Recent SEC Case Against Biotech Company Highlights the Intersection Between FDA Findings and SEC Enforcement

Introduction

On December 3, 2024, the U.S. Securities and Exchange Commission (SEC or Commission) announced that it filed settled charges against Kiromic BioPharma, Inc. (Kiromic or Company), its former Chief Executive Officer Maurizio Chiriva-Internati, and its former Chief Financial Officer Tony Tontat. According to the SEC’s press release and pleadings, Kiromic failed to disclose material information about the status of two of its pending investigational new drug (IND) applications to the U.S. Food and Drug Administration (FDA). According to its Order, the SEC did not impose a civil penalty against Kiromic because of its self-reporting to the SEC, remedial actions, and cooperation with the SEC’s investigation. Chiriva-Internati and Tontat agreed to civil penalties of $125,000 and $20,000, respectively, and Chiriva-Internati agreed to a three-year officer and director bar.

This case highlights the critical intersection between FDA regulatory processes and investor disclosures under the securities laws. Additionally, this case highlights how responding promptly to internal whistleblower reports may reap benefits in the form of cooperation and remediation credit from the SEC.

Key Facts

FDA Hold

According to the SEC’s Order, in June 2021, the FDA called Kiromic’s then-Chief Medical Officer (CMO) with news: the agency had placed two of Kiromic’s new cancer drug development programs on clinical hold, meaning the FDA was not permitting Kiromic to start clinical testing. The CMO allegedly let Chiriva-Internati know about the holds that day. A few days later, Chiriva-Internati met with the Board of Directors. According to the SEC’s Order, Chiriva-Internati’s communications with the Board “about the status of the [FDA’s hold] was imprecise.” While Chiriva-Internati mentioned that the IND applications were on hold, according to the Order, some members of the Board apparently left the meeting thinking that the FDA was still reviewing the IND applications.

Subsequent Investor Raise

The SEC Order states that Kiromic needed funds and, two weeks after the FDA’s call about the clinical hold, raised $40 million through a common stock offering. Although the purpose of the raise was to fund the drugs’ clinical trials, the SEC noted that in its investor roadshows, due diligence calls with underwriters and auditors, and SEC filings, Kiromic did not disclose the key fact that the FDA had stopped those trials from proceeding. Specifically, the SEC noted that the underwriters were particularly interested in when Kiromic would receive the FDA’s authorization to start clinical trials because the underwriters viewed this as a critical selling point for the offering. The SEC alleges that the clinical holds were not disclosed during those calls.

As is the FDA’s standard practice, a month after the FDA’s call, Kiromic received letters from the agency detailing why it had stopped the trials from proceeding. Tontat reviewed the letters and advised Chiriva-Internati and Kiromic’s Chief Strategy Officer that the letters were “material information” and urged their disclosure. But Kiromic’s subsequent press release downplayed the news, only stating that the “FDA returned with comments,” and did not reference the clinical hold. According to the SEC Order, Tontat subsequently certified the Company’s Form 10-Q even though he knew it omitted information about the FDA clinical hold.

Internal Whistleblowers Raise the Alarm

Following the filing of the Form 10-Q, the company’s internal anonymous hotline rang. Two internal whistleblowers reported their concerns about Kiromic’s SEC disclosures and public statements about the FDA communications and clinical trials. A special committee consisting of independent directors of the Board was formed to review the whistleblower complaints. The special committee brought in outside counsel to investigate the whistleblowers’ allegations, which were substantiated.

Self-Report and Remediation

The SEC highlights steps taken by the Board that resulted in no monetary penalty against the Company. These remedial measures included: (i) terminating Chiriva-Internati and appointing an interim CEO trained in disclosure controls and procedures; (ii) establishing a disclosure committee comprised of management; (iii) appointing two new, independent Board directors; (iv) voluntarily self-reporting the violations to the SEC; and (v) subsequently cooperating with the investigation, including facilitating the submission of sworn declarations and testimony from foreign-based witnesses.

Key Takeaways

The Kiromic Order offers several key takeaways worth considering.

• Carefully consider statements related to FDA correspondence, actions, and review timelines. Life sciences companies frequently need to make decisions regarding what, whether, and when to communicate to investors regarding the FDA review process. Life sciences companies dealing with FDA review of INDs and other review processes, even early in development, should be constantly evaluating the need to make or update disclosures. Any statements about the FDA review process likely will receive close attention, so ensure they are accurate. Resist the urge to issue statements that downplay bad news, as the SEC may view them as being materially misleading or reflecting omissions of material information. The SEC likely will have the communication from the FDA and will compare it to the public statements and disclosures.

In the Kiromic matter, the SEC’s Order emphasized that information about Kiromic’s FDA review timeline was important to their investors and underwriters. The Order noted that Kiromic’s first press release after receipt of the FDA hold — which did not mention the hold, but only that there were “comments” from the FDA — dropped Kiromic’s stock price “by an abnormal 16.36%.” The SEC highlighted this in the Order to show that even the receipt of comments from the FDA was important to Kiromic’s investors and impacted the stock price. The Order also noted that underwriters viewed the deficiencies detailed by the FDA in the hold letters, and the effect on the drugs’ development timeline, as significant information.

• Ensure proper disclosure controls and training. The SEC found that Kiromic did not maintain the required disclosure controls and procedures designed to ensure that information the Company disclosed was accurate. Proper training of management and directors, as well as effective disclosure controls, can prevent disclosure problems before they happen. Consider whether a dedicated disclosure committee is appropriate. The SEC has brought standalone cases based solely on the lack of disclosure controls at a company. We discussed one such case in our February 2023 Advisory.
• An anonymous company hotline can catch issues early. The Kiromic matter showcases the value of robust internal reporting channels as many investigations start with a whistleblower report. Were it not for the internal whistleblowers here, the Board may not have been alerted to the disclosure issues and been able to take prompt remedial action. Companies that are able to conduct thorough internal investigations showing a clear, robust response to an internal tip will be better able to effectively self-correct and have a defensible position if regulators or law enforcement become involved. Here, this approach paid off with no civil penalty being imposed on the company.
• The SEC values and may reward self-reporting. The SEC noted that a civil penalty was not imposed on Kiromic because it promptly self-reported, remediated, and cooperated with the SEC’s investigation. While the decision to self-report is a complex decision driven by facts and circumstances, and the rewards for self-reporting to the SEC are not always apparent, this case highlights that self-reporting may prevent more serious outcomes.

This is not the first time statements about the status of FDA processes have come under SEC scrutiny. Recently, one biotech company paid $40 million to resolve claims that it allegedly mislead investors about the results of a phase two clinical trial. Another paid $4 million to settle SEC charges that it had mislead investors concerning an FDA recommendation about a second clinical trial. Not only is the SEC interested, so too is the Department of Justice. It recently prosecuted and convicted two biotech CEOs for securities fraud and insider trading involving false and misleading statements about the timeline and status of regulatory submissions to the FDA. Finally, shareholder lawsuits often follow stock declines and regulatory action.

Please reach out to an author of this Advisory or your regular Arnold & Porter contact with any questions about the issues discussed herein.

*Ali Nayfeh contributed to this Advisory. Mr. Nayfeh is admitted only in Maryland; practicing law in Washington, D.C. during the pendency of his application for admission to the D.C. Bar and under the supervision of lawyers of the firm who are members in good standing of the D.C. Bar.

© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.