EFiled: Jul :52PM EDT Transaction ID Case No IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

Transcription

1 EFiled: Jul :52PM EDT Transaction ID Case No IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE HAMILTON PARTNERS, L.P., a New Jersey limited partnership, v. Plaintiff, MURRY ENGLARD, HOWARD BERG, YORAM HACOHEN, and THE BIO BALANCE CORP., and Defendants, NEW YORK HEALTH CARE, INC., and BIOBALANCE LLC, Nominal Defendants. C. A. No. VERIFIED COMPLAINT Introduction 1. This is a double derivative action on behalf of The Bio Balance Corp. ("BioBalance" seeking to preliminarily enjoin BioBalance LLC, a Delaware limited liability company ("BioBalance LLC", from entering into an asset purchase agreement with Enterologics, Inc., a Nevada corporation ("Enterologics", as contemplated under the Letter of Intent for the Purchase of Certain Assets of BioBalance LLC, dated June 8, Enterologics is an affiliate of Yitz Grossman ("Grossman", a one-third member of BioBalance LLC. BioBalance LLC's existence is the subject matter of Hamilton Partners, L.P. v. Englard, et al., Del. Ch., C.A. No VCL, currently pending in the Delaware Court of Chancery. A copy of the complaint in that action is attached hereto as Exhibit A, and is incorporated by reference herein (the "NYHC Complaint". That lawsuit alleges, inter alia, the directors of New York Health Care, Inc. ("NYHC" and BioBalance breached their fiduciary \436315v1 1

2 duties to BioBalance, NYHC and its stockholders by causing NYHC and BioBalance to enter into a settlement agreement with Grossman which was grossly unfair to BioBalance, NYHC and its stockholders. Pursuant to the terms of that settlement agreement, NYHC was caused to create BioBalance LLC, and make a multi-million dollar cash contribution to BioBalance LLC. Furthermore, BioBalance was caused to contribute all of its assets to BioBalance LLC. A onethird membership interest in BioBalance LLC was then issued to Grossman. As alleged in the NYHC Complaint, the terms of the settlement were grossly unfair to BioBalance, NYHC and its stockholders, and the directors of BioBalance and NYHC had plainly breached their fiduciary duties by placing their personal and business relationships with Grossman above the best interests of BioBalance, NYHC and its stockholders. Grossman, who is a criminal stock promoter guilty of perpetuating a pump-and-dump scheme on NYHC stockholders as well as money laundering through his international affiliates has already inflicted severe harm on BioBalance, NYHC and its stockholders and now seeks to do it again by pillaging BioBalance's and NYHC's assets. Parties 3. Plaintiff is and was at all relevant times hereto the holder common stock of the Company. Plaintiff owns more than one million shares, or approximately 4% of the Company's stock outstanding. 4. Nominal Defendant NYHC is a New York corporation which maintains its principal executive office at 1850 McDonald Avenue, Brooklyn, New York NYHC is engaged in two segments of the health care industry. Organized in 1983, NYHC continues as a licensed home healthcare agency employing paraprofessionals who offer a broad range of inhome healthcare support services. NYHC's health care segment generates a substantial and 2

3 constant stream of revenue, which, according to NYHC's most recently filed 10-Q, has amounted to $34,138,488 for the nine months ended September 30, Defendant BioBalance is a Delaware corporation, and a wholly owned subsidiary of NYHC. BioBalance is a biopharmaceutical company focused on the development of innovative treatments for various gastrointestinal ("GI" disorders. As of December 31, 2007, BioBalance maintained the rights to 14 patents issued in the United States and two patent applications filed and pending, with expiration dates ranging from 2020 to BioBalance devotes most of its effort towards the development of PROBACTRIX. BioBalance believes PROBACTRIX can reduce symptoms of pouchitis (a non-specific inflammation of the ileal reservoir (a surgical procedure involving the excision of the colon and rectum and the formation of a pouch which causes long-term problems in patients, irritable bowel syndrome and other GI disorders and BioBalance is pursuing an accelerated regulatory approval for the use of PROBACTRIX, for which the FDA has provided clearance to pursue Phase II clinical trials. Because NYHC has not been able to obtain alternative funding, BioBalance's operation is funded entirely by NYHC's health care segment. 6. Nominal Defendant BioBalance LLC is a Delaware limited liability company formed for the purpose of effecting the terms of a settlement agreement dated August 12, 2008, among Emerald Asset Management, Inc., a Delaware corporation wholly owned and controlled by Grossman, Grossman, NYHC, and BioBalance (the "Second Settlement Agreement" or "Second Settlement". Pursuant to the terms of the Second Settlement, NYHC formed BioBalance LLC, BioBalance contributed all of its intellectual property, which was valued at $628,056, to BioBalance LLC, NYHC contributed at least $2,000,000 in cash to BioBalance LLC, and Grossman was given a one-third interest in BioBalance LLC and a consulting 3

4 agreement with BioBalance LLC that required a minimum salary of $180,000 plus an annual bonus. Grossman was also paid $650,000 cash directly by NYHC under the terms of the Second Settlement. BioBalance LLC's managing member is BioBalance, which also holds the remaining two-thirds membership interest. BioBalance's Board of Directors is comprised of defendants Murry Englard, Dr. Howard Berg, and Yoram Hacohen. These same individuals constitute the Board of Directors of NYHC. 7. Defendant Murry Englard ("Englard" is a director and Chief Executive Officer of NYHC. Englard also serves as a director and Chief Executive Officer of BioBalance and BioBalance LLC. Englard signed the Letter of Intent on behalf of NYHC and BioBalance LLC. Grossman and Englard are members of the same community and as detailed in the NYHC Complaint, they and their families share a long and extensive history of personal and business dealings. 8. Defendant Dr. Howard Berg ("Berg" is a director of NYHC and BioBalance. As detailed in the NYHC Complaint, Berg has maintained a long-time personal relationship with Grossman, and was one of BioBalance's founding investors, financing BioBalance's acquisition of the intellectual property underlying PROBACTRIX. 9. Defendant Yoram Hacohen ("Hacohen" is a director of NYHC and BioBalance. Hacohen is an Israeli attorney and partner of the law firm Hacohen Wolf, located at 8 King Street, POB 890, Jerusalem Isreal. He is also a partner with the Israeli firm Jaffe, Fund & Co., Advocates. On information and belief, Hacohen is a long-time associate of Grossman and was instrumental in providing the legal structure for many of the transactions described in the NYHC Complaint. 4

5 Background to Transaction 10. Yitz Grossman is a consultant to BioBalance LLC. Grossman is a convicted felon. In 2003, Grossman was indicted by the United States Attorney's Office for the Southern District of New York for conspiring to manipulate the price and demand of NYHC common stock to an undercover FBI agent posing as a manager of a hedge fund. According to the indictment, Grossman met with the undercover agent and proposed that the hedge fund purchase million shares of NYHC for approximately $7 million. In exchange, NYHC was to secretly issue the agent 500,000 NYHC warrants. To conceal the warrants, NYHC was to issue them to a foreign company set-up by Grossman, control of which was to be passed to the agent. The warrants had an exercise price of $2.50. The purchase of the million shares was to lead to a corresponding increase in NYHC's stock price, allowing the agent to profit $1.75 million from the warrants. As consequence to the scandal, NYHC shares were delisted. Grossman pleaded guilty to conspiracy to commit securities fraud, mail fraud and commercial bribery and was sentenced to 41 months incarceration in a federal prison. Grossman is also a former broker of Mabon, Nugent & Company, where he was found guilty of misappropriating customer funds; he was identified as a stock promoter providing services to A.S. Goldman & Company, a failed brokerage firm accused of stock fraud; he and his affiliates have been found liable for, inter alia, violations of Florida blue sky laws in the United States District Court for the Middle District of Florida in connection with promoting Buzzeo, Inc; and, along with his indictment in connection with NYHC, Grossman was charged with four counts of money laundering, where he was found to have participated in a scheme to launder money through Switzerland and Israel. Nevertheless, the directors of NYHC and BioBalance awarded Grossman with the Second Settlement the day he was released from federal custody. They now 5

6 again succumb to Grossman's demands, transferring to him complete ownership and control of BioBalance's assets. 11. A detailed history of BioBalance is set forth in paragraphs 12 through 18 of the complaint filed in the NYHC Complaint. 12. Enterologics was incorporated in the State of Nevada on September 2, Its incorporator was Vcorp Services, LLC, which markets itself nationally as a same-day incorporation service. Listed on Enterologics' Certificate of Incorporation as directors are Dr. Lawrence Levitan and Dr. Robert Hoerr. On information and belief, Dr. Hoerr was also at this time BioBalance's Director of Medical and Regulatory Affairs, a position that he had held since February 3, 2003, after being hired by Paul Stark, BioBalance's then President. As detailed in the NYHC Complaint, Mr. Stark was convicted along with Grossman in November of 2003 in Grossman's pump-and-dump scheme. Interestingly, Dr. Hoerr's experience with BioBalance is not disclosed in Enterologics filings with the Securities and Exchange Commission (the "SEC". 13. Enterologics has approximately 27,000,000 shares of common stock outstanding. Its Certificate of Incorporation, as amended on October 6, 2009, authorizes Enterologics to issue up to 155,000,000 million shares of common stock. Enterologics Certificate of Incorporation does not provide for any other class or series of stock. 14. In September 2009 Enterologics sold a total of 10,300,000 shares of common stock to its "four founders" for $1,030 ($.0001 per share. Approximately 75% of those shares were sold to Grossman's wife, Lisa Grossman, who acts a Secretary of Enterologics. Later in 2009, Enterologics sold a total of 15,700,000 shares of common stock to 55 individuals for cash of $47,080 and a subscription receivable of $20 ($.003 per share. Irv Bader, Grossman's fatherin-law, acquired 2,500,000 of those shares, and Zachary Grossman, who on information and 6

7 belief is another relative of Grossman, also acquired 2,500,000 of those shares. Lisa Grossman, Irv Bader and Zachary Grossman collectively hold approximately 57% of Enterologics outstanding common stock. Dr. Hoerr holds approximately 5.77% of Enterologics outstanding common stock. Enterologics other stockholders include some of the same players in identified as regular clients of Grossman in the NYHC Complaint. Enterologics shares office space with The Meister Group, which is wholly owned and controlled by Grossman, and receives financing from The Meister Group, which on information and belief was primarily sourced from the Second Settlement. 15. Enterologics filed with the SEC a registration statement for the resale of 15,700,000 shares of common stock on February 17, 2010, and filed amendments to that registration statement on April 6 and April 7, 2010 (as amended, the "Registration Statement". On April 7, 2010, upon the effectiveness of the Registration Statement, Enterologics filed a prospectus for the sale of those registered shares. (the "Prospectus". 16. According to the Prospectus, Enterologics is "an early stage biopharmaceutical company with plans to focus on the identification, licensing and development of treatments for GI disorders," the same business description as BioBalance (and BioBalance LLC. The Prospectus states that Enterologics has raised $47,100 in a fully subscribed private placement of its common stock. As of December 31, 2009, Enterologics had a remaining cash balance of $43,694. Besides this cash balance, Enterologics has no assets. The Prospectus states that Enterologics has no products. 17. Lisa Grossman continues to be Enterologics largest stockholder, and individually holds 30% of Enterologics outstanding common stock. She is identified in the Prospectus as Secretary of Enterologics and Vice President of The Meister Group. The Meister Group is 7

8 simply described as a private consulting firm. The Prospectus does not disclose that The Meister Group is currently a consultant of BioBalance LLC, or that The Meister Group is controlled by Lisa Grossman's husband, who entered into the consulting agreement with BioBalance LLC as President of The Meister Group. Nor, as mentioned above, is there any disclosure in the Prospectus concerning the nature of Dr. Hoerr's relationship as BioBalance's Director of Medical and Regulatory Affairs, and The Meister Group's consulting work for BioBalance LLC. 18. On May 18, 2010, Enterologics filed with the SEC its quarterly financial statement for the period ending March 31, 2010 (the "Quarterly Report". The Quarterly Report provides that since December 31, 2009, Enterologics had generated no revenue, has no product, and that its cash on hand has been depleted to $30,384. The Quarterly Report states that "[o]ver the next twelve months, the Company intends to focus on establishing business operations, recruiting additional management to guide the development program, engaging expert consultants to assist in identifying products and intellectual property for in-licensing and further development, evaluating and expanding the intellectual property coverage for those products, and establishing the clinical and regulatory development program for the first in-licensed product." 19. The Quarterly Report provides Enterologics' estimate "that it will require an approximate minimum of $1,000,000 in the next 12 months to implement its activities." Enterologics states that it would utilized those funds as follows: (i G&A including expert consultant fees $500,000; (ii licensing costs $300,000; (iii legal, intellectual property and patents $150,000; and cost of operating as a public company $50,000. No funds are budgeted for the acquisition of any products. Indeed, no funds will be necessary. 8

9 20. On June 8, 2010, NYHC and BioBalance LLC entered into a Letter of Intent whereby BioBalance LLC would exchange its assets for a number of shares of Series A Convertible Preferred Stock ("Series A" of Enterologics as to be "mutually determined by the Board of Directors of Seller and Buyer." The Letter of Intent vaguely states that the number of Series A stock "shall initially represent no more than 20% of the Buyer." 21. The proposed terms of the Series A stock are attached to the Letter of Intent as Exhibit A. The Series A will have no defined dividend preference; may be converted into common stock at Buyers discretion if Buyer is able to raise $5,000,000 in capital, but no conversion rate is defined; is entitled to a liquidation preference at an amount equal to the purchase price of the preferred stock, but no purchase price is defined; and will have the right to appoint one board member. 22. The Letter of Intent provides Enterologics 12 months after closing to raise a minimum of $1,000,000. If Enterologics is unsuccessful in raising the capital, BioBalance LLC has a right to redeem the Series A stock for the assets to be sold by BioBalance. The Letter of Intent also provides Enterologics with a 90 day exclusivity period. During the exclusivity period, NYHC and BioBalance LLC are bound by a preclusive no-shop provision, which assures the sale of assets to Enterologics will close and will not be subject to a competitive bid process on the open market. 23. A definitive agreement is expected to be negotiated and executed before the close of the exclusivity period. Demand Futility Allegations 24. Plaintiff brings this action derivatively in the right and for the benefit of NYHC and its wholly owned subsidiary, BioBalance, seeking a remedy for the defendants' breach of 9

10 fiduciary duty in connection with their dealings with Grossman and entering into the Letter of Intent, and for breach of contract. 25. Making a demand on the Board of Directors of NYHC with respect to the double derivative claims brought herein would be futile and is excused, pursuant to N.Y. Bus. Corp. Law 626(c, because a majority of the directors are incapable of making an impartial decision as to whether to litigate this action. Each of the Defendants in this action participated in the wrongs complained of herein, risks substantial personal liability for their disloyal conduct taken in bad faith and is therefore personally interested in this action's outcome. 26. As alleged in the NYHC Complaint, Berg and Englard constitute a majority of the Board of Directors of both NYHC and BioBalance and each is a strawman whose real interests lie in their personal and business relationships with Grossman. The Letter of Intent and Enterologics' plans to raise capital through public markets is the exact conduct complained of in the NYHC Complaint. Enterologics failure to disclose the relationship its officers and directors and largest stockholders have with Grossman, NYHC, BioBalance, and BioBalance LLC only confirms this transaction is one more example of Grossman's long history of defrauded investors and the public markets. 27. Moreover, Grossman and the directors of NYHC and BioBalance are fully aware that the assets to be sold pursuant to the Letter of Intent are the subject of the allegations in the NYHC Complaint, and nevertheless, are plainly transferring those assets from BioBalance LLC, of which Grossman has a minority interests, to Enterologics, which Grossman, through his wife, father-in-law, and other relatives, holds majority control. Worse, according to Schedule A of BioBalance LLC's Operating Agreement (the "Operating Agreement", those assets have a stated value of $628,056. Yet, Englard, Berg, and Hacohen, as directors of BioBalance, BioBalance 10

11 LLC's managing member, agreed to sell those assets to Enterologics for a 20% equity interest in a Company that has no assets. 28. As in the NYHC Complaint, Berg, Englard and Hacohen have demonstrated an unyielding loyalty to Grossman rather than NYHC or BioBalance and continue to place their personal relationship with Grossman before the best interests of BioBalance, NYHC and its stockholders. herein. COUNT I (Breach of Fiduciary Duty 29. Plaintiff repeats and realleges each of the foregoing allegations as if fully set forth 30. Plaintiff asserts this count against Englard, Berg and Hacohen. 31. At all relevant times, it was the duty of Englard, Berg and Hacohen, as directors of BioBalance, to administer the affairs of BioBalance LLC in accordance with the terms of its Operating Agreement. This duty imposes an obligation to ensure BioBalance performed its duties as Managing Member of BioBalance LLC in good faith and with that degree of care that an ordinarily prudent person in a like position would use under similar circumstances as provided for under Section 8.2 of the Operating Agreement. Instead, Englard, Berg and Hacohen disregarded the interests of BioBalance LLC and its majority member and again sought to appease the demands of a criminal stock promoter, providing Grossman the means to pillage BioBalance LLC's assets. 32. This disloyal conduct threatens severe injury on BioBalance LLC. That Englard, Berg and Hacohen have for a second time knowingly and intentionally acted with utter disregard for their fiduciary duties for the benefit of a person who was criminally convicted of manipulating NYHC's stock gives meaning to the word unconscionable. 11

12 33. Plaintiff has no adequate remedy at law. COUNT II (Breach of Contract 34. Plaintiff repeats and realleges each of the foregoing allegations as if fully set forth herein. 35. Plaintiff asserts this count against BioBalance. 36. Section 8.1(a(ii of the Operating Agreement, authorizes BioBalance, as BioBalance LLC's Managing Member, to carry out the business of BioBalance LLC, including, to sell and dispose of both the tangible and intangible assets of BioBalance LLC. However, BioBalance LLC is contractually bound under Section 8.2 of the Operating Agreement to perform its duties to BioBalance LLC in good faith and with that degree of care that an ordinarily prudent person in a like position would use under similar circumstances. 37. Nevertheless, BioBalance knowingly conducted BioBalance LLC's affairs in an imprudent and irrational manner. Knowing the assets to be sold pursuant to the Letter of Intent are the subject of the allegations in the NYHC Complaint, BioBalance nevertheless, apparently authorized Englard, BioBalance LLC's Chief Executive Officer, to execute the Letter of Intent. BioBalance was fully aware that the terms of the Letter of Intent obligate BioBalance LLC to transfer its assets to an entity which Grossman, through his wife, father-in-law, and other relatives, holds majority control. BioBalance was fully aware that the assets to be transferred to Grossman had a stated value of $628,056. Yet, BioBalance apparently authorized Englard to agree to sell those assets to Enterologics for a 20% equity interest in Enterologics, which has publicly disclosed that it has no assets. Even if Enterologics is successful in raising $1,000,000 in capital, those funds, according to the Quarterly Report, are already committed, mostly to 12

13 "G&A including expert consulting fees." In short, the consideration contemplated by the Letter of Intent is worthless. 38. Knowingly acting in such an imprudent and irrational manner plainly constitutes willful misconduct, and a breach of Section 8.2 of the Operating Agreement. 39. BioBalance's breach of the Operating Agreement will result in irreparable harm to BioBalance LLC if the sale of assets contemplated by the Letter of Intent closes. 13

14 WHEREFORE, plaintiff respectfully requests that this Court: A. Declare Englard, Berg and Hacohen have breached their fiduciary duties as directors of BioBalance for failing to cause BioBalance to perform its duties as Managing Member of BioBalance LLC in accordance with the Operating Agreement; B. Declare BioBalance has breached Section 8.2 of the Operating Agreement by knowingly acting in an imprudent and irrational manner in connection with the Letter of Intent; C. Enjoin defendants from closing on the sale of assets contemplated by the Letter of Intent; D. Order the adoption of corporate governance reforms determined necessary by the Court to avoid future harm; F. Award fees, expenses and costs to Plaintiff and Plaintiff's counsel; and G. Grant such other and further relief as the Court deems just and proper. PRICKETT, JONES & ELLIOTT, P.A. By: /s/ Marcus E. Montejo Ronald A. Brown, Jr. (DE Bar No Marcus E. Montejo (DE Bar No King Street Wilmington, Delaware ( Attorneys for Plaintiff Dated: July 14,