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Law360 (June 9, 2020, 10:04 PM EDT ) The U.S. Department of Justice charged the president of California medical technology company Arrayit Corp. in an alleged COVID-19 testing scheme, while an investor in the company faces related civil claims from the U.S. Securities and Exchange Commission, the agencies announced on Tuesday.
Mark Schena, president of Arrayit, is accused of participating in a scheme to defraud investors and health care benefit programs by manipulating the company's stock price and submitting more than $69 million in false and fraudulent claims for allergy and COVID-19 testing, the U.S. Attorney's Office for the Northern District of California said.
Schena, 57, faces charges of securities fraud and conspiracy to commit health care fraud in what the Justice Department called its first criminal securities fraud prosecution related to the coronavirus pandemic.
Schena allegedly touted that Arrayit is the only laboratory to offer "microarray technology" that allows the company to test for allergies and COVID-19 based on a single drop of blood that is 250,000 times smaller than the technology touted by the infamous Theranos, according to the affidavit in support of the criminal complaint.
Beginning around 2018 and into February, Schena and others paid kickbacks and bribes to recruiters and doctors to run an allergy screening test for 120 allergens — ranging from stinging insects to food — on patients regardless of medical necessity, prosecutors said. Then they made numerous misrepresentations to potential investors about Arrayit's allergy test sales, financial condition and its future prospects, according to prosecutors.
Schena and others issued press releases and took to social media to tout partnerships with Fortune 500 companies, government agencies and public institutions — partnerships that either didn't exist or were of little value, prosecutors said.
Then, as the coronavirus crisis escalated in March, prosecutors said Schena and others made false claims about Arrayit's ability to provide fast, accurate and cheap COVID-19 tests that supposedly complied with state and federal regulations. They also made misrepresentations to potential investors about the tests and the company's future in coronavirus testing, according to prosecutors.
"Schena told investigators that he was confident Arrayit would be able to develop a COVID-19 test on March 9 because the switch from testing for allergies to testing for COVID-19 was 'like a pastry chef' who switches from selling 'strawberry pies' to selling 'rhubarb and strawberry pies,' but admitted that Arrayit did not start running the test 'until April of 2020,'" according to the affidavit.
U.S. Attorney David L. Anderson of the Northern District of California said in a statement on Tuesday that the allure of cheap and reliable alternatives to standard blood test panels for the health care industry have become "a prime subject for fraudsters."
"The scheme described in the complaint, in which the defendant allegedly leveraged this allure by appending the fear of the COVID-19 pandemic, amounts to a cynical multi-million dollar hoax," Anderson said.
Also on Tuesday, the SEC filed a civil complaint against Arrayit investor Jason C. Nielsen, who is accused of defrauding other investors for his own profit. The SEC said Nielsen conducted a fraudulent "pump-and-dump" scheme in the company's stock by making hundreds of misleading statements in an online investment forum, including the false assertion that Arrayit had developed an approved COVID-19 blood test.
In March, Nielsen encouraged investors to purchase Arrayit shares, without telling them about his large position in the company's stock or his plans to sell the shares while others were buying, according to the SEC's complaint. Nielsen also created the false impression of high demand in the company's stock by placing and canceling large orders to buy shares in a tactic called "spoofing," according to the SEC.
By doing this, Nielsen made about $137,000 in six weeks, but he couldn't profit further because the SEC temporarily suspended trading in Arrayit securities on April 13 after questions arose about the accuracy and adequacy of publicly available information.
"We allege that Nielsen engaged in multiple forms of deception to exploit investors amidst the COVID-19 pandemic," Erin E. Schneider, director of the SEC's San Francisco Regional Office, said in a statement on Tuesday. "Investors should be aware of the potential for stock manipulation, including through claims regarding products or services related to COVID-19."
Nielsen is accused of violating anti-fraud provisions of federal securities laws, and the SEC is seeking permanent injunctions, civil money penalties and disgorgement with interest.
Contact information for Schena and Nielsen was not immediately available.
The government is represented by Jacob Foster and Justin Weitz of the DOJ Criminal Division's Fraud Section and William Frentzen of the U.S. Attorney's Office for the Northern District of California.
The SEC is represented in-house by Erin E. Schneider, Monique C. Winkler, Jason H. Lee, John K. Han, Susan F. Lamarca and Fitzann R. Reid.
Counsel information for Schena and Nielsen was not immediately available.
The cases are U.S. v. Mark Schena, case number 5:20-mj-70721, and Securities and Exchange Commission v. Jason C. Nielsen, case number unavailable, both in U.S. District Court for the Northern District of California.
--Additional reporting by Jody Godoy. Editing by Nicole Bleier.
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