SEC inquiry into CellCyte Genetics cited in court filing

The Securities and Exchange Commission initiated an inquiry into CellCyte Genetics, the Bothell biotech whose stock has fallen 93 percent since December, according to a letter written by a lawyer representing the company.

The letter, filed last month in King County Superior Court as part of the company's legal dispute with a former employee, refers to a "confidential inquiry" by the commission. It was written in late February by Rebecca Lamberth, an outside counsel for CellCyte.

German securities regulators are also investigating recent stock-promotion efforts related to the company, The Seattle Times has learned.

CellCyte's market value soared to $440 million last fall as it was hyped by anonymous faxes and colorful brochures paid for by third parties with links to a well-known British Columbia stock promoter. The stock, which trades over the counter, closed at 54 cents on Friday, down from a high of $10.01 last year.

The first allegation of an SEC inquiry surfaced in a police report filed in mid-February by Theresa Deisher, a former CellCyte researcher who said she was being threatened by people at her former employer.

The Feb. 22 letter confirming the inquiry is among the court filings in a dispute stemming from Deisher's departure from CellCyte in October 2007.

Lamberth's letter complains that Deisher made "improper disclosures" in her police report: "... The intentional disclosure of the confidential inquiry by the Securities and Exchange Commission could be seen as nothing more than an attempt to further injure the company in order to create a platform from which she wrongly hopes to profit," the letter said.

An informal inquiry does not necessarily result in a formal investigation by the SEC.

CellCyte executives were not available for comment Friday, attorney Lamberth said in an e-mail.

Companies ordinarily disclose an inquiry or investigation in their quarterly reports, but CellCyte hasn't filed a report since last November. Late last month the company told the SEC it was unable to file its year-end report on time but would do so soon.

In 2007 the fledgling stem-cell research company, with 17 employees and no clinical trials, briefly became one of the region's most valuable biotechs by market capitalization.

Late last year, The Vancouver Sun, of British Columbia, and The Seattle Times reported on the company's ties to penny stock promoters. In January, The Times also published a story about discrepancies in the résumé of CellCyte Chief Executive Gary Reys. The company's shares tumbled during the Times inquiry.

The company now faces several shareholder lawsuits. It said in February that "it will defend itself vigorously" and continue developing its patented technology. The company also recently moved to a 26,500-square-foot facility in Bothell.

Meanwhile, a German financial regulator is investigating the source of promotional materials about the company.

CellCyte went public in early 2007 by merging with a B.C.-based mining concern, which traded in the loosely regulated U.S. over-the-counter board, and the Frankfurt stock exchange. One of the company's new investors was G. Brent Pierce, a Canadian stock promoter who is barred from working in British Columbia's securities industry.

Last fall German investors were flooded with unsolicited faxes reproducing what appeared to be a positive story on CellCyte from the German business publication Focus Money.

Complaints from investors reached Germany's Federal Financial Supervisory Authority (BaFin) in December and January. Focus Money itself claimed that the story being circulated was a fake. The magazine "said that they didn't make an analysis" of CellCyte, said BaFin spokeswoman Anja Neukotter.

The agency began a "formal investigation" in January, Neukotter said in a telephone interview.

Ángel González: 206-515-5644 or agonzalez@seattletimes.com

Seattle Times researcher David Turim contributed to this report.