JCI to pay $188 million for fraudulently obtaining confidential information of Hemispherx

Johannesburg Consolidated Investments Limited (JCI), a South African-based investment and finance company, was recently ordered to pay $188 million to Hemispherx Biopharma Inc. (Hemispherx), a biopharmaceutical company, for fraudulently obtaining confidential and proprietary information.

According to the second amended complaint filed in the U.S. District Court of the Southern District of Florida in October, 2009, JCI fraudulently obtained proprietary and confidential information from Hemispherx that spanned May 2000 through December 2004. The complaint alleged that JCI perpetuated the fraud by using that confidential information to cloud Hemispherx's patent estate; devalue Hemispherx's stock, and enlist major shareholders to join in a hostile takeover of the company. This fraud eventually caused a sharp drop in Hemispherx's stock price and damaged the company's ability to acquire funds for its operations, research and development.

Recently, the court ordered a default judgment against JCI, but the damages had to be determined. Stewart Appelrouth, a forensic accountant and partner with the accounting firm of Appelrouth, Farah & Co., was hired by Hemispherx's attorney, Thomas K. Equels, to carry out a forensic accounting analysis and calculate the damages as a result of JCI's fraudulent activities.

Mr. Appelrouth's damages calculations covered May, 2000 through December, 2004, when Hemispherx was introduced to JCI and their fraudulent activity took place. He quantified the amount by which Hemispherx's common stock price was artificially devalued during the period of fraud by calculating what Hemispherx's common stock price would have traded at during this period. This was based on its correlation to the NASDAQ and the AMEX Biotechnology Indices. He then computed the difference between that price and the price that Hemispherx's stock actually was trading at during the same period. Mr. Appelrouth determined this difference as the Adjusted Stock Price.

Mr. Appelrouth applied his calculation of the Adjusted Stock Price to three types of economic damages. The first type of damages were due to the fact that Hemispherx was unable to take advantage of the sale of its shares in order to finance its operations and instead had to rely on other, more costly means of funding. The amount calculated by Mr. Appelrouth for this type of damages was $77,578,537.00.

The second category of damages was based on the fact that in order to attract investors and raise the money to fund its operations, Hemispherx had to offer convertible debt securities and pledge its assets to secure those loans. Mr. Appelrouth calculated the amount as $39,298,319.00, based on the difference between the Adjusted Stock Price and the Actual Stock Price multiplied by the number of shares issued to investors on the warrants and the conversion of the convertible debt.

The third type of damages determined by Mr. Appelrouth was based on the fact that Hemispherx had to issue its shares at a diminished value as a result of JCI's fraud. He quantified those damages as $8,250,529.00 by multiplying the number of shares issued during the period by the difference between Hemispherx's Adjusted Stock Price and its Actual Stock Price.

The court found that these were reasonable methods for calculating economic damages and that Mr. Appelrouth's conclusions and testimony were supported by substantial competent evidence. On August 11, 2010, U.S. District Judge James Lawrence King, awarded the plaintiffs $188,492,319.00 in damages including prejudgment interest.