Massachusetts District Court Dismisses Putative Class Action For Failure To Adequately Allege Material Misstatements And Scienter
12/11/2018On December 6, 2018, Chief Judge Patti Saris of the United States District Court for the District of Massachusetts dismissed a putative class action asserting claims under the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder against the early-stage biopharmaceutical company Genocea Biosciences, Inc. and certain of its officers and directors. Emerson v. Genocea Biosciences, Inc., No. 17-12137-PBS (D. Mass. Dec. 6, 2018). Plaintiffs alleged that Genocea omitted to disclose to investors certain six-month post-dosing clinical trial test results because it knew the results to be negative, thereby causing class members to purchase Genocea stock at an inflated price. The Court dismissed the action, holding that the alleged omissions were not material and that other disclosures weighed against finding the required strong inference of scienter.
The Court rejected plaintiffs’ argument that Genocea had made a material omission in failing to disclose certain six-month post-dosing results in January 2017, emphasizing that the Exchange Act “did not create an affirmative duty to disclose any and all material information,” but rather only required disclosures necessary to make other statements not misleading. Slip op. at 14. The Court determined that, contrary to plaintiffs’ assertion that defendants must have known in January 2017 that the six-month results were negative, Genocea’s disclosures provided evidence that the data had not been expected until the “first quarter” or “first half” of 2017. Id. at 16. Without any specific factual allegation that Genocea was aware of the results sooner, the Court adopted only the inference that Genocea was aware of the results by July 2017, when the corresponding 12-month results were disclosed. Id. at 17-18. Furthermore, the Court noted that even though the 12-month results were negative, the stock price did not drop when the company released those negative results, thus supporting the conclusion that the disclosure of negative six-month results would likely not have been material to investors either. Id. at 20-21.
The Court also held that plaintiff had failed to adequately allege scienter. The Court determined that Genocea’s disclosure of negative 12-month results “weakens any showing of scienter,” as the disclosure of some but not all adverse events gave rise to a competing inference that defendants disclosed what they considered to be relevant. Id. at 23. For this reason, the Court rejected plaintiffs’ argument that scienter could be inferred through a “core operations” theory, based on how important the drug allegedly was to the company. Id. The Court also rejected plaintiffs’ arguments that Genocea executives’ stock sales were sufficient to show scienter, emphasizing that “[i]nsider trading cannot establish scienter on its own,” and that while one executive was alleged to have sold stock during the proposed class period, there was no evidence that Genocea knew of the six-month results at the time of the first transaction, and the second trade was pursuant to a 10b5-1 plan, which had been entered into before Genocea allegedly knew of the six-month negative results, and that trades are effectuated pursuant to such a plan “generally rebuts an inference of scienter.” Id. at 24-25. Thus, while the alleged insider trading was a “concern,” it did not, standing alone, support a strong inference of scienter. Id. at 25.
This decision is a helpful reminder that the materiality of alleged omissions (and allegations of scienter in connection with any omissions) must be analyzed in the context of other disclosures made by defendants.