SEC Charges Medical Device Company and its Founder with Fraud

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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