Arrayit Faces DOJ Prosecution for Alleged Securities and COVID-19-Related Healthcare Fraud

On June 8, the Department of Justice (DOJ) filed its first criminal complaint charging securities and healthcare fraud related to COVID-19 against the president of Arrayit Corp., a publicly traded medical company based in California. While this is the first complaint of its kind to date, it is unlikely to be the last—and it evinces an enforcement theory that the medical technology industry should take seriously as the pandemic continues.

According to the allegations of the complaint in U.S. v. Schena, beginning in March 2020, Mark Schena began promoting the use of Arrayit's supposedly inaccurate COVID-19 test, which allowed Arrayit to obtain Medicare beneficiary information that it then used to submit allegedly false and fraudulent claims for Arrayit's unrelated and more expensive allergy test. Among other things, the complaint alleges that Arrayit employees emailed medical clinics claiming that the accuracy of Arrayit's serological test "was comparable [to] or better" than a COVID-19 PCR test, and disseminated marketing materials stating that "COVID-19 compels allergy testing," with little medical basis for bundling COVID-19 tests with Arrayit's test for allergens. DOJ's complaint further alleges that Schena and others falsely represented the validity and results of Arrayit's COVID-19 test in marketing materials and communications to investors and medical clinics, including by failing to disclose that the FDA had told Arrayit that its COVID-19 test was not at an acceptable level of performance. For example, Schena allegedly emailed investors claiming that Arrayit had "received more than 50,000 requests for our finger stick blood test for SARS-CoV-2," when in (alleged) fact no doctors had requested it.

Notably, the COVID-19-related allegations appear to accompany additional accusations against Schena, other Arrayit employees, and a company investor. For example, the complaint details allegations against Schena dating back to 2018, alleging that Schena and other Arrayit employees paid kickbacks and bribes to recruiters and doctors in exchange for their use of Arrayit's allergy screening test, without regard to medical necessity. DOJ's complaint also alleges that throughout this period, Schena made numerous misrepresentations to potential investors about Arrayit's sales, financial condition, and future prospects in press releases and social media, including exaggerated or fictionalized news of partnerships with Fortune 500 companies, government agencies, and public institutions. In an unrelated action, the Securities and Exchange Commission (SEC) filed a separate complaint against Jason C. Nielsen, an Arrayit investor, in connection with allegedly false statements made on an online investment forum about the approval status of the COVID-19 test.

Although Schena is the first DOJ prosecution of alleged COVID-19 securities and healthcare fraud, investors have filed numerous class actions alleging securities fraud against life sciences companies they claim are overpromising their COVID-19 capabilities. Targets of these recent shareholder suits include Inovio Pharmaceuticals Inc., a vaccine developer, Co-Diagnostics Inc. and Chembio Diagnostics, Inc., test developers, and SCWorx Corp., a test kit supplier whose trading was suspended by the SEC due to the agency's concerns that the market lacked accurate information about its test-kit commercialization deal. Because activist investors and class-action plaintiff firms are often quick to scrutinize statements about medical technology performance, regulatory status, and commercial potential, it is increasingly common to see private parties bring actions alleging deceptive or misleading/inaccurate statements or business practices then followed by parallel government action (e.g., the ongoing Theranos litigation). Given the breadth of DOJ's allegations in Schena, it remains to be seen whether other companies or individuals will get caught up in DOJ's pandemic-related investigations, and whether misconduct not directly related to COVID-19 will play a role in how aggressively DOJ pursues such cases.

With the onset of the COVID-19 pandemic, DOJ said that "[i]nvestigating COVID-19 fraud scams billed to federal health programs" is a "top priority" and "[t]hose seeking to maximize profits while misleading investors should expect to pay a heavy price." The government's aggressive prosecution in Schena shows the risks that medical technology developers face if they appear to take advantage of investors or cut corners around regulatory compliance obligations, including FDA regulations and federal healthcare program-billing and anti-kickback/anti-inducement rules.

© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.