End Near in ICN Battle : But Issues Raised in the Squabble Will Persist

It began as a colorful but straightforward story, one of an ambitious and smooth-talking stockbroker who wanted to oust the dapper, mercurial chairman of a mid-sized pharmaceuticals company.

But in the 10 months since, Rafi Khan’s effort to topple Milan Panic, founder of ICN Pharmaceuticals Inc. in Costa Mesa, has evolved into an extraordinarily nasty battle whose repercussions have ricocheted throughout the financial services industry.

On Tuesday, at ICN’s long-awaited annual meeting, the question of whether Khan and a six-member slate of candidates should replace Panic and eight other ICN board members will finally be settled. It appears almost certain that Panic, whose troubles stem in part from his seven-month sojourn as prime minister of Yugoslavia, will emerge victorious.

The broader issues raised in this battle, though, will not disappear as quickly. For starters, Khan may still have to answer allegations of criminal wrongdoing that surfaced as a result of ICN’s concerted effort to discredit him.

More important, the ICN-Khan affair has focused overdue attention on the standards and practices of the booming mutual fund industry. Khan’s relationships with mutual fund companies that are ICN’s largest shareholders have led to questions about possible conflicts of interest on the part of fund managers--and may have contributed to the firing last month of prominent Invesco Funds Group Inc. manager John Kaweske.

Invesco said Kaweske was terminated because he broke company rules by not reporting personal trades. His portfolio included shares in a private placement of stocks in Cardiac Science Inc., an Irvine medical device company that Khan has promoted for the past two years.

Howard Cooper, chairman of Cardiac Science, is a member of Khan’s slate of would-be ICN directors. And the managers of three mutual funds that are large holders of ICN stock--Glickenhaus & Co., Putnam Investments of Boston and Chestnut Hill Management Corp.--also bought shares in Cardiac Science.

These funds and several other institutional holders of ICN shares also own stock in a laundry list of companies that Khan has recommended in a series of reports, written in an unabashedly campy style.

Most of those stocks have risen sharply in the past 24 months--though one of them, Future Communications, is in bankruptcy and the subject of a number of lawsuits.

The implication, subtly suggested by ICN, is that Khan has a network of fund managers who would support him in exchange for insider tips on new stock issues and other similar favors.

While no clear evidence has emerged to support such a theory, it has prompted federal and state regulators to focus on the links between stock promoters and fund managers.

Khan, who owns less than 1% of ICN’s outstanding shares, and the fund managers who have invested in the drug firm say the implications of wrongdoing are ridiculous.

“I think it is a sham that all this (controversy over Cardiac Science stock) comes up right before the annual meeting,” Khan said. “All this is inspired and contrived by Panic.”

Khan and the fund managers note that Cardiac Science has hardly been a stellar investment, and cite a far more innocent reason for their involvement with Khan: He has a good record in picking stocks.

“I’m very sympathetic to Khan,” said Seth Glickenhaus of Glickenhaus & Co. “He’s a salesman, a very bright person.”

ICN has invested heavily in an effort to discredit Khan, taking out full-page ads in newspapers and hiring private investigators to delve into his past.

Unfortunately for Khan, the investigators uncovered evidence that suggested he may have been involved in a scheme to defraud the British government by illegally buying too many shares in British Gas.

After a dramatic November hearing in federal court in New York, U.S. District Judge John Sprizzo found that Khan had probably masterminded the British Gas share-buying scheme and lied about it in court.

He later persuaded the U.S. attorney’s office in Manhattan to investigate Khan for perjury and other possible wrongdoing.

Khan, who was once a staunch ally of ICN and Panic, is now accused of using insider information in pursuing his proxy fight. He denies those charges.

Five brokerages involved in short-selling Future Communications shares accused Khan in lawsuits of engaging in market manipulation. Some of those firms either have settled or are negotiating deals, according to Khan’s attorney.

And federal authorities, working in seven cities, have subpoenaed records of Khan’s trading activity at his former employer, Beverly Hills brokerage Reynolds Kendrick & Stratton, and are looking into his stock dealings at another local brokerage, H.J. Meyers & Sons Inc.

Three former Khan employees and associates--Kristina Kraverica, Olivia Winsten and Shirley Kwok, all of whom knew Khan at H.J. Meyers or Reynolds Kendrick--were subpoenaed to appear before a New York grand jury beginning Wednesday, sources said.

No criminal charges have ever been filed against Khan. But clearly, the allegations have eroded Khan’s support among fund managers--even though many are dissatisfied with ICN.

“Rafi (Khan) is now a controversial figure,” said one fund manager, who asked not to be identified. “If a judge says that Rafi is a crook, then that is a pretty big hill to get over.”

Another manager noted that mutual funds rely heavily on their reputations to attract customers. “Funds are political creatures, very sensitive to their image,” he said. “That makes it very hard for them to vote for” Khan.

Some fund managers cited other problems. Philip Dubuque, fund manager at Chestnut Hill, would not divulge how he would vote, but he questioned the experience of Khan’s proposed directors.

Dubuque said management has lately been “listening to shareholders.” Indeed, Khan’s challenge has clearly forced ICN to promise to address a number of issues that had angered stockholders.

Those include the dilution of shares through private placements in Europe, lucrative compensation packages for ICN executives and Panic’s alleged neglect of the company during his ill-fated stint as prime minister of Yugoslavia that ended abruptly last year.

Putnam spokeswoman Nancy Fisher said her firm had decided to back current management after it “carefully considered the arguments of both sides.”

“We had face-to-face meetings with Mr. Khan and Mr. Panic, and while some concerns raised by Mr. Khan deserve serious attention, we are impressed by the willingness of ICN to address issues important to us,” Fisher said.

Still, not all of Khan’s erstwhile allies have abandoned him. Seth Glickenhaus said last week that he would probably vote his funds’ 575,000 ICN shares in favor of Khan’s slate.

Khan maintains that he holds the advantage in the proxy fight.

But privately, he is livid that funds such as Invesco--for whom he claimed to have made $500 million with profitable stock recommendations--are abandoning him now. Khan also believes that Invesco fired Kaweske because he would have pledged the fund’s 1.6 million shares to him.

Khan now says he is counting on support from a number of smaller mutual funds to land him a seat on ICN’s board.

ICN officials said they were heartened by what they feel will be an easy victory Tuesday after a long, tumultuous campaign.

Spokesman David Calef said the votes will be counted during the annual meeting and the results announced immediately.

“We are very confident about the outcome,” he said, noting that a New York judge has ordered Khan to vote 44,000 of his own 120,000 ICN shares to the company because it was determined that those shares were acquired as the result of trading on insider information. “Even Rafi is voting for us.”