SEC Charges CellCyte With Stem Cell Fraud

9/8/09Follow @xconomy

CellCyte Genetics, the Bothell, WA-based company that once said it was on the verge of entering clinical trials with a stem cell compound to repair the heart, has been charged with violating federal securities laws by making false statements to investors.

Today in U.S. District Court in Seattle, the company, its former CEO, and former chief scientist were charged with misleading investors that the company had successful stem cell technology headed for clinical trials, when it hadn’t received FDA clearance to do so. The SEC issued a statement today describing its legal actions against CellCyte, and two former executives, CEO Gary Reys and chief scientist Ronald Berninger. The Seattle Times reported on the SEC action earlier today.

“CellCyte and its senior officers knew that it would take years of research to determine whether the stem cell discovery could be developed into a viable product,” said Marc Fagel, director of the SEC’s San Francisco Regional Office, in a statement. “In their rush to cash in on the promise of stem cell research, they concealed the true facts from investors.”

CellCyte was briefly one of the Seattle region’s most valuable biotech companies in 2007, when its shares reached $7.50 and its market capitalization topped out at more than $450 million. The Seattle Times’ Angel Gonzalez reported in late 2007 that the spike in CellCyte’s value was driven by penny-stock promoters using mailings and spam faxes. The Times also reported that Reys exaggerated his credentials in regulatory filings—and the SEC formally began investigating later. By December 2008, when it was worth pennies a share, CellCyte reported that it had run out of cash and “substantially curtailed all activities.” In May, the company said it had tentatively agreed to a settlement with the SEC.

The SEC added more clarity in today’s statement. It said that CellCyte and Berninger agreed to a settlement, without admitting or denying the SEC’s allegations, in which they agreed to a permanent injunction. Berninger also agreed to pay a $50,000 fine and to be banned from serving as an officer or director of a public company for five years. The SEC, in separate legal action, is charging Reys with violating anti-fraud provisions. The SEC is seeking an injunction, a monetary penalty, and an order barring Reys from serving as an officer or director of a public company.

Despite all the legal troubles, CellCyte is still available for trading over-the-counter (OTC BB: CCYG). It was worth five cents a share at today’s close.

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