Schering-Plough's ticking time bomb.

Earlier this week BrandweekNRX provided a transcript from an interview of Schering-Plough CEO Fred Hassan by Jim Cramer.

Jim Cramer repeatedly asked leading questions about what Fred Hassan had known about the ENHANCE trial before unblinding and if the company was hiding something. For instance, Cramer asked "you didn't know, you didn't know anything did you?" and "Why is everyone so sure you found out six months before that?"

Hassan avoided responding to those questions, and BrandweekNRX speculated that the reason he may have done so was that he might have known more than he wanted the world to know. If he had falsely claimed he knew nothing before unblinding of the trial, he could later have been charged with securities fraud based on making a material misrepresentation.

Schering-Plough's management have been adamant in making it appear as if they knew nothing about the ENHANCE trial results before the trial was unblinded. They have not said so outright, but in support of this position, they made a highly unusual filing with the SEC. (Of course, this position has been contradicted by messages BrandweekNRX found on CafePharma.)

CNBC's Mike Huckman wrote about Schering-Plough's filing, "In what I would describe as a pretty extraordinary filing with the Securities and Exchange Commission, Schering-Plough is putting in black and white the date and time that senior level executives were informed about the results of the controversial ENHANCE* study of the cholesterol drug Vytorin."

The Wall Street Journal Health Blog commented, "We’ve pored over a lot of SEC filings in our years, but this is the first time we can remember this kind of time-clockology. "

So BrandweekNRX asked a lawyer at the Securities and Exchange Commission what his thoughts were on this. This person was not responding in his official capacity or on behalf of the SEC, but his reflections should be enlightning:

He said that "looking at the SP 8-K filing on January 25, 2008, the question that comes to mind is whether the disclosure regarding when the executives were informed of the ENHANCE results is misleading. For example, "Q: When was the Schering-Plough CEO informed of the top line results of ENHANCE? A: Fred Hassan was informed on January 10, 2008 at 8:00 a.m. by Tom Koestler, the head of Schering-Plough Research Institute."

He then concluded, "One assumes that this event did in fact occur. However, if Hassan knew the ENHANCE results already, the failure to disclose that fact may be materially misleading. The same for the Q&A about the other officers. I have no information on what the officers actually knew, and when, however, I agree with you that it is very odd that Hassan avoids saying that he didn't know the results before Jan. 10."

It is worth noting that in recent years the SEC and DOJ have vigorously prosecuted individuals and corporations who misrepresent or omit material information in securities filings. In the landmark decision Securities Exchange Comm'n v. Texas Gulf Sulphur Co., the Second Circuit defined a misrepresentation or omission as an act that conveys a false impression of the facts or is misleading. The court explained that this determination is made by inquiring "into the meaning of the statement to the reasonable investor and its relationship to the truth."

Prosecutions by the SEC and DOJ for misstatements or omissions are not limited to filings. Any form of publicized misstatement or omission can create liability. Courts have read Rule 10b-5 as prohibiting any deceit that materially affects the purchase or sale of securities--the deception need not necessarily concern the value of the stock.

Dr. Rost is a litigation consultant and pharmaceutical marketing expert. He is also the author of Killer Drug and The Whistleblower. 

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