The Poison Pill
Every good entrepreneur knows that a successful business venture requires a mix of personalities that work well together. The eccentric but brilliant software designer can be teamed with an experienced manager, then money is raised, contracts are signed, sales flourish. The right combination of talent can work marketplace magic.
Then there's the alternative.
A man comes up with a fabulous idea, a way for doctors to send prescriptions to pharmacies over the Internet. He signs on a man with extensive marketing experience, and together they recruit a veteran health-care CEO who possesses a golden Rolodex filled with some of the best-known business names in Colorado. More than two dozen of them agree to invest in the new venture.
Then everything goes wrong. The new CEO decides the inventor "rubs him the wrong way" and ousts him from the firm. The inventor, in turn, claims his erstwhile partners conspired to steal his software and sends letters to the firm's investors alleging a conspiracy to defraud him. Meanwhile, the CEO frets about his former colleague's extensive gun collection and his boast that he's a man "not to be messed with." Allegations of double dealing and corporate sabotage fly. So do the lawsuits.
As the court files grow, the company is unable to raise crucial financing and eventually shuts its doors in the Denver West office park.
That's the short version of Jefferson County District Court civil case number 1685. For over a year, several of the most prominent names in corporate Colorado have been mired in a pair of nasty lawsuits involving a failed business venture that once held enough promise to win the 1996 Innovation of the Year award from the Denver Business Journal.
But today Randy Prefer, a Littleton software designer and inventor, is suing his former business partners in Pharmnetrx Inc. for $4.3 million. Those partners filed a suit against Prefer the same day, asking for an unspecified amount in punitive damages. The resulting legal mess already spills over three huge files at the Jefferson County courthouse, even though a jury trial won't take place until early next year.
Shortly after the dueling lawsuits were filed on June 11, 1997, Jefferson County District Court Judge Leland Anderson issued a restraining order preventing Prefer from talking to "any third party" about the case. Others involved in the suits also decline to discuss the specifics.
But one Denver business veteran who worked closely with Pharmnetrx says it's clear there's no love lost between the former partners and Prefer. "He's sort of like a sociopath," says the source, who asks not to be named. "He has no conscience, but he's very believable, and people will give him their money. Now everybody is cleaning up Randy's messes."
Back in 1994, Randy Prefer was looking for a new project. He hooked up with Mitch Schwartz, a fellow Littleton resident with an extensive background in marketing, and surveyed some doctors, asking them what their biggest day-to-day problems were. After the physicians told them that writing and obtaining prescriptions burned up huge amounts of time, Prefer and Schwartz decided that finding a way to automate that process could be a tremendous business opportunity. In the spring of 1995, Prefer began developing the software that would become Pharmnetrx's chief asset.
A year later his fledgling company was tapped for an innovation award. "Prescriptions are something that doctors eat and breathe, but they are ten years behind the times," Prefer told the Denver Business Journal.
While Prefer worked on Intelli-Script, his software that could propel doctors into the Nineties, Schwartz focused on the sales and marketing of the proposed product. In September 1996 they filed articles of incorporation for their new company, Pharmnetrx. Their first big break came the next month, when King Soopers signed a letter of intent with Pharmnetrx; the grocery chain would be a test site.
After that, things moved quickly. Investment banker Paul Baker joined Pharmnetrx, as did Denver businessman Barry Curtiss-Lusher, and they began talking to potential investors. At the end of 1996 the company contracted with a Kansas City firm, DRT Systems International, to work with Prefer and make his software program "industrial-strength."
In February 1997, Philip Kalin, the former CEO and president of Rose Medical Center, signed on as Pharmnetrx's CEO. Kalin, who'd been working as a consultant since Rose's sale to the Columbia health-care corporation, joined the new venture full-time.
Having Kalin on board gave the company instant credibility as a serious venture, and Pharmnetrx began collecting investment dollars from many doctors and executives connected with Rose. Soon the company had a stellar list of more than two dozen investors, including well-known figures in Colorado health care such as Richard Abrams, now chairman of Precedent Health Partners, and Jeff Dorsey, the regional director for the Columbia chain. Larry Atler, a prominent Denver attorney and former chairman of the Denver Metro Chamber of Commerce, also anted up. Within the first few months of 1997, Pharmnetrx had raised more than $358,750 to launch its product.
But even as the money flowed in, other problems surfaced.
The most dramatic was Prefer's arrest in Jefferson County on May 13, 1997--for shoplifting at a King Soopers on West Ken Caryl Boulevard. And not just shoplifting anything: According to the police report, Prefer had been stopped for allegedly shoplifting prescriptions--four bottles of Dexedrine--from Pharmnetrx's most important potential client.
"King Soopers was the group we were going to do our clinical trial with," says one source who worked closely with the company. "I don't know what it is about Randy's personality that makes him do these things. He shoplifted $200 worth of pharmacy products, putting it in his briefcase. They had it on videotape."
Prefer was two hours late to work the next morning--the day Pharmnetrx was holding a strategic planning retreat. "He failed to have distributed a written report to share with Pharmnetrx's members, staff and advisors concerning the Internet strategies important to the company's strategies," Kalin noted in an affidavit.
But Prefer says his troubles started earlier, just after Kalin joined the company. In the middle of May 1997, Prefer claims, he was called to a meeting with Kalin, Curtiss-Lusher and Schwartz and told, "You rub us the wrong way." After that, according to Prefer's complaint, his former partners "began a series of negative behaviors which were intended to remove Mr. Prefer from the company he started and to steal his software programming."
Among other things, Prefer says, the Pharmnetrx executives illegally obtained his credit report--which they say showed that he had taken out fifty credit cards and charged all of them to the limit.
The filings of the Pharmnetrx executives tell a different story. In their lawsuit, they allege that Prefer engaged in a vengeful campaign to destroy the company he'd helped found, going so far as to tell the company's investors they should ask for their money back and requesting meetings with Pharmnetrx's potential clients. They also claim that Prefer's credit history reflected a reckless attitude toward money that caused them concern and that they began to suspect he might have misused company funds.
As for Prefer's claim that they conspired to steal his software, the Pharmnetrx executives insist that the software is the property of the company.
In an affidavit filed with the court, Kalin says that during the spring of 1997 he was becoming increasingly concerned over Prefer's ability to meet crucial deadlines in the development of the software. At the same time, he adds, Prefer was becoming antagonistic toward Schwartz and began pressuring Kalin to fire his original partner.
After Prefer's arrest, King Soopers officials told the firm they wouldn't have anything to do with him. At that point, Kalin reportedly told Prefer he should focus on developing the software and leave the firm's other business to his partners. "Phil said, 'Randy, why don't you just concentrate on the software?'" says a source close to the company. Prefer, says the source, "wouldn't hear of it."
"I proposed that both Randy and Mitch make certain changes in their roles that I thought were required in order to continue developing Pharmnetrx to achieve its business objectives," Kalin told the court. "Following that meeting, Randy immediately began calling investors, potential investors, business partners, customers and employees, spreading misinformation--including that he had fired me and furloughed all the other staff."
Prefer falsely claimed to have majority ownership of the company, said Kalin, and even used the title of president and CEO. At the time, Prefer actually owned 30 percent of Pharmnetrx, Schwartz owned 30 percent, and the rest was divided among the investors, including CEO Kalin.
On June 1, 1997, Prefer sent a letter to every Pharmnetrx investor, with the bold-type heading "Do Not Believe That Everything Is OK Because It Is Not!" In that letter, Prefer told investors they had a right to ask for their money back from the company and described the mid-May meeting with Kalin.
"The real reason for this obviously pre-meditated meeting was to inform me that they no longer needed me, the founder!" he wrote. "You know, Randy Prefer, the guy who made this huge opportunity possible. I'm the person who gave birth to an idea, designed that vision, produced the actual working product, and I should let you all know that I individually OWN all of the rights to my software program, until such time as I deem that an equitable situation exists."
In the letter, Prefer claimed his colleagues had intentionally set out to steal the software he had developed, taking advantage of his exhaustion from trying to meet deadlines on the project. "Like a fool, I worked for about six months, 24 hours a day, to complete a 2-year software project," he wrote. "So when I was totally worn down, stressed out and sick, they had their perfect time to attack."
Prefer vowed that he would "fight to eternity" and asked investors what they would do if someone tried to take away their first-born child. "Would you just stand by and let them take your child, or would you fight back?"
He concluded the letter by asking each investor to sign an attached proxy ballot so Prefer could vote their shares.
On June 5, 1997, Pharmnetrx held a special meeting. Randy Prefer was there, along with his lawyer.
By majority vote, the members of Pharmnetrx voted to appoint Schwartz and Kalin the new managers. They also voted to terminate Prefer's employment and directed him to return all of Pharmnetrx's property to its attorney.
Six days later, Prefer filed suit against his former colleagues. In what had to be a wild race, they beat him to the courthouse by nine minutes, filing their own suit for unspecified punitive damages.
Almost immediately, the court files began filling with claims and counterclaims.
Kalin shared his personal apprehensions about Prefer with the court, making an ominous reference to a cache of firearms. "Randy bragged to me during an initial meeting in San Diego that he was not a person to be 'messed with' and described how, when feeling taken advantage of while living on Long Island, he went into Harlem with one of the guns from his extensive gun collection and made sure he wasn't taken advantage of again."
While the possibility that Prefer was packing heat worried Kalin and his partners, their greater concern was corporate sabotage.
Telling Leland Anderson, the district court judge assigned to the case, that he feared Prefer would stop at nothing to ruin the company, Kalin asked for an injunction forbidding Prefer from destroying the software. "I have very serious concerns that if the Pharmnetrx property is left in Randy Prefer's hands, he will take steps to destroy, hide or transfer the property in an effort to sabotage Pharmnetrx," Kalin said.
Company co-founder Schwartz went even further, describing a conversation he'd had with Prefer just after he was forced out of the company. "He told me that he intends to move forward with developing and marketing the Intelli-Script product without us," Schwartz told the judge. "Randy stated this intent by saying to me that he will cut all of us out of the deal and that we would fail without him.
"He said that he has the encryption software and will not let us have it," Schwartz continued. "He also said that he would destroy the software leaving us unable to market the product, that the product and idea was his, and that he would die before he would give it to anybody. Randy ended this conversation by telling me he would deny saying any of this. These remarks concern me, because Randy owns an extensive firearms collection, which he keeps at his home."
Schwartz has been deeply distressed by the company blowup, says a former colleague, and blames himself for bringing other investors into the venture. "Mitch felt responsible for things Randy did," she says. "He suffered the most of all. He spent two years on this, and it was devastating for Mitch, financially and emotionally." (Schwartz did not return Westword's calls.)
Even after he was ousted, according to court documents, Prefer continued to contact investors, claiming the company's executives were conspiring to rob him of his software.
So Kalin and the remaining partners asked the judge for a temporary restraining order that would prevent Prefer from contacting Pharmnetrx investors, clients or employees and from making any public statements about the company. They also asked Anderson to issue an order of possession that would allow the sheriff to seize the software stored at Prefer's house.
In granting the company's request, Anderson found that Prefer had surrendered his ownership rights to the software when the firm incorporated and took on investors. He noted that Prefer drew a salary from Pharmnetrx while working on the software and did not hold a patent. He also cited the involvement of programmers from DRT, who worked with Prefer in developing the software under contract with Pharmnetrx, and said the resulting program was a "new creation" that went well beyond Prefer's initial effort.
And Anderson went further. He noted that criminal charges were pending against Prefer because of his arrest at King Soopers, after which King Soopers "refused to allow Mr. Prefer to interact with their company concerning the installation or beta-testing of the software product."
The judge also pointed out that Prefer had been cited by the Federal Trade Commission in 1995 for his involvement in an alleged scam that the government said "likely has caused millions of dollars in consumer injury." Prefer had been an executive with Panoramic Multimedia, a Littleton-based venture that sold computer-software distributorships for as much as $39,000. But while the company told investors they would have exclusive rights to sell a line of high-quality CD-ROMS through retail stores, the FTC said the company actually sent them boxes filled with next-to-worthless "samples, free software, or disks labeled 'not for resale.'"
As a result of Prefer's history with Panoramic, in February 1996 the FTC succeeded in getting the federal courts to forbid Prefer from ever again becoming involved with franchise or distributorship ventures. Prefer's involvement with Pharmnetrx, however, didn't violate that mandate, says an FTC spokesman.
The dueling lawsuits are scheduled to go to trial in early 1999. "So far," Kalin says, "the courts have ruled in our favor every step of the way." But those rulings came too late to save Pharmnetrx, he adds.
From the start the company had been in a race with several other firms around the country that had the same idea and were working just as furiously to bring a product to market. Several of Pharmnetrx's competitors are preparing to launch Internet-based services soon, Kalin says. The first company to do so stands to make millions. But it won't be Pharmnetrx.
Their venture was always a gamble, says Kalin, and the uproar over the lawsuit frightened away potential investors and cost the company crucial momentum. "The company hasn't operated since last summer," he adds. "By the time you would get the product ready to go, it was tied up in litigation. There's always a risk in start-up companies. Now we've all moved on."
Kalin, who has returned to consulting, declines to discuss the lawsuit or Randy Prefer, citing the ongoing litigation. But a former colleague says the legal mess has taken its toll on Kalin.
"Phil had some dark hair before this experience," she says. "He doesn't have any now."
Although Curtiss-Lusher also declines to discuss specifics of the lawsuit, he does say that several attempts to reach an out-of-court settlement have gone nowhere. He also makes it clear that he and his colleagues see themselves as Prefer's victims.
"I'd very much like to see some of this reach the public so that others won't be taken advantage of the way we were," says Curtiss-Lusher.
Pharmnetrx's implosion startled many in Denver's medical community. "I was surprised when I heard this fell apart," says Denver health-care consultant Ralph Pollock. "They had a lot of big-name connections, and somebody sure spent a lot of money."
The idea of online prescriptions is still valid, Pollock adds, especially since it would allow doctors and pharmacists to easily reference data on drug interactions. Lethal combinations of prescription medications are now the fourth leading cause of death in the United States, he says, and physicians desperately need up-to-the-minute information in order to safeguard their patients.
But no matter how good their ideas are, entrepreneurs often run into trouble when they try to market new products. "Sometimes it's just the personalities, but usually somebody has a vision and becomes a slave to it," Pollack says. "They may be good idea people but not be good at implementing it. Whoever had the idea may not want to give it up. Also, the longer they have the idea, the more paranoid they get that somebody will steal it from them."
In fact, Prefer says, some of the best-known businessmen in the state have plotted against him. "It's a David-versus-Goliath situation," he says, alluding to a sinister conspiracy.
Prefer cites Anderson's injunction when refusing to discuss details of the suit. "If I talked about the case, I'd go to jail," he says. "I can't afford to put my family in that kind of position." He does say that he's determined to take his case to a jury and that he doesn't want to settle out of court. "That would be shooting myself in the foot," Prefer says.
In the meantime, neither the FTC's sanction nor the Pharmnetrx suit seem to have discouraged Prefer from pursuing other business projects. He's reportedly back on the circuit of local venture-capital meetings.
"He's still out there wheeling and dealing," says a former colleague. "I don't think he even feels like he's had his hands slapped.
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