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Michael Pope/Stephen A Weiss/DS Healthcare

https://www.google.com/amp/s/www.fwdforensics.com/securities/trainwreck-ds-healthcare/amp/?client=safari



Corporate Governance Trainwreck at DS Healthcare

Justin Hibbard
8 months ago

The boardroom drama that has played out at DS Healthcare Group, Inc. over the past two months has had all the lunacy of a reality TV show. In case you missed it, here’s a chronological summary.

..February 29: The audit committee engages outside counsel to investigate certain revenue and equity transactions involving the company’s president and chairman of the board, Daniel Khesin, and others.1 DS Healthcare’s stock closes at $1.44 per share, down 69% from its 12-month high.

March 17: The board fires Mr. Khesin after the investigation found that he “engaged in a series of questionable stock transactions without board authorization, engaged in self-dealing and potentially engaged in transactions designed to artificially inflate the price of DSKX common stock.”2 The company claims that “both prior and subsequent to his dismissal, Mr. Khesin engaged in totally inappropriate conduct, including an illegal campaign of self-help, additional violations of the federal securities laws, as well as intimidation and defamation against Board members, management and outside professionals.”3 The company shares its findings with the SEC, which begins an investigation.

March 18: The audit committee concludes that the financial statements for the second and third quarters of 2015 were misstated. In particular: $900,000 of revenue that shouldn’t have been recognized was recognized; 800,000 shares of restricted stock were issued to a foreign distributor in a transaction that lacks future economic value; and 350,000 shares of common stock were issued to an investor relations firm that didn’t perform any work.4

Khesin lawyers up

March 23: Mr. Khesin’s lawyer sends a letter to the company’s lawyer saying that the company violated the terms of Mr. Khesin’s employment contract by failing to give him written notice of his purported misdeeds and an opportunity to remedy them. Therefore, Mr. Khesin intends to continue his employment and receive compensation until a final court order to the contrary is rendered.5

March 24: DS Healthcare’s stock closes at $0.86 per share after a heavy sell-off, down 35% from its previous closing price.

March 29: The Rosen Law Firm files a securities class-action lawsuit against DS Healthcare in federal court in the Southern District of Florida.

Press release pandemonium

March 31: Mr. Khesin issues a press release saying he has obtained “voting agreements” from people who, together with him, own a majority of the company’s outstanding common stock, which authorizes him to vote their shares to dismiss directors Michael Pope, Karl Sweis, and Dianne Rosenfeld from the board. The press release cites “concerns regarding violations of various obligations to shareholders and the resulting rapid decline in DS Healthcare securities and ensuing liabilities.”6

Although the termination letter issued to Mr. Khesin orders him to vacate the company’s premises and not to tamper with the company’s email, he returns and instructs the company’s IT consultant to block management’s access to the company’s file server.7 Then he accesses the email accounts of management and board members.8 The managers demand that Mr. Khesin restore their access to the network, but Mr. Khesin “refuse[s] to give up his total and exclusive control of the Company’s information system.”9 Mr. Khesin begins “searching for, taking and using highly confidential and privileged emails and other documents to continue his attack on the Board and its outside advisers.”10

April 1: Mr. Khesin holds a meeting of the company’s employees during which he denies the allegations against him.11

Conspiracy theory

April 2: Mr. Khesin issues a press release stating that “former board member Michael Pope, CEO Renee Barch-Niles, and company attorney Stephen A. Weiss conspired to defraud investors by arranging a transaction to issue 2,000,000 shares of DS Healthcare Group, Inc common stock to each other within days of filing a false 8k statement with the Securities and Exchange Commission proclaiming that Daniel Khesin had been terminated for cause.”11 To support his claims, Mr. Khesin publishes on the Internet an email dated 3/31/16 in which Mr. Weiss proposes to Ms. Barch-Niles and Mr. Pope that the company issue 2 million shares to management and Mr. Pope. Mr. Khesin says he has reported his findings to “the DOJ, FBI, Secret Service, and local law enforcement.”13

On the same day, CFO Mark Brockelman resigns.14

April 4: Mr. Khesin issues a press release proposing that three new board members be elected as soon as possible: Yasuhiro Fujiwara, former Head of Equities for Asia, Ex-Japan at Nomura Holdings, Inc.; Elina Yuabov, ESQ. of TD Securities; and Myron Lewis, a former executive.15

Hours later, the company issues a press release accusing Mr. Khesin of violating federal securities laws by unlawfully seizing control of the company. The board and management appeal to the SEC to take immediate action.16

On the same day, the Nasdaq Stock Market halts trading in DS Healthcare stock at a final price of $0.67. “Trading will remain halted until DS Healthcare Group, Inc. has fully satisfied Nasdaq’s request for additional information,” the exchange says in a press release.17

1 DS Healthcare Group, Inc. form 8-K issued 3/23/16
2 DS Healthcare Group, Inc. form 8-K, Ex. 99.1 issued 4/4/16
3Ibid
4 DS Healthcare Group, Inc. form 8-K, Ex. 99.1 issued 3/28/16
5 DS Healthcare Group, Inc. form 8-K, Ex. 99.2 issued 3/23/16
6 Press release: “DS Healthcare to Announce New Board Members,” Accesswire, 3/31/16
7 DS Healthcare Group, Inc. form 8-K, Ex. 99.1 issued 4/4/16
8Ibid
9Ibid
10Ibid
11Ibid
12 Press release: “DS Healthcare’s internal investigation on management and former Directors,” GlobeNewswire, 4/2/16
13 Ibid
14 DS Healthcare Group, Inc. form 8-K issued 4/4/16
15 Press release: “DS Healthcare Discloses New Board Members,” Accesswire, 4/4/16
16 DS Healthcare Group, Inc. form 8-K, Ex. 99.1 issued 4/4/16
17 Press release: “Nasdaq Halts DS Healthcare Group, Inc.,” GlobeNewswire, 4/4/16


Justin Hibbard
Justin Hibbard, MAcc, CFE

Justin Hibbard is a forensic accountant specializing in economic damages and anti-fraud matters. He regularly serves clients in litigation and internal investigations. Previously, he was an auditor at Ernst & Young, LLP and a journalist at BusinessWeek. | Email | vCard | LinkedIn.