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

PART TWO OF THREE

EXPERT WITNESS REPORT ON BRICE FOODS' CONDUCTION OF SECURITIES FRAUD AGAINST 100 INVESTORS FROM 1990 THROUGH 1995

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

BARBARA BADER ALDAVE

Professor of Law

St. Mary's University School of Law

One Camino Santa Maria

San Antonio, Texas 78228

 

EXPERT'S REPORT

PART TWO OF TWO PARTS

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

PART TWO

In November 1994, Cannon attended a meeting with Talley, one of Talley's investors, and Talley's attorney. Talley accused Scott of misappropriating investor funds. Cannon thereafter met with Amos and Holt and advised them what Talley had said about Scott. Also in November, Mr. Brandon Moore, an associate in BFI's international department, wrote a highly critical report concerning the inadequacies of Scott's operations in the Caribbean Basin and elsewhere. That same month, Scott advised Holt and Amos that he had closed two stores in Puerto Rico. Two months later, in January 1995, Ms. Vonda Jobe, a BFI international associate, sent Scott a letter relaying a customer's complaint about the closing of one of the stores in Puerto Rico, which store reportedly bad been managed by an escaped convict.

By the end of December 1994, Scott defaulted on the $325,000 in promissory notes payable to the company. Amos, Holt, Scott, Talley, and Cannon attempted to find a way to keep the notes on the company's books.

During the first half of 1995, Scott's financial problems worsened. After Scott defaulted on the notes for the master franchises for Germany, Austria, Hungary, and Switzerland in December, the company granted the licenses for these countries to Talley. Talley formed a new corporation to hold the franchises and caused it to sign a promissory note, in the amount of $325,000, to take the place of the notes on which Scott had defaulted in December 1994. In direct violation of one of its own policies, BFI never obtained a guaranty from Talley of his shell corporation's obligations to BFI. In further violation of company policies, none of the executives of BFI or ICBIY ever asked for or received a financial statement from Talley, obtained a credit report concerning him, obtained a business plan from him, or signed franchise agreements respecting the licenses granted to him. Talley's company defaulted on the $325,000 note on February 15, 1995.

During the period from January 1995 through March 1995, the situation continued to deteriorate. Cruickshank called Holt early in January to tell him of the dire state of Scott's business affairs in the United Kingdom. Scott was under increasing pressure from his creditors, including his lawyers, accountants, landlords, and real-estate brokers. Cruickshank needed inventory. Taxing authorities were seeking to collect the past-due amounts owed by Scott's UK company. At the end of February, BFI executives were advised by one of Scott's creditors that he was a bad credit risk.

In March 1995, Scott delivered a $10,000 check to BFI to pay a delinquent account, but his bank returned the check unpaid. Amos, Holt, and Mr. Thomas Herskowitz learned that two of BFI's distributors, Kraft and Sysco, had put Scott on a credit hold, and that Scott was operating a store in San Antonio under the name of "A Piece of Cake" without a franchise agreement. Nevertheless, later that month Amos and Holt attempted to persuade Scott to take the licenses for Germany, Austria, Hungary, and Switzerland and pay the $325,000 on which he had defaulted in December 1994, and on which Telley's company had defaulted in February 1995.

In April, an involuntary bankruptcy proceeding was filed in San Antonio against Hawk Wing, Ltd., the entity that Scott bad formed to hold the license for the United Kingdom and Ireland. Nevertheless, according to Mr. Michael Homer, one of Scott's money-raisers, Holt subsequently went to San Antonio to assure Homer that everything was all right with Scott and that he should continue to raise funds for Scott.

In May 1995, the operating entity that Scott had formed in the United Kingdom filed for a receivership there. Scott delivered to BFI two additional checks that his bank then returned unpaid.

On June 21, 1995, an order for relief was entered in the involuntary bankruptcy proceeding in San Antonio against Hawk Wing, Ltd. According to Horner's testimony, Herskowitz and Holt met with Homer on that day and assured him that there was no reason to be concerned about Scott, and that he should continue raising money for Scott.

It appears from a letter Written by Mr. Daniel Waitman to BFI that Holt was still taking telephone calls from potential investors in Scott's ventures as late as July 1995.

In my opinion, the executives of BFI and ICBIY, throughout 1994 and 1995, bad information that would have led a reasonable businessperson to terminate Scott's franchises and end his money raising activities. These executives, however, not only allowed Scott and his money-raisers to continue to seek funds from investors, but actually assisted him in doing so. Their conduct, in my opinion, was reckless.

2. The BFI Executives' Aiding of Scott

In the spring of 1992, the executives of BFI began to aid and assist Scott in raising more than $7,000,000 from investors. Some $2,500,000 of the $7,000,000 was raised from the plaintiffs in this case. In my opinion, the BFI executives materially aided Scott by (1) providing Scott and Lions Paw, Inc., a company owned by Mr. •••••• and Mr. ••••••, with large quantities of ICBIY brochures and other marketing materials, such as newspaper and magazine articles, showcasing Bill and Julie Brice and the success of their yogurt business; (2) allowing Scott to list officers and employees of BFI and ICBIY as references in the marketing materials used by Lions Paw, Inc.; (3) accepting telephone calls from investors and giving these investors false and misleading information about Scott and his operations; (4) allowing Lions Paw, Inc., to list ICBIY in its prospectuses as a joint venturer or development partner; and (5) allowing the Lions Paw prospectuses to go to investors without disclaimers to negate the implication that the Brices, BFI, and ICBIY were endorsing and sponsoring the investment opportunity.

B. Materiality of Misrepresentations and Omissions

A misrepresented or omitted fact is "material," under the federal securities laws, if there is a "substantial likelihood" that accurate disclosure of the fact "would have been viewed by the reasonable investor as having significantly altered the total mix of information made available." TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); see also Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988). The same test of "materiality" is applicable under the Texas Securities Act. See Granader v. McBee, 23 F.3d 120, 123 (5th Cir. 1994); see also Lutheran Bhd. v. Kidder Peabody & Co., 829 S.W.2d 300, 307 (Tex.App.-Texarkana 1992) (holding that "to be material, a misrepresentation or omission must have influenced the buyer's action to the extent that the buyer would not have entered into the transaction had the representation not been made").

END OF PART TWO