Case 2:13cv06808PD Document 18 Red 04/14114 Page 1 of 99 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA GUY RATZ, Individually and on behalf of all others similarly situated, Plaintig CIVIL ACTION NO.: 2:13-cv-06808-PD vs. PHOTOMEDEX, INC., DENNIS M. MCGRATH and DOLEV RAFAELI, JURY TRIAL DEMANDED Defendants. April 14, 2014 AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS Scoff it Shepherd Jams E Miller Jams C. Shah Karen Leser- Grenon Eric L. Young SHEPHERD, FINKELMAN, MILLER SHEPHERD, FINKELMAN, MILLER & SHAH, LLP & SHAH, LLP 65 Main Street 35 East State Street Chester, CT 06412 Media, PA 19063 Telephone: (860) 526-1100 Telephone: (610) 891-9880 Facsimile: (866) 300-7367 Facsimile: (866) 300-7367 Email: jrnii1er(i4sfrsbw. corn Email: sshepherd(à)sfiris]aw.corn 1deser(2),sfrsJaw. corn shah':.uimIawconi eyoun Inis1aw. corn Attorneys for Lead Plaintiff and the Proposed Class Case 2:13cv06808PD Document 18 Red 04/14114 Page 2 of 99 TABLE OF CONTENTS Page TABLE OF CONTENTS ......................................................... I. INTRODUCTION ........................................................ 1 II. NATURE OF THE ACTION................................................ 2 III. JURISDICTION AND VENUE .............................................. 8 IV. PARTIES...............................................................9 A. Lead Plaintiff ......................................................9 B. Defendant.........................................................9 V. FACTUAL ALLEGATIONS ............................................... 11 A. The 2011 Reverse Merger ............................................ 11 B. The No!No! Hair Removal Product And Its Status As PhotoMedex's Core Product ...................................................... 15 VT. CLASS PERIOD STATEMENTS, MATERIAL MISREPRESENTATIONS AND MATERIAL OMISSIONS............................................ 24 VII. THE TRUTH COMES TO LIGHT ........................................... 52 VIII. ADDITIONAL FACTS GIVING RISE TO A STRONG AND COGENT INFERENCE OF SCIENThR .....................................67 IX. LOSS CAUSATION.....................................................79 X. APPLICABILITY OF PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET............................................... 83 XI. INAPPLICABILITY OF THE SAFE HARBOR ................................ 84 XII. CLASS ACTION ALLEGATIONS.......................................... 85 -1- Case 2:13cv06808PD Document 18 Red 04/14114 Page 3 of 99 COUNT I VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE lOb-S THEREUNDER (Against PhotoMedex, Rafàeli and McGrath)..............................88 COUNT II VIOLATIONS OF SECTION 20(a) OF THE EXCHANGE ACT AND RULE lOb-S THEREUNDER (Against Rafaei and McGrath) . ........... 92 JURY DEMAND..............................................................94 -ii- Case 2:13cv06808PD Document 18 Red 04/14114 Page 4 of 99 I. INTRODUCTION 1. Lead Plaintig Asbestos Workers, Local 14 Pension Fund, by and through its undersigned counsel, individually on its own behalf and on behalf of all persons or entities that purchased and/or acquired the common stock of PhotoMedex, Inc. ('PhotoMedex" or the 'Company') between November 6, 2012 and November 5, 2013 (the "Class Period"), brings this action seeking relief under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § § 78j(b) and 78t(b) (the 'Exchange Act') and Rule 1 Ob- S promulgated thereunder by the United States Securities and Exchange Commission ("SEC"), 7 C.F.R § 240. 10b-5, against PhotoMedex, the Company's Chief Executive Officer Dolev Rafàeli, Ph. D. ("Rafàei'), and the Company's Chief Financial Officer, President, and Director Dennis M. McGrath ('McGrath"), as well as for control person liability under Section 20(a) of the Exchange Act, 15 U.S.C. § 78t, against Rafàei and McGrath (the individual Defendants'). Lead Plaintifl in support of this Amended Complaint ("Complainf) and for its claims, alleges the following upon knowledge as to itself and its own acts and, as to all other matters, based upon the investigation nude by and through its counsel, which included the following: (a) review and analysis of filings nude by PhotoMedex and the Individual Defendants with the SEC; (b)review and analysis of press releases, public statements, news articles, securities analysts' reports, earnings conference call transcripts, and other publications disseminated by or concerning PhotoMedex; (c) interviews with former employees (identified herein as confidential witnesses) of Photomedex and its predecessor, Radiancy, Inc. ('Radiancy"); (d) review of other publicly available inforimtion about or pertinent to PhotoMedex and the allegations in this Complaint; and (e) independent analysis of the above items. Additional facts supporting the allegations contained herein are -1- Case 2:13cv06808PD Document 18 Red 04/14114 Page 5 of 99 known only to the Defendants or are exclusively within their control at this time. Lead Plaintiff believes that substantial additional evidential support exists for the allegations set forth in this Complaint that will be revealed after a reasonable opportunity for discovery. II. NATURE OF THE ACTION 2. PhotoMedex, currently headquartered in Horsham, Pennsylvania, describes itself as a "leader in the dermatology market, committed to the Science of Skin Health in disease management and skin rejuvenation," Hip://www.phoiomedexcorn(conyany/purposehtrn, with the purpose "to provide branded dermatological solutions of superior value to improve patients' lives now and into the future." Id. To that end, the Conpany supplies proprietary products and services that address skin diseases and conditions including psoriasis, vitiligo, acne, actinic keratosis, and photodamage. The Company's flagship product, however, which generates most ofthe Company's revenues, is the no no! hair removal device ('no no! device"), described in more detail below. 3. In its current form, PhotoMedex is the result of a December 2011 'reverse merger" with Radiancy,' a fornirly privately-held developer and manufacturer of home- use and professional aesthetic and dermatological devices headquartered in Orangeburg, New York, with significant operations in the State of Israel- ' A 'reverse merger," otherwise known as a 'reverse takeover," is "a type of merger used by private companies to become publicly traded without resorting to an initial public offering. Initially, the private company buys enough shares to control a publicly traded conpany. The private company's shareholder then uses their shares in the private company to exchange for shares in the public company. At this point, the private company has effectively become a publicly traded one." httpi/www.investcpedia.com'terms!r/reversetakeover.asp; see also https:'/www.sec.gow'investor/alerts/reversenrrgers.pdf(explahtg the nature of reverse mergers in general). -2- Case 2:13-cv06808PD Document 18 Red 04/14114 Page 6 of 99 4. Radiancy marketed and sold a range of home-use devices under its proprietary brand, no! no! ®, for various indications including hair removal, acne treatment, skin rejuvenation, and facial muscle toning, which PhotoMedex now markets and sells as a result of the merger. Prior to the reverse merger, Radiancy's chief product was the no !no! device. Under the terms of the merger, Radiancy's President and Chief Executive Officer ("CEO"), Rafaeli, became the CEO of the new PhotoMedex, while PhotoMedex's previous President and CEO, McGrath, assumed the position of President and Chief Financial Officer ("CFO") ofthe new PhotoMedex 5. After the reverse merger, Radiancy's no !no! hair removal device became the new flagship product for PhotoMedex, and the Company's main revenue and profit driver. According to one of the advertising websites operated by Radiancy (which, following the reverse merger, became a wholly owned subsidiary of PhotoMedex), the no! no! device works through direct application ofthe device to the skin, whereupon the device transmits heat to the hair and removes it (httpliwww.trynono.conTilhownono-hawworks/). From the time of the December 2011 reverse merger and even continuing today, PhotoMedex represents to investors that the no! no! device has several technical "competitive advantages" over other hair removal products/ processes such as shavers, waxing, threading, and laser-based and intense pulsed light-based products. In fact and unbeknownst to investors, the no !no! device is no better or more effective at removing hair or reducing hair regrowth than a shaver, though it is significantly more expensive than a razor, with some models priced at approximately $270 per unit and others more than $300 per unit for retail. Essentially, PhotoMedex' s business model of generating revenue from the no! no! device relies on a massive false advertising campaign, which misinforms and -3- Case 2:13cv06808PD Document 18 Red 04/14114 Page 7 of 99 cajoles consumers into purchasing a novelty product that reliable scientific studies establish is lacking in efficacy. Indeed, the Company's advertising canpaign cites to three studies, one conducted in Chile, another conducted in Israel (in-house at Radiancy's clinical department), and the last in the United States (funded by Radiancy), which ostensibly provide clinical proof of the no!no! device's superior efficacy. As explained below, the Company and Individual Defendants are well aware that the no no! device lacks efficacy and is no more effective than a razor. Nevertheless,