WILMINGTON, Del. (CN) - Shareholders claim a felon and his cronies are trying to take control of a biopharmaceutical company that has a promising drug in Phase II FDA testing. The derivative complaint claims the defendants are trying to do this by offering a stake in a company that has no products or assets other than $30,384 in the bank.
In a "double derivative" complaint on behalf of BioBalance LLC and New York Health Care, Hamilton Partners LP asks Delaware Chancery Court to enjoin Enterologics' purchase of the assets of BioBalance.
The shareholders say the architect of the transaction is Yitz Grossman, a one-third member of BioBalance LLC. Grossman is not named as a defendant in this case, which claims he pleaded guilty to a 2003 indictment that accused him of conspiring to manipulate the price of New York Health Care.
"As consequence to the scandal, NYHC shares were delisted," the complaint states. "Grossman pleaded guilty to conspiracy to commit securities fraud, mail fraud and commercial bribery and was sentenced to 41 months incarceration in a federal prison."
The "pump-and-dump" scheme involved selling 1.325 million shares of New York Health stock for $7 million to an undercover FBI agent, who posed as a corrupt hedge fund manager.
Grossman issued the agent 500,000 NYHC warrants through a foreign company, and as the stock price of NYHC rose, the agent was told he would be able to profit $1.75 million from the warrants.
The complaint adds: "Grossman is also a former broker of Mabon, Nugent & Company, where he was found guilty of misappropriating customer funds; he was identified as a stock promoter providing services to A.S. Goldman & Company, a failed brokerage firm accused of stock fraud; he and his affiliates have been found liable for, inter alia, violations of Florida blue sky laws in the United States District Court for the Middle District of Florida in connection with promoting Buzzeo, Inc; and, along with his indictment in connection with NYHC, Grossman was charged with four counts of money laundering, where he was found to have participated in a scheme to launder money through Switzerland and Israel. Nevertheless, the directors of NYHC and BioBalance awarded Grossman with the Second Settlement the day he was released from federal custody."
Named as defendants in the new complaint in Chancery Court are Grossman's longtime friends Murry Englard, Howard Berg and Yoram Hacohen.
Englard is CEO of BioBalance, "and as detailed in the NYHC complaint, they and their families share a long and extensive history of personal and business dealings," according to the Chancery Court complaint.
Berg is a director of NYHC and BioBalance and "has maintained a long-time personal relationship with Grossman, and was one of BioBalance's founding investors," according to the complaint.
Hacohen, an Israeli attorney based in Jerusalem, is a director of NYHC and BioBalance, and "is a long-time associate of Grossman and was instrumental in providing the legal structure for many of the transactions described in the NYHC complaint," according to the complaint in Chancery Court.
According to the complaint, Yitzman is using his friends and family to secure "complete ownership and control of BioBalance's assets," which include the intellectual property rights to Probactrix, the gastrointestinal drug in Phase II of FDA clinical trials.
The complaint states that NYHC and BioBalance directors Englard, Berg and Hacohen are enabling Enterologics to defraud investors of BioBalance because they are "straw men" for Grossman.
Most of Enterologics' stock is owned by Yitzman, his wife and other family members, according to the complaint. According to the company's prospectus, Enterologics has an almost identical business description as BioBalance: "an early stage biopharmaceutical company with plans to focus on the identification, licensing and development of treatments for GI disorder."
The prospectus states that Enterologics has no products or assets, except for a cash balance as of Dec. 31, 2009, of $43,694. (In its most recent SEC filing, Enterologics reported its cash balance as $30,384.)
The plaintiffs want the proposed transaction enjoined, and the corporate governance of New York Health Care and BioBalance LLC reformed.
Hamilton Partners is represented by Marcus Montejo with Prickett Jones & Elliott, of Wilmington.
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