Ninth Circuit And Southern District Of New York Dismiss Class Action Securities Fraud Claims Against Pharmaceutical Companies For Alleged Misrepresentations About Drugs In Development
06/20/2016On June 8, 2016, the United States Court of Appeals for the Ninth Circuit and the United States District Court for the Southern District of New York issued decisions as to separate securities class action lawsuits, dismissing complaints against defendants Peregrine Pharmaceuticals, Inc. and Cellceutrix Corporation, in Fahey v. Peregrine Pharmaceuticals, Inc., et al., No. 14-5582, slip op. (9th Cir. Jun. 8, 2016) and Zagami v. Cellceutrix Corporation, et al., No. 15 Civ. 7194, slip op. (S.D.N.Y. Jun. 8, 2016).
The two cases are examples of courts dismissing securities fraud actions against pharmaceutical and biotechnology companies at an early stage, when courts find that plaintiffs’ claims are essentially based on criticisms of clinical trials, but fail to plead false or misleading statements or omissions. In both cases, plaintiffs alleged violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) against the companies and certain of their officers and directors, claiming that the stock they purchased declined in value due to alleged misrepresentations about drugs that the defendants had been developing. Both courts held that plaintiffs had failed to state a claim.
In Peregrine, plaintiffs alleged that the defendants had made false statements about test results for cancer drug bavituximab, and claimed that defendants’ failure to verify the test data on which those statements were based demonstrated defendants’ intent to deceive investors because, according to plaintiffs, a review of the clinical trial results in question would have revealed problems with the trial (namely that, according to the complaint, some of the trial patients who should have received bavituximab received a placebo, and vice versa). The Court disagreed, holding that the allegations did not support an inference that the defendants’ statements had been made with the necessary intent under the heightened pleading standards imposed by Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act. The Court rejected plaintiffs’ argument, finding that there was no duty for executives to verify data received from FDA-approved third-party biostatisticians. The panel noted that “[i]t is easy for plaintiffs to see what went wrong in hindsight, but that does not make defendants’ failure to see that problem prior to announcing test results fraudulent, at least in the absence of red flags,” which plaintiffs had failed to identify.
In Zagami, the Southern District of New York held that plaintiffs had failed to plead that Cellceutrix had intentionally made misrepresentations about the development and utility of antibacterial drug Brilacidin and cancer drug Kevetrin. The Court rejected plaintiffs’ argument that an academic conference poster for Brilacidin had falsely represented that the drug was effective against various different strains of a particular bacteria, finding that it was not “likely to mislead prospective buyers” because it did not specify which strains it targeted. The Court also rejected plaintiffs’ argument that a January 2015 press release had misled investors by asserting that Kevetrin affected levels of a particular biomarker. Plaintiffs argued that this biomarker did not correlate with cancer-fighting properties, but the Court noted that “[s]ecurities law is simply not a vehicle through which courts will police disagreements in the cancer research community or the parameters of clinical trials,” and concluded that Cellceutrix’s discussion of the biomarker “does not support a claim for securities fraud.”