Alliance's Story Sounds Too Familiar

One of the uglier sides of the technology-stock meltdown was the way average shareholders in cash-starved companies lost much of their equity in refinancing schemes known as "toxic convertibles." This kind of bailout, sadly, was often deadlier than the disease, leaving existing shareholders with virtually nothing, while vulture investors fed on the corporate corpse.

Alliance Pharmaceuticals , a small, struggling San Diego-based biotech firm, opted for last-resort refinancing late last year, transferring a large portion of the company's equity to a new group of investors. But Alliance's refinancing had an ominous twist: Some of the new investors were actually the old investors -- specifically, company insiders.

Unbeknownst to Alliance shareholders, who were told only after the deal was done, the company's management and one member of its board of directors actually took part, as investors, in a controversial private placement that ended up selling off 30% of the company for just $15 million. Thirty-two investors, including Alliance's CEO Duane Roth and Director Stephen McGrath, also were awarded warrants that, if exercised, put about 45% of the company in their hands. ...