Northern District Of California Declines To Dismiss Putative Class Action Against Biotechnology Company Because Challenged Statements, Even If “Literally True,” Could Have Misled A Reasonable Investor
On December 22, 2021, the United States District Court for the Northern District of California declined to dismiss most of the claims asserted in a putative class action against a biotechnology company, certain of its executives, and the company’s former majority investor under the Securities Exchange Act. In re Vaxart, Inc. Sec. Litig., No. 20-cv-05949-VC (N.D. Cal. Dec. 22, 2021). Plaintiffs alleged that the company made misrepresentations during the early months of the COVID-19 pandemic in 2020 regarding its efforts to develop a vaccine, and further alleged that the investor engaged in a scheme to inflate the company’s stock price in order to exit its position at a profit. The Court held that plaintiffs adequately alleged misrepresentations and scienter as against the company and its executives named as individual defendants but dismissed the claims against the investor.
The crux of plaintiffs’ allegations was that the company allegedly made statements in press releases and investor presentations that painted a misleadingly optimistic picture of the company’s efforts to develop a COVID-19 vaccine, including the possibility that the company’s vaccine could be selected as part of a major government purchasing program. Slip op. at 3-5.
The Court held that plaintiffs adequately alleged material misrepresentations, in particular with respect to two challenged statements. First, plaintiffs alleged that the company’s announcement that it had signed a “Memorandum of Understanding” with a manufacturer to manufacture and distribute the company’s COVID-19 vaccine which would “enabl[e] production of a billion or more COVID-19 vaccine doses per year” and solve the company’s “biggest technical bottleneck in terms of manufacturing,” was misleading because the manufacturer lacked the necessary FDA approvals to produce any such doses and did not have the ability to produce one billion or more doses. Id. at 4-5. Second, plaintiffs alleged that a company press release which stated in its headline that the company’s COVID-19 vaccine had been “selected” for the government purchasing program was misleading, even though the press release clarified, in smaller font in its body, that the program related only to a non-human primate challenge study. Id. at 5.
Importantly, the Court began its analysis of materiality by explaining that challenged statements must be “evaluated through a fisheye, not a telescope.” Id. at 8. From this perspective, the Court held that the challenged statements, when considered in the context of the company’s prior statements about its vaccine development, “created the materially misleading impression that [the company] stood at the precipice of pioneering a successful coronavirus vaccine.” Id. The Court emphasized that, in the context of a time period in which investors were speculating as to which few companies would receive a large influx of government funding, the company’s announcement regarding the manufacturing partnership “seemed to turn potentials into realities” and significantly altered the “total mix” of information available to reasonable investors. Id. at 8-9. Similarly, the Court concluded that the “bold headline” that the company had been “selected” for the government purchasing program “would have misled a reasonable investor into thinking that the company would be flush with funds.” Id. at 9. The Court rejected defendants’ arguments that the challenged statements were literally true, observing that even statements “literally true on their face” can mislead a reasonable investor when understood in context. Id. at 10-11. As the Court put it, although a sophisticated investor might have been able to avoid being fooled by the company’s “series of head-fakes,” that was not enough for the company to escape liability for securities fraud because a reasonable investor could have been misled in a material way. Id. at 2. Although the company could defend its statements as literally true “based on a close and isolated reading,” considering the “context, circumstances, and the manner in which the company communicated its progress to the market, the complaint does enough to identify specific statements that would have misled a reasonable investor.” Id. at 19.
The Court also determined that plaintiffs alleged “more than enough to infer” scienter. Id. at 12. With respect to the announcement of the manufacturing partnership, the Court noted that the company had allegedly informed the manufacturer that it lacked the necessary regulatory approvals and staffing, and that the manufacturer “played such a central role in [the company’s] vaccine plan that it would be absurd to suggest that management was without knowledge of its deficiencies.” Id. at 13. Moreover, the Court observed that the company had allegedly known for some time that it had been selected for a primate study but would not receive funding through the government purchasing program, creating an “even stronger inference” that the company “deliberately crated a press release designed to make it seem as if the company had achieved something significant.” Id. at 14.
However, the Court dismissed plaintiffs’ claims against the investor, which previously held a majority stake in the company. The Court explained that plaintiffs did not allege that the investor “meaningfully controlled” the company’s statements about its vaccine development. Id. at 17. While plaintiffs contended that the investor engaged in a scheme to sell its shares after inflating the share price, the Court observed that plaintiffs’ “theory hits a few snags” because the investor sold the vast majority of its stake before the alleged class period and did not sell any shares in the wake of statements which allegedly caused a rise in the company’s stock price. Id. The Court, however, granted plaintiffs leave to replead their claims against the investor.