SEC v. Ferrone: Alleged Misstatements Concerning A Biopharmaceutical Drug

In SEC v. Ferrone, No. 11 C 5223, 2014 BL 287831 (N.D. Ill. Oct. 10, 2014), the United States District Court for the Northern District of Illinois, Eastern Division, granted a motion for summary judgment against defendant Douglas McClain Sr. (“McClain Sr.”) and against Douglas McClain Jr. (“McClain Jr.”) for violations of the federal securities laws.  

According to the allegations, McClain Jr founded Argyll Biotechnologies, LLC (“Argyll”) and McClain Sr was the company’s chief science officer.  In 2006, Argyll acquired the rights to “SF-1019,” a biopharmaceutical drug extracted from goat blood, in 2006. Argyll formed Immunosyn Corporation (“Immunosyn”) and provided the company with a worldwide license to market and sell SF-1019.  Argyll retained a majority of the shares of Immunosyn.  

In December 2006, Argyll filed an Investigational New Drug (“IND”) application with the FDA, which contained a proposal for “Phase I” clinical trials of SF-1019 on human subjects. In March 2007, the FDA placed the IND application on a full clinical hold because of insufficient information to assess risk. Both defendants were allegedly aware of the hold. Immunosyn’s public filing with the SEC for the 2007 fiscal year noted SF-1019 had not been approved for human use or treatment of any particular disease, but failed to mention SF-1019 clinical trials were on full clinical hold. During the period from April 2007 to October 2007, while SF-1019 was on hold, the SEC alleged that defendants sold hundreds of thousands of their Immunosyn shares. 

The SEC asserted that McClain Sr. defrauded investors under the securities laws when he took their money but failed to deliver shares of Immunosyn stock.   McCain Sr., however, argued that the issue of scienter could not be resolved on a motion for summary judgment.  The court, however, found that the explanation given by McClain Sr. as to the reasons for not delivering the shares did “not provide a basis upon which a reasonable trier of fact could find that McClain Sr. did not intend to deceive investors at the Texas clinic.”  

The SEC also alleged that McClain Sr. made materially false or misleading statements during a presentation at a Texas clinic and in a video presentation on Immunosyn’s website. The court analyzed this theory by determining whether McClain Sr.’s statements were (1) false or misleading; (2) material; and (3) intended to deceive investors. 

During his presentation at the Texas clinic, the court found McClain Sr. made misleading statements about the FDA approval process and the alleged sale of SF-1019 to the Department of Defense. It also found, any reasonable investor would have viewed these statements as altering the total mix of information about Immunosyn’s primary asset. See Id.  (“Any reasonable trier of fact would conclude that McClain Sr. made false or misleading statements about SF-1019 at the Texas clinic and in his video presentation.”).  The court also found that the alleged misstatements were material and made with scienter.  

The final theory of liability alleged by the SEC was that McClain Sr. and McCain Jr. engaged in insider trading when they sold their Immunosyn stock while in possession of  material, non-public information. The court found that the holds placed by the FDA constituted material non-public information.  The only “contested” issue was whether the Defendants acted with scienter.  As the court noted, “[w]hat remains missing is a legitimate, nonfraudulent explanation of why they sold their Immuosyn shares when they did.”  As a result, “the McClains have failed to rebut the inference that inside information about the FDA holds played a causal role in their sales of Immunosyn stock.” 

Therefore, the court granted summary judgment for the SEC on all its claims. 

The primary materials for this case can be found on the DU Corporate Governance website

Mark Proust