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Case 1:11-cv-22389-RNS Document 46 Entered on FLSD Docket 11/20/2012 Page 1 of 32

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA

Miami Division





Case No. 11-cv-22389-SCOLA/BANDSTRA


100079 CANADA, INC., a foreign
corporation,


Plaintiff,





vs.

STIEFEL LABORATORIES, INC.,
a Delaware corporation, and
CHARLES W. STIEFEL, an individual,


Defendants.

_________________________________/


AMENDED COMPLAINT



Plaintiff, 100079 Canada, Inc., hereby sues Defendants, Stiefel Laboratories, Inc. (the

“Company” or “SLI”), a Delaware corporation, and Charles W. Stiefel, and states:

NATURE OF THE ACTION

1. This case arises from the backroom self-dealing and the knowing and material

misrepresentations and omissions of the Defendants. Defendant Charles Stiefel, at all relevant

times, exercised de facto ownership and voting control over the Company, a leading

pharmaceutical company specializing in the development, manufacturing and marketing of

products for the care and treatment of skin problems and diseases. Specifically, the Defendants –

to the exclusion of the larger SLI Board – conspired to repurchase a substantial portion of

Plaintiff’s shares at prices that they knew were grossly undervalued while at the same time

withholding their secret plans to sell the Company and their shares at a premium. The

Defendants knew the shares were undervalued because their long-time valuation professional –

Terence N. Bogush, C.P.A. (“Bogush”) – was not an independent appraiser as required by

applicable law and did not use appropriate valuation methodologies. By virtue of their actions,

Case 1:11-cv-22389-RNS Document 46 Entered on FLSD Docket 11/20/2012 Page 2 of 32

the Defendants knowingly cheated Plaintiff out of over $40 million and lined their already deep

pockets. Unfortunately, their conduct was not isolated. Hundreds of former Stiefel employees

were victim to the same pervasive acts of self-dealing – namely, the disingenuous repurchase of

substantial amounts of SLI stock at grossly undervalued prices while Defendants secretly

planned to sell the Company at a high premium. Just months after these repurchases, including

the repurchase of Plaintiff’s shares, the Company was sold to GlaxoSmithKlein plc (“Glaxo”) in

April 2009 at large multiples over the repurchase prices in a cash transaction valued at

approximately $3.5 billion.

2. Plaintiff asserts four claims against Defendants: (i) violation of the Securities and

Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C, §§ 78a-78kk, and Rule 10b-5 of the

Securities and Exchange Commission (the “SEC”) and Section 20(a) of the Exchange Act, § 15

U.S.C. §§ 78j and 78t; (ii) breach of fiduciary duty; (iii) fraudulent misrepresentation; and (iv)

negligent misrepresentation.

JURISDICTION AND VENUE

3. This Court has federal question jurisdiction pursuant to 15 U.S.C. §§ 78aa, 78j, and

78t, and 17 C.F.R. § 240.10b-5, and diversity jurisdiction pursuant to 28 U.S.C. § 1332.

4. This Court has personal jurisdiction over Defendants pursuant to Rule 4(k)(1)(A), Fed.

R. Civ. P., because they committed torts in Florida that caused damages to Plaintiff in Florida,

and thus all Defendants would be subject to the jurisdiction of a court of general jurisdiction in

the State of Florida.

5. Venue is proper in this Court pursuant to Section 27 of the Exchange Act and 28

U.S.C. § 1391(b) because the tortious acts and omissions complained of herein occurred in

substantial part in the Southern District of Florida, the headquarters and principal place of


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Case 1:11-cv-22389-RNS Document 46 Entered on FLSD Docket 11/20/2012 Page 3 of 32

business of Defendant Stiefel Laboratories, Inc. was, at all relevant times, in the Southern

District of Florida, and Defendants resided, at all relevant times, in the Southern District of

Florida.

THE PARTIES

Plaintiff

6. Plaintiff 100079 Canada, Inc., is a corporation organized and existing under the laws

of Canada formed for the purpose of holding and owning SLI shares. Plaintiff was a minority

shareholder in SLI. Plaintiff is owned and controlled by Richard J. MacKay (“Mr. MacKay”),

his wife and a family trust controlled by Mr. MacKay. Mr. MacKay worked at SLI for over three

decades.

7. Mr. MacKay is a resident of Montreal, Quebec, Canada. He began his career as a

pharmaceutical representative in 1958. In 1962, he joined Winley-Morris, Ltd. as a sales

manager and, in that capacity, came to know Werner and Herbert Stiefel, who are now deceased.

Werner Stiefel was then the CEO of the Company. Winley-Morris, a Canadian company,

distributed Stiefel products across Canada.

8. In 1975, Werner and Herbert Stiefel approached Mr. MacKay to start and head Stiefel

Canada, Inc. (“Stiefel Canada”). Stiefel Canada was set up as a partnership between SLI and Mr.

MacKay, who invested $24,000.00 in exchange for a 24% equity interest in Stiefel Canada and

was appointed as its President, CEO and director of Stiefel Canada, positions which he held until

the April 2009 sale to Glaxo.



9. Mr. MacKay built Stiefel Canada from the ground up by forging close relationships

with doctors, smart growth and various acquisitions. Mr. MacKay’s business strategy and

techniques were later emulated and implemented by Defendant Charles Stiefel and other key


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Case 1:11-cv-22389-RNS Document 46 Entered on FLSD Docket 11/20/2012 Page 4 of 32

executives throughout the Company.

10.

In light of Mr. MacKay’s success with Stiefel Canada, in the early 1980’s he was

asked to get involved with SLI’s international division and was appointed to head SLI operations

in Japan and Korea, which resulted in his Stiefel Canada equity being converted into SLI shares.

The conversion was based on an internal valuation of both SLI and Stiefel Canada. Stiefel

Canada, at that time, comprised approximately 20% of the total value of the Company. The

conversion resulted in Plaintiff owning just less than 5% of all SLI shares.

11. Mr. MacKay was appointed to the Board of Directors of SLI in 2002. Prior to this

nomination, the board was made up of only Stiefel family members. Defendant Charles Stiefel

replaced his brothers and sisters, and the new board consisted of Charles Stiefel, Herbert Stiefel,

Todd Stiefel, Brent Stiefel, Richard MacKay and Gabriel McGlynn (Vice President of Europe).

In April 2007, Mr. MacKay was appointed Vice Chairman of the Board of SLI while continuing

as President and CEO of Stiefel Canada.

12. Mr. MacKay was terminated as an employee in 2009 after the purchase of the

Company by Glaxo as further described below.

13.

Prior to his termination, Mr. MacKay’s relationship with the Stiefel Family

Defendants was essentially that of a long-term partner; his efforts were instrumental to the

growth and success of the Company. In a January 30, 2007 internal press release distributed to

the Company’s employees, Defendant Charles Stiefel summed up Mr. MacKay’s worth and

importance to the Company when he beamed, “Dick has been unstinting in his contribution to

the growth and development of Stiefel worldwide. He has demonstrated his talent for global

vision and shown exemplary leadership in a number of international executive positions. He is

one of the key leaders in our company’s history.”


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Defendants

14.

At all relevant times, SLI was a specialized pharmaceutical company that focused

on development and sale of dermatological and skin care products. Formed in Europe in 1847

by John D. Stiefel, it held itself out as the world’s largest independent pharmaceutical company

specializing in dermatology. The Company grew to market and sell a variety of prescription and

non-prescription products in more than 100 countries. For several years prior to the 2009 Glaxo

sale, SLI had annual sales approaching $1 billion and approximately 4,000 employees.

15.

Defendant, Charles W. Stiefel (“Charles Stiefel”), was, at all relevant times, a

United States citizen and a resident of Coral Gables, Florida. He is currently a resident of

Raleigh, North Carolina. At all relevant times, Charles Stiefel served as Chairman of the Board

of Directors and Chief Executive Officer of the Company. Defendant Charles Stiefel was

actively involved in and exercised actual control over the day-to-day operations of the Company.

On information and belief and at all relevant times, Defendant Charles Stiefel individually

owned approximately 90% of the voting common stock of the Company and, along with other

members of his family or entities that he owned or controlled, more than 90% of the outstanding

voting common stock and more than 60% of the total outstanding common stock of the

Company. Defendant Charles Stiefel owed Plaintiff the fiduciary duties of loyalty, good faith,

and fair dealing as a controlling shareholder, director and officer to a minority shareholder.

FACTS COMMON TO ALL CAUSES OF ACTION

Defendants’ Secret Insider Information

16.

The Defendants were privy to secret information – which was not known or made

available to Plaintiff or Mr. MacKay – concerning the Company, its operations, finances,

financial condition, present and future business prospects and matters impacting the fair market

value of the Company and the Company’s shares.


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Case 1:11-cv-22389-RNS Document 46 Entered on FLSD Docket 11/20/2012 Page 6 of 32

17.

Defendants had access to material information about the Company not otherwise

available to other Directors, including Mr. MacKay, because of their ownership and voting

control over the Company.

18.

Not only were Defendant Charles Stiefel and his sons Brent Stiefel and Todd

Stiefel senior executive officers and directors, but they also formed a virtual “Super Board” that,

as part of a pattern and practice, made all key decisions in meetings that were conducted outside

the presence of the full Board. Defendant Charles Stiefel and his sons regularly held “pre-board”

meetings at which they would make key decisions. They would then present predetermined

decisions to the Board for rubber-stamp approval.

19.

Defendant Charles Stiefel also controlled or possessed the authority to control

information given to Bogush for use in his valuations of the Company’s stock.

20.

The Bogush valuations were chronically, severely undervalued for over a decade,

and this fact was well known by Defendants. Defendants purposely used this inside knowledge

to the detriment of any shareholder who sold stock to the Company, including Plaintiff.

21.

Defendants were aware, or should have been aware, of the misrepresentations and

omissions that were made to Plaintiff, or they had the ability and opportunity to prevent such

misrepresentations or omissions or cause them to be corrected.

22.

Defendants owed fiduciary duties to Plaintiff under the common law, because

Plaintiff was a minority shareholder. In light of his relationship with the Stiefel family going

back nearly 50 years, Mr. MacKay and Plaintiff had the right to expect, and did expect, that he

would be treated as a partner by Defendants.

The Bogush Valuations

23.

Effective April 16, 1975, the Company established its Employee Stock Ownership


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Case 1:11-cv-22389-RNS Document 46 Entered on FLSD Docket 11/20/2012 Page 7 of 32

Plan and Trust (the “Employee Plan”), which was governed by the provisions of the Employee

Retirement Income Security Act of 1974, 29 U.S.C. § 1101 et seq. (“ERISA”), as well as the

Employee Plan documents. The Employee Plan was set up to allow Company employees to

share in the growth of the Company and to be a qualified stock bonus plan under the Internal

Revenue Code of 1986, 26 U.S.C. § 1 et seq. (“IRC”), specifically IRC §§ 401(a) and 409.

ERISA requires any company with an employee plan to obtain at least an annual valuation to be

performed in good faith and based on all relevant factors for determining the fair value of

securities.

24. While neither Plaintiff nor Mr. MacKay were participants in the Employee Plan,

the annual valuations performed for the Employee Plan participants were also used by the

Company as a means to determine share price for any employee or entity selling shares back to

the Company, including Plaintiff.

25.

As Trustee of the Employee Plan, Defendant Charles Stiefel had a duty under the

Employee Plan to “retain an independent appraiser who meets the requirements similar to those

contained in regulations under section 170(a)(1) of the [IRC].” The Company retained Bogush

beginning in the mid-1980’s, and in every year thereafter, to perform its annual valuation

appraisals.1

26.

The annual valuations performed by Bogush (the “Bogush Valuations”) were not

in good faith because the appraisals were not performed by a person who customarily makes

such appraisals and who is independent of [the Company] under §§ 54.4975-7(b)(9) and (12).2

Bogush was originally hired by Werner Stiefel, who was Trustee of the Employee Plan until


1
2002, when Charles Stiefel assumed that position.
2
These sections refer to the regulations promulgated under the IRC, specifically 26 C.F.R. § 170A-
11(d)(5). “For purposes of §§ 54.4975-7(b)(9) and (12) of this section, valuations must be made in good
faith and based on all relevant factors for determining the fair market value of securities. . . . [For
transactions with non-disqualified persons,] a determination of fair market value based on at least an


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Case 1:11-cv-22389-RNS Document 46 Entered on FLSD Docket 11/20/2012 Page 8 of 32

Bogush performed only one valuation a year – the Company’s valuation and only the Company’s

valuation – and therefore did not “customarily make such appraisals.” Bogush had also been an

employee of SLI, having worked as a comptroller at one of SLI’s plants, and therefore was not

neutral or independent of the Company.

27.

At all relevant times, Bogush was not a qualified appraiser under IRC §

401(a)(28)(C) because he did not “hold himself or herself out to the public as an appraiser or

perform appraisals on a regular basis.” 26 CFR § 1.70A-13 (5)(A). Further, Bogush was legally

excluded and could not have been a qualified appraiser at relevant times because he was a person

who “does not perform a majority of his or her appraisals made during his or her taxable year for

other persons.” 26 CFR § 1.70A-13 (5)(C)(iv).

28.

By virtue of their long relationship with Bogush, the Defendants knew that

Bogush was legally unqualified and not competent to perform the annual appraisals. At all

relevant times, each Defendant had a duty to Plaintiff to ensure that the Company’s stock was

correctly valued when Plaintiff sold 750 of its shares to the Company in June of 2008.

29.

The Bogush Valuations undervalued the Company’s stock by, among other

things, use of a 35% discount for lack of marketability, and other incorrect appraisal methods. At

all material times, Defendants knew or should have known that the Bogush Valuations severely

undervalued the Company’s stock.

30.

Defendants based the annual valuations of the Company’s stock directly upon the

Bogush Valuations that they knew or should have known were performed by a legally

unqualified and excluded person, and were undervalued.


annual appraisal independently arrived at by a person who customarily makes such appraisals and who is
independent of any party to a transaction under §§ 54.4975-7(b)(9) and (12) will be deemed a good faith
determination of value.” 26 C.F.R. § 170A-11(d)(5) (emphasis added).


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Case 1:11-cv-22389-RNS Document 46 Entered on FLSD Docket 11/20/2012 Page 9 of 32

31.

As a direct result of the annual under-valuations, shareholders who sold their

shares back to the Company, including Plaintiff, were short-changed by at least the amount of

the undervaluation at the time their shares were sold to the Company. Defendants were likewise

unjustly enriched by the difference in the sales price and the true value of the shares, to the

extent that it reduced the number of outstanding shares in the Company and therefore favorably

impacted the value of their own outstanding shares.

32.

The Bogush Valuations purportedly reflected the fair market value of shares as of

March 31st of each year. The valuation as of March 31, 2007 was established at $14,517.00 per

share (the “2007 Bogush Valuation”). As of March 31, 2008, the valuation was established by

Bogush at $16,469.00 per share (the “2008 Bogush Valuation”).

33.

The communication from Defendant Charles Stiefel dated December 6, 2007 to

all Company shareholders, including Plaintiff, announcing the 2007 Bogush Valuation falsely

represented that “our independent appraisers calculate the value of the Stiefel shares” and that

those appraisers utilize the “comparative fair market value method.” (emphasis added).

34.

The communication from Defendant Charles Stiefel dated October 14, 2008 to all

Company shareholders, including Plaintiff, announcing the 2008 Bogush Valuation falsely

represented that “we engage a separate independent accounting firm” and that “Stiefel

Laboratories obviously has no influence whatsoever on the methodology used by the appraisal

firm.” (emphasis added).

35.

The 2007 and 2008 Bogush Valuations failed to take into account Defendants’

discussions and plans to sell the Company or the nature of Blackstone’s involvement, as further

described below. In addition, the 2007 and 2008 Bogush Valuations completely ignored

Blackstone’s valuations of the Company, or its purchase of Company stock in August 2007 for


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Case 1:11-cv-22389-RNS Document 46 Entered on FLSD Docket 11/20/2012 Page 10 of 32

$500 million, or approximately $60,000 per share. Defendants failed to advise Bogush – or

Bogush completely ignored – the Company’s intention to enter into discussions or negotiations

for the sale of the Company before and after the Blackstone purchase of Company stock.

36.

On or before August 2007, a number of independent third party valuations of the

Company – none of which was performed by Bogush – were conducted in connection with

various financial transactions involving the Company. On information and belief, all of the third

party valuations were significantly higher than both the 2007 and 2008 Bogush Valuations.

Defendants were aware of these higher valuations placed on the Company.

37.

That the Bogush Valuations were grossly undervalued is also shown by

independent valuations done in connection with the processes resulting in the Company’s

acquisition of Connetics Corporation in December 2006 and the Blackstone investment in

August 2007, as further described below.

The Blackstone $500 Million August 2007 Investment

38.

On August 6, 2007, and after months of discussion beginning in 2006, nonparty

Blackstone Healthcare Partners, LLC, a Delaware limited liability company, entered into a

Securities Purchase Agreement to invest $500 million in SLI by purchasing what was labeled

“preferred stock” that was convertible 1:1 to common shares in the Company. Blackstone

Healthcare Partners LLC is part of an affiliated group of entities within the Blackstone Group,

more than one of which were involved in the transactions described herein. For ease of

reference, they will be referred to simply as “Blackstone.”

39.

To arrive at the purchase price for the August 2007 investment, Blackstone gave

the Company an enterprise value of $2.9 billion and an equity value of $2.1 billion.

40.

Defendants purposely, recklessly or negligently misrepresented the value of the


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Case 1:11-cv-22389-RNS Document 46 Entered on FLSD Docket 11/20/2012 Page 11 of 32

Company to Plaintiff, or omitted to state material facts that would have corrected Plaintiff’s

misimpression.

41.

After Blackstone invested $500 million to acquire shares in the Company for

$60,000.00 per share in August of 2007, Blackstone and its affiliates essentially acquired the

ability to force a sale of the Company within eight years.

42.

Blackstone’s modus operandi is to take companies public or sell them soon after

investing in them. By way of certain covenants in Blackstone’s agreement with the Company,

including but not limited to a provision that Blackstone had to recoup its investment within eight

years, the Blackstone investment marked a significant step in Defendants’ efforts to sell the

Company.

43.

Before and after Blackstone’s investment in the Company, the Defendants and

Blackstone had discussed and considered the sale of the Company to Blackstone and possibly

others. In January of 2007, for example, Blackstone sent Defendant Charlie Stiefel a proposal by

Blackstone to acquire the Company through a stock purchase or merger. Defendant Charles

Stiefel eventually met or conferred with representatives of Blackstone to discuss this proposal.

44.

Subsequent to Blackstone’s investment in the Company, the Defendants and

Blackstone discussed numerous ways by which to make the Company more profitable and

efficient. This internal due diligence is one of the classic initial steps taken by companies that

are preparing themselves to be sold.

45.

Although Defendants had received and considered an acquisition proposal from

Blackstone, Defendants purposely went out of their way to expressly and forcefully deny that

Blackstone’s investment would be for the purpose of taking the Company public or selling it.

Defendants purposely issued several misleading press releases and internal communications to


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Case 1:11-cv-22389-RNS Document 46 Entered on FLSD Docket 11/20/2012 Page 12 of 32

its employees, including Plaintiff and Mr. MacKay, stating that the Blackstone investment was in

the nature of a loan to help with short term liquidity issues, not a step towards selling the

Company, and that the Company was not for sale. In fact, Defendants repeatedly emphasized

that the purpose of the Blackstone investment was to provide the Company with cash to be used

for future acquisitions by the Company, as opposed to a future sale of the Company.

46.

Plaintiff relied on the misrepresentations and omissions made by the Defendants

to its detriment.

Defendants Purposely Withhold their Plans to Sell the Company

While Making Contrary Representations

47.

Throughout its 160-year history, and prior to the April 2009 sale to Glaxo, the



Company had been a privately held corporation. A majority of its shares had been and were

owned by Stiefel family members or entities under their control.

48.

The Defendants had, until the events described herein, steadfastly asserted to the

public, their employees and their shareholders that the Company was not for sale and would

remain privately held. For example:







a.
On March 8, 2007, in a Miami Herald article, Charles Stiefel
stated, “[t]he family has no plans to go public...There are so many
advantages to being private….”

b.
In a letter dated August 9, 2007 to Company employees and
shareholders, Charles Stiefel states “[t]here are currently no plans for
Stiefel to become a publicly traded company. Blackstone will have a
defined exit arrangement with Stiefel at the end of eight years, at
which point Stiefel may choose to buy back its shares or exercise
other options, one of which might be an initial public offering.”

c.
On August 10, 2007, the Company was quoted in a Miami
Herald article about its receipt of a $500 million infusion from the
Blackstone Group, a New York-based asset manager. According to
the article, the Company “stressed that the company will remain a


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Case 1:11-cv-22389-RNS Document 46 Entered on FLSD Docket 11/20/2012 Page 13 of 32

family-controlled business,” and denied rumors of a corporate
restructuring by explaining that although, “Blackstone, like most
private equity firms, often plots an exit strategy through a public
offering of stock – [it is] something that Stiefel has said in the past the
company has no interest in.”

d.
After the $500 million investment by Blackstone into the
Company, the Company and Charles Stiefel reiterated their mantra
that the Company was independent and not for sale by explicitly
saying so in communications to employees and shareholders. These
misleading communications by Defendants included statements made
in direct response to employees’ questions concerning whether the
Blackstone deal indicated the Stiefel Family Defendants might sell or
take the Company public.

e.
Placing information in corporate strategic plans available to
Company executives and employees as late as September 2008
indicating that the Company would continue to be “[p]rivately held
and led by the Stiefel family.”





49. While making these representations to the public in 2007 and 2008, the



Defendants were knowingly acting in direct contravention of these representations in their secret

efforts to sell the Company or take it public. The following e-mail exchanges establish that the

Defendants knew these representations were false at the time they were made:







a.
On January 2, 2007, a Blackstone representative sent Charles
Stiefel a
to Blackstone’s
Acquisition of Stiefel Laboratories, Inc.” that contemplated an a
purchase price for SLI based upon a $1.755 equity valuation;

titled “Terms Relating

term sheet

b.
On May 10, 2007, Todd Stiefel and Brent Stiefel received an
email from a Blackstone representative that, in part, stated: “I believe
we owe you a response on three last issues: the issue of the form of
consideration in the event of a sale, the protective provision pertaining
to the issuance of additional class B shares, and the IPO make-whole
language.”

c.
On July 31, 2007, Charles Stiefel sent another e-mail to the
Blackstone representative stating that Blackstone’s level of “financial
sophistication . . . will become increasingly important as we seek to
make additional acquisitions, and perhaps eventually pursue an IPO.”
Charles Stiefel further noted that he “looked forward very much to


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seeing Blackstone’s valuation tomorrow.”

d.
On September 6, 2007, following the now-closed $500 million
Blackstone investment and in advance of a meeting with several
Blackstone investment bankers, Todd Stiefel wrote: “I was planning
on having just me, my father and my brother for the meeting.” He
further stated that “we would just go to dinner with you folks and the
three of us without calling it a celebration dinner (so the others do not
feel left out from the celebration).”

e.
On December 28, 2008, Brent Stiefel wrote to yet another
Blackstone investment banker, with a copy to Charles Stiefel, in
regards to a potential sale of SLI to Sanofi Aventis, and noted “[w]e
want to make sure we sell the ‘reluctant bride’ story in the best
possible manner.” In response, the Blackstone representative told
Brent Stiefel: “At this juncture, we (Blackstone M&A advisory)
would typically interface with buyers and negotiate the NDAs, but as
you point out, we are going to maintain the image that there is not
currently a sale process.”

50.

None of the information contained in this exchange of e-mails and none of the






statements made in these e-mails was communicated to Plaintiff or Mr. MacKay. All would

have been relevant and material to Plaintiff’s subsequent decision to sell the 750 shares.

Plaintiff Sells its Shares


In early to mid-May 2008, Mr. MacKay had a series of discussions with

51.

Defendant Charles Stiefel indicating that he wanted to sell 100 shares held by Plaintiff for estate

planning purposes. Mr. MacKay further stated that he wanted to sell 100 shares held by Plaintiff

in each of the next several years, in order to ensure that his wife would have sufficient funds

should something happen to him. Defendant Charles Stiefel told Mr. MacKay in those

discussions that the Company could not guarantee continuous annual buy-backs of its shares

going forward and that, excluding the very near future, he could not guarantee any additional

opportunities whatsoever to sell shares back to the Company.

52.

As a follow-up to those discussions, Defendant Charles Stiefel contacted Steve


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Karasick, the Senior VP for People & Technology at the Company (“Karasick”), and

communicated the above-described conversation and representations. Karasick, in turn, spoke to

Mr. MacKay, reiterated Charles Stiefel’s statements to Mr. MacKay and sent the following e-

mail to Mr. MacKay on May 14, 2008:

Dick, Thanks for your time today on the phone. In regards to the proposed
sale of stock, please find attached a simple spreadsheet that I believe
captures what we discussed. Namely, it outlines the proposed sale of 750
shares of stock before June 15, 2008, and a tiered rate of discount. The
stock price and discount tiers are included for your review.


The spreadsheet showed the “Current Share Price” to be $14,517.00, which was the grossly

undervalued price established by the faulty 2007 Bogush Valuation. The 2007 Bogush Valuation

had already heavily discounted the share price, but the spreadsheet further discounted the share

price to an average additional discount (depending on number of shares sold) of 17.80%. Mr.

MacKay was told by both Defendant Charles Stiefel and Karasick that these additional discounts

were Company policy as a result of the lack of marketability of the shares. Mr. MacKay agreed

to sell a maximum of 750 shares because the spreadsheet indicated that any additional shares

sales over 750 would be discounted at the very high rate of 30%.

53.

As a result of his discussions with Defendant Charles Stiefel and Karasick and in

response to Karasick’s May 14th e-mail, Mr. MacKay sent the following e-mail on May 15, 2008

to Karasick:

I want to thank you for following up on my discussions with Charlie. I
appreciate that with your busy schedule, that we were able to resolve the
situation before the end of June.

My own inclination would have been not to sell the shares since I strongly
believe in the future of Stiefel. However, in view of the fact that the
company cannot fully guarantee continuous annual by-backs, my fiscal
advisor feels that this would give Francine a greater sense of security,
should something happen to me, and not have to worry each year whether
the company would by-back shares.


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54.

In response, on May 15, 2008, Karasick sent the following e-mail to Mr. MacKay:

Dick, it is my pleasure as always to work with you. You’ve been an
inspiration and a helpful advisor for me, ever since we met for that first
dinner in Montreal back in 2005.

I do understand your point of view, and given the size of your holdings
and your long service, I don’t think anyone could possibly doubt your
steadfast belief in Stiefel. You helped build the house from the ground up,
and this is just a natural progression of your estate planning, in my
opinion. And of course, it is also affected largely by the debt position and
covenants, without which you might be inclined to another course of
action.

On May 16, 2008, having received and reviewed Karasick’s May 15th e-mail, Mr.

55.

MacKay sent the following e-mail to Charles Stiefel, copying Karasick:



Good morning Charlie,
This will confirm that I wish to sell 750 shares held by 100079 Canada
Inc. to SLI pursuant to the discount schedule outlined in the attached
spreadsheet.
Kindest regards,
Dick

The spreadsheet attached to this e-mail is the same as the spreadsheet that was sent to Mr.

MacKay by Karasick as an attachment to Karasick’s May 14, 2008 e-mail, quoted above.

56.

In response, on May 16, 2008, Defendant Charles Stiefel sent the following e-

mail to Mr. MacKay, copying Karasick: “Dick, I hereby accept your offer on behalf of SLI.

Please send to Matt Pattulo the stock certificate(s), either signed on the back or accompanied by

a duly executed standard stock power, and he will handle the rest.”

57.

The transaction for the sale of Plaintiff’s shares was consummated on June 18,

2008. The average price per share received by Plaintiff was $11,932.97, resulting in total

proceeds of $8,949,730.50 for the 750 shares sold by Plaintiff.


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Case 1:11-cv-22389-RNS Document 46 Entered on FLSD Docket 11/20/2012 Page 17 of 32

58.

In forming his decision to sell Plaintiff’s 750 shares in June of 2008, Mr. MacKay

reasonably relied on the faulty 2007 Bogush Valuation, as well as the knowing omissions and

misrepresentations of Defendant Charles Stiefel that there was no market for the Company stock,

that the Company could not guarantee continuous annual buy-backs and that the Company would

not be sold. The Defendants repeatedly emphasized these statements to shareholders when

offering to purchase their shares for the artificially low prices established by the undervalued

Bogush Valuations. It was the Company’s policy to purchase non-employee plan shares at the

Bogush Valuation price less an additional discount of at least 10 percent.

59.

Defendant Charles Stiefel directly and through his agent, Karasick, pressured Mr.

MacKay to sell Plaintiff’s shares at an artificially low price in June 2008 by, in part, telling

Plaintiff and Mr. MacKay that if Plaintiff did not sell at that time, he might not have another

opportunity to sell in the next several years.

60.

Beginning in 2007, and perhaps earlier, and through 2008, Blackstone and the

Defendants began to discuss, consider and plan the possible sale of the Company, and entered

into discussions and negotiations for the sale of the Company with potential acquirers, including

Blackstone itself.

61.

In late 2008, Defendants also contracted with a separate arm of Blackstone,

Blackstone Advisory Services L.P., for consulting services with the express purpose of

accomplishing the sale of the Company. This consulting contract with Blackstone was

intentionally concealed from the other directors, including Mr. MacKay.

62.

Had Plaintiff been informed that Defendants were considering or planning to sell

the Company a few months later for a value of approximately $75,000.00 per share, Plaintiff

would not have sold 750 of its shares for only $11,932.97 per share in June of 2008.


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Case 1:11-cv-22389-RNS Document 46 Entered on FLSD Docket 11/20/2012 Page 18 of 32

Defendants’ knowing misrepresentations and omissions concerning material facts were the actual

and proximate cause of damages in the millions of dollars suffered by Plaintiff.

63.

Prior to Plaintiff’s sale of the 750 shares, each of the Defendants engaged in a

series of acts, misrepresentations and omissions designed to obtain shares from shareholders,

including Plaintiff, at less than fair value. Those acts, misrepresentations and omissions included,

but were not limited to, the following:



Purposely using an unqualified appraiser

a.
to conduct
supposedly “independent” valuations of the Company’s stock that
were chronically, severely undervalued;

b.
Allowing the unqualified “independent” appraiser to use
inappropriate methods for valuing the Company and/or failing to
provide the appraiser with sufficient information to allow the
appraiser to properly perform his task, such as Defendants’ secret plan
to sell the Company;

c. Misrepresenting to employees and shareholders, repeatedly,
that the Company had always been and would always remain
privately held;

In connection with annual letters sent by Charles Stiefel to

d.
shareholders before June 1, 2008:

(1) Misrepresenting the actual fair value of the Employee Plan
stock in effect at the time;

(2) Failing to disclose that the purchase price of the shares did not
represent the actual fair value of the shares of the Company stock
held by the Employee Plan;

(3) Representing that “our independent appraiser calculates the
value of the Stiefel shares owned by the Employee Plan” when the
appraiser was not independent as defined by law;

(4) Failing to disclose that Company employees had influence and
review authority with regards to the valuations prepared by the
“independent appraiser.”

Failing to disclose the much higher valuations of the Company

e.
that had been conducted by Blackstone and other third parties;
















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Case 1:11-cv-22389-RNS Document 46 Entered on FLSD Docket 11/20/2012 Page 19 of 32




f.
discussed an IPO with Blackstone;

Failing to disclose that the Company and Charles Stiefel had

g.
Failing to disclose that the Company and the Stiefel Family
Defendants had discussed selling the Company with Blackstone and,
upon information and belief, other third parties;

Failing to disclose that Blackstone made an offer to purchase

h.
the company as a whole in early 2007;

Failing to disclose that selling the Company was an option that

i.
the Defendants had discussed and considered; and

Failing to disclose that the Company and the Defendants had

j.
taken steps to position the Company for an eventual sale.







64.

Letters by Defendant Charles Stiefel regarding the value of the Company’s shares,



and touting the Bogush valuations, were sent to shareholders on an annual basis.

The GlaxoSmithKline Sale

65.

In late 2008, the Defendants took the final steps to accomplish the sale of the

Company by retaining Blackstone to assist in the sale of the Company.

66.

The Defendants eventually formed a group of shareholders and employees in the

Company who would assist Blackstone and the Company in gathering and compiling the

information needed in connection with the sale. These employees, which included Defendant

Charles Stiefel and his two sons, were described as “those who know.” Unfortunately for

Plaintiff and Mr. MacKay, they were not among “those who kn[e]w.”

67.

From late 2008 until the sale of the Company was announced publicly, the

Defendants continued to deny to the public and others that the Company as in the process of

being sold. As late as February 20, 2009, the Defendants agreed to and did concoct a “cover

story” to deny to those who inquired that the Company was in the process of being sold.

68.

Finally, and after denying it for months, on April 24, 2009, the Company notified


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Case 1:11-cv-22389-RNS Document 46 Entered on FLSD Docket 11/20/2012 Page 20 of 32

its shareholders of a merger agreement with Glaxo, and in a statement, in part, noted as follows:

a.
On April 19, 2009, the Company’s Board of Directors met,
discussed and approved the merger agreement with Glaxo. The merger
agreement was signed on April 20, 2009. As of April 20, 2009, there
were 32,812 shares of Company common stock outstanding and 8,930
shares of Series A Preferred stock outstanding. The price paid by Glaxo
to the Company shareholders was $68,515.29 in cash for each share of
common stock (all classes) and preferred stock with up to an additional
$7,186.91 based on certain contingencies related to the merger, for a
total of over $75,000.00 per share. (emphasis added).



Based upon the misrepresentations and omissions of Defendants, Plaintiff sold

69.

750 of his shares to the Company at the artificially low price of $11,932.97 per share in June

2008. Had Plaintiff and Mr. MacKay known that the Defendants were planning to sell the

Company for at least $68,515.29 per share only a few months after the sale of the 750 shares,

Plaintiff would have never sold those shares.

70.

Defendants’ intentional, reckless and negligent misrepresentations were the actual

and proximate cause of damages suffered by Plaintiff. But for Defendants’ misrepresentations

and omissions, Plaintiff would not have sold its 750 shares to the Company at that time and

price. Instead, Plaintiff – like Charles Stiefel – would have waited and sold the 750 shares at the

much higher share price of at least $68,575.29.

71.

Before and after the Blackstone investment in August 2007, the fair market value

as determined by the Company for the purpose of determining the sale price when a shareholder

sold shares back to the Company was not in good faith.

72.

Even prior to the Blackstone deal, Defendants were negligent and reckless by

using Bogush to perform valuations when they knew or should have known that he was

incompetent and unqualified to perform such valuations, and they knew or should have known

that his methods were inappropriate and not in accordance with accepted valuation principles.


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Case 1:11-cv-22389-RNS Document 46 Entered on FLSD Docket 11/20/2012 Page 21 of 32

73.

Defendants’ tortious acts and omissions caused Plaintiff to sell his shares of

Company stock to the Company for less than adequate consideration.

74.

Defendants caused the Company to pay Plaintiff a price for its 750 shares that

Defendants knew or should have known did not reflect the true fair value of the Company stock

and without questioning the accuracy of the valuation or, alternatively, with knowledge of the

undervaluation.

75.

Defendants used the 2007 Bogush Valuation when they knew or should have

known that it did not reflect the true fair value of the Company stock as of June of 2008, that it

did not take into consideration the 2007 purchase of Company stock by Blackstone for

approximately $60,000.00 per share, or prior valuations of the Company furnished by Blackstone

and others at or before the time of Blackstone’s investment in August 2007.

76.

Defendants consistently and repeatedly, for decades, told Plaintiff, employees and

the public at large that the Company was not for sale. In June 2008, Defendants deliberately left

Plaintiff with the misimpression that such was the case, as it had been for years, even though

Defendants had already discussed an imminent sale of the Company.

77.

These foregoing acts, misrepresentations and omissions were part of a scheme by

Defendants to act in their self interest to the detriment of the Company’s shareholders and

directors who were not part of the scheme, including Plaintiff and Mr. MacKay.

78.

Had Plaintiff known that Defendants secretly planned to sell the Company for a

price exceeding $68,515.29 per share in a deal that closed only a few months later, Plaintiff

would not have sold 750 of its shares for $11,932.97 per share in June 2008.

79.

Tellingly, Defendant Charles Stiefel, who had this secret insider knowledge about

the pending sale of the Company, did not sell any of his shares at the artificially low price prior


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Case 1:11-cv-22389-RNS Document 46 Entered on FLSD Docket 11/20/2012 Page 22 of 32

to the Glaxo Sale in April 2009.

80.

Nor did Defendant Charles Stiefel participate in the “opportunity to diversify”

that was aggressively pitched by Defendants to the other employees participating in the

Company’s retirement program.

81.

Defendants increased their efforts to reduce outstanding shares beginning in 2008

by terminating numerous employees and offering remaining shareholders the “optional

diversification opportunity” to sell their shares to the Company at the 2008 Bogush Valuation.

82.

By implementation of Defendants’ scheme, they were able to reduce the

outstanding number of Company stock. That reduction increased the stock value to the remaining

shareholders, primarily Defendant Charles Stiefel.

83.

All conditions precedent to the liability of the Defendants have occurred, been

performed, or been waived.

VIOLATION OF THE SECURITIES AND EXCHANGE ACT OF 1934 AND

RULE 10b-5 OF THE SECURITIES AND EXCHANGE COMMISSION

COUNT ONE

Plaintiff restates and incorporates by reference all allegations made in paragraphs

(All Defendants)



84.

1 through 86.

85.

Each Defendant carried out a plan, scheme, and course of conduct which was

intended to and did: (a) deceive the Plaintiff as to the fair value of his Company Stock; (b)

artificially deflate the valuation of Company Stock; and (c) cause Plaintiff to sell his Company

Stock to the Company at an artificially low price. In furtherance of this unlawful scheme, plan,

and course of conduct, each Defendant took the actions set forth herein.

86.

Each Defendant: (a) employed devices, schemes, and artifices to defraud; (b)

made untrue statements of material fact and/or omitted to state material facts necessary to make


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Case 1:11-cv-22389-RNS Document 46 Entered on FLSD Docket 11/20/2012 Page 23 of 32

the statements not misleading; and (c) engaged in acts, practices, and a course of business that

operated as a fraud and deceit upon the Plaintiff in an effort to maintain artificially low prices for

the Company securities in violation of Section 10(b) of the Securities and Exchange Act and

Rule 10b-5.

87.

Plaintiff sues each Defendant as a primary participant in the wrongful and illegal

conduct. Defendant Charles Stiefel is sued as a person in control of the Company under Section

20(a) of the Exchange Act.

88.

Defendants, individually and in concert, directly and indirectly, by the use, means

or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a

continuous course of conduct to misrepresent and conceal material information about the

Company’s fair valuation of the Company stock, which included, but were not limited to, the

following:











Purposely using an unqualified appraiser

a.
to conduct
supposedly “independent” valuations of the Company’s stock that
were chronically, severely undervalued;

b.
Allowing the unqualified “independent” appraiser to use
inappropriate methods for valuing the Company and/or failing to
provide the appraiser with sufficient information to allow the
appraiser to properly perform his task, such as Defendants’ secret plan
to sell the Company;

c. Misrepresenting to employees and shareholders, repeatedly,
that the Company had always been and would always remain
privately held;

In connection with annual letters sent by Charles Stiefel to

d.
shareholders before June 1, 2008:

(1) Misrepresenting the actual fair value of the Employee Plan
stock in effect at the time;

(2) Failing to disclose that the purchase price of the shares did not
represent the actual fair value of the shares of the Company stock


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Case 1:11-cv-22389-RNS Document 46 Entered on FLSD Docket 11/20/2012 Page 24 of 32









held by the Employee Plan;

(3) Representing that “our independent appraiser calculates the
value of the Stiefel shares owned by the Employee Plan” when the
appraiser was not independent as defined by law;

(4) Failing to disclose that Company employees had influence and
review authority with regards to the valuations prepared by the
“independent appraiser.”

Failing to disclose the much higher valuations of the Company

e.
that had been conducted by Blackstone and other third parties;

f.
discussed an IPO with Blackstone;

Failing to disclose that the Company and Charles Stiefel had

Failing to disclose that the Company and Charles Stiefel had
the Company with Blackstone and, upon

g.
discussed selling
information and belief, other third parties;

Failing to disclose that Blackstone made an offer to purchase

h.
the company as a whole in early 2007;

Failing to disclose that selling the Company was an option that

i.
the Defendants had discussed and considered; and

Failing to disclose that the Company and Defendant Charles

j.
Stiefel had taken steps to position the Company for an eventual sale.









89.

All of these statements, misrepresentations and omissions were made by the

Defendants and the Company, orally and in written materials and in other communications

distributed by the Company to all shareholders, including Plaintiff.

90.

Each Defendant acted either with recklessness or with actual knowledge that the

statements and omissions referenced herein were false and misleading and that the failure to

disclose material facts would affect the determination by the Company’s shareholders, including

Plaintiff, as to whether to sell their shares to the Company. Each Defendant deliberately or with

recklessness refrained from taking those steps necessary to inform shareholders, including

Plaintiff, of the true facts.


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Case 1:11-cv-22389-RNS Document 46 Entered on FLSD Docket 11/20/2012 Page 25 of 32

91.

In ignorance of the fact that the price of the securities was artificially depressed,

and relying directly or indirectly on the misleading statements and omissions made by these

Defendants, or on the absence of material information that was known to or recklessly

disregarded by these Defendants, but not disclosed to shareholders by these Defendants, Plaintiff

sold 750 of its shares to the Company at an artificially low price. Plaintiff was thereby damaged.

92.

At the time of these misrepresentations and omissions, Plaintiff believed all

statements made by Defendants were true and was unaware of any omissions. Had Plaintiff

known of the fair value of the Company stock in June of 2008, including, but not limited to, the

effect of the Blackstone Agreement on the fair value of the Company stock, and Defendants’

discussions and plans to sell the Company, Plaintiff would not have sold 750 shares of Company

stock to the Company at that time, or would not have done so at the artificially depressed price

that Plaintiff received.

93.

By way of the foregoing scheme, the Company and the Defendants have violated

Section 10(b) of the Securities and Exchange Act and Rule 10b-5 promulgated thereunder.

94.

The liability of Defendant Charles Stiefel as a control person under Section 20(a)

of the Securities and Exchange Act arises from the following facts: (a) he was a high-level

executive and director of the Company during all relevant times; (b) he was privy to and

participated in the creation and development of the Company’s internal budgets, plans,

projections, and/or reports; (c) he was aware of and participated in the Company's dissemination

of information to the shareholders that he knew was materially false and misleading; (d) he was

Chief Executive Officer and/or President of the Company and had the authority to direct the day-