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Organovo Holdings, Inc. v. Dimitrov

Court of Chancery of Delaware

June 5, 2017

ORGANOVO HOLDINGS, INC., a Delaware Corporation Plaintiff,
v.
GEORGI DIMITROV, Defendant.

          Submitted: March 3, 2017

          John L. Reed, Ethan H. Townsend, Harrison S. Carpenter, DLA PIPER LLP, Wilmington, Delaware; Grant P. Alexander, DLA PIPER LLP, Los Angeles, CA, Counsel for Organovo Holdings, Inc.

          David L. Finger, FINGER & SLALINA, LLC, Counsel for Georgi Dimitrov.

          OPINION

          LASTER, Vice Chancellor.

         Defendant Georgi Dimitrov moved to vacate the entry of default judgment against him. His motion is granted.

         I. FACTUAL BACKGROUND

         The facts are drawn from the Verified Complaint (the "Complaint") and the materials submitted by the parties during post-default proceedings. A default judgment "deem[s] admitted all the well-pleaded facts in the complaint."[1] This decision also takes judicial notice of previous proceedings in a related action.

         A. The Parties

         Plaintiff Organovo Holdings, Inc. ("Organovo" or the "Company") is a Delaware corporation with its headquarters in San Diego, California. The Company designs and creates functional human tissues through its use of proprietary three-dimensional bio-printing technology. In July 2013, the Company listed its common stock on the New York Stock Exchange. In the months following its initial listing, the Company's stock price fluctuated widely. Between October 2013 and March 2014, the Company's stock price ranged between $5.55 per share and $12.75 per share, with an average trading price of $8.78.

         Dimitrov is a man of mystery. In February 2014, he formed non-party Simeon Research, LLC ("Simeon"), a Delaware limited liability company. Shortly afterwards, he created a website for Simeon at the URL www.simeonresearch.com. He also secured for Simeon the Twitter handle @SimeonResearch. Simeon's Twitter bio described its feed as "long/short analytical equity research."[2]

         Simeon engaged in a single activity: publishing negative information about the Company. In March and April 2014, Dimitrov published two reports in Simeon's name. Dimitrov called attention to these reports by posting sixty-five comments on Simeon's Twitter account.

         B. The March Report

         In March 2014, Dimitrov posted a fifty-seven page report on Simeon's website titled "Organovo: Dissecting the Fairy Tale - Full Report" (the "March Report").[3]Dimitrov styled the March Report to look like work product from a professional equity research firm. He created official-looking letterhead and included a standard anti-reliance disclaimer. The report claimed to be the product of "hundreds of hours of intensive research from hundreds of journal publications, never-before seen primary sources, and extensive industry interviews."[4] It contained 189 footnotes citing public filings, news articles, and academic papers. It included numerous pictures and charts. Less professionally, it made extensive use of bold and underlined typeface, which this decision omits.

         The beginning of the March Report summarized its key points.

• "Organovo's bioprinting technology is not pivotal to tissue engineering or organ fabrication. Simeon Research publishes for the first time to the public the views expressed by Organovo's scientific founder: bioprinting - 'it's nothing, it's a stupid exercise.'"
• "Organovo has misled investors in multiple instances about its technology, its competitive position, and what it can deliver."
• "A number of companies and academics have developed bioprinters that have better capabilities than those of Organovo's NovoGen bioprinter."
"Organovo has failed to deliver on its promises a number of times in the past, and has experienced a wash-out of material partnerships."
• "Organovo's liver tissue data is years behind competitors in the 3D liver toxicology market." "Organovo's intellectual capital has deteriorated significantly, as the founder exited and key scientistis left."
• "The scientific consensus on organ printing is that the media has hyperbolized it far and above reality while the public has bought in . . . ."
• "Organovo has experienced a rabid run-up in price that is incongruent with its real valuation, which we believe to be $1.35/share."[5]

         The bulk of the March Report focused on the bioprinting industry's lack of commercial promise and the Company's technical inferiority to competitors in that field. It mixed in accusations that the Company's management had misled investors and engaged in self-dealing.

         Only the last three pages of the March Report analyzed the value of the Company's stock. Much of this final section consisted of quotes from outside analysts. The only original valuation work appeared in the final two pages. Simeon ultimately valued Organovo based on an asset-based approach described in a single paragraph:

We have demonstrated that Organovo lacks a competitive moat - its bioprinting technology is just a "stupid exercise" in the words of its scientific founder and it has been eclipsed by other bioprinting manufacturers while its liver tissue is inferior to the product offerings of other companies. Given this, we think it would be fairly easy to replicate every tangible asset on which Organovo's valuation is based - it thus makes a good basis for valuing the company. Bioprinters from a competing company. A warehouse. 35 scientists. $50M in cash. We will grant the exceedingly generous 5x multiple to Organovo's $13.5M in R&D spent since inception. All of this brings us to ~ $120M. At the current diluted share count, Organovo would be valued at $1.35/share. We think this is a fair value and even generous given the cascade of red flags about the company and its management.[6]

         The Company responded to the March Report on its website. Among other things, the Company asserted that the report "was issued by or at the request of a short seller or short-sellers."[7]

         C. The April Report

         The March Report portended further publications. "This report encompasses roughly a third of the information Simeon Research has uncovered. Additional reports will follow in the coming weeks."[8] In April 2014, Simeon published a second report on its website titled "Bargaining with the Devil: How Organovo Used Fraudulent Brokers and Promoters to Sell its Shares and Story" (the "April Report").[9] Dimitrov prepared the April Report in the same style as the March Report.

         The April Report asserted that the Company was defrauding its investors. The first sentence of the April Report stated, "Organovo has carried out one of the most successful penny stock promotions currently listed on a major exchange."[10] The April Report summarized its support for this assertion as follows:

• "Organovo paid millions to brokers with fraudulent histories to promote shares to individual investors."
• "Organovo paid for stock promotion services without disclosing the payments - it enlisted ProActive Capital, which has been accused of paying a cadre of authors to write promotional articles covering client stocks without SEC-required disclosures."
• "During the course of this stock promotion, we believe that pro-Organovo articles may have been published in exchange for compensation without any disclosure."
• "Organovo has spent nearly 3x as much on selling shares and promoting its stock as it has on Research & Development since the company was founded."[11]

         The April Report claimed that Simeon had "submitted [its] findings to the SEC and look forward to their response."[12] It touted that Organovo's stock price had fallen 9.3% since the publication of the March Report.

         The April Report responded to the Company's claim that Simeon was working on behalf of short-sellers. It stated: "We want to make unequivocally clear that our research and publications are in no way whatsoever the result of a 'request' or compensation by any third party. Our reports represent Simeon Research's original investigations and analysis. . . . [W]e stand by our work and believe in its accuracy."[13] The April Report also claimed that "Organovo has, in the past, attempted to smear critical research of its valuation by calling negative views 'short and distort' tactics."[14]

         D. The Tweets

         Dimitrov called attention to Simeon's two reports through the Company's Twitter account. After releasing the reports, Simeon sent out at least sixty-five tweets, all of which concerned the Company. For example, two tweets on April 8, 2014 stated, "Simeon Research reiterates $1.35 price target for Organovo shares . . . ." and "[Organovo] is down 4% today and 12% since our first report in March. We believe downside exists to $1.35/share."[15]

         E. The Simeon Action

         On April 21, 2014, the Company filed a lawsuit against Simeon in this court (the "Simeon Action").[16] Because the Company did not yet know who controlled Simeon, the Company included "unnamed Does 1-25" as defendants.

         The complaint alleged that the March and April Reports (together, the "Simeon Reports") contained numerous false or misleading statements.[17] The Company specifically cited the following:

• "[Organovo] has failed to achieve renewal from its 2 key pharmaceutical partners and secured fluff PR pieces instead."
• "No researcher will shell out $200, 000 to buy Organovo's bioprinter when they can make a comparable or better bioprinter on their own for a fraction of the price. Organovo has placed 6 of these bioprinters with academic centers since 2009, or, 1 bioprinter per year. And they didn't receive a cent - they loaned the printers at no cost."
• "Leapfrogging Organovo, researchers at Scotland's Herriot-Watt University have made a revolutionary breakthrough in tandem with privately-held Roslin Cellab by bioprinting human embryonic stem cells with high levels of viability (>95% with identical physiology post-printing) using a modified MakerBot printer. The work, unlike the claims of Organovo, has been published in the journal Biofabrication - it has been called "the greatest breakthrough in 3D bioprinting to date."
• "Keith Murphy [the Company's CEO] tells investors that Organovo can leverage its platform to achieve partnership deals that bring in $10, 000, 000-$30, 000, 000 per deal plus a 3%-7% royalty. That is 7 times to 22 times greater than Organovo's largest deal-to-date, a deal that has not been renewed."
• "The company publicizes any thread of good news while sweeping detrimental events under the rug without mention."
• "Of course, Organovo knows [that it did not develop the first bioprinter], because it worked with nScrpyt to develop its own bioprinter."
• "[E]ither Organovo's management made dubious claims to raise money from investors, or its employees and technology failed to achieve their targets."
• "Organovo has a history of serial dilution and insider sales in the last half-year exceed the amount of money the company invested in Research & Development."
• "Back in 2012, every private investor in Organovo sold their shares into the market, liquidating 32.1M shares (99.7% of their holdings) at a blended price of $3.02/share."[18]
• "[The fact that] Organovo has spent triple its entire R&D budget since inception on raising money from small-time investors and stock promotion demonstrates that Organovo is more penny-stock promotion than legitimate company."
• "Organovo has spent nearly three times as much money ($36.5 million) compensating its brokers and discounting shares in a follow-on as it has on Research and Development ($13.5 million) since the Company's inception."
• "ProActive provided Organovo a number of stock promotion services in exchange for Organovo's business - many had none of the legally-required disclosures."
• "ProActive Capital and DreamTeamGroup have absolutely no disclosures on any of their operated websites that they were compensated by Organovo for their promotions."
• "Organovo paid these brokers more than $1 in cash, stock, and warrants for every $1 raised from investors."[19]

         The Company brought claims for libel, libel per se, and tortious interference with prospective economic advantage. The Company sought an order "(i) enjoining Defendant from making or publishing any further false and defamatory statements regarding Plaintiff, and (ii) compelling Defendant to remove any and all defamatory and violative statements from its website and Twitter account."[20]

         After suing Simeon, the Company identified Dimitrov by subpoenaing Simeon's registered agent. On May 15, 2014, the Company served Dimitrov with a subpoena at his apartment in Alexandria, Virginia.[21]

         F. Simeon Defaults.

         Dimitrov caused Simeon to retain counsel, and Simeon moved to dismiss the Simeon Complaint for lack of subject matter jurisdiction, lack of personal jurisdiction, and failure to state a claim upon which relief could be granted.[22] Then, on June 10, 2014, Simeon's counsel moved to withdraw, stating that his client "has ceased communicating with counsel."[23] On June 16, I issued an order to show cause directing Simeon to file any opposition to the motion to withdraw by a specified date. The order warned Simeon that "[i]f no action is taken by this date, the Motion to Withdraw will be granted."[24] Simeon did not respond. On July 17, I granted the motion to withdraw.[25]

         From that point on, Simeon did not participate in the litigation. The Company asked the court to deny Simeon's motion to dismiss and enter a default judgment. I agreed in part and denied the motion to dismiss. I declined to enter a default judgment and instead provided Simeon twenty-one days to answer the complaint. Simeon again did not respond.

         On August 26, 2014, the Company renewed its motion for default judgment. By order dated September 3, 2014, I entered a default judgment against Simeon in the form requested by the Company. The final order permanently enjoined Simeon from "making any further defamatory statements about [the Company]" or "publishing or posting any libelous statements about Plaintiff anywhere on the Internet." Simeon was also ordered to "immediately remove or cause to be removed any and all libelous statements from its website, Twitter account, or any other public websites, " including the Simeon Reports and all posts on Simeon's Twitter account.[26]

         G. This Action

         On January 13, 2015, the Company filed this action against Dimitrov. The Company contended that Dimitrov acted through Simeon and used the entity "solely for the purpose of allowing him to shield his identity and assets, and to create the appearance that a legitimate research company was challenging the business of [the Company]."[27] The factual allegations of the Complaint were substantially identical to those alleged in the Simeon Complaint.

         The Company asserted for claims libel, libel per se, tortious interference with prospective economic advantage, and negligence. The Complaint sought an injunction substantially identical to the one asked for and obtained by default in the Simeon Action:

[T]he court should enter a permanent injunction (i) compelling Dimitrov to remove any and all defamatory and violative statements from any website he maintains and the @SimeonResearch Twitter account (ii) enjoining Dimitrov from forming or creating new entities with the purpose of preparing and/or publishing any false and defamatory statements regarding [the Company.], and (iii) enjoining Defendant from forming or creating new entities with the purpose of preparing and/or publishing any false and defamatory statements regarding [the Company.][28]

         Despite seeking this relief, the Company acknowledged in its Complaint that Simeon's website had been taken down and that all of Simeon's tweets about the Company had been removed.[29]

         H. Dimitrov Defaults.

         The Company attempted to serve Dimitrov at his last known address in Alexandria, Virginia. Someone accepted delivery, then returned the documents to UPS, suggesting that Dimitrov either no longer resided there or was evading service. The Company next attempted to contact Dimitrov via his last-known phone number, but he did not answer and his voicemail was full. The Company also e-mailed Dimitrov at his last known e-mail address, but Dimitrov did not respond. The Company then searched public records and sent a process server to an address in New York City, but a building representative told the process server that Dimitrov did not reside there.[30]

         The Company next sought and received permission to effectuate service by publication. The order authorizing service by publication directed Dimitrov to appear on May 18, 2015. It warned that "failure to appear shall be cause for entry of judgment by default."[31] The Company published the required notice on March 20, March 27, and April 3, 2015.

         On May 13, 2015, over a month after the last notice by publication, Dimitrov emailed the Company's counsel from a new e-mail address. His email stated:

         Hello,

My name is Georgi Dimitrov. I recently discovered through a posting on Delaware Online that Organovo has filed a civil suit against me due to my publications through my LLC, Simeon Research. I am writing first to ask the purpose of the suit, given my impression that by conceding the suit against Simeon Research and removing all research material and statements regarding Organovo the matter would be concluded.
Second, I am writing to inform you that I am currently in Europe, and due to personal matters am wholly unable to be present in court on May 18th. Therefore, I hope that a mutually favorable resolution can be reached, and in the meanwhile, I hope that you would see fit to at least delay the court date.[32]

         Dimitrov did not contact the court.

         By letter dated May 15, 2015, Organovo submitted Dimitrov's letter to the court and asked to proceed with the hearing as scheduled. The Company explained the lengths to which it had gone to serve Dimitrov and provide notice of the hearing. The Company also discussed the timing of Dimitrov's email:

In his May 13 e-mail, Mr. Dimitrov claims to have "recently discovered through a posting on Delaware Online that Organovo has filed a civil suit against me due to my publications through my LLC, Simeon Research." On this point, we note that Organovo arranged for the Order to be published in The News Journal on March 20, March 27, and April 3, 2015. Thus, Mr.Dimitrov's e-mail came more than 40 days after the most recent date the Order was published in The News Journal.[33]

         The Company inferred that Dimitrov "has gone through great effort to avoid learning the 'purpose' of this lawsuit."[34] The Company cited precedents in which Delaware courts had scheduled hearings and entered default judgments when parties failed to attend.[35]

         The Company provided a copy of its letter to Dimitrov using the email address that he had used to contact the Company. From that point forward, copies of all filings in this case were sent to Dimitrov at that email address. Dimitrov did not respond to the Company's letter.

         The hearing went forward as scheduled on May 18, 2015. Dimitrov did not appear. I held that he had defaulted.

         I. Post-Default Proceedings

         Despite ruling that Dimitrov was in default, I did not enter the form of default judgment that the Company had proposed. I instead instructed the Company's counsel to brief two matters: (i) the amount of damages, and (ii) whether the requested injunctive relief constituted an unconstitutional prior restraint on future speech.

         By letter dated September 16, 2015, the Company submitted a Proposed Order and Final Judgment of Default (the "Proposed Final Order"). The Proposed Final Order included a request that Dimitrov disgorge his trading profits. This was the first time that the Company had requested this relief. Lacking any public records reflecting Dimitrov's trades, the Company sought an order compelling Dimitrov to provide them. Dimitrov did not oppose the request, and I granted it.

         The Company commendably provided thorough and evenhanded briefing on the constitutional issues raised by its request for injunctive relief. The Company proposed a narrowly tailored injunction that permanently enjoined Dimitrov from republishing the content of the Simeon Reports and tweets. The Company agreed that in any future proceeding to enforce the injunction, the Company would bear the burden of establishing Dimitrov's ...


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