0 RECEIPT 0 AMOUNT SUMMONS ISSUE D UNITED STATES DISTRICT COURT LOCAL RULE 4 .1 WAIVER FORM DISTRIC T OF MASSACHUSETTS ------------------------------------------ X MCF ISSUEI EDWARD A . TOVREA, individually and on behalf : Case No. SY DIRTY C . DATE of all others similarly situated, : Plaintiff, -againstVASO ACTNR PHARMACEUTICALS, INC .., JOHN J . MASI. and JOSEPH FRAT'IAROLI Defendants . . CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LA W _ 04-1 O81 J JuKY TRIAL DEMANDE D VAWMTE JUDGE Plaintiff, by his attorneys, for his Class Action Complaint alleges : NATURE OF THE CAS E I . This is a Class Action brought on behalf of plaintiff and all other persons or entities , except . for defendants, who purchased or otherwise acquired Vasco (&quot;Vaso&quot; or the &quot;Company&quot; ) securities (the &quot;Class&quot;) during the period Deccmher 11, 2003 through March 31, 2004, inc] uwive (th e &quot;Class Period&quot; ) 2. This action , based on violations of section 10(b) of the Securities Exchange Act of 193 4 (&quot;Exchange Act&quot;), arises out of a series of false and misleading statements and omissions of materia l fact by defendants regarding Vaso' s financial results . TJR SI)1C Z&quot;ION AND VENUE 3 . This action arises under sections 10(h) and 20(a) ofthe Exchange Act, 15 UU .S_C- 78j (b ) and 78t(a) ; and Rule lOb-S promulgated p ursuant to section 10(b) by the Securities and Exchang e Commission, 17 C .F .R_ $ 240 .10b-5 . The jurisdiction of this Court is based on section 27 of th e Exchange Act, 15 UJ .S_C_ 78aa ; and on sections 1331 and 1337(a) of the Judicial Code, 28 U .S .C&quot; . 0 0 1331, 1337(a) . 4. Venu e is proper in this District under section 27 of th e Exchange Act, 15 U_S .C . 78aa, and section 1391(b) of the Judicial Code, 28 U .S .C . 1391(b) . The corporate headquarters of Vaso are located in this District . 5_ Tin connection with the acts and conduct alleged herein , defendants, directly and indirectly , used the means and instrumentalities ofinterstate commerce, including the United States mails an d the facilities of the national securities exchanges . PARTIE S fi_ Plaintiff Edward A . Tovrea, as set forth in the accompanying certification, incorporate d by reference herein , purchased shares of Vasco stock at artificially inflated prices during the Clas s Period as set forth in the accompanying certification and has been damaged thereby . 7. Vasa Active Pharmaceuticals , Inc . is an early stage company focused on commercializing , marketing and selling over- the-counter (OTC) pharmaceutical products, with a particular focus On drugs that incorporate the vaso active lipid encapsulated (VALE) transderm .al delivery technology . The Company began its operations as a division ofBioChemics, Inc,, a biopharmaceutical company focused on the development oftransderrnal drug delivery systems, in January 2001 . Tn January 2003, it became an independent subsidiary of 13ioChemics _ Vaso Active markets Athlete's Relief an d Ostcon in the United States . Ti. has begun negotiating agreements with third parties for the marketin g ofOsteon and Athlete' s Relief in the United States and inter iationally . It also rchranded the deFEE T athlete's foot anti-fungal medication product as Terrnin8 . 8 . Defendant John J . Masiz was, at all relevant times, Chairman, President and Chie f Executive Officer of'Vaso Active- 2 9 . Defendant Joseph Frattaroli was, at all relevant tim es, Chief Financial Officer of Vas o Active, 10. Defendants John J . Masiz and Joseph Frattaroli are collectively referred to herein as the &quot;Individual Defendants, &quot; 1 1 . The Individual Defendants, by reason of their management positions and membershi p and ownership of the Company's stock, were at all relevant times controlling persons of Vasco withi n the meaning of section 2 0( a) of the Exchange Act . T he individual Defendants had the power and influence to cause Vast] to engage in the unlawful acts and conduct alleged herein, and did exercis e such power and influence . PLAINTIFF'S CLASS ACTION ALLEGATION S 12 . Plaintiff brings this action as a class action pursuant to Federal Rule ol'Civil Procedur e 23(a) and (b)(3) on behalf of the Class, consisting of all persons who purchased or otherwis e acquired Vaso securities between December 11, 2003 through March31, 2004, inclusive. Excluded from the Class are defendants ; members of the immediate families of the Individual Defendants ; any entity in which any defendant has or had a controlling interest ; and the legal representatives , heirs, successors , or assigns of any del'endant . 13 . As a1'March 26, 2004, almost 5 .7 million shares of Class A common stock ofVaso wer e outstanding in an actively-traded and efficient market in which millions of shares were traded during the Class Period . Vaso common stack is traded on the New York Stock Exchange under the symbo l &quot;VAPii .&quot; The members of the Class are so numerous that joinder of all members is impracticable . While the exact number of Class members is unknown to plaintiff, and can only be ascertaine d through appropriate discovery, plaintiff believes that there are thousands of members of the Class- 3 similar to that customarily used in securities class actions . 0 Record owners and members of the Class maybe identified from records maintained by Vase or its transfer agent and may be notified of the pendency of this action by mail, using the form of notic e 14 . Plaintiffs claims are typical of the claims of the members of the Class in that plaintiff and each Class member purchased securities of Vasco during the Class Period and sustained injury as a result . 15. Plaintiff will fairly and adequately protect the interests of the members of the Class an d has retained counsel competent and experienced in class action and securities litigation . 16 . A class action is superior to other available methods for the fair and efficien t adjudication of this controversy since joinder of all Class members is impracticable . Furthermore, as the damages suffered by individual Class members may be relatively small, the expense an d burden ofindividual litigation make it impossible for Class members to seek redress individually fo r the wrongs done to them . There will he no difficulty in the management of this action as a clas s action . 17 . Common questions of law and fact exist as to all members of the Class and predominat e over any questions affecting solely individual members of the Class . Among the questions Of la w and fact common to the Class : (a) Whether the federal securities laws were violated by defendants' acts as alleged herein ; (b) Whether <a href="/keyword/defendants-acted/" >defendants acted</a> wilfully or recklessly in omitting to state an d misrepresenting material facts ; an d (c) Whether the members of the Class have sustained damages , and if so, what is th e 4 proper measure of damages . FACTS E 18 . Vaso Active nlanufactures , markets and sells over-the-counter pharmaceutica l products . According to the Company, the effectiveness of its products have been significantl y enhanced through the incorporation of the Company's proprietary &quot;VALE transdernna]&quot; deliver y technology . 19. During the Class Period , defendants materially misrepresented that &quot;independent&quot; clinical trial s con Firmed that its foot cream product - Termin8 - was a &quot;remarkably effective cure&quot; for athlete' s foot . Specifically, the Company represented that the clinical trials were conducted by &quot;independen t physicians&quot; and reviewed by the New England Medical Center , in Boston , MA . In fact, however, the person who supervised the study was a lone podiatrist hand-picked by Vaso Active's paren t company, BioChemics Inc . Furthermore, the New England Medical Center did nothing more tha n analyze the statistical information gathered byBioChemics Inc . -- something the center does all th e time for paying customers . In news articles, the medical center confirmed that it was unable to draw any conclusions about the effectiveness of the product, since it had no hand in selecting the patient s and gathering the evidence . 20, On March 31, 2004, financial markets were stunned when the SEC halted the trading o f the Company's stock. The SEC release questioned the accuracy elf assertions made in the company' s press releases , annual report, registration statement and public statements to investors , Materially False And Misleading Statements Issued During The Class Period 5 M 21 . The Class Period begins on December 11, 2003 . On that (late, the Company the Company issued a press release announcing the completion of its IPO thereby raising approximatel y $7.25 million, The registration statement (the &quot;Registration Statement&quot;) filed with the SEC i n connection with the IPO was signed . by Defendants Masiz and Frattaroli, among others . With regards to- the Company's products, the Registration Statement, stated, in pertinent part, as follows : Although all of our product candidates wi 11 be entering established markets, they will he distinct and unique among existing products in those markets in that they will all incorporate the VALE technology . We intend to market these product candidates using this distinction in much the same way as out current products have been marketed. Since these product candidates are in the early development stage, we are not able to predict when these product candidates will be ready for distribution and sale, if ever . Our current product candidates include : Product Product Description Total Mutual Market Development Stag e Classification Analgesic Topically applied Size $3 .1 billion Formulation bein g analgesic Toenail fungus treatment Tcrmin8/Xtinguish derivative topically applied to trea t toenail fungus Topically applied, anti-bacterial, annti - finalize d $800 million Formula finalize d Acne treatment $325 million In development inflammatory Transder orall y delivere d hydrocortisone First aid treatment Transdermally $395 million Formula finalized delivere d anitbacterial and Hydroeorti sonn e Hand and body lotion OTC skin hydration . $1 .06 billion Formula finalize d 6 Psoriasis Transdermal antiinIlar niatoiy anti- 0 - Formula i n developmen t itch and skin hydration 22, With regards to certain products and the clinical studies conducted by the Company, th e Registration Statement stated , in pertinent part, as follows : . . . During the course of the 12 month period immediately following this offering, all deFEET branded product currently in circulation will either he sold or removed from circulation and replaced with an identical product which will be commercialized, marketed and sold by us under the name Terming and/or Xtinguish, The formulation and functionality of Tcrmin8 and Xtinguish will be identical to that of dcFEET . All three of these products have been through the research and development, preclinical study and clinical trial stages and have received FDA approval . They are either currently being marketed and commercialized or will enter the marketing and commercialization phase upon the consummation of this offeding . 23. With regards to the clinical studies completed specifically on T ennin8, formerly know n as deFEET, the Registration Statement stated, in pertinent part, as follows : deFEET is a topically-applied, transdennal athlete's foot anti-fungal medication designed to eliminate athlete's foot infection in Jess than 10 days . It employs the VALE drug delivery system to effectively and elficienily deliver a mild antifitngal agent called Tolna11ate into the skin sun-ounding the affected area . In a pilot clinical trial, supervised by independent physicians and analyzed by the New England Medical Center in Boston, MA, 20 severely infected athlete's Toot patients were treated and studied over a 42-day period . There were two groups in the study, one treated with deFEET and the other with Schering-Plough's TinactinTD . Tu this study, deFEET eliminated the infection in 90% of the test group in 7 days and 100% of its patient population in 10 days . TinactinC[P, which also uses Tolnaitate in the same concentration as deFEET, required 42 days to care its first patient . These results demonstrate the ability of the VALE technology to deliver Tolnaftate much more effectively than a product not utilizing VAT .,F, technology . 24 . On December it,, 2003, the Company announced that it had successfully closed on th e placement of all of its over -allotment shares . The total over -allotment shares were 217, 500 shares 7 of Class A common stock, placed at $5 .00 per share. Combined with the 1,450,000 Class A common shares placed during the Company's TO, Vaso Active raised over $8 in gross proceeds . 25 . On February 19, 2004, the Company announced a 3 for 1 stock split of its common stock. Defendant Masiz stated that the stock split was a reaction to strong institutional demand for Vas o Active shares, commenting in pertinent part as follows : One of the ways many institutions measure investment appeal is through the liquidity of a security . Recently, there has been significant dernand for our common stock at the institutional level, However liquidity has proved to be an obstacle . To help resolve this, the Board of Directors has declared this 3-for-1 stock split to increase our liquidityto the public market place, thus enhancing our securities' appeal to both retail and institutional investors . 26 . On March 17, 2004, the Company announced that it had completed a private placement transaction in the amount of $7,500,000 with an institutional investor . The investment which is i n the fond of an 1S month 2%%% Convertible Note, is convertible into shares of Class A common stoc k at a conversion rate of $9 per share, at the option of the investor . In addition, Vaso Active issue d to the investor warrants to purchase 166,667 shares of'C'lass A common stock at an exercise pric e of$8 .75 per. share . DefendantMasiz,commentingpositivelyonthis transaction, stated, in pertinen t part, as follows : The ability to secure additional funds through the completion of this private placement gives Vaso Active significant new working capital to augment the working capital derived from its IPO . This will enhance Vaso Active's capital base with which to operate and will permit the Company to take advantage of strategic opportunities that arise in the course of growing our business . In addition, the execution of this agreement at a premium to the current market price of our common stock underscores the value of our technology to a material investor . 27 . On March 26, 2004, Vaso Active filed its annual report with the SEC on Form 10-KS B for the period ending December 31, 2003 . The annual report was signed by defendants Masiz and 0 Frattaroli . Regarding its Tcrmin8 product, defendants represented that: Terming is a topically-applied, transdermal anti-fungal medication designed to eliminate athlete's foot infection in less than 10 days . Ternnin8 employs the VALE transdernial drug delivery system to effectively and efficiently deliver a mild antifungal agent called Tolnaltate into the skin surrounding the affected area . 28 . On that same day, in an article published by TheStreet .com reported, that during a conlcrence to discuss the Company's 2003 financial results and 2004 outlook the company said i t expects sales to soar next year because of a number of &quot;strategic&quot; deals it has reached to marke t Tern,in$ and other lotions that use its &quot;revolutionary&quot; transdennal delivery system . 29_ The statements referenced above in T 21-28 were each materially false and misleadin g when made as they failed to disclose and/or misrepresented the following material adverse fact s which were then known to defendants or recklessly disregarded by them : (a) that the Company's claims regarding the effectiveness of its Tcrtnin8 produc t were unsubstantiated ; (h) that the FDA had not fully endorsed certain of its key products ; an d (c) as a result of the foregoing, defendants statements concerning the cIl cacy ofth e Company's products, as well as the Company's current and future financial prospects were lackin g in a reasonable basis at all relevant times . 30 . Then, on March 31, 2004, the markets were stunned when the SEC halted the tradin g ofthe Company' s stock through April 15 . The SEC release questioned the accuracy of assertions made in the company's press releases, annual report, registration statement and public statements to investors . 31 . At the time of the trading halt , Vaso Active common shares were priced at S7.59 per share. 32. The market for Vaso Active's common stock was open, well-developed and efficient at al l 9 0 0 relevant times- Asa result of these materially false and misleading statements and failures to disclose , Vase Active's <a href="/keyword/common-stock-traded/" >common stock traded</a> at artificially inflated prices during the Class Period Plaintiff arid other members of the Class purchased or otherwise acquired Vase Active common stock relying upo n the integrity of the market price of V aso Active' s common stock and market inlbrmation relating to Vaso Active, and have been damaged thereby. 33 . During the Class Period, defendants materially misled the investing public, thereby inflatin g the price of Vaasa Active' s common stock , by publicly issuing false and misleading statemen ts an d omitting to disclose material facts necessary to make defendants' statements, as set forth herein, not fals e and misleading. Said statements and omissions were materially false and misleading in that they faile d to disclose <a href="/keyword/material-adverse-information/" >material adverse information</a> and misrepresented the truth about the Company, its busines s and operations, as alleged herein . 34 . At all relevant times, the materi al misrepresentations and omissions particularized in this Complaint directly or proximately caused or were a substantial contributing cause of the damages sustained by Plaintiff and other members of the Class . As described Herein, during the Class Period, dci'cndaiits made or caused to be made a series of materially false or misleading statements about Vas e Active' s business, prospects and operations . These material misstatements and omissions had the caus e and effect of creating in the market an unrealistically positive assessment ofVaso Active and its business , prospects and operations, thus Causing the Conlpany1s common stock to be overvalued and artificiall y inflated at all relevant times . Defendants ' materially false and misleading statements during the Class Period resulted in Plaintiff and other members of the Class purchasing the Company's common stock at artificially inflated prices, thus causing the damages complained of herein . SCWFNlE'ER ALLEGATION S 1.0 0 0 35. As alleged herein , <a href="/keyword/defendants-acted/" >defendants acted</a> with scienter in that tlicykncw that the public document s and statements issued or disseminated in the name of the Company were materially false and misleading ; knew that such statements or documents would be issued or disseminated to the investing public ; and knowingly and substantially participated or acquiesced in the issuance or dissemination of suc h statements or documents as primary violations of the federal securities laws . As set forth elsewhere herein in detail, defendants, by virtue of their receipt of inlbrmation reflecting the true facts regardin g Vase, their control over, and/or receipt and/or modification of Vaso's allegedly materially misleMin g misstatements and/or their associations with the Company which made them privy to <a href="/keyword/confidential-proprietary-information/" >confidential proprietary information</a> concerning Vaso, participated in the fraudulent scheme alleged herein . COUNT I PURSUANT TO SECTION 10(h) OF THE EXCHANGE ACT AN D RULE 1 Ob-5 PROMULGATE]) THEREUNDER A ainst All Def nd n s ) 36 . Plaiiiti ff incorporates by reference the allegations of paragraphs 1 through 35 as if fully se t forth herein . 37. The reported financial results of Vase were materially false and misleading, and defendant s knew or were reckless in not knowing they were so, because defendants prepared and participated in th e issuance cif the deceptive and materially false and misleading statements to the investing public, as se t forth above . 38 . Defendants employed devices, schernes, and artifices to defraud and engaged in acts , practices, and a course of conduct in an effort to maintain artificially <a href="/keyword/high-market-prices/" >high market prices</a> for Vas o securities in violation of'section 10(b) of the Exchange Act and SEC Rule I Oh -S . 11 0 0 39. As a result of the dissemination of the aforesaid false and misleading reports and releases , the market price of the securities of. Vaso throughout the Class Period was higher than it would have bee n had the true facts concerning the Company's financial condition been known by the market . 40. In ignorance of the artificially <a href="/keyword/high-market-prices/" >high market prices</a> of Vaso's publicly traded securities, and relying upon the integrity of the market in which that stock was traded-- the New York Stock Exchange-Plaintiff and the other members oftlic Class acquired Vaso securities during the Class Perio d at artificially inflated prices and were damaged thereby . 41 . Had the market known of the true financial condition of Vaso, which was falsely represente d by defendants, plaintiff and the other members of the Class would not have purchased or otherwis e acquired their Vaso securities during the Class Period at artificially inflated prices at which they did . Hence, plaintiff and the other members of the Class were damaged by defendants' violations of Section 10(b) and Rule 10b-5 . COUNT I I PURSUANT TO SECTION 20(a) OF THE EXCHANGE AC T (Against the Individual Defendants ) 42. Plaintiff incorporates by reference the allegations of paragraphs 1 through 41 as if fully set forth herein . 43. This claim is asserted against the Individual Defendants and is based on section 20(a) of the Exchange Act. <a href="/keyword/individual-defendants-acted/" >individual <a href="/keyword/defendants-acted/" >defendants acted</a> </a> as controlling persons of Vaso within the meaning of sectio n 20(a) of the Exchange Act . By reason o f their positions as officers and directors of Vaso and ownership of Vaso stock, Individual Defendants had the power and authority to cause or to prevent the wrongfu l 12 0 0 conduct of herein and did exercise such power and authority. 44 . By reason of the foregoing, Tndividiual Defendants are liable jointly and severally with and to th e same extent as Vaso for Vaso's violations of section 10(b) of the Exchange Act and Rule iOh-5 . PRAYER FOR RELIE F WHEREFORE, plaintiff, on behalf of himself and the Class, prays for judgment as follows : (i) Declaring this action to be a proper plainti ff class action maintainable pursuant to rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure and declaring plainti li`to he a proper representative of the Class . (ii) Awarding plaintiff and all of the othermemhers of the Class damages in an amount to he proven at trial, together with prejudgment interest thereon ; (iii) Awarding plaintiff the costs and expenses incurred in this action, includin g reasonable attorneys', accountants', and experts' fees ; and (iv) Granting plaintiff and the other members of the Class such other and furthe r relief as the Court deems just and proper . 13 DEMAND FOR A JURY TRIAL , Plaintiff hereby demands a trial by jury. Dated : Apri128, 2004 Cyii,MNN AND PASTOR, LL P By, 64 ~ David Pastor (BBO No . 391000) Peter Lagorio ( BBO No . 567379) Stonehill Corporate Cente r 999 Broadway, Suite 500 Saugus, MA 01906 Telephone : [phone] Facsimile : (781) 231-784 0 MURRAY, FRANK &amp; SAILER LLP Eric; L Belfa Gregory Linkh 275 Madison Avenue, Suite 801 New York, New York . 10016 Telephone : [phone] Facsimile : (212) 682-189 2 GLANCY BINKOW &amp; GOLDBERG LL P Michael Goldberg 1 S01 Avenue of the Stars Los Angeles, Cali fcm,ia 90067 Telephone : [phone] Facsimile : [phone] LAW OFFICES OF BRUC E MURPHY Bruce Murphy 265 Llwyds Tune Vero Beach, FL 32963 Telephone: [phone] Attorneys for Plaintiff 14 .'u.:- .uaanwrgN~wuawW~ rrvr~~ur,la '^Yln, ~: k A; A I i. j r ,. a#t . &quot;. `, . . .i'1 .,rRir- titit?u_t. t _ i~ 1ii#~ n . i ., .:;t ;4r,w . ~ i 1 ~:rrnii iRx~. i ~ ; 1~ . 4 z6 x:y :tsMl;l rret ;si4 u t hn~a rt. x~ dti~i s : . fr W@n4E R re e ml ti aaT .~ ire v L4Ci~fdia l~k ti k}le h1 CC : *~ wctwN RO 4w in ! 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