Companies Can't Hide: Cases Show It Doesn't Pay to Lie to the SEC, or Your General Counsel
Whether you work at a marine theme park or a company that manufactures breast implants, concealing information is a bad idea, recent SEC actions indicate.
September 19, 2018 at 04:54 PM
4 minute read
Photo credit: jdwfoto/Shutterstock.com
A settlement Wednesday by a breast implant company was just one of several recent cases offering an important lesson for corporations and their CEOs: Don't hide important information from your financial regulators, your investors or your general counsel.
The U.S. Securities and Exchange Commission said that's exactly what Hani Zeini, founder and then-CEO of Sientra Inc., in Santa Barbara, California, did. Zeini concealed damaging news about the company's sole-source manufacturer of the silicon implants just days before Sientra closed a $60 million stock offering in 2015, the SEC alleged.
When Zeini learned that its Brazilian manufacturer had lost its compliance certificate needed to sell products in the European Union, he “hid this information from every other professional working on the offering—including Sientra's general counsel, its outside counsel, the offering's underwriters and their counsel.” He also concealed it from his chief financial officer and Sientra's board of directors.
Without admitting or denying the allegations, Sientra consented to the SEC order. The company declined to comment about the SEC action to Corporate Counsel and Zeini could not immediately be reached for comment.
The complaint alleged that Zeini also lied to a company vice president, saying he had discussed the certificate suspension with the company's general counsel and that they should tell no one else.
It also alleged that he had told the unidentified general counsel there was a “complaint” against the Brazilian manufacturer, but not that its compliance certificate was suspended. Zeini told the general counsel not to discuss the complaint with anyone else, including outside counsel, according to the SEC.
In due diligence calls just before the stock offering closed, Zeini assured underwriters and their counsel that there had been no material adverse event, the commission said. The day following the closing, Zeini issued a letter announcing the certificate suspension, and the stock price plummeted.
Zeini then allegedly tried to conceal that he withheld the information and tried to keep the general counsel, who found out, from informing the board of directors. When told of the incident, the board and Zeini agreed that Zeini would resign.
The SEC settled with Sientra by simply ordering it to cease and desist from future violations. The agency cited Sientra's prompt action upon discovering the fraud, its self-reporting of the violation and its “extensive cooperation” with the investigation.
The SEC issued an order prohibiting Zeini from acting as an officer or director of any securities issuer, imposing a civil penalty and seeking a permanent injunction. The commission said its litigation against Zeini continues.
In two other separate cases this week, the SEC penalized companies for hiding or withholding information.
On Tuesday the SEC said Boulder, Colorado-based Clovis Oncology Inc. and its CEO, Patrick Mahaffy, misled investors about how well Clovis' flagship lung cancer drug worked compared to another drug. It ordered the company, its CEO and its former CFO to pay more than $20 million in penalties.
According to the complaint, the company's investor presentations, press releases and SEC filings stated that the drug was effective 60 percent of the time, when actual results showed the rate was about 28 percent. The company didn't immediately return a message seeking comment.
“Biopharma companies cannot mislead investors about efficacy results,” said a statement from Stephanie Avakian, co-director of the SEC's Division of Enforcement. “As we allege here, the data available to Clovis and its executives should have alerted them to the inaccuracy of the claims about the effectiveness of its developmental drug.”
Also on Tuesday, the SEC accused SeaWorld Entertainment Inc. and its former CEO of misleading investors over the financial impact of a 2013 critical documentary film on the aquatic theme park. The company and the CEO entered into a $5 million settlement with the agency.
In a rare move, the SEC also charged SeaWorld's former vice president of communications, Frederick Jacobs, with making misleading public statements while he also was selling SeaWorld stock. Jacobs agreed to settle the case by paying disgorgement and interest amounting to over $99,000. He could not immediately be reached for comment.
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