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GINTOWT v. TL VENTURES

July 22, 2004.

KRISTOFF GINTOWT
v.
TL VENTURES, et al.



The opinion of the court was delivered by: MICHAEL BAYLSON, District Judge

MEMORANDUM

Plaintiff in this case, Kristoff Gintowt, is a shareholder and former director and employee of Broadreach Consulting, Inc. ("Broadreach"), a now-dormant company in which Defendants were also shareholders and managers. Defendants TL Ventures, TL Ventures III L.P., TL Ventures III Offshore L.P., TL Ventures III Interfund L.P., TL Ventures Management L.P. and TL Ventures III LLC, collectively referred to as "TL Ventures," are venture capital management firms and their management entities. Defendants Arthur Spector and James Dixon were directors and officers of Broadreach. Plaintiff alleges that the Defendants deprived him of the value of his investment and his employment, raising claims under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962 ("RICO"), and common law fraud and misrepresentation. Presently before the Court is Defendants' Motion for Summary Judgment.

Plaintiff argues against Defendants' Motion as if the facts support a seamless web of fraud leading to the loss of his investment. Defendants assert that Plaintiff has filed this lawsuit to recover damages for events which had nothing to do with any alleged fraud, but were caused by the general risks of the business world, specifically the blown "bubble" of technology investments. The Court, notwithstanding contrasting versions of facts and events, must analyze the legal issues and finds that a substantial part of Plaintiff's claims is barred by settled legal principles, but as to some claims, he has presented sufficient facts to withstand summary judgment. Thus, for the reasons that follow, Defendants' Motion will be granted in part and denied in part.

  I. Legal Standard

  Summary judgment is appropriate "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." FED. R. CIV. P. 56(c). An issue is "genuine" if the evidence is such that a reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A factual dispute is "material" if it might affect the outcome of the case under governing law. Id. A party seeking summary judgment always bears the initial responsibility for informing the district court of the basis for its motion and identifying those portions of the record that it believes demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Where the non-moving party bears the burden of proof on a particular issue at trial, the moving party's initial burden can be met simply by "pointing out to the district court that there is an absence of evidence to support the non-moving party's case." Id. at 325. After the moving party has met its initial burden, "the adverse party's response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial." FED. R. CIV. P. 56(e). Summary judgment is appropriate if the non-moving party fails to rebut by making a factual showing "sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322. Under Rule 56, the Court must view the evidence presented on the motion in the light most favorable to the opposing party. Anderson, 477 U.S. at 255.

  This Court has jurisdiction pursuant to 28 U.S.C. § 1331, as the case involves a cause of action arising under federal law. Venue is proper in this district because Broadreach, the corporation at issue in this case, and the acts alleged in connection with it, took place in this district.

  II. Background

  A. Procedural History

  Plaintiff filed his Complaint in this case on February 13, 2002. The case was transferred to the undersigned Judge on August 8, 2002. On October 3, 2002, this Court granted Defendant's Motion to Dismiss without prejudice, and gave Plaintiff leave to file an Amended Complaint and a RICO Case Statement, see Gintowt v. TL Ventures, 226 F. Supp.2d 672 (E.D. Pa., 2002), which he did on November 1, 2002. Defendants moved once again to dismiss the Complaint and the Court denied that motion on January 2, 2003, see Gintowt v. TL Ventures, 239 F. Supp.2d 580 (E.D. Pa., 2003). After the completion of discovery, Defendants moved for Summary Judgment on January 30, 2004. Briefing on the Motion for Summary Judgment, including Statements of Undisputed Facts and supplemental letter briefs by each side submitted at the request of the Court, was completed on June 18, 2004. The Court held oral argument on the Motion for Summary Judgment on June 4, 2004. B. Allegations of the Complaint

  As the details of Plaintiff's Amended Complaint are set out in this Court's previous two opinions in this case, the allegations will be briefly summarized here. Plaintiff, in his Amended Complaint, alleges five counts against the various Defendants, all based on the same alleged scheme of Defendants to take over the company in which Plaintiff had a substantial equity position, and was a director and employee of, and operate it for Defendants' own financial gain. Plaintiff alleges that Defendants deprived Plaintiff of appropriate financial information and concealed from Plaintiff the actual business activities of Broadreach. Plaintiff claims Defendants should be liable for damages constituting the lost value of his investment in Broadreach.

  Count One is a claim against only Defendants TL Ventures and Dixon for violation of RICO section 1962(b), which provides:
(b) It shall be unlawful for any person through a pattern of racketeering activity or through collection of an unlawful debt to acquire or maintain, directly or indirectly, any interest in or control of any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce.
18 U.S.C. § 1962(b). Count Two is a claim against Defendants TL Ventures, Spector, and Dixon*fn1 for violation of RICO Section 1962(c), which provides:
(c) It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt.
18 U.S.C. § 1962(c). Count Three is a claim against all Defendants for violation of RICO Section 1962(d), which provides:
(d) It shall be unlawful for any person to conspire to violate any of the provisions of subsection (a), (b), or (c) of this section.
18 U.S.C. § 1962(d). Counts Four and Five are claims against all Defendants for common law fraud and negligent misrepresentation, respectively.

  III. Undisputed Facts

  The following facts are not disputed by the parties.*fn2

  A. The Parties

  Plaintiff Kristoff Gintowt ("Gintowt") was a shareholder of The Reohr Group, Inc. ("Reohr") and a shareholder and, until January 1999, a director of Broadreach, a company that was the result of a merger between Reohr and other entities. Reohr was a corporation providing technicians to other companies to meet their information technology needs, a service known as "staffing." In the mid-1990's, Reohr began providing "consulting" services in addition to staffing. By 1996, Reohr was owned by Plaintiff along with Leighton Yohannan ("Yohannan") and Robert English ("English").

  Defendant TL Ventures consists of venture capital investment firms and their affiliated management entities. TL Ventures was one of the investors in, and one of the entities that coordinated the transaction that led to, Broadreach.

  Defendant James W. Dixon ("Dixon") was the CEO and a director of Broadreach. Prior to joining Broadreach, Dixon was the CEO of Information Technology Consulting, Inc. ("ITC"), a subsidiary of HDS Network Systems, Inc. ("HDS"). ITC was formed for the purpose of acquiring and combining several companies in the technology services field, as Reohr, and then selling an interest in the combined entity to the public through an initial public offering ("IPO") in a so-called "rollup" transaction.

  Defendant Arthur R. Spector ("Spector") was a director of Broadreach. Prior to joining Broadreach, Spector was the CEO of HDS, later known as Neoware Systems, Inc. ("Neoware"), as well as the managing director of TL Ventures.

  B. Stock Purchase Transaction

  In July and August of 1996, Spector approached the members of Reohr about the possibility of an investment. On August 23, 1996, Spector mailed to English a letter and confidentiality agreement. On October 2, 1996, Spector mailed to English, Plaintiff and Yohannan a draft proposal letter that expressed interest in acquiring Reohr's assets. On October 10, 1996, ITC sent a letter to English, Plaintiff and Yohannan by facsimile that outlined ITC's proposal to purchase Reohr's assets. A final proposal letter for the purchase of the assets and disclosed liabilities of Reohr dated November 18, 1996 was executed by Spector on behalf of ITC and by English (for himself and as President of Reohr), Plaintiff and Yohannan. That letter stated that closing was anticipated to occur by December 31, 1996. No closing on the Reohr acquisition occurred by year end 1996.

  In early 1997, TL Ventures purchased a company named GCG Consultants, Inc. d/b/a Global Consulting Group ("Global") which also provided data processing staffing. On February 17, 1997, ITC sent to Reohr a facsimile that included a draft Asset Purchase Agreement between ITC and Reohr. ITC and Reohr and its shareholders entered an Asset Purchase Agreement dated February 27, 1997. The obligations of ITC and the Reohr shareholders under the Asset Purchase Agreement were conditioned on the consummation of the IPO. On March 4, 1997, HDS, the parent company of ITC, issued a press release announcing the entry of the Asset Purchase Agreement and that Reohr and Global were expected to be included in the rollup transaction. The plans for an immediate IPO for the combined company were abandoned in the spring of 1997, though the Defendants continued to negotiate toward a transaction that would roll up technology service companies into a single entity, but with private investment.

  In the summer of 1997, Spector and Dixon engaged in negotiations to purchase a company called RealTime Consulting, Inc. for inclusion in the rollup transaction. In late July 1997, RealTime's owner withdrew, leaving only Global and Reohr as candidates for the combined entity.

  At this point, negotiations ensued for a restructured transaction which was not conditioned on an IPO and which resulted in ITC and Global merging into Reohr, which became the surviving corporation. Plans were made by ITC to borrow funds from a bank to provide working capital for the merged entity and a source for the payment of part of the purchase price. These plans were disclosed in a Confidential Offering Memorandum distributed by ITC in July 1997. The Confidential Offering Memorandum also disclosed that TL Ventures' purchase of Global was for cash. Prior to the closing on the merger transaction, Reohr did not conduct due diligence on Global.

  In August 1997, Dixon personally invested $1,000,000 in Reohr, obtaining an ownership interest of 6.711%. Dixon and TL Ventures became shareholders of Reohr, as embodied in the Stock Purchase and Combination Agreement of August 11, 1997 as amended and restated as of October 22, 1997. In September 1997, Rice Sangalis Toole & Wilson ("Rice Sangalis"), a private equity investment firm, elected to make an investment in the new entity.

  The final closing on the Stock Purchase and Combination Agreement by which ITC and Global were merged into Reohr and created the new entity, Broadreach, occurred on or about October 22, 1997. As a result of the transaction that finally closed on October 22, 1997, the Reohr shareholders collectively received $7,500,000 in cash. Plaintiff received 35% of this amount. As of the October 22, 1997 transaction, the shareholders of Broadreach were Plaintiff, the former Reohr partners Yohannon and English, Dixon, ITC, TL Ventures, and Rice Sangalis. Spector was not, individually, a shareholder of Broadreach.

  C. Termination of Plaintiff as Employee and Director of Broadreach

  In February 1998, Dixon placed a phone call to Plaintiff saying that his area of Broadreach was "not working out" and the next day had a meeting with Plaintiff asking him to resign from Broadreach. Dixon subsequently mailed a Separation Agreement and Release to Plaintiff.

  In January 1999, Plaintiff resigned from the Broadreach Board of Directors at the urging of Dixon. After Plaintiff resigned from the Board, Dixon sent him a letter dated February 1, 1999, promising to keep Plaintiff informed of Broadreach's affairs.

  The original Board of Directors of Broadreach consisted of the following individuals: Dixon, Plaintiff, English, Yohannan, Spector, Donald Rice and Stephen Andriole. At the Board meeting on February 12, 1999, after his resignation, Plaintiff was replaced by John Leonard, a business associate of English. Sometime during 1999, Gary Anderson became a member of the Broadreach Board. Effective February 4, 2000, Don Rice resigned from the Broadreach Board and was replaced by Kurt Keene.

  D. Conversion of Broadreach

  During 1998 and 1999, Broadreach's management migrated the company's business from primarily staffing to consulting, with an emphasis on eBusiness. The plans for and implementation of this migration were made openly and with the knowledge of Broadreach's senior managers and directors, including English, Yohannan, and other holdovers from Reohr. As early as September 1997, Dixon began to arrange for the attendance of Reohr employees at e-commerce seminars. In early September 1997, Dixon requested that Plaintiff and the other Reohr shareholders make a presentation to Rice Sangalis which emphasized the "solutions" or consulting work that Reohr had performed.

  Broadreach managers held a planning session on November 3-4, 1998 and a "midnight branding session" on December 10-11, 1998 devoted to planning for Broadreach's eBusiness. The results of this session were presented to the Broadreach Board at its meeting of February 12, 1999 by Rob Kelley with no recorded dissent from English or Yohannan. The migration from staffing to consulting and eBusiness was approved by the Broadreach Board of Directors upon management's recommendation.

  During 1998 and 1999, Broadreach's business grew, and the consulting segment contributed that growth, as the staffing segment contracted. The eBusiness segment of Broadreach's business included activities that could be categorized as "staffing" and those that could be categorized as "consulting" or "eBusiness." English and Yohannan were involved in the classification process. During this period, Broadreach periodically issued documents called "Options Holder Quarterly," signed by Dixon and English that summarized recent achievements of Broadreach, as well as challenges that the company faced in its transition to eBusiness. In addition, on several occasions after his resignation from Broadreach, Plaintiff received a binder prepared for Broadreach's Board Meeting, including materials on the company's progress. In 1999, Broadreach also issued at least one press release noting its success and received press coverage and awards.

  Beginning in July of 1999, Broadreach began experiencing difficulties. Its operating results for July and August of 1999 were disappointing and in October 1999, Broadreach engaged First Albany Corporation ("First Albany") to advise the company in connection with the possible sale of its eBusiness segment.

  On September 27, 1999, Broadreach — by its CFO, Robert Graham ("Graham") — sent a letter to Plaintiff, offering to buy back a portion of his shares in the company for $350,000, as required by the Stockholders' Agreement dated as of October 22, 1997. Plaintiff declined this offer. In November 1999, Broadreach sought an additional investment of $2 million from its shareholders. Plaintiff declined to participate, but shareholders TL Ventures, English, Dixon, Yohannan, and Rice Sangalis opted to participate. Graham also contributed capital to Broadreach as part of this call for additional investment.

  Between January and March of 2000, Broadreach and First Albany sent information and made presentations to prospective buyers of Broadreach. Preliminary discussions for a sale of Broadreach for as much as $120,000,000 occurred with one company, Merant, PLC, but this deal fell through, concurrent with the downturn in the stock market in April of 2000. Broadreach was able to sell its staffing business in the summer of 2000 for $1,625,000 to a company called Technisource, Inc. On August 9, 2000, Graham sent to Plaintiff a ...


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