Opinion ID: 1959580
Heading Depth: 1
Heading Rank: 4

Heading: GeneSys

Text: Wortley, the purchaser of IRM, came to play a prominent role in the conflicts violation involved in the GeneSys transaction. Essentially the conflict was generated by a bearer stock option, the background for which is somewhat complex. John J. Meindl, Jr. (Meindl), a client of Tomaino, had owned approximately ninety-five percent of the outstanding capital stock of GeneSys Data Technologies, Inc. (GeneSys), a Maryland corporation. In November 1988 Meindl sold this stock to Vest, Inc., a Delaware corporation, that was part of a Swiss conglomerate, Omni Finance (Omni). Meindl took a security interest in the stock that he had sold, in order to secure the performance of certain promises made by Vest. After the sale Meindl continued as chief executive officer of GeneSys. During the period of Vest's ownership of GeneSys, the latter acquired the stock of B & B Record Center, Inc. (B & B), one of the owners of which was Charles J. Bauer, Jr. (Bauer). He became the chief operating officer of GeneSys. Payment of part of the purchase price due from Vest for Bauer's stock in B & B had been deferred, and Bauer held a security interest in the B & B stock to secure that promise to pay. Also during this period Marc Mathys (Mathys) became chief financial officer of GeneSys. Mathys was an attorney who had been employed in the Omni conglomerate and who knew some of the officers of Omni in Switzerland. By the fall of 1990 Meindl wanted to reacquire his company and had formed the intent, known to Tomaino, to bring Bauer and Mathys into the ownership of GeneSys if Meindl were successful in reacquiring it. Meindl took the position that Vest owed him $730,500 in deferred purchase price, under a formula in the GeneSys incentive bonus plan. Vest took the position that it owed nothing because GeneSys had no profits. Tomaino then conceived, or participated in conceiving, a strategy under which Meindl would foreclose on the GeneSys stock and sell the stock at private sale to Wortley, thereby hoping to establish the credit to vest on Meindl's claim against Vest. Wortley would then give Meindl an option to reacquire the stock. Tomaino anticipated objection from Vest on the ground that the private sale to Wortley did not satisfy the requirement of § 9-504 of the Uniform Commercial Code that the sale be commercially reasonable. In an attempt to meet that objection Tomaino provided as the purchase price the book value of GeneSys, payable by the assumption by Wortley of the obligations of Vest to Meindl and to Bauer. To the extent that the book value of GeneSys exceeded the obligations of Vest to Meindl and Bauer, Wortley would cause GeneSys to issue preferred stock which Meindl would hold as trustee for Vest. Meindl's right to repurchase the stock of GeneSys from Wortley was to be evidenced by a bearer stock option agreement at an option price of $100,000. A bearer form of option was elected in order to conceal from Omni/Vest that Meindl was the optionee, inasmuch as Meindl hoped to negotiate the acceptance by those parties of the preferred stock proposal and thereby avoid any challenge to the private sale. If Meindl's negotiations with Vest were successful, Meindl would exercise the option and Wortley would be paid $100,000. Vest attempted to block the foreclosure by a temporary restraining order which was granted on March 21, 1991, by Judge Bollinger on condition that Vest post a $100,000 bond. It was unable to do so, itself having fallen on hard times financially. [2] Meindl proceeded to foreclose and, on March 23, 1991, Wortley, as nominee for Thornbush Investment Limited (Thornbush), purchased at a private sale pursuant to a Foreclosure Sale Agreement prepared by Tomaino. On April 1, 1991, Thornbush executed the Bearer Stock Option Agreement prepared by Tomaino. From April through July 1991 Tomaino spent almost all of his working hours on GeneSys matters. Unknown to him, but generally consistent with Tomaino's knowledge of the plan for GeneSys, Meindl, Bauer, and Mathys on May 21, 1991, had signed an agreement pooling all of their interests in GeneSys, B & B, and certain other corporations. Tomaino now acknowledges that Mathys, individually, became his client during this period. In June 1991 there was a falling out between Meindl, Mathys, and Wortley which left Meindl and Wortley aligned against Mathys, with both interests seeking control of GeneSys. Tomaino recognizes that, at that time, he should have withdrawn from representation of any of the parties, but he sided with Meindl. Events began to unfold rapidly, but not necessarily in the order in which we present them. Mathys, using his contacts in Switzerland and for a nominal consideration, had acquired the assets of the Dutch corporation which was the immediate parent of Vest, and Mathys had placed those assets in a corporation chartered by him in the Cayman Islands. Thus, if the foreclosure sale of the GeneSys stock could be set aside, Mathys would indirectly own GeneSys through his indirect ownership of Vest. Tomaino also testified, on information received from Meindl, that Mathys had obtained the bearer stock option from Meindl's possession and without Meindl's consent. Wortley and Meindl agreed that they no longer wanted Mathys in GeneSys. Tomaino, to convince Mathys that the bearer option was valueless, conceived a ploy whereby Thornbush sent Meindl a letter terminating the option agreement. Mathys, however, was unimpressed when Meindl showed him the letter of purported termination. Mathys told Meindl to have Tomaino respond. Caught in his own web, Tomaino, on behalf of Meindl, then wrote to Thornbush denying that Thornbush was legally entitled to do that which he knew Thornbush did not intend to do. Tomaino argued in this reply that the stock options were part of the consideration for the Foreclosure Sale Agreement. At the same time, Tomaino prepared a letter for Thornbush to copy on its stationery in which Thornbush countered by saying that the consideration was limited to that stated in the Foreclosure Sale Agreement, so that there was no consideration for the bearer option. It is not disputed that all of this was done for the purpose of deceiving, at least, Mathys. On July 24 Wortley, through Thornbush, called a special meeting of stockholders of GeneSys at which all then serving directors, other than Meindl, were removed, and Wortley and one of his colleagues at Thornbush were elected as the other directors. The new directors also removed Mathys as chief financial officer of GeneSys. Mathys responded by suing Wortley, Thornbush, GeneSys, and Meindl in an action in which Judge Levitz issued a preliminary injunction. Among other things, the injunction suspended the effect of the directors and shareholders meetings of July 24, designated Mathys a member of the board of GeneSys, ordered the GeneSys stock placed in escrow with the circuit court, and froze any disposition of GeneSys assets, other than in the ordinary course of business. Tomaino testified at the hearing before Judge Levitz on behalf of the defendants. Wortley's position in that hearing was that the bearer option had been validly terminated. Tomaino acknowledged before Judge Angeletti that I gave testimony to that effect, i.e., that the option had been validly terminated. At that hearing exhibits were introduced including the correspondence that constituted the charade intended to deceive Mathys. Tomaino acknowledged before Judge Angeletti that he did nothing to disabuse Judge Levitz of the impression that the letters were genuine communications, intended to convey what the words said. Tomaino's justification for his silence was that he was never directly asked if the correspondence was intended to effect a termination. Tomaino also acknowledged before Judge Angeletti that, when testifying before Judge Levitz, he had denied drafting the bearer option, but that, before Judge Daniels, he had acknowledged that he was responsible for it. The following exchange then took place between Judge Angeletti and Tomaino. [TOMAINO]: And I believe in front of Judge Daniels, I explained the fact that much to my embarrassment and very much consistent with who I was in 1991 versus who I was in 1996 is that I was attempting to be cute. Did I draft it? Did I word process it. Was this drafted. It was init was not concise and accurate and it was attempting to play the what [does `is'] mean game and that was unfortunate. .... THE COURT: A deliberate falsehood under oath? [TOMAINO]: It wasn't intended to be a falsehood. THE COURT: It was a deliberate falsehood under oath, wasn't it, Mr. Tomaino? [TOMAINO]: No, Your Honor, it was not intended. THE COURT: Well, then what would you characterize being cute under oath meaning? [TOMAINO]: It meant THE COURT: When you didn't tell the truth, sir? [TOMAINO]: The word drafting, I didn't conceive of the Bearer Option. I just word processed it. It was conceived initially by Marc Mathys. THE COURT: So you want the Court to find that you have changed, even though you're still making excuses for what you're saying? [TOMAINO]: I'm not making any excuses. I admitted that was wrong. The only thing I didn't admit to was what called for a conclusion as to whether it was perjurious or not and it wasn't false. THE COURT: I didn't mention that word. I simply asked you [TOMAINO]: It was a falsehood yes, Your Honor. THE COURT: And it was a falsehood under oath, wasn't it? [TOMAINO]: Yes, it was. THE COURT: Which means it's a lie under oath? [TOMAINO]: At the time I didn't appreciate it as a lie under oath. THE COURT: Just like you didn't appreciate putting this money in all of your personal accounts when you were given it, is that what you're telling me? [TOMAINO]: The same character flaw that led to that led to the other things, yes. Tomaino acknowledges that this record of the GeneSys transaction supports the MRPC 1.15 and 8.4(c) violations. The sequel to the GeneSys story is only sketchily presented in the record before us. In June 1992 Judge Joseph Murphy entered a judgment rescinding the foreclosure transaction, Foreclosure Sale Agreement, and the Bearer Stock Option Agreement. He found that Vest was in default as of March 15, 1991, on its stock purchase agreement with Meindl, and Judge Murphy restored Meindl to any rights that he had as of that date to the GeneSys stock as a secured creditor. That judgment also determined that the Combination Agreement between Meindl, Mathys, and Bauer was valid and enforceable and that any damage claims be resolved at a jury trial. The jury trial was held before Judge Daniels in 1996 and resulted in a verdict in favor of GeneSys against W & G and Tomaino of $24 million as damages for the loss of the fair market value of GeneSys. On a variety of theories, including a finding on clear and convincing evidence of fraud by Tomaino and a finding of negligent supervision by W & G, Meindl was awarded $400,500, GeneSys an additional $343,950, Mathys $160,000, and Vest $90,600. We were advised at oral argument that, at that point, the litigation was settled.