Star Scientific’s Jonnie Williams Has His Reasons To Rat Out Virginia Governor Bob McDonnell
Michael Matthew Bloomer, August 21, 2013
In my August 4, 2013 post, I suggested that the rumors about Star Scientific’s Jonnie Williams ratting out Governor Bob McDonnell were likely true. Well, that seems ever more likely now in light of Star Scientific’s quarterly 10-Q report, filed with the SEC on August 9, 2013. Star Scientific’s Williams would be very motivated to talk with investigators given the number of difficulties his company presently faces, particularly legal challenges that could mortally wound. Soon, it seems, we’ll learn Governor McDonnell’s fate, but Jonnie Williams’ role looks clearer and clearer. In truth, h
e had little choice.
Under Commodity and Securities Exchanges regulations, this report requires, among other things, that a company reveal any pending claims or legal proceedings, “other than ordinary routine litigation incidental to the business.” Here are two provisions mandating certain reporting:
§ 229.103 (Item 103) Legal proceedings.
Describe briefly any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant or any of its subsidiaries is a party or of which any of their property is the subject. Include the name of the court or agency in which the proceedings are pending, the date instituted, the principal parties thereto, a description of the factual basis alleged to underlie the proceeding and the relief sought. Include similar information as to any such proceedings known to be contemplated by governmental authorities.
Section four of §229.103 applies to Star Scientific in the McDonnell investigation:
4. Any material proceedings to which any director, officer or affiliate of the registrant, any owner of record or beneficially of more than five percent of any class of voting securities of the registrant, or any associate of any such director, officer, affiliate of the registrant, or security holder is a party adverse to the registrant or any of its subsidiaries or has a material interest adverse to the registrant or any of its subsidiaries also shall be described. [Click for the entire section 17 CFR § 229.103]
In its August 10-Q report, Star Scientific disclosed its involvement in the McDonnell investigation, and concluded
“on the basis of the results of the internal investigation, the cooperation with the USAO, and discussions and communications between our outside counsel and the USAO, we do not believe our company will be prosecuted for any of the matters that the USAO has been investigating.”
Yet, as you’ll read below in context, the company gave itself lots of wiggle room. From its 10-Q report:
Investigations:
As previously disclosed, in late January and February of this year our company, directors and others received subpoenas from the United States Attorney’s Office, or USAO, for the Eastern District of Virginia seeking documents. We have been responding to the subpoenas and cooperating fully with the investigation, and we believe that we have responded to substantially all of the issues being reviewed by the USAO. In addition, the international law firm of Chadbourne & Parke LLP conducted an internal investigation of these matters and that investigation was substantially completed in late June 2013.
We cannot predict whether or the extent to which the ongoing investigation will result in any legal action against any individual or entity, but on the basis of the results of the internal investigation, the cooperation with the USAO, and discussions and communications between our outside counsel and the USAO, we do not believe our company will be prosecuted for any of the matters that the USAO has been investigating.
Further, we cannot predict whether, or the extent to which, the related litigation or the other matters discussed herein or under “Part II – Item 1 – Legal Proceedings” will result in any liability or further legal action against our company or any of our employees. However, any such actions could cause us to incur material additional expenses and otherwise have a material adverse effect on our business. We have incurred significant increased legal expense in connection with the government and internal investigations discussed above, although we expect investigation-related expenses to be significantly lower in the near term as we believe those investigations, with respect to our company, are nearing completion.
Later in the “General and Administrative Expenses” section Star Scientific reported its legal expenses for the three months ended June 30, 2013:
“we had increased legal expenses of $4.9 million primarily related to our efforts in responding to subpoenas in the government investigation and in connection with our related internal investigation.”
And this overall result:
Net Loss. We had a net loss of approximately $8.7 million for the three months ended June 30, 2013 compared to a net loss of approximately $8.0 million for the same period in 2012. The increased net loss for the three months ended June 30, 2013 was primarily due to increases in legal expenses, offset, in part, by reduced marketing and research costs and by decreased executive compensation, travel costs, and non-cash charges related to stock options issued and the modification of the time to exercise previously issued stock options.
Star Scientific has been losing money for years. Williams realizes he must extricate himself from the McDonnell investigation in order to strengthen his company. That’s a tough task under good circumstances, legal proceedings aside. The company has lost nearly 70% of its value from its kickoff in January 2000 to date, from $4.78 to $1.97 per share. For three of the past four years, it had losses, 2009 through 2011, rebounding in 2012. And this was due to sales of its primary anti-inflammatory product, Anatabloc. Also helpful was a $5 million influx from its settlement with CigRx in a patent infringement case. Yet, star showed a negative earnings per share (eps) for each of those years, although 2012 showed a marked improvement.
(Click chart for larger & clearer image)
A wild ride over the years
On the good side, Anatabloc dietary supplement and facial cream, Star Scientific’s flagship products sold well in 2012, and this continued as indicated in an analysis of its recent 10-Q filing. Anatabloc accounted for nearly all of its increased profit over the year before, from $1.4 million to $2.5 million. (for a good summary of Anatabloc’s development see this.) Also, Star took the axe to its controversial dissolvable smokeless tobacco products, Ariva and Stonewall Hard Snuff, ending their sales as of January 2013. Controversy aside, Star was losing money on its tobacco-related products as if it were water at the boil.
So, money is dear. Star is a business in trouble, has been for many years. As mentioned, it successfully settled its trademark lawsuit with CigRx, but its facing two other potential costly legal actions: a Virginia tax case, and, between March and May 2013, a dreaded shareholder class action lawsuit (three of them originally) under%C
