$2 Million Gone Like That, Investors Say

     MANHATTAN (CN) – Palm Beach Capital, a Florida-based private equity firm, duped investors to pour $2 million into a motion picture visual effects company it knew was on the verge of a “meteoric plunge into bankruptcy and liquidation,” two investment groups claim in court.
     Iroquois Master Fund and Kingsbrook Opportunities Master Fund sued five PBC (Palm Beach Capital) entities, nine people, and Singer Lewak accountants of Los Angeles, in New York County Supreme Court. All the individual defendants, including lead defendant John Textor, were directors, advisers or spouses of the PBC defendants.
     The Digital Domain Media Group, not a party to this lawsuit, was a digital production and animation company headquartered in Port St. Lucie, Fla. It specialized in creating animated feature films, and computer-generated and three-dimensional imagery for large-scale feature films and advertising, according to the complaint.
     In the years before its Sept. 11, 2012 Chapter 11 bankruptcy filing, DDMG established an animated film production studio called Tradition Studios, and a partnership with Florida State University to launch a for-profit post-secondary educational institution called the Digital Domain Institute.
     It was these initiatives that doomed DDMG to failure, the plaintiffs say, but it would take them 9 months to realize the financial situation.
     The plaintiffs say all the PBC defendants played a part in soliciting their investment in DDMG’s initial public offering of stock, on Nov. 21, 2011.
     During these solicitations, “The inside director defendants affirmatively stated in conversations with plaintiffs and DDMG’s numerous public filings with the SEC that the company had sufficient sources of cash to support its business operations through all of 2012,” the complaint states.
     “In furtherance of the wrongful conduct described herein, the auditor defendant provided audit opinions unqualified by any expression of doubt it had or should have had about the ability of DDMG to continue as a going concern based on numerous conditions and events indicating that the company’s liquidity condition was sufficiently precarious to warrant such a qualification audit opinion, The outside director defendants were reckless or indifferent to the making of false statements to plaintiffs and thus negligently or recklessly acquiesced and approved such false statements.”
     Based on these representations, Iroquois and Kingsbrook say, they each bought 142,858 shares of DDMG common stock, 57,143 warrants, and call options covering 209,524 shares of DDMG stock for an aggregate price of $1,000,006 each.
     “The director defendants’ wrongful conduct concerning representations as to DDMG’s financial condition, its ability to fund its planned business operations and, thus, to operate as a going concern were materially false and misleading,” the plaintiffs say. “As early as May 16, 2911, when DDMG announced its IPO, its liquidity condition was susceptible to collapse, contrary to what was represented, making it highly unlikely that DDMG could continue to fund its operations through 2012. …
     “Unbeknownst to the public and contrary to the improper unqualified audit opinions issued by the auditor defendant, the director defendants’ ambitious plans to diversify DDMG quickly outpaced the company’s ability to generate revenue and obtain new financing to pay for the transformation. Their flawed business plan left DDMG with grave and continually worsening liquidity issues. The undisclosed purpose of the IPO and of other fundraising efforts undertaken in 2012 by the director defendants and the Palm Beach Capital Defendants, major holders of DDMG equity and DDMG insiders, was to generate cash to alleviate their concerns regarding DDMG’s liquidity. By June 7, 2012, when plaintiffs participated in the PIPE Offering and entered into the Call Option Agreements with DDMG and the Palm Beach Capital defendants, all defendants knew or should have known that DDMG’s liquidity crisis was more serious than had been disclosed to the public and plaintiffs. Defendants knew or should have known that the liquidity problem was likely to worsen and destabilize DDMG. Defendants knew or should have known that DDMG faced an imminent threat of a total liquidity failure that could lead to the demise of the entire company. Yet, defendants failed to correct the false and misleading statements concerning the ability of DDMG to fund its operations into 2013.”
     The plaintiffs say they’ve lost almost all of their investment.
     At the time of the IPO, DDMG’s stocks were valued at $8.50 a share. “At present, DDMG common stock is virtually worthless and thinly traded under the symbol ‘DDMGO’ on the OTC for between $0.01 and $0.03 per share,” the complaint states.
     The plaintiffs seek compensatory damages, costs and damages for fraud, aiding and abetting, negligent misrepresentations and omissions, negligence, breach of implied covenant of good faith and fair dealing and civil conspiracy.
     They are represented by Arthur N. Abbey with Abbey Spanier LLP in New York.

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