case: 8:07-cv-00254- c- 3 document : 1 date filed: 06/29...

Case : 8-07-cv-00254-LSC-FG3 Document : 1 Date Filed : 06/29/2007 of 29

IN THE UNITED STATES DISTRICT COURTFOR THE DISTRICT OF NEBRASKA

Willard F. Brehm, Trustee of the Willard F.Brehm Trust, and Gladys M. Brehm,Trustee of the Gladys M. Brehm Trust,Alvena T. Frost, Alvena T. Frost, Trusteeof the Alvena T. Frost Trust, Arlin Stutheit,Richard Hauberg, Elaine Hauberg, andGary Rademacher and PamelaRademacher, on behalf of themselves andall others similarly situated,

Case No.

(CLASS ACTION)

Plaintiffs,

v.

Capital Growth Financial, Inc., RebeccaEngle, Brian Schuster, Engle & SchusterFinancial, Inc., American CapitalCorporation, Royal Palm Capital Group,Inc., Capital Growth Equity Fund I, LLC,Alan Jacobs, Michael Jacobs, Gerald,Parker, John Boyce, GeraldineMagaldinck, Patrick Harrington, PeterKirschner, and Stark Winter Schenkein &Co., LLP,

Defendants.

COMPLAINTAND

DEMAND FOR JURY TRIAL ANDREQUEST FOR PLACE OF TRIAL

Plaintiffs allege and state the following for their claims for relief against

Defendants.

INTRODUCTION

1. This is a federal securities class action lawsuit for damages brought by

lead Plaintiffs Willard F. Brehm, as Trustee of the Willard F. Brehm Revocable Trust and

Gladys M. Brehm, as Trustee of the Gladys M. Brehm Revocable Trust, Alvena T. Frost,

Case : 8:07-cv-00254- C- 3 Document : 1 Date Filed : 06/29/2007 of 29

Alvena T. Frost, as trustee of the Alvena T. Frost Trust, Arlin Stutheit, Richard Hauberg,

Elaine Hauberg, Gary Rademacher and Pamela Rademacher (collectively referred to as

"Plaintiffs") on behalf of themselves and all other members of the Class, defined as

those who purchased or otherwise acquired securities of the American Capital

Corporation ("ACC") and Royal Palm Capital Group, Inc. ("Royal Palm") during

September 2002 through June 2006, inclusive (the "Class Period"), seeking to pursue

remedies under the provisions of Section 10(b) of the Securities and Exchange Act of

1934, as amended, 15 U.S.C. § 78aa (the "Exchange Act") and Rule 10b-5 promulgated

under the Exchange Act, 17 C.F.R. § 240.1 Ob-5.

2. Plaintiffs allege that during the Class Period, Defendants made materially

false and misleading statements and fraudulently concealed facts concerning ACC and

Royal Palm. Plaintiffs further allege that Defendants made the materially false and

misleading statements to conceal from ACC and Royal Palm investors the true financial

prospects , financial dealings and profitability of ACC and Royal Palm.

3. Defendants were aware of, but failed to disclose, the following material

undisclosed adverse facts to Plaintiffs:

a. In order to secure a business relationship to facilitate the raising of

funds for its business ventures , ACC in September 2002 made an equity

investment in Capital Growth Financial, Ltd ("Capital Growth"), a NASD broker-

dealer headquartered in Florida, of $250,000 in cash to entice Capital Growth to

distribute and sell its offerings to investors through its registered representatives.

b. On August 2, 2002, CGF Securities, LLC gave ACC authority to

issue warrants to Rebecca Engle ("Engle") and Brian Schuster ("Schuster") for

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the purchase of ACC' s Class C Common Stock in an amount equal to .15 shares

of Class C Common Stock for each dollar of Class B Common Stock and Series

A 10% Subordinated Debentures sold by Engle or Schuster.

c. Engle and Schuster targeted people for the sale of ACC and Royal

Palm securities who they believed to be elderly, naive and inexperienced in

investments.

d. Prior to selling ACC, Engle and Schuster had little if any experience

or expertise in selling private placements.

e. Engle and Schuster were unqualified to sell private placements.

f. Defendants did not disclose, at relevant times, the nature and

extent of Engle and Schuster ownership of ACC and Royal Palm.

g. As stated in ACC private placement memorandum offering

documents, ACC entered into a consulting agreement with International

Monetary Group ("IMG"), in Jupiter, Florida, for a monthly payment of $15,000

(over $200,000 was paid to IMG under this contract through 2004). In addition,

IMG was paid $675,000 in cash from the proceeds of the offering for work done

in connection with the offering. IMG was controlled and operated by the

Defendants John Boyce ("Boyce"), Geraldine Magalnick ("Magalnick") and

Patrick Harrington ("Harrington"), who were the same management principals

who were then operating ACC. It is unclear, and must be discerned through

discovery , what, if any , consulting services were provided to ACC by IMG under

the consulting contract as separate and distinct from the responsibilities that

Defendants Magalnick and Harrington held as officers of ACC.

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h. ACC paid IMG an additional $ 150,000 for the "restructuring" of

Sunshine Industries, Inc. ("Sunshine")

Disclosed was that on March 21, 2003, ACC entered into a loan

agreement whereby it loaned AEI Holding Corporation ("AEI"), $1.3 million in

cash, and on the same day entered into a placement agent agreement with

Advanced Equities , Inc., one of AEI' s affiliates , for the sale of ACC securities.

Undisclosed was that AEI subsequently repaid the loan directly to the senior

manager of ACC, instead of to ACC. It is unclear that any of the $1.3 million

repayment was ever returned to ACC.

j. On March 11, 2003, ACC invested $250,000 for an ownership

position in JSM Capital Holding Corporation ("JSM"), a New York broker-dealer.

The 2004 investment in JSM remained on the books and records of ACC at its

full value, although its value had become impaired, and should have been written

down.

k. Disclosed was that on or about March 11 , 2005, the lender for

Sunshine took control over assets of Sunshine. However, ACC did not disclose

that the lender had loaned Sunshine $2.6 million for inventory and accounts

receivable financing, and had serious concerns that the funds were not being

used in accordance with the terms and conditions of the financing agreement.

These concerns were a material contributing factor to the bank's decision to

seize Sunshine' s assets.

At the time of the acquisition of ACC by Royal Palm, Royal Palm's

previous management approved, by Board of Directors' resolution, separation

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payments for Defendants Boyce, Magalnick, and Harrington. Defendants Boyce,

Magalnick, and Harrington promptly received a lump sum payment of $150,000

in cash , for a total severance payment to ACC management of $450,000.

M. At the time of the December 2004 acquisition of ACC by Royal

Palm, Royal Palm was obligated to offer a "fair value" price per share purchase

of shares of ACC from ACC shareholders who did not approve the transaction

and the conversion of their shares to those of Royal Palm (that is, "dissenter's

rights", "appraisal rights"). The prior management of Royal Palm failed to provide

the offer.

n. In early 2006, Engle and Schuster were advised to cease selling

Royal Palm securities. However, Engle continued to sell Royal Palm securities

through June 2006.

4. The allegations contained in paragraphs 3(a)-3(n) are collectively referred

to as the " Material Undisclosed Adverse Facts."

PARTIES

5. Willard F. Brehm ("Willard") is an 89 year old man who resides in Brock,

Nebraska. Willard F. Brehm is Trustee of the Willard F. Brehm Revocable Trust.

6. Gladys M. Brehm ("Gladys") is an 86 year old woman who resides in

Brock, Nebraska . Gladys M. Brehm is Trustee of the Gladys M. Brehm Revocable

Trust.

7. Alvena T. Frost ("Frost') is a 90 year old woman who resides in Phelan,

California. Alvena T. Frost is Trustee of the Alvena T. Frost Revocable Trust.

8. Arlin Stutheit ("Stutheit") is a 62 year old man who resides in Nebraska

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City, Nebraska.

9. Richard Hauberg ("Richard") is a 71 year old man who resides in

Talmage, Nebraska.

10. Elaine Hauberg ("Elaine") is a 65 year old woman who resides in Talmage,

Nebraska. Richard Hauberg and Elaine Hauberg are collectively referred to as the

"Haubergs".

11. Gary Rademacher ("Gary") is a 60 year old man who resides in Nebraska

City, Nebraska.

12. Pamela Rademacher ("Pamela") is a 58 year old woman who resides in

Nebraska City, Nebraska. Gary and Pamela Rademacher are collectively referred to as

the "Rademachers".

13. Engle is an individual who resides in Nebraska City, Nebraska. Upon

information and belief, Defendant Engle is neither a minor, an incompetent person nor a

person in the military service as to be entitled to the benefits of the Servicemembers

Civil Relief Act of 2003 (50 U.S.C. Appx. § 501 et seq.). Engle transacted business in

Nebraska.

14. Schuster is an individual who resides in Syracuse, Nebraska. Upon

information and belief, Defendant Schuster is neither a minor, an incompetent person

nor a person in the military service as to be entitled to the benefits of the

Servicemembers Civil Relief Act of 2003 (50 U.S.C. Appx. § 501 et seq.). Schuster

transacted business in Nebraska.

15. Engle and Schuster Financial, Inc. ("E&S") is a Nebraska Corporation that

was administratively dissolved on April 16, 2006. At all relevant times, Engle was the

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Case: 8:07-cv-00254- C- 3 Document : 1 Date Filed : 06/29/2007 of 29

President of E&S and Schuster was the Vice-President of E&S.

16. Capital Growth is a Florida corporation, with its principal place of business

in Boca Raton , Florida. Capital Growth is a broker/dealer that is registered with the

NASD. Capital Growth was previously known as CGF Securities, LLC. The name was

changed from CGF Securities, LLC to Capital Growth Financial Ltd. on or about June

25, 2004 and for convenience, will be referred to as "Capital Growth." Capital Growth

transacted business in Nebraska.

17. From September 2002 to May 2006, Engle and Schuster were employed

by E&S and Capital Growth as stock brokers and investment advisors, in Nebraska.

18. ACC is a Delaware Corporation with its principal place of business in

Jupiter, Florida. ACC transacted business in Nebraska.

19. Royal Palm is a Florida Corporation with its principal place of business in

Boca Raton, Florida. Royal Palm transacted business in Nebraska.

20. Capital Growth Equity Fund I, LLC ("Capital Growth Fund"), is a Florida

Corporation with its principal place of business in Boca Raton , Florida. Capital Growth

Fund transacted business in Nebraska.

21. Alan Jacobs is an individual who resides in Palm Beach County, Florida.

At all material times, Alan Jacobs was the Chairman and Chief Executive Officer of

Capital Growth. Upon information and belief, Defendant Alan Jacobs is neither a minor,

an incompetent person nor a person in the military service as to be entitled to the

benefits of the Servicemembers Civil Relief Act of 2003 (50 U.S.C. Appx. § 501 et seq.).

Alan Jacobs transacted business in Nebraska and was physically present in Nebraska

during the Class Period.

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22. Michael Jacobs is an individual who resides in Palm Beach County,

Florida. At all material times, Michael Jacobs was the President of Capital Growth.

Upon information and belief, Defendant Michael Jacobs is neither a minor, an

incompetent person nor a person in the military service as to be entitled to the benefits

of the Servicemembers Civil Relief Act of 2003 (50 U.S.C. Appx. § 501 et seq.).

Michael Jacobs transacted business in Nebraska and was physically present in

Nebraska during the Class Period.

23. Gerald Parker ("Parker") is an individual who resides in Palm Beach

County, Florida. At all material times, Parker was the Chairman of Royal Palm. Upon

information and belief, Defendant Parker is neither a minor, an incompetent person nor

a person in the military service as to be entitled to the benefits of the Servicemembers

Civil Relief Act of 2003 (50 U.S.C. Appx. § 501 et seq.). Parker transacted business in

Nebraska and was physically present in Nebraska during the Class Period.

24. John Boyce (" Boyce") is an individual who resides in Palm Beach County,

Florida . At all material times , Boyce was the President and a director of ACC. Upon

information and belief, Defendant Boyce is neither a minor, an incompetent person nor

a person in the military service as to be entitled to the benefits of the Servicemembers

Civil Relief Act of 2003 (50 U.S.C. Appx. § 501 et seq.). Upon information and belief,

Boyce maintained a relation with the state of Nebraska to afford a basis for the exercise

of personal jurisdiction consistent with the Constitution of the United States.

25. Geraldine Magalnick ("Magalnick") is an individual who resides in Palm

Beach County, Florida. At all material times, Magalnick was an officer and director of

ACC. Upon information and belief , Defendant Magalnick is neither a minor, an

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of the Servicemembers Civil Relief Act of 2003 (50 U.S.C. Appx. § 501 et seq.). Upon

information and belief, Magalnick maintained a relation with the state of Nebraska to

afford a basis for the exercise of personal jurisdiction consistent with the Constitution of

the United States.

26. Patrick Harrington ("Harrington") is an individual who resides in Palm

Beach County, Florida. At all material times, Harrington was an officer and director of

ACC. Upon information and belief , Defendant Harrington is neither a minor, an


of the Servicemembers Civil Relief Act of 2003 (50 U.S.C. Appx. § 501 et seq.). Upon

information and belief, Harrington maintained a relation with the state of Nebraska to


the United States.

27. Peter Kirschner ("Kirschner") is an individual who resides in Palm Beach

County, Florida . Upon information and belief , Defendant Kirschner is neither a minor,

an incompetent person nor a person in the military service as to be entitled to the

benefits of the Servicemembers Civil Relief Act of 2003 (50 U.S.C. Appx. § 501 et seq.).

At all material times , Kirchner was an officer and director of ACC. At all material times,

Kirschner was also an officer and director of Royal Palm subsidiary Media Magic , Inc., a

successor company to GLUV, Corp. (" Media Magic"). From February 2, 2004 to

March 15, 2006, Kirschner was also an officer and director of Royal Palm. Upon

information and belief, Kirschner maintained a relation with the state of Nebraska to


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Case: 8:07-cv-00254-LSC- 3 Document : 1 Date Filed: 06/29/2007 of 29

the United States.

28. Media Magic is a 48.96% subsidiary of Royal Palm.

29. Stark Winter Schenkein & Co., LLP (" Stark Winter") is a Colorado limited

liability partnership. It is a firm of certified public accountants with its main office located

in Denver, Colorado and a satellite office in Bradenton, Florida. Upon information and

belief, Stark Winter maintained a relation with the state of Nebraska to afford a basis for

the exercise of personal jurisdiction consistent with the Constitution of the United

States.

30. Engle, Schuster, Alan Jacobs, Michael Jacobs, Parker, Boyce, Magalnick,

Harrington, and Kirchner are referred to collectively as the "Individual Defendants."

31. The Individual Defendants , and each of them, because of their respective

positions with ACC, Royal Palm and/or Capital Growth, had access to the Material

Undisclosed Adverse Facts about ACC and Royal Palm's business, operations,

products, operational trends, financial statements, markets and present and future

business prospects via access to internal corporate documents (including ACC and

Royal Palm's operating plans, budgets, and forecasts and reports of actual operations

compared thereto), conversations and connections with other corporate officers and

employees, attendance at management and Board of Directors meetings and

committees thereof and via reports and other information provided to them in

connection therewith.

32. As officers, directors and/or control persons of ACC and/or Royal Palm,

the Individual Defendants had a fiduciary duty to ACC and/or Royal Palm and their

shareholders, and had a duty to disseminate timely, accurate and truthful information

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with respect to ACC and Royal Palm's business , financial results and prospects and to

timely disclose any material facts that would otherwise result in materially misleading

and untrue impressions as to the companies' financial status so that the purchase and

retention of ACC stock, ACC debentures, Royal Palm stock and Royal Palm Promissory

Notes would be based upon truthful and accurate information. The misrepresentations

and omissions alleged herein violated these specific requirements and obligations.

33. The Individual Defendants , and each of them, participated in the drafting,

preparation and/or approval of the various public and shareholder and investor reports

and other communications complained of herein and were aware of, or recklessly

disregarded the misstatements contained therein and omissions therefrom, and were

aware of their materially false and misleading nature. Each of the Individual Defendants

knew or recklessly disregarded the Material Undisclosed Adverse Facts that seriously

undermined Defendants ' positive representations concerning ACC and Royal Palm and

rendered those positive statements materially false and/or misleading.

34. Because of their positions of power as controlling shareholders, and

authority as officers and/or directors of ACC and/or Royal Palm, the Individual

Defendants, and each of them, were able to, and did control the content of ACC and

Royal Palm's communications with their shareholders and debenture holders

throughout the Class Period . Based upon their positions within ACC and/or Royal

Palm, Plaintiffs believe that the Individual Defendants, and each of them, were provided

with the facts that are alleged to be materially false, misleading or omitted prior to or

shortly after the pertinent events and had the ability to correct the facts or properly

disclose them. Accordingly, the Individual Defendants, and each of them, are

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Case: 8:07-cv-00254-LSC- 3 Document : 1 Date Filed : 06/29/2007 of 29

responsible as primary violators under Rule 10b-5 for failing to disclose materially

adverse facts and for making materially false and misleading statements or secondarily

responsible for such statements under Section 20(a) as control persons of ACC.

JURISDICTION

35. This Court has jurisdiction pursuant to 28 U.S.C. §§ 1331 and 15 U.S.C.

§ 78aa.

VENUE

36. Venue is proper under 28 U.S.C. §1391(b) in that some of the Defendants

reside or have their principal places of business in Nebraska and in this judicial district.

A substantial part of the events or omissions giving rise to Plaintiffs' claims occurred in

Nebraska. The determination as to the suitability of the investment, the sale of the

investments and the payment for the investments all occurred in Nebraska.

CLASS ACTION ALLEGATIONS

37. Plaintiffs bring this action as a class action pursuant to Federal Rules of

Civil Procedure 23(a) and 23(b)(3) on behalf of all those who purchased or otherwise

acquired the securities of ACC and Royal Palm during the Class Period , and members

of their immediate families and their legal representatives, heirs, successors or assigns.

38. Members of the Class are so numerous that joinder of all members is

impracticable . As of May 2 , 2007, more than 165 people purchased stock , debentures,

and promissory notes in ACC and Royal Palm for a total of more than $20 million.

39. Plaintiffs' claims are typical of the claims of all other members of the Class

as all other members of the Class are similarly affected by Defendants' wrongful

conduct in violation of federal securities laws complained of herein.

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40. Common questions of law and fact exist to all members of the Class and

predominate over any questions solely affecting individual members of the Class.

Among the questions of law and fact common to the Class are as follows:

a. Whether Defendants Engle , Schuster, E&S, and Capital Growth

failed to conduct a reasonable-basis suitability review before selling

ACC stock, ACC debentures, Royal Palm stock and Royal Palm

promissory notes to Plaintiffs and other members of the Class;

b. Whether Defendants' failure to disclose the Material Undisclosed

Adverse Facts created a material misimpression , which induced

Plaintiffs to purchase ACC stock, ACC debentures, Royal Palm

stock and Royal Palm promissory notes;

c. Whether Defendants Engle, Schuster and E&S were competent to

sell private placements;

d. Whether the conduct of any of the defendants violated the federal

securities laws as alleged herein;

e. Whether members of the Class sustained damages as a result of

Defendants' conduct; and

f. The proper measure of damages sustained by the Class.

41. A class action is superior to all other available methods for fair and

efficient adjudication of this controversy since joinder of all members is impracticable.

Damages suffered by some of the individual Class members may be relatively small,

and the expense and burden of individual litigation for those Class members make it

virtually impossible for all members of the Class to individually redress the wrongs done

13


to them. No difficulty in the management of this action as a class action is anticipated.

SUBSTANTIVE ALLEGATIONS

42. In November 2001, ACC incorporated in Delaware.

43. In September of 2002, ACC made an equity investment of $250,000.00

cash in Capital Growth, for the alleged purpose of enticing Capital Growth to distribute

and sell its offerings to investors through its registered representatives . The equity

investment in Capital Growth represents a 9.9% interest in Capital Growth.

44. Plaintiffs Gladys and Willard are retired, and were long-time customers of

E&S and relied on the recommendations and advice of Engle and Schuster in making

their investment decisions.

45. In September 2002, E&S became affiliated with CGF Securities, LLC,

which is now known as Capital Growth.

46. To induce investment in ACC, Engle and Schuster told Gladys and Willard

that ACC was a safe investment, that they would "make a lot of money" and that they

would not lose their investments in ACC and Royal Palm. Gladys and Willard

interpreted these statements to mean that the investment would increase in value and

provide a consistent return on their investment. When concerns were raised regarding

such investments, said Defendants assured Gladys and Willard that ACC was a "mini

Berkshire Hathaway" and that they would double their money. These statements were

untrue because Gladys and Willard have now suffered a total loss of their investment.

47. Engle and Schuster told Gladys and Willard that they would receive

income in the amount of 10% per annum on any investment in ACC debentures. This

statement was untrue because Gladys and Willard have not received income in the

14


amount of 10% per year during each year of their investment in the ACC debentures.

48. Plaintiffs relied on the representations of Engle and Schuster in

purchasing and retaining the ACC stock and debentures as trustees of their revocable

trusts.

49. Gladys and Willard, as trustees of their revocable trusts, purchased

securities in ACC as follows:

Date Purchaser Type of investment Value

11-20-02 Willard 100,000 shares ACC stock $200,000

11-20-02 Gladys 75,000 shares ACC stock $150,000

02-18-03 Willard ACC Debentures $200,000

05-29-03 Gladys ACC Debentures $135,000

08-01-03 Willard 5,450 shares ACC stock $10,900

08-01-03 Gladys 2,350 shares ACC stock $4,700

$ 700,600

50. On December 27, 2004, Frost bought a 10% Royal Palm Promissory Note

in the amount of $600,000 and on March 6, 2006, she bought a 12 month mini-equity

kicker in Royal Palm for 12% at $200,000. Additionally, upon information and belief,

Frost also invested $500,000 in Capital Growth Fund.

51. Engle told Frost that she would not lose any money with her investments,

would make a lot of money on such investments and as such should spend her money.

These statements were untrue because Frost has suffered a total lost of her investment.

52. Stutheit purchased securities in ACC as follows:

Date Type of Investment

11-20-02 25, 000 shares ACC stock

3-17-03 25 ,000 shares ACC stock

Value

$50,000

50,000

$100,000

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53. Upon information and belief, on or about December 23, 2004, the

Haubergs purchased an unsecured Promissory Note payable by Royal Palm in the

amount of $15,000 ("Promissory Note"). Pursuant to the terms of the Promissory Note,

Royal Palm was to pay the Haubergs interest in the amount of 10% per annum. The

Haubergs based their belief upon a document prepared by Schuster. The Haubergs

have never received any documentation of their purchase other than the single

document prepared by Schuster.

54. The Haubergs expressed concern regarding the ratio of stock in the

proposed investment and questioned whether a money market account would be a

better investment. Schuster told the Haubergs that their investment was safe and that

they had a guaranteed return from financially solid companies. These statement were

untrue because the Haubergs have now suffered a total loss of their investment.

55. On or about February 3, 2003 , Gary purchased 1,000 shares of ACC in

the amount of $200,000 which shares were to be deposited in his IRA Account, and on

March 11 , 2003, Gary purchased Series A 10% subordinated debentures of ACC in the

amount of $263,000, which were to be deposited into his IRA Account. On or about

March 5, 2003, Pamela purchased units in Capital Growth Fund in the amount of

$19,000. To the best of their recollection, the Rademachers have never received any

documentation of their purchases other than letters and/or subscription agreements.

56. Engle told the Rademachers that ACC and the Capital Growth Fund were

"mini Berkshire Hathaways" and that their investments would be safe, and they would

not lose any money. Engle explained that such companies had assets like real estate,

and thus were financially solid. The Rademachers advised Schuster that Gary wanted

16


to cash out of such investments at age 591/ and retire from his medical practice at age

65. Engle assured them that the investments were completely safe and was suitable for

that purpose. These statements were untrue because the Rademachers have now

suffered a complete loss of their investments.

57. The purchases referenced in paragraphs 49, 50, 52, 53 and 55 above are

collectively referred to as the "Securities."

58. Capital Growth was the broker/dealer that processed the purchase of the

Securities . Capital Growth did not disclose any affiliation with ACC to Plaintiffs or

explain to Plaintiffs that conflict of interest existed.

59. In January - June 2003, ACC issued $6,120,900 in debentures and paid

$673,300 to Capital Growth in commissions and fees for the debentures.

60. Upon information and belief, Engle, Schuster and E&S received

commissions and fees for the sale of the Securities to Plaintiffs.

61. In March 2003, ACC loaned Advanced Equities, Inc. ("AEI") $1.3 million at

11 % interest payable over 3 years. AEI was an agent hired to sell Class B common

stock. AEI received 10% commission of the price of the shares sold.

62. On August 24, 2003, ACC disclosed to the shareholders that Engle

became a shareholder of ACC. However , Engle , Schuster , E&S or Capital Growth had

not disclosed this fact to Plaintiffs, nor did any of them disclose the conflict of interest

that existed as a result of the relationship.

63. On April 6, 2004, ACC finally disclosed ownership in Capital Growth to its

shareholders. However, Defendants Capital Growth, E&S, Engle, and Schuster never

disclosed this relationship to Plaintiffs, nor did they disclose the conflict of interest that

17


existed as a result of the relationship.

64. On May 14 , 2004, AEI repaid its notes to ACC . However, AEI repaid the

loan directly to the senior manager of ACC, instead of to ACC . It is unclear that any of

the $1.3 million repayment was ever returned to ACC.

65. On December 1, 2004, ACC issued a dividend in the form of SSI-PM

Holdings , Inc. ("SSI-PM") stock . An ACC subsidiary, SSI-PM is a Delaware corporation

that was formed for the purpose of acquiring Sunshine. As a result, Willard received

14,415 shares of SSI-PM stock; the Willard Trust received 785 shares of SSI-PM stock;

Gladys received 338 shares of SSI-PM stock, and the Gladys Trust received 10,811

shares of SSI-PM stock. In 2005, Sunshine filed for bankruptcy protection and ceased

all operations . It is unlikely that ACC will recover any assets.

66. On December 16, 2004, ACC merged with Royal Palm.

67. On February 22, 2005, Royal Palm purchased all the assets of ACC stock,

in exchange for the same number of Royal Palm shares. In addition, all stock in SSI-

PM was converted to shares of Royal Palm. Royal Palm did not offer its shareholders

the right to have their shares appraised in accordance with Florida law.

68. In 2004, Engle met with Frost at her home and told her that the investment

in Royal Palm was safe and that she would make a lot of money. This representation

was untrue because Engle knew that investment in Royal Palm was exceedingly risky.

69. On or about January 17, 2005, Engle became an officer and director of

Royal Palm. Defendants Capital Growth, E&S, Engle, and Schuster never disclosed

this relationship to Plaintiffs, nor did they disclose the conflict of interest that existed as

a result of this relationship.

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70. On or about January 11 , 2006 , Schuster became an officer and director of

ACC.

71. On or about March 15, 2006, Schuster became the Chairman and Chief

Executive Officer of Royal Palm.

72. On or about May 6, 2006, E&S ceased its affiliation with Capital Growth.

73. On or about June 30, 2006, Royal Palm wrote off its $11,007,900

investment in ACC, which represents a total loss.

74. On or about September 25, 2006 , final judgments were entered in the

case of SEC v. Media Magic, Inc. and Peter D. Kirschner, Case No. 06-1403, filed in the

United States District Court District of Columbia. The final judgments enjoin Media

Magic and Defendant Kirschner from engaging in further violations of the Securities

Exchange Act and order them to pay civil penalties for such violations that occurred in

May 2005.

75. In connection with the sale of Royal Palm's assets to PrimEdge, Royal

Palm issued a "Disclosure Statement," which was dated November 1, 2006.

76. Plaintiffs did not discover the Material Undisclosed Adverse Facts until or

after Royal Palm disclosed them in its "Disclosure Statement" dated November 1, 2006.

Plaintiffs could not have discovered the Material Undisclosed Adverse Facts, with the

exercise of due diligence, before November 1, 2006.

77. When the assets of Royal Palm were sold to PrimEdge , Plaintiffs ' shares

and/or Promissory Notes in Royal Palm were converted to equal shares of PrimEdge

stock. For every dollar of ACC promissory notes, ACC debentures or Royal Palm

promissory notes, the holder (who exercised the conversion rights) received $1 worth of

19


PrimEdge Series B Preferred Stock. Within one year of the sale (November 1, 2006),

PrimEdge must file such documents as to cure its delinquent reporting with the

Securities Exchange Commission ("SEC"), and file such documents to permit it to issue

common stock. Then, each share of PrimEdge Series B Preferred Stock shall be

converted to 20 shares of PrimEdge common stock.

78. To date, Plaintiffs have not received any PrimEdge stock certificates.

COUNT IUnsuitability

79. Plaintiffs reallege the claims in paragraphs 1 through 78 of this Complaint.

80. Willard and Gladys are high school graduates and were engaged in

farming throughout their professional careers.

81. Willard and Gladys are retired and instructed Engle and Schuster to invest

in safe investments that would achieve moderate growth.

82. Willard and Gladys invested approximately one half of their liquid assets

into ACC.

83. Frost completed the 9th grade and worked in manufacturing throughout her

professional career.

84. Frost is retired and instructed Engle to invest her money conservatively so

that it would be available to her when she needed it. At the recommendation of Engle,

Frost invested approximately sixty percent of her total assets in Royal Palm. When

Frost made inquiries of Engle as to the status of her investment, Engle told Frost that

Frost had lots of money" and to "go ahead and spend it", even though Engle knew that

Frost had suffered a total loss of her investment of more than $1.2 million.

85. Stutheit holds a Bachelor of Science in Pharmacy and was a pharmacist

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throughout his professional career.

86. At the time that Stutheit invested in ACC, he planned to retire within the

next few years and instructed Engle and Schuster to invest in assets accordingly.

87. Stutheit is now retired. At the recommendation of Engle, Stutheit has

invested more than 15% of his liquid assets into ACC and other unsuitable investments

recommended by Engle.

88. Elaine has a Bachelor of Science in nursing and worked as a registered

nurse throughout her professional career.

89. Richard is a high school graduate and worked in construction

management throughout his professional career.

90. The Haubergs are retired and instructed Engle and Schuster to invest in

assets that would be safe and provide them with some income.

91. Gary has a medical degree and license , and Pamela has a masters

degree in education.

92. Plaintiffs had little or no experience with investing in private companies,

and Engle, Schuster, E&S, and Capital Growth knew that.

93. Upon information and belief, Engle, Schuster, E&S, and Capital Growth

sold the Securities to more than 165 people and failed to conduct reasonable basis

suitability reviews for any of them. The information and belief is based upon the number

of people who have attended meetings related to the conversion of the Securities to

Royal Palm stock and subsequently to PrimEdge stock.

94. NASD is a private , not-for-profit organization . Under federal law, virtually

every securities firm doing business with the United States public is a member of NASD.

21


NASD registers member firms , writes rules to govern their behavior , examines them for

compliance and disciplines those that fail to comply.

95. NASD Conduct Rule 2310 provides as follows:

In recommending to a customer the purchase, sale orexchange of any security, a member shall have reasonablegrounds for believing that the recommendation is suitable forsuch customer upon the basis of the facts, if any, disclosedby such customer as to his other security holdings and hisfinancial situation and needs.

96. New York Stock Exchange Rule 723 imposes an affirmative duty upon the

member to assess a customer's suitability for any recommended transaction. The

member must have a reasonable basis for believing, at the time of making the

recommendation, that the customer has such knowledge and experience in financial

matters that he may reasonably be expected to be capable of evaluating the risks of the

recommended transaction, and is financially able to bear the risks of the recommended

transaction.

97. Defendants Engle, Schuster, E&S, and Capital Growth failed to conduct a

reasonable-basis suitability review before selling the Securities to Plaintiffs. Defendants

Engle, Schuster, E&S, and Capital Growth failed to explain the following to Plaintiffs:

a. ACC and Royal Palm are not liquid and cannot be sold.

b. There is either a limited or no secondary market for the Securities

and there is little transparency of pricing in any secondary market

transaction.

c. The creditworthiness of ACC and Royal Palm, and the value of the

underlying collateral for the debentures.

d. The principal, return, and/or interest rate risks of the investment in

22


the Securities and the factors that determine those risks.

e. The tax consequences of purchasing the Securities.

f. The costs and fees associated with purchasing the Securities.

98. The Securities purchased by Plaintiffs were unsuited to their needs.

99. Defendants Engle, Schuster, E&S, and Capital Growth knew or

reasonably believed the Securities were unsuited to Plaintiffs' needs.

100. Even though Engle, Schuster, E&S, and Capital Growth knew or

reasonably believed the Securities were unsuited to Plaintiffs' needs, they

recommended the Securities.

101. Defendants Engle, Schuster, E&S, and Capital Growth owed a fiduciary

duty to Plaintiffs.

102. Even though they owed a duty to Plaintiffs, Defendants Engle, Schuster,

E&S, and Capital Growth failed to disclose or misstated the following material

information relating to the suitability of the Securities.

a. ACC was a "mini Berkshire Hathaway."

b. Investment in ACC or Royal Palm would not result in a loss of the

investment.

c. Investment in ACC or Royal Palm would make Plaintiffs " a lot of

money."

d. Investment in ACC debentures would result in income of 10% per

year each year of such investment.

e. ACC had an ownership interest in Capital Growth, the broker

dealer.

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f. Engle, Schuster, and E&S received fees and commissions for the

sale of ACC stock and debentures.

103. The failure to disclose the material information to Plaintiffs is fraudulent.

104. Plaintiffs justifiably relied to their detriment on the fraudulent conduct of

Defendants Engle, Schuster, and Capital Growth, which resulted in a total loss of their

investment in the Securities.

105. Defendants were paying for, actively involved in, and benefiting from the

fraudulent conduct of Defendants Engle, Schuster, and Capital Growth.

COUNT IIViolation of 410(b) of the 1934 Securities Exchange Act and Securities Exchange

D..i„ 4 AI, c

106. Plaintiffs reallege the claims in paragraphs 1 through 105 of this

Complaint.

107. Defendants failed to disclose the Material Undisclosed Adverse Facts.

108. Defendants made the omissions knowingly, with reckless disregard for the

truth and with the intent to deceive and defraud.

109. Defendants made the omissions in connection with the purchase and sale

of Securities.

110. Defendants made the omissions by means of a facility of a national

securities exchange.

111. Defendants owed a duty to Plaintiffs to disclose the Material Undisclosed

Adverse Facts.

112. The omissions created a material misimpression, which induced Plaintiffs

to purchase the Securities.

113. Defendants' material omissions caused Plaintiffs to suffer a total loss of

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their investment.

COUNT IIIControl Person Liability for Violations of Section 10(b)and Rule 1 Ob-5


Complaint.

115. E&S was a control person of both Engle and Schuster.

116. Capital Growth was a control person of both Engle and Schuster.

117. At all relevant times, E&S exercised active control over the day-to-day

affairs of Engle and Shuster.

118. From September 2002 to March 2006, Capital Growth exercised active

control over the day-to-day affairs of Engle and Shuster and had the power to control

and influence the particular transactions that gave rise to the securities violations.

119. By means of the foregoing, Defendants E&S and Capital Growth violated

section 20 (a) of the Securities and Exchange Act of 1934.

WHEREFORE, Plaintiffs respectfully request that this Court grant the following

relief:

a. Determine that this action is a proper class action , certify Plaintiffs

as class representative under Rule 23 of the Federal Rules of Civil

Procedure and appoint Koley Jessen, P.C. lead counsel for the

Class;

b. Determine and award damages to Plaintiffs, and the other Class

members and against all Defendants, jointly and severally, for all

damages sustained as a result of Defendants' wrongdoing for those

claims compensable by monetary damages;

25


c. Award Plaintiffs and the Class their reasonable costs and expenses

incurred in this action, including attorney and experts fees; and

d. Such other, further and different relief as to this Court seems just

and equitable.

COUNT IVNegligent Misrepresentation


Complaint.

121. Stark Winter prepared and audited the consolidated statements of ACC's

operations, stockholders' (deficit) and cash flows for the years ended December 31,

2003 and 2002. According to the "Disclosure Statement" distributed by Royal Palm to

its shareholders on or about November 1, 2006, Stark Winter failed to disclose the

following:

a. In order to secure a business relationship to facilitate the raising of

funds for its business ventures , ACC in September 2002 made an equity

investment in Capital Growth Financial, Ltd., a NASD broker-dealer

headquartered in Florida, of $250,000 in cash in order to entice Capital Growth

Financial Ltd. to distribute and sell its offerings to investors through its registered

representatives.

b. As stated in ACC private placement memorandum offering

documents, ACC entered into a consulting agreement with International

Monetary Group ("IMG"), Jupiter, Florida, for a monthly payment of $15,000 (over

$200,000 was paid to IMG under this contract through 2004). In addition, IMG

was paid $675,000 in cash from the proceeds of the offering for work done in

26


connection with the offering. IMG is controlled and operated by the same

management principals who were then operating ACC.

c. Also, ACC paid IMG an additional $150,000 for the "restructuring"

of Sunshine.

d. Disclosed was that on March 21, 2003, ACC entered into a loan

agreement whereby it loaned AEI Holding Corporation, $1.3 million in cash, and

on the same day entered into a placement agent agreement with Advanced

Equities , Inc., one of AEI' s affiliates , for the sale of ACC securities. Undisclosed

was that AEI subsequently repaid the loan directly to the senior manager of ACC,

instead of to ACC. It is unclear that any of the $1.3 million repayment was ever

returned to ACC.

e. On March 11, 2003, ACC invested $250,000 for an ownership

position in JSM Capital Holding Corporation, a New York broker-dealer. The

investment in 2003 remained on the books and records of ACC at its full value,

although its value had become impaired, and should have been written down.

122. Stark Winter' s failure to disclose the foregoing constitutes a false

representation as to the financial condition of ACC.

123. The shareholders of ACC relied upon the audit of Stark Winter.

124. Stark Winter knew that the shareholders of ACC were relying on the

results of its audit in making their financial decisions.

125. Stark Winter failed to exercise reasonable care and/or competence in

preparing and auditing the consolidated statements of ACC's operation.

126. As a result of the failure to exercise reasonable care and/or competence,

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the shareholders of ACC suffered a total loss of their investment in ACC.

WHEREFORE, Plaintiffs respectfully request that this Court grant the following

relief:

a. Determine that this action is a proper class action , certify Plaintiffs

as class representatives under Rule 23 of the Federal Rules of Civil

Procedure and appoint Koley Jessen P.C. lead counsel for the

Class;

b. Determine and award damages to Plaintiffs, and the other Class

members and against all Defendants, jointly and severally, for all

damages sustained as a result of Defendants' wrongdoing for those

claims compensable by monetary damages;

c. Award Plaintiffs' and the Class their reasonable costs and

expenses incurred in this action, including attorney and expert fees,

and a disgorgement of the fees that Stark Winter earned on the

engagement; and

d. Such other, further and different relief as to this Court seems just

and equitable.

DEMAND FOR JURY TRIAL AND REQUEST FOR PLACE OF TRIAL

Plaintiffs demand trial by jury and request that the trial and any proceedings in

this case be held in Omaha, Nebraska.

28

Case - 8:07-cv-00254-LSC- 3 Document :1

DATED this 29th day of June 2007.

Date Filed : 06/29/2007 of 29

Willard F. Brehm, Trustee of the Willard F.Brehm Trust, and Gladys M. Brehm, Trusteeof the Gladys M. Brehm Trust, Alvena T.Frost, Alevna T. Frost, Trustee of the AlvenaT. Frost Trust, Arlin Stutheit, RichardHauberg, Elaine Hauberg, Gary Rademacherand Pamela Rademacher, on behalf ofthemselves and all others similarly situated,Plaintiffs,

By: s/Gregory C. ScaglioneGregory C . Scaglione , #19368KOLEY JESSEN P.C.,A Limited Liability Organization1125 South 103rd StreetSuite 800Omaha, NE 68124(402) 390 9500(402) 390 9005 (facsimile)Greg. Scaglionekoleyjessen.com

Attorneys for Plaintiffs.

374923.2 29

case: 8:07-cv-00254- c- 3 document : 1 date filed: 06/29...

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