Stock Sales By Leaders At Coronavirus Testing Company Raise Legal Concerns

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A lab technician for the company Co-Diagnostics prepares components for a coronavirus test. The company has come under scrutiny regarding its tests’ accuracy and stock sales by leadership at the company.

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A health worker performs a coronavirus test at a Test Iowa site in Waukee, Iowa.

Charlie Neibergall/AP

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Nebraska Governor Pete Ricketts, speaks during a news conference in April. Nebraska is one of three state governments that have used coronavirus tests from the company Co-Diagnostics.

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Daniel Taylor, an associate professor at the Wharton School of the University of Pennsylvania, said the federal law that requires public disclosure of these stock sales is not just a technicality.

«It’s important that shareholders and investors and other stakeholders in the company are able to monitor the trading of officers and directors to make sure that they’re acting not in their own best interests, but in the interests of the company, said Taylor.

But Durenard and Serbin of Co-Diagnostics failed to publicly disclose their stock sales until June 5, more than two weeks after the first batch of those sales took place and long after the legally mandated deadline.

«This is an extreme outlier, said Taylor.

In one case, according to the filings, the company also awarded Durenard stock options for 25,000 shares in June 2019. But Durenard did not disclose that until nearly a full year later.

«I think the circumstances suggest either extreme negligence, weakness of internal controls or intent, said Taylor.

The government requires individual executives and officers, rather than companies, to disclose stock purchases and sales. But the SEC has encouraged companies to make sure the filings go out on time, and has even brought cases against publicly traded companies for allegedly «contributing to filing failures.

Monica Loseman, an attorney with the firm Gibson Dunn who specializes in defending companies facing SEC investigations, said issues with late filings can plague small companies like Co-Diagnostics.

«It could certainly be that the company is trying to hide something from investors, said Loseman, «but it’s just as plausible, maybe even more plausible, that the company is suffering from some growing pains at the moment.

In fact, the company has acknowledged in multiple reports to the government that some of its internal accounting procedures «were not effective, and could lead to errors on the company’s financial statements.

Will the SEC step in?

Even if the violations were inadvertent, the SEC can seek financial penalties against people or companies that break the laws around disclosing stock sales.

But Loseman said government investigators tend to react differently if the evidence suggests a violation was simply a mistake versus an active attempt at deception. «It all depends on the facts and circumstances, she said.

In the case of Co-Diagnostics, the government may look closely at the fact that the board members who failed to file their disclosures on time also lead the company’s internal audit and compensation committees. Those committees are supposed to «monitor and advise the company, to ensure it follows legal requirements and other best practices. Their positions would suggest that both Durenard and Serbin should be aware of the laws around disclosure of stock sales.

NPR also uncovered past allegations against Richard S. Serbin, which may inform the SEC’s response. In the early 2000s, the New Jersey Office of the Insurance Fraud Prosecutor investigated Serbin. After suffering a stroke, prosecutors said, Serbin said he could no longer work, and started collecting disability benefits from his insurance company. But prosecutors alleged that Serbin actually continued to work — collecting more than $170,000 in disability benefits from the insurance company, while also making nearly $200,000 in consulting fees.

Serbin pleaded guilty to a charge of falsifying records. That charge was dismissed after he paid more than $200,000 as part of a civil penalty and restitution to the insurance company. New Jersey’s Supreme Court later suspended Serbin’s law license for six months, and the state’s Board of Pharmacy found grounds to revoke his pharmacist’s license. (Records from the pharmacy board indicate Serbin voluntarily retired from practicing pharmacy, instead of facing formal disciplinary hearings.)

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Co-Diagnostics declined to comment on the allegations against Serbin or how he was chosen to join the board of directors. NPR was unable to reach Serbin and Durenard independently. Lawyers representing the two men in court did not respond to NPR’s messages.

As the questions surrounding Co-Diagnostics have grown, the company’s share price has fallen from its peak, but remains much stronger than it was at the beginning of the year.

The states of Nebraska and Iowa continue to use the company’s tests. «Nebraska is very pleased with the tests provided by Co-Diagnostics, said Taylor Gage, a spokesperson for Nebraska Governor Pete Ricketts. «These tests have helped provide over 350,000 test results to date, or about 40% of the state’s tests.

A spokesperson for the governor of Iowa stated that its testing program using Co-Diagnostics’ tests «has greatly expanded testing in the state of Iowa.

A spokesperson for the Utah Department of Health said that the state now uses a different company to provide testing services, and «does not have any formal relationship with Co-Diagnostics. He did not elaborate on why the state changed testing providers.

The company is now promoting a new «ABC test, which combines tests for influenza A and B with a test for the coronavirus. On Nov. 23, CEO Dwight Egan told Bloomberg that there was «very strong demand for the company’s tests around the world.

But even as he projected confidence in the company’s future, that same day, he sold more than 70,000 shares of stock in his company, worth more than $700,000. Days later, Chief Financial Officer Reed Benson sold all of his company stock. As of Nov. 25, both Egan and Benson hold no direct stock in the company.

Co-Diagnostics did not respond to NPR’s questions about those stock sales.

Becca Costello of NET News contributed to this report