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REUBE v. PHARMACODYNAMICS

June 28, 1972

William A. REUBE et al.
v.
PHARMACODYNAMICS, INC., et al.


Hannum, District Judge.


The opinion of the court was delivered by: HANNUM

HANNUM, District Judge.

 On January 14, 1971, plaintiffs filed a Complaint charging various defendants, including Paul H. Rose, with violations of Section 17(a) of the Securities Act of 1933, as amended, 15 U.S.C. § 77q(a), *fn1" and Section 10(b) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78j(b), *fn2" and Rule X-10B-5 of the Rules and Regulations of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5. *fn3" District Court jurisdiction was asserted under Section 22 of the Securities Act of 1933, as amended, 15 U.S.C. § 77v, *fn4" and Section 27 of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78aa. *fn5"

 Pendent jurisdiction was asserted over certain non-federal claims, however, for purposes of the motions presently before the Court we will only consider the claims raised under Section 10(b) of the Securities Exchange Act of 1934, and Rule X-10B-5.

 Pursuant to Rule 64 of the Fed. R. Civ. P., 28 U.S.C., and the fraudulent debtors laws of Pennsylvania, writs were issued to attach the property of the defendant Paul H. Rose. These writs were served upon the Continental Bank and Trust Co., and attached two accounts of defendant Rose and his wife, Naomi Patricia Rose. Plaintiffs have posted bond with the Clerk in double the value of the property attached. The garnishee has filed its report. *fn6"

 On February 16, 1971, defendant Paul H. Rose and Naomi Patricia Rose filed a motion to intervene and dissolve the attachment. They assert that the accounts attached are held by them as tenants by the entireties and therefore are not subject to attachment.

 On March 27, 1972, the plaintiff filed a motion for summary judgment pursuant to Rule 56 of the Fed. R. Civ. P., 28 U.S.C.

 The defendant, Paul H. Rose (Rose), is an osteopathic physician and surgeon. Rose claims to have invented a drug that is useful in the treatment of diseases that involve inflammation of tissue. The drug is the result of mixing together two readily available prescription drugs in definite proportions. Rose has applied for a patent on this combination which he calls "actasterin". *fn7" Rose, Joseph Funfer (Funfer), and Wayne S. Bitting (Bitting), formed Pharmacodynamics, Inc., (Pharmaco) to exploit the drug. The dispute in this case arises from the sale of stock in Pharmaco to the plaintiffs. *fn8"

 Rose and defendant Bitting entered into a pre-incorporation agreement in which it was agreed that they would retain complete control of the corporation and that the corporation would pay Bitting a salary of $75,000 a year and Rose a salary of $100,000 a year. In addition, the agreement provided that the corporation would "reimburse" Rose for research expenses of $100,000 plus pay him $100,000 and 10% of the royalties for assignment of the patent application. It was further agreed that Rose was to be paid for assignment of the patent application out of the proceeds from the sale of stock. *fn10"

  Defendants commenced to solicit purchasers and sell stock in Pharmaco, including $12,000 worth of stock to the three shareholders in this action. *fn12" The defendants utilized the telephone and mails in connection with the sale of stock in Pharmaco. *fn13" After the defendant received the $12,000 paid by the plaintiff, this money along with that of other purchasers was deposited in Rose's personal account according to the terms of the agreement between Bitting and Rose. *fn14" No measures were taken by the defendants to comply with either state or federal securities regulations. *fn15"

 Defendants Rose and Funfer admit their failure to disclose the following information:

 1. That Pharmaco was to pay Rose $100,000 for assignment of the patent application;

 2. That Pharmaco was to pay Rose 10% of the royalties from the patent application;

 3. That Pharmaco was to pay Rose $100,000 "reimbursement" for research expenses;

 4. That Pharmaco was to pay Rose a salary of $100,000 a year;

 5. That Pharmaco was to pay Bitting a salary of $75,000 a year;

 6. That Rose and Bitting were to receive a special class of shares that had 1000 times as many votes as the class of shares sold to plaintiffs;

 7. That Rose was to be paid $100,000 for the assignment of the patent application out of the proceeds from stock sales.

 "Q. Okay. And what did you do when you took the subscription to the stock?

 A. What did I do?

 Q. Did you go to the people's homes or meet them someplace, and what did you say?

 A. Oh, I told them that the doctor had a good product that was going to make money.

 Q. What did you tell them about the drug?

 A. Well, it was effective.

 Q. You told them that the drug was effective?

 A. Yes.

 Q. Did you tell them that there was a patent on it or you assumed there would be a patent on it?

 A. I told them there was a patent pending.

 Q. A patent pending.

 What did you tell them about the effectiveness of the drug?

 A. Well, it stopped the pain of arthritis, and it removed -- removed all symptoms of arthritis -- swelling, pain --

 Q. Did you tell them --

 A. -- stiffness.

 Q. -- Pharmacodynamics, Incorporated had agreed to pay Dr. Rose $100,000.00 for research?

 A. No.

 Q. Did you tell them that Dr. Rose was going to have the controlling stock interest ...


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