Inspire may face SEC lawsuit

Regulators suspect that the Durham company violated securities law, company executives say

Federal securities regulators have notified Inspire Pharmaceuticals that they may sue the Durham company and two executives because of possible omissions and misstatements in reports to investors.

Staff of the Securities and Exchange Commission intends to recommend that the agency bring a civil action regarding possible violations of securities law and rules, Inspire said Monday. Chief executive Christy Shaffer and Mary Bennett, executive vice president of operations and communications, also received notices from the SEC staff.

At issue are the company's disclosures surrounding a clinical trial of Prolacria, its experimental therapy for dry-eye disease, Inspire said in a statement.

The SEC opened a formal probe of Inspire in August 2005. At the time, company officials said that they thought the probe was related to trading of the company's shares seven months earlier, when it reported that the latest test of the experimental drug found it no more effective than saline drops for treating dry-eye disease.

The disappointing test results caused the company's stock to drop sharply. The events also prompted five shareholder lawsuits.

Receiving notice of a possible SEC lawsuit is a big deal, especially for a company with no products of its own on the market, said James Cox, a securities law professor at Duke University's law school. He said many cases are settled before the SEC staff issues a "Wells Notice," the document that Inspire, Shaffer and Bennett received Thursday.

"The SEC doesn't usually go to a formal investigation unless the staff believes a pretty strong case can be made that there's been a violation of securities laws," he said.

A Wells Notice raises the financial and legal stakes for companies, their executives and the SEC, he said. Once the SEC staff is considering recommending a lawsuit, it's hard for a company or its officers to settle the case without paying some sort of fine, Cox said.

Inspire and the executives can respond in writing to the SEC notice, and their response will be included in the staff's formal recommendation to the agency's five commissioners. Inspire said the company, Shaffer and Bennett will be preparing submissions and may seek another meeting with the staff.

The SEC still hasn't told Inspire its exact concerns, said Jenny Kobin, a spokeswoman for the company. She said Shaffer and Bennett were not taking media calls.

However, the shareholder suits could shed some light on regulators' concerns about the stock. They alleged that the company purposely misled investors about the goal of the clinical trial in order to complete a secondary offering in July 2004 that raised $82.8 million for the company.

Inspire raised $42.3 million by selling more shares in November 2004. At the time of that offering, Inspire's stock traded at about $18. After the company reported the disappointing trial results, the shares fell from $16 to $8.88.

The drug, Inspire's best chance to get one of its own products on the market, still has not won approval from regulators. Inspire also has reported disappointing news about other drugs in development.

The shares have not recovered.

Inspire's shares fell 55 cents to close at $5.07 Monday. The stock is down 26 percent in the past year.

Under the leadership of new chairman Christopher Cox, SEC regulatory staff is under increased pressure to go after individual officers, rather than companies, said James Cox of Duke.

But if commissioners decide to pursue some action against Inspire, the company and its executives aren't necessarily headed to federal court. That's generally reserved for "more egregious cases," Cox said. The SEC also can hear cases through administrative proceedings at the agency.

"It's going to be interesting to see how this develops," he said.