A prospectus issued by Optical Imaging in May 2010 for raising NIS 19 million in an initial public offering on the Tel Aviv Stock Exchange alleged that the company's most advanced product was approved by the U.S. Food and Drug Administration - but apparently it never had been. The flawed share offering was at first postponed, and then completely cancelled in July, with no explanation.
However, TheMarker has learned that the cancellation was due to an embarrassing failure on the part of some of the most illustrious figures in Israel's biotech industry. The incident should serve as a red flag to the primary securities market.
Issuance of a prospectus falsely declaring FDA approval of a product is especially troubling given the stature of people leading the company. Phillip Frost, chairman of Teva Pharmaceuticals, is Optical Imaging's main shareholder with a 20% stake. Ruth Arnon, one of Israel's top scientists and a developer of Teva's Copaxone drug for treating multiple sclerosis, owns 5.4%. Company CEO Amiram Grinvald is a world-renowned neurobiologist and director of the Weizmann Institute of Science's Grodetsky Center for Research of Higher Brain Functions.
The Israel Securities Authority asked the Tel Aviv Magistrate's Court in October 2010 to impose a NIS 200,000 bond on Yoav Sella, the company's former regulatory affairs director, in lieu of an injunction against him leaving the country. According to the ISA, its investigations and intelligence department began investigating Sella in August on suspicion that he contravened the Securities Law by including misleading information in the company's prospectus. TheMarker has learned that Sella is suspected of fabricating FDA approval for its RFI 3006 product.
According to the prospectus, the company received FDA approval last February for the retinal function imager, which measures four parameters for early diagnosis of ophthalmic diseases: blood-flow velocity, capillary perfusion mapping, oxygen content in blood vessels and metabolic functioning. After searching the FDA website and finding nothing about approval, the ISA investigated and had Sella placed under house arrest in September. He was released after one day, forfeiting his passport for three months and committing himself to avoiding any contact with other parties involved in the case. Three other senior company officials were investigated for complicity in Sella's alleged fabrication: CEO Grinvald, CFO Ran Lev and Darin Nelson, head of R&D.
Optical Imaging's blunder could probably have been avoided had the company used an underwriter. Such a move, it could be reasonably assumed, would have checked any significant claims by the company and its legal documentation. In this sense, with the company having come so close to raising money from the public, red flags should be going up in the country's IPO market and among institutional investors who manage the public's funds and often buy securities not backed by underwriters, relying on prospectus drafts.
The risk of the public's money flowing into ventures based on unverified documents is mounting, considering that offerings without the benefit of underwriters accounted for 93% of monies raised in the primary market during the first 11 months of 2010. The lack of an underwriting mechanism is a market failure: The only thing coming between companies and investors has been the ISA - the sole remaining safeguard of the public's interest, which should be expected to take steps to rein in this phenomenon.
"Sella wasn't a company employee at the time the prospectus was released," responded Grinvald. "Eight bodies acted on the basis of the approval, none of which considered the possibility that the document wasn't authentic and that a former regulatory man had forged it."
It seems strange that you, as the company's chief scientist, were unaware that the FDA hadn't given its approval and that the information in the prospectus was false.
Grinvald: "Company management were subjected to lie-detector tests and found to be telling the truth. How could we know that the regulation person who told us in management meetings that he submitted the request to the FDA never in fact did so?"
Sella's attorney, Ronen Adini, refused to comment.
An earlier version of this article erroneously affiliated Optical Imaging with Teva Pharmaceutical Industries. Optical Imaging is not a subsidiary of Teva.