(CN) - Former shareholders of a company that was on the brink of developing a new diabetes treatment claim the company buckled under the weight of insider trading and self-dealing that wiped out over $30 million in investments.
MicroLet was only a few months away from reaching a major milestone in the treatment of Type-1 diabetes - which kills more than 193,000 people a year - when it collapsed from executive greed, according to the complaint in Los Angeles Federal Court.
Diabetes Research Restitution, on behalf of the MicroLet shareholders, claim MicroLet CEO Ronald Katz and more than a dozen other executives, including the company's outside counsel, Foley & Lardner, sank 10 years of research.
"MicroLet's demise resulted specifically from defendant's efforts to carry out the scheme, whereby MicroLet was saddled with wildly expensive debt that was regularly layered onto the company's balance sheet, often directly by the company's chairman, without any direct relation to the company's business plan or financing history," according to the complaint. "Furthermore, because of the short maturities of such debt, as little as three weeks, most of it was in default virtually upon issuance, allowing the chairman (who effectively stood on both sides of the debt transactions) to pull the trigger to implement his plan at any time." (Parentheses in original.)
Investors say the scheme involved a high-risk strategy designed to give the defendants approximately 92 percent of the company's common equity, representing "almost a 1,000 percent increase in the their ownership stake and a corresponding decrease in the ownership interesting of the existing shareholders (including all the members of the plaintiff)". (Parentheses in original.)
Katz and the cooperating board members knew that comparable biotechnology companies that had reached human trials - which MicroLet was approaching - routinely earned hundreds of millions of dollars in market capitalization, according to the complaint.
To prevent dissolution, the investors say they offered, and were in fact eager, to pump more money into MicroLet when the company showed signs of trouble.
MicroLet executives rejected the offers, claiming the company did not need additional financing or that they would obtain it from other sources, according to the complaint.
In November 2008, however, the shareholders say Katz and board filed for Chapter 11 protection.
As the executives' misconduct became apparent to shareholders, they abandoned the restructuring of MicroLet's finances and liquidated the company's assets.
"As a consequence, MicroLet's resources were depleted, its value was reduced to nil and it was deprived of income and profits which it would have earned but for defendant's misconduct," the complaint states.
Diabetes Research Restitution seeks compensatory and punitive damages and disgorgement of the defendant's ill-gotten gains on claims of violations of the RICO Act, breach of fiduciary duty, legal malpractice and insider trading. The group is represented by Craig Winterman of Herzfeld & Rubin.