UNITED STATES DISTRICT COURT WESTERN DISTRICT OF TENNESSEE WESTERN DIVISION C WILLODEAN P. PRECISE, V. Plaintiff, No. U4-244 8 Ml An CLASS ACTION JURY DEMAND DUNCAN WILLIAMS, INC. Defendant. COMPLAINT 1. SUMMARY OF THE ACTION 1. This action asserts class action claims under the federal securities laws and the common law on behalf of plaintiff and other individuals and entities that purchased municipal bonds sold by Duncan Williams, Inc. with respect to a real estate development in Alabama known as Capstone. 2. As discussed below, at the time the Capstone bonds were sold to the public, defendant knew and failed to disclose that the bonds were not a viable or creditworthy investment and that they were being misrepresented to the public. 3. Furthermore, after the Capstone bonds had defaulted, Duncan Williams compounded its misconduct by re-purchasing bonds from many of its clients at a fraction of the loss investors had sustained. As a part of this re-purchase. defendant
obtained an alleged release without fairly disclosing all facts that bond purchasers were entitled to receive. 4. Plaintiff therefore brings this action to recover all losses that she and all members of the Plaintiff Class sustained as a result of purchasing Capstone bonds, as well as prejudgment interest, punitive damages, and attorney's fees. II. THE PARTIES 5. Plaintiff Willodean P. Precise is a resident of Memphis. Tennessee. 6. Defendant Duncan Williams, Inc. is a Tennessee corporation with its principal place of business in Memphis, Tennessee. III. JURISDICTION AND VENUE 7. This Court has subject matter jurisdiction over plaintiff's federal securities law claims pursuant to 15 U.S.C. 78aa and 28 U.S.C. 1331. The Court has supplemental jurisdiction over plaintiff's state law claims pursuant to 28 U.S.C. 1367. 8. Venue properly lies in this Court pursuant to 28 U.S.C. 1391(a) because a substantial part of the events and omissions giving rise to plaintiff's claims occurred in this judicial district and because defendant resides here. 9. Venue is also proper under 15 U.S. C. 78aa because the defendant transacts business in this district and because some of the securities in question in this case were offered and sold in this district. 2
IV. FACTUAL ALLEGATIONS 10. Defendant Duncan Williams is a broker dealer engaged in the securities business. Duncan Williams holds itself out as an expert in municipal bonds. 11. In April of 2000. the Capstone Improvement District of Brookwood, Alabama issued Series 2000 municipal bonds in the amount of $13 million to provide financing for a residential real estate development in Brookwood, Alabama. These bonds will be referred to below as the "Capstone bonds." 12. The Capstone bonds were issued in two sub- issues : Series 2000A bonds were tax-exempt bonds and Series 2000B bonds were taxable bonds. 13. Duncan Williams was co-underwriter of the Capstone bond issue. The other underwriter of the Capstone bond issue, Southern Financial Group, has since been barred from the securities industry because of the marketing of a fraudulent Ponzi scheme. 14. Duncan Williams sold a significant portion of the Capstone bonds that were sold to the public. On information and belief, defendant sold several million dollars worth of bonds to more than fifty investors. 15. Duncan Williams sold Capstone bonds to members of the plaintiff class in April, May. June. July, and August of 2000. and thereafter into 2001. 16. In June of 2000. Duncan Williams sold $5.000 worth of Capstone bonds to plaintiff Willodean Precise. 3
17. At the time it sold Capstone bonds to plaintiff and members of the Plaintiff Class, Duncan Williams knew and/or recklessly ignored, and failed to disclose to investors, the following material facts: (a) Duncan Williams had agreed to be co-underwriter of the Capstone bond issue only three days before the Capstone bond issue closed and became effective on April 20, 2000. Until late March of 2000, another firm, Southwest Securities Corp., was to be co -underwriter of the bonds along with Southern Financial Group. Southwest Securities backed out at the last minute. obviously because of concerns about the project. (b) Duncan Williams therefore had insufficient time to properly investigate the Capstone bond issue in its roles as underwriter and securities seller. For example, prior to the bond closing, Duncan Williams failed to talk to a number of principals in the deal, including Eugene Borgosz. who had become the most important individual in the Capstone development by the time of the Capstone bond offering. (c) Mr. Borgosz became the primary manager of the Capstone development project by default because other principals in the development group began to disagree about their respective ownership positions and other issues. (d) Mr. Borgosz had never managed a real estate development before. He is also the CEO of three other companies. He therefore lacked the time and 4
the experience to take the lead role in the management of the Capstone development.' (e) In connection with the closing of the Capstone bond offering, approximately $1.9 million, which represented 15% of the $13,000,000 raised by the offering and 28% of the money that was supposed to go toward construction costs, was paid to the development company for construction work that had allegedly been done prior to the bond offering. This fact was inconsistent with the disclosures in the Capstone Official Statement'- and was highly significant because (1) these costs were incurred at a time when the project had no underwriter, no bond trustee, and no other independent oversight of any kind, and (2) there was a dangerous conflict of interest created by the fact that the development company stood to lose almost $2,000,000 in unpaid construction costs if the bond issue did not close. (f) A significant factor on which the success of the Capstone development depended was the construction of a 4.7 mile corridor road linking the development with the nearest interstate highway. Although containing boilerplate disclaimers, the Official Statement leads investors to believe that there was a good likelihood that the corridor road would be constructed within a time frame that would allow the Capstone development to succeed. In fact, no In a letter dated February 10, 200 1 to Duncan Williams and others, Mr. Borgosz stated that "for months it has been suggested that the development hire a competent, experienced individual to coordinate and manage all aspects of the development." Clearly, Duncan Williams Imew about or recidessly ignored the absence of such a manager from the outset. In municipal bond offerings, the prospectus given to investors is known as the Official Statement. 5
meaningful cost estimates and/or plans had been made concerning the corridor road, and there was no reasonable basis for believing that sufficient funds would become available to allow the building of the road in a viable time frame. The $12,000,000 "estimated" cost set forth in the Official Statement was not based on the opinion of any expert and proved to be far too low. (g) The Capstone bonds were sold with various maturity dates as follows: four years. ten years. fifteen years. twenty-three years. and twentyfive years. Thus. investors were led to believe that they might receive the attractive Capstone bond interest rates on a long-term basis. In fact, however, there was no way that any investor would ever be able to receive interest payments for the full life of the Capstone bonds that matured in ten years or thereafter. If the aggressive sales projections on which the bond offering was based had been met, then all the real estate lots securing the Capstone bonds would have been sold within five years. Although such sales would theoretically have allowed the repayment of the principal amount of the outstanding bonds, it would not have been feasible for the trustee to earn enough interest on the money generated by the lot sales to pay the principal and interest payments that came due over the next twenty years. On the other hand, if the aggressive lot sales did not materialize, there would have been a bond default (as in fact occurred). (h) The success of the Capstone bond issue was premised on the assumption that the lots in the development could be sold for a collective amount in the range of $2.000,000. This number. which was used in the revenue 6
projections in the Official Statement. was not supported by an appraisal or other reasonable basis. (j) On May 8, 2000. prior to the sale of all but a small handful of Capstone bonds, Duncan Williams was advised that the Capstone developer was negotiating to sell approximately one-quarter of the lots in the project at prices significantly below those used in the projections in the Official Statement.3 (i) The Official Statement indicates that interest payments to bondholders would be secured by the guarantee of U.C. Properties, LLC, a member of the Capstone development company. Although the Official Statement indicates that this entity had net assets worth $4.7 million dollars. this figure was grossly inflated. Duncan Williams failed to undertake a reasonable investigation of the assets of this guarantor. 18. Duncan Williams failed to disclose the material facts and to correct the misrepresentations discussed in paragraph 17 to plaintiff and the members of the Plaintiff Class. Similarly, these facts were not disclosed in the Official Statement provided to some or all members of the Plaintiff Class. 19. Prior to selling the Capstone bonds, Duncan Williams failed to undertake the diligent, good faith investigation of the bonds and the underlying project required both of underwriters and securities sellers. 20. In the months following the issuance of the Capstone bonds in late April of 2000, the situation continued to deteriorate. The following facts, among others, This sale ultimately fell through because of the Capstone developer's failure to meet its commitments to the buyer. 7
demonstrate Duncan Williams' knowledge that the Capstone project was off-track from the beginning and only got worse: (a) The bond offering was premised on projections indicating that more than 100 lots would be sold each year. In fact, there were virtually no sales. Only six lots were sold in the first two years, some of those to insiders. (b) The relationship between Duncan Williams and Southern Financial Group became strained early on. In addition. Southern Financial Group was paid a substantial fee to provide "surveillance" over the project, but provided no surveillance whatsoever. Ultimately, Southern Financial Group was terminated. (c) As noted above, the original principals in the Capstone development company did not stay actively involved in the project after the bonds were issued. Eugene Borgosz. who had invested in the project late in the game, became the manager of the project by default, although he lacked the time or experience to fulfill this position. (d) In November of 2000. Duncan Williams became aware that certain principals in the Capstone development had given Southern Financial Group an option to purchase certain property in the corridor where a road was to be built linking the development with the nearest interstate highway. This secret option had not been disclosed to investors and compromised Southern Financial's independence as an underwriter. (e) In January of 2001, Duncan Williams learned that the cost to construct the corridor road would be $17,000.000, rather than the $12,000,000 figure contained in the Official Statement. 8
(f) At some point between April 2000 and February 2001, Duncan Williams learned that there was a dispute between Mr. Borgosz and the other owners of the Capstone development company as to their relative ownership shares. Obviously, this dispute further undermined the efficient administration of the project. (g) In February of 2001, Mr. Borgosz reported to Duncan Williams that the construction of the first phase of the development was facing a cash shortfall of $500,000 to $750,000. (h) A month later. Duncan Williams was advised that the projected cash shortfall for completing the first phase of construction was $1.2 million. (i) In June of 2001, Duncan Williams was advised that there was not enough money available to pay the $277,978 construction draw from the prior month. Mr. Borgosz asked that Duncan Williams provide $750,000 in additional funding (which of course defendant did not agree to do). (j) In June of 2001, Duncan Williams was informed that the construction company that had purchased an option to buy one-quarter of the Capstone lots was threatening to sue the Capstone development company based on its failure to meet its obligations. (k) In July of 2001, Duncan Williams was informed that the Capstone project was out of money. that it had numerous unpaid bills, and that Mr. Borgosz had made a capital call request to the other principals in the Capstone development group. This capital call was ignored. 9
21. Duncan Williams never disclosed to plaintiff and/or other Capstone bondholders the facts set forth in paragraph 20. To the contrary, during the two years following the bond issue, Duncan Williams indicated on its customers' monthly account statements that the value of the Capstone bonds was the same as the original purchase price. In view of the obviously looming bond default, such a valuation was preposterous, fraudulent, and calculated to conceal the truth from bondholders. 22. Capstone bondholders received semi-annual interest payments until August of 2002, not because the Capstone project was generating revenue, but because money to make these initial payments had been placed in escrow at the. time of the bond issue. 23. In August 2002, the bond issuer defaulted on the interest payment due bondholders. 24. In the fall of 2003. after legal claims had been asserted against Duncan Williams by a large Capstone bondholder, defendant sought to limit its legal exposure through a fraudulent offer to repurchase the Capstone bonds it had sold to its customers. In a letter sent to plaintiff Willodean Precise (and presumably other members of the Plaintiff Class) on September 30, 2003, Duncan Williams denied that it had engaged in any wrongdoing or had any legal liability with respect to Capstone. This letter further stated that as an accommodation to its clients, Duncan Williams was prepared to re-purchase their bonds for 25% of the original purchase price. Defendant represented that this price was significantly greater than the fair market value of the bonds. In order to accept defendant's offer, investors were required to sign a general release in favor of Duncan Williams. 10
25. Defendant's letter misrepresented the true facts. falsely denied culpability on Duncan Williams' part, and failed to disclose information necessary to make the statements therein not misleading, including the facts set forth above concerning Duncan Williams' recklessness and knowledge of wrongdoing, its central role in a fraudulently marketed bond offering, and its failure to disclose numerous facts that it had a duty to disclose. 26. In reliance on the representations in defendant's letter, and not knowing the true facts, plaintiff Willodean Precise sold her Capstone bonds back to Duncan Williams for 25% of her original purchase price and signed a release that defendant required of her. Other members of the Plaintiff Class presumably accept defendant's re-purchase offer as well. V. CLASS ACTION CLAIMS A. Class Allegations 27. With respect to the legal claims asserted below, plaintiff seeks to pursue this action on her own behalf and, pursuant to Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure, on behalf of all those persons and entities who purchased Capstone Bonds from Duncan Williams (the "Plaintiff Class"). 28. Excluded from the Plaintiff Class are the defendant; any subsidiary, parent, or other affiliate of the defendant; the officers. directors, and the employees of the defendant; and the legal representatives, heirs, successors, or assigns of any such excluded party. 29. Also excluded from the Plaintiff Class are any persons or entities who
owned any interest in the Capstone development prior to April 20, 2000. 30. The members of the Plaintiff Class are so numerous that joinder of all members is impracticable. On information and belief, plaintiff alleges that there are more than 50 members of the Plaintiff Class. 31. Plaintiff's claims are typical of the claims of the other members of the Plaintiff Class and arise from a common nucleus of facts. Indeed, the conduct that gives rise to the class claims was identical with respect to each member of the Plaintiff Class. 32. Plaintiff is willing and able to protect the interests of the members of the Plaintiff Class fairly and adequately and has retained counsel competent and experienced in class litigation. 33. A class action is superior to other available methods for the fair and efficient adjudication of this controversy. In addition, because it is likely that the damages suffered by many individual Plaintiff Class members are small, the expense and burden of individual litigation would make it extremely difficult for some Plaintiff Class members to individually seek redress for the wrongful conduct alleged herein. 34. Common questions of law and fact exist as to all members of the Plaintiff Class and predominate over any questions solely affecting individual members of the Plaintiff Class. Among the questions of law and fact common to the Plaintiff Class are: (a) Whether defendant recklessly and/or negligently performed its duties as underwriter of the Capstone bond issue? (b) Whether defendant recklessly and/or negligently performed its 12
duties as seller of the Capstone bond issue? (c) Whether defendant failed to disclose material information to plaintiff and the Plaintiff Class? (d) Whether defendant breached its fiduciary duty to plaintiff and the Plaintiff Class? (e) Whether defendant engaged in a course of conduct which operated as a fraud or deceit on plaintiff and the Plaintiff Class? 35. Plaintiff knows of no difficulty that will be encountered in the management of this litigation that would preclude its maintenance as a class action. In this regard, it should be noted that the damages sustained by each member of the Plaintiff Class can be ascertained through mathematical calculations using undisputed documents in the possession of defendant and/or the Capstone bond trustee. 36. The names and addresses of the members of the Plaintiff Class are in the possession of defendant and/or the Capstone bond trustee. Notice can be provided to class members via first class mail using techniques and a form of notice similar to those customarily used in class actions. B. Count One - Resci ssion of Fraudulent Bond Repurchase 37. Plaintiff incorporates paragraphs 1-36 as if fully set forth herein. 38. In repurchasing Capstone bonds from Willodean Precise and any other members of the Plaintiff Class, Duncan Williams willfully and/or recklessly misrepresented and failed to disclose material facts in violation of (a) 10(b) of the Securities and Exchange Act of 1934. 15 U.S.C. 78j. and Rule lob-5(a) of the SEC 13
Regulations promulgated under that Act. (b) the common law of fraud. and (c) defendant's fiduciary duties. 39. Plaintiff relied on the assertions in defendant's letter of September 30, 2003 and was unaware of the true facts. 40. As a result of defendant ' s misconduct, plaintiff and all other members of the Plaintiff Class who accepted defendant's re-purchase offer have been damaged. 41. Plaintiff and any member of the Plaintiff Class who re-sold their bonds to defendant are entitled to rescind their sales. 42. Plaintiff and any member of the Plaintiff Class who re-sold their bonds to defendant are also entitled to recover punitive damages as a result of defendant's fraudulent conduct. C. Count Two - Federal Securities Fraud 43. Plaintiff incorporates paragraphs 1-42 as if fully set forth herein. 44. In connection with the offer and sale of securities, and using instrumentalities of interstate commerce. defendant and its agents, acting with respect to plaintiff and the members of the Plaintiff Class, intentionally and/or recklessly employed devices, schemes and artifices to defraud. failed to disclose material information, and engaged in acts, practices, and a course of business which operated as a fraud or deceit on plaintiff in violation of 10(b) of the Securities and Exchange Act of 1934, 15 U.S. C. 78j, and Rule lob-5(a ) of the SEC Regulations promulgated under that Act. 45. Plaintiff was unaware of defendants' misconduct and of the true facts. 14
46. Plaintiff and the other members of the Plaintiff Class have been damaged as a result of defendant's misconduct. 47. Defendant is liable for the 10(b) and Rule 10b-5 violations of its agents and employees under the doctrine of respondeat superior. Defendant is a controlling person of it agents and employees and is therefore also liable for the 10(b) and Rule 10b-5 violations of its agents and employees pursuant to 15 U.S.C. 78t. 48. Defendant is therefore liable to plaintiff and the other members of the Plaintiff Class for such damages as may be determined at trial, plus prejudgment interest. D. Count Three - Te nnessee Securities Act Violation 49. Plaintiff incorporates paragraphs 1-42 as if fully set forth herein. 50. In connection with the offer and sale of securities, defendant and its agents, acting with respect to plaintiff and the members of the Plaintiff Class, intentionally and/or recklessly employed devices, schemes and artifices to defraud, failed to disclose material information, and engaged in acts, practices, and a course of business which operated as a fraud or deceit on plaintiff in violation of the Tennessee Securities Act, T.C.A. 48-2-121 and actionable under T.C.A. 48-2-122. 51. Plaintiff was unaware of defendants' misconduct and of the true facts. 52. Plaintiff and the other members of the Plaintiff Class have been damaged as a result of defendant's misconduct. 53. Defendant is liable for the Tennessee Securities Act violations of its agents and employees under the doctrine of respondeat superior and under 48-2- 15
122(g). 54. Defendant is therefore liable to plaintiff and the other members of the Plaintiff Class for such damages as may be determined at trial, plus pre-judgment interest, and attorney ' s fees as provided in T.C.A. 48-2-122.. E. Count Four - Common Law Fraud 55. Plaintiff incorporates paragraphs 1-42 as if fully set forth herein. 56. In connection with the offer and sale of Capstone bonds to plaintiff and the Plaintiff Class, defendant and its agents intentionally and/or recklessly employed devices, schemes and artifices to defraud, failed to disclose material information, and engaged in acts, practices, and a course of business which operated as a fraud or deceit on plaintiff. 57 Plaintiff was unaware of defendants' misconduct and of the true facts. 58 Plaintiff and the other members of the Plaintiff Class have been damaged as a result of defendant's misconduct. 59 Defendant is therefore liable to plaintiff and the Plaintiff Class for such compensatory damages as may be determined at trial. plus prejudgment interest. 60. As a result of its willful misconduct and its conscious disregard of the rights of plaintiff and the Plaintiff Class. defendant is also liable for punitive damages in an amount to be determined at trial. F. Count Five - F iduciarv Breach 61. Plaintiff incorporates paragraphs 1-42 as if fully set forth herein. 16
62. In connection with the offer and sale of Capstone bonds to plaintiff and the Plaintiff Class, defendant violated fiduciary duties owed to plaintiff and the Plaintiff Class. 63. Plaintiff was unaware of defendant's misconduct and of the true facts. 64. Plaintiff and the other members of the Plaintiff Class have been damaged as a result of defendant's misconduct. 65. Defendant is therefore liable to plaintiff and the Plaintiff Class for such compensatory damages as may be determined by the Court, plus prejudgment interest. 66. As a result of its willful misconduct and its conscious disregard of the rights of plaintiff and the Plaintiff Class, defendant is also liable for punitive damages in an amount to be determined at trial. G. Count Six - Neg ligence 67. Plaintiff incorporate paragraphs 1-42 as if fully set forth herein. 68. In connection with the offer and sale of Capstone bonds to plaintiff and the Plaintiff Class, defendant acted negligently and failed to comply with the requisite standard of professional care owed to plaintiff and the Plaintiff Class. 69. Plaintiff and the other members of the Plaintiff Class have been damaged as a result of defendant's negligence. 70. Defendant is therefore liable to plaintiff and the Plaintiff Class for such compensatory damages as may be determined at trial, plus prejudgment interest. 17
PRAYER FOR RELIEF WHEREFORE, plaintiff, on behalf of themselves and all other members of the Plaintiff Class, pray for judgment as follows: (a) Declaring this action to be a proper plaintiff class action maintainable pursuant to Rule 23 of the Federal Rules of Court and declaring plaintiff to be proper representatives of the Plaintiff Class; (b) Award judgment in favor of plaintiff and the other members of the Plaintiff Class and against the defendant for damages in an amount to be determined at trial, including compensation for all losses plaintiff have incurred and will incur, a disgorgement and restitution of all fees and charges with which defendant has been unjustly enriched, prejudgment interest, attorney's fees and punitive damages; jury; and (c) Afford plaintiff and the other members of the Plaintiff Class a trial by (d) Provide such other relief as the Court deems to be just and proper. Respectfully submitted, lh4 - H. ill Falls Jr., # 87 John B. Veach III, #008994 Falls & Veach 1143 Sewanee Rd. Nashville. TN 37220 (615) 242-1800 18
CERTIFICATION OF LEAD PLAINTIFF 1. Willodean P. Precise, hereby state as follows: 1. I am a resident of Memphis, Tennessee. 2. I have reviewed the complaint in this case and agree to its filing. 3. I did not purchase the securities that are the subject of the complaint at the direction of plaintiff's counsel or in order to participate in any private action under the securities laws. 4. I am willing to serve as a representative party on behalf of a class, including providing testimony at deposition and trial. if necessary. 5. I have not filed a class or representative action before, nor have I ever attempted to serve as a representative party on behalf of a class. 6. I purchased $5,000 worth of Capstone bonds in June of 2000. 7. I understand that I may not receive or accept any payment for serving as a representative party beyond my pro rata share of any recovery in this case, unless ordered or approved by the Court. 9. I certify under penalty of perjury that the foregoing is true and correct. Executed this tday of May. 2004. Willodean P. Precise