Broken Trusts?

Broken Trusts?

Tampa entrepreneur John Kelly alleges a trusted legal adviser undermined a proposed $45 million initial public stock offering.

By David R. Corder

Associate Editor

Tampa direct marketer John Kelly met Atlanta attorney Glenn Sturm through a business associate about a dozen years ago. Sturm, a senior partner in the Atlanta office of Nelson Mullins Riley & Scarborough LLP, advised Kelly on various personal and business matters, including the $25 million cash sale in 1996 of Kelly's Okra Marketing Corp. to the John Harland Co.

With proceeds from the sale, Kelly formed MegaMarketing Corp. Not only did Sturm and the Columbia, S.C.-based law firm represent MegaMarketing on business matters but he also invested in the Tampa-based direct-marketing company. As president and chief executive officer, Kelly put together a business plan with a then-promising new idea - integrating traditional direct mailing and telemarketing operations with an Internet-based marketing program.

But the business relationship soured quickly, with Kelly accusing Sturm and the law firm of legal malpractice in a hotly contested lawsuit filed in the Tampa division of the U.S. District Court. Earlier this month, U.S. Judge James Whittemore temporarily delayed a possible eight- to nine-week trial over the accusations. It was at least the ninth time he has rescheduled the trial start date since Kelly first filed the accusations in June 2001.

In response, the law firm and Sturm retained two of the biggest names in the Tampa Bay area legal community. Guy Burns of Johnson Pope Bokor Ruppel & Burns LLP represents the Columbia law firm. Ben Hill III of Hill Ward & Henderson P.A. represents Sturm.

Each defendant has vigorously denied accusations they committed breach of fiduciary duty, professional malpractice and negligent misrepresentations, fraud and deceit and tortious contract interference with an employment contract.

They are involved in a bitter fight against Kelly's attorney, Bernard H. Dempsey Jr. of Orlando's Dempsey & Sasso PA. It is a legal fight replete with motions for sanctions and allegations of ethical violations.

Promising start

MegaMarketing quickly acquired several companies in pursuit of its business goal. It acquired direct marketers such as Control Group Inc., Genesis Direct Inc. and Aberdeen Marketing Group. Private investors took notice, purchasing 141,120 investment units at a price of $8.68 each, raising about $12.2 million.

Then in March 1999 MegaMarketing acquired a critical piece of the business plan, DeskGate Technologies Inc., an Internet-based software developer voted by Internet World magazine as the "Best New Company in 1998." Kelly then reorganized MegaMarketing and merged its acquisitions into a new identity - M2Direct Inc. The newly formed Tampa-based company had operations in Georgia, Pennsylvania, New Jersey, Delaware and Washington, D.C.

It was the heyday of the dot-com era - just before the bubble burst. Kelly moved quickly to transform M2Direct into a publicly traded company. He gained the financial backing of J.C. Bradford & Co. and First Union Capital Markets Corp. Then he filed a proposed $45 million stock registration statement in May 1999 with the Securities and Exchange Commission. Sturm's associates handled the legal affairs.

One month later, however, M2Direct's board of directors ousted Kelly as president and CEO. They blamed him for cash flow problems, with the company posting a deficit of almost $7.8 million for the year ended Dec. 31, 1998. The company reported a net loss of $10.7 million on net revenue of $34.8 million that year. Debt amounted to about $11.5 million.

Within two months, the proposed M2Direct stock offering had soured. J.C. Bradford and First Union withdrew their backing. Seven months later, M2Direct, which relocated to Atlanta, filed a petition with the U.S. Bankruptcy Court, Northern District of Georgia, to voluntarily reorganize under Chapter 11 of the U.S. Bankruptcy Code.

Alleged confession

A few months after the company filed the bankruptcy petition, Kelly claims he met with Sturm for a dinner meeting at Atlanta's popular Buckhead Diner.

"Sturm, who was visibly upset and emotional at this time, apologized to Kelly for what he said 'we did,' referring to Kelly's ouster on June 21, 1999," the federal lawsuit states. "Sturm stated that he knew that it was wrong and that (board member John) Collins also knew that it was wrong."

That action constituted a breach of fiduciary duties, Kelly argues in the complaint.

"Had Sturm and Nelson Mullins taken affirmative steps to inform Kelly and to protect Kelly in response to the plan to oust Kelly, Kelly could have at least taken preventative measures to protect his interests," the lawsuit states. "Furthermore had Sturm not actively participated in the plan to oust Kelly, it is certain that the board of directors would not have been so influenced to vote for the ouster.

"Indeed, Sturm virtually controlled the decisions of Collins and (board member Stephen) Gross," the complaint adds. "Had Sturm not been unfaithful to Kelly, causing Kelly's ouster, (Thomas) Maletta would not have become the president and CEO of M2Direct. Maletta should never had the power to take actions which he subsequently took, which ultimately led to M2Direct's filing of Chapter 11 bankruptcy."

The ouster immediately scuttled the proposed initial public offering, Kelly's complaint states.

"Members of the board had been assured by Sturm that the ousting of Kelly would not affect the IPO," the complaint states. "As the ultimate goal of a public offering of stock is to sell one's company to the public, a necessary feature of the process is to 'sell' the concept to the investment bankers, promote the company and show stability and unity. Ousting M2Direct's president shortly after filing an S-1 (SEC registration statement) certainly had the effect of putting up a red flag to the investment bankers causing the IPO to, at best, be postponed."

Postponement is unlikely since the Georgia bankruptcy court has since converted the M2Direct petition to a liquidation action under Chapter 7.

The defendants have vigorously denied Kelly's accusation.

In a motion to dismiss, the defendants first argued the court's Middle District of Florida has no jurisdiction over the matter. They claim any valid cause of action, "which the defendants vigorously dispute," occurred in Georgia.

Then the defendants accuse Kelly of failing to state a cause of action. They claim his accusations, though sounding in tort, are subsumed in what they consider "an overarching theory of legal malpractice."

They also claim Kelly has failed to even adequately allege the existence of an attorney-client relationship, "let alone that either defendant breached any duty allegedly owed to the plaintiff."

Moreover, the defendants argue Kelly's claims lack merit since they do not criticize either Sturm or the law firm for their legal work.

"The plaintiff's novel but unsustained theory appears to be that because Nelson Mullins and Sturm represented Kelly and members of his family in the past, in other legal matters unrelated to M2Direct (e.g., a will, estate planning, the purchase of real estate in North Carolina for a second home, an employment contract with a prior employer), Nelson Mullins and Sturm somehow owed Kelly a fiduciary duty to protect Kelly's employment with (and investment in) M2Direct," according to the defendant's motion. "The plaintiff contends Sturm and Nelson Mullins somehow breached these duties when they failed to stop M2Direct's board from terminating him as CEO."

Bitter battle

The defendants' arguments failed to impress Whittemore. In March 2002, the federal judge denied the motion to dismiss and referred the case to mediation.

In their answer to Kelly's complaint, the defendants once again vehemently denied the accusations and stated affirmative defenses.

Meanwhile, tempers heated. The judge ordered sanctions against the defendants over actions related to a deposition and then overruled their objections. He awarded Kelly attorney's fees in that dispute.

Then the defendants alleged ethical violations against Kelly's attorney. Magistrate Judge Mark Pizzo later issued an order denying that claim.

Since mediation failed, Whittemore ordered each side into court-annexed arbitration. The arbitrator issued an award, but the judge sealed it. Then Kelly demanded the award be set aside and the case scheduled for trial. The judge acceded. Whittemore also later denied the defendants' motion to enforce the settlement.

Whittemore first scheduled a trial date for August 4 last year. Most recently he temporarily delayed an April 5 trial start, because Kelly's attorney was involved in an unrelated trial elsewhere.