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The full case caption appears at the end of this opinion.


The facts of this case are undisputed. On February 1, 1996, Medtox Scientific, Inc. [FOOTNOTE 3] issued shares of preferred stock. The preferred stock was convertible to Medtox’s common stock, at the option of the holder, at a price equal to the average closing price of the common stock for the five trading days preceding the notice of conversion. The conversion right became exercisable on March 30, 1996. Morgan Capital purchased preferred stock in the offering. In a hypothetical conversion on the date of purchase, Morgan Capital would have received less than 10% of Medtox’s common stock. David and Alex Bistricer, officers and controlling principals of Morgan Capital’s operations, served on Medtox’s Board from July 1996 to June 1997.

On March 28, 1996, the price of Medtox common stock dropped to a point where, had Morgan Capital converted its preferred shares to common stock, it would have received more than 10% of the total common stock. As the value of Medtox’s common stock declined, the Bistricers made weekly phone calls to Medtox’s management to discuss the company’s affairs. Had Morgan Capital exercised its conversion right on any day between April 9 and May 1, it would have acquired more than 10% of Medtox’s common stock. On May 1, 1996, Morgan Capital converted all of its preferred stock and received more than 10% of the shares of Medtox’s common stock. In May and June of 1996, Morgan Capital sold some of its shares of common stock, realizing a profit of $576,785.80.

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