Mischaracterization of Regulatory Problems Leads SEC to Charge Medical Device CEO with Fraud
The US Securities and Exchange Commission (SEC) has announced it has charged a medical device executive for purportedly lying to investors about how regulators with the US Food and Drug Administration (FDA) had characterized an imaging device made by the company, which at the time had just been denied clearance under the 510(k) pathway by FDA.
Background
Under US law, to the extent that corporate officials communicate with their public investors, they must be truthful.
"Shareholders have a right to trust corporate officers to tell them the truth about the business," explained SEC Regional Director Michele Wein Layne in a statement. "When CEOs abuse that trust and make misstatements, innocent shareholders are victimized. The SEC will hold corporate officers accountable for misleading shareholders."
'Tis but a Scratch…
According to the agency, Dean Janes, CEO of Burbank, CA-based Imaging3, Inc. had participated in a conference call with investors in November 2010, shortly after FDA denied the company's proprietary 3-D imaging scanner.
Under FDA's premarket notification system [also known as the 510(k) submission pathway], companies must show their device is "substantially equivalent" to an already-approved predicate device. If they are unable to do so, they must go through the considerably more expensive premarket approval pathway, which requires clinical data and vastly more expensive filing fees.
The company had reportedly sought clearance twice before, having been rejected in 2008 and earlier in 2010, both times because of FDA's concerns about the "safety of the device and the quality of the images," SEC explained. For example, the device was apparently prone to over-heating and had yielded imagines that were "scientifically invalid and useless."
And, like the Black Knight in the 1975 movie Monty Python and the Holy Grail explaining how the loss of both his arms is "just a flesh wound," SEC said Dean's characterization of his product's deficiencies woefully understated the seriousness of the problem.
"[On] the conference call [with investors], Janes did not discuss the issues raised by the FDA in an October 2010 letter. Even when asked on the call whether any of the FDA's concerns were 'safety-related' or involved image quality, Janes said, 'Nope,' and that there was 'really and honestly not one question about the technology or its consistency. It just doesn't make sense to me.'"
Dean's characterization of FDA's regulatory response letter would eventually run into investor opposition when an investor obtained the original denial letter and posted it on the Internet. SEC said Dean then took to Facebook using his own personal account to further "mischaracterize the denial."
SEC said it had charged Dean and Imaging3 with fraud, and is seeking from them civil monetary penalties, the removal of Dean from the position of CEO, and a ban on Dean serving as an officer or director of the company.
Imaging3 did not have a statement available to the press. The company is currently involved in a bankruptcy-related restructuring.