SEC Goes After Drug Fraud

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On Monday, the Securities and Exchange Commission issued a litigation release announcing a civil lawsuit against Helvetia Pharmaceuticals and four officers of the company.

Helvetia was a private company that claimed it could treat cancer patients using heat to destroy cancer cells. In reality, it appears that the entire operation was a sham for the sole purpose of bilking investors out of their money. It allegedly managed to raise more than $3 million.

The SEC complaint (pdf file) is an incredibly juicy read that would be amusing if the activities described weren't so appalling. For example, the company's president, Richard A. Anders, allegedly persuaded a woman with cancer to invest $50,000 so that she could earn more money for her treatment from the upcoming IPO. Despite a promise to return the investor's money if the IPO didn't occur, the woman never got her money back. Another problem is that Anders allegedly did not disclose prior run-ins with the SEC for securities fraud.

Helvetia also failed to disclose that its drug therapy included the use of dinitrophenol, a chemical banned by the FDA in the 1930s due to severe toxicity. According to the SEC's complaint, Helvetia's offering materials stated that it "would not seek FDA approval for clinical trials or be subject to that agency's rules and regulations because of the associated costs and time." Not telling investors that the FDA would never approve a drug that had previously been banned is indeed troubling.

There are so many red flags here that it is heartbreaking to see so many people got duped. While this was a private company, this is a case that demonstrates why I think most people should avoid penny pharmaceutical stocks.

Fool contributor Charly Travers allegedly writes articles about biotechnology.

For more of his recent articles, see:

• Biotech's Full Monte
• Unraveling Biotech Potential
• Don't Be a Biotech Gambler
• Avoiding Biotech Land Mines