Stephens admits mistakes made at Osborne's former company.

LITTLE ROCK FINANCIER Warren Stephens said in a deposition that the management of Arkansas Research Medical Testing LLC of Little Rock "made mistakes" after the company was purchased from Jennings Osborne in 2004 for $20.3 million.

"Certainly the company didn't perform as we all hoped it would," Stephens, who is the CEO of Stephens Inc. of Little Rock and has an ownership interest in Arkansas Research, said in the January deposition. "The management team obviously made mistakes and the company didn't perform well."

In October, Osborne sued his former company, Stephens Capital Partners LLC and Stephens Holding Co. over their failure to pay him his expected deferred compensation. When Osborne sold Arkansas Research, he agreed to take a deferred payment of $10 million and stay on as a consultant.

Osborne was supposed to receive $500,000 for consulting fees, $500,000 as part of a non-compete agreement and $9 million if the company reached certain financial goals in the three years after its sale. The company, however, reached its financial goals only in the first of the three years, resulting in Osborne failing to receive $6 million.

Osborne said in the lawsuit, filed in Pulaski County Circuit Court, that the managers didn't have the experience to run his medical testing facility and didn't take his advice.

As an example of the poor management practices, one executive put himself in two studies in 2005 and 2006, which is causing problems today, one of Osborne's attorneys, Bud Whetstone of Little Rock, said recently.

Whetstone said the company's chief operating officer, Steve Bethel, volunteered to be in a study that required him to be at the facility but then left the premises at night.

"He violated protocol and didn't report it," Whetstone said. He said Bethel should have reported the deviation to the pharmaceutical company and the local Internal Review Board, which oversees medical tests.

In April, a former Arkansas Research employee, Bill Olds, said in a deposition that no report to the IRB has been made and Arkansas Research was still under an obligation to make a report, according to court filings.

In May, Whetstone asked Arkansas Research board member Jackson Farrow Jr. what the board has done since April about the incident.

Farrow, however, wouldn't answer the question because the attorney for the defendants, H. William Allen of Little Rock, said it was privileged information.

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Allen attended the company's board meeting on April 30 and offered his advice on what to do next.

Arkansas Research is regulated by the U.S. Food & Drug Administration "and it has been suggested in this proceeding that there could be FDA implications in the issue involved here," Allen wrote in his motion seeking to prevent Farrow from testifying about what the board has done.

County Circuit Court Judge Marion Humphrey has ruled that Farrow has to answer the question. Farrow's deposition hasn't been rescheduled.

Allen declined to comment on the case, which is scheduled to go to trial in September.

Arkansas Research, a 200-bed early-phase clinical research facility, still is operating.

'Mistakes Were Made'

Allen asked Humphrey in May to dismiss portions of Osborne's lawsuit because, Allen said, the purchase agreement he signed didn't guarantee the earn-out payments.

Osborne is "essentially asking the Court to rewrite the parties' contract," Allen wrote. "This is impermissible under Arkansas law."

Osborne's complaint centers on his allegation that he was given assurances he was going to have control of the company as its consultant, which is the reason he sold the company and agreed to earn-out payments, Whetstone said.

Osborne "didn't see where he was running any risk on a payout," Whetstone said. "Then what happened is they changed the damn deal .... It's constructive fraud."

Osborne wasn't forced to sell the business, Allen said.

Osborne "understood that the earn out provision was not a guaranteed payment when he agreed to sell his business, and appreciated that risk," Allen said. "He would have preferred a guaranteed payment, but after the earn out provision was offered on a 'take it or leave it' basis, he chose to take it. He did not, however, have to do so."

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Stephens said that when he invested in the company, he hoped it was going to meet its financial goals too.

"In our experience, you don't really expect anything, but you certainly hope so," he said.

Allen also said it was in Arkansas Research's best interest to make as much money as possible and no one acted in bad faith.

"Neither ARMT nor any other defendant had any reason to deprive" Osborne of the payments, Allen wrote.

But Arkansas Research had an economic incentive not to hit its revenue goals, Lloyd Tre Kitchens III of North Little Rock, another of Osborne's attorneys, said in his court filings in the case.

By not hitting its goals, the company saved $3 million annually by not paying Osborne, Kitchens wrote.

Stephens said the company was trying to grow, but it didn't. (Other investors in Arkansas Research included Stephens employees and Stephens family members, Stephens said.)

"I must tell you that in our investing life, ... there are other instances that frankly are much worse," Stephens said. "Certainly mistakes were made managing ... the business that cost us a lot more money than they cost Mr. Jennings."

Humphrey hasn't made a ruling yet on Allen's motion.

Growing Too Fast

Osborne and his former manager, Lisa Akin, who has worked for the company since 1981, said they knew the company was growing too fast in 2004 because no study was being turned away.

"It just kind of started falling apart," Akin, currently the company's clinical director, said in her April deposition.

She said she told the managers that the employees couldn't keep up with the volume of work. In addition, many mistakes were being made, she said.

When she complained, Akin's manager told her that she would have to learn to work with the management, Akin said.

"I felt pretty deflated at that point," Akin said in her deposition.

Osborne also warned the new managers about the rapid growth.

"Nobody ever asked me for my opinion," Osborne said in a deposition taken for the case. "They didn't want my opinion. I always gave it to them, but they didn't want it."

Stephens said he couldn't remember when he learned the business was in trouble but he had faith in his management team.

"We have always operated as a firm where while we may be even 100 percent owner or a majority owner, we tend to operate ... where the managements run their businesses, and our board representatives monitor that," Stephens said.

After six months of management, though, over 90 percent of Osborne's clients had jumped ship and discontinued their association with Arkansas Research, Whetstone said. Osborne tried to complain to Stephens about the management and reported all the problems he saw. But Osborne didn't receive a response.

Stephens said that he didn't investigate the allegations nor was he curious about why the business was having trouble. He said he also thought there was another side of the story.

"Let's just say I didn't take it as gospel that this ... was what happened," he said.

By Mark Friedman

mfriedman@abpg.com

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