PARACELSIAN v.BABISH: AN ANALYSIS--PART II
Paracelsian filed two complaints against Dr. Babish. The first complaint was filed on April 25th, 1997. The second, ammended complaint, was filed on May 21st. We can learn a lot by comparing the two complaints closely. I will quote extensively from the two complaints and comment on them. The quotes in bold will be from the original complaint. The ones in italics will be analogous passages from the ammended
complaint.
IS PARACELSIAN IN THE BUSINESS OF SCREENING
HERBAL EXTRACTS FROM AROUND THE WORLD OR DOES ITS
BUSINESS CONCENTRATE ON CHINESE HERBAL EXTRACTS?
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.
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.
Talk about leading with your chin! I can picture the following exchange between Paracelsian's lawyer (PL) and Babish's lawyer (BL) after the original complaint was issued.
BL: Herbs from India? Indian herbs???!!! I'm glad you brought up the subject. Paracelsian's1995 Annual Report states that the company
gave away 200,000 shares of stock worth $375,000 to do a screening of
Indian herbs, but we have never seen any evidence that such a screening was done. Please provide us with proof that there was such a screening.
PL (Doing his best RoseAnn RoseAnna Danna impersonation): Nevermind!
Clearly, Paracelsian wanted us to forget about the Indian fiasco so it
played down this emphasis in their ammended complaint. It was news
to me that Paracelsian portrayed itself as a company that screened
herbal extracts from plants around the world. With the exception of the infamous Indian herbs, neither the 1995 nor the 1996 Annual Reports mention any herbs other than those coming from China. Indeed, why Paracelsian is trying to acquire herbs from anywhere else at this point is unclear. Page 37 of the 1996 report states:
"Through the licensing agreement with the Institute of Nutrition and
Food Hygiene, an institute within the Chinese Academy of Preventive
Medicine, the Company has the exclusive right to acquire up to 5,000 to 10,000 extracts. The licensing agreement is being amortized over a
period of five years commencing in October 1994. The annual
amortization of the license agreement is $173,290 . . . "
At the stockholders meeting, Rhodes claimed that the company has
screened the 2800 extracts that it has in its possession. Why is it now interested in acquiring South American or Indian extracts, when it has a licensing agreement to acquire another 2200 to 7200 Chinese herbal extracts? Paracelsian has a limited budget. Shouldn't they be
screening those extracts for which they already have a license rather
than chasing around the world for new ones? There are only two logical reasons for Paracelsian to proclaim that it is now in the business of screening extracts from around the world:
1) John Babish has no job and may be interested in making a living as a broker of non-Chinese herbal extracts. Paracelsian is redefining its business so it can deny Babish an opportunity to make a living by
invoking the non-competition agreement which he signed in 1992. If
this is a case, then this reveals that Paracelsian's complaint was made in a spirit of maliciousness and vindictiveness. One can only assume that Paracelsian filed the complaint to punish Babish for his demand that Rhodes and the Board resign because of their illegal actions. This complaint is a nuissance lawsuit intended to keep Babish from telling the stockholders about what has been going on. The likelyhood that this was the motivating factor behind PRLN's lawsuit is reinforced by an observation made in an affadavit filed by Babish's lawyer:
techstocks.com
14. Paracelsian's counsel has admitted that its "investigation" of Dr. Babish did not begin until after Mr. Hecht (the NYC attorney
representing Dr. Babish and other shareholders) sent the April 15
demand letter (Exhibit B). Paracelsian's counsel has also admitted that this lawsuit was a response to that demand letter. Copies of the interchange of correspondence between Mr. Pinnisi and Mr. Hecht are
submitted as Defendant's Exhibit R.
And/OR
2) Paracelsian is now interested in extracts from countries other than
China because it no longer has access to the rest of the Chinese herbs. Colin Campbell was Paracelsian's connection to China. The Chinese may have decided to have nothing to do with PRLN when Campbell left the Board in disgust. If this is the case, then PRLN's failure to issue a news release to notify its stockholders of Campbell's departure is that much more serious. Campbell's departure from the Board was news that materially affected the way a reasonable stockholder would evaluate the company. If PRLN lost its Chinese connection because of his departure, then the importance of this news is multiplied.
DID BABISH INTENTIONALLY WITHHOLD HIS INTENTION TO
RESIGN FROM THE COMPANY?
The original complaint repeatedly states that when Babish sold his stock he knew he would resign from the company. He sold his stock with the intention of buying it back at a lower price after he announced his resignation and that he intentionally withheld his intention to resign from the company.
21. Babish wished to avoid a drop in that stock price intentionally by failing to disclose his intention to resign from the company.
Compare this with its counterpart in the ammended complaint:
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.
Now compare these passages:
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.
35. Notwithstanding this duty, Babish concealed from
Paracelsian his general intentions to acquire control of Paracelsian
and/or to wrongfully compete with the company, and his intentions
regarding specific actions to be taken in furtherance of those
Compare the following two lengthy passages carefully:
65. Upon information and belief, Babish conducted each sale
while maintining an intent to leave the employment of Paracelsian in the immediate future. The basis for this belief is in part the circumstances of the sales themselves and also Babish's express admission of fraudulent intent made to a person outside of the
company on the date of his resignation.
66. Babish concealed his intention to leave the employment of
Paracelsian and his further intentions regarding the company from
the President and the Board of Directors.
67. Babish was a fiduciary of Paracelsian, and owed a duty of
loyalty to the company. As a result of the same, Babish had a duty
to disclose to the company his intentions to resign and to obtain
control of Paracelsian.
68. Information regarding Babish's intent to resign from the
company and his reasons therefore was material to proper valuation of the stock, and upon information and belief, a reasonable shareholder would consider this information to be important in making investment decisions.
69. Paracelsian reasonably relied on Babish's silence to
conclude that Babish had no immediate intent to leave the
company or to attempt a hostile takeover of the company.
77. Accordingly, Babish's sale of Paracelsian stock without first disclosing his intention to resign was in violation of 15 U.S.C. 78j (b) and 17 C.F.R. 240.10b-5.
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.
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
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.
At first glance, these two passages say the same thing: Babish knew he was going to resign when he sold his stock and he withheld the
information of his impending resignation. But read these passages
closely and they reveal something else. The passage from the first
complaint explicitly states that Babish withheld the information of his impending resignation from the company. The second passage does
not state this. The only people he hid his intentions from were
stockholders outside the company. Why did Paracelsian change its
tune on this crucial point? Is it possible that PRLN changed its tune
because Koch's and Folk's testimony directly contradicts it on this point? Did Rhodes get caught with his pants down in a lie?
Whether or not Babish told Rhodes of his intentions to resign is
important. Both Folk's and Koch's testimony reinforce Babish's
testimony that when he sold his stock he had no immediate plans to
resign. But for arguments sake, let's assume that he knew he was going to resign when he sold his stock and that he had informed Rhodes of his intentions to resign. If failure to keep the stockholder informed of Babish's intentions when he conducted his stock sale was a crime, then Rhodes is just as deeply involved in this crime as Babish, for he shared Babish's knowledge and did not release this information to the public. Indeed, one can make an argument that Rhodes had a greater responsibility to release this information than Babish did. Rhodes was specifically hired to run the business activities of the company to allow Babish to spend full time on the scientific aspects. Deciding what news should be issued in a press release falls under Rhodes' job description more than it does under Babish's. And responsibility always rests at the top, especially when the person at the top knows what is going on below him.
This excerpt from the introductory letter of the 1994 Annual Report
leads me to believe that the purpose of Rhodes' hiring was to allow
Babish to spend full time on Paracelsian's science. If Rhodes didn't
have time to issue a press release to reveal information that he
considered material to the investor, then he he should have designated an assistant to do so.
"This expanding dual horizon, more scientific focus and the need for
more financing sources, was the principal impetus for strengthening the management team in July through a consulting arrangement with Keith Rhodes. This move permitted Dr. John Babish to devote full attention to the expanding field of interest in the Company's technology as well as launch the successful Drug Discovery Program."
DID BABISH'S RESIGNATION CAUSE AN IMMEDIATE FALL IN
THE STOCK'S PRICE?
The original complaint states:
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.
The ammended complaint states:
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.
Why the difference in wording? Could it be because Babish's lawyer
notes the following in his affadavit?:
"I obtained a daily price history for Paracelsian stock from a database maintained by CompuServe. A printout of the daily price and volume information from January 1,1997 through May 6, 1997 is submitted as Defendant's Exhibit N. I have annotated the printout to reflect Dr. Babish's trades (using the trade dates) and also to reflect the dates on which news of Dr. Babish's resignation was released and the date on which news of T. Colin Campbell's resignation was released. The stock price did not drop under $1.00 per share until about three weeks after the press release announcing Dr.Babish's resignation."
While Babish's resignation probably did have a great deal to do with the fall in the stock price, the cause and effect relationship is more clearly established when one exaggerates the situation as PRLN did in its original complaint. Though some might say I am quibbling by pointing out this change, I would say that this is another example of Rhodes getting caught with his pants down. Perhaps Rhodes could be the first executive to be sued by the stockholders for indecent exposure.
Robin |
