Overview
Lawyers inside and outside the US Securities and Exchange Commission (SEC) have speculated that the agency’s new leadership will take a “lighter touch” when it comes to enforcement. The ultimate approach of the new SEC remains unknown until those appointments are finalized, and the transition is complete. In the meantime, recent actions indicate that the incoming SEC, like its predecessors, will continue to police misleading statements in filings and press releases regarding the US Food and Drug Administration’s (FDA) review of drug and medical device applications. Relatedly, the SEC is expected to continue to pursue insider trading actions arising from FDA developments.
In Depth
CURRENT SEC ENFORCEMENT REGARDING FDA-RELATED INFORMATION
On March 12, 2025, the SEC filed suit against three former Allarity Therapeutics, Inc. executives for allegedly scheming to conceal harsh feedback from the FDA regarding Allarity’s flagship cancer drug candidate. The SEC alleged that from February 2020 to February 2022, the executives “schemed to conceal from investors harsh critique levied by the [FDA] about the approval prospects for Allarity’s flagship cancer drug candidate, dovitinib.” Statements from the FDA in February 2020 purportedly communicated that dovitinib would not be approved for sale to the public absent a new drug trial. In an effort to raise money from investors, the executives held out Allarity’s existing drug application for dovitinib based on old trial data as viable. The SEC contended that after Allarity submitted the drug application in December 2021 without a new drug trial, Allarity listed its stock and secured millions in investments in large part based on the professed viability of dovitinib. Almost two months later, Allarity revealed problems with the drug application when it announced that the FDA refused to review the application. The next trading day, Allarity’s share price closed down approximately 31%.
The SEC brought claims for violations of anti-fraud provisions of the federal securities laws. The SEC seeks permanent injunctions, disgorgement, civil penalties, and officer and director bars. The case is ongoing. Relatedly, the SEC simultaneously instituted administrative proceedings against Allarity based on similar allegations. Allarity consented to the entry of a cease-and-desist order and the payment of a $2.5 million penalty without admitting or denying the SEC’s findings.
The FDA faces especially tight constraints on the valuable human and technical resources that must be invested into the drug, device, and biologics approval processes. Consequently, the FDA often rejects outright incomplete new drug application (NDA) submissions, as well as submissions that ignore basic input that it previously afforded. Drug companies and the consultants they rely on are keenly aware of these constraints, their potential impact on product review and approval timeframes, and, in turn, their potential impact on investments in the company and prospects for commercial development. Drug sponsors typically meet with the FDA prior to submitting an NDA to align planning and expectations.
Improper disclosure or use of information gleaned from these meetings may result in an SEC investigation and charges. During the course of its Allarity investigation, for example, the SEC obtained minutes of a meeting between FDA staff and Allarity officials, which allegedly reflected the FDA staff’s admonition not to submit an application before conducting further testing. The SEC then used this information to challenge disclosures made by Allarity.
On March 7, 2025, in another case, the SEC charged Acadia Pharmaceuticals Inc.’s former drug safety official with insider trading. The SEC alleged that the safety official exercised nearly all of his vested options and sold the underlying shares in advance of the company’s announcement of negative FDA developments. The safety official allegedly traded based on information that made him “increasingly confident” that the FDA was going to reject the company’s supplemental application to expand the use of its drug to treat Parkinson’s disease. Based on the SEC’s allegations, the official avoided losses of approximately $1.3 million. Without denying the allegations, the safety official consented to a judgment that included a permanent injunction, a five-year officer and director bar, authorization for the court to determine disgorgement, and civil penalty. The US Attorney’s Office for the Southern District of California also filed criminal charges.
RECENT EXAMPLES OF SEC-FDA PARTNERSHIP ENFORCEMENT UNDER THE PRIOR COMMISSION
The Allarity case echoes enforcement actions filed toward the end of the last SEC administration. On December 3, 2024, the SEC filed settled charges against Kiromic BioPharma, Inc. and its then-two most senior officers for failing to disclose material information about the company’s two cancer fighting drug candidates before, during, and after a follow-up public offering that raised $40 million. The SEC’s findings included that the company violated Exchange Act Rule 13a-15(a) for not maintaining the requisite disclosure controls. The SEC also found that two weeks before the public offering, the FDA notified the company that it had placed the drug candidates on clinical hold – an order to delay the proposed clinical investigations. The FDA notified the company that it found its submission “grossly deficient,” and its lack of information prevented the FDA from assessing the risk of the product. The SEC challenged language in the company’s offering materials speculating that the FDA “could issue a clinical hold” and identifying the risk that clinical trials may not recommence “if the FDA imposes a clinical hold.” According to the SEC, “[d]espite disclosing the hypothetical risk of a clinical hold and the potential negative consequences on Kiromic’s business, Kiromic failed to disclose the material information that the FDA had already issued clinical holds.”
Whistleblower complaints prompted an internal investigation, which led Kiromic to remediate and file a Form 8-K revealing the deficient disclosures. By doing so, the company avoided a penalty while consenting to an order that it cease and desist from violating provisions of the securities laws that do not require scienter. The two former executives agreed to pay penalties of $125,000 and $20,000, respectively, and a three-year officer and director bar was imposed on one of them.
SEC enforcement cases are not confined to misrepresentations regarding the FDA’s review of an NDA. The SEC also has brought cases concerning misleading disclosures regarding the results of clinical trials following FDA clearance. On September 26, 2024, the SEC announced that Cassava Sciences, Inc., its founder and former CEO, and former senior vice president of neuroscience agreed to pay more than $40 million to settle charges related to misleading statements about the results of a Phase 2 clinical trial for the company’s purported treatment for Alzheimer’s disease. The SEC’s complaint displayed a detailed understanding of the complexities of the clinical trial process and the importance of unbiased “blinded,” “biomarker,” and “cognitive” testing. Without admitting or denying the allegations, the company and the two former executives consented to civil injunctions and agreed to pay penalties of $40 million, $175,000, and $85,000, respectively. The two former officers also consented to officer and director bars.
SEC-FDA PARTNERSHIP
The SEC’s working knowledge of the FDA review process is likely a by-product of formal collaboration between the SEC and the FDA. In 2004, the SEC and the FDA announced a partnership to enhance their cooperation in identifying and investigating securities law violations by public companies. This partnership established a streamlined process for the FDA to refer potential violations to the SEC, designated contacts within the FDA to assist with SEC information requests, and expedited sharing of nonpublic information between the agencies. These measures aimed to strengthen securities law enforcement and protect investors from misleading statements from life sciences companies. Pursuant to this partnership, the SEC has worked with the FDA to police misleading statements in filings and press releases regarding FDA review of NDAs and medical device applications.
The FDA’s sharing of nonpublic information also helps the SEC identify insider trading that occurs in advance of public disclosure. That collaboration builds on the SEC’s already robust ability to use technology to detect unusual trading patterns and to connect traders who share information.
* * *
All signs indicate that while the SEC may be taking a lighter enforcement touch in certain areas, it will continue to police (1) misleading statements in filings and press releases regarding FDA review of a company’s drug and medical device applications and (2) trading on the basis of positive or negative nonpublic information in advance of disclosed FDA-related information.
Counsel should give serious thought to the possible disclosure in SEC filings whenever FDA product review processes may impact a company’s future direction and possibility of success. Life sciences counsel know that clients can be sensitive about disclosing FDA feedback that expresses concerns or doubts relating to a product’s planned approval path. Cases such as Allarity and Kiromic strongly suggest, however, that the FDA shares the bad news it delivers to companies during (or leading up to a) review with the SEC staff. FDA collaboration also apparently helps the SEC to pursue enforcement when companies, such as Cassava Biosciences, allegedly omit disclosure of challenging clinical developments that occur outside of FDA review. It may be more prudent, then, for the company to disclose the FDA’s expressed concerns (or the clinical setback) without delay and – when possible – offer a serious rationale as to why the company believes its path forward is appropriate and should prove successful. Of course, the timing and extent of such disclosure decisions often involve careful fact-based considerations of materiality and context.
Companies in this space may avoid this scrutiny by carefully reviewing their FDA application disclosures and updating disclosure controls. Companies also should give attention to their insider trading policies and procedures, such as trading blackouts, in connection with these events.
Rachel Peltzer and Andrew Lang-Reyes also contributed to this article.
