PARACELSIAN v.BABISH: AN ANALYSIS--PART III
The following are comments based on Paracelsian's ammended
complaint:
RESPONSIBILITY FOR FAILURE OF PRODUCT LAUNCH
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 .
It is funny that the company is now blaming Babish for its failure to
launch AndroVir. Keith Rhodes' introductory letter clearly states
that in light of an FDA ruling "the Company decided that it was not
economically feasible to launch the product as proposed at this
time. The Company is exploring other significant near-term
commercialization options and has placed the launch of these
products on hold." Paracelsian's June 9th news release also
blames the FDA for its failure to launch AndroVir.
techstocks.com
Now they are suddenly blaming Babish. I hope the Pope doesn't
have any dealings with PRLN or else they will be blaming him for
not giving AndroVir his Papal blessing. It seems like they are willing
to blame everybody but themselves.
RHODES' APPOINTMENT AND BABISH'S RESIGNATION
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")
.
Actually, no one expected Paracelsian to earn a profit during its first
few years as a startup company. Babish should not be faulted for
its losing money as a startup. Indeed, point 7 of the ammended
complaint states:
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. . .
As noted in Part II of my analysis, Rhodes was brought in so that
Babish could concentrate on PRLN's science. He was also brought
in to raise money for the company's future operations. To my
knowledge, there never was a public statement that he was brought
in because Babish was causing the company to lose money.
The complaint continues:
11. Babish objected to Rhodes' management of the company,
disagreed expressly with many of his directives, and eventually
called 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.
This paints a nice little picture. Babish was incompetent so the
Board appointed a new leader. Babish objected. Babish threw a
tantrum and threatened to resign if it didn't kick out the new leader.
Babish doesn't get his wish, resigns, and then proceeds with his
nefarious plans to take over PRLN. This tale is more twisted than a
broken Slinky.
As far as I can tell, Babish was not forced out of his leadership
position because of his incompetence. Babish did threaten to
resign, but not because his leadership power was usurped. He
threatened to resign because PRLN renegged on its word to
register his warrants so they would be tradeable and because the
Board did not deal with him in good faith in his contract
negotiations. Tensions that arose because of Babish's and
Campbell's allegations of illegal behavior probably also figured into
the resignation. Finally, the Board that refused to kick Rhodes out
in response to Babish's allegations of illegal behavior was not the
Board that appointed Rhodes in the first place. Many of the original
Board members had resigned by this time and had been replaced
by members nominated by Rhodes.
FIDUCIARY RESPONSIBILITY
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.
The complaint reemphasizes Babish's fiduciary responsibility in
paragraphs 34 and 77. I agree completely with this point, but I
wonder what Rhodes means when he says that a fiduciary of the
company owes a duty of loyalty and due care. Does he mean that a
fiduciary should give away 200,000 shares of stock for a fictitious
Indian herb screening? It is true that I have no proof that an Indian
herb screening was never done. At this point it is only an unproven
allegation. But at the shareholders' meeting I heard Theodore
Nikolis admit that this incident has been under investigation for five
months to determine if a screening had been done. Forest Gump
was no genius, but if there had been a screening I'm sure he could
have found evidence for it in a day or two.
Does Rhodes believe that fiduciary responsibility entails issuing a
private placement of convertible preferred stock without a floor that
causes the stock price to plunge from $8 to $1 in a few months?
Does it entail buying back $1.3 million of stock on the open market
for $5/share? Does it entail spending 23% of the proceeds of this
private placement on expenses and closing costs, as Campbell
alleges in his suit against Paracelsian?
SOUTH AMERICAN HERBS AND USURPATION OF
CORPORATE OPPORTUNITY
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 usurpation of corporate opportunities by Babish.
Even if this is true, it is hard to see how Babish hurt the company.
As I said in Part II of my analysis, Paracelsian was in the business
of screening Chinese herbs, not herbs from around the world.
Paracelsian had yet to screen 2200 to 7200 herbs and it had limited
resources. One could make a strong argument that Babish would
have been behaving recklessly if he had tried to persuade the
company to go after South American herbs. PRLN had to use its
limited assets toward launching AndroVir, finishing the AndroCar
study that was supposed to be finished in June, and screening the
remaining Chinese herbs. Paracelsian would probably have
collapsed by spreading itself too thinly if it went after South
American herbs. Since PRLN was not in the market for South
American herbs before Babish's resignation there is no reason to
believe that Babish would think they were in the market after his
resignation. Babish had no reason to believe he would be
competing directly with PRLN for business opportunities.
Here is Babish's version of what happened:
41 I did meet a second time in early April with Dr. Henderson.
After trading phone calls over a couple of days, I stopped by his
office to tell him that the Board had decided not to make any
offer to try to bring me back into the company. During this brief
meeting, I told him that I had been in contact with Cornell about
possibly doing some teaching. We got to discussing Cornell's
ongoing efforts to catalogue rain forest plants in South America,
but I do not remember how we got onto that subject. In any case,
I told him that if he had any interest in doing research on South
American plants, I might be able to introduce him to some of the
people from that Cornell project. He said he might be interested
and I told him I could make some phone calls . The meeting
ended by both of us agreeing to keep in touch but without any
formal notion of any specific plan for the future.
44. Because Paracelsian was focussed solely on traditional
Chinese medicines and had never been involved with plants from
any other region (exclusive of the supposed Indian plants, which I
now believe to be fictitious, despite the annual report), I saw no
conflict whatsoever in mentioning to Dr. Henderson that I might
be able to put him in contact with people involved in South
American plants.
Paracelsian's complaint Babish failed to uphold his fiduciary
responsibility by
32b. 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;
I must tip my hat to Keith Rhodes. This is one of the greatest
examples of sleazy wordplay I have ever seen in my life. Even
Babish would have to agree that it is literally true. If Babish's
version of the story is correct then the extracts were identified and
developed by Cornell scientists while Babish was employed at
Paracelsian. Babish's employment and the extracts' identification
by Cornell scientists were two completely independant events.
They had absolutely nothing to do with each other. But by clever
use of the "and/or" and "while" phrases, this complaint ties the two
events together into one sinister activity. This is a truly breathtaking
accomplishment.
Keith Rhodes, if you are reading this I must salute you. You have
finally done something well.
CONVERSION (THEFT OF PROPERTY)
Paracelsian's complaint says that Babish stole company property.
Babish's lawyer did an inventory on the property that Babish
removed from PRLN and discovered two documents that he should
not have removed. Babish's lawyer testified that Babish returned
them promptly. It is easy to understand how a couple of
Paracelsian's papers could have gotten mixed up with the large
quantities of Babish's personal items that he removed. It is easy for
a few company papers to become intermingled with personal papers
even if one is extremely well organized. If Babish really wanted to
steal Paracelsian's secrets so he could compete with them as
Paracelsian alleges, I am surprised he didn't carry out more papers
than he did. If that were my plan then I would have duplicated
Paracelsian's most important papers and carried them out by the
boxload. As far as I can tell, Paracelsian does not claim that Babish
did this.
TRADEMARK INFRINGEMENT
Paracelsian's complaint says this about Babish's alleged trademark
infringement:
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 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."
Babish answers these charges as follows:
57. After leaving Paracelsian, my wife and I discussed
incorporating a new business through which both of us could do
consulting work. We discussed possible names and decided to
use "ParaDocs, LLC." My wife and I are both Ph.D.'s and we
thought the name ParaDocs was a nice play on "pair of docs"
and paradox. Sometime after March 19th when I resigned, I
programmed that name into my home fax machine, so that the
"fax tag" says "ParaDocs." I also prepared a fax cover page
using that name and I had some business cards printed up.
58. The name ParaDocs was not in any way related to or
derived from the name "Paracelsian." The company's name came
from Paracelsus, a pharmacologist who lived from 1493 to 1541.
59. When my attorney tried to register the name "ParaDocs" as a
corporation, I was informed that the name was unavailable in
New York State. Submitted as Exhibit M is a copy of the name
reservation rejection, which my lawyers received shortly after
May 6, 1997.
60. I have not conducted any business as ParaDocs, and
because the name is unavailable for incorporation in New York,
my wife and I will select a new name for our new business. I
presented a paper at the symposium on Molecular Toxicology on
April 28-30, 1997, but I was not paid. In the conference
materials (submitted before I learned the name was unavailable)
I described myself as "John G. Babish, Ph.D., Associate and
Consultant, Paradocs, LLC." There is no other description of
ParaDocs in the materials.
I would add two points:
1) It is hard to see how any herbal products Babish's new company
might release would be confused with any of Paracelsian's products
since Paracelsian has not released any products, and judging by
the way it's going under current management it never will. It is
unclear why Babish would want his new company's reputation to be
confused with Paracelsian's reputation since Paracelsian has
developed a reputation of bungling and making promises that it
can't deliver.
2) If Babish had gone into the pest control business and decided to
call his company "Parasite Exterminators", he would probably still
be open to a lawsuit by the company. After all, AndroVir is
supposed to fight the AIDS virus which is a parasite to the human
body. And Rhodes has developed a reputation as a parasite that
can suck the life blood out of a company.
END OF ANALYSIS
Robin |
