Lilly Eli & Co filed their quarterly 10-Q statement with the SEC on August 4th, which outlined their current financials and also brought to light the magnitude of lawsuits coming as a result of their two blockbuster drugs Zyprexa and Prosac. The company is also involved in several other lawsuits, including a class action lawsuit and corporate lawsuits involving insurance coverage.

The company was slammed back in 2005 when the U.S. Attorney General announced that it was investigating the company for Medicaid fraud. The government argues that Lilly illegally promoted Zyprexa for unapproved uses, and seeks to recover millions of dollars on behalf of customers. This case is still pending and, the company warned, could expand from Zyprexa to include other company drugs. The company also stated that it settled 10,500 Zyprexa-related lawsuits last year; however, 7,600 remain with 850 tolled claims. Both of these cases are still pending. The problem now is that insurance companies are attempting to reduce their liability in the matter. In their 10-Q filing, the company stated:

"We have insurance coverage for a portion of our Zyprexa product liability claims exposure. The third-party insurance carriers have raised defenses to their liability under the policies and are seeking to rescind the policies. The dispute is now the subject of litigation in the federal court in Indianapolis against certain of the carriers and in arbitration in Bermuda against other carriers. While we believe our position is meritorious, there can be no assurance that we will prevail."

Later in the filing, the company also notes:

"We have experienced difficulties in obtaining product liability insurance due to a very restrictive insurance market, and therefore will be largely self-insured for future product liability losses. In addition, as noted above, there is no assurance that we will be able to fully collect from our insurance carriers on past claims."

The company recorded a net pre-tax charge of $1.07b during the second quarter of 2005 to cover the Zyprexa lawsuits and reserves "to the extend that they can formulate a reasonable estimate of". While all pharmaceutical companies often experience a number of lawsuits centered around their drugs, Lilly's $1.07b charge was above average. And, the company could face even higher charges in the future if it fails to defend its right to insurance payouts, loses insurance coverage, or fails to defend itself in the large government and class action lawsuits that are currently pending. The result will either be a cheap buy, if the company prevails when the dust settles; or, it could mean a potential diseaster for the company. Either way, it is definitely something to keep an eye on.

Liberation has had an eye on Multimedia Games (MGAM) since late May of this year when it began quietly acquiring shares on the open market. Since then, the investment group has amassed an 8% stake in the company and has begun an activist campaign to increase shareholder value.

In Liberation’s initial June 30th filing with the SEC, they stated that they had met with Michael Maples, Chairman of the Board of the Company. During the meeting, the two parties discussed ways in which to maximize shareholder value. In particular, the investment group “urged the company to focus on a transaction or restructuring to monetize the Company’s participation arrangements with Native American tribes in the State of Oklahoma and use the proceeds to implement a substantial stock buyback or otherwise create a mechanism to deliver maximum value to shareholders”. Finally, the group warned that if the company did not demonstrate “in the near term” that it has made progress towards these goals, it would pursue all available alternatives.

Well, in a recent amendment to their original filing yesterday, the group stepped up their campaign by announcing:

“Unless the Company promptly articulates a strategy to maximize shareholder value, the Reporting Persons intend to solicit shareholders to call a special meeting of shareholders for the purpose of electing new directors to the Board. If a special meeting is called, the Reporting Persons intend to nominate individuals for election to the Board who will actively pursue strategies to maximize shareholder value consistent with, but not limited to, those described above. The Reporting Persons also intend to solicit proxies in support of the election of such directors at the special meeting.”

The company threatened to install its own board capable of action, or even resort to more extraordinary measures such as M&A activities or liquidation. Overall, this stock is definitely worth watching. The stock is currently trading at only $8.89. This investment group has averaged in from $11 down through $9 a share, and therefore would likely seek strategic alternatives that would recoup all or more of their investment, which represents a 10% to 20%+ premium from the current market price.

Delcath Systems (DCTH) has been involved in a long battle with hedge fund Laddcap Value Fund for over a year. The fund is seeking to replace the company's board and possibly put the company up for sale. While this would result in a nice short-term spike for investors, the company argued that its long-term prospects would pay off. The company continued its battle against Laddcap Value Fund today by announcing a lawsuit alleging that the fund failed to disclose critical details about its proposed replacement board. Their PRE-14C filing with the SEC today shed some interesting details on the funds owners and motivations.

The company begins by pointing out that the current board has witnessed a 916% increase in the share price over the past three years - this kind of performance does not justify shareholder action to replace the board. The company then shed light on the funds management and proposed slate of directors:

"Ladd Defendants have failed to disclose is that one of their director nominees, Paul William Frederick Nicholls, filed Chapter 7 personal bankruptcy in 2002. Among other items, Mr. Nicholls amassed credit card debt of $105,349.75 on nine credit cards, including cards issues by such luxury retailers as Bloomingdale's, Bergdorf Goodman and Macy's. They failed to disclose that another nominee, Fred. S. Zeidman, served on the Audit Committee for Seitel Corporation, a company that restated its financials for seven quarters and subsequently filed for bankruptcy. The Ladd Defendants failed to disclose that Mr. Zeidman was named in seven lawsuits arising out of the restatements. They failed to disclose that Michael Karpf, M.D. sat as Vice Provost of the UCLA hospital system through its period of financial woes, necessitating the hiring of an outside firm to ascertain what went wrong. And certainly, the Ladd Defendants have failed to disclose the abysmal performance of the Laddcap hedge fund run by Mr. Ladd."

Now, Delcath shareholders are faced with a choice. If the proposed consent solicitation garners enough interest for a proxy battle and Ladcapp is able to take over the company, they are likely to attempt to put the company up for quick sale. This hunch is based on the fact that they demanded that the company contact an investment bank several months ago to explore strategic alternatives - an attempt which ended up failing after lawsuits were filed. If current managements remains in place after a proxy battle, the stock price is likely to appreciate also due to the added security that current management will remain for long-term growth. If, however, the lawsuit and solicitations are dropped (which has been what has happened in the past), the uncertainty and the threat of takeover remains which may be a drag on the stock price in the near term. Overall, this situation warrants a close watch, as a proxy vote of any kind could mean a catalyst to a quick increase in the stock price.