WEST PALM BEACH -- A Florida biotech firm’s financial meltdown in April 2007 stemmed not from bad legal advice but the actions of a subsidiary that had become a “self-sustaining criminal enterprise,” the company’s chief financial officer has testified.
Wayne Moor, the former Dyadic International executive, told jurors in the Greenberg Traurig legal malpractice trial that no employee at Dyadic’s Hong Kong subsidiary, Puridet, could be trusted as he investigated allegations of fraudulent financial transactions contained in whistle-blower emails that year.
“I just saw lawsuits and a career-ending opportunity,” he said. “The thing was not fixable.”
Dyadic is suing the law firm for advice that Greenberg gave the company in 2007 to deal with the whistle-blower charges and comply with Securities Exchange Commission disclosure rules. Greenberg lawyers recommended that Dyadic voluntarily halt the company’s trading on the American Stock Exchange, have its chief executive officer take a leave of absence and issue a press release saying previous company financial statements could not be relied upon.
“It was a small little peanut that was losing a lot of money,” Moor said of Dyadic.
He also testified to feeling betrayed by CEO Mark Emalfarb, who promptly disclosed the 2007 anonymous whistle-blower emails to Moor but never told Moor about previous emails describing similar wrongdoing in 2003 and 2004. Moor was in Hong Kong to sort out company business after the death of Puridet’s chairman when the 2007 whistle-blower crisis occurred.
Moor described how the subsidiary’s textile enzyme factory in Dongguan, China, had apparently operated with cash accounts, customer orders that were done verbally and no written purchase orders or electronic accounting systems. This was all done in an effort to avoid paying China’s value-added tax, he said.
“This was the most difficult thing that has every happened in my professional life,” said the former financial officer, who noted that people in China had been executed in the past for tax fraud.
Most Dyadic investors saw Puridet as irrelevant to the company’s future, which was based on a proprietary technology platform that had applications for creating biofuels and medicines, Moor said.
Plaintiff’s attorneys have argued that Greenberg’s legal advice had precipitated Dyadic’s nosedive in net value and eventual delisting from AMEX trading. Dyadic is seeking damages from Greenberg for lost business of up to $700 million.
Defense attorney Steven Katzman noted in cross-examination that Moor seemed to benefit from the crisis as he was promoted to CEO after Emalfarb agreed to take a leave of absence.
“It didn’t feel like a promotion,” Moor said. “It felt more like Hotel California. You can check in and never leave.”
“Actually, sir, unlike Hotel California, you could have left any day,” Katzman said.
“That’s easy to say, hard to do,” Moor said. “You don’t leave messes.”
Katzman also highlighted rising hostilities between Emalfarb and other Dyadic employees and advisers as the crisis played out. Dyadic’s former outside counsel, Robert Schwimmer, used to call Emalfarb the “fart in the room,” Katzman said, and Moor called him “Evildick.”
“True,” Moor replied.
The former financial officer also criticized Emalfarb for allowing his firm to go public in 2005 when he knew it had a “fatal flaw,” the Puridet operation.
“I thought he lied to me and put me in harm’s way,” Moor said. “I resented that a lot.”
Under cross-examination from Katzman, however, Moor acknowledged the company seemed to be poised for growth in 2006, with $27 million in cash reserves and a deal with Abengoa Bioenergy. Moor also acknowledged that he had no past experience in dealing with a whistle-blower situation.
Also last week, a former Dyadic board of directors member, Harry Rosengart, agreed with Moor that tPuridet’s paperless transactions could not be reconstructed. That is what the company’s accountants at Ernst & Young wanted done before quarterly financial statements could be issued.
“I don’t think a dozen accountants could have figured it out,” said Rosengart, adding that the board became consumed with these financial problems. “… We were basically in a circular firing squad.”