Company's Debacle Is Lesson for Executives

Emalfarb insists he took appropriate action. He exchanged e-mails, copying his financial chief, with the anonymous source to get more information. He told Smeaton and also answered affirmatively when Ernst & Young asked a routine audit question about receiving any whistle-blower communications. He says he was ignorant of accounting intricacies and relied on underlings and outside professionals — including Ernst & Young and another accounting firm — to handle things. He had two Dyadic employees in China as his eyes and ears. Emalfarb eventually ordered all transactions with the dummy company to cease.

That was that, he says he thought. Unbeknown to Emalfarb, Puridet allegedly just got involved with a new dummy company.

In 2004, Emalfarb raised $1 million from a fund that venture capitalist Warner assembled, including $600,000 from Warner personally, and a total of $26 million. He took Dyadic public late that year via a reverse merger. He says he saw great things ahead for Dyadic.

He didn’t reckon on China. In 2007, shortly after Smeaton died of heart failure at age 44, Emalfarb received another anonymous whistle-blower e-mail. This time, Emalfarb immediately forwarded it to his chief financial officer, Wayne Moor, who had joined Dyadic after it went public and was visiting the China operation at the time. Emalfarb also told Moor about the earlier whistle-blower contact.

What followed stemmed from a mistake in memory by Emalfarb and the increasing cultural pressure on financial reporting and those responsible for it.

Emalfarb, confused about when he had received the first anonymous whistle-blower e-mail, told Moor he thought he had sent it to Moor when he first got it. That was impossible because Moor wasn’t with the company in 2003 when that first whistle-blower contact occurred. In the post-Enron era, however, Emalfarb’s mistake amounted to accusing Moor of ignoring evidence of financial irregularities. "That was the end of Wayne’s regard for Mark," says Warner, who had become a Dyadic board member. "Wayne decided Mark was the devil incarnate who roped him into this situation that totally threatened his career. He said Mark was a liar and a sociopath."

Emalfarb says he realized his mistake the next day and apologized, but he and Moor never spoke again. (Moor declined an interview for this article, as did former board Chairman Harry Rosengart.)

Moor, still in China, contacted Robert Schwimmer of Greenberg Traurig, Dyadic’s outside legal counsel, and board members. The dominoes fell as lawyers gave the board their advice. The board audit committee hired Miami law firm Moscowitz & Moscowitz to investigate. With Emelfarb on leave, the Moscowitz firm concluded in a report, which the company made public, that Emalfarb had been derelict in his fiduciary duties concerning that first whistle-blower e-mail and "has not been candid with us or with the board."

Bilzin Sumberg Baena Price & Axelrod, another Miami law firm hired by Dyadic’s audit committee, recommended firing Emalfarb for cause. The board, except for Warner, agreed. Warner says the report drew conclusions that the evidence didn’t support. "I don’t think (Emalfarb) ever in the remotest part of his mind said ‘I have to cover this up’ because he didn’t do anything to cover up," Warner says.

Researchers at Dyadic’s Netherlands facility work on improving the efficiency and yield of enzyme mixtures to convert biomass into fermentable sugars for fuel.