Opinion ID: 510217
Heading Depth: 3
Heading Rank: 5

Heading: Citisource, Inc.

Text: 31 Defendant Marvin Kaplan owned and operated a group of computer-service companies along with his older brother Albert, and their partners Marvin Kushnick and Morton Karper. The partners were known informally as The Four K's, and their companies as the Kaplan Group. The Kaplan Group firms included Computer Facilities Resource, Inc., Retail Data Processing, Data Conversion Corporation, Technical Maintenance and Services, and Data Consulting and Leasing. The Kaplan Group firms provided data-processing services for municipalities throughout the northeast, including Boston, Washington, D.C., Elizabeth, New Jersey, and New York City. These services usually involved the keypunching of parking and other types of tickets. 32 In about 1979, Data Conversion Corporation received a contract to perform the microfilming of parking tickets and the manual entry of information from parking tickets into the PVB computer. In the early 1980's, the PVB began to explore the possibility of using hand-held computers to issue parking tickets. At the end of each day, information stored in these hand-held computers would be transferred electronically to the PVB's data-processing system. The need for keypunching would be eliminated. The Four K's understandably feared that Data Conversion's keypunching work for the PVB would be jeopardized if they did not develop the new computer system themselves. Accordingly, in 1981 the Four K's hired Robert Richards, an investment partner of the Kaplan brothers, to oversee the development of a hand-held computer. The Four K's also hired Stanley Friedman as a lobbyist to assist them in obtaining a contract with the PVB for the development of the computer. 33 After leaving his position as Deputy Mayor, Friedman practiced law and remained politically active. He served as Chairman of the Bronx Democratic Committee and as a member of the Democratic National Committee. Like Manes, he was thus one of New York City's most influential politicians. As a lobbyist for the Kaplan Group, Friedman used his influence to organize a meeting attended by himself, Kaplan, Richards, Lindenauer and Lawrence Yermack, the Deputy Commissioner of the DOT. At this meeting, Kaplan and Richards attempted to persuade Lindenauer, Yermack and other City officials to award the Kaplan Group a contract to conduct a pilot project to develop the hand-held computer. Although the Kaplan Group sought a sole-source contract, Yermack stated that any contract for the computer would be awarded through competitive bidding. 34 Soon after their meeting with Yermack, Kaplan told Lindenauer that he would handsomely reward Lindenauer and Manes if they would assist the Kaplan Group in obtaining the contract. Specifically, Kaplan offered Lindenauer and Manes $500,000 each in stock of the company that Kaplan was creating to develop the hand-held computer. Lindenauer and Manes agreed to Kaplan's proposal. Manes insisted, however, that Friedman be enlisted to hold the stock. Lindenauer accordingly asked Friedman to hold the stock in three blocks, one each for Manes, Lindenauer and Friedman. Friedman agreed. 35 Municipal agencies in New York City solicit competitive bids by issuing requests for proposal (RFPs), which set forth specifications for contracts to be awarded through competitive bidding. Kaplan directed Richards to assist Lindenauer, whom Kaplan described as a friend of the Kaplan Group, in drafting an RFP for the hand-held computer. When they met, Lindenauer told Richards that he wanted to assure that the Kaplan Group would receive the contract for the hand-held computer and asked for information that would enable Lindenauer to draft an RFP favorable to the Kaplan Group. 36 Richards and Lindenauer then drafted an RFP that required the company obtaining the contract to guarantee the continuation of manual data entry. The Kaplan Group, whose Data Conversion Corporation was already engaged in manual data entry, was ideally suited to render such a guarantee. The RFP also provided that the PVB would make payments that were based on the number of summonses processed by the new system. The firm that won the contract would thus not be paid for developing the computer until the new system actually began to operate. Confident in the ability of the Kaplan Group to raise capital, Lindenauer and Richards believed that providing for payments based only on summons volume would favor the Group. In January 1983, the Kaplan Group formed Citisource, Inc. to respond to the RFP. Marvin Kaplan and Robert Richards were named chairman and president, respectively, of the new firm. Although Citisource's response to the RFP acknowledged Friedman's position as special counsel to the firm, at Kaplan's direction it omitted Friedman from its list of Citisource's prospective major shareholders. 37 Ten firms submitted responses to the RFP. Of these firms, Lindenauer's technical staff selected Motorola as the most qualified. Lindenauer nevertheless sought to convince the PVB's selection committee to recommend Citisource over Motorola and the other bidders. Lindenauer delivered to Richards the proposals submitted by Citisource's rivals and asked Richards to prepare comparative evaluations of the proposals. Richards responded by drafting a batch of handwritten evaluations favoring Citisource. After arranging to have the evaluations typed at the PVB, Lindenauer instructed PVB staff members to issue the evaluations to the selection committee and to take credit for their preparation. The PVB employees, threatened with dismissal by Lindenauer, obeyed his orders. 38 During the selection process, Lindenauer sought assurances from Kaplan, Friedman and Richards that the Kaplan Group would keep its side of the bargain. Kaplan told Lindenauer that the Citisource stock would soon be issued and that Friedman would receive 57,500 shares to hold for Manes and 57,500 shares to hold for Lindenauer. When Lindenauer visited Friedman, Lindenauer emphasized his desire that Friedman receive the stock before the selection committee's vote. Friedman stated that he understood, and wrote 57,500 on a piece of paper. After showing the paper to Lindenauer, Friedman burned it in an ashtray. Lindenauer also told Richards that Friedman would hold 50,000 shares of Citisource stock each for Manes and for Lindenauer. Subsequently, when Lindenauer asked Richards if everything [was] all right, Richards responded that Donald gets 50 and you get 50. 39 Citisource issued its stock in April 1983. Friedman subsequently received three certificates for 50,000 shares each and one certificate for 7,500 shares. 1 In late May, Friedman assured Lindenauer that he had received the stock by showing Lindenauer a letter confirming Friedman's receipt of three 50,000-share blocks of stock. Lindenauer subsequently informed Manes that Friedman had received the stock and told Manes that the PVB selection committee would make its decision in a matter of days. Lindenauer also reminded Manes that Manes had to get it [the proposed Citisource contract] through the Board of Estimate. Manes responded, I know. You don't have to tell me. All I want to know from you is when it's going to appear before the Board of Estimate and give me the calendar number. When the PVB selection committee met on June 7, 1983, however, the committee expressed concern that Citisource had yet to develop an adequate printing device for its hand-held computer. Lindenauer falsely told the committee that such a printer had been developed and that he had seen it. The committee then voted unanimously to award the contract to Citisource. 40 In the early months of 1984, the Kaplan Group decided to offer Citisource stock to the public in order to raise capital for the development of the hand-held computer. The company's only asset, however, was the prospect of obtaining a PVB contract, which had yet to be approved by the Board of Estimate. Friedman accordingly exerted his influence to expedite consideration of Citisource's prospective contract. While concealing his ownership of Citisource stock, Friedman lobbied Deputy Mayor Stanley Brezenoff, stating that Citisource was his client and urging that a decision on the PVB contract be made because the delay was causing Friedman terrible embarrassment and Citisource a lot of financial difficulties. The contract was placed on the Board of Estimate's calendar in June 1984 and was approved at the end of that month. Shortly thereafter, Citisource signed a City contract valued at approximately $22 million. 41 Citisource then filed a draft prospectus concerning the public offer of stock with the Securities and Exchange Commission. Although the company had thus far successfully concealed Friedman's ownership interest and directorship from the City, the draft prospectus accurately disclosed that Friedman was both Citisource's largest shareholder and a director of the company. After newspaper reports of the prospectus were published, Michael Zapantis, counsel to the PVB, wrote to Citisource and demanded to know when Friedman had first become a shareholder and a director. Citisource's response, drafted by Friedman and Kaplan and signed by Richards, falsely stated that Friedman had not become a shareholder until September 28, 1983, more than three months after the PVB selection committee's vote and four months after Friedman had in fact received his shares. 42 Citisource went public in the fall of 1984, and by February 1985 its stock traded at $15 per share. Each 50,000-share block of stock was thus worth $750,000. The company, however, failed to meet production deadlines. In January 1986, after the government's investigation of Citisource became public, the City canceled Citisource's contract. At approximately the same time, Kaplan told Richards to remain silent about Friedman's role in holding stock for Manes and Lindenauer. In February 1986, during testimony before the SEC, Kaplan was asked why Friedman was Citisource's largest shareholder. Kaplan responded by giving a rambling answer ultimately stating that he believed the stock was given to Friedman solely because he would be an asset in introducing, advising and helping Citisource.