Biotech firm CellCyte Genetics faces a criminal probe

CellCyte Genetics, left a cashless zombie after the stock-touting campaign that lifted its value to $400 million faded away, says it has reached a tentative settlement in the Securities and Exchange Commission (SEC) inquiry into its activities.

But the Bothell biotechnology company's legal troubles may not be over.

A criminal investigation of CellCyte, its executives and promoters was launched last year by the U.S. Attorney's Office in Seattle, according to court documents filed by some of those very people. The probe's subjects include Gordon Brent Pierce, a longtime Canadian stock promoter who arranged financing for the company and controlled two million of its shares.

Federal criminal investigations usually remain secret unless charges are filed, but the probe found its way into the public record because of disputes among the CellCyte defendants in a class-action lawsuit brought by shareholders. (That suit contends the company misled investors with claims about its technology and the résumé of CellCyte CEO Gary Reys.)

Attorneys for Pierce, Reys and CellCyte chief scientific officer Ronald Berninger each said in court filings last fall that an assistant U.S. attorney had confirmed the existence of a criminal probe.

And Judge Robert Lasnik, who is hearing the class-action case, wrote in a November ruling that "The U.S. Attorney's Office for the Western District of Washington has opened a federal criminal investigation involving CellCyte, and Pierce is a target of that investigation."

Asked about the current status of the criminal inquiry, Jeffrey Coopersmith, an attorney for Reys, said, "I can't tell you that the case has been dropped; I would hope that it will be."

He added, "Gary did nothing wrong, nothing criminal. Nothing that would be an SEC violation. ... If they (the U.S. Attorney's Office) decide to bring a case, I think that would be completely unwarranted and we would defend vigorously against it."

Defense attorney Larry Finegold, who represents Pierce in the criminal investigation, had no comment. An attorney for Berninger, Robert Mahler, said he doesn't know the status of the investigation.

CellCyte reported that the SEC's inquiry began in January 2008. That followed a Seattle Times report in December about a flurry of mailings in which CellCyte stock was touted with lines such as "Now, a practical 'pill-in-a-bottle' application puts the miracle of regenerative medicine within immediate reach!" The colorful 12-page pamphlets — as well as spam faxes sent in Europe where CellCyte stock was traded on the Frankfurt Exchange — lifted the company's share price above $7.

CellCyte would later write off its investment in licensing and patenting the technology, saying it was very early-stage research which did not support the claims for it. A former researcher suing the company said its executives knew this to be the case long before CellCyte disclosed it to investors.

The fine print of the pamphlets said they were paid for by a Swiss company controlled by Pierce, but he and the CellCyte executives are pointing fingers at each other over responsibility for the contents.

Pierce was interviewed in British Columbia by the SEC in July, say court filings. They also say the agency's investigation of CellCyte is being handled by the same SEC attorney who last summer began a cease-and-desist proceeding against Pierce in a case involving a Nevada mining company, Lexington Resources.

In that case, the SEC alleged Pierce and his associates got 5 million Lexington shares and "commenced a massive spam and newsletter campaign to promote the stock, more than doubling Lexington's stock price and allowing Pierce to net millions of dollars when he sold his shares to the public."

Pierce hasn't resolved that case, while Lexington and its chairman settled by agreeing not to commit any future SEC violations. In the CellCyte shareholder litigation, attorneys for Pierce claim he "experienced a significant loss on his investment in the company."

Other shareholders certainly did — its shares now trade at 6 or 7 cents.

Though the CellCyte saga seems far from over, the tally of lawyers embroiled in it already outnumbers the company's peak work force.

In the class-action case alone, the latest document was CC'd to 21 lawyers. CellCyte itself — if its filings can be relied on — only ever had 17 employees.

Comments? Send them to Rami Grunbaum: rgrunbaum@seattletimes.com or 206-464-8541

This column, first published May 24, 2009, was modified on May 3, 2010. The original column imprecisely described the value of stem-cell technology that CellCyte Genetics had licensed from the Department of Veterans Affairs. CellCyte wrote off its entire investment in licensing and patenting the technology, and asserted its initial work did not support the VA's claims regarding the technology. However, the technology was not "found to be worthless."