by Anne E. Railton and Courtney D. Orazio

Insider trading has long been a key enforcement priority for the U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DOJ).  The COVID-19 pandemic has caused market volatility not seen in decades, creating heightened concerns about insider trading that have only sharpened this focus.  Life sciences companies—including biotechnology, pharmaceutical, medical device, and healthcare product and services businesses—are likely to be particular subjects of scrutiny.  Already frequent targets of SEC and DOJ focus even before the pandemic, many life sciences companies on the frontlines of fighting COVID-19 have been privy to a regular stream of material COVID-related, market-moving information.  The ongoing opportunities for breakthroughs in responding to the pandemic create opportunities for lucrative trading, too—and regulators and prosecutors have taken notice.  Life sciences companies, along with their executives and directors, have already—and will continue to—face scrutiny arising out of event-driven trading issues relating to COVID-19 diagnostics, treatments, and vaccines. 

The Life Sciences Industry Was an Enforcement Priority Even Before the Pandemic

Insider trading actions in the life sciences industry are not new.  Life sciences companies are uniquely poised to achieve (or fail to achieve) major milestones. For instance, positive clinical trial results, FDA approval of a new drug, or significant transactions can have a dramatic impact on the company’s stock.  That volatility increases the risk of company insiders trading on (or tipping) material nonpublic information in advance of market-moving announcements, and recent years have seen the SEC and DOJ bring several cases cracking down on this conduct. 

In September 2016, for example, the SEC and DOJ brought parallel actions charging former Puma Biotechnology executive Robert Gadimian with insider trading ahead of the company’s announcements about its drug to treat breast cancer.[1]  The SEC alleged that Gadimian pocketed more than $1.1 million in illicit profits by purchasing Puma stock and options based on confidential information concerning positive clinical trial results for the drug.[2]  After pleading guilty to seven counts of securities fraud, Gadimian was sentenced to more than two years in prison.[3]

In June 2017, former Congressman Chris Collins, a director at Australian biotechnology company Innate Immunotherapeutics, and his son were charged with securities fraud for trading on material nonpublic information that Innate’s multiple sclerosis drug had failed a clinical trial.[4]  Collins was alleged to have passed the information to his son, who sold more than 1 million shares prior to the announcement of negative trial results.[5]  Collins was later sentenced to 26 months’ imprisonment and a $200,000 fine, while his son received six months’ home confinement and a $150,000 fine.[6]

Just last month, biotech executive Mark Ahn pleaded guilty to trading on confidential information in 2017, in advance of a buyout of Dimension Therapeutics.[7]  In parallel complaints against Ahn, the SEC and DOJ alleged that, while working as a consultant for Abeona Therapeutics, Ahn learned that Abeona was exploring an acquisition of Dimension, and began buying Dimension shares.[8]  After Dimension announced it would be sold, the company’s stock soared nearly 200%, at which point Ahn cashed out on his nearly 30,000 shares.[9]  Ahn is set to be sentenced in June.[10]

The Pandemic Portends a Heightened Focus on Insider Trading in the Life Sciences Industry

Over the past year, the SEC and DOJ have repeatedly emphasized the importance of combating COVID-related fraud, including insider trading and market manipulation, in light of the unprecedented volatility resulting from the pandemic.  Given their unique position at the forefront of pandemic response, life sciences companies are likely targets of this scrutiny. 

In a March 16, 2020 Memorandum for all United States Attorneys, former U.S. Attorney General William Barr directed all U.S. Attorney’s Offices to “prioritize the detection, investigation, and prosecution of all criminal conduct related to the current pandemic.”  On March 24, Barr followed up by announcing the creation of a national task force charged with addressing COVID-related fraud, specifically citing “market manipulation” as a task force enforcement priority.[11]  The DOJ has been true to its word: on March 26, 2021, the DOJ announced that to-date it has criminally charged 474 defendants with COVID-related fraud.[12] 

For its part, the SEC has shown a particular focus on trading-related enforcement investigations.  In a March 23, 2020 Public Statement Regarding Market Integrity, then-SEC Enforcement Division Co-Directors Steven Peikin and Stephanie Avakian cautioned that “a greater number of people may have access to material nonpublic information than in less challenging times,” warning those with such access—including directors, officers, employees, and consultants and other outside professionals—to be mindful of their duties of confidentiality and of the prohibitions against unlawful trading.  A few months later, on May 12, Peikin announced the creation of an SEC Coronavirus Steering Committee to monitor, among other things, “trading activity around announcements made by issuers in industries particularly impacted by COVID-19,” warning that “dynamic and volatile markets not seen in decades,” coupled with “a regular stream of potentially market-moving announcements by issuers, provide increased opportunities for insider trading and market manipulation.”[13] 

The SEC has also made good on its warnings: in its 2020 Annual Report, the Enforcement Division reported having opened more than 150 COVID-related investigations and having recommended several COVID-related fraud actions.  While most matters remain confidential at the investigation stage, investigations disclosed to date make clear that COVID-related trading issues in the life sciences industry are a key focus:

• In August 2020, Eastman Kodak disclosed that it was under SEC investigation in connection with a $765 million federal loan the company received to produce pharmaceutical ingredients for potential COVID-19 treatments, including due to concerns about insider trading around the time of the loan’s July announcement.[14] Kodak’s CEO received a $1.75 million stock option grant just one day beforehand, and former Kodak executives sold millions in shares after Kodak’s stock price soared more than 1,000 percent in the weeks following the news.[15]  Ultimately, Kodak disclosed in August that the loan had been put on hold, and that “Congressional investigations and an SEC investigation have been commenced which could affect the likelihood of the [loan’s] consummation.”[16] 
• In October 2020, Vaxart, Inc. disclosed[17] that it was under investigation by the DOJ and the SEC for allegedly exaggerating its role in the U.S. government’s Operation Warp Speed (OWS) program for developing COVID-19 vaccines and treatments, and potential insider trading around Vaxart’s OWS announcement.[18] In June, Vaxart issued a press release disclosing that its COVID-19 vaccine had been selected for OWS.[19]  Vaxart’s stock price soared on the news, and its controlling stockholder, a hedge fund, promptly sold shares for a profit of over $200 million.[20]  Later, news emerged that Vaxart had allegedly overstated its involvement in OWS, the company’s stock price tumbled, and the company found itself under investigation.[21]

These activities represent only a fraction of ongoing, still-confidential investigations into life sciences companies, and as the pandemic continues, further developments in testing, treatment and vaccines will continue to create opportunities for trading misconduct that will only draw further scrutiny.  In the coming year, we expect to see an uptick in trading-related enforcement actions and prosecutions.

Practical Takeaways For Public Life Sciences Companies

Against this backdrop, life sciences companies should pay special attention to their insider trading policies and controls to protect against the improper use of material nonpublic information.  Strategies to mitigate potential risk may include:

• Monitoring and documenting access to material nonpublic information. Companies should be diligent in monitoring which individuals become aware of information likely to be material to investors, and carefully analyzing trade requests—including requests to adopt or amend a trading plan under Rule 10b5-1—by directors, officers, and employees who are privy to such information. Companies should bear in mind that information that may be immaterial in ordinary times may be material, market-moving information in light of ongoing pandemic-induced volatility. 
• Training (and re-training) employees. The SEC Enforcement Division has emphasized that “a greater number of people may have access to material nonpublic information” than in ordinary times. Companies should provide robust, and frequent, employee training on insider trading policies and controls, including to employees who may not typically be privy to material nonpublic information.
• Revisiting trading plan policies. Rule 10b5-1 trading plans—which allow executives to sell stock at predetermined times without exposing themselves to insider trading liability, so long as the plans were adopted when the executive had no material nonpublic information and comply with certain other requirements—have come under scrutiny in light of trading that occurred in close proximity to COVID-related announcements. In November 2020 Congressional testimony, former SEC Chairman Jay Clayton called for lengthy, 4-6 month, “cooling-off” periods between adoption of a Rule 10b5-1 plan, and the first trade executed under the plan.[22]  Given Clayton’s comments, companies may wish to consider imposing (or lengthening) mandatory cooling-off periods for 10b5-1 plans. 

Indeed, effective corporate controls are not only important to protect against the risk of unlawful trading (or tipping) by company insiders, but as the SEC recently made clear, failure to maintain sufficient controls in this area can itself be a violation of securities laws.[23] 

The SEC recently cited energy company Andeavor LLC for deficiencies in this area.  In October 2020, the SEC announced that it had settled charges against Andeavor LLC for controls violations relating to a $250 million company stock buyback it implemented, pursuant to a corporate Rule 10b5-1 plan, while it was in discussions to be acquired by another company.[24]  As a result, the SEC issued a cease-and-desist order under Section 13(b)(2)(B) of the Exchange Act and imposed a $20 million penalty against Andeavor.[25]  According to the SEC’s order, Andeavor’s buyback was subject to company policy prohibiting repurchases while Andeavor was in possession of material nonpublic information, but the company “lacked an effective process for obtaining an accurate and complete understanding of the facts and circumstances necessary to determine” whether it in fact had such information.  The SEC’s order specifically highlights the importance of “conferring with persons reasonably likely to have potentially material information regarding significant corporate developments” before approving commercial transactions, finding that Andeavor’s process for evaluating the materiality of the acquisition negotiations did not include discussing the likelihood of a deal with the CEO.  Applying this guidance to the trading context, companies should consider implementing (and documenting) a formal materiality evaluation process in advance of opening the trading window, approving 10b5-1 plan adoptions or amendments, or authorizing other trading-related actions by insiders.

Anne E. Railton is a partner and Courtney D. Orazio is an associate at Goodwin Procter LLP.

Footnotes

[1] SEC Obtains Final Judgment Against Former Biotech Executive in Insider Trading Case, Litigation Release No. 24217, SEC v. Robert Gadimian, No. 1:16-cv-11955 (D. Mass.) (July 26, 2018), https://www.sec.gov/litigation/litreleases/2018/lr24217.htm.

[2] Id.

[3] Id.

[4] Press Release, Dep’t of Justice, Former Congressman and Two Others Settle Insider Trading Charges (Dec. 19, 2019), https://www.sec.gov/news/press-release/2019-257.

[5] Id.

[6] Nicole Hong, “With One Crime, and Ex-Congressman Damaged 2 Families,” N.Y. Times (Jan. 24, 2020), https://www.nytimes.com/2020/01/24/nyregion/chris-collins-son-insider-trading.html#:~:text=Broderick%20of%20Federal%20District%20Court,sparing%20him%20any%20prison%20time.

[7] Dep’t of Justice, “Press Release: Oregon Biotech Consultant Pleads Guilty to Insider Trading Scheme” (Mar. 2, 2010), https://www.justice.gov/usao-ma/pr/oregon-biotech-consultant-pleads-guilty-insider-trading-scheme.

[8] Id.; Complaint, SEC v. Mark. J. Ahn, No. 1:21-cv-10203 (Feb. 5, 2021), ECF No. 1, https://www.sec.gov/litigation/complaints/2021/comp25024.pdf (PDF: 231 KB).

[9] Id.

[10] Press Release, supra note 7.

[11] Office of the Attorney General, Dep’t of Justice, Department of Justice COVID-19 Hoarding and Price Gouging Task Force, “Memorandum” (Mar. 24, 2020), https://www.justice.gov/file/1262776/download (PDF: 415 KB).

[12] Dep’t of Justice, “Press Release, Justice Department Takes Action Against COVID-19 Fraud” (Mar. 26, 2021), https://www.justice.gov/opa/pr/justice-department-takes-action-against-covid-19-fraud.

[13] Steven Peikin, Co-Director, Div. of Enforcement, SEC, “Keynote Address at the Securities Enforcement Forum West 2020” (May 12, 2020), https://www.sec.gov/news/speech/keynote-securities-enforcement-forum-west-2020.

[14] Dave Michaels & Theo Francis, “Kodak Loan Disclosure and Stock Surge Under SEC Investigation,” Wall St. J. (Aug. 4, 2020, 7:00 PM), https://www.wsj.com/articles/kodak-loan-disclosure-and-stock-surge-under-sec-investigation-11596559126.

[15] Id.

[16] Eastman Kodak Co., Quarterly Report (Form 10-Q) (Aug. 11, 2020), https://investor.kodak.com/node/18561/html.

[17] Vaxart, Inc., “Report of unscheduled material events or corporate event (Form 8-K)” (Oct. 13, 2020), https://investors.vaxart.com/node/15576/html.

[18] Shannon Liao, “Covid-19 vaccine company under federal investigation after allegedly misrepresenting its role in government program Operation Warp Speed,” CNN Business (Oct. 18, 2020), https://www.cnn.com/2020/10/18/business/vaxart-sec-investigation/index.html.

[19] Id.

[20] Id.

[21] Id.

[22] Paul Kiernan, “SEC Chairman Urges Corporate Insiders to Avoid Quick Stock Sales,” Wall St. J. (Nov. 17, 2020), https://www.wsj.com/articles/sec-chairman-urges-corporate-insiders-to-avoid-quick-stock-sales-11605637892.

[23] See, e.g., SEC, “Press Release: SEC Charges Andeavor for Inadequate Controls Around Authorization of Stock Buyback Plan” (Oct. 15, 2020), https://www.sec.gov/news/press-release/2020-258.

[24] Id.

[25] Id.

Anne E. Railton is a partner and Courtney D. Orazio is an associate at Goodwin Procter LLP.

Disclaimer

The views, opinions and positions expressed within all posts are those of the authors alone and do not represent those of the Program on Corporate Compliance and Enforcement or of New York University School of Law.  The accuracy, completeness and validity of any statements made within this article are not guaranteed.  We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the authors and any liability with regards to infringement of intellectual property rights remains with them.