PARACELSIAN v.BABISH: AN ANALYSIS--PART I
WHY IS RHODES AWOL?
At first glance, Paracelsian's entire case rests on one man's words
against another. We must carefully weigh the words of John
Babish against those of Lee Henderson in order to decide the
merits of the case. This is in itself surprising, since one would
expect Paracelsian's case to rest upon the words of Keith Rhodes
against those of Babish. But Rhodes is AWOL on this case. His
signature does not show up on Paracelsian's complaint against
Babish, nor has he filed an affadavit bolstering Paracelsian's case.
The only person who signed the complaint against Babish was
PRLN's lawyer, someone who could not have had direct knowledge
of what had transpired. Why would Rhodes avoid signing the
complaint against Babish, when doing so could strengthen PRLN's
case? Is it possible that if he did sign the complaint, and if the
Court discovered that it contained lies, then he would be liable for
perjury? Could he be afraid to stick his neck out and personally
accuse Babish of breaking the law?
For whatever reason, Rhodes has decided to let Henderson do the
dirty work. Why would Henderson take the risk? He was not a
Board member when he signed his affadavit against Babish. He
was not a Paracelsian employee or officer. In fact, he had no
financial interest in this fight. Or so one would assume. But we
know from his own affadavit that he wanted to do business with
PRLN. Is it possible that Rhodes told him that they would throw
business his way if he signed a complaint against Babish? Does
anyone find it unusual that Henderson should sign a complaint
against Babish and then less than two months later find himself
nominated to serve on PRLN's Board of Directors? Is it possible
that his nomination to the Board was a payoff for his complaint?
Since Henderson had no formal relationship with PRLN when he
signed his complaint, he could not sue Babish in PRLN's name
because he had no standing in the case. Is it possible that his
election to the Board was intended to increase his standing and
possibly increase the Court's value of his testimony?
HENDERSON VS BABISH, KOCH AND FOLK
But this case is really not that of one man's word against another.
Henderson seems to have no one to back his testimony. Major
portions of Babish's testimony are bolstered by one or more
corroborating witnesses. Threre are two conflicting stories here.
According to Paracelsian's original complaint, Babish knew when
he sold his stock that he was going to quit. He had anticipated that
this would drive the stock price down and that he could buy enough
devalued stock back to gain control of the company. No mention is
made in PRLN's scenario of the possibility that the stock sale was
intended as a tool to pressure the Board into serious contract
negotiations. The only purson who has stuck his neck out
testifying to Paracelsian's version of events is Lee Henderson.
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Babish denies that he knew he was going to quit when he sold his
stock and that he was selling it in anticipation of buying it back at a lower price. He states that the purpose of the stock sale was to
pressure the Board into contract negotiations, and he has two
people backing up his testimony. According to Arthur Koch's
testimony:
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I learned sometime in early February 1997 that Dr. Babish
had filed with the SEC a Form 144 to sell up to 243,000 shares of
his stock. I spoke with Dr. Babish that day to ask why he was
selling shares. He told me that he needed to raise some cash
because he had some bills to pay. He also stated that he wanted to
send a message to the Board that they really needed to start
dealing with a renewal of his contract, which had expired in
1994.
Koch also testified that he had spoken to a number of securities
analysts, including Ron Folk. Folk testified:
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On or about February 11, 1997, I learned from an SEC filing
that John Babish had sold several thousand of his Paracelsian
shares during the month of January 1997. I immediately called
Keith Rhodes, who was, as I understood, the company's chief
executive officer and president. I asked Mr. Rhodes what was
going on. Mr. Rhodes told me that Dr. Babish and the company
were involved in a contract dispute over the terms of his renewed
employment contract. . . .Mr. Rhodes did not seem surprised by my
comments about Dr. Babish's stock sales, and I therefore believe
he already knew about the sales. . . .
I had several additional discussions (approximately 4 to 6) with Mr.
Rhodes of a similar nature during the month of February. I also spoke with Art Koch, who was chief financial officer of Paracelsian. When I asked Mr. Koch why Dr. Babish was selling his stock, Mr. Koch told me that Dr. Babish had some short term cash needs for which he had to liquidate about 80,000 shares and that Dr. Babish was selling additional shares to get the Board's attention on his employment contract. He said the company was in discussions with Dr. Babish about a renewed employment agreement. . . .
In one of my conversations with Mr. Rhodes, while we were
discussing Dr. Babish's stock sales, Mr. Rhodes said that Dr.
Babish was using a "scorched earth" policy to get the Board's
attention. . . .
In sum, I knew as early as approximately February 11, 1997, that
Dr. Babish was selling stock in the company and that from the company's perspective, at least one of the reasons that Dr. Babish was selling stock was because of the ongoing contract dispute.
Did Babish make up his mind to quit before or during the stock
sales? It seems he had decided to quit if his contract negotiations
did not go well, but according to Koch:
I believed then, and continued to believe until early March,
1997, that the company would in fact come to terms on a new
employment contract with Dr. Babish. My perception was that Dr.
Babish also believed that he and the company would eventually
resolve the issues so that his contract would be renewed.
Henderson's testimony strongly implied that Babish sold his stock
because he had definite plans to quit and gain control of the
company through illegal stock manipultion. If Henderson is telling
us the truth, then one of the following two possibilities is also true:
1) Both Koch and Folk were willing to perjur themselves to support
Babish. These two men were not only willing to perjur themselves,
but they were master perjurers, for their testimonies not only
support Babish's story, they support each other as well. I could not
find any inconsistancies in their testimony. Others are invited to
try.
OR
2) Babish was so clever that he anticipated that Paracelsian would
sue him when they discovered his plans to take over the company
through stock manipulation. He therefore developed an alibi by
telling Koch and Rhodes that he was selling his stock to get the
Board's attention. But if we believe this and if we believe
Henderson's testimony, we must also believe that someone clever
enough to anticipate these charges and plant a brilliant alibi would
then blurt out his illegal plans to Hendrson. We must
simultaneously believe that Babish is one of the world's most
brilliant schemers and one of its most stupid blunderers.
HENDERSON VS COMMON SENSE
Lee Henderson's testimony is also seems to be at odds with
Paracelsian's testimony. Henderson states:
5. On or about March 19, 1997 Mr. Babish came to my
office, and reported the following in part and in substance:
a. he had resigned from Paracelsian earlier that day;
b. he anticipated that the price of Paracelsian stock
would drop significantly upon release of the news
of his resignation;
c. he planned to buy a controlling interest in
Paracelsian if the price of Paracelsian stock
dropped "low enough" as a result of his departure;
d. he had sold much of his stock shortly before his
resignation and "put away that money" in order to
allow him to purchase a controlling interest in the
company, should that opportunity arise as he
anticipated;
e. he advised that, if he did not acquire control of the
company in this manner, an unidentified Board
member would arrange to bring him back to
Paracelsian;
f. he said that, in such event, he would not again
become an employee of Paracelsian personally,
but would instead work for Paracelsian through a
new company which he planned to form;
g. his salary upon return was anticipated to be
$220,000 per year, plus benefits and stock rights;
h. he wanted his new company to enter into a
relationship with VTI similar to that which I had
proposed previously for Paracelsian, and to have
that new company in turn enter into an agreement
with Paracelsian, resulting in this new company
having insinuated itself into the middle of the
relationship;
i. he offered to split his anticipated $220,000 salary
with me if I would agree to such an arrangement
with his company in lieu of dealing directly with
Paracelsian;
j. he explained further that, if he could not either
acquire control of Paracelsian or enter into a joint
venture as described above, then he would simply
do business through his new company;
Now let's look at a passage from Paracelsian's complaint:
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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.
According to PRLN's complaint, Babish resigned and intended to
engage in a nefarious stock manipulation scheme because he
could not gain control of the company. Yet according to
Henderson's testimony, if Babish could not gain control of the
company through stock manipulation:
e. he advised that, if he did not acquire control of the
company in this manner, an unidentified Board
member would arrange to bring him back to
Paracelsian;
Now, if Babish left because he and the unidentified Board member
did not have the power to control the company, it is hard to
understand how the unidentified Board member would suddenly
have the power to force the other Board members to bring him
back, no matter how many shares Babish held. Remember, the
Board decides issues by voting amongst themselves and each
Board member gets one vote, Board votes are not decided on the
basis of the number of shares of stock each member controls.
Before Babish resigned he could count on two votes, his own and
that of the unidentified Board member. Once he resigned he could
only count on one vote. It is hard to see how Babish's resignation
would have given him more influence over the Board.
As it happened, Babish stated in his affadavit that Colin Campbell
was hoping that he could persuade the Board to bring him back.
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37. On the day I resigned, I did stop by Dr. Henderson's office
(which, as noted above, was just downstairs from Paracelsian's). I
viewed Dr. Henderson as a kindred spirit-- he, like me, had been an academician and had started a company to try to commercialize academic research. I told Dr. Henderson that I had resigned, but
that Colin Campbell (a Paracelsian director at the time) was going
to talk to the other board members to see if they could find a way
to bring me back into the company. I told Dr. Henderson that I
wasn't really interested in going back as the only executive scientist. I told him that I might be willing to go back part time, and I said that maybe he and I could split the position. I told him that my current salary was $160,000 per year but that I thought the Board might increase that to $220,000 if they wanted to bring me back,
and I said that if we split the position he could make at least
$80,000. I told him that I didn't know what the Board would do
and that I wasn't in a position to make any firm offer. The idea
that I discussed with Dr. Henderson was a simple job-sharing arrangement in which we would both be part-time Paracelsian employees.
As I have said, this hope was naive considering that he could not
persuade them to enter serious negotiations on Babish's contract
in the first place. But could Babish possibly be so dillusional as to believe that Campbell could persuade the Board members to
accept him back after they had learned that Babish was appealing
to them only after his illegal stock manipulation scheme had failed?
Anyone with an ounce of common sense would suspect that once
the Board members had learned of Babish's failed attempt to gain
control, they would only become enraged at him. Such a move
could only solidify their resolve to have nothing to do with him.
But let us suppose for arguments sake, that Babish had returned to
Paracelsian, either through buying a controling interest or through
Campbell's efforts to persuade the rest of the Board to hire him
back. In the first case, Babish would have so much stock that he
would not need to have started an intermediary company to do
business with VTI in order to become wealthy. He would have so
much stock that he could become wealthy when Paracelsian's
share price gained in value. In the second case, he could become
wealthy on the percentage of the cut that his business would take
out of Paracelsian's profits. But is it reasonable to believe that the rest of the Board would tolerate such an arrangement? There are
two possibilities: 1) Either the Board would not tolerate this
arrangement or 2) Babish would have Svengali-like control over
the Board which would cause them to overlook this conflict of
interest. If the Board became enraged by Babish's enriching
himself through his intermediary company, they would undoubtedly kick him out of PRLN and have nothing to do with him. Then what would Babish's intermediary company have to offer Henderson and his company? Certainly not a portion of Babish's $220,000 salary. And certainly none of PRLN's extracts in its library. If the Board kicked Babish out then his deal with VTI would be dead, and if VTI wanted access to Paracelsian's herbs it would have to deal directly with Paracelsian.
Of course, perhaps Babish could maintain strong enough control
over the Board so that they would overlook this conflict of interest. But if his control was that strong, couldn't he better enrich himself
just as easily by having the Board register his warrants as they
were already obligated to do and then vote to give him a few
hundred thousand extra shares of stock as a bonus to stay on with
the company? Why would he need Henderson's help to enrich himself? Indeed, why would he give away a large part of his salary to Henderson when he could enrich himself on his own? Would Henderson like us to believe that Babish was in the habit of giving away $80,000 to $110,000 for no reason at all?
WHAT HENDERSON'S AFFADAVIT DOES NOT SAY
A) It is interesting to note that Henderson's affadavit and
Paracelsian's complaint says nothing about the flawed financing of
convertable preferred stock without a floor that saw the stock price
drop from $8 to $1 in a few months, nor does it say anything of the
$1.3 million the company spent to buy its stock back on the open
market at $5 per share. Paracelsian's complaint tried to pin
everything but the kitchen sink on Babish. Since they didn't try to
pin this on him, one can only assume that Rhodes is implicitly
admitting that he is responsable for these blunders.
B. Henderson wrote the following in his affadavit:
6. After a rescheduling, I met again with Mr. Babish
about two weeks later. During that meeting he reported in
part and substance that he was forming his new company as
planned, and inquired whether VTI had any interest in
acquiring certain extracts from South American plants. I
advised in substance that VTI may have an interest in such
extracts, and requested that Mr. Babish provide additional
details regarding his proposal. Mr. Babish did not repeat or
reference any other information that provided during our
March 19, 1997 meeting at that time, and I did not inquire about those subjects.
7. Within about one week of this conversation I called
Mr. Babish, and left a message asking whether further
discussion about the South American extracts was
warranted. He returned that call by leaving a brief message
on my answering machine. I did not return that call,
howeverer, because by that time I had come to the opinion
that Mr. Babish's actions and intentions may be improper,
and so I declined to participate further in any discussions
with him.
So Henderson was quite willing to engage in a business deal with
Babish when he left a message on Babish's answering machine,
but by the time Babish returned his call Henderson had concluded
that Babish was acting improperly. Henderson did not state how
much time elapsed between these events. Assuming Babish
returns his phone calls promptly, Henderson had a change of heart
within a day or two. What could have caused him to change his
mind in such a short period of time? Did he acquire new
information about Babish's activities, and if so, from whom? Did he
suddenly grow a conscience? Had he talked to Rhodes or anyone
else on the Board in this intervening time? Henderson does not
say.
It is impossible to determine the truthfullness of some of the
allegations in Henderson's affadavit. Some allegations in his
affadavit are easlily shown to be questionable by comparing his
affadavit with testimony from other sources. Other parts of his
affadavit can not be checked against outside sources so all we are
left with is his word against Babish's. If the parts we can check
prove to be questionable, then parts we can't check must fall under
suspicion.
Robin |
