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Quigley Corp. v. Karkus

June 12, 2009

THE QUIGLEY CORPORATION
v.
TED KARKUS, ET AL.



The opinion of the court was delivered by: Gene E.K. Pratter, J.

MEMORANDUM

BACKGROUND

The battle for control of The Quigley Corporation ("Quigley") continues unabated.*fn1

Indeed, given the melodrama portrayed in the papers, from the witness stand and in counsel's arguments, it may be said fairly that the contest has descended to distressing depths, muddying, if not befouling, the waters to such a degree that it is a challenge to keep in mind what must be decided now.*fn2

The proxy fight initiated by Defendant Ted Karkus (together with defendants Burnett, DeShazo, Gleckel and Leventhal) (collectively, "Karkus Defendants") resulted in a shareholder vote conducted at Quigley's annual meeting on May 20, 2009. The election results favored the Karkus Defendants' slate for the board of directors by a margin of approximately 300,000 shares from the 12,908,383 shares outstanding.

On May 29, 2009, 11 days after voluntarily dismissing the Quigley I action in which Quigley urged the Court to order the Karkus Defendants to disclose in required filings with the SEC that John Ligums (a defendant in the present suit - - "Quigley II" - - as well as in the prior action) was a member of the Karkus group of insurgent proxy contenders, Quigley commenced Quigley II against the same defendants. Here in Quigley II the claim is that between the conclusion of Quigley I and the commencement of Quigley II, Quigley representatives learned of certain new information, the upshot of which materially undermined the efficacy of the Court's May 15, 2009 ruling in Quigley I denying Quigley's prayer for injunctive relief.

Specifically, the allegations about the new information may be summarized as follows. On May 19, 2009 (the day before the scheduled shareholder vote) a group of Quigley executives (along with the company's outside general counsel) confronted Dr. Richard Rosenbloom, the Quigley chief medical officer (described by Quigley as a "key" Quigley employee) with certain documentation that had come into the accusers' possession. This prompted Dr. Rosenbloom to admit, contrary to his prior representations, that he had sought and been receiving monies periodically since October 2008 from Mr. Karkus. According to Quigley's pleadings, Dr. Rosenbloom also stated on May 19 that Mr. Karkus offered him other employment-related inducements to support the Karkus proxy effort. Quigley also claimed its recent discovery that Dr. Rosenbloom (and/or members of his family) had been receiving monies from certain of Quigley's outside vendors. And, according to Quigley, at this same May 19 session, Dr. Rosenbloom attributed to Mr. Ligums various statements to the effect that Mr. Ligums was actively acquiring additional Quigley stock and was part of the insurgent Karkus group that hoped to unseat the incumbent board at the upcoming shareholders' meeting. At some point in this same time frame Quigley also allegedly learned that Dr. Rosenbloom sought and had been receiving money from Mr. Ligums as well as from Mr. Ligums's son.

Using the new information about the Karkus-Rosenbloom transactions, Quigley also specifically accused Mr. Karkus of giving false deposition testimony in Quigley I when, on May 13, 2009, he denied ever having had financial transactions with a "member of management or employee of Quigley." Thus, Quigley claimed to have facts that called into question the truthfulness of the testimony by Messrs. Karkus and Ligums in Quigley I that Mr. Ligums was not part of the Karkus group, the key issue in Quigley I. As a result of learning the foregoing, and because the results of the shareholder vote ostensibly in favor of the Karkus group was about to be certified, Quigley commenced this new litigation.

In Quigley II, Quigley moved for a temporary restraining order and/or preliminary injunction to prevent the installation of the new board of directors which was scheduled to take place on June 1, 2009. To permit orderly preparations for a preliminary injunction hearing on these new allegations, after consultation with counsel for the parties, the Court issued two orders, dated May 29, 2009 and June 2, 2009, respectively, to put into place a standstill agreement with respect to Quigley corporate activities to be overseen, as and if needed, by a Special Master, and preserving the status quo with respect to the board composition. The evidentiary hearing necessitated by the Quigley motion commenced on Friday, June 5, 2009 and concluded on Monday, June 8, 2009.

At the hearing, Quigley first called Dr. Rosenbloom, Quigley's executive medical director and the executive vice president and chief operating officer of Quigley Pharma, Inc., a wholly-owned subsidiary of Quigley. In the telling of an unhappy tale of dire, ever worsening personal financial circumstances, Dr. Rosenbloom testified that prior to having been suspended without pay*fn3 from his position at Quigley on May 19, 2009, he had had financial dealings with Mr. Karkus, Mr. Ligums and Mr. Ligums's son. In sum, going back to 2005 Dr. Rosenbloom received in various periodic increments an aggregate of more than more than $50,000 from Mr. Ligums. Hrg. N.T. 161-162. He also had received a now-repaid $50,000 mortgage loan from Mr. Ligums's son. Hrg. N.T. 20. Finally, since fall 2008, Mr. Karkus had made periodic payments to Dr. Rosenbloom totaling $55,000. Pltf. Ex. 67. The most recent funds from Mr. Karkus had been received by Dr. Rosenbloom March 26, 2009, Pltf. Ex. 66, and from Mr. Ligums May 6, 2009. Pltf. Ex. 79. Dr. Rosenbloom characterized the funds thus received as loans necessitated by the desperate financial straits in which he found himself. He candidly testified that he has been looking essentially anywhere and everywhere for money.

According to Dr. Rosenbloom, he did not tell Mr. Karkus about the loans from Mr. Ligums, did not tell Mr. Ligums he was borrowing money from Mr. Karkus, and, as far as Dr. Rosenbloom knew, those two did not otherwise know about the other's financial dealings with him. Hrg. N.T. 36, 44. Dr. Rosenbloom also confirmed under oath that on more than one occasion - - most recently on April 13, 2009 by which date he had been aware of the impending proxy fight - - he had denied to Quigley management having had any contacts or financial transactions with either Mr. Karkus or Mr. Ligums. Hrg. N.T. 10-13. Those denials were patently untrue when made. Dr. Rosenbloom also acknowledged having received payments from several Quigley outside vendors which the witness portrayed as payments to him for previously rendered consulting services to those vendors in their respective organizational stages. Hrg. N.T. 37-38.

Under oath Dr. Rosenbloom unambiguously denied ever having heard from Mr. Ligums that Mr. Ligums was working with Mr. Karkus in the 2009 proxy efforts. Hrg. N.T. 88, 178. He also denied telling his questioners in the May 19th meeting that Mr. Ligums had said he (Ligums) was working with Mr. Karkus to change the Quigley board. Hrg. N.T. 86.

Mr. Ligums also testified at the hearing. He acknowledged having loaned money to Dr. Rosenbloom periodically since sometime in 2005. Hrg. N.T. 160. Mr. Ligums claimed to be unaware that Dr. Rosenbloom had also turned to Mr. Karkus for financial assistance, though Mr. Ligums did know that his son (another Quigley shareholder) had given Dr. Rosenbloom a mortgage. Hrg. N.T. 159, 162. Mr. Ligums also did receive an e-mail in January 2009 from Dr. Rosenbloom that reasonably could be interpreted as suggesting that Dr. Rosenbloom would be trying to receive assistance of some sort from Mr. Karkus. Ex. R000042. As he had in Quigley I, Mr. Ligums denied being part of the Karkus group, and he denied ever having said or suggested to Dr. Rosenbloom that he was. Hrg. N.T. 178, 244-45. Finally, Mr. Ligums acknowledged having increased his Quigley shareholdings by 346,000 shares in the months leading up to the 2009 annual meeting. He said he did so as a way to put certain available funds to use. He also acknowledged that members of his family had increased their ownership of Quigley shares as well, making the aggregate Ligums family's related holdings approximately 1 million shares. Hrg. N.T. 159.

Quigley also called Mr. Karkus to give testimony. Not unlike Mr. Ligums, Mr. Karkus admitted having made loans to Dr. Rosenbloom, sometimes on terms very favorable to Dr. Rosenbloom. Hrg. N.T. 135-137. The Karkus loans were memorialized in notes that were replaced when new loans were made. Id. Mr. Karkus acknowledged that a hearing exhibit, Pltf. Ex. 62, was a copy of a photographic copy of the first page of one such promissory note which had apparently been surreptitiously taken by a housekeeper employed by Dr. Rosenbloom (and who is a friend of the daughter of Quigley's incumbent CEO) using a cell phone to secure financial information about Dr. Rosenbloom which was then supplied to Quigley. Hrg. N.T. 136. Mr. Karkus testified that once he ...


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