Wednesday, September 19, 2018
Investors Not Duped if Needed Information Is Publicly Available
Opinion Says Company’s Methodology in Testing Product Wasn’t Hidden Where It Appeared In Scientific Journal; Reliance Can’t Reasonably Be Restricted to Hype
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals has affirmed the dismissal of a class action against a biotechnology company which, according to the complaint, duped investors by portraying a product under development as having higher potential than it actually did, with the court placing responsibility on investors to review scientific literature before buying shares and not just rely on a company’s hype.
In a memorandum opinion filed Monday, a three-judge panel agreed with the District Court that the pleading failed to identify a material misrepresentation or omission, and did not adequately allege scienter, as required in a securities fraud case. The panel found that part of the information available to potential investors was provided in a 2008 article in a medical journal.
The action against Celladon Corporation (now Eiger BioPharmaceuticals, following a 2016 merger) and its two principals, at the time of the alleged misconduct, was based on rosy reports to the public concerning Mydicar, designed for one-time use in patients who had experienced heart failure. It was injected directly into heart cells to replace a faulty gene or boost activity of the gene.
Comprising the class were persons who purchased shares in Celladon between July 7, 2014 and June 25, 2015. On the former date, Celladon issued a press release announcing a second clinical trial of the product, quoting Chief Executive Officer Krisztina Zsebo as trumpeting the “promising results” in initial studies; the latter date was the day before Celladon released a statement, before trading opened, that it was suspending studies on Mydicar and that the company might be liquidated.
The announcement of the suspension of studies came on the heels of an April 26 disclosure that the second trial of Mydicar showed it was inefficacious—with Zsebo commenting that Celladon was “surprised and very disappointed”—and a June 1 statement that Zsebo had resigned as CEO and as a director.
“As a result of defendants’ false statements,” the complaint sets forth, “Celladon securities traded at artificially inflated prices during the Class Period. However, after the above revelations seeped into the market, the Company’s shares were hammered by massive sales, sending the Company’s stock price down 95% from its Class Period high and causing economic harm and damages to class members.”
Statements about the success of the first trial of Mydicar “were materially false and misleading” because, in fact, that trial “was so small it was not indicative of any success,” the July 2, 2015 complaint alleges.
District Court’s Decision
District Court Judge Anthony J. Battaglia of the Southern District of California, in dismissing the action on Oct. 7, 2016, without prejudice, termed Celladon’s positive statements about the product as “puffery” and remarked:
“The Court finds that Defendants’ statements regarding the ‘encouraging results’ of Mydicar and ‘Mydicar’s unique characteristics’ are all projections of general optimism.”
Battaglia found insufficient allegations regarding scienter on the part of the corporation or the individual defendants, Zsebo and Rebecque J. Laba, Celladon’s vice president, finance and administration. He said that Zsebo’s departure from the company—whether the result of a voluntary resignation or her being fired—“is not evidence of scienter on its own.”
The plaintiffs opted not to amend and appealed from the Oct. 7 order.
During the class period, Zsebo sold shares of her stock in Celladon for more than $4.1 million, and Laba made sales of shares for more than $1.3 million.
Ninth Circuit Opinion
The Ninth Circuit’s opinion says that “the alleged flaws” in the initial clinical test “were disclosed by defendants in a publicly accessible journal article published years before Celladon went public.”
Battaglia’s order alludes to “an article that was co-authored by Zsebo and published by the Journal of Cardiac Failure in June of 2008.” It cites the article in connection with the name of the study.
The memorandum opinion continues:
“As this information was already part of the total mix of information available to investors, defendants’ statements were not misleading.”
With respect to the necessity of alleging intent in a securities fraud case, the opinion recites that the complaint sets forth Zsebo’s education and savvy, the small size of Celladon, and the fact that Mydicar was its sole product candidate as indications that the defendants knew the initial clinical trial was meaningless and that there was a knowing effort to misrepresent the significance of the results.
The opinion declares:
“As the district court found, plaintiff has failed to allege specific facts demonstrating that defendants acted with the intent to manipulate the clinical trial or deceive the public. In addition, the purported weaknesses with the trial were disclosed by defendants, and there is nothing to suggest that Zsebo or her co-authors, who were prominent physicians, did not believe in the results of the study. Even viewing plaintiff’s allegations holistically, the inference of scienter in this case is not as compelling as opposing inferences from the facts alleged.”
The outcome was telegraphed by the panel—comprised of Circuit Judges Jay Bybee and Paul J. Watford, joined by District Court Judge Marco A. Hernandez of the District of Oregon, sitting by designation—at oral argument in Pasadena on Aug. 28.
Watford declared that proponents of the gene therapy “told everyone the analysis they went through and if people thought that that was junk science, they were perfectly entitled to read that, make their own judgment, and not bother investing in the company.”
New York attorney David Goldsmith argued that Celladon disclosed its methodology “exactly once” in an article that “no reasonable investor would be able to make heads or tails” of, relating:
“I had to hire an expert to explain this to me.”
He pointed out that the methodology “was not disclosed in any document directed to investors.”
The case is Tadros v. Celladon Corporation, No. 16-56904.
Eiger sold Mydicar to Theragene Pharmaceuticals, Inc. in 2017.
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