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A Federal Court Judgement Offers Lessons for Young Entrepreneurs; $3.2 Million Award Ends Litigation in Securities Fraud Case
Business Wire, Dec 12, 2000
Legal Writers
IRVINE, Calif.--(BUSINESS WIRE)--Dec. 12, 2000
Late last month, in the Santa Ana courtroom of Federal Judge Alicemarie H. Stotler, a four year old securities fraud case came to an end for three young entrepreneurs, who received a $3.2 million award.
To observers and participants in the protracted litigation, lessons coming out of the fray may be just as important as who won or lost.
"What this case underscored," said plaintiffs' attorney Mark T. Palin, managing partner of the Irvine, Calif. office of Arter & Hadden LLP, "is that entrepreneurs have to be exceptionally careful in their business dealings.
"When they are offered an opportunity to partner with someone, and their financial needs are very current, often they have neither the interest or the inclination to do the right due diligence.
"The coins of duplicity are wide and universal," Palin pointed out. "In this instance, the result was almost disastrous."
When Charles Leone, Robert Nyland and Allan King founded San Antonio, Texas-based Select Switch Systems Inc., in 1995, they were certain the firm would become a key telecommunications player. As the company's switching systems gained acceptance, its operating assets began to be stretched severely.
Then, in 1996, the company landed a potentially lucrative government contract as a subcontractor for the installation and operation of telephone systems on certain military bases.
The founders knew they could not keep up with demand without additional cash infusions. In their search for interim funding, they were introduced to a Palm Springs, California investor named Joseph Lanza and a companion firm, Indian Wells Investment Co.
Lanza and the investment company told the Texas firm that they could help. By selling their interest in Select Switch Systems (Select) to a third, publicly traded firm owned by Lanza and Indian Wells -- Xecom Corp. -- they could capitalize on the defense contracts. Xecom, also known as Airstar, would provide much needed cash.
They also alleged that the sellers would receive stock in Xecom equal to their investment in Select, with a much larger potential payout. The deal was struck.
Leone, Neyland and King soon found, however, that they'd been had. Xecom (Airstar) did not have the financial resources it claimed. Moreover, the company had, in the meantime, absorbed Select Switch Systems and had begun methodically stripping the company of its assets, and pocketing the money it received.
http://findarticles.com/p/articles/mi_m0EIN/is_2000_Dec_12/ai_67926272
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