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Jane Kober is no stranger to the disclosure requirements for public companies. In her seven years as general counsel of Biopure Corporation, a small Massachusetts-based drug company, she’s regularly signed off on scores of filings with the Securities and Exchange Commission. But disclosure questions always boil down to judgment calls, and now Kober’s judgment has been seriously second-guessed. In a civil fraud action set for trial in May, the SEC argues that Biopure, Kober, and two former executives misled investors about the prospects for Hemopure, a blood substitute that is the company’s flagship product. Biopure’s application for Hemopure ran into mounting problems at the Food and Drug Administration in 2003, according to the SEC. Yet during an eight-month period that year in which Biopure raised $35 million from stock offerings, the company allegedly failed to disclose the bad news. The SEC contends that Biopure withheld some material information about the Hemopure application from investors, and put a falsely positive spin on other negative news from the FDA. Kober and her codefendants, ex � CEO Thomas Moore and former VP Howard Richman, declined through their counsel to comment for this article. But Biopure has said in a statement that its executives “acted properly in these matters.” In essence, the company maintains that its disclosures about Hemopure were true and sufficient. Whatever the outcome of the case, it will provide important guidance to other biotechnology outfits, particularly those built around a single product. The SEC’s suit is one of the first disclosure-related actions against a biotech company to head to court since 2004. That year the SEC and FDA beefed up a long-standing agreement to monitor public statements by companies that are regulated by the FDA. The agencies’ agreement was revised because of a scandal two years earlier at ImClone Systems Incorporated � which, like Biopure, was also accused of making misleading disclosures about a new drug’s approval prospects. According to Coleen Klasmeier, who was special assistant to the FDA’s chief counsel at the time, the agency took a lot of heat in the fallout from ImClone. “The FDA was being beaten up unfairly for not policing public statements made by FDA � regulated companies,” recalls Klasmeier, now a counsel in the Washington, D.C., office of Sidley Austin. She says that monitoring disclosures “is not [the FDA's] role,” however, but the SEC’s. So Klasmeier and others set to work strengthening the relationship between the two agencies. The main innovation of the 2004 agreement, according to Klasmeier, was to create “a centralized procedure for the FDA to refer suspect actionable statements to the SEC.” In announcing the new arrangement, both agencies emphasized that false disclosures by biotech outfits can have a far-reaching impact. “If we have companies that are exaggerating the likelihood that their products will be approved,” Klasmeier explains, “that cuts into investments for products with real therapeutic potential.” The Biopure case underscores how seriously the SEC, aided by the FDA, is scrutinizing disclosures by biotech companies. “This is a smart case for the SEC to cut its teeth on,” says Elizabeth Gray, a former SEC lawyer who now advises biotech businesses as a senior counsel in the D.C. office of Foley & Lardner. Gray says that with Biopure, her old agency “is testing the waters.” Kober and her codefendants have already gained a strategic advantage over the SEC. After filing their responses to the agency’s complaint, they successfully persuaded federal district court judge Patricia Saris in Boston to place the SEC’s reply brief under seal. Kober is represented by Thomas Dougherty in the Boston office of Skadden, Arps, Slate, Meagher & Flom, while Biopure has tapped Robert Buhlman of Bingham McCutchen. Ian Roffman, a trial attorney in the SEC’s Boston office, is the agency’s lead lawyer on the suit. All declined to comment for this article. However, court documents filed before the seal order provide a substantial record of the case. Though the SEC makes numerous allegations, the two most important are that Biopure failed to immediately disclose that the FDA had barred it from conducting new human tests of Hemopure, and that the company issued a falsely optimistic press release about a later discouraging letter from the FDA. For their part, the defendants maintain that the testing ban didn’t have to be disclosed because it was immaterial, and that the press release was accurate. Since it was founded in Cambridge in 1984, Biopure has devoted practically all of its efforts to developing Hemopure, a temporary substitute for human red blood cells that is derived from cow’s blood. The company has suggested that Hemopure could be used for patients with anemia, as well as for individuals who need emergency treatment for a sudden loss of blood (the U.S. military, for one, has expressed a long-standing interest in the product). Gaining regulatory approval for Hemopure from the FDA was a major impetus behind Biopure’s decision to go public in 1999. The company’s only other product is a similar blood substitute approved for the treatment of anemia in dogs. By the time Kober came aboard as GC in 1999, the company had initiated its third and final round of human testing to assess a specific use of Hemopure for anemic patients undergoing orthopedic surgery. In late 2002 Biopure submitted an application to the FDA for this limited use of the treatment. But the company was also looking ahead to other uses for Hemopure. In Biopure’s 2002 annual report, CEO Moore said that its next “clinical priority” was to test the product in trauma settings such as emergency rooms. In March 2003 Biopure asked the FDA for permission to start in-hospital trauma trials of Hemopure. According to the SEC, that’s when the company ran into its first obstacle. In April the FDA told Biopure that it had found discrepancies and safety concerns in data from the earlier orthopedic surgery trials of Hemopure. For that reason, the FDA said it was barring additional human testing of the product. Biopure stayed mum about the FDA’s ban, however, and continued to talk to investors about its plans for trauma trials. The SEC faults Biopure for not disclosing the trial ban immediately, and pins part of the blame on GC Kober. Vice president Richman, as the company’s chief regulatory executive, was the one who signed off on disclosure statements concerning FDA matters. But according to the SEC, Kober helped draft and review the nonfinancial reporting sections of filings made in connection with its stock offerings. The SEC adds that Kober knew about the FDA’s safety concerns by May, and about the trial ban by June. In their response to the SEC suit, the defendants argue that they didn’t have to disclose the FDA’s ban for two main reasons. First, the new trials were for a different use of Hemopure � trauma settings � than what was specified in the original FDA application � orthopedic surgeries. Second, the defendants argue that Biopure’s communications with the FDA about the ban were merely part of the normal back-and-forth between the company and its regulator. But outside lawyers say that Biopure’s previous public statements, in which it called trauma trials a priority, served as a baseline for its disclosure duties going forward. “You don’t have to talk about a company’s prospects, but once you do, you better make sure that what you say is accurate,” says Peter Henning, a professor at Wayne State University Law School who studies white-collar crime. Natasha Leskovsek concurs. A senior associate at Heller Erhman who has experience in FDA disclosure matters, Leskovsek says, “If you’re sitting in the general counsel’s seat and you have the vaguest shadow of a doubt as to whether an FDA communication is material, vet it thoroughly, inside and out.” Nothing in the available court record indicates whether Kober sought advice from the company’s outside securities counsel. Though that firm is not identified, Biopure had previously sought securities advice from LeBoeuf, Lamb, Green & MacRae, where Kober had been a corporate partner for ten years before joining Biopure. LeBoeuf partner Matthew Ricciardi would not comment on his firm’s work for Biopure, except to say that the company is no longer a LeBoeuf client. The dilemma that Biopure faced over the trial ban, however, was soon overshadowed by a bigger problem. Around July 30, 2003, Moore, Richman, and Kober received a letter from the FDA in which the agency wrote, “The information and data submitted [for Hemopure] are inadequate for final approval action at this time.” The FDA explained that it was suspending its review of the Hemopure application until Biopure answered 220 questions and inconsistencies. Among other things, the agency requested an explanation for why most trial subjects’ use of Hemopure had been stopped “due to investigator concerns about safety . . . and subjects experiencing adverse events.” Unlike the trial ban, the July 30 letter was something that Biopure’s executives knew they had to disclose, and so they set to work on a press release that’s the centerpiece of the SEC’s case. According to the agency, Kober was told by the law firm advising Biopure on FDA regulatory matters that an early draft of the release seemed “unduly optimistic.” (This firm is not identified in the court record.) Kober shared these concerns with Moore and Richman. But in the end, Biopure’s August 1 announcement � despite some boilerplate cautionary language � was undeniably upbeat. The company said that the FDA had “completed its review” of the Hemopure application and had “issued a letter requesting additional information . . . primarily on clarification of clinical and preclinical data.” The release also quoted Moore as saying, “The FDA is encouraging us to work with them to complete the approval process as quickly as possible.” Within two days of the announcement, Biopure’s stock price rose 22 percent. The SEC asserts that investors were responding to false spin. The optimism expressed in the August 1 press release “had no basis in fact,” the agency claims, “and was inconsistent with the seriousness and number of deficiencies identified by the FDA.” Kober and her codefendants are vigorously challenging the SEC on this point. In a motion for summary judgment seeking dismissal of all claims surrounding the August 1 announcement, the defendants maintain that their description of the FDA’s letter was both true and sufficient. They note that Biopure’s press release quoted from the FDA’s own correspondence, and add that “a disclosure speculating about the issues that remained ‘up in the air’ would have been premature and irresponsible.” Judge Saris had yet to rule on the motion at press time. Given the history of Biopure’s stock price, outside observers predict that the company will have a hard time arguing that the August 1 release wasn’t misleading. Biopure’s stock rose in value when it made its initial positive announcements about Hemopure. As details of the FDA’s actions on Hemopure filtered through the company and into the marketplace, however, Biopure’s stock price sank [see chart]. Heller, Erhman’s Leskovsek says that in evaluating disclosures about FDA communications, biotech companies should not only consider whether their statements are accurate, but also whether their tone and substance are consistent with the message the FDA intended to convey. “The suggestion that [the July] letter [to Biopure] was a request for clarification is a huge understatement,” says Leskovsek, who reviewed the FDA letter for this article. Leskovsek adds that even if a company decides to put a positive spin on unwelcome FDA developments, “the statement has to be balanced.” In public filings, Biopure admits that the SEC action could shut it down. In December, however, the company raised $5.8 million through another stock offering. And Hemopure has recently gained traction elsewhere in the world, notably in South Africa, where it has been approved for limited uses. However things shake out for Biopure, the SEC’s suit is already stirring debate about how to share news from the FDA with investors. “As with all disclosure issues, it’s a question of interpretation,” says Wayne State law professor Henning. “It may be that they can establish the truthfulness of their statements. But can they also explain away all the other negative information that eventually came out and that was not in the initial disclosures?”

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