|Footnotes for this article are available at the end of this page.
An appellate court upheld a judgment that clever omissions from statements made by a corporate officer constituted securities fraud. On January 22, 2021, the U.S. Court of Appeals for the First Circuit in Boston, Massachusetts upheld a jury’s fraud verdict against an executive in a securities case tried in the U.S. District Court for the District of Massachusetts.1 In a 30-page opinion, the Court in SEC v. Johnston2 refused to overturn a verdict finding that defendant David Johnston, the former chief financial officer of AVEO Pharmaceuticals, Inc.,3 renamed AVEO Oncology (“AVEO”),4 had engaged in fraudulent conduct under Section 10(b) of the Securities Exchange Act of 1934 (and Rule 10b-5 thereunder) and Section 17(a)(1) of the Securities Act of 1933.5
Johnston’s fraudulent conduct arose from two sets of public statements, one he prepared for AVEO’s now-former chief medical officer, William Slichenmyer, and one he made in his own conference call. Both sets of statements concerned AVEO’s new anti-cancer drug and the FDA’s preliminary view of its test results.
The FDA Meeting
At trial, the Securities and Exchange Commission (“SEC”) presented evidence placing Johnston’s statements in the context of his knowledge, claiming he materially misled analysts and investors about statements the Federal Drug Administration (“FDA”) staff had made to AVEO in a meeting on May 11, 2011 (“Meeting”). During the Meeting, FDA staff addressed AVEO’s plan to file a new drug application (“NDA”) for its kidney anti-cancer drug, tivozanib, and its views of the results of AVEO’s first—and only—Phase 3 survivability trial. In the “pre-NDA” meeting, the FDA staff expressed concern about the test’s survivability results, opined that an NDA based on such results would trigger a “review issue” affecting approvability, and recommended that AVEO conduct a second Phase 3 study. Although Johnston did not attend the Meeting, he testified that he “learned of the FDA’s recommendation to conduct another study shortly after the pre-NDA meeting.”
Problem for AVEO’s Management
The suggestion of a second trial posed a serious problem for AVEO. Management had informed investors that the Company would file the NDA for tivozanib in the third quarter of 2012, less than six months following the Meeting. A second, newly designed test would take at least two years to complete, would likely delay the NDA filing, and might not provide the desired clinical-benefit results needed for approval. Considering how important the new drug was to AVEO, the FDA’s recommendation was a significant problem.
Management had several options relative to informing the public: (1) tell the market about the Meeting, including all material facts learned; (2) stay completely silent about the Meeting; or (3) talk about the fact that the Meeting occurred but omit details regarding the FDA staff’s opinions and recommendations. AVEO management also had options regarding next steps and whether to follow the FDA staff’s views and recommendations. AVEO could: (1) conduct a second survivability trial and delay filing the NDA, which would have been in line with what the FDA staff had recommended or (2) take their chances and go forward with filing the NDA as planned and without first conducting a second survivability trial.
AVEO’S executives chose to disclose that the Meeting had taken place and provide partial information about what they had learned from the FDA staff and to file the NDA as planned. These decisions proved catastrophic.
AVEO filed its NDA on September 27, 2012, three days short of the end of the third quarter 2012; the FDA panel recommended non-approval, by a 13-1 vote, on May 2, 2013,6 and on June 10, 2013, AVEO received a Complete Response letter stating that, based on the NDA, tivozanib would not be approved.7
The epilogue was predictable: private class actions,8 an SEC investigation and fraud action against AVEO, CEO Tuan Ha-Ngoc, Johnston, and Slichenmyer,9 with a $4 million penalty against the Company.10 Of the four defendants named in the SEC’s complaint, only CFO Johnston insisted on a trial; the Company and the other two executives settled.11
Materially Misleading Statements and Omissions
August 2, 2012: No speculation
Johnston made materially misleading statements through AVEO’s CMO, Slichenmeyer, on an August 2, 2012 conference call when AVEO reported its second-quarter results.12 Although the CMO spoke, Johnston had prepared a script with answers to anticipated questions about the pre-NDA meeting and was on the call. Most significantly, the CMO used the answers in the script prepared by Johnston. Investment analysts asked Slichenmyer if the FDA had “outlined” any “other possibilities” to address overall survival concerns, such as “additional studies.” The Court noted that “Johnston knew that there were two readily apparent, non-deceptive answers: ‘Yes’ or ‘we choose not to answer that question.’”13 The latter response, of course, would be tantamount to yes.
Instead, the CMO used Johnston’s script and said he “could not ‘speculate’ about ‘what the agency might be thinking’ or ‘what additional actions might be necessary.’” Another questioner asked, did the FDA “‘push [AVEO] into a different direction of maybe doing . . . additional studies,’” to which Slichenmyer responded, again, that “he could not ‘speculate on what the agency might want us to do in the future.’”14 These two answers were clearly misleading because there was no need to “speculate:” the FDA staff had specifically suggested a second trial.
AVEO later reported that, on November 27, 2012, it filed and the FDA accepted the filing of the NDA for tivozanib, the Company’s “lead product candidate, with the proposed indication for the treatment of patients with advanced renal cell carcinoma, or RCC.” 15 AVEO noted that the FDA’s “Oncologic Drugs Advisory Committee, or ODAC, which provides the FDA with independent expert advice and recommendations, will review our NDA for tivozanib on May 2, 2013,” and the “review of the NDA is expected to be complete by July 28, 2013.”16
January 2013: Follow-on Offering
On January 23, 2013, with the market still ignorant of the FDA’s concerns and suggestions, AVEO closed a follow-on public offering of its securities that netted the Company $53.6 million.17
February 27, 2013: No “Formal” Discussions
During a conference call on February 27, 2013, in which Johnston directly responded to questions, he was asked about AVEO’s discussions with the FDA: “Have you—either your partner or the FDA discussed any further trials in kidney cancer so far?” Johnston replied, “We have not had any formal discussions, no.” He did note that another trial was within the “range of possibilities that might come out of this.”18 The First Circuit found that this response, coupled with the misleading statements Johnston had scripted for the CMO for the August 2012 call, “reinforced the misleading impression that the FDA had not even discussed with AVEO an additional trial during the pre-NDA meeting.”19
Jury Verdict Upheld
The First Circuit upheld the jury’s findings of securities fraud against Johnston. The Court noted that the “pivotal question is whether those statements were knowingly misleading.” Specifically, the Court posited, “the question is . . . whether Johnston communicated to investors a false statement about the past: that the FDA had not formally discussed, much less recommended, a second study.”20 The answer to this question was one for the factfinder—in this case, the jury—and the jury answered “yes.” This was not a view the Court was prepared to overturn.
The usual rule is that, absent some affirmative requirement to disclose information (e.g., publishing financial statements on a quarterly and annual basis, etc.), a public company and its executives are not required to make public disclosures about everything the company is doing, even if that information would be viewed as important to investors. However, once a company does decide to disclose information, any such disclosure must be truthful and the company may not omit material information, the withholding of which renders the disclosure misleading. In this regard, subtle half-truths and clever omissions can create enormous problems for a public company and its officers and directors.
The Johnston case provides a cautionary tale for corporate executives not to engage in “too clever by half” disclosures to investors. What we observe in this case is an executive team faced with a difficult situation—a significant delay in the ability to market and sell a keystone product in which the company has invested significant time and funds. Because of the FDA staff’s interpretation of AVEO’s data, at the moment when it anticipated FDA approval of its tivozanib drug, AVEO instead contemplated a multi-year delay for new trials and potentially even denial of FDA approval if those trials did not show improved results. This would either delay the date when the company could begin turning a profit on its substantial investment or even render that investment worthless, depending on the outcome of the new trials. AVEO’s executives knew that the market would not reward the company’s share price for the delay and the company was about to seek additional funding via an offering of additional securities to the public; negative news about the FDA Meeting would not have benefited the new offering (or, for that matter, the executives’ own bottom line to the extent their compensation was based on options on company shares). Faced with this very difficult set of facts, AVEO’s management team blinked.
Rather than say nothing about the FDA Meeting and risk a backlash when AVEO failed to bring its drug to market on the expected timetable, the executives decided they would pretend that all was going according to plan: they would disclose there had been a meeting with FDA staff but they would not disclose what they had learned of the FDA’s staff’s views and the recommendation to perform a second survivability trial. Had they stuck to this plan and said nothing at all about the FDA’s recommendations, this might have been fine. However, when pressed, and based on a script prepared in advance as to how to respond to the predictable follow-up questions about whether the FDA had recommended “additional studies,” AVEO’s CFO and CMO responded with a clever, deceptive response: they said they would not “speculate” about what the FDA staff was thinking. This response implied, of course, that AVEO had not received such a recommendation when, in fact, it had. And later, when Johnston was separately asked about trials, his “no formal discussions” response was likewise misleading.
The AVEO executives found themselves in a difficult situation once the decision to disclose the FDA Meeting had been made. They may have believed that saying they would not speculate about the FDA’s future recommendations regarding the need for a study addressed both whether ultimately such an additional study would be needed and their hope that the NDA would be approved without needing a second study. And since they did not squarely assert that the FDA had or had not made any particular recommendation, they may have assumed their response was not false or misleading. However, when the SEC and the Courts (and, in this case, a jury) revisit such statements years later, it is always with the full context of what preceded the statements and also what happened next, which will have been documented. This can appear unfair, in the sense that “hindsight is always 20/20,” but this case presents a fresh example of just how scrupulously executives making in-the-moment, real-time decisions must watch their words to avoid being second-guessed many years later.
 The jury delivered its verdict on November 20, 2018. See, SEC, Public Statement, Statement on Jury Trial of Ex-CFO of AVEO (Nov. 20, 2018), https://www.sec.gov/news/public-statement/jury-trial-ex-aveo-pharmaceuticals.
 SEC v. David Johnston, Case No. 19-2264 (1st Cir. Jan. 22, 2021) (“Opinion”), http://media.ca1.uscourts.gov/pdf.opinions/19-2264P-01A.pdf.
 AVEO announced the appointment of Johnston on October 30, 2007. AVEO Pharmaceuticals, Inc., Press Release, AVEO Pharmaceuticals Appoints David Johnston as CFO (Oct. 30, 2007), https://investor.aveooncology.com/news-releases/news-release-details/aveo-pharmaceuticals-appoints-david-johnston-cfo. Johnston was CFO when the Company conducted its initial public offering in 2010.
 AVEO is located in Cambridge, Massachusetts and is listed on NASDAQ under the symbol “AVEO.” See, https://www.aveooncology.com/.
 The SEC filed its original complaint on March 29, 2016, after which it filed a first amended complaint on September 1, 2016. SEC v. Aveo Pharmaceuticals, Inc., Complaint, Case No. 1:16-cv-10607 (Mar. 29, 2016), https://www.sec.gov/litigation/complaints/2016/comp-pr2016-59.pdf; and SEC v. Aveo Pharmaceuticals, Inc., First Amended Complaint, Case No. 1:16-cv-10607 (Sep. 1, 2016), https://www.sec.gov/divisions/enforce/claims/docs/aveo-complaint-090116.pdf. The claims against Johnston included non-fraud violations as well.
 David Pittman, FDA Panel Votes Down Two Cancer Drugs, Medpage Today (May 2, 2013), https://www.medpagetoday.com/HematologyOncology/RenalCellCarcinoma/38830.
 Michael Smith, FDA Rejects Renal Cancer Drug Tivozanib, Medpage Today (June 10, 2013), https://www.medpagetoday.com/HematologyOncology/RenalCellCarcinoma/39736.
 Nate Raymond, Aveo settles investor lawsuit over cancer drug for $15 mln, warrants, (Dec. 27, 2017), https://www.reuters.com/article/health-aveo/aveo-settles-investor-lawsuit-over-cancer-drug-for-15-mln-warrants-idUSL1N1OS00I.
 SEC, Press Release, SEC: Biotech Company Misled Investors About New Drug’s Status With FDA, (Mar. 29, 2016), https://www.sec.gov/news/pressrelease/2016-59.html.
 On November 26, 2013, Johnston resigned as AVEO’s CFO, effective December 30, 2013. AVEO Pharmaceuticals, Inc., Form 8-K (Nov. 26, 2013), https://www.sec.gov/Archives/edgar/data/1325879/000119312513458551/d634997d8k.htm. See also, Don Seiffert, CFO of Aveo to resign seven months after drug failure, Boston Business Journal (Dec. 2, 2013), https://www.bizjournals.com/boston/blog/bioflash/2013/12/cfo-of-aveo-to-resign-7-months-after.html.
 SEC, Statement, SEC v. AVEO Pharmaceuticals, Inc., et al., Case No. 16-cv-10607 (D. Mass.), (Mar. 1, 2018) (announcing SEC’s filing of amended complaint on Sep. 1, 2016, and entry of final consent judgment against Ha-Ngoc on Dec. 8, 2017), https://www.sec.gov/divisions/enforce/claims/aveo-pharmaceuticals.htm; SEC, Litigation Release, SEC Obtains Final Judgments Against Former AVEO Pharmaceuticals Executives, Rel. No. 24062 (Mar. 5, 2018) (settlements of AVEO and Slichenmyer), https://www.sec.gov/litigation/litreleases/2018/lr24062.htm.
 AVEO Pharmaceuticals, Inc., Press Release, AVEO Reports Second Quarter 2012 Financial Results (Aug. 2, 2012), https://investor.aveooncology.com/news-releases/news-release-details/aveo-reports-second-quarter-2012-financial-results.
 Opinion, supra note 2, at 17.
 Id. at 17-18.
 AVEO Pharmaceuticals, Inc., Form 10-K, at 2 (Mar. 11, 2013) (for the year ended December 31, 2012), https://www.sec.gov/Archives/edgar/data/1325879/000119312513101343/d453836d10k.htm.
 Id. at 4.
 Opinion, supra note 2, at 18.
 Id. at 18-19.
 Id. at 20.