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.
An expert 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 legal advice.
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 laws.
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.
The 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, he said.
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.
Asked if 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.
And he 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.