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IN RE PAR PHARMACEUTICAL

November 8, 1990

IN RE PAR PHARMACEUTICAL, INC. DERIVATIVE LITIGATION.


The opinion of the court was delivered by: Robert P. Patterson, Jr., District Judge.

OPINION AND ORDER

This is a shareholder derivative action brought on behalf of Par Pharmaceutical, Inc. ("Par") against certain directors, officers and former officers of Par alleging violations of Sections 14 and 20 of the Securities Exchange Act of 1934, 15 U.S.C. § 78n and § 78t, and of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961-68, and alleging intentional and negligent breach of fiduciary duty under state law. Based on Rule 23.1 of the Federal Rules of Civil Procedure, Par has moved to dismiss the complaint against all defendants in favor of its prosecution of a state court action against certain defendants. Plaintiffs have cross-moved for discovery if the Court finds that Par has made a prima facie showing that its motion to dismiss should be granted. For the reasons set forth below, both motions are denied.

BACKGROUND

Defendant Par is a corporation in the business of manufacturing and marketing prescription and over-the-counter oral and topical generic drugs. Par owns 60% of a subsidiary, Quad Pharmaceuticals, Inc. ("Quad"), which manufactures and markets injectable generic drugs. This action consolidates for pretrial purposes three separate shareholder derivative suits brought on behalf of Par in August 1989. The Consolidated Amended Complaint was filed on December 21, 1989. It names the following persons as "insider defendants": (1) Ashok Patel ("A. Patel"), former Senior Vice President and Secretary of Par; (2) R.K. Patel ("R.K. Patel"), former Senior Vice President and Assistant Secretary of Par; (3) Barry Geller ("Geller"), former Vice President, Regulatory Affairs; (4) Perry Levine ("P. Levine"), former President of Par; (5) Jeffrey Levine ("J. Levine"), present Executive Vice President of Par; and (6) Dilip Shah ("Shah"), former President and Chief Executive Officer of Quad. A. Patel, R.K. Patel and Geller were directors of Par until April and July of 1989. P. Levine has been a director at all relevant times and J. Levine is currently on the Par Board. The complaint also names as defendants Quad and the following present directors of Par, Jacob Robbins, Photios Paulson, Nagin Patel ("N. Patel") and Richard Nadler. Par is a nominal defendant.

Following an investigation instituted in October 1986 under the supervision of the United States Attorney, a grand jury impaneled in the District of Maryland indicted A. Patel, Par, Shah and Quad. In July of 1989, all four pled guilty to bribing officials of the federal Food and Drug Administration ("FDA") in order to obtain expedited approvals for certain generic drugs Par was to manufacture and sell (hereinafter "the bribing incidents"). In connection with Par's plea on July 19, 1989, the United States Attorney for the District of Maryland stated with respect to the other defendants in this action:

  [W]e have found no evidence that any officer,
  director, or employee of Par, other than Ashok
  Patel, participated in or was aware of any
  criminal conduct within the scope of this
  Office's investigation.

In a separate incident in July 1989 ("the switching incident"), defendant R.K. Patel switched certain product samples with those of another batch during an FDA inspection at Par's facilities. R.K. Patel has admitted to this switching and the incident forced Par to recall its generic version of the drug Maxzide and to suspend shipments of all of its products.

1. Plaintiffs' Claims

Plaintiffs' RICO and RICO conspiracy claims are solely against the insider defendants*fn1 and arise from the bribing incidents. Plaintiffs claim that from 1986 through July 1988, the insider defendants committed predicate acts of mail fraud, wire fraud, violation of the Travel Act and bribery under RICO and conspired to conduct Par's affairs through such a pattern of racketeering activity in order to further the scheme to bribe officials of the FDA. Allegedly the bribing scheme was designed in part to inflate the market value of Par stock by creating the artificial appearance that Par had special expertise in obtaining expeditious FDA approvals. Pursuant to the alleged scheme, A. Patel and Shah are claimed to have made a series of sixteen payments totalling $16,800 to two FDA employees.

Plaintiffs' securities fraud claims are interposed solely against defendants A. Patel, R.K. Patel, P. Levine and Robbins who constituted the entire Board of Directors of Par ("the Board") when the February 1987 and February 1988 proxy statements were issued.*fn2 Plaintiffs claim that these proxy statements were false and misleading in violation of Sections 14(a) and 20 of the '34 Act because they sought the reelection of directors without disclosing the role of three of the directors — P. Levine, A. Patel and R.K. Patel — as insider participants in the scheme underlying the bribing incidents. The February 1988 proxy statement is also alleged to have been misleading because it sought and obtained shareholder approval of an amendment to Par's Certificate of Incorporation which eliminated or substantially limited liability of the officers and directors and caused the corporation to indemnify all the individual defendants at a time when the insider directors' conduct had not yet been made public.

Plaintiffs' state law claims are brought against all defendants for negligent and intentional breach of fiduciary duties.

2. Demands on the Board of Directors

On November 17, 1988, counsel for two Par shareholders who are not plaintiffs in this action made a written demand upon the Board to investigate the facts underlying the grand jury investigation of the bribing incidents and to take action against the individuals at Par responsible for the wrongdoing. Par responded by letter dated December 7, 1988 — before the parties had entered the guilty pleas — that it was conducting an investigation. Par did ...


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