In a matter of first impression in the Ninth Circuit, the court applied the Supreme Court’s Omnicare standard for pleading the falsity of a statement of opinion to a Section 10(b) claim in City of Dearborn Heights Act 345 Police & Fire Retirement System v. Align Technology, Inc., — F.3d —, 2017 WL 1753276 (9th Cir. May 5, 2017).

The litigation arose from Align’s $187.6 million acquisition of Cadent Holdings, Inc. in April 2011, and Align’s alleged failures to properly assess and write off the goodwill associated with the acquisition. Align’s statements regarding the fair value of goodwill, of course, were quintessential statements of opinion, because they were inherently subjective. In Omincare, the Supreme Court set the standard for pleading the falsity of an opinion claim under Section 11. Many practitioners, including Lane Powell’s securities litigation team, had opined—and the Second Circuit and other courts had held—that the rationale of Omnicare should equally apply to Section 10(b) claims, since the falsity element is the same. In Align, the Ninth Circuit agreed, and partially overturned a previous Ninth Circuit case that permitted plaintiffs to plead falsity by alleging that “there is no reasonable basis” for the defendant’s opinion.

Align’s accounting for the acquisition resulted in $135.5 million of goodwill, $76.9 million of which was attributable to one of Cadent’s business units (the “SCCS unit”). The plaintiffs alleged that the purchase price, and thus the goodwill, was inflated due to Cadent’s channel stuffing practices prior to the acquisition, and that the defendants must have known as much after performing their due diligence. Following the acquisition, the SCCS unit’s financial results suffered due to numerous factors. Nevertheless, at the end of 2011, Align found no impairment of its recorded goodwill. Align did not perform any interim goodwill testing in the first or second quarters of 2012. Id. at *2-3.

On October 17, 2012, Align finally announced it would be conducting an interim goodwill impairment test for the SCCS unit, which it said was triggered by the unit’s poor financial performance in the third quarter of 2012 and the termination of a distribution deal in Europe. That announcement led to a 20% hit to Align’s stock price. On November 9, 2012, Align announced a goodwill impairment charge of $24.7 million, and it announced subsequent goodwill charges in the following two quarters. Id. at *3. The plaintiffs alleged that the defendants made seven false and misleading statements concerning the goodwill valuation between January 30, 2012 and August 2, 2012. The plaintiffs’ allegation was that defendants deliberately overvalued the SCCS goodwill, thereby injecting falsity into statements concerning the goodwill estimates and the related financial statements. The district court dismissed the complaint with prejudice for failing to adequately plead falsity and scienter. Id. at *4.

At issue in the Ninth Circuit was whether the plaintiffs had adequately pled that Align’s statements were false. The first question was what analytic framework applied. The plaintiffs did not dispute that five of the seven statements at issue were pure statements of opinion. However, with respect to two statements, the plaintiffs alleged the opinions contained “embedded statements of fact.” Those statements were that “there were no facts and circumstances that indicated that the fair value of the reporting units may be less than their current carrying amount,” and that “no impairment needed to be recorded as the fair value of our reporting units were significantly in excess of the carrying value.” The Court held that the former statement was an opinion with an embedded statement of fact, but that the latter was an opinion. Id. at *5.

The Court also addressed the proper pleading standard for falsity of opinion statements. The panel concluded that Omnicare established three different standards depending on a plaintiff’s theory:

  1. Material misrepresentation. Plaintiffs must allege both subjective and objective falsity, i.e., that the speaker both did not hold the belief she professed, and that the belief was objectively untrue.
  2. Materially misleading statement of fact embedded in an opinion statement. Plaintiffs must allege that the embedded fact is untrue.
  3. Misleading opinion due to an omission of fact. Plaintiffs must allege that facts forming the basis for the issuer’s opinion, the omission of which makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.

Importantly, the Ninth Circuit extended this Omnicare holding from the Section 11 context to the Section 10(b) and Rule 10b-5 claims at issue in Align. Id. at *7. In doing so, the Ninth Circuit joined the Second Circuit in extending Omnicare in this regard. See Tongue v. Sanofi, 816 F.3d 199, 209-10 (2d Cir. 2016). Finally, the court overruled part of its previous holding in Miller v. Gammie, 335 F.3d 889, 900 (9th Cir. 2003) (en banc), which allowed for pleading falsity by alleging that there was “no reasonable basis for the belief” under a material misrepresentation theory. City of Dearborn Heights, 2017 WL 1753276, at *7.

Applying this pleading standard to the Align facts, the Ninth Circuit concluded that the plaintiffs had not met their pleading burden. Because the plaintiffs did not allege the actual assumptions the defendants relied upon in conducting their goodwill analysis, the court could not infer that the defendants intentionally disregarded the relevant events and circumstances. Accordingly, six of the seven statements that relied on the material misrepresentation theory failed to allege subjective falsity and were properly dismissed. Likewise, the failure to allege the actual assumptions used by the defendants prevented plaintiffs from pleading objective falsity as to the one statement of fact embedded in an opinion statement. Id. at *8-10.

After concluding that the plaintiffs failed to allege falsity, the Ninth Circuit went on to hold that plaintiffs had not alleged scienter against the defendants, providing a second ground for dismissing the complaint. At most, the plaintiffs alleged that the defendants violated generally accepted accounting principles, but such a failure does not establish scienter. Likewise, the stock sale allegations, core operations inference, the temporal proximity between the challenged statements and the goodwill write-downs, the CFO’s resignation, and the magnitude of the goodwill write-downs did not create an inference of scienter. Id. at *10-13.

Judge Kleinfeld concurred in the judgment. He would have upheld the district court’s dismissal based on scienter alone, leaving the weightier issue of falsity described above to a future case where such a decision was necessary. Id. at *13-14 (Kleinfeld, J., concurring in the judgment).

In Brennan v. Zafgen, Inc., — F.3d –, 2017 WL 1291194 (1st Cir., April 7, 2017), the First Circuit affirmed a District of Massachusetts decision dismissing claims against Zafgen, Inc., a biopharmaceutical developer, and its CEO, Dr. Thomas Hughes. Judge Stahl, writing for a panel that included retired Supreme Court Justice Souter (sitting by designation), concluded that plaintiffs’ complaint did not allege facts giving rise to the “cogent and compelling” inference of scienter required by the Reform Act. Id. at *1 (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007)).

Between August 2012 and May 2013, before Zafgen went public, the company conducted a Phase II trial of an anti-obesity drug called Beloranib. As the trial progressed, four patients in the trial who were receiving the drug suffered adverse “thrombotic”—i.e., blood-clotting—events of varying severity. Third-party clinical investigators classified two of these adverse thrombotic events as “superficial,” and the other two events as “serious.” In April 2014, as Zafgen was preparing for a June 2014 IPO, it disclosed the two serious events, but not the two superficial events, in its Form S-1 Registration Statement. Id. at *1-2.

In mid-October 2015, Zafgen’s share price began to decline, falling from $34.76 on October 12 to $15.75 at close of trading the next day. On October 15, Zafgen disclosed that a patient in its ongoing Phase III trial of Beloranib had died; and on October 16, the company confirmed that this patient had been treated with the drug (rather than a placebo), and that the FDA had placed Beloranib on a partial clinical hold. Also on October 16, 2015, Zafgen’s chief medical officer, Dr. Dennis Kim, disclosed for the first time the two superficial adverse events from the Phase II trial that was conducted in 2012-2013. By the end of trading on October 16, the price of Zafgen stock had dropped to $10.36. Id. at *2.

The plaintiffs in Brennan sued Zafgen and Dr. Hughes on behalf of a putative class consisting of all persons and entities who bought Zafgen stock between its IPO on June 19, 2014 and October 16, 2015, when the company announced the FDA’s partial clinical hold. Id. at *3. They argued that the company had made misleading statements about its Beloranib trial in ten different documents that were signed by Dr. Hughes, and they asserted claims under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5. Specifically, the plaintiffs claimed that the challenged statements were misleading because they failed to mention the two superficial adverse events from the Phase II trial, which were disclosed for the first time by Dr. Kim on October 16, 2015. Id. at *1-3. (Despite alleging material omissions in Zafgen’s Registration Statement, plaintiffs did not assert Securities Act claims.)

The district court dismissed plaintiffs’ complaint on the ground that it failed to adequately plead a “strong inference” of scienter, as is required by the Reform Act. In doing so, the district court placed particular emphasis on the materiality of the two superficial adverse events, which it described as “marginal,” thereby weakening any inference of scienter. Id. at *4.

On appeal, the plaintiffs argued that they had, in fact, satisfied the Reform Act’s scienter requirement, because they had pled that defendants (1) knew, or were reckless in not knowing, about news and scientific articles purportedly showing a link between Beloranib and adverse thrombotic events; and (2) had a motive to commit securities fraud, as shown by Zafgen’s compensation structure, and by “heavy” insider sales before the patient death was announced. Id. at *5.

Regarding the news and scientific articles cited by plaintiffs, the First Circuit noted that “‘[t]he key question … is not whether defendants had knowledge of certain undisclosed facts, but rather whether [they] knew or should have known that their failure to disclose those facts’ risked misleading investors.” Id. (quoting City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Waters Corp., 632 F.3d 751, 758 (1st Cir. 2012)). In this case, the cited articles “may [have] suggest[ed]” that the defendants were aware of a link between Beloranib and thrombotic events. But the articles did not demonstrate that the defendants “deliberately or recklessly risked misleading investors” by not disclosing the two superficial events from the Phase II trial until October 16, 2015. Id.

Turning to plaintiffs’ motive allegations relating to insider trading and Zafgen’s compensation structure, the First Circuit agreed with the district court that “the strength of the insider trading allegations drifts towards the marginal end of that spectrum because [CEO] Hughes and all other Zafgen insiders kept the vast majority of their Zafgen holdings.” Id. at *6 (observing that after accounting for vested options, Dr. Hughes retained at least 93 percent of his Zafgen stock, and every other insider identified in the complaint retained at least 85 percent). In light of this fact, the district court was correct in determining that the plaintiffs’ insider trading allegations “d[id] not alter the conclusion that the complaint as a whole fails to raise a strong inference of scienter.” Id.

As for the plaintiffs’ arguments regarding Zafgen’s compensation structure, the First Circuit found that the complaint’s allegations offered no basis for inferring fraudulent intent, but showed only “the usual concern by executives to improve financial results.” Id. (quoting In re Cabletron Sys., Inc., 311 F.3d 11, 39 (1st Cir. 2002)). An allegation that a defendant had motive and opportunity to commit fraud, or that a corporation “rewards [its executives for] the achievement of corporate goals,” does not satisfy the Reform Act “without something more.” Id.

The First Circuit also discussed several other considerations that “bolster[ed]” its conclusion that the complaint’s allegations did not give rise to a sufficiently strong inference of scienter. These included the fact that (1) the materiality of the two undisclosed superficial adverse events was “marginal,” which “tends to undercut the argument that the defendants acted with the requisite intent … in not disclosing [them],” id. at *7 (quoting In re Ariad Pharm. Sec. Litig., 842 F.3d 744, 751 (1st Cir. 2016)); and (2) Zafgen’s disclosures before and during the class period mentioned the two serious thrombotic events from the Phase II study, and also stated that the company would not disclose all adverse events as they occurred, which “weaken[ed] the complaint’s scienter showing,” id. at *8.

Having thus concluded that the plaintiffs’ allegations, considered as a whole, did not give rise to a “cogent and compelling” inference of scienter, the First Circuit affirmed the dismissal of plaintiffs’ Section 10(b) claim as well as their Section 20(a) claim against Dr. Hughes, which was derivative of the former. Id.

In monitoring securities cases filed around the country, I like to keep an eye out for regional trends. Historically, plaintiffs’ counsel respected the company defendant’s forum, filing in the federal court closest to the company’s headquarters.  That is certainly not true today. Many plaintiffs’ firms initiate cases in New York or California—and sometimes, a seemingly random location—against companies headquartered elsewhere.

Sometimes, these firms file outside of the headquarters forum simply because their headquarters is there, which allows them to keep litigation expenses down and avoid splitting fees with another lawyer if local counsel in the headquarters form is be required.  Along with targeting smaller companies in what I call “lawsuit blueprint” cases, this type of cost savings has allowed some smaller plaintiffs’ firms to hurdle the high barriers to entry in the plaintiffs’ securities class action market, beginning with the Chinese reverse-merger cases in 2010.  These plaintiffs’ firms have used the business strategy and returns from those cases to continue filing securities class actions, mostly against smaller companies. This expansion of the securities class action plaintiffs’ bar is one of the most significant securities litigation developments of this decade.

But, often, these plaintiffs’ firms file in a particular jurisdiction for strategic reasons.  Over the last two years, I have noticed a small surge in certain securities complaints filed in the Third Circuit, even where defendants appear to have little connection to the forum.  In particular, there has been an uptick in the number of Third Circuit cases involving foreign defendants or overseas conduct and the purchase or sale of stocks traded in over-the-counter markets or on non-registered exchanges, including the Over-the-Counter Bulletin Board (“OTCBB”) and Pink Sheets.  I believe this trend relates to the Third Circuit’s interpretation of the Supreme Court’s ruling in Morrison v. Nat’l Australia Bank, 561 U.S. 247 (2010).

Before Morrison was decided, the lower courts had applied a number of different tests in determining when and how to apply Section 10(b) of the Exchange Act to fraudulent schemes involving conduct outside the United States. In Morrison, the Supreme Court held that Section 10(b) has no extraterritorial application, and can only apply to two categories of transactions: (1) “transactions in securities listed on domestic exchanges”; and (2) “domestic transactions in other securities.”

While Morrison simplified the framework for applying Section 10(b) in cases that involve overseas conduct, it inevitably left open a number of important questions, which have been addressed in the years since by the courts of appeals.  For a good recent discussion of post-Morrison issues, please see this March 6, 2017 guest post on Kevin LaCroix’s The D&O Diary by Wiley Rein’s David Topol and Margaret Thomas: “Post-Morrison Application of U.S. Securities Laws to Foreign Issuers.”

One such question is how the Morrison test applies in cases that involve non-domestic conduct and the purchase or sale of securities in OTC markets and on non-registered exchanges.  Two years ago, the Third Circuit addressed this question in a criminal case, United States v. Georgiou, 777 F.3d 125 (3d Cir. 2015), in which the defendant, Georgiou, had been charged with participating in a stock fraud scheme that involved the purchase and sale of shares in US companies quoted on the OTCBB and the Pink Sheets.  While Georgiou manipulated the price of these securities through offshore brokerage accounts, at least one of the fraudulent transactions in each target stock was executed with a market maker based in the United States.

Applying the first prong of Morrison, the Third Circuit held that none of the trades qualified as “transactions in securities listed on domestic exchanges,” because the OTBB and Pink Sheets are not among the eighteen national securities exchanges registered with the SEC.  This reasoning has since been cited and adopted by several district courts outside the Third Circuit.  See, e.g., In re Poseidon Concepts Sec. Litig., 2016 WL 3017395 (S.D.N.Y., May 24, 2016); Stoyas v. Toshiba Corp., 191 F.Supp.3d 1080 (C.D. Cal. 2016).

Turning to Morrison’s second prong, however, the Third Circuit concluded that the trades facilitated by US market makers were “domestic transactions,” because the purchaser or seller had incurred “irrevocable liability” for these trades in the United States.  In other words, by working with a domestic market maker, a purchaser or seller makes a “commitment” to the transaction in the United States, which brings the transaction within the scope of Section 10(b). On this basis, the Third Circuit affirmed Georgiou’s securities fraud conviction.

The Third Circuit’s ruling as to the second prong of Morrison does not put it directly at odds with any other circuit.  Yet by stating unambiguously that use of a domestic market maker renders a transaction “domestic,” Georgiou offers plaintiffs’ counsel more certainty than exists elsewhere.

The year before Georgiou was decided, the Second Circuit addressed a similar issue in Parkcentral Glob. Hub Ltd. v. Porsche Auto. Holdings SE, 763 F.3d 198 (2d Cir. 2014), but offered a more qualified ruling.  Like the Third Circuit, the Second Circuit indicated that a transaction should be considered “domestic” if irrevocable liability was incurred in the United States.  But while Georgiou suggests that Section 10(b) applies to all domestic transactions, Porche held that the domestic trades at issue in that case were beyond the territorial scope of the Exchange Act.  “While a domestic transaction or listing is necessary to state a claim under Section 10(b),” Judge Leval argued, “a finding that these transactions were domestic would not suffice to compel the conclusion that the plaintiffs’ invocation of Section 10(b) was appropriately domestic,” and it would be a mistake to “treat[ ] the location of a transaction as the definitive factor in the extraterritoriality inquiry.”

Porche involved an unusual fact pattern—foreign defendants, largely foreign conduct, and domestic trading in swaps tied to foreign securities—and it may be advisable to read the Second Circuit’s opinion narrowly.  See, e.g., Poseidon, 2016 WL 3017395 at *12-13 (holding that Porche was inapposite where plaintiff had purchased domestically a foreign stock traded on Pink Sheets in the United States).  Moreover, the Third Circuit decided Georgiou after Porche, and apparently felt no need to criticize, distinguish, or even mention the Second Circuit’s ruling.

Nonetheless, the bright-line rule that Georgiou arguably establishes—namely, that Section 10(b) applies in all cases involving a domestic transaction—currently makes the Third Circuit a more attractive destination for plaintiffs’ counsel in foreign-issuer cases, particularly in cases where other territorial factors might weigh against invoking jurisdiction.  For this reason, I expect to see more cases of this kind filed in district courts in the Third Circuit in the future.

A senior officer’s violations of a corporation’s code of conduct do not give rise to a claim for violation of the federal securities laws—even where the corporation (including the officer himself) has touted the company’s high standards for compliance with its own ethical code.  That was the Ninth Circuit’s holding in a recent opinion affirming a district court’s dismissal of a putative class action filed against Hewlett-Packard and its former CEO and Chairman, Mark Hurd.  Retail Wholesale & Department Store Union Local 338 Retirement Fund v. Hewlett-Packard Co. and Mark A. Hurd, 845 F.3d 1268 (9th Cir. 2017).  The case arose out of Hurd’s departure from the company following revelations of Hurd’s relationship with an HP contractor and subsequent efforts to cover up the relationship.  Plaintiffs brought claims under Section 10 of the Securities Exchange Act of 1934 and Rule 10b-5, alleging that HP had materially misrepresented or alternatively made material omissions about its high ethical standards and compliance with its Standards of Business Conduct (“SBC”), where its Chairman and CEO was found to have violated the SBC.

HP touted its strict code of conduct prior to Hurd’s resignation for violating the code.

Several years earlier, under Hurd’s leadership, HP had revised and strengthened its SBC following a 2006 ethics scandal in which it was revealed that HP had hired detectives to spy on directors, employees and journalists.  While the then-Chairman and General Counsel faced criminal charges, Hurd (then-CEO) was found free of any wrongdoing in that scandal, and was promoted to Chairman in addition to his role as CEO.  As the Ninth Circuit noted, following the scandal “Hurd took many opportunities to proclaim HP’s integrity and its intention to enforce violations of the SBC.”

Four years later, in 2010, former HP contractor Jodie Fisher contacted HP’s Board of Directors through her attorney, alleging that Hurd had sexually harassed Fisher.  The Board launched an investigation, and Hurd initially lied to the Board about the nature of his relationship with Fisher before admitting to a “very close personal relationship” with her.  The investigation revealed that Hurd had also falsified expense reports to hide his relationship.  Hurd resigned following the investigation, and HP acknowledged in a press release that Hurd knowingly violated the SBC and acted unethically.  HP’s stock dropped immediately upon the announcement of Hurd’s resignation, resulting in a $10 billion loss in market cap.

Statements about a code of conduct must be both objectively false and material to be actionable.

Investors filed a putative class action claiming that the violations of the SBC amounted to securities fraud, either in the form of material misrepresentations because HP’s statements about its ethics were inconsistent with Hurd’s conduct, or in the form of material omissions regarding Hurd’s unethical behavior, which Plaintiffs claimed HP had a duty to disclose.  The district court rejected both theories and dismissed the complaint with prejudice.  A three-judge panel of the Ninth Circuit unanimously affirmed the dismissal.

In this issue of first impression before the Ninth Circuit, the court articulated a two-part test for determining whether a violation of a corporate code of ethics may give rise to a securities fraud claim.  First, it examined the objective falsity of the company’s statements regarding its code of ethics.  Second, it turned to the materiality of those statements.  The court found that Plaintiffs’ claims failed under both elements.

As to objective falsity, the Ninth Circuit held that HP and Hurd had made no “objectively verifiable” statements about its compliance with the SBC, and instead characterized the code of conduct and statements about it as “inherently aspirational.”  Plaintiffs pointed in particular to Hurd’s comments prefacing the SBC as revised following the 2006 scandal, in which Hurd urged employees to “commit together, as individuals and as a company, to build trust in everything we do . . .”  But the Court reasoned that such statements are not “capable of being objectively false,” and thus found no affirmative misrepresentation.

The Ninth Circuit further found that the challenged representations were not material.  It noted that companies are required by the SEC to publish their codes of conduct, and “it simply cannot be that a reasonable investor’s decision could conceivably have been affected by HP’s compliance with SEC regulations requiring publication of ethics standards.”  Moreover, while plaintiffs pointed to the stock drop as evidence of materiality, the court cited its decision in Police Ret. Syst. Of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051, 1060 (9th Cir. 2014), for the proposition that the stock drop goes to reliance, not materiality.  Where, as here, there was no actionable misstatement, the court would not reach the reliance analysis.

The court also rejected plaintiffs’ alternative theory that HP failed to disclose material facts concerning Hurd’s noncompliance with the SJC.  The court found that HP’s “transparently aspirational” statements in and about the SBC did not amount to a suggestion that nobody at HP would ever violate the SBC.  Absent statements creating the impression that everyone at HP was in full compliance with the ethical standards, there was nothing that gave rise to a duty to disclose noncompliance.

The future is dim for securities claims based on violations of a company’s ethical code—and that’s good news for companies and their directors and officers who wish to adopt and tout strong codes of conduct.

Plaintiffs may complain that the Ninth Circuit’s opinion takes away a tool for enforcing compliance with codes of conduct, as (at least in the Ninth Circuit) securities class actions based on alleged noncompliance with SEC-mandated codes of conduct are unlikely to survive a motion to dismiss.  Indeed, defense counsel are already brandishing Hewlett-Packard to support the assertion that statements about ethics-policy compliance are not actionable under the securities laws—Goldman Sachs sent a letter to the Second Circuit recently citing the HP decision in support of Goldman’s bid to decertify a class of investors suing over its Abacus CDO.

But I think the better view is that the court’s ruling finding that “aspirational” statements will generally not support a finding of falsity or materiality under the securities laws should provide a level comfort to companies seeking to adopt robust ethical codes, and to speak freely both within the company and publicly about their values and compliance goals—with a few notes of caution.

First, it probably goes without saying that, even under the Ninth Circuit’s newly-articulated standard, companies should avoid unequivocal statements in or about their codes of conduct suggesting for example that there will be no violations of the ethical code.  Such statements will likely prove false over time, and probably demonstrably so.  But apart from those types of unequivocal statements, the Ninth Circuit’s ruling should be an encouraging sign for companies who adopt and publish strong codes of conduct, and for directors and officers who make statements about their efforts to abide by such codes.  As the court made clear, these “aspirational statements” about a company’s compliance with its own code of conduct—even where strongly stated or oft-repeated—will typically be neither objectively false nor material under the securities laws.  As the court noted, “A contrary interpretation—that statements such as, for example, the SBC’s ‘we make ethical decisions,’ or Hurd’s prefatory statements, can be measured for compliance—is simply untenable, as it could turn all corporate wrongdoing into securities fraud.”

The second caution is that the Ninth Circuit’s ruling did not go so far as to say that non-compliance with a code of conduct could never be actionable under federal securities laws.  The court imagined that “the analysis would likely be different if HP had continued the conduct that gave rise to the 2006 scandal while claiming that it had learned a valuable lesson in ethics.”  Accordingly, companies should continue to be particularly vigilant to avoid repeating (or continuing) prior ethical lapses, which the Ninth Circuit suggested could give rise to causes of action, particularly where the company indicated through public statements that such conduct had ceased.

In Ganem v. InVivo Therapeutics Holdings Corp., 845 F.3d 447 (1st Cir. Jan. 9, 2017), the First Circuit affirmed a District of Massachusetts decision dismissing claims against InVivo Therapeutics Holdings Corp., a biotechnology company, and its former CEO, Frank Reynolds. The First Circuit held that InVivo could not be liable for its projections about the start and end dates of a clinical study, because the plaintiff failed to adequately allege that these statements were rendered materially misleading by the nondisclosure of conditions imposed on the study by the FDA. Having found that the complaint did not support a Section 10(b) or Rule 10b-5 claim against InVivo, the First Circuit held that the plaintiff could not pursue a control person claim against Reynolds.

In early March 2013, InVivo issued its Form 10-K for 2012, in which it stated that its “Lead Product Under Development” was a device called “biopolymer scaffolding,” which was designed to prevent further harm to patients who had already suffered a spinal injury. The annual report indicated that before InVivo could market the device in the U.S., it would have to obtain an Investigational Device Exception (IDE) from the FDA, which would allow it to conduct necessary human clinical trials. Id. at 450.

On March 29, 2013, the FDA sent InVivo a letter indicating that its application for an IDE had been “approved with conditions.” The letter said that InVivo could begin the study immediately with a single human subject, but that that InVivo would need to meet a set of 11 conditions in 45 days and any additional subjects could only be enrolled in the study in five stages over a minimum period of 15 months. The FDA letter also included eight recommended modifications to the study’s design. Id. at *451.

On April 5, the week after receiving the FDA letter, InVivo issued a press release stating that the FDA had approved its IDE application, and indicating that the company “intends to commence a … clinical study in the next few months.” The April 5 release also quoted Reynolds as saying, “we expect to have all data [from the completed study] to the FDA by the end of 2014.” On April 8, the first trading day after InVivo issued this release, its stock price rose from $2.85 to $3.19 on “relatively high” trading volume. Id. at *451-52.

On May 9, InVivo issued another press release, indicating that the company “expects to commence the [study] in mid-2013 and submit data to the FDA by the end of 2014.” There was no allegation that the May 9 release led to an increase in InVivo’s stock price. Id. at 452-53.

Finally, on August 27, InVivo issued another press release entitled, “InVivo Therapeutics Updates Clinical Plan.” This release stated that the company “now expects that, based on the judgment of new management, it will enroll the first patient in [the study] during the first quarter of 2014,” and that additional patients would be enrolled over a period of 21 months after the enrollment of the first. Between August 23, when InVivo’s stock had begun to trade at an unusually high volume, and August 28, the day after the issuance of the “update” release, InVivo’s stock price fell from $4.00 to $2.07. Id. at *453.

The plaintiff in the Ganem litigation sued InVivo and Reynolds on behalf of a putative class consisting of all persons and entities who bought InVivo stock between April 5 and August 26, 2013—that is, all purchasers between the date when InVivo announced it had obtained approval to conduct the study, and the date when it revised the study timeline. The complaint asserted that InVivo and Reynolds had violated Section 10(b) and Rule 10b-5 by making misleading statements about the timing of the study in the April 5 and May 9 press releases. The plaintiff’s basic theory was that the projections in these releases were materially misleading because InVivo had failed to reveal that the FDA’s approval was conditional; that InVivo would need to conduct the study in five stages; and that the FDA had recommended modifications to the study design. Id. at *453-55.

The district court dismissed the complaint, finding that the plaintiff had failed to allege material misrepresentations or scienter to support the first claim. On appeal, the First Circuit considered only whether the plaintiff had pled an actionable misrepresentation—a question that disposed of the entire complaint when answered in the negative. Id. at *454. Notably, although the challenged statements were forward-looking, the First Circuit did not apply the Reform Act’s safe harbor for forward-looking statements, finding that “the absence of a material misrepresentation or omission is determinative.” Id. at 454 n. 5.

Regarding InVivo’s statements in the challenged releases that it expected to begin the study “in the next few months” and in “mid-2013,” the First Circuit held that these projections were not materially misleading because there was nothing in the FDA approval letter that would have prevented InVivo from initiating the study on this schedule. Although the FDA had required, for example, that InVivo meet a set of conditions within 45 days, the plaintiff had alleged “no facts suggesting that InVivo would fail to meet that deadline.” Id. at 456.  Likewise, the First Circuit found that InVivo could conceivably have completed the study and submitted data to the FDA within the timeline it offered in these releases (i.e., “by the end of 2014”) while complying with all of the requirements in the FDA letter, including the stipulation that the study must have five stages to be completed over a minimum of 15 months. Id. at *456-57.

Given that the FDA’s approval letter was not inconsistent with InVivo’s projections, the First Circuit concluded that the plaintiff was left “only with the inference that because, in retrospect, the [study] lagged significantly behind the proposed timeline, the timeline must always have been impossible to achieve.” Id. at *457. The court noted, however, that “fraud in the hindsight does not satisfy the pleading requirements in a securities fraud case,” and although “’greater clairvoyance’ might have led InVivo to propose a more conservative timeline [for its study], ‘failure to make such perceptions does not constitute fraud.’” Id. (quoting Denny v. Barber, 576 F.2d 465, 470 (2d Cir. 1978)).

The Eleventh Circuit recently affirmed a Northern District of Georgia decision dismissing claims against Galectin Therapeutics (“Galectin”), a hedge fund, and five Galectin directors and officers, in In re Galectin Therapeutics, Inc. Securities Litigation, — F.3d —, 2016 WL 7240146 (7th Cir. Dec. 15, 2016).  The litigation focused on Galectin’s payments to four stock promoters in exchange for their publication of favorable reports about the company and its stock, and Galectin’s non-disclosure of the payments.  After news of the company’s payments to the stock promoters came to light, Galectin’s stock price fell precipitously.  The Eleventh Circuit, following the Supreme Court’s Janus decision, held that the defendants could not be liable for the stock promoters’ statements or omissions, because the defendants were not the “makers” of any such statements or omissions.  The court also held that Galectin’s payments to stock promoters did not violate the securities laws, and the company’s disclosures that they did not and would not take any actions to manipulate its stock price was not actionable.

Galectin is a small biopharmaceutical company headquartered in Georgia that conducts research to develop drugs to treat cancer and fatty liver disease.  In 2009, defendant 10X Fund took over and restructured Galectin’s predecessor company.  The five individual defendants are all directors and/or senior officers of Galectin, and held stock in the company.  Id. at *1.

In 2013 and 2014, Galectin issued two rounds of stock in “at the market” (“ATM”) offerings. Id. at *2.  Around the same time, Galectin retained four separate stock promoters and paid them to publish articles in order to recommend or tout Galectin’s stock.  SEC rules do not prohibit such arrangements, and do not require the issuer to disclose that it paid the stock promoter for its services.  Instead, the SEC requires the stock promoters themselves to disclose the relationship with the company they are promoting so that the disclosure can be found in the actual promotional materials.  Two of Galectin’s paid promoters failed to make any disclosure.  A third promoter disclosed its relationship with Galectin, but plaintiffs claimed that the disclosure was inadequate.  With respect to the fourth promoter, Galectin disclosed in its 10-Q that it had paid the promoter as part of a “consulting agreement.”  The plaintiffs claimed this disclosure was inadequate because it was untimely, appearing two months after the promotional material was published, and vague because it only referred to a consulting agreement without being more specific. Id. at *3-4.

The plaintiffs further alleged that the stock promoters’ publications were manipulative, because the defendants timed them to coincide with the ATM offerings in order to pump up Galectin’s stock price artificially.  Plaintiffs did not allege a pump-and-dump scheme; instead they alleged that the defendants pumped the stock price to avoid dilution of their own stock holdings following the ATM offerings. Id. at *4.  The plaintiffs also claimed that the ATM offerings filed with the SEC were materially misleading, because Galectin stated that it had not taken any action that caused or resulted in the “manipulation” of its stock price, and that it would not “directly or indirectly” manipulate its stock price in the future.  The district court dismissed the claims. Id. at *5.

On appeal, the Eleventh Circuit affirmed the district court’s dismissal.  The court first addressed plaintiffs’ claim that because Galectin paid the promoters, the promoters became agents of the company and the company assumed the stock promoters’ disclosure responsibilities.  According to plaintiffs, because the promoters did not disclose (or adequately disclose) that Galectin paid for the publications, the defendants should be held liable for the materially misleading publications, which violated Section 10(b) and Rule 10b-5.

The court examined the Supreme Court’s decision in Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011).  In Janus, the Supreme Court held that “[f]or purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.”  Id. at 142.  Applying that holding, the court quickly concluded that plaintiffs had not sufficiently alleged that Galectin had “ultimate authority” over the stock promoters’ statements. Galectin’s payments to the promoters was not sufficient to support the claim.  In re Galectin, 2016 WL 7240146, at *9-11.

Second, the court rejected plaintiffs’ argument that Galectin’s representations in its SEC filings that it had not and would not take actions to manipulate its stock price was an untrue statement of fact.  There is no prohibition in the securities laws against a company hiring a stock promoter.  Moreover, the word “manipulation” is “‘virtually a term of art when used in connection with securities markets,’ generally referring ‘to practices, such as wash sales, matched orders or rigged prices, that are intended to mislead investors by artificially affecting market activity.’”  Id. at *11 (quoting Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 476 (1977)).  Manipulation “connotes intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities.”  Id. (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 (1976)).  The court concluded that plaintiffs had not alleged the kind of conduct by the defendants necessary to amount to “manipulation.”  Id. at *12.

Finally, the court rejected plaintiffs’ argument that Galectin’s 10-K and 10-Qs contained material omissions of fact because they failed to disclose that the number of new shares issued in the ATM, the price per share, and the net proceeds were impacted by the stock promoters’ activity.  The court ruled that the 10-K and 10-Qs simply reported those figures accurately, and the disclosures did not create a duty to disclose that the company had paid the promoters to promote its stock. Id. at *13.

After affirming the dismissal of the Section 10(b) and Rule 10b-5 claims, the court also affirmed dismissal of the Section 20(a) claims, noting that there were no remaining primary violations remaining that could form the basis of a control person liability claim.  Id. at *14.

The First Circuit affirmed the dismissal of nearly all securities class action claims against Ariad Pharmaceuticals, Inc. (Ariad) and four corporate officers, in In re Ariad Pharmaceuticals, Inc., Securities Litig., 842 F.3d 744 (1st Cir. 2016). The litigation focused on Ariad’s public statements about the potential for FDA approval of an experimental drug designed to treat a particular type of leukemia.  Ariad made robust public statements about the efficacy of the drug, until the FDA pulled the drug from clinical trials amid negative side effects. The First Circuit found that other than one statement, the allegations of misrepresentations were insufficient to support a strong inference of scienter. The court also held that the allegations of insider trading were not actionable.

Ariad is a pharmaceutical company employing R&D to develop new products. One such product showed promise in treating a chronic form of leukemia. After a series of clinical trials, Ariad sought FDA approval. The FDA initially rejected Ariad’s application, but eventually approved limited use, with the caveat that the packaging must indicate a significant risk of adverse cardiovascular events (a so-called “black-box” label). Black-box labels are the strictest warnings issued by the FDA and indicate that evidence of a serious hazard exists with the drug. Despite the concerns and the required label, Ariad projected public confidence about the drug’s effectiveness, which included a statement that management believed the drug would be approved “with a favorable label.” Within a year, however, clinical studies showed increased medical complications, ultimately resulting in the decision to suspend commercial distribution of the drug.  Ariad’s stock price went from $23/share to $2.20/share.

Plaintiffs brought claims under both the Exchange Act and the Securities Act. Plaintiffs identified two categories of alleged misstatements: (1) those statements made before the FDA approved the drug for limited use; and (2) those statements made post-approval. On either side of the FDA approval timeline, the crux of the alleged misstatements related to what Ariad knew and said (or failed to say) about the rate of cardiovascular events attributed to the drug’s use. To bolster their scienter allegations, plaintiffs alleged that certain executives sold shares during the class period.

On appeal, the First Circuit affirmed, in part, the district court’s dismissal. The court overwhelmingly rejected plaintiffs’ theory because, while the complaint was replete with conclusory allegations that the Ariad defendants knew about the rate of cardiovascular events, “plaintiffs’ theory of fraud suffer[ed] from a glaring omission”—plaintiffs failed to make concrete allegations of contemporaneous knowledge. The allegations, taken as a whole, did not establish when the adverse events occurred or, more importantly, when the defendants knew about those adverse events.  Instead, the complaint sought to impermissibly establish fraud by hindsight. As such, plaintiffs failed to create the required strong inference of scienter.

The court did find, however, that one statement did support a strong inference of scienter. After the FDA had informed Ariad that its limited approval would include a black-box label requirement, Ariad published a report indicating the drug would likely receive a favorable label. The court found this allegation sufficient.

The First Circuit also dispensed with the stock-sale allegations. Relying on its decision in Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir. 1999), the court analyzed the insider trading allegations under its holding that insider trades may be probative of scienter, but do not, on their own, establish scienter. The court found that the bulk of insider trades occurred well before the high point of Ariad’s stock price, an indication that the trades did not appear to be suspicious. Ariad’s CFO made trades closest to the stock’s high point, but, significantly, the court concluded a pharmaceutical company’s CFO is not likely to have access to nonpublic information obtained through clinical trials. As such, it was unlikely, in the court’s estimation, that the CFO’s trades indicated knowledge of negative information not yet available to the public. The upshot: none of the insider trading allegations bolstered the plaintiffs’ scienter allegations.

Finally, the First Circuit held that plaintiffs did not adequately plead that the purchase of their shares was traceable to the relevant offering. Based on the plaintiffs’ allegations, the court found it more plausible than not that they purchased shares that were issued prior to the date(s) of the alleged misstatements.

Reversing a district court’s dismissal of a securities class action for failure to adequately allege scienter, the Ninth Circuit held in Schwartz v. Arena Pharmaceuticals, Inc. — F.3d —-, 2016 WL 6246875 (9th Cir. Oct. 26, 2016), that the facts alleged in the complaint gave rise to a strong inference of scienter where the defendants knew of the FDA’s concerns about the potential carcinogenic effects of a new drug based on animal studies, yet represented to investors that FDA approval was likely because all of the data gathered, including “animal studies,” were “favorable.”  The court reaffirmed that, while there is generally no affirmative duty to disclose material information to investors, such a duty arises when the information that is disclosed creates a misleading impression.  The court found that the defendants’ statements concerning “animal studies” were misleading in the absence of any disclosure about the FDA’s concerns.

Arena’s stock dropped sharply following the FDA’s disclosure of its concerns about the potential carcinogenic effects of lorcaserin, a weight-loss drug that Arena was developing.  The FDA based its concerns on testing of the drug in rats (the “Rat Study”).  While the rats developed cancer, Arena had proposed to the FDA an explanation for the carcinogenic mechanism based on the effect of the hormone prolactin, which made it irrelevant to humans.  The FDA did not halt the ongoing human clinical trials, but requested follow-up testing and bi-monthly reports on the rats’ prolactin levels, and later requested a final report on the Rat Study as soon as possible.  The complaint alleged that those requests were “highly unusual” and “out-of-process.”  However, following Arena’s discussions with the FDA in 2007 and 2008, Arena heard nothing further from the FDA on the Rat Study issue until September 2010.  Moreover, Arena’s February 2009 final report concluded that the follow-up studies substantiated the prolactin hypothesis.

Thereafter, Arena made a number of statements to its investors about its confidence in lorcaserin’s ultimate approval by the FDA.  In March 2009, Arena’s CEO told investors that confidence was based on both the preclinical and clinical data as well as the “animal studies” that had been completed.  In May 2009, Arena represented in an SEC filing that lorcaserin’s “safety and efficacy” has been “demonstrated” in part by carcinogenicity “animal studies.”  In September 2009, Arena’s Vice President of Clinical Development stated that lorcaserin showed “favorable results on everything we’ve compiled so far.”  Finally, in November 2009, Arena’s CEO stated that “all of the data in hand” would be included in Arena’s imminent FDA approval application, and that Arena was “not expecting any surprises” in the approval process.

In December 2009, Arena submitted is final application (which included the Rat Study conclusions) to the FDA.  In September 2010, the FDA published briefing documents in connection with Arena’s application that disclosed the existence of the Rat Study and the FDA’s concerns about lorcaserin’s potential carcinogenicity.  Following that disclosure, Arena’s stock plunged 40% in a single day.

Later, the FDA Advisory Committee voted against approval of lorcaserin based on its carcinogenicity concerns, and the FDA denied Arena’s drug approval application.  However, following further pathological review, the FDA ultimately approved lorcaserin, and it is currently on the market.

Following the September 2010 FDA disclosure, plaintiffs brought a putative class action suit against Arena and several of its officers, alleging that the defendants’ statements referring to the animal studies were misleading and made with scienter.  The district court dismissed the complaint for failure to adequately allege scienter.   The Ninth Circuit reversed.  Assuming that the challenged statements were misleading, the Ninth Circuit focused its opinion on what it described as a “simple” theory of scienter: because Defendants had referred to the animal studies when touting lorcaserin’s safety and likely approval, they were obligated to disclose the Rat Study’s existence to the market, and their failure to do so demonstrated scienter.  2016 WL 6246875, at *4.

While acknowledging that it was a “close case,” the Ninth Circuit ultimately agreed.  Id.  The court observed that, under Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011), Defendants would have been under no affirmative duty to disclose the Rat Study in the absence of other statements they had made to the market.  However, as in Matrixx, once Defendants represented that “animal studies” supported lorcaserin’s safety and likely approval, they were bound to do so in a manner that would not mislead investors.  Id. at *5-*7.  The court found that, at the time those statements were made, “Arena knew the animal studies were the sticking point with the FDA[,]” and that it was simply untrue that all of those studies were “favorable.”  Id. at *7 (emphasis in original).

The Ninth Circuit also rejected Defendants’ attempt to analogize the case to In re AstraZeneca Sec. Litig., 559 F. Supp. 2d 453 (S.D.N.Y. 2008), where the court found that a “scientific disagreement” between the defendant company and the FDA regarding the safety profile of a proposed new drug did not give rise to an inference that the defendants did not honestly believe that the drug was safe.  The court observed that Schwartz’s “theory of fraud” was not that Defendants had misled the market as to lorcaserin’s objective safety, but rather that they had withheld information about the FDA’s concerns about its safety, which implicated its prospects for approval—regardless of whether those concerns were well-founded.  Id. at *8.

In some respects, the Ninth Circuit’s opinion seems rather harsh.  After all, while the FDA had initially expressed some concern about the Rat Study, Arena had ultimately concluded that the animal tests did not suggest that lorcaserin was carcinogenic to humans, and the FDA had not expressed disagreement with that conclusion at the time the challenged statements were made.  It seems plausible that, at the time they made those statements, Defendants actually believed that the Rat Study supported the drug’s safety and would not be a significant stumbling block in the approval process.

On the other hand, the FDA had not expressed that its concerns about the Rat Study had been mollified, either.  By expressly invoking “favorable animal studies” as a basis for Arena’s belief that lorcaserin would be approved, Defendants arguably created an impression that nothing in the animal studies would cause the FDA any concern—an arguably misleading impression, given that the FDA had already expressed its concern.  Had Arena simply stated its belief or confidence that lorcaserin would be approved, it likely would have avoided an inference of scienter.  But once it specifically referenced “animal studies” as a basis for that belief, the failure to disclose that those “animal studies” had actually given the FDA pause arguably created a misleading picture for investors.

Analogizing a plaintiff’s allegations to “brushstrokes” intended to paint a “portrait” of scienter, the First Circuit found those allegations “cover[ed] too little canvas” to give rise to the strong inference of scienter required under the Private Securities Litigation Reform Act.  See Local No. 8 IBEW Ret. Plan & Trust v. Vertex Pharmaceuticals, — F.3d —-, 2016 WL 5682548 (1st Cir. 2016).  In doing so, the First Circuit reaffirmed the very high bar that a plaintiff must clear to allege scienter on the basis of recklessness.

The case arose from Vertex’s correction of previously-reported preliminary results from clinical trials for an experimental drug combination treatment for cystic fibrosis.  Initially, Vertex reported an “absolute improvement” in lung function of 5 percent or more for 46 percent of patients receiving the combination therapy, and an “absolute improvement” of 10 percent or more for 30 percent of patients receiving the treatment.  Vertex was effusive in describing the preliminary results, stating that they “exceeded expectations” and were driving Vertex to accelerate its plans to bring the treatment to market.  Immediately thereafter, Vertex’s stock price shot up by more than 55 percent, and by a few weeks later had risen more 73 percent.  During that period, several of Vertex’s officers and directors sold over half a million shares of their Vertex stock for a total of almost $32 million.

At that point, however, Vertex reported that the preliminary results had been overstated.  Vertex explained that it had “misinterpreted” the results received from a third-party vendor, which reflected a “relative improvement” from the patients’ baseline lung function, rather than an “absolute improvement.”  Vertex reported that, once the results were recalculated to put them in terms of “absolute improvement,” only 35 percent of patients showed an improvement in lung function of 5 percent or more, and only 19 percent showed an improvement of 10 percent or more.  Following that disclosure, Vertex’s stock price declined significantly, although it remained over 54 percent higher than it had been before the initial announcement.

Plaintiffs filed a securities class action.  The lead plaintiff, Local No. 8 IBEW Ret. Plan & Trust (“Local No. 8”), alleged that, “[w]hen faced with … study results that seemed too good to be true, Defendants, rather than checking the results, turned a blind eye, accepting and promoting unlikely data that offered them a windfall on the sale of their stock.”  Id. at *3 (quoting complaint).  Defendants moved to dismiss, arguing that the facts alleged did not give rise to a “strong inference” of scienter, as required by the Reform Act.  The district court granted the motion, and Local No. 8 appealed.

On appeal, the First Circuit explained that, to show scienter through “recklessness” rather than actual intent for purposes of a securities fraud claim, a defendant’s conduct must go beyond “merely simple, or even inexcusable negligence, but [must involve] an extreme departure from the standards of ordinary care.”  Id. (citation omitted).  The court explained that this form of recklessness is “closer to a lesser form of intent” than to ordinary negligence. Id. (citation omitted).

With that background, the First Circuit turned to the facts alleged in the complaint that Local No. 8 argued cumulatively supported an inference of scienter.  The court indicated it was “mindful that ‘[e]ach individual fact about scienter may provide only a brushstroke,’ but it is our obligation to consider ‘the resulting portrait.’”  Id. at *4 (citation omitted).  Thus, the court would evaluate each fact individually, and then assess their cumulative effect.  Id.

The First Circuit did not find that any of the facts alleged, considered individually, were particularly indicative of scienter:

  • Local No. 8 alleged that the implausibility of the initial results should have been obvious for a number of reasons, and that some individuals within the company were highly skeptical of them.  The court found that, while Defendants admitted the initial results were surprising, Local No. 8 did not allege facts indicating that they were “so obviously suspect” that Defendants should have inquired further.  Id. at *4-*6.  Nor did Local No. 8 allege that any of the individuals within the company who were “skeptical” of the results reported that skepticism to any of the Defendants.  Id. at *5.
  •  Local No. 8 argued on appeal that it was “rare” for a company to publish interim results.  The First Circuit declined to consider that contention, as it was not made in the complaint and, in any event, there was no legal requirement that Vertex double-check interim results before reporting them.  Id. at *6.
  •  The First Circuit found that Local No. 8’s allegations of insider trading also did not strongly suggest scienter.  The court observed that one of the individual defendants—Vertex’s CEO—did not sell any stock, and one of the others sold only small amounts that were consistent with his trading pattern both before the initial announcement and after the correction.  While the other individual defendants had more substantial stock sales, the court found them “perfectly understandable” in light of Vertex’s previously languishing stock price.
  • Finally, Local No. 8 alleged that the sudden retirement of Vertex’s Chief Commercial Officer, Nancy Wysenski, shortly after a U.S. Senator asked the SEC to investigate potential insider trading by Vertex executives suggested consciousness of guilt, at least with respect to her.  Id. at *7.  The court noted that the allegations “point[ing] the finger” at Wysenski “tend to exculpate the others who did not retire or leave the company.”  Id. at *8.  Moreover, “[a]lternative explanations abound[ed]” for Wysenski’s retirement—her large insider sales could have been embarrassing to the company even in the absence of fraud, or she might have been negligent in preparing the press release announcing the initial results.  Id.

The First Circuit concluded that, “[c]umulatively, the brushstrokes here do not paint the required strong inference of scienter.”  Considered in the context of the allegations as a whole, “the stock sales by some of the individual defendants and the timing of Wysenski’s retirement (which might otherwise look very different) cover too little canvas to evoke inferences of scienter strong enough to equal the alternative inference that Vertex was negligent in viewing very good results as being even better than they in fact were.”  Id.

In a 91-page opinion covering several important securities-litigation issues, the Second Circuit upheld the district court’s partial judgment against Vivendi following a three-month jury trial that resulted in the jury finding Vivendi liable under Section 10(b) and Rule 10b-5.

As I was preparing to summarize the opinion for this blog, I read a summary by Wiley Rein’s David Topol and Jennifer Williams in Kevin LaCroix’s blog, The D&O Diary.  Their post is excellent and comprehensive.  So instead of publishing a separate summary, I obtained their permission to refer readers of this blog to their post:

Vivendi: A Victory for Plaintiffs on the Price Maintenance Theory and on Loss Causation .