Suit, Filings Trace Dispute Over Doll Firm

When John J. Francis and Nic P. Neumann invested a combined $175,000 in American Patriots Inc., they thought they were buying into a financial holding company that would acquire insurance operations.

But a curious thing happened. American Patriots failed in several buyouts of insurance firms and instead went into the toy business. The holding company bought Newport Beach-based Curiosity Inc., which was developing a high-technology doll, Cheerful Tearful.

Curiosity has since foundered. And, Francis, who invested $100,000, and Neumann, who put up $75,000, filed suit in Orange County Superior Court against American Patriots, Curiosity, its chairman, Joseph V. Delaney, and others. The suit alleges that the companies and Delaney engaged in fraud and misrepresentation.

The lawsuit, filed in June, alleges that Delaney and the investment group’s other officers and directors “systematically and pervasively defrauded shareholders, mismanaged and diverted Patriots’ funds, abused corporate authority” and other improprieties.

The suit also alleges that Delaney of Newport Beach, his wife and son received excessive salaries and other payments over a three-year period--a total of more than $700,000--while investors suffered losses of $881,000.

Delaney’s attorney, Bruce Feuchter, has denied the allegations in court filings. He says that the lawsuit is without merit and that Delaney disclosed everything necessary in the private offering that led to formation of American Patriots in 1987.

Feuchter said in court filings that the compensation received by Delaney and his family was proper and approved by the corporation’s board of directors. He also said American Patriots bought Curiosity only after it failed at three attempts to buy insurance firms.

Delaney, a former vice president for Drexel Burnham Lambert, formed American Patriots in 1987 and was elected its chairman. He also has been president of J.V. Delaney & Associates, a registered broker-dealer, since 1981.

American Patriots issued a private offering, soliciting investors willing to sink $50,000 or more into a high-risk venture in hopes of seeing a five-fold increase in their investment when the company went public, which was estimated to occur at 12 to 18 months. The company never went public.

The board included the retired presidents of the Cigna, Home and Transamerica insurance companies as well as economist Arthur Laffer. The private offering raised $2.8 million among 103 investors, according to attorneys for the two investors.

After the acquisition attempts failed, American Patriots’ board decided on Dec. 14 to invest $550,000 for a 64% stake in Curiosity, a new toy company that had plans for an innovative baby doll. The board also approved a $50,000 loan to Curiosity and a $144,000 annual salary for Delaney as chairman of Curiosity, court filings show.

Francis and Neumann say that they, as shareholders, were never consulted about the move into the toy business and have not been allowed to get their money back.

“At that point, they should have called a meeting of shareholders and said, ‘Look guys, we tried to buy an insurance company and we would like to consider going into another business,’ ” said Gary Cooper, an attorney acting as legal counsel for the two shareholders.

Francis and Neumann are also alleging fraud because Delaney appears to have profited from renting a house to an employee, took additional commissions besides his salary and approved company payments totaling more than $60,000 to his wife and son, Francis said.

“The basic fraud is that Delaney took a substantial amount of money and he did not provide any services or benefit for that money,” Cooper said.

Feuchter counters in court papers that his client rendered services for every dollar paid to him and that the payments were approved by Curiosity’s board. He also said Delaney’s wife and son performed necessary services for the company.

As for Curiosity, the company has amassed its share of troubles. The baby doll garnered $15 million in orders, but financing troubles prevented its arrival in time for the crucial Christmas season. The company was disbanded, folded back into American Patriots, and its founder resigned.