HUGH BRIAN HANEY, Plaintiff,
v.
BRYAN J. ZWAN & DIGITAL LIGHTWAVE, INC., Defendants.
Case No. C2-97-1218
Judge Edmund A. Sargus, Jr. (Magistrate Judge Mark Abel)
AMENDED COMPLAINT SECURITIES FRAUD
Jury Demand Endorsed Hereon
Plaintiff by its attorneys, the Law Office of Eric L. Brown Co., L.P.A., for its amended complaint against Defendants avers as follows.
I. THE PARTIES
1. Plaintiff is, and at all times mentioned in this amended complaint was, a resident of Franklin County, Ohio and a citizen of Ohio.
2. Upon information and belief, Defendant Digital Lightwave, Inc., is a corporation organized and existing under the laws of the State of Delaware with its principal place of business located at 601 Cleveland Street, Fifth Floor, Clearwater, Florida 34615 and does business in the State of Ohio and in this district.
3. Upon information and belief, Defendant Bryan Zwan ("Defendant Zwan") is a citizen of Florida whose address is 601 Cleveland Street, Fifth Floor, Clearwater, Florida 34615.
II. JURISDICTION AND VENUE
4. This Court has jurisdiction over the subject matter of the claims alleged herein pursuant to 28 U.S.C. ~~ 1331, 1332, and 1367, and 15 U.S.C. ~~29(b), 77aa, and 78j(b) and 17 C.F.R. 240.10b-5. The amount in controversy, exclusive of interest and costs, exceeds $75,000.
5. Venue is proper under 15 U.S.C. ~ 77aa.
III. NATURE OF THE ACTION
6. Plaintiff H. Brian Haney is seeking rescission and damages
as the result of a fraudulent scheme or device by Defendants which caused him to transfer for $2.5 million his 49% ownership interest in Defendant Digital Lightwave, Inc., valued at approximately $235 million, and to forego his rights to reacquire the same.
IV. STATEMENT OF FACTS
7. At all times mentioned in this amended complaint, Defendant Zwan was the controlling shareholder, the president and chief operating officer of Defendant Digital Lightwave, Inc., a Delaware corporation ("New Digital"), and its predecessor Digital Lightwave, Inc., a California orporation ("O1d Digital") (collectively, New Digital and Old Digital are hereinafter referred to as "Digital"), and in doing the things alleged in this amended complaint was acting both individually and in his capacity as president and chief operating officer of Digital.
8. At all times mentioned in this amended complaint, the principal product or products of Digital have been certain advanced computer systems that provide information concerning the performance of lightwave telecommunications networks and transmission equipment (hereinafter referred to collectively as the "SONET Testers")
9. Unless otherwise noted in this amended complaint, all conversations and discussions described herein between Defendant Digital and its representatives, including Defendant Zwan and Al Zwan, on the one hand, and Plaintiff and his representatives, including Emil S. Colucci, on the other hand, took place on the telephone when Plaintiff and his representatives were located at 3656 Paragon Drive, Columbus, Ohio 43228.
10. On November 16, 1993 Defendant Zwan, together with a representative named "Charmaine" of the organization known as the Church of Scientology visited Plaintiff in Columbus at the Scientology organization's place of business at 30 North High Street, Columbus, Ohio. After many hours of discussion, Plaintiff agreed in principle (a) to donate an additional $100,000 to the Church of Scientology's "Superpower" project; and (b) personally and through companies owned by him, to invest in Digital a maximum of $5 million through a stock purchase and a line of credit (the "Line of Credit") in exchange for a 50% ownership interest in Digital. Defendant Zwan invited Plaintiff to visit Digital's offices at 1811 Centinela Avenue, Santa Monica, California 90404 ("Digital's California Offices") 11. On November 21, 1993, Defendant Zwan gave Plaintiff and his financial and legal advisers a tour of Digital's California Offices. During such tour, Defendant Zwan stated to Plaintiff that he was an expert in telecommunications patent applications, that Digital's SONET Tester technology was proprietary and patentable, and that he would shortly prepare and file a patent application with respect to the SONET Tester; Defendant Zwan also forecast to Plaintiff that Digital would be able to capture a significant share of the $200 million per year market for SONET Testers for the years 1995, 1996 and 1997, that Digital would sell 100 SONET Testers for a total of $1,950,000 total sales in 1994, with the first such sales to occur in March 1994, and that the maximum amount Digital would need to borrow from Plaintiff under the Line of Credit would be $2 million.
12. On December 2, 1993, Plaintiff and Defendant Zwan executed a stock purchase agreement (the "Stock Purchase Agreement") providing for the purchase by Plaintiff from Defendant Zwan of 4,900 shares of common stock of Digital for $2 million. In addition, Plaintiff agreed to provide as much as $3 million to Digital under the Line of Credit. At the time, Defendant Zwan owned 100% of the 10,000 outstanding shares of capital stock of Defendant Digital, and Plaintiff's purchase was a purchase of a 49% ownership interest in Defendant Digital.
13. The Stock Purchase Agreement contemplated a closing date of January 10, 1994, conditioned on, among other things, delivery by Defendant Zwan by such date an opinion of special patent counsel to the effect that some or all of the essential elements of the SONET Tester were patentable by Digital. Defendant Zwan was unable to deliver such patent opinion by January 10, 1994, and Plaintiff and Defendant Zwan agreed to postpone the closing date of the Stock Purchase Agreement until February 10, 1994.
14. On or about February 8, 1994, Defendant Zwan delivered an opinion of special patent counsel Cushman Darby & Cushman expressing, in effect, no opinion concerning the patentability of the SONET Tester. Plaintiff and Defendant Zwan agreed to postpone the closing date of the Stock Purchase Agreement until May 31, 1994.
15. Digital relocated its corporate offices and headquarters to 601 Cleveland Street, Fifth Floor, Clearwater, Florida 34615 ("Digital's Florida Offices") during the first three months of 1994.
16. On May 2, 1994, Plaintiff caused Great American Fun Corp., an Ohio corporation wholly owned by him ("GAF Corp."), to lend Digital the sum of $1 million.
17. On June 2, 1994, Digital forecast to Plaintiff sales of 125 SONET Tester units in 1994 for a total of $3,000,000 total sales in 1994, with first sales to occur in August, 1994, and that the maximum borrowings Digital would need to make from Plaintiff would be $3 million. 18. On June 2, 1994, Plaintiff caused GAF Corp. to 1 end Digital the sum of $1,130,917.81. On June 20, 1994, Plaintiff caused GAF Corp. to enter into Commercial Loan Notes 001 and 002 (the "Commercial Loan Notes"), each in the amount of $l.S million and each secured by a security agreement (the "Security Agreements") granting GAF Corp. a security interest in Digital's assets and establishing the Line of Credit in a maximum amount of $3 million.
19. On June 21, 1994, Plaintiff and Defendant Zwan executed a new stock purchase agreement (the "New Stock Purchase Agreement") , providing for the Line of Credit and for purchase by Plaintiff of 4,900 shares of Digital common stock owned by Defendant Zwan, representing a 49% ownership interest in Defendant Digital, for the sum of $500,000. Defendant Zwan had requested, and Plaintiff agreed, that in lieu of paying an additional $1.5 million for the 4,900 shares of Digital common stock as originally agreed in the Stock Purchase Agreement, Plaintiff arrange a loan of $1.5 million to Logical Magic, Inc., a company owned by Defendant Zwan by Great American Fun (HK) Ltd., a Hong Kong company who 1 ly owned by Plaintiff ("GAF HK") (the "LMI Note")
20. In the New Stock Purchase Agreement, Plaintiff and Defendant Zwan agreed that the balance of the Line of Credit was to be made available to Digital as approved by the Board of Directors of Digital against a business plan.
21. On June 21, 1994, Defendant Zwan transferred 4,900 shares of Digital common stock to Plaintiff, and Plaintiff paid Defendant Zwan the sum of $500,000.
22. Also on June 21, 1994, Plaintiff and Defendant Zwan and Defendant Digital entered into a shareholders' agreement (the "Shareholders' Agreement") which, among other things, restricted the disposition of shares of Digital, the issuance of new shares and instruments convertible into shares, the incurrence of indebtedness by Digital, paYment of dividends, management of Digital, and which gave Plaintiff the right to examine and copy any of Digital's records or documents.
23. On June 21, 1994, Plaintiff was elected to the Board of Directors of Digital and with Defendant Zwan was one of only two authorized directors. As required by the Shareholders' Agreement, and by Board re solut ion dated June 21, 1994, both authorized directors of Digital were required to approve: (a) the operating budget of Digital; (b) incurrence of debt outside the operating budget; (c) reinvestment of earnings or retained earnings; (d) compensation of Defendant Zwan.
24. On June 21, 1994, Defendant Zwan stated to Plaintiff that the SONET Tester could not be sold or shown to potential customers until a patent application was filed to protect Digital's proprietary technology in the SONET Tester, however Defendant Zwan stated the patent application would be filed within a few weeks. Such statements were false, and upon information and belief were known by Defendant Zwan to be false at the time they were made.
25. The basis for Plaintiff's belief that Defendant Zwan knew the statements were false is that in its registration statement, as amended (the "Digital Registration Statement") filed with respect to the initial public offering of Digital stock made February 5, 1997 (the "Digital IPO"), which reflects substantial sales of the SONET Testers starting in the first quarter of 1996, Digital admitted that it does not rely on patents to protect its proprietary rights in its products, does not hold any patents, that patents on its core technologies may never be granted, and that its success will be largely dependent on its reputation for technology, product innovation, affordability, marketing ability and response to customers' needs, rather than upon patents.
26. Upon information and belief, the motivation for Defendant Zwan's false statement that a patent application had to be filed prior to any sales of the SONET Testers was to permit Defendant Zwan to falsely explain the lack of sales by Digital as a consequence of patent law procedure, when in fact Digital could have sold SONET Testers during 1994. Defendant Zwan wanted an excuse not to generate sales while Plaintiff was a shareholder of Digital, thereby causing Plaintiff to fear for the safety of his investment and undervalue his Digital shares, as part of a fraudulent scheme or device by Defendant Zwan to obtain the benefit of Plaintiff's $5 million investment but thereafter to acquire for himself the 49% ownership of Digital purchased by Plaintiff.
27. On or about September 29, 1994, Digital appointed Al Zwan, Defendant Zwan's brother, its Chief Financial Officer and VicePresident of Operations without consultation with Plaintiff or action by the Board of Directors, in violation of Digital's corporate By Laws.
28. By letter dated October 12, 1994, from Al Zwan to Emil S. Colucci, Plaintiff's financial adviser and representative ("Mr. Colucci"), Digital told Plaintiff it had reorganized to be structured to initiate sales and delivery, stated that sales efforts for the SONET Testers were underway, that the patent application would be filed on or about December 5, that the SONET Testers could soon thereafter be shown to customers and initial orders for the SONET Testers were anticipated in December, 1994, and January, 1995.
29. On October 17, 1994, Plaintiff travelled to Clearwater, Florida and visited Defendant Zwan at Digital's Florida Offices. On such date, Defendant Zwan and Plaintiff visited together a headquarters of the Church of Scientology known as "FLAG", at 210 South Ft. Harrison Avenue, Clearwater, Florida. There Defendant Zwan, in the presence of the President of FLAG named "Mary" told Plaintiff that a serious problem had arisen in their business relationship. Defendant Zwan stated that Plaintiff's wife Linda Mrva Haney was expelled from the Church of Scientology and unless Plaintiff caused his wife to repair her standing with the Church of Scientology by following prescribed steps, she would remain in effect excommunicated and Plaintiff would have to become "disconnected" from his wife, meaning divorced, or Defendant Zwan could no longer be associated with Plaintiff in business. Mary confirmed Defendant Zwan' s statement. Plaintiff told Defendant Zwan and Mary that he would not divorce his wife to please the Scientologists.
30. On November 2, 1994, Digital forecast to Plaintiff that it would sell zero SONET Tester units in 1994, but that it would sell 200 such units in 1995 for a total of $9,400,000 total sales in 1995_, with first sales to occur in January, 1995, and the maximum borrowings Digital would need to make from Plaintiff would be $3,550,000.
31. On January 3, 1995, Al Zwan informed Mr. Colucci that Digital had replaced their previous Controller and had hired a new, inexperienced, Controller, without consultation with Plaintiff.
32. Because of the failure of Digital to deliver the agreed upon patent opinion, its failure to file its patent application (most recently when scheduled on December 5, 1994), its failure despite its forecasts to make any sales at all of the SONET Testers during 1994; because of its unauthorized appointments of Defendant Zwan's brother as Chief Financial Officer and Vice President of Digital, and its unauthorized appointment of a new, inexperienced, Controller; because of Digital's repeated increases in its forecasted borrowings from Plaintiff, its failure to timely make its interest payments under the Line of Credit, and its failure to timely submit its financial statements and cash flow forecasts; and because of Digital's generally uncooperative behavior, Plaintiff contacted Digital on January 4, 1995, and requested that his financial representative visit Digital to review its books and records.
33. On January 4, 1995, Plaintiff also requested that Defendant Zwan personally guarantee the Line of Credit, reminded Digital of its obligation to prepare a business plan anticipating further draws against the Line of Credit subject to the approval of the Board of Directors, and requested that Defendant Zwan transfer 100 additional shares of Digital to Plaintiff as additional security.
34. On January 11, 1995, Defendant Zwan and Digital refused to permit Mr. Colucci to inspect Digital's books and records. On such date, Defendant Zwan told Plaintiff in a telephone call that no one associated with Plaintiff could visit Digital's offices because of the problems between Plaintiff's wife and the Church of Scientology. 35. On January 11, 1995, and on other dates during January, 1995, Plaintiff and his representatives placed telephone calls to Defendant Zwan to obtain information concerning Digital's business operations. On January 11, 1995, Defendant Zwan refused to speak to Mr. Colucci and failed to return the other telephone calls made to him by Mr Colucci and Plaintiff.
36. On January 11, 1995, Al Zwan told Mr. Colucci in a telephone call that the patent application might be ready "next week" if Defendant Zwan were not distracted by a search for additional financing.
37. On January 23, 1995, Digital forecast to Plaintiff that it would sell 200 SONET Tester units in 1995 for a total of $8,920,000 total sales in 1995, with first sales to occur in April, 1995, and the maximum borrowings Digital would need to make from Plaintiff would be $4,300,000 (the "January 23, 1995, Forecast") This amount was substantially in excess of the Line of Credit and was explained in the forecast by Digital's failure to make the sales it had previously forecast, which, in turn were supposedly dependent upon the patent application being filed.
38. Upon information and belief, the January 23, 1995, Forecast contained false information and was intended by Defendant Zwan to deceive Plaintiff. The purpose of the January 23, 1995, Forecast was to scare Plaintiff into believing that it was not possible for Digital to make the predicted sales of the SONET Testers without additional substantial amounts of money beyond the $S million contemplated by Plaintiff and to fear for the safety of his investment. Defendant Zwan sought thereby to cause Plaintiff to undervalue his Digital shares, as part of a fraudulent scheme or device by Defendant Zwan to obtain the benefit of Plaintiff's $5 million investment but thereafter to acquire for himself the 49% ownership of Digital purchased by Plaintiff.
39. The reasons for Plaintiff's belief that the January 23, 1995, Forecast was intentionally deceptive are that, as set forth above, Digital subsequently admitted that patents were not essential to its business, and that, as shown by Digital's financial statements for 1996 in the Registration Statement, Digital in fact made substantial sales of the SONET Testers as soon as Defendant Zwan acquired Plaintiff's 49% ownership of Digital.
40. In efforts to help Digital raise additional capital, Plaintiff arranged contacts for Digital with U.S. West, a major telecommunications company, and the Geneva Company, a high technology venture capital firm, with the expectation that either or both would consider an investment of several million dollars in the SONET Testers. Upon information and belief, Defendant Zwan never pursued such referrals.
41. On January 25, 1995, Al Zwan stated to Mr. Colucci that his questions concerning Digital's finances were trivial. On January 30, 1995, Mr. Colucci asked Digital to provide additional financial information concerning Digital' s operations so Plaintiff could evaluate Digital's business, but never received the information requested.
42. On January 31, 1995, Al Zwan and Defendant Zwan met with Plaintiff, Mr. Colucci and counsel to Plaintiff at the GAF Corp. offices at 3656 Paragon Drive, Columbus, Ohio (the "January 31, 1995, Meeting"). During the January 31, 1995, Meeting, Plaintiff explained to Defendant Zwan why he had requested additional security, including 50% stock ownership, from Digital and Defendant Zwan before authorizing further borrowings from the Line of Credit.
43. During the January 31, 1995, Meeting, Defendant Zwan reiterated to Plaintiff that Digital's operations would require substantial amounts of money beyond the Line of Credit. Plaintiff asked Defendant Zwan why sales of the SONET Testers could not be made to generate cash for Digital's operations as Digital had originally forecast. Defendant Zwan again stated that sales could not be made until the patent application for the SONET Testers was filed. Plaintiff told Defendant Zwan that before additional amounts were advanced under the Line of Credit, Plaintiff wished Digital to file its patent application, appoint Mr. Colucci as Digital's Chief Financial Officer, to permit a review of the SONET Testers by an expert, to schedule quarterly Board of Directors meetings, and to cooperate with Plaintiff in showing the SONET Testers to prospective investors. Plaintiff also requested that Defendant Zwan permit Plaintiff to acquire sufficient additional shares in Digital to exercise control.
44. During the January 31, 1995, Meeting, Defendant Zwan took Plaintiff aside and falsely stated to him that because Plaintiff's wife had been expelled by the Church of Scientology, and because Plaintiff refused to divorce his wife, Plaintiff could not remain a shareholder of Digital. Defendant Zwan stated that the good will of the Church of Scientology was vital to him personally and vital to the success of Digital and that Plaintiff's refusal to rid himself of his wife jeopardized Digital's future. Defendant Zwan falsely stated to Plaintiff that if Plaintiff remained a shareholder of Digital, the company would fail and Plaintiff would lose his entire investment up to that time of $4.4 million.
45. Upon information and belief, Defendant Zwan's statements to Plaintiff on October 17, 1994, January 11, 1995 and January 31, 1995, concerning the impact of his wife's Scientology problems on Plaintiff's relationship with Digital were false, and known by Defendant Zwan to be false at the time they were made. The purpose of such false statements was to provide an excuse for Digital's failure to provide Plaintiff the information he had requested to evaluate the performance of his $5 million investment and to provide a purported justification for asking Plaintiff to relinquish his entire ownership interest in Digital. Defendant Zwan sought thereby to cause Plaintiff to undervalue his Digital shares, as part of a fraudulent scheme or device by Defendant Zwan to obtain the benefit of Plaintiff's $5 million investment but thereafter to acquire for himself the 49% ownership of Digital purchased by Plaintiff.
46. The basis for Plaintiff's belief is that according to the Digital Registration Statement, immediately prior to the Digital IPO, Defendant Zwan owned 88.8% of Digital's shares, and after the Digital IPO remained owner of 77.9% of Digital's shares because he had acquired Plaintiff's 49% interest in Digital, and that Defendant Zwan offered to pay no more than $2.5 million for Plaintiff's shares on January 31, 1995, which had a market value on November 3, 1997, of approximately $235 million, and that, as set forth above, Defendant Zwan repeatedly failed to provide information to Plaintiff to enable Plaintiff to correctly evaluate his investment.
47. In fact, upon information and belief, the Church of Scientology was not vital to Digital's future. The basis for this belief is that there is no disclosure whatever of the Church of Scientology's importance to Digital in the Digital Registration Statement.
48. At no time from June 21, 1994 through February 9, 1995, did Defendant Zwan deliver an opinion of special patent counsel, nor did he provide a copy of Digital's patent application, nor did he provide Plaintiff with a business plan or operating budget as contemplated by the Stock Purchase Agreement, the New Stock Purchase Agreement and the Shareholders' Agreement. 49. Believing that his entire investment of $4.4 million in Digital was at risk if he did not accede to Defendant Zwan' s requests, on February 9, 1995, Plaintiff granted Defendant Digital an option to purchase his 4,900 shares of Digital common stock representing 100% of Plaintiff's stock in Digital and a 49% ownership interest in Defendant Digital (the "Haney Shares Option") The option price was $2.5 million, of which $1.605 million could be made by repayment of the LMI Note together with interest (the "Haney Shares Option Exercise Price"). By its terms, the Haney Shares Option could be exercised until August 25, 1995 (the "Haney Shares Option Expiration Date")
50. At no time during the negotiations with Plaintiff for the Haney Shares Option did Defendant Zwan disclose to Plaintiff that he was at the same time negotiating with other investors for rights to participate in the Digital I PO. If Plaintiff had known that Defendant was negotiating with other inve s tors for rights to participate in the Digital IPO, he would not have granted the Haney Shares Option.
51. Upon information and belief, Defendant Zwan did conduct such negotiations with other investors prior to the date the Haney Shares Option was granted because over the next few months Digital did in fact grant numerous such options to other investors and concealed the fact from Plaintiff.
52. Specifically, as set forth in the Digital Registration Statement, on March 17, 1995, Digital granted an option, exercisable solely in the event of the Digital IPO to purchase $150,000 worth of Digital shares at a price equal to 50% of the Digital IPO price per share to Michael Baum and George Murgatroyd; on June 19, 1995, Digital granted a similar option with respect to $400,000 worth of Digital shares at a price equal to 1% of the Digital IPO price per share to Stanley P. Zurn; on June 22, 1995, Digital granteda similar option with respect to $30,000 worth of Digital shares at a price equal to 50% of the Digital IPO price per share to Edward F. Guignon; on June 23 1995, Dig.ital granted a similar option with respect to $30,000 worth of Digital shares to Paul J. Hedlund; on July 12, 1995, Digital granted a similar option with respect to $21,000 worth of Digital shares to Margaret A. Guignon (the "March July 1995 Digital IPO Options")
53. Once the Haney Shares Option was granted, even though Plaintiff remained owner of 49% of the shares of Digital anda member of the Board of Directors, Digital became even less cooperative and informative than before. Digital failed to make its interest payments on the Line of Credit on a timely basis for the months of January, February, March, April, and May, 1995. Al Zwan refused to communicate with Mr. Colucci although Mr. Colucci called him in an effort to obtain information concerning Defendant' s business on six occasions in March and April, 1995.
54. When Defendant Zwan and Digital failed to provide monthly financial and operational information to Plaintiff as required, Plaintiff wrote to Defendant Zwan on June 30, 1995, reminding him of his obligation to provide Plaintiff with monthly financials and interest payments, and requesting a written summary of Digital's operating progress every two weeks.
55. By letter dated July 3, 1995, Defendant Zwan sent to Plaintiff the Digital May, 1995, financial statements (the "Digital May 1995- Financial Statements"), together with a memorandum summarizing Digital's outstanding loans (the "3 July 1995 Outstanding Digital Notes Memorandum") . Neither the Digital May 1995 Financial Statements nor the 3 July 1995 Outstanding Digital Notes Memorandum reveal the fact that Digital had granted any of the March July 1995 Digital IPO Options.
56. On behalf of Digital Al Zwan sent a letter, dated August 21, 1995, to Plaintiff stating that enclosed were minutes of Digital Board of Directors meetings signed by Defendant Zwan for the following dates in 1994: July 28, October 20, November 30, December 17, and December 19; and, in addition, the following dates in 1995: January 23, January 24, January 30, February 27, April 6, April 27, May 15 and July 14; and minutes of a November 30, 1994 Annual Digital Shareholders Meeting; and requested Plaintiff's signature to all of them (the "August 21 1995 Digital 1994 and 1995 Minutes") None of such minutes disclose or authorize the March - July 1995 Digital IPO Options, or disclose that Defendant Zwan was planning and negotiating the Digital IPO.
57. At no time did Defendant disclose the March - July 1995 Digital IPO Options to Plaintiff. Plaintiff learned of the March July Digital IPO Options when he read the Digital Registration Statement in September, 1997. Upon information and belief, the reason Al Zwan refused to communicate with Mr. Colucci was because Digital did not wish to disclose to Plaintiff, and wished to conceal from Plaintiff, the fact that Digital was planning the Digital IPO. Upon information and belief, the reason Defendant Zwan failed to provide financials and operating summaries as required, the reason none of the Digital May 1995 Financial Statements, the 3 July 1995 Outstanding Digital Notes Memorandum, and the August 21 1995 Digital 1994 and 1995 Minutes disclose or authorize the March - July 1995 Digital Options is because Digital did not wish to disclose to Plaintiff, and wished to conceal from Plaintiff, the fact that Digital was planning the Digital IPO . Defendant Zwan intended thereby that Plaintiff would undervalue his shares in Digital.
58. On August 14, 1995, Defendant Zwan requested that Plaintiff extend the Haney Shares Option Expiration Date from August 25, 1995 to October 16, 1995 and the Haney Shares Option be modified so that it could be exercised by Defendant Zwan in addition to Digital (the "First Haney Shares Option Amendment"). In negotiating the First Haney Shares Option Amendment in telephone conversations with Plaintiff, Defendant Zwan did not disclose the March - July 1995 Digital IPO Options to Plaintiff. Plaintiff would not have agreed to the First Haney Shares Option Amendment if he had been aware of the March - July 1995 Digital IPO Options because he would have realized his shares had a substantially higher value than that represented by the Haney Shares Option Exercise Price. 59. Upon information and belief, Defendant Zwan intentionally concealed his planning for the Digital IPO from Plaintiff because he wished to acquire Plaintiff's 49% ownership of Digital for himself.
60. On August 15, 1995, Digital granted an option to purchase 200,000 Digital shares to Michael Baum and Paul J. Hedlund (the "Baum-Hedlund Option") . The Baum-Hedlund Option was never disclosed to Plaintiff-by Defendant Zwan and Plaintiff first learned of it from the Digital Registration Statement in September, 1997. Upon information and belief, Defendant Zwan was negotiating and had offered the Baum-Hedlund Option prior to Plaintiff's agreement to the First Haney Shares Option Amendment. The fact of the BaumHedlund Option is something Plaintiff would have wanted to know and would have considered in connection with his decision to agree to the First Haney Shares Option Amendment. Upon information and belief, Defendant Zwan did not disclose the Baum-Hedlund Option to Plaintiff because he wished to conceal his planning for the Digital IPO from Plaintiff so that Plaintiff would not realize the true value of his Digital shares.
61. On or about September 2, 1995, Plaintiff asked Defendant Zwan and Digital to provide him with the details of a proposed refinancing of Digital by Ellenburg Capital Corporation which Defendant Zwan had described to him in general terms.
62. On or about September 6, 1995, Defendant Zwan asked Plaintiff to consent to the assignment of 500 of Defendant Zwan's 5100 shares in Digital as security for a loan to Digital of $230,000 from Tony Charles Lonstein (the "Lonstein Assignment")
63. On September 6, 1995, Defendant described the Lonstein Assignment to plaintiff as consisting of a Promissory Note, UCC-1 Financing Statement, Continuing Guarantee, Consultant Services Agreement and Assignment of Corporate Shares apart from Certificate, and Defendant delivered the same to Plaintiff for his review and approval.
64. At no time during the telephone discussions he had with Plaintiff to obtain Plaintiff's consent to the Lonstein Assignment did Defendant Zwan disclose to Plaintiff that he had offered Lonstein the opportunity to participate in the Digital IPO. However, upon information and belief, Defendant Zwan did have such discussions with Lonstein. The facts supporting such belief are that on September 7, 1995, Defendant granted an option to Lonstein exercisable in the event of the Digital IPO to purchase $70,000 worth of shares of Common Stock at a price equal to 50% of the Digital IPO effective price per share (the "Lonstein IPO Option") Plaintiff first learned of it from the Digital Regist ration Statement in September, 1997. None of the documents Digital sent to Plaintiff for review and approval on September 6, 1995, described the Lonstein IPO Option.
65. On September 27, 1995, Plaintiff gave his consent to the Lonstein Assignment, as requested, after requesting that certain changes be made to protect his interests. If Defendant Zwan had informed Plaintiff that Digital had granted the March - July 1995 Digital IPO Options, the Baum-Hedlund Option or the Lonstein IPO Option, Plaintiff would not have agreed to the Lonstein Assignment because he would have realized his shares had a substantially higher value than that represented by the Haney Shares Option Exercise Price.
66. During a telephone call at approximately 2:00 PM on September 29, 1995, Defendant Zwan purported to inform Plaintiff concerning the financing alternatives available to Digital. Defendant Zwn told Plaintiff that prospects for the Digital IPO were "dead" because Plaintiff and Defendant Zwan would not be able to keep more than 6% or 7% of the stock of Digital after an initial public offering; that new investors would not have the vision to help Digital succeed; and that an initial public offering would make it impossible for Digital to repay the Line of Credit since new investors would not permit proceeds from the initial public offering to be used to satisfy Digital's debts to existing shareholders.
67. Upon information and belief, at the time Defendant Zwan made such statements to Plaintiff on September 29, 1995, Defendant Zwan knew the statements were false because his planning for the Digital IPO was well under way.
68. Minutes of a Digital Board of Directors meeting between Plaintiff and Defendant Zwan, dated September 29, 1995, do not disclose or authorize the March - July 1995 Digital IPO Options, the Baum-Hedlund Option or the Lonstein IPO Option or that Defendant Zwan's planning for the Digital IPO was well under way. Such minutes refer to discussion of an "IPO" without explanation only among a list of topics touched upon and are ambiguously worded to disguise that what Defendant Zwan told Plaintiff on September 29, 1995, was that prospects for the Digital IPO were "dead".
69. On October 2, 1995, Defendant Zwan again requested that the Haney Shares Option Expiration Date be extended from October 16, 1995 to November 30, 1995 (the "Second Haney Shares Option Amendment ") Defendant Zwan did not disclose to Plaintiff the existence of the March - July 1995 Digital IPO Options, the BaumHedlund Optioún or the Lonstein IPO Option or that planning for the Digital IPO was well under way and that prospects for the Digital IPO were not dead. Defendant Zwan sought to cause Plaintiff to undervalue his Digital shares as part of a fraudulent scheme or device by Defendant Zwan to obtain the benefit of Plaintiff's $5 million investment but thereafter to acquire for himself Plaintiff's shares in Digital for an unfairly low price.
70. By letter to Plaintiff dated October 2, 1995, Al Zwan stated that he enclosed a letter from Ellenburg Capital Corporation ("Ellenburg"), dated July 25, 1995 (the "Ellenburg Letter"). The Ellenburg Letter described interim and term debt financing for Digital of $10 million with fees and/or shareholding participations to be paid to persons who succeeded in procuring such debt financing. Upon information and belief, the Ellenburg Letter was a misleading statement of the status of Digital's agreements with Ellenburg on October 2, 1995, in that by that date Defendant Zwan and Ellenburg had already begun to implement the plan for the Digital IPO, had agreed to merge Digital into a newly formed Delaware corporation with the same name as part of their plan to implement the Digital IPO, and failed to disclose these facts to Plaintiff. The facts supporting this belief include the facts that Digital had by October 2, 1995, already issued the March - July 1995 Digital IPO Options, the Baum-Hedlund Option and the Lonstein IPO Op t i on; also, Digital signed an Agreement of Merger with newly formed Delaware corporation of the same name (New Digital) on January 9, 1996, which merger was consummated on March 18, 1996 (the " Digital Merger " ) and , according to the- Digital Registration Statement, Ellenburg received shares of New Digital prior to the Digital IPO and sold a portion of such shares in the Digital IPO for the sum of approximately $2.5 million.
71. In a telephone call to Plaintiff on or about October 2, 1995, to negotiate the Second Haney Shares Option Amendment, Defendant Zwan described Digital's proposed financing with Ellenburg to be in the form of a long term loan to Digital, consisting of $5.0 million in debentures paying 12 - 15% interest annually and maturing at least four years in the future; Defendant Zwan told Plaintiff that he needed a 30-day extension of the Haney Shares Option Expiration Date, but that $1.5 million of the amount owed to Plaintiff and due December 31, 1995, would need to be extended until June 30, 1996; Defendant Zwan told Plaintiff that Ellenburg had requested 3% of the stock of Digital as compensation for raising the funds and that Defendant Zwan could lose majority ownership and control of Digital to Plaintiff and Ellenburg if they combined their 49% and 3% ownership so therefore Defendant Zwan needed to find a way to provide for 3% ownership for Ellenburg without reducing his own 51% ownership of Digital. 72. On October 2, 1995, Plaintiff gave his consent to the Second Haney Shares Option Amendment, after requesting that certain changes be made to protect his interest~s. If Defendant Zwan had informed Plaintiff that Digital had granted the March - July 1995 Digital IPO Options, the Baum-Hedlund Option or the Lonstein IPO Option, or that planning for the Digital IPO was well under way, Plaintiff would not have agreed to the Second Haney Shares Option Amendment because he would have realized his shares had a substantially higher value than that represented by the Haney Shares Option Exercise Price.
73. On November 9, 1995, by means of a memorandum delivered by facsimile transmission from Defendant Zwan at the Digital offices in Florida to Plaintiff at his office in Columbus, Ohio, Defendant Zwan requested that additional modifications be made to the already twice amended the Haney Shares Option' exercise price and to the date on which $l.S million owed to Plaintiff would be paid. While considering Defendant Zwan' s latest request to amend the Haney Shares Option, Plaintiff requested more details concerning Digital's proposed financing with Ellenburg.
74. Defendant Zwan arranged for a telephone conference call among himself, Ellenburg's principal Gerald Ellenburg and Plaintiff on November 13, 1995 (the "November 13, 1995, Ellenburg Call") During the November 13, 1995, Ellenburg Call, Defendant Zwan reminded Plaintiff that Ellenburg was a member of the Church of Scientology and that Plaintiff and Mr. Ellenburg had met at FLAG, Scientology's headquarters in Clearwater, Florida. Defendant Zwan stated that the financing being arranged for Digital by Ellenburg was $5.5 million to be used to exercise the Haney Shares Option and to repay the Line of Credit. Gerald Ellenburg told Plaintiff that the financing being arranged was a matter of "ethics", a term used by Scientolgists to represent that they are telling each other the absolute and full truth under sanction of ecclesiastical punishment by the Church of Scientology, and to signify a high degree of commitment. Neither Defendant Zwan nor Gerald Ellenburg disclosed to Plaintiff the March - July Digital IPO Options, the Baum-Hedlund Option, the Lonstein IPO Option, the Digital IPO, or the Digital Merger.
75. Upon information and belief, Defendant Zwan and Gerald Ellenburg deliberately concealed the Digital IPO from Plaintiff so that he would agree to further modifications in the Haney Shares Option so that Defendant Zwan could acquire all of Plaintiff's shares in Digital for an unfairly low price.
76. On November 20, 1995, Plaintiff agreed to amend the Haney Shares Option to reduce the exercise price to $800,522, to extend the maturity date of the $1.5 million LMI Note from November 30, 1995 to December 20, 1995, and to extend the maturity date of Commercial Loan Note 001 from December 20, 1995, to June 20, 1996; Defendant Zwan and Digital agreed to collateralize their obligations to Plaintiff by placing in escrow shares guaranteed by Digital and Defendant Zwan to represent 46% of the outstanding shares of Digital until such obligations were paid in full (the "Escrowed Shares")
77. Under the terms of the agreement governing the Escrow (the "Escrow Agreement"), dated November 30, 1995, among Plaintiff, Defendant Zwan and Huntington Trust Company N.A., of Columbus, Ohio as Trustee, the parties agreed that Plaintiff had an absolute right to receive the Escrowed Shares endorsed for transfer to him and representing ownership of 46% of Digital if he or his companies failed to receive payment of any of the following amounts on the foll6wing dates: (1) $1,699,478.00 by December 20, 1995; (2) an additional $220,796.92 by December 20, 1995; and (3) $2,400,000, together with 5 2/3 months interest at the prime rate, by June 20, 1996.
78. Attached to the Escrow Agreement were the forms of two documents each titled "Mutual General Release", one of which was to be signed and exchanged when the December 20, 1995, payment was made and the other of which was to be signed and exchanged when the June 20, 1996, payment was made.
79. On November 30, 1995, Defendant Digital exercised the Haney Shares Option, as amended, and received 4,900 shares of Digital from Plaintiff in exchange for payment of $800,522 and the Escrow was established by the deposit by Defendant Zwan of 2,346 shares of Digital common stock as Escrowed Shares. 80. Upon information and belief, such shares were subsequently transferred from Digital to Defendant Zwan. The basis for such belief is that the Digital Registration Statement disclosed that Defendant Zwan owned 88.8% of the Digital shares of common stock immediately prior to the Digital IPO. 81. Upon information and belief, Defendant Zwan and Digital did not maintain the Escrowed Shares at 46% of the shares of Digital. The basis for such belief is that the Digital Registration Statement disclosed that the Escrowed Shares represented no more than 23.5% of the outstanding shares of Digital.
82. On December 18, 1995, Defendant Zwan requested an extension of the date by which the first two payments under the Escrow Agreement were due from December 20, 1995 to December 22, 1995 and Plaintiff agreed (the "December 1995 Escrow Extension") . If Plaintiff had not agreed to the December 1995 Escrow Extension, the Escrowed Shares representing 46% ownership of Digital would be automatically delivered to him when Digital's payment was not received on December 20, 1995. The first two payments were made on December 22, 1995. The parties signed the Mutual General Release dated effective as of December 20, 1995, and delivered it to each other on December 22, 1996 (the " December 22 1995 Re lease") Defendant Zwan and Digital did not disclose their plans for the Digital IPO.
83. On January 2, 1996, Digital issued its $1 million subordinated promissory note due January 2, 1999, plus warrants to acquire 200,000 shares of Digital at $5.00 per share exercisable upon the filing of a registration statement for an underwritten public offering (the "January 1996 Note and Warrants")
84. On or about January 4, 1996, Defendant Zwan contacted Mr. Colucci and requested release of the Escrowed Shares against partial payment of the remaining $2.4 million obligation and a further extension of the due date of such obligation beyond June 20, 1996. Plaintiff declined.
85. On January 9, 1996, Digital signed the Merger Agreement. Defendant Zwan and Digital did not disclose the Merger Agreement to Plaintiff either before or after it was signed. Plaintiff learned of the Merger Agreement and the Digital Merger for the first time in September, 1997 in the Digital Registration Statement.
86. On January 25, 1996, counsel to Plaintiff wrote to newlyidentified counsel to Digital and Defendant Zwan, Seth Joseph, Esq., to inform him of his representation in matters concerning Digital's obligations to Plaintiff.
87. On March 4, 1996, Digital asked Plaintiff to agree to release the Escrowed Shares in exchange for a partial payment by March 31, 1996, of $1.4 million of the $2.4 million due June 20, 1996 and to also agree to extend the due date for the balance of the $2.4 million together with interest from June 20, 1996 to December 20, 1996. Plaintiff agreed to this, but upon information and belief, Digital was unable to make the $1.4 million payment on March 31, 1996, and Digital did not in fact make such payment on such date or receive the Escrowed Shares.
88. The Digital Merger was effective March 18, 1996. By operation of law, Old Digital ceased to exist. Each share of common stock in Old Digital was converted in the Digital Merger into a legal right to 3,921.5686 shares of New Digital common stock (the "Automatic Share Conversion") . As a result, Plaintiff's security for the $2.4 million Digital owed him was radically changed and Plaintiff had a right to know this.
89. Under each of the Security Agreements, Digital was required to give GAF Corp. at least 30 days notice of a change in Digital's name, identity or corporate structure. Failure to provide such notice was an event of default under the Security Agreements.
90. At no time did Digital or Defendant Zwan disclose to Plaintiff that the Digital Merger had taken place or that the security for the Line of Credit had become shares in a non-existent company with a legal right to receive something else in exchange, or that Digital, by failing to provide notice of the change in Digital's identity was in default under the Security Agreements, the Commercial Loan Notes and the Line of Credit (the "Default") Plaintiff first learned of these matters in the Digital Registration Statement in September, 1997.
91. On May 15, 1996, Digital contacted Plaintiff and requested that the June 20, 1996, due date for the $2.4 million payment under the Escrow Agreement be extended to July 20, 1996, with a possible further extension to August 20, 1996 (the "May 1996 Escrow Extension" ) . On May 15, 1996, Plaintiff requested information concerning the status of Digital's patent application since it formed part of Plaintiff's security under the Security Agreements. Plaintiff also requested that Digital acknowledge that in the event Digital failed to make its payment, Plaintiff had the right without further notice to take possession and ownership of the Escrowed Shares. Digital refused to provide any information concerning the patent application and refused to agree to the acknowledgment requested by Plaintiff. In an telephone call to Plaintiff on May 16, 1996, Defendant Zwan told Plaintiff the only way for Plaintiff to receive the money owed him under the Line of Credit was to agree to the May 1996 Escrow Extension_because otherwise Digital would fail. Plaintiff agreed to the May 1996 Escrow Extension on May 16, 1996.
92. If Plaintiff had not agreed to the May 1996 Escrow Extension, the Escrowed Shares representing 46% ownership of Digital would be automatically delivered to him when Digital's payment was not received on June 20, 1996. Plaintiff would not have agreed to the May 1996 Escrow Extension if he had known of the plans for the Digital IPO or the Default.
93. During July, 1996, options for Digital shares valued at $470,000 were exercised for an exercise price of $39,000 (the "July 1996 Option Exercise") . Plaintiff first learned of these options in the Digital Registration Statement in September, 1997.
94. On July 18, 1996, Seth Joseph, Esq., counsel to Digital and Defendant Zwan, personally telephoned Mr. Colucci and attempted to negotiate a further extension of the due date of the $2.4 million payment required under the Escrow Agreement. At the time of such call and unknown to Plaintiff, as set forth above, Digital was in default under the Security Agreements for failure to disclose the Digital Merger. In addition, and unknown to Plaintiff but surely known to Digital and its counsel, within three weeks Digital would file the August 1996 Digital Registration Statement (as defined below) which valued the outstanding shares of Digital stock at approximately $360,000,000. If Plaintiff did not agree to the extension requested by attorney Joseph, the Escrowed Shares representing 46% ownership of Digital would be automatically delivered to Plaintiff when Digital's payment was not received on July 20, 1996 or August 20, 1996. Mr. Colucci referred the matter to Plaintiff's counsel, who reminded Mr. Joseph by letter dated July 18, 1996, that direct communications between an attorney and the client of another attorney concerning a represented matter are inappropriate . Mr. Joseph threatened that his client may "never again return a phone call from Mr. Colucci" and termed the letter "disgusting."
95. On July 25, 1996, Digital increased to 200 million its authorized shares of common stock (the "July 1996 Authorized Shares Increase"). Defendants never disclosed this to Plaintiff.
96. On August 2, 1996, Digital filed with the Securities and Exchange Commi s s ion (the " SEC " ) a registration statement with respect to the Digital IPO (the "August 1996 Digital Registration Statement "), but failed to disclose the same to Plaintiff. The August 1996 Digital Registration Statement cent empl at ed that 4,100,000 shares of Digital common stock would be sold in the Digital IPO at an assumed price of $10.00 per share. Defendant Zwan and Digital did not disclose to Plaintiff that the August 1996 Digital Registration Statement had been filed.
97. On or about August 9, 1996, Defendant Digital contacted Plaintiff and requested the August 20, 1996 due date of the $2.4 million payment under the Escrow Agreement, as amended, be extended to September 6, 1996 (the "August 1996 Escrow Extension") . Plaintiff agreed on August 16, 1996.
98. When Plaintiff agreed to the August 1996 Escrow Extension, he was unaware of the March July 1995 Digital Options, the Hedlund-Baum Option, the Lonstein IPO Option, the Merger Agreement, the Digital Merger, the January 1996 Note and Warrants, the Default, the July 1996 Authorized Shares Increase, the July 1996 Option Exercise, the August 1996 Digital Registration Statement, and the planned Digital IPO. If Plaintiff had not agreed to the August 1996 Escrow Extension, the Escrowed Shares representing 46% ownership of Digital would be automatically delivered to him when Digital's payment was not received on August 20, 1996. According to the August 1996 Digital Registration Statement, the 46% of Digital's shares which Plaintiff was entitled to receive on August 20, 1996 were valued by Digital at the time at $10.00 per share or approximately $180 million.
99. Plaintiff was unaware of the information because Defendant Zwan and Digital failed to disclose it to him at any time before or after he agreed to the August 1996 Escrow Extension. Upon information and belief, Defendant Zwan deliberately concealed the information because he wished to receive the Escrowed Shares for himself. The basis for this belief is that he did receive the Escrowed Shares himself and, as a result, currently owns 77.9% of Digital's shares with a market value based on the November 3, 1997 market price of $18.5 per share of approximately $375,000,000.
100. Plaintiff relied on the information given to him by Defendant Zwan in making his decision to agree to the August 1996 Escrow Extens ion, and the information concealed from him was material to his decision. Had Plaintiff been aware of the concealed inf ormat ion , he would have refused to agree to the August 1996 Escrow Extension and, under the terms of the Escrow Agreement, as amended, he would on August 20, 1996 automatically have received from the Escrow Agent the 2,346 shares of Digital common stock which were the Escrowed Shares and represented 9,200,000 shares of Common Stock of New Digital worth $90,200,000 at the price assumed by the August 1996 Digital Registration Statement. Furthermore, since the 9,200,000 shares of New Digital only represented no more than approximately 23.5% of the outstanding shares of New Digital, rather than the 46% which had been guaranteed by Digital and Defendant Zwan, Plaintiff could have required Digital and Defendant Zwan to deliver to him an additional shares sufficient to bring his ownership interest to 46% of the outstanding shares, which would have a market value based on the market price of $18.5 per share as of November 3, 1997, of approximately $220 million.
101. On August 27, 1996, the January 1996 Note and Warrants were surrendered for 200,000 shares of common stock of Digital. Defendants never disclosed this to Plaintiff.
102. On September 5, 1996, Digital delivered a check in the amount of the $2.4 million payment together with interest as set forth in Escrow Agreement, as amended, the Escrow Agent delivered such check to Plaintiff and the Escrowed Shares to Defendant Zwan.
103. On September 5, 1996, Digital requested that Plaintiff sign a Mutual General Release dated September 5, 1996 (the "September 5 1996 Release") but failed to disclose that Digital had filed the August 1996 Digital Registration Statement and that the Digital IPO was imminent. Plaintiff signed, and in doing so was entirely unaware of the steps taken by Digital to prepare for the Digital IPO and described above or that he was being asked to relinquish his claim to Digital shares then assumed by the August 1996 Digital Registration Statement to be valued at $10.00 per share or approximately $180 million.
104. Plaintiff would not have agreed to the December 1995 Escrow Extension, the December 22 1995 Mutual General Release, the May 1996 Escrow Extension, the August 1996 Escrow Extension, or the September 5, 1996, Mutual General Release if he had known of the plans for the Digital IPO, because he would have realized that he could reacquire a 46% ownership interest in Digital simply by letting Digital fail to make its payment on the due date and that such 46% ownership interest would be worth far more than the payment.
105. Plaintiff trusted Defendant Zwan and reasonably relied on Def endant Zwan to provide him with truthful information about Digital on which Plaintiff could base his investment decisions concerning Digital. Based on what Defendant Zwan told him, Plaintiff believed Digital was a failing company and that Defendant Zwan was exerting himself mightily in an effort to repay Digital's debts to Plaintiff as a matter of ethics.
106. Plaintiff first became aware of the Digital IPO in August, 1997, when he read an article about Defendant Zwan on a Scientology newsgroup on the Internet. He immediately began to investigate the details of the Digital IPO. Over the next two months, Plaintiff assembled from voluminous files and the material filed by Digital with the SEC the details of the complex scheme by which Digital and Defendant Zwan defrauded him into selling his shares at a ridiculously low price.
107. The details of the March - July IPO Options, the Baum-Hedlund Option, the Lonstein IPO Option, the Promissory Note and Warrants, the Agreement of Merger, the Digital Merger, the Automatic Share Conversion, the Default, the July 1996 Option Exercise, and the Digital IPO, among other facts, were all intentionally concealed from Plaintiff by Defendant Zwan and Digital. Plaintiff first learned of Defendants' fraudulent scheme or device when he read the Digital Registration Statement in September, 1997.
108. On February 4, 1997, Digital consummated the Digital IPO by selling 3,658,860 shares of common stock and 838,399 shares of Digital common stock were sold by certain stockholders. The selling price was $12.00 per share.
109. As of as of June 30, 1997 the total number of Digital shares of common stock outstanding was 26,177,777. On November 3, 1997, the market price of shares of Digital common stock was $18.50, for a total market capitalization of Digital of $484,277,775. The 49% of Digital shares owned by Plaintiff and fraudulently acquired by Defendant Zwan had a market valuation of $237,296,110 on November 3, 1997.
110. Plaintiff has filed his claims within one year of his discovery of the Digital IPO and within the period of limitations provided by the Securities Exchange Act. He has acted with due diligence in investigating the complex facts of the fraudulent scheme or device by which he was defrauded of shares worth $237,296,110.
COUNT I
SECURITIES FRAUD
111. Plaintiff repeats and realleges paragraphs 1 through 110 with the same force and effect as if fully set forth herein.
112. The acts of the Defendants Digital and Zwan in obtaining Plaintiff's agreement to the Haney Shares Option constitute securities fraud in violation of 15 U.S.C. ~~ 78j(b) and 17 C.F.R. ~ 240.10b-5. 113. Defendants Zwan and Digital have fraudulently concealed their wrongful acts; 114. Defendant have caused damage to Plaintiff in the amount of $235,000,000.00.
COUNT II SECURITIES FRAUD
115. Plaintiff repeats and realleges paragraphs 1 through 114 with the same force and effect as if fully set forth herein.
116. The acts of the Defendants Digital and Zwan in obtaining Plaintiff's agreement to the First Haney Shares Option Amendment and the Second Haney Shares Option Amendment and the exercise of the Haney Shares Option constitute securities fraud in violation of 15 v.S.c. ~g 78j(b) and 17 C.F.R. ~ 240.10b-5.
117. Defendants have caused damage to Plaintiff in the amount of $235,000,000.00.
COUNT III
SECURITIES FRAUD
118. Plaintiff repeats and realleges paragraphs 1 through 117 with the same force and effect as if fully set forth herein. 119. The acts of the Defendants Digital and Zwan in obtaining Plaintiff's agreement to the Escrow Agreement, the December 1995 Escrow Extension, the May 1996 Escrow Extension, and the August 1996 Escrow Extension constitute securities fraud in violation of 15 v.s.c. ~~ 78j(b) and 17 C.F.R. ~ 240.10b-5.
120. Defendants have caused damage to Plaintiff in the amount of $235,000,000.00.
COUNT IV
COMMON LAW FRAUD
121. Plaintiff repeats and realleges paragraphs 1 through 120 with the same force and effect as if fully set forth herein.
122. The statements made by Defendant Zwan to Plaintiff that prospects for the Digital IPO were "dead", that sales of the SONET Testers could not be made before a patent application was filed, that Plaintiff could not remain a shareholder of Digital because of his wife's problems with Scientology, and that Plaintiff risked losing his $4.4 million investment in Digital unless he relinquished his shares, were false; they were known by Defendant Zwan to be false at the time they were made, were intended to mislead Plaintiff, and were reasonably relied on by Plaintiff who was damaged thereby;
123. Defendants wrongful acts constitute fraud under the common law of Ohio.
124. Defendants have caused damage to Plaintiff in the amount of $235,000,000.00.
COUNT V
CONSTRUCTIVE TRUST
125. Plaintiff repeats and realleges paragraphs 1 through 124 with the same force and effect as if fully set forth herein.
126. Defendants Zwan and Digital had a fiduciary duty to, and a confidential relationship with, Plaintiff;
127. By wrongfully inducing Plaintiff to sign the Haney Shares Option, the First Haney Shares Option Amendment, the Second Haney Shares Option Amendment, the Escrow Agreement, the December 1995 Escrow Extension, the May 1996 Escrow Extension, and the August 1996 Escrow Extension, and by nondisclosure and false statements concerning the Digital IPO, Defendant Zwan and Digital wrongfully induced Plaintiff to transfer to Defendant Zwan his 49% interest in Digital;
128. Because of such wrongful inducement, the Plaintiff suffered a detriment in that he has been impoverished by the loss of Digital shares valued at $235,000,000.00.
129. The Digital shares received by Digital from Plaintiff including dividends and distributions on such shares constitute a res on which this Court may impose a trust; the proprietary technology embodied in the SONET Testers also constitutes a res on which the Court may impose a trust.
COUNT VI
BREACH OF CONTRACT
130. Plaintiff repeats and realleges paragraphs 1 through 129 with the same force and effect as if fully set forth herein;
131. Defendants wrongful acts invalidate the December 22 1995 Release and the September 5 1996 Release;
132. Defendants are in breach of contract under the New Stock Purchase Agreement and the Shareholders' Agreement;
133. Defendants have caused damage to Plaintiff in the amount of $235,000,000.00.
COUNT VII
VIOLATION OF CALIFORNIA CORPORATIONS STATUTE
134. Plaintiff repeats and realleges paragraphs 1 through 134 with the same force and effect as if fully set forth herein;
135. By failing to provide Plaintiff with notice of and obtaining his consent to shareholder resolutions, including those amending Old Digital's certificate of incorporation to increase the number of authorized shares of stock, and to merge with New Digital, Defendants have violated Plaintiff's rights as a shareholder under the California General Corporation Law, and in particular, ~ 900 et seq. and ~ 1100 et seq. thereof.
COUNT VIII
VIOLATION OF DELAWARE CORPORATION STATUTE
136. Plaintiff repeats and realleges paragraphs 1 through 135 with the same force and effect as if fully set forth herein;
137. By failing to provide Plaintiff with notice of and failing to obtain Plaintiff's consent to shareholder resolutions, including those amending New Digital's certificate of incorporation on July 25, 1996, to increase the number of authorized shares of New Digital, Defendants have violated Plaintiff's rights as a shareholder under the Delaware General Corporation Law, and in particular, Sections 228 and 242 thereof.
WHEREFORE, Plaintiff prays that this Court enter judgment:
138. Rescinding, or declaring void the following transactions: (1) the transfer of 49% of Digital's shares from Plaintiff to Defendant Digital; (2) the Option Amendments; (3) the Escrow Extensions ; (4) the December 22 1995 Release; (5) the September5 1996 Release; (6) the Digital Merger; and (7) the Digital IPO.
139. Ordering Defendants Zwan and Digital to pay Plaintiff such damages, in an amount not less than $235 million together with interest, as Plaintiff has sustained in consequence of Defendants wrongful acts;
140. In the alternative, ordering Defendants to transfer to Plaintiff 49% of the outstanding shares of common stock of Digital; 141. Imposing a constructive trust for Plaintiff's benefit on sufficient shares of Digital to comprise 49% of the outstanding shares of Digital common stock, or on a 49% interest in the proprietary technology embodied in the SONET Testers;
142. That Defendants pay to Plaintiff the costs of this action and reasonable attorney's fees to be allowed by this Court; and
143. Granting Plaintiff such other and further relief as is just and equitable.
Columbus, Ohio Dated: December 15, 1997
LAW OFFICE OF ERIC L. BROWN CO., L.P.A.
JURY DEMAND
Plaintiff demands trial by Jury for all issues in this action.
Eric L. Brown TRIAL ATTORNEY FOR PLAINTIFF