My Sunday column: U law prof quits board after investor uprising
- Blog Post by: James Eli Shiffer
- June 30, 2014 - 2:33 PM
My Sunday column (linked here, and pasted below) reported on a University of Minnesota law professor's side job as chairman of a company that grows diamonds. To report this story, I used public records about the company available through the Securities and Exchange Commission's EDGAR database, as well as legal records from the federal court's PACER system. I also included information from the company's statement last week about the ouster of four board members, Edward Adams' biography on the University of Minnesota web site and the university's policy on outside consulting. I also used material from Star Tribune reports from 2003.
Here's the column:
Edward Adams joined the faculty of the University of Minnesota Law School in 1992, and since then has amassed quite a résumé. He holds an endowed chair as the Howard E. Buhse Professor of Finance and Law, specializing in commercial, bankruptcy and corporate law. He has won teaching awards and written numerous books.
Those academic credentials have not helped him in his long-running battle with investors in Scio Diamond Technology Corp., a start-up company that has suffered net losses of $13 million since it went public, with Adams as chairman, in 2011. In filings with the Securities and Exchange Commission and lawsuits, shareholders have alleged that Adams has at times served as a director, officer, lawyer and stockbroker for Scio or its privately financed predecessors. One shareholder asserted in April that since 2002, Adams’ brokerage and law firm have extracted at least $3.85 million from the company.
By this spring, the proxy fight had become so nasty that shareholders were highlighting Adams’ day job in their SEC filings: “If put to them on an upcoming final exam, we can safely assume that even the students in the corporate law classes taught by Adams would agree that directors work for the stockholders, not the other way around …”
Adams declined to comment. He’s hardly unique among faculty in holding a job outside academia. University policy says outside work can have benefits on and off campus but cautions that faculty members must declare any potential conflicts of interest and ensure that the integrity of the university is “paramount” in whatever they do.
Adams, who earns $164,487 from the university, is a practicing lawyer with his own firm, and has also been a registered securities broker.
The Scio affair is not the first time he has run afoul of his fellow investors. In 2003, he sat on the board of VirtualFund.com, a failed company that tried to refashion itself as an e-commerce firm. The Star Tribune reported that year how Adams and another board member were paid $1 million over two years by the company.
The payments were legal and despite shareholder unrest, Adams kept his seat on the board, the newspaper reported at the time.
Since 2004, Adams has sought fortune in a business founded by his father-in-law that makes diamonds. Not fake ones. Real diamonds, grown in a lab by a patented “chemical vapor deposition” process, according to Scio’s website.
The alchemy apparently has produced diamonds good enough for wedding rings and cutting tools. But it hasn’t made money.
The business has raised about $40 million from investors as it transitioned through three companies, according to court records. The first public sign that something was wrong came in 2012, when two investors filed a lawsuit. That suit was quickly settled. Three others followed, including one filed by investor Bernard McPheely.
This spring, the Securities and Exchange Commission served investigative subpoenas on the company. The SEC does not comment on investigations.
Pressure kept building for the board to call an annual meeting. Then, on Monday, Adams and three other board members abruptly resigned from Scio. Among their replacements: McPheely, the South Carolina businessman who had led the proxy fight.
In an interview earlier in June, McPheely said Adams’ status as a law school professor did not factor into his decision to invest in the company two years ago. Still, he said, based on what the law school now knows about Adams and Scio, “I can’t imagine … they wouldn’t at least investigate.”
Cynthia Huff, a spokeswoman for the law school, would say only: “We are aware of the allegations against Professor Adams and are monitoring the situation.”
With more time on his hands, Adams could use the diamond debacle as a teachable moment. He has all the material he needs for a new seminar on business law: “How to respond to angry investors who claim you’ve enriched yourself while the company you manage is going down the tubes.”
© 2014 Star Tribune