The U.S. Securities and Exchange Commission (SEC) recently announced settled charges against Kiromic BioPharma, its former CEO Maurizio Chiriva-Internati, and former CFO Tony Tontat for failing to disclose material information regarding the FDA's clinical hold on two of its cancer drug development programs. The SEC's order highlights the critical intersection between FDA regulatory processes and investor disclosures under securities laws.
FDA Clinical Hold and Investor Disclosures
In June 2021, the FDA placed two of Kiromic's cancer drug development programs on clinical hold, preventing the company from initiating clinical trials. According to the SEC, Kiromic's then-Chief Medical Officer (CMO) informed Chiriva-Internati about the holds. However, the SEC alleges that Chiriva-Internati's communication with the Board of Directors regarding the FDA's hold was "imprecise," leading some board members to believe the FDA was still reviewing the IND applications.
Subsequently, Kiromic raised $40 million through a common stock offering, intended to fund the clinical trials. The SEC noted that Kiromic did not disclose the FDA's clinical hold in its investor roadshows, due diligence calls with underwriters and auditors, or SEC filings. The underwriters viewed FDA authorization to start clinical trials as a critical selling point for the offering.
A month after the initial call, the FDA sent letters detailing the reasons for the clinical holds. Tontat, the CFO, recognized the letters as containing "material information" and urged disclosure. However, Kiromic's subsequent press release only stated that the "FDA returned with comments," failing to mention the clinical hold. The SEC alleges that Tontat certified the Company's Form 10-Q despite knowing it omitted information about the FDA clinical hold.
Internal Whistleblowers and Remedial Actions
Following the Form 10-Q filing, internal whistleblowers reported concerns about Kiromic's SEC disclosures and public statements regarding FDA communications and clinical trials. A special committee of independent directors was formed to investigate these complaints, which were later substantiated by outside counsel.
Kiromic took several remedial actions, including terminating Chiriva-Internati, appointing an interim CEO trained in disclosure controls, establishing a disclosure committee, and appointing two new independent board directors. The company also voluntarily self-reported the violations to the SEC and cooperated with the investigation.
SEC's Findings and Implications
The SEC emphasized that accurate and timely communication regarding FDA actions is crucial for investors. In this case, Kiromic's initial press release, which downplayed the FDA hold, led to a 16.36% drop in the company's stock price, demonstrating the significance of FDA communications to investors.
The SEC's order underscores the importance of robust disclosure controls and procedures, proper training of management and directors, and effective internal reporting channels. The SEC acknowledged that Kiromic avoided a civil penalty due to its self-reporting, remediation, and cooperation with the investigation.
This case serves as a reminder for life sciences companies to carefully consider statements related to FDA correspondence, actions, and review timelines. Companies should resist the urge to downplay negative news and ensure that all disclosures are accurate and complete. The SEC's scrutiny of statements about FDA processes, along with recent prosecutions by the Department of Justice for securities fraud involving misleading statements about FDA submissions, highlights the need for vigilance in communicating with investors about regulatory matters.
