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First Circuit Affirms Dismissal Of Putative Securities Class Action, Finding Public Disclosures Precluded Any Finding Of Intent To Mislead Investors
05/23/2017On May 12, 2017, the United States Court of Appeals for the First Circuit affirmed the dismissal of a putative securities class action against biopharmaceutical company Biogen Inc. and three of its officers. In Re: Biogen Inc. Sec. Litig., No. 16-1976, 2017 WL 1963468 (1st Cir. May 12, 2017). Plaintiffs alleged that Defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) by concealing declining sales of multiple sclerosis drug Tecfidera following the death of a trial patient, leading to a stock drop when the company later reduced its growth forecasts for 2015. The First Circuit, in affirming the prior ruling of United States District Judge F. Dennis Saylor, IV of the United States District Court for the District of Massachusetts dismissing the amended complaint with prejudice, held that although the amended complaint gave rise to a “plausible” inference of scienter on the part of defendants, it did not support a “strong” inference of scienter as required under the heightened pleading requirements of the Private Securities Litigation Reform Act (“PSLRA”).
The First Circuit, noting the district court’s “careful and thoughtful opinion” dismissing plaintiffs’ Section 10(b) claims, agreed that plaintiffs had failed to meet the “rigorous” standard for scienter under the PSLRA. In support of their claims, plaintiffs alleged false or misleading statements by defendants regarding the forecast of Tecfidera sales, relying in large part on ten confidential witness statements in support of those allegations. The First Circuit, however, found that the confidential witness statements were insufficiently particular to give rise to a strong inference of scienter as to senior management because none of the witnesses were senior managers and they had little contact with such managers. The Court also held that these statements failed to support an inference of scienter because they did “not even begin to quantify the magnitude of the sales decline” of Tecfidera at the company level, and did not “explain with any precision whether the sales decline resulted from higher discontinuations, fewer new starts, changes in the market, or some combination of these factors.” The Court further observed that there was a “significant timing problem” in that the later confidential witness statements do not go to how the defendants’ allegedly misleading statements were knowingly or recklessly misleading at the time they were made. Lastly, the Court emphasized that these statements did not purport to contradict any of the company’s public financial reporting, noting that the company’s “cautious” projection of Tecfidera growth and repeated warnings to investors of downside risks undercut any inference of fraudulent intent.
Separate and apart from the confidential witness statements, the First Circuit also found that plaintiffs’ additional scienter allegations concerning statements made by defendants were “inapt” because the evidence does not establish that, at the time the challenged statements were made, there existed reasonably accessible data within the company materially contradicting those statements. The Court also found unconvincing plaintiffs’ allegations that defendants had sufficient motivation and opportunity to commit securities fraud, finding that defendants’ compensation structure and stock holdings in fact weakened any inference of scienter. In particular, the Court found it significant that two of the officers had bonus structures based on revenue growth, which was not alleged to have been inaccurately reported throughout the class period. Further undermining plaintiffs’ allegations, the Court determined, was the fact that all three of the officer defendants increased their company stock holdings during the class period, which “cuts against scienter.” Having fully considered plaintiffs’ scienter allegations, the First Circuit agreed with the district court that the strongest inferences are in favor of the defendants. Finding that the claims under Section 10(b) were inactionable, the Court summarily rejected plaintiffs’ control person liability claims under Section 20(a) of the Exchange Act.
The First Circuit also affirmed the district court’s dismissal of plaintiffs’ motion for leave to vacate the judgment under FRCP 59(e) and for leave to file a second amended complaint under FRCP 60(b)(2). Specifically, the Court rejected plaintiffs’ contention that the purported new evidence—three new confidential witnesses—would have altered the outcome in the district court, and noted that plaintiffs had failed to offer a “cogent reason” for why they could not obtain this new evidence earlier. In denying plaintiffs’ motion for leave to file a second amended complaint, the First Circuit emphasized that plaintiffs had the full time it had requested in order to file the initial amendment and also had the motion to dismiss “in hand” for nearly four months before the district court ruled. According to the Court, “under circumstances like these, we wish to discourage any expectation that there will be leisurely repeated bites at the apple.”
