they derive therefrom.
26. The Management Defendants have caused the Company to grant the Individual Defendants selected options to purchase a substantial portion of the Company stock. Plaintiff is informed and believes that the Management Defendants have granted themselves stock options that in the aggregate total approximately 9.55 percent of the Company's stock and have authorized, but not yet issued to themselves, options for an additional 4 percent, for a total of 13.55 percent. All these stock options shall henceforth be collectively referred to as the "Stock Options." The Management Defendants caused the Stock Options to be issued with unreasonably low exercise prices.
27. On or about August 2, 1996, the Management Defendants announced that the Partnership would sell all its Company stock in an initial public offering. At that time, the Partnership owned 100 percent of the Company's stock. This plan was abandoned after the Limited Partners expressed opposition to this plan and over ten percent of the Limited Partners demanded a partnership meeting in accordance with the partnership agreement to vote on the plan.
28. On or about September 6, 1996, the Management Defendants caused the Company to award defendants CHILL, FREED, KENNER, and WRIGHT golden parachute employment agreements. These employment agreements provide that, should there be a "change in control" of the Company, the Stock Options will immediately vest and defendants CHILL, FREED, KENNER, WRIGHT will each be entitled to a lump sum payment equal to twice his annual compensation and to other substantial payments.
29. In or about September, 1996, without the approval of the Limited Partners, the Management Defendants caused the Company to issue new shares in the Company in an initial public offering, thereby diluting the Partnership's ownership of the Company's stock from 100 percent to approximately 66 percent.
30. Defendants entered into a lock-up agreement with Bear, Stearns & Co., Inc., the underwriter of this offering of Company stock. The lock-up agreement prohibits the Partnership from selling any Company stock for a period of 270 days after the offering without the consent of Bear, Stearns & Co., Inc. The lock-up agreement prohibits the Partnership from selling any Company stock except pursuant to an underwritten public offering until December 1, 1997.
31. The interests of the Management Defendants are in conflict with the interests and rights of the Limited Partners. It is in the interests of the Limited Partners to have the Partnership liquidated at the highest possible price. Because the Partnership owns a controlling interest in the stock of the Company, the Partnership has a control premium. The Management Defendants have an incentive not to engage in a transaction involving a transfer of the controlling interest, because such a transaction could cause them to lose their lucrative control positions in the Company. In fact, the Management Defendants do not even claim that they have attempted to market the stock as a block or to explore other transactions that might result in a change of control of the Company or otherwise threaten their control over the Company. In addition to their own personal conflicts of interest, the Management Defendants are also subject to fiduciary duties to the Company and to the new public shareholders of the Company that may at least potentially conflict with their fiduciary duties to the Limited Partners.
32. On February 11, 1997, plaintiff WININGER filed a class and derivative lawsuit (the "Lawsuit") in Delaware Chancery Court against the defendants. Among the relief requested in the Lawsuit is (1) removal of the General Partner; (2) dissolution of the Partnership; (3) compensatory damages for actions taken by the defendants that lessened the value of the Limited Partners' partnership units; and (4) appointment of a receiver and implementation of such other or alternative means as may be necessary or appropriate to ensure that all reasonable means to maximize the return to the Limited Partners are independently pursued and evaluated in the Limited Partners' interests, that the highest possible price is obtained in the liquidation of the Partnership, and that the liquidation of the Partnership is carried out without the contaminating influence of the defendants' conflicts of interest.
33. On March 21, 1997, defendant S.I. MANAGEMENT G.P. sent a letter (the "Letter") to the plaintiff and the other Limited Partners announcing a revised "Plan of Dissolution" under which the controlling block of Company stock held by the Partnership would again be sold in a public offering and advocating that the Limited Partners vote in favor of a "Plan of Dissolution." This Letter, which was signed by defendant CHILL, is attached as Exhibit A hereto and incorporated by reference as if fully alleged herein.
34. The first sentence of the Letter states, "I am pleased to inform you that we will soon propose for your approval a highly flexible Plan of Dissolution for the Partnership under which you may choose to receive cash, common stock of Synthetic Industries, Inc. or a combination of both for your interest in the Partnership." The Letter advocates in favor of this Plan of Dissolution through statements such as, "The various terms of the Plan are intended to distribute the Partnership's assets to you in a manner that is in all of your best interests."
35. The Letter explained that the Plan of Dissolution is subject to approval of two-thirds of the Limited Partners. The Letter states, "We currently intend to hold a meeting of Limited Partners about one month after we send out the proxy statement, at which time we will answer any remaining questions and ask for your vote. I hope you will be able to attend this meeting. If not, you will be able to vote by proxy."
36. No proxy statement was sent to plaintiff on or before the date on which he received the Letter. Plaintiff is informed and believes that the Letter was sent to all the other Limited Partners. Plaintiff is informed and believes that the Letter was not filed with the Securities and Exchange Commission (SEC), and that no proxy statement was filed with the SEC or sent to the other Limited Partners on or before the date on which the Letter was sent out.
37. Plaintiff is informed and believes that all the defendants undertook the wrongful acts and omissions alleged in this complaint in concert with each other and as the agents of each other.
38. Plaintiff realleges and incorporates by reference, as though fully set forth, paragraphs 1 through 37.
39. The Letter of March 21, 1997, was a proxy solicitation as defined in 17 C.F.R. Section 240.14a-1(l)(1), since it was a "request for a proxy whether or not accompanied by or included in a form of proxy," and/or a "communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy," and/or part of a continuous plan ending in solicitation and which prepares the way for its success.
40. The Letter was sent by use of the United States mails to the plaintiff and the other Limited Partners on or about March 21, 1997.
41. Defendants sent the Letter to plaintiff without concurrently or previously furnishing him with a publicly filed proxy statement. Plaintiff is informed and believes that defendants sent the Letter to the other Limited Partners without concurrently or previously furnishing them with a publicly filed proxy statement. Defendants thereby violated SEC Rule 14a-3(a), 17 C.F.R. Section 240.14a-3(a).
42. Plaintiff realleges and incorporates by reference, as though fully set forth, paragraphs 1 through 41.
43. Plaintiff is informed and believes that defendants sent the Letter to plaintiff and to the other Limited Partners without previously or concurrently filing it with the SEC. Defendants thereby violated SEC Rule 14a-6(b), 17 C.F.R. Section 240.14a-6(b).
44. Plaintiff realleges and incorporates by reference, as though fully set forth, paragraphs 1 through 43.
45. Defendants made the following statements in the Letter about their proposed Plan of Dissolution:
(a) "The various terms of the Plan are intended to distribute the Partnership's assets to you in a manner that is in all of your best interests. We will not conduct a stock offering at a price that, at the time, does not represent fair value for the shares.";
(b) "We have more than 1800 Limited Partners with a wide variety of investment goals and objectives. We believe the Plan will satisfy these diverse needs in a fair, equitable, and tax efficient manner.";
(c) "I would like to reiterate that the Plan has been designed to provide fair and equitable treatment of all our Limited Partners."; and
(d) "You may have heard of partnership liquidations that were accompanied by General Partners attempting to take, in various ways, amounts larger than they were entitled to. Please be assured that the Plan will provide that the General Partner will receive only amounts to which it is clearly entitled under the Partnership Agreement and the General Partner will not receive any fees or other compensation for carrying out the Plan.";
(e) "The Plan has been designed to preserve the long-term financial strength of our Company."
46. In the Letter, defendants omitted to state material facts necessary in order to make the statements quoted in paragraph 45 not false or misleading, as described in paragraphs 47 to 56.
47. Defendants failed to disclose the identities and interests of the individuals and entities who have authorized the proposed Plan of Dissolution and the sending of the March 21, 1997 letter and how these individuals and entities stand to benefit therefrom.
48. Defendants failed to disclose that the Limited Partners and Partnership own a control premium by virtue of the Partnership's ownership of a controlling interest in the Company, and that the proposed Plan of Dissolution would cause this control premium to be dissipated and irrevocably lost.
49. Defendants failed to disclose that a sale or transfer of the Partnership's controlling interest in the Company as a block or other transaction which would allow the realization of the control premium would threaten the Management Defendants' control over the Company.
50. Defendants failed to disclose the facts regarding their lack of efforts to market the Company stock held by the Partnership as a block or explore other alternatives so to realize the control premium and/or to maximize the price to be received.
51. Defendants failed to disclose that the interests of the Limited Partners and/or the Partnership may be in conflict with the defendants' duties to the Company and/or the public shareholders of the Company.
52. Defendants failed to disclose that they own Stock Options in the Company, failed to disclose that these Stock Options have low exercise prices, and failed to disclose the details of the Stock Option grants.
53. Defendants failed to disclose the Lawsuit filed by plaintiff WININGER in Delaware or the details of the Lawsuit (which are set forth above).
54. Defendants failed to disclose that they have golden parachute employment agreements with the Company and failed to disclose the details of those agreements (which are set forth above).
55. Defendants failed to disclose the positions of defendants CHILL, FREED, KENNER, and WRIGHT in the Company (which are set forth above) or the salaries and other compensation they receive from the Company (which are set forth above). Defendants failed to disclose that defendant BECKMAN has an agreement with the Company under which he receives $125,000 per year and is required to provide 20 hours of consulting services per month.
56. Defendants failed to disclose the lock-up agreement with Bear, Stearns & Co., Inc. or the details of that agreement (which are set forth above).
57. Defendants failed to disclose the material facts and items of information, including facts described in paragraphs 47 to 56 and other facts, that they are required to disclose in a proxy statement under SEC Rule 14a-101 and SEC Schedule 14A, 17 C.F.R. Section 240.14a-101.
58. By making the statements set forth in paragraph 45 and failing to disclose the material facts described in paragraphs 47 to 56, defendants violated SEC Rule 14a-9, 17 C.F.R. Section 240.14a-9.
59. Plaintiff realleges and incorporates by reference, as though fully set forth, paragraphs 1 through 58.
Plaintiff requests an injunction ordering the defendants to:
(a) file with the SEC and send to all the Limited Partners a proxy statement which discloses all the facts described in paragraphs 47 to 56 and otherwise complies with SEC regulations;
(b) file the Letter of March 21, 1997, with the SEC and inform the SEC about the violations of SEC regulations described herein; and
(c) send a corrective disclosure to all the Limited Partners disclosing all material facts, including the facts described in paragraphs 47 to 56 and informing the Limited Partners about the violations of SEC regulations described herein.
60. Plaintiff requests a declaratory judgment stating that:
(a) defendants violated SEC Rule 14a-3(a) for the reasons stated in the First Claim for Relief;
(b) defendants violated SEC Rule 14a-6(b) for the reasons stated in the Second Claim for Relief; and
(c) defendants violated SEC Rule 14a-9 for the reasons stated in the Third Claim for Relief.
61. Plaintiff also requests that this action be certified as a class action pursuant to Federal Rule of Civil Procedure 23(a), 23(b)(1), 23(b)(2), and/or 23(b)(3), that plaintiff be appointed as class representative, and that The Mills Law Firm be appointed as class counsel.
62. Plaintiff also requests an award of costs of suit herein, including attorneys' fees and expenses, to the extent permitted by law.
63. Plaintiff also requests such other relief as may be necessary to protect the Limited Partners or that is otherwise just and reasonable.
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Dated: May 1, 1997 |
THE MILLS LAW FIRM
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