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Back in the spring, states were scrambling to find effective tests for the coronavirus. Three states ended up turning to a small company with a limited track record called Co-Diagnostics. Then, questions piled up about the accuracy of those tests. Now, an NPR investigation has revealed that two members of the company's board cashed in nearly a $1 million worth of stock just as the company was coming under intense scrutiny. Here's NPR investigative correspondent Tom Dreisbach.
TOM DREISBACH, BYLINE: The testing program started with a group of companies in Utah. One of those companies was Co-Diagnostics. They made the tests. Here's CEO Dwight Egan on Fox Business News back in April.
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DWIGHT EGAN: The more we get a lot of people tested very quickly and regularly, the more we're going to be getting people back to work.
DREISBACH: Co-Diagnostics and the other companies came together through a nonprofit called Silicon Slopes. And the head of that nonprofit, Clint Betts, said these companies would provide testing without making a buck.
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CLINT BETTS: No tech company is going to make any money off of this. We're going to make sure of that. This partnership with the state of Utah is all about getting all Utahns tested.
DREISBACH: The testing program that started in Utah moved to Iowa and Nebraska, too. But the promise that no one would be making money off the tests - the truth was more complicated. Utah's government committed about $10 million to contract with the companies. Iowa and Nebraska committed close to $30 million each. Silicon Slopes declined to comment to NPR, but they did later clarify in a blog post that as the testing effort grew, it ended up including, quote, "commercial terms."
Co-Diagnostics, which provided the tests, started making money in another way. At the beginning of the year, its stock was worth less than $1 per share. But as states started buying their tests, investors started buying Co-Diagnostics stock, and its share price exploded. Plus, the company claimed in press releases it had a big advantage. Independent evaluations had shown its tests were 100% accurate. I asked an expert, Dr. H. Gilbert Welch of Brigham and Women's Hospital, about that.
Is there such a thing as a test that is 100% accurate?
H GILBERT WELCH: I've never seen such a thing. All our diagnostic tests are imperfect.
DREISBACH: The Food and Drug Administration says the same thing - there's no such thing as a 100% accurate test all the time. And around early May, local news outlets were reporting concerns that the tests from Co-Diagnostics were being processed slowly, may not be as accurate as advertised. And state governments announced that the accuracy rates were closer to around 95% - still high, but not 100%. The company has said that it really only meant its tests were 100% accurate in a handful of specific evaluations, not all the time, and it stands by its tests.
Either way, with all those questions swirling, in late May, two members of the company's board of directors sold all of their stock in the company. Months earlier, that stock wasn't worth very much. But in May, each man was able to cash in nearly $1 million each. Selling stock at a time like that can be considered a major warning sign for investors, so federal law requires that executives and directors publicly disclose stock sales within two business days. But some of these sales were not disclosed for about two weeks.
DANIEL TAYLOR: That's an outlier, an extreme outlier.
DREISBACH: That's Daniel Taylor. He's a professor at the Wharton business school.
TAYLOR: The circumstances suggest either extreme negligence, weakness of internal controls or intent.
DREISBACH: In a statement, an attorney for Co-Diagnostics emphasized that it was the responsibility of the individual board members, not the company, to disclose these stock trades. The attorney also stated that there's no evidence that the members of the board acted with, quote, "illicit intent." NPR was unable to reach the individual board members directly, and Co-Diagnostics declined to make anyone available for an interview.
Monica Loseman is a lawyer with the firm Gibson Dunn. She specializes in this kind of law. And she said small, fast-growing companies often struggle with all of their disclosure requirements.
MONICA LOSEMAN: It could certainly be that the company is trying to hide something from investors, but it's just as plausible - maybe even more plausible - that the company is suffering from some growing pains.
DREISBACH: Sorting out the answer to that question may involve a federal investigation, or we might learn more from the four lawsuits brought by investors who have alleged that the company misled them about the quality of their tests. Co-Diagnostics said that it will vigorously defend itself.
In the meantime, Iowa and Nebraska continue to use Co-Diagnostics tests. Utah is no longer using the tests, but the state department of health did not elaborate on why they made the change. Finally, right around Thanksgiving, the company's CEO and the chief financial officer both sold all of their stock in the company. Investors often see that move as a sign of trouble ahead.
Tom Dreisbach, NPR News.
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