Court: District Court, District of Columbia; April 19, 2018; Federal District Court
Nathaniel M. Gorton, United States District Judge, addresses a case involving AVEO Pharmaceuticals, Inc. (AVEO) and allegations from the Securities and Exchange Commission (SEC) against AVEO and its executives, including CEO Tuan Ha-Ngoc, CFO David Johnston, and CMO William Slichenmyer. The SEC claims that they made materially misleading statements to investors regarding their communications with the Food and Drug Administration (FDA) during the approval process for their cancer drug candidate, tivozanib (Tivo). Specifically, the SEC alleges that Johnston concealed the FDA's recommendation for AVEO to conduct a second clinical trial to secure approval for Tivo.
The court is currently considering Johnston's motion for summary judgment, which will be denied. The background includes an overview of the FDA approval process, which requires pharmaceutical companies to demonstrate drug safety and efficacy through three phases of clinical trials before submitting a New Drug Application (NDA). The FDA then reviews the NDA, potentially sending a Day 74 Letter to address any preliminary deficiencies.
AVEO, based in Boston and publicly traded, has been developing Tivo for renal cell cancer treatment. In 2012 and 2013, Johnston was CFO and part of the Executive Committee, responsible for strategic decisions and disclosures. AVEO initiated a Phase 3 trial, TIVO-1, in 2009, which compared Tivo's efficacy and safety against sorafenib. During a pre-NDA meeting in May 2012 with the FDA, AVEO presented data from the TIVO-1 trial, indicating that while Tivo met its primary endpoint, the secondary endpoint showed a negative trend in overall survival. The FDA expressed concerns regarding the drug's safety and efficacy based on these secondary results and suggested that AVEO conduct a second, adequately powered randomized trial to address these issues, warning that the negative trend could lead to a Refusal to File (RTF) letter.
Following the pre-NDA meeting, Johnston participated in subsequent AVEO Executive Committee and board meetings to review the outcomes of the pre-NDA session and budget considerations for a second Phase III trial of Tivo, known as TIVO-2. AVEO initially sought FDA engagement regarding TIVO-2's design but withdrew its request due to significant concerns raised by the FDA. Consequently, AVEO decided to proceed with the NDA submission based on TIVO-1 results. In August 2012, AVEO issued a press release highlighting the FDA's concerns about overall survival (OS) trends in TIVO-1, indicating these would be addressed during the NDA review. Johnston also took part in an investor call where Dr. Slichenmyer refrained from speculating on further FDA actions.
AVEO filed a Form 10-Q that did not mention any FDA recommendation for a second trial, followed by another 10-Q in November 2012 with similar disclosures. The FDA accepted the NDA in November 2012, commencing substantive review, and later issued a Day 74 letter expressing ongoing safety concerns regarding TIVO-1, to be discussed at a May 2013 ODAC meeting. In January 2013, AVEO filed an 8-K with the SEC that omitted any reference to the FDA's suggestion for a second trial and announced plans for TIVO-2. Shortly thereafter, AVEO offered 6,667,000 shares at $7.50 each, raising $53.8 million.
Ahead of the May 2013 ODAC meeting, the FDA published a briefing book revealing its prior recommendation for a second trial, leading to a 30% drop in AVEO's stock price. The ODAC subsequently voted 13 to 1 against Tivo's approval, with the FDA following suit the next month.
In March 2016, the SEC initiated action against AVEO, resulting in a consent decree. The SEC's amended complaint alleged violations of the Securities Exchange Act and the Securities Act. Settlement agreements were reached with other defendants in 2017-2018, while Johnston filed for summary judgment on all claims against him in January 2018, which is now under consideration. Summary judgment aims to clarify whether any genuine disputes of material fact exist, determining if a trial is necessary. The moving party must demonstrate, through various evidence, that there are no genuine disputes that would affect the case outcome.
Upon satisfying its initial burden, the moving party shifts the obligation to the non-moving party to present specific facts that demonstrate a genuine, triable issue exists. The court must view the entire record in favor of the non-moving party and draw all reasonable inferences for that party. Summary judgment is granted if, after this review, the court finds no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law.
In the application context, Johnston argues that AVEO's omission regarding the FDA's recommendation for a second trial was not material, asserting that the recommendation was not compulsory and merely posed a potential risk rather than an immediate obligation to disclose. He contends that the FDA's communications are part of a regulatory process that carries inherent uncertainties and that companies are not required to disclose routine risks or ongoing discussions with the FDA.
In contrast, the SEC argues that the recommendation was indeed material and that the issue of materiality should be determined by a jury. The SEC highlights evidence, including a slide deck reviewed by Johnston, indicating that failing to conduct a second trial posed a significant risk of non-approval, which impacted investor decisions as reflected by a steep drop in stock price following the FDA's statement. The SEC asserts that the recommendation was critical for AVEO's internal planning and discussions.
Under SEC Rule 10b-5, it is unlawful for a company to make false statements or omit material facts that are necessary to avoid misleading statements. To succeed on a 10b-5 claim, a plaintiff must prove that the defendant made a material misrepresentation or omission with scienter in connection with a security transaction. Establishing a material omission requires demonstrating that the defendant had a duty to disclose the omitted information. Material information is defined as that which could significantly alter an investor's decision-making process, possessing a substantial likelihood of being deemed important by a reasonable shareholder.
Voluntary disclosures of information deemed material by reasonable investors must be complete and accurate to avoid misleading omissions. Materiality is established if a reasonable juror could find that the omission significantly alters the total mix of information available to investors. Generally, materiality is a jury question, unless the court has thoroughly analyzed the withheld information. Evidence suggests that the FDA's recommendation for AVEO to conduct a second clinical trial materially impacted the information landscape, as it raised concerns regarding the potential non-approval of AVEO's sole drug candidate, tivozanib. The likelihood and magnitude of the potential decision's impact must be evaluated in the context of the company's circumstances. AVEO had indicated its reliance on tivozanib's success in its reports, highlighting the importance of the FDA's recommendation to investors. Johnston argued that the FDA's feedback was too indefinite for disclosure; however, the First Circuit has indicated that not all regulatory communications need to be disclosed, especially if they don't represent definitive risks. In previous cases, companies that provided explicit warnings about potential regulatory issues were treated differently, and similar warnings were not presented by Johnston or AVEO.
AVEO and Johnston's public disclosures—including an August 2012 press release, regulatory updates, and multiple 10-Q filings—lacked explicit warnings about the potential negative impact of TIVO-1 results on Tivo's approval process. Johnston highlighted the importance of these results but failed to mention the need for a second trial, leading to potential misrepresentation of facts for investors. The SEC argues that these disclosures did not adequately inform investors, as securities laws require material information to accurately inform rather than mislead. Evidence suggests that AVEO and Johnston were aware of the approval risks, particularly as they actively worked on TIVO-2, indicating concerns about regulatory approval without further trials.
Johnston seeks summary judgment, claiming the SEC cannot prove he acted with the necessary intent (scienter) to deceive investors. He asserts that there was no duty to disclose and that uncertainties surrounding regulatory outcomes weaken any inference of intent. Johnston's understanding of risk was informed by advice from regulatory experts, which he argues should absolve him of liability. The SEC counters that a genuine dispute exists regarding Johnston’s awareness of the high risks involved, emphasizing that state of mind is typically a jury question. The SEC maintains that Johnston’s limited disclosures do not reflect good faith. The legal standard for proving scienter includes not just intent to deceive but also a "high degree of recklessness," which is distinct from ordinary negligence. Although generally a jury issue, summary judgment may be granted if the opposing party relies on mere speculation or implausible inferences.
Johnston's deposition reveals that he managed AVEO's communications team, which prepared a script addressing potential concerns for an analyst call. The script suggested a response indicating that the FDA had not mandated additional clinical studies for approval, but included an internal note to elaborate on discussions with the FDA if pressed. The First Circuit recognizes that discrepancies between internal reports and external statements can indicate scienter. Johnston argues that the 'Risk Factors' in AVEO's SEC filings adequately warned investors about adverse TIVO-1 data, which may mitigate implications of scienter. However, the court notes that while there were warnings, investors were not informed about the FDA's recommendation for a second clinical trial, suggesting that the disclosures may not sufficiently weaken the inference of scienter. Therefore, a jury could infer intent to deceive based on the significant divergence between public statements and internal discussions. Consequently, Johnston's motion for summary judgment regarding scienter is denied.
Regarding the Rule 13a-14 claim, Johnston claims entitlement to summary judgment, arguing that the rule does not establish a separate cause of action and that omissions are non-actionable if there is no duty to disclose. The SEC contends that such a duty exists, asserting that the filings contained materially misleading statements. Rule 13a-14 requires principal executives and financial officers to certify the accuracy of financial statements, attesting that reports do not contain false statements or material omissions necessary to avoid misleading interpretations. The First Circuit has yet to determine if Rule 13a-14 creates a separate cause of action.
A circuit court of appeals has established that a cause of action exists under Rule 13a-14 based on misrepresentation, as indicated in SEC v. Jensen. The court will allow the SEC's claim under Rule 13a-14 to proceed, finding that there is a genuine issue of material fact regarding whether Johnston failed to disclose misleading information with the necessary intent, which constitutes false certification of SEC filings. The court emphasized that it is insufficient for CEOs and CFOs to merely sign certifications without a solid basis for their accuracy. Consequently, Johnston's motion for summary judgment regarding the SEC's Rule 13a-14 claim is denied. Additionally, the SEC had previously reached a consent judgment with AVEO and settlements with other defendants, leaving Johnston as the sole remaining defendant.
