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KLEIN v. SALVI

March 26, 2004.

TERRY KLEIN, Derivatively on behalf of SICOR INC., Plaintiff, -against- CARLO SALVI, RAKEPOLL FINANCE N.V., KARBONA INDUSTRIES LTD., BIO-RAKEPOLL N.V., MICHAEL D. CANNON, Defendant -and- SICOR, INC., Nominal Defendant


The opinion of the court was delivered by: ALVIN HELLERSTEIN, District Judge

OPINION AND ORDER REGULATING FEES AND ALLOWANCES
Plaintiff's counsel, having produced a settlement recovery of $10,750,000 for the corporation on whose behalf they brought this derivative lawsuit, seek compensation for their efforts and the benefit they produced. The settlement has been paid by defendants who were alleged in the complaint to have made $28,704,750 in short swing profits, in violation of section 16(b) of the Securities Exchange Act, 15 U.S.C. § 78p(b). In the settlement agreement, defendants agreed to pay the settlement amount without admitting wrongdoing on their part. The corporation, SICOR, Inc., of which defendants were principal stockholders, executives and directors and for whose benefit plaintiff brought his lawsuit, agreed under the settlement to pay the fee and expenses of plaintiff's counsel, up to $3,580,000, to the extent allowed by me. At a hearing held November 12, 2003, I approved the settlement as fair and reasonable to SICOR, Inc., after notice had been duly given to the stockholders of SICOR, Inc. through publication in national Page 2 newspapers and posting on SICOR's internet web page. I reserved decision as to the fees and allowances to be paid to counsel for the derivative plaintiff. I now decide that issue, and order the case closed.

THE UNDERLYING FACTS AND PRIOR PROCEEDINGS

  In March of 2002, Plaintiff Terry Klein filed suit derivatively on behalf of SICOR alleging violations of section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b). Section 16(b) confers liability on a corporate insider who, within a six-month period, purchases and then sells, or sells and then purchases, securities of the corporation of which he is an insider. Pursuant to section 16(b), and regardless of the insider's intent, any profit realized by such a person is to "inure to and be recoverable by the issuer." Certain exceptions apply: as relevant here, a safe harbor for transactions approved by the corporation's board of directors or by a specifically defined committee of the board of directors. SEC Rule 16b-3, 17 C.F.R. § 240 § 16b-3. Successful plaintiffs in section 16(b) suits are not personally entitled to receive any portion of the recovered damages. Their counsel, however, in recognition of the benefit conferred on the issuer, may be entitled to reasonable attorney's fees and reimbursement of expenses incurred in prosecuting the litigation. See Smolowe v. Delendo Corporation, 136 F.2d 231, 241 (2d Cir. 1943).

  The transaction upon which suit was brought was complicated. It originated with the acquisition by certain of SICOR's insiders, in or around September 2000, of Biofa A.B., a Lithuanian manufacturer of generic drugs marketed and distributed in Eastern Europe and Russia. Biofa, to be made profitable, had to be reorganized and modernized so that its products could satisfy the stricter regulatory requirements of the Western European countries and the United States.

  SICOR's board of directors, according to the parties, was not itself interested in the transaction, and authorized its chief executive officer, president, director and controlling Page 3 stockholder — defendant Carlo Salvi — and its executive vice president — defendant Michael D. Cannon — to purchase Biofa. Salvi and Cannon made the purchase through Salvi's controlled affiliated companies chartered in Nassau Bahamas and Curacao, the other defendants named in the caption, issuing 1,500,000 shares of one of these companies, Rakepoll Finance N.V., to Biofa's owners.*fn1 He financed the transaction through a $30,000,000 loan from an Italian bank, Banco. del Gottardo, to Rakepoll Finance, Salvi's controlled company.

  Ten months later, on July 25, 2001, SICOR decided to purchase the assets that it had declined to purchase in September of 2000. SICOR purchased Biotechna, the owner of Biofa, for a consideration that appeared substantially greater than Salvi's purchase in September 2000, but which Salvi argued was the equivalent. SICOR issued 1,500,000 shares of its common stock to Salvi and his companies,*fn2 assumed the $30,000,000 loan from the Italian bank to Salvi's affiliate, issued warrants to the bank entitling it to purchase 150,000 shares of SICOR's stock at $3.50 per share plus $10,000, and assumed Biotechna's short and long term indebtedness — almost another $30,000,000 of debt. Following these transaction, Salvi and companies he controlled owned approximately 65 percent of SICOR's capital stock. The stock issued to Salvi's companies was restricted, meaning that the shares could not be sold except by SEC registration and public offering or an appropriate SEC exemption, but such a registration and public offering quickly followed. Page 4

  At the time of the transaction, Biotechna had but $700,000 in product sales in the three months ending September 30, 2001, a negative cash flow and no earnings. Its ability to satisfy Western European regulators was untested; its technology did not comply with Western commercial practice; and it was in need of substantial additional investment. However, SICOR's directors received a fairness opinion from an outside expert that the transaction with Salvi and his companies was fair to SICOR, and a committee of the two independent directors (those not financially involved with or controlled by Salvi) approved SICOR's purchase of Biotechna.

  SICOR's purchase of Biotechna closed July 25, 2001. Four months later, on October 16, 2001, SICOR and defendant Rakepoll Finance N.V. (Salvi's company) registered with the SEC and sold in a public offering 11,500,000 shares of SICOR's common stock, at a price of $17.715 per share. The sale included the 1,500,000 shares that SICOR had paid to Rakepoll Finance to acquire Biotechna. The sale occurred within a six-month period of Rakepoll Finance's purchase of the 1,500,000 shares, as consideration for Rakepoll Finance's sale of Biotechna to SICOR.*fn3

  Plaintiff alleged that SICOR's issuance of 1,500,000 shares of its stock to Salvi's controlled company on July 25, 2001 constituted a purchase by Salvi on that date of those shares, and that Salvi's purchase should be matched against Salvi's sales to the public and issuance of warrants to Banco. del Gottardo, on October 16, 2001. According to plaintiff, the transactions fell within the proscriptions of section 16(b) of the Securities Exchange Act, as purchases and sales "within any period of less than six months." Plaintiff alleged that the 1,500,000 shares issued by SICOR to Salvi and his companies on July 25, 2001 to purchase Biotechna, worth $28,704,750, Cannon, Aug. 28, 2003, Ex. A at 19. Page 5 should "inure to and be recoverable by the issuer," SICOR, since the consideration gained by SICOR, the ownership of Biotechna, plaintiffs alleged, was essentially valueless.

  Plaintiff's demand to SICOR's Board of Directors, and suit against defendants Carlo Salvi and Michael D. Cannon, and Salvi's companies, defendants Rakepoll Finance N.V., Karbona Industries Ltd. and Bio-Rakepoll NV (collectively, the "Settling Defendants"), followed. Plaintiff alleged that defendants violated section 16(b) of the Securities Exchange Act by profiting from short-swing purchases and sales of SICOR common stock, on July 25, 2001 and October 16, 2001, respectively. The Settling Defendants denied liability, and alleged that Biotechna was a valuable asset when sold to SICOR, that no profits resulted, and that the transactions, having been approved for fairness by a committee of the independent directors of SICOR's board of directors, were exempt under safe harbor provisions of section 16(b) and of SEC Rule 16b-3 thereunder.

  Section 16(b) authorizes the SEC to exempt from liability "any transaction . . . as not comprehended within the purpose" of the statute. Rules 16b-3(a) and (d) exempt transactions between issuers and officers or directors that are approved either by "the affirmative votes of the holders of a majority of the securities of the issuer," or of the board's "disinterested directors." 17 C.F.R. § 240.16b-3(a), (d). Defendants allege that a committee of independent directors, that is, the two independent directors, Donald E. Panoz and Carlo Ruggieri, of the ten directors of SICOR, functioned with legal and accounting help between October 2000 and April 2001 to review the transactions, and recommended on April 9, 2001 that they be approved, and that SICOR's board of directors thereupon voted to approve the transactions effected July 25, 2001.

  THE SETTLEMENT

  Following discovery, defendants moved for summary judgment. Plaintiff opposed, and both sides filed briefs. Before the date for argument, however, the parties asked to be referred Page 6 to a Magistrate Judge, and agreed to settle before the Magistrate Judge. The parties filed a stipulation of settlement on July 14, 2003, the terms of which provided that the Settling Defendants would pay SICOR $10,750,000, while continuing to maintain that no wrongdoing had occurred and that the settlement was made to avoid litigation costs and to resolve the matter expeditiously. The parties argued that, at approximately 38 percent of maximum alleged recovery, the settlement was in SICOR's best interest.

  At my request, the parties supplemented their submissions to provide additional supporting information for the settlement. After considering the extensive legal memoranda, reports of experts and affidavits submitted by plaintiff and defendants, and after hearing the parties on September 8, 2003, I gave my preliminary approval to the Proposed Settlement. By Order dated September 23, 2003,1 directed the parties to provide notice to the owners of SICOR's securities. The parties initially resisted providing notice, but I held that since the case involved allegations of insider trading by those who owned a substantial portion of SICOR's issued and outstanding stock, and important issues of public responsibility were involved, SICOR's shareholders should evaluate the settlement and have the right to express objections in response to a publicly disseminated notice. I divided the costs of providing notice equally between the Settling Defendants and SICOR. The parties gave proper notice, by publication in national financial newspapers ...


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