$25 Million ‘Pure Fiction’ In Natrol Price Tag Made Real

Natrol owner Aurobindo asks a bankruptcy court for an order before previous owner Plethico Pharmaceuticals agrees to pay close to the price of a phantom engineering contract Plethico claimed as a debt. Aurobindo alleged Plethico sold Natrol to prevent creditors from uncovering the sham.

Aurobindo Pharma USA Inc.’sallegation that the $132.5 million it paid for dietary supplement firm Natrol LLC included $25 million for a sham contract former owner Plethico Pharmaceuticals Ltd. claimed as a debt prompted Plethico to make a deal rather than try its luck in court.

A complaint filed in bankruptcy court in Delaware on April 6 stated Aurobindo acquired the contract in its cash purchase of Chatsworth, Calif.-based Natrol in a bankruptcy proceeding in December 2014. The contested contract allegedly was made with an Indian firm, identified as “Fabtech,” for a construction project to install four manufacturing lines for Natrol's vitamin and nutraceutical products.

However, Aurobindo determined the contract was “pure fiction” and that Fabtech is a legitimate company but was not party to the alleged agreement with Plethico. Instead, Plethico executives intended to hide the activity through Natrol’s bankruptcy and siphoned to other accounts money from Aurobindo’s acquisition targeted to cover the debt, alleged Aurobindo, which also was reported to file litigation against Plethico in India.

The dispute did not go before a judge in either country, though, before being settled. In an April 9 notice to the Indian stock exchange, Aurobindo said Plethico made good on the debt. “Based on the discussions a settlement agreement has been reached, wherein Plethico group would assign $23.3M in cash in milestone payments, certain global IP rights and other assets,” according to Aurobindo.

Natrol filed for Chapter 11 protection in June 2014, also in Delaware, after federal judges consolidated multiple class action claims accusing the firm of false advertising for its joint health support products. As part of the class action settlement, Natrol's largest creditor, Cerberus Business Finance LLC, was guaranteed to receive $68.8 million (Also see "Supplement Space Exits: Bankruptcy Traffic Could Accelerate" - Pink Sheet, 11 Dec, 2014.).

Aurobindo, the Dayton, N.J.-based U.S. business of Indian firm Aurobindo Pharma Ltd.,argued Plethico sought to stave off action by Cerberus, “invoking the jurisdiction of the Bankruptcy court to obtain the benefit of the automatic stay.”

Aurobindo also alleged Plethico is “trying to twice profit from the same fraud” – after being paid for the contested contract in the sale of Natrol, it could recover an additional amount in the final Chapter 11 distribution of Natrol’s assets.

Plethico used “this Court's jurisdiction to implement a sale process to secure a buyer for [Natrol's] assets 'free and clear' of claims,” pursuant to Bankruptcy Code,” according to the complaint.

The suit also named Plethico subsidiaries Plethico Global Holdings B.V., of the Netherlands, and Plethico U.S. Holdings KFT, of Hungary, as well as several investors in California. In addition to deeming the Fabtech contract null and void, Aurobindo asks for restitution of at least $25 million from Plethico and others.

Illicit Deeds Masked By Deal

Plethico acquired Natrol for approximately $80 million in a general tender offer and cash-out merger in 2007, but after several years it became clear it could not turn a profit with business (Also see "Plethico’s Natrol Acquisition Reflects Growing Indian Supplement Investment" - Pink Sheet, 26 Nov, 2007.). [See Deal]

However, Plethico’s 2014 annual report showed strong potential for Natrol’s products as it claimed the business’s health brands were backed by a wide distribution network of U.S. outlets.

Following the acquisition, Plethico and its associates “used their influence and control” to conduct Natrol's affairs through a pattern of racketeering activity, via the Fabtech contract, starting no later than Feb. 20, 2013, and “continuing to this day,” according to the lawsuit.

Aurobindo alleges Plethico engineered the fraud through a phony vendor scheme, claiming that Natrol entered into a contract with a Singapore company while using the name of a legitimate Indian firm in order to mask the deception.

By installing two Plethico representatives on Natrol’s board of directors, Plethico used the firm's operations as a vehicle for illicit purposes, including fraudulently gaining control of funds borrowed from Cerberus and funneling to it a foreign bank account.

“These predicate acts are all related to each other and to the purpose of siphoning as much money out of [Natrol] as possible without detection and directing that money covertly to” Plethico and its associates, the complaint stated.

The complaint sought relief on 12 claims, including violations of the federal bankruptcy and racketeering laws. Specific claims linked to the Aurobindo’s contract with Plethico include fraudulent inducement through intentional misrepresentation and fraudulent concealment; and reimbursement for illegal construction contract under California state law.

Aurobindo also sought temporary and preliminary injunctive relief enjoining Plethico and “all others acting in concert with them or at their direction, including any bank or debtors, from transferring any funds to any person or entity,” according to the lawsuit.

“There is a material risk that Plethico will … transfer assets to offshore Plethico accounts or other persons leaving [Aurobindo] without a remedy.”

Aurobindo’s litigation with Plethico almost mirrors a complaint filed in 2014 by an affiliate of Cerberus Capital Management, which reportedly loaned money to Natrol when it was owned by Plethico. Cerberus later settled its case against full settlement of dues.

An Indian industry source said Aurobindo detected the alleged wrongdoings at Natrol, mostly related to “acute financial mismanagement,” after it had agreed to acquire the company. “Issues like false entries related to supplies of goods were found in the books of Natrol and there may have been siphoning of funds,” said the source.