A Salt Lake City-based company that provided Utah with COVID-19 tests in connection with a large no-bid contract during the pandemic was fined by the U.S. Securities and Exchange Commission Wednesday, in part because of how it promoted its tests to investors and others early in the crisis.
The SEC has ordered Co-Diagnostics, which develops and sells disease testing technology, to pay a civil penalty of $250,000, and to cease and desist its violations of federal law, including misleading investors and failing to disclose hefty payments to top executives’ relatives.
Co-Diagnostics’ former chief financial officer, Reed Benson, was separately ordered to pay a $40,000 fine. He now serves as the company’s general counsel. The SEC did not immediately respond to questions from The Salt Lake Tribune regarding whether there are other orders as part of the investigation, or whether the investigation is closed. Co-Diagnostics also did not immediately respond to a request for comment.
Boosted by the pandemic, the small Salt Lake City company turned a profit in 2020 for the first time since it had gone public in 2017, netting more than $42 million and enjoying a surging stock price. In July 2019, the company’s stock had sunk so low that the Nasdaq sent it a letter saying it was in danger of being delisted, the SEC filing said.
The TestUtah coronavirus testing initiative, which was launched in April 2020 by Nomi Health under a no-bid state contract worth millions, initially used tests from Co-Diagnostics.
The testing company’s 2020 profits, according to the SEC, were inflated by two news releases that prematurely led investors to believe its COVID-19 tests were ready to be sold to health care providers.
Published online Feb. 6 and Feb. 10, 2020, the releases announced “sales of its screening test designed to identify the presence of the novel coronavirus,” and quoted CEO Dwight Egan saying the company was “pleased to be able to offer a product to this market that excels in being both sensitive and specific, the two benchmarks for accuracy in molecular diagnostics.”
While the company’s tests received early authorization from the European Union on Feb. 24, 2020, the U.S. Food and Drug Administration did not approve the tests to be sold for diagnostic purposes until April 3 of that year.
The FDA reached out to the company with concerns about the news releases on Feb. 11. According to the SEC, Co-Diagnostics offered and sold over 3.3 million shares of stock at $3.08 per share, pulling in over $10 million on or around Feb. 13. It had not yet amended the news releases.
Co-Diagnostics was further admonished for not properly disclosing transactions with executives’ family members — including Egan’s son, Seth Egan, who was the director of sales, and Benson’s son, Andrew Benson, who served as the head of communications and investor relations. Both of their salaries more than quadrupled to over $1.1 million in 2020.
In its filing, the SEC said Co-Diagnostics did not disclose those relationships in its annual reports for fiscal 2018, 2019 or 2020, nor did it document them in its proxy statements in 2019, 2020 and 2021. It said the company had not established any policies or procedures concerning related party transactions, and did not identify those transactions in its books or records, as required by the Exchange Act.
The SEC’s inquiries
As Utah continued to buy COVID-19 tests from Co-Diagnostics, health officials and doctors raised concerns about the testing practices at TestUtah locations and the sensitivity of the test. By mid-April 2020, state data showed the rate of positive results among people tested at TestUtah sites was less than half of what it was for patients tested elsewhere in the state.
Co-Diagnostics executives defended the test as having “consistently and repeatedly achieved 100% clinical sensitivity and specificity,” although the FDA was warning the public that no test was completely accurate.
Within months, state health officials had made changes that required TestUtah to stop using Co-Diagnostics tests and Orem’s Timpanogos Regional Hospital, which had processed them.
The Salt Lake Tribune first learned that the SEC was investigating Co-Diagnostics in 2021, through an email it obtained through a public records request. An attorney for the SEC’s enforcement division, Tiantong Wen, emailed Tom Hudachko, who was the communications director of what was then the Utah Department of Health, in April 2020. Wen told Hudachko that the SEC was interested in the state’s testing program, and wanted to know what companies won contracts or subcontracts to provide tests.
Hudachko explained to Wen that those contracts were awarded by the Governor’s Office of Management and Budget, and referred her to former Gov. Gary Herbert’s staff.
Responding to an email in which Hudachko copied top members of both Herbert’s and then-Lt. Gov. Spencer Cox’s staff, Wen wrote, “We are also interested in understanding the number of tests that one member of the initiative, Co-Diagnostics, has supplied so far.”
Wen also asked Hudachko about the accuracy concerns about the tests.
After The Tribune published its 2021 story, now-Gov. Cox said he had not been contacted by the SEC, and added, “I sure as hell was going to use every test I could get ... .”
Other legal issues pending
In addition to the SEC’s actions, Co-Diagnostics is the subject of ongoing federal litigation over its communications to investors.
“Their fraudulent misstatements, and disregard for the basic scientific principles that make their falsity of their statements clear in retrospect, cost investors to lose millions of dollars,” the complaint in one class action suit alleges.
In its quarterly report filed May 11, Co-Diagnostics said it was defending against two class action claims and three derivative cases that claim its “false and misleading press releases” were issued to increase the price of its stock “to improperly benefit the officers and directors.”
It is also facing two commercial litigation lawsuits “in which plaintiffs are claiming they are owned certain remuneration based on alleged agreements with the company,” it said.
Co-Diagnostics “believes these lawsuits are without merit and intends to defend the cases vigorously,” its report said.
The quarterly report stated the company had a net loss of $5.7 million for the three months ended March 31. For the same three months a year ago, it had reported a net income of $11.7 million.
The reversal was primarily caused by a drop in revenues — with fewer sales of its Logix Smart COVID-19 test — the company said, combined with increased operating expenses and other factors. For the three months ended March 31, Co-Diagnostics had revenues of $601,957 — compared to revenues of $22.7 million for the same period a year earlier.
The company reported it had cash and equivalents of $6.3 million and $68,920,535 of marketable investment securities.
