Securities And Exchange Commission v. Patel

Facts

D was a founder, director and senior vice president for research and development of Par Pharmaceutical, Inc. (Par), a manufacturer of generic drugs. D submitted to the FDA an Abbreviated New Drug Application for a generic version of the drug known as Maxzide, which is used for the treatment of hypertension. The Application falsely represented that Par's generic Maxzide, of which sodium bicarbonate was an ingredient, had been tested in bioequivalency studies required by the FDA. This misrepresentation came in the form of a certificate of analysis for sodium bicarbonate. The certificate was backdated to conceal the fact that the bioequivalency studies were performed with a formulation of Maxzide that did not contain the sodium bicarbonate. D knew that the Application was false and he sold 75,000 shares of common stock in Par. The average sale price was approximately $21.00 per share.  Eventually, Par publicly disclosed that it was recalling its Maxzide tablets. Par had experienced a number of adverse events before it revealed its problems with Maxzide. Par was the subject of a congressional subcommittee investigation into the generic pharmaceutical industry and allegations of bribes and payoffs to FDA officials. Par also announced that it was a target of a grand jury investigation into various improprieties, including bribery, in the generic drug industry. The negative news on Par was fast and furious. It included resignations, indictments and even indictments against FDA officials for bribery.  When the Maxzide products hit the news, the price of Par stock closed on July 24 at $8.375 per share, down $1.625 from the $10 closing price on Friday, July 21, the previous trading day. On July 25, the next trading day, the stock closed at $7.125 per share. The total decline from the July 21 closing price was $2.875 or 28.75%. On July 26, 1989, the third day after the disclosure, Par stock rallied from $7.125 to close at $7.625. D resigned as a director and senior vice president of Par and as a director of its subsidiary, Quad Pharmaceuticals, Inc. In March of 1992, he settled a securities fraud class action claim with the payment of 500,000 shares of Par stock valued at approximately $3,000,000. D pled guilty to conspiracy to defraud the FDA in connection with the generic Maxzide Application and thereafter was sentenced to a 27-month term of imprisonment, two years of supervised release and a $25,000 fine. P jumped in and filed a complaint that alleged violations of various antifraud provisions of the federal securities laws: Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240-10b-5. Injunctive relief was sought, along with disgorgement of 'avoided losses' plus prejudgment interest, assessment of civil penalties under the provisions of the Insider Trading Sanctions Act of 1984, 15 U.S.C. § 78u-1, and an order barring D from ever serving as an officer or director of a public company. D agreed that a permanent injunction against future violations would be appropriate. The court ordered the disgorgement of d's avoided losses plus interest in accordance with the computation suggested by P. The court also imposed a lifetime bar against D's service as an officer or director of any public company. D appealed.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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