in theunitedstatesdistrictcourt …securities.stanford.edu/filings-documents/1037/... · 17. royal...

Case : 8:07-cv-00254-J -T Document : 161 Date Filed : 01/22/2008 of 49

IN THE UNITED STATES DISTRICT COURTFOR THE DISTRICT OF NEBRASKA

LYLE BREHM, on behalf of Willard F.Brehm, Gladys M. Brehm, the Willard F.Brehm Revocable Trust and the Gladys M.Brehm Revocable Trust, REX WELDON, onbehalf of Nancy Weldon, Robert ClarkWeldon and the Robert Clark Weldon andNancy Weldon Trust, JILL SCHUNEMAN,on behalf of herself and the Jill SchunemanLiving Trust, and DAVID BUCKLEY, onbehalf of himself, the Robert L. MckissickIrrevocable Trust and the Brenda L.Buckley Revocable Trust, collectively onbehalf of themselves and all others similarlysituated,

Case No . 8:07-CV-254

CLASS ACTION

FIRST AMENDED COMPLAINT ANDDEMAND FOR JURY TRIAL ANDREQUEST FOR PLACE OF TRIAL

Plaintiffs,

v

CAPITAL GROWTH FINANCIAL, LLC,REBECCA ENGLE , BRIAN SCHUSTER,ENGLE & SCHUSTER FINANCIAL, INC.,AMERICAN CAPITAL CORPORATION,ROYAL PALM CAPITAL GROUP, INC.,ALAN JACOBS , MICHAEL JACOBS,GERALD PARKER , JOHN BOYCE,GERALDINE MAGALNICK , PATRICKHARRINGTON, PETER KIRSCHNER, ANDSTARK WINTER SCHENKEIN & CO., LLP,

Defendants.

Plaintiffs, Lyle Brehm, on behalf of Willard F. Brehm, Gladys M. Brehm, the

Willard F. Brehm Revocable Trust and the Gladys M. Brehm Revocable Trust

("Brehm"), Rex Weldon, on behalf of Nancy Weldon, Robert Clark Weldon, and the

Robert Clark Weldon and Nancy Weldon Trust ("Weldon"), Jill Schuneman, on behalf of


herself and the Jill Schuneman Living Trust ("Schuneman"), and David Buckley, on

behalf of himself, the Robert L. Mckissick Irrevocable Trust and the Brenda L. Buckley

Revocable Trust ("Buckley"), collectively on behalf of themselves and all others similarly

situated, (collectively referred to herein as the "Plaintiffs") allege and state the following

for their claims for relief against Defendants, Capital Growth Financial, LLC ("Capital

Growth"), Rebecca Engle ("Engle"), Brian Schuster ("Schuster"), Engle & Schuster

Financial , Inc. ("E&S"), American Capital Corporation ("ACC"), Royal Palm Capital

Group, Inc. ("Royal Palm"), Alan Jacobs, Michael Jacobs, Gerald Parker ("Parker"),

John Boyce ("Boyce"), Geraldine Magalnick ("Magalnick"), Patrick Harrington

("Harrington "), Peter Kirschner (" Kirschner"), and Stark Winter Schenkein & Co., LLP

("Stark Winter") (collectively referred to herein as the "Defendants")

1. JURISDICTION AND VENUE

1. The claims alleged herein arise under Sections 10(b) and 20(a) of the

Exchange Act, 15 U.S.C. § 77aa, 78j(b), 77o and 78t(a) and Rule 10b-5 , and 17 C.F.R.

§ 240.1 Ob-5 promulgated thereunder.

2. This Court has jurisdiction over the subject matter of this action pursuant

to Section 27 of the Exchange Act, 15 U.S.C. § 78aa and 28 U.S.C. § 1331 and Section

22 of the Securities Act of 1933.

3. Venue is proper in this Judicial District pursuant to Section 27 of the

Exchange Act (15 U.S.C. § 77aa) and 28 U.S.C. § 1391( b). Many of the acts and

transactions alleged herein, including the preparation and dissemination to the investing

public of materially false and misleading information, occurred in substantial part in this

Judicial District.

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year old man who resides in Brock, Nebraska, and Gladys M. Brehm, an 86 year old

woman who resides in Brock, Nebraska . Willard F. Brehm is trustee of the Willard F.

Brehm Revocable Trust and Gladys M. Brehm is trustee of the Gladys M. Brehm

Revocable Trust. Willard F. Brehm and Gladys M. Brehm, and their trusts, were clients

of the Investment Advisors identified below and purchasers or acquirers of securities of

ACC and Royal Palm (collectively referred to herein as the "Securities" unless

specifically referred to otherwise herein).

5. Rex Weldon is the attorney-in-fact for his mother, Nancy Weldon, and the

Successor Trustee of the Robert Clark Weldon and the Nancy Weldon Trust. Nancy

Weldon is a 74 year old woman who resides in Beatrice, Nebraska. Nancy Weldon and

the trust were clients of the Investment Advisors identified below and purchasers or

acquirers of the Securities.

6. Schuneman is a resident of Milbank, South Dakota and is the Trustee of

the Jill Schuneman Living Trust and the owner of the Jill Schuneman IRA account.

Schuneman and the trust were clients of the Investment Advisors identified below and a

purchaser or acquirer of the Securities.

7. David Buckley is a resident of Omaha, Nebraska. Buckley is a trustee of

the Mckissick Irrevocable Trust and the Brenda L. Buckley Revocable Trust. Buckley

and the trusts were clients of the Investment Advisors identified below and purchasers

or acquirers of the Securities.

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located in Nebraska City, Otoe County, Nebraska. E&S was administratively dissolved

on April 16, 2006. At all relevant times, Engle was the President of E&S and Schuster

was the Vice-President of E&S.

9. Engle is an individual who at all relevant times was a resident of Otoe and

Nebraska City, Nebraska. Engle currently resides in Pima County, Arizona. 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. ).

10. Schuster is an individual who at all relevant times was and still is a

resident of Syracuse, Nebraska. 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.).

The Broker/Dealers

11. CGF is a Florida corporation, with its principal place of business in Boca

Raton, Florida. At all times material hereto, CGF maintained a branch office in

Nebraska City, Nebraska at E&S's office. CGF is a broker/dealer registered with the

National Association of Securities Dealers ("NASD"), now known as Financial Industry

Regulatory Authority ("FINRA"). CGF was formerly known as Capital Growth Financial

Securities, LLC. The name was changed from Capital Growth Financial Securities, LLC

to CGF on or about June 25, 2004 and for convenience, will be referred to herein as

"CGF." CGF transacted business in Nebraska.

4


12. From August 1, 2002 to May 5, 2006, Engle was a registered

representative affiliated with and under the supervision of CGF as a stock broker and

investment advisor in Nebraska City, Nebraska.

13. Likewise, from August 1, 2002 through March 28, 2006, Schuster was

affiliated with and under the supervision of CGF as a stock broker and investment

advisor in Nebraska City, Nebraska.

CGF Control Persons

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

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

CGF. 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 at various times from August 1, 2002 to May 5,

2006. Alan Jacobs currently is and at all relevant times was licensed with the State of

Nebraska to sell securities in the State of Nebraska. As a result, Alan Jacobs

maintained a relationship with the State of Nebraska to afford a basis for the exercise of

personal jurisdiction consistent with the Constitution of the United States.

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

Florida . At material times hereto , Michael Jacobs was the President of CGF. 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 at various times from August 1, 2002 to May 5, 2006.

5


Michael Jacobs currently is and at all relevant times was licensed with the State of

Nebraska to sell securities in the State of Nebraska. As a result, Michael Jacobs

maintained a relationship with the State of Nebraska to afford a basis for the exercise of

personal jurisdiction consistent with the Constitution of the United States.

The Companies and Their Securities

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

Jupiter, Florida. ACC transacted business in Nebraska . ACC issued shares of Class B

common stock, debentures and was the maker of certain promissory notes purchased

by Plaintiffs. As described below, ACC was formed for the purpose of enabling

Defendants to engage in self-dealing transactions for personal gain, all to the detriment

of the Plaintiffs. ACC filed various Regulation D notices with the Nebraska Department

of Banking.

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

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

successor to ACC and issued shares of stock to Plaintiffs in exchange for their interests

in ACC. Royal Palm was an entity used by the Defendants to continue the scheme

which began with ACC. Royal Palm filed various Regulation D notices with the

Nebraska Department of Banking.

ACC/Royal Palm Control Persons

18. Parker is an individual who resides in Palm Beach County, Florida. At

material times hereto, Parker was an officer and director of ACC and a director and the

Chairman of Royal Palm. Parker is also the Chairman of St. James Investment Group,

Inc. ("St. James"). Parker is neither a minor, an incompetent person nor a person in the

6


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 at various times from August 1, 2002 to May 5, 2006.

As a result, Parker maintained a relationship with the State of Nebraska to afford a

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

United States.

19. Boyce is an individual who resides in Palm Beach County, Florida. At

material times hereto , Boyce was the President and a director of ACC . 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.). Boyce maintained a relationship with the State of Nebraska to afford a basis for

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


2006.

20. Magalnick is an individual who resides in Palm Beach County, Florida. At

material times hereto , Magalnick was an officer and director of ACC and a principal

owner of International Monetary Group, Inc. ("IMG'). Magalnick 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.).

Magalnick maintained a relationship with the State of Nebraska to afford a basis for the

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


2006.

7


21. Harrington is an individual who resides in Palm Beach County, Florida. At

material times hereto , Harrington was an officer and director of ACC and was a principal

owner and President of IMG. Harrington 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.). Harrington maintained a

relationship with the State of Nebraska to afford a basis for the exercise of personal

jurisdiction consistent with the Constitution of the United States and was present in

Nebraska at various times from August 1, 2002 to May 5, 2006.

22. Kirschner is an individual who resides in Palm Beach County, Florida.

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 material times hereto , Kirschner was an officer and

director of ACC. From February 2, 2004 to March 15, 2006, Kirschner was an officer

and director of Royal Palm. Kirschner was also an officer and director of Royal Palm's

subsidiary Media Magic, Inc. ("Media Magic"). Kirschner maintained a relationship with

the State of Nebraska to afford a basis for the exercise of personal jurisdiction

consistent with the Constitution of the United States.

The Accounting Firm

23. 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. Stark Winter maintained a relationship with the

State of Nebraska sufficient to afford a basis for the exercise of personal jurisdiction

consistent with the Constitution of the United States. Stark Winter prepared the audited

8


financials for ACC that were disseminated to the Plaintiffs and a Stark Winter principal

offered to serve as a reference for ACC.

III. CLASS ACTION

24. This is a securities class action lawsuit for damages brought by lead

plaintiffs Brehm, Buckley, Schuneman and Weldon, individually and on behalf of all

members of the class defined as those who purchased or otherwise acquired the

Securities from August 1, 2002 through May 5, 2006, inclusive, excluding any of the

named Defendants, (the "Class") (the terms Class and Plaintiffs are used

interchangeably throughout this First Amended Complaint). The Class is seeking

remedies under the provisions of § 10(b) of the Securities and Exchanges Act of 1934,

as amended, 15 U.S.C. § 77aa (the "Exchange Act"), Rule 1 Ob-5 promulgated under the

Exchange Act, 17 CFR § 240.1Ob-5 , and Section 20 (a) of the Exchange Act, 15 U.S.C.

§§77o &78(t).

25. The Class Period is from August 1, 2002 to May 5, 2006.

26. The identified Class is so numerous that joinder of all members is

impractical. At the present time there are no fewer than 165 known individuals who

would constitute members of the Class.

27. Common questions of law and fact link the members of the Class. All

Class members allege that the Defendants defrauded the Class through the sale of the

Securities and a variety of inter-corporate dealings and self-dealings. Defendants,

through material misrepresentations and calculated omissions of material facts,

schemed to defraud the Class. The scheme to defraud was known to Defendants at the

time of the sale of the Securities to the Class, thus making the Securities unsuitable to

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Case: 8:07-cv-00254-J -TDT Document : 161 Date Filed: 01/22/2008 of 49

any member of the Class . Questions of law and fact common to the members of the

Class which predominate over questions which may affect individual Class members

include:

a. Whether the Federal Securities laws were violated by Defendants;

b. Whether Defendants omitted and/or misrepresented material facts;

c. Whether Defendants' statements omitted material facts necessaryto make the statements made, in light of the circumstances underwhich they were made, not misleading;

d. Whether Defendants knew or deliberately disregarded that theirstatements were false and misleading;

e. Whether the investments in the Securities were suitable to anymember of the Class; and

f. To what extent the members of the Class have sustained damagesand the proper measure of such damages.

28. The claims of the lead plaintiffs are typical of the claims of the Class as a

whole. No unique facts or circumstances exist that set apart the representatives from

the Class.

29. The lead plaintiffs will thoroughly and adequately protect the interests of

the Class.

CLASS ACTION UNDER FEDERAL RULE OF CIVIL PROCEDURE 23(b)(1)

30. Prosecution of separate actions by individual members of the Class would

create a risk of adjudication of the rights of certain Class members and obligations of

the Defendants which would be dispositive of the interests of the other Class members

who are not a party to the action.

CLASS ACTION UNDER FEDERAL RULE OF CIVIL PROCEDURE 23(b)(3)

31. The questions of facts and law common to the members of the Class

predominate over any questions affecting only individual members and a class action is

10


superior to other methods for the fair and efficient adjudication of the controversy.

Furthermore, as the damages suffered by individual Class members may be relatively

small, the expense and burden of individual litigation makes it virtually impossible for the

members of the Class to individually redress the wrongs done to them. There will be no

difficulty in the management of this action as a class action.

IV. FACTUAL ALLEGATIONS COMMON TO ALL CLAIMS FOR RELIEF

ACC's & CGF's Introduction to and Affiliation with Engle, Schuster and E&S

32. In 2002, CGF began brokering transactions for private placement sales of

ACC securities. CGF was responsible for retaining registered representatives who

would locate individuals to purchase the ACC securities. In addition, CGF was

responsible for maintaining paperwork relating to account agreements with the

individual purchasers of the ACC securities along with the paperwork relating to the

sales themselves.

33. On or about July 1, 2002, Engle and Schuster were introduced to CGF

and on or about August 1 , 2002, Engle and Schuster were introduced to ACC , including

the officers and directors of ACC.

34. On or about August 1, 2002, Engle and Schuster flew to Florida to meet

with officers and directors of CGF. While in Florida, Engle and Schuster were informed

that they could be "investment bankers" at CGF and earn commissions of 10% by

selling private placement securities from ACC to their clients.

35. On August 1, 2002, CGF, ACC, Engle , Schuster, and E&S entered into an

agreement relating to Engle ' s, Schuster' s, and E&S's ability to sell ACC private

placements to the Class in the form of both common stock and subordinated

11


debentures to the Class, all of whom were or would necessarily become clients of CGF,

E&S, Engle and Schuster . It was also agreed that CGF would receive and house

copies of all ACC subscription documents and prospectus.

36. Further, in the agreement, CGF and ACC agreed to provide compliance

and investment banking experience and services to Engle and Schuster. The

agreement also acknowledged that Engle and Schuster "... have never sold private

placements before , and will need legal and compliance guidance from CGF and ACC."

37. On August 2, 2002, CGF gave ACC permission to issue warrants to Engle

and Schuster , for their personal benefit , for 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 to the Class. This remuneration was concealed from the Class.

38. Shortly thereafter , in early August 2002 , Engle , Schuster , and E&S

immediately began soliciting the sales of ACC private placements to new clients,

without legal or compliance guidance. Engle, Schuster, and E&S sold the private

placements to the Class, representing the private placements as the "good alternative to

a tough market."

39. Engle's practice was to tell the Class members or their agents investing in

the private placements at issue that they would "double your money" and that the

companies were like "mini Berkshire Hathaways," without regard to her client's

investment objectives or suitability.

40. Additionally, Engle, Schuster and E&S continued to sell the investments in

ACC to their clients despite their lack of the education or experience necessary to

12


analyze private placement memorandums or related documents or provide meaningful

advice to their clients.

41. Engle, Schuster, E&S and CGF never told the Class that Engle and

Schuster lacked the education or experience to analyze the private placement

memorandum or related documents to provide meaningful advice to their clients.

42. On September 20, 2002, Engle and Schuster received a $50,000.00

advance on future commissions for the sale of ACC securities. This advance was never

disclosed to the Class.

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

in CGF for the purpose of enticing CGF to continue distributing and selling its pivate

placement offerings to investors through its registered representatives, Engle, Schuster

and E&S.

44. Engle, Schuster and E&S continued to sell ACC securities through the

remainder of 2002 and throughout 2003.

45. On March 3 , 2003, Engle wrote to Boyce , Harrington and Magalnick

confirming Engle and Schuster's exclusive right to sell a predetermined amount of ACC

totaling the first $20 million of ACC investments to theirs and CGF's clients.

46. On March 11, 2003, ACC invested $250,000.00 for stock in JSM Capital

Holding Corporation ("JSM"), a New York broker-dealer. The 2003 investment in JSM

remained on the books and records of ACC at its full value of $250,000, although its

value was immediately impaired , and should have been written down or off . The ACC

financials likewise do not show any return on the JSM investment.

47. On March 26 , 2003, Engle , Schuster and E&S sent a letter to members of

13


the Class soliciting members of the Class who were "looking to get more income on

their investments and might be interested in ACC income at 10% or they may be looking

for growth in ACC equity investment...."

48. On March 31, 2003, Engle, Schuster and E&S sent a letter to the Class

thanking the Class for investing in ACC. In the letter , Engle described an ACC

investment as a "win-win model." She touted the ACC investment as compensation for

the loan, advising the Class that they received interest plus `free equity' (shares).

49. On March 31 , 2003, Engle , Schuster and E&S sent a letter to CGF stating

all correspondence must be approved by CGF because CGF was providing their

compliance supervision.

50. On March 31, 2003, CGF wrote Engle and informed her that CGF's policy

had changed and that CGF would no longer review Engle's letters for compliance with

the NASD, SEC or any self regulatory organizations' applicable rules and regulations.

51. At some point, Engle , Schuster and E&S named ACC's independent

auditor, Stark Winter, and Neal Winter, a principal of Stark Winter, as references for

those clients interested in buying ACC investments. CGF questioned Engle on why she

was naming references.

52. In April 2003, ACC acquired a controlling interest in what ACC defined as

its "second core business", Litestream Technologies, LLC ("Litestream"), a Tampa,

Florida, based company. With this acquisition, ACC collaborated with TECO Energy,

Inc. ("TECO"), which remained a minority stakeholder in Litestream.

53. On June 13, 2003, Boyce (then President of ACC) published a letter to the

Class stating that TECO was a company "whose total revenues for 2002 topped $2.6

14


million" and further stated that he believed ACC' s acquisition of Litestream increased

the value of ACC's assets and as a direct result of this new valuation, the Board of ACC

was considering raising the current offering price of the common stock in its ongoing

ACC equity placement. Boyce never explained how the acquisition increased the value

of ACC because there was no increase in value.

54. Only three months later, on July 9, 2003, Engle, Schuster, and E&S began

expressing concerns to the "ACC Partners ," Harrington , Magalnick and Boyce about the

viability of ACC. Specifically, Engle and Schuster stated We have a significant portion

of our clients ' funds in ACC. We cannot afford to have ACC fail and thus we need to be

as hands-on as possible with both ACC and ACC' s portfolio ' s companies ." These

concerns were never disclosed to the Class.

55. In fact, in late 2003, Engle was advising the Class that the ACC stock was

worth $2 per share and to expect a "nice increase" in its value by the end of the year,

even though there was no public market for the shares. The $2 per share was merely

the current sale price. Moreover, upon purchase, each share's value was diluted by

96%.

56. On approximately October 28, 2003, Engle wrote a letter to ACC,

Harrington, Magalnick and Boyce and stated: "I am extremely concerned about my

shareholders with ACC at CGF. What happens if someone needs his or her money due

to death or a mandatory IRA distribution? Right now I have three clients that need a

mandatory IRA distribution for 2003. This IRA distribution must be taken by 12/31/03.

Because Patrick [Harrington] told me there would be a dividend paid this year I invested

all the clients IRAs in ACC. Could you please provide me with any solutions you may

15


have to these concerns."

57. In November of 2003, Engle was appointed to the Board of Directors of

ACC.

58. In the year 2003, E&S made commissions from the sale of ACC totaling

$1,532,970.

59. In the year 2003, E&S paid direct compensation to Engle totaling

approximately $1,073,079.

60. In 2003, E&S paid direct compensation to Schuster totaling approximately

$459,891.

61. On February 26, 2004, Engle expressed concern over ACC's failing

investment in Litestream. Engle wrote a letter to the Board of ACC stating she and all

Board members had "a fiduciary duty to stay informed and I think recent events dictate

that we make the following changes through a resolution by the Board." Engle further

stated she felt "there was not enough due diligence and audited financials done on

Litestream before we invested money in them. I am asking for all my shareholders that

this $925,000.00 be given back to ACC for the lack of due diligence and the loss of

income on my shareholder's money invested in ACC for the past year. Frankly, IMG did

not do the job they were paid to do." Engle demanded that the $1 million in ACC

warrants owned by IMG be forgiven unless all ACC shareholders doubled their money.

Engle, Schuster, and CGF failed to disclose this information to the Class. The

reference to IMG pertained to purported "consulting services" from IMG in presenting

the investment opportunity to ACC, which itself was controlled by the same principals as

IMG: Boyce, Harrington and Magalnick.

16

response, Engle was reminded that she had the exclusive right" to sell the first twenty

million dollars of ACC investments to her CGF clients. Engle, Schuster, E&S, and CGF,

failed to disclose this information to the Class.

63. On approximately March 3, 2004, Boyce, Harrington and Magalnick

indicated that the right thing for Engle and Schuster to do for their ACC investors is to

"refund half , if not all , of your commissions ." Engle , Schuster , E&S, CGF, ACC, and its

officers and directors failed to disclose this information to the Class, and did not refund

any commissions.

64. On March 4 , 2004 , Engle, allegedly acting as an ACC Board Member,

sent a letter to Magalnick , Boyce and Harrington expressing concern with ACC's

profitability. She stated "Let's pray that ACC is profitable to our shareholders. Every

one of the shareholders in attendance has asked when the dividend is being paid and

when the stock split is ???????" Neither Engle , Schuster , E&S, CGF, ACC, or its

officers and directors Magalnick, Boyce or Harrington ever expressed these concerns

and, in fact, Engle and Schuster continued aggressively soliciting sales in ACC.

65. On or about March 4, 2004, Engle reiterated to the ACC Board,

Magalnick, Boyce and Harrington, that she knew about the "Litestream problems." She

additionally told the ACC Board , Magalnick , Boyce and Harrington that We should get

on our knees and thank God I didn't raise any more money because it would have gone

to Litestream and caused us more grief than we have ." Engle, Schuster , E&S, CGF,

and ACC, and its officers and directors failed to disclose this information to the Class.

17

more? Let's talk and act more professional to one another." Engle also admitted she

was "extremely concerned about our [ACC's] ability to get our money back." Engle,

Schuster, E&S, CGF, ACC, and its officers and directors failed to disclose this

information to the Class.

67. On March 5, 2004, Engle wrote a letter to the ACC Board Members again

voicing concerns over ACC' s investment in Litestream . The letter stated : " I request we

pass a resolution requesting the Litestream Board to Fire Phil Holbrook IMMEDIATELY.

Engel added: "Litestream and TECO are going to steal everything not nailed down and

they are going to give shoddy service to our Litestream clients thus bad name for us

and loss of clients. We are presently losing a couple of hundred thousand a week.

Stop the bleeding." Engle, Shuster, E&S, CGF, ACC, and its officers and directors

failed to disclose this information or these concerns to the Class.

68. On March 19 , 2004, Engle emailed Boyce regarding the ACC , Litestream

and TECO problems. She recommended that ACC "buy Litestream for two to three

million dollars and just take it over ????" Engle indicated this would solve several

problems, including not having to explain the problems to "many unhappy shareholders

and it would give us one less headache." Engle, Schuster, E&S, CGF, and ACC, and

its officers and directors failed to disclose this information to the Class.

69. On March 24, 2004, CGF sent a memo to all registered representatives,

including Engle and Schuster, stating that "Senior management is concerned with the

solicitation of securities for certain accounts whose profits do not meet the criteria for

18


the purchase of said securities . In other words , you should be more aware of the

suitability factors for your accounts. What may be suitable for some accounts may not

be suitable for others." This memo was a direct result of Engle and Schuster's practices

in selling private placements of ACC securities to individuals for whom they were

inappropriate.

70. Engle and Schuster were instructed to bring any questions about whether

a particular investment is suitable for the client to the CGF supervisor prior to executing

a trade. CGF stated, "Should management, in its review of trading, determine that a

trade was unsuitable for a client, we will bust the trade and charge you for any loss

incurred. Additionally, we may fine you and write a notation to your file regarding the

infraction. It is immaterial whether the trade was solicited or unsolicited." CGF also

reminded Engle and Schuster that they had a fiduciary duty to protect clients from

themselves.

71. Despite expressing concerns regarding Engle's, Schuster's and E&S' sale

of the private placement in the March 24, 2004 memorandum, CGF continued to allow

Engle and Schuster to aggressively solicit the sales of private placements in ACC

without regard to suitability with little or no supervision by CGF.

72. Engle, Schuster and E&S solicited and sold the private placements to the

Class by refusing to discuss the high degree of risk and discouraging the review of

private placement material.

73. On approximately July 8, 2004 , Engle emailed Boyce requesting a special

ACC Board Meeting and access to a financial report on ACC to determine the amount

of funds ACC had in the bank, "... how much money is invested and where and who with

19


the investment exists , a list of all ACC employees and their salaries , a copy of the

audited numbers, and an agenda for the July 13, 2004 meeting." Yet, Engle, Schuster

and E&S did not disclose their request to the Class.

74. On July 8, 2004, Engle emailed Boyce and further requested an update on

the status of lawsuits concerning ACC's investment in Litestream , which involved TECO

and the bankruptcy of Litestream . Engle , Schuster , E&S, CGF, and ACC , and its

officers and directors failed to disclose this information to the Class.

75. On July 9, 2004, Boyce sent a letter to Engle stating the ACC Special

Meeting would include discussion regarding CGF, the Engle debt , Sunshine Industries,

Litestream Technologies, financial matters, and public market exploration. Further,

Boyce stated that ACC may also address at the Special Meeting , " attendant

commission refunds."

76. On July 13, 2004, Engle wrote a letter to Boyce regarding the ACC Board

of Director's July 13, 2004 meeting . In this letter , Engle stated : " I believe it is incumbent

upon the Board to protect the interest of the Class B shareholders and Debenture

holders who have provided the only financial capital to ACC ." Engle also proposed:

that the ACC Board pass and adopt a resolution that all Warrants and Founders'

shares held by members of the Board be subordinated to Class B Shareholders and

Debenture holders, and that no Warrants or Founder's shares may be redeemed until

the Class B and Debenture holders receive repayment of one-hundred percent (100%)

of their principle investment." Engle, Schuster, E&S, CGF, ACC, and its officers and

directors failed to disclose this information to the Class.

77. On July 13, 2004, Engle resigned as a Director of ACC.

20


78. Yet , on July 29 , 2004, Engle and Schuster wrote a letter to the ACC Board

of Directors, Harrington, Boyce, Magalnick and Parker, stating "I can't tell you how

excited Brian and I are to work with you and take ACC to the next level with the two for

one split on the equity shares and by retiring the debentures. Both are a necessity for

ACC. Because of the $6 million bankruptcy Litestream is in; bringing on Gerry Parker is

truly a gift to ACC. We now have access to the public markets. We have synergy that

we all needed. We will have a new story to tell our shareholders ."

79. Engle and Schuster also used the July 29, 2004 letter to ask for more

stock for themselves. We are all in this together but in order to move forward Brian and

I feel that we all need to be equal partners when it comes to Founders Shares. In order

to move forward, we need to be equal partners. This means Brian and I need to be

equal owners of Founders Shares with Patrick [Harrington], Geraldine [Magalnick] and

Gerry [Parker]." Notably, the Founders Shares requested were the same shares that

Engle earlier proposed to be subordinated to the shares held by the Class.

80. Due to the exclusivity provisions regarding investments that ACC afforded

Engle and Schuster, Engle, Schuster and E&S were the primary sources through which

ACC raised capital. At various times, Engle would refuse to continue to sell ACC

securities, unless her commission demands were met. This information was not


81. Engle and Schuster stated in an August 3, 2004, letter to the ACC Board

of Directors : "Without Brian and I, there would be no ACC . If Brian and I don't knock

out the debt so that we can take ACC public who will? Our first choice is to have

someone else raise the equity ACC needs to take out the debentures. Our book will

21

Case: 8:07-cv-00254-J -TDT Document : 161 Date Filed : 01/22/2008 of 49

have way too much ACC in it. Who else can save ACC? Who else can raise ACC

money? To quote Patrick: `Without you guys doing A, ACC couldn' t do B.' We are

presently a lawsuit waiting to happen ." Engle, Schuster, E&S, CGF, ACC, and its


82. On August 3, 2004, Engle and Schuster also expressed to the ACC Board

their extreme concern over the value of ACC; the availability of money to pay bond

interest; income to pay for payroll and expenses; the loss of 60% of the equity because

of Litestream; the failure of Sunshine; the lack of an audited financial; and the need to

raise $6 million to retire the debentures and take ACC public. Engle , Schuster, E&S

CGF, ACC, its officers and directors failed to disclose this information to the Class.

83. Engle and Schuster had the most serious concerns about ACC and yet

never disclosed these concerns to any members of the Class and, in fact, continued

soliciting the sale of ACC Common Stock and Debentures of ACC during the time they

were voicing their concerns. CGF failed to monitor this activity and ignored its

knowledge thereof.

84. Even with Engle and Schuster's recognition that their book had too much

ACC in it, Engle and Schuster continued to sell ACC to all the Class without regard to

suitability and despite the foregoing material omissions and misrepresentations of fact.

CGF continue to be aware of the sales, as brokers of the transactions.

85. No later than July of 2004, Engle and Schuster knew the demise of ACC

was eminent stating: We are faced with the dilemma of A) closing down ACC now and

just taking what we can get or B) plunging in deeper because of Gerry's involvement to

try and get our client's principal back." Engle , Schuster , E&S, CGF, and ACC, and its

22



86. On September 17, 2004, Boyce sent a letter to the shareholders of ACC

announcing the "leveraged buyout" of Sunshine Industries, Inc. stating: "Sunshine will

provide a platform for its parent, SSI-PM Holdings, Inc., to trade in the public markets."

Boyce advised the shareholders that: The Board of Directors of American Capital

Corporation now has under consideration the declaration of a dividend by which a

portion of SSI-PM Holdings' outstanding common stock will be distributed to you, the

shareholders of ACC."

87. On October 28, 2004, Parker, Boyce and Magalnick hosted an ACC

Shareholder's meeting in Nebraska City, Nebraska. Engle was in attendance at the

meeting. At the meeting , Boyce stated that the Class ' investments in ACC were " part of

a five (5) year plan" to reach a "liquidating event," at which time the ACC shares could

be sold because of the creation of a market for the shares. Boyce then stated that ACC

was on track for a liquidating event within three (3) to five (5) years." Boyce stated that,

We [ACC] have all the resources still to create a return."

88. Boyce also stated at the meeting that Magalnick , ACC's Treasurer,

"watched every penny."

89. On November 4, 2004, ACC sent a letter to Engle and Schuster, signed by

Boyce, stating Engle and Schuster had made written and verbal requests for financial

information of both ACC and Sunshine Industries . Boyce indicated concern at Engle

and Schuster's demands by stating: We believe it benefits our shareholders to have

accurate information. Even though we are a privately held company, and there is no

requirement to do so, we have provided audited financial statements and other

23


information. Rest assured, we will continue to inform all our shareholders."

90. On November 8, 2004, Engle and Schuster wrote Magalnick, the CFO at

ACC, suggesting: We may be able to pacify the clients who are disgruntled, but we

need to be assured that Sunshine is on track. As we discussed earlier, we would like

this to work with the original people all involved, but as it stands now it is only a matter

of time until one of our clients pushes too hard ." Engle , Schuster , E&S, CGF, and ACC,

and its officers and directors failed to disclose this information to the Class.

91. As stated in the ACC private placement memorandum, ACC entered into a

consulting agreement with International Monetary Group ("IMG") in Jupiter, Florida, for a

monthly retainer of $15,000. Over $200,000 was paid to IMG under this consulting

agreement 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 Boyce, Magalnick and Harrington, who were

the same management principals who were then operating ACC.

92. No consulting services , if any , were provided to ACC by IMG under the

consulting agreement as separate and distinct from the responsibilities that Defendants

Boyce, Magalnick and Harrington had as officers of ACC.

93. On November 5, 2004, CGF, through its attorney, sent a letter to the

NASD representing it had provided Engle and Schuster with extensive private

placement training. CGF stated it had meetings in Boca Raton, Florida, with Engle and

Schuster on July 12 and 13, 2003, February 18, 2004, and April 17, 2004. Yet, Engle,

Schuster and E&S had been selling the private placements since August 2002.

94. CGF claimed to have carefully supervised Engle and Schuster' s sales of

24


private placements through "one-on-one meetings , discussions involved current private

placement offerings, compliance aspects of those private placements in general private

placement marketing. In addition to these one-on-one meetings, countless telephone

conversations occurred to discuss the same and sent various internal memorandums

discussing suitability for the private placement offerings."

95. From January through June 2004, E&S made commissions from CGF

totaling approximately $366,166.52.

96. As of the end of 2004, Engle and Schuster had sold approximately $12

million of ACC investments to their clients without regard to suitability and through

material misrepresentations and omissions.

97. In December 2004, ACC made an additional equity investment in

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

Sunshine Industries. However, Sunshine was insolvent at the time and ACC had been

falsely representing to the Class that Sunshine was a going concern. Moreover, it is

unclear what, if any "restructuring" was performed.

THE CONVERSION FROM ACC TO ROYAL PALM

98. In December 2004, Engle and Schuster met with Alan and Michael Jacobs

at CGF to discuss the ACC investments and a possible conversion of ACC into Royal

Palm, with additional private placement opportunities.

99. On December 17, 2004, ACC officers and directors Boyce, Harrington and

Magalnick paid themselves $150,000.00 for a " Merger Agreement," and paid IMG an

additional $20,000 for "SSI-PM consulting," which reduced the balance of the ACC

account ledger from $475,722.89 to $5,722.89.

25


100. On December 21, 2004, ACC was merged into Royal Palm. Notice of the

merger was never sent to the Class. Parker became Royal Palm's Chairman of the

Board.

101. As a result of the merger, ACC became a wholly owned subsidiary of

Royal Palm and each share owned in ACC was converted into one share in Royal

Palm. In a letter dated December 30, 2004, to the shareholders of ACC , Boyce and

Parker indicated the merger from ACC to Royal Palm was a positive one and did not

provide any financial information to the Class. In fact, the merger provided no financial

advantage to the Class and was designed and executed to confuse the Class. Class

Members' notes were also converted to stock.

102. On December 20, 2004, Alan Jacobs , acting as Chairman and CEO of

CGF, signed a letter addressed to Engle and Schuster claiming to prohibiting Engle and

Schuster from further soliciting investments in ACC or attempting to "Restructure any

investments in ACC or any affiliate of or successor to ACC." This information was never


103. In late December 2004, CGF actually fired Engle and Schuster and failed

to report with FINRA as required by law. In late December 2004, CGF decided to rehire

Engle and Schuster. None of this was disclosed to the Class.

104. On December 29, 2004, Engle and Schuster wrote a letter to Alan and

Michael Jacobs following up on a phone conference with Michael Jacobs that same

day. This letter acknowledged that Engle and Schuster would continue to be employed

by CGF, operating as E&S. This letter recognized CGF's approval of Engle and

Schuster's continued solicitation and sale of ACC and Royal Palm Securities.

26


105. On January 4, 2005, Engle and Schuster published a mass mailing to the

Class introducing their investors to Royal Palm. This letter failed to mention any of

Engle and Schuster ' s concerns with ACC and/or Royal Palm and actually stated: We

feel ACC made a very good alliance when they merged with Royal Palm. It should

benefit us all."

106. On January 13, 2005, ACC and Royal Palm held a shareholders' meeting

in Nebraska City, Nebraska. The stated purpose of the meeting was to discuss the

merger and introduce Parker as the Chairman of Royal Palm. Parker was introduced as

someone with a history of taking companies public to produce investor returns.

107. At the January 13 meeting , Parker stated that the benefit to owning ACC,

was that the Class has everything they owned with ACC, plus everything that Royal

Palm owns."

108. Parker stated that Royal Palm was a company that principally owned

subsidiaries, including Bidville, Inc. ("Bidville"), STS Technologies, Inc. ("STS") and a

company called Digikidz, Inc. ("Digikidz"), which Parker stated was "going to be a really

big deal for Royal Palm and its shareholders." Parker stated the value of Royal Palm

and its subsidiaries was "twelve-million dollars ($12,000,000.00)."

109. Parker then stated that "Royal Palm owned Bidville" and that Bidville was

one of the top companies in the world" and Parker also claimed that Forbes said it's

second only to EBAY®."

110. Parker further stated that one of Royal Palm's principal investments,

Digikidz, which enabled Royal Palm to value itself at $12,000,000.00, was poised to

"take off'.

27


111. On January 13, 2005 , the account ledger for Digikidz listed a balance of

negative $652 .20. This fact was not disclosed to the Class

112. On January 13, 2005, the account ledger for STS was $420.41. This fact

was not disclosed to the class.

113. Parker also stated at the January 13, 2005, meeting that Royal Palm was

in the process of "taking Sunshine public" and that going public will happen in the next

few months."

114. Parker continued, stating that "Within the next six (6) months, it's our

intention to take Royal Palm public."

115. Parker further stated that the whole process of taking Royal Palm public

would "take one-and-one-half years." Parker stated that later date would then be the

point at which Royal Palm and the Class reached "a liquidating event." Parker stated

that the Class would at that time also realize a two (2) dollar per share price for its

dividend holdings in SSI.

116. On January 24, 2005, Royal Palm filed an annual report with the Secretary

of State for the State of Florida certifying that Engle and Schuster were added to the

Board of Directors.

117. On March 3, 2005, Engle and Schuster wrote a letter to CGF, asking

permission to continue selling investors for investments in Royal Palm to CGF clients

and also to be "formal observers" on the Royal Palm Board of Directors. CGF gave its

permission on March 7, 2005.

118. On or about March 11 , 2005, the lender for Sunshine repossessed the

assets of Sunshine. The Class had never been informed that the lender had loaned

28


Sunshine $2 . 6 million , pledging its inventory and accounts receivable financing.

Further , the Defendants did not disclose that the funds invested by ACC in Sunshine

were not being used in accordance with the terms and conditions of the financing

agreement.

119. On April 28, 2005, Parker wrote a letter to Royal Palm shareholders,

claiming that we are working towards having Royal Palm Capital Group, Inc. shares of

common stock traded in the public market and will keep you informed of the status of

this endeavor."

120. On or about May 25, 2005, Royal Palm removed Engle as a member of

the Board of Directors, for undisclosed reasons. Yet, no member of the Class was

advised of these activities.

121. On August 23, 2005, Engle and Schuster wrote to Royal Palm, naming

Parker and Kirschner , and demanding financial statements from ACC and Royal Palm.

Neither Engle, Schuster, E&S, Parker, Kirschner nor Royal Palm disclosed this demand

to the Class.

122. On September 14, 2005, Royal Palm issued a check to Stark Winter, the

accountants who had previously prepared ACC financials.

123. On September 26, 2005, Royal Palm issued a check to Magalnick, ACC's

former Treasurer, for $10,000.00 to cover "Professional Fees: Consulting."

124. On November 15, 2005, CGF conducted a Branch Office Examination of

its Nebraska City, Nebraska office with its Chief Compliance Officer. During this branch

office exam, CGF noted that there was an outstanding customer complaint relating to

private placements made by Engle and Schuster by a client, yet no action was taken

29


and this was not disclosed to the Class.

125. CGF , Engle, Schuster and E&S acted together in 2005 to suppress

information relating to the private placements from the Class. Specifically, CGF worked

secretly to rescind private placements sold subject to a confidentiality agreement. CGF,

Engle, Schuster and E&S concealed this rescission from the Class.

126. Parker stated in a 2005 memorandum that the management of Royal

Palm will never do anything that would enhance us and hurt the shareholders because

we are shareholders with you."

127. Throughout 2005, Royal Palm, at Parker' s direction , paid approximately

$386,450.00 in "management fees" to St. James. Parker was simultaneously Chairman

and principal owner of St. James, and it is unclear, what services, if any, were provided

to Royal Palm independently of Parker's duties or services provided to Royal Palm.

128. Additionally, through a series of transactions in 2005, Parker personally

deposited approximately $86,000.00 into the Royal Palm account, yet withdrew

approximately $108,766.67 as "repayment" for his personal deposits.

129. In its January 2006 Newsletter, Royal Palm and Parker indicated valuation

of Royal Palm shares of stock would only be made consistent with Generally Accepted

Accounting Principles. Parker stated the only effective measurement for market value

of each share of common stock for Royal Palm is determined by public trading.

130. On January 5, 2006, Engle and Schuster wrote a letter to CGF providing a

list of all private placements sold by Engle , Schuster and E&S through CGF to the

Class. Further, Engle and Schuster advised CGF that certain paperwork relating to the

private placement sales was stored in the E&S office.

30


131. As late as January 2006 , Royal Palm was sending draft newsletters to

Engle for her approval, permitting Engle to participate in controlling of what company

information was released to the Class.

132. On January 11 , 2006 , Schuster exchanged email correspondence

regarding a termination agreement and release between various Royal Palm insiders,

Royal Palm Capital Group, and Engle and Schuster. In this email correspondence,

Schuster recognized Royal Palm was subject to legal and regulatory exposure as a

direct result of the actions of Parker and could possibly be subject to a rescission.

Engle , Schuster , E&S, CGF, Royal Palm and its officers and directors failed to disclose

this information to the Class.

133. On January 23, 2006, CGF, Alan Jacobs and Michael Jacobs entered into

a Letter of Acceptance, Waiver and Consent with the Department of Enforcement NASD

concerning allegations that between January 2003 and August 2003, certain sales

efforts of CGF's registered representatives, including Engle, acting under the

supervision of CGF approved the use of letters and invitations to seminars to be sent to

prospective clients at the firm; that the communications failed to disclose that the

securities referenced were subject to a high degree of risk, failed to disclose risks

specific to the securities, were misleading by being promissory of successful investment

results, and otherwise made exaggerated, unwarranted, or misleading statements, all

contrary to NASD Conduct Rules 3010 and 2110. Engle, Schuster, E&S and CGF


134. The NASD specifically found that from January to August 2003, CGF

failed to establish, maintain and enforce adequate supervisory system, including written

31


procedures , reasonably designed to achieve compliance with applicable rules and

regulations relating to the sale of private offerings. Engle, Schuster, E&S, and CGF


135. In spite of the investigations by the NASD and the large amount of private

placement sales made by Engle, Schuster and E&S, CGF failed to place Engle and

Schuster on heightened or special supervision, contrary to NASD Rules.

136. On April 14, 2006, the Nebraska Department of Banking sent a letter to

Engle giving her notice of their intent to commence an investigation into Engle's sale of

ACC and Royal Palm to Nebraska residents and directing Engle that No further sale of

the Investments may occur in Nebraska until the final status of this matter has been

established under the Act."

137. Shortly after receipt of the April 14, 2006, letter from the Nebraska

Department of Banking, a representative of E&S erased the hard drive from an E&S

computer containing account information regarding the members of the Class and their

investments in the Securities.

138. On April 26, 2006, CGF, through its attorney, acknowledged to John Clark,

Supervisor of Examiners for NASD Regulation , Inc., that CGF failed to provide any

supervision of Engle, Schuster, and E&S concerning the sale of ACC and Royal Palm.

139. Between January and April 29, 2006, Schuster was officially acting in the

capacity of both CGF Registered Representative, officer of E&S, and Chairman of the

Board of Royal Palm, and during this period, Schuster still actively solicited, sold and

received commissions from the sale of Royal Palm debentures.

140. In a June 2006 Newsletter from Royal Palm to the Class, Schuster stated

32


We have exciting events to announce" and added "First, we are making a `best effort'

to go public."

141. On June 30, 2006, the United States Securities and Exchange

Commission ("SEC") notified E&S that it was conducting an investigation into the sales

of the Nebraska City office of Royal Palm and ACC investments and their various

related companies. Engle, Schuster, E&S and CGF failed to disclose this information to

the Class.

142. On July 20, 2006, Engle sent a letter to the Class indicating that she

needed to take a temporary leave of absence from the Nebraska City, Nebraska office

and that her new partner would provide them with investment advice. Engle claimed the

leave of absence was due to illness, but failed to disclose she was not then licensed

with the Nebraska Department of Banking and was under investigation.

THE CONVERSION OF ROYAL PALM TO PRIMEDGE

143. On November 1, 2006, Royal Palm entered into an Asset Purchase

Agreement with PrimEdge, Inc. ("PrimEdge"), whereby PrimEdge acquired all of the

assets of Royal Palm. Schuster was previously installed as Chairman of the Board and

CEO of PrimEdge.

144. On November 7, 2006, Engle mailed the Class a letter touting the Royal

Palm merger with PrimEdge and referencing Warren Buffet, and suggesting the Class

would have "Lizard Brains" not to convert.

145. At no time did Engle, Schuster or E&S advise or recommend to the Class

that they should exercise their appraisal rights or dissenter's rights to limit their losses or

seek counsel concerning the sale of PrimEdge or the demise of Royal Palm.

146. On December 11, 2006, the compliance officer for VSR Financial

33


Services , Inc., Engle ' s broker-dealer at the time that managed the conversion, expressly

approved a letter to be sent to the Class indicating that Royal Palm and ACC note

owners only had five remaining days to sign their conversion packets, and urging the

Class to sign the conversion documents, or risk losing their stock and investment.

147. In order to further induce the Class into conversion, Engle, Schuster, and

other licensed individuals in the Nebraska City, Nebraska office under the direction of

Engle and Schuster systematically met or conversed with the Class and advised them

they would "double their money" if they converted and claimed that shares only need to

be traded at 5¢ per share to break even and get back their principle and interest.

148. On December 13, 2006, Engle sent a letter to the Class explaining the

conversion of Royal Palm shares into PrimEdge shares. The letter made the following

representations: 1) that Royal Palm was going public through PrimEdge; and, 2) that

the goal of the conversion was not just to get Royal Palm shareholders principal back

but to also get the PrimEdge profits.

149. Under Federal Securities Law, the conversion of ACC and Royal Palm into

PrimEdge shares were all sales.

150. On April 2, 2007, Engle sent a letter to the Class encouraging investors of

Royal Palm and ACC to be optimistic and indicating that PrimEdge, a penny stock, was

currently trading at $1.75 per share.

151. This letter also told the Class that investment questions should be directed

to other E&S personnel and assured that the Class that their investments were "safe."

152. On June 29, 2007, the present action was filed.

34

153. Plaintiffs incorporate and re-allege the allegations in paragraphs 1 through

152 of this First Amended Complaint, as if fully set forth herein.

154. Defendants made the material statements specifically recited above and

reviewed, in part, below.

ENGLE'S, SCHUSTER'S & E&S' MISREPRESENTATIONS AND OMISSIONS

155. Engle , Schuster and E&S told the Class that an investment in ACC was

the good alternative to a tough market." This statement was made with reckless

disregard for the fact that an investment in ACC was highly speculative , with no promise

of a return. Yet, Engle consistently represented to the Class that they would "double

their money" and that an investment in ACC was like an investment in a "mini-Berkshire

Hathaway" and touted the investment in an ACC private placement as "safe."

156. Engle, Schuster and E&S never divulged to the Class that Engle and

Schuster did not understand the private placement documents related to ACC and had

insufficient education and training to analyze the documents or advise the Class with

regard to the documents. These omissions accordingly made every statement Engle,

Schuster and E&S issued with respect to the safety or expected return from an

investment in ACC materially false.

157. Engle, Schuster and E&S knew Engle and Schuster lacked the ability to

understand the investments in ACC that they systematically steered the Class into and

that there was no factual basis to support the statements Engle, Schuster, and E&S

made with regard to ACC.

158. In late 2003, Engle, Schuster and E&S were advising the Class that the

35


ACC stock was worth $2 per share and to expect a " nice increase" in its value by the

end of the year , even though there was no public market for the shares . The $2 per

share was merely the current sale price and upon purchase, each share's value was

diluted by 96%. However, as of the time Engle, Schuster and E&S were advising the

Class of the "nice increase" in the value of ACC, Engle, Schuster and E&S did not

disclose to the Class that they had expressed serious concerns to the officers and

directors of ACC, including Boyce, Harrington and Magalnick with regard to promised

distributions and dividends.

159. Engle also never disclosed to the Class in the spring of 2004 that she

communicated to the Board of ACC that insufficient due diligence was done before ACC

invested in Litestream, which investment Engle knew was seriously detrimental to the

Class, given her request for a $925,000.00 refund to be paid to ACC, and her failure to

advise the Class of the same.

160. In January 2005 , Engle ' s, Schuster' s and E&S' statements regarding the

ACC merger with Royal Palm and its "benefit" to class were materially false and Engle

knew this. Engle, Schuster and E&S knew that ACC was worthless and that the merger

with Royal Palm would confuse the Class.

161. In April 2007, when Engle sent a letter to the Class stating their money

and investments were "safe," Engle knew this statement was false because she knew

there was no value in ACC or Royal Palm or PrimEdge.

BOYCE, HARRINGTON, MAGALNICK, PARKER & ACC MISREPRESENTATIONS &OMISSIONS

162. Boyce ' s statement on October 28, 2004, that ACC was on track for a

liquidating event in three (3) to five (5) years" was false or was made with reckless

36


disregard for the truth of the matter asserted therein . Boyce knew the statement was

false or made recklessly because there was nothing to suggest there would be a "public

market" for ACC shares at any time. The intended consequence of the statement was

to keep the Class from investigating the self-dealing that Boyce and the other directors

of ACC had engaged in while in control of ACC and the Class ' investment.

163. Magalnick, as stated by Boyce to be "watching every penny," therefore

knew that Boyce, Harrington and Magalnick were siphoning funds from ACC, disguised

as "consulting" payments to IMG and as other payments for "Merger Agreements."

Magalnick , as Treasurer of ACC had a duty to correct the misstatements of ACC's

financial condition and omissions regarding the true nature of the self-dealing payments.

164. ACC , and Harrington , Parker and Boyce, as officers and directors of ACC,

likewise had a duty to correct the inaccuracy of the stated values of ACC and its

investments in Litestream, Sunshine or SSI, and JSM Investments.

165. Boyce, Harrington, Parker and Magalnick never disclosed to the Class that

these investments were worthless and that ACC therefore had no value as an

investment.

166. Boyce stated in his September 17, 2004, letter to the shareholders of ACC

that "Sunshine will provide a platform for its parent, SSI-PM Holdings, Inc., to trade in

the public markets." These statements were false because Boyce knew that Sunshine

would not be going public as Sunshine was nearly insolvent at all material times.

167. At the October 28, 2004, shareholder' s meeting , Boyce stated that We

[ACC] have all the resources still to create a return." This statement was false because

37


Boyce knew that ACC was in a dire financial condition and that all of ACC' s investments

were liabilities and not benefits to ACC at the time the statement was made.

PARKER/ROYAL PALM MISREPRESENTATIONS & OMISSIONS

168. At the January 13 meeting, Parker stated that the benefit to owning ACC,

was that the Class has everything they owned with ACC, plus everything that Royal

Palm owns." Parker stated that Royal Palm was a company that principally owned

subsidiaries, including Bidville, STS and a company called Digikidz. Parker stated

Digikidz was "going to be a really big deal for Royal Palm and its shareholders." Parker

stated the value of Royal Palm and its subsidiaries was "twelve-million dollars

($12,000,000.00)."

169. Parker then stated that "Royal Palm owned Bidville" and that Bidville was

one of the top companies in the world" and Parker also stated that Forbes said it's

second only to EBAY®." Parker further stated that one of Royal Palm's principal

investments, Digikidz, which enabled Royal Palm to value itself at $12,000,000.00, was

poised to "take off".

170. The above statements were false because on January 13, 2005, the

account ledger for Digikidz listed a balance of negative $652.20 and the account ledger

for STS was $420.41. These facts were not disclosed to the Class, which facts Parker

knew made his statements regarding the value of Royal Palm and its subsidiaries false.

Likewise, representing that owning Royal Palm meant the Class owned "everything that

ACC owned" meant nothing and was misleading, because ACC did not own anything

and was not worth anything at the time of the merger.

171. Parker also stated at the January 13, 2005, meeting that Royal Palm was

in the process of "taking Sunshine public" and that going public will happen in the next

38


few months" and that "Within the next six (6) months , it's our intention to take Royal

Palm public."

172. Parker stated on January 13, 2005, that the whole process of taking Royal

Palm public would "take one-and-one-half years." Parker stated that later date would

then be the point at which Royal Palm and the Class reached "a liquidating event."

Parker stated that the Class would at that time also realize a two-dollar ($2.00) per

share price for its dividend holdings in SSI.

173. These statements were also false because Parker knew that Sunshine

would not be going public, nor would Royal Palm and thus, there was no "liquidating

event" for which the Class would realize revenue.

174. Parker knew these statements would induce the Class to refrain from

investigating into the true facts known to Parker, that neither Royal Palm nor its

subsidiaries were worth what Parker represented them to be worth.

175. Parker also knew that he was siphoning funds from Royal Palm for his

own personal benefit and that he was failing to disclose this fact to the Class. Parker

knew that a consequence of his self-dealings was that Royal Palm was not worth what

he told the Class it was worth and that Royal Palm could not accomplish the objectives

that Parker promised the Class, namely, either a "liquidating event" or an ability to

provide shares of subsidiaries as dividends to the Class . Thus, Parker also knew that

his statement, the management of Royal Palm will never do anything that would

enhance us and hurt the shareholders because we are shareholders with you" was also

false.

STARK WINTER'S FAILURE TO CORRECT

176. Beginning in no later then late 2002, Stark Winter began providing

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accounting and auditing services for ACC. These services for ACC continued through

and after ACC merged with Royal Palm until at least late 2005.

177. On June 29, 2004, Stark Winter issued its report of independent auditors,

which was disseminated to the Class , containing the audit of ACC' s consolidated

balance sheet, consolidated statements of operations, stockholder's deficit and cash

flows for the years ended December 31, 2002, and 2003. The report stated that in our

opinion, the financial statements referred to above present fairly, in all material respects,

the financial position of American Capital Corporation as of December 31, 2003, and

results of its operations and its cash flows for the years ended December 31, 2003, and

2002, in conformity with accounting principles generally accepted in the United States of

America."

178. On page 2 of the report, Stark Winter reflected a value of $250,000.00 for

"investments in private entities" relating to ACC's investment in JSM.

179. Stark Winter knew or should have known that this report was to be

disseminated the Class.

180. Stark Winter had to have learned or was reckless in not learning that the

JSM investment had virtually no value given the fact that Stark Winter served as ACC's

accountant and auditor during from 2002 forward.

181. In light of Stark Winter's knowledge regarding the JSM investment or

opportunity to learn the truth about the JSM investment, Stark Winter failed to take

reasonable steps to correct or withdraw the financial statement reflecting the

$250,000.00 value or the opinion that the investment was with $250,000.00.

182. Defendants made the above omissions and material misrepresentations in

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connection with the purchase and sale of the Securities.

183. Defendants used and employed the above deceptive devices in

connection with the purchase or sale of a security in contravention of Securities and

Exchange Commission rules and regulations.

184. In connection with the acts, transactions and conduct alleged herein,

Defendants, directly and indirectly, used the means and instrumentalities of interstate

commerce, including the United States mails, interstate telephone communications and

the facilities of the national securities exchanges.

185. Defendants owed a duty to Plaintiffs to disclose the true nature of the

private placements at issue and to refrain from selling the Class the Securities.

186. The misrepresentations and omissions listed above induced Plaintiffs to

purchase and convert the Securities. In fact, but for the above described

misrepresentations or omissions, the Class would not have entered into the detrimental

securities transactions at issue.

187. The Class justifiably relied upon Defendants' material misrepresentations

when purchasing and converting the Securities.

188. The material omissions and misrepresentations alleged above caused the

loss for which Plaintiffs seek to recover damages.

CLAIM IIUnsuitability

189. Plaintiffs incorporate and re-allege the allegations in paragraphs 1 through

188 of this First Amended Complaint, as if fully set forth herein.

190. Defendant Engle , Schuster , E&S, CGF, ACC, Royal Palm, Alan Jacobs,

Michael Jacobs, Gerald Parker, John Boyce, Geraldine Magalnick, Patrick Harrington

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and Peter Kirschner originally sold or otherwise transferred the Securities at issue

without regard to the suitability of the Class or its investment needs. The Securities

were in fact unsuitable for any investor.

191. Specifically, Defendants Engle , Schuster, E&S, CGF, ACC, Royal Palm,

Alan Jacobs, Michael Jacobs, Gerald Parker, John Boyce, Geraldine Magalnick, Patrick

Harrington and Peter Kirschner, as alleged above, engaged in a scheme to defraud the

Class by steering all of Engle and Schuster's, or a predetermined number of Engle and

Schuster's investors into the private placements at issue without regard to the Class'

investment goals and regardless of what each investor told their Engle, Schuster, E&S

or their broker-dealer about the investor's objectives.

192. Engle, Schuster, E&S, Boyce, Harrington, Magalnick, and ACC and its

officers and directors initially presented ACC to the Class as an opportunity for "growth"

and "income ." The only "income " appears to be the $675,000.00 ACC paid to IMG for

"consulting services ," and as stated, IMG's principals were the same principals of ACC,

to wit: Boyce, Harrington and Magalnick.

193. Engle, Schuster, E&S and CGF never disclosed to the Class that CGF

had instructed Engle, Schuster and E&S that its solicitation of securities in ACC did not

meet the suitability profile for Class members.

194. The merger and stock conversion/exchange of ACC into Royal Palm,

orchestrated by Engle, Schuster , E&S, CGF , Boyce, Harrington , Magalnick , Parker,

ACC and Royal Palm likewise failed to be suitable to any Class member. Boyce,

Harrington and Magalnick each received $150,000.00 "merger agreement" packages

from ACC, leaving ACC with an account balance of approximately $25,000.00, of which,

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available funds approximating $5,722.89.

196. Once ACC shares were converted to Royal Palm shares , the Class was

subject to the same scheme that Boyce, Harrington and Magalnick had perpetrated

from the inception of ACC , now at the hands of Parker . Parker siphoned funds from

Royal Palm, alternately paying them as "management fees" to his other venture, St.

James or to himself individually, or to himself as a "salary" from Royal Palm.

197. Defendants Engle , Schuster , E&S, CGF , Boyce , Harrington , Magalnick,

Parker , ACC and Royal Palm knew or recklessly disregarded that the Securities or their

conversion thereof, were unsuited to the Class or any investor, given the complete

failure to attempt to obtain any of the stated objectives of ACC or Royal Palm, or to

perform with skill and care the appropriate due diligence of any of the "core businesses"

into which ACC or Royal Palm invested.

198. Likewise, Defendants Boyce, Harrington, Magalnick and Parker's

continuous siphoning of funds from both ACC and Royal Palm, all for their own personal

benefit and to the detriment of the Class made the investments unsuitable, because the

ACC and Royal Palm were designed to facilitate and were utilized for such self-dealing

transactions.

199. The scheme employed by Defendants Engle , Schuster, E&S, CGF, ACC,

Royal Palm, Alan Jacobs, Michael Jacobs, Parker, Boyce, Magalnick, Harrington and

Kirschner was fraudulent from its inception and throughout its continued execution.

43


These Defendants misrepresented and failed to disclose the unsuitability of the

securities and proceeded to recommend, purchase and/or convert the private

placements anyway.

200. Despite any stated or unstated concerns by any of the Defendants

regarding the suitability of the investments in the Securities, no Class member was ever

found to be unsuitable.

201. Defendants were actively involved in, and benefiting from the fraudulent

scheme of Defendants Engle , Schuster , E&S, CGF, ACC, Royal Palm Capital Group,

Alan Jacobs, Michael Jacobs, Gerald Parker, John Boyce, Geraldine Magalnick, Patrick

Harrington and Peter Kirschner. The acts and omissions of the defendants caused the

loss for which the plaintiffs seek to recover damages.

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

under 15 U.S.C. 4477o & 78(t)

202. Plaintiffs incorporate and reassert the allegations contained in paragraphs

1 through 201 of this First Complaint.

203. As described above, Engle and Schuster violated Section 10(b)(5).

204. As described above, E&S violated Section 10(b)(5).

205. Rebecca Engle was a control person of E&S. Rebecca Engle had the

power to control the operations of E&S and exercised control over E&S.

206. Brian Schuster was a control person of E&S. Schuster had the power to

control the operations of E&S and exercised control over E&S.

207. CGF was a control person of Engle , Schuster and E&S.

208. Alan Jacobs and Michael Jacobs, as officers and directors of CGF, were

44


control persons of CGF.

209. As described above, Boyce, Harrington, Magalnick, Parker and ACC

violated Section 10(b)(5).

210. Defendants Boyce, Harrington, Magalnick and Parker were also officers

and directors of ACC and, as such , were control persons of ACC who had the power to

control the day-to-day affairs of ACC and did exercise that power and control over ACC

as described above.

211. As described above, Royal Palm violated Section 10(b)(5).

212. As described above, Defendant Parker violated Section 10(b)(5).

213. Defendants Parker and Kirschner were officers and directors of Royal

Palm and, as such, were control persons of Royal Palm. Defendants Parker and

Kirschner had extensive participation in day-to-day affairs of Royal Palm and possessed

the power to control Royal Palm's general operations. These Defendants also had

control over the specific false statements recited above.

214. From August 2002 to March 2006, CGF, as a broker-dealer, assumed

control over the day-to-day affairs of Engle, Schuster and E&S and had the power to

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

alleged herein and to discipline the conduct of Engle, Schuster and E&S.

215. Alan Jacobs, as an officer and director of CGF, is a control person of

CGF. Alan Jacobs had the power to control CGF' s operations and exercised such

control over CGF.

216. Michael Jacobs , as an officer and director of CGF, is a control person of

CGF. Michael Jacobs had the power to control CGF's operations and exercised such

45


control over CGF.

217. As specifically set forth above, Defendants Engle, Schuster, E&S, CGF

Boyce, Harrington, Magalnick, Parker, Kirschner, Alan Jacobs and Michael Jacobs

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

218. The acts and omissions of the Defendants affected the Securities

transactions at issue and caused the loss for which the Plaintiffs seek to recover

damages.

WHEREFORE, Plaintiffs pray for judgment in their favor and against Defendants

as follows:

a. Determine that this action is certifiable as a proper class action under Rule

23(b)(1) and (b)(3) of the Federal Rules of Civil Procedure;

b. Determine and award general and special damages, in an amount to be

determined, to Plaintiffs and the Class 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;

d. Award Plaintiffs prejudgment and post judgment interest; and

e. Award such other, further and different relief as the Court may deem just

and proper.

46


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.

Dated this day of January 2008.

LYLE BREHM, DAVID BUCKLEY, JILLSCHUNEMAN, and REX WELDON, onbehalf of themselves and all otherssimilarly situated, Plaintiffs,

By: /s/ David A. YudelsonGreg C . Scaglione , # 19368David A . Yudelson , #23257KOLEY JESSEN , P.C., L.L.O.1125 South 103rd Street , Suite 800Omaha, Nebraska 68124Telephone: (402) 390-9500Facsimile : (402) 390-9005greg . scaglione koleyjessen.com

By: /s/James B. Cavan hcJames B. Cavanagh , #10643Andrew G. Davis , #20370LIEBEN , WHITTED, HOUGHTON,SLOWIACZEK & CAVANAGH, P.C.,

L.L.O.100 Scoular Building2027 Dodge StreetOmaha , Nebraska 68102Telephone: (402) 344-4000Facsimile : (402) 344-4006icavana h liebenlaw.com

47


By: /s/J. L. SpraJ.L. Spray, #18405Robin L. Spady, #23240MATTSON, RICKETTS, DAVIES,STEWART & CALKINS134 South 13th Street, Suite 1200Lincoln, Nebraska 68508-1901Telephone: (402) 475-8433Facsimile: (402) 475-0105jis mattsonricketts.com

Attorneys for Plaintiffs.

CERTIFICATE OF SERVICE

I hereby certify that on January 22, 2008, I electronically filed the foregoingpleading with the Clerk of the Court using the CM/ECF system which sent notification ofsuch filing to the following:

James B. CavanaghAndrew G. DavisJ.L. SprayRobin L. SpadyDavid M. GabaCarl F. Schoeppl

Thomas DahlkTrenten P. BauschMegan S. WrightRandall L. GoyetteW. Scott DavisDerek ZimmermanDavid R. ChaseKaren Tibbs

and the undersigned sent the following pleading via U.S. Mail this 22"d day of January,2008, to the following:

Rebecca Engle639 North 38th RoadOtoe, NE 68417

American Capital Corporationc/o Brian J. Schuster, Reg. Agent101 Plaza Real South, Suite 217Boca Raton, FL 33432

Brian Schuster1135 11th StreetSyracuse, NE 68446

Engle & Schuster Financial, Inc.c/o Rodney K. Vincent, Reg. Agent303 N. 52nd Street, Suite 220Lincoln, NE 68504

Royal Palm Capital Group, Inc.c/o Matthew J. Cohen, Reg. Agent101 Plaza Real South, Suite 217Boca Raton , FL 33423

John Boyce900 South U.S. Hwy . One, Suite 108Jupiter , FL 33477

David R. ChaseChase Law Firm1700 East Las Olas BoulevardFort Lauderdale, FL 33301

Attorney for Peter Kirschner

407756.11

/s/ David A. YudelsonDavid A . Yudelson

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