A New York federal judge declined to impose sanctions against a Manhattan law firm that pursued a failed fraud case against Beverly, Massachusetts-based Cellceutix based in part on negative blog posts written by an anonymous short-seller.
The ruling, issued on Wednesday, found that the case filed by The Rosen Law Firm on behalf of a Cellceutix (OTC: CTIX) investor did not qualify as “abusive litigation.”
The complaint was filed in September 2015, about one month after the investor website Seeking Alpha published an article about Cellceutix by a short seller using the pseudonym Mako Research. The article questioned the scientific basis of Cellceutix’s drugs and said that it appeared to be a “shell company” run out an empty office building. The story caused a sharp decline in shares of the company, which are traded over the counter, likely resulting in profits for the author.
New York City-based Rosen Law Firm filed a shareholder suit shortly after that appeared to be based largely on the blog.
After winning a ruling in June 2016 dismissing the fraud claims, Cellceutix asked the judge to fine Rosen Law Firm, arguing that its attorneys had failed to adequately investigate the claims before rushing to the courthouse.
U.S. District Judge Katherine Polk Failla rejected that argument in Wednesday’s ruling. She said that while the claims in the suit lacked merit, they were “not indefensible.”
“The court understands defendants’ frustration at having to defend against a class action lawsuit that proceeded from, and perpetuated, ominous reports about Cellceutix’s long-term prospects for survival,” the judge wrote. “The fact that it was able to do so successfully does not mean, however, that it is entitled to sanctions from plaintiff or his counsel.”
Cellceutix CEO Leo Ehrlich did not immediately respond to a request for comment after the ruling on Monday.
The fraud claims related to Cellceutix’s past assertions about the effectiveness of its antibiotic drug Brilacidin and its cancer drug Kevetrin, as well as the company’s false statement in a 2009 federal filing that its chief scientific officer had earned a PhD from Harvard. (Cellceutix corrected the error in later filings.)
Mako has continued to disparage Cellceutix, writing in a January blog post that the company is risks going bankrupt due to its past financial ties to a hedge fund manager who was recently arrested and charged with fraud. Mako has written negative articles about seven other biotechs in recent years.
Cellceutix and its high-profile lawyer, former Massachusetts U.S. attorney Michael Sullivan, have argued that the articles about the company may constitute illegal stock manipulation, though proving such a case may be difficult.
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