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Securities and Exchange Commission v. Muraca

United States District Court, D. Massachusetts

December 5, 2019



          F. Dennis Saylor IV United States District Judge

         This is a civil enforcement action brought by the Securities and Exchange Commission against Patrick Muraca and two companies that he founded, NanoMolecularDX, LLC and MetaboRX, LLC. Essentially, the SEC alleges that Muraca raised investor funds and then diverted a substantial portion for his personal use. The complaint alleges that defendants violated § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 340.10b-5.

         The SEC and NanoMolecularDX, LLC have filed cross-motions for summary judgment. For the following reasons, the motion of the SEC will be granted and the motion of NanoMolecularDX, LLC will be denied.

         I. Background

         A. Factual Background

         Patrick Muraca served as President and Chief Executive Officer of NanoMolecularDX, LLC (“NMDX”) and MetaboRX, LLC (“Metabo”). Both companies are Delaware limited liability companies headquartered in Lee, Massachusetts. (Pl. SOF ¶ 2-3)

         The business of NMDX was to develop technology for detecting and monitoring biomarkers in oncology and endocrinology. (Id. ¶ 5). NMDX's website stated that it focused on developing in vitro diagnostic and research-use-only diagnostic assays and kits. (Id.).

         The business of Metabo was to develop “novel therapies for cancer and metabolic disease.” (Id. ¶ 6). Metabo's website stated that it was building therapies to “attack[] . . . fatty acid synthase (FAS), ” “a well-tested, proven metabolic enzyme” “that regulates the production of fatty acids in our body.” (Id.).

         1. Muraca's Communications to Investors

         In April 2016, Muraca began soliciting investors for the companies. (Id. ¶ 4). On September 6, 2016, he e-mailed investors a solicitation letter that stated the following:

The proceeds from this Seed offering will be used primarily for (i) Development and manufacturing of FAS and HER-2 for the commercialization of Manual kits, (ii) commencing the FDA review for the Nano based Product, and (iii) supporting ongoing regulatory and operation efforts necessary for commercialization. The completion of this Seed financial is critical for our pre-commercialization efforts.

(Id. ¶ 7). He e-mailed investors another solicitation letter on October 21, 2016, stating that “the use of proceeds from this offering will be used primarily for Manufacturing of pre-clinical test assays, commercialization of the Tissue repository and clinical histochemistry products and for ongoing regulatory efforts to support our NanoMolecularDX development.” (Id. ¶ 8). On November 3, 2016, he e-mailed investors another solicitation letter stating that additional investments “will allow the company to move the development of the Nuvera assets on the [Nano] platform forward and will help to find a new initiative at the Center for Nanoscale Science and Engineering (CNSE) for the development of this asset . . . .” (Id. ¶ 9).

         On March 16, 2017, Muraca e-mailed investors a “financing update” providing as follows:

         The Company seeks strategic financing up to a maximum of $1, 000, 000 USD in aggregate. The purpose of this strategic financing is:

1. Acquire assets of Nuclea Biotech through court-ordered bankruptcy liquidation. The purchase price for these assets is $300, 000, plus associated fees. Estimated total cost is $350, 000.
2. Assess, analyze and monetize the aforementioned assets. Estimated cost is $350, 000.
3. Fund ongoing corporate operations, bridging the revenue gap created by the billing cycle inherent in the current service contract with [a large laboratory]. Estimated cost is $250, 000.

(Id. ¶ 10).

         2. Muraca's Misappropriation of Investor Funds

         Between April 29, 2016, and June 30, 2017, fifteen individuals invested $1, 175, 680 in NMDX and Metabo. (Id. ¶ 11; Albers Dec., ¶ 9).[1] The investments were made either by wire or by check. (Albers Dec., ¶ 9). Of that amount, $73, 180 was deposited directly into Muraca's personal bank account; $1, 002, 500 was deposited into NMDX's business bank account; and $100, 000 was deposited into Metabo's business bank account. (Id., ¶¶ 11, 17, 19).

         Muraca diverted at least $411, 684 of the investors' funds for his personal use. In addition to the $73, 180 that he received directly into his personal account, he transferred $161, 549 into his personal account by checks from the NMDX account and $23, 523 by checks from the Metabo account. (Id., ¶ 10). Muraca also directly spent $125, 732 from the NMDX account and $27, 700 from the Metabo account on personal expenses.

         3. Muraca's Criminal Case

         On December 4, 2017, Muraca was indicted in the United States District Court for the Southern District of New York. (Huntington Dec., ¶ 2, Ex. 1). On June 20, 2018, the government filed a superseding indictment asserting one count of wire fraud and one count of making a false statement to the FBI. (Id., ¶ 3, Ex. 2). The wire-fraud count alleged as follows:

From at least in or about 2016, up to and including in or about July 2017 . . . PATRICK MURACA . . . willfully and knowingly, having devised and intending to devise a scheme and artifice to defraud, and for obtaining money and property by means of false and fraudulent pretenses, representations, and promises, transmitted and caused to be transmitted by means of wire, radio, and television communication in interstate and foreign commerce, writings signs, signals, pictures, and sounds for the purpose of executing such scheme and artifice, to wit, MURACA defrauded investors in two companies he founded and controlled . . . by soliciting investments purportedly to expand the companies' businesses, and then misappropriating the invested funds for his personal use, and in connection therewith and in furtherance thereof, MURACA transmitted and caused to be transmitted interstate e-mails and wire transfers of funds.

(Id., ¶ 3, Ex. 2).

         On August 8, 2018, Muraca was convicted on both counts. (Id., ¶ 4; Ex. 3). He was sentenced to 27 months in prison, followed by a supervised release term of three years and restitution in the amount of $132, 780. (Id., ¶5; Exs. 1, 4). It also appears that an order of forfeiture and money judgment was issued in the amount of $1, 165, 280. (Id., ¶ 5; Ex. 4).

         B. Procedural History

         The SEC filed this action on July 31, 2017. On March 15, 2018, the United States filed a motion to intervene and to stay discovery pending completion of the criminal case.

         The Court granted the motion to intervene and to stay on April 27, 2018. On March 15, 2019, the Court issued an order lifting the stay.

         The SEC has moved for summary judgment. NMDX has opposed the SEC's motion and cross-moved for summary judgment.[2]

         II. Standard of Review

         The role of summary judgment is to “pierce the pleadings and to assess the proof in order to see whether there is a genuine need for trial.” Mesnick v. Gen. Elec. Co., 950 F.2d 816, 822 (1st Cir. 1991) (internal quotation marks omitted). Summary judgment is appropriate when the moving party shows that “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). “Essentially, Rule 56[] mandates the entry of summary judgment ‘against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial.'” Coll v. PB Diagnostic Sys., 50 F.3d 1115, 1121 (1st Cir. 1995) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986)). In making that determination, the court must view “the record in the light most favorable to the nonmovant, drawing reasonable inferences in his favor.” Noonan v. Staples, Inc., 556 F.3d 20, 25 (1st Cir. 2009). When “a properly supported motion for summary judgment is made, the adverse party must set forth specific facts showing ...

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