Case 9:98-cv-08520-DTKH Document 30 Entered on FLSD...
Transcript of Case 9:98-cv-08520-DTKH Document 30 Entered on FLSD...
Case 9:98-cv-08520-DTKH Document 30 Entered on FLSD Docket 12/30/1998 Page 1 of 56
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA WEST PALM BEACH DIVISION
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Plaintiffs, by their undersigned attorneys, for their
Consolidated Class Action Complaint, make the following allegations
upon information and belief (except as to the allegations
specifically pertaining to the named plaintiffs and their counsel),
based upon the facts alleged below, which are predicated upon,
inter alia, a review of relevant filings made with the Securities
and Exchange Commission ("SEC") , press releases, news and analyst
reports, and an investigation undertaken by plaintiffs' counsel.
Plaintiffs believe that further substantial evidentiary support
will exist for the allegations set forth below after a reasonable
opportunity for discovery.
NATURE OF THE ACTION
1. This is a class action on behalf of a class (the
"Class") consisting of all persons other than defendants who
purchased the common stock of Golden Bear Golf, Inc. ("Golden Bear"
or the "Company") from April 30, 1997 through July 27, 1998,
inclusive (the "Class Period").
2. On or about July 27, 1998, the last day of the Class
Period, Golden Bear announced that it had completed an internal
review of its construction subsidiary, Paragon Construction
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IN RE GOLDEN BEAR SECURITIES
CONSOLIDATED CASE LITIGATION
98-8520-CIV-HURLEY
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PLAINTIFFS' FIRST CONSOLIDATED CLASS ACTION COMPLAINT
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International ("Paragon"). As a result of the internal
investigation, the Company disclosed that during fiscal 1997 and
1998, Paragon's management had "deliberately falsified records,
misrepresented the status of construction projects and made false
statements about Paragon's revenues, costs, and profits . . .
Golden Bear also disclosed that Paragon had deliberately underbid
for new construction projects, in order to obtain new projects and
revenues in an attempt to mask the losses on Paragon's existing
projects.
3. The Company was forced to restate its loss for the
year ended December 31, 1997 to $24.7 million, or $4.49 per share.
Previously, the Company had falsely represented that its loss was
only $2.9 million for fiscal 1997, or $0.53 per share. Golden
Bear's restatement resulted in a reduction of Paragon's revenues
from $39.75 million to $21.89 million, wiping out approximately 45%
of the construction unit's revenues for fiscal 1997. Moreover,
Golden Bear announced that it was restating its financial results
for the first quarter of fiscal 1998, recognizing a net loss $7.3
million. Previously, the Company had falsely represented that its
loss during the first quarter of 1998 was only $778,290.
4. Upon the announcement of the restatement, the
price of Golden Bear's stock fell to as low as $0.50 per share.
During the Class Period, Golden Bear common stock had traded as
high as $15.00 per share.
5. Ultimately, Golden Bear common stock was delisted
from the NASDAQ National Market System as the Company was no longer
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able to meet the net tangible asset requirements for listing. In
October of 1998, the Company disclosed that the SEC had commenced
a private investigation to determine whether the Company and
certain of its officers and/or directors had engaged in conduct in
violation of the Securities and Exchange Act of 1934. In November
of 1998, Golden Bear disclosed that its Board of Directors had
approved the discontinuance of Paragon as of October 26, 1998.
6. By the use of fraudulent accounting, defendants
materially overstated Golden Bear's revenues, results of
operations, and earnings per share and made materially false or
misleading statements concerning the Company's financial health and
activities. As a result of the defendants' material misstatements
and omissions, Golden Bear's common stock traded at artificially
inflated prices throughout the Class Period.
7. Plaintiffs and the other members of the Class each
purchased shares of Golden Bear common stock in the open market
without knowledge of defendants' materially false or misleading
statements and without knowledge that the price of Golden Bear
common stock was artificially inflated during the Class Period, and
have suffered damages as a result.
JURISDICTION AND VENUE
8. The claims asserted herein arise under and pursuant
to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
(the "Exchange Act") [15 U.S.C. SS 78j(b) and 78t(a)] and Rule
10b-5 promulgated thereunder by the SEC [17 C.F.R. § 240.10b-5].
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9. This Court has jurisdiction over the claims asserted
in this Complaint pursuant to § 27 of the Exchange Act as amended
[15 U.S.C. § 78aa], 28 U.S.C. SS 1331 and 1337.
10. Venue is properly laid in this judicial district
pursuant to § 27 of the Exchange Act. Certain acts and conduct
complained of herein, including the dissemination of materially
false and misleading information to the investing public, occurred
in the Southern District of Florida, where Golden Bear maintains
its corporate headquarters and principal place of business and did
so at all relevant times.
11. In connection with the acts and conduct alleged in
this Complaint, defendants, directly or indirectly, used the means
and instrumentalities of interstate commerce, including, but not
limited to, the mails, interstate telephone communications and the
facilities of the NASDAQ National Market System, a national
securities exchange.
PARTIES
Lead Plaintiffs
12. Plaintiffs Joseph Bazinet, John Dominick, Indeco,
Inc., Charles Leyman, Ronald Murphy, Joaquin Rionda, and David
Selby (collectively referred to herein as the "Lead Plaintiffs")
purchased Golden Bear common stock during the Class Period as set
forth in the schedules attached hereto as Exhibit 1, and were
damaged thereby. These individuals were each duly appointed to
serve as Lead Plaintiffs herein pursuant to an Order of this Court
dated November 9, 1998.
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Additional Plaintiffs
13. Plaintiffs Don Aggers, Nasir Albarim, Daniel S.
Allmacher, Beverly B. Andrews, Lynn Asquith, Todd Atwell, Barry P.
Baker, John Barnhart, Charles M. Barresi, Gary E. Battenberg,
Barbara L. Beal, Patrick Bodkin, Robert E. Bosland, James Brosious,
Marvin Browne, Brian Bury, Chris Butchikas, Bill Chadbourne,
Christopher B. Colby, Michael Colello, Les Crooks, Daryl Crow,
Thomas Cummings, Anthony Cutillo, William F. Davis, Jeraldine
Diamond, David Eichelberger and Sherri Eichelberger, Robert
Erskine, Dan Farley, Bodo Fickler, Jay Flanders, Janet N. Foley,
Joseph F. Freeman, Jr., Mark D. Frink, Bianca Gallo, Dale Ganser,
Joseph Gerlach, Louis Giglio, Christopher Gregory, Robert Hart,
Jody Hechtman, Michael W. Hill, Gary Horning, James Howard, Ronald
Hurst, Yvonne Hyatt, Joseph Joyce, Allan Kiser, Charles Kleman,
Doug Koht, William R. Kolb, Jr., Ralph R. Krepfle, Raymond J.
Krepfle, William Lan, Peter Lansbury, David M. LeMieux, Adam
Leonard, Neil McCarty, Patrick McGrew, David Mahfet, Walter Mello,
Larry Mitchell, Tyson Moeller, Brian Moore, Gregory Moore, Herbert
Moore, Kirk Neal, Lee Nelson, Todd Nims, Donna Oglesby, Richard
Olson, Teresa N. Owens, Stacey Parker, Larry Post, Mark Pottinger,
Mark E. Preston, Allen Prinstine, Sam Quinn, David Reiners, Ruth
Rich, James Rike, Bob Romzek, Jess Rosenberg, John Salaris and
Barbara Salaris, Robert Sarver, Philip and Doris Schwartz, Ronald
Schwartz, John Shaull, Gregory Shoemake, Peter Joseph Short and
Mary Jean Short, Wayne Sicz, Gerald Simpson, Mary Jane Sullivan
Smith, Susan Smithson, Richard G. Snell, Steven Soboksky, Lauri
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Bomstein Sokoloff, Sander Sokoloff, Richard Starbird, Robert
Stieha, Gregory L. Stoner, Jim Sullivan, Richard Thayne,
Christopher Tighe, Louis J. Tirreno, James D. Weeks, Barbara S.
Wise, Joe Wise, and George Yorks (collectively referred to herein
as the "Additional Plaintiffs") purchased Golden Bear common stock
during the Class Period and were damaged thereby. Certifications
reflecting the Additional Plaintiffs' transactions are available
upon request. Collectively, the Additional Plaintiffs and Lead
Plaintiffs will be referred to herein as "plaintiffs."
Defendants
14. Defendant Golden Bear purports to be a diversified,
international brand name golf products and services company engaged
in the development, marketing, and management of golf-related
businesses including the licensing, ownership, and operation of
golf practice and instruction facilities, the operation of golf
instructional schools, and the licensing, distribution and sale of
golf-related consumer products. Golden Bear maintains its
principal executive offices at 11780 U.S. Highway One, Palm Beach,
Florida. The Company began publicly trading its stock on or about
August 1, 1996, selling approximately 2.48 million shares in an
initial public offering (the "IPO").
a. At the start of the Class Period, Golden Bear
was comprised of three divisions: the Golf Division, the
Construction Division, and the Marketing Division. The Company's
Golf Division licensed, owned and operated golf practice and
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instruction facilities under the Jack Nicklaus Golf Center, Jack
Nicklaus Academy of Golf, and Golden Bear Golf Center brand names.
b. The Company's Construction Division consisted
of its wholly-owned subsidiary Paragon. Paragon was incorporated
in 1992, but its predecessor had been in business since 1983 as
part of Jack Nicklaus's family of companies. Paragon was a full
service construction organization which provided comprehensive
project management and golf course construction services to resort,
residential and commercial golf developments around the world.
Paragon was discontinued as of October 1998.
C. Golden Bear's Marketing Division licensed
Nicklaus, Jack Nicklaus, and Golden Bear branded consumer products
and operated Nicklaus/Flick Golf Schools.
15. Defendant Jack W. Nicklaus ("Nicklaus") is and was
Chairman of the Board and an employee of Golden Bear at all
relevant times during the Class Period. Nicklaus founded Golden
Bear International, Inc., the predecessor of the Company, in 1970
and has served as the Chairman of the Board since its inception.
a. As of June 16, 1997, Nicklaus beneficially
owned approximately 240,000 shares of the Company's Class A common
stock and approximately 2,760,000 shares of the Company's Class B
common stock. Nicklaus' holdings constitute approximately 91% of
the total voting power of Golden Bear's outstanding common stock.
b. Nicklaus was a signatory to Golden Bear's 1997
Form 10-K filed with the SEC on or about March 31, 1998 (the "1997
Form 10-K").
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C. From the outset, the Company's strategy was to
capitalize on Nicklaus' reputation, image, and accomplishments.
The Nicklaus, Jack Nicklaus, and Golden Bear names and symbols and
the image and reputation of Nicklaus were utilized in order to
raise capital from investors and to distinguish the Company and its
activities from competitors. As such, Nicklaus owed investors a
high degree of care and loyalty with respect to the Company's
operations.
d. Throughout the Class Period, defendant Nicklaus
maintained a close relationship with Paragon. For example, at the
time of Golden Bear's IPO, Nicklaus was the primary guarantor of
Paragon's $1 million credit line. Moreover, Nicklaus has over 25
years experience as a golf course designer, having designed 138
courses in 23 countries. Since 1983, Paragon and its predecessor
provided construction services throughout the world in the
development of approximately 39 golf courses, most of which were
designed by Nicklaus. Thus, Nicklaus has special expertise with
regard to golf course construction and design.
16. Defendant Richard P. Bellinger ("Bellinger") was
President, Chief Executive Officer, and a director of Golden Bear
at all relevant times during the Class Period. Bellinger was a
signatory to Golden Bear's 1997 Form 10-K and all amendments
thereto. In addition, Bellinger was a signatory to all of Golden
Bear's Form 10-Qs filed with the SEC during the Class Period.
Throughout the Class Period, defendant John Boyd, President of
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Paragon, reported directly to Bellinger. On or about October 19,
1998, Bellinger resigned from his positions with the Company,
having served over 19 years with Nicklaus-related companies.
17. Defendant Jack P. Bates ("Bates") was Chief
Financial Officer, Secretary, and a Senior Vice President of Golden
Bear up until his resignation on or about October 22, 1997. As the
Company's principal financial and accounting officer, Bates was
responsible for Golden Bear's financial, treasury, and accounting
functions. In such capacity, Bates was a signatory to the
Company's Form 10-Qs filed with the SEC for the first two quarters
of fiscal 1997.
18. Defendant Stephen S. Winslett ("Winslett") is Chief
Financial Officer and a Senior Vice President of Golden Bear and
has held those positions since October 22, 1997. As the Company's
principal financial and accounting officer, Winslett was
responsible for Golden Bear's financial, treasury, and accounting
functions. Winslett was a signatory to the Company's 1997 Form 10-
K and all amendments thereto. In addition, Winslett was a
signatory to the Company's Form 10-Qs filed with the SEC for the
third quarter of fiscal 1997, and the first and second quarters of
fiscal 1998.
19. Defendant John Boyd ("Boyd") served as President of
Paragon from the beginning of 1997 through approximately April 27,
1998, when he was dismissed by defendant Bellinger. Throughout the
Class Period, Boyd reported directly to defendant Bellinger
concerning Paragon's financial performance and activities. At the
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end of the Class Period, Golden Bear admitted that executives at
Paragon had "deliberately falsified records, misrepresented the
status of construction projects and made false statements about
Paragon's revenue, costs, and profits," during fiscal 1997 and
fiscal 1998.
20. Defendants Nicklaus, Bellinger, Bates, Winslett and
Boyd are herein collectively referred to as the "Individual
Defendants."
21. Each of the Individual Defendants, by virtue of
their management or directorship positions, had the duty to
exercise due care and diligence and the duty of full and candid
disclosure of all material facts related thereto. The Individual
Defendants were required to exercise reasonable care and prudent
supervision over the dissemination of information concerning the
business, operations and financial reporting of Golden Bear. By
virtue of such duties, these officers and directors were required
to supervise the preparation of Golden Bear's SEC filings and
approve any reports concerning the financial condition and results
of operations of Golden Bear.
22. All of the Individual Defendants were control
persons of Golden Bear within the meaning of Section 20(a) of the
Exchange Act by reason of their own involvement in the daily
business of Golden Bear and Paragon and by reason of their
positions as senior executives of Golden Bear and/or Paragon. The
Individual Defendants, at the time they held positions with the
Company, were able to, and did, exercise substantial control over
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the operations of Golden Bear, including control of the materially
false or misleading statements, omissions and course of conduct
complained of herein.
23. It is appropriate to treat the Individual Defendants
as a group for pleading purposes and to presume that the false or
misleading information conveyed in Golden Bear's public filings,
press releases and other publications as alleged herein are the
collective actions of the narrowly defined group of defendants
identified above.
24. As officers, directors and/or controlling persons of
a publicly held company and under the federal securities laws, the
Individual Defendants had a duty: (a) to disseminate promptly
complete, accurate and truthful information with respect to Golden
Bear; (b) to correct any previously issued statements from any
source that had become materially misleading or untrue; and (c) to
disclose any trends that would materially affect earnings and the
present and future operating results of Golden Bear, so that the
market price of Golden Bear's publicly traded securities would be
based upon truthful and accurate information.
25. Defendant Arthur Andersen ("Arthur Andersen") is an
international accounting firm with its headquarters located in
Chicago, Illinois. Before and throughout the Class Period, Arthur
Andersen was engaged by Golden Bear to provide independent
auditing, and accounting services. Arthur Andersen audited Golden
Bear's publicly filed year-end financial statements and reviewed
Golden Bear's publicly filed quarterly financial statements issued
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during the Class Period. During the Class Period, Arthur Andersen
falsely opined that the Company's financial statements were issued
in accordance with generally accepted accounting principles
("GAAP").
26. The undisclosed adverse information concealed by
defendants during the Class Period is the type of information
which, because of SEC regulations, rules of the national stock
exchanges and customary business practice, is expected by investors
and securities analysts to be disclosed to the investing public.
This information is known by corporate officials and their legal
and financial advisors to be the type of information which is
expected to be and must be disclosed. For example:
a. Under Item 303 of Regulation S-K, promulgated
by the SEC under the Exchange Act, there is a duty to disclose in
periodic reports filed with the SEC "known trends or any known
demands, commitments, events or uncertainties" that are reasonably
likely to have a material impact on a company's sales revenues,
income or liquidity, or cause previously reported financial
information not to be indicative of future operating results. 17
C.F.R. § 229.303 (a) (l)-3(3) and Instruction 3. In addition to the
periodic reports required under the Exchange Act, management of a
public company has a duty "to make full and prompt announcements of
material facts regarding the company's financial condition." SEC
Release No. 34-8995, 3 Fed. Sec. L. Rep. (CCH) ¶ 23,120A, at
17,095, 17 C.F.R. § 241.8995 (October 15, 1970). The SEC regulates
companies "that can reasonably be expected to reach investors and
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the trading markets, whoever the intended primary audience." SEC
Release No. 33-6504, 3 Fed. Sec. L. Rep. (CCH) ¶ 23,120, at
17,095-3, 17 C.F.R. § 241.20560 (January 13, 1984). The SEC has
emphasized that "[i]nvestors have legitimate expectations that
public companies are making, and will continue to make, prompt
disclosure of significant corporate developments." SEC Release No.
18271, [1981-1982 Transfer Binder] Fed. Sec. L. Rep. (CCH)
¶ 83,049, at 84,618 (November 19, 1981).
27. The market for Golden Bear common stock was open,
well-developed and efficient at all relevant times. As a result of
the materially false and misleading statements and failures to
disclose the full truth about Golden Bear, its business and future
prospects, Golden Bear common stock traded at artificially inflated
prices throughout the Class Period. Plaintiffs and other members
of the Class purchased or otherwise acquired Golden Bear common
stock relying upon the integrity of the market price of Golden Bear
common stock and market information relating to Golden Bear or, in
the alternative, upon defendants' materially false and misleading
statements, and in ignorance of the adverse, material undisclosed
information and false financial statements known to defendants and
have been damaged thereby.
PLAINTIFFS' CLASS ACTION ALLEGATIONS
28. Plaintiffs bring this lawsuit pursuant to Rule 23(a)
and (b) (3) of the Federal Rules of Civil Procedure on behalf of all
persons who purchased Golden Bear common stock from April 30, 1997
through July 27, 1998, inclusive (the "Class"). Excluded from the
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Class are defendants herein, members of the immediate family of
each of the defendants, any person, firm, trust, corporation,
officer, director or other individual or entity in which any
defendant has a controlling interest or which is related to or
affiliated with any of the defendants, and the legal
representatives, agents, affiliates, heirs, successors-in-interest
or assigns of any such excluded party. This suit seeks, inter
alia, damages, and expressly does not seek any recovery for
personal injuries.
29. This action is properly maintainable as a class
action for the following reasons:
a. The Class is so numerous that joinder of all
Class members is impracticable. During the Class Period, over 2.7
million shares of Golden Bear Class A common stock were
outstanding. The members of the Class for whose benefit this
action is brought are dispersed throughout the United States. Upon
information and belief, there are hundreds, if not thousands, of
Class members.
b. There are questions of law and fact which are
common to members of the Class which predominate over any questions
affecting only individual members of the Class. The common
questions include, inter alia, the following:
(1) Whether defendants' acts as alleged herein
violated the federal securities laws;
(2) Whether defendants participated in and
pursued the common course of conduct complained of herein;
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(3) Whether documents, press releases and
other statements disseminated to the investing public and Golden
Bear's shareholders during the Class Period misrepresented material
facts about the business, management, revenues, transactions,
markets, financial condition, risk and business prospects of Golden
Bear;
(4) Whether statements made by defendants to
the investing public during the Class Period misrepresented
material facts about the business and finances of Golden Bear;
(5) Whether the market price of Golden Bear's
common stock during the Class Period was artificially inflated due
to the material misrepresentations and defendants' failure to
correct the material misrepresentations complained of herein;
(6) Whether Golden Bear's financial statements
filed with the SEC throughout the Class Period were prepared in
compliance with GAAP;
(7) Whether defendant Arthur Andersen's audit
of Golden Bear for fiscal year 1997 was performed in compliance
with Generally Accepted Auditing Standards ("GAAS"); and
(8) To what extent each member of the Class
has sustained damages and the proper measure of damages for each
member.
C. The claims of plaintiffs are typical of the
claims of other members of the Class and plaintiffs have no
interests that are adverse or antagonistic to the interests of the
Class.
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d. Plaintiffs are committed to the vigorous
prosecution of this action and have retained competent counsel
experienced in litigation of this nature. Plaintiffs' selection of
counsel was approved by Order of the Court dated November 9, 1998.
Accordingly, plaintiffs are adequate representatives and will
fairly and adequately protect the interests of the Class.
e. Plaintiffs do not anticipate any difficulty in
the management of this case as a class action.
30. For the reasons stated herein, a class action is
superior to other available methods for the fair and efficient
adjudication of this action and the claims asserted herein.
Because of the size of the claims of individual members of the
Class, few, if any, members of the Class could afford to seek legal
redress individually for the wrongs complained of herein.
APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD-ON-THE-MARKET DOCTRINE
31. At all relevant times, the market for Golden Bear
common stock was an efficient market for the following reasons,
among others:
a. Golden Bear common stock was listed and
actively traded on the NASDAQ National Market System, a highly
efficient and automated market;
b. As a regulated issuer, Golden Bear filed
periodic public reports with the SEC; and
C. Golden Bear regularly communicated with the
investing public through the dissemination of various reports,
participated in meetings and conferences with investors and
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securities analysts and engaged in other customary means of
communicating such as use of major newswire services for the
dissemination of press releases and providing information and
interviews about the Company to the business media.
32. As a result, the market for Golden Bear common stock
promptly reflected current information regarding the Company from
all publicly available sources and reflected such information in
Golden Bear's stock price. Under these circumstances, all
purchasers of Golden Bear shares during the Class Period suffered
similar injury through their purchase of shares at artificially
inflated prices and a presumption of reliance applies.
SUBSTANTIVE ALLEGATIONS
Background
33. On or about June 7, 1996, Golden Bear filed a
preliminary Form S-1 Registration Statement and Prospectus with the
SEC for the sale of 1.8 million shares of Golden Bear common stock.
The Registration Statement and Prospectus was amended several times
and became effective on or about July 31, 1996.
34. The effective Form S-i Registration Statement and
Prospectus (collectively the "IPO Prospectus") described Golden
Bear's business as follows:
Golden Bear, Inc. is a diversified, international brand name golf products and services company engaged in the development, marketing and management of golf-related businesses, including the licensing, ownership and operation of golf practice and instruction facilities, the construction and renovation of golf courses, the marketing of golf course design services and the licensing, distribution and sale of golf-related consumer
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products. Through its three divisions, the Golf Division, the Construction Division, and the Marketing Division, the Company provides high quality products and services in over 40 countries .
(IPO Prospectus at 3).
35. The IPO Prospectus described Paragon, Golden Bear's
construction division, as follows:
The Company provides comprehensive golf course construction services. These services include project management, shaping, renovation and golf course construction.
(IPO Prospectus at 36).
36. On or about August 1, 1996, pursuant to the IPO
Prospectus, Golden Bear sold approximately 2.48 million shares of
common stock at $16.00 per share, generating over $34.5 million.
Golden Bear common stock began trading on the NASDAQ National
Market System, closing at $18.50 per share on August 1, 1996.
37. Beginning in the fourth quarter of 1996 and
continuing into the first quarter of 1997, Golden Bear
substantially restructured its Paragon subsidiary. Defendant Boyd
was appointed President of the construction unit and several other
members of senior management were replaced.
38. On or about February 28, 1997, Golden Bear issued a
press release announcing its financial results for the fourth
quarter of fiscal 1996. Defendant Bellinger commented:
Growth in all three divisions led to our strong revenue performance . . . . Paragon Golf Construction completed a successful restructuring, and is competing effectively on new project awards . . . . (Emphasis added)
39. On or about April 10, 1997, in an article reported
in Dow Jones Online News, Golden Bear reported that its first-
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quarter results would be hurt by delays and senior management
changes. The Company stated that it would take a charge of
$570,000 in the first quarter to cover severance costs as a result
of personnel changes. Golden Bear announced that it had hired
defendant Boyd as the President of Paragon. The Company added that
Paragon had a lower volume of business in the first quarter, but
said it has "implemented improved processes and controls."
Defendants' Materially False And Misleading Statements During The Class Period
40. On or about April 30, 1997, Golden Bear issued a
press release announcing its results for the first quarter of
fiscal 1997 ended March 31, 1997. The Company reported revenues of
$6.8 million, a 58% increase over the $4.3 million in revenues
reported for the first quarter of 1996. Golden Bear, however,
reported a loss for the quarter of $1.6 million, or $0.29 per
share. The Company explained that the loss was due, in part, to
the previously announced severance charge and the restructuring at
Paragon which had now been completed. Golden Bear touted the
"improvements" at Paragon as follows:
The restructuring of Paragon, which began in the fourth quarter of 1996, continued into the first quarter of 1997. This decision led to a lower volume of active business in the first quarter, but has resulted in improved processes and controls. The company received prolect awards in excess of $35 million in the first quarter and work on these prolects is currently underway. (Emphasis added).
41. On or about May 15, 1997, Golden Bear filed with the
SEC a Form lO-Q for the first quarter of fiscal 1997 ended March
31, 1997. The quarterly report, signed by defendants Bellinger and
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Bates, reiterated Golden Bear's financial results announced in the
April 30, 1997 press release. Moreover, the quarterly report
represented:
The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with generally accepted accounting principles . . . . In the opinion of management, all adjustments considered necessary for a fair presentation have been included.
42. Golden Bear's press release and Form lO-Q for the
first quarter of fiscal 1997 were materially false and misleading
because of the following undisclosed material information, all of
which the Golden Bear defendants knew or recklessly disregarded:
a. contrary to the Company's assurances, Golden
Bear had not established "improved processes and controls" and
lacked sufficient internal controls to monitor the financial
performance and activities of Paragon;
b. Paragon was falsifying records and
misrepresenting the status of its construction projects;
C. Paragon was materially understating expenses,
including construction and shaping costs;
go Paragon was overstating revenues;
e. the growth at Paragon was materially overstated
because the Company was obtaining contracts based upon bids that
were unprofitable and would inevitably lead to increased losses in
net income and earnings per share; and
f. as a result of Paragon's fraudulent financial
reporting, Golden Bear's revenues, results of operations, and
earnings per share were materially overstated and the Company's
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financial statements were not prepared in accordance with GAAP as
detailed below.
43. On or about June 18, 1997, in an article published
in the Daily Business Review (Miami, Florida), the Company stated,
"future profitability and growth is assured by the executive and
organizational changes that have already been implemented [at
Paragon]." (Emphasis added). This statement was materially false
and misleading because, as the Golden Bear defendants knew or
recklessly disregarded, the Company lacked adequate internal
controls to monitor the financial performance of Paragon.
Moreover, the Golden Bear defendants knew or recklessly disregarded
that, as a result of inaccurate financial reporting at Paragon,
Golden Bear's revenues, earnings per share, and results of
operations were materially overstated in direct violation of GAAP.
44. On or about July 24, 1997, Golden Bear announced
that Paragon had recently increased its services to include project
management and design/build services for all golf-related
developments. By expanding its services, Paragon was said to be
able to provide clients with turnkey solutions for an entire
project. Defendant Boyd stated:
Having built a strong reputation for constructing quality golf courses, we felt it was time to expand our level of expertise into new areas of development. We have assembled an exceptional team of professionals with a wide variety of planning and construction specializations. (Emphasis added).
45. Defendant Boyd's statements on July 24, 1997 were
materially false or misleading at the time they were made because,
as the Golden Bear defendants knew or recklessly disregarded on
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July 24, 1997, the Company lacked sufficient internal controls to
monitor the financial performance and activities of Paragon, and
Paragon was misusing percentage-of-completion accounting to
artificially inflate its net income through improper revenue
recognition and the understatement of costs in violation of GAAP.
46. On or about July 31, 1997, Golden Bear issued a
press release announcing its financial results for the second
quarter of fiscal 1997 ended June 30, 1997. The Company reported
break-even net income on revenues of $22.3 million, representing a
164% increase over revenue reported for the same period in 1996.
The Company also reported that revenues for Paragon increased 153%
over revenues for the second quarter of 1996. The press release
further stated:
Paragon Construction continued to win substantial project awards, including letters of intent, as a result of its focus on expanded service offerings, bringing total awards through June 30, 1997 to more than $90 million. Paragon is currently developing more than 20 projects in the U.S., Mexico, Europe, and Asia, including a number of projects which reflect the division's expansion into project management and design/build services for golf-related developments.
47. On or about August 14, 1997, Golden Bear filed its
quarterly report on Form 10-Q for the second quarter of fiscal 1997
ended June 30 1 1997. The quarterly report, signed by defendants
Bellinger and Bates, reiterated the Company's financial results
announced in the July 31, 1997 press release. Moreover, the
quarterly report represented:
The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with generally accepted accounting principles . . . . In
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the opinion of management, all adjustments considered necessary for a fair presentation have been included.
48. Golden Bear's press release and Form 10-Q announcing
its second quarter fiscal 1997 financial results were materially
false and misleading because of the following undisclosed material
information, all of which the Golden Bear defendants knew or
recklessly disregarded:
a. the Company lacked sufficient internal controls
to monitor the financial performance and activities of Paragon;
b. Paragon was falsifying records and
misrepresenting the status of construction projects;
C. Paragon was materially understating expenses,
including construction and shaping costs;
d. Paragon was overstating revenues;
e. the growth at Paragon was materially overstated
because the Company was obtaining contracts based upon bids that
were unprofitable and would inevitably lead to increased losses in
net income and earnings per share; and
f. as a result of Paragon's fraudulent financial
reporting, Golden Bear's revenues, results of operations, and
earnings per share were materially overstated and the Company's
financial statements were not prepared in accordance with GAAP as
detailed below.
49. On or about September 29, 1997, in an article
published in the Engineering News-Record entitled "Golf Boom Puts
Paragon's Sales on a Sharp Upward Trajectory," Paragon projected
revenue of $65 million in 1997, a substantial improvement over the
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$20.4 million reported for 1996. Defendant Boyd stated that
Paragon's backlog had bulged to $100 million and that Paragon had
taken advantage of the golf boom through aggressive marketing and
an expanded range of services.
50. Defendant Boyd's comments in the September 29, 1997
Engineering News-Record article were materially false and
misleading because of the following undisclosed material
information, all of which the Golden Bear defendants knew or
recklessly disregarded:
a. Paragon was falsifying records and
misrepresenting the status of its construction projects;
b. Paragon was materially understating expenses,
including construction and shaping costs;
C. Paragon was overstating revenues in direct
violation of GAAP; and
d. the growth at Paragon was materially overstated
because the Company was obtaining contracts based upon bids that
were unprofitable and would inevitably lead to increased losses in
net income and earnings per share.
51. On or about October 7, 1997, Golden Bear announced
the completion of a definitive credit agreement with SunTrust Bank
for a $10 million revolving credit facility. Defendants were
motivated, in part, to misrepresent the Company's financial
condition in an effort to secure this line of credit. Defendant
Bellinger was quoted as saying: "[W]e are pleased to have arranged
working capital financing, especially for our rapidly growing
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Paragon Construction division, which through June of this year has
won contract awards in excess of $90 million . . . ."
52. Defendant Bellinger's comments in the October 7,
1997 press release were materially false and misleading at the time
they were made because of the following undisclosed material
information, all of which the Golden Bear defendants knew or
recklessly disregarded:
a. Paragon was falsifying records and
misrepresenting the status of its construction projects;
b. Paragon was materially understating expenses,
including construction and shaping costs;
C. Paragon was overstating revenues in direct
violation of GAAP; and
d. the growth at Paragon was materially overstated
because the Company was obtaining contracts based upon bids that
were unprofitable and would inevitably lead to increased losses in
net income and earnings per share.
53. On or about October 30, 1997, Golden Bear issued a
press release announcing its financial results for the third
quarter of 1997 ended September 30, 1997. The Company reported
revenues of $17.7 million, representing a 79% increase over
revenues of $9.9 million reported for the third quarter of 1996.
Net earnings for the quarter were $364,000, or $0.07 per share, up
from the $268,000 reportedly earned in the third quarter of 1996.
Golden Bear reported that Paragon's revenues increased 50% over
revenues from the third quarter of 1996. Defendant Bellinger
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commented, "Paragon . . . continued to win substantial project
awards, and is currently developing nearly 30 projects around the
world. Total backlog . . . now exceeds $100 million."
54. On or about November 14, 1997, Golden Bear filed its
Form lO-Q for the third quarter of fiscal 1997 ended September 30,
1997. The quarterly report, signed by defendants Bellinger and
Winslett, reiterated the financial results announced by Golden Bear
in its October 30, 1997 press release. Moreover, the quarterly
report represented:
The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with generally accepted accounting principles . . . . In the opinion of management, all adjustments considered necessary for a fair presentation have been included.
55. Golden Bear's October 30, 1997 press release and
third quarter fiscal 1997 Form 10-Q were materially false and
misleading because of the following undisclosed material
information, all of which the Golden Bear defendants knew or
recklessly disregarded:
a. the Company lacked sufficient internal controls
to monitor the financial performance and activities of Paragon;
b. Paragon was falsifying records and
misrepresenting the status of construction projects;
C. Paragon was materially understating expenses,
including construction and shaping costs;
d. Paragon was overstating revenues;
e. the growth at Paragon was materially overstated
because the Company was obtaining contracts based upon bids that
26
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were unprofitable and would inevitably lead to increased losses in
net income and earnings per share; and
f. as a result of Paragon's fraudulent financial
reporting, Golden Bear's revenues, results of operations, and
earnings per share were materially overstated and the Company's
financial statements were not prepared in accordance with GAAP as
detailed below.
56. On or about January 15, 1998, Golden Bear issued a
press release announcing that it had again reorganized, this time
streamlining its organization into two operating units: Paragon
and a new Customer Products Division. Defendant Bellinger stated,
"We expect to see benefits from this streamlined and more balanced
organizational structure."
57. On or about February 27, 1998, Golden Bear issued a
press release announcing its financial results for the fourth
quarter and fiscal year ended December 31, 1997. Revenues for the
fourth quarter were reported as $21.0 million, representing a 93%
increase over revenues from the fourth quarter of 1996. Paragon's
revenues reportedly increased 133% from the corresponding quarter
in 1996.
58. For fiscal year 1997, the press release reported
consolidated revenues of $67.7 million, a 102% increase over 1996
revenues. The net loss for the year was reported as $2.9 million,
or $0.53 per share, an improvement over the net loss of $0.57 per
share recorded for fiscal 1996. Defendant Bellinger was quoted in
the press release:
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Paragon . . . generated record revenues and profits this year. We are very pleased with the results of our restructuring of Paragon, which is poised for substantial growth in 1998 . .
59. Golden Bear's February 27, 1998 press release was
materially false and misleading because of the following
undisclosed material information, all of which defendants knew or
recklessly disregarded:
a. contrary to the Company's fraudulent
representations, Golden Bear had suffered a net loss of $24.7
million for fiscal 1997 on revenues of only $34.8 million, as the
Company admitted in its restatement at the end of the Class Period;
b. Golden Bear lacked sufficient internal controls
to monitor the financial performance and activities of Paragon;
C. Paragon was falsifying records and
misrepresenting the status of construction projects;
d. Paragon was materially understating expenses,
including construction and shaping costs;
e. Paragon was overstating revenues;
f. the growth at Paragon was materially overstated
because the Company was obtaining contracts based upon bids that
were unprofitable and would inevitably lead to increased losses in
net income and earnings per share; and
g. as a result of Paragon's fraudulent financial
reporting, Golden Bear's revenues, results of operations, and
earnings per share were materially overstated and the Company's
financial statements were not prepared in accordance with GAAP as
detailed below.
28
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60. On or about March 31, 1998, Golden Bear filed its
1997 Form 10-K. The annual report repeated the financial results
announced in the Company's February 27, 1998 press release. In
addition, the annual report stated:
The level of construction service [provided by Paragon] during the fourth quarter of 1996 and the first quarter of 1997 was limited based on management's decision to curtail such activities pending the implementation of new systems and the integration of new staff. The Company believes that the improved processes and controls that have been put into place will facilitate the future growth of its Construction Division. During 1997, the Company continued to receive significant new project awards, bringing Paragon's total backlog as of December 31, 1997 to over $170 million, compared to a backlog of less than $10 million at December 31, 1996. (Emphasis added).
61. Golden Bear's 1997 Form 10-K also contained the
following report by defendant Arthur Andersen:
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Golden Bear Golf, Inc.: We have audited the accompanying consolidated balance sheets of Golden Bear Golf, Inc. and subsidiaries as of December 31, 1997, anc 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for ea Dh of the three years in the period ended December 31, 1997. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
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We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Golden Bear Golf, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. (Emphasis added).
62. Golden Bear's 1997 Form 10-1< was materially false
and misleading at the time it was filed because of the following
undisclosed material information, all of which defendants knew or
recklessly disregarded:
a. contrary to the Company's fraudulent
representations, Golden Bear suffered a net loss of $24.7 million
for fiscal 1997 on revenues of only $34.8 million, as the Company
admitted in its restatement at the end of the Class Period;
b. Golden Bear lacked sufficient internal controls
to monitor the financial performance and activities of Paragon;
C. Paragon was falsifying records and
misrepresenting the status of construction projects;
d. Paragon was materially understating expenses,
including construction and shaping costs;
e. Paragon was overstating revenues;
f. the growth at Paragon was materially overstated
because the Company was obtaining contracts based upon bids that
were unprofitable and would inevitably lead to increased losses in
net income and earnings per share;
30
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g. as a result of Paragon's fraudulent financial
reporting, Golden Bear's revenues, results of operations, and
earnings per share were materially overstated and the Company's
financial statements were not prepared in accordance with GAAP as
detailed below;
h. Golden Bear's financial statements did not
fairly present the true financial position of the Company;
i. Golden Bear's financial statements were not
prepared in accordance with GAAP; and
j. Arthur Andersen's audit of the Company was not
performed in accordance with GAAS.
63. on or about April 23, 1998, Golden Bear issued a
press release announcing its financial results for the first
quarter of fiscal 1998 ended March 31, 1998. The Company reported
revenues of $22.5 million, "more than triple the $6.8 million in
revenues recorded for the first quarter of fiscal 1997." (Emphasis
added). Paragon's revenues were reported as $16.0 million,
compared to revenues of only $1.3 million in the year ago quarter.
For the quarter, Golden Bear reported a net loss of only $778,290.
64. Golden Bear's April 23, 1998 press release was
materially false and misleading because of the following
undisclosed material information, all of which the Golden Bear
defendants knew or recklessly disregarded:
a. contrary to the Company's fraudulent
representations, Golden Bear suffered a net loss of $7.3 million
for the first quarter of fiscal 1998 on revenues of only $11.3
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million, as the Company admitted in its restatement at the end of
the Class Period;
b. Golden Bear lacked sufficient internal controls
to monitor the financial performance and activities of Paragon;
C. Paragon was falsifying records and
misrepresenting the status of construction projects;
d. Paragon was materially understating expenses,
including construction and shaping costs;
e. Paragon was overstating revenues;
f. the growth at Paragon was materially overstated
because the Company was obtaining contracts based upon bids that
were unprofitable and would inevitably lead to increased losses in
net income and earnings per share; and
g. as a result of Paragon's fraudulent financial
reporting, Golden Bear's revenues, results of operations, and
earnings per share were materially overstated and the Company's
financial statements were not prepared in accordance with GAAP as
detailed below.
65. On or about April 29, 1998, without any prior
warning, Golden Bear issued a press release announcing that
defendant Boyd was "no longer with the Company." Golden Bear also
stated that Paragon management would now report directly to
defendant Bellinger.
66. On or about May 5, 1998, Golden Bear issued a press
release announcing that the Company had commenced an internal
review of the activities at Paragon. The Company stated:
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The review will focus on the status of construction projects, cost requirements associated with the completion of the projects and the anticipated profitability of the projects. Specific attention will be given to contract requirements, including amendments and change orders, and the related estimated anticipated costs of fulfilling those requirements. From the information currently available to the Company, the Company believes it may be necessary to recognize losses associated with the projects.
*****
The Company is in the process of hiring a new President at Paragon and, in the interim, has hired Donald W. Dreusike . . . to serve as acting President of Paragon.
67. On or about May 8, 1998, in an article published in
The Palm Beach Post, Golden Bear announced that, in addition to
defendant Boyd, three other unnamed executives had also departed
from Paragon. In connection with the Company's commencement of the
internal review, defendant Bellinger commented, "We've been able to
identify the potential for potential losses . . . but we don't
know that to be fact."
68. Golden Bear's statements concerning defendant Boyd's
dismissal and the Company's commencement of an internal
investigation were materially misleading at the time they were made
because of the following undisclosed material information, all of
which the Golden Bear defendants knew or recklessly disregarded:
a. Paragon was falsifying records and
misrepresenting the status of construction projects;
b. Paragon was materially understating expenses,
including construction and shaping costs;
C. Paragon was overstating revenues; and
33
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d. as a result of Paragon's fraudulent financial
reporting, Golden Bear's revenues, results of operations, and
earnings per share were materially overstated for fiscal 1997 and
the first quarter of fiscal 1998 and the Company's financial
statements were not prepared in accordance with GAAP as detailed
below.
69. On or about May 15, 1998, Golden Bear filed with the
SEC a Form lO-Q for the first quarter of fiscal 1998 ended March
31, 1998. The Form lO-Q, signed by defendants Bellinger and
Winslett, reiterated the Company's financial results announced in
the April 23, 1998 press release. Moreover, the quarterly report
represented:
The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with generally accepted accounting principles . . . . In the opinion of management, all adjustments considered necessary for a fair presentation have been included.
70. The Company's Form 10-Q for the first quarter of
fiscal 1998 was materially false and misleading at the time it was
filed because of the following undisclosed material information,
all of which the Golden Bear defendants knew or recklessly
disregarded:
a. contrary to the Company's fraudulent
representations, Golden Bear suffered a net loss of $7.3 million
for the first quarter of fiscal 1998 on revenues of only $11.3
million, as the Company admitted in its restatement at the end of
the Class Period;
34
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b. Golden Bear lacked sufficient internal controls
to monitor the financial performance and activities of Paragon;
C. Paragon was falsifying records and
misrepresenting the status of construction projects;
d. Paragon was materially understating expenses,
including construction and shaping costs;
e. Paragon was overstating revenues;
f. the growth at Paragon was materially overstated
because the Company was obtaining contracts based upon bids that
were unprofitable and would inevitably lead to increased losses in
net income and earnings per share; and
g. as a result of Paragon's fraudulent financial
reporting, Golden Bear's revenues, results of operations, and
earnings per share were materially overstated and the Company's
financial statements were not prepared in accordance with GAAP as
detailed below.
71. On or about May 25, 1998, an article in The Columbus
Dispatch reported that Bellinger "expects the company to make a
profit this year, with revenue poised to increase 20%." It was
further reported that the golf construction business was "booming,
with $170 million worth of work on the boards at the beginning of
the year -- compared with $10 million a year ago." Discussing the
stock's recent decline in price, defendant Bellinger stated:
Are we disappointed our stock hasn't done well since the initial public offering? Absolutely. Are we panicking? Rubbing our hands? No. Because we understand why it has happened.
35
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72. Defendant Bellinger's comments in the May 25, 1998
article were materially false and misleading because of the
following undisclosed material information, all of which the Golden
Bear defendants knew or recklessly disregarded:
a. Golden Bear lacked sufficient internal controls
to monitor the financial performance and activities of Paragon;
b. Paragon was falsifying records and
misrepresenting the status of construction projects;
C. Paragon was materially understating expenses,
including construction and shaping costs;
d. Paragon was overstating revenues; and
e. the growth at Paragon was materially overstated
because the Company was obtaining contracts based upon bids that
were unprofitable and would inevitably lead to increased losses in
net income and earnings per share.
73. In response to the Company's partial disclosure of
Paragon's problems, the price of Golden Bear common stock began to
decline as rumors concerning a restatement began to surface. From
May 5, 1998 to July 27, 1998, the common stock price of Golden Bear
fell from $8.625 per share to $4.00 per share.
74. On or about July 25, 1998, in an article published
by the Wall Street Journal, Donald Trump stated that he was
thrilled when Paragon had agreed to build a golf course at Trump
International Golf Club for $7 million, which was less than half
what he would have had to pay anyone else. Paragon was awarded the
bid in early 1998, but after Boyd's departure and Golden Bear's
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announcement of its internal investigation, Donald Trump released
Paragon from its contract, as the Company would have lost millions
if it had to complete the job under the contract's terms. The fact
that Paragon's bid was less than one-half than that of other
bidders indicates that the defendants were well aware, or at least
recklessly disregarded, the fraudulent financial activities
occurring at Paragon.
75. On or about July 27, 1998, NASDAQ halted trading of
Golden Bear shares upon learning the Company was going to issue an
announcement regarding its internal investigation. Later that same
day, Golden Bear issued a press release announcing the completion
of its internal review of construction projects at Paragon. The
press release stated as follows:
Golden Bear Golf, Inc. announced today that it has completed its internal review of construction projects at its subsidiary, Paragon Construction International, for the year ended December 31, 1997, and, as a result, the Company will report a restated loss of $24.7 million or a loss of $4.49 per share for the year ended December 31, 1997, compared to a loss of $2.9 million or $.53 per share as originally reported.
The Company expects to complete its review for 1998 prior to August 15, 1998, and expects to recognize losses for the six months ended June 30, 1998, of up to $17 million attributable to ongoing Paragon construction projects and the operations of Golden Bear Golf Centers prior to their sale. Restated financial statements will be filed with the Securities & Exchange Commission. Accordingly, the previously filed financial statements for the periods ended December 31, 1997, and March 31, 1998, and the report of Arthur Andersen LLP on the December 31, 1997, financial statements should not be relied upon.
As previously announced, the Company has undertaken an extensive review of its construction projects at Paragon, focusing on the status of such projects, along with the costs required to fully complete the jobs and anticipated profitability. This review was conducted with the
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assistance of its outside legal counsel Fleming, Haile & Shaw P.A., Arthur Andersen LLP, and PriceWaterhouse Coopers LLP.
As a result of this review, the Company has found clear and compelling evidence that former management of Paragon deliberately falsified records, misrepresented the status of construction projects and made false statements about Paragon's revenues, costs, and profits . . . (Emphasis added).
76. The following day, July 28, 1998, NASDAQ announced
that trading in Golden Bear common stock would remain halted until
the Company fully satisfied NASDAQ's request for additional
information.
Post Class Period News and Admissions
77. On or about August 14, 1998, Golden Bear issued a
press release announcing that the Company would be delisted from
the NASDAQ National Market on August 18, 1998 because it no longer
was able to meet the net tangible asset requirements for listing.
78. On or about August 21, 1998, Golden Bear began
trading over the counter on the OTC Bulletin Board at a price as
low as $0.50 per share. During the Class Period, as a result of
defendants' materially false or misleading statements, Golden Bear
common stock traded as high as $15.00 per share.
79. On or about October 19, 1998, Golden Bear issued a
press release announcing that it had filed an amended Form 10-K for
the year ended December 31, 1997, an amended Form 10-Q for the
first quarter ended March 31, 1998, and a Form 10-Q for the second
quarter ended June 30, 1998. The Company also announced that
defendant Bellinger had resigned as President and CEO.
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80. In Golden Bear's amendment to its 1997 Form 10-K,
filed on or about October 19, 1998, the Company disclosed:
In connection with the departure of certain members of Paragon's senior management during 1998, the Company conducted comprehensive review of Paragon's construction projects, focusing on the status of the projects, the costs required to fully complete the jobs and the anticipated profitability or losses of such projects
In the review, the Company found evidence that former management of Paragon falsified records, underbid construction projects, and made false statements about Paragon's revenues, costs and profits .
The Securities and Exchange Commission is conducting a private investigation to determine whether the Company or certain of its current or former officers, directors and employees have engaged in conduct in violation of certain provisions of the Securities Exchange Act of 1934 and the rules and regulations thereunder. The Company believes that such investigation is focused principally on the recognition of additional costs and losses associated with the review of Paragon's construction projects and the Company's public statements and accounting systems with respect thereto. (Emphasis added).
81. On or about November 25, 1998, Golden Bear issued a
press release announcing its financial results for the third
quarter ended September 30, 1998. The Company disclosed that its
Board of Directors had approved the discontinuance of its Paragon
construction division as of October 26, 1998. Defendant Winslett
stated that the Company would, however, attempt to continue its
involvement in golf course construction through an alliance with
the Weitz Company, Inc.
DEFENDANTS' FAILURE TO COMPLY WITH GAAP
82. Under ARB 45, the accounting pronouncement governing
accounting for long term construction contracts, the percentage of
completion method may only be used when estimates of costs to
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complete and extent of progress toward completion of long term
contracts are reasonably dependable. ARB 45.15. If the percentage
of completion method is used however "when the current estimate of
a total contract costs indicate a loss, in most circumstances
provisions should be made for the loss on the entire contract."
ARB 45.6. (Emphasis added).
83. With respect to percentage-of-completion accounting,
Golden Bear's financial statements were not prepared in accordance
with GAAP as the Company: (1) utilized the percentage of completion
method even though defendants knew or recklessly disregarded that
there were insufficient controls and systems to allow for the
calculation of reasonably dependable estimates of costs to complete
and extent of progress toward completion of the contracts; and (2)
failed to make timely provisions for losses on the construction
contracts even though there were indications of a loss.
84. The foregoing materially false and misleading Golden
Bear financial statements, which were filed with the SEC and
disseminated to the investing public throughout the Class Period,
also violated at least the following principles of GAAP:
(a) The principle that financial reporting should
provide information that is useful to present and potential
investors and creditors and other users in making rational
investment, credit and similar decisions (FASB Statement of
Concepts No. 1, ¶ 34);
(b) The principle that financial reporting should
provide information about the economic resources of an enterprise,
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the claims to those resources, and the effects of transactions,
events and circumstances that change resources and claims to those
resources (FASB Statement of Concepts No. 1, ¶ 40);
(c) The principle that financial reporting should
provide information about an enterprise's financial performance
during a period. Investors and creditors often use information
about the past to help in assessing the prospects of an enterprise.
Thus, although investment and credit decisions reflect investors'
expectations about future enterprise performance, those
expectations are commonly based at least partly on evaluations of
past enterprise performance (FASB Statement of Concepts No. 1,
¶ 42);
(d) The principle that financial reporting should
be reliable in that it represents what it purports to represent.
That information should be reliable as well as relevant is a notion
that is central to accounting (FASB Statement of Concepts No. 2,
11 58-59) ;
(e) The principle of completeness, which means that
nothing is left out of the information that may be necessary to
ensure that it validly represents underlying events and conditions,
(FASB Statement of Concepts No. 2, ¶ 79); and
(f) The principle that conservatism be used as a
prudent reaction to uncertainty to try to ensure that uncertainties
and risks inherent in business situations are adequately
considered. The best way to avoid injury to investors is to try to
41
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ensure that what is reported represents what it purports to
represent (FASB Statement of Concepts No. 2, ST 95, 97).
ARTHUR ANDERSEN'S FAILURE TO COMPLY WITH GAAS
85. Arthur Andersen's audit of Golden Bear and its
representation that Golden Bear's financial statements complied
with GAAP violated at least the following standards of GAAS adopted
by the American Institute of Certified Public Accountants and set
forth in the Professional Standards at § AU 150.02:
a. Due professional care is to be exercised in the
performance of the audit and the preparation of the report;
b. A sufficient understanding of internal control
is to be obtained to plan the audit and determine the nature,
timing, and extent of tests to be performed; and
C. Sufficient competent evidential matter is to be
obtained through inspection, observation, inquiries, and
confirmations to afford a reasonable basis for an opinion regarding
the financial statements under audit.
86. With respect to the aforementioned standards, Arthur
Andersen did not exercise due professional care in its audit of the
revenue cycle and its audit of the percentage-of-completion
accounting for Paragon. Arthur Andersen failed to obtain
sufficient competent evidential matter to corroborate management's
"estimates" of the status of individual construction projects,
which resulted in the Company reporting overstated revenues and
results of operations. Furthermore, Arthur Andersen knew or was
reckless in not knowing that Paragon's system of internal controls
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relating to its percentage-of-completion accounting was inadequate.
Had Arthur Andersen done the aforementioned, it would have known
that the reported results of operation were materially overstated.
87. Arthur Andersen falsely opined that Golden Bear's
reported financial results for 1997 fairly presented the Company's
results of operations for the year in conformity with GAAP and that
their audit of the Company's financial statements was executed in
conformity with GAAS. As described in Paragraphs 82 through 84,
Golden Bear's financial statements were not prepared in accordance
with GAAP. Additionally, as described in the preceding paragraph,
Arthur Andersen's audit was not performed in accordance with GA-AS.
88. Arthur Andersen was obligated to perform a diligent
investigation and apply a heightened level of scrutiny into Golden
Bear's internal controls as Arthur Andersen's audit for 1997 was
its initial audit after Paragon had undergone substantial
restructuring in the early part of 1997.
ADDITIONAL SCIENTER ALLEGATIONS
89. As alleged herein defendants acted with scienter as
they knew or recklessly disregarded that the public documents and
statements issued or disseminated in the name of Golden Bear were
materially false and misleading; knew that such statements or
documents would be issued or disseminated to the investing public;
and knowingly or recklessly substantially participated or
acquiesced in the issuance or dissemination of such statements or
documents as primary violators of the federal securities laws. As
set forth elsewhere herein in detail, defendants, by virtue of
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their receipt of information reflecting the true facts regarding
Golden Bear, their control over, and/or receipt and/or modification
of Golden Bear's allegedly materially misleading misstatements
and/or their associations with Golden Bear which made them privy to
confidential proprietary information concerning Golden Bear,
participated in the fraudulent scheme alleged herein. Defendants
knew and/or recklessly disregarded the falsity and misleading
nature of the information which they caused to be disseminated to
the investing public.
90. Defendants knew or recklessly disregarded the truth
concerning Paragon's financial activities and condition, as
evidenced by the following:
a. Paragon was obtaining its construction
contracts based upon bids that were substantially below the bids
submitted by its competitors. For example, Donald Trump stated
that Paragon's contract bid for a Trump International Golf Club
project was "less than half" of what was bid by Paragon's
competitors;
b. Paragon's revenues reportedly grew 156% in the
second quarter of fiscal 1997, 50% in the third quarter of fiscal
1997, and 133% for the fourth quarter of fiscal 1997. For the
first quarter of fiscal 1998, Paragon's reported revenues grew by
over 1100%. This alarming growth rate was clearly a red flag for
defendants to further monitor and investigate the growth and
financial activities of Paragon; and
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C. Golden Bear's fiscal 1997 restatement resulted
in a reduction of Paragon's revenues from $39.75 million to $21.89
million, wiping out approximately 45% of the construction unit's
revenues. Such an outrageous overstatement of revenues and fraud
of this magnitude could hardly have gone unnoticed or undetected by
the Golden Bear defendants absent actual knowledge or recklessness
during the Class Period
NONAPPLICABILITY OF SAFE HARBOR
91. The statutory safe harbor provided for forward-
looking statements ("FLS") does not apply to the false FLS pleaded.
The safe harbor does not apply to Golden Bear's allegedly false
financial statements. The FLS pleaded herein were not specifically
identified as "forward-looking statements" when made nor did
meaningful cautionary statements identifying important factors that
could cause actual results to differ materially from those in the
FLS accompany those FLS.
COUNT I
[Violations of Section 10(b) of the Exchange Act and Rule lOb-5 Promulgated Thereunder Against
All Defendants I
92. Plaintiffs repeat and reallege the allegations set
forth above as though fully set forth herein.
93. This count is brought by plaintiffs pursuant to
Section 10(b) of the Exchange Act and Rule 10b-5 promulgated
thereunder by the SEC against all of the defendants.
94. Defendants knew, or were reckless in failing to
know, of the material omissions and misrepresentations contained in
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the statements as set forth above. Because of their board
membership and/or their executive and managerial positions with
Golden Bear and Paragon, or other relationships with Golden Bear,
defendants: (a) knew or had access to information concerning the
adverse non-public information concerning Golden Bear's financial
outlook, which information was not disclosed; and (b) drafted,
reviewed, and/or approved the misleading statements, releases,
reports, and other public representations of and about Golden Bear.
95. Throughout the Class Period, defendants, with
knowledge or reckless disregard for the truth, disseminated or
approved releases, statements and reports, referred to above, which
were materially false and misleading in that they contained
misrepresentations and failed to disclose facts necessary in order
to make the statements made, in light of the circumstances under
which they were made, not misleading.
96. During the Class Period, defendants, individually
and in concert, directly and indirectly, engaged and participated
in a continuous course of conduct and conspiracy to conceal adverse
material information regarding the financial activities and
condition of Paragon as specified herein. Defendants employed
devices, schemes, and artifices to defraud and engaged in acts,
practices, and a course of conduct as alleged herein to commit a
fraud on the integrity of the market for the Company's stock and to
maintain artificially high market prices for the common stock of
Golden Bear. This included the formulation, making of and/or
participation in the making of, untrue statements of material facts
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and the omission to state material facts necessary in order to make
the statements made, in light of the circumstances under which they
were made, not misleading, and engaging in acts, practices and a
course of conduct which operated as a fraud and deceit upon
plaintiffs and the Class, all of the above in connection with the
purchase of Golden Bear common stock by plaintiffs and members of
the Class.
97. By reason of the conduct alleged herein, defendants
knowingly or recklessly have violated § 10(b) of the Exchange Act
and Rule 10b-5 promulgated thereunder in that they: (a) employed
devices, schemes, and artifices to defraud; (b) made untrue
statements of material fact and/or omitted to state material facts
necessary to make the statements not misleading; and (c) engaged in
acts, practices, and a course of business which operated as a fraud
and deceit upon the purchasers of Golden Bear's stock in connection
with their purchases of Golden Bear stock during the Class Period.
98. Plaintiffs and the Class have suffered substantial
damages in that, in reliance on the integrity of the market, they
paid artificially inflated prices for Golden Bear common stock as
a result of defendants' violations of §10(b) of the Exchange Act
and SEC Rule 10b-5. Plaintiffs and the Class would not have
purchased Golden Bear common stock at the prices they paid, or at
all, if they had been aware that the market prices had been
artificially and falsely inflated by defendants' materially false
and misleading statements and concealments. At the time of the
purchases by plaintiffs and the Class of Golden Bear common stock,
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the fair market value of said common stock was substantially less
than the prices paid by them.
99. By virtue of the foregoing, all of the defendants
have violated Section 10(b) of the Exchange Act, and Rule 10b-5
promulgated thereunder.
COUNT II
[Violation of Section 20(a) of the Exchange Act Against the Individual Defendants]
100. Plaintiffs repeat and reallege the allegations set
forth above as if set forth fully herein. This claim is asserted
by plaintiffs against the Individual Defendants.
101. The Individual Defendants acted as controlling
persons of Golden Bear within the meaning of Section 20(a) of the
Exchange Act as alleged herein. By virtue of their high-level
positions, substantial stock holdings, participation in and/or
awareness of the Company's operations and/or intimate knowledge of
the Company's internal financial condition, business practices,
products and the actual progress of its development and marketing
efforts, these defendants had the power to influence and control
and did influence and control, directly or indirectly, the
decision-making of Golden Bear, including the content and
dissemination of the various statements which plaintiffs contend
are false and misleading. Each of the Individual Defendants was
provided with or had unlimited access to copies of Golden Bear's
internal reports, press releases, public filings and other
statements alleged by plaintiffs to be misleading prior to and/or
shortly after these statements were issued and had the ability to
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prevent the issuance of the statements or cause the statements to
be corrected.
102. In particular, each of the Individual Defendants had
direct involvement in or intimate knowledge of the day-to-day
operations of Golden Bear and, therefore, is presumed to have had
the power to control or influence the particular transactions
giving rise to the securities violations as alleged herein, and
exercised the same.
103. As set forth above, the Individual Defendants each
violated Section 10(b) and Rule 10b-5 by their acts and omissions
as alleged in this Complaint. By virtue of their positions as
controlling persons, these defendants are liable pursuant to
Section 20(a) of the Exchange Act.
104. As a direct and proximate result of the wrongful
conduct of these defendants, plaintiffs and other members of the
Class suffered damages in connection with their purchases of the
Company's securities during the Class Period.
PRAYER FOR RELIEF
WHEREFORE, plaintiffs, on behalf of themselves and the
Class, pray for judgment as follows:
A. declaring this action to be a plaintiff class
action properly maintained pursuant to Rule 23
of the Federal Rules of Civil Procedure;
B. awarding plaintiffs and other members of the Class
damages together with interest thereon;
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C. awarding plaintiffs and other members of the Class
their costs and expenses of this litigation,
including reasonable attorneys' fees, accountants'
fees and experts' fees and other costs and dis-
bursements; and
D. awarding plaintiffs and other members of the Class
such other and further relief as may be just and
proper under the circumstances.
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JURY TRIAL DEMANDED
Plaintiffs hereby demand a trial by jury.
Dated: December 24, 1998
BURT & PUCILLO, LLP
BY: Michal J.
' ücillo
Florida Ballo. 261033 Wendy H. Zoberman Florida Bar. No. 434670 Esperanté 222 Lakeview Avenue Suite 300 East West Palm Beach, Florida 33401 Phone: (561) 835-9400 Fax: (561) 835-0322
Plaintiffs' Co-Lead Counsel and Liaison Counsel
SCHIFFRIN CRAIG & BARROWAY, LLP Andrew L. Barroway Marc A. Topaz Gregory M. Castaldo Three Bala Plaza East Suite 400 Bala Cynwyd, PA 19004 Phone: (610) 667-7706 Fax: (610) 667-7056
Plaintiffs' Co-Lead Counsel
ABBEY, GARDY & SQUITIERI, LLP Lee Squitieri, Esq. James S. Notis, Esq. 212 East 39th Street New York, NY 10016 (212) 889-3700
51
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BERMAN, DEVALERIO & PEASE LLP Peter A. Pease, Esq. One Liberty Square Boston, MA 02109 (617) 542-8300
LAW OFFICE OF LEO W. DESMOND Leo W. Desmond, Esq. 2161 Palm Beach Lake Blvd. Suite 204 West Palm Beach, FL 33409 (561) 712-8000
ROBERT C. GILBERT, P.A. Robert C. Gilbert, Esq. 133 Sevilla Coral Gables, FL 33134 (305) 529-9100
LAW OFFICES OF DENNIS J. JOHNSON Dennis J. Johnson, Esq. Jacob B. Perkinson, Esq. 1690 Williston Road South Burlington, VT 05403 (802) 862-0030
LAW OFFICES OF RICHARD D. KRANICH Richard D. Kranich, Esq. 120 Broadway Suite 1016 New York, NY 10271 (212) 608-8965
LEESFIELD LEIGHTON RUBIO & MAHFOOD, P.A.
George G. Mahfood, Esq. 2350 South Dixie Highway Miami, FL 33133 (305) 854-4900
LEVY AND LEVY Stephen Levy, Esq. 445 Northern Blvd. Great Neck, NY 11021 (516) 829-4500
52
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MILBERG WEISS BERSHAD HYNES & LERACH LLP
Steven G. Schulman, Esq. Samuel H. Rudman, Esq. Michael A. Swick, Esq. One Pennsylvania Plaza 49th Floor New York, NY 10119-0165 (212) 594-5300
RABIN & PECKEL LLP Marvin L. Frank, Esq. 275 Madison Avenue New York, NY 10016 (212) 682-1818
REINHARDT & ANDERSON Randall Steinmeyer, Esq. E-1000 First National Bank Building 332 Minnesota Street St. Paul, MN 55101 (651) 227-9990
STULL, STULL & BRODY Jules Brody, Esq. 6 East 45th Street New York, NY 10017 (212) 687-7230
WEISS & YOURNAN Joseph H. Weiss, Esq. 551 5th Avenue New York, NY 10176 (212) 682-3025
53
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WOLF POPPER, LLP Marian P. Rosner, Esq. Paul 0, Paradis, Esq. Carl L. Stifle, Esq. 845 Third Avenue New York, NY 10022 (212) 759-4600
LAW OFFICES OF ALFRED C. YATES, JR. Alfred G. Yates, Jr., Esq. 519 Allegheny Building 429 Forbes Avenue Pittsburgh, PA 15219 (412) 391-5164
Attorneys for Plaintiffs
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that a true and accurate copy of the
foregoing has been furnished via U.S. Mail this 24th day of
December, 1998, to all counsel on the attached Service List.
~-3 V L' U -~ ~\ 0, Mich el Jycillo
H: \Judy\28052\Amcomp. htm
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Michael J. Pucillo Burt & Pucillo, LLP 222 Lakeview Avenue Suite 300 East West Palm Beach, FL 33401
Stephen Levy Levy and Levy 445 Northern Blvd. Great Neck, NY 11021
Dennis J. Johnson Jacob B. Perkinson Law Offices of Dennis J. Johnson 1690 Williston Road South Burlington, VT 05403
Robert C. Gilbert Robert C. Gilbert, P.A. 133 Sevilla Coral Gables, FL 33134
Peter A. Pease Berman DeValerio & Pease LLP One Liberty Square Boston, MA 02109
Marian P. Rosner Paul 0. Paradis Carl L. Stine Wolf Popper LLP 845 Third Avenue New York, NY 10022
Andrew L. Barroway Schiffrin Craig & Barroway, LLP Three Bala Plaza East Suite 400 Bala Cynwyd, PA 19004
Leo W. Desmond Law Offices of Leo W. Desmond 2161 Palm Beach Lakes Blvd. Suite 204 West Palm Beach, FL 33409
Marvin L. Frank
George Mah food Rabin & Peckel
Leesfield Leighton Rubio & Mahfood 275 Madison Avenue
2350 S. Dixie Hwy. New York, NY 10016
Miami, FL 33133
Case 9:98-cv-08520-DTKH Document 30 Entered on FLSD Docket 12/30/1998 Page 56 of 56
Alfred G. Yates, Jr. Law Offices of Alfred G. 519 Allegheny Building 429 Forbes Avenue Pittsburgh, PF 15219
Richard D. Kranich Yates, Jr. Law Offices of Richard D. Kranich
120 Broadway Suite 1016 New York, NY 10271
Lee Squitieri James S. Notis Abbey, Gardy & Squitieri, LLP 212 East 39th Street New York, NY 10016
Steven G. Schulman, Esq. Samuel H. Rudman, Esq. Michael A. Swick, Esq. Milberg Weiss Bershad
Hynes & Lerach LLP One Pennsylvania Plaza, 49th Floor New York, NY 10119-0165
Jules Brody, Esq. Joseph H. Weiss, Esq. Stull, Stull & Brody
Weiss & Yourman 6 East 45th Street
551 5th Avenue New York, NY 10017
New York, NY 10176
Randall Steinmeyer, Esq. Reinhardt & Anderson E-1000 First National Bank Building 332 Minnesota Street St. Paul, MN 55101
Gerald F. Richman, Esq. Gary S. Betensky, Esq. Joseph F. Hession, Esq. Richman Greer Weil Brumbaugh Mirabito &
Christensen, P.A. 777 S. Flagler Dr., Ste. 1100- East Tower West Palm Beach, FL 33401
Eugene E. Stearns, Esq. Richard Jackson, Esq. Stearns Weaver Miller Weissler
Alhadeff & Sitterson, P.A. 150 West Flagler Street Suite 2200, Museum Tower Miami, FL 33130