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UNITED STATES OF AMERICA
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In the Matter of ZILA, INC.
Respondents. |
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ORDER INSTITUTING PUBLIC ADMINISTRATIVE PROCEEDINGS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, AND IMPOSING A CEASE-AND- DESIST ORDER |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate that a public administrative proceeding be, and hereby is, instituted against Zila, Inc. and Joseph Hines ("Respondents") pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act").
II.
In anticipation of the institution of these public administrative proceedings, the Respondents have submitted Offers of Settlement ("Offers"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings contained herein, except as to the Commission's jurisdiction over them and over the subject matter of the proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order ("Order").
III.
On the basis of this Order and Respondents' Offers, the Commission makes the findings set forth below:
A. RESPONDENTS
1. Zila, Inc. ("Zila"), a Delaware corporation, is headquartered in Phoenix, AZ. Zila is a pharmaceuticals preparations company that, among other things, makes and markets vitamins and dental products. Zila has a class of equity stock registered with the Commission pursuant to Section 12(g) of the Exchange Act and its shares trade on the NASDAQ.
2. Joseph Hines ("Hines") is a resident of Paradise Valley, AZ. Hines is the chairman and Chief Executive Officer of Zila.
B. SUMMARY
This matter involves violations of the antifraud provisions by Zila, which were caused by Hines. The violations arise from statements Zila made concerning its expectation that the U.S. Food and Drug Administration ("FDA") would approve its drug OraTest, a mouth rinse that Zila hoped dentists would use to diagnose oral cancer.
On November 9, 1998, Zila announced in a press release that the FDA had agreed to review Zila's New Drug Application ("NDA") for OraTest. On December 3, 1998, in connection with the FDA's review of the NDA, the Oncologic Drugs Advisory Committee ("ODAC") publicly announced that it would make its recommendation concerning OraTest to the FDA at a public meeting to be held on January 13, 1999. In anticipation of that meeting, in December 1998, Zila and Hines issued press releases and made public statements indicating that the company expected ODAC to recommend FDA approval of OraTest. Also, in its Form 10-Q for the first quarter of fiscal year 1999, filed on December 11, 1998, Zila and Hines stated that it expected the FDA to approve OraTest for production and marketing.
On or about December 28, 1998, the FDA staff provided Zila a draft copy of its review of OraTest, which had been given to the ODAC. The review was critical of Zila's NDA and included a recommendation to ODAC that Zila's NDA was not approvable. Nevertheless, with Hines's knowledge, Zila continued to make optimistic public statements about FDA approval of OraTest through its public relations spokesperson without disclosing the fact or substance of the draft FDA staff review. In addition, Zila, through Hines, disseminated an update to brokers, market makers and money managers on January 12, 1999, which criticized a recent negative analyst report that discussed Zila's NDA for OraTest, and adopted statements in a different analyst report that said that Zila expected OraTest to be approved. Zila, however, failed to disclose in the update the fact or substance of the draft FDA staff review.
At the January 13, 1999 public meeting, ODAC unanimously voted against recommending approval of OraTest. The price of Zila stock, which from November 9, 1998, to January 13, 1999, had gone from $5 ¼ to approximately $10 per share, tumbled to $5 3/8 per share. On March 2, 1999, the FDA sent a letter to Zila stating that the OraTest NDA was not approvable.
C. FACTS
1. Background
Zila is a pharmaceutical preparations company that manufactures and markets various dental products to consumers and dental supplies to dentists. Zila also has a product called OraTest, a mouth rinse that it believes can assist in the detection of oral cancer. The active ingredient in OraTest is toluidine blue, a chemical compound that dental schools have taught may be of use in determining whether a suspicious lesion in the mouth should be biopsied for cancer. Zila believes that dentists will use toluidine blue on a widespread basis if it is packaged and sold as a mouth rinse, thereby making it easier for dentists to use.
2. 1998: FDA Agrees to Review OraTest; FDA Staff
Recommends to the ODAC that the OraTest NDA is Not Approvable
On November 9, 1998, the FDA staff notified Zila that the OraTest NDA had been filed. FDA staff also informed Zila that, pursuant to the company's request, the NDA had been given "priority review," which meant that the FDA would either accept or reject OraTest six months from the date of Zila's submission -- by March 3, 1999. On November 9, 1998, Zila, in a press release and in an update to brokers, market makers and fund managers, informed the marketplace that the FDA had agreed to review the OraTest NDA and had granted the NDA priority review.
On December 3, 1998, the FDA publicly announced that the OraTest NDA would be considered by the ODAC on January 13, 1999. Zila issued a press release on the same day, which Hines reviewed, which stated that "we expect the committee will recommend approval of our inexpensive and potentially life-saving technology." Similarly, on December 10, 1998, Zila issued a positive earnings press release, which Hines edited and reviewed, which included the statement that "we expect the committee will recommend approval of our inexpensive and potentially life-saving technology." Finally, in its Form 10-Q for the first quarter of fiscal year 1999, filed on December 11, 1998, and signed by Hines, Zila stated that it expected the FDA to approve OraTest for production and marketing.
On or about December 28, 1998, Zila received a draft copy of the FDA review that the FDA staff submitted to the ODAC for its January 13, 1999 meeting. The 97-page report was critical of OraTest. Among other things, the FDA staff review stated that the study was "incomplete, seriously flawed, of questionable quality, and definitive conclusions regarding the efficacy of OraTest cannot be drawn." The FDA staff also concluded that monitoring during the study was not adequate. Finally, the FDA staff recommended to the ODAC that the OraTest NDA was not approvable.
3. 1999: Zila Makes Materially Misleading
Statements About Expected Approval of OraTest
Hines did not tell Zila's public relations spokesman about the negative draft FDA staff review. Between December 28, 1998 and January 13, 1999, the public relations spokesman sought news coverage for Zila and fielded calls about the upcoming ODAC meeting. Consistent with the statements contained in the December press releases and Form 10-Q, the public relations spokesman, with Hines's knowledge, made optimistic statements concerning FDA approval of OraTest to Zila shareholders, brokers and members of the media. By virtue of the fact that Hines did not inform the public relations spokesman of the negative draft FDA staff review, he caused Zila to make materially misleading statements, through the public relations spokesman, to shareholders, brokers and members of the media. These public statements were materially misleading because in making these statements of optimism, Zila failed to disclose the fact and substance of the negative draft FDA staff review.
The price of Zila stock rose in the week before the ODAC meeting to a new high of $12 per share in intraday trading on January 6, 1999, and closed at $11 5/8 on the same day. Zila stock dropped on January 8, 1999, however, when an analyst from Evolution Capital initiated coverage of Zila with a sell rating. The Evolution Capital report was critical of Zila's NDA for OraTest and concluded that, in the author's opinion, OraTest would have a difficult time until it possessed conclusive results from its ongoing clinical trial.
The price of Zila stock dropped to $9 11/16, on January 8, 1999, following this negative analyst report. Zila's public relations spokesperson received numerous calls from concerned shareholders and brokers. In response to the calls and the drop in the stock price, the public relations spokesperson and Hines drafted a response on January 11, 1999, which Zila issued in the form of an update to brokers, market makers and fund managers on January 12, 1999, the day before the ODAC meeting. The update stated that "[m]anagement believes [the Evolution Capital] report was inaccurate and misleading." Zila, through Hines, went on to state that subsequent comments were issued by two analyst firms which "more accurately reflect the status of OraTest." One of the attached reports stated that the analyst was "confident that Zila would obtain FDA approval to market OraTest in the United States." Zila's statements in the update, made through Hines, were materially misleading because Hines caused Zila to fail to disclose the fact and substance of the negative draft FDA staff review.
Zila stock recovered somewhat after the January 12 update, rising to over $10 per share on the morning of January 13. At the ODAC meeting, which began at 1:00 p.m., members of the public testified first in favor of OraTest, and then Zila spoke on behalf of its product. The company's presentation was followed by questions from some of the ODAC members. The FDA medical reviewer then gave the FDA staff's presentation about OraTest. At approximately 4:00 p.m., the ODAC unanimously voted against recommending approval of OraTest.
The price of Zila stock began to decline during the ODAC meeting, from $9 ½ per share during the first hour of the meeting, to $8 per share between 3:15 and 3:30 p.m., to $7 per share shortly after 3:30 p.m. Zila closed at $5 3/8 per share on January 13, 1999.
D. Violations
Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, prohibit the making of materially false or misleading statements in connection with the purchase or sale of any security. A fact is material if there is a substantial likelihood that a reasonable investor would consider the information to be important. Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988).
Violations of the antifraud provisions require proof of scienter. See Aaron v. SEC, 446 U.S. 680 (1980). Scienter is established by showing that a person acted knowingly or recklessly. Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569 (9th Cir. 1990); Nelson v. Serwold, 576 F.2d 1332, 1337 (9th Cir. 1978); Howard v. Everex Systems, 228 F.3d 1057, 1062 (9th Cir. Sept. 29, 2000). Recklessness has been defined as conduct that is "highly unreasonable . . . an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it." Hollinger, 914 F.2d at 1569.
1. Zila's Violations of the Antifraud Provisions of the Exchange Act
Zila violated the antifraud provisions when Zila, through its public relations spokesman, made optimistic statements concerning FDA approval of OraTest to Zila shareholders, brokers and members of the media after December 28, 1998. These optimistic public statements were materially misleading because when Zila made these statements, Zila knew, but failed to disclose, the fact and substance of the negative draft FDA staff review.
Zila also violated the antifraud provisions when on January 12, 1999, it disseminated an update to brokers, market makers and fund managers. In the update, Zila, through Hines, said that "[m]anagement believes that [the Evolution Capital report is] inaccurate and misleading." The update went on to state that recent comments by other analyst firms "more accurately reflect the status of Oratest" and then the update explicitly adopted the views of an analyst in one of the other reports who said she was "confident that Zila would obtain FDA approval to market OraTest in the United States." The statements in the update were materially misleading because Zila knew, but failed to disclose, the fact and substance of the negative draft FDA staff review.
2. Hines was a cause of Zila's violations of
the antifraud provisions of the Exchange Act
Hines caused Zila's violation of the antifraud provisions when he permitted Zila, through its public relations spokesman, to make optimistic statements concerning FDA approval of OraTest to Zila shareholders, brokers and members of the media without also disclosing the fact and substance of the negative draft FDA staff review. Hines knew that the public relations spokesman was making optimistic public statements about OraTest and he was reckless in failing to disclose to the public relations spokesman the fact and substance of the negative draft FDA staff review. As a result of his conduct, Hines caused Zila, through its public relations spokesperson, to make materially misleading public statements.
Hines also caused Zila to violate the antifraud provisions when he disseminated an update to brokers, market makers and fund managers on January 12, 1999. In the update, Hines said that management believed that the Evolution Capital report was inaccurate and misleading and then explicitly adopted the views of an analyst who said in a different report that she was "confident that Zila would obtain FDA approval to market OraTest in the United States." The statements in the update were materially misleading because Hines was aware of, but recklessly failed to disclose, the fact and substance of the negative draft FDA staff review.
It is Zila's and Hines's position that they were at all times advised by attorneys who specialized in FDA regulatory matters, and that Zila's FDA regulatory counsel believed that the Company's NDA relating to OraTest was approvable. Zila and Hines, however, did not receive advice from any legal counsel regarding their disclosure obligations under the federal securities laws. The Commission finds that, notwithstanding Zila's and Hines's position that they relied on the advice of counsel, what a public corporation discloses is its own responsibility and, under the facts presented here, cannot be excused on the basis of Zila's and Hines's position that they relied on the advice of counsel. Accordingly, the statements made by its public relations spokesperson, and the statements made in the January 12 update, which were all made after Zila and Hines learned of the negative draft FDA staff review, were materially misleading because they failed to disclose the fact and substance of the negative draft FDA staff review.
Accordingly, based on the foregoing, the Commission finds that Zila violated Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. Furthermore, based on the foregoing, the Commission finds that Hines caused Zila's violations of Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder.
IV.
Based on the foregoing, the Commission deems it appropriate to accept the Offers and to impose the relief specified herein.
Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that:
A. Zila cease and desist from committing or causing any violation, and any future violation, of Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder; and
B. Joseph Hines cease and desist from committing or causing any violation, and any future violation, of Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder.
By the Commission
Jonathan G. Katz
Secretary
http://www.sec.gov/litigation/admin/34-45169.htm
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