WEST PALM BEACH, Fla. — Greenberg
Traurig attorneys gave a Florida biotech firm bad legal advice that
precipitated a crisis atmosphere a decade ago and sent the company on
a downward financial spiral, an expert witness recently testified at
a legal-malpractice trial last week.
The case had webcast coverage provided
by Courtroom View Network.
“There’s real confusion here, and
it looks like it’s a rush to judgment,” David Bayless, a former
Securities Exchange Commission official who now handles white-collar
defense cases and securities litigation, told jurors.
witness for plaintiff Dyadic International, Bayless said that
Greenberg attorneys gave wide-ranging advice to the biotech company
in April 2007 that fell below the reasonable standard for corporate
The Dyadic board of directors decided at that time
to put its chief executive officer, Mark Emalfarb, on a temporary
leave of absence, halt the company’s trading on the American Stock
Exchange and issue a news release saying that its previous financial
statements were unreliable.
That was the company’s reaction to
anonymous emails received by Emalfarb that alleged the company’s
subsidiary in Hong Kong, Puridet, had engaged in financial fraud. The
company’s chief financial officer, Walter Moor, eventually
concluded Puridet was doing business in violation of local tax
After the trading halt in 2007, the Greenberg attorneys
should have focused the company on performing a forensic accounting
of what happened, Bayless said. The use of accounting techniques to
investigate potential embezzlement or fraud was required to get the
Stock Exchange to allow Dyadic to trade again, he said, but the
attorney’s actions in that area was subpar.
“Their conduct did
not focus on the key issue in the case,” Bayless said.
company should have better investigated the allegations in the emails
prior to taking drastic actions, such as the release of a news
release that seemed to assume the financial improprieties were real,
Bayless also pointed to what he said was the disparate
treatment given to Emalfarb and Moor. The Greenberg attorneys urged
the board to put Emalfarb on a leave of absence while the company
tried to identify the problems at Puridet, which at one point
provided about 40 percent of Dyadic’s revenues. In contrast, Moor
was eventually promoted to interim CEO.
The Securities and
Exchange Commission would have expected to see both Emalfarb and Moor
isolated from the investigation of Puridet, Bayless said.
the Greenberg attorneys had “put the cart before the horse” by
urging the disclosure of alleged financial improprieties prior to
proving them, the expert witness said, “That’s a good, apt
description of what’s happened here.”
Defense attorney Stuart
Singer tried to chip away at Bayless' credibility and independence by
asking him about the more than $680,000 he was paid for his work on
the case and pointing out that a partner in Bayless' law firm had
represented Emalfarb and a group of investors in lawsuits against
Dyadic in past years.
Singer said Bayless’ report in the Dyadic
case also seemed to find legal negligence at every turn, noting that
50 different instances of attorney negligence were alleged.
pointed to the nonprofit Public Company Accounting Oversight Board’s
guidance as backing up Greenberg’s advice to Dyadic. If financials
can’t be determined by a long investigation, then you can’t rely
on those statement, Singer said.
Moor, who was in Hong Kong in
April 2007 and consulted with Puridet employees, concluded that not
less than 30 percent of the Puridet receivables were from customers
who made transactions in violation of local laws, according to
documents presented by Singer.
Singer also quoted Stock Exchange
guidelines that said events that are likely to have a significant
effect on the price of securities should be disclosed immediately. In
turn, Bayless acknowledged that timely disclosure of such information
avoids the appearance of insider trading.
In addition, the defense
emphasized that Dyadic’s audit committee eventually agreed with
Moor that doing a forensic audit would be a waste of time due to
Puridet’s inadequate record-keeping and skimmed cash.