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CaroLinks investors file lawsuit: Seek injunction, receiver appointment
By Dan McCue
Staff Writer
Two of CaroLinks’ biggest initial investors are suing the company in the wake of revelations that the S.C. Attorney General’s office is investigating the firm and its founder, Lucy Duncan-Scheman, for securities fraud.
G. Robert Kraus Jr. of Charlotte, N.C., and a relative, George Kraus, of Southampton, N.Y., are two of the 27 CaroLinks’ investors identified by only their initials in a recent order issued Oct. 12 against the company by the S.C. Attorney General’s securities division.
The lawsuit, which provides more detail into the alleged inner workings of CaroLinks than the attorney general’s order, asks for a jury trial and the appointment of a receiver to oversee the finances of CaroLinks and its parent entity, Safe-Ports LLC.
The suit also seeks a preliminary injunction wresting control of the company’s financial assets from founder Lucy Duncan-Scheman and her husband Ron Scheman. It also requests an award of damages in an amount to be proven at trial but thought to be at least $25,000 each for Lucy Duncan-Scheman’s and Ron Scheman’s alleged breach of fiduciary duty, and repayment of the plaintiffs’ court costs.
Alan Capper, CaroLinks’ spokesman, could not be reached for comment by phone or e-mail.
According to the lawsuit, filed in the Court of Common Pleas on Oct. 19, the Schemans; Kenneth Londoner, who is listed on the company’s Web site as the managing partner of Safe-Ports LLC finance; Robert Kraus; and Christine Parrot executed the Safe-Ports limited liability company agreement Oct. 10, 2005.
The lawsuit states that Kraus immediately thereafter invested $500,000 in the company, based “on Duncan-Scheman’s representations and the representations of a private placement memorandum” he received, a memorandum he believed was provided to all of CaroLinks’ equity investors.
During 2006, both Robert Kraus and George Kraus extended four separate loans to the company totaling $1.7 million.
The lawsuit says those loans were made pursuant to the terms of a promissory note executed on behalf of Safe-Ports and individually guaranteed by the Schemans and Londoner.
Each of the loans was to be repaid, with interest, within 45 days.
According to an affidavit provided to the court by Robert Kraus, the money was intended to serve as a bridge loan to fund general and administrative expenses of Safe-Ports/CaroLinks in its startup phase, subject to being paid with other financing that Duncan-Scheman represented would be forthcoming.
He also stated in the affidavit that the profit from last month’s Jafza International’s purchase of Carolinks’ Orangeburg property is the ideal time to dissolve Safe-Ports and Carolinks for the benefit of all creditors and shareholders.
Safe-Ports and its principals defaulted on their obligations, the lawsuit said.
On Nov. 16, 2006, Robert and George Kraus each executed separate forbearance agreements with Safe-Ports, whereby the Schemans acknowledged and agreed the loans were in default. In exchange for the forbearance, each Kraus was issued 156 units of Class B membership interest in Safe-Ports.
The agreement also prohibited Safe-Ports’ ability to “incur any additional material indebtedness” without the Krauses’ written consent. The loans were ultimately repaid in early March 2007.
The lawsuit charges that Duncan-Scheman and her husband subsequently violated the terms of the amended operating agreement, including, without limitation, incurring substantial, material indebtedness, without first obtaining the Krauses’ written consent.
Specifically, the Krauses charge that Safe-Ports incurred $2 million in debt payable to Scheman pursuant to a note executed on May 7, 2007.
Further, the lawsuit charges that Safe-Ports, through the conduct of its members, assigned, conveyed or transferred all or a substantial part of Safe-Ports assets to other entities without the proper assent of Safe-Ports members.
Moreover, the suit states, “the defendants, or some of them, have ignored generally accepted accounting principles, co-opted corporate opportunities, failed or refused to remit state and federal payroll tax payments, and willfully, wantonly and maliciously concealed the true nature of Safe-Ports financial conditions from partners, lenders and investors.”
The Krauses contend that they repeatedly requested information relating to CaroLinks’ finances, but those requests were brushed off by Duncan-Scheman and others, who cited conflicting travel and business schedules.
When documents were finally produced, the Krauses maintain that the defendants produced only a portion of the books and records requested.
The suit maintains that CaroLinks raised $4 million in investments and a similar amount in loans, most of which has been spent. By the time they got to see the books, the Krauses charge, only $44,000 in cash remained.
At the same time, the court papers state Safe-Ports/CaroLinks apparently forfeited $1.7 million of nonrefundable deposits on land. It also appears to have booked a sale of $500,000 in stock (in addition to the $4 million cited above) with the offsetting entry being office rent.
The Krauses charge that the assets of Safe-Ports/CaroLinks have been misappropriated and contend that without the appointment of a receiver, the company is in grave financial jeopardy.
The Krauses also charge that Duncan-Scheman is planning to use the profits of the sale of Safe-Ports/CaroLinks’ Orangeburg land options to Jafza International for her own benefit, to make preferential payments to relatives or other corporate insiders and to employ a new business plan that has not been shared with the remaining members.
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