The author is a shareholder with Greenberg Traurig LLP, Chicago.
To: New Client Review Committee
From: Scott Mendeloff
RE: Bass Legal Representation
Michael Bass has contacted us and asked us to represent him. I know we are all familiar with the facts given the extensive newspaper coverage of this matter, and so I will not repeat them here. These are my initial thoughts about whether we should take the case, and if so, our strategy.
Bass almost certainly will have to pay for the great bulk of his litigation expenses, with the possible exception of expenses related to the theft of trade secret counterclaim by his former employer, GyneTech, against both him and his current employer, MedaStar. Given the broad-ranging civil, regulatory, and criminal legal problems on the horizon for Bass, a predicate to retention will be: (i) a major initial retainer; (ii) Bass’s agreement in an engagement letter to replenish the retainer whenever it is depleted to a certain level; and (iii) if Bass is indicted, a significantly larger retainer. Bass’s problems occurred during his employment with GyneTech, from which he cannot hope to receive financial help for a defense.
A variety of entities and individuals have myriad claims and potential claims against Bass. Bass is entwined in two class actions: one by GyneTech shareholders focused upon the drop in the price of GyneTech stock; and a second by drug trial participants for drug trial fraud, negligence, reckless endangerment, and products liability. Bass has sued GyneTech for breach of his employment agreement, and GyneTech has counterclaimed against Bass and MedaStar for fraud, breach of fiduciary duty, breach of contract, and theft of trade secrets. Sylvie Bass likely will sue for divorce. Dawn Pringle may sue as well.
Beyond navigating the shifting sands of all these civil cases, we encounter the pending criminal investigation, which adds another important layer of strategic complexity. GyneTech is currently the target of a federal investigation into possible witness intimidation, health care fraud, and securities fraud. The DOJ also will be interested in the possible destruction of evidence as well as the circumstances surrounding Diana Gray’s demise. Because such investigations invariably extend to the corporate executives involved, I suspect that Bass is also a target. Pressing the DOJ for confirmation of this will be the first order of business upon finalizing an engagement.
Class action (by shareholders) for stock drop/securities fraud. As to Bass, these claims will most likely incorporate the failure to disclose the problems with GyneTech’s drug trial and possibly Bass’s philandering with Dawn Pringle. As to the stock drop/securities fraud claim, there is an obvious overlap between the fraud claim in the shareholders suit and the corresponding claim in the drug trial class action. With respect to the fraud elements of the shareholders’ suit, however, there is an elevated scienter requirement. A central issue will be whether the data/study results that disquieted Gray were objectively as serious as she believed and whether her concerns were sufficient to require, as a matter of law, public disclosure under the securities laws.
For all but the latest SEC filing, a core issue for Bass will be what he knew or had reason to know regarding the drug trial problems. Bass says that Gray never directly informed him of the problems. Because she was “going up the chain of command” with her concerns, however, one obvious (and troubling) scenario is the possibility that Bass received notice indirectly or received sufficient red flags to raise a triable issue that he should have known of the problem. Bass’s emails will be critical, as, of course, will be all communications between him and individuals who directly or indirectly received notice from Gray. Plainly, there is a meaningful risk that the group of witnesses who could pose problems might be sizable.
As to the latest 10-Q, it appears that Bass was cut out of the decision-making process regarding what to include in the filing. Further, at present, we have no reason to believe that Gray included Bass in her final, most damaging email. If this is in fact the case, this will obviously help. The strength of the proof of Bass’s prior knowledge would then become determinative. The more tenuous that proof is, the steeper the climb for the case against Bass. Circumstantial proof of Bass’s knowledge allegedly drawn from earlier communications with those in the know would be much more compelling if offered to build on a case predicated upon Bass’s inclusion in Gray’s final email than it would as the core of a case against him.
In this context, I view the philandering theory much more as a throw-in to smear Bass than a legitimate threat. First, it is questionable whether such an issue is sufficiently material to oblige a corporation to disclose such matters as a matter of securities law; we will need to explore that. Second, even before the disclosures in question, GyneTech’s stock already demonstrated substantial volatility, moving from $167/share on Monday morning to $216/share 24 hours later. It will be a tough sell to link news of the philandering to the drop in the stock price.
Class action (by drug trial participants) for drug trial fraud, negligence, reckless endangerment, and products liability. Bass will have several defenses to the drug trial claims, including: (i) Bass’s state of mind; (ii) the nature, extent, and objective severity of the problems with the trial; (iii) the nature and details of the information Gray had been pressing as she went “up the chain of command” with her concerns over the drug trial—e.g., was she including sufficient details to raise a concern; and (iv) causation of damages. If we take the case, we will need to explore and develop each of these defenses.
Bass v. Bass. Another firm will handle defending this substantively. If Bass did tell his wife anything damaging, the marital privilege will protect us—unless he did so with a third party present. Because that is unlikely, communications between them should not be a problem in court. However, this does not mean that Sylvie does not pose a practical threat to Bass. She could hurt Bass in a variety of ways by leaking information or making public allegations. The fact that harming Bass financially will correspondingly harm Sylvie’s pocketbook when it comes to splitting up marital assets does not mean that she will necessarily hold back. The pain she feels from Bass’s now very public disloyalty could overcome rationality. So, I would advise my client to do whatever he can to assuage his soon-to-be-ex-wife. It would be extraordinarily short-sighted for him to be anything other than overwhelmingly contrite and very fair in divorce settlement discussions.
Counterclaims. Needless to say, we also will have to develop the facts and defenses relevant to Bass’s claim against GyneTech and GyneTech’s counterclaims for breach of contract, breach of fiduciary duty, and theft of trade secrets. Bass tells us that there is no basis for any of these counterclaims; our fact investigation and discovery in the lawsuit will flesh that out.
Priority of issues and strategy. The most crucial priority by far is to get well ahead of the government and civil litigants in investigating all facts surrounding the various civil claims and the criminal investigation relating to the alleged undisclosed side-effects of GyneTech’s cancer drug trials. If we take the case, our first step should be to carefully debrief Bass. The key issues here would be to discover: (i) all pertinent facts, paying particular attention to the precise contours of his personal knowledge; (ii) the identity of any individual with knowledge of the facts who would provide what we hope would be truthful information in an interview and/or who would help us work through other challenges like obtaining information from others; (iii) the identity of any individual with knowledge who has an ax to grind or who might, for whatever reason, provide information harmful to our position; (iv) the best way to approach the company about cooperating and working out a deal; and (v) the possible location of important documents that have not yet been scrubbed, including any information Bass can provide regarding operation of the company’s IT system and the best people to approach who might help us to get important information on the system. After that, of course, we will follow up on these leads, all the while maintaining careful files, building a chronology, and identifying and fleshing out the viability of the defenses outlined above.
As we explore these leads, a particularly critical task will be to develop meaningful alliances. Of course, GyneTech presents by far the best potential source for information and thus the development of defenses. However, as he has been dismissed from GyneTech on less than amicable terms and is in litigation against the company, Bass’s ability to access that critical information poses one of the most vital challenges in a representation of Bass. Bass has one huge advantage that most jettisoned executives in his position do not: the fact that his new employer, MedaStar, is a minority stockholder in GyneTech. Given the value MedaStar clearly puts on Bass, he may be able to leverage his new position at MedaStar to exert influence upon GyneTech for behind-the-scenes help.
Another significant potential obstacle to GyneTech’s cooperation is Kauffman’s hostile proxy battle with MedaStar for control of GyneTech. If Kauffman wins, crucial information would be lost absent careful handling now. Time is of the essence in using the MedaStar connection to get access to as much information from GyneTech as possible. The first priority will be to get access to GyneTech documents, especially the emails of Gray and Bass himself. Although Gray’s computer was wiped, important documents might still be preserved on company servers or on the computers of her colleagues. A close second priority will be to try to arrange interviews of key GyneTech employees, who might not be available if the proxy battle goes the wrong way. An alternative would be to obtain this information from other defendants who are on better terms with GyneTech.
In any event, we should begin now to develop means of approaching the rest of the board, who have their own problems given that they did not include the potential FDA issues in the 10-Q filing. We should try to find a way to use those problems to our best advantage.
Finally, another possible Bass ally is the GyneTech General Counsel, Norbert Dwight. The board hung him out to dry by telling him to file the 10-Q without disclosing the information they had regarding the drug trials. That is likely to make Dwight a subject of the DOJ and SEC investigations, and he also faces the real risk of being added as a defendant in the securities fraud class action. So Dwight may be sympathetic to Bass, a fact we should exploit if we take this engagement.
If we can make the necessary financial arrangements with Bass , then developing information and developing alliances will be our primary considerations.
This article was prepared for informational purposes only and is not intended to be considered or used as general legal advice. Please contact the author if you have any questions.