In a closely-watched trial, the former CFO of Aveo Pharmaceuticals has been found liable for federal securities fraud. On 20 November 2018, a jury in the U.S. District Court for Massachusetts found that David Johnston failed to adequately disclose the company's interactions with the Food and Drug Administration (FDA) over a kidney-cancer drug, called tivozanib. Aveo began clinical trials of tivozanib in 2010 and met with the FDA in May 2012 to discuss those trial results ahead of seeking FDA approval of the drug. In those meetings, the FDA expressed concerns about survival rates of patients on tivozanib and recommended that Aveo undertake a second clinical trial of the drug, but in subsequent public disclosures the company did not disclose that another trial could be necessary.
In 2016, the SEC brought a civil action against Aveo and certain of its executives. Aveo and the other executives settled the matter, leaving Johnston as the only defendant to go to trial. At his trial, Johnston argued that as the CFO, he relied upon the company's internal processes and advisors in deciding what to disclose about the FDA interactions. The advisors included in-house and external lawyers who allegedly approved the omission of the FDA's recommendation for a second trial. These communications with the company's attorneys were privileged, however, and the privilege was held by the company. As a result, the jury did not hear any testimony concerning the advice the attorneys provided, and the SEC questioned whether Johnston had provided the attorneys with sufficient information about the FDA interactions. In the end, Johnston was found liable after only four hours of jury deliberation.
The Aveo/Johnston case illustrates (a) the aggressiveness of the SEC in bringing disclosure actions, including against corporate executives who do not have any particular expertise in the subject matter being disclosed, and (b) the importance of well-documented corporate disclosure procedures.