Life should be peaceful at La Jolla Farms, that tony area of 100 superluxury homes adjacent to Torrey Pines State Park.But war has broken out there. One resident controls a local biotech. A former resident says she was fraudulently induced to put her life savings in the company. She has sued. Defendants say it’s premature for her to say she has lost her money; the company has cleaned house and rebounded, they assert.
Kathleen (Kitty) Jennings has filed a suit in superior court, claiming that she was wooed into investing $1.6 million in a privately held company named Biocept because of misrepresentations, primarily by the company’s former chief executive, Gordon Janko, and Jennings’s La Jolla Farms neighbor, Claire Reiss, the major shareholder.
Jennings says that she talked face-to-face with Reiss only about twice a year — at the La Jolla Farms Christmas and Fourth of July parties. One time, the socially prominent Reiss exulted that the company was on the verge of releasing a breakthrough product that would rake in money and she was offering her friends the chance to make a buck on “confidential” information, according to the suit. The company is focused on developing a diagnostic technology for the detection of Down syndrome in the first trimester of pregnancy, as well as early identification of certain cancers.
After Reiss gave Jennings the initial pitch, Janko gave her what she considers a fraudulent song and dance about Biocept’s looming success, according to the suit. Reiss and others, including chief financial officer Jennifer Crittenden, didn’t curb his hyper-enthusiasm. Email correspondence shows that Reiss promised Jennings she would return her money but later reneged.
The suit charges Biocept, Reiss, Janko, Crittenden, and others with fraudulent misrepresentation and concealment, breach of fiduciary duty, and corporate waste, among several things. Defense attorney Christopher McGrath won’t comment. “The lawsuit is at a very early stage,” he says. The company is known to have directors’ and officers’ liability insurance.
Reiss doesn’t want to comment about the suit, other than to say, “That lady [Jennings] will regret she did this.” Reiss’s late husband was a prominent biotech investor/scientist and had served on Biocept’s board. Reiss appears to have put $30 million to $40 million in Biocept. “The [financial] problems occurred last year. The company is doing beautifully. Her [Jennings’s] investment is worth a lot.”
But Jennings says she never received an audited financial statement. Says her lawyer, Erwin Shustak, “It is just a question of time before [Biocept’s] money runs out.”
The suit charges that in its 12-year history, the company burned through $84 million of money raised from investors “and has failed to generate any meaningful revenue or launch any products or technologies into the market.”
“Janko misappropriated a large portion of the company’s monies and assets to finance his own lavish lifestyle,” including million-dollar homes and luxury cars, according to the suit. Records indicate he owned four homes during the 2003–2008 years in which he headed the company, but it’s possible some were rentals. Also, he had accumulated personal wealth as a result of a corporate buyout before he joined Biocept.
The suit also charges that he owned a company that provided services to Biocept. I have tried unsuccessfully to reach Janko at several locations. Crittenden would not answer my questions.
Claire Reiss contacted Kitty Jennings in late 2007, according to the suit. Jennings, a divorcée with three teenage sons, paid $5.33 a share for Biocept stock, and Janko told her the shares would be worth $15 each in a short period of time, the suit charges. She was assured that the company would launch a prenatal diagnostic device by late 2008 or early 2009, and it would enjoy a $100 million market, according to the suit. She was also told that Food and Drug Administration approval for the product would not be necessary; the company had 100 patents, and big pharmaceutical companies coveted Biocept’s technology. All those claims were false, according to the suit. In addition, she was not told that Johnson & Johnson, perhaps the most successful health-care colossus, was in direct competition with Biocept.
Then commenced a series of emails between Jennings and Reiss. On August 7 of last year, Reiss said, “If what I hoped will not come through by next year, I will personally buy your shares from you…I never want to see my friends lose money because they know me.” But on September 9, Reiss emailed, “I can’t afford to buy your shares right now.” Jennings, citing health problems, begged her a second time to relent.
In those emails, Reiss admitted to Jennings that Janko did not tell the truth in hyping Biocept’s immediate prospects. In August of 2008, Reiss said Janko “is a great salesman and that is it.” She lamented his “country club style.” She told how she was lining up investor votes for his ouster.
Jennings wrote back to say, “Remember, you ultimately control the company because you control the money.”
By mid-August, the company was talking to Stephen Coutts, a San Diego biotech executive who has a Ph.D. in biochemistry from Harvard and a master’s of business administration from New York University (although for 11 years he was head of research and development for La Jolla Pharmaceutical, which failed in its attempt to bring out a product). On August 17, Coutts said in an email to a former Biocept official that “no products [are] ready for commercialization” and there is “no apparent market analysis or financial modeling.” Coutts would not comment to me.
In early fall of 2008, a lawyer representing Biocept told Janko that if he didn’t depart, the company might go out of business — one reason the lawsuit says Biocept was almost insolvent by mid-2008.
Coutts was named chief executive on October 6, 2008. Reiss then thanked the departing Janko for his five years as chief executive. The company went about correcting its deficiencies and raising more investor funds. On July 1 of this year, Biocept named to its board one of San Diego’s most distinguished businesspersons, M. Faye Wilson, a banker who was instrumental in the founding of Home Depot and served as both a senior officer and board member of that huge retailer. Wilson had invested funds in Biocept in 2008 and had helped recruit Coutts. Other investment funds have come in to the company.
She won’t comment on the suit but says, “I am pleased with the progress the company is making and excited about the prospects for the company. It is solvent, has adequate funding — very good angel support.”
Jennings can clearly show that she was fed hype that didn’t pan out. But did that constitute fraud? And can she show that she has lost money at this point?