MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S, LERACH (68581)
600 West Broadway, Suite 1600
San Diego, CA 92101
Telephone: 619/231-1058
- and -
JEFF S. WESTERMAN (94559)
355 South Grand Avenue
Suite 4170
Los Angeles, CA 90071
Telephone: 213/617-9007
STEPHEN LOWEY
THOMAS SKELTON
LOWEY DANNENBERG BEMPORAD
& SELINGER, P.C.
747 Third Avenue
New York, NY 10017
Telephone: 212/759-1504
Attorneys for Plaintiff
SUPERIOR COURT OF THE STATE OF CALIFORNIA
COUNTY OF LOS ANGELES
FRANK O'SHEA, IRA, On Behalf of ) CASE NO. BC147386
Himself and All Others Similarly )
Situated, ) CLASS ACTION
)
Plaintiff, ) CLASS ACTION COMPLAINT FOR
) (1) BREACH OF FIDUCIARY
vs. ) DUTY;
) (2) BREACH OF CONTRACT AND
WALLER CAPITAL CORP, MARC ) NEGLIGENCE;
NATHANSON, FALCON CABLE SYSTEMS ) (3) BREACH OF IMPLIED
COMPANY, FALCON CABLE INVESTORS ) COVENANT OF GOOD FAITH AND
GROUP and FALCON HOLDING GROUP, ) FAIR DEALING; and
INC., ) (4) NEGLIGENCE
)
Defendants. ) Plaintiff Demands A
Trial By Jury
JURISDICTION AND VENUE
1. This Court has jurisdiction over this action
pursuant to Code of Civil Procedure Section 410.10.
2. Venue is proper in this Court pursuant to Code
of Civil Procedure Sections 395 and 395.5. Defendants maintain
their principal place of business in this county and defen-
dants' liability to plaintiff and the class arises from defen-
dants' wrongful acts in this County.
THE PARTIES
3. Plaintiff Frank O'Shea ("O'Shea"), through his
individual retirement account, has bean a holder of 800 limited
partnership units of Falcon Cable Systems Co. ("Falcon" or the
"Partnership") at all times relevant to the transactions com-
plained of herein, and is a holder of such units today.
4. Defendant Falcon is a California limited part-
nership with its principal offices located at 10900 Wilshire
Blvd., Los Angeles, California. Falcon was formed by the
Amended and Restated Agreement of Limited Partnership of Falcon
Cable Systems Company, dated as of December 15, 1986 (the
"Partnership Agreement"). Falcon owns, operates, and develops
cable television systems, primarily in rural communities in
California and Oregon. Falcon has 6.4 million limited partner-
ship units outstanding which are publicly traded on the Ameri-
can Stock Exchange.
5. Defendant Falcon Cable Investors Group ("Falcon
Investors" or "General Partner") is a California limited part-
nership which is the General Partner of Falcon. Falcon Inves-
tors also maintains its offices at 10900 Wilshire Blvd., Los
Angeles, California. Falcon Investors manages the operations
of
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Falcon. As General Partner, Falcon Investors receives
monthly payments of five percent (5%) of the gross revenues of
Falcon plus reimbursement of expenses. During the nine months
ended September 30, 1995, these payments amounted to approxi-
mately $3.4 million.
6. Defendant Falcon Holding Group, Inc. ("Falcon
Holding"), a California corporation, is the General Partner of
Falcon Investors. Falcon Holding manages the operations of
Falcon Investors.
7. Defendant Marc B. Nathanson ("Nathanson") has
managed Falcon at all relevant times. Nathanson is Chairman of
the Board of Directors, President and Chief Executive Officer
of Falcon Holding. Falcon, Falcon Investors, Falcon Holding
and Nathanson are sometimes collectively referred to herein as
the "Falcon Defendants."
8. Defendant Waller Capital Corp. ("Waller Corp."),
a New York corporation, was retained by defendant Falcon Hold-
ing to perform an appraisal of the assets of Falcon, a summary
of which appraisal was filed as an exhibit to Falcon's report
on Form 8-K, filed on or about March 12, 1996.
FACTS
The Partnership Agreement
9. The Partnership Agreement provides that Falcon
Investors shall use its best efforts to cause the partnership
to sell all of the Partnership's cable systems between December
31, 1991 and December 31, 1996, the termination date of the
Partnership, and provides the General Partner (or its affili-
ates) the right to purchase for cash substantially all of the
Partnership's cable
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systems at any time after December 31, without soliciting
unaffiliated purchasers (the "purchase right").
10. Pursuant to the Partnership Agreement, in the
event the General Partner (or its affiliates) exercises such
right, the purchase price is determined by reference to an
"appraised value" determined pursuant to an appraisal process
set forth in the Partnership Agreement (the "Appraisal Pro-
cess").
11. The Partnership Agreement provides that the
appraised value shall be determined by the average of three
appraisal evaluations of the Partnership's cable systems and
provides that one appraiser is to be selected by the General
Partner, one appraiser is to be selected by a majority vote of
the independent members of the Partnership's a advisory commit-
tee, and one appraiser in to be selected by the two appraisers
already so chosen.
The Appraisals
12. In or about November, 1995, the General Partner
explored the possibility of exercising the purchase right, and
initiated the Appraisal Process. In accordance with the
Appraisal Process, three appraisers were selected: Malarkey-
Taylor Associates Inc., Kane-Reece Associates Inc. and Waller
Capital Corp. (the "Appraisers").
13. On or about March 12, 1996, Falcon announced
that, in accordance with the Appraisal Process, Falcon had
received the results of the three appraisals of all of its
cable systems (the "Total Systems"). The appraised value of
the Total Systems as of December 31, 1995, calculated as the
average of the three appraisal results (the "Total Systems
appraised value"), was $247.57 million (the average of $283.23
million, $245.80 million, and $213.67 million, the appraised
values as of December 31, 1995, of the
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Total Systems, as set forth in the appraisals delivered by each of
Malarkey-Taylor, Kane-Reece, and Waller Capital,
respectively).
14. On or about March 18, 1996, Kane Reece amended
its appraised value to $245.29 million, which lowered the Total
Systems appraised value to $247.40 million.
15. Based upon the revised Total Systems appraised
value of $247.40 million, and assuming a hypothetical liquida-
tion of the partnership on December 31, 1995, involving the
sale of the Total Systems on that date for an amount equal to
the Total Systems appraised value, the estimated cash distribu-
tion to unit holders would have been $9.08 per unit (the "hypo-
thetical estimated per unit distribution") (based upon
6,398,913 units outstanding).
16. The hypothetical estimated per unit distribution
was calculated assuming (i) net liabilities on the balance
sheet of the partnership, excluding property, plant and equip-
ment and intangible assets ("net liabilities") of approximately
$183.09 million (as of December 31, 1995) and (ii) a sale fee
payable to the General Partner equal to approximately $6.19
million (2-1/2 percent of the Total Systems appraised value),
each of which the Partnership Agreement would require be paid
prior to the distribution of any remaining cash to unit hold-
ers.
The Exchange
17. Certain affiliates (the "Affiliates") of the
Partnership and its General Partner, including defendant
Nathanson, have made a preliminary proposal to the independent
members of the Partnership's advisory committee with respect to
an exchange transaction (the "Exchange"), whereby substantially
all of the Falcon units owned by the Affiliates would be
exchanged for a
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portion of the Partnership's cable systems (the "Exchange
Systems"), equal to the proportion of total outstand-
ing units exchanged by the Affiliates.
18. Under the proposal, the Exchange would take
place immediately prior to the exercise by the General Partner,
or its affiliates, of their right to purchase for cash, sub-
stantially all of the partnership's cable systems remaining
after giving effect to the Exchange (the "Sale Systems").
19. In other words, the Affiliates intend to
exchange their units in Falcon for certain of Falcon's cable
systems, and only after the Affiliates have received full value
for their units will the Falcon Defendants purchase the remain-
ing systems for cash. However, section 3.14 of the Partnership
Agreement provides only for a "sale" of said systems, i.e., for
cash, and not for an exchange of those systems for units in
Falcon.
20. Moreover, the General Partner intends to deduct
a sales fee of 2-1/2% of the Total Systems appraised value, or
in excess of $6 million prior to making any distribution to the
unit holders. Given the manner in which the Falcon Defendants
have structured this transaction, partially as an exchange of
units and partially as a cash sale to itself, the General Part-
ner should receive no sales fee whatsoever.
21. On March 11, 1996, the General Partner designat-
ed to the Appraisers those cable systems of the partnership
that would constitute the Exchange Systems, in the event the
proposal is pursued. The Appraisers will determine the
"Appraised Value" (as defined in the Partnership Agreement) of
the Exchange Systems and the Sale Systems.
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The Value of Falcon's Assets
22. By virtue of their dominance and control over
Falcon, the Falcon Defendants intend to liquidate Falcon at a
price of $9.08 per unit, which is a grossly inadequate and
unfair price. The actual value of a unit of Falcon is believed
to be in excess of $14 per unit. This estimate is based in
part on a restriction in the Partnership Agreement requiring
that the partnership's debt not exceed 65% of the value of the
partnership's assets. The Partnership Agreement requires unit
holders, approval to lift the debt restriction, but such ap-
proval was never sought.
23. As of September 30, 1995, Falcon's net outstand-
ing borrowings totalled approximately $168.6 million. In order
to comply with the debt restriction, the fair market value of
all Partnership assets, as determined by the General Partner,
would have to have been in excess of $259 million, a figure
which is consistent with the average of the Malarkey-Taylor and
Kane-Reece appraisals ($283.23M + $247.4M + 2 = $265.315M).
24. However, the Waller appraisal is completely out
of line with the others. It is $70 million lower than the
Malarkey-Taylor appraisal and $42 million lower than the Kane
Reece appraisal. Moreover, the Waller appraisal is $46 million
lower than the minimum value Falcon's assets were required to
be, in order for Falcon to comply with the 65% debt restric-
tion, i.e., $259 million.
25. The Waller appraisal methodology (a ten year
discounted cash flow methodology) was improper and not consis-
tent with industry norms. In contrast to this single method
utilized by Waller, Malarkey-Taylor used five different methods
to establish a range of fair market values from which to derive
its appraisal.
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Similarly, Kane Reece used both an income and a market approach
to derive a range of the fair market value of the systems.
26. The Waller appraisal does not reflect the fair
value of Total Systems in that Waller (a) did not base its
appraisal on all information available to it, including without
limitation, information concerning the Exchange, and informa-
tion concerning the 65% debt restriction contained in the part-
nership agreement; and (b) ignored the exclusion of any
increased value that could be derived from a third-party sale
of the cable systems together, the exclusion of any increased
value which could be realized by the clustering of cable sys-
tems, and the exclusion of any increased value which could be
realized through the sale of the cable systems to a strategic
purchaser.
27. The methodology used by defendants to determine
the estimated per unit distribution contains numerous inconsis-
tencies, including (a) the inclusion of General Partnership
expenses in the valuation of the cable systems on a stand alone
basis, (b) the exclusion of any increased value that could be
derived from a sale of the cable systems together, and (c) the
reduction of net asset value by the entire stated net liabili-
ties of the partnership, rather than just net debt.
28. For the two weeks preceding the March 12
announcement of Falcon's appraisals, Falcon units traded at
prices ranging from $12-1/8 to $12-3/8, on the day after
Falcon's announcement, the unit price had dropped to $9-3/4,
and has not gone above $10-3/8 since then.
CLASS ACTION ALLEGATIONS
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29. Plaintiff brings this class action on behalf of
himself and all others similarly situated as members of the
proposed nationwide plaintiff class. The proposed class con-
sists of all persons and entities, wherever located, who hold
units of Falcon as of the date of this Complaint, or their suc-
cessors in interest. Excluded from the class are defendants
herein; any entity in which any of the defendants has a con-
trolling interest; officers, directors and employees of the
defendants; and legal representatives, heirs, successors and
assignees of each of the foregoing excluded persons and enti-
ties.
30. This action has been brought and may properly be
maintained pursuant to the provisions of Code of Civil Proce-
dure Section 382, Civil Code Section 1781.
31. Numerosity of the Class (C.C.P. Section 382;
Civ. Code Section 1781(b)(1)): Members of the class are so
numerous that their individual joinder herein is impracticable.
There are approximately 6.4 million units of Falcon outstanding
and traded on a national market, and there are believed to be
hundreds of unit holders as of the date of this Complaint. The
precise number of class members and their addresses may be
obtained from defendants' records. Class members may be
notified of the pendency of this action by mailed or published
notice.
32. Existence and Predominance of Common Questions
of Fact and Law (C.C.P. Section 382; Civ. Code Section
1781(b)(2)): Common questions of law and fact exist as to all
members of the class and predominate over the questions affect-
ing only individual class members. These common legal and fac-
tual questions include, without limitation:
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(a) Whether defendants committed the violations of
law alleged herein; and
(b) The nature and extent of damages and other rem-
edies to which plaintiff and the class are entitled for
defendants' wrongful conduct.
33. Typicality (Civ. Code Section 1781(b)(3)):
Plaintiff's claims are typical of the claims of the members of
the class. Plaintiff is a member of the class and has been
injured by the same common course of wrongful conduct by
defendants that has damaged the other members of the class.
34. Adequacy (Civ. Code Section 781(b)(4)):
Plaintiff will fairly and adequately protect the interests of
the class. Plaintiff has no interests of which he is aware
that are adverse or antagonistic to those of the class.
Plaintiff has retained competent counsel experienced in complex
class action litigation and intends to prosecute this action
vigorously. The interests of members of the class will thus be
fairly and adequately protected by plaintiff and his counsel.
35. A class action is superior to other available
means for the fair and efficient adjudication of the claims of
plaintiff and the class. The damages suffered by each indi-
vidual class member are relatively small given the burden and
expense of individual prosection of this complex and extensive
litigation. Furthermore, individual litigation would increase
the delay and expense to all parties and to the court system.
By contrast, the class action device presents far fewer manage-
ment difficulties and provides the benefits of single adjudica-
tion, economy of scale and comprehensive supervision by a sin-
gle court.
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36. In the alternative, this action is certifiable
because:
(a) the prosecution of separate actions by the indi-
vidual members of the class would create a risk of incon-
sistent or varying adjudications with respect to individu-
al class members, which would establish incompatible stan-
dards of conduct for defendants;
(b) the prosecution of separate actions by individu-
al class members would create a risk of adjudications with
respect to them which would, as a practical matter, be
dispositive of the interests of other class members not
parties to the adjudications, or substantially impair or
impede such class members' ability to protect their inter-
ests; and/or
(c) defendants have acted or refused to act on
grounds generally applicable to the class, thereby making
appropriate final declaratory and injunctive relief with
respect to the class as a whole.
FIRST CAUSE OF ACTION
[Against the Falcon Defendants,
For Violation of Fiduciary Duties]
37. Plaintiff realleges each allegation contained in
paragraph 1 through 36 as if set forth fully herein.
38. By reason of their respective positions as Gen-
eral Partner of Falcon, General Partner of Falcon Investors,
and as managers of the business and affairs of Falcon, defen-
dants Falcon Investors, Falcon Holding and Nathanson owe plain-
tiff and the class fiduciary duties of the highest degree of
fidelity, loyalty, and care.
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39. In all of their dealings with the unit holders
of Falcon, and particularly in connection with the proposed
transaction the Falcon Defendants are required as fiduciaries
to act in accordance with the best interests of the unit hold-
ers and to assure themselves that the proposed transaction is
entirely fair to the unit holders, and they may not use their
power and control over the business and operations of Falcon
for their own aggrandizement at the expense of its unit hold-
ers.
40. The proposed transaction in grossly unfair to
plaintiff and the class because the General Partner is attempt-
ing to acquire Falcon's cable systems based on a substantial
undervaluation of their, fair market value by one of the three
appraisers selected.
41. The Falcon Defendants have not presented the
transaction to the unit holders of the Falcon for approval. No
proxy statement has been Bent to the unit holders of Falcon.
No vote of the unit holders of Falcon has been provided for.
No opportunity to negotiate or otherwise affect the terms of
the transaction has been afforded the unit holders of Falcon.
42. The Falcon Defendants are violating the fiducia-
ry duties owed to plaintiff and the class.
43. As a direct and proximate result of the Falcon
Defendants' wrongful conduct, plaintiff and the class are enti-
tled to the relief sought herein.
SECOND CAUSE OF ACTION
[Against the Falcon Defendants, For Breach of Contract]
44. Plaintiff realleges each allegation contained in
paragraphs 1 through 43, as if set forth fully herein.
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45. The Falcon Defendants committed a material
breach of the Partnership Agreement in that the Partnership
Agreement does not permit the General Partner to proceed with
its publicly announced intention to acquire the partnership's
cable systems pursuant to the Exchange without the approval of
the disinterested limited partners. The Partnership Agreement
requires the General Partner to pay cash for these partnership
assets.
46. Moreover, if the Falcon Defendants use the Total
Systems appraisal value, the Falcon Defendants will be in vio-
lation of the Partnership Agreement's 65% debt restriction.
47. As a direct and proximate result of the Falcon
Defendants' wrongful conduct, plaintiff and the class are
entitled to the relief sought herein.
THIRD CAUSE OF ACTION
[Against the Falcon Defendants, For Breach of
Implied Covenant of Good Faith and Fair Dealing]
48. Plaintiff realleges each allegation contained in
paragraphs 1 through 47 as if set forth fully herein.
49. The acts hereinbefore alleged constitute a mate-
rial breach of the implied covenant of good faith and fair
dealing contained in the Partnership Agreement.
50. As a direct and proximate result of the Falcon
Defendants' wrongful conduct, plaintiff and the class are
entitled to the relief sought herein.
FOURTH CAUSE OF ACTION
[Against Defendant Waller, For Negligence in
Performing Its Appraisal]
51. Plaintiff realleges each allegation contained in
paragraphs 1 through 50, as if set forth fully herein.
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52. By virtue of its retention as an appraiser of
the assets of Falcon for purposes of determining the fair value
thereof in the proposed transaction between the General Partner
(or its Affiliates) and Falcon, Waller assumed a duty to the
unit holders of Falcon to perform its appraisal in a profes-
sionally competent manner in accordance with generally recog-
nized industry standards.
53. Waller performed its appraisal negligently, by
inter alia, not attempting to determine the fair market value
of Falcon's assets; not utilizing recognized valuation method-
ologies; and basing its appraisal only on one methodology, a
discounted cash flow analysis, that resulted in a grossly inad-
equate valuation.
54. Waller ignored market factors, including
increased value that could be derived from a sale of the cable
systems together, the increased value which could be realized
by a purchaser who could cluster some of the cable systems, and
increased value that could be realized through the sale of all
or some of the cable systems to a strategic purchaser.
55. Waller failed to take into account all available
information including Falcon's own internal valuations of its
cable properties and the valuations of the other two apprais-
ers.
56. As a direct and proximate result of defendant
Waller's wrongful conduct, plaintiff and the class are entitled
to the relief sought herein.
FIFTH CAUSE OF ACTION
[Against Defendant Waller, For Breach of Fiduciary Duties]
57. Plaintiff realleges each allegation contained in
paragraphs 1 through 56 as if set forth fully herein.
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58. By virtue of its retention as an appraiser of
the assets of Falcon for purposes of determining the fair value
thereof in the proposed transaction between the General Partner
(or its Affiliates) and Falcon, Waller assumed fiduciary duties
to perform its appraisal with care and to act in the best
interests of the unit holders of Falcon.
59. Waller breached its fiduciary duties to plain-
tiff and the class by inter alia, not attempting to determine
the fair market value of Falcon's assets; not utilizing recog-
nized valuation methodologies; and basing its appraisal only on
one methodology, a discounted cash flow analysis, that resulted
in a grossly inadequate valuation.
60. Waller ignored market factors, including
increased value that could be derived from a sale of the cable
systems together, the increased value which could be realized
by a purchaser who could cluster some of the cable systems, and
increased value that could be realized through the sale of all
or some of the cable systems to a strategic purchaser.
61. Waller failed to take into account all available
information including Falcon's own internal valuations of its
cable properties and the valuations of the other two apprais-
ers.
62. As a direct and proximate result of defendant
Waller's wrongful conduct, plaintiff and the class are entitled
to the relief sought herein.
BASIS OF ALLEGATIONS
Plaintiff, on behalf of himself and all others simi-
larly situated, alleges, upon personal knowledge as to himself
and his own acts, and upon information and belief as to all
other matters.
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WHEREFORE, plaintiff requests of this Court the fol-
lowing relief for himself and all others similarly situated:
1. An order, certifying the proposed class herein
under C.C.P. Section 382 and Civil Code Section 1781 and
appointing plaintiff and his undersigned counsel to repre-
sent the class;
2. A declaratory judgment, declaring the Waller
Appraisal to be inconsistent with industry norms and
unfair to the unit holders;
3. A mandatory injunction directing the Falcon
Defendants to base any distribution to unit holders as a
result of the proposed transactions on the average of the
Malarkey-Taylor and Kane-Reece appraisals, without regard
to the Waller Appraisal;
4. A permanent injunction, prohibiting the Falcon
Defendants from consummating the proposed transactions
until such time as the Falcon Defendants pay fair value to
the unit holders;
5. Damages, in the event that the proposed transac-
tion is consummated on the terms proposed;
6. Reasonable attorneys' fees;
7. Prejudgment interest;
8. Costs of suit; and
9. Such other and further legal and equitable
relief as this Court may deem just and proper.
JURY DEMAND
Plaintiff demands a trial by jury.
DATED: April 1, 1996 MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
JEFF S. WESTERMAN
/s/ Jeff S. Westerman
______________________________
JEFF S. WESTERMAN
355 South Grand Avenue
Suite 4170
Los Angeles, CA 90071
Telephone: 213/617-9007
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LOWEY DANNENBERG BEMPORAD
& SELINGER, P.C.
STEPHEN LOWEY
THOMAS SKELTON
747 Third Avenue
New York, NY 10017
Telephone: 212/759-1504
Attorneys for Plaintiff
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