In the latest SEC enforcement action relating to alleged misrepresentations pertaining to the coronavirus outbreak, the agency has filed a securities fraud action against the President and Chief Science Officer of a biotechnology company who allegedly made false statements to investors concerning the status of his company’s COVID-19 test. The enforcement action complaint also contains allegations concerning the individual’s statements about the status of his company’s delinquent SEC reporting. The enforcement action underscores the fact that the SEC intends to enforce the securities laws with respect to company statements falsely suggesting the company is in a position to profit from the coronavirus outbreak. A copy of the SEC’s September 25, 2020 complaint can be found here. The SEC’s September 25, 2020 press release regarding the enforcement action can be found here.
Arrayit Corporation is a biotechnology company based in Sunnyvale, California. Mark Schena is the company’s President and Chief Science Officer. The company’s CEO is Schena’s wife. Arrayit has had as many as 25 employees, but as of September 25, 2020, the company had a workforce consisting of six employees and seven consultants. Arrayit’s shares are quoted on OTC Link LLC (previously “Pink Sheets”). Its share trade outside of an interdealer quotation system. Since November 2015, the company has not filed any quarterly or annual reports with the SEC.
The Enforcement Action
The SEC filed a complaint against Schena in the Northern District of California on September 25, 2020. According to the complaint, during the period from October 2018 through the present, Schena allegedly has made a number of statements to investors about the status of the company’s financial reports. The complaint alleges that Schena “made numerous statements to investors falsely assuring them that Arrayit would soon become current with its required periodic reports.” Statements about the company’s readiness to submit the period reports appeared in emails, on the company’s website, and on Internet message boards. However, the company did not file and has not filed the required quarterly or annual reports.
The SEC complaint alleges that Schena’s statements about the company’s readiness to file the required reports affected the price and trading volume of Arrayit’s stock, on at least one occasion causing the share price (which is in the range of fractions of a penny) to soar over 300% and the volume to increase over 600%. The complaint alleges that Schena “knew or was reckless in not knowing, that his statements about the status of Arrayit’s financial statements were false and misleading.”
The complaint also alleges that in March and April 2020, Schena made “a series of false and misleading statements in emails to investors about the status of the development of Arrayit’s COVID-19 test.” The complaint alleges that Schena made “false and misleading statements” claiming Arrayit had a test before it actually possessed all of the essential components for a test. The complaint also alleges that Schena made “false and misleading” statements claiming that Arrayit’s COVID-19 test was pending emergency approval, before the company had even applied for approval. The complaint also alleges that Schena made “false and misleading statements to investors” in emails concerning the company’s COVID-19 test while “omitting the fact that the test was not approved by the FDA or any other regulatory entity.”
The complaint alleges that the false and misleading statements affected the trading price and trading volume of Arrayit’s stock, on one occasion causing the company’s share price to rise over 50% and the trading volume to increase nearly 100%. The complaint alleges that Schena “knew or was reckless in not knowing that is statements regarding the status of Arrayit’s COVID-19 test were false and misleading.”
The complaint alleges that Schena’s statements regarding the company’s financial statements and regarding the status of the company’s COVID-19 test violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint requests that Schena be permanently enjoined from directly or indirectly violating the federal securities laws; that Schena pay civil money penalties; and that Schena be prohibited from acting as an officer or director of any issuer with registered securities or is a reporting company under the securities laws.
Arrayit has been in the SEC’s sights for several months during the pandemic. In April 2020, the agency halted trading in the company’s stock. As discussed here, in June 2020, the SEC brought an enforcement action against Jason C. Nielsen, a penny stock trader whom the SEC alleged attempted to orchestrate a “pump-and dump scheme” with respect to Arrayit’s stock. The SEC’s recent enforcement action against Arrayit President Mark Schena is just the latest step in this series of actions involving the company.
Schena also separately faces a criminal complaint (here), filed in the Northern District of California in June 2020, containing unrelated allegations against him for conspiracy to commit healtcare fraud, as well as for securities fraud in connection with his representations of the status of the company’s COVID-19 test.
By my count, the action against Schena represents the fifth coronavirus outbreak-related enforcement action the company has filed. All of the actions involved companies that had tried to represent themselves as able to profit from the pandemic, and all involve companies whose securities trade as penny stocks.
As noted in a June 9, 2020 Harvard Law School Forum on Corporate Governance article about the SEC’s prior COVID-19 enforcement actions (here), “since the onset of the COVID-19 pandemic, the SEC has aggressively messaged its intent to remain vigilant and protect investors from fraud in the current environment.” The SEC, the article’s authors note, has already demonstrated its commitment “to target companies that it views as taking advantage of the volatility and instability inherent in the pandemic.”
While the SEC has clearly demonstrated its willingness to take action, with only five COVID-19 related enforcement actions so far, the pandemic has not in fact led to significant SEC activity. This latest action against Schena is in fact the first COVID-19 related enforcement action the agency has filed since June.
Though the number of SEC enforcement actions is so far relatively modest, I continue to believe there will be more COVID-19 related enforcement actions to come. In a series of statements and actions, the agency has shown its intent actively monitor the markets for “frauds, illicit schemes and other misconduct relating to COVID-19.” Among other things, the agency’s Enforcement Division has formed a Coronavirus Steering Committee to focus on fraud, insider trading, disclosure improprieties, and market-moving pronouncements relating to the pandemic. The likelihood is that there will be further SEC enforcement actions in the weeks and months to come.