Gilmur R. Murray, Esq. (#111856)
Derek G. Howard, Esq. (#118082)
Alex J. Luchenitser, Esq. (#177367)
THE MILLS LAW FIRM
300 Drakes Landing, Suite 155
Greenbrae, California 94904
Telephone: (415) 464-4770

Attorneys for Plaintiff Dwight E. Wininger
On Behalf of Himself and All Others Similarly Situated

To defendants SI Management L.P., et al. and their attorneys of record: NOTICE IS HEREBY GIVEN that on October 24, 1997, plaintiff Wininger will and hereby does move for partial summary judgment. This motion is based on this Motion and Memorandum of Points and Authorities in Support Thereof, Plaintiffs' Statement of Undisputed Material Facts in Support of Motion for Partial Summary Judgment, and the Declaration of Alex J. Luchenitser.

Plaintiffs move for partial summary judgment on the issue of liability, on the first through third claims for relief in their complaint, that defendants have violated Securities and Exchange Commission ("SEC") Rules 14a-3, 14a-6, and 14a-9, respectively. See 17 C.F.R. §§ 240.14a-3, .14a-6, .14a-9.

I. BACKGROUND

The Court heard a motion for a preliminary injunction on July 25, 1997, and issued an order deciding that motion on August 4, 1997. Ex. J. This motion is based on the same central, undisputed facts, which are set forth in the Court's August 4 order. See Ex. J at 2-4.¹ These undisputed facts are summarized below.

The lead plaintiff in this case, Dr. Dwight E. Wininger, is a limited partner in Synthetic Industries, L.P. ("the Partnership"). Ex. H, ¶ 1. Dr. Wininger brings this case as a class action on behalf of all the other limited partners in the Partnership ("the Limited Partners").

The Partnership's sole asset is two-thirds of the stock of Synthetic Industries, Inc. ("the Company"). Ex. M, p. 3, ¶ 24. The defendants are the individuals and entities who control both the Partnership and the Company.²

The defendants have proposed a Plan of Withdrawal and Dissolution for the Partnership ("the Proposed Plan"). Ex. E. In order to unlawfully predispose the Limited Partners into supporting the Proposed Plan before making the disclosures required to be made in a proxy statement, the defendants sent the Limited Partners a letter on March 21 which advocated in favor of the Proposed Plan ("the March 21 Letter"). Ex. A; Ex. H, ¶¶ 3-4. The advocacy in the March 21 Letter included the following statements:

(a) "[T]he Plan has been designed to provide fair and equitable treatment of all our Limited Partners." (Ex. A at 3 (emphasis added));

(b) "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." (Ex. A at 2 (emphasis added));

(c) "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." (Ex. A at 1 (emphasis added)); and

(d) "[T]he 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." (Ex. A at 2).

In furtherance of their plan to predispose the Limited Partners into being in favor of the Proposed Plan before sending them a proxy statement, the defendants issued a press release about the Proposed Plan on June 9, 1997. Ex. B. The Press Release advocated in favor of the Proposed Plan by making the following statements:

(a) "Leonard Chill, President and Chief Executive Officer of Synthetic Industries, Inc., commented, 'With this plan, we are delivering on our promise to enhance liquidity for limited partners in our majority shareholder, while increasing the public float for common shareholders in a non-dilutive manner.'"

(b) "The filing was made pursuant to a proposed plan of Synthetic Industries, L.P. to provide liquidity for holders of its limited partnership units by offering limited partners the opportunity to receive over time the shares of Synthetic Industries, Inc. common stock that underlie their partnership units."

Ex. B (emphasis added).

Plaintiffs moved for an injunction to remedy the defendants' unlawful advocacy. Ex. K. In an August 4 order, the Court found that plaintiffs had established a likelihood of success on the merits of their claims that the March 21 Letter and the Press Release were unlawful proxy solicitations. Ex. J at 8-10. The Court stated that "Plaintiff has established that Defendants made statements that are probably prohibited by SEC regulations." Ex. J at 12. While the Court concluded that the equities did not then warrant injunctive relief, the Court cautioned that "the equities in this case would be altered if, prior to distribution of a proxy statement, Defendants made additional statements concerning the dissolution plan that were not strictly neutral and informational." Ex. J at 13.

On August 14, 1997, the defendants filed a 10-Q quarterly report ("the 10-Q") which characterized the Proposed Plan in a favorable and misleading manner. Ex. C at 15. Like the March 21 Letter and the Press Release, the 10-Q fails to disclose numerous facts material to the Proposed Plan and omits all negative information about it. Ex. A, B, C.

After plaintiffs pointed out the deficiencies in the 10-Q to the defendants, defendants represented that they would not send the 10-Q to the Limited Partners. Ex. N, O. However, the 10-Q is publicly available over the internet. See Luchenitser Decl. ¶ 3; Ex. C. Defendants still intend to go forward with the Proposed Plan, but they have yet to disseminate a proxy statement or otherwise make the disclosures required by the federal securities laws.³

Plaintiffs now move for partial summary judgment on the issue of liability that defendants have violated the proxy provisions of the federal securities laws.

II. THE MARCH 21 LETTER AND THE JUNE 9 PRESS RELEASE WERE PROXY SOLICITATIONS

A. As this Court has Previously Indicated, Communications Which Advocate In Favor of a Proposed Transaction are Proxy Solicitations

The law governing what constitutes a "proxy solicitation" is set out in the Court's August 4 order and summarized below. See Ex. J at 5-8.⁴ The Securities and Exchange Act of 1934 (the "Exchange Act") gives the SEC the power to promulgate regulations governing proxy solicitations and makes it unlawful for anyone to violate these regulations. 15 U.S.C. ß 78n(a).5 SEC Rule 14a-2 defines what communications constitute a "proxy solicitation" subject to the SEC's regulations. A "proxy solicitation" is:

(i) Any request for a proxy whether or not accompanied by or included in a form of proxy;

(ii) Any request to execute or not to execute, or to revoke, a proxy; or

(iii) The furnishing of a form of proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.

17 C.F.R. § 240.14a-2(l)(1) (emphasis added).

A long line of cases holds that the definition of "proxy solicitation" extends "to any other writings which are part of a continuous plan ending in solicitation and which prepare the way for its success." S.E.C. v. Okin, 132 F.2d 784, 786 (2d Cir. 1943); see also Long Island Lighting Co. v. Barbash, 779 F.2d 793, 796 (2d Cir. 1985); Trans World Corp. v Odyssey Partners, 561 F. Supp. 1315, 1319 (S.D.N.Y. 1983); S.E.C. v. Topping, 85 F. Supp. 63, 64 (S.D.N.Y. 1949).

This doctrine has been liberally interpreted. See Studebaker Corp. v. Gittlin, 360 F.2d 692, 696 (2d Cir. 1966); Capital Real Estate Inv. Tax Exempt Fund Ltd. Partnership v. Schwartzberg ("CRITEF I"), 917 F. Supp. 1050, 1061-62 (S.D.N.Y. 1996); Crouch v. Prior, 905 F. Supp. 248, 252-53, 259 (D.V.I. 1995); Kaufman v. Cooper Cos., 719 F. Supp. 174, 185 (S.D.N.Y. 1989); S.E.C. v. American Real Estate Inv. Trust, 529 F. Supp. 1300, 1306 (C.D. Cal. 1982); Canadian Javelin Ltd. v. Brooks, 462 F. Supp. 190, 193-94 (S.D.N.Y. 1978); Nottingham Partners, Fed. Sec. L. Rep., S.E.C. No-Action Letters ¶ 77,862, 1984 WL 46009 (Dec. 17, 1984); cf. S.E.C. v. Commercial Inv. & Dev. Corp. of Fla., 373 F. Supp. 1153, 1163, 1165 (S.D. Fla. 1974).

In its August 4 order, this Court stated that two tests have been used to determine when communications by management constitute a link in a chain of communications designed to procure proxies. Ex. J at 7. The better test is set forth in Capital Real Estate Inv. Tax Exempt Fund Ltd. Partnership v. Schwartzberg ("CRITEF II"), 929 F. Supp. 105 (S.D.N.Y. 1996). In CRITEF II, the court held that, in determining whether communications constitute proxy solicitations, "the appropriate line falls between a purely factual description of the proposed transaction, perhaps coupled with a statement that the issuer's position and more information will be forthcoming in a proxy statement, and a more commendatory or subjective presentation." Id. at 113. The court stated,

If the issuer makes a recommendation or makes other statements that reasonably portray the transaction in a favorable light -- in other words, if it presents the transaction in a manner objectively likely to predispose security holders toward or against it -- it must comply with the proxy rules. If it confines itself to the basic facts, it need not do so.

Id. CRITEF II held that a press release at issue there was a proxy solicitation, as it "went far beyond . . . bare bones factual description of the proposed transaction." Id.

The other test for determining whether a communication is a proxy solicitation, referred to by the Court in its August 4 order as the "Smallwood test" (see Ex. J at 8), emphasizes the timing of the communications involved. See Smallwood v. Pearl Brewing Co., 489 F.2d 579, 601 (5th Cir.), cert. denied, 419 U.S. 873 (1974). In its August 4 order, the Court stated that under the CRITEF II test, the March 21 Letter "was a proxy solicitation" (Ex. J at 8), and that under the Smallwood test, plaintiffs "raised serious questions" about whether the March 21 Letter was a proxy solicitation (Ex. J at 9).

As the Court indicated at the July 25 hearing, the CRITEF II test is the appropriate test to follow. See Ex. I at 23. Unlike the Smallwood test, the CRITEF II test draws a bright line for corporate officers and attorneys. The CRITEF II test makes it easy to determine at the time a communication is made whether the communication constitutes a proxy solicitation. The CRITEF II test upholds the purposes of the securities laws by prohibiting management from advocating in favor of a proposed transaction until they make the detailed disclosures required to be made in a proxy statement. See 17 C.F.R. § 240.14a-101.

B. The March 21 Letter and the June 9 Press Release Were Proxy Solicitations

The Court has already made clear that, under the CRITEF II test, the March 21 Letter and the June 9 Press Release were proxy solicitations. See Ex. J at 8, 10. The March 21 Letter overtly advocated in favor of the Proposed Plan -- it thrice used the word "fair" in describing the Proposed Plan and twice used the word "equitable," and it told the Limited Partners that the Proposed Plan is "in all of your best interests." Ex. A. In Data Probe Acquisition Corp. v. Datatab, Inc., 568 F. Supp. 1538, 1556 (S.D.N.Y.), rev'd on other grounds, 722 F.2d 1 (2d Cir.1983), cert. denied, 465 U.S. 1052 (1984), the court held that a similar letter was a proxy solicitation.

As this Court has recognized, the Press Release also advocated in favor of the Proposed Plan. See Ex. J at 8-10. For example, the Press Release quoted defendant Leonard Chill as stating, "With this plan, we are delivering on our promise to enhance liquidity for limited partners in our majority shareholder, while increasing the public float for common shareholders in a non-dilutive manner." Ex. B. In ConAgra, Inc. v. Tyson Foods, Inc., 708 F. Supp. 257, 268-69 (D. Neb.), order vacated by stipulation, 716 F. Supp. 428 (D. Neb. 1989), the court held that a press release issued under circumstances similar to those of the case at bar was a proxy solicitation.

Even under the Smallwood test, as the Court's August 4 order suggests, the March 21 Letter and the Press Release were proxy solicitations. See Ex. J at 8-10. As the Court's order points out, the March 21 Letter contains more advocacy than the letter at issue in Smallwood, and, unlike the letter in Smallwood, the March 21 Letter was followed by a press release which advocated in favor of the Proposed Plan. See Ex. J at 8; cf. Smallwood, 489 F.2d at 601. It is self-evident from their text that the March 21 Letter and the Press Release were part of a chain of communications reasonably calculated to increase the likelihood that the Limited Partners would vote in favor of the Proposed Plan.

III. DEFENDANTS VIOLATED THE FEDERAL SECURITIES LAWS BY MAKING PROXY SOLICITATIONS PRIOR TO DISSEMINATING A PROXY STATEMENT AND BY NOT FILING THESE SOLICITATIONS WITH THE SEC

SEC Rule 14a-3(a) provides that a proxy solicitation may not be made "unless each person solicited is concurrently furnished or has previously been furnished with a publicly-filed preliminary or definitive written proxy statement . . ." 17 C.F.R. § 240.14a-3(a). Defendants do not dispute that they have not yet disseminated a proxy statement. Ex. N, p. 5, ¶ 36. By issuing the March 21 Letter and the June 9 Press Release prior to the dissemination of a proxy statement, defendants violated Rule 14a-3.

SEC Rule 14a-6(b) provides that "eight definitive copies of the proxy statement . . . and all other soliciting material . . . shall be filed with, or mailed for filing to, the [SEC] not later than the date such material is first sent or given to any security holders." 17 C.F.R. § 240.14a-6(b). Defendants violated Rule 14a-6 by not filing the March 21 Letter with the SEC. Ex. N, p. 5, ¶ 36. Defendants also violated Rule 14a-6 by not filing the Press Release as a proxy solicitation and filing it only as an exhibit to the registration statement which they filed on June 9, 1997. See Ex. E at 155.

SEC Rule 14a-9 provides that no proxy solicitation may make "any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading." 17 C.F.R. § 240.14a-9(a) (emphasis added). For purposes of Rule 14a-9, "[a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." TSC Industries v. Northway, Inc., 426 U.S. 438, 449 (1976).

It is obvious that, in the March 21 Letter and the Press Release, the defendants failed to disclose numerous material facts relevant to the Proposed Plan. In the March 21 Letter and the Press Release, while advocating for the Proposed Plan, defendants failed to even disclose their own identities, how they stand to benefit from the Proposed Plan, or what their interests are in relation to the Proposed Plan. Ex. A, B. As a matter of law, these were material facts that had to be disclosed, given defendants' recommendation of the Proposed Plan. See S.E.C. v. Falstaff Brewing Corp., 629 F.2d 62, 74-75 (D.C. Cir.) (securities laws required disclosure of interests stockholder who controlled corporation's board had with respect to proposed dividend plan), cert. denied, 449 U.S. 1012 (1980); Gould v. American-Hawaiian S.S. Co., 535 F.2d 761, 774 (3d Cir. 1976) (disclosure of interests of corporate directors who recommended merger was required); Swanson v. American Consumer Industries, Inc., 415 F.2d 1326, 1330 (7th Cir. 1969) (securities laws violated because conflict of interest of directors with respect to reorganization plan was not disclosed); see also SEC Rule 14a-101, 17 C.F.R. § 240.14a-101, Item 5 (interests of directors and officers must be disclosed in proxy statement).

In the March 21 Letter and the Press Release, defendants also failed to disclose other material facts. They completely failed to disclose many material terms of the Proposed Plan. Ex. A, B. They further failed to disclose any possible disadvantages of the Proposed Plan. Ex. A, B. Defendants thereby violated Rule 14a-9.

IV. PLAINTIFFS ARE ENTITLED TO PARTIAL SUMMARY JUDGMENT

Fed. R. Civ. P. 56(c) provides that summary judgment should be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." There can be no dispute about what the contents of the March 21 Letter and the Press Release are. The test for determining whether a communications is a proxy solicitation is an objective test. See CRITEF II, 929 F. Supp. at 113-14. The issue before the Court is a pure issue of law -- there are no genuine issues of material fact. For the foregoing reasons, plaintiffs respectfully request that the Court grant partial summary judgment to plaintiffs on the issue of liability that defendants have violated SEC Rules 14a-3, 14a-6, and 14a-9.

¹ All exhibit cites herein are to the Declaration of Alex J. Luchenitser.

² The individual defendants are Leonard Chill, Ralph Kenner, W. Gardner Wright, W. Wayne Freed, and Jon Beckman ("the Individual Defendants"). The Individual Defendants control the Partnership and the Company through the following multi-level structure: The sole general partner of the Partnership is defendant SI Management L.P. The sole general partner of SI Management L.P. is defendant Synthetic Management G.P. The general partners of Synthetic Management G.P. are five Delaware corporations -- defendants Chill Investments, Inc., Kenner Investments, Inc., Wright Investments, Inc., Freed Investments, Inc., and Beckman Investments, Inc. Each of these five corporate general partners is wholly owned and controlled by one of the five Individual Defendants. Ex. D at 46.

In addition to controlling the Company by virtue of their control over the Partnership, the Individual Defendants also have control positions with the Company. Defendant Chill is president, chief executive officer, and a director of the Company. Ex. D at 38. Three of the four other Individual Defendants are also officers in the Company. Ex. D at 38. The fifth Individual Defendant, defendant Beckman, receives $125,000 per year from the Company through a "consulting agreement" with it. Ex. D at 46.

³ Defendants filed a registration statement containing a "Joint Proxy Statement and Prospectus" describing the Proposed Plan on June 9, 1997. Ex. G. Defendants amended the registration statement on August 8 and August 28. Ex. E, F. On September 2, 1997, plaintiffs filed, in Delaware Chancery Court, a motion for a preliminary injunction against the Proposed Plan based on breaches by defendants of their fiduciary duties under state law and breaches of the governing partnership agreement. On September 4, 1997, defendants represented to the Delaware Chancery Court that they would revise the Proposed Plan to eliminate many of the aspects to which plaintiffs' injunction motion objected. On September 17 and 18, 1997, defendants again amended their registration statement. Ex. P, Q. While this registration statement made substantial changes to the Proposed Plan, it failed to remedy the Proposed Plan's main substantive deficiencies and failed to make all the changes defendants represented they would make at the September 4 Delaware hearing.

⁴ The cases cited in this section are discussed in greater detail in Plaintiffs' Reply in Support of Motion for Preliminary Injunction (filed July 11, 1997) and Plaintiff's Memorandum of Points and Authorities in Support of Motion for a Preliminary Injunction (filed May 22, 1997). Ex. L at 2-7; Ex. K at 5.

⁵ Section 14(a) of the Exchange Act provides, in relevant part, that:

It shall be unlawful for any person, by the use of the mails or by any means or instrumentality of interstate commerce . . . or otherwise, in contravention of such rules and regulations as the [SEC] may prescribe . . . to solicit . . . any proxy or consent or authorization in respect of any security . . . registered pursuant to section 78l of this title.

15 U.S.C. § 78n(a). The Partnership's securities are registered pursuant to 15 U.S.C. § 78l. See Ex. E at 8.