Investors prevail in aaiPharma suit

Ex-execs agree to $7.5 million payment

Four former aaiPharma executives agreed to a $7.55 million payment to investors who sued on claims the Wilmington company had misled them.

The lawsuit, filed in 2004, alleged that the four -- former Chief Executive Philip Tabbiner, founder and former CEO Frederick Sancilio, former Chief Financial Officer William Ginna and former Chief Operating Officer David Hurley -- inflated aaiPharma's sales during the second and third quarters of 2003 to advance a hotly contested merger.

The settlement, which was filed Tuesday in U.S. District Court for the Eastern District of North Carolina, is a compromise on how much damage the sales manipulations caused, said Amber Eck, a California lawyer who represented a union pension fund that had invested in aaiPharma.

"It was hard-fought, arms-length negotiations over about a year," Eck said.

According to court documents, the four men did not admit any wrongdoing by agreeing to the settlement. Their lawyers could not be reached for comment. The settlement was paid through insurance policies taken out by the company.

AaiPharma is now a privately owned contract-research organization. Investors' claims against the company were resolved after aaiPharma filed for bankruptcy in May 2005, Eck said.

AaiPharma's current executives were not involved in the lawsuit and could not be reached for comment.

Legal action against accounting firm Ernst & Young, which audited aaiPharma's financial statements in 2003, continues, Eck said. Ernst & Young has asked the court to dismiss the claims, but the investors opposed the request, she said.

A new direction

AaiPharma conducted a series of product acquisitions in 2001. Those acquisitions added drug sales to the revenue mix of the company, which until then had generated revenue by helping pharmaceutical companies test experimental medicines.

The decision to add drug sales coincided with the struggle by large pharmaceutical companies to come up with new drugs to develop.

While other contract research organizations floundered, aaiPharma flourished.

Within two years, revenue had increased 68 percent, to about $237 million in 2003, according to filings with the U.S. Securities and Exchange Commission.

In August 2003, the company announced that it was merging with CIMA Labs, a Minnesota company that had developed a method for turning injectable drugs into pills.

Three months later, aaiPharma was added to the Nasdaq Biotechnology Index. To become a member, companies had to be worth at least $200 million in stock, and at least 100,000 of their shares had to change hands daily.

By Jan. 20, 2004, aaiPharma's shares were trading at a record $31.50.

But the financial success turned out to be hollow.

On Feb. 5, 2004, aaiPharma announced that it was taking a $16 million loss for returned inventory of an injectable asthma drug. Shares plummeted 23 percent in one day. Investors began to ask questions and filed a lawsuit Feb. 12, 2004.

Hurley, aaiPharma's former COO, had engaged in "channel stuffing" to inflate sales, according to court records. The scheme worked by selling merchandise to wholesalers at a time when they didn't reasonably need the product. AaiPharma then counted the wholesale deliveries as final sales, according to the investors' lawsuit.

Hurley later pleaded guilty to conspiracy to commit wire fraud, mail fraud and securities fraud. A month ago, a federal judge in Charlotte sentenced Hurley to two years' probation, of which he has to serve six months on house arrest; he also must pay a $10,000 fine.

HISTORY OF AAIPHARMA