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Dr. Joseph Memminger began using computers in the 1970s as a researcher at a Detroit hospital. So many physicians asked his advice that in 1982 he started his own company, Scientific Data Management Inc., to help physicians with Medicare accounting. By 1999, SDM was doing well, with annual revenue of about $5 million, Memminger says, but the industry was consolidating. He needed to partner with a larger company, and he wanted more time to spend with his family. It was time to sell. “We were looking to partner with somebody just for strength,” Memminger says. In the spring of 1999, Atlanta-based Infocure Corp., which changed its name to VitalWorks after spinning off its dental software division last year, expressed interest in buying SDM. It seemed like a good fit, Memminger says. Infocure was a much larger, NASDAQ-listed company, with 1999 revenue of $203 million. The company sold practice management software that complemented SDM’s product. The two companies struck a deal. Infocure would acquire SDM, trading 280,243 shares of its stock for the company. At the time of the closing in August 1999, Infocure was trading at $19.25, making the deal worth about $5.4 million. The merger, Memminger says, would give him “a lot more money and less hours per week [at work].” Within months of closing the transaction, however, the relationship between Memminger and Infocure began to deteriorate. And now Infocure’s law firm, Atlanta-based Morris, Manning & Martin, has been drawn into the dispute as the defendant in a $22 million suit filed by Memminger and shareholders in three other companies acquired in the past few years by Infocure. Memminger says Morris Manning, as well as Infocure and its directors, who are also named as defendants, should be held liable for broken promises and failing to make full disclosure. The suit alleges securities law violations, fraud, breach of contract and negligence. Memminger says he lost $7.2 million because of the way the transaction was handled. All together, the defendants say they lost $22 million in potential earnings. The broken promise was Morris Manning’s representation that it would register Memminger’s newly issued stock promptly, allowing him to sell it, Memminger alleges. And what neither the company nor the law firm disclosed was that Infocure was in play at the time of the SDM transaction, and thus had an incentive to delay registering new stock in order to avoid possible dilution of its own share value. One of Memminger’s lawyers, Alan L. Frank of Philadelphia’s Frank & Rosen, says Morris Manning simply delayed the registration to inflate the price of Infocure stock. “If you put this all together,” Franks says, “it looks like they were trying to pump the price up.” ESTABLISHING CULPABILITY The suits pose several tough questions. What obligation does a law firm representing one side in a securities transaction have to the other side? And, if the law firm makes promises to the other side, what happens when those promises are broken? Finally, what kind of disclosures does the firm have to make to the other side? “It seems to me there’s culpability among all the defendants,” Frank says. The notion that the plaintiffs had a contractual relationship with Morris Manning is “preposterous,” says John P. MacNaughton, a Morris Manning partner who handles the firm’s compliance issues. MacNaughton says Morris Manning had no contractual obligation to the plaintiffs, whose interests should have been protected by their own lawyers. And he denies that the firm broke any promise to register the stock promptly. He says Morris Manning registered the stock as soon as the company and SEC regulations allowed it to do so. Michael R. Smith, a King & Spalding attorney who represents Infocure, says there was no obligation for Infocure to register the shares. “In most of the cases, there was simply no obligation to register the shares by a date certain,” he says. “And where there was in the few instances where there was an obligation to register the shares by a date certain, the facts will show that there were extenuating circumstances that will absolve Infocure from liability.” ADDITIONAL SUITS Memminger’s allegations mirror those of seven other plaintiffs in five additional suits filed against Infocure and Morris Manning. All the plaintiffs are shareholders of companies that were acquired by Infocure in 1999. All allege that Morris Manning failed to register shares used to pay for acquisitions in a timely manner. The suits were filed in U.S. District Court in Atlanta and Pennsylvania last year and in January. Since then, they were all removed to Atlanta. Hafner v. Infocure et al., No. 1:00-CV-3123, (N.D. Ga. Nov. 24, 2000); Memminger v. Infocure et al. No. 1:00-CV-3247, (N.D. Ga. Dec. 7, 2000); Weintraub v. Infocure et al., No. 1:00-CV-3440, (N.D. Ga. Dec. 28, 2000); Runde v. Infocure No. 1:00-CV-3440 (N.D. Ga. Dec. 28, 2000); Habermeier v. Infocure et al., No. 1:00-CV-3442 (N.D. Ga. Dec. 28, 2000) and Weiner et al. v. Infocure et al., C.A. No. 1:01-CV-0001 (N.D. Ga. Jan. 02, 2001). On March 30, U.S. District Judge Thomas W. Thrash Jr. denied Morris Manning’s motions to dismiss the cases and said discovery could go forward. He also consolidated the cases for discovery purposes. In re: Infocure Securities Litigation, No. 01-CV-840-TWT (N.D. Ga. Mar. 30, 2001). MEMMINGER ACCEPTED WAIT When the transaction closed in August 1999, Memminger says he knew he’d have to wait a few months to see the proceeds, but he didn’t expect any problems. As is common in such transactions, the stock couldn’t be sold immediately and wasn’t registered. Memminger says Morris Manning promised that the stock would be registered as soon as possible and he would then be free to sell it by mid-November 1999. In the meantime, Infocure developed an incentive not to issue more stock and possibly dilute its share price, Memminger charges, when a larger company began courting it. Infocure was never acquired. While Infocure never publicly identified a possible suitor, it disclosed in an August 1999 SEC filing that it had retained the investment banking firm of Goldman Sachs to discuss its acquisition by another company. Goldman Sachs was to review Infocure’s “strategic alternatives, including a possible merger, sale of all or a portion of the Company or other business transaction involving the Company,” according to the filing. On Friday, Sept. 17, 1999, Infocure, through Morris Manning, sent a notice of registration intent to Memminger. It offered him the chance to register all 280,243 shares of his Infocure stock. Memminger was told to respond immediately if he wanted his stock registered on Sept. 24. Memminger talked to his lawyers over the weekend, and then on Monday, Sept. 20, he says he faxed a notice to Morris Manning that he wanted his stock registered. But a Morris Manning attorney told him that was too late, Memminger says. Morris Manning did include Memminger’s stock in a registration it filed Oct. 7, he later found out. But it registered only half of Memminger’s promised stock. Memminger says Morris Manning told him at some point between mid-October and No. 11, 1999 it would “promptly” register the rest of the stock. They say the agreement proved that Infocure was only permitted to register half the stock under their agreement with Memminger. Finally, on Nov. 12 and 16, Memminger was able to sell two blocks of 10,000 shares each at $15.95 and $18 per share. Memminger says he began to worry about cashing out the rest of his holdings and made repeated inquiries, starting in November 1999, with Morris Manning and Infocure about the registration of the rest of his stock. The company and the law firm both promised to expedite the registration, claiming it had been delayed by accounting difficulties, Memminger says. Meanwhile, Memminger tried to protect the value of his holdings from market volatility by taking out options that obligated him to sell the stock if it increased in value. On Dec. 7 and 8, 1999, Memminger says, he called his broker, Salomon Smith Barney, and was told that he couldn’t sell the stock or repurchase the options because Infocure had placed a hold on his shares. As a result, Memminger says, he lost $1.3 million. In January, Infocure’s stock rose to an all-time high of $36.625 per share, and Memminger was unable to sell because the company still had his stock on hold. Infocure released the hold on the stock in April 2000 and registered the rest of Memminger’s stock. By this time, Infocure was trading in the single-digits after reporting earnings below analysts’ expectations. Memminger’s registration statement became available in mid-May 2000 and he sold all of his remaining Infocure stock at $6 per share, less than a third of what it sold for when the deal was closed in August 1999. As of early Thursday afternoon, Infocure’s stock (NASDAQ: VWKS) was trading at $1.74 per share. DISCOVERY DELAYED Discovery was delayed in the case because of the motion to dismiss and just now has been given the go-ahead by Judge Thrash. But as the case begins to wind its way toward a hearing in court, Memminger’s lawyer Frank says he’ll look for evidence that shows Morris Manning had direct privity of contract with Memminger and other plaintiffs. The contract was demonstrated by Morris Manning’s promise to the plaintiffs to promptly register their stock, he says. Christine L. Mast of Hawkins & Parnell, who represents Morris Manning, countered in the hearing for a dismissal before Thrash that the promise to register the stock falls way short of a contract. “To be liable to a client,” Mast said, “a lawyer must have undertaken representation.” Mast adds that the plaintiffs were not intended third-party beneficiaries of Infocure’s contract with Morris Manning. Smith says it’s too early in the trial to rule out the possibility of cross-claims. Smith notes that because discovery was suspended prior to Friday, the parties don’t have all the necessary information yet. “At this point, there’s been no cross-claim by Infocure against Morris Manning,” Smith says. But Infocure and its officers and directors are keeping “all of their options open,” he adds. Mast also would not rule out the possibility of Morris Manning filing a cross-claim against Infocure and its officers and directors. Timothy P. Terrell, a professor who teaches ethics at Emory University School of Law, wouldn’t comment directly on Memminger’s case. But he says there’s plenty of case law that suggests an attorney has a responsibility to a nonclient under certain circumstances. For example, Terrell, says, if a lawyer makes a representation to a nonclient and the nonclient relies on that representation, the lawyer may be held liable for any resulting damages. The issue then becomes whether there’s any cause of action that makes the misrepresentation amount to malpractice, Terrell says. “The background issue is, could a nonclient sue the lawyer for the purchasing company?” Terrell says. “The answer is yes.”

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