Did Matrixx ( MTXX ) Commit Securities Fraud By Withholding Adverse Reaction Reports From the FDA?

Matrixx Initiatives, Inc. (Nasdaq: MTXX), the makers of Zicam products, looks like it committed securities fraud statutes when it failed to provide the Food and Drug Administration (FDA) with more than 800
reports relating to the loss of sense of smell associated with the Zicam Cold Remedy intranasal products.

According to the FDA, as of Dec. 2007, Matrixx was required to provide reports of adverse reactions to the agency per the Dietary Supplement and Nonprescription Drug Consumer Protection Act, which President Bush signed into law Dec. 22, 2006. The Act requires manufacturers, packers, or distributors whose name appears on a nonprescription drug or dietary supplement product label to notify FDA of any serious adverse event report associated with the product's use within 15 business days of receipt of such information. The industry was given a one-year grace period to begin to comply with the law.

In a letter to Matrixx, dated June 16, 2007, the FDA informed Matrixx it concluded that certain Zicam products may pose serious risks to consumers who use them, and that Matrixx marketing practices violate several laws relating to the products.

It also stated that the "agency is aware that Matrixx appears to have more than 800 reports related to loss of sense of smell associated with Zicam Cold Remedy intranasal products" and directed Matrixx "to arrange ubmission of all reports related to loss of sense of smell associated with Zicam Cold Remedy intranasal products" and to "indicate which of these reports have been previously submitted to the FDA."

Upon release of this letter by the FDA, Matrixx stock plummeted from approximately $19 per share to less than $7 per share. From the FDA ranscript:

Lisa Stark: Thank you. Actually most of my questions have been
asked. But let me ask you one thing. You mentioned that I think it was
after December 2007 the companies had to provide adverse event reports
to the FDA. They didn't have to do so prior to that. Did this company
since that time provide any adverse event reports to you based visa vie
these products?

Deb Autor(FDA): As Dr. Lee said, the reports that we have are
from consumers and healthcare providers. And in the warning letter we
have asked Matrixx to provide to us the more than 800 reports that we
know that they have relating to the lose of sense of smell associated
with the Zicam Cold Remedy intranasal products.Those have not been
provided to the agency at this time.

Lisa Stark: Should they have been under the current regulations?
Should you have received those reports?

Deb Autor: I can't address that question today.

On July 23, 2009, Matrixx acknowledged the Securities and Exchange Commission (SEC) is launching an informal inquiry. Since December 2007, insiders, including the Executive VP and CFO, the VP of Sales and the VP of Research and Development, have sold more than $2.7 million worth of Matrixx shares.

According to new reports, the COO said Matrixx first learned during the FDA's on-site inspection last month that the federal agency wanted all such "adverse events" reports immediately after consumers filed them with the company. Matrixx, acting on its legal advice, thought the company merely had to make such reports available to FDA inspectors during on-site visits."We have complaints here, clearly, but we weren't required to send them; at least we didn't believe we were required to
send them," he said.

The Hagens Berman press release regarding their investigation of this matter can be found here.