Harry Zhabilov Jr. was following in his father's footsteps when he became an executive at Viral Genetics Inc. five years ago.

The Bulgarian scientist Harry Zhabilov Sr. co-founded the San Marino biotech company for his HIV and AIDS treatment research. His immune-based therapy has become Viral Genetics' chief product. It was clinically tested in South Africa, where it is nearing commercialization.

But a lot has gone wrong lately. Zhabilov Jr. was fired from the company built by his father, who died in 2002, and he now stands accused of trying to bankrupt the company and steal the intellectual property related to his father's research.

The dispute stepped up when Viral Genetics filed a lawsuit earlier this month in Los Angeles state court claiming that Zhabilov Jr. was colluding with Chicago-based Timothy & Thomas LLC to improperly divert intellectual property to that company.

The company also alleges that while he was executive vice president of research and development and a board member, Zhabilov Jr. "had been involved in an effort to bankrupt Viral Genetics" by approving a convertible debenture that increased the company's debt and devalued its stock through dilution.

In 2006, after discovering Zhabilov Jr.'s alleged misconduct, Viral Genetics terminated his employment.

Viral Genetics' attorney, Los Angeles-based Steven Berliner, declined to comment on the pending litigation. Calls to the company for comment were not returned.

Zhabilov Jr. couldn't be located for comment. He has not been served with the lawsuit, which implies that the company is having trouble locating him.

Timothy & Thomas representatives could not be reached.

Intellectual property litigators said disputes between biotech companies and their researchers often escalate into legal battles, especially when the dispute involves the rights to a medical treatment with significant potential value.

What is unusual about this case is that Viral Genetics was co-founded by Zhabilov Sr. and is now in a legal battle with Zhabilov Jr.

"The assets here happen to be patents on a type of drug that obviously could have great value, including financial value," said Ben Davidson, a litigation partner in the Los Angeles office of Howrey LLP who is not involved in the case.

The allegations against Zhabilov Jr. are especially pointed.

"The complaint talks about Viral Genetics' IP and it seems to be that he was plotting to move it to Timothy & Thomas. That would be a shocking allegation if true," said R. Joseph Trojan, a Beverly Hills-based intellectual property lawyer who also is not involved in the case.

The lawsuit alleges fraud and deceit, which means Viral Genetics can seek punitive damages against Zhabilov Jr., according to intellectual property litigators. Punitive damages can reach multimillion-dollar sums.


"Punitive damages come down to the value of the technology," said John Carpenter, an IP partner at Pasadena-based Christie Parker & Hale LLP who is not involved in the case, "and whether the technology gave the other company a lead time or advance they wouldn't otherwise have had."

Developing troubles

Viral Genetics was founded in 1995. The company's researchers study therapies designed to boost the immune system's ability to fight illness. The principal product developed by Zhabilov Sr., called VGV-1, has been shown in South African clinical tests to lower the levels of HIV in the bloodstream.

The company, which has four Harvard University professors on its scientific advisory board, is still in predevelopment phases of the HIV treatment in the United States. The therapy is being researched through a joint venture with the University of Colorado and a biology professor there, Karen Newell.

Viral Genetics is listed on the Pink Sheets. The company's stock hasn't traded above $1 since June 2002. In a March report, an analyst said Viral Genetics has no meaningful revenue. In a September 2007 filing with the Securities and Exchange Commission, Viral Genetics stated that it had incurred a deficit of $55 million, and was in need of funding to continue research and development.

The legal conflict began in 2006 when Viral Genetics was sued in Illinois federal court by Timothy & Thomas, which claimed Viral Genetics misrepresented its ownership of the therapy in order to solicit its investment.

In the Illinois federal lawsuit, Timothy & Thomas executives Timothy Wright and Tom Little claim that Viral Genetics Chief Executive Haig Keledjian approached them in 2003 about investing in the company.

Court documents show that Little made an initial investment of $200,000 after being told that Viral Genetics was developing a promising treatment for HIV and AIDS, and that the company owned the exclusive and worldwide rights to those treatments. In the suit, Little and Wright claimed that they invested more than $6 million to fund South African clinical trials of Viral Genetics' HIV and AIDS treatment, but they alleged Viral Genetics had misrepresented its ownership of the rights and never funded its portion of the cost of the South African clinical trial.

Viral Genetics denied the allegations, according to court documents, and it filed a countersuit accusing Timothy & Thomas of trying hijack the company's technology.

It was during that litigation that Viral Genetics claims it discovered Zhabilov Jr. was trying to undermine the company and it terminated his employment.

THE NEWS:
A biotech company in San Marino is accusing a fired executive of attempting to divert intellectual property to another company.

WHAT'S UNUSUAL:
The accused former executive is the son of the company's founder.

THE BACKSTORY:
The two companies have a history of bad blood.

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