MILBERG WEISS BERSHAD
HYNES & LERACH LLP
ALAN SCHULMAN (128661)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
HAGENS & BERMAN
STEVE W. BERMAN
KARL P. BARTH
1301 Fifth Avenue
Suite 2929
Seattle, WA 98101
Telephone: 206/623-7292
Attorneys for Plaintiff
[Additional counsel appear on signature page.]
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
WESTERN DIVISION
MARKSMAN PARTNERS, L.P., On Behalf ) No. 96-0872 GHK (JRx)
of Itself and All Others Similarly )
Situated, ) CLASS ACTION
)
Plaintiff, )
)
vs. ) CLASS ACTION COMPLAINT FOR
) VIOLATION OF THE FEDERAL
CHANTAL PHARMACEUTICALS CORPORATION ) SECURITIES LAWS
and CHANTAL BURNISON, )
)
Defendants. ) Plaintiff Demands A
____________________________________) Trial By Jury
NATURE OF THE ACTION
1. This is a securities class action on behalf of all
persons, other than defendants and affiliated persons as described
below (the "Class"), who purchased or otherwise acquired the common
stock of Chantal Pharmaceuticals Corporation ("Chantal" or the
"Company") between July 10, 1995 and January 5, 1996, inclusive
(the "Class Period").
2. During the Class Period, defendants Chantal and Chantal
Burnison (collectively the "defendants"), issued a series of false
statements about the financial performance and financial condition
of Chantal which operated to artificially inflate the price of
Chantal's common stock while defendant Burnison sold at least
300,000 shares of her Chantal holdings near the stock's all time
high for total proceeds of at least $6.3 million, prior to
disclosure of the truth about Chantal's purported financial
success.
3. An essential element of the defendants' fraudulent scheme
was to report increasing quarterly earnings during the Class
Period. By reporting increasing profits in successive quarters,
defendants knew that the securities market and investors would view
Chantal in a positive light, and as a result the price of Chantal's
stock would increase. In order to report a profit for the quarters
ending June 30, 1995, and September 30, 1995, defendants falsely
portrayed the financial condition of Chantal primarily through
overstating earnings by improperly recognizing revenue on sales
which provided for the right of return and did not meet the
criteria under Generally Accepted Accounting Principals ("GAAP")
for revenue recognition, and by failing to disclose related party
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transactions with Stanson Marketing for financial reporting
purposes. As a result, Chantal overstated its revenues for the
fiscal year ended June 30, 1995 and the quarter ended September 30,
1995 by approximately $3 million and $10 million respectively, and
overstated its receivables by at least $10 million on September 30,
1995. Chantal would have reported a loss in each period if
defendants had properly followed GAAP.
4. As a result of reporting positive earnings for the
quarters ending June 30, 1995 and September 30, 1995 and the
misleading statements regarding Chantal's marketing agreement with
Stanson, Chantal's stock price rose from $6-9/16 on July 10, 1995
to $28-1/8 on December 29, 1995. When the facts concerning
Chantal's financial condition were disclosed, Chantal stock
plummeted from $19-1/8 per share to $7-5/16 per share on January 8,
1996 on huge volume of 7.7 million shares, more than ten times its
daily average.
JURISDICTION AND VENUE
5. Plaintiff brings this action pursuant to 15 U.S.C.
§§78j(b) and 78t(a) (§§10(b) and 20(a) of the Securities Exchange
Act of 1934 (the "Exchange Act")), and Rule 10b-5, promulgated
thereunder by the Securities and Exchange Commission ("SEC"), 17
C.F.R. §240.10b-5, as a result of false and/or misleading
statements defendants made to the marketplace in connection with
the public trading of Chantal's common stock during the Class
Period.
6. This Court has jurisdiction in this action pursuant to
§27 of the Exchange Act, 15 U.S.C. §78aa, and 28 U.S.C. §1367.
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7. Venue is proper in the Central District of California
pursuant to §27 of the Exchange Act, 15 U.S.C. §78aa, and 28 U.S.C.
§§1391(b) and (c). A substantial part of the events and omissions
giving rise to the claims alleged herein, including the dissemina-
tion of the various public statements and reports that contained
materially false and misleading information, occurred in this
district. Chantal's corporate headquarters and executive offices
are located in Los Angeles, California.
8. In connection with the acts and conduct alleged in this
complaint, defendants, directly and indirectly, used the means and
instrumentalities of interstate commerce, including the mails and
telephone communication systems, and the facilities of a national
securities markets [sic].
THE PARTIES
9. Plaintiff Marksman Partners, L.P., a Washington limited
partnership, through its general partner, Mark Ruljancich,
purchased and sold shares of the common stock of Chantal on the
dates and at the prices indicated below, and has been damaged as a
result of defendants' conduct as described herein. As of
January 5, 1996, plaintiff was the holder of 29,000 shares of
Chantal stock acquired at an average price of approximately $21.50
per share.
Date Transaction No. Shares Price Cost/Proceeds
---- ----------- ---------- ----- -------------
11/17/95 - 11/20/95 Bought 3,000 $14-5/8 $ 43,965
11/22/95 Bought 3,000 15-15/16 47,875
11/24/95 - 11/25/95 Bought 8,000 19 152,180
11/25/95 Bought 2,000 21-1/4 42,560
11/29/95 Bought 2,000 24-1/8 48,250
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11/29/95 Bought 1,000 23-1/4 23,250
11/29/95 Sold 3,000 25-5/16 75,875
11/30/95 Bought 2,000 21-3/8 42,810
12/7/95 Sold 3,000 23-3/4 71,250
12/13/95 Bought 3,000 24-1/8 72,375
12/11/95 - 12/13/95 Sold 8,000 22-1/4 177,875
12/21/95 Bought 4,000 22-3/8 89,500
12/21/95 Bought 2,000 22-1/4 44,500
12/21/95 Bought 2,000 22-3/8 44,810
12/21/95 Bought 1,000 22-3/8 22,405
1/4/96 Bought 5,000 20-3/8 101,875
1/4/96 Bought 5,000 20-3/8 101,875
1/4/96 Sold 5,000 20-1/4 101,250
1/5/96 Bought 5,000 18-3/4 93,750
On January 8, 1996, plaintiff sold 29,000 shares of Chantal stock
at an average price of $7.53 per share. Plaintiff's loss on
Chantal stock, net of previous gains, was $327,463.
10. Defendant Chantal Pharmaceutical Corporation is a
Delaware corporation that maintains its principal offices in Los
Angeles, California. Its stock trades on the NASDAQ Exchange
(Small Cap System) under the symbol "CHTL."
11. Chantal is primarily engaged in the business of
researching, developing, and marketing various compounds for use as
dermatological and skin care consumer products. Although the
Company holds patents and exclusive distribution rights for various
compounds designed to treat ailments ranging from male pattern
baldness and acne to cancer, the only product that it has marketed
to date is Ethocyn -- a compound designed to eliminate wrinkles and
improve the appearance of aging skin. Consequently, at all times
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relevant hereto, Chantal was heavily dependent upon revenues from
sales of Ethocyn. Indeed, for the fiscal year ended June 30, 1995
("fiscal 1995"), sales of Ethocyn accounted for over 98% of the
Company's total revenues.
12. Defendant Chantal Burnison ("Burnison") was Chairman of
the Board and Chief Executive Officer of the Company throughout the
Class Period. From at least November 1995 until the end of the
Class Period, Burnison was also the Principal Financial and
Accounting Officer of the Company. Because of defendant Burnison's
position with the Company, she had access to the adverse non-public
information about Chantal's finances, and had access to internal
corporate documents (including the Company's operating plans,
budgets and forecasts and reports of actual operations compared
thereto). Throughout the Class Period, Burnison also served as
President and a member of the Board of CBD Pharmaceutical
Corporation ("CBD"), a privately-held entity controlled by
Burnison. As of December 31, 1994, Burnison owned or controlled
1,522,103 shares of Chantal common stock, either directly or
through CBD. During the Class Period, Burnison sold at least
300,000 shares of Chantal common stock, or approximately 20% of her
holdings, at prices ranging from $20.88 to $22 per share, and
realized proceeds from these sales in excess of $6.3 million.
Burnison had not sold any of her Chantal holdings in the three year
period prior to her sales in December 1995.
13. As an officer, director and/or controlling person of a
publicly-held company whose stock is registered with the SEC under
the Exchange Act and traded on NASDAQ, Burnison had a duty to
promptly disseminate accurate and truthful information with respect
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to the Company's financial condition and to correct any previously
issued statements that had become untrue and to disclose any
adverse trends that would materially affect the present and future
financial operating results of the Company, so that the market
price of the Company's stock would be based upon truthful and
accurate information.
14. Because of her position with the Company, Burnison
controlled the contents of Chantal's quarterly and annual reports,
filings with the SEC, financials, press releases and presentations
to securities analysts. She was responsible for the major
decisions involving Chantal. Burnison was provided with copies of
the Company's reports, financials and press releases alleged herein
to be misleading prior to or shortly after their issuance and had
the ability and opportunity to prevent their issuance or cause them
to be corrected. Because of her position and access to material
non-public information available to her but not the public,
Burnison knew that the adverse facts specified herein had not been
disclosed to and were being concealed from the public and thus knew
that the positive representations which were being made were then
false and misleading. As a result, Burnison is responsible for the
accuracy of the public reports and releases detailed herein and is
therefore responsible and liable for the representations contained
therein.
15. Burnison engaged in the wrongful conduct alleged herein
so that she could inflate the price of the Company's stock in order
to: (i) allow her to sell a substantial portion of her holdings at
artificially inflated prices; (ii) complete a substantial private
placement of additional shares of Chantal common stock during the
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Class Period; (iii) enhance the value of her stock holdings,
options and warrants in Chantal; and (iv) protect and enhance her
executive position and the substantial compensation and prestige
she obtained thereby.
CLASS ACTION ALLEGATIONS
16. Plaintiff brings this case as a class action pursuant to
Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure on
behalf of a Class consisting of all persons and entities who
purchased Chantal common stock from July 10, 1995 through
January 5, 1996, inclusive. Excluded from the Class are the
defendants herein, any subsidiaries or affiliates of Chantal,
members of any defendants' immediate family, the officers and
directors of Chantal during the Class Period, and each of their
heirs, successors and assigns.
17. During the Class Period, thousands of shares of common
stock of Chantal were traded on an efficient and developed
securities market. Thousands of brokers nationwide have immediate
access to trading information about Chantal through the system.
Within minutes of any transaction taking place, this system
displays the most recent trades and prices.
18. The members of the Class are so numerous that joinder of
all members is impracticable. Chantal has more than 17 million
shares outstanding. During the Class Period, millions of shares of
Chantal stock were purchased by hundreds of persons located
throughout the United States. The exact number of Class members
can be determined by appropriate discovery.
19. Plaintiff's claims are typical of the claims of the
members of the Class. Plaintiff and all members of the Class
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sustained damages as a result of defendants' wrongful conduct
complained of herein.
20. Plaintiff will fairly and adequately protect the
interests of the members of the Class and has retained counsel
competent and experienced in class and securities litigation.
Plaintiff has no interests that are adverse or antagonistic to
those of the Class.
21. A class action is superior to other available methods for
the fair and efficient adjudication of this controversy. Because
the damages suffered by many individual Class members may be
relatively small, the expense and burden of individual litigation
make it virtually impossible for the Class members to individually
seek redress for the wrongful conduct alleged herein.
22. Common questions of law and fact exist as to all members
of the Class and predominate over any questions affecting solely
individual members of the Class. Among the questions of law and
fact common to the Class are:
(a) whether the federal securities laws were violated by
defendants' acts as alleged herein;
(b) whether statements disseminated to the investing
public and securities markets by the defendants misrepresented
and/or omitted material facts about Chantal, its business and its
prospects;
(c) whether defendants acted willfully or recklessly in
misrepresenting and/or omitting to state material facts;
(d) whether the market price of Chantal's common stock
during the Class Period was artificially inflated due to the
misrepresentations and/or non-disclosures complained of herein; and
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(e) whether the members of the Class have sustained
damages, and, if so, what is the proper measure thereof.
23. Plaintiff will rely, in part, upon the presumption of
reliance established by the fraud-on-the-market doctrine in that:
(a) defendants made public misrepresentations or omitted
material facts during the Class Period, as alleged herein;
(b) the misrepresentations and/or omissions were
material;
(c) Chantal's common stock was traded in an efficient
market;
(d) the misrepresentations and/or omissions alleged
tended to induce reasonable investors to misjudge the value of
Chantal shares; and
(e) plaintiff and members of the Class acquired their
shares between the time defendants made the misrepresentations
and/or omissions and the time the truth was revealed, without
knowledge of the falsity of the misrepresentations.
24. Based upon the foregoing, plaintiff and members of the
Class are entitled to a presumption of reliance upon the integrity
of the market for, at least, the purposes of class certification,
as well as for ultimate proof of the claims on their merit.
Similarly, plaintiff and members of the Class are entitled to a
presumption of reliance with respect to the omissions alleged
herein.
25. Plaintiff envisions no difficulty in the management of
this litigation as a class action.
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BACKGROUND FACTS
26. Chantal was formed in 1982 for the purpose of developing
and bringing to market various drug products derived from a family
of synthetic compounds that are proprietary to the Company. The
three primary compounds for which the Company holds patents and
exclusive marketing and distribution rights are (i) Cyoctol, which
is designed to treat acne, male pattern baldness, and excessive
scarring; (ii) Metcyclor, which the Company claims to be effective
in reducing malignant tumors in cases of renal, colon, breast,
ovarian and prostate cancer; and (iii) Ethocyn, which purportedly
modulates skin elasticity, thereby reducing the appearance of
wrinkles from aging.
27. The Company acquired its proprietary compounds on May 21,
1982, when it obtained the licensing right to the patents and
safety and efficacy test data conducted to such date from CBD -- a
pharmaceutical corporation owned and controlled by defendant
Burnison and her family, and which has employed defendant Burnison
as its President since 1980. In return for the licensing rights to
its proprietary compounds, the Company issued approximately 2.6
million shares of its common stock to CBD, making it Chantal's
largest shareholder, and appointed defendant Burnison to the post
of Chairman of the Board and Chief Executive Officer of the
Company. Consequently, through her continued ownership and control
of CBD, defendant Burnison in effect became the largest shareholder
of Chantal without making any cash payment for her shares of common
stock.
- 11 -
28. On July 21, 1994 -- approximately one month following the
close of fiscal 1994 -- the price of Chantal common stock reached
a 52-week low of $0.75 per share.
29. Faced with virtually non-existent revenues, rapidly
eroding market capitalization, and a complete lack of funds
necessary to secure FDA approval of any of its proprietary
compounds, defendants embarked upon a course of conduct designed to
restore value to the Company's common stock and then convert this
value into cash by selling Chantal common stock to the public
through a series of private placements and open-market
transactions. To accomplish this goal, the Company focused its
efforts on marketing Ethocyn, Chantal's proprietary compound
designed to eliminate the appearance of wrinkles from aging.
30. Defendants launched their plan involving the marketing of
Ethocyn on August 2, 1994, when Chantal and Burnison released over
the PR Newswire a statement detailing a report given by Dr. Richard
Strick at the annual meeting of the American Academy of
Dermatology. The report was a key jumping point for Chantal's
claim that its new product, Ethocyn, would be a tremendous
financial success:
According to Dr. Strick, Clinical Professor of
Medicine and Dermatology at UCLA School of Medicine, "We
have known for years why skin tends to sag and wrinkle
with age. But we have had few options to reverse the
process. This Ethocyn study is an exciting breakthrough
because it gives us, for the first time, a new tool to
deal with the important skin elasticity component of
sagging and wrinkled skin."
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* * *
"What we saw," according to Dr. Strick, "was that on
average, patients' skin elastin content was increased 100
percent. However, those patients who came to the study
with low skin elastin fiber content realized 200 percent
to 500 percent increases in their skins' elastic fiber
content after topically applying the Ethocyn solution
every day for two months. The six month clinical trial
duration confirmed that patients who continued to apply
the Ethocyn solution twice a day, maintained their two
month noted elastin fiber content levels at six
months." Dr. Strick further reported that "Ethocyn not
only increased the elastic fiber content in patients'
skin, but did so without any side effects including no
reports of Ethocyn skin irritation or phytotoxicity
common to Retin A and alpha hydroxy acids."
31. Chantal's efforts to market Ethocyn appeared to produce
beneficial results. On or about February 21, 1995, the Company
filed its Form 10-Q for the fiscal quarter ended December 31, 1994,
which revealed that Chantal's revenues increased from $37,000 to
$1,042,000 for the six months ended December 31, 1993 and 1994,
respectively, although its net loss for these periods widened from
$776,000 to nearly $l.2 million. Chantal's operating results
continued to improve, however, during the following quarter. On
May 23, 1995, the Company announced that the fiscal quarter ended
March 31, 1995, was the first profitable quarter in its history,
reporting earnings of $408,752 on revenues of $2,813,346.
Consequently, the Company's reported results for the nine months
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ended March 31, 1995, showed significant improvement over the same
period of fiscal 1994, with revenues increasing from $134,102 to
$3,855,049 and the net loss for the period narrowing from
$l,054,992 to $776,441.
32. Following the Company's announcement of positive results
for the quarter ended March 31, 1995, certain widely-read financial
analysts began to recommended the purchase of Chantal common stock.
For example, on June 9, 1995, CNBC correspondent Dan Dorfman
reported that the price of the Company's stock could rise to as
high as $15 per share within the next twelve months, based upon
information provided by Barbara Doran of Doran Capital Management.
Dorfman further reported that Doran had projected sales for Chantal
of approximately $5 million for fiscal 1995.
33. By June 1995, Chantal and defendant Burnison, through the
foregoing statements and others, had primed the market to expect
that Ethocyn was a commercially viable product. The next step was
to demonstrate that sales of Ethocyn would allow Chantal to become
a highly profitable company, which was accomplished through the
issuance of false and misleading financial statements as set forth
below.
FALSE AND MISLEADING STATEMENTS MADE DURING THE CLASS PERIOD
34. On July 10, 1995, the day the Class Period commences,
Chantal issued a press release announcing that it had signed a
marketing agreement (the "Marketing Agreement") with Stanson
Marketing ("Stanson") of Los Angeles, to distribute the Company's
line of Ethocyn-based skin care products to physicians and
pharmacies in North America.
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35. In connection with this announcement, Burnison further
stated in the Company's press release, that Chantal was "very
comfortable with the experienced team and marketing ability of
Stanson under the leadership of Mr. Fred Reinstein, who has proven
successes in the area of health and beauty products marketing."
The Company did not disclose any of the specific terms of the
Marketing Agreement when making its announcement. In addition,
defendant Burnison stated in her announcement that the Marketing
Agreement "became effective at July 1, 1995." Burnison did not
disclose that in fact the agreement was dated June 29, 1995, and
covered sales to Stanson occurring in the fourth quarter of 1995.
36. The specifics of the Marketing Agreement provided for
Stanson to purchase specified quantities of Ethocyn from Chantal
for resale. Stanson, however, assumed virtually no risk of loss in
the event that it was unable to distribute the product success-
fully; instead the Marketing Agreement granted Stanson the right to
return any product purchased from the Company on the same terms as
"Chantal's own 1-800 # return offer to end user customer[s]." As
detailed in Chantal's Form 10-K for fiscal 1995, "[t]he Company's
sales terms for direct marketing Ethocyn-based skin care products
allow the customer the right to return the product within 60 days."
Consequently, the Marketing Agreement allowed Stanson to resell
Ethocyn to retail distributors with a 60-day right of return, and
subsequently return these products to Chantal for a full refund.
In addition, the Marketing Agreement allowed Stanson an unusually
long period of 90 days to pay Chantal for its purchases.
37. The terms of the Marketing Agreement also revealed that
Stanson, as a purchaser for resale, lacked any economic substance
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apart from that provided by Chantal, by (i) granting Stanson an
option to sell itself to Chantal (the "Put Option"), and
(ii) granting Chantal an option to purchase Stanson (the "Call
Option"). Specifically, the Put Option gave Stanson the right to
sell itself to Chantal anytime after December 31, 1995, for a price
of 12 times Stanson's net earnings for the three months immediately
preceding the exercise of the option, while the Call Option
provided Chantal with the right to acquire Stanson on virtually
identical terms. These twin options would allow Stanson to sell
itself to Chantal for a substantial multiple of earnings derived
from goods that it had purchased from the Company and resold
subject to a 60-day right of return. Thus, if the option were not
exercised, any revenues that Chantal had recognized from the sale
of these products to Stanson would be jeopardized, since Chantal
would become liable to accept return of these goods for a full
refund. If the option were exercised, Chantal would, in effect, be
repurchasing any unsold goods held in Stanson's inventory that
Chantal had previously sold to Stanson. Moreover, this Put/Call
Option is not an insignificant part of the agreement. Either one
of the parties to the agreement could make the sale take place.
38. On July 24, 1995, Bloomberg News Service reported that,
according to defendant Burnison, the Company expected to report
"break-even" earnings for fiscal 1995 on revenues of approximately
$7 million, representing nearly an 8000% increase from fiscal 1994
revenues of $89,996. When making this statement, defendant
Burnison knew, but did not disclose, that nearly 50% of Chantal's
estimated revenues for fiscal 1995 -- and over 90% of its estimated
revenues for the final quarter of that fiscal year -- were
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comprised of sales to Stanson that were subject to the terms of the
Marketing Agreement, and that Stanson's right to return the goods
that comprised these revenues had not yet expired.
39. Defendant Burnison's July 24, 1995 statement was
materially false and misleading because the Company could not
recognize any revenues from sales to Stanson during fiscal 1995 in
accordance with GAAP, and specifically, Statement of Financial
Accounting Standards No. 48 ("FAS 48"), which sets forth the
criteria for recognizing revenue when a right of return exists.
40. Specifically, FAS 48 provides that when an enterprise
sells its products with a right of return, the seller may not
recognize revenue from the sale until the right of return has
expired unless, among other things, the following two conditions
have been met: (i) "[t]he amount of future returns can be
reasonably estimated"; and (ii) "[t]he buyer acquiring the product
for resale has economic substance apart from that provided by the
seller."
41. As explained in more detail in ¶¶67-79, below, Chantal's
recorded sales to Stanson during the final quarter of fiscal 1995
failed to meet either of these criteria. First, Chantal had
insufficient basis to reasonably estimate the amount of future
returns thereby precluding recognition of these revenues under the
express terms of FAS 48 as: (a) Chantal lacked any historical
experience of selling goods to Stanson from which it could
reasonably estimate returns; (b) its entry into the Marketing
Agreement constituted a substantial "change in the selling
enterprise's marketing policies or relationships with its
customers"; (c) the product was susceptible to significant external
- 17 -
factors, such as technological obsolescence or changes in demand;
and (d) there were relatively long periods in which its products
could be returned.
42. Secondly, under the terms of the Marketing Agreement,
Stanson lacked any economic substance apart from that provided by
Chantal, as required by FAS 48. As detailed in ¶¶67-79, below, the
existence of the Put Option and the Call Option in the Marketing
Agreement, combined with the fact that Stanson primarily performed
business activities on behalf of Chantal throughout the Class
Period, had the effect of eliminating any meaningful distinction
between the operations of Stanson and those of Chantal.
43. Defendant Burnison knew at the time she made her
preliminary earnings announcement that the overwhelming majority of
the Company's revenues for the final quarter of fiscal 1995
consisted of sales to Stanson, and that GAAP (specifically FAS 48)
precluded the Company from recognizing revenue from these sales for
the reasons set forth in ¶¶67-79.
44. The price of Chantal common stock again began to rise
substantially following the materially false and misleading report
of the Company's revenues and earnings for fiscal 1995, and
defendants capitalized on this increase by completing a substantial
private placement. Specifically, on August 8, 1995, Chantal
announced that it had completed a private placement of 1 million
shares of restricted common stock, and 500,000 shares of
convertible preferred stock, at a price of $4.90 per share,
realizing proceeds before placement fees of $7,350,000, or more
than twice the consideration that Chantal had received in its prior
three stock offerings during fiscal 1995 combined. Within one week
- 18 -
of this announcement, the price of Chantal common stock reached a
new 52-week high of $12.25 per share.
45. The Los Angeles Business Journal reported on the rise of
Chantal's stock on September 25, 1995, and specifically noted the
relationship between positive earnings, Stanson and the increase in
Chantal's stock price:
The drug [Ethocyn] met with considerable excitement
when it was released in Aug. 1994, but this summer's
stock price increase -- from $3.50 a share on June 5 to
$11 on Aug. 31, a whopping 214 percent gain -- was fueled
mainly by the company's stellar sales figures announced
in June and an agreement signed the same month between
Chantal and Stanson Marketing Inc., a Los Angeles-based
pharmaceutical distributor.
* * *
Currently, according to Burnison, the company cannot
produce enough Ethocyn to meet the demand. Chantal is
negotiating with an independent laboratory in Zurich,
Switzerland to synthesize the drug, after a deal to
purchase a laboratory in Tucson, Arizona fell through in
early September because of the high cost of repairing the
facility.
This article demonstrates the effect the previous announcements had
on the market price of Chantal's stock.
46. On September 27, 1995, Chantal and defendant Burnison
announced that the results for fiscal 1995 were in line with
Burnison's July 24th estimate:
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Chantal Pharmaceutical Corp. (NASDAQ: CHTL) said
today that for the first year in the company's history,
it will report earnings.
For the fiscal year ended June 30, 1995, earnings
are estimated to be in excess of $.02 per share on
revenue of $7,214,938, the exact figures being subject to
final audit judgments.
The announcement was made by Chantal Burnison,
chairman and chief executive officer of Chantal
Pharmaceutical Corp., who noted that the successful
results are attributable to the sales of Chantal Ethocyn
Skin Care Line of products, which the company began
marketing in Aug. 1994. Burnison noted that fourth
quarter 1995 revenue was strong at $3,358,889 and
earnings are estimated to be in excess of $.09 for the
quarter.
The company also announced that it is filing with
the SEC for an extension for the filing of the company's
Annual Report on Form 10-K and that it expects to file
such report within the permitted extended period.
This statement was false and misleading when made because the
defendants were aware that improper and fraudulent accounting
practices were being employed, as detailed below in ¶¶67-79, to
improperly inflate Chantal's revenue and income figures. Chantal's
stock was trading at $10-l/4 at the close of business on
September 27, 1995.
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47. In reaction to this strong earnings report, Chantal stock
rose from $10-l/4 per share on September 27, 1995 to $12-3/4 per
share on October 15, 1995.
48. On September 29, 1995, based in part on statements made
by Burnison, Cruttenden Roth issued a research report recommending
Chantal as a "Buy." Cruttenden's report specifically highlighted
the relationship with Stanson, described as a "street-wise
marketer" and made specific reference to the new agreement. Based
in part on Chantal's reported earnings, Cruttenden forecast sales
in 1996 of $80.5 million and net income of $1.05 per share, versus
$7.2 million and $0.02 per share as reported for 1995.
49. On October 13, 1995, based on conversations with
defendant Burnison, Dabney Resnick issued a research report
recommending Chantal as a "Buy." The report specifically noted as
positives about Chantal the Marketing Agreement with Stanson,
heralding its "long history of selling to pharmacies" and that it
had established "significant inroads to pharmacies and
dermatologists." These remarks regarding Stanson were based on
statements made by Burnison.
50. These statements were false and misleading as the
revenues recognized under the Marketing Agreement were reported in
violation of GAAP (see ¶¶67-79), and failed to disclose the history
of Fred Reinstein, President of Stanson. Relevant to consideration
of Stanson's long history, and necessary to make these statements
not misleading, would have been the disclosure of various claims
against Reinstein involving allegations of fraudulent conduct,
including allegations that he spearheaded a scheme to bilk
- 21 -
consumers of products made by Turbo-Tek and falsified shipping
documents.
51. On October 27, 1995, Chantal formally announced earnings
of $406,139, or $0.03 per share, on revenues of $7,214,938 for
fiscal 1995, as compared with a loss of $1,795,061, or $0.19 per
share, for the prior fiscal year. In a statement accompanying
Chantal's earnings announcement, defendant Burnison noted that
"[t]he year's results reflect fourth quarter earnings of $l,182,580
or $.09 per share, on revenues of $3,358,889." Once again, the
defendants failed to disclose that approximately 90% of these
revenues constituted sales to Stanson, which could not be properly
recognized during fiscal 1995 under GAAP, and specifically FAS 48,
for the reasons set forth in ¶¶67-79.
52. On the same day that the Company issued its press
release, Chantal filed its Form 10-K for fiscal 1995 with the SEC,
which was signed by defendant Burnison, and which confirmed the
financial results set forth above.
53. The 1995 Form 10-K revealed for the first time that
approximately 90% of the Company's revenues for the final quarter
of that year were derived exclusively from sales to Stanson, and a
copy of the Marketing Agreement was attached as an exhibit to the
document. Nevertheless, neither the management's discussion and
analysis section, nor the audited financial statements (including
the notes thereto) discussed the existence of the Marketing
Agreement or its terms, despite the fact that the agreement covered
revenues recorded and recognized prior to the end of the fiscal
year. As a result, the financial statements in the Form 10-K were
- 22 -
materially misleading for the reasons set forth in ¶¶67-79. The
Form 10-K was signed by Burnison.
54. Chantal accelerated its efforts to boost revenues by
selling additional goods to Stanson during the first quarter of
fiscal 1996. On or about November 14, 1995, the Company filed its
Form 10-Q for the quarter ended September 30, 1995 with the SEC, in
which Chantal reported that its results for the quarter had
eclipsed its results for the entire fiscal 1995 period.
Specifically, the Company reported net income of nearly $4.2
million on revenues of approximately $11 million, signifying
increases in revenue and net income of 56% and 93%, respectively,
from its reported results for all of fiscal 1995. The Form 10-Q
also incorporated the financial statements contained in the fiscal
1995 Form 10-K by reference, and further assured readers that "[i]n
the opinion of the Company's management, all adjustments
(consisting only of normal recurring adjustments) necessary for a
fair presentation of the condensed consolidated financial
statements have been made." The Form 10-Q was signed by defendant
Burnison.
55. The Form 10-Q indicated that over 90% of the Company's
reported revenues for the quarter consisted of sales to Stanson,
which were made pursuant to the terms of the Marketing Agreement.
Nevertheless, the Form 10-Q did not summarize, discuss, or
otherwise set forth the significance of those terms, and included
false financial statements which reported revenues derived from
sales to Stanson during the quarter in violation of GAAP, and
specifically FAS 48, for the reasons set forth in ¶¶67-79. One day
after filing the Form 10-Q, the Company announced these results to
- 23 -
the public in a press release in which defendant Burnison falsely
stated that Chantal's "record results" were due to "the aggressive
marketing efforts for the Chantal Ethocyn Skin Care line of
products by the company and its distributor, Stanson Medical
Marketing."
56. Following these positive but false and misleading
announcements, the price of Chantal common stock rose from $12.18
per share on November 14, 1995, to $28.125 per share on
December 29, 1995. According to a report issued by Dow Jones News
Service on November 27, 1995, the dramatic increase in the price of
Chantal's common stock during this time period was fueled by
"several factors, including the company's earnings momentum and the
unveiling of a nationwide magazine advertising campaign."
57. On December 29, 1995, the Company filed with the SEC a
Registration Statement and Prospectus (the "December Prospectus"),
covering shares sold by the Company in a series of private
placements during fiscal 1995 including those sold in the August
1995 private placement, in which the Company again expressly
incorporated its audited financial results for fiscal 1995, and
also included the full text of Coopers & Lybrand's report
concerning its audit of these financial results. The Company also
included its financial results for the quarter ended September 30,
1995 in the December Prospectus, along with Chantal's assurance
that, "[i]n the opinion of the Company's management, all
adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the condensed consolidated
financial statements have been made." Once again, the audited
financial results presented in the December Prospectus, as opined
- 24 -
upon by Coopers & Lybrand, did not discuss the existence of the
Marketing Agreement, and the December Prospectus included financial
statements prepared in violation of GAAP, and specifically FAS 48,
which precluded the Company from recognizing revenue from sales to
Stanson during the final quarter of fiscal 1995 and the first
quarter of fiscal 1996, for the reasons set forth below.
INSIDER SELLING BY DEFENDANT BURNISON
58. Despite the uniformly positive reports concerning Chantal
that circulated throughout the investment community during this
period, defendant Burnison knew otherwise and she began to unload
her shares.
59. The following chart depicts the sale of Chantal stock by
defendant Burnison through CBD, which she controls:
CBD Pharmaceutical Corp.
12/4/95 10,000 21.88 218,800
12/4/95 10,000 21.63 216,300
12/4/95 10,000 21.38 213,800
12/4/95 25,000 20.88 522,000
12/4/95 25,000 21.00 525,000
12/4/95 20,000 21.88 437,600
12/4/95 100,000 22.00 2,200,000
December 951 100,000 20.00 2,000,000
------- ----- ---------
Totals 300,000 $6,333,500
ADVERSE DISCLOSURE SENDS THE PRICE
OF CHANTAL'S STOCK PLUMMETING
60. Soon after defendant Burnison sold at least $6.3 million
worth of the Company's common stock, defendants' scheme began to
unravel when Barron's published an article on or about January 6,
____________________
1 Estimated based on disclosures made by Burnison during
interviews in January 1996.
- 25 -
1996, entitled "Chantal Pharmaceutical's Appeal May Be Only Skin
Deep," which provided the first detailed analysis of the terms of
the Marketing Agreement to enter the investment community. For
example, Barron's analyzed the Put Option found in the Marketing
Agreement, as described above, and concluded that, if exercised,
the option "would mean . . . that Chantal would be buying back its
own receivables -- revenues [from sales to Stanson] would suddenly
be converted back into inventory." Consequently, Barron's
concluded that the Put Option "seems to leave open the question of
whether Chantal's . . . revenues [from sales to Stanson]
represent[] a true sale, because the risk of ownership of the
products does not appear to have been transferred to Reinstein."
61. More specifically, Barron's reported as follows:
Chantal climbed 1,111% in 1995, from $2.25 a share to
$27.25, making it one of the year's biggest gainers. A
closer look at the company, however, suggests that
Chantal's appeal may be only skin deep.
The company's stock took flight last fall when a
report of sharply higher revenues resulted in earnings
for the first time in Chantal's 13-year existence. For
its fiscal year ending June 30, Chantal earned three
cents a share, compared with having lost 19 cents the
year before, as revenues jumped 4,270%, to $7.2 million.
Even more spectacular were Chantal's first quarter
results, coinciding with a splashy reintroduction of the
company's Ethocyn-based skin-care products, which it sold
under a different name in 1985 without much success. Net
revenues climbed to $10.9 million and earnings came in at
- 26 -
24 cents a share for the quarter ended Sept. 30, 1995.
On the strength of these gains, analysts estimate Chantal
could have $80 million in revenues by the end of fiscal
1996 and $200 million by 1997.
The article continued by disclosing that the Company's sales and
related receivables were, at best, questionable:
Of the $10.9 million in revenues, however, $10
million is actually an account receivable owed to Chantal
by one entity, Stanson Marketing, also based in Los
Angeles.
* * *
Chantal gives Stanson Marketing 90 days -- unusually
generous terms -- to pay for products shipped to it by
Chantal before Dec. 31, 1995. More startling than the
generous 90-day terms, however, is a brief provision in
the distribution agreement granting Stanson the option to
sell itself to Chantal at any time after Dec. 31, 1995.
If exercised, this "put" option would mean, in
effect, that Chantal would be buying back its own
receivables -- revenues would suddenly be converted back
into inventory. The put option obligates Chantal to buy
Stanson Marketing, with all of its debts and assets, for
three times Stanson's annualized net earnings in the
prior three months, a number over which Reinstein can
presumably have considerable control. Imagine, for
instance, if Reinstein sells $10 million of Chantal
products to drugstores in three months, and records a
- 27 -
profit, only to have the products returned to him the
following quarter.
* * *
[T]he novel "put" option still seems to leave open the
question of whether Chantal's $10 million in revenues
represents a true sale, because the risk of ownership of
the products does not appear to have been transferred to
Reinstein.
The article continued by outlining Chantal's checkered history in
the market, and commented on Chantal's future prospects:
This isn't the first time that Chantal's stock has
risen sharply in response to claims about its products,
nor the first time its products have met with skepticism.
In its 1992 rollercoaster ride, the stock hit $12 on
hopes that Upjohn would develop Cyoctol, Chantal's drug
to treat acne and stem hair loss. When Upjohn terminated
its agreement in 1993, Chantal stock fell to $1 a share.
In a transcript of a television interview given in
New York last week, Chantal Burnison states that she's
unfazed by the arrival of J&J's Renova, predicting they
can both survive, "side by side." With Stanson Marketing
as its distributor, Burnison says the company met its
goal to have its product available in 10,000 drug stores
by the end of 1995.
At $20 a share, with 17.8 million shares outstand-
ing, Burnison presides over a company valued in the stock
market at $350 million. That's 20 times trailing 12-
month sales and 65 times earnings.
- 28 -
It's a rich price to pay for a drug company, let
alone one that, so far at least, seems to be selling
little more than a cosmetic moisturizer.
62. In reaction to these disclosures, Chantal common stock
lost 62% of its value on January 8, 1996 -- the first day of
trading following the publication of the Barron's article --
falling from $19.125 to $7.31 per share on trading volume of over
7 million shares.
63. The reaction of the market to the Barron's article was
also the subject of a Reuters news report on January 8, 1996:
Chantal Pharmaceutical Corp shares lost over 60 percent
of their value by mid-day on Monday after a report in
Barron's that questioned Chantal's dealings with Los
Angeles distributor Stanson Marketing and Chantal's
leading cosmetic product, Ethocyn anti-wrinkle cream.
Chantal shares plunged 11-3/4 to 7-3/8 as over 5.5
million shares changed hands, more than 10 times average
daily volume.
The Barron's story raised issues about Chantal's
option to acquire Stanson, the chief distributor of
Ethocyn, highlighted lawsuits against Stanson president
Frederick Reinstein and challenged claims Ethocyn can
reduce skin wrinkling.
64. In an attempt at damage control, on January 9, 1996,
defendant Burnison announced via PR Newswire that:
"We are completely confident of our distribution,
financial projections, and the efficacy of Ethocyn (TM)-
based skin care products. However, recent stock market
- 29 -
activity requires that not only we have such confidence,
but that it be broadly shared by the investment community
and key investors. Consequently, I have ordered the
following steps be taken immediately:
-- "Retention of an independent auditing
firm to confirm the current distribution by
Stanson Medical Marketing of Chantal skin care
products in more than 14,000 retail outlets.
This independent study will also review and
audit Stanson's retail orders, reorders, and
returns (which are estimated to be less than
one percent).
-- "On or before Monday, January 22, we
will announce estimated earnings for the
second quarter and six months ended
December 31, 1995. We believe these earnings
will be in line with current market
projections. The company's 10Q is due to be
filed on or about February 14, 1996.
* * *
In addition, Ms. Burnison announced that Chantal
Pharmaceutical Corporation's distribution agreement with
Stanson Medical Marketing has been modified. Effective
immediately, Frederick M. Reinstein, president of Stanson
Medical Marketing, has agreed to delete from the
agreement Stanson's option requiring Chantal to acquire
Stanson Medical Marketing. In consideration, the company
agreed to allow Stanson to assign the agreement without
- 30 -
restriction after December 31, 1996, while retaining the
restriction on assignability without its consent prior to
that date.
65. Defendant Burnison also granted an interview to Bloomberg
News Service on January 9, 1996, in which she publicly acknowledged
for the first time that she had sold, through CBD, 300,000 shares
of Chantal common stock in December 1995 at a price of
approximately $21 per share.
66. On January 11, 1996 -- two days after her interview with
Bloomberg News Service -- defendant Burnison canceled a series of
meetings with Chantal investors that had been scheduled to take
place in New York City on that day. Following this cancellation,
the price of Chantal common stock closed at $6.625 per share,
representing a decline of 76% from its high merely two weeks
earlier, and a decrease of 68% below the price at which defendant
Burnison sold her shares of the Company's common stock.
CHANTAL'S FALSE AND MISLEADING FINANCIAL STATEMENTS
67. In order to improperly inflate Chantal's revenues,
earnings and assets during the Class Period, defendants undertook
a scheme whereby they:
(a) improperly recognized revenue where the right of
return existed for which future returns could not be reasonably
estimated;
(b) improperly recognized revenue where the buyer did
not have economic substance apart from the seller; and
(c) improperly failed to disclose related party
transactions with Stanson.
- 31 -
68. These improper accounting practices and manipulations
were in direct violation of GAAP and SEC rules, as described below,
and resulted in materially overstated earnings and net assets for
the fiscal year ended June 30, 1995 and the quarter ended September
30, 1995.
69. GAAP is the set of conventions, rules and procedures
which constitute the professional standards of the accounting
profession. Regulation S-X (17 C.F.R. §210.4-01(a)(1)) provides
that financial statements filed with the SEC which are not prepared
in compliance with GAAP are presumed to be misleading or
inaccurate. Financial Accounting Standards ("FAS") are promulgated
by the Financial Accounting Standards Board and, along with
opinions of the Accounting Principles Board ("APB") are considered
to be the highest authority of GAAP.
70. According to GAAP, specifically FAS 48, revenue may not
be recognized where the buyer has no economic substance apart from
that provided by the seller or where there is no basis for
estimating future returns of the product. Therefore Chantal
overstated its revenues and receivables for the quarters ended June
30, 1995 and September 30, 1995 by approximately $3 million and $10
million respectively.
Chantal Improperly Recognized Revenues
On Sales To Parties That Lacked
Economic Substance Apart From The Seller
71. The relevant provision is FAS 48 (¶6(d)) which provides
that revenue from a sales transaction shall not be recognized
unless "[t]he buyer acquiring the product for resale has economic
substance apart from that provided by the seller."
- 32 -
72. The terms of the Marketing Agreement also revealed that
Stanson, as a purchaser for resale, lacked any economic substance
apart from that provided by Chantal, by (i) granting Stanson an
option to sell itself to Chantal (the "Put Option"), and
(ii) granting Chantal an option to purchase Stanson (the "Call
Option"). Specifically, the Put Option gave Stanson the right to
sell itself to Chantal anytime after December 31, 1995, for a price
of 12 times Stanson's net earnings for the three months immediately
preceding the exercise of the option, while the Call Option
provided Chantal with the right to acquire Stanson on virtually
identical terms. These twin options would allow Stanson to sell
itself to Chantal for a substantial multiple of earnings derived
from goods that it had purchased from the Company and resold
subject to a 60-day right of return. Thus, if the option were not
exercised, any revenues that Chantal had recognized from the sale
of these products to Stanson would be jeopardized, since Chantal
would become liable to accept return of these goods for a full
refund. If the option were exercised, Chantal would, in effect, be
repurchasing any unsold goods held in Stanson's inventory that
Chantal had previously sold to Stanson. Thus, Stanson had no
disincentive to accepting large shipments from Chantal so that
Chantal could report large increases in revenues and earnings.
Thus, both revenues and related accounts receivable were overstated
at June 30, 1995 by at least $3 million and at September 30, 1995
by at least $7 million.
- 33 -
Chantal Had No Reasonable Basis To
Estimate Future Returns For Stanson
73. The sales to Stanson also could not properly be
considered income in the periods ended June 30, 1995 and
September 30, 1995 because the amount of returns from Stanson could
not reasonably be estimated. Chantal had no method of accurately
forecasting such returns. FAS 48(f) provides that if a reasonable
estimate of such allowance cannot be made, revenue may not be
recognized at the time the product is shipped.
74. FAS 48, ¶08 addresses the ability of a company to
reasonably estimate future returns:
8. The ability to make a reasonable estimate of the
amount of future returns depends on many factors and
circumstances that will vary from one case to the next.
However, the following factors may impair the ability to
make a reasonable estimate:
a. The susceptibility of the product to significant
external factors, such as technological
obsolescence or changes in demand
b. Relatively long periods in which a particular product may
be returned
c. Absence of historical experience with similar types
of sales of similar products, or inability to apply
such experience because of changing circumstances,
for example, changes in the selling enterprise's
marketing policies or relationships with its
customers
- 34 -
d. Absence of a large volume of relatively homogeneous
transactions
Chantal could not reasonably estimate returns, as defined by this
provision, because:
(a) Ethocyn is a product which is extremely susceptible
to significant external factors. For example, if a new product
were to be introduced that was either more effective or less
expensive, sales of Ethocyn would drop dramatically. Several
products in final development, including a product being developed
by Johnson & Johnson (that received FDA approval during the Class
Period), could steal away much of Ethocyn's market share; and
(b) Chantal had no historical experience with Stanson
selling Ethocyn or other types of products. Additionally, Ethocyn
was being marketed in a dramatically different way -- through
pharmacies and dermatologists -- than Chantal had ever attempted
before. Therefore, the factor described in FAS 48, ¶8(c) would be
triggered.
(c) The relatively long period of time in which product
could be returned to Chantal.
75. The combination of the above three factors rendered
Chantal unable to reasonably estimate returns from Stanson.
Therefore, FAS 48, ¶ 6(f) provides that these sales could not be
recognized as revenue until the right of return expired.
76. Contrary to the standards described above, Chantal
improperly recognized sales and related accounts receivable of at
least $3 million at June 30, 1995 and at least $10 million at
September 30, 1995.
- 35 -
Chantal Failed To Disclose Adequately
Related Party Transactions With Stanson
77. Chantal's financial statements for the quarters ended
June 30, 1995 and September 30, 1995 were materially false and
misleading in that they failed to disclose adequately related party
transactions with Stanson, as required by GAAP. The relevant
accounting standard addressing this topic is FAS 57, Related Party
Disclosures, which requires sufficient detail to allow the reader
of the financial statements to be able to fully understand the
effects of the related party transaction on the financial
statements. This provision states, in pertinent part:
Financial statements shall include disclosure of material
related party transactions . . . . These disclosures
shall include:
a. The nature of the relationship(s) involved;
b. A description of the transactions, including
transactions to which no amounts or nominal amounts
were ascribed, for each of the periods for which
income statements are presented, and such other
information deemed necessary to an understanding of
the effects of the transactions on the financial
statements;
c. The dollar amounts of transactions for each of the
periods for which income statements are presented
and the effects of any change in the method of
establishing the terms from that used in the
preceding period;
- 36 -
d. Amounts due from or to related parties as of the
date of each balance sheet presented and, if not
otherwise apparent, the terms and manner of
settlement.
78. The footnotes to Chantal's June 30, 1995 and
September 30, 1995 financial statements describe only a
"concentration of credit risk" in a receivable with Stanson.
Neither set of financial statements reference the relationship
between Chantal and Stanson, or discuss the existence of the
options, exercisable by either Chantal or Stanson, whereby Chantal
could buy 100% of Stanson.
79. The existence of these options clearly constitutes a
related party relationship, as defined by FAS 57, which states:
Related Parties. Affiliates of the enterprise; entities
for which investments are accounted for by the equity
method by the enterprise; trusts for the benefit of
employees, such as pension and profit-sharing trusts that
are managed by or under the trusteeship of management;
principal owners of the enterprise; its management;
members of the immediate families of principal owners of
the enterprise and its management; and other parties with
which the enterprise may deal if one party controls or
can significantly influence the management or operating
policies of the other to an extent that one of the
transacting parties might be prevented from fully
pursuing its own separate interests. Another party also
is related party if it can significantly influence the
management or operating policies of the transacting
- 37 -
parties or if it has an ownership interest in one of the
transacting parties and can significantly influence the
other to an extent that one or more of the transacting
parties might be prevented from fully pursuing its own
separate interests.
A party which has a right to purchase all of the shares of another
company exerts "control" or "significant influence" over that
company. Similarly, Regulation S-X §210.1-02(g) defines "control"
as "the possession, direct or indirect, or the power to direct or
cause the direction of the management and policies of a person,
whether through the ownership of voting shares, by contract, or
otherwise." An option to purchase all of the outstanding shares of
Stanson clearly constitutes "control" under the SEC's definition.
COUNT I
FOR VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE ACT
AND RULE 10b-5 OF THE SEC AGAINST ALL DEFENDANTS
80. Plaintiff incorporates by reference and realleges the
preceding paragraphs as though fully set forth herein. This Count
is asserted against all defendants.
81. The defendants knew, or were reckless in failing to know,
of the material omissions from, and material misrepresentations
contained in the statements as set forth above. The defendants
also knew, or were reckless in failing to know, at the time of
these material omissions and misrepresentations, that they caused
a false and misleading presentation of Chantal. Because of their
Board membership and/or their executive and managerial positions
with Chantal and/or their personal and/or professional
relationships, each of the defendants: (a) knew or had access to
- 38 -
the material, adverse non-public information about Chantal's
adverse financial outlook and then-existing business conditions
which were not disclosed; and (b) drafted, reviewed, ratified
and/or approved the misleading statements, releases, reports and
other public representations of and about Chantal.
82. Throughout the Class Period, defendants, with knowledge
of or reckless disregard for the truth, disseminated or approved
releases, statements and reports, referred to above, which were
misleading in that they contained misrepresentations and failed to
disclose material facts necessary in order to make the statements
made, in light of the circumstances under which they were made, not
misleading.
83. During the Class Period, defendants, individually and in
concert, directly and indirectly, engaged in and employed acts and
a fraudulent scheme to conceal material adverse information
regarding Chantal's then-existing business conditions and financial
outlook of Chantal as specified herein, and pursued a course of
business that operated as a fraud or deceit on the purchasers of
Chantal stock. Defendants employed devices, schemes and artifices
to defraud and engaged in acts, practices and a course of conduct
as herein alleged to commit a fraud on the integrity of the market
for the Company's stock and to maintain artificially high market
prices for the common stock of Chantal. This included the
formulation, making of and/or participation in the making of untrue
statements of material facts and the omission to state material
facts necessary in order to make the statements made, in light of
the circumstances under which they were made, not misleading, and
engaging in acts, practices and a course of conduct which operated
- 39 -
as a fraud and deceit upon plaintiff and the Class, all of the
above in connection with the purchase of Chantal common stock by
plaintiff and members of the Class.
84. By reason of the conduct alleged herein, defendants
knowingly and/or recklessly, directly and indirectly, have violated
§10(b) the Exchange Act and Rule 10b-5 promulgated thereunder in
that they: (a) employed devices, schemes and artifices to defraud;
(a) made untrue statements of material facts or omitted to state
material facts necessary in order to make statements made, in light
of the circumstances under which they were made, not misleading; or
(b) engaged in acts, practices and a course of business that
operated as a fraud or deceit upon plaintiff and others similarly
situated in connection with their purchases of Chantal common stock
during the Class Period.
85. Plaintiff and the Class have suffered substantial damages
in that, in reliance on the integrity of the market, they paid
artificially inflated prices for Chantal common stock as a result
of defendants' violations of §10(b) of the Exchange Act and Rule
10b-5. Plaintiff and the Class would not have purchased Chantal
stock at the prices they paid, or at all, if they had been aware
that the market prices had been artificially and falsely inflated
by defendants' misleading statements and concealment.
COUNT II
VIOLATIONS OF SECTION 20(a) OF THE EXCHANGE ACT
AGAINST DEFENDANT BURNISON
86. Plaintiff repeats and realleges each of the allegations
set forth in the foregoing paragraphs.
- 40 -
87. Defendant Burnison was a controlling person of the
Company within the meaning of §20 of the Exchange Act during the
Class Period. By reason of her positions as Chairman of the Board,
Chief Executive Officer throughout the Class Period, and Principal
Financial and Accounting Officer of the Company since at least
November 13, 1995, and as the owner, directly and/or through CBD of
over 1 million shares or approximately 5% of the Company's common
stock issued and outstanding, Burnison had the power and authority
to cause the Company to engage in the wrongful conduct complained
of herein.
88. By reason of her position of control over the Company, as
alleged above, defendant Burnison is liable jointly and severally
with and to the same extent as Chantal is liable to plaintiff and
the members of the Class as a result of the wrongful conduct
alleged herein.
BASIS OF ALLEGATIONS
89. Plaintiff has alleged the foregoing based upon the
investigation of its counsel, which included a review of Chantal's
SEC filings, securities analysts reports and advisories about the
Company, press releases issued by the Company, media reports about
the Company and discussions with consultants, and believes that
substantial evidentiary support will exist for the allegations set
- 41 -
forth in ¶¶2-4, 15, 29, 33, 38-44, 50-51, 53-58, 64 and 67-79 after
a reasonable opportunity for discovery.
JURY DEMAND
Plaintiff demands a trial by jury.
DATED: February 6, 1996 MILBERG WEISS BERSHAD
HYNES & LERACH LLP
ALAN SCHULMAN
______________________________
ALAN SCHULMAN
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
HAGENS & BERMAN
STEVE W. BERMAN
KARL P. BARTH
______________________________
STEVE W. BERMAN
1301 Fifth Avenue, Suite 2929
Seattle, WA 98101
Telephone: 206/623-7292
BERNSTEIN LITOWITZ BERGER &
GROSSMANN, LLP
MAX W. BERGER
ROBERT S. GANS
1285 Avenue of the Americas
33rd Floor
New York, NY 10019
Telephone: 212/554-1400
Attorneys for Plaintiff
- 42 -
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
WESTERN DIVISION
MARKSMAN PARTNERS, L.P., on |
behalf of themselves and all | NO.
others similarly situated, |
| CERTIFICATION OF CLASS
Plaintiff, | REPRESENTATIVE REGARDING THE
| FILING OF A CLASS ACTION
vs. | COMPLAINT
|
CHANTAL PHARMACEUTICALS |
CORPORATION, CHANTAL BURNISON |
and MARC DWORKIN, |
|
Defendants. |
_______________________________|
I, Mark Ruljancich, in my capacity as General Partner of
Marksman Partners, L.P. ("Marksman Partners") hereby certify
that:
(a) I have reviewed the complaint prepared by counsel in the
above referenced case, and have authorized its filing;
(b) Marksman Partners did not purchase the shares of Chantal
common stock at the direction of plaintiff's counsel or in order
to participate in any private action arising under the federal
securities laws.
(c) Marksman Partners is willing to serve as a representative
party on behalf of a class, including providing testimony at
deposition and trial if necessary
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(d) During the proposed class period, Marksman Partners executed
the following transactions related to Chantal common stock:
Dates Action Amount Price
----- ------ ------ -----
November 17, 1995 Bought 3,000 shares 14-5/8
November 22, 1995 Bought 3,000 shares 15-15/16
November 24, 1996 Bought 3,000 shares 17-3/8
November 27, 1995 Bought 3,000 shares 18-7/8
November 28, 1995 Bought 2,000 shares 21-5/8
November 28, 1995 Bought 2,000 shares 21-1/4
November 29, 1995 Sold 3,000 shares 25-5/16
November 29, 1995 Bought 2,000 shares 24-1/8
November 29, 1995 Bought 1,000 shares 23-1/4
November 30, 1995 Bought 2,000 shares 21-3/8
December 7, 1995 Sold 3,000 shares 23-3/4
December 11, 1995 Sold 5,000 shares 22
December 13, 1995 Bought 3,000 shares 24-1/8
December 13, 1995 Sold 3,000 shares 22-5/8
December 21, 1995 Bought 4,000 shares 22-3/8
December 21, 1995 Bought 2,000 shares 22-1/4
December 21, 1995 Bought 2,000 shares 22-3/8
December 21, 1995 Bought 1,000 shares 22-3/8
January 4, 1996 Bought 5,000 shares 20-3/8
January 4, 1996 Bought 5,000 shares 20-3/8
January 4, 1996 Sold 5,000 shares 20-1/4
January 5, 1996 Bought 5,000 shares 1-3/4
(e) Marksman Partners has not acted as a class
representative in any cases brought under the federal securities
laws during the past three years.
(f) Neither Markman Partners, nor me personally, will accept any
payment for serving as a representative party on behalf of a
class beyond the plaintiff's pro-rata share of any recovery,
except as ordered or approved by the court.
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SWORN AND CERTIFIED THIS 30th DAY OF January, 1996.
__________________________
Mr. Mark Ruljancich
General Partner
Marksman Partners, L.P.
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