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 Ed note: •••••• indicates name suppressed at their request

PART ONE OF THREE

EXPERT WITNESS REPORT ON BRICE FOODS' CONDUCTION OF SECURITIES FRAUD AGAINST 100 INVESTORS FROM 1990 THROUGH 199

UNDERSTANDING THE $12 MILLION MOTIVE FOR THE YOGURT SHOP MURDERS STATEMENT OF BARBARA BADER ALDAVE DEAN, ST. MARY'S SCHOOL OF LAW

On September 8, 1999, a San Antonio jury was impaneled on the fourth floor of the Bexar County Courthouse and began hearing evidence in a lawsuit alleging fraud and conspiracy against Brice Foods' owners and top corporate officers. Also accused was Hugh Scott of San Antonio, a man that the jury would later determine acted as a straw "Master Franchisee" operator for Brice Foods. As can be seen from the following expert witness report, Brice Foods and Hugh Scott conducted a massive telemarketing scheme, stealing millions of dollars from over 100 investors in a confidence game of deception, lies and abuse of the trust relationship.

September 9, 1999 is the same day that the Austin Police Department and ATF Agent Charlie Meyers went out and began to systematically accuse four young men of having "confessed" to the December 6, 1991 Yogurt Shop Murders.

On September 17, 1999, all questioning stopped.

On October 5, 1999, the San Antonio jury returned with multiple counts of fraud and conspiracy against three top Brice Food executives and Hugh Scott of San Antonio. Although the Brices' themselves were cleared in the October 5, 1999 jury verdict, the lawyer for the plaintiffs, Leon Simons of Houston, has filed a motion for a directed verdict as to the Brices, as they were found by the jury to be "in control" of their corporation at the same time the investor fraud scheme was taking place.

On October 5, 1999, APD requested and obtained arrest warrants for the four boys.

The boys were arrested on October 6, 1999. To date, more than two months later, they remain in the Travis County jail, facing constant pressures from their court appointed lawyers to "confess."

They also remain unindicted.

It is believed that the true motive for the girls' murders was to create death claims into which millions of dollars could be laundered in a mock settlement. To date, according to the US Attorney's office, no insurance company has been identified. It appears that there is no insurance company.

Brice Foods also took the position in the above investor fraud litigation that it had purchased no insurance coverage.

Nor is there any indication of insurance payment deductions on Brice Foods' income tax filings. Yet Austin attorney Roy Q. Minton and Jeff Rusk claim to have settled the case for $12 million.

Oddly, the settlement document itself fails to make any mention of a specific insurance company.

The families assert that the true motive for these murders was not the $35 monetary motive asserted by ATF Agent Charlie Meyers and the Austin Police Department. The true motive was to create a $12 million loss pocket into which the stolen investor funds could be laundered. The girls' murders generated "death claims" that, like the securities that Brice Foods' sold to the 100 investors, could likewise be subjected to a fraudulent transaction.

To date, all of the money stolen remain unaccounted for. None of it has been located by Leon Simons or the other attorney representing 75 of the 100 defrauded investors.

That other attorney is none other than Jeff Rusk. Jeff Rusk is the same attorney that represented the families of all four girls that were murdered.

What follows is a detailed account of Brice Foods' criminal conduct.

 

BARBARA BADER ALDAVE

Professor of Law

St. Mary's University School of Law

One Camino Santa Maria

San Antonio, Texas 78228

EXPERT'S REPORT

 

No. 96-CI-03315

Crescendo Investments, Inc., et al. v. Brice Foods, Inc., et al.

In the 225th Judicial District Court, Bexar County, Texas

 

October 30, 1998

As a witness specially employed to provide expert testimony on behalf of the Plaintiffs in the above-entitled case, I am submitting this written report. This report describes my qualifications to render opinions in this case, the information I have considered in arriving at my opinions, and the opinions that I have formed to date.

I. Qualifications

I earned a B.S. degree from Stanford University in 1960, and a J.D. degree from the University of California at Berkeley in 1966. I was admitted to the Oregon State Bar in 1966 and to the State Bar of Texas in 1982. Since 1970, I have been a law professor, teaching at the law schools of the University of Oregon, the University of California at Berkeley, the University of Texas, Northeastern University, and St. Mary's University. I served as the Dean of St. Mary's University School of Law from June 1, 1989, through May 31, 1998. During the past twenty eight years, I have taught approximately twenty courses in Business Associations and twenty-five courses in Securities Regulation. I have published a number of articles on corporate law, securities fraud, and insider trading. I am currently the Ernest W. Clemens Professor of Corporate and Securities Law at St. Mary's University. My curriculum vitae is attached as Exhibit A.

II. Information Considered

In forming my opinions, I have considered the documents and depositions which I have received from counsel in this case, information provided to me by counsel, and knowledge that I have acquired during three decades of practicing, studying, and teaching corporate law and securities regulation. In particular, I have reviewed the pleadings (including Plaintiffs' Second Amended Petition; Plaintiff Crescendo Investments, Inc.'s Motion for Partial Summary Judgment; and the Original or Amended Answers of Julie Brice, Peter Holt, Michael Homer, Donald Tomola, James H. Amos, Jr., •••••• and ••••••, and ••••••., and ••••••••.); depositions (including those of John Broadbent, Brian Gile, Deborah Ryan, Vonda Jobe, Larry Talley, Gary L. Langston, Charles Cannon, Michael Flowers, Michael Homer, and Bill Brice, Jr.); excerpts from oral depositions (including those of Charles E. Engelman, Tully Currie, Buford D. Clemmer, and others); depositions on written questions (propounded to Elizabeth Evanovich, Rodney Crowl, Glendon Gale Barron, Mark Bryant, Bill D. Carroll, William James Bright, R.B. Caldwell, and Earl M. Buys); Master Franchise Agreements between Brice Foods, Inc., and entities controlled by Hugh L. Scott, Jr.; offering documents (including those distributed by Lions Paw,. Inc., Lions Paw International Corporation, Hawk Wing, Ltd., and Adler, Ltd.); financial statements for Brice Foods, Inc., and affiliates; and miscellaneous other materials (including letters, memoranda, and notes of meetings).

III. Opinions

The opinions that I have formed in this case to date, and the reasons for these opinions, are generally as follows:

A. Recklessness and Material Aid

Under Article 581-33(F)(2) of the Texas Securities Act, "[a] person who directly or indirectly with intent to deceive or defraud or with reckless disregard for the truth or the law materially aids a seller, buyer, or issuer of a security is liable under Section 33A, 33B, or 33C jointly and severally with the seller, buyer, or issuer, and to the same extent as if he were the seller, buyer, or issuer."

1. The Recklessness of BFI's Executives

In my opinion, the officers and directors of Brice Foods, Inc. (BR) acted recklessly, in a number of respects, in connection with the transactions at issue in this litigation. Conduct is "reckless" when "the actor bas intentionally done an act of an unreasonable character in disregard of a known or obvious risk that was so great as to make it highly probable that harm would follow, and which thus is usually accompanied by a conscious indifference to the consequences." W. Page Keeton et al., Prosser and Keeton on the Law of Torts Section 34, at 213 (5th ed. 1984). That is, conduct can properly be labeled "reckless" whenever "the defendant, whatever his state of mind, has proceeded in disregard of a high and excessive degree of danger, either known to him or apparent to a reasonable person m his position." Id. at 213-14. In short, "reckless misconduct, differs from that form of negligence which consists in mere inadvertence, incompetence, unskillfulness, or a failure to take precautions … in that reckless misconduct requires a conscious choice of a course of action, either with knowledge of the serious danger to others involved in it or with knowledge of facts which would disclose this danger to any reasonable [person]." Restatement (Second) of Torts Section 500 cmt. g (1965).

Messrs. Amos and Holt, in my opinion, acted recklessly in entering into seven international Master Franchise Agreements and two domestic franchise agreements with shell companies created by Mr. Scott or others without requiring him to submit to BFI or I Can't Believe It's Yogurt, Ltd. (ICBIY), on his own behalf or on behalf of any of the actual franchisees, (1) a business plan, (2) a confidential investor questionnaire, or (3) a financial statement. The dereliction of Amos and Holt appears to be particularly egregious in light of the fact that BFI's own policies required the submission of such documents in cases in which the principal intended to take the license in a newly formed corporate entity, with the principal guaranteeing the obligations of the entity. In my opinion, Mr. Bill E. Brice, Jr., and Ms. Julie Brice, as the chief executives of BFI and ICBIY, also acted recklessly by adopting or acquiescing in a corporate policy that permitted Amos and Holt, the very persons who were selling the international master franchises and earning commissions or bonuses on their sales, to determine whether a potential franchisee was operationally and financially capable of performing his obligations under a Master Franchise Agreement.

As time passed after the execution of the Caribbean Basin Master Franchise Agreement in October 1991, the executives of BFI received some clear warnings concerning Scott's inability to fulfill his obligations under his Master Franchise Agreements. Approximately two months after the first agreement was signed, Mr. Alan Crites, Scott's business partner and the Designated Operator under the Caribbean Basin Master Franchise Agreement, warned Amos that Scott intended to raise money from investors through a telemarketing scheme, and that Scott intended to use substandard materials to construct his first showcase store in the Grand Cayman Islands. In May 1992, Scott's showcase store in the Cayman Islands finally opened, but six months behind schedule. By August 1992, when Scott was granted the master franchise for the United Kingdom and Ireland, Amos, Holt, and Bill Brice, Jr., knew that Scott was raising funds from sizable groups of small investors. By November 30, 1992, when Scott was granted the franchise for the Middle East, Julie Brice knew that Scott was raising money from outside investors. 

By the end of 1992, the executives of BFI and ICBIY, including Amos, Holt, Bill Brice, Jr., and Julie Brice, knew that Scott was beginning to establish a pattern of paying BFF5 invoices late, sometimes months after payment was due. By February 1993, Amos and Holt knew that Scott had written bad checks, had failed to meet his payroll, and had accrued past-due debts to vendors and taxing authorities in the United Kingdom. In addition, the company bad been unable to obtain any meaningful information about the location or profitability of the stores that Scott was supposed to. Have opened and operated in the areas in which he held franchises. By March 1993, the executives of BFI knew that Scott was using two separate organizations, one in San Antonio and one in Dallas, to raise money for the development of stores in the United Kingdom. In April 1993, the officers and shareholders of the company received a letter in which the landlord of one of Scott's stores in Puerto Rico made serious complaints about Scott's financial and operational capabilities. In June 1993, the company received a letter in which Ms. Frieda Cruickshank outlined several serious inadequacies of Scott's operations in the United Kingdom. In August 1993, the company was warned by the then-owner of the master franchise for Germany that the projections Scott was using to raise money for the operations in the United Kingdom were overstated. In September 1993, Amos was told by a domestic franchisee from San Antonio that Scott's money raising practices were jeopardizing the reputation of BFI and ICBIY, and that the projections being used by Scott to raise money from investors were overstated with respect to revenues and understated with respect to expenses.

Nevertheless, in October 1993, the company granted Adler, Ltd., a shell company formed by Scott, the master franchise rights for Australia and New Zealand; in December 1993, the company granted one of Scott's companies the master franchise rights for Germany, Austria, Hungary, and Switzerland; and in the beginning of 1994, the company granted to a company newly formed by Scott the master franchise rights for Spain and Portugal. In each case Scott was the sole guarantor of the obligations of the corporate master franchisee. Yet no director, officer, or employee of BFI or ICBIY ever requested or received a credit report on Scott, a copy of a business plan from Scott, or a financial statement reflecting Scott's assets, liabilities, or net worth. The inference is strong that the company and its executives acted recklessly in granting these master franchises.

At a meeting on February 6, 1994, Mr. Larry Talley, one of Scott's money-raisers, told Holt that Scott had failed to open several stores for which Talley had raised money, that Scott was not responding to Talley's inquiries concerning the whereabouts of the money, and that the investors were becoming extremely nervous and were likely to make claims against Talley's organization and BFI. A week later, at an International Franchise Association convention in Las Vegas, Mr. Andy Pollock, an accountant overseeing Scott's operations in the United Kingdom, told Amos and Holt that there was something seriously wrong with the development of Scott's UK company. Pollock also expressed concern over the fact that individuals who had invested in Scott's venture were beginning to contact him.

By the end of the first quarter of 1994, BFI and its executives, including Bill and Julie Brice, learned that Scott might be committing securities violations in which BFI and ICBIY could be implicated. In the third and fourth quarters of 1993, several executives of BFI, including the controller and Chief Financial Officer, and the Brices' father, Mr. Bill Brice, Sr., a practicing attorney in Dallas, Texas, had learned that Scott was raising money from investors through a telemarketing scheme. Mr. Charles Cannon, in-house general counsel to BFI, also learned through friends who had received solicitations that Scott was raising money through telemarketing. Bill Brice, Sr., asked Amos to investigate the matter. Amos, in turn, instructed Cannon to investigate. After conducting an investigation, Cannon wrote a memorandum to Amos on March 24, 1994, to warn him that Scott's money-raisers might be committing securities fraud, and that the offering documents disseminated by Scott's money-raisers could be read to implicate "The Brice Group" as aiders or abettors. During this period, Amos and Cannon met with Scott and Talley. They asked Scott and Talley to update the information about ICBIY in the promotional materials that were being sent to prospective investors. They also asked Scott and Talley to add to the "To Whom It May Concern" letters authored by executives of the company, and to the offering materials, a disclaimer emphasizing that BFI was not endorsing or sponsoring the investments. Despite the foregoing, for more than eighteen months Scott continued to raise money from investors without adding the much-discussed disclaimers to some of the "To Whom It May Concern Letters" authored by the company, or to any of the promotional materials disseminated to investors, and without updating the information about ICBIY in the offering materials. Bill and Julie Brice, as directors and the chief executives of the company, were aware of the Cannon memo and the fact that Scott was raising money through a telemarketing scheme.

At this point, the executives of BFI and ICBIY, armed with Cannon's opinions on the potential exposure of BFI and ICBIY for securities fraud, the advice from Talley regarding Scott's misuse of investor funds raised for stores in the United Kingdom, and the advice of Scott's accountant in the United Kingdom regarding Scott's financial problems there, should have taken steps to prevent Scott from continuing to raise money from investors. In my opinion, they acted recklessly in failing to terminate Scott's Master Franchise Agreements and allowing him to continue to raise funds until all of his companies collapsed in the later part of 1995. Further, according to their own testimony, the executives of BFI and ICBIY never checked to see whether Scott's money-raisers had updated the information about ICBIY, or begun to include disclaimers, in the materials sent to investors. Again, in my opinion, they were reckless in failing to do so.

In May 1994, Pollock's firm assisted in the preparation of financial statements for Scott's operations in the United Kingdom. These statements, which were filed of record in the United Kingdom and were available for review, indicated that Scott's company had a negative net worth and had sustained operating losses of $436,670 for the year ending in September 1993. At or around the same time, Scott informed Amos and Holt that he would not pay $325,000 in notes payable to the company and due in December 1994.

By September 1994, the Leicester Square store, which Scott testified was the only profitable store in the United Kingdom, had been involuntarily closed. Scott was past due on over $31,000 in accounts receivable owed to the company.

A month later, in October 1994, Amos and Holt met with Cruickshank, Scott's director of operations in the United Kingdom, and Talley at the Paris International Franchise Association convention. Talley told Amos and Holt, in the presence of Cruickshank, that Scott was a "liar, crook and a thief," and that Scott was running a "Ponzi scheme."

END PART ONE