Paracelsian's original complaint against Babish was filed on
April 25th, 1997. They filed an ammended complaint on that was dated May 21st. I am posting this here so you can compare the two complaints. Note that the second and third Cause of Actions of the original complaint (the RICO causes) were dropped.
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF NEW YORK
Paracelsian, Inc.,
a Delaware company,
Plaintiff, AMMENDED COMPLAINT
-v- 97-CV-604
JOHN G. BABISH
Defendant
INTRODUCTION
1. Paracelsian, Inc. ("Paracelsian"), by its attorneys,
Brown, Pinnisi & Michaels, P.C., brings this actuion pursuant
to 15 U.S.C. 1100, et seq. (trademark act), 15
U.S.C. 78 et seq. (Securities Exchange Act of 1934),
and common law. As set forth below, defendant John G. Babish
("Babish") a former officer and director of Paracelsian, unjustly
enriched himself and sought to seize control of Paracelsian at the
expense of the company and its shareholders. That conduct
included in part the manipulation of Paracelsian's stock price,
trading in the company's stock on inside information, breach of
fiduciary and contractual duties, theft of company property, and
usurpation of corporate opportunities.
2. Paracelsian is distressed that the defendant's conduct has
hindered the company's development and release of its products,
not only because its shareholders have been disadvantaged, but
more importantly, because the company and its staff believe that
their products will be of great benefit to the health and welfare of
the public. Because Paracelsian believes that the defendant's
conduct has delayed the public's receipt of the important health
benefits promised by its products, because that same conduct has
wrongfully caused financial loss to the company and its
shareholders, and because continuation of that conduct threatens to
exacerbate those harms irreparably, Paracelsian seeks injunctive
relief, compensatory damages, exemplary damages, and recovery of
its litigation costs and fees .
JURISDICTION AND VENUE
3. This Court has jurisdiction to hear this case pursuant to 28
U.S.C. 1331 (federal question) and principles of pendent
jurisdiction.
4. Venue is proper pursuant to 28 U.S.C. 1391 and the Local
Rules of this Court because all parties reside in the County of
Tompkins, New York, and because plaintiff's claim for relief arose
in that same County.
PARTIES
5. Paracelsian is a corproration formed and existing
under the laws of the State of Delaware, with its principal
place of business in Ithaca, New York. Paracelsian's stock
is publicly traded.
6. Defendant John Babish is a resident of Ithaca, New
York and a former Director and Officer of Paracelsian.
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BACKGROUND FACTS
Generally
7. Paracelsian is a corporation that specializes in the
identification and testing of extracts derived from various
herbs and other plants, from around the world, including
those traditonally used for medicinal purposes in Asia.
Paracelsian's work has produced an exciting range of
discoveries which promise advances in nutrition and viral
suppression, and Paracelsian holds a number of patents for
its discoveries. The company is relatively new, and has not
yet marketed a significant percentage of its products. As a
result, research and operating costs currently exceed
revenues, and although the future is very promissing
because of the quality of the company's product, its current
financial poosition is precarious.
8. Babish was one of the founders of Paracelsian, and a
major factor in the creation and promotion of much of the
company's product. Babish was the Chief Science Officer of
the company, and also served for a time as Paracelsian's
Chief Executive Officer.
9. The company, however, experienced significant
financial losses under Babish's leadership.
10. As a result, the Board resolved to bring in a different and
experienced chief executive, Mr. Keith A. Rhodes ("Rhodes") .
11. Babish objected to Rhodes' management of the company,
disagreed expressly with many of his directives, and eventually
called
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openly for Rhodes' ouster from the company.
12. In or about August 1996 Babish gave an ultimatum to the
Board: if Rhodes was not removed as Chief Executive, Babish
would leave the company.
13. The Board disagreed with Babish's demand, and decided to
continue with Rhodes as Chief Executive.
14. To mollify Babish, however the Board created an Office of
the Chief Executive comprised of Rhodes, Babish and another
company officer to manage the corporation's affairs.
15. This arrangement proved unworkable, and was discontinued
when Babish resigned from the company, leaving Rhodes in place
as President.
16. Having failed to regain control of the company by proper
internal channels, Babish decided to leave Paracelsian.
17. On information and belief, Babish then devised a plan
whereby he would either acquire control of the company, or
failing that, maneuver himself into a position of unfair competitive
advantage over Paracelsian
18. On Information and belief, Babish's plan to regain control
was (a) to sell a majority of his shares while stock prices remained
high, (b) to resign from the company and thus devalue its stock,
(c) to use his remaining Paracelsian shares as a basis to institute
derivative litigation that would further devalue the stock, and (d) to
then buy back control of the under-valued company with the
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illicit profits of his liquidated stock and the additional financial
support of cooperating investors.
19. On information and belief, Babish formed an alternative
plan in the event that he was unable to acquire control in the
manner described above, whereby he would (1) set up his own
company to compete with Paracelsian, (2) wrongfully obtain the
company's intellectual and other property, (3) usurp corporate
opportunities, and (4) recruit Paracelsian's key employees in
contravention of their obligations not to compete with Paracelsian.
Stock Price Manipulation and Insider Trading
20. In and about early 1997, Paracelsian stock was trading at
approximately $2.00 per, share.
21. During early 1997, Babish held over 300,000 shares of
Paracelsian stock.
22. Babish wished to sell a majority of those shares before he
resigned from the company.
23. Babish knew at the time that he was a key employee of
Paracelsan. and that news of his resignation would lower the price
of the company's stock significantly.
24. Babish sold the majority of those shares in a series of over
20 transactions conducted between January 21 and February 26,
1997.
25. By these sales, Babish liquidated over 200,000 shares at an
average selling price of $2.00 per share.
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26. Approximately three weeks after these sales were
completed, Babish announced his resignation from the company.
27. The price of Paracelsian stock droppod by more than half
within a few weeks in response to this news, to under $1.00 per
share.
28. Babish also retained a law firm to threaten a shareholders'
derivative action against the company; an action that may have been
intended solely to further distract and weaken the company and
devalue its stock.
29. The price of Paracesian stock has remained significantly
below the prices realized by Babish in the above-described sales,
and has dropped to as low as $.58 per share on occasion, since
Babish's resignation.
Wrongful Actions Against Corporate Interest
30. As an offier and director of Paracelsian, Babish was a
fiduciary of the company and thus owed duties of loyalty and due
care to Paracelsian.
31. Babish also executed an employment agreement with
Paracelsian whereby he undertook additional duties of
confidentiality and non-competition.
32. As described more fully below, Babish breached those
duties by taking the following and other actions against Paracelsian:
a. attempting to divert an opportunity for a joint
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venture with Viral Technologies, Inc. from Paracelsian to himself;
b. attempting to market by himself extracts from South
American plants that were identified and developed by Babish
and/or others while Babish was employed by Paracelsian;
c. conducting correspondence and other communications
under the trade name "ParaDocs";
d. soliciting defection of key employees from Paracelsian to
Babish and/or Pa:raDocs;
e. disparaging Paracelsian's reputation to others in the trade
and soliciting business from Paracelsian's contacts;
f. converting company documents, computer files, and other
property.
FIRST CAUSE OF ACTION
Fraudulent Concealment
33. Paracelsian repeats and realleges herein the allegations set
forth in paragraphs 1 through 32 above.
34. Babish owed a fiduciary duty of candor and disclosure
to Paracelsian.
35. Notwithstanding this duty, Babish concealed from
Paracelsian his general intentions to acquire control of Paracelsian
and/or to wrongfully compete witht he company, and his intentions
regarding specific actions to be taken in furtherance of those
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objectives.
36. Babish's failure to disclose this information to Paracelsian
induced Paracelsian to leave Babish in a position of authority and
control until the date of his resignation, thereby allowing Babish the
opportunity to execute his plans which were harmful to the
company.
37. As a direct and proximate result of Babish's fraudulent
concealment Paracelsian has suffered monetary losses and
irreparable injuries that include, without limitation: (a) devaluation
of its stock; (b) loss of business reputation; (c) loss of corporate
opportunities; (d) loss of good will; (e) loss of profits; (f) decreased
investor confidence and consequent effects; (g) potential
shareholder deriviative actions against the company; and (h)
possible insolvency.
38. Irreparable harm to the company is likely to recur in the
absence of an injunction enjoining defendant's further misconduct.
SECOND CAUSE OF ACTION
Trademark Infringement
15 U.S.C. 1100 et seq
39. Paracelsian repeats and realleges herein the allegations set
forth in paragraphs 1 through 38 above.
40. The trademark "Paracelsian" (the "mark") was duly
registered and has been continously maintained in the United States
Patent and Trademark Office Pricnicpal Register beginning on June 6,
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1995 under registration number 1,897,235.
41. The mark has been continuously used and continues to be
used in interstate or foreign commerce in connection with the sale,
offering for sale, distribution, or advertizing of goods or services.
42. Babish at all relevant times knew that the mark had been
registered, maintained and used as described above.
43. Babish attempted to incorporate a business entity which
included in its name the term "ParaDocs."
44. Babish attempted to conduct business and/or has conducted
business under the trade name "ParaDocs."
45. Babish used the trade name "ParaDocs" intentionally in
interstate commerce and in connection with the provision of goods
and services.
46. The intentional use of the trade name "ParaDocs" by Babish
is likely to cause confusion or to cause mistake, or to deecive as the
result of the overall similarity of "ParaDocs" to the mark as
evidenced by similarity in sound.
47. The intentional use of the trade name "ParaDocs" by
Babish is likely to cause confusion, or to cause mistake, or
to deceive as to the affiliation, connection or association of
Babish with Paracelsian.
48. The intentional use by Babish of "ParaDocs" has and is
likely to cause confusion, mistake, or deception as to the origin,
sponsorship, or approval of goods, services, or commercial
activities
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by Paracelsian and Babish.
49. Paracelsian has been damaged by Babish's intentional use of
the trade name "ParaDocs," and is likely to continue to be damaged
by this intentional use.
50. Upon information and belief, Babish has profited from his
intentional use of the name "ParaDocs."
51. Paracelsian is therefore entitled to monetary damages in the amount of its lost profits plus the profits of Babish, costs of the action including attorney's fees, and a permanent injunction from
future use by Babish of the trade name "ParaDocs."
THIRD CAUSE OF ACTION
Securities Fraud
15 U.S.C. 78j (b) and C.F.R.
240.10b-5
52. Paracelsian repeats and realleges herein the allegations set
forth in paragraphs 1 through 51 above.
53. In at least tenty-one separate stock transactions between the
dates of January 21, 1997 and February 26, 1997, Babish sold not
fewer than 209,000 shares of Paracelsian stock as follows:
a. 11,000 shares sold on January 21, 1997, at a price of
$2.0625 per share;
b. 5,000 shares sold on January 23, 1997, at a price of
$2.0625 per share;
c. 5,000 shares sold on January 23, 1997, at a price of
$2.0312 per share;
d. 3,000 shares sold on January 28, 1997, at a price of
$1.8125 per share;
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e 10,000 shares sold on January 29, 1997, at a price of
$1.8750 per share;
f. 10,000 shares sold on January 30, 1997, at a price of
$1.9375 per share;
g. 10,000 shares sold on February 3, 1997 at a price of
$1.8760 per share;
h. 10,000 shares sold on February 4, 1997 at a price of
$1.8750 per share;
i. 5,000 shares sold on February 6, 1997 at a price of
$1.8438 per share;
j. 10,000 shares sold on February 7, 1997 at a price of
$1.9375 per share;
k. 20,000 shares sold on February 10, 1997 at a price of
$2.1718 per share;
l. 10,000 shares sold on February 10, 1997 at a price of
$2.0625 per share;
m. 10,000 shares sold on February 10, 1997 at a price of
$1.9375 per share;
n. 10,000 shares sold on February 11, 1997 at a price of
$2.3125 per share;
o. 10,000 shares sold on February 12, 1997 at a price of
$2.1875 per share;
p. 6,500 shares sold on February 13, 1997 at a price of
$2.4375 per share;
q. 10,000 shares sold on February 14, 1997 at a price of
$2.2813 per share;
r. 10,000 shares sold on February 18, 1997 at a price of
$2.1875 per share;
s. 12,000 shares sold on February 19, 1997 at a price of
$2.0442 per share;
t. 15,000 shares sold on February 24, 1997 at a price of
$1.7916 per share;
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u. 8400 shares sold on February 25, 1997 at a price of
$1.7813 per share;
v. 5,000 shares sold on February 26, 1997 at a price of
$1.750 per share;
54. Upon information and belief, Babish knew that he was
going to resign from the company before he commenced the above-
described sales of his shares.
55. Upon information and belief, Babish consciously withheld
the news of his intended resignation until he had completed the
above-described sales, with the specific intention of selling those
shares at a higher price than he otherwise would have obtained.
56. Babish's motive to commit this fraud was his recipt of the
difference between the actual price realized by his sales and the
price he likely would have obtained had he sold after announcing
his resignation, a difference of approximately $300,000 to his
benefit.
57. Babish had the opportunity to perpetrate this fraud because
of his status as a key employee and his personal knowledge of his
intentions to resign.
58. Information regarding the timing of Babish's decision to
resign from the company was material to proper valuation of the
stock, and upon information and belief, a reasonable shareholder
would have considered that information to be important in making
investment decisions.
59. Upon information and belief, no purchaser of stocks
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sold by Babish in the above-described transactions was
aware of his intention to resign from Paracelsian.
60. Babish's above-described sales of Paracelsian were in
violation of 15 U.S.C. 78j (b) and 17 C.F.R. 240.10b-5.
61. Upon information and belief, Babish intends to continue his
attempts to devalue Paracelsian stock and to either acquire control
of the company or wrongfully compete with the company.
62. Babish has expressed an intention to use the proceeds of
the above-described sales to help acquire control of the company.
63. As a direct and proximate result of Babish's insider trading,
Paracelsian has suffered and is likely to continue to suffer monetary
loss and irreparable harm as alleged above.
64. Paracelsian is entitled to a permanent injunction enjoining
Babish from acquiring Paracelsian stock.
FOURTH CAUSE OF ACTION
Usurpation of Corporate Opportunity
65. Paracelsian repeats and realleges herein the allegations set
forth in paragraphs 1 through 64 above.
66. During January 1997, Babish met with Lee Henderson,
President and Scientific Director of Viral Therapeutics, Inc.,
regarding a possible joint venture between Paracelsian and VTI.
67. This proposed joint venture was intended to be separate and
distinct from, and in addition to, prior dealings between Paracelsian
and VTI.
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68. Henderson drafted a propoosed joint venture agreement as
a result of the meetings. Babish told Henderson that he was very
interested in the joint venture proposal and that he would deliver
the written proposal to Keith Rhodes and to the Paracelsian Board
of Directors.
69. Babish never delivered the written proposal to either
Rhodes or the Board of Directors.
70. Instead, Babish kept the proposal to himself until after he
resigned from Paracelsian, at which time he approached Lee
Henderson and proposed that VTI enter into a similar relationship
with a new company formed or to be formed by Babish, and not
with Paracelsian as Henderson originally had proposed.
71. During his employment at Paracelsian Babish also learned
about prospects for development of extracts from South American
herbs.
72. Babish failed to disclose information regarding those South
American extracts to the company prior to his resignation.
73. After his resignation from the company, Babish approached
Lee Henderson and proposed to him that VTI develop those South
American extracts in cooperation with Babish and/or his new
company, and not with Paracelsian.
74. Babish's failure to inform Paracelsian regarding the
proposed joint venture or the South American extracts and his
attempt to develop these opportunities for himself, constitute
improper
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usurpation of corporate opportunities by Babish.
75. As a direct and proximate result of Babish's usurpation of
corporate opportunity, Paracelsian has suffered and is likely to
continue to suffer monetary loss and irreparable harm as alleged
above.
FIFTH CAUSE OF ACTION
Breach of duties of care and loyalty
76. Paracelsian repeats and realleges herein the allegations set
forth in paragraphs 1 through 75 above.
77. As Vice President, Chief Science Officer and member of the
Board of Directors, Babish was a fiduciary of Paracelsian and owed
Paracelsian duties of care and loyalty.
78. Babish breached those duties by planning to wrongly
acquire control of and/or wrongly compete with the company as
described above.
79. Babish breached those duties by performing actions in
furtherance of those plans.
80. As a direct and proximate result of Babish's breach of his
duties of care and loyalty, Paracelsian has suffered and is likely to
continue to suffer monetary loss and irreparable harm as alleged
above.
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