A federal appeals court on Friday upheld a jury’s verdict finding that Aveo Pharmaceuticals Inc’s ex-chief financial officer misled investors about the prospects for regulatory approval of its flagship drug under development.
The 1st U.S. Circuit Court of Appeals in Boston ruled that the evidence of fraud and intent that the U.S. Securities and Exchange Commission presented at trial against David Johnston was sufficient to support the jury’s verdict.
“In summary, because Johnston’s calculated statements were inconsistent with known facts, a reasonable jury could conclude that he made those statements at least with a high degree of recklessness,” U.S. Circuit Judge William Kayatta wrote.
Kayatta wrote for a two-judge panel. U.S. Circuit Judge Juan Torruella, who was on the panel that heard arguments in the case in October, died later that month.
John Sylvia, Johnston’s lawyer at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, did not respond to a request for comment.
The SEC sued Johnston and two other former executives – Tuan Ha-Ngoc, Aveo’s CEO from 2002 to 2015, and William Slichenmyer, the company’s former medical director – in 2016. The same day, the SEC announced a $4 million settlement with Aveo.
Ha-Ngoc and Slichenmyer later settled for $80,000 and $50,000, respectively.
A federal jury in November 2018 concluded that Johnson misled investors by failing to disclose that the U.S. Food and Drug Administration in 2012 recommended that Aveo conduct another clinical trial for tivozanib, a kidney cancer drug.
The recommendation, made by FDA staff in response to data showing patients on tivozanib died sooner than those on a rival drug, increased the risk that it would not get FDA approval, the SEC said.
The SEC said Aveo was able to raise another $53 million in January 2013 from investors unaware of that risk. When the FDA revealed its recommendation on April 30, 2013, Aveo’s stock price dropped 31%.
At the time of the verdict, Johnston was the CFO of another publicly traded biotech company, ImmunoGen.
He subsequently resigned. A federal judge imposed a two-year ban on his serving as a corporate officer and ordered him to pay more than $127,000 in penalties and forfeited profits.
On appeal, Johnston’s lawyers argued that he had no legal duty to disclose the recommendation while Aveo sought clarity on the timing of any new study the FDA wanted.
But Kayatta wrote that the SEC was not disputing that Johnston did not have a duty to disclose the recommendation.
Instead, the SEC argued that the statements Johnston and Aveo made publicly to analysts and investors about their communications with the FDA were misleading in light of what they knew the FDA had recommended, the judge wrote.
When asked at a Feb. 27, 2013, investment conference if the FDA and Aveo had discussed further clinical trials, even though the FDA had specifically recommended one, he responded: “We have not had any formal discussions, no.”
“In sum, a reasonable jury could find that Johnston used carefully crafted half-truths and distortions to convey a false understanding of the FDA’s feedback on the company’s clinical trial,” Kayatta wrote.
The case is Securities and Exchange Commission v. David Johnston, 1st U.S. Circuit Court of Appeals, No. 19-2264.