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Arrayit Asks Court to Dismiss Request Seeking to Block Issuance of Shares

NEW YORK (GenomeWeb) – Arrayit this week responded to an investor lawsuit over the company's alleged failure to meet the terms of an agreement to settle earlier litigation, arguing that it is the plaintiffs in the case who have not lived up to their end of the deal.

Additionally, Arrayit said that a contract to develop food safety testing technology with the US Department of Agriculture is in jeopardy based on the actions of one of the plaintiffs in the case.

In a filing with the US District Court for the Southern District of New York, Arrayit has also asked the court to dismiss the investors' request for an injunction that would bar the company from issuing certain securities to a group of lenders.

The roots of the legal row extend back to August 2014, when Arrayit investor Reuben Taub sued Arrayit's management for "fraud and failure to properly disclose withholding and other tax liabilities of the company" as well as "misrepresentations concerning the development costs for, and company's ownership interest in, OvaDx," a microarray-based test for early stage ovarian cancer that Arrayit has been developing with Avant Diagnostics, which spun off from Arrayit in 2011.

A month later, Arrayit disclosed in a filing with the US Securities and Exchange Commission that the suit had been dismissed and that it had entered into a deal to provide a company called Array Molecular — owned by Taub and certain other Arrayit investors including Irwin Zalcberg — with intellectual property for use in developing a DNA microarray platform for detecting pathogens in food.

Notably, this arrangement also included a contract Arrayit had struck with the USDA to develop the food-testing technology. According to court filings, it also required Arrayit to double the number of shares that could be purchased through warrants held by Taub and Zalcberg and to provide Zalcberg with additional shares and warrants.

Earlier this year, Taub sued Arrayit and its management for allegedly failing to meet the terms of the settlement, neglecting to transfer any IP or technology to Array Molecular, and not providing any securities to Taub and Zalcberg.

Zalcberg later joined the suit as a plaintiff.

As part of that suit, Taub asked the court to prevent Arrayit from distributing securities to certain parties that loaned the firm money, arguing that the securities represented the only asset that could be used to satisfy judgment in the case.

This week, Arrayit and its management asked the court to reject the plaintiffs' request to prevent it from issuing securities, stating that "there are no restrictions in any agreement between the parties that prevent Arrayit from issuing shares to anyone."

The request, Arrayit added, is part of an attempt by the plaintiffs to "refashion" the initial settlement agreement to their advantage.

Further, Arrayit claims that its settlement with Taub called for Array Molecular to raise up to $2 million to fund development of the food safety testing technology, but that the plaintiffs "have yet to raise a single dollar of that obligation."

Arrayit said that it has been working on the technology, anticipating reimbursement from Array Molecular for its expenses, but without that money it was forced to borrow $630,000 from various third parties. These loans included options for repayment in the form of Arrayit stock.

"Had [the] plaintiffs provided funding for the project, as agreed to, the loans would not have been necessary in the first place," Arrayit said. Although a portion of those loans have been converted to shares, additional conversion can be prevented by the plaintiffs, it added.

In a statement to the court, Arrayit CEO Rene Schena also claimed that its USDA contract has been threatened by Taub's actions at a scientific meeting last year.

Specifically, Arrayit alleged that Taub was present at the meeting, which included a presentation by the company and USDA collaborators, but that he was "so disruptive and insulting to the USDA representative in charge of developing the [food safety] test that she checked further into Taub's background," discovering that he had pleaded no contest to securities violations charges by the SEC in 1999.

Schena stated in the court filing that the USDA representative told her that the agency "would not move forward" with the food safety project as long as Taub was involved.

Arrayit has asked the court to reject any injunction request that would prevent it from issuing stock to its lenders, or, if an injunction is granted, to require the plaintiffs to post a $2 million bond to pay off the lenders.

Requests for comment from Taub and Arrayit were not returned.