Neogenix Oncology, Inc. v. Gordon
2015 U.S. Dist. LEXIS 135663, 2015 WL 5774171, 133 F.Supp.3d 539 (2015)
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Rule of Law:
A corporation's claim against its agents for misconduct is not barred by the 'in pari delicto' doctrine at the motion to dismiss stage if the corporation plausibly alleges that the agent's actions were entirely adverse to its interests, even if the misconduct provided a short-term financial gain, by pleading facts that suggest the same benefit could have been achieved through legal means.
Facts:
- In 2005, Peter Gordon, the Chief Financial Officer (CFO) of Neogenix Oncology, Inc., created a 'Finder Fee Program' (FFP) to raise capital by paying commissions to individuals for securing investments.
- The FFP paid commissions to intermediaries regardless of whether they were legally licensed as brokers under state and federal laws.
- An attorney from Neogenix's outside counsel, the law firm Mintz, advised Gordon at the program's inception that paying commissions to non-licensed intermediaries was unlawful.
- Gordon did not disclose this legal warning to other officers or directors at Neogenix, and the company proceeded with the FFP.
- For years, Neogenix continued the FFP, during which time it was represented by Mintz and later Nixon Peabody, and employed Daniel Scher as Chief Legal Officer, none of whom alerted the company's board to the program's illegality.
- Several unlicensed intermediaries who received commissions were friends of Gordon, including Harry Gurwitch and Brian Lewis, who also served on the company's Business Advisory Board.
- In 2011, new outside counsel informed Neogenix that the FFP was unlawful, which triggered an internal review and a U.S. Securities and Exchange Commission (SEC) investigation.
- The public disclosure of the SEC inquiry and the massive potential rescission liability from the illegal stock sales allegedly made it impossible for Neogenix to attract further investment, forcing the company into bankruptcy in 2012.
Procedural Posture:
- Neogenix Oncology, Inc. commenced this action against its former executives, advisors, and outside law firms in the U.S. District Court for the Eastern District of New York.
- Plaintiff filed an amended complaint alleging claims including legal malpractice and breach of fiduciary duty.
- All defendants filed separate motions to dismiss the amended complaint under Federal Rule of Civil Procedure 12(b)(6), arguing the claims were barred by the in pari delicto doctrine and the Wagoner rule, among other defenses.
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Issue:
Can a corporation sue its former officers, directors, and outside counsel for implementing an illegal fundraising program where the corporation alleges the program conferred no benefit that could not have been achieved legally and was thus entirely adverse to the corporation's interests?
Opinions:
Majority - Judge Joseph F. Bianco
Yes, the corporation can sue its former officers and counsel despite the in pari delicto doctrine. A defendant's wrongdoing is not imputed to a corporation if the 'adverse interest exception' applies, which requires the agent to have 'totally abandoned his principle's interest and be acting entirely for his own or another's purpose.' Here, Neogenix plausibly alleged that the FFP fell within this exception. The complaint asserts that Neogenix could have raised the same amount of capital through licensed brokers, meaning Gordon's decision to use unlicensed finders—many of whom were his friends—provided no actual benefit to the company. Instead, it only benefited Gordon and his associates. Because this creates a question of fact as to whether any benefit was truly conferred upon Neogenix, the defendants' defenses based on attribution are not apparent on the face of the complaint and cannot support dismissal.
Analysis:
This decision clarifies the pleading standard for the 'adverse interest' exception to the in pari delicto defense, particularly in cases of corporate fraud. By allowing the case to proceed, the court establishes that a plaintiff can overcome this defense at the motion-to-dismiss stage by plausibly alleging a counterfactual—that a legal alternative would have yielded the same benefit, rendering the agent's illegal choice entirely self-serving. This prevents defendants from using the defense as an automatic shield just because their misconduct resulted in a short-term cash infusion for the company. The ruling reinforces that the question of whether an agent's actions truly 'benefited' the corporation is a factual inquiry not typically suitable for resolution on the pleadings.
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