368 F. Supp. 3d 247
D.D.C.2019Background
- In 2016 the SEC sued David Johnston, former Aveo Pharmaceuticals CFO, alleging a scheme (Aug 2012–Apr 2013) to mislead investors about FDA approval prospects for Aveo’s drug tivozanib (Tivo).
- Aveo had disclosed negative overall survival data from Tivo’s first trial but omitted the FDA’s recommendation that Aveo conduct a second randomized trial; Johnston led scripted investor communications that downplayed the FDA concerns.
- Aveo filed an NDA without a second trial; in April 2013 the FDA’s prior recommendation became public, Aveo’s stock fell ~31%, and an ODAC panel later rejected the first trial’s adequacy.
- A jury found Johnston liable under §10(b) of the Exchange Act, §§17(a)(1)–(3) of the Securities Act, and Rule 13a-14 after an eight-day trial.
- The SEC moved for final relief: officer/director bar, disgorgement, prejudgment interest, civil penalties, and a permanent injunction; the Court resolved each remedy request.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Officer/director bar (unfitness) | Johnston led a deceptive communications scheme and should be barred from public-company officer/director roles. | Johnston argued his conduct was less egregious, first offense, relied on counsel/process, and lifetime bar is reserved for extreme schemes. | Court imposed a two-year officer/director bar (serious role and scienter but not flagrant or recurring). |
| Disgorgement (amount / causation) | Johnston avoided loss by selling 3,597 shares; SEC calculates avoided loss ~$8,345. | Johnston says one sale was mandatory under a 10b5-1 plan (1,150 restricted shares), breaking causal link for that portion. | Court required disgorgement of $5,677 (adjusted for mandatory divestiture). |
| Civil penalty (Tier level & amount) | Violations involved fraud and created substantial loss; Tier III penalties appropriate (up to $150,000 per violation). | Johnston argued penalties should be lower (Tier II) and single violation. | Court found substantial loss (expert valuation loss >$100M) and imposed a single Tier III penalty of $120,000. |
| Permanent injunction & prejudgment interest | SEC sought permanent injunction and prejudgment interest on disgorgement. | Johnston did not oppose prejudgment interest; argued lack of scienter at times. | Court entered a permanent injunction (risk of future opportunities to violate) and awarded prejudgment interest on $5,677 per IRS rate. |
Key Cases Cited
- SEC v. Selden, 632 F. Supp. 2d 91 (D. Mass. 2009) (district court discretion on officer/director bars; factors for assessing unfitness)
- SEC v. Patel, 61 F.3d 137 (2d Cir. 1995) (six-factor test for officer/director unfitness)
- SEC v. Weed, 315 F. Supp. 3d 667 (D. Mass. 2018) (lifetime bar and maximum penalties in pump-and-dump context)
- SEC v. Druffner, 802 F. Supp. 2d 293 (D. Mass. 2011) (equitable power to order disgorgement)
- First Jersey Sec., Inc. v. [sic] (First Jersey Sec.), 101 F.3d 1450 (2d Cir. 1996) (disgorgement and prejudgment interest principles)
- Fire & Police Pension Ass'n v. Abiomed, 778 F.3d 228 (1st Cir. 2015) (scienter assessment where disclosures mitigated investor risk)
- SEC v. Wyly, 56 F. Supp. 3d 394 (S.D.N.Y. 2014) (measure of unjust enrichment for disgorgement)
- SEC v. Happ, 392 F.3d 12 (1st Cir. 2004) (burden-shifting on disgorgement causation)
- SEC v. Bilzerian, 29 F.3d 689 (D.C. Cir. 1994) (standard for injunction based on reasonable likelihood of future violations)
- Steadman v. SEC, 603 F.2d 1126 (5th Cir. 1979) (factors bearing on unfitness and future risk)