Indianapolis businessman Timothy E. Cook and two businesses he controlled must pay nearly $643,000 for defrauding investors, according to a ruling Monday by a federal court judge.
Cook, the CEO of a cancer research firm called Xytos Inc., was sued in 2013 by the U.S. Securities and Exchange Commission, which alleged the company, since at least 2010, had no revenue, employees or even an office, yet Cook repeatedly published false information about the company to lure investors.
Cook, 56, representing himself in the litigation, vehemently denied all of the SEC’s allegations. He said he would appeal Monday's ruling.
“If you have been following the case, you will see that we had rebutted all of their false allegations ... so I am shocked,” Cook wrote in an e-mail. He added, "We were looking forward to an independent jury trial, but this ruling came before we were able to present this to a jury."
Judge Sarah Evans Barker concluded that Cook, while making plenty of arguments against the SEC, had presented no verifiable facts to challenge the SEC’s story of fraud. So she granted the SEC’s motion for summary judgment.
“In sum, Mr. Cook has failed to set forth evidence to create any genuine issues of material fact that rebut the SEC’s evidentiary showing,” Barker wrote. “Only one logical conclusion flows from the undisputed facts before us: Mr. Cook committed numerous violations of the Securities Act’s antifraud provisions.”
Xytos’ roots go back to the late 1990s, when Cook raised money to invest in ISM Holding Corp. to operate racing teams. When that failed, Cook took over ISM and, in 2004, changed its name to Xytos.
Xytos declared itself a medical research company, first buying technology meant to regenerate hair and teeth, and then later linking up with an Australian doctor to treat skin, prostate and breast cancers using light therapy.
Xytos rented office space near St. Vincent Indianapolis from 2006 to 2008, then lost access to the space for failure to pay rent. But Xytos continued to show photos of the office building on Naab Road on the company’s web site, referring to the office as its “U.S. Centre.”
Xytos’ website also claimed that the company had an operational treatment center for six years after the facility had been sold, and it cited as a director a man who had been dead for five years.
Those "false and misleading" statements allowed Cook to sell Xytos’ shares, which traded over the counter, generating more than $500,000 in income for himself, the SEC said. Cook used that money at such retailers as Pizza Hut, Benihana, Kroger, the Reebok store, and McDonald’s, and to pay a DirecTV bill.
“Xytos shareholders invested in what appeared to be an operational biomedical company,” the SEC’s original lawsuit claimed. “In reality, they invested in an illusion that Cook created and then exploited for personal gain.”
Cook argued that his employment agreement allowed him to spend money on personal expenses. And he argued that he spent plenty of the stock sale proceeds on company business. For example, Cook submitted a list of Xytos expenses from 2012 and 2013 to establish a Xytos International entity in Germany.
"Obviously, I didn't take the money," Cook said in a brief phone call. "They see in the bank statements where the money went."
Xytos did bring Dr. Tom Cleary from Australia to Indianapolis and he did treat one patient here, for free, in 2006 or 2007. But after 2008 or 2009, Cleary moved to Ireland and Xytos never had any operations or revenue after that.
But Xytos continued to issue financial statements claiming Xytos had cash balances of more than $100,000 when, in fact, Xytos never had any more than $6,470 in those periods and, at times, had as little as $171, according to court documents.
According to Barker’s ruling, from 2009 to 2012, Cook sold more than 4.8 million shares of Xytos’ stock, which traded as a pink sheet on the over-the-counter market. Those sales were made through Asia Equities, which Cook controlled. He made 290 separate sales, generating $503,513.
Cook also raised about $100,000 from investors in private placement sales in 2010 and 2011. Overviews of Xytos that Cook distributed before those sales projected Xytos would have revenue in 2012 of $22 million and, by 2015, $126 million, according to court documents.
Barker especially faulted Cook for five press releases he issued in 2010 and 2011, all of which were misleading, she concluded. For example, Xytos issued a press release on May 26, 2010, announcing Dr. John Trotter as its chief medical officer.
But in a deposition, Trotter said he never signed a contract with Xytos and ceased being its chief medical officer in January 2010 after only one month in the position.
After the news release was issued, Cook sold 905,390 Xytos shares after the price rose from 5.9 cents on May 26 to more than 8 cents per share in the following two days.
“Mr. Cook’s obvious intention in each of these instances in which he spewed out fabricated information was to drive up the price of Xytos’ stock and to promote its sale,” Barker wrote.
Barker ordered Cook, Xytos and Asia Equities to refund the $605,513 she said they had defrauded from investors and to pay $39,315 in interest. Cook and the two companies are also due for a civil penalty, which will be determined at a future court hearing.