Publications

(Article from Securities Law Alert, July/August 2020)

For more information, please visit the Securities Law Alert Resource Center

On July 13, 2020, the Second Circuit reversed the dismissal of putative securities fraud class action claims based on its determination that plaintiffs adequately alleged falsity and loss causation as to certain challenged statements. Abramson v. NewLink Genetics Corp., 965 F.3d 165 (2d Cir. 2020) (Walker, J.). However, the Second Circuit affirmed the dismissal of claims challenging defendants’ optimistic statements regarding the results of a clinical trial because the court found those statements were “unactionable puffery.”

Background

In September 2013, during a presentation for investors at a biotech conference, the company’s President & Chief Medical Officer (“CMO”) described the 24.1 month survival rate for participants in the company’s Phase 2 trial as “remarkable.” He stated that “all the major studies” show that “survival rates come between 15 to 19, 20 months. That’s it.” Several months later, in March 2014, an analyst asked how the company’s statistical assumptions would be impacted if it assumed that the control group lived for 24 or 25 months. The President & CMO responded that the company did not have “any reason to believe that median survival [rate] for these patients will be more than [the] low 20s.”

Plaintiffs alleged that the September 2013 and March 2014 statements were misleading because numerous significant studies “showed survival rates ranging from 25 months to 43 months.” But the district court “determined that the September and March statements were unactionable statements of opinion or disagreements with how [d]efendants chose to interpret the historical data, rather than falsifiable statements of facts.”

Plaintiffs also challenged a statement in the company’s September 17, 2013 press release representing that the company had “met” its “accrual goal of 722 subjects” for its Phase 3 trial. At the conclusion of that trial, “the control group had a higher survival rate than the test group by three months.” Plaintiffs presented confidential witness allegations that the company had enrolled ineligible individuals, and contended that this led to the failure of the Phase 3 clinical trial, which in turn caused plaintiffs’ financial losses. The district court held that plaintiffs adequately alleged falsity with respect to the enrollment-related statement, but found plaintiffs failed to plead loss causation. Plaintiffs appealed.

Failure to Disclose Studies Showing Longer Baseline Survival Rates Rendered Defendants’ Statements Misleading

The Second Circuit explained that Rule 10b-5 “renders both statements of fact and those of opinion actionable when such statements would be misleading without the contextualization of material facts.” The court noted that prior to the Supreme Court’s decision in Omnicare v. Laborers Dist. Council Industry Pension Fund, 575 U.S. 175 (2015), the Second Circuit “recognized sparingly few circumstances in which a statement of opinion would be actionable.” The court observed that “Omnicare rejected the proposition that there can be no liability based on a statement of opinion unless the speaker disbelieved the opinion at the time it was made.”[1]

The Second Circuit explained that after Omnicare, plaintiffs can state a securities fraud claim by “alleg[ing] that a statement of opinion, without providing critical context, implied facts that can be proven false.”[2] The court pointed out that liability for such a statement turns on what a reasonable investor would expect in light of the context in which the statement was made. The court also made it clear that “a statement of opinion does not imply false information to a reasonable investor simply because there is some fact cutting the other way that the speaker omitted.”

With respect to the September 2013 statement, the court noted that the President & CMO did not “couch his representation of survival rates with prefatory language like ‘I believe’ or ‘In my estimation.’” He instead presented a “categorical proposition,” and “cited the results of ‘all the major American studies’” in support of his statement. The court found it significant that the statement was made “at an important conference for biotech investors.” Given the context, the court determined that “[i]nvestors in attendance reasonably would not have interpreted his statement as a baseless, off-the-cuff judgment; instead, they would have credited his statement as researched and intentional, part of a well-prepared professional presentation.” The Second Circuit held that the statement could lead “a reasonable investor” to believe that “no credible studies have shown resected pancreatic cancer patients to have survival rates higher than 20 months.” The court found the March 2014 statement similarly misleading, “[b]oth because of its posture as a response to a specific question and its categorical nature.”

Plaintiffs Adequately Pled Loss Causation by Alleging That the Stock Price Dropped Due to the Clinical Trial’s Failure, Which Happened Because the Company Enrolled Ineligible Individuals

The Second Circuit explained that in order “[t]o establish loss causation, [p]laintiffs must demonstrate that the subject of the fraudulent statement or omission was the cause of the actual loss suffered.” Plaintiffs alleged, inter alia, that defendants “materially misrepresented . . . the design of their Phase 3 clinical trial, and that these misrepresentations caused [p]laintiffs’ financial losses.” Specifically, plaintiffs contended that “the failure of the Phase 3 trial was attributable to the concealed” enrollment of ineligible individuals, “and that the failure therefore constructively disclosed the fraud.” The Second Circuit found this theory of loss causation “persuasive,” reasoning that “a sufficient number of improper enrollments would naturally and predictably affect a trial’s statistical integrity.” The court concluded that plaintiffs’ theory “suffices” to plead loss causation “because, at this early pleading stage, we do not require conclusive proof of the causal link between the fraud and [p]laintiffs’ loss.”