Law360 (September 25, 2020, 5:32 PM EDT) -- The U.S. Securities and Exchange Commission filed suit in California federal court Friday against a top executive of biotechnology company Arrayit Corp. who it says conned investors into believing the company had developed a COVID-19 test and misled them about the status of financial reports.
From October 2018 to April 2020, Mark Schena, the president and chief science officer of Arrayit, who also faces criminal charges, deceived investors about the status of Arrayit's delinquent financial reports and its development of a COVID-19 test, leading to surges in the price and trading volume of Arrayit's stock, according to the complaint.
Schena told investors in emails in March and April that Arrayit had developed a COVID-19 test, when in reality it lacked essential components for such a test, the SEC said.
He also told investors that Arrayit's COVID-19 test was awaiting emergency approval from the U.S. Food and Drug Administration before the company had even sought such approval, the SEC alleged.
Schena also told investors that the company received more than 50,000 requests for its finger stick blood test and was coordinating with local, state and federal agencies to make the test available, according to the complaint.
His misleading statements caused the price of the company's penny stock to climb and trading volume to increase, the SEC alleged.
After his statement about the 50,000 requests for its blood test, from March 17 to March 19, Arrayit's closing share price rose 55% from $0.0242 to $0.0374, and its trading volume increased 99%, from 1,480,455 to 2,943,365 shares, according to the complaint.
"We allege that Mark Schena took advantage of the COVID-19 pandemic at the expense of investors," Erin E. Schneider, director of the SEC's San Francisco regional office, said in a statement. "A pandemic does not exempt public company executives from their responsibility to make accurate disclosures."
The SEC halted trading on the company's stock from April 14, 2020, through April 27, 2020, and its shares are currently trading in the gray market.
Schena, 57, of Los Altos, California, was charged with securities fraud and conspiracy to commit health care fraud in June, with prosecutors alleging that he defrauded investors and health care benefit programs by manipulating the company's stock price and submitting more than $69 million in fraudulent claims for allergy and COVID-19 testing.
Arrayit had not filed any SEC Form 10-Q quarterly or annual reports since November 2015, according to the SEC complaint.
While Arrayit initially arranged for an unnamed auditing firm to audit financial statements from 2014 to 2018, the auditing firm's emails to the company were repeatedly ignored, and necessary documents and information was never provided to the auditing firm to complete the audits, the SEC said.
In 2018, responding to numerous inquiries from investors about when Arrayit's financial statements would be filed and made public, Schena and his wife, Rene Schena, Arrayit's CEO, lied to them and said Arrayit would soon become current with its required periodic reports, according to the complaint.
Schena posted the same false statement to Arrayit's Twitter account on Oct. 31, 2018, and Dec. 31, 2018, the Schenas and other Arrayit personnel issued a press release stating, "At year end, we implemented a new electronic medical billing solution and we expect to bill $1 million per week for our health and wellness tests. The actual contribution of medical reimbursement to our revenues and earnings will be detailed in financial reports, which we anticipate filing in the coming quarter," the complaint said.
In a March 2019 post on Arrayit's website, the CEO said the company "complies with federal rules and regulations governing public companies," including making disclosures to the SEC. "We will resume quarterly and annual financial filings during the first quarter of 2019."
Schena responded to investor emails inquiring about the financials, telling them the financials would be filed shortly but they never came, the SEC said.
His misleading statements artificially inflated the company's stock price, according to the SEC.
From January 1, 2019 to March 26, 2019, the closing share price of Arrayit securities increased 313% from $0.0477 to $ 0.1969, and the daily trading volume increased 674% from 708,719 to 5,485,236 shares, according to the complaint.
As the first quarter of 2019 was ending with no sign of periodic reports, the closing share price of Arrayit securities declined, according to the SEC.
From March 26, 2019 to April 2, 2019, the closing share price declined 73% from $0.1969 to $0.0541, and the daily trading volume increased 558% from 5,485,236 to 36,107,809 shares, according to the complaint.
"Mark Schena knew, or was reckless in not knowing, that his statements about the status of Arrayit's financial statements were false and misleading," the SEC complaint said. "He also knew, or was reckless in not knowing, that he omitted material facts when making statements about the status of Arrayit's financial statements, including the fact that Arrayit had failed to provide necessary documents to its independent auditor."
The SEC seeks a permanent injunction, an unspecified civil money penalty and a ban on holding officer and director positions.
Counsel for Schena declined to comment Friday.
Schena is represented by Todd Pickles of Greenberg Traurig LLP.
The SEC is represented by in-house counsel Fitzann R. Reid and John K. Han.
The case is SEC v. Schena, case number 5:20-cv-06717, in the U.S. District Court for the Northern District of California.
-Additional reporting by Lauren Berg. Editing by Peter Rozovsky.
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