'Phantom Pain' Device Maker Misled Investors, Suit Says
By William Gorta
Law360, New York (June 8, 2017, 5:34 PM EDT) -- A maker of devices that treat post-amputation "phantom pain" was hit with an investor suit Wednesday in New York federal court for allegedly making false and misleading statements to the investing public to cover up “egregious mismanagement” at the company.
Investor William Austin Lewis and several of his investing firms seek to recover millions of dollars in damages from Calmare Therapeutics Inc. and four of its directors, including its CEO. Lewis says he invested about $2 million in Calmare since 2014, after receiving assurances that it was pursuing profitable government contracts, working to develop regular income streams, and developing a second-stage device. Instead of doing those things, Calmare and the other defendants used the money to pay personal and company expenses, the suit says.
Lewis alleges the company, despite its successful device, has barely made payroll and has operated in the red throughout his relationship with it. Calmare has not hired enough salespeople to market its device successfully and has spent exorbitant sums on contracts and consulting agreements that have failed to produce results, according to the complaint.
“It is unacceptable that defendants would mismanage the company to the extent that they have, and fail to employ appropriate due care in managing the affairs of the company,” the complaint says. “It is indefensible that ... defendants would engage in a fraudulent scheme to cover-up their failure to perform the duties and obligations they owed to the company and plaintiffs, as shareholders in the company.”
Among the alleged false statements to investors is a Calmare announcement last year saying the company had secured a $15 million contract to supply its device to the U.S. government, even going so far as to file a Form 8-K with the U.S. Securities and Exchange Commission. Calmare has not received revenue from the government on the contract, or said the deal fell through, which would require another 8-K filing. Nor has Calmare filed its annual report for 2016 with the SEC, which was due March 31, according to the suit. The company filed for a 15-day extension, but the deadline has long passed, and no 10-K has been filed, the complaint says.
Lewis is bringing claims for breach of fiduciary duty, fraud in the sale of securities, breach of contract, and conversion, among other claims. He says he has made demands upon the Calmare board that have been rebuffed, and that further demand would be futile because the defendants were self-interested in the transactions.
He seeks compensatory and punitive damages, access to the company’s books and records, and attorneys' fees.
Calmare did not respond Thursday to a call seeking comment.
Lewis is represented by Daniel A. Schnapp, Ernest Edward Badway and Catherine A. Savio of Fox Rothschild LLP.
Counsel information for the Calmare defendants was not immediately available.
The case is Lewis et al. v. Calmare Therapeutics Inc. et al., case number 1:17-cv-04297, in the U.S. District Court for the Southern District of New York.
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