May have to be in portions. Here's the first part, after the boilerplate stuff:
INTRODUCTION
Cellceutix Corporation (“Cellceutix”) is a development stage biotech company. Because it
has no revenues, Cellceutix needed to constantly raise funds and convince investors that it was
worth investing in. Defendants chose to do this with lies. Defendant Krishna Menon has a long
history of fabricating his resume. Before the class period he falsely claimed to be involved in the
development of two blockbuster drugs. He falsely claimed to be the sole inventor, rather than joint
inventor, of the drug Kevetrin. He falsely claimed that two prominent scientists were on
Cellceutix’s advisory board. He falsely claimed to have a PhD from Harvard, a lie which he
continued to make during the class period.
During the class period, new lies accumulated. Defendants lied about their Phase 1 trial for
Kevetrin, misconstruing their results to portray Kevetrin as a “home run” and falsely claiming to
have successfully treated a Stage 4 cancer patient. Defendants purchased the rights to Brilacidin
and lied about that drug as well, exaggerating its effectiveness beyond what the science supported.
Moreover, when Defendants acquired the rights to Brilacidin, they did not disclose to shareholders
the serious risks that the purchase entailed, risks arising from the fact that 1) Defendants had no
experience with Phase 3 trials and 2) the Phase 3 trial drastically increased Cellceutix’s financing
needs.
Defendants were finally called out on their lies by the short seller Mako Research.
Defendants have responded by blaming everybody but themselves. They claim that Mako is part
of a conspiracy to manipulate the price of Cellceutix stock. Defendants attempted to blame
Plaintiff, arguing that by filing a complaint, Plaintiff drove down the price of Cellceutix stock. But
Defendants cannot escape the simple fact that their stock declined because their lies were exposed.
Case 1:15-cv-07194-KPF Document 41 Filed 03/11/16 Page 6 of 36
2
II. FACTS
A. Background
Cellceutix purports to be in the business of developing innovative small molecule therapies
to treat diseases with significant medical need, particularly in the areas of cancer and inflammatory
disease. ¶
1
18. Cellceutix was founded as EconoShares, Inc. on August 1, 2005. ¶19. On December
6, 2007 the Company acquired Cellceutix Pharma, Inc., which was founded, and owned, by
Menon. Id. The company then changed its name to Cellceutix Corporation. Id. Cellceutix began
development of an anti-cancer medication called Kevetrin. Kevetrin is intended to activate the
gene P53. Id. P53 is involved in regulating cell duplication, and mutations in P53 are a common
cause of cancer. Id. In September of 2013, Cellceutix acquired the assets of Polymedix, a bankrupt
biotech company. Id. Among those assets were the rights to develop Brilacidin, an antibiotic,
which was in Phase 2 of development at the time of Polymedix’s bankruptcy. Id.
Defendant Krishna Menon (“Menon”) served as President of Cellceutix Pharma since
inception in June 2007. ¶14. Following the Company's acquisition of Cellceutix Pharma in 2007,
Dr. Menon served as President, Chief Scientific Officer and a director of the Company.
Additionally, he serves as Chairman of the Board of the Company. Id. Dr. Menon, simultaneously
therewith, also serves as the Chief Operating Officer at Kard Scientific, Inc. Id. Menon originally
trained as a veterinary surgeon. Menon has also simultaneously worked for Nanoviricides, Inc., as
Chief Regulatory Officer, from 2006 to the present. Id. Defendants failed to disclose Menon’s
employment with Nanoviricides in the 10-Ks filed throughout the class period. Id. In 1982, Menon
began working at the Dana Farber Cancer Research Institute. ¶15. From 1985 to 1990, Dr. Menon
was a Research Scientist at Dana Farber Cancer Research Institute. Id. He then worked as a Senior
1 Unless otherwise indicated, references to ¶_ refer to the Second Amended Complaint.
Case 1:15-cv-07194-KPF Document 41 Filed 03/11/16 Page 7 of 36
3
Research Scientist at In Vivo Research (Cancer), at Bayer Pharmaceuticals (Miles Laboratories)
until 1993. Id. Dr. Menon then began a veterinary oncology and drug development consultancy
practice at Eli Lilly, and one year later, became a Group Leader, Cancer In Vivo Research and
Clinical Development, for Eli Lilly, where he worked in 2001. Id. Menon earned a PhD in
Pharmacology from Kerala University, where his work focused on anti-folate therapy of various
cancers. Id.
Defendant Leo Ehrlich (“Ehrlich”) has served as the Company's Chief Executive Officer
since November 5, 2010, as well as a director and CFO of Cellceutix, roles he assumed after the
acquisition by Cellceutix of Cellceutix Pharma in December 2007. Id. Prior to Cellceutix’s
acquisition of Cellceutix Pharma, Ehrlich served as Chief Financial Officer of Cellceutix Pharma
since its inception in June 2007. Id. From September 1999 to December 2008, Ehrlich served as a
director of StatSure Diagnostic Systems, Inc. Id. From September 1999 to March 2005, Ehrlich
was CEO of StatSure. Id. From September 1999 to March 2005, Ehrlich was also Chairman of the
Board of StatSure. Id. Mr. Ehrlich was also CFO of StatSure from September 1999 to at least
November 2008. Id. StatSure, which developed tests for HIV, ran large and unsustainable deficits
for several years, but managed to achieve a market capitalization of over $100 million, before
defaulting on its debts in 2005. Id. The company narrowly avoided being forced into bankruptcy,
but remained in default on its debts through 2008, when, with the value of its stock reduced to 30
cents per share, and its market capitalization down to $1.2 million, it withdrew its registration with
the SEC. Id. Defendants disclosed that Ehrlich was a director of StatSure, but never disclosed that
he was CFO during the period of StatSure’s default and dramatic decline in value. Id. Mr. Ehrlich
previously practiced as a Certified Public Accountant and received his BBA from Bernard Baruch
College of the City University of New Yoork. Id.
Case 1:15-cv-07194-KPF Document 41 Filed 03/11/16 Page 8 of 36
4
Cellceutix began a Phase 1 trial for Kevetrin on October of 2012, that is estimated to be
complete in August of 2016. ¶20. Cellceutix also completed a phase IIb study of Brilacidin, which
began in February of 2014 and ended in October of 2014. Id. This study compared Brilacidin with
Daptomycin for the treatment of acute bacterial skin and skin and skin structure infection caused
by the bacterium Staphylococcus. Id. Cellceutix also began a phase II study for the use of
Brilacidin for the treatment of Oral Mucositis, an atrophying of the mucosal lining of the mouth
due to chemotherapy or radiation. Id. Cellceutix has claimed that Brilacidin’s antibacterial and
anti-inflammatory properties contribute to the efficacy of Brilacidin in treating oral mucositis. Id.
The phase 2 Oral Mucositis study began in May of 2015 and will end in December of 2016. Id.
Cellceutix participated in an “end of phase 2” meeting with the FDA in July of 2015
regarding Brilacidin for treatment of acute bacterial skin and skin structure infections or
“ABSSSI”. ¶21. At that meeting Cellceutix discussed the procedures for a Phase 3 trial. Defendants
did not disclose this fact at the time, but instead included the disclosure in its 10-K at the end of
the class period in September 2015. Id. At that meeting, the FDA instructed Cellceutix that to
obtain approval for Brilacidin, it would be required to perform two phase 3 trials with a total of
1240 patients. ¶48. This would likely cost Cellceutix nearly $150 million.
B. Wrongful Conduct
1. Menon Lied About his Education
Menon has had a habit of falsely claiming to have received a PhD from Harvard. Prior to
the Class period, Defendants’ 10-K for the year ending June 30, 2009, dated October 8, 2009
falsely claimed that Menon received a PhD from Harvard. ¶24. On May 10, 2013, Future Woman
published a profile article on Defendant Menon, for which he was interviewed. ¶22. In the article,
Defendant Menon confirmed earning his PhD in Pharmacology from Harvard University. Id.
Case 1:15-cv-07194-KPF Document 41 Filed 03/11/16 Page 9 of 36
5
Indeed, Menon falsely stated for the article: “Tom made Menon a scientist at his laboratory in
Harvard. But as per Harvard’s law, one should have doctorate to work there. As Menon didn’t
have a PhD, it was a major challenge before him. But Tom was not ready to give up. He admitted
Menon as a PhD student under his guidance. And it’s the time for Menon to act. He took his first
PhD in pharmacology in 34 months.” Id. Menon, in fact, never received a PhD from Harvard.
2. Defendants Exaggerate the Antibiotic Properties of their Drug
Brilacidin.
During the class period, Defendants claimed that their drug Brilacidin could treat the
difficult to treat “gram negative” bacteria, and could be used as an antibiotic oral rinse to treat oral
mucositis. Between April 25-28 2015, Defendants displayed a poster at the 2015 European
Congress of Clinical Microbiology and Infectious Diseases (“ECCMID”) in Copenhagen,
Denmark, which touted Brilacidin’s ability to kill gram-negative bacteria such as Escherichia coli
(“E. coli”). ¶25. The poster states in part that “Brilacidin has potent Gram positive activity [and]
gram negative coverage”. Id. In Defendants’ Form 10-K for the fiscal year ending June 30, 2014,
filed September 15, 2014, Defendants stated “Brilacidin and related compounds have shown
antibacterial, anti-biofilm and anti-inflammatory properties in various pre-clinical studies [of oral
mucositis]. We believe that the combination of these attributes contribute to the efficacy of
Brilacidin in these animal models.” ¶27. This statement was repeated in Cellceutix’s 10Q dated
November 10, 2014, filed September 30, 2014, Cellceutix’s 10Q dated February 9, 2015, for the
period ending December 31, 2014, and Cellceutix’s 10Q dated May 11, 2015 for the period ending
March 31, 2015. Id. In fact, Defendants later admitted that Brilacidin could not treat gram negative
bacteria, and Brilacidin’s antibiotic properties were not effective in treating oral mucositis.
INTRODUCTION
Cellceutix Corporation (“Cellceutix”) is a development stage biotech company. Because it
has no revenues, Cellceutix needed to constantly raise funds and convince investors that it was
worth investing in. Defendants chose to do this with lies. Defendant Krishna Menon has a long
history of fabricating his resume. Before the class period he falsely claimed to be involved in the
development of two blockbuster drugs. He falsely claimed to be the sole inventor, rather than joint
inventor, of the drug Kevetrin. He falsely claimed that two prominent scientists were on
Cellceutix’s advisory board. He falsely claimed to have a PhD from Harvard, a lie which he
continued to make during the class period.
During the class period, new lies accumulated. Defendants lied about their Phase 1 trial for
Kevetrin, misconstruing their results to portray Kevetrin as a “home run” and falsely claiming to
have successfully treated a Stage 4 cancer patient. Defendants purchased the rights to Brilacidin
and lied about that drug as well, exaggerating its effectiveness beyond what the science supported.
Moreover, when Defendants acquired the rights to Brilacidin, they did not disclose to shareholders
the serious risks that the purchase entailed, risks arising from the fact that 1) Defendants had no
experience with Phase 3 trials and 2) the Phase 3 trial drastically increased Cellceutix’s financing
needs.
Defendants were finally called out on their lies by the short seller Mako Research.
Defendants have responded by blaming everybody but themselves. They claim that Mako is part
of a conspiracy to manipulate the price of Cellceutix stock. Defendants attempted to blame
Plaintiff, arguing that by filing a complaint, Plaintiff drove down the price of Cellceutix stock. But
Defendants cannot escape the simple fact that their stock declined because their lies were exposed.
Case 1:15-cv-07194-KPF Document 41 Filed 03/11/16 Page 6 of 36
2
II. FACTS
A. Background
Cellceutix purports to be in the business of developing innovative small molecule therapies
to treat diseases with significant medical need, particularly in the areas of cancer and inflammatory
disease. ¶
1
18. Cellceutix was founded as EconoShares, Inc. on August 1, 2005. ¶19. On December
6, 2007 the Company acquired Cellceutix Pharma, Inc., which was founded, and owned, by
Menon. Id. The company then changed its name to Cellceutix Corporation. Id. Cellceutix began
development of an anti-cancer medication called Kevetrin. Kevetrin is intended to activate the
gene P53. Id. P53 is involved in regulating cell duplication, and mutations in P53 are a common
cause of cancer. Id. In September of 2013, Cellceutix acquired the assets of Polymedix, a bankrupt
biotech company. Id. Among those assets were the rights to develop Brilacidin, an antibiotic,
which was in Phase 2 of development at the time of Polymedix’s bankruptcy. Id.
Defendant Krishna Menon (“Menon”) served as President of Cellceutix Pharma since
inception in June 2007. ¶14. Following the Company's acquisition of Cellceutix Pharma in 2007,
Dr. Menon served as President, Chief Scientific Officer and a director of the Company.
Additionally, he serves as Chairman of the Board of the Company. Id. Dr. Menon, simultaneously
therewith, also serves as the Chief Operating Officer at Kard Scientific, Inc. Id. Menon originally
trained as a veterinary surgeon. Menon has also simultaneously worked for Nanoviricides, Inc., as
Chief Regulatory Officer, from 2006 to the present. Id. Defendants failed to disclose Menon’s
employment with Nanoviricides in the 10-Ks filed throughout the class period. Id. In 1982, Menon
began working at the Dana Farber Cancer Research Institute. ¶15. From 1985 to 1990, Dr. Menon
was a Research Scientist at Dana Farber Cancer Research Institute. Id. He then worked as a Senior
1 Unless otherwise indicated, references to ¶_ refer to the Second Amended Complaint.
Case 1:15-cv-07194-KPF Document 41 Filed 03/11/16 Page 7 of 36
3
Research Scientist at In Vivo Research (Cancer), at Bayer Pharmaceuticals (Miles Laboratories)
until 1993. Id. Dr. Menon then began a veterinary oncology and drug development consultancy
practice at Eli Lilly, and one year later, became a Group Leader, Cancer In Vivo Research and
Clinical Development, for Eli Lilly, where he worked in 2001. Id. Menon earned a PhD in
Pharmacology from Kerala University, where his work focused on anti-folate therapy of various
cancers. Id.
Defendant Leo Ehrlich (“Ehrlich”) has served as the Company's Chief Executive Officer
since November 5, 2010, as well as a director and CFO of Cellceutix, roles he assumed after the
acquisition by Cellceutix of Cellceutix Pharma in December 2007. Id. Prior to Cellceutix’s
acquisition of Cellceutix Pharma, Ehrlich served as Chief Financial Officer of Cellceutix Pharma
since its inception in June 2007. Id. From September 1999 to December 2008, Ehrlich served as a
director of StatSure Diagnostic Systems, Inc. Id. From September 1999 to March 2005, Ehrlich
was CEO of StatSure. Id. From September 1999 to March 2005, Ehrlich was also Chairman of the
Board of StatSure. Id. Mr. Ehrlich was also CFO of StatSure from September 1999 to at least
November 2008. Id. StatSure, which developed tests for HIV, ran large and unsustainable deficits
for several years, but managed to achieve a market capitalization of over $100 million, before
defaulting on its debts in 2005. Id. The company narrowly avoided being forced into bankruptcy,
but remained in default on its debts through 2008, when, with the value of its stock reduced to 30
cents per share, and its market capitalization down to $1.2 million, it withdrew its registration with
the SEC. Id. Defendants disclosed that Ehrlich was a director of StatSure, but never disclosed that
he was CFO during the period of StatSure’s default and dramatic decline in value. Id. Mr. Ehrlich
previously practiced as a Certified Public Accountant and received his BBA from Bernard Baruch
College of the City University of New Yoork. Id.
Case 1:15-cv-07194-KPF Document 41 Filed 03/11/16 Page 8 of 36
4
Cellceutix began a Phase 1 trial for Kevetrin on October of 2012, that is estimated to be
complete in August of 2016. ¶20. Cellceutix also completed a phase IIb study of Brilacidin, which
began in February of 2014 and ended in October of 2014. Id. This study compared Brilacidin with
Daptomycin for the treatment of acute bacterial skin and skin and skin structure infection caused
by the bacterium Staphylococcus. Id. Cellceutix also began a phase II study for the use of
Brilacidin for the treatment of Oral Mucositis, an atrophying of the mucosal lining of the mouth
due to chemotherapy or radiation. Id. Cellceutix has claimed that Brilacidin’s antibacterial and
anti-inflammatory properties contribute to the efficacy of Brilacidin in treating oral mucositis. Id.
The phase 2 Oral Mucositis study began in May of 2015 and will end in December of 2016. Id.
Cellceutix participated in an “end of phase 2” meeting with the FDA in July of 2015
regarding Brilacidin for treatment of acute bacterial skin and skin structure infections or
“ABSSSI”. ¶21. At that meeting Cellceutix discussed the procedures for a Phase 3 trial. Defendants
did not disclose this fact at the time, but instead included the disclosure in its 10-K at the end of
the class period in September 2015. Id. At that meeting, the FDA instructed Cellceutix that to
obtain approval for Brilacidin, it would be required to perform two phase 3 trials with a total of
1240 patients. ¶48. This would likely cost Cellceutix nearly $150 million.
B. Wrongful Conduct
1. Menon Lied About his Education
Menon has had a habit of falsely claiming to have received a PhD from Harvard. Prior to
the Class period, Defendants’ 10-K for the year ending June 30, 2009, dated October 8, 2009
falsely claimed that Menon received a PhD from Harvard. ¶24. On May 10, 2013, Future Woman
published a profile article on Defendant Menon, for which he was interviewed. ¶22. In the article,
Defendant Menon confirmed earning his PhD in Pharmacology from Harvard University. Id.
Case 1:15-cv-07194-KPF Document 41 Filed 03/11/16 Page 9 of 36
5
Indeed, Menon falsely stated for the article: “Tom made Menon a scientist at his laboratory in
Harvard. But as per Harvard’s law, one should have doctorate to work there. As Menon didn’t
have a PhD, it was a major challenge before him. But Tom was not ready to give up. He admitted
Menon as a PhD student under his guidance. And it’s the time for Menon to act. He took his first
PhD in pharmacology in 34 months.” Id. Menon, in fact, never received a PhD from Harvard.
2. Defendants Exaggerate the Antibiotic Properties of their Drug
Brilacidin.
During the class period, Defendants claimed that their drug Brilacidin could treat the
difficult to treat “gram negative” bacteria, and could be used as an antibiotic oral rinse to treat oral
mucositis. Between April 25-28 2015, Defendants displayed a poster at the 2015 European
Congress of Clinical Microbiology and Infectious Diseases (“ECCMID”) in Copenhagen,
Denmark, which touted Brilacidin’s ability to kill gram-negative bacteria such as Escherichia coli
(“E. coli”). ¶25. The poster states in part that “Brilacidin has potent Gram positive activity [and]
gram negative coverage”. Id. In Defendants’ Form 10-K for the fiscal year ending June 30, 2014,
filed September 15, 2014, Defendants stated “Brilacidin and related compounds have shown
antibacterial, anti-biofilm and anti-inflammatory properties in various pre-clinical studies [of oral
mucositis]. We believe that the combination of these attributes contribute to the efficacy of
Brilacidin in these animal models.” ¶27. This statement was repeated in Cellceutix’s 10Q dated
November 10, 2014, filed September 30, 2014, Cellceutix’s 10Q dated February 9, 2015, for the
period ending December 31, 2014, and Cellceutix’s 10Q dated May 11, 2015 for the period ending
March 31, 2015. Id. In fact, Defendants later admitted that Brilacidin could not treat gram negative
bacteria, and Brilacidin’s antibiotic properties were not effective in treating oral mucositis.
1
