Law360 is providing free access to its coronavirus coverage to make sure all members of the legal community have accurate information in this time of uncertainty and change. Use the form below to sign up for any of our weekly newsletters. Signing up for any of our section newsletters will opt you in to the weekly Coronavirus briefing.
Sign up for our California newsletter
You must correct or enter the following before you can sign up:
Thank You!
Law360 (March 19, 2021, 9:42 PM EDT) -- Three investor companies sued Decision Diagnostics Inc. and its CEO in California federal court Thursday, alleging he falsely told them the biotechnology company was developing an at-home coronavirus test and denied them the right to convert shares in the company worth tens of millions of dollars at the time.
The lawsuit brought by Licgo Partners, LLC, Sovereign Partners, LLC and Paradigm Capital Holdings LLC against Decision Diagnostics, its CEO Keith Berman and Decision's subsidiary PharmaTech Solutions Inc. points to information in a criminal indictment filed against Berman in December, as well as a parallel civil suit brought by the U.S. Securities and Exchange Commission.
According to the companies, with Decision Diagnostics facing severe financial difficulties in the early winter and spring of 2020, Berman concocted a scheme to dupe investors into believing his company was close to gaining U.S. Food and Drug Administration approval of an at-home COVID-19 test.
"Neither DECN, nor Berman, ever developed or created a COVID-19 screening test kit, let alone one that was either ready to pass FDA approvals or be available for distribution," the complaint says.
To bolster the fabrication, Berman told an "outright lie" in an April press release that said Decision Diagnostics had entered into a vital distributorship agreement on its COVID-19 test with a company owned by members of the investor companies, according to the complaint.
Federal prosecutors allege that Berman misled investors from February to December 2020 in an effort to prop up the California-based medical device manufacturer's failing financial health. Berman misappropriated hundreds of thousands of dollars in company funds for his own personal use in recent years while falsely telling investors he had received no cash compensation, the government said.
By early March 2020, Berman and Decision Diagnostics' financial condition were in a precarious position, so he hatched a scheme to raise investor funds by touting the development of a COVID-19 test that could detect the virus through a finger-prick blood sample, according to the indictment.
The investor suit filed Thursday points several times to information from the indictment and SEC suit. The investors said that aside from the phony COVID-19 test, Berman and the defendant companies also routinely misrepresented and overstated their distribution contracts for its legitimate medical device products.
According to the complaint, in May 2016 Licgo invested in Decision Diagnostics through a convertible preferred class C subscription agreement at a purchase price of $1,000 per share for a total purchase price of $2,239,000. The investors said they also made subsequent stock purchases and signed an independent contractor agreement with Decision Diagnostics worth an additional hundreds of thousands of dollars.
The companies said they tried at least twice in March and April 2020 to request some of the shares be issued to it for conversion into common stock — estimated to be worth tens of millions at the time — but Decision Diagnostics and Berman wrongfully rejected the request in violation of their agreements. Berman responded at times by swearing at the investors, or telling them that "the store is closed" or that he "cannot allow that to happen," according to the complaint.
"After defendants' fraud was uncovered, DECN's common stock was rendered worthless, as was plaintiffs' investment in DECN," the suit says.
The investors' 10-count complaint includes alleged violations of the Securities Exchange Act of 1934, unjust enrichment and breach of contract, and seeks among other things to for the defendants be temporarily restrained from disposing of all or part of their assets, pending appointment of a receiver and a completion of an accounting and restitution to the investors.
Decision Diagnostics' purported at-home COVID-19 test, GenViro! Swift, is still advertised on PharmaTech's website as of Friday.
The website says that "PharmaTech Solutions, Inc. is excited to announce the development of a new product. GenViro!® Swift is a brand new product that will allow you to screen for the Coronavirus (COVID-19). We care about your health and want to make sure you can check for the coronavirus before your symptoms worsen. GenViro!® Swift only works with GenViro! Swift Meter."
The message adds that the product "is not available for sale in the U.S. or Puerto Rico. FDA EUA applications have been filed. The product is for sale in select international venues. GenViro! Swift is patent pending."
A message sent to Decision Diagnostics seeking comment on the lawsuit was not immediately returned.
The investors are represented by Kevin P. Roddy of Wilentz Goldman & Spitzer PA.
Counsel information for the defendants was not immediately available.
The case is Licgo Partners LLC et al v. Keith Berman et al., case number 2:21-cv-02390, in the U.S. District Court for the Central District of California.
--Additional reporting by Reenat Sinay. Editing by Breda Lund.
For a reprint of this article, please contact reprints@law360.com.
