United States District Court, D. Massachusetts
MEMORANDUM & ORDER
NATHANIEL M. GORTON UNITED STATES DISTRICT JUDGE
an eight-day trial after which the jury found David Johnston
(“Johnston” or “defendant”) liable
for securities violations, the Securities and Exchange
Commission (“the SEC”) has moved for final
judgment. The SEC seeks an officer and director bar,
disgorgement, prejudgment interest, civil penalties and a
2016, the SEC filed a complaint against defendant, alleging
that Johnston, as Chief Financial Officer (“CFO”)
of Aveo Pharmaceuticals (“Aveo”) engaged in a
scheme to mislead Aveo investors about the pending approval
by the Food and Drug Administration (“FDA”) of
Aveo's flagship drug, tivozanib
(“Tivo”). The SEC alleged that the scheme to defraud
occurred between August, 2012, and April, 2013.
2012, Aveo representatives attended a pre-New Drug Approval
(“NDA”) meeting, where the FDA 1) expressed
concerns about the negative results of Tivo's overall
survival data in its first clinical trial and 2) recommended
that Aveo conduct a second randomized trial with respect to
Tivo. Three months later, Aveo issued a press release which
disclosed the negative overall survival data but did not
disclose the FDA's recommendation to conduct a second
clinical trial. In the meantime, Johnston and his team
developed a communications strategy which emphasized that
Aveo could not “speculate” as to future FDA
actions, despite knowing about the FDA's recommendation.
After Aveo issued its August, 2012, press release Johnston
participated in several conference calls with stock analysts
that obfuscated the situation.
after its August, 2012, press release, Aveo filed its Tivo
NDA with the FDA without conducting a second clinical trial.
In February, 2013, FDA staff informed Aveo that the Oncologic
Drugs Advisory Committee (“ODAC”) would be
reviewing the sufficiency of Tivo's first clinical trial
the following May. One month later, the FDA publicly
disclosed that it had previously recommended that Aveo
conduct a second trial for Tivo. Following the FDA's
public disclosure in April, 2013, Aveo's stock price
dropped by 31%. The next month, the FDA's ODAC panel
rejected the adequacy of Aveo's first clinical trial by a
vote of 13 to 1.
the trial, Johnston argued that his decision not to disclose
was in good faith because he relied on the corporate process
in connection with Aveo's disclosures. Specifically, he
referred to opinions of Aveo's outside counsel, the
underwriters' counsel and internal executive committees
to justify his defense. After eight days of trial, the jury
returned a verdict for the SEC, finding that Johnston
violated Section 10(b) of the Securities Exchange Act of 1934
(“Exchange Act”), Section 17(a)(1) of the
Securities Act of 1933 (“Securities Act”) and
Sections 17(a)(2) and (a)(3) of the Securities Act and Rule
13a-14 of the Exchange Act.
Officer and director bar
seeks to bar Johnston from serving as an officer and director
of a public company for the aforementioned securities
violations. Pursuant to 15 U.S.C. § 77t(e) and 15 U.S.C.
§ 78u(d)(2), district courts exercise “substantial
discretion” in deciding whether to bar an individual
from serving as an officer and director in a public company.
SEC v. Selden, 632 F.Supp.2d 91, 96-97 (D. Mass.
2009). To that end, the Second Circuit has established six
factors for determining whether an individual is
1) the egregiousness of the underlying securities law
violation; 2) the defendant's repeat offender status; 3)
the defendant's role or position when he engaged in the
fraud; 4) the defendant's degree of scienter; 5) the
defendant's economic stake in the violation; and 6) the
likelihood that misconduct will recur.
SEC v. Patel, 61 F.3d 137, 141.
the Patel factors are instructive with respect to
the unfitness assessment, they are not exhaustive and it is
not necessary to apply all of the factors in every case.
Id. In light of the Patel factors, the
Court proceeds to consider whether Johnston's conduct
supports imposing an officer and director bar pursuant to 15
U.S.C. § 77t(e) and 15 U.S.C. § 78u(d)(2).
argues that Johnston's conduct was egregious because, as
the head of Aveo's corporate communications and investor
relations, he led a deceptive scheme to mislead investors by
1) omitting material information, 2) drafting scripted
responses to avoid investor questions about the FDA's
clinical trial recommendation and 3) continuing to engage in
selective disclosure at four investor conferences. Johnston
responds that a jury finding that he violated securities law
does not mean that his conduct was egregious per se.
Rather, he contends that lifetime bars are reserved for more
serious violations such as boiler-room, pump-and-dump or
Johnston as the head of Aveo's corporate communications
undoubtedly led this deceptive scheme, his selective
disclosure was limited to a few months, not years, and his
disclosures, while materially misleading, are not so
egregious as to warrant a lifetime bar. Cf. SEC
v. Weed, 315 F.Supp.3d 667, 677-78 (D.
Mass. 2018) (imposing a lifetime bar where the defendant
played an essential role in a pump-and-dump scheme);
SEC v. Selden, 632 F.Supp.2d 91,
97 (D. Mass. 2009) (finding serious violations when defendant
engaged in affirmative misstatements over a period of several
years). Although Johnston's violations were serious, they
were not particularly flagrant.
concedes that this is Johnston's first offense and
Johnston, to no surprise, points to his 30-plus years of
compliance with securities laws both before and after the
deceptive scheme in 2012. ...