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Pathfinder Management, Inc. v. Mayne Pharma

November 25, 2009


The opinion of the court was delivered by: William J. Martini Judge



Dear Litigants:

This matter comes before the Court on Defendants‟ Motion to Dismiss the Third Amended Complaint ("TAC"), pursuant to Fed. R. Civ. P. 9(b) and 12(b)(6). In accordance with Fed. R. Civ. P. 78, there was no oral argument. For the reasons set forth below, Defendants‟ Motion to Dismiss is GRANTED with prejudice with respect to Count One. The Court declines to exercise supplemental jurisdiction over the four remaining state law claims. See 28 U.S.C. § 1367(a); United Mine Workers v. Gibbs, 383 U.S. 715, 726 (1966).


This action arises out of a securities transaction entered into by Plaintiff Pathfinder Management, Inc. ("Pathfinder") and Defendants Mayne Pharma, Inc. ("Mayne Pharma"), Faulding Consumer Holdings, Inc. ("FCHI"), and Stuart Hinchen ("Hinchen"), the CEO of both Mayne Pharma and FCHI.*fn1 Pathfinder entered into a Purchase Agreement in 2003 (the "Agreement") to acquire the stock and assets of two FCHI subsidiaries, Faulding Consumer, Inc. ("FCI") and Faulding Healthcare (IP) Holdings ("FHIH") (collectively, the "Acquired Companies" or the "Subsidiaries"). (TAC ¶ 13). The effective date of the transaction was January 1, 2003, but the official closing date was not until April 3, 2003. (Id. ¶14). After the acquisition, the Acquired Companies were consolidated and became a single entity by the name of Radiant Technologies, Inc. ("Radiant"). (Id. ¶ 28).

Plaintiff alleges that shortly after acquiring the Subsidiaries, it began to observe indications that fraud that had been perpetrated by Defendants. (Id. ¶24). Specifically, Plaintiff says it began to experience customer returns that far exceeded the representations made by Defendants‟ agents. (Id.) Additionally, it learned of over $3 million in returns that had taken place in between the effective date of the transaction and the closing date that had not been disclosed. (Id. ¶25). Further, Plaintiff alleges that it learned of falsified accounting data and general misrepresentations about the financial health of the Acquired Companies, concealing the fact that they were virtually worthless. (Id. ¶28).

Pathfinder‟s claims against Defendants can be divided into four general categories: (1) financial misrepresentations made by Defendants‟ agents during a January 2003 due diligence meeting, (2) misrepresentations made by Defendants‟ agents during a warehouse tour in January 2003, (3)misrepresentations made during two March 2003 telephone conferences between Plaintiff, Defendant Hinchen, and others, and (4) overall misleading and fraudulent accounting practices.

A. Sales Representations During the January 2003 Due Diligence Meeting

On January 20-21, 2003, Pathfinder personnel attended a document inspection and due diligence meeting in Fort Lauderdale, FL. (Id. ¶15). During the course of a presentation to Plaintiff, the TAC alleges that Andrew Vidler ("Vidler"), FCI‟s vice president, and John Winning ("Winning"), FCI‟s national sales manager, made the following representations: (1) 2002 gross sales were approximately $8 million and 2002 net sales were approximately $4 million; (2) as of January 2003, all material returns had been accounted for among the major customer accounts; (3) strong sales were projected for 2003; (4) the CVS corporation was a major account with strong projected sales for 2003; (5) Shoppers Drug Mart, a major Canadian account, was a non-return business such that there was no risk of returns in Canada; and (6) Associated National Brokerage, an exclusive Canadian distributor, had an outstanding balance from 2002 and therefore had no right to any credits from products returned by customers prior to December 1, 2002. (Id. ¶ 16).

The TAC also states that at this same meeting, FCHI provided Plaintiff with a fact sheet dated December 2002 which reported the following financial performances: (1) for financial year ("FY") 2000/2001, gross sales of $4.3 million, gross profit of $2.3 million, and earnings before interest and taxes ("EBIT") of negative $1.12 million, (2) for FY 2001/2002, gross sales of $8.5 million, gross profit of $4.0 million, and EBIT of negative $858,000; and (3) for FY 2002/ 2003, forecasted gross sales of $11.8 million, gross profit of $7.1 million, and EBIT of positive $1.5 million. (Id. ¶17). The TAC states that Defendant FCHI "provided" Plaintiff‟s representatives with the fact sheet but does not specifically state which individual actually handed it over or prepared it. (Id.). The TAC also does not state which of Defendant‟s agents were present at the meeting. Furthermore, the TAC states that in the fact sheet, Defendant actually refers to itself as Mayne or Mayne Group and not as FCHI. (Id.).

Finally, the TAC alleges that credits and returns were discussed at the meeting and that "Plaintiff‟s representatives were told that all returns were in." (Id. ¶15). The TAC does not say who specifically made this assertion.

The TAC goes on to allege that all of these assertions were false. Business records allegedly maintained by FCI controller Frank Scanlan ("Scanlan) during the relevant time periods revealed the following financial information: for FY 2002/2003, gross sales of $9.4 million, gross profit of $2.5 million, and EBIT of $13.5. (Id. ¶35). However, these records also allegedly showed a cancellation of debt that reduced the actual EBIT to negative $9.7 million, which was far below the $1.5 million represented by Hinchen, Vidler, or Winning. (Id.). The TAC alleges that Defendant and its representatives "certainly knew" that the EBITs were incorrect when represented because of an email containing this information that was written by Vidler and sent to Scanlan, and because Scanlan reported to Hinchen and Vidler. (Id. ¶36). The TAC also asserts that Defendants "would have been aware" of the information being reported to the IRS. (Id. ¶ 37).

B. Representations Regarding Warehouse Inventory

On January 21, 2003, Plaintiff conducted a tour of warehouse facilities in Pompano Beach, FL. (Id. ¶18). Present on the tour were Hinchen, Winning, Vidler, Erin Zaccaro ("Zaccaro") of Defendant Mayne Pharma, FCI warehouse manager Mitch Saltzman ("Saltzman"), and various Pathfinder personnel. (Id.). Plaintiff alleges that its representatives were shown racks of the Acquired Companies‟ inventory. According to the TAC, "the issue of the product containing the old Asta-Zanthin staining formula was discussed, and Defendants‟ representatives specifically told Pathfinder that the inventory shown did not represent any of the defective Asta-Zanthin product." (Id.).*fn2 The TAC does not allege who specifically made this representation.

Plaintiff further alleges that the representation made concerning the lack of Asta-Zanthin product in the inventory was false. After the transaction closed, the TAC says Saltzman told Plaintiff that he overheard a conversation between Vidler and Winning in which they discussed hiding the defective Asta-Zanthin product off site but instead decided to place it in the warehouse on the highest shelves, in hopes that prospective buyers would not look there. (Id. ¶46.b). Plaintiff further alleges that "Hinchen, Vidler, and/ or Winning" threatened to fire Saltzman if Saltzman told anyone from Pathfinder about the presence of the defective product. (Id.).

C. Representations During March 2003 Telephone Conference Calls

Plaintiff alleges that although a purchase price of $3,500,000 was initially agreed upon, it ultimately agreed to pay an additional $1.1 million based upon representations made by Defendants. (Id. ¶ ¶21-23). Specifically, Plaintiff alleges that it was told by Defendants of significant positive accounts receivable (money due to come in from customers) that would more than offset any negative accounts receivable (credits in favor of retailers) and that Defendants requested more money for the sale. (Id.). A telephone conference was held on March 4, 2003, between Defendant Hinchen, who was located in New Jersey, and Pathfinder representatives located in California. (Id.). During this call, Pathfinder‟s representatives stated that this demand would be acceptable only if the $1,000,000 in positive accounts receivable was "new money" that had not previously been factored into the purchase price. (Id.). According to the TAC, "Hinchen did not dispute the accuracy" of this position. (Id.).

On March 5, 2003, there was a second telephone conference, between Winning and Pathfinder personnel, concerning the accounts receivable. (Id. ¶22). Based on the total of these representations, Pathfinder agreed to pay an additional $1.1 million for the assumption of the positive accounts receivable listed on Schedule 2.4(c) of the Agreement. (Id. ¶23). However, Pathfinder alleges that it learned during a ...

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