Cel-Sci Settles Over South African Partner Flap

VIENNA, Va. ( TheStreet) -- Cel-Sci ( CVM) is paying $12 million in cash and stock to settle a lawsuit brought by a group of hedge funds investors allegedly cheated out of their investment when Cel-Sci later struck a drug licensing and discounted fund-raising deal with a mysterious South African partner.

Under terms of the settlement agreement, Cel-Sci will pay $3 million in cash and $9 million in stock -- both convertible notes and preferred shares -- to 13 hedge funds which participated in a 2006 financing deal, according to the company’s first-quarter regulatory filing.

Cel-Sci says it still disputes the allegations made by the hedge funds but chose to settle the lawsuit and pay the settlement as a way to move forward, according to its regulatory filing.

The central issue of dispute in this case centers on the identity of Byron Biopharma, a company chosen by Cel-Sci to market its experimental cancer drug Multikine in South Africa, if the drug is ever approved for sale.

In March 2009, Cel-Sci granted Byron Biopharma an exclusive license to market Multikine in South Africa. As part of this marketing partnership, Byron Biopharma was allowed to defer a license payment for Multikine -- which was later paid. Cel-Sci also sold deeply discounted stock to Byron that quickly turned into millions of dollars in paper profits due to an increase in the price of Cel-Sci shares.

The identity and business history of Byron Biopharma was not disclosed by Cel-Sci when the licensing agreement was announced in March 2009 and to this day, Cel-Sci executives have refused to answer questions about its South African partner.

Records show that Byron Biopharma was incorporated just days before it signed the South Africa Multikine licensing agreement in March 2009, but those records provided no information about Byron's permanent address, phone number or a list of executives and directors.

Cel-Sci claims that its deal with Byron Biopharma was and still is a legitimate drug marketing licensing deal. The 13 hedge funds alleged that Cel-Sci concocted Byron Biopharma to raise additional cash but purposefully avoid tripping anti-dilution provisions in their 2006 financing agreement with the company.

These hedge funds sued Cel-Sci in October 2009 asking for $30 million in actual damages, $90 million in punitive damages and reduction in the conversion price of the Cel-Sci convertible notes and warrants they purchased in 2006.

Cel-Sci ended the first quarter with $17.7 million in cash. In its first-quarter regulatory filing, Cel-Sci warned that additional cash or long-term financing will be required for the company to continue funding its Multikine clinical trial and possibly seek regulatory approval. The company is still in the beginning stages of a phase III study of Multikine that could take years to complete.

Cel-Sci shares closed Monday at 68 cents.

--Written by Adam Feuerstein in Boston.

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Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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