AI Biotech CEO Admits to Raising $40M Without Disclosing Clinical Holds

Kiromic BioPharma Inc. (the Company), its former CEO, Maurizio Chiriva-Internati and former CFO Tony Tontat admitted to raising $40 million without disclosing that the Company’s two new drug applications had been placed on clinical hold weeks prior.[1] Following a U.S. Securities and Exchange Commission (SEC) investigation, Chiriva and Tontat agreed to civil penalties and Chiriva agreed to a three-year bar on serving as an officer or director of a public company, but no penalty was imposed on the Company due to its self-reporting, cooperation and remediation. This settlement, announced on Dec. 3, 2024, reflects the consequences of imprecision in communications with investors, the board and auditors and lawyers, the benefits to companies from appropriately investigating and remediating potential violations of law, and the SEC’s new procedure for federal court settlements as a result of the Supreme Court’s decision in Jarkesy.[2]

Factual Background

Kiromic is a Houston-based pre-revenue gene-editing company that in May 2021 had two Investigational New Drug (IND) applications for cancer product candidates pending before the U.S. Food and Drug Administration (FDA). Kiromic’s  applications were for T-Cell live cell therapy developed in part based on a proprietary target discovery artificial intelligence engine.[3] Kiromic announced the submission of its applications on May 17 and May 24, 2021, and under FDA regulations, an application goes into effect in 30 days unless the FDA imposes a clinical hold.[4]

On June 16 and 17, 2021, the FDA informed Kiromic’s then-chief medical officer of the imposition of a clinical hold on the two IND applications because the submissions were “grossly deficient.” The CMO informed Chiriva of the clinical hold by phone and by email, and suggested that Kiromic promptly disclose the clinical holds. 

Chiriva, however, who is not a native English speaker, did not clearly inform the Company’s board of the clinical holds. At a June 22, 2021, virtual board meeting, Chiriva conveyed that the FDA had requested 30 days to conduct a secondary review and that further questions from the FDA were expected.[5] No board member asked Chiriva or the CMO to clarify what this meant and some board members left the meeting with the understanding that the FDA was still reviewing the INDs. 

Similarly, Kiromic went forward with a July sale of $40 million of common stock without disclosing in its SEC filings, investor roadshows or due diligence calls the clinical holds. Kiromic filed a Form S-1 and final prospectus, which Chiriva signed, that stated that its INDs were in the pre-initial new drug stages, and that human dosing in Phase I clinical trials was expected to commence in the third quarter of 2021.[6] Similarly, Kiromic’s CFO conveyed to investors on roadshow calls, which Chiriva was present for, that Kiromic was still waiting to hear back from the FDA and that it had “very high” confidence in receiving FDA authorization. Further Kiromic’s CFO failed to disclose to its underwriters, lawyers and auditors on due diligence calls, which Chiriva was present for, the truth about the clinical holds despite being asked direct questions about the clinical trial timeline. 

Later in July, Kiromic received letters from the FDA describing in greater detail the basis for the clinical holds, and both Chiriva and Tontat reviewed these letters and recognized that they were “material information.” Despite this, Kiromic issued a press release and filed a Form 10-Q, which Chiriva and Tontat signed, that failed to disclose clearly the clinical holds and that merely noted that the “FDA returned with comments” regarding the INDs but that Kiromic still expected to meet its third quarter clinical trial timeline. 

SEC Settlement 

In August 2021, after Kiromic had filed its Form 10-Q and raised $40 million from a stock offering, the Company received complaints via its anonymous hotline identifying concerns regarding Kiromic’s public disclosures and the clinical holds.[7] Kiromic’s board formed a special committee comprised of only independent directors, which engaged outside counsel to investigate the issue. The special committee found that the Company had failed to disclose information about the clinical holds, and reported the issue to the SEC, agreed to cooperate with the SEC’s investigation, and imposed various remedial measures including firing Chiriva for cause. 

In light of the Company’s voluntary self-reporting, remediation and cooperation, the SEC declined to impose any civil penalty and merely imposed a cease-and-desist order enjoining the committing or causing of any future violations of the federal securities laws. Similarly, in light of Tontat’s cooperation with the SEC, and what appears to be his misunderstanding of the impact of the FDA’s clinical hold determination, the SEC imposed on Tontat only a $20,000 civil penalty. As to Chiriva, however, the SEC sought, and Chiriva, agreed to a $125,000 civil penalty and a three-year bar on serving as a director or officer of a public company.[8] 

Substantive Takeaways

These settlements reflect both the perils of inaccurate disclosures about new drug applications and the benefits to companies that proactively investigate and address potential violations. As to Chiriva, his failure to ensure that all relevant stakeholders were aware of the FDA’s clinical hold led to a six-figure penalty, as well as his loss of his job and livelihood for three years. Even if Chiriva, perhaps owing to his limited English skills or lack of prior professional experience, did not fully understand the implications of the clinical hold, there is no indication that he sought guidance on its impact or how to disclose it from his board or professional advisors.[9] There is also no indication that Chiriva sold stock at artificially inflated prices, but his alleged defrauding of investors on behalf of Kiromic will have profound consequences on his career and future.

For the Company, however, this incident was not a death warrant. Despite these significant issues, the Company continues to develop new drug candidates, and as of its November 2024 10-Q, it has five active or upcoming clinical trials and two expected new INDs. Although the Company has not generated any revenue, and may not survive as a going concern, it funded continued operations with equity and debt offerings while this investigation remained pending. At bottom, the Company has been able to continue drug development and avoid a significant SEC penalty because its compliance procedures worked: the Company’s whistleblower reporting system alerted it to the issue before being approached by law enforcement, and its independent directors were empowered to investigate, remediate and disclose the identified misconduct. Board members, officers and in-house counsel should also take note of the importance of engaging outside counsel early when allegations of misconduct arise at the very top of an organization similar to how they did for Kiromic.     

Procedural and Legal Takeaways

This settlement also reflects the SEC’s mandated new procedure for resolving even non-adversarial fraud cases in federal court. Prior to Jarkesy, the SEC may have resolved settled charges resulting in a civil penalty and an officer and director bar in an administrative proceeding that does not require approval from an Article III judge. In Jarkesy, however, the Supreme Court held that SEC claims alleging securities fraud and seeking civil penalties must proceed before a federal court pursuant to the Seventh Amendment.[10] For this reason, the SEC here filed a complaint and an unopposed motion to enter a final judgment, which are currently pending before a federal judge. 

Practically speaking, the court here may grant the motion and approve final judgment without further ado given that there is no party opposing such relief. On the other hand, the court could choose to question a number of aspects of SEC settlements that were otherwise unscrutinized in administrative proceedings. For example, the court could find that the proposed injunction against violating Section 17(a)(2) is an improper obey-the-law injunction that is impermissibly vague under FRCP 65(d).[11] It could opine on the size of the civil penalty and provide more definitive interpretation of the statutory civil penalty regime.[12] Or it could take issue with the SEC’s no-admit-no-deny rule, which prohibits even indirect criticism of the SEC following a settlement.[13] Post-Jarkesy, these issues will be squarely before federal judges more often, and both litigants and judges should have more opportunities to push back against SEC overreach where applicable.     

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[1] https://www.sec.gov/newsroom/press-releases/2024-189?utm_medium=email&utm_source=govdelivery

[2] SEC v. Jarkesy, No. 22-859 (June 27, 2024).   

[3] See https://ir.kiromic.com/news-releases/news-release-details/kiromic-announces-fda-ind-submission-forty-five-days-end-second

[4] See 21 C.F.R. § 312.40(b)(1).   

[5] See SEC v. Chiriva-Internati, 4:24-cv-04729 (S.D. Tex. 2024) (ECF No. 1 at ¶ 19-20)

[6] Id. at ¶¶ 22-39. 

[7] Id. at ¶¶ 40-42.

[8] Id. at ECF No. 1, 2. 

[9] The SEC’s complaint alleges that Chiriva acted at least negligently, but does not specifically charge him with reckless or knowing misconduct, which suggests that there are factors weighing against a finding that he acted with a more culpable mental state.  

[10] See Jarkesy, (slip op. at 11, 27).   

[11] See SEC v. Goble, 682 F.3d 934, 949-52 (11th Cir. 2012).

[12] See 15 U.S.C. § 77t(d) and 15 U.S.C. § 78u(d)(3).

[13] See https://www.sec.gov/newsroom/speeches-statements/peirce-nand-013024#_ftn23