Biotech Company Settles SEC Charges for Misleading Statements on Clinical Trials

A biotherapeutics company settled SEC charges for making materially false statements to investors about the status of the Food and Drug Administration's ("FDA") clinical trials on two of the company's drug candidates.  

According to the Order, the company was notified by the FDA in June 2021 that it had placed two of the company's investigational drug applications on clinical hold, preventing the company from proceeding with clinical trials until deficiencies were addressed. The SEC found that the company failed to disclose the clinical holds in its SEC filings, investor presentations, or during due diligence discussions related to a $40 million stock offering in early July 2021. The SEC said the company presented misleading timelines suggesting that trials would begin in the third quarter of 2021.

Further, the SEC found that statements in the company's filings, including its Form S-1 and final prospectus, omitted material facts about the FDA's clinical holds. The SEC said these documents acknowledged hypothetical risks of a clinical hold but did not disclose that the FDA had already imposed such holds. The SEC found that the company misled its underwriters and auditors during due diligence calls by failing to disclose the clinical holds, despite being directly questioned about the regulatory status of its investigational drugs.

The SEC also found that the company's former CEO and CFO signed and approved Form 10-Qs that contained false statements and failed to correct to investors. (See Complaint and Order.)

As a result, the SEC determined that the company violated SEA Sections 13(a) ("Periodical and other reports") and 17(a) ("Records and Reports") as well as SEA Rule 13a-15(a) ("Controls and Procedures"); the former CFO violated SEA Section 13(a) and SEA Rules 12b-20, 13a-13 and 13a-14. The SEC charged the former CEO with violating SEA Sections 13(a) and 17(a) as well as SEA Rules 12b-20 ("Additional information"), 13a-13 ("Quarterly reports on Form 10-Q"), 13a-14 ("Certification of disclosure in annual and quarterly reports") and 13a-15(a).

To settle the charges, the company agreed to (i) a cease-and-desist order and (ii) implement enhanced disclosure procedures, which included (a) appointing an interim CEO who received training on appropriate disclosure controls and procedures; (b) establishing a Disclosure Committee comprised of management; and (c) appointing two new independent directors to the Board. No civil monetary penalties were imposed due to the company's self reporting, cooperation and remedial actions.

The former CFO agreed to (i) a cease-and-desist order and (ii) pay a $20,000 civil penalty based, in part, upon his cooperation. The former CEO agreed to (i) an enjoinment from committing further violations; (ii) civil money penalties; and (iii) a bar from acting as an officer or director of any registered securities issuer.