This story originally ran May 6.
By Tony Fong
Protein biomarker firm Power3 Medical Products is suing two shareholders, alleging insider trading.
The lawsuit was filed on April 14 in United States District Court for the Southern District of Texas, located in Houston, and specifically claims that the shareholders, Richard Kraniak and Roger Kazanowski, illegally profited from insider information pertaining to Power3's acquisition of stem cell firm StemTronix.
The deal was announced on Feb. 11, 2010, but, according to the complaint, Kraniak and Kazanowski knew about the deal before it was made public, and "knowingly or recklessly engaged in numerous purchase and sale transactions in the company's common stock while in possession of material, non-public information concerning the proposed acquisition of [StemTronix] by [Power3] and in breach of their fiduciary duty to" Power3 and its shareholders.
In addition, The Woodlands, Texas-based Power3 alleges that the defendants did not file appropriate forms with the US Securities and Exchange Commission as owners of a certain percentage of the company's stock.
Peter Sarkesian, a lawyer representing Kraniak and Kazanowski, said that the allegations are false and Power3 had filed the lawsuit in error. His clients, he added, had not been served and it was his understanding that Power3 intends to withdraw the lawsuit.
As of the end of the business day on May 5, Power3 had not done so. Richard Martini, Power3's attorney, said that his client would be issuing a statement but also as of the end of business day on May 5, Power3 had not commented.
This week, the company announced it was terminating its merger agreement with StemTronix (See related story this issue).
According to the lawsuit, since 2008 both Kraniak and Kazanowski have been affiliates of Power3, defined by the SEC as any person who either directly controls or is controlled by an issuer — in this case Power3 — or a person owning a significant percentage of the issuer's outstanding stock.
The company did not disclose in its 2009 annual report, filed last month, how many shares either defendant owns, but in its 2008 annual report, Power3 said Kraniak owned more than 41 million shares, or 12.8 percent of its common stock, as of March 31, 2009, while Kazanowski owned more than 11 million shares, 8.3 percent of Power3 stock, as of that date.
Sarkesian said that both still own millions of shares of Power3 stock.
In late 2009 Power3 began negotiations to buy StemTronix, a Texas firm focused on developing stem cell-based therapeutics for tissue repair. During this period, Power3 alleges, Kraniak and Kazanowski, "were privy to material, non-public information concerning" the proposed acquisition of StemTronix, "through their correspondence, discussions, and relationship" with Power3.
As affiliates of Power3, they owed Power3 and its shareholders a fiduciary duty "to maintain such information in confidence until it was publicly disseminated," the company said in its complaint.
"Defendants, individually and as a group … misappropriated such material, non-public information and gained, or expected to gain, a personal benefit by knowingly or recklessly purchasing and selling securities of the company with material non-public information," Power3 added. "As a result of defendants' conduct, defendants, individually and as a group, reaped substantial illegal profits."
It is not clear when Kraniak and Kazanowski are alleged to have engaged in their insider trading, but between Sept. 21, 2009, and Feb. 11, 2010 — the period when Power3 and StemTronix were in negotiations — shares of Power3 fluctuated from a low of $0.05 on Oct. 28-30 and a high of $0.22 on Nov. 18.
On the day the StemTronix deal was announced, Power3 shares closed at $0.08. Since then, the stock has fluctuated between $0.03 and $0.07 per share, the closing price on May 5.
While insider trading cases that receive the most attention are usually brought forth by the government, a company can also sue as a private right of action. Ron Geffner, a former lawyer with the SEC who has prosecuted insider trading cases, was not familiar with the particulars of the Power3 lawsuit, but said if the government is not involved in the case, Power3's allegations may be difficult to prove in court.
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"At the end of the day it's not clear [that] if the case is so strong, why the federal government would not be bringing in action," said Geffner, now a partner in New York law firm Sadis & Goldberg.
Power3 does not allege it has suffered any financial harm from the alleged actions of Kraniak and Kazanowski, but is asking the court to order the defendants to disgorge "illicit trading profits or other ill-gotten gains, compensation, and benefits (whether realized, unrealized, or received)" resulting from the alleged conduct.
It also seeking "pre-judgment interest on all amounts awarded and restitution or disgorgement ordered," and asks the court to impose civil penalties on the defendants.
Power3 also is alleging that the two shareholders failed to file certain forms with the SEC as required by law. For example, Power3 claims that both Kraniak and Kazanowski did not file SEC Form 13(D) notifying the agency they held more than 5 percent of Power3 shares.
In addition, Kraniak and Kazanowski acted in concert to buy and sell Power3's stock, and so under SEC rules are defined as "group," and are therefore required to file an SEC Form 3 since they held more than 10 percent of the company's stock, according to the complaint. Power3 alleges they did not file the form.
And, according to the lawsuit, both failed to file an SEC Form 4 alerting the agency of changes in their Power3 securities holdings.
Sarkesian, the lawyer for Kraniak and Kazanowski, called Power3's allegations "misleading and defamatory." Technically, because his clients have not been served, there is no lawsuit, he said. Regardless, if the matter is not resolved, his clients intend to file a counterclaim against the company and its officers "for breach of contract, misrepresentation, very probably defamation, breach of their fiduciary duty to the company and its shareholders, and in all probability there will be security law violations that we will allege, as well, on the part of the officers."
Kraniak and Kazanowski have been major investors in the firm and to date have invested more than $2 million into the company, Sarkesian added.
The lawsuit against his clients is "an attempt by [Power3] to coerce additional money" from them, he said.
The lawsuit is the second involving Power3 in recent months. In February, it was sued by Transgenomic alleging slander, fraud, and breach of contract. Last month, Power3 asked US District Court in Nebraska to dismiss the fraud claim (PM 02/26/10 and 04/16/10).