8:11-cv LSC -TDT Doc # 8 Filed: 08/16/11 Page 1 of 23 - Page ID # 16

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1 8:11-cv LSC -TDT Doc # 8 Filed: 08/16/11 Page 1 of 23 - Page ID # 16 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEBRASKA DENNIS P. CIRCO, CHRISTOPHER W. CIRCO, Case #: 8:11-cv Plaintiff, v. DXP ENTERPRISES, INC v. Defendant and Counterclaim- Plaintiff and Third-Party Plaintiff, CIRCO ENTERPRISES, LLC, AND CIRCO HOLDINGS, LLC ANSWER AND COUNTERCLAIM AND THIRD-PARTY COMPLAINT (Demand For Jury Trial) Third-Party Defendants. COMES NOW Defendant, Counterclaim-Plaintiff and Third-Party Plaintiff DXP Enterprises, Inc. ( DXP ), pursuant to Rule 8 of the Federal Rules of Civil Procedure, and for its first answer, including affirmative defenses and a counterclaim, states and alleges as follows in answer to the Complaint ( Complaint ) (Filing No. 1) filed by Plaintiffs, Dennis P. Circo ( Circo ) and Christopher W. Circo ( Chris Circo ) (collectively Plaintiffs ): ANSWER 1. DXP admits the allegations in Paragraph 1 of the Complaint. 2. DXP admits the allegations in Paragraph 2 of the Complaint. 3. DXP admits the allegations in Paragraph 3 of the Complaint. 4. DXP admits the allegations in Paragraph 4 of the Complaint. 5. DXP admits the allegations in Paragraph 5 of the Complaint.

2 8:11-cv LSC -TDT Doc # 8 Filed: 08/16/11 Page 2 of 23 - Page ID # DXP admits the allegations in Paragraph 6 of the Complaint. 7. DXP realleges and incorporates herein by reference its admissions and denials to Paragraphs 1 through 6 of the Complaint as though fully set forth herein. 8. DXP admits a closing related to the Agreement (as defined in Paragraph 5 of the Complaint) took place on September 19, DXP denies the remaining allegations in Paragraph 8 of the Complaint. 9. DXP admits it was the sole stockholder of Precision after the acquisition. DXP denies the remaining allegations in Paragraph 9 of the Complaint. 10. DXP admits the allegations in Paragraph 10 of the Complaint. 11. DXP admits it was given access to certain books and records relating to Precision. DXP denies the remaining allegations in Paragraph 11 of the Complaint. 12. DXP admits it was given an opportunity to conduct, and did conduct, certain due diligence with respect to Precision s business, including regarding financial reports and inventories. DXP denies the remaining allegations in Paragraph 12 of the Complaint. 13. DXP denies the allegations in Paragraph 13 of the Complaint. 14. DXP denies the allegations in Paragraph 14 of the Complaint. 15. DXP admits the allegations in Paragraph 15 of the Complaint. 16. DXP admits it paid an additional $5 million to Plaintiffs. DXP denies the remaining allegations in Paragraph 16 of the Complaint. 17. DXP denies the allegations contained in Paragraph 17 of the Complaint. 18. DXP admits the allegations in Paragraph 18 of the Complaint. 2

3 8:11-cv LSC -TDT Doc # 8 Filed: 08/16/11 Page 3 of 23 - Page ID # DXP admits the allegations in Paragraph 19 of the Complaint to the extent they allege DXP had the opportunity to inspect certain books and records. DXP denies the remaining allegations in Paragraph 19 of the Complaint. 20. DXP admits the allegations in Paragraph 20 of the Complaint to the extent they allege DXP had the opportunity to inspect certain books, records, plants and warehouses of Precision. DXP denies the remaining allegations set forth in Paragraph 20 of the Complaint. 21. DXP is without sufficient knowledge or information sufficient to admit or deny the allegations set forth in Paragraph 21 of the Complaint and, therefore, denies the same. 22. DXP admits it was provided certain reports represented to be audits. DXP denies the remaining allegations in Paragraph 22 of the Complaint. 23. DXP denies the allegations in Paragraph 23 of the Complaint. 24. DXP denies the allegations in Paragraph 24 of the Complaint. 25. DXP denies the allegations in Paragraph 25 of the Complaint. 26. DXP denies the allegations in Paragraph 26 of the Complaint. 27. DXP denies the allegations in Paragraph 27 of the Complaint. 28. DXP denies the allegations in Paragraph 28 of the Complaint. FIRST CLAIM FOR RELIEF (Dennis P. Circo Only Breach of Contract) 29. DXP realleges and incorporates herein by reference its admissions and denials to Paragraphs 1 through 29 of the Complaint as though fully set forth herein. 30. DXP denies the allegations in Paragraph 30 of the Complaint. 31. DXP denies the allegations in Paragraph 31 of the Complaint. 32. DXP denies the allegations in Paragraph 32 of the Complaint. 3

4 8:11-cv LSC -TDT Doc # 8 Filed: 08/16/11 Page 4 of 23 - Page ID # DXP denies the allegations in Paragraph 33 of the Complaint. 34. DXP denies the allegations in Paragraph 34 of the Complaint and further denies the allegations in the WHEREFORE clause of the Complaint following Paragraph 34. SECOND CLAIM FOR RELIEF (Dennis P. Circo Only Accounting) 35. DXP realleges and incorporates herein by reference its admissions and denials to Paragraphs 1 through 34 of the Complaint as though fully set forth herein. 36. DXP denies the allegations in Paragraph 36 of the Complaint and further denies the allegations in the WHEREFORE clause of the Complaint following Paragraph 64. THIRD CLAIM FOR RELIEF (Dennis P. Circo and Christopher Circo Declaratory Relief) 37. DXP realleges and incorporates herein by reference its admissions and denials to Paragraphs 1 through 36 of the Complaint as though fully set forth herein. 38. DXP denies the allegations in Paragraph 38 of the Complaint. 39. DXP admits the allegations in the First Sentence of Paragraph 39 of the Complaint. DXP denies the remainder of the allegations in Paragraph 39 of the Complaint. 40. DXP denies the allegations in Paragraph 40 of the Complaint. 41. DXP denies the allegations in Paragraph 41 of the Complaint. 42. DXP admits it had access to certain books and records of Precision and conducted due diligence. DXP denies the remaining allegations in Paragraph 42 of the Complaint, including those allegations in subparagraphs (a) through (d). 43. DXP denies the allegations in Paragraph 43 of the Complaint, including those allegations in subparagraphs (a) through (c). 44. DXP denies the allegations in Paragraph 44 of the Complaint. 4

5 8:11-cv LSC -TDT Doc # 8 Filed: 08/16/11 Page 5 of 23 - Page ID # DXP denies the allegations in Paragraph 45 of the Complaint and further denies the allegations in the WHEREFORE clause of the Complaint following Paragraph 45. AFFIRMATIVE DEFENSES 46. DXP asserts, additionally and alternatively, the following affirmative defenses. FIRST AFFIRMATIVE DEFENSE (Failure to State a Claim) 47. Neither the Complaint nor any claim for relief alleged therein states a claim against DXP upon which relief can be granted. SECOND AFFIRMATIVE DEFENSE (Waiver) 48. Plaintiffs claims are barred, in whole or in part, by waiver. THIRD AFFIRMATIVE DEFENSE (Unclean Hands) 49. Plaintiffs claims are barred, in whole or in part, by their unclean hands. FOURTH AFFIRMATIVE DEFENSE (Mitigation of Damages) 50. Plaintiffs are barred from recovering any damages, in whole or in part, due to Plaintiffs failure to reasonably mitigate its damages, if any. FIFTH AFFIRMATIVE DEFENSE (Estoppel) 51. Plaintiffs claims are barred, in whole or in part, by the doctrine of estoppel. SIXTH AFFIRMATIVE DEFENSE (Express Contract) 52. Plaintiffs claims are barred, in whole or in part, by express contract. 5

6 8:11-cv LSC -TDT Doc # 8 Filed: 08/16/11 Page 6 of 23 - Page ID # 21 SEVENTH AFFIRMATIVE DEFENSE (Prior Material Breach) 53. Any alleged breach by DXP as alleged in the Complaint was excused by Plaintiffs prior material breach. EIGHTH AFFIRMATIVE DEFENSE (Good Faith) 54. DXP has, at all relevant times, acted reasonably, and in good faith in light of the circumstances of which it was aware at the time it acted. Plaintiffs. NINTH AFFIRMATIVE DEFENSE (Payment) 55. Plaintiffs claims are barred, in whole or in part, by payment from DXP to TENTH AFFIRMATIVE DEFENSE (Unjust Enrichment) 56. Plaintiffs claims and any alleged recovery are barred, in whole or in part, by Plaintiffs unjust enrichment. WHEREFORE, DXP prays that the Court dismiss the Complaint with prejudice and for such other and further relief, including reasonable attorneys fees and costs to the extent allowed by law, or such other and further relief the Court finds just or equitable or allowed by the pleadings or at law. COUNTERCLAIM AND THIRD-PARTY CLAIM COMES NOW, Counterclaim-Plaintiff DXP, pursuant to Rules 8 and 14(a) of the Federal Rules of Civil Procedure, for its claims for relief and for its Counterclaim and Third-Party Complaint against Circo and Chris Circo, and for its Third-Party Complaint against Third-Party Defendants Circo Enterprises, LLC ( Circo Enterprises ) and Circo Holdings, LLC ( Circo 6

7 8:11-cv LSC -TDT Doc # 8 Filed: 08/16/11 Page 7 of 23 - Page ID # 22 Holdings ) [collectively with Circo and Chris Circo Counter-Defendants ], and hereby states and alleges as follows. THE PARTIES 1. DXP is a corporation organized and existing under the laws of the State of Texas, with its principal place of business in Houston, Texas. 2. Circo is an individual with his primary residence in Omaha, Nebraska. Circo may be served at his place of business at 4611 South 96 th Street, Omaha, NE Chris Circo is an individual with his primary residence in Omaha, Nebraska. Circo may be served at his place of business at 4611 South 96 th Street, Omaha, NE Circo Enterprises is a Nebraska limited liability company with its principal place of business in Omaha, Nebraska. Circo Enterprises may be served through its registered agent, Dennis Circo, at 4627 South 96 th Street and/or 4611 South 96 th Street, Omaha, NE Circo Holdings is a Nebraska limited liability company with its principal place of business in Omaha, Nebraska. Circo Holdings may be served through its registered agent, Dennis Circo, at 4627 South 96 th Street and/or 4611 South 96 th Street, Omaha, NE JURISDICTION AND VENUE 6. Jurisdiction of this civil action is proper in this Court pursuant to 28 U.S.C. 1332(a)(1), (c) and (d) for the reason that the matter in controversy exceeds $75,000.00, exclusive of interest and costs, and is between citizens of different states. Jurisdiction is also proper in this Court pursuant to 28 U.S.C for the reason that this matter is a civil action arising under the laws of the United States. 7. Venue is proper in this Court pursuant to 28 U.S.C. 1391(a)(1), (2) and (3) and (c) for the reason that this is a civil action wherein jurisdiction is founded on diversity of 7

8 8:11-cv LSC -TDT Doc # 8 Filed: 08/16/11 Page 8 of 23 - Page ID # 23 citizenship and has been filed in a district in which Counter-Defendants reside or are subject to personal jurisdiction and/or in which a substantial part of the events or omissions giving rise to the claim occurred. INTRODUCTION 8. This is a fraud case arising out of the sale of shares of stock of Precision Industries, Inc. ( Precision ) from Counter-Defendants to DXP in Counter-Defendants knowingly and intentionally made false representations to DXP regarding the financial condition of Precision and, in particular, regarding the value of the inventory of Precision and the amount of the accounting reserve for same, thus fraudulently inducing DXP to buy Counter-Defendants shares of stock in Precision. 9. Counter-Defendants represented in writing that the inventory of Precision had a value of over $43 million, that it was in good and marketable condition, that it was usable and of a quantity and quality salable in the ordinary course of business, that an adequate reserve of approximately $1 million was reflected in the balance sheet of Precision for obsolete, excess, damaged, slow-moving or otherwise unusable inventory, and that Precision s financials were complete and accurate in accordance with GAAP. 10. When DXP started converting Precision s financial information to DXP s systems in late 2009, DXP discovered the inventory of Precision was grossly overstated and the reserve was grossly understated. The reserve for obsolete, excess, damaged, slow-moving or otherwise unusable inventory should have been over $20 million, not $1 million, and thus the true value of the inventory was far less than represented. DXP had to write off millions of dollars for unsalable, dead and excess inventory. As a direct and proximate result of Counter-Defendants misrepresentations and omissions, securities fraud and deceptive trade practices, DXP incurred 8

9 8:11-cv LSC -TDT Doc # 8 Filed: 08/16/11 Page 9 of 23 - Page ID # 24 substantial damages and was denied the benefit of its bargain under a stock purchase agreement ( SPA ) executed with DXP. SUMMARY OF THE FACTS 11. DXP is a publicly traded, professional distribution management company that provides products and services to a variety of industries through its Innovative Pumping Solutions (IPS), Supply Chain Services and MROP Products and Services, including but not limited to, pumps, bearings, power transmission, seals, hose, safety, fluid power, electrical and industrial supplies. 12. Precision was owned and controlled by Circo, and also owned by several entities Circo controlled. At all times, Circo acted as an authorized agent and representative of the other Counter-Defendants. Precision was located in Omaha, Nebraska, and was in the business of distributing MROP products and services. 13. DXP and Counter-Defendants executed a Stock Purchase Agreement dated August 17, 2007 (the SPA ) pursuant to which Counter-Defendants sold their shares of stock of Precision to DXP. In the SPA, Counter-Defendants made certain representations that were false, including that: a. The inventories of Precision were in good and marketable condition (Section 4.21); b. The inventories of Precision were usable, and of a quantity and quality salable in the ordinary course of business (Section 4.21); c. The inventories of Precision set forth in the balance sheet were stated in accordance with GAAP (Section 4.21); d. Adequate reserves had been reflected in the balance sheet for obsolete, excess, damaged, slow-moving, or otherwise unusable inventory, which were calculated in accordance with GAAP (Section 4.21); and 9

10 8:11-cv LSC -TDT Doc # 8 Filed: 08/16/11 Page 10 of 23 - Page ID # 25 e. Each of the financial statements of Precision was complete and correct and prepared in accordance with GAAP (Section 4.7(a)). 14. Counter-Defendants represented the value of the inventories of Precision (the Inventory ) was $43,600,147 as of closing in 2007, and that a reserve of $1,070,593 was complete and correct and further was adequate under GAAP to account for obsolete, excess, damaged, slow-moving, or otherwise unusable inventory. As set forth herein in more detail, the Inventory was grossly overstated and the reserve was grossly understated. 15. While Counter-Defendants disclosed that approximately $6.8 million of the Inventory was ineligible as defined by Precision s bank for lending purposes, Counter- Defendants specifically represented the very same Inventory was in good and marketable condition, was usable and of a quantity and quality salable in the ordinary course of business and that the reserve of $1 million for it (and all Inventory) was adequate. Merely because inventory is not eligible to be included in a calculation for bank loans does not mean it is unsalable, dead or excess. 1 As an example, many banks will not loan against receivables over a certain number of days old. That does not mean the receivables are not collectible. 16. Counter-Defendants knew the ineligible inventory was unsalable, dead or excess, yet failed to disclose this knowledge to DXP (and, as stated previously, expressly represented otherwise). In addition, Counter-Defendants misrepresented the amount of ineligible inventory. The true amount of ineligible inventory at the time of the acquisition was more than $6.8 million. 1 Inventory is unsalable if it has expired (the manufacture has given the item a predetermined shelf life that has been exceeded) or out of the manufacturer s date code (the manufacturer has marked the item with a date code indicating the date of manufacture and the shelf life is determined by the date code). Inventory that is unsalable cannot be shipped to a customer. Inventory is dead if it has not been sold within a 12 month period as of the date of the acquisition, and inventory that is excess is that which exceeds the two year supply needed for customers as of the date of the acquisition. 10

11 8:11-cv LSC -TDT Doc # 8 Filed: 08/16/11 Page 11 of 23 - Page ID # DXP did not become aware of (an could not reasonably have become aware) Counter-Defendants misrepresentations and omissions until late 2009 and early 2010 when Precision s financial and accounting systems were converted to DXP s systems. As the result of an earn out provision under the SPA, Counter-Defendant Chris Circo continued to manage and conduct the day to day operations of Precision for several years after the acquisition by DXP in During this period, Counter-Defendants actively concealed their fraud. As the earn-out period was about to expire, Precision s operations and financials were converted and integrated into DXP s systems. As DXP assumed control of Precision, DXP for the first time learned that Counter-Defendants had grossly misrepresented the Inventory and the reserve. Given the facts and circumstances and the magnitude of the misrepresentations, Counter-Defendants knew or had reason to know their representations were false at the time they were made. The following are a few examples showing Counter-Defendants knew the representations they made were not true: a. Certain parts known as snap rings were obtained in a Precision acquisition in 2002 and had still not been sold in b. Certain product described as Gladwin inventory also was remained on account despite the fact the customer went out of business in c. Some inventory located in a local warehouse (Gratton warehouse) came from lost customers and closed service centers and, in 1997, a portion of such inventory was moved from Omaha to Dallas; then in 2002 moved back to Omaha and then in 2003 moved again to the Gratton warehouse. d. Some inventory known at the Precision Omaha Distribution Center ( ODC ) the ( ODC inventory ) had zero usage as of the date of acquisition. Inventory for one 11

12 8:11-cv LSC -TDT Doc # 8 Filed: 08/16/11 Page 12 of 23 - Page ID # 27 customer, Significant customer stored at the Gratton warehouse had expired, included out of date codes, was damaged or was missing, modified, obsolete or had packaging issues and said customer refused to purchase same even though Counter-Defendants represented it was committed inventory. 2 Some of this inventory included scrap pieces of belting with unusable sizes and lengths or was unsalable based on age or condition. e. There were other inventory items in the Precision Industries Service Centers and ODC that had expired, out of date, missing, modified, obsolete or had packaging issues. f. Inventory held by Precision at its Greenville location from the Timken contract that terminated in 2006 was valueless since Timken properly refused to purchase the worthless product, but Precision merely palletized and stored such product in Precision s Goldsboro location. There also has been more than $2.7 million of physical inventory missing from Precision that was required to be written off. g. When Precision would close a branch location, management of Precision, led by Circo and Chris Circo, would direct the inventory to be moved from the closed location to another branch office. Employees at the new branch office were told not to be concerned about the relocated inventory. As a result, Precision was not making any effort to sell the relocated inventory. In many instances, the relocated inventory was merely boxed or palletized and left alone for years. 2 Counter-Defendants represented that committed inventory meant inventory that a customer was contractually obligated to purchase, or in other words, the customer was committed to buy it. 12

13 8:11-cv LSC -TDT Doc # 8 Filed: 08/16/11 Page 13 of 23 - Page ID # 28 h. When Precision would move inventory from a closed branch to a platform branch, the inventory would sometimes become committed and documented as same. However, the inventory should not have been listed as committed as the customer had no obligation to purchase it (in several instances, the customer had never even used the items). i. As another example, Precision had a drop factor of ten percent (10%) scrap for supply of a major customer. The scrap was not and could not be sold to that customer. Nonetheless, Precision boxed the scrap, gave it new part numbers, put the boxes on the shelf, and included the scrap in the value of the Inventory. Rather than taking a loss for scrap items or increasing the reserve, Precision treated the scrap as committed inventory, representing to DXP the customer was obligated to purchase the scrap. Counter-Defendants knew or should have known the customer would not purchase scrap, it should not be included as part of committed inventory or total Inventory, yet Counter-Defendants did not disclose these facts to DXP. j. In other examples, Precision misrepresented that some inventory was committed when it exceeded any reasonable amount the customer could be expected to use (in some instances up to ten years of supply), it included parts that were out of manufacturer s date, and it included parts that could not be supported if sold. 18. In short, Counter-Defendants knew or should have known the amount of the committed Inventory was misstated, as they knew or should have known no customer could ever reasonably be expected (or forced) to purchase it. Counter-Defendants overstated the amount of committed inventory by more than $1.2 million. As of the date of acquisition, more than $3.3 13

14 8:11-cv LSC -TDT Doc # 8 Filed: 08/16/11 Page 14 of 23 - Page ID # 29 million of items supposedly part of the committed inventory had not been sold in 2 years, and over $700,000 of the committed inventory was unsalable. 19. Precision also represented to its auditors and to DXP that no further reserve was necessary for certain slow moving inventory valued at more than $4 million because it could be returned to suppliers for a nominal restocking fee, when in fact, this representation was not true. 20. When DXP started to realize Counter-Defendants may have made misrepresentations regarding the Inventory, DXP conducted an investigation, including conducting a physical count, inspection and review of the inventory. DXP determined more than $20 million of the inventory was unsalable, dead or excess as of the date of the acquisition and from this amount, more than $5.7 million was unsalable. 21. During the course of DXP s investigation, Precision employees admitted that when they conducted a physical Inventory prior to the acquisition by DXP and found the amount on hand was less than the amount on the books (known as shrink ), they were directed by Precision management to go back and find the missing inventory. 22. In another example, a Precision branch in Boise, Idaho was short on inventory. Despite not physically having the inventory recorded on its books, Precision employees were directed to keep the inventory listed on the books under the guise it had been actually delivered to the customer, but accidentally not billed. Rather than adjust for missing inventory, Precision employees were told to add it to the count and that Precision would bill the customer later, which it never did. This practice also resulted in the amount of physical inventory being overstated on the books of Precision. 14

15 8:11-cv LSC -TDT Doc # 8 Filed: 08/16/11 Page 15 of 23 - Page ID # During the course of the investigation, DXP asked Precision employees about the $1 million reserve. Precision employees admitted to DXP the reserve was far too low and further that they knew it was such even before the acquisition by DXP in DXP increased the reserve relating to Precision about one year after acquiring Precision for various reasons, but primarily because of differences it perceived in the accounting philosophies between Precision and DXP. DXP had not discovered the Counter-Defendants concealment of facts and thus had no idea the reserve actually should have been more than $20 million, which it discovered much later after the conversion of financial systems took place and DXP s investigation revealed Counter-Defendants fraud. DXP ultimately determined the reserve should have been $20,522, as of the date of the acquisition, which thus required DXP to write off another $13.78 million. FIRST CLAIM FOR RELIEF (Fraud) 25. DXP repeats and realleges each of the allegations in Paragraphs 1 through 24 as though fully set forth herein. 26. Counter-Defendants made representations to DXP in the SPA in 2007 as set forth herein, including but not limited to the following: (a) (b) (c) (d) The inventories of Precision were in good and marketable condition; The inventories of Precision were usable, and of a quantity and quality salable in the ordinary course of business; The inventories of Precision set forth in the balance sheet were stated in accordance with GAAP; Adequate reserves had been reflected in the balance sheet for obsolete, excess, damaged, slow-moving, or otherwise unusable inventory, which were calculated in accordance with GAAP; and 15

16 8:11-cv LSC -TDT Doc # 8 Filed: 08/16/11 Page 16 of 23 - Page ID # 31 (e) Each of the financial statements of Precision was complete and correct and prepared in accordance with GAAP. 27. Counter-Defendants representations were false. 28. Counter-Defendants representations were known by Counter-Defendants to be false when made, or were made recklessly without knowledge of its truth and as a positive assertion. 29. Counter-Defendants representations were made with the intention that DXP rely on same, and to induce DXP to enter into the SPA and pay more than it otherwise would have paid for the shares of stock had DXP known the true value of the inventory and the reserve. 30. DXP did reasonably rely on the representations. 31. As a direct and proximate result of its reliance upon the representations, DXP suffered damages in an amount to be proven at trial. SECOND CLAIM FOR RELIEF (Chapter 27 of the Texas Business and Commerce Code) 32. DXP repeats and realleges each of the allegations in Paragraphs 1 through 24 as though fully set forth herein. herein. 33. Counter-Defendants made representations to DXP in the SPA in 2007 as set forth 34. The representations were false. 35. The representations were known by Counter-Defendants to be false when made, or were made recklessly without knowledge of its truth and as a positive assertion. 36. The representations were made with the intention that DXP rely on same, and to induce DXP to enter into the SPA and pay more than it otherwise would have paid for the shares of stock had DXP known the true value of the Inventory and the reserve. 16

17 8:11-cv LSC -TDT Doc # 8 Filed: 08/16/11 Page 17 of 23 - Page ID # DXP did reasonably rely on the representations. 38. The conduct of Counter-Defendants constitutes a violation of Chapter 27.01, et seq., of the Texas Business & Commerce Code. 39. As a direct and proximate result of Counter-Defendants conduct, DXP suffered damages in an amount to be proven at trial. THIRD CLAIM FOR RELIEF (Texas Securities Act) 40. DXP repeats and realleges each of the allegations in Paragraphs 1 through 24 as though fully set forth herein. 41. Counter-Defendants are liable to DXP pursuant to Tex. Rev. Civ. Stat. Ann. art. 581, 33A(1) (Vernon 2010) by reason of their sale of securities while not being registered as a dealer and/or agent and through persons who were not registered as a dealer and/or agent with the Texas State Securities Board in violation of the Texas Securities Act. 42. Counter-Defendants are liable to Plaintiffs pursuant to Tex. Rev. Civ. Stat. Ann. art. 581, 33A(2) by reason of their fraudulent statements, misrepresentations, and omissions in the sale of securities to Plaintiffs, as set forth in detail herein. 43. Counter-Defendants are liable to DXP pursuant to Tex. Rev. Civ. Stat. Ann. art. 581, 33-1 (Vernon 2010) because Counter-Defendants committed fraud or engaged in a fraudulent practice in rendering services as investment advisors as described herein. Act. 44. The conduct of Counter-Defendants constitutes a violation of the Texas Securities 17

18 8:11-cv LSC -TDT Doc # 8 Filed: 08/16/11 Page 18 of 23 - Page ID # As a direct and proximate result of Counter-Defendants violations of the Texas Securities Act, DXP has been damaged in an amount to be proven at trial. DXP hereby seeks all damages available under Tex. Rev. Civ. Stat. Ann. art. 581, 33-1(B). FOURTH CLAIM FOR RELIEF (Securities Exchange Act of 1934 and 17 C.F.R b-5) 46. DXP repeats and realleges each of the allegations in Paragraphs 1 through 24 as though fully set forth herein. 47. Counter-Defendants have, by engaging in the conduct described herein, directly or indirectly, by use of means or instrumentalities of interstate commerce, or of the mails, or of a facility of a national security exchange, with scienter: (a) employed devices, schemes or artifices to defraud; (b) made untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or (c) engaged in acts, practices or courses of business which operated or would operate as a fraud or deceit upon other persons, in connection with the purchase or sale of securities. 48. As part of and in furtherance of their scheme, Counter-Defendants, directly and indirectly, prepared, disseminated, or used contracts, promotional materials, investor and other correspondence, and oral presentations which contained untrue statements of material facts and misrepresentations of material facts, and which omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. 49. Counter-Defendants made the referenced misrepresentations and omissions intentionally, knowingly, or with severe reckless disregard for the truth. 18

19 8:11-cv LSC -TDT Doc # 8 Filed: 08/16/11 Page 19 of 23 - Page ID # By reason of the foregoing, Counter-Defendants have directly or indirectly violated Section 10(b) of the Exchange Act (15 U.S.C. 78j(b)) and Rule 10b-5 (17 C.F.R b-5). 51. As a direct and proximate result of Counter-Defendants violations of the Securities Exchange Act of 1934, DXP has been damaged in an amount to be proven at trial. FIFTH CLAIM FOR RELIEF (Securities Act of 1933) 52. DXP repeats and realleges each of the allegations in Paragraphs 1 through 24 as though fully set forth herein. 53. Counter-Defendants acts and omissions, as set forth herein, violated 15 U.S.C. 77l(a)(2) in that Counter-Defendants offered and sold securities by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of material fact and omitted to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made not misleading. 15 U.S.C. 77l(a)(2). 54. Counter-Defendants violated 15 U.S.C. 77q(a)(1)-(3) in that they sold or offered for sale securities by the use of means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly (1) to employ any device, scheme, or artifice to defraud; (2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and (3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon DXP. 19

20 8:11-cv LSC -TDT Doc # 8 Filed: 08/16/11 Page 20 of 23 - Page ID # As part of and in furtherance of their scheme, Counter-Defendants, directly and indirectly, prepared, disseminated, or used contracts, promotional materials, investor and other correspondence, and oral presentations, which contained untrue statements of material fact and which omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. 56. Counter-Defendants made the above-referenced misrepresentations and omissions intentionally, knowingly, or with severe reckless disregard for the truth. 57. Counter-Defendants were also negligent in their actions regarding the representations and omissions alleged herein. 58. As a direct and proximate result of Counter-Defendants violations of the Securities Act of 1933, 15 U.S.C. 77l and 77q, DXP has been damaged in an amount to be proven at trial. SIXTH CLAIM FOR RELIEF (Investment Advisors Act) 59. DXP repeats and realleges each of the allegations in Paragraphs 1 through 24 as though fully set forth herein. 60. Counter-Defendants, as investment advisors, used the mails and means or instrumentalities of interstate commerce, directly and indirectly to (1) employ devices, schemes or artifices to defraud clients or prospective clients, or (2) engage in transactions, practices, and courses of business which operated as a fraud or deceit upon clients and prospective clients. 61. The conduct of Counter-Defendants constitutes violations of sections 206(1) and 206(2) of the Investment Advisors Act, 15 U.S.C. 80b-6(1-2). 20

21 8:11-cv LSC -TDT Doc # 8 Filed: 08/16/11 Page 21 of 23 - Page ID # As a direct and proximate result of Counter-Defendants violations of the Investment Advisors Act, DXP has been damaged in an amount to be proven at trial. SEVENTH CLAIM FOR RELIEF (Nebraska Deceptive Trade Practices Act) 63. DXP repeats and realleges each of the allegations in Paragraphs 1 through 24 as though fully set forth herein. 64. DXP is a person under, and a buyer protected by, the Nebraska Deceptive Trade Practices Act, Neb. Rev. Stat et al (the Act ). 65. Counter-Defendants, in the course of their business, represented that goods had characteristics or benefits that they do not have, and/or that goods were of a particular standard, quality or grade when they were another, in violation of Neb. Rev. Stat Counter-Defendants further used a scheme or device to defraud DXP by means of obtaining money or property by knowingly making false or fraudulent pretenses, representations, or promises, and/or by selling property for the purpose of furthering such scheme in violation of Neb. Rev. Stat DXP was induced by a violation of Neb. Rev. Stat to acquire the shares of stock of Precision, and therefore the SPA is unenforceable and DXP is entitled to rescind the SPA, or alternatively, retain the shares delivered and seek damages. 68. Counter-Defendants willfully engaged in one or more of the above trade practices knowing that they were deceptive and, in fact, knowing they were acting fraudulently. REMEDIES AND DAMAGES 69. DXP seeks rescission of the SPA and return of all amounts paid to Counter- Defendants for the shares of stock of Precision. DXP was fraudulently induced into purchasing 21

22 8:11-cv LSC -TDT Doc # 8 Filed: 08/16/11 Page 22 of 23 - Page ID # 37 the shares by virtue of Counter-Defendants fraudulent representations, and DXP is entitled to and hereby seeks to rescind the transaction. DXP is entitled to rescission under the common law and pursuant to Tex. Rev. Civ. Stat. Ann. art. 581, 33 and 33A(2). 70. Additionally and alternatively, DXP seeks actual damages equal to the difference between the value of the shares of stock of Precision as falsely represented, less the true value of the shares as of the date of the acquisition. This amount is at least equal to the difference in the reserve Counter-Defendants should have included for Inventory as of the date of the acquisition ($20,522,846.19), and the reserve as revised and increased by DXP before it discovered Counter- Defendants fraud. DXP also seeks all actual damages available under Tex. Rev. Civ. Stat. Ann. art. 581, 33-1(B). 71. DXP seeks and is entitled to recover its reasonable and necessary attorneys fees, expert witness fees, costs for copies of depositions, and costs of the court pursuant to Chapter 27 of the Texas Business & Commerce Code and the Nebraska Deceptive Trade Practices Act. WHEREFORE, Plaintiff DXP respectfully prays for the following relief from this Honorable Court: A. Judgment and rescission and return of the entire purchase price paid for the shares of stock of Precision; B. Judgment and recovery of actual damages; C. Attorneys fees, costs and expenses as allowed by law; D. Pre-judgment and post-judgment interest at the maximum rates allowed by law; and E. Such other and further relief as this Court deems just or proper. REQUEST FOR PLACE OF TRIAL Pursuant to NELR 40.1(a), DXP requests place of trial at Omaha. 22

23 8:11-cv LSC -TDT Doc # 8 Filed: 08/16/11 Page 23 of 23 - Page ID # 38 DATED this 16th day of August, DXP ENTERPRISES, INC., Defendant and Counterclaim-Plaintiff and Third-Party Plaintiff By /s/bartholomew L. McLeay Bartholomew L. McLeay #17746 Suzanne M. Shehan #20531 Kutak Rock, LLP The Omaha Building 1650 Farnam Street Omaha, NE (402) and D. Scott Funk pro hac vice pending Gabe T. Vick pro hac vice pending Looper Reed & McGraw PC 1300 Post Oak Blvd. Suite 2000 Houston, Texas (713) CERTIFICATE OF SERVICE I hereby certify that on August 16, 2011, I electronically filed the foregoing with the Clerk of the Court using the CM/ECF system which sent notice of such filing to the following: Thomas J. Culhane Erickson & Sederstrom, P.C. culhane@eslaw.com /s/ Bartholomew L. McLeay Bartholomew L. McLeay 23