SEC enforcement activity continues to increase under Chair Gary Gensler. In the fiscal year ending September 30, 2022, the SEC filed over 700 enforcement actions and obtained judgments and orders totaling $6.4 billion. A number of these actions highlight the key risk areas for life sciences companies in 2023.
- SPACs: The SEC has remained interested in special purpose acquisition companies (SPACs). In September 2022, the SEC charged an investment adviser with failing to disclose conflicts of interest relating to SPACs owned in part by its personnel. The SEC found that the firm’s personnel, given their ownership interests, had incentives to cause, and did cause, a life sciences pooled investment fund that the firm managed to make investments to help ensure the SPAC’s completed business combinations. The SEC concluded that given their ownership interests, this was problematic. The SEC also found that the firm had failed to disclose these SPAC-related conflicts in a timely manner to the fund’s board. The firm agreed to a $1.5 million penalty to settle the claim.
- Insider Trading: The SEC continues to scrutinize the life sciences sector for insider trading. This scrutiny is heightened because of the high volume of material nonpublic information that is held within the industry, including information regarding product results, regulatory approvals and significant transactions, and recent market volatility. For example, the SEC brought charges against two individuals who allegedly had tipped off others about confidential information they learned through their employment at or advisory work for life sciences companies. These charges were brought even though the individuals did not themselves make any trades. In another action, the SEC charged a former employee of a pharmaceutical company with insider trading ahead of a company announcement, even though the employee had made less than $5,000 from the trades. The SEC also recently charged a former business development executive of a biopharmaceutical company with insider trading on the grounds that he had traded stock in a competitor company believing that the competitor’s stock price would increase as a result of his company’s then-impending acquisition.
- Accounting and Disclosure: The SEC has continued its investigative focus on revenue recognition issues, including where companies have allegedly inflated sales or revenue numbers by sending more product than customers ordered, so-called “channel stuffing.” Life sciences companies are at an increased risk of these types of charges, given their product distribution channels, which often involve distributors and subdistributors and/or large sales forces. For example, the SEC brought an enforcement action against a surgical implant manufacturer for masking disappointing sales numbers by shipping future orders ahead of schedule to accelerate revenue. In a similar manner, the SEC filed charges against a medical supply company — in addition to its former CEO and COO — for allegedly inflating the company’s financial results by creating sham sales, which it reported as revenue on its financial statements.
The importance of adequate disclosures is highlighted by an action the SEC brought against a pharmaceutical company that had raised money from investors through private placements of its stock. Among other things, the company’s offering materials indicated that it had an exclusive license to a drug-delivery technology, even though the validity of the license was disputed. The SEC has also brought actions against companies related to disclosures of regulatory approvals. For example, the SEC charged a diagnostic test company and certain individuals with, among other things, issuing press releases and filings that misled investors about the status of the company’s emergency use authorization (EUA) submissions to the FDA.
Tip
- In light of the current regulatory environment, life sciences companies should assess their internal controls, policies and procedures, and training to ensure that they have adequately addressed these heightened enforcement risks.
