On May 31, 2022, Judge Beth Labson Freeman of the Northern District of California dismissed without prejudice a putative class action asserting claims under the Securities Exchange Act against a synthetic biology company and certain of its executives. Joseph v. Precigen, Inc.
, No. 20-cv-06936-BLF (N.D. Cal. May 31, 2022). Plaintiff alleged that the company misrepresented the efficiency and economic viability of its methane conversion program. The Court held that plaintiff failed to adequately allege scienter and failed to allege falsity with respect to certain alleged misrepresentations; however, the Court granted leave to replead.
With respect to falsity, the Court held that plaintiff’s allegations were sufficient with respect to challenged statements regarding yield levels and the commercial viability of the methane conversion program. Slip op. at 8-9. Such statements included that the program was “in the money,” had achieved “commercially relevant yields,” and had developed the ability to “profitabl[y]” use natural gas. Id.
at 3. The Court rejected the company’s argument that an SEC order finding that those statements were inaccurate could not be relied on to plead falsity, distinguishing this situation from other cases in which allegations were drawn from mere complaints or documents that did not contain factual findings. Id.
In addition, the Court held that plaintiff adequately alleged falsity as to “general statements regarding a risk of governmental investigations”—indicating that the company “may” become subject to such investigations. Id.
at 4, 10. The Court found it “plausible” that such statements gave a misleading impression of the company’s current state of affairs given that the company was already under investigation by the SEC at that time. Id.
However, the Court held that plaintiff failed to adequately allege falsity as to other challenged statements for which plaintiff relied on confidential witness allegations. Id.
at 9. The Court noted that allegations regarding the company’s failure to meet internal deadlines and assessments of viability were “not clearly within the expertise” of the confidential witnesses, and allegations about “generalized ‘challenges’ facing the … program” were insufficient to show that statements about the progress or viability of the program were false or misleading. Id.
Moreover, while plaintiff alleged that the company’s disclosures about the program’s progress were based on “cherry-picked” data, the Court explained that a recent Ninth Circuit decision—addressed in our prior post
—concluded that allegations that data was “cherry-picked” were insufficient without more because “we simply do not know what the results would have been without the outlier data or what those results would mean.” Id.
at 9 (citing In re Nektar Therapeutics Sec. Litig.
, No. 21–15170, 2022 WL 1573821 (9th Cir. May 19, 2022)).
The Court also concluded that certain other alleged misstatements were non-actionable puffery (such as describing the methane conversion program as “a very breakthrough platform”), protected forward-looking statements (such as that the company was “working to create novel, highly engineered bacteria”), or non-actionable statements of opinion (such as a statement that one executive “personally believe[d]” that one development represented “the most valuable biotechnology in history”). Precigen
, slip op.
With respect to scienter, the Court first determined that the confidential witness allegations were insufficient to establish scienter as to any of the individual defendants. As to two executives, the Court noted, first, that the confidential witnesses alleged “no direct interactions” and, second, that allegations of “widespread knowledge” were insufficient to plead scienter. Id.
at 12. Regarding two other executives, the Court emphasized that general allegations regarding attendance at meetings, interactions with employees, or receipt of certain reports lacked the requisite particularity. Id.
at 12. Moreover, while the Court referred to allegations regarding another executive as plaintiff’s “strongest allegations of scienter”—including regarding an “in-person meeting” and that the executive was allegedly briefed on the sources of the data being used in the company’s public statements—the Court concluded that they were still “insufficiently specific or too indirect.” Id.
The Court also rejected plaintiff’s theory of scienter based on the “core operations” doctrine, which the Court emphasized applies only in “rare circumstances where the nature of the relevant fact is of such prominence that it would be absurd to suggest that management was without knowledge of the matter.” Id.
at 13. While plaintiff alleged that the methane conversion program was “one of the company’s largest teams,” that executives were kept informed about the program, and that one executive had referred to the program as “probably the most valuable biotechnology in history,” the Court concluded that such allegations were insufficient because the program was only one component of the company’s operations and plaintiff failed to allege facts showing that the program here was one of those “rare circumstances” that justified application of the core operations doctrine. Id.
In addition, the Court rejected plaintiff’s motive theory of scienter, based on alleged stock sales by executives, the company’s fund-raising and convertible note sales, the company’s acquisition of other companies using common stock, and its losses and capitalization problems. Id.
at 14. While plaintiff argued that these allegations showed a motive to inflate the company’s stock price, the Court concluded that such allegations “are insufficient to take [plaintiff’s] otherwise deficient scienter allegations over the line, particularly without additional allegations indicating they were suspicious.” Id.
at 14. The Court also noted that the allegations based on stock sales were “particularly deficient in light of the [company] stock purchases” those executives made during the same period. Id.
Moreover, the Court rejected plaintiff’s scienter argument as to the statements regarding government investigations. While plaintiff argued that it “defies credulity” that defendants would not have known about the SEC inquiry at the time of the alleged misstatements, the Court found allegations relating to this theory to be “barebones” and “insufficient at this stage, particularly in the context of [plaintiff’s] insufficient pleadings regarding scienter for the other challenged statements.” Id.
The Court also addressed plaintiff’s loss causation allegations, holding that plaintiff had adequately alleged loss causation at this stage, concluding it was “plausible” that investors could have “reasonably inferred” from at least some of the alleged corrective disclosures that the company had made false and misleading statements with respect to the methane conversion program and the risk of government investigations. Id.
Having concluded that plaintiff failed to adequately allege a primary claim under the Exchange Act, the Court accordingly dismissed plaintiff’s “control person” claims against the individual defendants. With respect to one executive, the Court further explained that allegations regarding the executive’s ownership stake in and responsibilities at the company were insufficient to establish control person liability without specific factual allegations as to his involvement in the company’s “day-to-day affairs” or his role in preparing and releasing the allegedly false or misleading statements. Id.