Belinda Tsao-Nivaggioli

Wrestling with a Rat

November 04, 2009

Case categories include: Ethics   Finance   Leadership   

At the end of this story is an arrest and an indictment. Read about the battle between a CEO and a two-legged rat that got deep inside the firm’s capital raising efforts.

Belinda Tsao-Nivaggioli, CEO of Avicena Group Inc. (OTCBB: AVGO) had a bad feeling about a certain someone, but when the stock started going in the wrong direction, she was convinced she had a rat on her hands.

The wrong direction, in this case, meant the stock skyrocketed on bad news, and plummeted on good news. It first happened, of course, at the worst of times. The company had only gone public a few months earlier, in March of 2005, at the same time that Belinda was promoted from COO to CEO. Through introductions, the Rat had become trusted by the board the year prior, and had persuaded them to go public at an unusually early stage. He had acted as an unpaid investment banker, and their IPO raised just $3.5 million. All but $600K of it had been used up on fees, costs, and retiring old debt. Belinda’s first task as CEO was another capital raise.

The timing was poor; disappointing clinical results had just been announced. Yet the stock price went up. The analysts asked why, and Belinda had no logical explanation. But her board wasn’t worried.

As with many late-stage life sciences firms, Avicena was burning through cash. They developed two key compounds involving cellular energy, aimed at curing Lou Gehrig’s, Huntington’s, and Parkinson’s diseases and related ailments. One was in Phase II, and the other was in Phase III.  The cost of running clinical trials was staggering, but the capital raise was barely enough for core salaries and overhead. Belinda was unwilling to see the drug development stall. In years past, she had turned to the National Institute of Health (NIH) for non-dilutive grant money, and she worked the NIH in 2005 more heavily than over, earning $20 million in grants. The NIH money was only for running the clinical trials, paying the principal investigators, the sites and project management. Such grant money never covers drug costs, non-clinical studies or research, salaries or any other regulatory support.

By April of 2006 the cash from the IPO was gone, and the Rat issued a line of credit to the company. After the first draw, he refused further advances until the firm was desperate, effectively controlling Avicena’s liquidity. In May, the price rose from $0.50 per share to $6.00 per share the moment it began trading. Since he controlled all of the public float, there was no mistaking where the volatility stemmed from, but no proof either. He had transferred all of the float to electronic shares, which are hard to trace. As new financing neared, he was able to scuttle it with the support of two hand-picked associates he’d placed on the board at the IPO. In September of 2006, he introduced a new “friend," who bought 2.5 MM of the Series A stock at $6.00.

Determined to keep the trials running and on schedule for a second drug, Belinda continued her work at NIH and brought in another $6 million in 2006.

In the first quarter of 2007, the Rat brought in a new capital source who invested another $2 million in the Series B. But the company was still running on fumes to pay salaries and overhead. Belinda went on the road for a Series C and connected with a NY firm for a $15M PIPE (Private Investment in Public Entity) in May of 2007. The new money would replace the Rat-picked board members and wrest control from the Rat. At the pivotal board meeting, Belinda made her case. Surprisingly, an hour into the meeting, a fax arrived from the Rat, who had been tipped off to all the board level discussions, stating that he would wire $2 million the following day to alleviate the cash strain, and arguing that the board should vote against the PIPE and the CEO. Belinda lost that particular match and was voted down. Of course, the $2 million never arrived. The board asked Belinda to revive the PIPE, but the Rat was “inexplicably” kept appraised of her every move, and just before the negotiations finalized, the stock price plummeted and the PIPE collapsed.

Belinda marched on with the Series C work, unwilling to yield. Through the efforts of a West Coast banker she secured $3.2 million, and an associate of the Rat’s committed another $10 million. But just as the Series C closed, the Rat’s associate backed out.

Over 80 percent of Belinda’s time had been absorbed with fund raising (NIH and in the public markets), and managing her board and keeping the company from being pinned down by the Rat was draining her energy. 

Despite the good news of having raised some new money from the Series C, the stock price, immediately after the close, began plummeting. No new scientific news had been announced (or was even known), yet in one week, in September/October 2007, the price fell from $3.35 to $1.80. By the end of the year, the stock had dropped to $0.21 on no news, but the public suspected an insider had advance knowledge of bad results from the clinical trial. The reality was that the clinicals had not even ended, and were being funded by another $60 million in NIH grants that had been raised in 2007.

Belinda’s legal counsel, inherited from her predecessor and endorsed by the board, had been advised of events as they went along. They felt they did not have enough hard evidence against the Rat to go to the SEC.  Review of the transfer agent reports and NOBO reports yielded little. Discussion with market makers gave no insights. This Rat was smart, and he had apparently decided that the coming year, 2008, was to be the Year of the Rat.

He began his efforts to take control of the company. He started with buying preferred shares and started putting together a highly dilutive Series D. Repeatedly he pushed the firm up against the wall, starving Avicena for liquidity, then jumping in to “save” management at a high cost. By April 2008, Belinda and her entire team of employees had been unpaid for five months. Their passion for their life-saving work was so great that they kept on. When auditors demanded that the employees be paid, the Rat reluctantly advanced some money on their line, but only after being paid a placement fee, and demanding that the conversion price be dropped to 15 cents.

As April unfolded, Avicena’s chairman had enough and resigned, leaving Belinda and a loyal board member deadlocked against the two Rat-picked board members.

In June of 2008 they learned that the Rat’s trading activities had racked up margin losses of over $20 million, and had caused the failure of a broker dealer in the Bahamas four months earlier. That news precipitated the resignation of one of the Rat-picked board members.

Again, Belinda and her team worked without pay from May 2008 to September 2008. The Rat’s demands for a self-serving and illegal structure of the Series D offering meant delays, and he punished Belinda’s resistance by withholding cash advances on the line.

In August of 2008, he demanded Belinda’s resignation, proposing that his one remaining Rat-picked board member take the CEO position. Belinda refused and stood her ground. Too much promising scientific work had been completed to be lost to the Rat.

By September 2008 he advanced $300K and signed the paperwork for the Series D. The $6 million he had committed to in the Series D never arrived. Despite all the drama, Belinda brought in another $20 million of NIH grant money in 2008 to keep the clinical trials on track. She became the largest grant recipient for clinical trials the NIH has ever funded.

Then the Rat stopped interfering. In fact, he stopped responding to calls and e-mails. It was as though he fell off the end of the Earth. But he didn’t. He had fallen into the Department of Justice’s (DOJ) hands and had been arrested on charges for illegal activities with two unrelated Canadian companies. The DOJ requested and received Avicena’s full support, and charges against the Rat grew to include his activity with Avicena as well as a fourth firm. The SEC joined in a parallel suit. After the DOJ subpoenaed the trading records, the pattern became clear. They told Belinda that the Rat had erected a very sophisticated system of smokescreens, cutouts, and middlemen to protect himself and obscure his activities. Indicted in February of 2009, he remains under house arrest. His trial is set to begin in January of 2010.

Between September 2008 and January 2009, Belinda became Chairman and CEO, and rebuilt the entire board with seasoned investors. She formed three new private companies with new high level investors with strong track records in this space. Each company focuses on a different area (CNS, Creatine Transporter Defect and Dermatology), and licenses IP from Avicena, which is now a royalty trust. Belinda, now free to concentrate on running the business, continued bringing in more NIH money, as well new opportunities. Most recently, she has been wrapping up a joint development deal with the South Center of Innovative Pharmaceuticals in Guangzhou, China for development of a diagnostic and drug therapy for Creatine Transporter Defect, a condition that Avicena discovered that affects autistic children. In exchange for the Chinese government’s funding of the work, China will get a share of the profits from the Chinese market.

What a nightmare to endure for any CEO! How can a CEO avoid such problems, or mitigate the damages when the match is already on? Here are five ideas that can help.

Demand Transparency. Fraud and illegal activity is more common that most of us like to think.  When you think you smell a rat, you might really have a rat. Be as proactive as you can be to investigate and find facts. This requires the willingness to be skeptical of the trust you or your board may have built for someone. It is difficult to keep such skepticism at a level that is healthy for the relationship, but typically people that are honest and up front will understand your need for transparency.

Surround yourself with great advisors. CEOs need vetted advisors and mentors that have earned their trust and actively support them in areas that are new to them. Once trouble hits, it is often difficult to switch. Don’t settle for advisors just because they are the incumbent. Never hesitate to get a second opinion, especially when the advice you are getting seems ineffective or contra-intuitive.

All board members must follow the rules. Board quality and integrity are huge factors. There should be no tolerance for board leaks, or other self-serving behavior. Board members not only should oversee the CEO, but they should assist the CEO with their networks and business acumen.

Understand where the money comes from. Vet investors carefully, and know how and where the money is coming from. Big money can feel like a gift, but illegal money will bring big headaches. Most investors act in normal roles, and follow a normal path. If your money source (or the connections that bring you money source) is too far afield in his or her behavior, look out.

Run for the hills. Does it need to be your wrestling match? Bad boards don’t deserve great CEOs. In many cases, as with this one, a sitting board brings in the CEO. Once you’ve realized that your work as CEO will be hindered by the board, start looking for other opportunities. Belinda had a very hard four-year wrestling match with the Rat that wasn’t fun, and frankly, hurt her performance. While we admire her fortitude and are thankful that her drugs are still on track to help us all, she paid a high price for her passion for Avicena.

It is gratifying to know that the Rat will be the big loser of this four-year wrestling match, and will be pinned in the penitentiary for some time to come. Thanks to Belinda and the DOJ, we have one less two-legged rat preying on our companies. Better still is that the promise of Avicena’s drugs is healthy and heading toward pharmacy counters worldwide.

Robert Sher is an Alliance Director and principal of CEO to CEO. He may be contacted at