Biotech Beware: Increased SEC Focus on COVID-Related Activities and Claims Amplifies the Enforcement Risks for the Unaware or Brazen

July 08, 2020

Key Takeaways

  • As stocks surge in reaction to news about COVID-19-related products and solutions, the SEC is actively working to protect investors from misleading statements, fraud, and even investment scams relating to the COVID-19 crisis.

  • The biotech sector, in particular, has been in the spotlight: Since February, the SEC has suspended trading in more than 20 biotech companies for issuing misleading statements related to COVID-19, and, since May, the SEC’s Enforcement Division has brought several actions against biotech companies, their executives, and other market participants for making misleading announcements and/or engaging in other questionable conduct related to COVID-19.

  • Pursuant to recent guidance from the SEC, companies should “provide disclosures that allow investors to evaluate the current and expected impact of COVID-19” or face the consequences, and investors should “look out for coronavirus investment scams.”

The COVID-19 crisis has generated intense interest in, and reliance on, the biotech sector. Although many businesses are scrambling to adjust to the “new normal” of working remotely and otherwise adapting their business practices, recent headlines about vaccine candidates and other products designed to combat COVID-19 have generated enormous excitement and driven huge stock price increases.

At the same time, regulatory focus on alleged misleading statements and/or omissions about COVID-19 related products and product candidates has led to an uptick in pandemic-related enforcement actions. In May 2020, the Securities and Exchange Commission (“SEC”), with assistance from Financial Industry Regulatory Authority (“FINRA”), filed two enforcement actions against companies for their allegedly misleading public announcements about products positioned to combat the COVID-19 pandemic. On June 9, the SEC filed fraud charges against a trader for allegedly making misleading statements in an online investment forum about a company’s development of an “approved” COVID-19 blood test, and on June 11 the SEC announced its case against individuals in connection with a US$25 million fraud scheme aimed to capitalize on the COVID-19 pandemic.

Further, the SEC has suspended trading in more than 30 companies for issuing misleading statements related to COVID—about two-thirds of which are biotech companies. On June 23, the SEC issued guidance encouraging companies “to provide disclosures that allow investors to evaluate the current and expected impact of COVID-19.” For the foreseeable future, biotech will remain in the spotlight, and market participants should proceed with caution.

Stocks Have Surged In Reaction To COVID-19 Product And Candidate Announcements

On May 18, 2020, the Wall Street Journal reported that stocks soared on “hopeful developments surrounding a potential coronavirus vaccine,” with the Dow Jones surging more than 900 points that day—the index’s best day in 6 weeks. Then, after the New York Stock Exchange trading floor re-opened after Memorial Day, on May 26, the Wall Street Journal reported that stocks “surged on optimism about economies reopening and the potential development of a coronavirus vaccine,” with another 600 point surge by the Dow. Similarly, on July 7, the Wall Street Journal reported that U.S. markets had “jumped” after the long Fourth of July weekend, “boosted by shares of businesses [including] medical technology companies.”

Companies working to develop COVID-19 vaccine candidates have especially enjoyed a boost from investors in recent months. For example, on May 26, Barron’s (published by Dow Jones & Company) reported that Novavax enjoyed a single-day stock increase of more than 15% after announcing that it had received US$388 million from the Gates Foundation’s Coalition for Epidemic Preparedness and begun a Phase 1/2 trial of its own potential COVID-19 vaccine. And, weeks later, on July 7, CNBC reported that Novavax stock “soared 31.6%” after announcing an additional $1.6 billion in funding from the federal government for further development of its COVID-19 vaccine candidate; Novavax’s stock price is now up nearly 2,350% so far this year—from US$4.49/share on January 2 to US$104.56/share as of July 7. Similarly, according to the Wall Street Journal, Humanigen, Inc. stock enjoyed a single-day, 30% jump on June 15 due to promising results from early human trials of an experimental COVID-19 treatment.

Overall, biotech stocks are up nearly 50% since mid-March. The NASDAQ Biotechnology Index ("NBI") has increased from 2,961.94 on March 16 to 4,402.64 on July 7, and stocks of companies providing solutions to the COVID-19 pandemic, in particular, are riding high. But the recent boom in the biotech sphere is not without its risks.

The SEC Protects Investors, Especially Amidst a Crisis

As emphasized in its 2019 Annual Report, the SEC’s Division of Enforcement is “acutely focused” on protecting investors against the “bad actors in the securities markets.” This focus has only sharpened in the backdrop of these uncertain times since the COVID-19 outbreak.

On February 4, the SEC issued an Alert (updated on June 23) urging investors to “Look Out for Coronavirus Investment Scams.” Since the Alert was issued, the SEC has suspended trading in more than twenty publicly-traded biotech companies in connection with COVID-19, as the SEC believed information about the companies was “inaccurate or unreliable.” In late March, the SEC established a Coronavirus Steering Committee, with a mandate to “proactively identify and monitor areas of potential misconduct.” The Committee’s focus has been, most notably, on microcap fraud, insider trading, and adequacy of disclosure from public companies about the impact of COVID-19 on their business. 

On June 23, the SEC’s Division of Corporation Finance issued CF Disclosure Guidance encouraging companies “to provide disclosures that allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management and to proactively revise and update disclosures as facts and circumstances change.” Considerations companies should consider disclosing include any information “material to an investment or voting decision,” such as the company’s transition to a remote workforce, disruptions or adjustments to the company’s supply chain, and any number of “financing activities” that companies have undertaken in response to the effects of COVID-19.

Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement, affirmed on May 14: “We are actively monitoring the markets to detect potential fraudsters who seek to use the COVID-19 crisis as a basis for investment scams.” Her Co-Director, Steven Peikin, added: “We will continue to act swiftly when necessary to protect investors.” They have held true to their word.

The SEC Brings Enforcement Actions for Misleading COVID-19 Announcements

Beginning in May and continuing this month, the SEC has brought enforcement actions against microcap companies and other market participants for making allegedly false and misleading statements—claiming solutions for the COVID-19 pandemic or otherwise fraudulently capitalizing on the pandemic—that they had reason to believe were untrue or incomplete.

In its May 14 complaint against Applied Biosciences, the SEC alleged that the company’s March 31 press release that its finger-prick COVID-19 tests were to be used for “Homes, Schools, Hospitals, Law Enforcement, Military, Public Servants or anyone wanting immediate and private results” was misleading. According to the SEC, the tests had to be administered in consultation with a medical professional and therefore were not intended for home use or use by the general public. In addition, the complaint alleged that no Applied Biosciences tests had been shipped prior to that announcement, and the press release further failed to disclose that the tests were not FDA-approved.

Also on May 14, the SEC filed a complaint against Turbo Global Partners and its CEO, alleging that the company’s announcements that it would be engaging in a “multi-national public-private partnership” to make thermal scanning (fever detecting) equipment widely available was false and misleading. The allegedly problematic statements included an assertion that the equipment was “99.99% accurate” and was “designed to be deployed IMMEDIATELY in each State,” when, according to the SEC, no multi-national agreement or partnership with the company existed. The SEC further alleged that the company’s CEO knew the statements to be false when he drafted the releases.

On June 9, 2020, the SEC brought an enforcement action against Jason C. Nielsen, a penny stock trader.  In its complaint against Nielsen, the SEC alleges that Nielsen “engaged in a ‘pump and dump’ scheme involving the stock of Arrayit Corporation [ ], a biotechnology company.”  Specifically, the SEC alleges that Nielsen “posted numerous false and misleading statements on an internet forum that were designed to encourage other investors to buy Arrayit stock and, thereby, drive up the price of the stock.” According to the SEC, “Nielsen then sold his shares of Arrayit stock at the artificially-inflated price and reaped the profit.” The SEC also made a variety of other allegations against Nielsen relating to the pandemic, including that he made “statements that Arrayit had developed a COVID-19 test; that Arrayit had an Emergency Use Authorization application for the COVID-19 test pending with the U.S. Food and Drug Administration (FDA); and that Arrayit received FDA approval for its COVID-19 test[.]”

More recently, on June 11, the SEC announced that it brought a complaint against several Microcap Fraud Scheme participants, alleging that the participants (five individuals and six offshore entities) engaged in a scheme generating more than US$25 million from stock sales of companies subject to SEC trading suspensions. According to the SEC, the scheme involved the illegal dumping of the illicit stock onto unsuspecting investors, fraudulently capitalizing on the COVID-19 pandemic by boosting stock sales through false and misleading promotional campaigns. The fraudulent promotional campaigns allegedly included false claims that the suspended companies would provide goods and services to help combat COVID-19, such as medical quality facemasks or automated kiosks for retail use.

In Conclusion

Consumers and investors around the globe are carefully eyeing, and quickly digesting, announcements from the biotech industry for glimmers of hope. As the SEC cautions, even those companies not directly making claims about COVID-19 products or solutions should take care to ensure their public disclosures are accurate—both by disclosing the impact of COVID-19 on their business and by not hiding unrelated weaknesses under the guise of a COVID-19 consequence. The market regulators are watching, and market participants should tread lightly.

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