Suit Filed Against Ex-Owners as Result of Strawberry Scare
The former owners of the San Diego processor that sliced and froze the Mexican-grown strawberries implicated in the hepatitis A scare last week in Los Angeles-area schools were sued Monday by the new parent company.
In a suit filed in federal court in Oregon, Epitope Inc. is seeking $20 million in actual and punitive damages. It also wants to undo the $7.7-million stock swap in December by which it bought the processor, Andrew & Williamson Sales Co. In other words, Epitope wants a divorce.
Epitope, a biotechnology company based in Beaverton, Ore., alleges that the former owners of the processor defrauded Epitope, violated federal and state securities laws and breached contracts by falsely certifying that strawberries sold to the federal government’s school lunch program were U.S.-grown.
Andrew & Williamson executives could not be reached for comment.
“Our first concern is to do everything we can to cooperate with the [U.S. Department of Agriculture, the Food and Drug Administration] and others in protecting the public’s well-being,” Epitope Chief Executive Adolph J. Ferro said in a statement. “Epitope is a company whose employees have devoted their careers to finding new methods to improve the health and well-being of the public, and we are outraged by the false certification.”
The uproar over the possible exposure of more than 9,000 Los Angeles-area students and adults to hepatitis A--and Epitope’s response in court--helps demonstrate why biotechnology investors need to have patience and nerves of steel.
Founded in 1978 as a paternity testing company, Epitope has never turned a profit. And now it is scrambling to cope with the fallout from its seemingly innocuous purchase of Andrew & Williamson.
“They’re in a kind of state of confusion right now,” said Laurie Miller, a vice president with the Portland, Ore., investment firm of Black & Co.
For most of its life, Epitope has been primarily a research venture. Years ago, it developed a saliva test for antibodies to HIV, the virus that causes acquired immune deficiency syndrome. The company touted the product as a way to revolutionize the industry by eliminating the need for needles and blood tests.
After going public in 1986, Epitope racked up $75 million in losses and forced out two founders, all the while continuing to hint that FDA approval of its saliva test was imminent.
The publisher of one stock market newsletter dubbed the company “EpiJoke.” Short sellers, who profit when a company’s stock price falls, launched a siege, and unhappy shareholders sued.
“Epitope has been a controversial company that has been very bullish on its prospects,” said Jim McCamant, publisher of the AgBiotech Stock Letter in Berkeley.
Then last year, it received approval to sell the OraSure diagnostic kit, which uses fluid from the mouth to test for HIV antibodies. But naysayers maintain that the product has fared less well than management had forecast, despite a marketing partnership with SmithKline Beecham.
Michael Murphy, publisher of the Overpriced Stock Service newsletter in Half Moon Bay said the company got into the agricultural biotech business when it realized that OraSure “would be a hard row.” The company’s Agritope group announced a bioengineering process that would improve the shelf life of tomatoes and it went to work developing such products as frost-free strawberries.
Last November, the company announced its intention to buy Andrew & Williamson, saying the deal would enable the company to take full advantage of its technology by providing the needed production, distribution and marketing infrastructure. Andrew & Williamson’s main business is producing and distributing fresh fruits and vegetables; frozen strawberries accounted for a small portion of its $62 million in sales for the year ended Sept. 30, 1996.
Then last week, as short seller Murphy put it, the deal “turned around and bit ‘em.”
Epitope announced Wednesday that it had accepted the resignation of Fred L. Williamson, the processor’s president and chief executive, and that Andrew & Williamson had lied in describing some of its strawberries for the federal school lunch program as U.S.-grown. In fact, Epitope said, they were grown in Mexico, a violation of federal rules.
Named in the suit are Williamson; his son Fred Williamson Jr.; Fred Andrew, and his son Keith Andrew, Epitope said.
Epitope shares plunged 31% early last week, to $7.25, but have since rebounded. On Monday the price rose $1.50 to $9.375 on Nasdaq.
