U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22801 / September 18, 2013
Accounting and Auditing Enforcement Release No. 3486 / September 18, 2013
Securities and Exchange Commission v. Imaging Diagnostic Systems, Inc., Linda Grable, and Allan Schwartz, Civil Action No. 0:13-cv-62025 (S.D. FL.) (September 13, 2013)
SEC Charges Imaging Diagnostic Systems, CEO, and CFO With Fraud
The Securities and Exchange Commission today charged Florida-based medical technology company Imaging Diagnostic Systems and two top executives for making material misstatements and omissions in public filings about the timing of its Food and Drug Administration (FDA) application and its failure to remit payroll taxes to the Internal Revenue Service (IRS).
According to the SEC's complaint filed in U.S. District Court for the Southern District of Florida, Imaging Diagnostic Systems is engaged in the development and testing of a breast imaging system called CTLM® that purportedly uses a laser to detect breast cancer. The company has failed to obtain FDA approval to market and sell the CTLM® in the United States. From October 2008 to December 2009, Imaging Diagnostic Systems repeatedly disclosed in filings and letters to shareholders that it expected to file by specific deadlines a premarket approval application with the FDA to obtain permission to market and sell the CTLM®. The company failed to meet its projected deadlines. In fact, CEO Linda Grable and CFO Allan Schwartz knew there was no basis for the projections because Imaging Diagnostic Systems did not have enough cancer cases to finish its clinical trials and could not pay for the clinical sites.
The SEC further alleges that beginning in early 2010, Imaging Diagnostic Systems stopped remitting payroll taxes to the IRS for its employees. The company's failure to pay payroll taxes constituted a known commitment, event, or uncertainty of the type that should have been disclosed in the Management's Discussion and Analysis sections of the company's periodic filings, which were signed by Grable and Schwartz. However, the company did not publicly disclose that it failed to remit payroll taxes until more than 16 months later, and even then still failed to disclose the risks associated with its failure to pay payroll taxes.
The SEC's complaint also alleges that Grable and Schwartz failed to file beneficial ownership reports in 2009, 2010, and 2011 despite having received stock or options.
The SEC's complaint charges Imaging Diagnostic Systems, Grable, and Schwartz with violating Section 17(a)(2) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b). The complaint alleges that Imaging Diagnostic Systems violated Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13. The complaint alleges that Imaging Diagnostic Systems and Grable violated Section 14(a) of the Exchange Act and Rule 14a-9; Grable and Schwartz violated Section 16(a) of the Exchange Act and Rules 13a-14, 13b2-1, and 16a-3; and Grable and Schwartz aided and abetted the company's violations of Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5(b), 12b-20, 13a-1 and 13a-13. The SEC seeks financial penalties and permanent injunctions. The SEC also seeks penny stock bars and officer-and-director bars against Grable and Schwartz.
The SEC's investigation was conducted by Jenny A. Trotman and Kathleen Strandell and supervised by Thierry Olivier Desmet in the Miami Regional Office. The SEC's litigation will be led by Robert Levenson.