(Reuters) - The U.S. Securities and Exchange Commission sued the former chief financial officer of Aceto Corp in Brooklyn federal court on Thursday alleging he learned inside information about the now-defunct generic drug company's precarious financial condition before his 2018 retirement and cashed out his stock days later.
The agency said Douglas Roth of East Northport, New York, avoided more than $305,000 in losses by trading ahead of Aceto's April 2018 announcement that it would write down intangible assets by at least $230 million and was negotiating with lenders over debt covenants, causing its share price to drop 64 percent.
Alexander Bateman of Ruskin Moscou Faltischek represents Roth and said he will answer the allegations in court.
Before his retirement in March 2018, Roth had worked on the write-down and on plans to deal with the fact that Aceto's debt to earnings ratio was in danger of violating the terms of its lending agreements, according to the lawsuit. The SEC alleges Roth acted on that information when he sold off 69,549 Aceto shares that were part of his compensation and that vested upon his retirement.
Shareholders sued the Port Washington, New York-based company along with Roth and other executives after the disclosures, alleging that it should have written down its assets sooner and made other misrepresentations to investors. Aceto, which filed for bankruptcy in early 2019, did not answer the complaint. The executives argued investors had failed to allege the statements at issue were material or false.
U.S. District Judge Edward Korman dismissed the claims in 2019 and dismissed an amended version of the complaint, which had dropped Aceto as a defendant, with prejudice in August, saying investors had failed to allege the executives acted with scienter.
The lead plaintiff in the proposed class action, represented by the Rosen Law Firm, has asked Korman to reconsider based on a 2nd U.S. Circuit Court of Appeals ruling in Setzer v. Omega Healthcare Investors that came down on Aug. 3, the same day as he dismissed their lawsuit. The ruling revived a shareholder lawsuit against real estate investment firm Omega Healthcare Investors finding that investors' allegations of scienter were adequate. The 2nd Circuit said they had adequately alleged it was reckless for Omega to release incomplete information, a holding the Aceto shareholders urged Korman to apply in their case.
The former Aceto executives, represented by Friedman Kaplan Seiler & Adelman, have argued the 2nd Circuit's ruling did not change the law and should have no effect on the lawsuit.
Aceto filed for Chapter 11 bankruptcy in New Jersey in February 2019 selling off assets including its chemicals and generic drug units.
The case is SEC v. Roth, No. 20-cv-05368, in U.S. District Court for the Eastern District of New York.
For the SEC: Richard Hong
For Roth: Alexander Bateman and Andrew Garbarino of Ruskin Moscou Faltischek