1. Nov. 20-26, 2015 Proudly serving Santa Barbara, Ventura and San Luis Obispo counties Vol. 16, No. 38
By Philip Joens
Staff Writer
Sientra,theGoleta-basedcompanythatde-
velopedabreakthroughtechnologyforbreast
implants,isinthefightofitsshortlifeasapub-
lic company.
Mysterious particles that appeared in the
sole factory it uses and the company’s failure
tosatisfyEuropeanregulatorsthatitsproducts
were safe set off a chain of events that led to
thecollapseofthecompany’sstockpriceanda
house-cleaning in the C-Suite.
ThefactoryinBrazilsufferedseveredamage
fromafireandthecompanynowfaceslitigation
overwhatitdidanddidnottodisclosetoshare-
holderswhenitsoldnewsharestothepublicon
Sept. 23 at $22. Shares closed at $2.99 on Nov.
18.
WhatSientrahasn’tdisclosedinanyregula-
toryfilings,however,isthatproblemswithpar-
ticlesatitsfactorystartedasearlyasthespring
of 2014.
Over the past two months, the Business
Times interviewed dozens of sources and
combedthroughhundredsofpagesofregula-
tory documents and news releases issued by
Sientra and other parties.
It’s clear Sientra was losing money before it
went public in October 2014, and needed new
sources of capital. A second public offering in
Septemberwouldhaveallowedittopaydown
debt and secure its future.
Butlawfirmsaroundthecountryallegethat
inthemonthspriortotheofferingtwomonths
ago, Sientra purposely hid information about
particle contamination and investigations by
American and European regulators.
Now,thequestionsthathangoverthecom-
pany are these: What did Sientra executives
knowabouttheproblemswiththefactoryinRio
deJaneiro?Didtheymakeadequatedisclosures
about the problems?
Sientra’sregulatorytroublesappeartohave
started in the spring of last year. In April 2014,
the Food and Drug Administration conducted
Sientracollapsedoomedexecs
During the past five years, Dig-
nity Health has made methodical
moves to bolster the healthcare sys-
tem in North Santa Barbara and San
Luis Obispo counties.
That strategy has paid off in im-
provedpatientcareandbetterfacili-
ties. Now health care is emerging as
an industry that attracts talent and
capital. It’s an industry that has gone
from a liability to a long-term asset
for attracting business to the region.
For Alan Iftiniuk, CEO of French
Hospital Medical Center in SLO, a
bigpieceofthehealthcarepuzzlefell
into place on Nov. 17 when around
250 business and civic leaders gathered
to unveil the three-story Copeland Health
Education Pavilion, a research and commu-
nitycenterthatwasfundedwithsubstantial
gifts from the Copeland Family.
The normally low-key Copelands, who
Plains ordered
to purge oil
from Line 903
By Alex Kacik
Staff Writer
Regulators have ordered Plains All Amer-
ican Pipeline to empty Line 903, which has
held corrosive crude oil since late May.
The U.S. Department of Transportation’s
Pipeline and Hazardous Materials and Safe-
ty Administration issued an order Nov. 13
requiringthatPlainspurgeits130-milepipe-
line that runs from Gaviota to Kern County.
Plains is responsible for the Refugio oil
spill that fouled the Gaviota coast when an
estimated 143,000 gallons of crude leaked
from Line 901 on May 19.
Freeport McMoRan, which relies on Line
903 to transport most of its oil, told PHMSA
that the rust inhibitor in its oil that currently
sits in the pipeline started wearing off in No-
vember. Neither PHMSA, Plains nor Free-
port specified why the line was not cleaned
DignityHealthinvestmentinCentralCoastpayingoff
see SIENTRA on page 19A
see PIPELINE on page 18A
see DUBROFF on page 17A
henry
dubroff
Editor
$1.50
Port of Hueneme plans
world trade center
See page 3A
East Ventura Co.
Companies preparing for
Small Business Saturday
See page 7A
THE INDEX
THE LIST: Municipalities. . . . . . . . 14A
Commentary. . . . . . . . . . . . . . 16A
Leads. . . . . . . . . . . . . . . . . . . . . . 12A
Newsmakers. . . . . . . . . . . . . . . . 5A
REAL ESTATE . . . . . . . . . 4A
Regulating short-term rentals
WINE. . . . . . . . . . . . . . . . . 6A
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2. 18A Pacific Coast Business Times Nov. 20-26, 2015 Nov. 20-26, 2015 Pacific Coast Business Times 19A
Sientra executives celebrate being listed on the Nasdaq after an IPO in October 2014.
COURTESYPHOTO
SIENTRA
Continued from page 1A
Probes, plant fire, punishing stock collapse
• April 2014
FDAinvestigatesreportsofmicroscopicparticlesonSientragelbreastimplants.
Sientra’sinternalprobeandindependenttestlabresultsrevealnoparticulate
contaminationinitsproducts.FDAconcludesnoimmediateactionneeded.
• April 2015
GermangovernmenthiresGermancompanyTUEVSUEDtoconductasurprise
investigationofSilimed’sfactoryinRiodeJaneiro.Sientraimplantsamples
showed silica and cotton particle contamination.
• July 2015
More Silimed factory samples taken by TUEV SUED show contamination.
• Sept. 17, 2015
TUEVSUEDsuspendsthreequalitymanagementcertificatesforSilimed.Silimed
acknowledgesEuropeaninvestigationbutsaysitsproductsaresafe.Silimed
voluntarily suspends sales of products in all of Europe.
• Sept. 18, 2015
Sientrafilesprospectussummaryforupcomingfollow-onpublicofferingbutdoes
not disclose knowledge of contamination investigations.
• Sept. 23, 2015
Sientraholdsfollow-onpublicoffering.Sharescloseat$20.58.UnitedKingdom
MedicinesandHealthcareProductsRegulatoryAgencysuspendssalesofSilimed
products in the UK. FDA leaves Sientra products on the market.
• Sept. 24, 2015
Sientrasharesplummetto$9.70.SientrafounderandCEOHaniZeinisendsaletter
to plastic surgeons reassuring them Sientra products are safe.
• Sept. 25, 2015
InvestorssueSientra,filingalawsuitseekingclass-actionstatusinfederalcourt.
• Oct. 9, 2015
Sientra voluntarily suspends sales of all products in America.
• Oct. 22, 2015
AfireatSilimed’sfactoryinRiodeJaneiroburnsdownthebuildingwhereSientra
implants are made.
• Oct. 28, 2015
Zeiniholdsaconferencecalltoupdateinvestors.Zeinisaysproductioncould
possibly resume at a smaller Silimed building.
• Nov. 12, 2015
Zeini,ChairmanNicholasSimonandGeneralCounsel,ChiefComplianceOfficer
andCorporateSecretaryJoelSmithallresign.ZeiniisreplacedasCEObyindustry
veteran Jeffrey Nugent. Sientra shares close at $3.88.
an investigation into reports that Sientra
breast implants were contaminated by mi-
croscopic particles of silica and cotton. Dur-
ing the investigation, the FDA reviewed a
report completed by Sientra and found no
particulatematteronSientrabreastimplants.
“The FDA looked at available internal
dataonSientraimplantsandfoundnochange
inadverseeventratesoreventsthatspecified
thepresenceofparticulatesonimplants,”the
FDAtoldtheBusinessTimesinastatement.
FAILURE TO DISCLOSE
Sientra,aprivatecompanyatthetime,did
not disclose the FDA review. According to
plastic surgeons, news of the FDA’s 2014 re-
viewwaswellknownthroughouttheplastic
surgery industry.
However, Sientra, whose shares started
trading on the Nasdaq market 13 months
ago, was not out of the woods.
In April 2015, the German Ministry of
Health gave inspection firm TUEV SUED
the authority to conduct a surprise inspec-
tionatthefactoryofSientra’smanufacturer,
Silimed, in Rio de Janeiro. Inspectors found
particulates of silica and cotton on breast,
calf, pectoral and other implants in the fac-
tory. More samples were taken in July and
they were also contaminated.
“The manufacturer was unable to ad-
equately clarify the origin of this contami-
nationanditsimpactsonproductsafety,”a
spokesman for TUEV SUED said. “In par-
ticular,thecompanyhastodatebeenunable
toimplementeffectiveandadequatecorrec-
tive actions within the scope of its quality
management system.”
While medical device regulatory bodies
fromacrosstheglobeworkwitheachother,
thereisnosetstandardforacceptablelevels
of particles on devices.
“Manufacturers are required to have ro-
bustqualitymanagementsystemsthatassure
the quality of their products,” the FDA said.
“There are standards for breast implants;
however,thesedonotincludelimitsforpar-
ticles.”
Doug MacKenzie, a surgeon at Santa
Barbara’s Pacific Plastic Surgery, told the
Business Times in October that European
regulatorsmaybemoresensitivetoproduct
recalls.
In 2012, British newspaper The Guard-
ianreportedtheUnitedKingdomMedicines
andHealthcareProductsRegulatoryAgency
didnottakeactionin2006whentheagency
found metal on metal hip implants could
cause cancer.
“Because of that, I think the Europeans
and the German inspectors may be a little
gun shy,” MacKenzie said.
The next critical date came on Sept. 17
when TUEV SUED suspended three qual-
ity management certificates, known as CE-
Marks, at Silimed’s factory.
Silimed acknowledged the European
investigation in a Sept. 17 news release by
sayingitvoluntarilypulleditsproductsfrom
the European market. Silimed said particles
werefoundonitsimplants,butsaidparticles
were normal on breast implants.
“Thepresenceofparticlesdoesnotmean
theproductiscontaminated,”Silimedsaidat
the time.
UK regulators found out on Sept. 18. A
spokesman for the agency said that once a
CE-Mark is suspended, it’s only a matter of
timebeforeaproductispulledfromtheEu-
ropean market.
On Sept. 18, Sientra also issued a pro-
spectus summary for a follow-on public of-
feringplannedforSept.23.Theofferingdid
notdiscloseeitherinvestigationbytheFDA
or European regulators. Sientra declined to
comment for this story.
SECOND PUBLIC OFFERING
Five critical days later, on Sept. 23, UK
regulatorsannouncedsalesofSilimedprod-
ucts were suspended in Europe. The same
day Sientra held its second public offering.
Shares started trading at $22 but closed at
$20.58.
The bottom fell out from Sientra’s stock
the next day in reaction to the suspension.
Sincethenshareshavecontinuedtoplunge,
losing86percentoftheirsecondarystockof-
fering value.
A source at a Los Angeles area invest-
mentfirmwhodeclinedtobeidentifiedsaid
thefirmonlyboughtintoSientraduringthe
second stock offering.
“Wehadneverthoughtofthepotentialfor
themtoknowabouttheregulators,thenan-
nouncingthefollow-onofferingafterward,”
saidthesource.“Thetimingiscertainlysus-
picious.”
Sientra’s own financial statements show
that on June 30, 2014 Sientra had just $21.6
million in cash on hand. But Sientra netted
about $77 million in the IPO on Oct. 29,
2014 and by the summer of 2015, Sientra
narrowed its losses.
Sientra lost just $5.81 million in 2014.
Operatingexpensesalsodecreasedslightly
to $39 million in 2014. With $89.66 million
incashand$93.43millioninworkingcapital
onJune30,2015,Sientraappearedtobeon
solid financial ground.
Sientraplannedtousetheproceedsfrom
its secondary offering in September for
working capital, to invest in new technolo-
gies, or repay some of its $25.7 million in
debt. Regulatory filings before both offer-
ings,quarterly,andannualreportssaySien-
tra places a heavy reliance on Silimed.
“Our manufacturer may not currently
beormaynotcontinuetobeincompliance
withallapplicableregulatoryrequirements,
which could result in our failure to produce
ourproductsonatimelybasisandinthere-
quired quantities, if at all,” a filing from Oct.
20, 2014 said.
Sientra pocketed $61.4 million in its sec-
ondary offering, and some of that money
may go to pay legal fees or settlements.
SHAREHOLDERS SUE
A class-action lawsuit filed on Sept. 25
in federal court in Los Angeles demands
thatshareholderswhopurchasedstocksbe-
tween March 18, 2015 and Sept. 24, 2015 be
compensatedfordamagescausedbySientra
withholding that information.
“Had Plaintiff and the other members
of the Class known the truth, they would
nothavepurchasedorotherwiseacquired”
Sientrashares,thecomplaintsaid.Claimants
have until Nov. 24 to sign on.
Sientra’s problems went from bad to
worse.
On Oct. 22, a fire badly damaged the
building where Silimed was producing im-
plants for Sientra.
Sientra CEO Hani Zeini and Chairman
NicholasSimonresignedwhenthecompany
cleaned house on Nov. 12. Zeini and Simon
will still serve on the board of directors.
Joel Smith, Sientra’s chief legal counsel
and chief compliance officer, resigned as
well. A Sientra news release on Nov. 12 did
not elaborate.
Jeffrey Nugent — a former executive at
Biolase, Precision Dermatology, Revlon and
Neutrogena — will be tasked with turning
around the company.
Sientra’s contract with Silimed runs
through April of 2017. Zeini said previously
thatalloptionsareonthetableatthispoint
and Sientra could potentially switch manu-
facturers.
During Sientra’s third quarter earnings
call Nov. 16, an analyst asked Nugent if that
wasstillthecase.Nugentrespondedthatthe
company was focused on fixing current is-
sues adding that “any considerations in this
area would challenge our focus.”
St. Louis brokerage Stifel said in a report
on Oct. 9 that it would stop covering the
company. “Anyfundamentalresearchinthe
near-termisovershadowedbytheongoing
regulatory events in Europe and Brazil (and
possibly the FDA), eliminating all visibility,”
the report said.
MANAGEMENT BREAKDOWN
PaulLeonardi,aprofessorintheUCSan-
ta Barbara Technology Management Pro-
gram,saidglobalsupplynetworksoffercost
savingsandtheabilitytosharetechnologies.
Because Sientra is a relatively small compa-
ny, and Silimed is very large, Leonardi also
saidSientramaynothavehadenoughlever-
ageoverSilimedtoforceSilimedintotaking
corrective actions.
“As you distribute more parts globally,
then the possibility for coordination failure
grows exponentially,” Leonardi said.
Gerhard Apfelthaler, dean of Cal Luther-
an’s School of Management, said cultural
andlanguagedifferencescouldhaveplayed
alargeroleinthebreakdownofcommunica-
tions between the two companies.
“Itstartswiththelanguagebarrierseven
if the words are the same they often don’t
meanthesamethingindifferentlanguages.”
Apfelthalersaid.“Somaybesomesubtleties
get lost in translation.”
PORT
Continued from page 3A
HAGGEN
Continued from page 3A
PIPELINE
Continued from page 1A
This Haggen store in Santa Barbara received bids in a bankruptcy auction.
ALEXKACIKFILEPHOTO
with the goal of reaching out to local
businessleaderssometimenextyear.The
goalistofocusononeindustryforabout
a year and then start researching a new
regional industry after that.
Apfelthaler said agriculture is going
to be the first industry the world trade
centerfocusesonandtechnologyshould
be the second.
Things keep progressing at the port.
On Nov. 4, the port received a
$12.3 million grant to deepen the port,
enlargecargobaysforshipsandimprove
dock and rail infrastructure at the port.
“This grant we received is tremen-
dous,” said Port of Hueneme President
Jess Herrera at a Nov. 12 breakfast meet-
ing held by the Oxnard Chamber of
Commerce. “There’s a lot of things we’re
going to be able to do with it that are go-
ing to allow us to create new jobs, new
facilities and it’s a very exciting time for
us.
Herrera also said the port benefitted
from recent closures at the Ports of Los
Angeles and Long Beach.
Closures at the ports snarled traffic
of cargo ships and left dozens sitting for
days as they waited to be unloaded. Her-
rera said some traffic from Los Angeles
and Long Beach was diverted to Port
Hueneme.
“Luckily, in our case, the Port of Hue-
neme handled a lot of cargo that was
diverted from the ports of LA/Long
Beach,” Herrera said. “We were working
around the clock to accommodate some
of that cargo, and our labor did a great
job. They stepped up to it.”
Some of those businesses are still cus-
tomers of the Port of Hueneme, he said.
Herrera also responded to the con-
cerns of a local businessman who said
theongoinglabor-relatedclosuresatthe
Los Angeles and Long Beach ports hurt
his business.
“We can’t do anything about it,” Her-
rera said. “Because that’s a labor and
management issue that comes up.”
Herrera noted that the Port of Hue-
neme receives more bananas than any
other good — importing 655,000 tons of
bananas last year. Fresh fruit producer
Del Monte even has a banana handling
facility at the port.
“It’senoughbananastogoaroundthe
world 12 and one-half times,” Herrera
said.
Automobiles are the port’s biggest
revenuesource.Theportsetanewrecord
byimportingandexporting321,000cars
last year.
Herrera said the port imports and ex-
ports about 880 cars per day, 6,157 cars
per week and 24,631 cars per month.
The port even exported its one millionth
Honda in 2012.
“We only have like 8,000 parking
spaces on the port, so it’s an amazing
juggling act to keep these cars coming
and going,” Herrera said. “The wonder-
ful thing about automobiles is they’re
very good for revenue and they’re also
labor intensive and they provide many,
many jobs.”
Haggen for allegedly not paying for inven-
tory. A former Carpinteria employee is also
suing the company for wrongful termina-
tionwhileaclass-actioncomplainthasbeen
filedonbehalfofdevelopmentallydisabled
workers the company laid off.
Grocery suppliers hold most of Hag-
gen’s unsecured debts, according to court
documents. Haggen, a majority of which
is owned by Florida-based investment firm
Comvest Partners, had a monthly payroll
cost of $26.4 million. It owes its 10,880
workers more than $11 million in unpaid
salaries, accrued wages and overtime pay.
“The only way you could fail at this level
is if you’re trying to do it on purpose,” Liv-
ingston said.
Haggen never gained traction. Many
shelves remained bare for weeks at a time
when it didn’t pay its distributors. Its food
wasmarkedupabout20percentanditdidn’t
offer anything unique, Livingston said.
“The last thing Albertsons wanted to do
is sell (stores) to a formidable competitor,”
he previously told the Business Times.
Albertsons looks to take over stores
at 1500 N. H Street in Lompoc and 163
S. Turnpike Road in Santa Barbara with
$300,000 and $1.6 million bids, respec-
tively. Sprouts successfully bid $1 million
for the 175 N. Fairview Ave. location in Go-
leta and $1 million for a Simi Valley store at
2800 Cochran St.
Albertsonsoperatesaround2,200stores
in more than 33 states while Sprouts has
200-plus stores across 13 states.
Commerce-based Super A, which runs
eightlocationsthroughoutSouthernCalifor-
nia, bid $500,000 for 2400 Las Posas Road
in Camarillo. Stater Brothers, which has 168
storesmostlythroughoutSouthernCalifor-
nia, bid $1.2 million for 660 E. Los Angeles
Ave. in Simi Valley. Roxy’s Market, which
operatestwosmallerstoresinColoradoand
Montana, bid for 2010 Cliff Drive in Santa
Barbara.Butthelandlordwasn’tinterested.
“Lazy Acres already fills that all-natural
niche,” Lawler said. “What people need
there is more conventional food, which is
(about 70 percent of) what we do.”
Haggen planned to hold on to 32 of its
146acquiredstores,butthecompanysaidit
alsoplanstoauctionthoseoffinaseparate
Januaryauction.Haggencouldendupwith
just five locations.
As for Lawler and his wife Roxy, they
have always been attracted to the region.
Lawler grew up in San Francisco but this
was his first business venture in Santa Bar-
bara. He is uncertain whether Roxy’s will
look for another location in the area.
“We’velookedatotheropportunitiesbut
haven’tbeenabletoconnectonanything,”
hesaid.“Thelandlordswereprobablylook-
ingforabiggerhitterbutagrocerofmysize
is putting their neck on the line.”
out earlier.
“This unprocessed crude may contain
water, natural gas and other impurities
thatcontributetointernalcorrosion,”the
order reads. “According to Freeport (Mc-
MoRan), the biocide and rust inhibitor in
this crude oil will begin to lose effective-
ness around November 2015, adding to
the risk of accelerated internal corrosion
on Line 903.”
Extensive corrosion is what may have
caused Line 901’s rupture on May 19,
according to PHMSA. Plains’ in-line in-
spection tool showed 45 percent metal
loss while a third-party estimated it was
closer to 80 percent.
“It does not appear that Plains has an
effective corrosion control program,” the
order reads.
Line 901 connects to Line 903, which
has also shown significant signs of dete-
rioration during internal inspections in
2013 and 2014, regulators say. An ex-
amination in April 2013 found that Line
903’s 38-mile segment between Gaviota
andSisquochad“99metallossanomalies
requiring investigation.”
“Based on our review of the in-line in-
spectiondata,wehavetofocusonrepairs
that need to be made on Line 903,” PHM-
SA Director of Public Affairs Artealia
Gilliard said.
PHMSA has the authority to impose
actionwhenthereisathreatofimminent
danger,butthatthreatwasn’tpresentuntil
now, Gilliard said.
“A PHMSA independent review of
Plains Pipeline’s in-line inspection sur-
veys discovered instances where the tool
miscalculatedthedegreeofcorrosionoc-
curring in specific portions of Lines 901
and 903,” the order reads.
Plains also withheld in-line inspection
data so “it could enhance its interpreta-
tion of the data,” the order reads.
Line 903 ceased operation on May 28,
except for a 15-mile section from Pent-
land to Emidio that is operating intermit-
tently at a reduced pressure. A February
2014analysisfoundthatsectionhad“two
girthweldanomaliesrequiringinvestiga-
tion.”
PHMSA recently proposed new rules
thataimtopreventfurtherinspectiondis-
crepancies, Gilliard said.
Public officials have called for more
vigilantpipelineregulation,requiringthe
use of new technology and improving oil
spill response. Gov. Jerry Brown signed
three bills that require the California Fire
Marshalltoreviewoilpipelineconditions
every year, not every five years as man-
dated by more lax federal regulations;
aim to make oil spill response faster and
more effective; and force intrastate pipe-
lines to use the best technology such as
automatic shutoff valves.
Line 903 will remain shut down after
itiscleanedout,independentlytestedand
filled with inert gas that aims to prevent
further degradation, according to the or-
der.
If Plains does not contest the order, it
has until Nov. 28 to submit a purge plan.
PHMSA’s investigation is ongoing.
Pipelineinvestigationstakeanaverageof
20 months, the administration said.
”This alarming pattern of corrosion
on both Lines 901 and 903 is unaccept-
able and PHMSA must ensure Plains
fully addresses the problems prior to any
considerationofarequesttorestarteither
of these pipelines,” Rep. Lois Capps, D-
Santa Barbara, wrote in a letter to Plains.
Plains replied to that letter by saying it
voluntarily took the portion of Line 903
from Gaviota to Pentland out of service.
Twooftheregion’sbiggestoilproduc-
ers,ExxonMobilandVenoco,havehalted
their entire production due to the pipe-
line shutdowns. They are stuck until they
come back online – estimates range from
18 months to five years.
If the pipelines do not restart over the
next three years, Santa Barbara County
could lose out on an estimated $74 mil-
lion, according to preliminary findings
by Mark Schniepp of the California Eco-
nomic Forecast.
Santa Barbara County officials said
they plan to file a claim with Plains for
lost property tax revenue. But it could
take years for the county to be made
whole.
“It is critical that (PHMSA) requires
Plainsthatbothoftheselinesremainshut
down until a full investigation is com-
plete, the corrosion issue is fully under-
stood, corrective actions are taken, and it
is demonstrated that both Lines 901 and
903 are safe to operate,” Capps wrote.