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Further thoughts on the defendants in the FDA’s stem cell injunction actions

Further thoughts on the defendants in the FDA’s stem cell injunction actions

My post about considerations facing the defendants in the FDA’s injunction cases,

http://rickjaffeesq.com/2018/05/17/hard-choices-stem-cell-

defendants-fdas-injunction-cases/

was discussed yesterday in the stem cell field’s big dog, the Niche, by Paul Knoepfler.

https://ipscell.com/2018/05/when-the-fat-stem-cells-hit-the-fire-will-clinics-sued-by-fda-opt-to-stop-soon/.

After reading it, a follow-up is in order.

A correction and follow up:

In my post, I said that both US Stem Cell and California Stem Cell Treatment Center had received warning letters. Knoepfler correctly pointed out that the California company had not received a warning letter from the FDA, just 483 inspection observations. I stand corrected.

BUT what the company did also get was a visit from federal agents who executed a search and seizure warrant, which removed the smallpox vaccine and presumably seized records.

See my original post on this and the warning letter to US Stem Cells.

http://rickjaffeesq.com/2017/09/22/sleeping-giant-awakens-fda-starts-final-push-eliminate-practice-medicine-stem-cell-clinics/

I haven’t reviewed the search warrant, but normally search warrants are issued in the name of a grand jury and is approved by a federal magistrate. As we all now know as a result of the Trump/Michael Cohen legal drama, an affidavit in support of the search warrant would have to establish probable cause that a crime was committed. (Affidavits in support of search warrants are normally sealed until after an indictment.)

So, the lack of a warning letter shouldn’t be all that comforting to the California folks, since it appears that some federal judicial officer has already agreed that the facts alleged in the affidavit constitutes a federal crime.

I think a 483 with a search and seizure warrant is at least the functional equivalent of a 483 plus a warning letter in terms of establishing intent, which is as stated, is the ticket to Felony land.

In fact, it’s arguably worse practically than a warning letter, since the both the OCI (the FDA’s office of Criminal Investigations) and the criminal division of the US Attorneys’ office are likely already involved in the case. These are government employees you definitely don’t want sniffing around your controversial stem cell business. (Again, on the assumption that the warrant was a standard federal criminal warrant.)

Follow-up on US Stem Cell public corporation status

Knoepfler suggested that I didn’t factor in US Stem Cell’s public company status in the decision tree on whether or not it should stop treating patients now.
Interesting point taken. Here’s my quick analysis:

The main difference between private and public companies is that public companies are required to file reports with the SEC, annually, and usually quarterly. The reports (10K’s and 10Q’s) give shareholders and the public at large the company’s financial information as well as disclose other material information which affect the company’s health and future. The information required to be disclosed comes from a variety of sources, including accountants and attorneys who do work for the public company.

As reported by the Knoepfler last month, US Stem Cells issued a press release:

“On or about March 1, 2018, the U.S. Securities and Exchange Commission (“Commission”), Miami Regional Office (“Commission Staff”), served a subpoena upon U.S. Stem Cell, Inc., which seeks production of certain documents and communications including, among other things, minutes and other documents relating to the Company’s board and audit committee meetings, financial statements, and press releases. The Commission Staff is conducting a formal non-public, fact-finding inquiry of U.S. Stem Cell, Inc. This investigation is neither an allegation of wrongdoing nor a finding that any violation of law has occurred. The Company is cooperating with the Commission Staff and has provided, and will continue to provide, information and documents to the Commission Staff.***”

Here is the link to Knoepfler’s article about this and other problems the company faces.

https://ipscell.com/2018/04/clinic-biz-us-stem-cell-reports-sec-subpoena-adding-to-uncertainty-on-its-future/

Having started my career in a wall street securities litigation firm, and having represented a few small, thinly capitalized public companies involved in controversial or innovative technologies, I have some experience with the decision-making which is going on right now at the company.

There are two big reasons the SEC would investigate a very small public company like this: The second reason is possible stock price manipulation. That’s not likely since the company’s stock is probably thinly traded.

The first, and more likely reason is disclosure issues in the reporting documents, and more likely still, press releases, and specifically the possible inaccuracy thereof.

Let’s just say that the company’s business model (and future revenue stream) has arguably been in some doubt since at least the issuance of the FDA’s draft stem cell guidance documents, and arguably in serious doubt since the FDA’s warning letter and the final guidance documents.

There is often a battle between the company and its outside lawyers about how much to disclose and how bleak a picture to paint when bad stuff/things with potential negative consequences happen. Usually a compromise is reached, but the compromise is often less than absolute, perfect disclosure that would maximally protect the company (and the lawyer).

This company and its founder have a lot of enemies out there. Something I’ve seen very often is that the enemies of promoters of unapproved medical interventions use government investigating authorities to attack these businesses. The vehicle of choice is the state medical boards, but when the feds have jurisdiction like in this case, it’s a no-brainer. I’d bet someone in the stem cell mafioso filed some kind of complaint with SEC about alleged false and misleading press releases and required filings.

The other shoe that hasn’t dropped yet

My prediction is that the SEC inquiry/investigation and the FDA injunction action are not the end of the story. There’s more to come.
Either agency action alone would be blood in the water. Together it’s like putting a thousand tons of chum in the water and hoping that the sharks won’t show up in shark infested waters.

The sharks being the plaintiffs’ class action securities lawyers. They are like ambulance chasers only worse, in that they tear apart companies, rather than take money from large, greedy insurance companies. (I still hate insurance carriers.)

These lawyers work on a contingency fee, and so they like to do as little work as possible for maximum gain. One of the best techniques to effectuate this maximum payout for the minimum work ratio is to let other people do their work and apply pressure. There’s no better applier of pressure than the federal investigatory agencies. An adverse finding by an agency like the SEC or the FDA does most of the work on a plaintiff’s liability case. I have been in this situation many, many times and it is not pleasant for the company. It feels like the world is closing in on them.

So, my guess is that if the complaint wasn’t filed by or with the support of one of these plaintiffs’ firms, the combination of the SEC and FDA’s actions is going to make the company a target too good to pass-up.

So, what does all that mean for US Stem Cells?

Up until the FDA litigation, I’m guessing that the company’s insurer has paid the freight on its legal fees and payouts in the several settled malpractice actions.

Normally, FDA litigation costs are not insurable. Neither are SEC investigations, and neither are fraud securities claims filed by private parties (directors might be covered under directors’ insurance policies).

The company is facing massive legal fees over the next year or two, at least in the high six figures. That’s an important consideration. And since the company’s principal is not a medical doctor, there’s no falling back to a straight medical practice which is the option that the principals of the California company have.

The even more important consideration is what effect stopping/continuing will have on the SEC investigation and the likelihood of the plaintiffs’ bar going after the company.

It’s a complicated calculation, like playing multidimensional chess (a la Spock). We’ll see what they decide and I’ll have more to say later.

Rick Jaffe, Esq.
www.rickjaffe.com
rickjaffeesquire@gmail.com

Hard choices for the stem cell defendants in the FDA’s injunction cases

Hard choices for the stem cell defendants in the FDA’s injunction cases

As recently reported, the FDA filed permanent injunction actions against the two highest profile stem cell clinic/operators, US Stem Cells Clinic and Cell Surgical Network/California Stem Cell Treatment. See my post at http://wp.me/p7pwQD-dz

As an FDA attorney who has worked on civil and criminal stem cell investigations and cases, I can tell you that these defendants are facing a major decision: whether to stop treating patients during the pendency of the permanent injunction action.

Here’s what I believe to be the decision tree/analysis:

Factors weighing in favor of stopping operations pending the judge’s final decision:

1. The FDA can seek a preliminary injunction barring treatment pending the outcome of the case

The FDA has not yet moved for a preliminary injunction, but of course it can do so.My guess is that the FDA didn’t give either clinic advance notice that it intended to file the permanent injunction action, and that the FDA decided to file first then discuss with the operators their ceasing operations pending the judge’s decision on the permanent injunction. I would guess that these discussions are currently going on now or has just concluded. If they agree to close down, expect a FDA press announcement soon.

To obtain a preliminary injunction, the government has to prove 1. Likelihood of success of on the merits, 2.irreparable injury, and 3. balance of equities in favor of the government and the injunction pending a final decision.

These are flexible standards. Regrettably, recent case law is on the government’s side, making it likely they can show likelihood of success on the merits.

Both complaints cite cases of actual harm in the form of side effects the some patients. That will present a challenge to the operators, but it’s not insurmountable.

As to the balance of the equities, again it’s a challenge but there are arguments to be made in support of the operators.

A preliminary injunction motion is a mixed blessing. The advantage is that it’s a dry run, in that will give the operators a sense of the judge’s thinking early on in the case. If they lose, they could decide to fold up their tents, which will save them big bucks as opposed to trying a long and expensive permanent injunction case. The downside of course is losing, and that means operations stop, and there are other negative consequences explained below.

In my mind, the government’s threat of filing a preliminary injunction, while serious, should not be a determining factor in deciding whether to stop operating.

2. Potential criminal prosecution

This is where the rubber meets the road. The government is claiming that these operators are introducing into interstate commerce an unapproved new drug, and that the drug id adulterated and misbranded. These are both civil and criminal violations. And here’s where it gets interesting.

The FDA criminal statutes are both misdemeanors and felonies. The difference is intent or knowledge that what you’re doing is illegal. Based on the operators’ prior receipt of the warning letters in late summer 2017, and more importantly, the fact that the operators are now being charged with FDA violations in a civil action, well that goes a long way towards proving they had intent or knowledge that what they are doing is illegal.

And that puts the operators in Felony Land!

And once you’re in the land of felonies, that makes it more likely that the criminal division of the US attorney’s office will get involved, because they are basically “felony factories”, meaning they typically don’t prosecute cases involving only misdemeanors, because most people who plead or get convicted of misdemeanors get probation. (And what’s the fun of that for the prosecutors!) But most people who get convicted of felonies go to jail.

Of course, the operators can take the position that they are entitled to assert their legal defenses in the civil case. However, their lawyers are surely telling them that to do so creates a risk of criminal prosecution and a greater risk of actual incarceration upon conviction. That’s a tough thing for most successful doctors and business folk to risk.

Which is probably why when the FDA filed a permanent injunction action against Regenerative Sciences and its physician owner, Chris Centeno, he decided to stop treating patients with his expanded cell, stem cell procedure pending the outcome of the case. Turned out he made the right decision since he lost both at the district and appellate court levels. I suspect that no criminal charges were brought against him in no small part because of that decision.

Factors weighing for not closing down pending the end of the case:

1. There’s been no decision by a judge yet, and everyone is entitled to present a defense.

2. Their case is different from Chris Centeno’s case in the following ways: ____________,_______,______ (the defendants will have to fill in the blanks.

3. These folks are very, very motivated to seek vindication. Both Berman and Comella have been quoted in the stem cell press as expressing a high degree of motivation and belief in the righteousness of their actions, and caving-in just might not be in their DNA.

4. And here is the biggest factor and the consideration which could carry the day if they decide not to close down pending the outcome of the case:

Both operators have networks of physicians or franchisee physicians providing stem cell treatments throughout the country. (And that’s a big part of the reason why the FDA chose to go after these two first).

I don’t know the details of how these folks operate, but there are many physicians in the United States who treat patients with stem cells associated with these two operations. I suspect, but don’t know for sure whether they supply any stem cell products or supplies to their networkees/franchisees. But if they do, then agreeing to stop operations now might cause the cessation of all the associated clinics. (Hey these Feds aren’t so dumb!) Because the decision could involve so many other people involved in business with them, I think this could be the dispositive factor, if either or both decide not to close their operations right now. One way or the other, there might be some collateral legal/liability issues between the operators and their networkees.

What happens if they don’t close down now?

The decision to remain open during the pendency of this permanent injunction case will certainly have consequences. There is discovery in a civil case, and the defendant should expect to be deposed. There is no Fifth Amendment privilege in a civil case, so the defendants are going to have to answer every question fully, or ultimately, their formal answer to the injunction complaint will be stricken by the court and judgment will be entered against them.

On the other hand, if they do answer questions, the answers will be admissible in a criminal case, whether or not they take the stand in a criminal trial. This is just another wrinkle to what has to be a very hard decision.

Having defended medical mavericks for a long time, my guess is that at least one of them (and probably both) is going to stay open, but we’ll see. It would be hard to overestimate the impact of these cases as they wind their way through the courts.

Rick Jaffe, Esq.
www.Rickjaffe.com
rickjaffeesquire@gmail.com

The FDA’s injunction complaints against US Stem Cell Clinic and California Stem Cell Treatment Center

The FDA’s injunction complaints against US Stem Cell Clinic and California Stem Cell Treatment Center

Yesterday, May, 9th the FDA filed complaints seeking permanent injunctions in Florida and California federal courts against the two highest visibility U.S. stem cell operations. For the interested, here are the complaints.

comella

bermancomplaint

What’s in the complaints?

It’s pretty much as I said in yesterday’s post. The two complaints are substantially identical and no doubt prepared in Washington, primarily by the FDA with input from Main Justice (or vice versa).

Both entities were inspected by the FDA, after which they received 483 inspection observations indicating Good Manufacturing Practices violations and the fact that they were illegally manufacturing unapproved new drugs which makes the products adulterated and misbranded under federal law.

The clinics responded with basically the same legal argument that the FDA didn’t have jurisdiction to regulate them because they were doing a surgical procedure/just practicing medicine which the FDA cannot regulate.

The FDA then issued warning letters rejecting the lack of jurisdiction argument. That was back in late summer 2017. Since that time, both companies continued their rejection/defiance of the warning letters via public statements about the FDA’s lack of jurisdiction over their clinics’ medical practices.

It was just a matter of time.

The complaints go through the FDA standard argument that the products are drugs and biological products, and not covered by the same surgical procedure exemption (21 CFR 1271.15, which I’ve discussed in many of my previous posts:
See my post at: http://wp.me/p7pwQD-bB )

The complaint against US Stem Cell points out that the solutions the company uses to separate the fat from the stem cells and to wash the product are labeled for “research purposes only” and “not for human therapeutic use.” Ooops! (While that’s mostly just CYA on the part of the suppliers, it won’t sit well with the federal judge, and I predict, the suppliers’ limitation language will be in the judge’s final opinion.)

The complaint against California Stem Cell Treatment Center points out that its stem cell product (actually stromal vascular fraction (SVF) contains a small pox vaccine, Vaccinia Vaccine, Live, which carries a black box warning “designed to call attention to serious or life-threatening product risk, including swelling of the heart tissues, brain or spinal cord.” Yikes! Expect a lot of discussion about that in the summary judgement papers.

Both complaints relate serious adverse events associated with the products, which in the case of US Stem Cell are the notorious three cases of blindness (or partial blindness) resulting from injecting the SVF into the eyes of patients (a practice which US Stem Cell mercifully doesn’t do anymore, according to its co-owner).

So what’s next?

The good news is that there is no motion for a preliminary injunction which means that the cases will take some time, months, at least. The companies will file an answer raising all their arguments. A scheduling conference with the judge will be held, and the government will press for setting up a summary judgement briefing schedule.

The companies need to do something different, because we know how summary judgement proceedings go in this type of case; just ask Chris Centeno and the Regenerative Science folks. So defendants, try something different. Searching for a factual issue would be the place to start. There’s only heartache and loss in summary judgement in this kind of case, followed by an affirmance by the Circuit court. (Here is the legal precedent what has to be worked around, https://caselaw.findlaw.com/us-dc-circuit/1656447.html )

So do something different!

Rick Jaffe, Esq.
www.rickjaffe.com
rickjaffeesquire@gmail.com