$100 Million in Paper Shuffling Alleged

     (CN) – Shareholders say the manager of two property holding companies looted them of $100 million to fund his misadventures in the stock market and then – perhaps understandably – refused to let them look at the books. And they say defendant Rubin Schron told them he has “no duty to explain” what he’s done.
     Defendants in Delaware Chancery Court are Rubin Schron, of Brooklyn, N.Y., SMV Property Holdings and SWC Property Holdings, both LLCs. Schron has been sole manager of SMV since 2004 and of SWC since 2003, according to the complaint. Also sued is Cam-elm Company LLC, the majority member of the other LLCs, which Schron also allegedly controls as its sole manager.
     Plaintiffs include Mich II, which owns 2.5 percent of SMV; SEEVA II, 12.5 percent owner of SMV; MICH, which owns 2.5 percent of SWC; and SEEVA, which owns 5.5 percent of SWC.
     According to the 40-page complaint, SMV and SWC are real estate holding companies that collect revenue from properties leased by nursing and health care facilities. Both entities were formed in business deals that Leonard Grunstein and Murray Forman originated. The businessmen, owners of plaintiffs MICH II Holdings LLC and SEEVA II Holdings LLC, asked Schron to act as a sole manager for SMV and SWC after completion of the two transactions in 2003 and 2004.
     The two shareholders say Schron has blocked their efforts to unearth the extent of his misconduct by refusing to open the books. They say Schron also stripped them of their membership interest and share of profits, the suit states.
     “Schron and CAM-Elm are looting SMV and SWC and denying the MICH and SEEVA companies their rights as members,” the complaint states. “Schron has misappropriated more than $100 million from SMV and SWC, kept false and inaccurate books and records, and refused to provide members with audited financials for SMV and SWC as required by the SMV and SWC Operating Agreements. As part of Schron’s effort to cover up his misconduct and squeeze the minority members out of SMV and SWC, he is now refusing to recognize the membership interests of the MICH and SEEVA Companies.”
     In May this year the shareholders say they tried to inspect the books and records of the holding companies to “shed light on the sudden and unexplained termination by SMV and SWC of distributions of profits.”
     But according to the complaint, Schron told them that he had “no duty to explain his decision.”
     “In effect, Schron is claiming he can unilaterally rewrite the SMV and SWC Operating Agreements to deprive the MICH and SEEVA companies of their rights. Schron, however, has no power or authority to unilaterally terminate the interests of the MICH and SEEVA companies and rewrite the operating agreements to exclude members who are parties to those agreements. Schron is acting ultra vires and for an improper purpose. In bad faith, Schron is seeking to enrich himself and his immediate family, which own majority-member CAM-Elm, and to retaliate against the owners of the MICH and SEEVA Companies, Leonard Grunstein and Murray Forman, who have objected to Schron’s mismanagement and misappropriations,” the complaint states.
     The shareholders say Schron’s actions are “the culmination of a history of misconduct” which includes siphoning millions of dollars from the companies to cover a failed interest rate swap with Citibank.
     According to the complaint: “(I)n 2008 and 2009, Schron took millions of dollars from SMV and SWC to cover his losses on a personal investment with Citibank. The Citibank investment was an interest rate swap investment dated September 25, 2008, between Schron individually and Citibank. As explained in greater detail below, an interest rate swap generates profits or losses depending on how interest rates change. The investment went bad for Schron almost at once. Because of the change of interest rates in the fall of 2008, Schron immediately became personally liable to Citibank for tens of millions of dollars on his interest rate swap agreement. Schron and Citibank had taken a particular care to make sure the interest rate swap agreement was with Schron personally, not with SMV or SWC or in the name of SWC. But when the margin calls and ultimately the losses on the investment came, Schron simply took the cash he needed from SMV and SWC as if it was his own. In this 2008 and 2009 period, Schron misappropriated over $65 million from SMV and SWC to cover his personal losses on his interest rate swap agreement.”
     The plaintiffs claim Schron also pilfered $11 million to settle litigation and pay his legal fees in defending a personal liability action in Boston. Schron was named as a defendant in that lawsuit, but SMV and SWC were not, according to the Delaware complaint.
     “He also misappropriated an additional $40 million by improperly transferring at least that amount to himself or to defendant CAM-Elm, which is indirectly owned by Schron’s family and which is a 77.35 percent owner of SMV,” the complaint states.
     The shareholders say that Schron cooked the books at both SMV and SWC to prevent proper distributions and “enrich him or his family. His improper records include records concerning a falsely alleged capital contribution or undocumented loan of $75 million to SMV,” according to the complaint.The plaintiffs say that CAM-Elm, a majority member of SWC and shareholder of SMV, “is an inseparable part of Schron’s schemes.”
     “CAM-Elm is the majority member of SMV and SWC and has the authority under the SMV and SWC operating agreements to remove any manager of SMV and SWC. CAM-Elm well knows what Schron is doing. But CAM-Elm has no interest in removing Schron as manager or in correcting any of Schron’s misconduct. CAM-Elm, which is beneficially owned by Schron’s family and controlled by Schron, has benefited from Schron’s misappropriations and other misconduct,” the complaint states.
     It continues: “On March 23, 2010, the MICH and SEEVA companies, Grunstein and Foreman, and others sued Schron and his affiliates in New York’s Supreme Court, New York County, in an action captioned MICH II Holdings LLC, et al. v. Schron, et al., No 600736/10. The MICH II lawsuit asserted derivative claims against Schron for the benefit of SMV and SWC, and also direct claims against Schron. After the suit was filed, Schron pretended to discuss settlement, but then abruptly started his own separate counter-suit. Schron moved to dismiss the suit against him claiming that it could only be brought in Delaware because of the forum selection clause in the SMV and SWC operating agreements.”
     The plaintiffs say the New York Supreme Court agreed and dismissed the complaint. That prompted this complaint in Delaware. The plaintiffs seek Schron’s removal from the two companies and more than $117 million in damages for breach of the operating agreements and breach of fiduciary duty.
     “Schron has profited immensely from the opportunity that Grunstein and Forman brought to him,” the complaint states. “But Schron is not satisfied with the half-billion dollars or more that he made from the transactions that Grunstein and Forman arranged. Schron has betrayed the plaintiffs and their owners (Grunstein and Forman) at every turn. Grunstein and Forman and the MICH and SEEVA companies relied on Schron to manage SWC and SMV properly and to deal honestly with them in all matters. But Schron and his family have other plans. Schron has resorted to theft, improper accounting manipulation, and more against those who trusted and relied on him.”
     The plaintiffs are represented by John Reed with DLA Piper.

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