A Maryland judge on Friday blasted federal prosecutors for seeking an enhanced sentence for a former biotech executive convicted of fraud for his role in the CytoDyn stock inflation scheme, saying the government wanted a harsher sentence for allegations he was already acquitted of at trial.
U.S. District Judge Paula Xinis heard the final arguments of a three-day sentencing hearing for the two former executives convicted of fraud after CEO Nader Pourhassan repeatedly lied to investors about the progress his company was making on an HIV and COVID-19 drug. After a month-long trial last year, Pourhassan was convicted of four counts of securities fraud, two counts of wire fraud and three counts of insider trading. But his co-defendant, Kazem Kazempour, was convicted on just two of the eight counts he faced, for securities and wire fraud.
Still, federal prosecutors argued Friday that Kazempour's sentence should be enhanced for the use of "sophisticated means," saying he attempted to mislead the U.S. Food and Drug Administration in CytoDyn's biologics license application.
But those allegations were wrapped up in other charges that Kazempour was already acquitted of, Judge Xinis said.
"If I'm assuming some rationality to the jury … that's what they were looking at," she told the prosecutors during a lengthy back-and-forth. "Now you're saying I should use it as grounds to [enhance the sentence] on someone who was acquitted of almost everything … At some point a little common sense needs to kick in."
Arguing for the government, U.S. Department of Justice attorney Lauren Archer said that the judge couldn't know "why the jury, specifically, acquitted on some counts and not others."
Amid a series of missed development deadlines, CytoDyn issued a press release in April 2020 claiming that it had finished its long-awaited biologics license application, or BLA. With help from Kazempour's company, Amarex Clinical Research, CytoDyn said it had submitted its completed application to the FDA, sending the company's stock price up more than 30%.
But in reality, the BLA — with a cover letter written by Kazempour — was missing crucial data sets on the drug's testing, something the government on Friday claimed constituted "sophisticated means."
Kazempour's attorney, Jason Cowley of McGuireWoods LLP, quickly pointed out that Kazempour himself had alerted the FDA to the missing data set revisions in the cover letter, and that there was no evidence suggesting that Kazempour knew what was being said in Pourhassan's press release until the FDA told him that the release was inaccurate shortly thereafter.
Cowley joked that, if he could, he would actually ask for a downward departure from the sentencing guidelines based on how "unsophisticated" it was.
"I would say it was extremely unsophisticated to [say] … 'Hey, we're missing stuff, there's more stuff that we owe you,'" Cowley said, adding that Kazempour's cover letter actually led to the FDA pointing out that the press release was inaccurate.
Judge Xinis, questioning why the government was pursuing the line of argument, seemingly agreed with Cowley, saying that there was plenty of evidence to suggest that he wasn't reviewing CytoDyn's press releases or investor statements at the time.
Prosecutors are seeking an eight-year sentence for Pourhassan, the alleged mastermind of the scheme, and four years in prison for Kazempour. They said that CytoDyn's repeated lies in promotional materials, investor calls and press releases regarding its development of a drug that could purportedly be used to treat both HIV and COVID-19 drew unwitting investors in, allowing Pourhassan to cash out his stock options at inflated prices. Many shareholders, meanwhile, saw their retirement savings nearly wiped out, the prosecutors said Friday.
The government also argued for sentencing guideline enhancements for Pourhassan, meeting less resistance from Judge Xinis, who said that she would need time to work through the complex case and deliver sentences.
The same sophisticated means enhancement should be applied to Pourhassan, as well as an enhancement for inflicting substantial financial hardship on investors, prosecutors said Friday, pointing to victim impact statements detailing the plight of those who suffered heavy losses once the company's scheme unravelled.
"There are myriad victims … [who] have legitimately affecting stories," one DOJ lawyer said Friday, "people who had to take out … reverse mortgages on their home, people who are working eight extra years … to make up their loss … spouses who've had to go back to work."
But Douglas Tween of Linklaters LLP, an attorney for Pourhassan, said Friday that there wasn't enough evidence to say exactly how many investors suffered substantial hardship as a result of Pourhassan's statements. And while he acknowledged that it was "tragic" that people lost money on what he called "a highly speculative stock," it wasn't advisable to invest so heavily.
"It's really tragic," Tween said Friday. "And I would advise them to spread their money out a little more sensibly."
Attorneys for both executives are seeking sentences without any imprisonment.
The government is represented by Lorinda I. Laryea, Matthew Reilly, Vasanth Sridharan, Lauren Archer and Matthew Reilly of the U.S. Department of Justice's Criminal Division and Kelly O. Hayes and Adeyemi Adenrele of the U.S. Attorney's Office for the District of Maryland.
Pourhasssan is represented by Adam S. Lurie, Doug Davison, Douglass M. Tween and Nicole E. Jerry of Linklaters LLP.
Kazempour is represented by Caroline Schmidt Burton and Jason H. Cowley of McGuireWoods LLP and Benjamin O'Neil of Quinn Emanuel Urquhart & Sullivan LLP.
The case is U.S. v. Nader Pourhassan et al., case number 8:22-cr-00440, in the U.S. District Court for the District of Maryland.
--Editing by Dave Trumbore.
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