Triangle venture capital firm sues former Chimerix CEO over anonymous emails

Art Pappas is founder and managing partner of Pappas Ventures, an RTP-based venture capital investment firm.
Art Pappas is founder and managing partner of Pappas Ventures, an RTP-based venture capital investment firm. Courtesy of Pappas Ventures

Kenneth Moch, the former CEO of Chimerix who made national headlines last year for refusing to supply an experimental drug to a critically ill child, has been sued for pursuing an anonymous, allegedly malicious smear campaign against A.M. Pappas & Associates, a prominent Triangle venture capital firm.

Moch, meanwhile, has countersued A.M. Pappas, which like Chimerix is based in Durham. His lawsuit contends he was merely exercising his First Amendment rights and that the venture capital firm previously threatened a lawsuit – and criminal prosecution – as part of a “scheme” designed to force Moch to pay $10 million in damages and provide information that would help the firm in an unrelated lawsuit it has filed against a former general partner.

In his lawsuit, Moch admits that he is the anonymous emailer who, beginning in October 2014, sent a series of missives to A.M. Pappas investors that raised questions of “potential misuse of funds” by the firm, as well as other issues.

A.M. Pappas fired the first salvo in court papers filed Wednesday that declared that Moch had retaliated against Art Pappas, the founder of the venture capital firm and a former member of Chimerix’s board of directors, because he was “resentful and angry that he was no longer CEO of Chimerix.”

In an interview published last month by the Princeton Alumni Weekly, Moch said that leaving Chimerix wasn’t his choice and that he wasn’t happy about his departure.

The lawsuit also lays out how the venture capital firm, guided by an information technology consulting firm, determined that Moch was behind the anonymous emails sent to investors and others alleging financial improprieties by the firm and two of its executives – Pappas and Ford Worthy, a partner and chief financial officer.

The anonymous emails prompted A.M. Pappas’ advisory committees – consisting of representatives of some of the firm’s largest investors – to hire a forensic accounting firm to investigate its finances. That audit found that there was “no merit” to the allegations of financial impropriety.

But Moch’s lawsuit, filed Wednesday afternoon, went on the attack. It states that on Oct. 12, an attorney representing A.M. Pappas notified Moch by letter that the firm had discerned that Moch was behind the anonymous emails. The letter said that the company would pursue a lawsuit against him unless he, among other things: provided a written retraction and apology; paid $10 million in damages; and provided “all relevant evidence.”

“At trial, we will seek at least $25 million,” states the letter sent by an attorney representing A.M Pappas. The letter also promised that the firm would “refrain from reporting you to law enforcement authorities” if Moch complied with those demands.

Moch’s lawsuit asserts that this was “extortion.”

Moch himself declined to discuss the Pappas lawsuit. But his attorney, Winston-Salem lawyer Jeffrey D. Patton, said in a statement that Moch “did nothing wrong and will not stand for this type of criminal extortion.”

Moch’s lawsuit contends that the audit performed on Pappas’ finances was inadequate.

Worthy said in an interview that the letter sent to Moch was “entirely appropriate” when seeking an out-of-court settlement and that labeling it extortion was “absolutely without any basis.” He also defended the thoroughness of the audit of the company’s finances.

He called Moch’s lawsuit an effort to “divert attention from the allegations we have made. ... His assertions are simply not true – absolutely not true.”

Subpoena power

Pappas focuses on investing in life science companies and has managed $450 million in capital since it was founded in 1994.

The firm, which invested $6.5 million in Chimerix before the drug-development company went public in 2013, initially filed its libel lawsuit against an unknown John Doe or Jane Doe in Durham County Superior Court in June. At that time, the firm declared that it planned to use the subpoena power that comes with filing a legal complaint to uncover the identity of the anonymous emailer.

“We’ve been using the subpoena power of the court to gather evidence,” Worthy said. “We have been doing so layer by layer.”

“It is a very sad story for me and for us, for our firm,” Worthy said. “This was and is an individual who led a company in which we invested millions, and we backed this individual as the CEO, and we did everything we possibly could have done, as we do with any investment, to make it a successful investment. And it was a successful investment.”

Worthy added that Moch reaped “millions of dollars” from the stock options he received while at Chimerix.

When Moch resigned, according to a document Chimerix filed with the Securities and Exchange Commission, he received $585,625 in severance and had vested options for 819,666 shares. Moch’s strike price for the vast majority of those shares – that is, the price-per-share required to exercise those options – was a small fraction of the then-prevailing price.

Since then, the company’s shares have risen well more than twofold. The stock closed at $41.54 Wednesday.

Anonymous emails

Moch, a graduate of Princeton and Stanford universities, joined Chimerix in 2009 and was CEO from 2010 to April 2014.

Moch abruptly resigned from Chimerix a month after he became enmeshed in controversy when the family of a critically ill first-grader went public with Chimerix’s refusal to make its experimental drug available to combat a potentially fatal virus that the child contracted after a bone marrow transplant. At the time, Moch contended that selectively making the medicine available would be unethical.

Moch was placed under armed escort after receiving death threats as a result of his stance.

It wasn’t long, however, before Chimerix worked out a pilot program with federal regulators that called for it to provide the drug to the child and 20 others in similar situations.

The anonymous emails began circulating in October 2014 and continued through at least May of this year.

Worthy said that he and his colleagues have repeatedly asked themselves over the last couple of months why “a respected member of the biotech/life sciences community” would engage in a smear campaign.

The legal complaint asserts that Moch acted “cowardly” by sending anonymous emails.

“Mr. Moch knew his allegations were false or acted with reckless disregard for the truth, which is why he went to such great lengths to hide his identity,” the complaint states. “Had there been any truth to Mr. Moch’s allegations, there would have been no reason for him to proceed anonymously.”

But Moch’s lawsuit counters that he sent the emails anonymously so that investors “would focus on the message and not the messenger” and out of a fear that A.M. Pappas “would retaliate against him for simply raising these legitimate concerns.”

In addition to libel, the lawsuit accuses Moch of unfair and deceptive trade practices and cyberstalking and seeks both actual and punitive damages.

Worthy declined to say how much money A.M. Pappas has spent to date as a result of the anonymous emails but called it “a very, very significant amount of money.”

Moch’s complaint, which likewise seeks actual and punitive damages from Pappas for unfair and deceptive trade practices as well as abuse of process, noted that there was no media coverage of the anonymous emails until Pappas filed its John Doe lawsuit.

David Ranii: 919-829-4877, @dranii