The opinion of the court was delivered by: Baylson, District Judge.
Plaintiff Kristoff Gintowt has filed a Complaint asserting
violations of the
Racketeer Influenced and Corrupt Organizations Act (RICO),
18 U.S.C. § 1961-68, against all Defendants. Presently before this
Court is a motion to dismiss Plaintiffs Complaint pursuant to
Federal Rule of Civil Procedure 12(b)(6), by Defendants TL
Ventures, TL Ventures III L.P., TL Ventures III Offshore L.P.,
TL Ventures III LLC, TL Ventures III Interfund L.P., TL Ventures
Management L.P., Arthur Spector and James Dixon. The Motion will
be GRANTED, with leave to Plaintiff to file an amended
I. Legal Standard on Rule 12(b)(6) Motion to Dismiss
When deciding a motion to dismiss pursuant to Federal Rule of
Civil Procedure 12(b)(6), the court may look only to the facts
alleged in the complaint and its attachments. See Jordan v.
Fox, Rothschild, O'Brien & Frankel, 20 F.3d 1250, 1261 (3d Cir.
1994). The court must accept as true all well pleaded
allegations in the complaint and view them in the light most
favorable to the plaintiff. See Angelastro v. Prudential-Bache
Sec., Inc., 764 F.2d 939, 944 (3d Cir. 1985). A Rule 12(b)(6)
motion will be granted only when it is certain that no relief
could be granted under any set of facts that could be proved by
the plaintiff. See Ransom v. Marrazzo, 848 F.2d 398, 401 (3d
II. Allegations of the Complaint
Plaintiff alleges the following facts, which, for the purpose
of deciding the instant motion, will be read in the light most
favorable to Plaintiff. The Reohr Group Inc. (herein "Reohr"), a
successful staffing company, was a closely-held corporation,
whose shares were entirely owned by Plaintiff and two other
individuals (herein "the Reohr partners"). See Complaint ¶ 11.
In October 1997 Reohr merged into a new company, Broadreach
Consulting, Inc. ("Broadreach"). As explained below, Plaintiff
claims that his equity in Broadreach was obliterated as a result
of numerous acts of fraud, which were concealed from Plaintiff
(and others), as well as various misrepresentations by
Defendant TL Ventures (herein "TL") was a venture capital fund
("VCF"), which managed other VCFs and offered shares in those
VCFs to the public. Id. ¶ 5. TL was "closely affiliated" with
Safeguard Scientifics, Inc. ("Safeguard"). Id. Defendants TL
Ventures III L.P. ("Ventures III"), TL Ventures III Offshore
L.P. ("Offshore"), TL Ventures III LLC, and TL Ventures III
Interfund L.P. ("Interfund") were also VCFs affiliated with
Safeguard. Id. ¶ 6. Yet another entity, TL Ventures Management
L.P., was the General Partner of the other TL entities (herein
"TL Defendants"). Information Technology Consulting Inc. ("ITC")
was a subsidiary of HDS Network Systems, Inc. ("HDS"). ¶ Id. ¶
7. HDS was eventually renamed Neoware Systems, Inc.
("Neoware").*fn1 Id. Defendant Arthur Spector was managing
director of TL Ventures Management L.P. and CEO of HDS. Id.
Defendant James Dixon was CEO of Broadreach. Id. ¶ 8.
Plaintiff alleges that Dixon and Spector, at all times, acted on
behalf of Neoware and the TL Defendants. Id. Defendant Rice
Sangalis Toole & Wilson ("Rice") was an investment firm, while
Defendant RSTW Partners, III L.P. ("RSTW") was a limited
partnership created by Rice for the purpose of acquiring an
interest in Reohr.*fn2 Id. ¶ 9-10.
According to Plaintiff, in July 1996 Spector approached the
Reohr partners, representing that the TL Defendants were
interested in making an equity investment
in Reohr, See Complaint at ¶ 14-15. In the fall of 1996, Spector
tendered proposals by the TL Defendants to purchase all of
Reohr's assets. Id. ¶ 16. Spector represented that the TL
Defendants intended to acquire several successful companies and
combine them into a single staffing company, Broadreach. Id. ¶
17. Dixon represented to the Reohr partners, via telephone, that
the three Reohr partners would each have a seat on the
Broadreach board. Id. ¶ 34. Dixon also faxed unspecified
"documents related to the completion of the merger." Id. On
October 2, 1996 and November 18, 1996, Spector sent letters to
the Reohr partners confirming that the "companies to be acquired
in the initial stages would have at least $50 million in
revenues." Id. ¶ 16. Spector and Dixon, on behalf of the TL
Defendants, represented to the Reohr partners that the
businesses to be acquired would all be profitable companies
engaged in the same business as Reohr. Id. ¶ 17. They further
represented that, following their investment in Reohr, Reohr's
business would remain substantially unchanged. Id.
However, Plaintiff alleges that the TL Defendants actually
planned to transform Reohr into an electronic business
consulting firm that could be quickly "flipped" for a giant
profit, given the "public euphoria" surrounding Internet
commerce in the late 1990s. Id. ¶ 19, 52. Defendants failed to
disclose, at any time, that they intended to take extraordinary
risks and assume high amounts of debt in managing the new
entity. Id. ¶ 19.
In anticipation of the Reohr merger, TL purchased an entity
called Global Consulting Group ("Global"). Id. 21. Spector and
Dixon represented to the Reohr partners that Global was a stable
company in the same line of business as Reohr. The merger was
completed in October 1997, but with significantly different
equity allocations than Defendants had led the Reohr partners to
believe, Id, ¶ 27, Rice, a new investor, purchased a substantial
amount of equity, allowing TL to limit its investment to about
20% of the new company. Also, the Reohr partners were paid for
their shares not out of TL capital, as the Reohr partners had
been led to expect, but with funds borrowed from PNC bank, which
saddled Broadreach with debt. Id.
Defendants thereafter pressured Plaintiff to resign his
Broadreach management and Board positions, so that he would not
be in a position to oppose their risky plans for the company. In
February 1998, Dixon telephoned Plaintiff and assured him that
Broadreach was doing well, except in the marketing area. ¶ 43.
Dixon also stated that Plaintiffs employment at the company was
not "working out." Id. Plaintiff resigned his management
position at Broadreach based on this discussion with Dixon, as
well as Dixon's assertion that the three Reohr partners would
continue to hold Broadreach board seats. Id. Yet, throughout
1998, Plaintiff was excluded from Board meetings and not
provided with financial records. Id. ¶ 46. Dixon repeatedly
asked for Plaintiffs Board resignation and exerted "intolerable
pressure and indignities" on Plaintiff until he finally left the
In late January 1999, Dixon sent to Plaintiff, in the U.S.
mails, a general release, which would have absolved Defendants
of liability related to Plaintiffs separation, except as
provided by contract. Plaintiff refused to sign the release. ¶
48. On February 1, 1999, Dixon sent a letter to Plaintiff, also
via the mails, accepting his resignation from the Board and
advising him that he would keep Plaintiff appraised of
Broadreach's performance. ¶ 49.
Dixon, with the assistance of Board members placed on the
Board by TL and Rice, began to mask Broadreach as an e-commerce
company, in order to make the
company more attractive to buyers. Id. ¶ 50-51. To carry out
this "illusion," Defendants hired expensive executives, gave
inexperienced workers management titles, misrepresented to
potential buyers that Broadreach had expertise in areas that it
did not, and even sold off the company's staffing business.
Id. ¶ 52-53, 59. In the fall of 1999, the company "directed a
stream of misleading communications regarding the nature of its
business to potential buyers." Id. ¶ 53. The Marant Group
briefly showed interest in acquiring Broadreach, but rejected
the inflated price when it learned of Broadreach's lack of
e-business experience. Id. ¶ 54.
At an unspecified point in 1999, Dixon offered to buy
Plaintiffs shares. When Plaintiff inquired of Kurt Keene of the
Rice firm as to Broadreach's prospects, Keene failed to disclose
information regarding the company's high debts and other reasons
for concern, causing Plaintiff not to sell. Id. ¶ 58. By the
second quarter of 2000, as a result of Defendants' scheme and
the enormous bank debts taken on to finance the "charade,"
Broadreach was experiencing negative earnings. Id. ¶ 60. On
December 19, 2000, Dixon, on behalf of Broadreach, sent a notice
through the U.S. mails seeking additional funding from Plaintiff
and other shareholders. ¶ 61. No investors were willing. On
January 1, 2001, Broadreach announced by press release and over
the wires that the company would "spin off" its staffing work
into a new entity called LiquidHub. ¶ 62. On July 23, 2001,
Broadreach sent to Plaintiff, via U.S. mail, notice of a Special
Meeting of Shareholders, for the purpose of authorizing the sale
of all or substantially all of the company's assets. Id. ¶ 64.
In August 2001, Plaintiff gave Broadreach notice that he
intended to exercise dissenters' rights. Id. ¶ 65. Though
Plaintiff repeatedly requested access to Broadreach's books, the
Board stonewalled. Id. ¶ 70.
On August 3, 2001, Citizens Bank of Massachusetts
("Citizens"), a creditor of Broadreach, notified Broadreach that
it was in default and that Citizens would exercise its UCC
rights, obtain all Broadreach collateral securing the defaulted
loan, and transfer those assets to Vector esp, Inc. ("Vector").
Id. 68. Upon acknowledging that it had no rights as to the
collateral securing the Citizens indebtedness, Broadreach
conveyed to Vector all of its remaining assets. Id. ¶ 70.
Thus, Broadreach ceased to exist. Id. ¶ 72. Plaintiff alleges
that the Board entered into the Citizens/Vector transaction "in
hopes that Broadreach would no longer constitute a viable entity
for purposes either of derivative litigation or of any
dissenters' rights proceedings."*fn3 Id. Plaintiff further
claims that, because ...