Biotech Class Action|Must Be Amended

SAN FRANCISCO (CN) - A federal judge dismissed without prejudice a shareholder class action accusing Cellular Biomedicine Group of pumping its stock price through ads touting technology it did not have.

Lead plaintiff Francis Bonnano sued Cellular Biomedicine Group, five institutions and six people in April 2015, claims the entertainment-turned-biotechnology company paid PR firms to market its purported cell-based therapies for chronic and degenerative diseases such as cancer, osteoarthritis and inflammatory diseases.

But Cellular had no such technology or intellectual property, and needed money, and lots of it, to buy the technology and run clinical trials, according to the original complaint.

Bonnano claimed Cellular paid producers for "professional looking" broadcasts to attract investors, without adequate disclosure that the Internet ads were paid promotions.

The defendants "knew or were reckless in not knowing that the promotional campaign would appear to be independent by inadequately disclosing that the company had bought and paid for the positive research," the plaintiffs said. They also claimed that Cellular made false and misleading filings with the SEC.

Apparently, it worked, as the stock price rose to $32.50, according to the complaint.

But things fell apart after a blogger known as Pump Stopper posted a 25-page piece on the financial news site SeekingAlpha.com on April 7, 2015, revealing the paid ads and claiming that patients had died in Cellular clinical trials at an illegal offshore stem-cell clinic, according to the complaint.

The complaint cites these items, and other, from the blog post, referring to Cellular Biomedicine Group as CBMG.

"With paid stock promotion CBMG has achieved an unsustainable $500m valuation, and with $20m in stock sold and insiders stock registered to sell, I expect CBMG will continue to collapse.

"CBMG 'Car-T' technology was acquired for $1.8m, has experienced patient deaths and is worthless. CBMG recent R&D of just $4.9m makes the $500m valuation clearly absurd.

"CBMG founders face dishonesty allegations, are responsible for alleged illegal offshore stem cell clinic, while partnered with John Mattera who is currently serving 11 years in prison for fraud (again)."

(Mattera was sentenced to 11 years in federal prison in June 2013 after pleading guilty to defrauding investors of $13 million, Reuters reported at the time.)

Cellular Biomedicine shares plummeted to $7 after the blog post. In July 2015, the court approved a motion to appoint Michelle Jackson as lead plaintiff and Laurence Rosen of Los Angeles as lead counsel.

Defendants, including Cellular, its CEO Wei "William" Cao, Streetwise Reports and LifeTech Capital and its senior managing director of research Stephen Dunn filed a motion to dismiss on April 20 this year, arguing, in part, that the plaintiffs failed to establish "causation between the Pump Stopper report and the economic loss suffered."

On May 20, U.S. District Judge William Orrick agreed, granting dismissal with 20 days leave to amend.

"[Plaintiffs'] allegations fail to sufficiently establish causation," Orrick wrote. "The section of the Pump Stopper report plaintiffs quote in their complaint contains merely the opinions of the author and cannot be categorically labeled as 'the truth.'"

He added: "The section of the report that plaintiffs rely on proclaims, 'I do not suggest anyone, EVER invest in any company that pays to promote their stock. Time and time again we have seen how these end with 10k+stocks in the U.S. alone, there is no reason I can see to invest in any company of this poor quality.' This 'advice' appears in the Pump Stopper report without any referenced footnotes or hyperlinks. These two sentences form the majority of a three-sentence paragraph that ends with the sentence, 'I recommend you read the extensive research below and form your own opinions.' An anonymous poster's opinion cannot reveal to the market the falsity of [Cellular's] misrepresentations."

Orrick said he did not need to address the plaintiffs' other claims because they "have not adequately pleaded loss causation."

The plaintiffs have until June 9 to file an amended complaint.

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