CellCyte Genetics Corp. (fka CCYG)

[scion]

SEC launches case against CellCyte Genetics

2009-09-08 20:53 ET - Street Wire
Also Street Wire (U-*SEC) U.S. Securities and Exchange Commission
Also Street Wire (U-CCYG) CellCyte Genetics Corp
by Mike Caswell
http://www.stockwatch.com/newsit/newsit_newsit.aspx?bid=Z-C:*SEC-1641692&symbol=*SEC&news_region=C

The U.S. Securities and Exchange Commission has filed civil fraud charges against CellCyte Genetics Corp., a Seattle-based company that allegedly misled investors about the prospects for its stem cell technology. The SEC says that CellCyte had no basis to claim that the technology, which purportedly helped repair organs, was headed for human trials.

The complaint comes 20 months after the company's shareholders launched a class action lawsuit against Vancouver promoter Gordon Brent Pierce and others, claiming that Mr. Pierce financed a misleading promotional campaign touting CellCyte. The SEC does not name Mr. Pierce as a defendant in its lawsuit. It does repeatedly refer to a Canadian promoter, but it does not provide a name for that promoter.

SEC's complaint

The SEC's complaint, filed on Sept. 8, 2009, in the Western District of Washington, names as defendants CellCyte and its former chief scientific officer, Ronald Berninger, 63, of Mukilteo, Wash. According to the complaint, CellCyte partnered with a Canadian stock promoter who pumped the company to a $7.50 high in the fall of 2007. (All figures are in U.S. dollars.) The stock then collapsed, falling to eight cents and leaving investors with massive losses, the SEC says.

The complaint states that CellCyte's technology, a purported advance in stem cell research, was actually an untested idea that a scientist had developed in 2001. The scientist, who worked for a government agency, had observed that a special compound would cause stem cells to migrate to specific organs. This would allow scientists to overcome a problem of stem cells being quickly flushed from the body. The scientist told Mr. Berninger that she had performed only preliminary research, and that her testing had killed some mice, the complaint states.

The SEC says that CellCyte paid $90,000 to license the discovery. The agreement required the company to raise $5.5-million within one year for additional research.

Around the same time, Mr. Berninger met with the Canadian promoter, who controlled a public shell company, Shepard Inc., the complaint states. They conducted a reverse merger, taking CellCyte public. The SEC says that as part of the merger, CellCyte received $6-million from the Canadian promoter and other investors, and the promoter received 15 million free trading shares of CellCyte. As a result, the Canadian promoter controlled 90 per cent of the company's public float, the complaint states.

After the merger, the company attempted to develop the stem cell compound, without success, the complaint states. The SEC says that experiments using it in mice failed to produce any of the results needed. In spite of the lab failures, the company claimed in regulatory filings that it had the first stem cell enabling drugs that were headed for clinical trials. The SEC says that Mr. Berninger knew that CellCyte had never filed an application for an investigational new drug, and had no FDA approval to begin clinical trials.

The company also falsely claimed that it was testing its compound with the ultimate goal of being able to repair the human heart, the SEC alleges. "In reality, Berninger knew that CellCyte never attempted any research nor achieved any results to prove that its stem cell technology could repair the heart in mice, a prerequisite to beginning any clinical trial to repair the heart in humans," the complaint reads. CellCyte also failed to disclose several important pieces of information, including that fact that it had not done any toxicology tests on the special compound, the SEC says.

Around the same time, the Canadian promoter was preparing a $2-million campaign to tout the stock, according to the complaint. Between August and December, 2007, he allegedly distributed millions of spam e-mails, blast faxes and newsletters that contained misleading statements about CellCyte. During the campaign, the stock rose from $4 to $7.50, and the daily trading volume increased from 2,000 to more than 100,000 shares, the complaint notes. This gave the company a market capitalization of $450-million at one point.

The campaign concluded in January, 2008, after the Canadian promoter had dumped much of his stock into the market, the SEC says. The stock declined below a dollar, and last traded for five cents.

Mr. Berninger and CellCyte, without admitting to any wrongdoing, have settled the case without a hearing. They have each consented to a permanent injunction barring future violations. In addition, Mr. Berninger has agreed to pay a $50,000 penalty and to serve a five-year ban from acting as an officer or director of a public company.

The SEC also filed a separate complaint on Tuesday against CellCyte's former chief executive officer, Gary Rays, 64, of Freeland, Wash. That complaint is nearly identical to the one against Mr. Berninger and CellCyte. Mr. Rays has not settled the charges.

Shareholder lawsuit

On Jan. 14, 2008, shareholders launched the class action lawsuit in the Western District of Washington. The suit named as defendants CellCyte, Mr. Reys, Mr. Berninger and Mr. Pierce. It alleged that Mr. Pierce, through his Zurich-based stock promotion firm Stockgroup AG, paid for a misleading 12-page colour mailer touting CellCyte. The mailer was allegedly created by Florida newsletter writer James Rapholz, who received $445,000 for his services.

Mr. Pierce denied any wrongdoing. In a motion to dismiss dated Nov. 10, 2008, he said that there was no evidence that he made any misleading statements touting CellCyte. He was not an officer or director of the company, nor did he participate in its day-to-day management, he claimed. He further said that the newsletter touting CellCyte did not attribute any statements to him or to Stockgroup AG. The judge has not yet ruled on his motion.

Prior regulatory actions

Shareholders, in their suit, noted that Mr. Pierce has been subject to prior regulatory actions. On June 8, 1993, the B.C. Securities Commission banned him for 15 years. The BCSC's case centered around money raised for Bu-Max Gold Corp., a former Vancouver Stock Exchange listing. According to an agreed statement of facts, the company raised $210,000 (Canadian) in May, 1989, for exploration. It then paid $100,000 (Canadian) of that money to a private company controlled by Mr. Pierce for purposes which did not benefit Bu-Max. The BCSC ban expired on June 8, 2008.

More recently, the SEC fined Mr. Pierce $2.04-million for the alleged Lexington Resources Inc. pump-and-dump. The regulator said he and his associates made $13-million dumping Lexington as the stock rose to $7.50. Mr. Pierce did not appear at a three-day hearing the SEC held in Seattle in February, 2009, for the Lexington case. He instead sent his lawyer, Christopher Wells. The promoter said he was concerned he could be arrested if he went to Seattle, because federal prosecutors were investigating him for CellCyte.

http://www.stockwatch.com/newsit/newsit_newsit.aspx?bid=Z-C:*SEC-1641692&symbol=*SEC&news_region=C