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Neogenix Oncology, Inc. v. Gordon

United States District Court, E.D. New York

March 31, 2017

PETER GORDON, MINTZ LEVIN COHN FERRIS GLOVSKY and POPEO P.C., NIXON PEABODY LLP, DANIEL J. SCHER, HARRY GURWITCH, and MAIE LEWIS, not individually but as personal representative of the Estate of BRIAN LEWIS, Defendants.


          A. KATHLEEN TOMLINSON, United States Magistrate Judge

         I. Preliminary Statement

         This case involves claims for breach of fiduciary duty and legal malpractice primarily against former law firms and attorneys who provided services to Neogenix Oncology, Inc. (“Plaintiff” or “Neogenix”). Neogenix is “a publicly reporting biotechnology company focused on developing genetically engineered cancer treatments.” See Amended Complaint (“Am. Compl.”) ¶ 1 [DE 35]. Neogenix alleges that Defendants Peter Gordon, the law firms of Mintz, Levin, Cohn, Ferris, Glovsky, and Popeo, P.C. and Nixon Peabody LLP, Daniel J. Scher, Harry Gurwitch, the Estate of John Squire, and Maie Lewis (not individually, but as personal representative of the Estate of Brian Lewis) (collectively, the “Defendants”), orchestrated a “cover up” which “prompted an SEC investigation” and ultimately forced Neogenix to “file for bankruptcy and sell its assets under court supervision.” Id. ¶ 3.

         Specifically, as part of an effort to raise money for Neogenix, the former Chief Financial Officer of the company, Defendant Peter Gordon, initiated the Finder Fee Program, under which Neogenix paid commissions to anyone who brokered a sale of Neogenix stock, regardless of whether those persons were registered with the Securities and Exchange Commission (“SEC”). Id. ¶¶ 25-26. Neogenix claims that at the time, it did not know that the Finder Fee Program violated the Securities Exchange Act of 1934, which essentially prohibits anyone from selling securities without first being registered with the SEC, and, in turn, bars a company from compensating these unlicensed brokers. Id. ¶ 29. As a result, Neogenix brought this suit against (1) its former Chief Financial Officer for breach of fiduciary duty in instituting the unlawful Finder Fee Program, and (2) all former counsel, chiefly Mintz Levin Cohn Ferris Glovsky and Popeo P.C. (“Mintz Levin”), for legal malpractice by allegedly failing to provide proper and timely legal advice with regard to the unlawful Finder Fee Program. See generally id.

         Pending before the Court is a motion filed by Mintz Levin (“Defendant” or “Mintz Levin”) seeking to compel non-party Precision Biologics, Inc. (“Precision”) to comply with a subpoena seeking documents and testimony (“the Subpoena”) served on Precision on December 8, 2015. See generally DE 165 (Mintz Levin's Notice of Motion to Compel Compliance with Subpoena Served on Precision Biologics, Inc.). Non-party Precision opposes enforcement of the Subpoena primarily on grounds of relevance.[1] See DE 166. For the reasons set forth below, the Court DENIES Mintz Levin's motion to compel compliance with the Subpoena served upon Precision.

         II. Background

         A. Facts Relevant to the Current Motion[2]

         Because this motion bears upon facts involving Neogenix's Chapter 11 Bankruptcy, including non-party Precision's stalking horse bid and successful purchase of Neogenix's operating assets, the Court begins with a brief factual summary in order to frame its analysis.

         1. Plaintiff's Formation and Financial Model

         Neogenix was founded in 2003 as a “clinical stage, pre-revenue generating, biotechnology company focused on developing therapeutic and diagnostic products for the early detection and treatment of cancer.” Bates Decl., Ex. 5 at 20. Although it initially focused its research efforts on therapeutic and diagnostic products aimed at pancreatic and colorectal cancers, Neogenix “believed its approach and portfolio of three unique monoclonal antibody therapeutics held the potential for novel and targeted therapeutics and diagnostics for the treatment of a broad range of tumor malignancies.” Id.

         As a “development stage bio-tech company, ” Neogenix did not generate any revenue from either product sales or operations. Id. at 22. Rather, it primarily funded its operations through the sale of common stock as well as from interest obtained from funds invested in bank Certificates of Deposit. Id. at 23. Specifically, “certain shares of the common stock were, at the direction of prior management and upon the advice of the Company's prior counsel, sold through unlicensed compensated finders” which Neogenix asserts “later hinder[ed] [its] ability to raise capital.” Id. As of July 9, 2012, Neogenix had a total of 22, 924, 419 shares of common stock outstanding with approximately 942 shareholders of record. Id. In addition, as of December 31, 2011, Neogenix had approximately 16, 147, 000 shares of common stock issuable based upon outstanding stock options and warrants. Id.

         2. Events Resulting in Plaintiff's Chapter 11 Bankruptcy Filing

         Beginning in spring 2011, “Neogenix ascertained that based on the strategy implemented under the direction of prior management and the advice of the Company's prior counsel and outside advisors, Neogenix for years had engaged in the practice of paying finder fees to individuals and entities for raising capital for the Company[.]” Id. This “finders' fee” program entailed payments being made by Neogenix to third parties in connection with the sale of its common stock.” Id. As part of this program, Neogenix was paying finders' fees to individuals and entities that it “had not confirmed were registered broker-dealers or otherwise properly licensed under applicable state law to participate in the sale of [ ] securities on a compensated basis.” Id. Upon this “realization, ” and pursuant to “the advice of new outside counsel, the new management team [ ] promptly caused the company to discontinue its prior practice of using unlicensed compensated finders to sell common stock.” Id. at 24.

         As a result of paying finders' fees to unlicensed individuals and entities in conjunction with the sale of its common stock, Neogenix was faced with the prospect that “at least some investors who purchased shares of common stock in transactions in which finders' fees were paid to unlicensed compensated finders may have the right to rescind their purchases of those shares.” Id. As of July 10, 2012, Neogenix calculated its potential rescission liability to range from $0 to $31 million dollars, although as of that date it had already “received communications from several shareholders making requests or claims of rescission of investments in Neogenix's common stock totaling approximately $1.4 million.” Id. However, “no litigation against Neogenix has been initiated with respect to rescission of any Shareholder's investment.” Id. Notwithstanding the absence of any lawsuits seeking rescission, Neogenix asserts that “[i]f the Company had been forced to rescind a significant number of share purchases and/or pay substantial damages, it would have severely jeopardized [its] ability [ ] to continue [its] business operations.” Id. In addition, “this potential liability had a chilling effect on the Company's ability to raise capital from investors.” Id.

         In October 2011, following its own realization that part of its finders' fee program had potentially exposed it to legal ramifications, Neogenix received a letter of inquiry from the Philadelphia Regional Office of the Securities and Exchange Commission (“SEC”).[3] The letter requested that Neogenix “provide certain information relating to payments made by Neogenix to third parties (referred to as ‘finders' fees') in connection with the sales of Neogenix's common stock.” Id. at 23. Although Neogenix fully cooperated with this inquiry, “a number of [its] SEC-required filings were delayed.” Id. at 23-24. Specifically, the SEC's inquiry resulted in a delay in the filing of Neogenix's third quarter 2011 Form 10-Q as well as the “full year 2011 financial statements based upon uncertainty regarding the appropriate accounting treatment to reflect the potential rescission liability[.]” Id. at 24. Neogenix claims that the SEC's inquiry created an additional “chilling effect” concerning its ability to actively raise capital through the sale of common stock. Id. at 25.

         In addition to these issues, Neogenix faced the prospect of extensive dilution due to the 16, 147, 000 outstanding stock options which, if exercised, “would have been highly dilutive to both the current and future shareholders, as such number of options represented nearly 72% of those shares already outstanding.” Id. Thus, this “potential dilution” created an additional hindrance in “the Company's future ability to raise capital via what had been its primary source of financial support - the sale of its common stock.” Id.

         In light of these as well as other market factors, Neogenix was unable to raise the necessary operating capital it required through outside investment and so it turned instead to internal cost-cutting initiatives as well as evaluating strategic alternatives. Id. Specifically, between December 2011 and January 2012, both Neogenix's management and its Board of Directors (the “Board”), in conjunction with advice from its new outside counsel, “initiated an aggressive cash conservation program and began a series of cost cutting initiatives [while] at the same time, . . . evaluating various potential strategic alternatives available to the Company.” Id. These efforts led to: (1) operational restructuring in order to “reduce cash outflows for general and administrative expenses through a combination of reductions in force and in compensation, restructuring of various contacts and leases and refocusing business strategies;” and (2) the formation of the Strategic Alternatives Committe (“SAC”) which was “charged with the mission of exploring, in a thorough, thoughtful and deliberative manner, all of the strategic options and alternatives that were available to [Neogenix] to address the serious liquidity problems that [it] was facing, and to carefully evaluate the pros and cons of each potential strategic alternative.” Id. at 26.

         As a result of its operational restructuring, Neogenix was able to “stretch its remaining working capital for a much longer period of time than otherwise would have been possible, thereby giving [it] significant additional time to thoroughly, thoughtfully and deliberatively consider all of its strategic options.” Id. at 25. In addition, as a result of the SAC's review, the Board authorized the engagement of an investment banker and financial advisor in order to assist Neogenix in determining whether it could “raise the funds necessary to continue its on-going business operations in order to (1) preserve its therapeutic and diagnostic science and technology, and (2) maximize the value of [its] assets for the benefit of its shareholders, or, alternatively, accomplish these goals through a strategic chapter 11 bankruptcy filing in order to conduct a 363 sale of the Debtor's operating assets.” Id. at 26.

         During late February and early March 2012, the SAC recommended that the Board engage Piper Jaffray & Co. (“PJC”) as Neogenix's investment banker to investigate its future potential to raise capital in order to sustain its business operations or, in the alternative, “search for a buyer of [its] operating assets.” Id. The Board accepted the SAC's recommendation and from March 2012 through June 2012, PJC “contacted numerous parties to determine their interest in either investing in Neogenix or, acquiring [its] operating assets.” Id. Specifically, PJC contacted a total of 59 potential suitors, of which 40 reviewed Neogenix's prospectus and/or “participated in high-level discussions about the transaction.” Id. Ultimately, three interested parties negotiated confidentiality agreements and two of these parties participated in an initial telephone call with Neogenix's management and PJC to further explore this business opportunity. Id.

         Despite PJC's efforts, “the only party to submit a bid for [Neogenix's] operating assets was Precision Biologics.” Id. at 27. Through its receipt of post-marketing feedback, PJC ascertained that many parties which had initially expressed interest ultimately dropped out “because the stage of [Neogenix's] development was too early to determine the efficacy and commercialization potential of its drugs, and because [it] had an unproven track record.” Id. Rather, it appeared that “the market generally believed that a company like [Neogenix] was much more suitable for investment or sale after completing Phase 2 clinical trials.” Id.

         3. Stalking Horse Bid by Precision Biologics

         Precision Biologics (“Precision”) is a corporate entity which was formed “specifically for the purpose of purchasing [Neogenix's] assets and was initially owned and managed by its founder, Stanley B. Archibald, Jr., who is both a shareholder of Neogenix as well as a former member of [its Board.]” Id. In early February 2012, after having served as a Board member for approximately seven months, Mr. Archibald resigned “in order to explore the potential viability of raising money and forming a new company to buy [Neogenix's] operating assets through a strategic chapter 11 bankruptcy filing and a 363 sale process.” Id. After obtaining “sufficient financial support from a targeted group of other Neogenix shareholders, ” Precision began “substantive discussions with Neogenix regarding the potential acquisition of Neogenix's operating assets.” Id. Precision's interest in acquiring Neogenix's operating assets stemmed from its desire to “continue development of [Neogenix's] therapeutic and diagnostic products without being burdened by the SEC Inquiry, the contingent rescission liability or the highly dilutive stock operation overhand and, therefore, with the ability to continue to raise funds to support future business operations.” Id. In short, this arrangement would enable Precision to “provide an attractive revitalized capital structure that would appeal to new shareholders and investors.” Id.

         After raising a sufficient amount of capital to make a comprehensive bid for Neogenix's operating assets, Precision and Neogenix entered into an Asset Purchase Agreement (“APA”) in July 2012. As such, Precision effectively assumed the role of the “stalking horse bidder.”[4]Precision's stalking horse bid was comprised of “(a) $3, 325, 000 of cash (including purchase price adjustments) and $730, 000 of contingent cash to fund (1) [Neogenix's] on-going business operations through the close of the sale and (2) the bankruptcy process until the bankruptcy process is completed, (b) 5.5 million shares of Precision Biologics stock, and (3) rights to purchase an additional 5 million shares of Precision Biologics stock at $1.50 per share.” Id. at 28. Thereafter, on July 18, 2012, after extensive further deliberations, Neogenix's Board determined that “the most effective way to preserve Neogenix's therapeutic and diagnostic sciences and to maximize the value of [its] assets for the benefit of [its] shareholders was to seek bankruptcy protection in order to sell [its] operating assets through a sale pursuant to section 363 of the Bankruptcy Code to Precision Biologics, pursuant to the terms of the APA, subject to higher and better offers through a bankruptcy court authorized public sale process.” Id. Two additional components of the stalking horse bid included a pre-petition bridge loan in the principal amount of $640, 697 plus interest and fees and a Debtor-in-Possession (“DIP”) financing loan, “which purpose was to provide [Neogenix] with the funds necessary to (1) continue its on-going business operations . . . and (2) fund [its] bankruptcy case until the bankruptcy process is completed.” Id. at 29.

         4. Filing of the Bankruptcy Petition and Ultimate Asset Sale ...

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