Defendant(s)
PARTIES
owner of 40,000 shares of common stock of Defendant Eloxx Pharmaceuticals, Inc. (“Eloxx” or
the “Company”).
known as Sevion Therapeutics, Inc. On information and belief, the Company’s principal
executive offices are currently located at 950 Winter Street, Waltham, MA.
residing in or around Contra Costa County, California. During the period relevant to this action,
or around Contra Costa County, California. During the period relevant to this action, Schmidt
residing in Miami-Dade County, Florida. On information and belief, during the period relevant to
this action, Honig was an investor in the Company and directed or otherwise exercised control
6. This Court has jurisdiction over this action pursuant to 28 U.S.C. § 1331 because
this action arises under the Constitution, laws, or treaties of the United States. This Court has
supplemental jurisdiction pursuant to 28 U.S.C. § 1367(a) over the common law claims asserted
in this action.
the Company is incorporated in this district and a substantial part of the events or omissions by
the individual defendants that gave rise to the claims occurred while those individuals were
SUBSTANTIVE ALLEGATIONS
preferred stock in the Company (the “Series A Preferred Stock”). Pursuant to existing terms, the
Series A Preferred Stock was convertible into 266,666 shares of common stock of the Company
9. On or about January 28, 2017, Rector, the then CEO of the Company, and Honig,
a purportedly independent investor, contacted Plaintiff regarding his Series A Preferred Stock.
Honig and Rector represented to Plaintiff that the Company was low on capital and required new
financing. Honig and Rector represented that it was necessary to convert Plaintiff’s Series A
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Preferred Stock into common stock of the Company so that the Company could obtain the new
financing it needed.
Series A Preferred Stock at a more favorable price of $0.25 per share, which would result in the
issuance of not 266,666 common shares, but 800,000 shares of common stock to Plaintiff – three
times as many common shares. Plaintiff made clear to Honig and Rector that he would agree to
convert only if the Company (1) granted him most-favored-nations status with respect to the
conversion price by notifying Plaintiff of any offer to another investor to convert Series A
preferred stock at a lower price, and (2) granted to Plaintiff the right to also convert at the lower
price (even retroactively). Honig and Rector agreed to give Plaintiff MFN status, and agreed that
Plaintiff would receive the benefit of the lowest conversion price offered to any other investor,
11. In or around January 2017, Rector sent to Plaintiff a form Preferred Stock
Exchange Agreement. The Preferred Stock Exchange Agreement provided, inter alia, for the
exchange of Plaintiff’s Series A Preferred Stock for shares of common stock at a conversion
12. Among other things, in Section 2.2(g) of the Preferred Stock Exchange
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13. In reliance upon the representations, warranties, covenants, and agreements made
by Rector, Honig, and the Company during various telephone calls and in the Preferred Stock
Exchange Agreement, on or about January 18, 2017, Plaintiff executed the Preferred Stock
Exchange Agreement. Pursuant to the terms of the Preferred Stock Exchange Agreement, the
conversion, however, would not occur until Plaintiff delivered to the Company his Series A
Preferred Stock certificate. Plaintiff did not immediately deliver to the Company his Series A
Preferred Stock certificate because he was waiting for confirmation that the remainder of the
series A preferred stock had been converted on the same terms or, if on more favorable terms, for
14. In order to further induce Plaintiff to tender his certificate and complete the
conversion, Rector wrote to Plaintiff in a January 29, 2017 email. In the email, Rector again
offered to Plaintiff a “one-time ratchet of $0.25 per equivalent common shares for your position
(currently at 266,666 common shares) that would yield you 800,000 common shares per your
agreement. . . .” Rector also made the following representation to Plaintiff: “If we do not resolve
these issues quickly, it will jeopardize our current funding. Accordingly, the current lead investor
(Mr. Honig) has offered to purchase your Series A stock for $185,000. Alternatively, you can
confirm you wish to continue with the conversion into common stock at the $0.25 conversion
15. On or about February 1, 2017, Honig contacted Plaintiff by telephone to urge him
to proceed with the conversion and deliver the stock certificate. Among other things, Honig
disclosed to Plaintiff that he had purchased or expected to purchase all of the other outstanding
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unconverted series A preferred stock. Honig again promised to Plaintiff that he would receive the
lowest, most favorable conversion price for his Series A Preferred Stock. Yet Plaintiff continued
to hold his certificate because he was waiting for confirmation from the Company that the other
series A preferred stock had been tendered and converted at the same price offered to Plaintiff
16. On information and belief, as of May 22, 2017, there remained issued and
outstanding only 270 shares of series A preferred stock. In a Form 10-Q filed with the Securities
and Exchange Commission (the “SEC”) on May 22, 2017, the Company disclosed the following
17. On information and belief, the reference in the foregoing 10-Q to “one holder
owning 200 shares of Series A Preferred Stock” referred to Plaintiff and his 200 shares of Series
A Preferred Stock. Following the February 15, 2017 conversion of 110 shares of series A
preferred stock, there remained issued and outstanding and unconverted only another 70 shares
18. On or about May 25, 2017, Honig again contacted Plaintiff to urge him to proceed
with the conversion proposed by the Company. Honig again promised Plaintiff that he would
receive the lowest conversion price. Honig further disclosed that the other holder of the
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remaining 70 shares of series A preferred stock would sell those shares to Honig or convert at a
19. On June 6, 2017, the Company filed with the SEC a Form 8-K announcing that on
May 31, 2017, it (and certain affiliates) had entered into an agreement with Eloxx
Pharmaceuticals Ltd., an Israeli company (“Eloxx Ltd.”), pursuant to which, subject to the
satisfaction of certain conditions, a subsidiary acquisition vehicle of the Company would merge
with and into Eloxx Ltd., with Eloxx Ltd. becoming the surviving corporation and a wholly-
20. Among others, the conditions precedent to the Merger Transaction required the
Company to convert all series A preferred stock to common stock. At the time of this
announcement, Plaintiff continued to hold his Series A Preferred Stock certificate, waiting for
notice of more favorable terms or confirmation that his conversion price of $0.25 was the lowest.
21. In or around late June or early July, 2017, Schmidt, the interim CFO of the
Company, told Plaintiff that the other holder of the remaining series A preferred stock had
reached an agreement and that those shares would be converted at the same price as in Plaintiff’s
agreement (i.e., $0.25 per share). Schmidt then asked Plaintiff to deliver his certificate.
and Honig, in or around late June or early July, 2017, Plaintiff delivered to the Company – to his
detriment – the stock certificate representing his 200 shares of Series A Preferred Stock,
believing that he had received the best conversion terms offered to investors of the Company.
Delivery of the stock certificate effectuated the conversion of Plaintiff’s 200 shares of Series A
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Preferred Stock Exchange Agreement, in or around early November 2017, Schmidt called
Plaintiff to request a proxy statement for a special meeting. Plaintiff inquired as to whether all
the series A preferred stock had been converted. Schmidt advised Plaintiff that Honig had
24. Upon learning that Honig had acquired series A preferred stock and had converted
those shares into common stock, Plaintiff reviewed the Form 10-K filed by the Company on
October 13, 2017 for the fiscal year ending June 30, 2017 (the “10-K”). Plaintiff was shocked to
25. The conversion transaction described above constituted a consent by Honig to the
conversion of 70 shares of series A preferred stock into 700,000 shares of common stock at a
conversion price of $0.10 per share or less, terms substantially and materially more favorable
than those offered to Plaintiff, and terms to which Plaintiff was entitled pursuant to the most-
26. On information and belief, the Company, Honig, Rector, and Schmidt acted in
concert, under the direction and control of Honig, to misrepresent to Plaintiff that he would
receive the benefit of any lower conversion price for his Series A Preferred Stock. Honig, Rector,
and Schmidt engaged in a scheme to provide to Honig the most favorable conversion price after
first obtaining from Plaintiff his Series A Preferred Stock certificate for conversion at the higher
price of $0.25.
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27. The 10-K also revealed that on or about February 15, 2017 and May 22, 2017, the
Company had amended certain convertible notes (the “November Notes”) to also provide to the
holders thereof a conversion price of $0.10. The company entered into this amendment after
Plaintiff executed the Preferred Stock Exchange Agreement and, therefore, the amendment
and belief, the Company, Honig, Rector, and Schmidt acted in concert, under the direction and
control of Honig, to conceal from Plaintiff the amendment to the November Notes providing for
a materially more beneficial conversion price, at the expense and to the detriment of Plaintiff.
28. Defendants also failed to disclose to Plaintiff that Honig had an undisclosed
relationship with OPKO Health, Inc. (“OPKO”) and its Chief Executive Officer, Dr. Phillip Frost
(“Frost”). On September 7, 2018, the SEC filed a complaint in the Southern District of New
York against Honig, Frost, OPKO, and several others. In its complaint, the SEC alleged that
Honig orchestrated, along with the other defendants, including on certain occasions, OPKO and
Frost, three “pump-and-dump” schemes from 2013 through 2018, in the stock of three public
companies. The complaint alleges that in each scheme, Honig and other defendants acted as an
undisclosed control group to promote the stock of the public companies through misleading
29. On February 22, 2017, the Company filed a Form 8-K disclosing that on February
15, 2017, the Company had issued convertible promissory notes in the aggregate amount of
$500,000 to OPKO “and an existing stockholder of the Company.” The promissory notes
30. On August 14, 2017, OPKO filed a Form 4, Statement of Changes in Beneficial
Ownership, in which it disclosed that it had converted $400,000 in principal amount owed under
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two convertible notes into 4,126,822 common shares of the Company at a conversion price of
$0.10 per share. Defendants failed to disclose this more favorable conversion price to Plaintiff or
offer him an opportunity to convert his Series A Preferred Shares at the same conversion price
31. On December 19, 2017, the Company consummated the Merger Transaction.
Upon consummation of the Merger Transaction (the “Closing”), the Company adopted the
business plan of Eloxx Ltd. and discontinued the pursuit of the Company’s business plan pre-
Closing. In connection with the Merger Transaction, the Company agreed to acquire all of the
outstanding capital stock of Eloxx Ltd. in exchange for the issuance of an aggregate 20,316,656
shares of the Company’s common stock, par value $0.01 per share, after giving effect to a 1-for-
20 reverse split effected immediately prior to the Merger Transaction. As a result of the Merger
Transaction, Eloxx Ltd. became a wholly-owned subsidiary of the Company. While the
Company was the legal acquiror in the transaction, Eloxx Ltd. was deemed the accounting
acquiror. Immediately after giving effect to the Merger Transaction, on December 19, 2017, the
32. Had Plaintiff been offered the same terms as Honig and the holders of the
November Notes, Plaintiff would have received an additional 1,200,000 shares of common stock
33. Contrary to and in violation of the Preferred Stock Exchange Agreement, the
Company failed to provide Plaintiff the requisite notice that it had entered into a preferred stock
exchange agreement with Honig on August 11, 2017 or that it had amended the November
Notes; nor did the Company issue and deliver to Plaintiff the additional 1,200,000 shares of
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common stock he was automatically entitled to as a result of the agreement with Honig or the
Promulgated Thereunder
34. Plaintiff re-alleges each of the foregoing paragraphs, as if fully set forth herein.
35. As specifically detailed herein, Defendants: (i) employed devices, schemes, and
artifices to defraud; (ii) made untrue statements of material fact and/or omitted to state material
facts necessary to make the statements not misleading; and (iii) engaged in acts, practices, and a
course of business which operated as a fraud and deceit upon the Plaintiff in connection with the
collectively, at the expense of Plaintiff, in violation of §10(b) of the Exchange Act and Rule 10b-
5.
36. Defendants, individually and in concert, directly and indirectly, by the use, means,
continuous course of conduct to conceal adverse material information about the more favorable
37. As set forth more particularly herein, Defendants had actual knowledge of the
misrepresentations and/or omissions of material facts set forth herein. Defendants’ material
misrepresentations and/or omissions were done knowingly or recklessly and for the purpose and
effect of concealing the truth about the foregoing from Plaintiff. Defendants, if they did not have
actual knowledge of the misrepresentations and/or omissions alleged, were reckless in failing to
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obtain such knowledge by deliberately refraining from taking those steps necessary to discover
information and/or failure to disclose material facts, as set forth above, Defendants awarded to
Honig a materially lower conversion price, resulting in the delivery to Honig of a substantially
greater number of shares per share of series A preferred stock exchanged in connection with the
transactions set forth above, the results of which caused damage to Plaintiff.
39. At the time of said misrepresentations and/or omissions, Plaintiff was ignorant of
41. Had Plaintiff known the truth regarding the foregoing, which was not disclosed by
Defendants, Plaintiff would not have exchanged any of his Series A Preferred Stock, or, if he had
exchanged such stock, he would not have done so at the artificially inflated conversion price
offered to him.
42. By virtue of the foregoing, Defendants have violated §10(b) of the Exchange Act
violated § 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder in connection with
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44. Plaintiff re-alleges each of the foregoing paragraphs, as if fully set forth herein.
45. By virtue of their high level positions, participation in and/or awareness of the
Plaintiff, Rector, Schmidt, and Honig (the “Control Group”) had the power to influence and
control, and did influence and control, directly or indirectly, the decision making of the
Company, including the dissemination to Plaintiff of various statements which Plaintiff contends
were false and misleading, the offering to Honig of the more favorable conversion terms, and the
concealment of same from Plaintiff. The Control Group were provided with or had unlimited
access to information concerning the ownership and conversion status of series A preferred stock
and other information before Plaintiff and other members of the investing public and had the
ability to prevent the issuance of the statements or cause the statements to be corrected.
46. In particular, members of the Control Group, including Rector and Schmidt, had
direct and supervisory involvement in the efforts of the Company to convert all of the series A
preferred stock to common stock and, therefore, are presumed to have had the power to control
or influence the particular transactions giving rise to the securities violations as alleged herein,
47. As set forth above, Rector, Honig, and Schmidt violated §10(b) and Rule 10b-5
by their acts and/or omissions as alleged in this Complaint. By virtue of their positions as
controlling persons, the members of the Control Group are liable pursuant to §20(a) of the
Exchange Act.
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48. As a direct and proximate result of the individual Defendants’ wrongful conduct,
Plaintiff suffered damages in connection with his conversion of the Company’s preferred stock.
Fraud
49. Plaintiff re-alleges each of the foregoing paragraphs, as if fully set forth herein.
to him the most favorable terms for the conversion of Plaintiff’s Series A Preferred Stock. In
A Preferred Stock;
(b) Concealed from Plaintiff the fact that Honig had purchased the
(c) Concealed from Plaintiff the fact that the Company had agreed to
52. Defendants made these intentional false representations, and engaged in acts of
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concealment, Plaintiff entrusted Defendants by delivering to the Company his Series A Preferred
concealment, Plaintiff has suffered injury and damages, in an amount to conform to proof at trial.
described herein, were willful, malicious and designed to obstruct and otherwise interfere with
the rights granted to Plaintiff in the Preferred Stock Exchange Agreement. Plaintiff, therefore, is
entitled to recover exemplary and punitive damages in a sum sufficient to punish Defendants.
Breach of Contract
56. Plaintiff re-alleges each of the foregoing paragraphs, as if fully set forth herein.
57. On or about January 18, 2017, Plaintiff and the Company entered into a written
Preferred Stock Exchange Agreement whereby the Company promised to convert Plaintiff’s
Series A Preferred Stock at a conversion price of $0.25 per share, or any more favorable
58. The Preferred Stock Exchange Agreement is a valid and enforceable contract.
59. Plaintiff substantially performed by delivering to the Company a certificate for his
60. The Company breached the terms of the Preferred Stock Exchange Agreement by
failing to provide notice to Plaintiff of the conversion of other shares of series A preferred stock
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61. The Company breached the terms of the Preferred Stock Exchange Agreement by
failing to issue and deliver to Plaintiff 1,200,000 additional shares of its common stock based on
the more favorable conversion price of $0.10 per share presented to Honig and OPKO.
62. As a direct and proximate result of the Company’s breach of Preferred Stock
Exchange Agreement, Plaintiff has suffered injury and damages, in an amount to conform to
proof at trial.
63. Plaintiff re-alleges each of the foregoing paragraphs, as if fully set forth herein.
64. On or about January 18, 2017, Plaintiff and the Company entered into a written
Preferred Stock Exchange Agreement whereby the Company promised to convert Plaintiff’s
Series A Preferred Stock at a conversion price of $0.25 per share, or any more favorable
65. Plaintiff fully performed under the Preferred Stock Exchange Agreement.
66. On the other hand, the Company violated its duties to act fairly and in good faith,
Plaintiff’s Series A Preferred Stock on terms less favorable than those extended to Honig and
OPKO. In furtherance of this scheme, the Company fraudulently misrepresented and concealed
from Plaintiff the truth for the illegal personal gain of Honig and OPKO.
67. As a direct and proximate result of the Company’s breach of the implied covenant
of good faith and fair dealing, Plaintiff was harmed and has suffered injury and damages, in an
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68. The Company’s wrongful conduct, as described herein, was willful, malicious and
designed to obstruct and otherwise interfere with the Plaintiff’s right of conversion of Series A
Preferred Stock on the most favorable terms as required under the Preferred Stock Exchange
Agreement. Plaintiff, therefore, is entitled to recover exemplary and punitive damages in a sum
WHEREFORE, Plaintiff prays for judgment against Defendants and for such
(a) For an order directing Eloxx to issue to Plaintiff 60,000 shares of common stock, which
amount reflects the 20:1 reverse stock split of the Plaintiff’s pre-split common stock;
(b) For compensatory, special, and consequential damages according to proof at trial;
(c) For statutory damages in an amount of at least three times the amount of actual damages
suffered by Plaintiff;
(g) For disgorgement of Defendants’ ill-gotten gains resulting from the conduct alleged
herein;
(h) For an accounting of all monies, property, and all other benefits obtained by Defendants
resulting from the conduct alleged herein;
(i) For imposition of a constructive trust over Defendants’ ill-gotten gains derived from the
conduct alleged herein;
(j) An award of attorney's fees, costs, and expenses in an amount to be determined at trial,
plus interest; and
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(k) Such other and further relief as this Court deems just and proper.
and
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