The U.S. Securities & Exchange Commission this week accused medical device company Imaging Diagnostic Systems (OTCMKTS:IMDS) and its top executives of misleading investors and failing to remit payroll taxes to the Internal Revenue Service.
The SEC accused IDS CEO Linda Grable and CFO Allan Schwartz of issuing meaningless timelines, thus misinforming investors of the company’s progress toward FDA review of its CTLM laser-based breast cancer detection systems. The CTLM or Computed Tomography Laser Mammography device uses lasers to evaluate blood flow to the breast, using increased blood flow as an indicator of newly forming tumors.
"In fact, CEO Linda Grable and CFO Allan Schwartz knew there was no basis for the projections because Imaging Diagnostic Systems did not have enough cancer cases to finish its clinical trials and could not pay for the clinical sites," according to the SEC statement.
The device maker halted clinical trials in November 2008, the SEC said, because it was no longer able to pay its clinical sites. Schwartz was purportedly responsible for making those payments, and knew that progress would stop without funding.
"Nevertheless, Imaging continued to list the unrealistic and impossible deadlines in its public filings," according to the SEC lawsuit.
Furthermore, the company allegedly stopped paying payroll taxes in early 2010 amid "severe financial problems," but Grable and Schwartz hid that information until more than a year later, the SEC claimed. Grable and Schwartz were also accused of failing to file beneficial ownership reports, despite having stock and options from 2009 to 2011, according to a legal complaint filed against IDS.
The watchdog agency accused Grable and Schwartz of issuing 8 misleading public filings between October 2008 and December 2009, in which the company set various deadlines by which it was purportedly estimating an FDA win for the CTLM system. The lawsuit claims that the executive duo had information showing that the company wouldn’t be able to meet those deadlines. IDS missed every benchmark, ultimately filing its FDA application in November 2010. The company has yet to win FDA approval for the imaging system.
Grable and Schwartz were IDS’s only executives prior to 2012, as well as the only inside directors, according to legal documents. The SEC is seeking financial penalties and permanent injunctions against IDS, as well as "penny stock bars" and officer-and-director bars against Grable and Schwartz, both of which hold their positions at IDS.