O'Dwyer's PR Services Report

November, 1990

Ex-Nestle firm goes bankrupt

A successor firm to Pagan International, Arlington, Va., which won a Silver Anvil of PublicRelations Society of America in 1986 for helping Nestle to settle a ten-year boycott againstits products, has filed a Chapter 7 bankruptcy action in Virginia Bankruptcy Court, listingassets of $ 27,000 and liabilities of $ 1,604,289.

Debtors of Strategic Issues Management Inc. include the Internal Revenue Service, $ 37,950for payroll taxes; the governments of Maryland, Virginia and District of Columbia, $ 12,986 inpayroll taxes; Blake Development, $ 45,040 in rent; 25 N. Lynn, $ 43,557 in rent; DavidWhipple, fees of $ 27,808; National Bank of Washington, $ 10,000 loan, and World WideTravel Assocs., $ 6,579 in airfare.

79 Unsecured Creditors

There are a total of 79 unsecured creditors, including Rafael D. Pagan, Jr., President of SIM,who states he is owed $ 198,083 in accrued salary; $ 103,281 in loans, and $ 18,000 inaccrued expenses.

An initial bankruptcy filing was made July 30 and was amended Aug. 30.

Chapter 7 bankruptcy involves the halt of a business's activities and the division of assetsamong creditors.

The firm had more than 25 employees in 1987 when its techniques for issue resolution werebeing applied to a number of major clients including Shell Oil, Union Carbide, Ciba-Geigy Corp.,Chevron and the Government of Puerto Rico.

The bankruptcy action follows a series of lawsuits launched against PI by three formerexecutives of the firm -- John O. Mongoven, Ronald A. Duchin and Alvin B. Biscoe Jr.

PI, meanwhile, has countersued.

Biscoe claims in one of the actions that he and his wife, Eleanor, loaned PI $ 400,000 andwere "largely responsible for keeping PI solvent since August 1987."

The $ 400,00 is listed in the bankruptcy as a "disputed" debt. Fees of $ 60,640 owed to AlvinBiscoe are also disputed.

Pagan International, in its countersuit, claims that Mongoven and Duchin "leaked" confidentialplans for client Shell Oil, thereby damaging PI, and also took other "trade secrets."

Mongoven and Duchin deny the charges.

Representing PI until June, 1990, were Thomas Ward and Harold Bruno of the law firm ofWard, Lazarus, & Grow.

However, the bankruptcy papers indicated that PI has owed $ 17,547 in fees to the law firmsince Sept. 30, 1989, and that since June of this year a new law firm has been retained --Paley, Rothman, Goldstein, Rosenberg & Cooper, Chartered.

Ward, Lazarus & Grow was paid $ 5,000 on June 21, 1989, while the new law firm was paid $3,000 in June 1990, the papers indicate.

Representing Mongoven and Duchin is Dan Free of Hamilton & Hamilton.

Hearing the case in the D.C. Court is Judge Stanley Sporkin, formerly of the Securities &Exchange Commission.

Three Split in 1988

Mongoven, who was a VP at PI, and Biscoe and Duchin, who were senior VPs, left the firm inJuly 1988 to form Mongoven, Biscoe & Duchin in Washington after making an unsuccessfulattempt to purchase PI.

According to Civil Action No. 89-0176 filed Jan. 25, 1989, in the U.S. District Court, D.C., arestructuring agreement had been drawn up in 1988 under which Mongoven, Biscoe andDuchin were to buy control of PI by paying Pagan and his wife, Jean, $ 528,000 over aten-year period in exchange for consulting services and a promise not to compete.

According to an affidavit by Biscoe, "It became clear to me that the firm's survival required alimitation on the ability of Pagan to expend the company's resources."

Pagan, according to Biscoe, set forth five alternatives for the proposed restructuring,including one in which Pagan was to be a consultant.

Biscoe further stated that Pagan and his wife tentatively agreed in mid-April 1988 to "anoutline of principles that would guide a restructuring and involve the buyback of stock by thecorporation."

Mongoven said he and the other executives who supported the buy-out felt that Pagan wasdevoting too much time to activities not connected to the firm, including trips to the FarEast to interest investors there in investing in Puerto Rico.

Worked on San Juan Deal

One of the deals that Pagan had become involved with was the proposed purchase of the

Government-operated Convention Center and two hotels in San Juan, Puerto Rico.

His partners included John F. McMahon, a U.S. apartment and office developer, andShisegato Kono, Japanese real estate investor, among others.

Pagan, as Chairman of Kono Puerto Rico, offered $ 63 million for the property, according toan article in the March 13, 1989 Washington Business Journal Magazine.

Plans were to invest another $ 200 million to build a 300-room hotel.

The magazine, portraying Pagan as "The DealMaker," said he was "on the verge of puttingtogether his first major real estate purchase in his former native land."

However, nearly a year and a half later, in mid-September of 1990, there had been no dealon the Convention Center.

Another contender, Houston-based Flagship Inc., was about to sign a contract with thePuerto Rico Industrial Development Company, owner of the property.

Elizabeth Roman, tourism editor of Caribbean Business, San Juan, said that the companyheaded by Pagan had lost the bidding battle even though its bid was lower than Flagship.She said she heard threats of a lawsuit by Kono Puerto Rico but that none had been startedto her knowledge.

The magazine, meanwhile, marveled at how Pagan, who once lived in a small village in themountains outside of San Juan, had grown to become an international financier.

Pagan Background

Pagan's father, Rafael Sr., had left an executive post to be an Episcopal priest in the villagewhen Rafael Jr. was nine years old.

Remaining in the village until after high school, Pagan graduated from the University of PuertoRico in 1948 and joined the U.S. Army in 1951.

After serving as a captain in the Korean War, he had a tour of duty at the Pentagon duringwhich he became involved in political and economic briefings at the White House. TheGovernment sent him on various missions to foreign countries, especially those in LatinAmerica.

Following his Government service, he worked for such multinational corporations asInternational Nickel, Castle and Cooke, and Nestle, particularly on their Latin Americanbusiness and labor relations.

Negotiations Broke Down

Negotiations to buy Pagan International from the Pagans broke down, according to the suit,when the couple failed to appear for a meeting June 13, 1988, on the restructuring.

Mongoven, Biscoe and Duchin then told the Pagans they would resign if the agreement wasnot signed by 5 p.m. on June 15, 1988.

Mongoven, Biscoe & Duchin was formed the next month. Mongoven described the firm asvery successful although he would not provide staff or fee income figures.

Charge Client Interference

PI charges in its countersuit that Mongoven, "through the means, including, but not limited tothe misuse of their fiduciary knowledge, intentionally interfered with the contractual relations(with Shell Oil Corp. and Ciba-Geigy Corp.) causing a termination of such relations." The twocompanies are now clients of MB&D, the counterclaim adds.

Shell, according to PI had a written contract to pay PI $ 50,000 monthly through June 1989while Ciba-Geigy paid $ 9,000 monthly for PR services.

Duchin Lawsuit

Duchin, in an affidavit, said PI initially hired him at a salary of $ 60,000, which was laterraised to $ 70,000 in September of 1987 and $ 72,000 in May of 1988.

He claims he is owed $ 3,000 for pay from June 1 to Jun 15, 1988, plus $ 2,500 for accruedvacation.

Duchin said he also loaned $ 26,400 to PI on or about April 28, 1988 and that the loan hasnot been repaid.

He is seeking repayment of $ 17,000 in loans and $ 16,990 in fees.

PI denied that it owes any funds to Duchin.

Mongoven, who had a salary at PI of $ 98,000, said he loaned PI $ 7,200 on April 28, 1988,as part of a check for $ 33,600 that had been given to PI by Biscoe, who was then the firm'sexecutive VP and chief financial officer. Mongoven said he repaid Biscoe on June 15, 1988.

Mongoven seeks $ 13,815 in fees.

The Duchin and Mongoven claims are described as "disputed" in the bankruptcy papers.

Pagan Blames Leak

PI, in answering the suit by Mongoven and Duchin, said the two executives "leaked thesensitive public relations strategy that PI had devised for Shell," thereby irreparably harmingPI's relationship with Shell and compromising its reputation as a PR consulting firm.

Pagan told a reporter for O'Dwyer's PR Services Report that the firm started having troublewhen a program called "The Neptune Strategy," dealing with Shell's handling of race relationsin South Africa, was leaked to the press even before the company had a chance to see it.

PI lost $ 800,000 in current business because of the leak and, meanwhile, prospects stoppedtalking to it, Pagan said.

He described the company's debts as around $ 200,000, including wages and payroll taxes,and said much of the remaining debt is either owed to himself or is the subject of lawsuits.

Muskie Commission Formed

Nestle, with advice from PI, had set up the "Nestle Infant Formula Audit Commission" in theearly 1980s to investigate complaints about the marketing of the company's infant formula.

Activists claimed that mothers in Third World countries were mixing the formula withcontaminated water.

They also claimed that mothers were being persuaded not to breast feed their infants,thereby depriving them of disease-fighting elements that occur naturally in human milk.

Former Maine Senator Edmund Muskie headed the Commission.

The Commission reported in 1983 that it took 78 complaints and obtained "adequateinformation" on 57 of them.

The individual responses ranged from one to more than 100 pages. Commission membersmade on-the-scene inspections in a number of countries.

The PI techniques called for communications and negotiations with activist groups.