The First Circuit Affirms Verdict That Ex-AVEO CFO Committed Securities Fraud

On January 22, 2021, the First Circuit Court of Appeals affirmed a jury’s verdict finding that the former chief financial officer of AVEO Pharmaceuticals, Inc., David Johnston, committed securities fraud in relation to his statements regarding AVEO’s kidney cancer drug, tivozanib.  See Sec. & Exch. Comm’n v. Johnston, No. 19-2264, 2021 WL 222037, at *1 (1st Cir. Jan. 22, 2021).  Johnston had appealed from a federal jury’s November 2018 verdict that found him liable for civil securities fraud and imposed a two-year restriction on serving as an officer in a public company.

The action arose from allegations that, during a meeting between AVEO and the FDA on May 11, 2012, the FDA provided two recommendations to the company: (1) before AVEO submits an approval application for its drug tivozanib, AVEO should conduct a second phase 3 study of the drug; and (2) AVEO should conduct a final analysis of overall survival in the current phase 3 trial.  Id. at *2.  After this meeting, Johnston represented to the market that AVEO and the FDA had not had any formal discussions regarding the need for further trials of tivozanib.  Id. at *4.  When the FDA released briefing documents revealing that it had recommended in May 2012 that AVEO conduct another trial, the company’s stock price dropped 31%.  Id. at *5.  

In its decision, the Court of Appeals explained that when Johnston chose to speak about AVEO’s communications with the FDA, he “used carefully crafted half-truths and distortions to convey a false understanding of the FDA’s feedback on the company’s clinical trial and thereby violated his duty to make accurate statements regarding material facts.”  Id. at *7.  The court also found that Johnston acted with a strong inference of scienter because his own testimony reflected that he learned of the FDA’s recommendation shortly after the May 2012 meeting.  Id. The Court of Appeals rejected Johnston’s arguments that the jury instructions contained prejudicial errors as well.  Id. at *10.

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About Megan Remmel

Megan Remmel is a Partner in the New York office of Faruqi & Faruqi, LLP.

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