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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