U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21811 / January 13, 2011
Securities and Exchange Commission v. CytoCore, Inc., et al., United States District Court for the Northern District of Illinois, Civil Action No. 1:11-cv-00246 (N.D. Ill. Jan. 13, 2011)
SEC Files Action Against CytoCore, Inc., CytoCore's CEO, and the Company's former Chairman for Trading and Compensation-related Violations
On January 13, 2011, the Securities and Exchange Commission filed a civil injunctive action against CytoCore, Inc. ("CytoCore"), Daniel J. Burns ("Burns"), the former Chairman of CytoCore's Board of Directors, and Robert F. McCullough, Jr. ("McCullough"), CytoCore's Chief Executive Officer and Chief Financial Officer, alleging that they engaged in violative conduct relating to trading in CytoCore stock and Burns' compensation.
According to the complaint, from 2003 to 2008, Burns employed fraudulent schemes to profit from CytoCore stock transactions and received hundreds of thousands of dollars in improper compensation and benefits from CytoCore as an unregistered broker. In February 2008, Burns allegedly caused CytoCore to issue a press release touting Burns' investment in CytoCore stock, and then secretly sold shares immediately following the announcement. According to the complaint, Burns' secret selling also constituted insider trading because Burns was in possession of material, nonpublic information about an ongoing CytoCore private stock offering.
The complaint further alleges that, from 2003 to 2008, Burns improperly received transaction-based compensation as an unregistered broker soliciting investors in CytoCore stock. CytoCore and McCullough allegedly aided and abetted Burns by engaging him to act as a broker for the Company. The complaint also alleges that Burns submitted false claims for commissions purportedly earned by a friend for soliciting CytoCore investors, and his friend, in turn, remitted those commission payments to Burns. Burns also allegedly submitted to CytoCore false claims for expense reimbursements relating to his investor solicitations.
The complaint further alleges that Burns and McCullough violated insider reporting requirements. Burns allegedly publicly disclosed only his purchases, never his sales, of CytoCore stock, and he arranged for the secret sale of CytoCore stock through a friend to further conceal his selling. McCullough allegedly failed to report more than 100 CytoCore stock transactions, and both Burns and McCullough allegedly misreported their stock holdings in disclosure forms and in CytoCore's proxy statements.
The Commission's complaint alleges that Burns violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b), 14(a), 15(a), and 16(a) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5, 14a-9, and 16a-3 thereunder. The complaint also alleges that CytoCore and McCullough violated Section 14(a) of the Exchange Act and Rule 14a-9 thereunder, and aided and abetted Burns' violations of Section 15(a) of the Exchange Act. Finally, the complaint alleges that McCullough violated Section 16(a) of the Exchange Act and Rule 16a-3 thereunder.
The Commission is seeking permanent injunctions, disgorgement of ill-gotten gains, including prejudgment interest, civil penalties, and a bar from serving as an officer or director of any public company against Burns. CytoCore and McCullough settled the charges against them without admitting or denying the allegations of the complaint. CytoCore has consented to injunctive relief and certain undertakings, and McCullough has consented to injunctive relief and a $100,000 civil penalty. As part of the settlement, McCullough has also consented to a twelve-month suspension from association with a broker-dealer or investment adviser.
The Commission's case resulted from a referral by the Financial Industry Regulatory Authority ("FINRA"), and the Commission acknowledges FINRA's assistance with its investigation.