SUBSTANTIVE ALLEGATIONS
45. IFTP was incorporated under the laws of Ohio on September 11, 1997. The
company was acquired by its parent company, National Boston Medical, Inc. in a share exchange
agreement executed on November 21, 1998. On April 25, 2000, Dr. Abravanel's Formulas, Inc.,
a Nevada corporation, acquired IFTP, a wholly owned subsidiary of National Boston Medical,
Inc., in a share exchange in which 100% of the outstanding stock of IFTP was exchanged for
100% of the common stock of Dr. Abravanel’s Formulas, Inc. As a result of the share exchange,
Dr. Abravanel’s Formulas, Inc. changed its name to IFTP.
46. IFTP is in the direct marketing/direct to retail marketing business, which
encompasses the sale of various products through commercials, infomercials, print media, radio,
and the Internet.
47. During the period June 2000 through the early part of September 2000, IFTP
borrowed money from each of the Plaintiffs, among others, in return for the Notes with attached
Warrants it issued to them. The Notes provided for interest at the rate of 10% per annum and the
repayment of principal by IFTP to Plaintiffs in two installments: 50% due 180 days from the date
of the Note and 50% due 270 days from the date of the Note. With each Note IFTP also granted
Warrants to Plaintiffs as follows: 6 warrants exercisable at $0.08 for each dollar loaned to IFTP.
The Warrants carried “piggyback registration rights.”
48. During the period from June 22, 2000 through September 6, 2000, IFTP issued a
series of false and misleading statements about its financial condition and performance, growth,
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operations, financial statements, business, products, markets, management, revenues, earnings,
cash positions and present and future business prospects, including the following:
(a) Press release dated June 22, 2000: “Bringing a successful product
like this [the Torso Tiger] into our company will be of great value to our shareholders. The sales
projections based off of the performance of this product alone will not only meet but also surpass
our earlier revenue and earnings projections for the coming fiscal year….This is a big win for
our … shareholders.”
(b) Press release dated June 26, 2000: “The Torso Tiger infomercial has
been rated as one of the top infomercials running during the past several months….By keeping
the dynamics of the Torso Tiger team in place we are able to ensure a solid stream of
revenue….The success of Torso Tiger should continue into the foreseeable future and the
transition in terms of weekly revenue should be seamless. Infotopia will begin accounting for
revenue on its books and records in about thirty days…Torso Tiger will have a life span for
many years to come…With this product in place we feel that we can safely project earnings of
$0.205 per share for this fiscal year.”
(c) Form 10Q filed by IFTP on July 24, 2000: “The Body Rocker has the
potential in an 18 month period to match the revenue of all Dean and Charles’ previous products
combined.”
(d) Press release dated August 1, 2000: “The Torso Tiger infomercial has
been rated as one of the top infomercial running during the past several months….Infotopia
should be able to report on the earnings from this and other great products in the next few
weeks….Torso Tiger will have a life span for many years to come….”
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(e) Press release dated August 3, 2000: “We’ve worked hard to ensure
that we can produce enough units [of the Body Rocker], and distribute those units quickly
throughout the world….”
(f) Press release dated August 4, 2000: “Infotopia Inc. announced today
that it has signed a Letter of Agreement for a $20,000,000 financing package. Under the terms of
the agreement, the company will be able to draw on the financing as needed, at its discretio n,
over the next thirty-six months….This is a real home run for our company….The terms of the
deal allow us to raise money as we need it and there are no hidden traps like preset equity values
or floorless exercise prices. We chose this package because it is an outstanding value to our
shareholders … and will help us reach profitability much faster than we would have
otherwise….In order to prepare for future exercises of the financing, Infotopia’s board of
directors has approved an increase in the number of authorized shares from forty million to one
hundred million….[I]ncreasing a company’s authorized shares is quite normal and does not
mean dilution.”
(g) Press release dated August 15, 2000: “The Torso Tiger has also been
in the Top Ten performing infomercials for the last several months….[W]e are expecting a
tremendous launch into retail for 4th quarter. Interest in the product has been outstanding and
doesn’t seem to be abating at all. Torso Tigers are selling nearly as fast as they can be
made….As of this week revenue from the Torso Tiger will begin hitting Infotopia’s books and
we will begin announcing the revenue performance of this product on our web site….”
(h) Press release dated September 6, 2000: “We were happily
surprised that we did this well during the dog days of summer and it looks like its just going to
keep getting better and better….The future looks very bright thanks to the Torso Tiger…”
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49. These statements were false and misleading:
(a) The “top rated infomercial” referred to infomercial airings not
sales results from the infomercial.
(b) The statements about earnings in general and of $.205 per share in
particular, were also knowingly false and misleading in that there were no earnings for the
balance of the year and management had no reasonable basis upon which to make such
projections. Indeed, in its Form 10-Q filed on January 23, 2001, IFTP reported a loss of
$16,053,156 for the three month period ended November 30, 2000 and in it Form 10-K filed for
the 10 month period ended December 31, 2000, IFTP reported a loss of $26,735,233. In that
same Form 10-K, IFTP’s independent auditors’ report stated that “the Company has suffered
recurring losses from operations and its limited capital resources raise substantial doubt about its
ability to continue as a going concern.”
(c) The statements suggesting a revenue stream from the Torso Tiger
into the future were baseless. In its Form 10-K filed on March 23, 2001, IFTP disclosed that it
discontinued the sale of this product as of December 31, 2000.
(d) The image of world wide sales was grossly exaggerated. The
Body Rocker in fact had a very limited release.
(e) There never was an agreement for a $20 million dollar financing.
Although the supposed signed Letter of Agreement for a $20 million financing package was
announced by IFTP’s press release on August 4, 2000 and characterized as a “real home run for
our company,” IFTP’s Form 10-Q for the quarter ending August 31, 2000 disclosed nothing at
all about the $20 million financing. And despite the August 4, 2000 press announcement that the
financing package had “no hidden traps” and was “an outstanding value to our shareholders,” in
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a letter to the shareholders dated September 28, 2000, Hoyng disclosed that the Letter of
Agreement was in fact a Letter of Intent and that the IFTP Board of Directors chose not to
exercise it because of the high cost of warrants and fees attached.”
(f) There was massive dilution despite the statements to the contrary.
50. The false and misleading statements had the effect of causing the stock price to
rise from 12 cents per share on August 23, 2000 to a high of $1.12 per share on September 12,
2000. Moreover, during this same period, the volume of IFTP stock being traded increased
dramatically. Indeed, on August 28, 2000 and September 12, 2000 Smith sold 150,000 shares of
IFTP realizing a profit of nearly $100,000 and on September 20, 2000 Hoyng sold 775,000
shares of IFTP realizing a profit of more than $250,000.
51. On September 11, 2000 Hoyng wrote to the Plaintiffs stating: “Hopefully, you
have all been tracking our stock and have seen the significant gains the past two weeks. We
have decided to file a S-3 registration statement at the end of this week. We are offering you an
opportunity to convert your warrants into stock at this time. We anticipate these shares will be
free trading in approximately thirty days.”
52. The September 11, 2000 letter from Hoyng to the Plaintiffs was false and
misleading in that no S-3 registration for the Plaintiff’s stock could have been filed since IFTP
was not eligible to use Form S-3 to register securities in that it did not satisfy the condition that
(a) it had been subject to the requirements of sections 12 or 15(d) of the Exchange Act and has
filed all the material required to be filed pursuant to sections 13, 14 or 15(d) for a period of at
least twelve calendar months and (b) it had filed in a timely manner all reports required to be
filed during the [preceding] twelve calendar months.
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53. In reliance on the false and misleading statements set forth above and the
artificially inflated stock price, the Plaintiffs exercised their Warrants shortly after receiving
Hoyng’s September 11, 2000 letter. IFTP required that Plaintiffs surrender their Notes in order
to exercise their Warrants. These transactions resulted in the Plaintiffs obtaining IFTP stock at
the agreed upon price of $0.08 per share and additional stock at the arbitrary price of $0.50 per
share, thus increasing the average cost basis of each Plaintiff in IFTP stock. Thus, rather than
receiving the principal and interest provided for by the Notes, Plaintiffs received no cash and
stock they were unable to sell until nearly two months later when their stock was finally
registered and the price of IFTP stock was down by about 80%.
54. Between the time Plaintiffs exercised their Warrants and surrendered their Notes,
and the time Plaintiffs were able to sell their stock, IFTP had announced that there was no $20
million financing package, that the number of authorized shares would be increased from 100
million to 200 million, and that millions of shares of IFTP stock owned by insiders, attorneys and
promoters were registered for sale, among other things.
55. Defendants made the misrepresentations set forth above with scienter in that they
knew or recklessly disregarded that their representations were materially false and misleading
when made.
56. The Individual Defendants were each a senior officer and/or a director of a public
company with significant experience in business and financial matters, including the
requirements for proper disclosure of financial information to the investing public. The
Individual Defendants had the ability to understand and had access to accurate information
regarding IFTP’s prospects, products, revenues, earnings and cash positions.
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57 Prior to his employment at IFTP, Hoyng had over eight years of experience as an
executive in a public company, having previously served as Chairman and CEO of National
Boston Medical, Inc., a Divisional Director for Healthcare Services Group, Inc., a publicly
traded company, and a Sales Manager and General Manager for ARA/Cory Refreshment
Services.
58. Prior to his employment at IFTP, Zavoral had over 20 years of marketing and
managerial experience.
59. Prior to his employment at IFTP, Lo zowicki had several years of corporate
managerial and experience.
60. Smith is a member of the Louisiana bar and a partner in a law firm.
61. The Individual Defendants had access to internal corporate documents, regular
communications with other employees at IFTP, attendance at meetings of management and the
Board of IFTP, and as a result, were well aware of the true nature of the Company’s financial
condition and performance, growth, operations, financial statements, business, products, markets,
management, revenues, earnings, cash positions and present and future business prospects.
62. As directors and executive officers of IFTP, the Individual Defendants controlled
its press releases, SEC filings and its communications with the Plaintiffs.
63. The Individual Defendants each had substantial personal financial benefits tied to
the price of IFTP stock. During the period of June 2000 through September 2000, Hoyng
beneficially owned 2,886,200 shares of IFTP stock, Zavoral beneficially owned 2,646,788 shares
of IFTP stock, Lo zowicki owned 1,475,000 shares of IFTP stock and Smith owned 750,000
shares of IFTP stock. These stock ownership positions provided the Individual Defendants with
incentive to issue false and misleading statements about IFTP’s prospects, products, revenues,
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earnings and cash positions in order to drive up the price of IFTP stock. As stated above, during
this period of time Smith sold a total of 150,000 shares of IFTP stock (20% of his holdings)
realizing a profit of nearly $100,000 and Hoyng sold 775,000 shares of IFTP stock (nearly 27%
of his holdings) realizing a profit of more than $250,000. These sales by insiders were not
disclosed to the public until July 23, 2001.
64. The statutory safe harbor providing for forward- looking statements under certain
circumstances does not apply to the false and misleading statements pleaded herein since IFTP
issues penny stocks. Additionally, insofar as the false and misleading statements concern
misrepresentations of historical facts they are not forward- looking. Further, even if the
statements were forward-looking, they were not accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to differ materially from
that in the forward-looking statement. To the extent that the statutory safe harbor does apply to
any statement pleaded, the defendants are liable for those false forward-looking statements
because at the time each of those statements was made the speaker actually knew the statement
was false and the statement was authorized and/or approved by an executive officer of IFTP who
actually knew that those statements were false when made.
FIRST CLAIM FOR RELIEF
For violation of section 10(b) of the Exchange
Act and Rule 10b-5 against all defendants
65. Plaintiffs repeat and reallege paragraphs 1 through 64.
66. Throughout the time relevant to the allegations herein, IFTP acted through the
Individual Defendants, whom it portrayed and represented to the press and public as its valid
representatives. The motive, kno wledge, and recklessness of these Individual Defendants are
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therefore imputed to IFTP, which is primarily responsible for the securities law violations of the
Individual Defendants while acting in their official capacities as Company representatives.
67. Each of the Individual defendants (a) knew or had access to the material, adverse
non-public information about IFTP’s business, products, prospects and earnings and thenexisting
business conditions which was not disclosed; and (b) participated in drafting, reviewing
and/or approving the misleading statements, releases, reports, and other public representations of
and about IFTP.
68. During the period relevant to the allegations herein, with knowledge of or reckless
disregard for the truth, the Individual Defendants disseminated or approved the false statements
specified above, which were misleading in that they contained misrepresentations and failed to
disclose material facts necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading.
69. As described herein, the individual Defendants made or caused to be made a
series of false statements and failed to disclose various material information concerning IFTP.
Those material misrepresentations and omissions created a false assessment of IFTP, its
business, prospects and earnings in the market and caused the Company’s securities to be
overvalued and artificially inflated at all relevant times.
70. The Individual Defendants’ false portrayal of IFTP’s financial conditio n and
performance, growth, operations, financial statements, business, products, markets, management,
revenues, earnings, cash positions and present and future business prospects during the period
relevant to the allegations herein resulted in artificially high IFTP stock prices and induced
Plaintiffs to exercise their Warrants by converting their Notes for IFTP common stock.
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71. Plaintiffs would not have exercised their Warrants by converting their Notes for
IFTP common stock had they been aware of the true facts concerning the Company’s financial
condition and performance, growth, operations, financial statements, business, products, markets,
management, revenues, earnings, cash positions and present and future business prospects,
massive dilution and the registration and sale of millions of shares of IFTP stock by insiders,
attorneys and promoters.
72. Defendants 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 facts or omitted to state material facts necessary in order to
make statements made, in light of the circumstances under which they were made, not
misleading; and/or (c) engaged in acts, practices and course of business that operated as a fraud
or deceit upon the Plaintiffs.
73. At all relevant times, the material misrepresentations and omissions particularized
herein, directly or proximately caused or were a substantial contributing cause of the damages
sustained by Plaintiffs.
SECOND CLAIM FOR RELIEF
For violation of Section 20(a) of the Exchange Act against all defendants
74. Plaintiffs repeat and reallege paragraphs 1 – 73.
75. The Individual Defendants acted as controlling persons of IFTP within the
meaning of § 20 of the Excha nge Act. By reason of their respective positions and stock
ownership, the Individual Defendants had the power and authority to cause IFTP to engage in the
wrongful conduct complained of herein.
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76. By reason of such wrongful conduct, IFTP and the Individual Defendants are
liable pursuant to § 20(a) if the Exchange Act. As a direct and proximate result of the
Defendants’ wrongful conduct, Plaintiffs suffered damages in connection with their exercise of
their Warrants by converting their Notes for IFTP common stock.
THIRD CLAIM FOR RELIEF
Common law fraud against all defendants
77. Plaintiffs repeat and reallege paragraphs 1 – 76.
78. Defendants made the false and misleading statements alleged above to deceive
Plaintiffs and to induce them to exercise the ir Warrants by converting their Notes into IFTP
common stock.
79. Plaintiffs, without knowledge of the falsity of Defendants’ material
misrepresentations and omissions described above, and believing such statements to be true and
complete, and in reasonable and justifiable reliance upon the statements and representations
made by Defendants, as previously set forth herein, exercised their Warrants by converting their
Notes into IFTP common stock in reliance upon the truth and completeness of said statements.
Plaintiffs would not exercised their warrants by converting their Notes into IFTP common stock
except for their reliance upon the aforesaid representations made by Defendants.
80. At the time the statements and omissions were made by Defendants, they were
false, Defendants knew them to be false and they intended to deceive Plaintiffs by making such
representations and omissions.
81. At the time of the false statements and omissions set forth above, Defendants
intended that Plaintiffs act on the basis of the misrepresentations and omissions set forth above in
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deciding whether to exercise their Warrants by converting their Notes for IFTP common stock
and the Plaintiffs reasonably relied thereon to their detriment in making such decisions.
82. Had the Plaintiffs known of the material facts which Defendants wrongfully
concealed and misrepresented and the falsity of Defendants’ representations, Plaintiffs would not
have exercised their Warrants by converting their Notes for IFTP common stock.
83. Plaintiffs, as a result of their exercise of their Warrants by converting their Notes
for IFTP common stock and by reason of Defendants’ wrongful concealment and
misrepresentations, have sustained damages and have lost a substantial part of their respective
investments, together with lost interest and general and incidental damages in an amount to be
determined at the trial of this action.
84. By reason of the foregoing, Defendants are jointly and severally liable to Plaintiffs.
85. In addition, Defendants’ fraudulent acts were willful, wanton and aimed at the
public generally. Therefore, Plaintiffs are entitled to punitive damages.
FOURTH CLAIM FOR RELIEF
Negligent misrepresentation against all defendants
86. Plaintiffs repeat and reallege paragraphs 1 – 85.
87. The Defendants owed to Plaintiffs duties: (a) to act with reasonable care in
preparing and disseminating the statements set forth above that were relied upon by Plaintiffs in
deciding to exercise their Warrants by converting their Notes for IFTP common stock; and (b) to
use reasonable diligence in determining the accuracy of and preparing the information contained
therein.
88. The Defendants breached their duties to Plaintiffs by failing to investigate,
confirm, prepare and review with reasonable care the information contained in the statements set
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forth above and by failing to disclose to Plaintiffs the true facts regarding IFTP’s business,
prospects, products, earnings and cash position, dilution and the registration and sale of millions
of shares of IFTP stock by insiders, attorneys and promoters, and in failing to correct the
misstatements, omissions and inaccuracies contained therein.
89. As a direct, foreseeable and proximate result of this negligence, Plaintiffs have
sustained damages, and have lost a substantial part of their respective investments, together with
lost interest, general and incidental damages in an amount to be determined at the trial of this
action.
FIFTH CLAIM FOR RELIEF
Breach of fiduciary duty against all defendants
90. Plaintiffs reallege paragraphs 1 – 89.
91. Defendants owed a fiduciary duty to Plaintiffs.
92. The Defendants breached their fiduciary duty owed to Plaintiffs by making the
false and misleading statements alleged above.
93. As a direct consequence of the Defendants’ breach of fiduciary duty, Plaintiffs
have sustained damages and have lost a substantial part of their respective investments, together
with lost interest, general and incidental damages in an amount to be determined at the trial of
this action.
BASIS OF ALLEGATIONS
94. Plaintiffs have alleged the foregoing based upon the investigation of their counsel,
which included a review of IFTP’s SEC filings, reports and advisories about the Company, press
releases issued by the Company, media reports about the Company, consultations with experts
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and others, and believe that after reasonable opportunity for discovery, substantial evidentiary
support will likely exist for the allegations set forth.
PRAYER FOR RELIEF
WHEREFORE, Plaintiffs respectfully request judgment as follows:
1. Awarding Plaintiffs compensatory damages in an amount to be determined at the
trial of this action, but in no event less than $5 million together with interest thereon;
2. Rescinding the exercise by Plaintiffs of their Warrants by the conversion of their
Notes into common stock of IFTP, awarding Plaintiffs damages equal to the face amount of their
Notes together with interest thereon at 10% per annum from the dates of their respective Notes
and restoring to Plaintiffs the Warrants that were attached to their Notes;
3. Awarding Plaintiffs punitive damages in an amount to be determined at the trial
of this action but in no event less than $5 million;
4. Awarding Plaintiffs post-judgment interest as well as reasonable attorneys’ fees,
expert witness fees and other costs; and
5. Awarding Plaintiffs such other relief as this Court may deem just and proper.
JURY DEMAND
Plaintiffs demand a trial by jury.
OF COUNSEL:
___s/________________________________
Arthur M. Kaufman (#0017724)
HAHN LOESER & PARKS LLP
3300 BP Tower
200 Public Square
Cleveland, Ohio 44114-2301
(216) 621-0150
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OF COUNSEL:
Mark S. Arisohn, Esq.
Goodkind Labaton Rudoff & Sucharow LLP
100 Park Avenue
New York, New York 10017
(212) 907-0700
Attorneys for Plaintiffs |
