by T. GormanPosted on Posted in SECActions

The Commission charged a medical device company and its founder with making false statements regarding the FDA’s refusal to approval a device which is a key component of its business plan. The action was brought against Imaging3, Inc. and its founder Dean Norman Janes. SEC v. Imaging3, Inc., Case No. CV 13-4616 (C.D. Cal. Filed June 25, 2013).

Imaging3 was founded in 1993 by Mr. Janes. The Burbank, California based company sells, rents and services remanufactured or refurbished mobile imaging devices. That business is operating at a loss.

A key product for the future, however, is a Dominion Scanner. Based on proprietary technology, and under development for years, the product is supposed to produce 3D medical diagnostic images in real time. Thus, for example, the Scanner has been crafted to produce a 3D image of a broken bone which, if done, would facilitate diagnosis by a physician.

To market its Dominion Scanner, Imaging3 needed FDA approval. The company first sought that approval in an application filed in 2007. To secure approval the company had to demonstrate in its application that the device is safe and as effective as what is called a “predicate device,” that is, one on the market that is not subject to approval. The year after the application was filed the FDA denied approval. The agency stated that the device was not substantially equivalent to the predicate devices.

In September 2009 the company tried again. In a January 2010 letter the FDA again denied clearance. The letter recited essentially the same reason as those given for the earlier denial.

A third application was submitted in July 2010. Again the FDA denied the application. In an October 2010 letter the agency identified several issues that had to be resolved. Those included concerns about the safety of the device and the quality of the images.

On November 1, 2010 Mr. Janes held a news conference to update investors on the development of the Scanner. He told investors that the company would again apply for clearance by the FDA. During the conference Mr. Janes also stated that the denials by the FDA were not based on safety concerns or the quality of the images. Rather, the denials were what he called “ridiculous” and “administrative,” not “substantive.” The FDA letter was not released.

Two months later an investor posted the FDA’s October 2010 denial letter, obtained through an FOIA request, on an online message board. Mr. Janus subsequently provided a link to the letter on his personal Facebook page. The company did not release the letter until February 2013.

The Commission’s complaint alleges violations of Exchange Act Section 10(b). The case is in litigation. See also Lit. Rel. No. 22733 (June 26, 2013).

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by T. GormanPosted on Posted in SECActions

Fraudulent investment funds purporting to give the public an opportunity to acquire pre-IPO shares of potentially hot stocks such as Facebook have been front and center in the District Court in Manhattan in recent days. In one case a former Oregon gubernatorial candidate and securities law recidivist pleaded guilty while in the other a Florida businessman was sentenced to prison. In both cases investors lost millions of dollars.

The first centered on a scheme orchestrated by Craig Berkman, a one time aspiring political figure. Over a period of about two years beginning in 2010 Mr. Berkman raised an estimated $13.2 million from over 120 investors for three fraudulent investment schemes.

Ventures Trust LLCs: Investors were told these entities held large quantities of pre-IPO shares of Facebook, Groupon, LinkedIn, and Zynga. In fact they did not. One entity did have a small, indirect interest in pre-IPO shares of Facebook.

Face-Off Acquisitions, LLC: This entity, investors were told, would use the funds to purchase an existing special purpose vehicle that owned a significant stake in Facebook. The representation was false.

Assensus Capital Investors, LLC: In this scheme investors were lured to provide funding for what they were told would be an investment in various start-ups, including technology, medical device and energy companies. Investor funds were supposedly secured in part by interests in pre-IPO shares of Facebook. The claims were false.

In fact Mr. Berkman misappropriated much of the money raised from investors. These was not the first such schemes in which Mr. Berkman has been involved. Previously, the Oregon Division of Finance and Securities issued a cease and desist order against him and imposed a $50,000 for selling securities without a license. Later an Oregon jury found him liable in a private action for breach of fiduciary duty, conversion of investor funds and misrepresentations.

Now Mr. Berkman has pleaded guilty to one count of securities fraud and one count of wire fraud. He is scheduled for sentencing on October 1, 2013. U.S. v. Berkman, No. 13-mg-00732 (S.D.N.Y.). The SEC has a parallel action pending. In the Matter of Craig Berkman, Adm. Proc. File No. 3-13249 (Filed March 19, 2013).

In the second case, Florida businessman John Mattera was sentenced to serve 11 years in connection with a fraudulent investment fund scheme tied to pre-IPO shares of stocks like Facebook. He had previously pleaded guilty to securities and wire fraud charges. U.S. v. Mattera, 1:12-cr-00127 (S.D.N.Y.).

From 2010 through 2011 Mr. Matteria served as Chairman of the Advisory Board of Praetorian Global Fund Ltd., a mutual fund. In that capacity he was responsible for the investment decisions.

Beginning in the late summer of 2010 Mr. Mattera and others offered investors the opportunity to purchase shares in special purpose entities related to the Praetorian. Those vehicles supposedly owned pre-IPO shares of companies such as Facebook and Groupon. Based on these representations about $11 million was raised. Investors were assured that their funds would be held in escrow until after the IPOs.

In fact the representation were false. Most of the investor money was transferred to other entities with which Mr. Mattera was associated. About $4 million was spent by Mr. Mattera for personal items. The SEC has a parallel case pending. SEC v. Mattera, Civil Action No. 11-cv-8323 (S.D.N.Y. Filed Nov. 18, 2011).

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