Omeros Settles Wrongful Termination Suit With Former CFO for $3.9M

Xconomy Seattle — 

Omeros, the Seattle-based drug developer, has ended a long-running dispute with former chief financial officer Richard Klein by agreeing to pay him $3.94 million to settle a wrongful termination case he brought against the company three years ago.

Omeros (NASDAQ: OMER) said today in a regulatory filing with the Securities and Exchange Commission that it has agreed to settle the dispute with Klein, and that the company’s insurer, Carolina Casualty, has agreed to make the full payment. Besides his wrongful termination claim, Klein also brought a charge against the company under the Federal False Claims Act, in which individuals can bring forward an allegation that the government has been defrauded by federal contractors. That False Claims charge, and all claims Klein made on behalf of the federal government, are expected to be dropped, Omeros said in today’s regulatory filing.

As part of the agreement, Omeros isn’t admitting any wrongdoing.

Even though Omeros and Klein have settled, this isn’t the end of Omeros’s legal issues stemming from the case. The company still has pending litigation with Carolina Casualty. Although the insurer has agreed to make the $3.94 million payment for the time being, it has argued in court it has no obligation to make the payment, and it is seeking to recover the amount of the settlement from Omeros. The company is making a counterargument that Carolina Casualty has failed to defend the company under its insurance policy and has acted in “bad faith,” according to the filing.

The dispute between Klein and Omeros, first reported here at Xconomy three years ago, was based on Klein’s contention that he was wrongfully terminated after filing a whistleblower complaint to the audit committee of the Omeros board of directors. Klein’s lawsuit, filed in U.S. District Court in the run-up to the Omeros IPO in October 2009, included allegations in which he said the company submitted false timekeeping records to the National Institutes of Health for work performed under a federal research grant. Omeros countered that it had alerted the government to internal mistakes in timekeeping, and that an internal investigation concluded that it had underbilled, rather than overbilled, the government. The company’s legal response included a statement from the NIH, which said it accepted the results of the investigation, which was conducted by the board’s audit committee and outside legal counsel.

Greg Demopulos, the Omeros chairman and CEO, issued a long statement to Xconomy via email explaining the company’s decision to settle. He said the company didn’t retaliate against Klein for making the whistleblower complaint. Even so, he said the company made “an economic decision” to settle. Klein served as CFO of Omeros from May 2007 until January 2009.

“While we absolutely believe that we did nothing wrong – and have absolutely admitted to no wrongdoing – settling was in the best interests of the company,” Demopulos said in the statement. “As an individual, I would have preferred to see this case all the way through a jury trial because I believe that Omeros is right and that what Mr. Klein did is wrong. But as CEO I made a reasoned decision to put this behind us and focus on the three sets of clinical data coming this quarter and preparing to become a commercial company. Jury trials are inherently uncertain and, despite our belief in our position, we decided that proceeding with a jury trial posed a risk that was unwarranted when viewed in light of our fiduciary obligations to our shareholders. So, as distasteful as it is, we elected to settle.”

Tom Lemly, an attorney with Davis Wright Tremaine who represented Klein, said that Omeros initiated the settlement talks about a week before the case was scheduled to go to trial. In a statement sent to Xconomy by email, Lemly noted that Omeros recently lost a bid to exclude testimony at the trial from three NIH staffers. The testimony, he said, “would have greatly benefited” Klein’s case.

“Although Davis Wright Tremaine normally represents employers in False Claims Act cases and other employment litigation, this was an exceptional case,” Lemly wrote in the statement, along with fellow attorneys Harry Korrell and Cassandra Kennan. “We felt that Mr. Klein had a strong legal and factual basis for his claims, and we were pleased to be able to represent him in this matter in order to obtain redress for the wrong done him.”

If Omeros does end up on the hook for making the full settlement payment, that would be significant to the company. The company reported it had about $7.3 million in cash and investments in the bank at the end of June, and that it raised another $32.4 million from investors in early July. The latest financing represents about a year’s worth of operating cash for Omeros at its current burn rate.