Enforcement News: Biotech Company and Its CEO Charged With Fraud Concerning Blood Testing Device for COVID-19

• Posted on: Dec 21 2020

In prior posts, we examined enforcement actions brought by the Securities and Exchange Commission (“SEC” or “Commission”) against those who seek to benefit from the COVID-19 pandemic (e.g., here, here and here). 

Earlier this month, we wrote about an enforcement proceeding that the SEC brought against The Cheesecake Factory (here). As noted in that article, that proceeding was the first time the SEC had charged a large public company for misleading investors about the financial effects of the COVID-19 pandemic on the company’s business and operations. 

Since February of this year, the SEC has released several warnings to investors to beware of fraud, illicit schemes and other misconduct during the coronavirus health emergency (here). In these warnings, the SEC has highlighted the proliferation of internet promotions, often using social media, in which the company claims that its products or services could prevent, detect or cure the virus, and that the sale of these products or service would lead to a dramatic increase in the price of those companies’ stock. Many of these scams, said the SEC, “often take the form of so-called ‘research reports’ and make predictions of a specific ‘target price.’” In reality, explained the SEC, these are pump-and-dump schemes.

On December 18, 2020, the SEC announced (here) that it brought charges against Decision Diagnostics Corp. (“Decision Diagnostics”), a California-based biotechnology company, and its CEO, Keith Berman, with making false and misleading claims in numerous press releases that the company had developed a working, break-through technology that could accurately detect Covid-19 through a quick blood test. The SEC temporarily suspended trading in Decision Diagnostics’ securities on April 23, 2020 (here).

In the complaint (here), the SEC alleged that Decision Diagnostics and Berman falsely claimed  that Decision Diagnostics had developed a finger prick blood test that could detect Covid-19 in less than a minute. According to the SEC, from March 2020 to at least June 2020, Decision Diagnostics and Berman made false and misleading statements about the existence of Decision Diagnostics’ Covid-19 device and progress towards FDA emergency use authorization. As alleged, at the time Decision Diagnostics and Berman made these claims, the company lacked a proven method for detecting the virus and had no physical testing device. Further, alleged the SEC, the company’s advisors had warned that the testing kit they were trying to manufacture would not work as Decision Diagnostics had described. The SEC further alleged that the statements created the misleading impression that the test was soon to be introduced to the market and led to surges in the price and trading volume of Decision Diagnostics’ stock.

“During this unprecedented time, when the need for truthful disclosures concerning Covid-19 tests is of vital importance, Decision Diagnostics and its CEO allegedly misled investors by claiming to have made a working test device when all they had was an idea that had not materialized into a product,” said Stephanie Avakian, Director of the Division of Enforcement. “With the onset of the global pandemic, we quickly pivoted to identify potential areas of fraud. This case is another example of how the Commission will hold accountable those who exploit the pandemic to harm investors.”

“In our complaint, we allege that Decision Diagnostics and Berman repeatedly made baseless representations to the investing public about market-moving events like progress in obtaining FDA approval and having breakthrough technology,” said Anita B. Bandy, Associate Director of the Division of Enforcement. “Today’s filing is a credit to the dedicated SEC staff, who continued to investigate after the trading suspension and quickly uncovered the alleged fraud.”

The SEC filed the complaint the U.S. District Court for the Southern District of New York. The Commission charged Decision Diagnostics and Berman with violating the antifraud provisions of the securities laws. The SEC is seeking to enjoin both Decision Diagnostics and Berman from directly or indirectly violating those provisions and ordering them to pay civil penalties.

In addition, the Department of Justice’s Market Integrity and Major Frauds Unit announced (here) that parallel criminal charges against Berman were also filed in the U.S. District Court for the District of Columbia.

[Ed. Note: an indictment is merely an allegation and the defendant is presumed innocent until proven guilty beyond a reasonable doubt in a court of law.]

In the indictment (here), the government alleged that, from February through December 2020, Berman falsely claimed that the company had developed a 15-second test to detect COVID-19, when in fact the test was merely an idea and not a validated method of accurately detecting COVID-19.  According to the indictment, Decision Diagnostics was in precarious financial condition prior to the pandemic, and Berman wrote in internal emails that he needed a “new story” to “raise millions.” 

In addition, the government claimed that Berman falsely told investors that the Food and Drug Administration (“FDA”) was on the verge of approving the company’s request for emergency use authorization of its COVID-19 test.  In truth, alleged the government, Berman knew that the company lacked the financial resources and insurance necessary to conduct the clinical testing required by the FDA to complete the application process. The government also said that Berman sought to exert political pressure on the FDA by hiring a political consultant to lobby Members of Congress, telling them in talking points that the FDA had “moth-balled” the company’s submission and that it remained “stuck in limbo” at or around the same time that Berman was telling investors that the test was on the verge of approval.  Between early March and April 23, 2020, the company’s stock price rose by over 1,500 percent.   

The indictment further alleged that, as part of the alleged scheme, Berman used an alias, “plutoniumimplosion,” to repeat false and misleading statements to investors on Internet message boards, and lull suspecting investors into inaction by refuting allegations of fraud and threatening potential whistleblowers with civil or criminal sanctions.