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U.S. Securities and Exchange Commission v. Ferrone

United States District Court, N.D. Illinois, Eastern Division

October 10, 2014

U.S. SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
STEPHEN D. FERRONE, et al., Defendants.

MEMORANDUM OPINION AND ORDER

ELAINE E. BUCKLO, District Judge.

The U.S. Securities and Exchange Commission ("SEC") has moved for summary judgment on its claims that Douglas McClain, Sr. ("McClain Sr.") and Douglas McClain, Jr. ("McClain Jr.") (collectively, "Defendants" or "the McClains") engaged in securities fraud. See Compl. at Counts I and II. I grant the SEC's motion for the reasons stated below.

I.

Defendants have not disputed the SEC's statement of material facts. Therefore, I accept all of the SEC's properly supported factual assertions as true. See N.D.Ill. Local R. 56.1(b)(3)(C). However, at the summary judgment stage, I must view the SEC's undisputed facts and the McClains' statement of additional facts in the light most favorable to the non-movants. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986).

A.

McClain Jr. and James T. Miceli[1] formed Argyll Biotechnologies, LLC ("Argyll") in 2002. McClain Sr. served as Argyll's chief science officer.

In 2006, Argyll acquired the rights to "SF-1019, " a biopharmaceutical drug product derived from goat blood. Physicians in Africa and Europe had administrated a precursor form of SF-1019 known as "BB7075" to patients suffering from AIDS and multiple sclerosis. The underlying chemical structure of SF-1019 has been patented in the United States since 2008. See U.S. Patent No. 7, 358, 044.

Shortly after acquiring the rights to SF-1019, Argyll created a public company called Immunosyn Corp. ("Immunosyn"). In exchange for granting Immunosyn an exclusive worldwide license to market and sell SF-1019, Argyll became Immunosyn's majority shareholder. McClain Jr. served as Chairman of the Board and Chief Financial Officer for Immunosyn. McClain Sr. did not have an operational role at Immunosyn, but acquired 2.8 million shares of Immunosyn stock as compensation for the work he performed on SF-1019 as Argyll's chief science officer. Immunosyn stock began trading publicly in October 2007.

In December 2006, Argyll filed an Investigational New Drug ("IND") application with the U.S. Food and Drug Administration ("FDA") containing a proposal for "Phase I" clinical trials of SF-1019 on human subjects. On January 27, 2007, the FDA notified Argyll during a conference call that its IND application for SF-1019 was being placed on hold and could not be initiated. See Pl.'s Ex. 14. McClain Sr. admits that in January 2007, he was aware of the hold placed on SF-1019 clinical trials. Pl.'s Ex. 8 at 33:9-12. In a follow up letter dated March 15, 2007, the FDA placed the IND application for SF-1019 on a "full clinical hold" based on Argyll's presentation of "insufficient information to assess risk to human subjects." Pl.'s Ex. 14 at 1. McClain Sr. and McClain Jr. received notice of the full clinical hold placed on SF-1019 within hours of its announcement. See Pl.'s Ex. 8 at 34:3-6; Pl.'s Ex. 15.

In placing a full hold on SF-1019 clinical trials, the FDA informed Argyll, "Until you have submitted the required information, and we notify you that you may initiate the trial(s), you may not legally conduct clinical studies under this IND." Pl.'s Ex. 14 at 3. The FDA hold barred any use of SF-1019 on humans, including through so-called compassionate use waivers. See Dr. Rheinstein Declar. at ¶ 17.[2]

Immunosyn's public filing with the SEC for the 2007 fiscal year noted that "SF-1019 has not been approved for any human use nor treatment of any particular disease, and such approval may never be obtained." Pl.'s Ex. 7 at 16. However, Immunosyn made no mention of the full FDA hold placed on SF-1019 clinical trials in March 2007. McClain Jr. sold hundreds of thousands of his Immunosyn shares between April 2007 and October 2007 while Argyll's first IND application for SF-1019 remained on a full hold. See Pl.'s Exs. 35-37.

In July 2008, McClain Sr. was invited to speak to potential investors at the Holistic Health Care Center in Boerne, Texas ("the Texas clinic"). The founder of the Texas clinic, Michelle Longo O'Donnell ("O'Donnell"), told her patients about SF-1019 and Argyll's efforts to secure FDA approval for the drug before McClain Sr.'s visit. O'Donnell asked McClain Sr. to sell some of his Immunosyn shares to her patients at a discounted price.

The SEC alleges that McClain Sr. made several false statements about SF-1019 during his presentation at the Texas clinic: (1) that the FDA had issued "compassionate use waivers" for Argyll or Immunosyn to treat patients in Minnesota and Texas with SF-1019; (2) that Phase 2 clinical trials for SF-1019 were "ready to start in about 60 days under orphan designation"; (3) that "by the time we start our Phrase 2 trials in sixty to ninety days, a year from then we should have our FDA approval"; and (4) that the U.S. Department of Defense "bought 600, 000 vials [of SF-1019] from us last year." Pl.'s Ex. 10 ("Transcript of Presentation by Douglas McClain, Sr.") at 5-6, 15-16, and 25.

In addition to his presentation at the Texas clinic, McClain Sr. appeared in two video presentations posted on Immunosyn's website in 2008. The SEC alleges that McClain Sr. made three false statements during the longer of these two presentations: (1) that "[i]n pre-clinical human studies, [SF-1019] appears to create a therapeutic effective response over a range of demyelinating conditions of [the] peripheral nervous system"; (2) that "[c]ompassionate use waivers have been issued by the institutional review board of the FDA in Houston, Texas for the use of SF-1019" and (3) that "preparations for clinical trials are underway in the United States and Europe." Pl.'s Ex. 28 at 2-3.

McClain Sr. collected over $338, 000 from selling his Immunosyn shares to people who attended his presentation at the Texas clinic and other investors. It is undisputed that McClain Sr. never delivered Immunosyn shares to these investors and failed to return their money. The SEC has submitted declarations from five investors who tried, unsuccessfully, to obtain their Immunosyn shares or a refund from McClain Sr.

In November 2008, Argyll submitted a second IND application proposing "Phase II" clinical trials involving SF-1019. On December 17, 2008, the FDA placed this application on a full clinical hold and memorialized this administrative action in a follow up letter identifying "unreasonable and significant risk[s] of illness or injury to human subjects." Dr. Rheinstein Declar. at ¶ 10.

Although Argyll has not withdrawn either of its IND applications, its proposed clinical trials for SF-1019 remain on full FDA holds.

II.

In August 2011, the SEC filed a civil enforcement action against McClain Sr. and McClain Jr. as well as other defendants alleging, inter alia, that they engaged in securities fraud.[3] The SEC seeks summary judgment on these claims. At this stage, I must view the facts in the light most favorable to the non-movants and resolve all evidentiary conflicts in their favor. Liberty Lobby, 477 U.S. at 255. Summary judgment is appropriate only when "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a).

The SEC has asserted claims against McClain Sr. and McClain Jr. under Section 17(a) of Securities Act of 1933, 15 U.S.C. § 77q(a), in Count I and under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, in Count II. Where, as here, the SEC's claims relate solely to alleged fraud in the sale of a security&mdashnamely, Immunosyn stock-the three anti-fraud provisions cited above are "substantially the same" and may ...


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