Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 1 of 34

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1 Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 1 of 34 UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF FLORIDA ORLANDO DIVISION GENE BADGER, JOHN LOVE, MARVIN CASE NO. 6:06-cv-1253-ORL-19JGG EVANS, SID BANACK, and JOHN WILLIS, filed herein in Case No. 6:06-cv-637-ORL- 28KRS pursuant to this Court ' s Order dated derivatively on behalf of March 30, 2007 consolidating actions (Doc. No. 22) PLAINTIFFS' SHAREHOLDERS CORPORATION, a Florida corporation, vs. Plaintiffs, SOUTHERN FARM BUREAU LIFE INSURANCE COMPANY, a Mississippi corporation, and Jury Trial Demanded PLAINTIFFS' SHAREHOLDERS CORPORATION, a Florida corporation, Defendants. AMENDED VERIFIED DERIVATIVE COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS Plaintiffs, Gene Badger, John Love, Marvin Evans, Sid Banack, and John Willis, derivatively on behalf of Plaintiffs' Shareholders Corporation (collectively, "Plaintiffs") and through their undersigned counsel, and in accordance with this Court' s Order Granting Plaintiff Leave to File Amended Complaint, allege the following based upon personal knowledge as to the individual named plaintiffs and their own acts, and, as to all other matters, upon information and belief and an investigation made by their undersigned counsel which included, inter alia, a review of the notice of a special

2 Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 2 of 34 stockholders' meeting to consider approval of the sale of the security at issue, the proxy statement and proxy form for this special meeting, the meeting minutes for the August 24, 2004 joint meeting of the Board of Directors of the Florida Farm Bureau Federation and Florida Farm Bureau Holding Corporation, the opinion letter of Towers, Perrin, Forster & Crosby, Inc. containing a valuation of the security at issue, and the related opinion letter of Harold G. Ingraham, Jr., Consulting Actuary. This derivative action was consolidated into the class action filed by the Plaintiffs (Case No. 6:06-cv KRS) due to the similar nature of the claims. However, due to the differences in the types of actions, Plaintiffs are filing separate complaints in both the class action and the derivative action. NATURE OF THE ACTION 1. This is a shareholder derivative action on behalf of Plaintiffs' Shareholders Corporation ("PSC"), a Florida corporation, for violations of federal securities laws and common law fraud under Florida law arising from Defendant Southern Farm Bureau Life Insurance Company's ("Southern Life") fraudulent and unlawful omissions and misrepresentations of material fact made in connection with its purchase of a single security owned by PSC, defined in paragraph 7 below as the "Debenture." 2. Plaintiffs have been damaged by Southern Life's fraudulent omissions and misrepresentations of material fact in connection with its purchase of the Debenture from PSC and hereby seek remedies pursuant to Section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act") ( codified at 15 U.S.C. 78j), Rule 10b-5 (codified at 17 2

3 Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 3 of 34 C.F.R b-5), and fraud under Florida common law. JURISDICTION AND VENUE 3. One of the claims asserted herein (Count 1) ari ses under Section 10(b) of the 1934 Act and Rule IOb-5. Thus, this Court has jurisdiction pursuant to Section 27 of the 1934 Act (15 U.S.C. 78aa) and 28 U.S.C. 1331, Venue is proper in the Middle District of Florida pursuant to Section 27 of the 1934 Act (15 U.S.C. 78aa) and 28 U.S.C. 1391(b), as many of the acts and omissions complained of herein, including Southern Life's dissemination of false and misleading material information, occurred in substantial part in the Middle District of Florida. Furthermore, Southern Life conducts business throughout the Middle District, including in Orange County, Florida. 5. In connection with the acts and omissions alleged in this complaint, Southern Life, directly or indirectly, used the means and instrumentalities of interstate commerce including, but not limited to, the United States mails and interstate telephone communications. THE PARTIES 6. Plaintiffs Gene Badger, John Love, Marvin Evans, Sid Banack, and John Willis, suing derivatively on behalf of PSC, were shareholders in PSC when all of the events giving rise to this cause of action occurred. At all such times, Gene Badger, John Love, Marvin Evans, Sid Banack and John Willis held, respectively, 5,288, 2,500, 466, 2,580, and 220 shares of common stock of PSC. 7. PSC, which is being sued herein as a nominal defendant because this is a 3

4 Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 4 of 34 derivative action, is a Florida corporation with its principal place of business in Gainesville, Alachua County, Florida, PSC was formed out of a prior Rule lob-5 class action against Southern Life, Winchester v. Florida Farm Bureau Equities, Inc., Case No. GCA MMP (Sept. 4, 1987), that was settled in 1987 (the "Winchester Settlement"). As a part of the Winchester Settlement, PSC was to receive a 27.7% equity interest in Florida Farm Bureau Holding Corporation ("Florida Holding"), a Florida corporation that owns 10% of the common stock of Southern Life. Thus, PSC was the beneficial owner of 2.77% of the stock of Southern Life, which as of December 31, 2004 had an adjusted net worth in excess of one billion one hundred million dollars ($1,100,000,000). Because of concern about restrictions in a certain trust agreement discussed below, PSC's ownership of Florida Holding was evidenced by Florida Holding's issuance of a convertible debenture (the "Debenture") to PSC. PSC was formed specifically for the purpose of holding the Debenture and does not otherwise conduct any business. 8. Pursuant to the terms of the Debenture as approved by the court in Winchester, PSC became entitled to 27.7% of any cash dividends paid by Southern Life to Florida Holding. In other words, PSC was entitled to payment of 2.77% of all dividends declared by Southern Life. 9. As part of the Winchester Settlement, the Stipulation of Settlement approved by the court provides in relevant part: (d) FLORIDA FARM BUREAU HOLDING CORPORATION, a Florida corporation ("Florida Holding" ), owns 10% of the Common Stock of Southern Life, which is subject to certain restrictions contained in 4

5 Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 5 of 34 the Agreement and Declaration of Trust dated July 15, 1947, as amended, a copy of which is attached hereto as Exhibit "A") (sic ). Florida Holding is in good standing in the State of Florida and is a wholly-owned subsidiary of [Florida Farm Bureau]. Within seven days of the settlement effective date, [ Florida Farm Bureau] will cause Florida Holding to issue to a corporation, partnership, trust or other entity to be formed by class members ("Shareholders Corporation ") [ incorporated as PSC] a convertible debenture or debentures which shall be convertible into twenty - seven point seven percent (27.7%) of the outstanding common capital stock of Florida Holding... (e) It is the intent of the parties that Shareholders Corporation shall be entitled to receive the same financial benefits it would receive if it owned outright 27.7% of the common stock of Florida Holding In the event Southern Life pays any cash dividend(s) on its stock owned by Florida Holding, then in such event, Florida Holding shall pay to Shareholders Corporation 27.7% of such dividend(s) within seven days of receipt thereof... (g)... (iv) Except as provided in said Agreement and Declaration of Trust dated July 15, 1947, as amended, [Florida Farm Bureau] will not sell, transfer, pledge, assign, convey, or otherwise dispose of its shares in Florida Holding, or any interest therein, nor will it allow same to occur by operation of law or otherwise, nor will it authorize or permit the issuance of any additional shares in Florida Holding, other than strictly in accordance with the terms of this Stipulation and the terms of the convertible debenture. (v) [Florida Farm Bureau] has caused Florida Holding to place, on the face of all issued and outstanding stock certificates in Florida Holding, a legend giving notice that the sale, transfer, pledge assignment, conveyance, or other disposition of any interest therein, is subject to the 5

6 Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 6 of 34 provisions of the convertible debenture; and (vi) [Florida Farm Bureau] will not take, or permit any action to be taken by Florida Holding, which would dilute or reduce the interest of the class members in Florida Holding, including, but not limited to, doing, or failing to do, any act which would trigger the rights of first refusal under Article "I (e)" or Article "II (b)" of the Agreement and Declaration of Trust dated July 15, 1947, as amended... (i) [Florida Farm Bureau]'s counsel shall provide Plaintiffs' escrow counsel prior to the settlement hearing with an opinion in the form reasonably acceptable to Plaintiffs' escrow counsel that neither the issuance of the convertible debenture, nor any provision of the settlement documents, will trigger the rights of first refusal as set forth in Article "I (e)" or Article "II (b)" of the Agreement and Declaration of Trust dated July 15, 1947, as amended, or otherwise violate the provisions of that instrument,.... A copy of the Stipulation of Settlement is attached hereto and incorporated by reference as Exhibit "1." 10. Pursuant to the Stipulation of Settlement, and the court orders approving same, Florida Holding ultimately issued to PSC the Debenture in the form attached hereto and incorporated by reference as Exhibit "2." The Debenture was validly issued by Florida Holding to PSC. 11. The Debenture was automatically convertible into 27.7% of the capital stock of Florida Holding upon the earliest of the following: (1) the termination of the above-referenced Agreement and Declaration of Trust dated July 15, 1947, as amended (the "Trust Agreement"); (2) the elimination or modification of the restrictions set forth in Article I (e) and/or Article II (b) of the Trust Agreement to permit the transfer of capital stock of Florida Holding to PSC; or 6

7 Case 6 : 06-cv JA-KRS Document 56 Filed 05/08/2008 Page 7 of 34 (3) the bankruptcy, insolvency, reorganization, liquidation or receivership of Southern Life. 12. The Debenture also provides that PSC: "shall be entitled to receive the same financial benefits it would receive if it owned outright 27.7% of the capital stock of [Florida Holding]. Accordingly, in the event Southern Life pays any cash dividend to holders of its stock, then in such event, [PSC] shall be entitled to receive a payment hereunder of an amount equal to 27.7% of such dividends received by [Florida Holding] on the shares of capital stock of Southern Life owned by [Florida Holding]. 13. Under the unique circumstance created by the Stipulation of Settlement, the orders approving same, and the Debenture, PSC became the equitable and beneficial owner of 27.7% of the common stock of Florida Holding. 14. Defendant, Southern Life, is a privately-held, multi-state company incorporated in the State of Mississippi and is authorized to do business in the State of Florida and doing business in Florida. 15. Southern Life' s issued and outstanding shares of common stock are owned by ten holding companies, one of which is Florida Holding, which became part of Southern Life's ownership structure in Florida Holding and the other nine holding companies each own 10% of Southern Life's outstanding common stock. 16. All of the common stock of each of the ten holding companies is held by its own respective state farm bureau federation. These farm bureau federations are corporations providing products and services to member families who join county farm bureaus, including access to insurance products sold by Southern Life and its subsidiaries. 7

8 Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 8 of Shortly after Southern Life' s incorporation in 1946, several of the farm bureau federations formed their respective holding companies which in turn issued common stock to the farm bureau federations and preferred stock to individual member families which belonged to the farm bureau federations. The holding companies, in turn, used the money raised by the issuance of that stock to purchase capital stock in Southern Life. Southern Life issued 400 shares of capital stock, priced at $200 per share, to the holding companies, thereby raising $80,000 in initial capital and surplus from each of the holding companies. THE TRUST AGREEMENT 18. On July 15, 1947, the initial holding companies and the respective farm bureau federations that owned them entered into the Trust Agreement. The Trust Agreement was amended in 1972, 1973 and 1984 to include all of the current holding companies and their respective farm bureau federations, as if they had been original signatories to the Trust Agreement. Pursuant to the terms of the Trust Agreement, any amendment to the Trust Agreement requires unanimous consent of all signatories to the Trust Agreement. A true and accurate copy of the Trust Agreement and the amendments thereto is attached and incorporated by referenced as Composite Exhibit "3." 19. The Trust Agreement was created by the farm bureau federations for the benefit of the 20,000 original charter policyholders ("Charter Policyholders") who bought an insurance policy ("Charter Policy") offered by Southern Life on or before May 1, The Trust Agreement was designed to ensure that the Charter 8

9 Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 9 of 34 Policyholders would receive, at most, three times their gross annual premiums over each three-year period as a return on non-transferable participation certificates that were issued to the original 20,000 Charter Policyholders. The 20,000 Charter Policyholders, as the trust beneficiaries, were and are essentially receiving an annual investment return equal, at most, to three times the amount of their respective insurance premiums over a three year period. 21. The Trust Agreement terminates within three years after maturity of the last surviving holder of a Charter Policy Contract. Each of the 20,000 Charter Policies matures when the Charter Policyholder reaches 85 or upon death, whichever event occurs first. 22. According to the express terms of the Trust Agreement, the farm bureau federations agreed to release and relinquish any claim to dividends greater than $5,700 out of the dividends paid annually to the holding companies by Southern Life. Also according to the Trust Agreement, the dividends in excess of $5,700, must be transferred by the holding companies to a trustee committee designated as the Southern Farm Bureau Charter Committee ("Charter Committee"). The Charter Committee is made up of the treasurers from each of the farm bureau federations and is responsible for distributing the excess dividends. 23. The Charter Committee is also responsible for making distributive share payments to the Charter Policyholders. Although the distributive share payments are made to the Charter Policyholders annually, the amount paid cannot exceed three times the premiums of their individual life insurance premiums over each three-year period. 9

10 Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 10 of 34 Any excess funds after the distributive share payments must be distributed proportionately to each of the farm bureau federations to carry on general education programs. 24. Despite the fact that the Trust Agreement contains no limitation on the amount of dividends paid to Southern Life's ten shareholders (and, instead, limits the amount of the distributed dividends that those shareholders can retain), Southern Life has relied on the Trust Agreement to avoid paying any reasonable dividends to its ten holding company stockholders, including Florida Holding, and thereby has been able to accumulate a rapidly increasing net worth that in 2004 exceeded one billion one hundred million dollars ($1,100,000,000). SUBSTANTIVE ALLEGATIONS 25. On April 5, 2002, the individually named plaintiffs in the instant action, other than John Willis and John Love, filed a lawsuit in state court in Orange County, Florida, derivatively on behalf of PSC against Southern Life for its failure to pay reasonable dividends to Florida Holding, in which PSC was a 27.7% beneficial owner pursuant to the Debenture. See Badger v. Southern Farm Bureau Life Ins. Co., Case No. C (9th Jud. Cir. Fla.) (Apr. 5, 2002) ("Badger"). While Badger was stayed pending the resolution of federal injunction proceedings initiated by Southern Life, and before any discovery on the merits, Southern Life made an offer to purchase and ultimately did purchase the Debenture from PSC, thereby foreclosing any further consideration of that action. It is Southern Life's fraudulent omissions and misrepresentations in connection with its purchase of the Debenture that are the subject 10

11 Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 11 of 34 of the instant action. 26. From time to time before 2004, and with greater urgency during the year 2004, Southern Life engaged in efforts to extend the term of the Trust Agreement for as long as was legally permissible. At all material times, Southern Life knew that under the requirements of the Trust Agreement, in order to extend the Trust Agreement, all signatories to the Trust Agreement, including all ten of Southern Life's shareholders had to consent to the extension. At all material times, Southern Life also knew that under the Winchester Settlement, neither Florida Holding nor Florida Farm Bureau Federation ("Florida Federation") could approve the extension of the Trust Agreement without the consent of the holders of the Debenture (i.e., PSC and its shareholders). 27. As part of its scheme to defraud Plaintiffs, on July 19, 2004, Southern Life hired the actuarial firm of Towers Perrin Forster & Crosby, Inc. ("Towers Perrin") to valuate the Debenture (the "Valuation"). 28. On August 25, 2004, the Florida Farm Bureau Federation Board of Directors and the Florida Holding Board of Directors (collectively, the "Board") met in Gainesville, Florida (the "August Board Meeting"). Joseph Stroble, the CEO of Southern Life, and Joseph Purvis, the Secretary and General Counsel of Southern Life, attended the August Board Meeting and made a presentation to the Board concerning, inter alia, Southern Life's desire to extend the Trust Agreement. After hearing from Messrs. Stroble and Purvis, the Board deliberated and passed the following resolution concerning extension of the Trust Agreement: Florida Holdings is authorized and directed to vote in favor of the extension and amendment of the [Trust Agreement] 11

12 Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 12 of 34 and related matters, if, and only if (i)southern Life first purchases the Debenture from PSC; and (ii) Southern Life, as the holder of the debenture provides written consent to the extension and amendment of the [Trust Agreement.] A true and correct copy of the Minutes from the August Board Meeting is attached hereto as Exhibit "4." 29. Immediately after the August Board Meeting, Southern Life offered to purchase the Debenture from PSC for $3,300,000 based upon the Valuation of the Debenture which Southern Life provided to PSC at the time of its offer. Southern Life knew that the Valuation would also be presented to each of the PSC shareholders for them to consider in deciding whether to vote to approve the sale of the Debenture to Southern Life. A true and correct copy of the Valuation is attached hereto as Exhibit "5." Southern Life also knew that the Valuation omitted material facts and contained material misrepresentations, including the value of the Debenture itself which was grossly understated. 30. Southern Life knowingly and intentionally misrepresented to Towers Perrin, and subsequently to PSC and its shareholders, including Plaintiffs, that the Trust Agreement was not expected to terminate until 2033 and that the Debenture would not or was not expected to convert into actual stock of Florida Holding until that time. In making that material misrepresentation, Southern Life knowingly and intentionally or with severe recklessness omitted the material fact that the trust created by the Trust Agreement (the "Trust") had long since served its purpose and was no longer necessary to protect the entitlement of any remaining Charter Policyholders to receive the de minimis amount of three times their respective insurance premiums over each three-year 12

13 Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 13 of 34 period. Thus, Southern Life knowingly and intentionally or with severe recklessness omitted the material fact that the Trust Agreement had effectively terminated such that PSC had a present right to 27.7% of the stock of Florida Holding equivalent to a 2.77% interest in Southern Life. 28. Substantially all of the original 20,000 Charter Policyholders who purchased Charter Policies prior to 1947 have died or their Charter Policies have lapsed. With Southern Life's net worth in excess of one billion one hundred million dollars ($1,100,000,000) as of 2004, no need or reasonable basis for maintaining the Trust has existed for years, if not decades. In providing Towers Perrin with the information upon which the Valuation is based, Southern Life omitted the material fact of how many Charter Policyholders were alive or under 85 years of age as of 2004, as well as the amount of funds necessary to pay their de minimis premiums. 29. Southern Life failed to inform Towers Perrin that Southern Life had a specific corporate policy and goal to extend the Trust Agreement and that it could not do so without the consent of the Debenture holder. Further, Southern Life knew that Florida Holding and Florida Federation would only vote to extend the Trust Agreement if Southern Life purchased the Debenture from PSC and subsequently consented to the extension of the Trust Agreement, however, Southern Life also failed to tell this to Towers Perrin. As a result, Towers Perrin did not consider Southern Life's desire to extend the Trust Agreement and PSC's control, as the holder of the Debenture, over the extension of the Trust Agreement. 13

14 Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 14 of Upon information and belief, Southern Life did not inform PSC that missing from the Valuation was any consideration of (i) Southern Life's attempts to extend the Trust Agreement, (ii) PSC's control of any such extension or (iii) Southern Life's need to purchase the Debenture because Florida Holding and Florida Federation would only vote to extend the Trust Agreement if Southern Life purchased the Debenture from PSC and subsequently consented to the extension of the Trust Agreement. 31. Southern Life also knew that the Valuation was not a market valuation but rather an actuarial valuation, and Southern Life failed to disclose this to PSC. 32. Upon information and belief, Bruce Brashear, general counsel of PSC, and Donald Nelson, a director of PSC, attended all or a portion of the August Board Meeting and may have learned that Florida Holding and Florida Federation would only agree to extend the Trust Agreement if Southern Life purchased the Debenture and subsequently consented to the extension of the Trust Agreement. With regard to these conditions imposed by Florida Holding and Florida Federation, PSC and its shareholders were misled as to these facts because either Bruce Brashear and Donald Nelson did not disclose these material facts to PSC, the remainder of the PSC Board of Directors or the PSC shareholders, or Bruce Brashear and Donald Nelson disclosed these material facts to the remainder of the PSC Board of Directors and the Board did not disclose these material facts to the PSC shareholders. Acting intentionally in concert with Southern Life, or having been deceived themselves, the PSC Board failed to disclose that Florida Holding and Florida Federation would not agree to extend the Trust Agreement unless Southern Life purchased the Debenture and then consented to the extension of the 14

15 Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 15 of 34 Debenture, failed to consider these facts as a reasonable person would under the same circumstances or otherwise deceived PSC as a corporate entity. 33. In addition, Southern Life did not tell PSC that when it submits Southern Life's offer to purchase the Debenture to a vote of the PSC shareholders, it must inform them that the Valuation was not a market valuation and did not consider (i) Southern Life's attempts to extend the Trust Agreement, (ii) PSC's control of any such extension or (iii) Southern Life's need to purchase the Debenture because Florida Holding and Florida Federation would only vote in favor of extending the Trust Agreement if Southern Life purchased the Debenture. 34. Southern Life failed to tell the PSC shareholders that it was attempting to extend the Trust Agreement or that Florida Holding and Florida Federation would only consent to the extension of the Trust Agreement if Southern Life first purchased the Debenture. Further, Southern Life never told the PSC shareholders that the Valuation was not a market valuation and did not consider (i) Southern Life's attempts to extend the Trust Agreement, (ii) PSC's control of any such extension or (iii) Southern Life's need to purchase the Debenture because Florida Holding and Florida Federation would only vote in favor of extending the Trust Agreement if Southern Life purchased the Debenture. 35. The materiality of Southern Life' s omissions and misrepresentations is obvious on the face of the Valuation. The Valuation assumes, based on Southern Life's omissions and misrepresentations, that the Debenture will not become a 2.77% ownership interest in Southern Life until 2033, when Southern Life is expected, pursuant to Towers Perrin's own estimations, to have a total value of $5.737 billion. Applying an actuarial 15

16 Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 16 of 34 discount rate of 14% for each year between 2004 and 2033, Towers Perrin reduced PSC's 2.77% interest in Southern Life's future estimated value of $5.737 billion in 2033 to a present value of only $3.3 million. If, however, Southern Life had truthfully disclosed that PSC had a present right to convert the Debenture into Florida Holding stock based on the actual or effective termination of the Trust Agreement and, therefore, that PSC had a present 2.77% ownership interest in Southern Life, the Debenture would have been valued, using Southern Life's own actuarial data, at $34,868,760, or 2.77% of Southern Life's 2004 estimated total value of $1.259 billion. 36. Thus, Southern Life made the following omissions of material fact to PSC and its shareholders in connection with its purchase of the Debenture from PSC (hereinafter collectively referenced as "Material Omissions"): (a) Southern Life omitted the number of Charter Policyholders whose policies remained in effect pursuant to the Trust Agreement; (b) Southern Life omitted the dollar amount necessary to pay the surviving Charter Policyholders their de minimis premiums pursuant to the Trust Agreement; (c) Southern Life omitted that there was no longer a business purpose for maintaining the Trust in order to pay de minimis premiums to surviving Charter Policyholders; and (d) Southern Life omitted that it was and is legally permissible to terminate the Trust by setting aside the funds needed to satisfy its payment of de minimis premiums to surviving Charter Policyholders. (e) Southern Life, knowing the Valuation would be provided to each of the PSC shareholders, omitted to tell Towers Perrin that Southern Life was attempting to extend the Trust Agreement and that it could not do so without the consent of the Debenture holder. (f) Southern Life failed to inform Towers Perrin that Florida Holding and Florida Federation would only consent to extension of the Trust 16

17 Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 17 of 34 Agreement if Southern Life first purchased the Debenture from PSC. (g) Southern Life omitted to tell PSC that the Valuation was not a market valuation and that missing from the Valuation was any consideration of (i) Southern Life's attempts to extend the Trust Agreement, (ii) PSC's control of any such extension or (iii) Southern Life's need to purchase the Debenture because Florida Holding and Florida Federation would only consent to the extension of the Trust Agreement if Southern Life first purchased the Debenture. (h) Southern Life omitted to tell PSC that when it submits Southern Life's offer to purchase the Debenture to a vote of its shareholders, it must inform them that the Valuation was not a market valuation and did not consider (i) Southern Life's attempts to extend the Trust Agreement, (ii) PSC's control over such extension or (iii) Southern Life's need to purchase the Debenture because Florida Holding and Florida Federation would only vote to extend the Trust Agreement if Southern Life first purchased the Debenture. (i) Southern Life omitted to tell the PSC shareholders that it was attempting to extend the Trust Agreement or that Florida Holding and Florida Federation would only vote to extend the Trust Agreement if Southern Life first purchased the Debenture. (j) Southern Life omitted to inform the PSC shareholders that the Valuation was not a market valuation and did not consider (i) Southern Life's attempts to extend the Trust Agreement, (ii) PSC's control over such extension or (iii) Southern Life's need to purchase the Debenture because Florida Holding and Florida Federation would only vote in favor of extending the Trust Agreement if Southern Life first purchased the Debenture. 37. Southern Life' s Material Omissions caused its actuarial agent, Towers Perrin, to understate the value of the Debenture in the Valuation by, at a minimum, more than 90%, or approximately $31.6 million. See Ex. 5. Thus, Southern Life misrepresented the true value of the Debenture by at least $31.6 million. 38. Southern Life knew that the Debenture was PSC 's sole asset and that majority shareholder approval would be required by Florida statute to approve its sale. Nonetheless, in connection with Southern Life 's offer to purchase the Debenture from 17

18 Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 18 of 34 PSC, Southern Life provided the Valuation to PSC knowing that it was based on Southern Life's Material Omissions and that it grossly misrepresented the true value of the Debenture, and that PSC would rely on and use the Valuation, the misrepresentation of value stated therein, and the Material Omissions to solicit the approval of PSC's shareholders to sell the Debenture to Southern Life. In fact, a majority of PSC's shareholders, in reliance on Southern Life's Material Omissions and its misrepresentations regarding the value of the Debenture, voted to approve the sale of the Debenture by PSC to Southern Life, as a result of which the Debenture was sold, at a minimum, for more than $30 million less than its true value. 39. Specifically, on September 22, 2004, PSC retained its own actuary, Harold G. Ingraham, Jr. ("Ingraham"), to render an opinion about the Valuation, specifically, the discount rate of 14% used by Towers Perrin. A true and correct copy of Ingraham's opinion letter is attached hereto as Exhibit "6." Ingraham did not independently valuate the Debenture and instead merely analyzed the appropriateness of the discount rate used by Towers Perrin, thereby relying on all of the same material omissions and misrepresentations provided by Southern Life to Towers Perrin. 40. Ingraham concluded that a reasonable range for a discount rate was /x. Based on Towers Perrin's estimation of the 2033 total value of Southern Life, $5.37 billion, Ingraham's range of discount rates of 11-14% resulted in a present value for the Debenture of $4.3 to $4.9 million, respectively. On that basis, PSC advised Southern Life that it would sell the Debenture to Southern Life for $4.4 million, subject to a majority vote by PSC's shareholders to approve the sale at that price. 18

19 Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 19 of Southern Life then counter-offered to purchase the Debenture for $4.4 million, to be paid with $3.3 million in cash and a $1.1 million promissory note to be paid with interest within two years. 42. On September 29, 2004, PSC, through its president, Royal French, sent a letter to Plaintiffs in their capacities as shareholders of PSC, stating PSC's intent to hold a special meeting of stockholders on October 15, 2004, for the purpose of voting on Southern Life ' s offer to purchase the Debenture for $4. 4 million. Since the Debenture constituted substantially all of the assets of PSC, a shareholder vote with majority approval was required to effectuate a sale of the Debenture to PSC. Accordingly, the letter enclosed a proxy statement ("Proxy Statement") and proxy form ("Proxy Form") soliciting Plaintiffs' individual votes on the proposed sale of the Debenture to Southern Life for $4.4 million. A true and correct copy of Royal French's September 29, 2004 letter with the attached proxy statement and proxy form are attached hereto as Composite Exhibit "7." 43. In recommending in the Proxy Statement that Plaintiffs vote to approve the sale of the Debenture to Southern Life for the grossly understated and inadequate price of $4.4 million, PSC relied on the Material Omissions and misrepresentations provided by Southern Life in the Valuation, which Valuation provided the basis of PSC's own actuary's analysis regarding the Debenture, and which Valuation was distributed to the shareholders of PSC to seek their approval for the sale of the Debenture to Southern Life. 44. Thus, Southern Life' s Material Omissions and misrepresentations in the 19

20 Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 20 of 34 Valuation directly form the basis of the Proxy Statement provided to PSC 's shareholders, including Plaintiffs. PSC's shareholders relied on the Proxy Statement and the Material Omissions and misrepresentations of Southern Life upon which the Proxy Statement was based, including the Material Omissions and the misrepresentation regarding the value of the Debenture, in voting by a majority of shares to approve the sale of the Debenture to Southern Life for $4. 4 million. 45. The majority vote approving the sale of the Debenture to Southern Life for $4.4 million forced each and every shareholder of PSC either to accept his pro rata distribution for the sale of the Debenture or to elect Florida statutory appraisal rights and sell his PSC shares. Thus, even those PSC shareholders who dissented from PSC's sale of the Debenture were forced to obtain their appraisal rights pursuant to Sections ,.1333, Florida Statutes, and exchange their shares in PSC for "fair value." 46. Southern Life' s Material Omissions and misrepresentations in connection with its purchase of the Debenture, as specifically alleged above, convinced PSC's Board of Directors to recommend approval of the sale and forced each of PSC's shareholders to accept his or her pro rata distribution from the sale of the Debenture to Southern Life or to exercise appraisal rights and sell his or her shares in PSC, thereby causing damage to PSC and to the majority of PSC' s shareholders who voted to approve the sale, as well as to the remaining shareholders, including Plaintiffs, who were forced to exercise their appraisal rights and, thus, were forced sellers of their PSC stock. FRAUDULENT SCHEME AND COURSE OF BUSINESS 47. Southern Life is liable for (a) making false statements, or (b) failing to 20

21 Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 21 of 34 disclose adverse facts known to it in connection with its purchase of the Debenture. Southern Life's fraudulent scheme and course of business, which operated as a fraud or deceit on PSC as the seller of the Debenture and on its shareholders as sellers and forced sellers of their shares in PSC, enabled Southern Life to profit at the expense of PSC and its shareholders, including Plaintiffs. DERIVATIVE DEMAND WAS MADE AND PSC'S BOARD OF DIRECTORS WRONGFULLY REFUSED TO TAKE ACTION 48. On May 11, 2006, Plaintiffs served PSC's Board of Directors with a formal written demand ("Demand") that PSC's Board of Directors take the following action: [T]he Shareholders hereby demand that PSC, on behalf of all of its shareholders, immediately bring an action in the United States District Court for the Middle District of Florida against [Southern Life] for federal securities fraud in violation of section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. 78j(b)), and Rule lob-5 (17 C.F.R (b)(5)), and for common law fraud in connection with Southern Life's purchase, on October 15, 2004, of [the Debenture]... Demand at p.1. A true and correct copy of the Demand dated May 11, 2006, and received by PSC on May 15, 2006, is attached hereto and incorporated by reference as Exhibit "8." 49. The Demand sets forth with specificity the acts of securities fraud, as alleged herein, committed by Southern Life against PSC and its shareholders, including Plaintiffs. 50. Nonetheless, PSC's Board of Directors (the "Board") rejected the Demand by letter dated August 10, 2006, taking the position, without any explanation 21

22 Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 22 of 34 whatsoever, that it is not in PSC's best interests to sue Southern Life for the securities fraud or common law fraud alleged herein. A true and correct copy of the Board's response to the Demand is attached hereto and incorporated by reference as Exhibit "9." 51. The Board's rejection of the Demand was clearly a wrongful refusal as the Board failed to conduct a reasonable investigation to support it. In fact, there is no indication that any investigation whatsoever was conducted to support the Board's conclusion that suing Southern Life was not in PSC's best interests. The rejection merely states in conclusory form that suing Southern Life for the fraud alleged herein is not in PSC's best interests. 52. On information and belief, the Board failed to inquire with Southern Life as to any of its material misrepresentations or omissions in connection with its purchase of the Debenture from PSC, including the Material Omissions. Specifically, the Board did not inquire with Southern Life as to whether the Trust Agreement was not expected to terminate until 2033 as misrepresented by Southern Life; the Board did not inquire with Southern Life as to the number of Charter Policyholders whose policies remained in effect pursuant to the Trust Agreement at the time of the Valuation or the time of Southern Life's offer to purchase the Debenture; the Board did not inquire with Southern Life as to the dollar amount necessary to pay the surviving Charter Policyholders their de minimis premiums pursuant to the Trust Agreement; the Board failed to inquire as to whether there was a business purpose for maintaining the Trust in order to pay de minimis premiums to surviving Charter Policyholders, if any; the Board failed to inquire as to whether it was legally permissible to terminate the Trust by setting 22

23 Case 6 : 06-cv JA-KRS Document 56 Filed 05/08/2008 Page 23 of 34 aside the funds needed to satisfy the de minimis payments of premiums to surviving Charter Policyholders; and the Board failed to obtain a new and correct valuation of the Debenture in light of Southern Life' s material misrepresentations and omissions. 53. On information and belief, the Board failed to conduct a reasonable investigation, which would have included making the inquiries and obtaining a new valuation for the Debenture as described in paragraph 52 above, despite the fact that the Debenture was PSC's only asset, and despite the fact that there was no other PSC business to impede such an investigation since PSC did not conduct any business other than to hold the Debenture. 54. The Board's rejection of the Demand without explanation is in bad faith. No good faith basis exists to conclude that bringing this action is not in the best interests of PSC. PSC has lost its only asset due to fraud. Any reasonable investigation into the Demand would have revealed that pursuing such an action would not expose PSC to liability or cost PSC significant sums. Further, any reasonable investigation done in good faith would have required the Board to inquire with Southern Life about the allegations of fraud in the Demand, would have caused the Board to obtain a new valuation of the Debenture, and would have revealed Southern Life' s fraud. 55. On information and belief, the Board's rejection of the Demand was also in bad faith because Southern Life and Florida Farm Bureau Federation, which owns Florida Holding (a ten percent shareholder in Southern Life), effectively control the selection of PSC' s Board of Directors and its decisionmaking. Southern Life's and Florida Farm Bureau Federation's effective control over the Board prevented it from 23

24 Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 24 of 34 considering the Demand in good faith. In fact, on information and belief, Southern Life and Florida Farm Bureau Federation controlled the Board's wrongful refusal of the Demand. Thus, the Board clearly acted in bad faith in wrongfully refusing the Demand. 56. The Board ' s wrongful refusal of the Demand, through its bad faith and failure to conduct a reasonable investigation into Plaintiffs' claims of fraud against Southern Life contained in the Demand, compelled Plaintiffs to bring the present derivative action for the benefit of PSC and all of its shareholders. 57. Plaintiffs are compelled to bring the present action for the benefit of PSC, so that PSC's shareholders, including Plaintiffs, may have their rights as such protected. 58. Plaintiffs do not have an adequate remedy of law. 59. This action is not a collusive one to confer jurisdiction on a court of the United States which it would not otherwise have. 60. All conditions precedent to the filing of this cause have been performed, have occurred or have been waived. 61. Plaintiffs have employed the undersigned firm of Baker & Hostetler, LLP, to represent it in this action and have agreed to pay said firm a reasonable attorney's fee for its services. COUNT I (For Southern Life 's violations of Section 10(b) of the 1934 Act and Rule lob-5) 62. Plaintiffs incorporate herein by reference and reallege paragraphs 1 through 61 above as if fully set forth herein. 24

25 Case 6 : 06-cv JA-KRS Document 56 Filed 05/08/2008 Page 25 of Southern Life violated Section 10(b) of the 1934 Act and Rule I Ob-5 by using means or instrumentalities of interstate commerce or of the mails: (a) To employ devices, schemes, or artifices to defraud Plaintiffs and the other members of the Class; (b) To make untrue statements of material facts or to omit to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or (c) To engage in acts, practices, or courses of business that operated as a fraud or deceit upon Plaintiffs and the other members of the Class in connection with its purchase of the Debenture from PSC and the resulting forced sale of the Class' stock in PSC. 64. Southern Life omitted material facts and misrepresented material facts in its dissemination of information, including the Valuation, to Plaintiffs, which omissions and misrepresentations, including the Material Omissions and the gross misrepresentation of the value of the Debenture, were provided by using means or instrumentalities of interstate commerce or of the mails in connection with Southern Life' s purchase of the Debenture. Specifically, Southern Life knowingly and intentionally, or with severe recklessness, made the Material Omissions defined in paragraph 36 above including omissions regarding the number of surviving Charter PolicyHolders, the amount of money needed to pay their de minimis premiums, that there was no longer a business purpose for maintaining the Trust in order to pay de minimis premiums to surviving Charter PolicyHolders, and that it was and is legally permissible to terminate the Trust by setting aside the funds needed to satisfy its payment of de minimis premiums to surviving Charter PolicyHolders. 65. In so doing, Southern Life misrepresented that the Trust Agreement was 25

26 Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 26 of 34 not expected to terminate until 2033 and that the Debenture would not or was not expected to convert into actual stock of Florida Holding until that time. In making that material misrepresentation, Southern Life knowingly and intentionally or with severe recklessness omitted the material fact that the trust created by the Trust Agreement (the "Trust") had long since served its purpose and was no longer necessary to protect the entitlement of any remaining Charter Policyholders to receive the de minimis amount of three times their respective insurance premiums over each three-year period. Thus, Southern Life knowingly and intentionally or with severe recklessness omitted the material fact that the Trust Agreement had effectively terminated such that PSC had a present right to 27.7% of the stock of Florida Holding equivalent to a 2.77% interest in Southern Life. 66. Southern Life thereby also knowingly and intentionally or with severe recklessness misrepresented the material fact that the Debenture was worth in excess of $34.9 million rather than the grossly understated amount of $3.3 million misrepresented in the Valuation. 67. Southern Life also failed to inform Towers Perrin that Southern Life was trying to extend the Trust Agreement and could not do so without the consent of the Debenture holder and never informed Towers Perrin that Florida Holding and Florida Federation would only vote to extend the Trust Agreement if Southern Life first purchased the Debenture. Southern Life failed to inform PSC that missing from the Valuation was any consideration of Southern Life 's attempts to extend the Trust Agreement, PSC's control over any such extension and Southern Life's need to purchase 26

27 Case 6 : 06-cv JA-KRS Document 56 Filed 05/08/2008 Page 27 of 34 the Debenture because Florida Holding and Florida Federation would only vote to extend the Trust Agreement if Southern Life first purchased the Debenture. In addition, Southern Life failed to inform PSC that when it submitted Southern Life's offer to purchase the Debenture to its shareholders, it must inform them that the Valuation did not consider that Florida Holding and Florida Federation would only vote in favor of extending the Trust Agreement if Southern Life first purchased the Debenture from PSC. Moreover, Southern Life did not tell the PSC shareholders that it was attempting to extend the Trust Agreement or that Florida Holding and Florida Federation would only consent to the extension of the Trust Agreement if Southern Life purchased the Debenture. Finally, Southern Life failed to inform the PSC shareholders that the Valuation did not consider Southern Life's attempts to extend the Trust Agreement, PSC's control of such extension or Southern Life's need to purchase the Debenture because Florida Holding and Florida Federation would only consent to the extension of the Trust Agreement of Southern Life purchased the Debenture. 68. Southern Life also knew that its Material Omissions and misrepresentations involved in the Valuation would be relied on by PSC to seek and obtain approval by a majority of PSC's shareholders of the sale of the Debenture to Southern Life and, ultimately, to sell the Debenture to Southern Life. 69. Alternatively, Southern Life acted with severe recklessness with respect to the Material Omissions and misrepresentations contained in the Valuation and other information provided to PSC and Plaintiffs and further acted with severe recklessness with regard to the dissemination of that misleading information to PSC and Plaintiffs. 27

28 Case 6:06-cv JA-KRS Document 56 Filed 05/08/2008 Page 28 of PSC relied directly on Southern Life 's Material Omissions and misrepresentations in soliciting, through the Proxy Statement, a vote by PSC's shareholders, including Plaintiffs, to approve by a majority the sale of the Debenture to Southern Life. Those PSC shareholders who voted to approve the sale of the Debenture by PSC to Southern Life also directly relied on Southern Life' s Material Omissions and misrepresentations. Those PSC shareholders who did not vote to approve the sale of the Debenture, and who instead dissented and exercised their appraisal rights, including Plaintiffs, were nonetheless forced sellers of their shares in PSC. 71. Southern Life 's Material Omissions and misrepresentations in connection with its purchase of the Debenture and the resulting forced sale of Plaintiffs' stock in PSC directly and proximately caused PSC and all of its shareholders, including Plaintiffs, to suffer damages. WHEREFORE, Plaintiffs, derivatively on behalf of PSC, demand judgment in their favor and against Southern Life for damages plus interest, court costs, reasonable attorney's fees and such other relief as may be just and equitable. COUNT II (For Common Law Fraud Under Florida Law) 72. Plaintiffs incorporate herein by reference and reallege paragraphs 1 through 61 above as if fully set forth herein 73. Southern Life omitted material facts and misrepresented material facts in its dissemination of information, including the Valuation, to PSC and Plaintiffs, which omissions and misrepresentations were provided by using means or instrumentalities of 28