On Verge of Omeros IPO, Former Finance Chief Accuses Company of Filing False Records with NIH

Xconomy Seattle — 

Seattle-based Omeros, the biotech company attempting to raise as much as $80 million in an initial public offering slated for next week, has been accused of submitting false timekeeping records to the National Institutes of Health for grant work, according to a federal lawsuit filed by the company’s former chief financial officer.

Richard J. Klein has accused Omeros of wrongfully terminating him from his job in January after he allegedly discovered false record-keeping on a federal grant and reported it to the board’s audit committee under the company’s whistleblower policy, according to a complaint filed in U.S. District Court in Seattle. That allegation arose in December, when Klein informed the audit committee that CEO Greg Demopulos and George Gaitanaris, the vice president of R&D, instructed several employees “to falsely record time on an NIH grant even though they were not actually working on the grant project for the recorded period of time,” according to Klein’s lawsuit.

Omeros, in a separate legal response to the complaint, denies that Demopulos instructed scientists to falsely record their work time. The company did admit that Gaitanaris provided instructions on time keeping practices that were later corrected, but the previous practices were based on Gaitanaris’ belief that they would end up billing the NIH for less time than was actually spent by Omeros staff doing the work, according to Omeros’s response. The company said it didn’t overbill the NIH for its work, and actually charged the government for less than all the time its people spent working on the grant.

Neither Klein’s complaint nor the Omeros legal response states how much the NIH grant was worth, or what specific work it required of the company. Klein’s complaint notes that Omeros “has been awarded millions of dollars” of such federal research grants.

A spokeswoman for Omeros said the company is unable to comment on the lawsuit because it is in the middle of a “quiet period” imposed by the Securities and Exchange Commission for companies that are seeking to go public. Two attorneys who are representing Klein didn’t immediately respond to e-mailed requests for comment.

Omeros, in a disclosure within its IPO prospectus, said its audit committee and outside legal counsel investigated Klein’s charges and discovered the company hadn’t submitted false claims to the NIH. It terminated Klein one month after he raised those accusations, although the company says his dismissal was “for reasons other than this incident.” The company said in its disclosure to investors that it plans to defend itself, even though the lawsuit “may consume our time and resources.”

Klein, a former chief financial officer of Bothell, WA-based Sonus Pharmaceuticals and director of finance at ATL Ultrasound, has included other charges in his complaint. He accuses Omeros of making “false statements” in its IPO prospectus to investors, which “omits critical facts” about his whistleblower report to the company audit committee, and about the audit committee’s findings.

The audit committee and outside legal investigators informed Klein that his original report about false time-keeping practices was accurate, according to his legal complaint. Yet he says Omeros gave a “misleading” account of his complaint in its prospectus. Omeros summed up the dispute in its prospectus by saying Klein reported to the audit committee that “the company had submitted grant reimbursement claims to the NIH for work the company had not performed.”

Klein challenged that assertion in his complaint: “This is a false statement and omits critical facts which imply that Klein’s report to the Audit committee was unsubstantiated and false,” Klein said in the complaint.

Omeros, in its response, denies that any of the statements in its IPO prospectus are false or misleading.

One of the important facts that Klein says the company omitted from its prospectus is that David Mann, the former chief financial officer of Seattle-based Immunex, resigned from the Omeros audit committee in March, after Klein’s whistleblower report and termination. The company, in its response, also says that Mann resigned in March, but that his departure is not relevant to the allegations raised by Klein’s lawsuit.

In other parts of his complaint, Klein describes escalating tension between Demopulos and himself throughout the fall of 2008, before the whistleblower report was filed. Klein, who worked at Omeros from May 2007 until January, “discovered problems and issues” from “time to time” at the company, according to his complaint.

For example, in 2007, according to Klein’s complaint, Demopulos exercised stock options “and attempted to avoid reporting the taxable income or paying the taxes resulting from the option exercise as required by Federal tax law.” After Klein found this out, his complaint says, he required Demopulos to report the taxable income to the IRS. Demopulos also tried to prevent withholding of federal taxes from a bonus he received, Klein’s complaint contends. Omeros denies those allegations in its legal response as well.

When Klein brought up these problems to Demopulos and tried to fix them, “Demopulos was upset with Klein and insisted that Klein stop creating problems,” according to Klein’s complaint. Omeros also denies that allegation.

By October and November 2008, Klein made three separate reports to the audit committee about the problems he saw with Demopulos’ handling of tax and financial matters, according to his complaint. When Demopulos and Klein met in late November for a regularly scheduled financial meeting, Demopulos was “visibly upset” with Klein, and told him “he delegated too many tasks” and needed “to work on appearing more supportive of him (Demopulos) during company meetings,” according to Klein’s account of the meeting.

By January 13, less than one month after Klein filed the whistleblower report to the audit committee, he was placed on administrative leave and “effectively terminated,” according to his complaint. Klein was escorted from the office, told not to have any contact with anyone affiliated with Omeros, and removed from the corporate e-mail network, his complaint says.

“Demopulos had already made the decision to terminate Klein but knew any such termination was not supported by the facts and would be on shaky legal ground,” according to Klein’s complaint. As a result, according to the complaint, “Omeros conducted a forensic search of Klein’s computer in an attempt to set him up and find any grounds on which to terminate him.” By January 29, Klein was terminated, according to the complaint.

Omeros, in its response, says Klein was placed on administrative leave on January 13 and terminated on the 29th, but denies the rest of Klein’s allegations.

Klein is seeking a jury trial to hear his case, and damages that include lost pay and future wages in an amount to be determined at trial. U.S. District Judge John Coughenour has been assigned the case. For those who want to look it up, the case number is 2:09-cv-01342-JCC Klein v. Demopulos et al.