BioChemics, Inc., a Massachusetts-based biopharmaceutical company was ordered Wednesday to pay a total of almost $18 million to the U.S. Securities and Exchange Commission. The SEC had accused the company of making false statements to investors about its collaborations with major pharmaceutical companies, FDA review of its products, and the status of drug trials of the company’s main product. BioChemics also allegedly created fraudulent valuations of the company’s stock in order to raise millions of dollars from investors.
The SEC originally filed an enforcement action against BioChemics, the founder and former CEO, John Masiz, and two promoters, Greg Kroning and Craig Medoff, in December 2012. The SEC complaint alleged that from 2009 until mid-2012, BioChemics and the defendants raised at least $9,000,000 from approximately 70 investors by misrepresenting, among other things:
- That BioChemics had ongoing research and development collaborations with certain pharmaceutical companies when in fact the collaborations with those companies had either never begun or had ended;
- That BioChemics had two drugs currently under FDA review, when in fact it had no products under any type of FDA review;
- The status and results of clinical trials for BioChemics' drugs; and
- That certain purported valuations of BioChemics at between $500 million and $2 billion were independent and reliable when they were not.
The complaint walks through the alleged misrepresentations, for example, a solicitation by BioChemics to approximately 50-100 prospective investors. The solicitation allegedly stated that BioChemics “currently has 6 drugs under development, 2 of which are in Phase II trials that are expected to be completed within six months;” BioChemics is raising money “to complete Phase II clinical trials for the Company’s two lead drugs: BC-IBU-1 (prescription ibuprofen) and BC-DN-1 (a diabetic neuropathy treatment);” and “Independent Valuation by Mercury Capital** $1.2B based solely on the first 2 drugs currently under FDA review.”
In response to this solicitation, SEC argued:
The statements contained in this solicitation were materially misleading in several respects. At the time the statements were made, BioChemics did not have “2 drugs currently under FDA review.” It had no drugs under any type of FDA review. In fact, BioChemics did not seek to begin the FDA review process for the first of its products, ibuprofen, until the spring of 2012. In addition, at the time the statements were made, BioChemics’ diabetic neuropathy drug was not “in” a phase two clinical trial and there was no reasonable expectation that the diabetic neuropathy trial would be “completed within six months.”
The complaint also alleged that BioChemics and the defendants misrepresented Masiz's background and use of investor proceeds. According to SEC, they failed to disclose to investors that Masiz was the subject of a prior Commission securities fraud action that resulted in a final judgment against him in 2004, and that BioChemics' investor funds were used to pay for Kroning and Masiz's personal expenses, “including meals, massages, clothes and sporting goods and to make interest-free loans of over $200,000 to Kroning in addition to paying for his personal expenses including a leased BMW.”
On Wednesday, March 25, U.S. District Judge Mark Wolf consented to the SEC’s request that BioChemics disgorge $15.1 million, as well as to pay prejudgment interest of $2 million and hand over a $750,000 civil penalty. View the Judge’s Supplement Judgment document.
“They were lying about what they had to sell, how soon it was likely to get to market, how and whether it was under the governmental approval processes and how much their company might be worth,” said Paul Levenson, regional director of the SEC’s Boston Regional Office.
According to SEC, BioChemics specialized in transdermal drug delivery, which delivers a wide variety of existing drug molecules through the skin to a patient’s bloodstream.
This action follows our coverage of SEC enforcement of life sciences companies. Notably, enforcement has extended beyond alleged Foreign Corrupt Practices Act violations--what the pharmaceutical industry normally associates with the SEC. As Andrew Ceresney, the SEC's Director of Enforcement, recently noted, his agency is focusing on disclosures in company dealings with the FDA. "FDA dealings and approvals are the lifeblood of your business and are so important to investment decisions," he advised the industry.
"The message from these cases is that you need to be completely accurate in recounting your dealings with the FDA," Ceresney added. "So much turns on those interactions and not being straight with investors will have significant consequences." Indeed, the case at hand shows that companies will pay dearly if they misrepresent their interactions with the FDA, and could be required to disgorge all profits that SEC can trace back to these statements.