PARACELSIAN'S ORIGINAL COMPLAINT PART I
Paracelsian, Inc.,
a Delaware company,
plaintiff,
-v- 97-CV-604
Judge Pooler
Magistrate Judge DiBianco
JOHN G. BABISH
Defendant
INTRODUCTION
1. Paracelsian, Inc. ("Paracelsian"), by its attorneys,
Brown, Pinnisi & Michaels, P.C., brings this actuion pursuant
to 18 U.S.C. 1962 et seq. RICO, 15 U.S.C. 78 et
seq. (Securities Exchange Act of 1934), 15 U.S.C. 1100,
et seq. Lanham trademark act. and common law. As set
forth below, defendant John G. Babish ("Babish") a former officer
and director of Paracelsian, has engaged in a pattern of wrongful
conduct by which he sought to unjustly enrich himself and 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.
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6. Defendant John Babish is a resident of Ithaca, New
York and a former Director and Officer of Paracelsian.
BACKGROUND FACTS
Generally
7. Paracelsian is a corporation that specializes in the
identification and testing of extracts derived from various
herbs and other plants, including those which traditonally
have been used for medicinal purposes in India and 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
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("Rhodes") .
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.
17. On information and belief, Babish then devised a plan
whereby he would either purchase 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
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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 illicit profits of his liquidated stock.
19. On information and belief, Babish formed an alternative
plan in the event that he was unable to buy 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 contractual 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. Babish wished to avoid a drop in that stock price
intentionally by failing to disclose his intention to resign from the
company.
22. 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.
23. During early 1997, Babish held over 300,000 shares of
Paracelsian stock, and sold the majority of those shares in a series
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of over 20 transactions conducted between January 21 and
February 26, 1997. By these sales, Babish liquidated over 200,000 shares at an average selling price of $2.00 per share.
24. Approximately three weeks after these sales were
completed, Babish announced his resignation from the company.
25. The price of Paracelsian stock droppod rapidly by more
than half in response to this news, to under $1.00 per share.
26. Babish also retained a law firm to threaten a shareholders' derivative action against the company, a move which may have been intended solely to further distract and weaken the company.
27. The price of Paracesian stock has remained below $1.00 per
share since Babish's resignation, and has dropped to as low as $.58
per share on occasion.
28. To Paraceisian's knowledge, Babish has not sold any of his
remaining shares in the company since he announced his
resignation.
29. Babish's actions in this regard were unlawful and harmful to
Paracelsian and its shareholders.
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
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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 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 ParaDocs;
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
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to Paracelsian.
35. Notwithstanding this duty, Babish concealed from
Paracelsian his intentions to sell a majority of his stock, to resign
from Paracelsian, to devalue Paracelsian's stock, and thereafter to
buy a controlling interest in Paracelsian.
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 concealment
and Paracelsian's reliance on the same, Paracelsian has suffered
damages including without limitation a devaluation of its stock, loss
of business reputation, loss of corporate opportunities, loss of
assets, and loss of profits generally.
SECOND CAUSE OF ACTION
Racketeering' Influenced and Corrupt Organizations Act
18 U.S.C. 1962(a) and l964(c)
38. Paracelsian repeats and realleges herein the allegations set
forth in paragraphs 1 through 37 above.
39. Babish wrongfully acquired income through a pattern of
racketeering activity in violation of 18 U.S.C. 1962(a) by selling
his stock in Paracelsian with the material inside information that he
planned to resign shortly thereafter
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40. Babish failed to disclose this information to the
investing public prior to selling his stock in violation of 15
U.S.C. 78j (b) and 17 C.F.R. 240.10b-5.
41. Babish carried out this scheme to defraud
Paracelsian by the execution of a number of predicate acts,
including without limitation, the following:
a. he engaged in at least twenty-one (21) separate
stock transactions on and between the dates of January 21,
1997 and February 26, 1997 in which he sold at or about
205,900 shares of Paracelsian stock.
b. He conducted these sales without first disclosing
his intent to resign from the company.
c. He knew that his resignation would likely cause a
significant reduction in the price of Paracelsian's stock, and
that information regarding his intent therefore was likely to
be information that would affect the investment decision of a
reasonable investor;
d. prior to and during the period of the
aforementioned stock transactions, Babish used the
interstate wires and mails in furtherance of his scheme to
defraud Paracelsian and its stockholders in violation of 18
U.S.C. 1341 and 1343. Babish's mail and wire fraud
consisted of the following acts in furtherance of his scheme:
(1) Babish used the United States mails and
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facsimile transmissions in early 1997 to distribute
communications on behalf of the company, but failed to
disclose his intent to resign from the company in those
communications in order to avoid any reduction in the price
of Paracelsian stock prior to the completion of his twenty-
one (21) separate stock transactions;
(2) Babish, upon information and belief, placed
telephone calls to a broker to accomplish the twenty-one
(21) separate stock transactions;
(3) Babish, upon information and belief, received
the proceeds from his fradulent stock transactions via the
United States mails and/or wires; and
(4) Babish used the Unites States mails to report
to the Securities and Exchange Commission the occurrence
of each of the twenty-one (21) fraudulent stock transactions.
42. Babish used the income he acquired through this
pattern of racketeering activity to establish "ParaDocs," an
enterprise within the meaning of 18 U.S.C. 1962(a), with
the intention to either buy a controlling interest in
Paracelsian or to compete with Paracelsian.
43. As a direct and proximate result of Babish's scheme
to defraud and the acts committed in furtherance thereof,
Paracelsian has been injured in its business and property.
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44. Paracelsian is therefore entitled to treble damages
and attorney's fees pursuant to 18 U.S.C. 1964(c) |
