A federal judge ruled yesterday that Rep. Otis G. Pike (D.N.Y.) violated federal securities law and defrauded a business associate in buying the controlling interest in a Long Island nursing home.
U.S. District Court Judge Vincent L. Broderick, said Pike of the Southern District of New York, "employed a scheme to defraud or engaged in acts which operated or engaged in connection with purchases of stock in The Long Island Home Inc.
Broderick ruled against Pike in a civil lawsuit brought against the congressman by Dr. Carl H. Neuman, a Manhattan heart specialist who operator severl private hospitals and nursing homes.
Pike and Neuman jointly own a majority of the stock of The Long Island Home Inc., which operates South Oaks Hospital a large private psychiatric hospital in Amityville. N.Y.
In the lawsuit, Neuman said he provided most of the money to buy the shares, in return for a promise from Pike that the two would jointly choose the five members of the company's board of directors. When Pike allegedly reneged on his promise and refused to approve Neuman's nominees for the board. Neuman sued, accusing Pike of securities fraud.
In a lengthy ruling filed yesterday in New York, Judge Broderick upheld most of Neuman's complaint. The judge gave Pike one week to approve one of Neuman's choices for the board, or to explain why he had not approved Neuman's nominee.
Broderick's ruling said Pike, in asking Neuman to invest $479,000 in the stock, "represented to Neuman that he would share control of the corporation by giving Neuman the right to independently designate a member of the board of directors. Pike, in fact, did not intend to share control.
"Since Neuman would not have purchased the securities but for Pike's representation. Neuman was deceived 'in connection with the purchase of any shares of any security,'" Borderick said, quoting the law Pike was accused of violating.
The securities fraud charge involved in the lawsuit is a civil matter.
Ruling on a counter claim filed by Pike against Neuman. Broderick awarded Pike nominal damages of $100, saying Neuman had broken an oral agreement.
Pike, who has announced he will not seek reelection when his term expires this year, did not returns calls seeking comment on the decision. He had earlier refused to discuss the lawsuit with a reporter for The Washington Post.
The cardiologist and the congressman became involved in seeking control of the nursing home in 1974, records filed in the lengthy litigation reveal.
Pike, who was already a member of the home's board of directors and a small shareholder, learned that a large block of shares was for sale and that enough additional stock might be purchased to control the highly profitable corporation.
Through a mutual acquaintance, James Millard, a Long Island attorney, Pike recruited Neuman to provide funds to buy the stock.
Together they purchased a block of about 800 shares owned by the trustees of Columbia and Cornell universities, then purchased smaller amounts from several other sellers. Those stock purchases, plus 276 shares owned by Pike before the acquisitions began, gave the two 1.513 of the 3,000 shares, a bare majority but enough to elect all five members of the board.
The court records show that Neuman invested $479,000 and Pike put in $137,000 and his 276 shares for which he has paid $44,500. Although Neuman provided most of the cash, the two agreed to share control of the company equally.
Neuman, in court depositions, said he was willing to share control of the stock because Pike made the purchases possible and because the investment was worth far more than he paid for it.
At one point, before the case went to Judge Broderick, Neuman offered to pay Pike $2 million for his share of the nursing home. Pike refused the offer and also refused to buy out Neuman's share at the same price.
Pike's holdings in the nursing home were never made public until the lawsuit revealed them. During his seven terms in Congress Pike refused to disclose his private finances. Since he is not seeking reelection, he avoids new congressional disclosure regulations.
According to court records, as a board member and general counsel to the nursing home - both part-time jobs - Pike was paid $54,375 last year by the nursing home, and collected almost $50,000 more in dividends on his stock. Under new congressional restrictions on outside income. Pike would be limited to collecting $3,625 a year from outside sources.
Judge Broderick's ruling also discussed what Neuman charged was a member of the nursing home's board conflict of interest involving Pike as a of directors.
The block of 800-plus shares that Pike and Neuman purchased was at one point offered for sale to the home's board of directors at $800 a share.
"The consenus of the board was that $800 per share was too high a price," Broderick noted. "Pike participated in that board meeting . . . and never disclosed to other board members that he did not consider $800 per share too high a price and that he was planning to participate in the purchase . . . at that price."