Former Rockwell Medical executive alleges SEC violations

The former head of drug development at Rockwell Medical Technologies Inc. (Nasdaq: RMTI) says the company and its chief executive knowingly issued false and misleading press releases and violated other securities laws.

Dr. Richard C. Yocum, who was fired from Rockwell Medical in September, alleged in a wrongful termination suit that he was ousted because he repeatedly complained to its chairman and CEO, Robert L. Chioini, about violations of Securities Exchange Commission and Food and Drug Administration rules.

Rockwell Medical, a Michigan-based company that makes and distributes dialysis products, was the subject of an earlier Sharesleuth story.

Yocum said in his suit that press releases the company put out in 2010 and 2011 made it appear that the clinical trials for a new product called Soluble Ferric Pyrophosphate (SFP) were going better than they actually were.

Yocum was Rockwell Medical’s vice president of drug development and medical affairs, and had primary responsibility for the SFP development program.

He said in his suit that Chioini not only ignored his concerns about the trials but caused Rockwell Medical to issue press releases that included statements directly contradicting what Yocum had told him.

Yocum also said that, based on the nature of questions he received from analysts or investors, it appeared that Rockwell Medical engaged in selective disclosure regarding details of those trials.

Because Yocum was fired from his job, which had a base salary of $298,000 a year, he could be viewed as having a grudge against Rockwell Medical. But his allegations are not the only red flags at the company.

Yocum’s successor, Dr. Annamaria Kausz, recently left Rockwell Medical after just seven months, adding to the turnover in its clinical-development program. The company provided no explanation for that departure in the press release it issued April 19 to announce the hiring of her replacement. In fact, it didn’t even mention her or say that she had resigned.

Sharesleuth also noted that Rockwell Medical took the unusual step last November of extending the life of 400,000 warrants it had issued in the fall of 2008 to a consultant who was later found to have participated in a massive fraud scheme at another public company.

That consultant, Michael J. Xirinachs, was one of Rockwell Medical’s co-founders.

The federal judge hearing the SEC’s civil case against Xirinachs and his company, Emerald Asset Advisors LLC, last week ordered them to pay as much as $10 million in disgorgement, interest and fines.

The 400,000 unexercised warrants gained more than $900,000 in value after Rockwell Medical pushed back the expiration date by six months, to May 4.

Rockwell Medical’s decision to grant Xirinachs and Emerald Asset Advisors the extension  – for no additional consideration – sets up the possibility that they could use the additional profits to help offset the SEC judgment.

Rockwell Medical did not respond to a list of questions submitted to its investor-relations representative. In court filings, the company has denied Yocum’s allegations and has asked the judge to dismiss the case.

Continue reading

Rockwell Medical Technologies has close ties to financier facing SEC charges

The Securities and Exchange Commission recently brought charges against financier Michael J. Xirinachs, alleging that he helped a Florida company called Universal Express Inc. dump billions of unregistered shares on the market in 2006 and 2007. 

The SEC said Xirinachs, though two investment companies, bought more than 15 billion unregistered shares from Universal Express at a discount to the market price, then sold them to the public, generating $17.5 million in proceeds. According to the complaint, he routed $11 million of that money to Universal Express as payment.

 

Sharesleuth noted that one of those same investment companies entered into a consulting agreement last November with Rockwell Medical Technologies Inc. (Nasdaq: RMTI), which sells dialysis concentrates and solutions to healthcare providers.

 

Rockwell Medical’s shares doubled in the 15 days that followed that agreement, and doubled again in the first seven months of this year. The warrants that Xirinach’s company, Emerald Asset Advisors LLC, received as the sole compensation for its consulting services are currently worth $1.9 million more than their exercise price.

 

The consulting agreement called for Emerald Asset Advisors to introduce the company to potential licensing partners, acquisition candidates, securities analysts, stock brokers and institutional investors. 

 

The timing of the contract and the surge in Rockwell Medical’s shares could be a coincidence. But a Sharesleuth investigation found that Xirinach has a long history with Rockwell Medical, dating back to the mid-1990s, when he was an executive with D.H. Blair & Co., a brokerage that defrauded investors by manipulating stock prices and engaging in high-pressure “boiler room” sales tactics.

 

THE COMPANY

 

Rockwell Medical bills itself as a fully integrated biopharmaceutical company. Its products target end-stage renal disease, chronic kidney disease and iron deficiency anemia. It recently completed Phase 2 clinical trials of a new drug, Soluble Ferric Pyrophosphate, for delivering water-soluble iron into the bloodstream during dialysis treatment.

 

Rockwell Medical employs about 250 people, according to SEC filings, and has manufacturing and warehousing facilities in Wixom, Mich.; Grapevine, Tex., and Greer, S.C. The company, which is based in Wixom, reported $25.8 million in revenue for the first half of 2009, up 4.9 percent from a year ago. It posted a loss of $3.4 million for the first half, compared with a loss of $2.3 million a year earlier.

 

Rockwell Medical’s shares got a boost this summer when the company was added to the Russell 2000, an index of small capitalization stocks. Rockwell Medical completed a directed offering of shares and warrants last month that netted $20.5 million in new capital. It placed the securities with a group of institutional investors led by Deerfield Management Co., a New York-based hedge fund that focuses on healthcare businesses.

 

Rockwell Medical’s shares peaked at $9.39 on Aug. 7. They closed Monday at $6.84, giving the company a market value of $116.5 million.

 

(Disclosure: Mark Cuban, the majority member of Sharesleuth.com LLC, has no investment position in Rockwell Medical; Chris Carey, editor of Sharesleuth, does not trade in individual stocks and has no investment position in Rockwell Medical.)

 

Unlike some of the companies that Sharesleuth has written about, Rockwell Medical is clearly a real business, with growing revenue and a potentially valuable new product. For those reasons, we think that investors might want to ask why the company has maintained its relationship with Xirinachs, who figured into another SEC case in 2003 and also was sued for investment fraud last year in connection with a failed venture involving Emerald Asset Advisors.

 

Sharesleuth submitted written questions to Rockwell Medical’s public-relations and investor-relations representatives last month about the consulting contract and Xirinachs’ activities on behalf of the company. We received no reply.

 

EARLY INVOLVEMENT

 

Rockwell Medical’s initial SEC filings in 1997 identified Xirinachs as one of its three founders, and said he held 24.9 percent of its stock. Proxy filings show that he also served on the company’s board of directors until 1999.

 

Later filings show that Xirinachs or his then-wife, Patricia Xirinachs, maintained at least a 7 percent stake in the company until at least January 2006. On June 22 of that year, Rockwell sold Emerald Asset Advisors an additional 111,895 shares of stock for $500,000, or $4.47 a share, a discount of more than 30 percent from that day’s closing price. 

 

According to the SEC’s complaint, Michael Xirinachs is the sole owner and manager of Emerald Asset Advisors, which is based in Melville, N.Y.

 

Xirinachs’ attorney, Ira L. Sorkin, declined to discuss the SEC’s allegations, except to say that his client denies guilt.

 

“We intend to defend against the charges,” he said.

 

THE CONSULTING DEAL

 

On Nov. 5, 2008, Emerald Asset Advisors signed a one-year consulting contract with Rockwell Medical. It got warrants to buy 300,000 of the company’s shares at $1.99 each, a slight discount to that day’s closing price. Between Nov. 5 and Nov. 12, when Rockwell Medical made a presentation at an investment event in New York, its stock slipped to $1.50 — a five-year low. 

 

The next day, the company announced earnings for the third quarter of 2008, and its share price began rebounding on a sharp increase in volume.

 

Rockwell Medical reported that its revenue for that quarter rose 22 percent from a year earlier, to $13.5 million, and that revenue for the first nine months rose at a similar rate, to $38.1 million. However, the company said its losses also widened, to $2.5 million for the quarter and $4.8 million for the nine months.

 

From Nov. 13 through Nov. 20, more than 2.1 million shares of Rockwell Medical’s stock traded hands — eight times the average daily volume in the months leading up to the surge. By Nov. 18, the company’s stock was up to $3.14 a share. Two days later, it closed at $4.54, after climbing as high as $4.79.

 

Rockwell Medical’s shares posted those gains at the same time that the Dow Jones Industrial Average and other market indexes were plunging.  Between Nov. 18 and Nov. 20, the Dow fell more than 10 percent.

 

On Nov. 21, Rockwell Medical amended its consulting agreement with Emerald Asset Advisors.  It extended the contract by a year, and granted Xirinachs’ firm two more sets of warrants – 200,000 exercisable at $4.54 a share and 200,000 exercisable at $7 a share.

 

The original tranche of 300,000 warrants becomes exercisable Thursday.

 

Sharesleuth also noted that, last Nov. 19, Rockwell Medical’s board of directors awarded 100,000 shares of restricted stock and 170,000 options to Robert L. Chioini, the company’s chairman and chief executive.  The board also granted 50,000 restricted shares and 80,000 options to Thomas E. Klema, executive vice president and chief financial officer.

  

The options and restricted shares vest over three years. At current market prices, Chioni’s award would be worth $1.3 million.

 

FRAUDULENT BROKERAGE FIRMS

 

When Xirinachs got involved with Rockwell Medical, he was senior vice president for investments at D.H. Blair. The New York-based brokerage shut down under regulatory pressure in 1998. A grand jury later issued a 173-count indictment against the firm and 15 of its executives and brokers.  D.H. Blair, along with its chairman and two vice chairman, entered guilty pleas in 2002, agreeing to pay $21 million in restitution.

 

Xirinachs was not among those charged.

 

In July 1997, Rockwell Medical enlisted another New York brokerage, Maidstone Financial Inc., as underwriter for an initial public offering that was to raise as much as $7.24 million. Before they could complete that deal, the National Association of Securities Dealers brought charges against Maidstone and its top executives, alleging that they defrauded investors of millions of dollars on similar offerings.

 

Rockwell Medical then turned to two other firms, Mason Hill & Co. and J.W. Barclay & Co. They raised roughly $7.5 million for the company through the sale of shares and warrants.

 

In 2002, however, then-New York Attorney General Eliot Spitzer announced the indictment of Mason Hill and five of its employees, alleging that they defrauded investors by manipulating the share prices of at least six public companies, including Rockwell Medical. And in 2003, the SEC brought civil charges against J.W. Barclay and eight of its employees, saying they either defrauded investors and failed to halt the wrongful acts.

 

UNIVERSAL EXPRESS

 

Xirinachs and Emerald Asset Advisors are among 13 individuals and companies charged by the SEC in connection with the unusual stock activity at Universal Express, a Florida company that offered point-to-point luggage shipping and other transportation and logistics services.

 

Richard A. Altomare, Universal Express’ chief executive, has claimed in press releases, blog postings and YouTube videos  that the mysterious flood of shares that sank the company’s stock price to a fraction of a penny was the work of hedge funds and other unknown parties that were engaged in “naked shorting.” 

 

The SEC concluded that the company itself had issued billions of unregistered shares. It brought fraud charges in 2004 against Universal Express, Altomare and five other defendants.  The agency alleged that Universal Express relied on illegal stock sales to survive, and that Altomare used company funds for lavish personal expenses, including private jet flights, luxury hotel stays and jewelry. 

 

The SEC won a $21.9 million judgment against Universal Express and Altomare in 2007.

 

According to SEC’s new complaint, Xirinachs and Emerald Asset Advisors entered into a deal with Universal Express in February 2006, under which they would buy its stock at a discount to the market price in exchange for cash.

  

The complaint says that, between February 2006 and June 2007, Emerald Asset Advisors bought 6.37 billion shares from Universal Express, deposited them into a brokerage account, then sold most of them on the public market, netting $11 million. Emerald Asset Advisors sent $7.9 million to Universal Express to pay for the shares.

 

The SEC said more than 6 billion of the shares that were offered and sold were not covered by any registration statement.

 

According to the complaint, Xirinachs opened a second brokerage account in September 2006 in the name of North Atlantic Resources Ltd., an offshore company domiciled in St. Vincent and the Grenadines. According to the SEC, Xirinachs acted as investment advisor for North Atlantic and had authority to buy and sell shares.

 

Between November 2006 and June 2007, North Atlantic Resources bought 9.2 billion shares from Universal Express, plus 350 million shares from Emerald Asset Advisors.  It sold roughly 9.5 billion shares to the public for $6.48 million, and sent $3 million of the proceeds to Universal Express.

 

The SEC said Xirinachs received 10 percent of the profits on North Atlantic’s trades. It said none of the 9.5 billion shares were covered by registration statements.

 

ANOTHER SEC CASE

 

Xirinachs figured into another SEC case in 2003. The agency brought fraud charges against Park South Securities LLC and Todd M. Eberhard, its majority owner. According to the complaint, Eberhard misappropriated money from customers and falsified account statements to conceal his activities.

 

The SEC also said in court filings that Eberhard had improperly transferred $1.75 million in customer money to a purported hedge fund called Stone House Capital Partners LP, which listed Xirinachs as one of its two general partners. Xirinachs was a registered representative at Park South at the time, and worked with Eberhard at an office in Melville, N.Y.

 

Eberhard, who appeared frequently on financial-related television programs, was indicted on criminal charges in 2004 in connection with his activities and pleaded guilty in 2005. He acknowledged that he looted customer accounts, traded excessively and inappropriately to generate extra commission income and forged account statements and other documents. Eberhard was sentenced to more than 13 years in prison. 

The trustee assigned to liquidate Park South reclaimed the $1.75 million in customer money held by Stone House.  Xirinachs was not charged with any wrongdoing.

 

CIVIL SUITS

 

In September 2008, an investor sued Xirinachs, Emerald Asset Advisors and several other defendants, alleging fraud in a failed deal to buy a cigarette-distribution business called Tobacco Holdings Inc. The investor provided $325,000 in financing, and said in the complaint that the defendants repeatedly misrepresented their progress on the acquisition, diverted the money for other purposes and failed to repay it after the deal fell through.

 

Xirinachs, Emerald Asset Advisors and the other defendants settled the case last October, agreeing to pay $468,308, plus another $102,000 for legal fees and expenses.

 

The president of Tobacco Holdings was later indicted on charges of trafficking in contraband cigarettes, conspiracy, wire fraud and money laundering. Federal prosecutors alleged that Carlo J. Nappi, also known as Carl Nappi, had devised a scheme to ship cigarettes from New York to Michigan without paying applicable sales taxes.

 

The same investor filed a second suit in November 2008, alleging fraud and misrepresentation in the solicitation of funds for the development of a purported television series for HBO. Xirinachs was one of four defendants, although he was not named in the most serious counts. Another of the defendants settled the debt for roughly $61,000. The case against Xirinachs and other defendants remains open.