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SALT LAKE CITY — The U.S. Securities and Exchange Commission on Wednesday issued a cease-and-desist order to Salt Lake City-based biotechnology company Co-Diagnostics over "materially misleading press releases" regarding COVID-19 tests manufactured by the company and making undisclosed payments to family members.
The order also says Co-Diagnostics has agreed to pay a civil penalty of $250,000.
The proceedings are centered around two press releases issued by Co-Diagnostics on Feb. 6, 2020, and Feb. 10, 2020, concerning a screening test it had developed to detect COVID-19, dubbed the "Logix Smart Test."
"Specifically, the press releases misleadingly suggested that the test could be used by consumers to detect COVID-19, when in fact, at that time, the test was intended for Research Use Only, which meant it could not be sold for clinical diagnostic purposes," the order said.
Furthermore, the order states that Co-Diagnostics offered and sold securities to investors after issuing the press releases and after the Food and Drug Administration contacted the company to raise concerns regarding the language in the press releases.
Among the aforementioned violations, the order also states that Co-Diagnostics "failed to disclose related party transactions involving the family members of the company's chief executive officer and then-chief financial officer, secretary, and general counsel in its annual reports."
The latest incident comes after a class action lawsuit was filed in June 2020, alleging executives at Co-Diagnostics misrepresented its Logix COVID-19 test as being "100% accurate" in statements and news releases, a claim that it alleges was later shown to be false but only after the company's stock value saw dramatic increases.
"Co-Diagnostics, its directors and officers — including Ph.D.-level scientists who should know better — made continual, knowing and willful misstatements about their main product, a COVID-19 diagnostic test, to pump up the price of Co-Diagnostics' stock while the officers and directors exercised low-priced options and dumped their stock into the market," the complaint states. "Their fraudulent misstatements, and disregard for the basic scientific principles that make their falsity of their statements clear in retrospect, cost investors to lose millions of dollars."
That lawsuit is still pending.
Messages left with Co-Diagnostics seeking comment were not immediately returned Thursday.
Timeline
On July 2, 2019, Co-Diagnostics received a letter from the Nasdaq — the market where the company trades — saying that the company was in danger of becoming de-listed because its stock had closed below $1 for the prior 30 consecutive business days.
Per Nasdaq rules, to remain listed, Co-Diagnostics's stock had to close at or above $1 for 10 consecutive business days within the following 180 calendar days and if it failed to regain compliance within that time, Co-Diagnostics could be eligible for an additional 180 calendar day period to regain compliance.
As a result, Co-Diagnostics ramped up its public relations efforts, issuing more press releases and using a third-party consultant company co-owned by Andrew Benson, who also served as Co-Diagnostics' head of corporate communications and investor relations.
On Feb. 6, Co-Diagnostics issued a press release stating that its test was "ready for sale to appropriate laboratories, hospitals and institutions in need of a solution to the current coronavirus epidemic."
However, at the time the press release was sent out, Co-Diagnostics had not received authorization from the FDA or any other regulatory entity to sell or use its Logix Smart Test for diagnostic purposes, according to the order.
On Feb. 6, 2020, Co-Diagnostic's stock closed at $3.08, representing an 18.92% increase over the day prior on a volume of 10,909,200, and a 48% increase from the average daily volume for the prior 30 calendar days, according to the order.
The Feb. 10 press release used similar language to describe its Logix Smart Test, announcing "sales of its screening test designed to identify the presence of the novel coronavirus" and quoted Co-Diagnostics CEO Dwight Egan as saying the company was "pleased to be able to offer a product to this market that excels in being both sensitive and specific, the two benchmarks for accuracy in molecular diagnostics."
Similar to its stock performance after the Feb. 6 press release, the company's stock on Feb. 10 closed at $3.96, representing a 32% increase over the day prior, on a volume of 28,920,600, the order says.
After the FDA contacted Co-Diagnostics on Feb. 11 to raise concerns over the language in the releases, a note was added to the releases on or around Feb. 28, saying "The Logix Smart™ 2019-nCoV kit is for Research Use Only. Not for use in diagnostic procedures. This product is for export only and not available for sale in the U.S."
"On or around Feb. 13, 2020, Co-Diagnostics offered and sold 3,324,676 shares of the company's common stock at a purchase price of $3.08 per share in a registered direct public offering, for gross proceeds of approximately $10.2 million. At the time of the offer and sale, Co-Diagnostics had neither retracted nor modified the materially misleading statements contained in the Feb. 6 or 10 releases," the order says.
Family affair
Along with what the SEC described as "materially misleading" language in the press releases, it also said Co-Diagnostics failed to report transactions with family members of its CEO, Egan, as well as the company's former chief financial officer Reed Benson (the father of Andrew Benson).
Regulations require "an issuer to disclose 'any transaction ... in which any related person had or will have a direct or indirect material interest,'" said the order.
The relevant related-person reporting thresholds for Co-Diagnostics were $29,791 for the fiscal year 2018, then $31,077 for the fiscal year 2019, and $18,842 for the fiscal year 2020.
However, from fiscal year 2018 to fiscal year 2020, Co-Diagnostics employed Egan's son as the company's director of sales and marketing. According to the order, Egan's son was paid compensation totaling $91,352 in the fiscal year 2018, then $224,900 in the fiscal year 2019 and $1,113,440 in the fiscal year 2020.
During the same time frame, Co-Diagnostics paid Andrew Benson $327,820 in the fiscal year 2018, then $218,959 in the fiscal year 2019 — and $1,109,303 in the fiscal year 2020.
In addition, Co-Diagnostics utilized the services of the consulting company that Andrew Benson co-owned and paid that company $60,000 in the fiscal year 2018, then $78,500 in the fiscal year 2019 and $20,000 in the fiscal year 2020. Co-Diagnostics also issued 7,000 shares of Co-Diagnostics stock to the consulting company in fiscal year 2020, according to the order.
While these payments all constituted reportable transactions, none were recorded in Co-Diagnostics' books and records as related-party transactions.
"During this time, Co-Diagnostics did not have any policies or procedures concerning related-party transactions, including what constitutes a related-party transaction or how such transactions should be disclosed by the company. Co-Diagnostics did not identify related-party transactions in its books and records," said the order.
The order said Co-Diagnostics will have 30 days to pay a civil money penalty of $250,000 to the SEC for transfer to the general fund of the United States Treasury.
More details can be found regarding the cease-and-desist order and the violations of Co-Diagnostics here.
