The original backers of New Day Pharmacy have accused Nashville law firm Harwell Howard Hyne Gabbert & Manner of malpractice, accusing the firm of contributing to the venture’s bankruptcy by not spotting a potential violation of federal self-referral restrictions.
Ardemore Corp. says it hired H3GM attorneys Susan Sidwell and John Blackwood to handle three share offerings between 2006 and 2008 that generated about $3 million from 15 investors. At least three of those investors were physicians who worked at a Cincinnati nursing home that became New Day’s first customer in May 2007. When those doctor-owners ordered prescriptions through New Day’s dispensing machines, they likely violated what is commonly known as the Stark law.
Seeing that some of New Day’s investors were doctors “should have raised a red flag with Defendants given their professed expertise in the ‘nuances and operational and regulatory requirements’ of healthcare law,” says the suit by Ardemore, which has about 25 investors including New Day founder and current President Dick Wager. “Unfortunately, Defendants failed each time to caution Ardemore regarding the potential violations of federal law.”
The issue came to the fore about 16 months ago after New Day had attracted the attention of local finance shop Council Ventures. Council had committed to investing $5.5 million to grow the company — which was then deemed to be worth about $4 million — and said it might follow that up with another $5 million.
During their due diligence, attorneys for Council raised the issue of potential self-referrals and estimated that federal authorities could hold New Day liable for between $300,000 and $8 million. The VC firm backed out of its investment agreement and New Day filed for bankruptcy protection a month later. Its reconstituted assets were acquired by a Council-led group three months later and recently also received TNInvestco funding.
Ardemore’s suit (available here) asks for $9.5 million – its value had Council invested in early 2009 – as well as the up to $8 million it may have to fork over to the government.
Mark Manner, managing shareholder at H3GM, said his team think Ardemore’s claims have no merit. Manner said his firm was limited in its work with Ardemore by Wager's attempts to keep a lid on spending at his start-up.
“We’re pretty frustrated about this,” Manner said in a voicemail. “He told us he had other counsel working on regulatory matters [and] we’re getting inappropriately and unfairly blamed now that his company’s gone under.”
Both Sidwell and Blackwood specialize in securities work. Sidwell heads H3GM’s securities practice group and has in the past worked with BioMimetic Therapeutics as well as Juris. Blackwood works primarily on mergers and acquisitions, securities law cases and commercial bankruptcies.
Jason Conte, an attorney at Cincinnati-based Ulmer & Berne representing Ardemore, said H3GM did "100 percent of the legal work, not just the securities side" during New Day's formative stages and said he was not aware of another firm's involvement.
- ALEX B FRUIN INHERITANCE TRUST; CANDACE F STEFANSIC INHERITANCE TRUST; CANDANCE F STEFANSIC INHERITANCE TRUST; FRUIN, ALEX B TRUSTEE; FRUIN ALEX B INHERITANCE TRUST; STEFANSIC, CANDACE F TRUSTEE; STEFANSIC CANDACE F INHERITANCE TRUST; STEFANSIC CANDANCE F INHERITANCE TRUST
- ROSS, BRIDGETT D
- COOKE, ETHEN LANYARD TRUSTEE; COOKE, ETHEN LEWIS ESTATE
- JACOBS, JESSICA ALEXANDRA; JACOBS, ERIKA BESS