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Investors Say They Were Bilked in Liquidation

WILMINGTON, Del. (CN) - Stockholders in Preferred Communications Systems claim in court they were cheated by management bent on paying off insiders first - including one who was allowed to buy 61,000 shares for a penny apiece.

Lead plaintiff Dorothy J. Agar claims the dozens of plaintiffs invested millions of dollars in PCS Preferred Stock Series A and B under the assurance that the stock would pay dividends and would be convertible into PCS Common stock without limitations. They also claim they were induced to buy the PCS stock with promises they would receive a two-for-one stock split.

But now that PCS has agreed to sell Sprint its wireless spectrum rights in the continental United States for $60 million, the terms have changed, the investors say in the lawsuit in Chancery Court.

"PCS has stated that it plans a liquidation in which it will, shortly after the receipt of the cash, pay its creditors, then return the remainder to the common stockholders," the complaint states.

One of those common stockholders is defendant Michael Judy, a PCS board member, who has "mysteriously procured more than 80,000 shares of PCS common stock, making him the single largest stockholder in PCS," according to the complaint.

"Judy purportedly procured most of these shares for a pittance - $610 - from warrants held by defendant [Jay] Bishop, convertible into common stock at a penny a share, which Bishop purports to have received in October 2006," the lawsuit states.

The investors say they paid $7.50 per for their Series A Preferred stock during the same time period. The complaint describes Bishop as "a purported former consultant to PCS."

"Plaintiffs invested millions of dollars in the middle of the last decade to keep this company going. It is outrageous that Judy claims to have procured 61,000 shares of stock in PCS for $610 and is now the largest stockholder by far," states the complaint.

The plaintiffs claim that "Bishop left PCS in 2001 and in July of 2008 swore to the FCC that he had no financial interest whatsoever in PCS."

The receiver for PCS, Richard L. Renck, concluded in the first Chancery Court action involving PCS that "Bishop's warrants did not exist," the shareholders says.

After that first PCS trial, "the Court justifiably commented that the four founders of the company ([Pendleton] Waugh, Bishop, [Charles Matthew] Austin, and [Charles] Guskey) 'ought to be referred to as the four fraudsters,'" the complaint states. (Parentheses, but not brackets, in complaint.)

Waugh was "sentenced to federal and state prison terms" after being "convicted of securities law charges in several different proceedings" in the 1990s, according to the complaint.

It adds that "Jay Bishop was convicted and went to prison for tax evasion."

"Relatedly, the court struck or greatly reduced stock received by Waugh, Austin and Setka, similar to the purported Bishop warrant at issue here," states the complaint.

"Setka" is not further identified in the lawsuit, by first name or position.

The plaintiffs claim that "one of the chief contact persons between PCS and plaintiffs was Clementine Estrada, who was "later sentenced to prison for a $1.8M fraud scheme she ran during this time." She was an agent for Vineyard Investment Group LLC, the entity "engaged to conduct these sales," according to the complaint.

"PCS specifically advertised the 2:1 split to purchasing plaintiffs," and also touted "yearly cash dividends" and entitlement to a cash payment "in any liquidation" that "must be made before any to the common stockholders," according to the 44-page lawsuit.

But now that the company is liquidating, most of the promises made during these sales pitches have gone unfulfilled, say the investors.

"In January 10 and/or 13, 2014 conference calls with PCS stockholders, [defendant] CEO [J. Barclay] Knapp stated that PCS would refuse to pay dividends to the Series A or B Preferred stockholders," the complaint states.

Preferred stockholders have not been paid dividends since 1999.

"The company has stated that the A and B Preferred are entitled to receive cash up to 'par value' in the liquidation," and "each share's par value is $0.001," states the complaint.

"While warrants exercised by Judy for a penny a share are to get a lion's share of the proceeds from the Sprint Transaction, management intends to pay plaintiff preferred stockholders, who invested millions of dollars into PCS, 1/10 of a penny a share. This is wrongful and inequitable."

The investors say that the first step in the liquidation process is the "Sprint Transaction" while "step two of the liquidation will be to sell the Puerto Rico licenses."

The investors seek equitable and declaratory relief, and ask the court to "grant a narrow temporary status quo order that would serve only to prevent PCS from paying out the payment from Sprint until the issues raised in this lawsuit are resolved."

Plaintiffs are represented by Evan O. Williford of Wilmington.

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