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NASSAU COUNTY, NY – A Nassau judge ruled last week that Patrick LaFontaine, professional hockey player and inductee in the Hockey Hall of Fame, can move forward with his fraud claims against defendants Dunkin’ Brands and the principals of its bankrupted franchisee Kainos Partners Holding Company.
Although not named in the lawsuit, Dunkin’ executive chairman of the board Jon L. Luther is at the center of the litigation as LaFontaine’s former neighbor and friend, and board member of his Companions In Courage non-profit charitable foundation for children.
The lawsuit filed under LaFontaine’s company High Tides, LLC, alleges Kainos board members used fraudulent misrepresentations, omissions and concealment of facts to induce his company to invest in their franchise operation. Kainos was formed in November 2006 to create a long-term business alliance with Dunkin’ Brands. It was initially capitalized by its founding members for $6 million. The company purchased the rights to develop Dunkin’ Donut/Baskin-Robbins combo retail shops in the greater Buffalo, New York area and elsewhere.
LaFontaine’s relationship with the Kainos principals began at a golf tournament in 2005, where Luther first introduced him. At that time, and in the context of discussing a possible equity investment by the hockey player, LaFontaine learned that Kainos was working with Luther to develop Dunkin’ shops, and that the Dunkin’ CEO believed that LaFontaine’s status as a former Buffalo Sabres hockey icon would assist Kainos in developing and growing the Buffalo market.
In 2006, Thomas H. Lee Partners LP, Bain Capital Partners and the Carlyle Group purchased Dunkin’ Donuts for $2.43 billion. According to the lawsuit, as part of this purchase, and through a complicated securitized structure, “Dunkin’ Brands burdened itself with secured debt estimated to be in excess of one billion dollars—a debt that needs to be retired.” It further states that “on information and belief, Dunkin’ is also preparing an initial public offering, whereby it hopes to offer common stock to the general public for the first time, for the benefit of itself and its investors.”
After consulting with Luther again in 2007, LaFontaine claims he was induced to invest in Kainos through an initial investment of $500,000, thereby becoming the owner of 500 shares. Later that year, the equity holders of Kainos, including High Tides, invested an additional $25 million. LaFontaine asserts that he relied on Luther’s advice, which earned his trust in Luther and Dunkin’ Brands. In press releases, Luther was quoted recognizing Kainos as “Dunkin’ Brands Rising Star” at an awards banquet at John F. Kennedy Presidential Library and Museum in Boston.
The allegations further state that included in Kainos’ fraudulent conduct were public and private statements made by Luther in joint press releases with Kainos, giving business updates on the financial health of the franchisee group. High Tides was provided with a confidential investor summary memorandum (November 2007), 2008 annual operating plan and other financial reports and statements, all to lull High Tide into a false sense of security regarding the viability of its investment, according to the lawsuit filed in the New York Supreme Court. Although LaFontaine’s company received communications from Kainos routinely, touting its continued growth and success, reports never included the actual disclosures. They mainly mentioned Kainos’ opportunity for further growth in untested markets.
As part of Kainos' expansion into the Buffalo development marketing area, the franchisee corporation, at a cost of $4 million, developed and operated the Central Manufacturing Facility to supply baked goods to Dunkin’ shops in the territory. High Tides later learned from a Kainos board member that the Buffalo market was “pushed” on Kainos by Dunkin’ Brands “as a favor to [Jon Luther], then chairman and CEO, and that the central bakery facility was a major drain on Kainos from its inception.”
Although Kainos principals continued to represent the success of their group, LaFontaine alleges that in reality the representations and warranties were fraudulent when made, and intended to further mislead and deceive High Tides into a continued false sense of security that the “house was still in order.”
Kainos Behind the Scene
According to the complaint, High Tides plaintiffs allege that on December 1, 2008 Kainos’ chief financial officer Christopher Cortese advised LaFontaine that Kainos’ board was looking for yet another round of funding to support its “incredible growth.” He stated that the price for any units sold in any new round of funding would be priced at $1,250 per unit, given the fact that Kainos, which at that time had a value of $40 million, would have a value of $77 million after closing.
Two weeks after Kainos’ CFO valued the company at $77 million, Kainos was without money to continue operations.
In early February 2009, LaFontaine was told by a fellow investor that Kainos was in serious financial distress, that there were problems with the board, including allegations of embezzlement and fraud, and that “Palisade was coming in and taking over.” Palisade Capital Investment Management, LLC, an SEC registered investment advisor, was also an investor in the Kainos entity.
Less than one month after Dunkin’ Brands loaned Kainos approximately $5 million, Luther was replaced by Nigel Travis, who took over in January 2009 as Dunkin’s chief executive officer and chairman. At that time, Luther became Dunkin’s executive chairman of the board.
In his decision last week, Judge Stephen A. Bucaria states that High Tides, the plaintiff, asserts seven causes of action related to fraud, concealment and negligent misrepresentation. The court order dismisses some of the defendants’ claims and grants others. Although the judge granted Dunkin’s motion to dismiss on the sixth cause of action, conspiracy to defraud, he denied its seventh cause of action for aiding and abetting fraud, as he did with other defendants. Dunkin’ argued that the claim cannot be sustained because of the absence of factual allegation that Dunkin’ had actual knowledge of the fraudulent acts committed by the Kainos co-defendants and that Dunkin’ provided substantial assistance to them.
Although Dunkin’ declined an interview, its communication office issued this statement:
Dunkin’ Brands is aware of the lawsuit that was recently filed by High Tides, LLC, an investment company owned by Pat LaFontaine. Mr. LaFontaine's investment was not with us, but with Kainos Partners Holding Co. LLC, which formerly owned and operated Dunkin' Donuts restaurants in Buffalo, Las Vegas and South Carolina. While we have great respect for Mr. LaFontaine and regret that his firm lost money, we are not responsible for these losses.
Dunkin' Brands recently took ownership of the Kainos restaurants in New York and Las Vegas, which have since shown improvement.
As this is an ongoing legal matter, we are not able to provide further information.
The law firm of Zarco, Einhorn, Salkowski & Brito is representing High Tide as co-counsel with Robert Bergson, Abrams Garfinkel Margolis Bergson. Robert Zarco and Robert Salkowski issued this statement regarding Judge Bucaria’s ruling:
The members of High Tides are extremely pleased with the court’s decision that allows its aiding and abetting fraud claims against Dunkin Donuts and the other defendants to proceed to discovery. Based on the facts alleged in the complaint, which High Tides is certain that it will be able to prove in court, Dunkin Donuts will have a very difficult time claiming that it knew nothing about the financial condition of Kainos during the time that Kainos was soliciting additional capital investments from High Tides and other unwitting investors.
The court’s decision should be a wake-up call for Dunkin’ Donuts and the other Defendants that they will not be able to avoid liability simply by claiming to have remained silent in the face of such overwhelming misrepresentations.
|High Tide complaint.pdf||888.86 KB|
|High Tide Decision.pdf||834.81 KB|