Samuel J. Wohlstadter helped create what is now the world's largest biotechnology company, Amgen Inc. He took on Roche Holding Ltd. in a licensing dispute and forced the Swiss drugmaking giant to pay more than $1.25 billion in cash to obtain a technology owned by his Gaithersburg biotech company.
But now the 62-year-old BioVeris chairman and chief executive is facing, perhaps, an even more difficult battle. His company, which switched its name from Igen International Inc. to BioVeris Corp. after the Roche deal, filed suit last week against a venture run by his son.
Through a series of events, triggered by new accounting rules, BioVeris directors and their auditors became concerned that Wohlstadter's 34-year-old son, Jacob N. Wohlstadter, was making lavish purchases with money from a joint venture largely funded by BioVeris.
Samuel Wohlstadter is "heartsick" about his son's apparent misuse of corporate assets, said a person familiar with the situation who spoke on condition of anonymity because the company will not authorize public comment on the lawsuit. He "had no involvement and did not know" about his son's activities, that person said.
The Securities and Exchange Commission has opened an informal inquiry into BioVeris's disclosures, according to another source who is familiar with the probe but not authorized to speak publicly about it.
Sam Wohlstadter, who has a home in Charlottesville, Jacob Wohlstadter, who lives in Potomac, and board members did not respond to phone calls last week. Messages left last week at the law firm representing Jacob Wohlstadter were not returned. Samuel Wohlstadter's lawyer declined comment.
Igen was founded in 1982 by Samuel Wohlstadter, who thought the time was right for a diagnostics company using new technology, and by Richard J. Massey, who had been a faculty member in the microbiology and immunology department at Rush Medical Center in Chicago and a senior research scientist at the National Cancer Institute. Igen developed a technology that used light-emitting molecules to measure the presence of biological substances, from viruses in human blood to bacteria in undercooked meat to biowarfare agents in the desert sand.
Igen was one of several companies started by Samuel Wohlstadter, a venture capitalist and forceful entrepreneur. "He is a very aggressive businessman," said George B. Rathmann, recruited by Wohlstadter to be Amgen's chief executive. "Sam came after me with a call a week." Wohlstadter eventually convinced Rathmann in 1980 to leave his job as an Abbott Laboratories executive and run Amgen for several years.
By 1995, Wohlstadter and Massey had built Igen into a publicly traded company with a wide range of testing products. That year Igen launched a company called Meso Scale Diagnostics (MSD). The venture was intended to allow Jacob Wohlstadter, who graduated from the Massachusetts Institute of Technology at age 19 with a degree in biology, to develop an idea he had for miniaturizing Igen technology, potentially opening up new applications.
MSD was jointly owned by Igen and Meso Scale Technologies LLC, a corporate entity that, according to a 1996 SEC filing, was established and operated by Jacob Wohlstadter, who then was 25. Nadine Wohlstadter, Samuel Wohlstadter's wife, was identified that year as a member of the MSD's two-person board of managers. Jacob Wohlstadter and Massey now sit on the two-person board, which governs the joint venture.
Igen agreed to provide MSD $5 million in capital funds for organizational and other expenses. If it invested the entire amount, Igen would get 50 percent of the joint venture's voting equity, according to filings.
Igen also agreed to provide MSD with funds for collaborative research work. Last week's lawsuit said that by the end of May, BioVeris had invested a total of $115 million in MSD. In return, it received 31 percent of the company's Class A voting shares, as well as Class C preferred shares, which entitle BioVeris to get its investment returned from future profits before others.
The rest of the Class A voting shares are owned by Meso Scale Technologies, the entity wholly owned by Jacob Wohlstadter.
Jacob Wohlstadter's initial salary for running MSD was $420,000 for 40 months, according to the 1996 filing. His most recent disclosed employment agreement provided that he be paid $250,000 in salary in 2003, plus be eligible for a cash bonus of up to $50,000, according to a BioVeris filing with the SEC earlier this year. It does not say if Jacob received the bonus.
In addition, Jacob Wohlstadter received $275,000 from Igen in fscal 2002 for consulting services provided from 1995 to 2001, according to the filing. He also has an ongoing consulting agreement that expires Aug. 15, 2004, that document says. He also received stock options for 180,000 shares of Igen stock in 1997 and for 75,000 shares in 2000, according to the company's 2003 proxy filing.
MSD began selling products in October 2002, according to a BioVeris filing, and in the fiscal year ended March 31, 2003, had revenue of $3.2 million and a net loss of $18.2 million, prompting complaints from analysts about the arrangement.
Dennis Roth, an independent analyst, who has tracked Igen and BioVeris for several years,said: "For what it put in, Igen got a pittance of what they should have." Roth, who consults for investors, is the former director of research at the now-defunct Chesapeake Financial Services, a Towson brokerage.
"Whenever you are dealing with relatives, you make sure to go overboard to make it fair," said Luke Smith, an analyst with brokerage Chapin, Davis in Baltimore. Smith owns BioVeris stock. "It doesn't look to me that this was done in this case. Every advantage went to MSD. I can't imagine this deal would be done with an outsider."
When Roche bought Igen, Igen shareholders got $47.25 in cash and one share of BioVeris stock. In its five months in existence, BioVeris shares have fallen from $17.22 to close Friday at $10.35. An investor would have paid $64.09 for a share of Igen immediately before the merger; if the investor kept the cash and held on to his share of BioVeris, that investment would be worth $57.50 today, according to company filings.
Some analysts said they repeatedly asked Sam Wohlstadter and other executives to defend the unusual MSD arrangement. They said BioVeris did so by noting it was fully disclosed in SEC filings. The company said in its filings that it believed the transactions "were made on terms no less favorable to the Company than could have been obtained from unaffiliated third parties."
The company also pointed out that in 2000 it had created a special committee of its board of directors, known as the joint venture oversight committee, to watch over MSD. Samuel Wohlstadter is not on that committee, which is made up of outside BioVeris directors. According to SEC filings, the committee's responsibilities include approving MSD's budget and negotiating BioVeris's agreements with MSD and Jacob Wohlstadter.
The members of the committee, as of the company's last proxy statement filed in July 2003, were Robert Salsmans, until recently chief executive of biotech firm Diosynth RTP Inc.; Joop Sistermans, who chaired an advisory council for science and technology to the Dutch parliament, and Anthony Rees, director of science at the French biotech firm Synt:em. None of the three responded to calls or e-mails last week.
In 2001, a firm then known as Brown Simpson Asset Management LLC, a New York investment firm that had purchased $25 million in debt convertible into Igen stock, sued the company, claiming that several members of the Igen board of directors "have permitted defendant Samuel J. Wohlstadter to operate Igen like a privately owned candy store, without regard to the interests of the company's public shareholders."
The suit was later dismissed, on the grounds that Brown Simpson was not a shareholder.
Unrelated to MSD, Samuel Wohlstadter is involved with at least four other companies that have ties to BioVeris [See chart, Page E1]. In a statement from an outside spokesman, Paul Caminiti, BioVeris said transactions among those companies were all above board. "Igen and BioVeris have made extensive disclosures regarding related party transactions in public filings," Caminiti said. He added that despite the losses associated with MSD, BioVeris shareholders have enjoyed large financial returns. "By any financial measure, tremendous value was created for all Igen shareholders including more than $1.25 billion in cash through the Roche transaction," he said.
The issues at MSD became public after a new accounting rule required BioVeris to consolidate its minority interests, including its 31 percent ownership stake in MSD. That meant, for the first time, BioVeris auditors examined MSD's books, according to a source familiar with the situation.
In March, BioVeris said it replaced Deloitte & Touche, its auditor since the creation of MSD in 1995, with PricewaterhouseCoopers. The new auditors noticed questionable purchases and told BioVeris's audit committee, which is composed of the independent directors and does not include Samuel Wohlstadter. The auditor said that until the questionable transactions were cleared up, BioVeris would likely be unable to file its financial statements for the fiscal year ended March 31 by its June 29 due date.
The audit committee of BioVeris's board of directors then filed the lawsuit against Jacob Wohlstadter, alleging that he misappropriated $700,000 from MSD to buy or put deposits on nine luxury vehicles and spent an additional $1.7 million on residential property next to his home. It also alleges that he used a subsidiary of the joint venture to "purchase or attempt to purchase" residential property in New York with a price of $4.6 million.
The son is considering exercising an option to buy out BioVeris's share of MSD, according to BioVeris's lawsuit. As a result, he is trying to get Massey removed from MSD's two-person management board, according to the lawsuit. BioVeris has argued that as long as BioVeris remains a 31 percent owner of MSD, Massey should remain on the management board. The company also asked the court to prevent the younger Wohlstadter from completing any transactions on behalf of MSD worth more than $10,000 or outside the normal course of business, according to court documents.
"It' s pretty clear that Sam and Jacob have not been on very good grounds," said John M. Putnam, managing director at Belmont Harbor Capital LLC in Chicago.
Staff researcher Richard Drezen contributed to this report.