A small Rancho Cordova biotech company was accused by regulators Thursday of defrauding investors out of $6.5 million by making grandiose claims about its progress in finding cures for cancer.
In a lawsuit filed by the Securities and Exchange Commission, 3-year-old Telomolecular Corp. and two of its former officers were accused of telling investors the company had a staff of 50 scientists and was "on the verge" of major scientific breakthroughs. In fact, the company employed just five scientists and its business consisted mainly of selling cosmetic skin cream over the Internet.
The case has already been settled, and the privately held company has ousted the two officers named in the suit: Chief Executive Matthew Sarad and director of investor relations Jeremy Jobe.
"Virtually no one is there who was involved in the activities that the charges are based on," said the company's lawyer, Gerald Niesar.
The company's new chief executive, Robert Sexauer, said his main objective is to generate "a generous return on investment" for shareholders.
In settlement papers filed along with the lawsuit, Telomolecular, Sarad and Jobe pledged not to violate the securities laws again. There were no admissions of wrongdoing.
Sarad, 35, of Folsom, also agreed to pay a $100,000 fine and is prohibited from serving as an officer or director of a public company for five years.
Niesar said he wasn't aware of any criminal investigation.
The lawsuit, filed in U.S. District Court in Sacramento, said Telomolecular sold $6.5 million in stock to 300 investors in 25 states.
The shares were never registered with the SEC.
On one conference call with investors in 2006, Sarad said the company hoped "to eradicate and cure the problem of cancer within 2.5 years," the lawsuit said.
SEC lawyer Michael Dicke said the company made emotional appeals to investors based on the cancer claims. "Here's a company that's trying to cure cancer," he said. "Wouldn't it be great to invest in this company because they're doing great things?"
The suit said the company repeatedly told investors that it was going to go public within weeks or months, and was about to secure $10 million in funding from an investment bank.
Sexauer, a 30-year veteran of the drug industry who became CEO in late May, said the company will still work on cancer treatments but is putting more emphasis on heart attack, stroke and other products that can be brought to market more quickly.
Sexauer is based in England but spends one to two weeks a month in Rancho Cordova. He said the company will maintain a strong presence in the area. Telomolecular employs about a dozen workers, he said.
Sarad, in a statement, said he is "extremely proud of the cutting edge medical work I did while at Telomolecular and I think it is unfortunate that an enforcement action was viewed as necessary.
"In the current heightened regulatory environment company executives must be much more diligent about the words they (choose) to use to express their holdings and prospects to investors."
Jobe, 31, who lives in Dallas, couldn't be reached.
Call The Bee's Dale Kasler, (916) 321-1066.
