Bad legal advice derailed 'Little Engine That Could,' Dyadic witnesses testify

By Michael Carroll | Feb 15, 2017

WEST PALM BEACH, Fla. — Negligent lawyers were “driving the bus” when the board of directors of Dyadic International made fateful decisions in 2007 that sent the biotech company barreling toward the financial cliff, a witness told jurors last week.

As the Greenberg Traurig legal-negligence trial went into its fourth week, attorneys for plaintiff Dyadic continued to put witnesses on the stand in an attempt to show that Greenberg’s legal advice to the biotech firm a decade ago sent its net value plummeting and upended timely opportunities to seal multimillion-dollar deals.

Greenberg attorneys at that time advised the firm to halt trading on the American Stock Exchange, declare that its previous financial statements were not reliable and put its chief executive officer, Mark Emalfarb, on leave. All this was to precede the investigation of anonymous whistleblower allegations of fraud and financial improprieties at Dyadic’s Hong Kong subsidiary, Puridet.

“We were stampeded into the whole process,” said Dyadic board of directors member Steven Warner, who eventually voted to terminate Emalfarb, but not for cause, based on Greenberg’s legal advice.

Warner characterized Puridet as an irrelevant part of Dyadic’s overall business. At one point in his testimony, he attributed the company’s problems in April 2007 to financial-disclosure rules and auditors who were more interested in protecting themselves rather than the company.

“It could be washed away by a tsunami, and it wouldn’t have been material,” he testified about the financial importance of Puridet.

Warner said he was incredulous about Greenberg’s advice about putting Emalfarb on leave and initially thought that declaring the financials unreliable was premature. But even so, he and other board members relied on Greenberg’s guidance to comply with the appropriate financial laws and rules, he said.

“Greenberg Traurig was very insistent that this was part of the procedure of such a situation,” Warner said.

Defense attorney Stuart Singer played videotaped testimony of Warner that indicated the Dyadic board didn’t always follow Greenberg’s advice. In the video, Warner said the board had declined to pursue forensic accounting in the Puridet investigation, despite Greenberg’s recommendation to carry out such a review.

Singer also suggested during cross examination that allowing people to invest in the company based on inaccurate financial statements could have been the basis for a class-action lawsuit.

Also testifying last weeka was Anna Kazanchyan, a medical doctor who is also an expert on the biotech industry and an equity research analyst. As a result of the company’s downward spiral in April 2007 as the Puridet revelations became known, Dyadic lost out on making deals and investments worth $813 million, Kazanchyan said.

She agreed that prior to the whistleblower incident, Dyadic could be termed “The Little Engine That Could,” based on the potential of its proprietary technology to cheaply and efficiently produce biofuels and pharmaceuticals.

Saying that timing is everything for biotech companies, Kazanchyan described the 2007-08 period as the golden age for biotechnology investments. The events precipitated by the Greenberg advice meant Dyadic missed the boat on the investment boom, she said.

Under cross-examination, however, Kazanchyan acknowledged that only one out of 200 biotech firms are profitable at any given time. Moreover, hundreds of millions of dollars in biotech-deal opportunities were available in the years before and after the 2007 events, she said.

Kazanchyan was also unable to point to a single contract, letter of intent or term sheet involving Dyadic during the 2007-08 period, suggesting that no deal was on the horizon.

The case had webcast coverage provided by Courtroom View Network.

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