dipinvestor,
If he knew and he did not tell them, then they have grounds for recision or revaluation. I cannot imagine his lawyers let him make that mistake.
The most he could have told them is that the financials needed to be redone. While many can say it's obvious the stock would plunge on the news, not everyone would believe it could get this bad - myself included. Maybe they were figuring they could not get many shares at $4 or under and a certain good deal was still a good deal...
He probably was in denial about the E or just did not think it relevant to a 6 month view of the business.
Maybe its them buying this up at bottom to have some low cost shares along side the restrcted ones?