WASHINGTON _ Biotechnology financier David Blechreportedly rejected a last-gasp proposal from ParnassusPharmaceuticals Inc. that might have allowed the privately heldfirm to attract new investors and survive as a corporate entity.Blech's banker, speaking to Parnassus founder Daniel Santi byphone early on Friday, nixed a deal that would have required Blechto retire his shares in the company and forgive its debt in exchangefor 1 million warrants at 35 cents apiece exerciseable over fouryears.Two venture capital firms and at least one company reportedlyexpressed interest in buying out Alameda, Calif.-based Parnassus inrecent days, according to Santi, but only if Blech did not own acontrolling interest. Blech has pumped more than $6.8 million ofhis own money into Parnassus since January 1993 and currentlyowns almost 50 percent (9 million shares) of the company'scommon stock. (D. Blech & Co. managing director Mark Germainowns another one million shares.)Parnassus, which was forced to lay off its entire 25-person workforce on Oct. 1, had been subsisting on monthly checks from Blechuntil those checks started bouncing and then stopped comingaltogether at the end of September.Now that Blech has refused terms that Parnassus executives hopedwould resurrect the company, Santi has scheduled a meeting of theBoard of Directors for Oct. 11 to "dissolve" Parnassus.Transactions that took place leading to the death of Parnassus revealsome sketchy details of the fantastically tangled financial affairs ofBlech, once called biotechnology's "boy wonder." One paththrough the complexity leads to the door of Citibank's Private Bankin New York.Parnassus officials said they have been negotiating with Blech viaCitibank, where Blech is a client. Citibank vice president RobertKiley told Santi and other company executives that Blech had"pledged" his shares in Parnassus to Citibank as collateral for aloan. Kiley allegedly said in the same conversation that Citibankhad full power with regard to the fate of those shares and asked thatParnassus submit a proposal to recover some of their value.Yet when Santi made his offer to Citibank on Oct. 6, Kiley said thatBlech's approval was needed for any action. Kiley informed Santiearly on Friday that Blech "would not cooperate" with Parnassus'seleventh-hour survival plan. Blech has poured more hard cash intothe 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 someauthority over the disposition of his assets, despite Kiley'sassurances to them that Citibank would be able to cut a deal. It'sunknown how many shares in which companies may have beenpledged to Citibank as collateral for Blech's loans but Santisuspects there are "basketfuls" of documents representing shares invarious companies pledged to Citibank.Last April, Barron's reported that Blech had pledged stock in atleast one public biotechnology company, NeoRx Corp., as collateralunder a loan agreement. The NeoRx stock was sold by Citibank inwhat sources in the Barron's article speculated was a $40 millionmargin call.Restricted Shares As Collateral?Lawyers said that pledging shares in a public company, which canbe assigned a value at some discount to market and which are freelytradable, is a different matter than pledging shares in a privatelyheld company such as Parnassus, which are restricted. Attorney JoelMarcus of Health Sciences Capital Partners in Los Angeles said thata bank accepting restricted shares as collateral for a loan is "adelicate thing.""If the person defaults on a loan, a bank would then foreclose on thestock but the bank would have to make sure that it could place thoseshares privately and that they weren't restricted," explained Marcus,speaking in general terms and with no specific knowledge of theParnassus case. A bank could not advertise the sale of such sharespublicly, potentially hampering its ability to dispose of them.Other questions loom: how would Citibank place a value on Blech'sParnassus stock? The proposed initial public (IPO) offering price of$6 that appeared on Securities and Exchange Commissiondocuments was never reviewed by a "qualified independentunderwriter" other than Blech, as law requires. In addition, theParnassus IPO lists the The Edward Blech Trust (EBT) as beneficialowner of Parnassus stock, not Blech himself. Edward Blech, who isunder five years old according to sources, is David Blech's son. Inorder to pledge shares to Citibank, Blech must have obtained aletter from the EBT trustee transferring the ownership of the shares.Blech routinely assigns ownership of shares of companies heinvests into the EBT. But share ownership may fluctuate betweenEBT, D. Blech & Co. and Blech himself in unknown ways.`Arms-Length' Transaction Raises Questions"You have to ask, if David Blech disclaimed beneficial ownershipof the shares in an arms-length transaction, how do these sharesthen get out of the trust into the hands of a bank as collateral for aloan?" said one attorney familiar with the Parnassus deal who askednot to be identified. "His dealings with that trust is a veryinteresting question."The same attorney also questioned the wisdom of a bank that wouldaccept 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 bankhas a "long-standing policy of not commenting on our customers,their business or our transactions with them" and did not confirm ordeny whether Blech's Parnassus shares had been pledged ascollateral for a loan.In another interesting twist, Citibank issued paychecks to Parnassusvendors and employees in mid-September that bounced after theyhad cleared. According to a source within the company, Parnassusemployees received and deposited their normal paychecks in thedays after Sept. 15 and many were stamped "cleared" by Sept. 19.However, on Sept. 21, just one day before D. Blech & Co. informedthe National Association of Securities Dealers that it had fallenbelow net capital requirements, Citibank canceled the checks. Thepersonal accounts of Parnassus employees were then debitedunexpectedly and without warning for the amount of theirpaychecks. By taking this action, Citibank reclaimed about$200,000 from Parnassus just days before Blech's biotechnologyempire crumbled publicly. n
-- Lisa Piercey Washington Editor
(c) 1997 American Health Consultants. All rights reserved.