CHICAGO (CN) - The board of directors of a multimillion-dollar prescription mail order company sold all its assets to one director for $10, and investors got nothing for their shares, stockholders claim in a derivative complaint.
Lead plaintiff Jeffrey S. Reiniche sued Health Alliance Holdings, HA Holdings, HA Acquisition, venture capital firms MTS Health Alliance and Ashcroft Associates, EBM Ventures, and eight corporate officers in Cook County Court: Andrew Paul, Curtis Lane, Kevin Swan, James Kelly, Jamie Martin, Allen Palles, John Hennessy, and E.B. Martin Jr.
"This action arises from the unlawful conduct of the controlling directors of a nonpublic corporation, HA Holdings, Inc, led by Andrew Paul, one of those directors who was also the principal in New York based venture capital firms which were controlling shareholders of Holdings," the complaint states.
Paul was a director of Health Alliance Holdings (HAH), chairman of MTS Health Partners, and owner of Ashcroft Associates, according to the complaint.
"In November 2004, Holdings' directors approved the sale of all of Holdings' assets to an entity led by a fellow director and owned and controlled by that director's husband," the complaint states. "The sale price was a mere $10.00, although Holdings could have sold its assets for tens of millions of dollars.
"Plaintiffs are shareholders of Health Alliance Holdings, Inc., a corporation which owned substantial stock in Holdings.
"Because Holdings' assets were sold for a mere $10.00, plaintiffs and HAH received nothing for their investment in Holdings."
Health Alliance sold medical supplies to diabetic and asthma patients on state Medicaid, and HA Holdings was a vehicle for raising capital, according to the complaint. Because Health Alliance contracted directly with the state, not individual patients, its "accounts receivable were virtually 100 percent collection and collectible," but took 20 to 60 days for processing, requiring a large amount of operating cash.
They plaintiffs say: "During 2003 and 2004, Health Alliance's - and thus, Holding's - patient base grew. Holdings' annualized first quarter 2003 revenues was $14 million but grew in the fourth quarter of 2003 to an annualized $28 million.
"By June, 2004, monthly revenues were $2.9 million, equating to annual revenues of $34 to $36 million. Gross profit margins on these revenues were above 20 percent.
"While the company did not show a net profit during this time period, plaintiffs are informed and believe and therefore allege that excessive compensation, overhead, and wasteful and unnecessary spending, authorized by at least Paul, Lane, Swan, and Kelly, resulted in a substantial reduction in net profits during this period."
In October 2004, the Board decided to sell all of Health Alliance's assets, according to the complaint. Although it received offers from other companies, it allegedly rejected them, in favor of the "Martin interests," including Jamie Martin, E.B. Martin, Acquisition, EBM Ventures and Votum.
At the time of sale, Health Alliance "had $7.7 million in assets and only $5.3 million in liabilities. Thus, the Martin interests, for a mere $10.00, acquired a company which, simply from its then current financial statements, had a net worth, at a minimum, of a positive $2,400,000," the complaint states.
The Board approved the sale without informing shareholders that "at least two potential buyers, DeliverMed and CCS, would have provided far more value to Holdings than the Martin interests, and because with the reduction of the bank debt from $4.1 million to $1 million, Holdings' balance sheet reflected a substantial positive net worth," according to the complaint.
And, the plaintiffs claim, the Board forged a release purportedly signed by director Mark Swift that was necessary for the deal to close.
"That the Swift 'release' is a forgery is shown, inter alia, by the fact that Swift has, under oath, denied that he ever signed it and by the fact that the purported notary sent Swift an email on November 9, 2004, asking for his signature on a document which she purported to have notarized on November 1, 2004," the complaint states.
The plaintiffs add that "there is an overwhelming and compelling inference that the only explanation of Paul's approval of the sale of Holdings' assets to the Martin interests for a value millions of dollars less than the true value of those assets, by himself and the other Holdings directors he controlled, was to compensate the Martins or provide an offset to them, in whole or in part, for their past losses on their investments in Paul's company, Enhanced Capital Partners LLC, and to serve as an inducement to the Martins to continue to invest in Paul's businesses."
In the four years after the sale of Holdings to the Martin interests, the company "achieved total gross revenues during those years of approximately $97,000,000 and derived gross profits of more than $17,000,000. Regardless of any actual net benefits achieved by the Martins for themselves personally during those years, which information is not available to plaintiffs, this performance of the Health Alliance business further establishes that in 2004, Health Alliance had a value substantially in excess of $10.00 and could have been sold for millions of dollars," the shareholders claim.
The shareholders seek more than $10 in damages [sic] for breach of fiduciary duty.
They are represented by Martin Oberman.