Watch Out: Increasing Scrutiny by the SEC of your Dealings with Regulators
I. The SEC Enforcement Trend
There has been an emerging enforcement trend by the U.S. Securities and Exchange Commission (“SEC”) focusing on public companies’ omissions of key feedback received from regulatory agencies and statements inconsistent with that feedback in the companies’ public filings and corporate communications. This has resulted in corporate defendants being required to disgorge illegal gains plus interest and pay millions of dollars of civil penalties, and in some cases, top executives being permanently barred from senior positions at public companies. In light of these recent SEC enforcement actions, it would be prudent for public companies operating in regulated industries, such as life science, medical device and clean-tech companies, to take special care in assessing how to share a regulatory update with investors and avoid making misleading public statements concerning their dealings with regulators.
II. Understand Where the Liabilities Come From
A recurring theme in these types of cases is that the public companies in question, according to the SEC, were not entirely forthcoming with investors about important communications with regulatory agencies that might cast serious doubt on whether the companies’ products could meet required regulatory approvals or standards. Under SEC rules and regulations, public companies not only shall refrain from making any untrue statement of a material fact but also may not omit a material fact necessary to render the statements made, in light of the circumstances under which they are made, not misleading. Below, we provide a brief overview of situations that have given rise to SEC enforcement actions:
A. In Connection with Raising Capital
Securities law prohibits fraud and misrepresentations in a company’s offer or sale of securities. In its action against AVEO Pharmaceuticals Inc. (“AVEO”), the
SEC alleged that when AVEO raised $53 million in a public offering, the company concealed the U.S. Food and Drug Administration (“FDA”)’s level of concern about the company’s flagship drug, tivozanib, in public statements to investors by omitting the critical fact that FDA staff had explicitly recommended a second clinical trial for tivozanib to address their concerns before they could approve the drug.
B. In Connection with SEC Filings
SEC filings have to be factually accurate and non-misleading. In addition, a public company’s CEO and CFO are required to certify in the company’s annual and quarterly reports that such reports are in compliance with SEC rules and regulations. In its action against Navistar International Corporation (“Navistar”) regarding Navistar’s efforts in obtaining a certificate of conformity from the U.S. Environmental Protection Agency (“EPA”) for Navistar’s next-generation diesel engine, the SEC alleged that four days after a meeting in which the EPA staff told Navistar that the proposed engine did not appear to meet the certification requirements, Navistar filed its 2011 annual report on Form 10-K, which stated that it believed the engine met EPA’s certification requirements.