WASHINGTON _ Biotechnology financier David Blech reportedly rejected a last-gasp proposal from Parnassus Pharmaceuticals Inc. that might have allowed the privately held firm to attract new investors and survive as a corporate entity. Blech's banker, speaking to Parnassus founder Daniel Santi by phone early on Friday, nixed a deal that would have required Blech to retire his shares in the company and forgive its debt in exchange for 1 million warrants at 35 cents apiece exerciseable over four years. Two venture capital firms and at least one company reportedly expressed interest in buying out Alameda, Calif.-based Parnassus in recent days, according to Santi, but only if Blech did not own a controlling interest. Blech has pumped more than $6.8 million of his own money into Parnassus since January 1993 and currently owns almost 50 percent (9 million shares) of the company's common stock. (D. Blech & Co. managing director Mark Germain owns another one million shares.) Parnassus, which was forced to lay off its entire 25-person work force on Oct. 1, had been subsisting on monthly checks from Blech until those checks started bouncing and then stopped coming altogether at the end of September. Now that Blech has refused terms that Parnassus executives hoped would resurrect the company, Santi has scheduled a meeting of the Board of Directors for Oct. 11 to "dissolve" Parnassus. Transactions that took place leading to the death of Parnassus reveal some sketchy details of the fantastically tangled financial affairs of Blech, once called biotechnology's "boy wonder." One path through the complexity leads to the door of Citibank's Private Bank in New York. Parnassus officials said they have been negotiating with Blech via Citibank, where Blech is a client. Citibank vice president Robert Kiley told Santi and other company executives that Blech had "pledged" his shares in Parnassus to Citibank as collateral for a loan. Kiley allegedly said in the same conversation that Citibank had full power with regard to the fate of those shares and asked that Parnassus submit a proposal to recover some of their value. Yet when Santi made his offer to Citibank on Oct. 6, Kiley said that Blech's approval was needed for any action. Kiley informed Santi early on Friday that Blech "would not cooperate" with Parnassus's eleventh-hour survival plan. Blech has poured more hard cash into the Parnassus venture than he has into other recent start-ups, including the high-profile Ariad Pharmaceuticals Inc. deal. Parnassus executives said it's clear that Blech still has some authority over the disposition of his assets, despite Kiley's assurances to them that Citibank would be able to cut a deal. It's unknown how many shares in which companies may have been pledged to Citibank as collateral for Blech's loans but Santi suspects there are "basketfuls" of documents representing shares in various companies pledged to Citibank. Last April, Barron's reported that Blech had pledged stock in at least one public biotechnology company, NeoRx Corp., as collateral under a loan agreement. The NeoRx stock was sold by Citibank in what sources in the Barron's article speculated was a $40 million margin call. Restricted Shares As Collateral? Lawyers said that pledging shares in a public company, which can be assigned a value at some discount to market and which are freely tradable, is a different matter than pledging shares in a privately held company such as Parnassus, which are restricted. Attorney Joel Marcus of Health Sciences Capital Partners in Los Angeles said that a bank accepting restricted shares as collateral for a loan is "a delicate thing." "If the person defaults on a loan, a bank would then foreclose on the stock but the bank would have to make sure that it could place those shares privately and that they weren't restricted," explained Marcus, speaking in general terms and with no specific knowledge of the Parnassus case. A bank could not advertise the sale of such shares publicly, potentially hampering its ability to dispose of them. Other questions loom: how would Citibank place a value on Blech's Parnassus stock? The proposed initial public (IPO) offering price of $6 that appeared on Securities and Exchange Commission documents was never reviewed by a "qualified independent underwriter" other than Blech, as law requires. In addition, the Parnassus IPO lists the The Edward Blech Trust (EBT) as beneficial owner of Parnassus stock, not Blech himself. Edward Blech, who is under five years old according to sources, is David Blech's son. In order to pledge shares to Citibank, Blech must have obtained a letter from the EBT trustee transferring the ownership of the shares. Blech routinely assigns ownership of shares of companies he invests into the EBT. But share ownership may fluctuate between EBT, D. Blech & Co. and Blech himself in unknown ways. `Arms-Length' Transaction Raises Questions "You have to ask, if David Blech disclaimed beneficial ownership of the shares in an arms-length transaction, how do these shares then get out of the trust into the hands of a bank as collateral for a loan?" said one attorney familiar with the Parnassus deal who asked not to be identified. "His dealings with that trust is a very interesting question." The same attorney also questioned the wisdom of a bank that would accept restricted stock in a private company as collateral for a loan. "Is that the best way to run a bank? I think not," he said. Citibank spokeswoman Susan Weeks told BioWorld that the bank has a "long-standing policy of not commenting on our customers, their business or our transactions with them" and did not confirm or deny whether Blech's Parnassus shares had been pledged as collateral for a loan. In another interesting twist, Citibank issued paychecks to Parnassus vendors and employees in mid-September that bounced after they had cleared. According to a source within the company, Parnassus employees received and deposited their normal paychecks in the days after Sept. 15 and many were stamped "cleared" by Sept. 19. However, on Sept. 21, just one day before D. Blech & Co. informed the National Association of Securities Dealers that it had fallen below net capital requirements, Citibank canceled the checks. The personal accounts of Parnassus employees were then debited unexpectedly and without warning for the amount of their paychecks. By taking this action, Citibank reclaimed about $200,000 from Parnassus just days before Blech's biotechnology empire crumbled publicly. n

-- Lisa Piercey Washington Editor

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