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Avalon Correctional Services Settles Suit Over Alleged Corporate Irregularities

On November 16, 2012, Avalon Correctional Services, Donald Smith and Tiffinay Smith agreed to settle a lawsuit brought by Ravenswood Investment Company and Ravenswood Investments III (Ravenswood) over alleged corporate irregularities by the Smiths. The settlement calls for Avalon to purchase all the common shares of stock held by Avalon's non-management minority shareholders for $4.05 in cash plus the pro-rated portion of a fee expense pool not used to cover fees and expenses awarded by the court (this would add between 0 and 30 per share) and, subject to some exemptions, a callable three-year, non-voting preferred share of Avalon with an annual dividend of 7% and a face amount of $1.75.

The lawsuit originated in an Oklahoma federal court when Avalon filed a request for a declaratory judgment that Avalon was not required to allow Ravenswood to view corporate books and records because it was incorporated under Nevada law and Nevada law had no such requirement. Ravenswood had made several requests to view corporate records citing Oklahoma law, OKLA. STAT. tit. 18, §§1065, 1002(a) and 1130(D).

Ravenswood filed a counterclaim, alleging that the Smiths had breached fiduciary duties and usurped corporate control by orchestrating the departure of all of Avalon's other directors, then entering Avalon into self-dealing transactions. "It also alleged that the Smiths caused Avalon to issue them one million shares of voting, dividend-bearing preferred stock at an unfair, preferential price and to repurchase over 2.3 million shares of Avalon common stock for the sole purpose of pledging it to a Supplemental Executive Retirement Plain trust that they controlled."

The complaint further claimed that the Smiths and other Avalon managers "obtained unfair benefit by the use of corporate assets to re-purchase stock and place it in trust for the management shareholders, and as a result of defendants' conduct the stock price was depressed and the liquidity of the stock was adversely impacted.

Due to legal technicalities, Ravenswood Investments III became the sole plaintiff and the counterclaim became the main claim. As part of the settlement agreement, Avalon agreed not to contest Ravenswood seeking attorney fees of up to $300,000.

The settlement requires Avalon to offer all non-management shareholders $4.05 plus the pro-rated share of the fee pool, plus a Preferred B Share with liquidation participation of $1.75 for each share of common stock. Avalon has the option of paying $1.75 per share instead of offering the preferred stock if the shareholder has 1,000 or fewer shares. "This provides for total consideration valued at between $5.80 and $6.10 per share. The Avalon stock is quoted on the NASDAQ Pink Sheets and the trading market for the Shares is limited and sporadic. In 2012, there were, through November 6, 2012, five days with reported trades of an aggregate of 5,124 Shares and the price ranged from $1.51 to $3.50."

The lawsuit started as an apparent attempt by Avalon to avoid transparency and grew into allegations of corporate malfeasance. It is being settled under conditions unfavorable to Avalon. You can draw your own conclusions as to whether Avalon management was using the company as its private cash sow. See: Ravenswood Investment Company v. Avalon Correctional Services, U.S.D.C. W.D.Okla., Case No. 5:09-cv-00070-R.


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