SEC Charges Massachusetts Company, CEO and Promoters With $9 Million Securities Fraud
Recently, the Securities and Exchange Commission filed an enforcement action in federal court in Boston against BioChemics, Inc., a biopharmaceutical company based in Danvers, Massachusetts, its CEO and two individuals it paid to solicit investors. The SEC alleges, among other things, that the defendants made false statements to investors about collaborations with major pharmaceutical companies and the status and results of drug trials of the company's main product, and that they created fraudulent valuations of the company's stock in order to raise millions of dollars from investors. The action charges BioChemics, its CEO John Masiz of Topsfield, Massachusetts, Craig Medoff of New York, New York and Gregory Kroning of Norwood, New Jersey, with violating the federal securities laws in a fraudulent scheme that raised at least $9 million from 70 investors in 19 states from at least 2009 until 2012.
According to the SEC's complaint, filed in the United States District Court for the District of Massachusetts, BioChemics purportedly makes a transdermal drug delivery system. The defendants allegedly told investors that BioChemics was engaged in active research and development collaborations with major pharmaceutical companies, that it had two drugs under FDA review, and that it was conducting specific clinical trials-all of which was false. According to the complaint, when BioChemics finally did conduct one clinical trial, it misrepresented the results of that trial. The SEC's complaint further alleges that defendants Masiz and Medoff created and gave to investors fraudulent valuations setting the worth of BioChemics at between $500 million and $2 billion. However, according to the complaint, the valuations had no reasonable basis and the defendants' representations that the valuations had been developed by reputable independent investment banks were false. In addition, the complaint alleges that defendants told investors their money would be used to fund clinical trials and for operating expenses, but in fact used some investor funds to pay for personal expenses for Masiz including meals, massages, clothes and sporting goods and to make interest-free loans of over $200,000 to Kroning in addition to paying for his personal expenses including a leased BMW.
Masiz and Medoff have previously been sued by the Commission in connection with earlier securities frauds. Masiz was a defendant in a 2004 SEC enforcement action alleging false and misleading statements by VASO Active Pharmaceuticals, a BioChemics subsidiary. A final judgment by consent was entered against Masiz that permanently enjoined him from violating the antifraud provisions of the federal securities laws. Medoff was a defendant in a 1993 SEC enforcement action alleging the fraudulent offering of unregistered securities. That case resulted in a final judgment by consent against Medoff in 1994 that permanently enjoined him from violating the antifraud provisions of the federal securities laws. The Commission also issued an Order in January 1995 barring Medoff from associating with, among others, brokers, dealers, and investment advisers. In a separate case involving different conduct, Medoff also pled guilty to criminal securities fraud charges in 1995.
The complaint charges all defendants with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder and also charges Kroning and Medoff with violating Section 15(a) of the Exchange Act by acting as unlicensed brokers and Medoff with violating Section 15(b) of the Exchange Act by acting as a broker after being permanently barred from the industry in a previous action by the Commission. The complaint seeks injunctive relief, disgorgement, and civil penalties, as well as an order barring Masiz from serving as an officer or director of any public company. The complaint also seeks an order barring Masiz and Medoff and any entity they own or control from participating in the issuance, offer, or sale of any security aside from their own personal trading accounts. [SEC v. BioChemics, Inc., et al., Civil Action No. 1:12-cv-12324 (District of Massachusetts)]
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