Author Archives: BleeckerStreetResearch

TransEnterix: Watch for a 60% Crash After Stock Promotion and Disappointing Sales

Summary

  • A stock promotion sent TRXC up by over 150%; these same promoters have been involved in multiple other disastrous stock promotions.
  • TRXC is now preparing to issue equity via a dilutive stock sale even as insiders are preparing to cash out.
  • TRXC ALF-X robot has already been approved in Europe for 5 years, but has seen virtually no sales.
  • TRXC has been claiming that they are expanding their sales force in presentations, but LinkedIn and the company website show limited employees engaged in any sales capacity.

Authors note: The purpose of this article is to highlight a compelling short opportunity in shares of TransEnterix. There is currently limited stock borrow available for shorting shares. However, there are liquid calls and puts available at $2.50 and $5.00 strikes. Those who are interested in shorting TransEnterix can either buy puts or sell calls and be effectively short in a way very similar to shorting common stock.

Overview

TransEnterix (NYSEMKT:TRXC) is a $400 million market cap medical device manufacturer. The company manufactures the SurgiBot and the ALF-X surgical robot, which has been approved and on the market for 5 years in Europe. However, the company still generates zero revenues because the product simply doesn’t sell. Management and board members have multiple ties to past similar promotions which have imploded.

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Shares of TransEnterix have risen by more than 150% in recent weeks due to a promotion from “Small Cap IR”, which has spread rumors that the company could be an attractive buyout target. Small Cap IR has been extremely effective in boosting the share prices of its clients just in time for the companies to complete equity offerings. After the offering is completed, the share prices inevitably come crashing back down. It should be seen as no coincidence that TransEnterix just filed an ATM registration to raise money via stock sales. This was done just in time for the stock promotion. Shortly after the price spiked, TransEnterix filed for the sale of 43 million shares for certain institutional investors.

Background on exposing stock promotions

Over the past several years, I have exposed numerous companies whose share prices have been propped up only by paid stock promotion. There is always an underlying business, with some catalyst to sell investors on. The promoters take the basic underlying story and create a powerful new spin on it. Maybe there is a buyout in the works. A new FDA approval. A new strategic investor. The list of hypothetical catalysts for promoting a stock is nearly endless.

But in general, this promotion only exists as a way for the company to sell shares into the market, using inflated stock prices and volumes to raise money at an artificial premium. Typically it is retail shareholders who are left holding the bag, having bought in on the basis of the new hype in the promotion.

In the past year I have exposed DS Healthcare (NASDAQ:DSKX), Chanticleer Holdings (NASDAQ:HOTR), and Cellceutix (OTCPK:CTIX) as having been the subject of stock promotion. In each of these cases, the stock price had risen by more than 100% due to inappropriate and unsustainable stock promotion. I highlighted each of these examples as a compelling opportunity on the short side.

Since my publications, CTIX has fallen almost 70%, HOTR has fallen 73%, and DSKX has fallen 60%. The promotion behind TransEnterix is virtually identical to what we saw in those cases above. As with the others, watch for shares of Transenterix to quickly fall by at least 60%. There is minimal underlying business and the recent share price strength is simply the result of unsustainable promotion.

Recent Stock Promotion

TRXC has been the subject of recent stock promotion. Those promoting the stock have numerous ties to other cases of stock promotion in which shares have plunged substantially, and many instances where the SEC halted the stock outright.

On February 1st, a report from Broad Street Alerts speculated about the possibility of TRXC being acquired by Johnson and Johnson. The title read “TransEnterix Inc. Rumors of Johnson & Johnson Considering Acquiring the Company.” You can view the full report here. The report only provides extremely vague speculation about the acquisition:

“Because Johnson & Johnson has a large medical device division that’s seen its sales flat-line, its management has indicated plans to restructure and conduct M&A, and it’s already announced a collaboration to work with Alphabet (NASDAQ: GOOG) on robotic surgical devices, investors are speculating that TransEnterix could be on the company’s wish list. The company did recently hire former Intuitive Surgical sales leaders to spearhead their commercialization efforts, and the market is big and growing. For example, Intuitive Surgical sales increased 12% to $2.38 billion in 2015.”

Broad Street Alerts suggests that Johnson and Johnson would be interested in acquiring TRXC because sales in its medical device division have been flatlining, pointing to a collaboration with Google (Alphabet) as an indicator that J&J would acquire TRXC.

Yet why would J&J, a $290 billion dollar company, acquire a pre-revenue company, when it is already in a partnership with Google? Furthermore, why would J&J seek to acquire a company whose product has been approved and on the market for 5 full years without generating any meaningful sales?

Despite the nonsensical nature of the rumor, the speculation quickly spread and was repeated in 5 separate articles on the Motley Fool, helping to fuel the share price even higher.

Broad Street Alerts is simply a landing page, that provides no information on their website other than a few vague lines about a trading community and there is no evidence of any written reports on their website. Broad Street Alerts is really just a front page for Small Cap IR, also known as Small Cap Street, a well known stock promotion firm that has promoted multiple disasters.

According to WhoIs records, BroadStreetAlerts.com is registered by Shaun Zirnhelt.

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Shaun Zirnhelt is the Vice-President of Small Cap IR according to hisLinkedIn.

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According to this unrelated press release Paul Lipp is the President of SmallCapIR. His LinkedIn profile lists him as the owner of Small Cap Specialists LLC.

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According to Michigan LLC records Small Cap Specialists is registered by Shaun Zirnhelt, the same person who registered the SmallCapIR and Broad Street Alerts websites.

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SmallCap IR is a highly effective stock promotion firm, having successfully touted companies like Provectus (NYSEMKT:PVCT), ForceField Energy (NASDAQ:FNRG) and Actinium (NYSEMKT:ATNM), among others.

Following a paid-for promotion by SmallCap IR, PVCT was quickly exposedby The Pump Stopper. The over inflated stock quickly cratered by more than 70%.

Here is a screenshot of some of the reports that SmallCapIR had to say about PVCT:

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The Pump Stopper highlighted the fact that PVCT had been promoted by Small Cap Street and Small Cap Specialists, which is another front for SmallCapIR. These various aliases are just fronts for promoters to hide their past failures.

Despite the hype, Provectus now trades for just 40 cents.

The most similar blueprint for a Small Cap IR promotion is Actinium Pharmaceuticals. Small Cap IR began promoting ATNM in October 2014 inthis report. Like TRXC, the stock had recently sold off from its highs but was bouncing. The report commented on ATNM’s strong pipeline and the recent submission of an Orphan Drug Application. Also like TRXC, Phil Frost was an investor in ATNM.

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But we can see clearly how the stock performed following the promotion.

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ATNM popped briefly after the promotion began. Shortly after the promotion began ATNM completed an equity offering, diluting shareholders that had bought into the promotion. This is an excellent example of the fact that many of these promotions exist only to prop up the stock temporarily in order to allow management to raise new money.

Forcefield Energy is another stock promotion which was run by SmallCap IR. Author Richard Pearson exposed ForceField Energy management’s ties to past frauds as well as the promotion. Days after the Pearson report, ForceField Energy executives were charged with manipulating the stock price while the CEO of that company was arrested when he was attempting to flee the country. As for the stock, ForceField cratered by 99% from $7.50 to just 1 cent per share. The lesson to be learned here is that when a stock promotion is exposed, the implosion can come quickly and without further warning.

These are just a few examples which highlight the fact that Small Cap IR gets paid to hype up companies which are either of very low quality or are outright frauds. There are numerous other examples which can be seen simply by viewing the past clients listed on Small Cap IR’s website.

History of Management of TRXC and Holders

Management and board members of TRXC have a very checkered past. If TranEnterix was going to be a successful venture, then it would be the first successful venture that these stock operators have ever produced.

Paul LaViolette owns 12% of TRXC’s outstanding shares and is on theBoard of Directors. While Mr. LaViolette did spend 15 years with Boston Scientific, eventually rising to the rank of COO, his post-Boston Scientific career has been spent being a number of private medical device companies. Along with David Milne, he is a managing partner of SV Life Sciences, a healthcare venture capital firm.

David Milne owns 12% of outstanding shares and is on the Board of Directors of the company, and is a managing partner of SV Life Sciences.. Mr. Milne has been involved with several other public companies, and none have fared well. Here are some charts from the public companies that Mr. Milne has been involved in.

Lombard Medical (NASDAQ:EVAR)

Like TRXC, Lombard Medical is a medical device company. EVAR focuses on minimally invasive treatments for abdominal aortic aneurysms. Management touted a huge addressable market, but the company has lost $68 million over the past three years.

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Raptor Pharmaceutical (NASDAQ:RPTP)

In September 2015 Raptor Pharmaceutical plunged almost 40% one day after its main drug failed to meet its primary endpoint in its pediatric NASH study. RPTP is down almost 75% from its peak. RPTP has burned through $140 million in the past three years.

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Catabasis Pharmaceutical (NASDAQ:CATB)

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Ocular Therapeutix (NASDAQ:OCUL)

Ocular Therapeutix went public in July 2014 and raised $75 million. The stock began trading at $15/ share and quickly traded up to $40/ share. Things have been downhill since then, and in March 2015 the company failed its phase 3 trial for the eye drops which it was manufacturing. Biotech website FierceBiotech had this to say about the failure:

“Ocular Therapeutix ($OCUL) needed a clean sweep in its expansive Phase III program for a postoperative eye treatment in order to set itself up for a clear shot at an FDA approval. But it didn’t get it.

OTX-DP is a hydrogel formulation designed to provide an extended-release dose of dexamethasone. It’s intended to replace some eye drops now used to prevent inflammation and pain after cataract surgery. As the Bedford, MA-based biotech spelled out recently, it needed to hit both primary efficacy endpoints in the second of two late-stage trials to count it a success. The first Phase III was heralded as a win, but investigators noted today that while the biobetter performed better than a dummy version in reducing pain, it failed to distinguish itself from the placebo when measuring the “absence of inflammatory cells in the anterior chamber of the study eye on day 14.”

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Dr. Jane H Hsiao owns 7.8% of the outstanding shares and is a director of TRXC. She is also involved with Opko (NYSE:OPK) in several roles, including on the board of directors. There is less to say about the companies that she has been involved with, although all exhibit similar characteristics to TRXC. They are money losing companies that have all declined significantly.

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Cocrystal Pharma (OTCQB:COCP)

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Sorrento Therapeutics (NASDAQ:SRNE)

Dr. Hsiao was a director at Sorrento Therapeutics. SRNE is an oncology company that was developing drugs to aid with cancer pain. SRNE paidthe infamous RedChip for investor relations services in 2014. Here is the SRNE CEO being interviewed by RedChip founder David Gentry.

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As you can see below, SRNE has fallen over 75% from it’s highs this past summer.

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In addition to the long list of failures and stocks that have cratered that those on the Board of Directors have been involved with, current CFO Joseph Slattery was the CFO of a similar company when it was fined $6 million by the DOJ for causing health care providers to submit false claims to Medicare.

“Medical device manufacturer TranS1 Inc., now known as Baxano Surgical Inc., has agreed to pay the United States $6 million to resolve allegations under the False Claims Act that the company caused health care providers to submit false claims to Medicare and other federal health care programs for minimally-invasive spine surgeries, the Justice Department announced today.”

Joseph Slattery was the CFO of Baxano Surgical at this time. Baxano Surgery would later file for bankruptcy after Mr. Slattery left, wiping out shareholders. Like TRXC, Baxano Surgery was a reverse merger and a medical devices company.

TRXC also has connections to Dr. Phillip Frost through Dr. Jane Hsiao. Much has been written about Dr. Frost’s involvement with penny stocks and numerous failures. The best and most in-depth of these reports wasLakewood Capital’s takedown of Opko Health .

“While Dr. Frost has earned the admiration of the investment community after selling two companies (Key Pharmaceuticals and Ivax Corporation) for incredibly large gains, we think there is another side of his career that should be of great concern anyone investing in Opko. Dr. Frost has a disturbingly large number of connections to what we believe are two serial stock promoters that have each been the subject of multiple lawsuits, Barry Honig and Michael Brauser (who together run an entity called Marlin Capital). We have counted 16 different penny stocks in which Frost, Honig and Brauser have invested together in recent years, including entities in which Opko is directly involved. In fact, the business address listed for Honig and Brauser, 4400 Biscayne Blvd., is owned by Dr. Frost and is also the offices of Opko Health, Ladenburg Thalmann (where Dr. Frost is Chairman) and numerous other companies in which Frost, Honig and/or Brauser are involved (including MusclePharm, BioZone,SafeStitch Medical, Non-Invasive Monitoring Systems and others). In fact, Barry Honig’s office is listed as being in the exact same suite (Suite 850) of 4400 Biscayne Blvd. as Dr. Frost’s Frost Gamma Investments Trust.”

SafeStitch Medical was the precursor to TRXC and Jane Hsiao was the CEO of Non-Invasive Monitoring Systems, a penny stock.

To go public, TRXC did a reverse merger with a company called SafeStitch. Dr. Jane Hsiao was the Chairwoman of SafeStitch at the time of the reverse merger, as highlighted above Dr. Hsiao is also involved with OPK. Additionally, up until August 2014 TRXC leased office space from Dr. Frost’s real estate company in Miami.

Who will be selling the products?

In a recent presentation at the JP Morgan Healthcare conference TRXC revealed its recent and future milestone plans in this slide. TRXC said that it expects sales of its ALF-X surgical robot system to commence in Q1 2016 and that it will begin its commercial team expansion.

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According to their milestones slide, TRXC should be in the midst of expanding their commercial sales team to prepare for the start of ALF-X sales. However, TRXC’s Career website only shows four current job openings. Most importantly, none of these openings are in sales.

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A search of LinkedIn also confirms that TRXC has not been building out it sales force. There are only of handful of TRXC employees that claim to work in marketing or sales on LinkedIn.

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TRXC is facing stiff competition, and competitors have been investing more as well

TRXC is going up against a much larger and better capitalized company in ISRG. Consider the comparative R&D spend for each company. Over the last couple of years TRXC has spent about 7 times more on R&D each of the last several years.

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Just because TRXC receives FDA clearance doesn’t mean anything

TRXC promoters and bulls would like to have you believe that when the company receives 510k approval that sales will immediately begin and revenues will immediately ramp. This is simply not true. Look at the fate of TRXC’s precursor, SafeStitch Medical.

In November 2009, SafeStitch Medical announced that they had received FDA clearance to sell their AMID Stapler. From this date until June 30th, 2013, SafeStitch only generated $52,000 in revenues. Clearly just because the FDA approves a medical product does not means sales will follow.

More importantly, TRXC’s ALF-X has been approved for sale in the European Union since 2011, and it took until 2013 for the first device to be installed. Despite being approved for five years, the ALF-X surgical robot is still not generating meaningful revenue. The carve-out filings, for the ALF-X indicate that it generated zero dollars in revenue in 2013 and 2014, and only approximately $77,000 worth of revenue in 2015.

In addition to the commercial failure of one of TRXC’s main product, TRXC has already had a surgical robot fail. TRXC developed the SPIDER Surgical System, you can view a demonstration of the SPIDER Surgical Devicehere. TRXC promoted the SPIDER Surgical Device in 2014 much the same way it is touting its SurgiBot and ALF-X systems.

So what became of the SPIDER Surgical System? According to TRXC’s website, it is currently being phased out. It was a commercial failure.

Conclusion

TRXC is nothing but a stock promotion being propped up by stock promotion. Those long TRXC should consider the track record of those who have funded TRXC, as well as the track record of management and the Board of Directors. One of TRXC’s key products in the past was a comerical failure, and TRXC simply began the development of a new product to have a new story to pitch to investors. The other of TRXC’s products is a commercial failure. Once the stock promotion ends, all longs will have to hold on to is the success of the products, which given the indication of sales in Europe, will de disappointing. Once the SurgiBot receives 501(k) clearance, there will be no story to promote. Only sales, and with no one to sell either product sales will be disappointing.

DS Healthcare: Look for 60-70% Drop On Equity Offering, Accounting Problems and Solvency Concerns

DS Healthcare: Look for 60-70% Drop On Equity Offering, Accounting Problems and Solvency Concerns

  • Stock has risen by 500% in 2015 due to overly promotional press releases touting “profitability” as well as appearances on microcap promotion networks
  • Auditors raised “going concern” warning and multiple weaknesses in accounting internal controls
  • Company is out of cash and desperately needs to raise money in the near term
  • Recent resignation of audit committee head
  • Despite promotional press releases, business is stagnating and continues to lose money

Background

Microcap stock promotions (mostly targeting retail investors) have the potential for explosive stock price appreciation.  But when they finally implode, the drop can be swift and brutal.  The last microcap stock promotion I exposed was Chanticleer Holdings (HOTR), which owns the rights to several Hooters franchises in the US and abroad.  That stock had more than doubled to over $4.00 on the back of numerous promotional articles and press releases, which all ignored the company’s poor underlying financial condition and prospects.  Following my article on Chanticleer, the stock is now down by more than 50% and is closing in on 52 week lows.  Despite its previous highs of over $4.00, the stock is likely to fall below $1.00 by year end.

Even after I exposed this promotion, we can see numerous comments from small retail investors who refuse to believe that they have been caught up on a stock promotion.  I would encourage readers to view the comments posted below my article on Chanticleer to see just how “taken in” retail investors can be with these stock promotions.

DS Healthcare (DSKX) bears many similarities to Chanticleer. Like Chanticleer, we are almost certain to see rapid declines in DSKX of 60-70%. DSKX was trading at well below $1.00 for the earlier part of 2015 and the company was quick to sell new shares at a price of just 50 cents in April. As shown below, DSKX is likely to fall back to below $1.00 by year end based on multiple negative catalysts.

Much of this increase has been driven by an endless stream of promotional press releases as well as numerous appearances on promotional interview websites such as “Corporate Profile” and “Newtothestreet TV.” Corporate Profile is a quasi-IR firm that describes itself as “a broadcasting website where Fashion meets Finance; merging two mainstream industries and creating a unique platform for investors to stay up-to-date on today’s news, tips, interesting companies, and market info.

It covers mainly crummy microcap companies that appear to be in need of financing, much like DSKX.

Company Overview

DS Healthcare is a South Florida based marketing company which sells skin creams and hair growth products. DSKX sells its products through distributors in the US and abroad. Around 60% of its revenues come from international distributors. Looking into these distributors raises questions about how DSKX can be generating this revenue.

DSKX has consistently tried to portray itself as “profitable” by focusing on a made up accounting term called “adjusted EBITDAS” which basically excludes nearly all expenses from the bottom line. The reality is that DSKX continues to lose money and burn cash.

Exploring the distributor issues takes some digging and will be addressed below. But first, there are many more obvious problems which show why DSKX is set for a rapid and steep decline.

 

You can read the full article here on SeekingAlpha

American Addiction Centers: Even More Undisclosed Deaths, Jerrod Menz Indicted for Murder, and the start of Real Problems

American Addiction Centers: Even More Undisclosed Deaths, Jerrod Menz Indicted for Murder, and the start of real problems

Author’s note on additional undisclosed patient deaths:  

Prior to March of 2015, there were no references to patient deaths at AAC facilities which could be found in the mainstream media.  A Google search would turn up nothing.  In March, Bleecker Street Research published a report which highlighted four (4) deaths which occurred in California, as disclosed in a report from the California State Senate.  Last week, an article in Forbes highlighted an additional two deaths, bringing the number of known deaths to six (6).  In this article, we have uncovered an additional two (2) patients declared dead in 2014 in Florida and California. This brings the total number of undisclosed deaths at AAC facilities to eight (8). This is what has been uncovered so far.  However, finding this information has been very difficult and much of it remains hidden by AAC. As a result, we believe that there may be additional undisclosed patient deaths which are being hidden by AAC.

Following my first article on AAC in March, I ended up having direct contact from a number of former patients and employees of AAC.  These parties have described in detail the illegal activities at AAC which resulted in multiple patient deaths. Unsealed court documents are provided below.  I strongly encourage any other current or former patients or employees to contact me via SeekingAlpha or at BleeckerResearch@gmail.com with any additional information.

Background

AAC Holdings, also known as American Addiction Centers (AAC), continues to deceive patients, investors and analysts about the extent of and the details of multiple patient deaths that have been occurring in its facilities as recently as 2014. First AAC goes to great lengths to cover up the deaths. In most cases, no one knows that they have even happened. When found out, AAC then tries to make the deaths appear as if they were from natural causes in an attempt to avoid liability for negligence.

Last week, there was a public criminal indictment of AAC’s president, Jerrod Menz, in the death of Gary Benefield. As a result, AAC was forced to disclose some details in this one death. However, AAC now insists that the death was due to natural causes.  We will see below that this is demonstrably not the case and that this will be easily proven in a court of law.  Beyond this, AAC continues to fail to disclose any details in seven (7) additional deaths which have occurred as recently as 2014.

AAC only made this disclosure on its quarterly earnings call. AAC’s quarterly results were incredibly strong, but the stock has already begun to sell off based on this news. But in reality, it now looks as if things may actually be far worse than they already appear.

There was some very relevant information which was left out by AAC management.

First, the specific charge leveled was “murder”, the most serious charge that could have come up. That news was only revealed by the press one day later, and not by AAC.

Second, not only was president Jerrod Menz (who has since resigned from the board and as president, but is still working with the company) indicted, but also the company’s Forterus unit was indicted as an organization.  Clearly you can’t put the company in jail, but you can put it out of business. Forterus is the largest AAC division and is responsible for nearly 20% of AAC’s revenues.

Third, three independent medical doctors cited the actions of Forterus staff as having directly caused the death of the patient – it was not natural causes.

The summary is as follows:

AAC has stated that the patient died of “natural causes”. This is clearly not the case. Based on the facts below, Forterus and Mr. Menz ran an organization which repeatedly and consistently had low wage unlicensed employees (former addicts hired by Forterus) dispense controlled medications to patients without prescriptions. Medications were taken from a “house supply” of drugs. According to the independent medical examiner, this practice directly resulted in the death of Mr. Benefield (and others).  Forterus also made it a practice to aggressively recruit unsuitable patients who had acute medical needs which could not be met by the company. This also directly resulted in multiple patient deaths. Together, it is these practices which are the basis of the “murder” charge against AAC’s president, Jerrod Menz, and its director of operations, Meg Dean.

So far there have been at least seven (7) additional undisclosed deaths of patients at AAC facilities in California and Florida. Some of these have occurred as recently as 2014. None of these has been disclosed by AAC to investors, to prospective patients or to analysts.

The murder indictment also included the charge of Dependent Adult Abuse and was handed down on exactly the 5th anniversary of the death of Mr. Benefield. This suggests that this initial indictment was done now, simply in order to be within the statute of limitations.  In other words, it is highly likely that more indictments will follow for the additional deaths which occurred later.   

Conversations with former employees reveal that the pattern of negligence and abuse (including with unlicensed dispensing of controlled medications) has continued at AAC facilities even after the deaths of multiple patients. According to employees, such practices are still ongoing today.

The impact on AAC is likely to be massive.

First, it is a PR nightmare. Patients who research any of the AAC facilities will now immediately find that the president of the company was forced to resign after being indicted for the “murder” of a patient. They will also quickly learn about the dispensing of medications by low wage, unlicensed former addicts, without any prescriptions. They will also learn of the substandard care and aggressive marketing practices.

Second, there is a high likelihood that Forterus will simply be shut down in California.  This is especially likely given the dangerous policies and procedures which resulted in deaths appear to still be in place. Forterus accounts for nearly 20% of AAC’s revenues.

Third, AAC may now be less able to conduct the acquisitions which it needs in order to grow. These charges put AAC in violation of their credit facility, which has been instrumental in allowing AAC to pursue its roll-up strategy.

How likely is it that Jerrod Menz and the Forterus unit will be convicted in the death of the AAC patient?

Readers can decide for themselves how likely a conviction will be. But it appears from the testimony laid out below that Jerrod Menz ran an organization and knowingly had in place policies which had a high potential to injure or kill patients. These practices and policies were both blatant and egregious and carried on for many years.

Robert Swensrud, a former driver and house manager is one of the witnesses in the criminal case, as shown on the indictment. He previously testified that he was instructed to follow the company “detox protocol” which included giving controlled medications (including Serax and Trazadone) to patients depending on what substances they were detoxing from.

According to Swensrud:

These medications would be given to patients at times prior to a patient seeing a medical doctor and without the patient having a prescription for the medication. The house managers were in charge of overseeing the care given to the patients…and dispensing prescription medications. The house mangers would typically be recovering addicts out of a six month clean and sober living program without any medical training.

Death of Gary Benefield

The name of the patient who died in the criminal case is Gary Benefield. Mr, Benefield  was an alcoholic patient who needed external oxygen for his COPD.  When the driver picked him up, he smelled of alcohol and his oxygen tank was empty. Swensrud testified that he called management to say that Benefield needed a higher level of care than could be provided at the San Diego facility and advised her about his lack of oxygen. He was advised to give Benefield two tabs of Serax and bring him to the Murrieta detox house.

Swensrud then gave Benefield the medication, dispensed from the “house supply” of controlled prescription medications.

According to testimony from another former employee Rodney Davidson, he had separately been advised to give Benefield two tabs of serax subsequent to the two pills provided by Swensrud.  But Davidson was unaware that Swensrud had already given the man the medication previously.

Serax is a respiratory depressant and Benefield died shortly thereafter. He never saw any medical attention while he was at the facility (not even for his oxygen).

Did Gary Benefield die of “natural causes” or not?

AAC’s CEO Michael Cartwright maintained that Benefield died of “natural causes” and states that the coroner had even signed off on this.  However, testimony from Dr. Frank Sheridan, the Chief Medical Examiner in San Bernardino County, shows that Forterus’ procedures directly contributed to Mr. Benefield’s death.

You can view the entirety of Dr. Sheridan’s testimony here.

Also named in the murder indictment is the Operations Director of the San Diego branch of Forterus, Meg Dean. Unlike Mr. Menz, Ms. Dean is still employed by AAC.  According to the depositions, Ms. Dean was the individual who instructed Davidson to give Mr. Benefield the Serax.

This information comes from the declaration of Robert Swensrud, a driver.

Additional factors to consider

Additional testimony from the depositions may also play a role in the ultimate conviction of Mr. Menz and Forterus.  From the deposition of Thalia Kirchwhem (a former intake specialist), Mr. Menz is on record with the following quotes:

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Interestingly enough, the clinical director at Forterus seemed to need rehab more than the patients themselves.

Dr. Noreen Bumby served as the medical director at Forterus and held that post when Benefield died June 26, 2010. Bumby created the “detox protocol” that had Forterus personnel giving patients drugs without a prescription and before being seen by a doctor.

In December 2009, six months before Benefield died, California’s Osteopathic Medical Board filed a 17-page public complaint against Bumby arguing that her license should be revoked or suspended. Bumby was ultimately put on probation for multiple acts of “gross negligence” and for repeatedly being drunk.

http://addictionspecialists.com/profile.php?id=16036

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http://www.ombc.ca.gov/consumers/enforce_action.shtml

ENFORCEMENT ACTIONS OCTOBER 1, 2011 THROUGH DECEMBER 31, 2011

BUMBY, Noreen A. D.O., Palm Desert, CA

(20A6441)

Business and Professions Code sections 2234(b), gross negligence; 2234(c), repeated acts of negligence; 2239(a), use of drugs/alcohol in an injurious or dangerous manner; 2264, aiding and abetting unlicensed practice; 2266, failure to maintain adequate and accurate records; 2234, unprofessional conduct. Revocation stayed, five years probation with terms and conditions, ordered November 2, 2011, effective November 16, 2011.

Affidavits in the Benefield trial underscored that it should have been obvious to Forterus management that Bumby was unfit for her job.

House manager Justin Craig, who worked at Forterus from November 2009 to September 2012, said, “I personally observed that Noreen Bumby…appeared too inebriated to walk and talk much of the time she was there. More than once clients told me that the doctor smelled like alcohol.”

House manager Helene Mary Leonard said, “Those who met with Dr. Bumby commented that she needed detox more than they did. I am personally aware that prescriptions for medications were written out in advance, without the client seeing a doctor, in the Corning office using Bumby’s prescription pads.

The fact that Dr. Noreen Bumby was even working at Forterus under Jerrod Menz is indicative of the type of operation that he ran and what his priorities were.

The ongoing pattern of deaths and what it means for AAC now

There are several reasons why we should expect additional criminal charges against AAC.

First, there have been (at least) seven additional deaths which AAC has not disclosed to investors or the public. In fact, there may be even more which have yet to be uncovered.

Second, there is an ongoing pattern of deaths being caused by overdoses due to the administration of drugs by unlicensed low wage employees without prescriptions.

Third, there is also a clear ongoing pattern of AAC admitted patients who are blatantly unsuitable for treatment at their facilities either due to medical or psychiatric reasons. AAC has made it a practice to aggressively recruit unsuitable patients even when it creates a grave risk to their safety. This has also contributed to multiple patient deaths.

Fourth, the criminal indictment handed down came at the exact 5 year anniversary of the death of Mr. Benefield. This indicates that it was a preliminary action taken to prevent a lapse under the statute of limitations. The DOJ will then seek additional indictments based on the subsequent deaths, and will use discovery from this case to bolster the subsequent cases.

The details of these deaths comes from the declarations of three different medical experts. The main and most detailed one came from Dr. Frank Sheridan, you can view the entire declaration here. The most important information comes on pages 4-14.

Death of James Sisk

James Sisk had a history of diabetes, weighed 300 lbs., had high blood pressure and used a CPAP machine.  Mr. Sisk died within hours of his admission after he was dispensed Ativan without a prescription. Ativan (also known as Lorazepam) is a benzodiazepine and a CNS depressant.

Death of Roberta McMinn

According to the court depositions, Roberta McMinn was another medically fragile patient who was admitted to Forterus while taking the prescription drug Amitriptyline for a heart condition.  It was the house policy to take away the patient’s prescription drugs from them, to be administered by house faculty of hired recovering addicts.  According to her autopsy, McMinn died of an Amitriptyline overdose.

Death of Gregory Thomas

Gregory Thomas was deemed a severe suicide risk who was “severely intoxicated” on “bath salts” (a designer drug) when he was admitted to the program and picked up by a driver.  Per the facility’s own policies, Thomas was not an appropriate candidate for the program.

According to the deposition:

“Mr. Thomas met with a counselor at the ABT facility and then left on foot. He was not followed or looked for by ABT, despite having been told by their own employee, Justin Craig, that he was suicidal and being urged to go after him. Mr. Thomas was found deceased by police, after hanging himself from a bridge approximately 400 yards from the ABT facility.”

Death of Shawn Reyna

Shawn Reyna is another example of a patient who was admitted to the program despite being an inappropriate candidate due to severe health and suicide risks. After being admitted, Mr. Reyna displayed severe withdrawal symptoms, including delirium tremens, paranoia and hallucinations. Staff raised concerns and thought that Mr. Reyna needed immediate psychiatric evaluation.  This never happened and Mr. Reyna was found dead in his room after slitting his own wrist and throat with a razor. Mr. Reyna should have never been admitted to the program. Second, upon recognition of this, he should have been sent for immediate psychiatric care.

Death of Brian McCarthy

Brian McCarthy also died while under care from AAC’s facility. He was severely ill with end stage liver disease and severe jaundice. According to the deposition,”Mr. McCarthy was clearly in need of acute medical care and by ABT’s own licensing standards not appropriate for admission to ABT’s non-medical residential detox.

Criminal recruiting practices

The point is that AAC has made it a practice to deliberately and aggressively recruit new patients at all costs, even when it means jeopardizing lives of at-risk patients. The facility purported to provide drug / alcohol detox however the company is in no way staffed or equipped to handle such medically fragile patients.

Thalia Kirchwhem was a former intake specialist at the AAC unit. She quit over frustration with the recruiting tactics required by CEO Jerrod Menz.

According to Ms. Kirchwhem’s deposition.

  • Intake work was a high pressure environment, with a “boiler room” atmosphere
  • I was expressly instructed by Mr. Menz [the current CEO] and Ms Scarella to offer potential clients anything they asked for – homeopathic treatment, gym, spa, pool, beach, 24 hour medical care, doctors or psychiatrists on staff, medications – anything the client wanted in terms of rehab services
  • Mr. Menz took me to some of the different residential facilities while he was explaining the goals of the intake department. I learned that the house managers were handling the detox program, and that most house managers were former addicts, many of whom were only 6 months sober.
  • Mr. Menz stated to me that he hires people cheap, who have little sober time, in exchange for rent, and that is how he makes all his money.
  • I started getting uncomfortable because I had become aware that many of the services and amenities I was instructed to offer were not actually available, and the intake staff was expected to lie to people who called to inquire about the services offered

Again, keep in mind that these are her official statements from her court deposition under penalty of perjury.  

From the court documents and Ms. Kirchwehm’s declaration it should be clear that AAC was telling patients that it could provide a level of medical-care that it’s not equipped to handle, a practice which continues today.

To see if AAC’s marketing practices had changed at all I used the chat feature on their website, posing as someone addicted to Xanax consuming 14mg of it per day with a history of seizures. Xanax is one of the hardest drugs to withdraw from, and someone taking that high of a dosage with a history of seizures would need a closely monitored medical detox.

Screen Shot 2015-08-03 at 8.25.34 AM

The AAC representative was quick to recommend inpatient treatment and was just as quick to ask the “Are you insured?” question. I have spoken with several addiction center operators who have all stated that someone with a history of seizures and taking 14mg of Xanax per day (again, an enormous dose) would need a medical detox. The problem is that Forterus is not licensed for a medical detox, and is instead licensed for “Residential-Detox.”

You can view a list of all the “non-medical alcoholism and drug abuse treatment facilities licensed and/or certified by the Department of Health Care Services” here.

As you can see, Forterus is licensed for “Res-Detox” which is not the same as a medical detox.

Screen Shot 2015-08-03 at 8.27.33 AM

This information comes from the California Department of Health Care Services Licensing and Certification Section Status report, which can be found here. At the top of that document it says that “This is an alphabetical list by county of all non-medical alcoholism and drug abuse recovery or treatment facilities licensed and/or certified by the Department of Health Care Services.”

The point is that Forterus is clearly not a medical detox, but even to this day is still willing still accept patients who are medically in need of a detox in a medical environment.

More deaths in 2014 could ensnare Michael Cartwright

At the Forterus unit, Jerrod Menz was not the individual who handed Gary Benefield the pills that killed him. Instead, he has been indicted for murder because he was the individual who set up the incredibly dangerous policies and procedures that killed Benefield. Likewise, Michael Cartwright may now be on the hook due to the more recent deaths that have occurred in California and Florida.

Very little is known about these most recent two deaths because they have not yet found their way into any public court filings. AAC is certainly not sharing any of the details with anyone.

What we do know is that 16 year old Billy Patient went missing from AAC’s Singer Island facility while out on a day trip to the beach. He was declared dead on March 4th 2014.

Screen Shot 2015-08-02 at 10.18.30 PM

My conversations with multiple employees also reveal that another patient died in California

According to two former employees, there was another death at Forterus in July 2014. Below is a copy of the email that was sent out by Forterus after Mr. Caetano’s death.

Screen Shot 2015-08-03 at 8.31.54 AM

This particular death occurred at the Symeron House, one of the Forterus houses. I have spoken with two former employees who worked there at the time of the death, and both told the same story. The story coming from both of these employees is notably different than the details contained in the email.

When Mr. Caetano was found struggling, the house manager (who still works at Forterus) fainted. It was the patients who called 911 and performed CPR and Mr. Caetano until the paramedics arrived. It is unclear at the moment exactly what lead to Mr. Caetano’s death, but according to both employees there was an empty pill bottle found under his bed.

Again, both of these deaths occurred in 2014 and (as with the previous deaths) neither has been disclosed to the public, to investors or to analysts.

What will be the impact on AAC going forward of these deaths and criminal charges?

As a roll-up story AAC is reliant on its access to capital to acquire other addiction facilities. AAC has known about the potential for a criminal charge in the Benefield case since at least August 2013 when Hardy Gold stated, “I anticipate criminal charges will be filed shortly.” This was more than a year before AAC went public. Yet AAC has raised $200 million ($75 million in the IPO, and $125 million in the debt offering) from investors without ever disclosing the pending criminal investigation.

In AAC’s Credit Agreement on page 59, the credit agreement states:

6.03 Notices.

Promptly and in any event within five (5) Business Days notify the Administrative Agent and each Lender of:

(a) of the occurrence of any Default;

(b) of any matter that has resulted or could reasonably be expected to result in a Material Adverse Effect;

(c) of the occurrence of any ERISA Event;

(d) of any material change in accounting policies or financial reporting practices by any Loan Party or any Subsidiary thereof;

(e) after receipt of written notice of (i) the institution of any investigation, review or proceeding against the Borrower or any Subsidiary to suspend, revoke or terminate any agreement of participation with a Payor, (ii) the institution by any Payor or Governmental Authority of any investigation, review or proceeding against the Borrower or any Subsidiary that could reasonably be expected to result in the Borrower’s or such Subsidiary’s right to participate with or receive payment from any Payor or (iii) any loss accreditation, participation under any Payor or Medical Reimbursement Program, or any license if such loss could reasonably expected to result in a Material Adverse Effect

AAC’s president Jerrod Menz and Forterus itself being charged for murder is certainly a “material adverse effect” and I believe this puts AAC in violation of its credit agreement.

More importantly, this harms AAC’s ability to raise money in the future. While Jerrod Menz has stepped down, Forterus was also charged with murder and that is a key part of AAC. While analysts have defended the stock after the initial news, will they continue to defend it in the face of murder charges against Jerrod Menz and the company itself?

AAC has done a remarkable job of covering up the fact that the charges were murder. But the news is slowly trickling out. Once this news become more widely public, it will become a public relations nightmare for AAC and it will be much more difficult for AAC to fill their beds. If you are looking to put a family member in an addiction center, and you Google that addiction center, news that the facility that you are looking at is being charged with murder will likely lead you to chose another facility for you or your loved ones.

This could potentially lead to a “death spiral.” AAC has used a tremendous amount of capital to acquire these facilities, and just as they are beginning to come online, a major press nightmare will make the beds they have acquired much harder to fill.

Conclusion

Even when AAC is attempting to tell the truth, they just cannot seem to come clean.

AAC has known that criminal charges were pending against the company since 2013. In August, 2013, Hardy R. Gold was the Deputy Attorney General BMFEA in the California Attorney General’s division when he provided a signed and publicly available affidavit in a civil complaint filed by AAC itself which nearly promised criminal charges against AAC. Speaking of the June 2010 death of Gary Benefield at one of the Forterus group homes, Gold said, “I anticipate criminal charges will be filed.” You can view Mr. Gold’s statement here on page 3 of the document.

AAC claims in the July 29th press release that “The Company is not currently aware of any evidence that the Company or any of the individuals charged were responsible for the resident’s death.” The civil lawsuit filed by Gary’s widow Kelly Benefield includes thousands of pages of signed declarations and depositions from numerous Forterus employees with firsthand knowledge of what happened to Mr. Benefield while in the care of AAC as well as affidavits from three different medical examiners who blamed AAC for Benefield’s death.

I have posted most of the key documents on Scribd.com which you can view on this site.

Perhaps most importantly, the July 29th press release says “we are just now having the opportunity to review this indictment.” But in fact, the indictment was issued Tuesday July 21st and Menz’s arraignment happened first thing Thursday morning California time.

 

Case Number Name Filing Date Charges Next Hearing Jurisdiction
SWF1501351 MENZ, JERROD NATHAN 07/21/2015 PC 368(B)(1)PC 187(A) Arraignment07/29/2015 AT 8:30 AM DEPT. S204

You don’t get notified you’re going to be arraigned for murder without being shown a copy of the indictment.  The fact that AAC rescheduled its earnings call on Friday the 24th strongly suggests they knew about the indictment by then if not earlier.

These facts underscore the fact that AAC management is not to be trusted. Not many companies have a 25% shareholder that is being charged with murder. Not only being charged with murder, but being charged with murder because of the company’s standard operating procedure. It’s that bad.

Note: AAC IR has not returned any of my questions since my first article. I have attempted to get questions answered on numerous topics, but have not received any responses.

American Addiction Centers – Supporting Documents

Part of the reason this information wasn’t known about earlier is because it was not on PACER, instead it was on the Riverside County Superior Court website and buried in declarations related to other cases. To make everyone’s life easier, I have uploaded supporting documents to Scribd, and they are embedded below where you can just scroll down and read everything for yourself to make your own judgement.

Hardy Gold Declaration – “I anticipate criminal charges will be filed.”

 

AAC-Hardy Gold Declaration 8-30-13 by Bleecker St

Dr. Frank Sheridan Declaration 

 

AAC-Benefield-Declaration of Dr Frank Sheridan 3-19-14 by Bleecker St


Benefield – Statement of Undisputed Facts 

AAC-Benefield – Statement of Undisputed and Disputed Facts by Benefield Legal Team 5-1-14 by Bleecker St


Jose Ochoa Declaration 

AAC-Benefield-Declaration of Jose Rutillo Ochoa on 4-24-14 That Menz Approved Benefield by Bleecker St

Robert Swensrud Declaration 

Robert Swensrud Declaration by Bleecker St

Thalia Kirchwhen Declaration 

AAC-Benefield –Thalia Kirchwehm Affidavit 3-19-14 by Bleecker St

 

Shirley Cox Lawsuit 

Shirley Cox Lawsuit – False Imprisonment, Emotional Distress, Etc by Bleecker St