Local No. 8 IBEW Retirement Pl v. Vertex Pharmaceuticals, Inc., et al

Filing

OPINION issued by Juan R. Torruella, Appellate Judge; William J. Kayatta , Jr., Appellate Judge and David J. Barron, Appellate Judge. Published. [15-2250]

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Document: 00117062571

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Date Filed: 10/03/2016

Entry ID: 6037291

United States Court of Appeals
For the First Circuit
No. 15-2250
LOCAL NO. 8 IBEW RETIREMENT PLAN & TRUST, on behalf of itself
and all others similarly situated,
Plaintiff, Appellant,
v.
VERTEX PHARMACEUTICALS, INC.; JOSHUA BOGER, Ph.D.; JEFFREY
LEIDEN, Ph.D.; PETER MUELLER, Ph.D.; PAUL SILVA; ELAINE ULLIAN;
NANCY J. WYSENSKI,
Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. F. Dennis Saylor IV, U.S. District Judge]

Before
Torruella, Kayatta, and Barron,
Circuit Judges.

Amanda F. Lawrence, with whom David R. Scott, Joseph P.
Guglielmo, Beth A. Kaswan, Donald A. Broggi, and Scott + Scott,
Attorneys at Law, LLP, were on brief, for appellant.
John F. Sylvia, with whom Andrew Nathanson, Matthew D. Levitt,
Rebecca L. Zeidel, and Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo, P.C., were on brief, for appellees.

October 3, 2016

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KAYATTA, Circuit Judge.

Date Filed: 10/03/2016

Entry ID: 6037291

During the course of clinical

trials for an experimental drug combination intended to treat a
fatal

lung

disease,

Vertex

Pharmaceuticals,

Inc.

("Vertex")

announced interim results that overstated the improvement in lung
function exhibited in a group of patients receiving the combination
treatment.

Following this announcement, Vertex's stock price rose

from $37.41 per share to close at $64.85 three weeks later.

It

then lost some of its gain, dropping to $57.80, after Vertex
corrected the initial release's overstatement.

Acting on behalf

of all those who acquired Vertex stock during the period in which
the overstatement stood uncorrected, Local No. 8 IBEW Retirement
Plan & Trust ("Local No. 8") filed this securities fraud class
action complaint against Vertex and six past and current Vertex
employees.

The district court dismissed the complaint, finding

that it failed to create a strong inference that the defendants
had acted with scienter, the requisite mental state.

See Local

No. 8 IBEW Ret. Plan v. Vertex Pharm., Inc., 140 F. Supp. 3d 120,
137 (D. Mass. 2015).

We agree and so affirm.
I.

Background1

As one of the world's largest biotechnology companies,
Vertex researches, develops, and sells treatments for a variety of

1

Because Local No. 8 appeals from a judgment granting the
defendants' motion to dismiss, we take the facts alleged in the
complaint as true and draw all reasonable inferences from those
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In 1998, Vertex began working on drugs to combat cystic

fibrosis, a fatal and as yet incurable lung disease.

In early

2012 it gained Food and Drug Administration ("FDA") approval to
market a drug, Kalydeco, to treat patients with a rare form of the
disease.

This approval, along with a contemporaneous drop in the

value of Vertex's stock due to Vertex's diminishing returns from
another product line, prompted Vertex to focus its energies on
developing a more broadly marketable cystic fibrosis treatment.
In pursuit of this aim, Vertex explored a "combination
therapy," in which a cystic fibrosis patient first undergoes a
course of treatment with an experimental drug called VX-809 and
only then begins taking Kalydeco.

Hoping that this combination

would be effective against the most common form of cystic fibrosis,
Vertex began a three-phase clinical investigation required for FDA
approval.

See N.J. Carpenters Pension & Annuity Funds v. Biogen

IDEC Inc., 537 F.3d 35, 39 (1st Cir. 2008) (describing the FDA
approval process); 21 C.F.R. § 312.21 (describing the three phases
of clinical investigation). On May 7, 2012, while the second phase
of

this

process

was

ongoing,

Vertex

issued

a

press

release

announcing interim results drawn from roughly half of the 108
enrolled patients.2

The press release focused in particular on

facts in favor of Local No. 8. See In re Bos. Sci. Corp. Sec.
Litig., 686 F.3d 21, 27 (1st Cir. 2012).
2

Phase 2 trials are typically closely controlled, smallscale studies designed to evaluate an experimental treatment's
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one of the principal markers used to evaluate the effectiveness of
a cystic fibrosis treatment:

lung function, as measured by the

amount of air a patient is capable of exhaling in one second.
According to the press release,
[o]f those who received [the combination
therapy], approximately 46 percent (17/37)
experienced an absolute improvement from
baseline to Day 56 [of the trial period] in
lung function of 5 percentage points or more,
and
approximately
30
percent
(11/37)
experienced an absolute improvement from
baseline to Day 56 of 10 percentage points or
more.
None of the patients treated with
placebo (0/11) achieved a 5-percentage point
or more improvement from baseline to Day 56 in
lung function.
The

press

release

described

these

results

as

"exceed[ing]

[Vertex's] expectations," although it cautioned that "complete
data" were not yet available and that "the final outcomes of this
clinical trial or future clinical trials . . . may be less
favorable than the interim analysis reported today, or may not be
favorable at all."3

efficacy, as well as its short-term side effects and potential
risks. See 21 C.F.R. § 312.21(b).
3

Although the text of the press release was not incorporated
into Local No. 8's complaint and was instead submitted by the
defendants in support of their motion to dismiss, we may--as the
district court did--nevertheless consider it at this stage because
it is referenced in the complaint, it is central to Local No. 8's
claim, and no party disputes its authenticity. See Schaefer v.
Indymac Mortg. Servs., 731 F.3d 98, 100 n.1 (1st Cir. 2013). We
also consider the subsequent press releases issued by Vertex on
May 29, 2012 and June 28, 2012, both of which were submitted to
the court below without objection.

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The same day, Vertex held a conference call for media
and investors.

On the call, Vertex's Executive Vice President and

Chief Scientific Officer, Peter Mueller ("Mueller"), described the
interim results as "really, really fantastic" and went on to say,
"I have never seen anything like this."
Officer

("CEO"),

Jeffrey

Leiden

Vertex's Chief Executive

("Leiden"),

also

expressed

confidence in the results, saying that they were "driving us
to . . . plan for potential market entries sooner than we had
previously planned" and that, "[p]ending final data this summer
and discussions with regulators, we look forward to accelerating
the development of our [cystic fibrosis] combination regimen."
Nancy

Wysenski

("Wysenski"),

at

that

time

Vertex's

Chief

Commercial Officer and Executive Vice President, further noted
that

the

number

of

patients

who

stood

to

benefit

from

the

combination treatment under review exceeded 70,000--a market that
could translate into billions of dollars in potential sales.4
Vertex's

stock

price

swiftly

responded

announcement of the promising interim results.

to

the

On May 7, 2012,

the day of the announcement, Vertex stock closed at $58.12 per
share--up from the prior close of $37.41, with a trading volume

4

Vertex's Chief Financial Officer confirmed in a call the
following day that "the data [were] beyond our expectations" and
that Vertex sought "to drive . . . quickly into" the next phase of
the clinical investigation in order to "get to . . . patients as
fast as possible with this combination therapy."

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forty times higher than average.

Date Filed: 10/03/2016

By May 25, 2012, the closing

price had risen to $64.85 per share.
employees

named

as

Entry ID: 6037291

defendants

in

Meanwhile, five Vertex
this

suit--Joshua

Boger

("Boger"), then Vertex's Director; Paul Silva ("Silva"), who had
formerly

served

as

Vertex's

Vice

President

and

Corporate

Controller; Elaine Ullian ("Ullian"), Vertex's co-lead independent
director; Mueller; and Wysenski--sold a total of 539,313 shares of
Vertex stock, collecting almost $32 million in all.
On May 29, 2012, Vertex announced in a press release
that the interim results that had so energized its market prospects
had overstated the improvement in lung function exhibited among
the Phase 2 patients receiving the combination treatment.

The

error, as Vertex acknowledged that day in a conference call,
stemmed from a "misinterpretation" as to whether the results Vertex
had received from the third-party statistical analysis vendor
reflected the absolute improvement in the patients' lung function
or, rather, the improvement relative to the patients' baseline
levels of lung function.5

When evaluated properly, Vertex's press

release explained, the data showed that 35 percent of the patients

5

According to the complaint, a relative improvement means "a
percentage change from baseline," whereas an absolute improvement
is "the numerical distance between the baseline measurement and
the improved measurement." For our purposes, it appears that we
need only understand the distinction to mean that an absolute
improvement is more favorable than a relative improvement of the
same percentage.

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taking the combination treatment (rather than 46 percent, as had
initially been reported experienced an absolute improvement of 5
percent or more, and that 19 percent (rather than 30 percent, as
had initially been reported) experienced an absolute improvement
of 10 percent or more.
the

corrected

Immediately following the announcement of

results,

the

closing

price

of

Vertex

stock

experienced its greatest decline in three years, dropping to $57.80
per share, down from $64.85 per share on May 25, yet still well up
from the May 4 close of $37.41.
Just short of two years later, Local No. 8 filed a classaction

complaint

against

Vertex--as

well

as

Boger,

Leiden,

Mueller, Silva, Ullian, and Wysenski--on behalf of all those who,
like

Local

No.

8,

had

acquired

Vertex

stock

between

the

announcement of the overstated interim results on May 7, 2012, and
the announcement of the corrected results on May 29, 2012.
complaint

charged

all

defendants

with

securities

fraud

The
under

section 10(b) of the Securities Exchange Act of 1934 ("Exchange
Act"),

15

U.S.C.

§

78j(b),

and

the

Securities

Commission's Rule 10b-5, 17 C.F.R. § 240.10b-5.

and

Exchange

It also charged

the six individual defendants with joint and several liability
under section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), for
the alleged securities fraud, on the theory that these defendants
"controlled

Vertex,

Defendants";

and

and/or

charged

controlled

Boger,

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Mueller,

other
Silva,

Individual
Ullian,

and

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Wysenski with insider trading under section 20A of the Exchange
Act, id. § 78t-1(a).

The gravamen of the alleged fraud, according

to the complaint, is 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."
The defendants moved to dismiss for failure to state a
claim, see Fed. R. Civ. P. 12(b)(6), arguing that the facts alleged
in the complaint fail to generate a strong inference that the
defendants acted with the mental state required to render them
liable under section 10(b) and Rule 10b-5.
agreed.

The district court

It found as well that Local No. 8's section 20(a) and

section 20A claims could not survive in the absence of a proper
section 10(b) and Rule 10b-5 claim, and dismissed the complaint.
See Local No. 8, 140 F. Supp. 3d at 137.

This timely appeal

ensued.
II.

Analysis

We review de novo the district court's grant of the
defendants' motion to dismiss for failure to state a claim.
Aldridge v. A.T. Cross Corp., 284 F.3d 72, 78 (1st Cir. 2002).
A.

Section 10(b) and Rule 10b-5
To successfully state a securities fraud claim under

section 10(b) and Rule 10b-5, a plaintiff must adequately allege,
among other things, scienter.

"Scienter . . . is 'a mental state

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embracing intent to deceive, manipulate, or defraud.'"

Entry ID: 6037291

Id. at 82

(quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12
(1976)).

A plaintiff can establish scienter "by showing that

defendants either 'consciously intended to defraud, or . . . acted
with a high degree of recklessness.'"

Miss. Pub. Emps.' Ret. Sys.

v. Bos. Sci. Corp. ("Boston I"), 523 F.3d 75, 85 (1st Cir. 2008)
(quoting Aldridge, 284 F.3d at 82).

"Recklessness in this context

is 'a highly unreasonable omission, involving not merely simple,
or even inexcusable negligence, but an extreme departure from the
standards of ordinary care.'"

In re Smith & Wesson Holding Corp.

Sec. Litig., 669 F.3d 68, 77 (1st Cir. 2012) (quoting Miss. Pub.
Emps.' Ret. Sys. v. Bos. Sci. Corp. ("Boston II"), 649 F.3d 5, 20
(1st Cir. 2011)).

The omission must "present[] a danger of

misleading buyers or sellers that is either known to the defendant
or is so obvious the actor must have been aware of it."
(quoting Boston II, 649 F.3d at 20).

Id.

This form of recklessness

is "closer to a lesser form of intent" than it is to ordinary
negligence.

Greebel v. FTP Software, Inc., 194 F.3d 185, 199 (1st

Cir. 1999).6

6

Local No. 8 attempts to dilute this stringent standard by
citing to a Ninth Circuit case, In re Oracle Corp. Sec. Litig.,
627 F.3d 376 (9th Cir. 2010), which stated that recklessness arises
where the defendant "had reasonable grounds to believe material
facts existed that were misstated or omitted, but nonetheless
failed to obtain and disclose such facts although he could have
done so without extraordinary effort," id. at 390 (quoting Howard
v. Everex Sys., Inc., 228 F.3d 1057, 1064 (9th Cir. 2000)). While
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To

determine

Page: 10

whether

Date Filed: 10/03/2016

the

complaint

here

Entry ID: 6037291

adequately

alleges that the defendants acted with this culpable mental state,
we

eschew

the

ordinary

standards

of

Federal

Rule

of

Civil

Procedure 8(a)(2), which require only that the plaintiff "plead[]
factual content that allows the court to draw the reasonable
inference that the defendant[s] [are] liable for the misconduct
alleged," Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

Instead,

Congress has directed us to evaluate section 10(b) and Rule 10b-5
claims of this type under the heightened pleading standards of the
Private Securities Litigation Reform Act of 1995 ("PSLRA"), Pub.
L. No. 104-67, 109 Stat. 737.

See Aldridge, 284 F.3d at 78.

As

is relevant here, the PSLRA provides that a complaint must "state
with particularity facts giving rise to a strong inference that
the
§

defendant[s]

acted

78u-4(b)(2)(A).

Under

with
this

[scienter]."
standard,

"[a]

15

U.S.C.

complaint

will

survive . . . only if a reasonable person would deem the inference
of scienter cogent and at least as compelling as any opposing

the Ninth Circuit has indeed recently applied this formulation of
recklessness in assessing the adequacy of a complaint under the
PSLRA, Reese v. Malone, 747 F.3d 557, 569 (9th Cir. 2014), even
more recently it has rejected this same formulation as insufficient
for assessing such a complaint, applying instead the formulation
used in this circuit. In re NVIDIA Corp. Sec. Litig., 768 F.3d
1046, 1053 & n.7 (9th Cir. 2014), cert. denied sub nom. Cohen v.
Nvidia Corp., 135 S. Ct. 2349 (2015). In any event, however one
might describe the law in the Ninth Circuit, we see no reason not
to continue to apply a standard that makes clear that allegations
of merely unreasonable conduct do not sufficiently plead scienter.

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inference one could draw from the facts alleged."

Entry ID: 6037291

Tellabs, Inc.

v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007).
Local

No.

8

argues

on

appeal

that

the

complaint

adequately alleges facts making it as likely as not that the
defendants recklessly turned a blind eye to an obvious danger that
the announced interpretation of the initial results was wrong.7
To support this argument, Local No. 8 points to the cumulative
probative force of seven facts alleged in the complaint.

We are

mindful that "[e]ach individual fact about scienter may provide
only a brushstroke," but it is our obligation to consider "the
resulting portrait."
(1st Cir. 2002).

In re Cabletron Sys., Inc., 311 F.3d 11, 40

Accordingly, we examine each alleged fact in

turn, and then conclude by assessing them cumulatively.
First,

Vertex

itself

described

the

unexpected, or as "exceed[ing] . . . expectations."

results

as

The results

were unexpected because, the complaint alleges, it was known
"within Vertex" that VX-809 caused Kalydeco to "work less well."
The fact remains, though, that Vertex made the investment necessary
to design and perform a study testing the two drugs in combination.
So, its puffing professions of surprise notwithstanding, Vertex

7

Local No. 8 contends that the district
conflated the recklessness standard with an
standard. We do not find the district court to
because we review the dismissal of Local No. 8's
under the proper standard, the outcome of this
depends on our so finding.

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court improperly
actual knowledge
have done so, but
complaint de novo
appeal in no way

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must have thought that positive results were possible, even if not
probable. We suspect, too, that many studies of new pharmaceutical
products result in surprises, both good and bad.
This moves us to Local No. 8's second and related point,
which

arises

from

the

complaint's

science of cystic fibrosis research.

allegations

concerning

the

Local No. 8 alleges that

cystic fibrosis research focuses on both "lung function and sweat
chloride."

Because cystic fibrosis progressively and eventually

fatally obstructs the lungs, "pulmonary function is an important
marker of cystic fibrosis lung disease severity."
pulmonary

function,

scientists

Expired Volume" ("FEV").

test

the

As a measure of

patient

for

"Forced

Local No. 8 alleges that scientists

studying cystic fibrosis also measure "sweat chloride levels"
because cystic fibrosis impairs the tissues of the sweat glands,
thereby elevating the concentration of chloride in the patient's
sweat.
The interim results reported to and by Vertex showed
increased FEV measurements, but no material drop in sweat chloride
levels.

Local No. 8 argues that some people have described sweat

chloride levels to be the "gold standard" in cystic fibrosis
research,

and

that

"individuals

at

the

Company

were

'highly

skeptical' of the study results because of the lack of sweat
chloride improvements."

Therefore, reasons Local No. 8, it was

obvious that there was something wrong with the results.

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Missing from the allegations is any contention that any
defendant viewed the sweat chloride levels as incompatible with
the FEV measurements, or that any of the unnamed individuals
conveyed any such skepticism to any defendant.

Greebel, 194 F.3d

at 199; cf. Auto. Indus. Pension Trust Fund v. Textron Inc., 682
F.3d 34, 39 (1st Cir. 2012) (inference that defendants suspected
a

statement

was

misleading

is

weaker

where

"warnings

by

subordinates or expressions of concern by executives are notably
absent").

The complaint does not even allege that scientists in

general, much less those at Vertex, regarded the reported results
as implausible.

And given that the final results reflected the

same phenomenon (improved FEV and steady sweat chloride levels),
there is no reason given here to presume that scientists in general
must view the possibility of such results as obviously wrong.
Notably, too, Vertex reported the sweat chloride levels in the
same press release in which it reported the positive FEV results.
So it would seem most likely that Vertex itself did not view the
former as belying the latter, and neither apparently did the
market.8

8

Contrary to Local No. 8's assertion, Boston I is not
"particularly on point." In Boston I, we reversed the dismissal
of a section 10(b) claim, 523 F.3d at 94, finding that the
defendants' own statements in connection with a manufacturing
change to a medical device could be read as an admission that the
change had been made in response to a design defect that the
defendants had not previously disclosed, see id. at 88. No such
potentially facially incriminating statements are at issue here.

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Third, Local No. 8 alleges that the study was very
important to Vertex, and that it would therefore "be 'absurd' to
suggest that Defendants were not aware of the suspect nature of
the results."

It is true that the importance of a particular item

to a defendant can support an inference that the defendant is
"paying close attention" to that item.

Institutional Inv'rs Grp.

v. Avaya, Inc., 564 F.3d 242, 271 (3d Cir. 2009).

Such an

inference, however, is only helpful in establishing scienter if
that close attention would have revealed an incongruity so glaring
as to make the need for further inquiry obvious.

See id. at 270–

71 (noting that a "steep decline" in operating margins creates
inference that Chief Financial Officer, who "was paying close
attention to these numbers," would investigate the cause).

We

have already discussed why the complaint fails to establish that
the announced results, on their face, contained such an obvious
incongruity.
Similarly, some cases have recognized that certain key
facts known to lower-level company managers concerning a company's
flagship product, such as whether a $100 million contract has been
signed to sell the product, or that sales are falling fast rather
than rising, are very likely known to senior management who made
repeated public announcements concerning sales of the product.
See, e.g., Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d
702, 706-10 (7th Cir. 2008).

But the complaint here does not

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allege

that

anybody

at

Page: 15

Vertex

Date Filed: 10/03/2016

responsible

for

Entry ID: 6037291

receiving,

reviewing, and reporting the results had actually spotted the error
in the interpretation of the results before the discovery that led
to the second announcement.
Fourth, Local No. 8 points to its allegation that the
specific

error

in

the

publicly

reported

results--namely,

the

substitution of relative improvement for absolute improvement in
lung function--was so "fundamental" that it should have been
apparent to the Vertex pulmonologist responsible for receiving the
raw data from the third-party vendor "regardless of how [the data]
w[ere] presented by the vendor."

The pulmonologist is not a

defendant, however, and there is no allegation that any party
responsible for the decision to announce the interim results
received the raw data.

The fact that a Vertex pulmonologist was

the one who received the raw data actually cuts sharply against
Local

No.

8

because

pulmonologist

there

noticed

or

is

no

allegation

suspected

that

that

even

Vertex's

this

reported

interpretation of the results was incorrect, or told anyone of any
skepticism.

The complaint does assert in conclusory fashion that

the pulmonologist "should have known" of the error.
complaint

tells

us

nothing

about

the

precise

form

Yet, the
of

the

information conveyed by the vendor, or the vendor's reliability.
Negligence by the pulmonologist, too, hardly gets Local No. 8
anywhere.

Rather, it adds a concrete reason why the erroneous

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interpretation of the study results would not have been obvious to
the executives to whom the pulmonologist reported the results.
Even making the reasonable inference, as Local No. 8
urges, that the defendants had access to the raw data--review of
which would allegedly have rendered the error obvious through
"simple math"--we have already determined that the complaint's
allegations are insufficient to establish that the erroneously
interpreted end results (which are all the individual defendants
are alleged to have received) were themselves so obviously suspect
that we can draw a strong inference that the defendants were
reckless

in

failing

to

consult

the

raw

data

themselves

for

verification.9
Fifth, in its appellate brief, Local No. 8 also observes
that it is "rare[]" to publish interim results and implies that
Vertex's decision to do so here is probative of scienter. However,
the complaint nowhere alleges that the publication of interim
results was anomalous, and so we do not consider this argument in
assessing whether the complaint has stated a claim. Nor does Local
No. 8 point to any legal requirement, or any undertaking by Vertex,

9

At oral argument, counsel for Local No. 8 noted that, prior
to discovery, few plaintiffs will be in a position to make specific
allegations about the form of internal documents. "But while a
trawl through archives may sometimes catch a few fish, Congress,"
for reasons of its own, "deliberately raised the entry bar to
discovery . . . through the PSLRA's heightened pleading standards."
Textron, 682 F.3d at 40.

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that obligated the company to double-check the interim results
before announcing them.
Sixth, we have considered Local No. 8's allegations that
the defendants had a financial motive to "turn[] a blind eye" to
the erroneous interpretation of the interim results because of the
stock price spike precipitated by the error.

Cf. Aldridge, 284

F.3d at 83 ("When financial incentives to exaggerate [material
information] go far beyond the usual . . . , they may be considered
among other facts to show scienter." (emphasis supplied)).

Here,

several facts strongly suggest that at least Vertex's CEO, Leiden,
had no motive to ignore an error that was obvious and that would
therefore soon become known.

Leiden, who touted the erroneous

interim results as driving Vertex "to accelerat[e] the development
of [its] [cystic fibrosis] combination regimen," is not alleged to
have sold any stock during the class period.

Local No. 8 contends

that this was "a major study that . . . was central to [Vertex's]
prospects."

Announcing good results on such a study would have

been clearly better for Vertex than announcing great results only
to reduce them to good results by shortly thereafter confessing
error,

thereby

harming

reputation for competence.

the

company's

credibility

and

its

Combined with the foregoing points,

this fact makes it quite unlikely (and certainly less than 50-50)
that any error was so obvious that Leiden must have known that the

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results

Document: 00117062571

were

mistaken

Page: 18

(and

would

Date Filed: 10/03/2016

therefore

soon

Entry ID: 6037291

have

to

be

withdrawn or corrected).
Local No. 8 therefore places its focus on the fact that
the other five defendants sold almost $32 million worth of stock
following release of the overstated interim results.

According to

the complaint, these sales were "unusual when compared to [the
individual defendants'] trading history before and after" the
three-week class period.

Local No. 8 argues that this unusual

activity, together with the inferences that can be drawn from the
defendants' failure to double-check the interim results, makes
"the inference that Defendants turned a blind eye to the suspect
test results to line their own pockets . . . at least as strong"
as an inference of negligence.
It is well settled that "[i]nsider trading in suspicious
amounts or at suspicious times may be probative of scienter."
Boston I, 523 F.3d at 92 (citing Greebel, 194 F.3d at 197;
Greenstone v. Cambex Corp., 975 F.2d 22, 26 (1st Cir. 1992)).

At

the outset, however, it bears noting that, in addition to Leiden,
defendant Boger did not engage in any inconsistent trading behavior
during the class period.

Boger, who was Vertex's Director at the

time, sold consistently small amounts of stock on a more or less
weekly basis before, during, and after the class period.
So, to regard the stock sales as either motive for the
fraud or evidence of the defendants' knowledge that the interim

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study results had been misinterpreted, we must hypothesize either
that the error was obvious only to those defendants who made
unprecedented sales, or that it was obvious to all, yet the
Director and CEO nevertheless went along with announcing obviously
flawed results.

The complaint, though, offers no fact suggesting

that the sellers knew more than the nonsellers.

To the contrary,

the largest seller, Wysenski, was not a scientist.

And our

discussion of Leiden's salient interests and motive renders a
stretch any inference that he would have gone along with announcing
obviously erroneous results.
The

complaint's

chronology

also

alternative explanation of the stock sales.

offers

a

simple

After a long period

of steady or dropping stock prices, the stock price suddenly jumped
a large amount.

Such an increase--no matter what its cause--

creates a substantial incentive for holders to sell unless they
believe the price will continue to rise and are willing to wait.
Sales in the historical context described in the complaint carry
little force in implying knowledge that the stock will drop.10

All

in all, the presence of this perfectly understandable, innocent

10

By contrast, consider a case of more or less steady stock
price, followed by a nonpublic adverse event, inside sales, and
then public disclosure of the adverse event. See, e.g., SEC v.
Rocklage, 470 F.3d 1, 3–4 (1st Cir. 2006).

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reason to sell, combined with the poor fit between the facts and
Local No. 8's theory, leaves us short of the scienter mark.11
Seventh,

there

is,

finally,

the

fact

that

Vertex

announced the retirement of Wysenski, aged fifty-four at the time,
"suddenly and without any forewarning" on June 8, 2012--just one
day after Iowa Senator Charles Grassley had sent a letter to
Securities and Exchange Commission Chairwoman Mary Shapiro asking
her to probe whether "Vertex . . . executives . . . took advantage
of the spike in the stock knowing the news of the clinical data
being overstated would be made public eventually, which in turn
would

negatively

affect

the

stock

value."

From

these

circumstances, Local No. 8 asks us to infer (1) that the defendants
were aware of Senator Grassley's letter, and (2) that the letter
prompted Wysenski's retirement (3) because it correctly exposed
that Wysenski, at a minimum, had deliberately turned a blind eye
to the risk that the announced interim results were erroneous.

11

Local No. 8 cites a Ninth Circuit case, No. 84 EmployerTeamster Joint Council Pension Trust Fund v. America West Holding
Corp., 320 F.3d 920 (9th Cir. 2003), which it describes as
"analogous." However, a major factor in the America West court's
determination that the stock sales at issue were "unusual and
suspicious," id. at 940, was the fact that "[m]ost of the [alleged
insiders] sold 100% of their shares, with the lowest percentage
being 88%," id. at 939. Here, by contrast, the two most senior
defendants made no sales out of the ordinary course, and the
complaint contains no allegation as to what proportion of his or
her total stock any other defendant sold during the class period.

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These allegations both point a finger at Wysenski and
tend to exculpate the others who did not retire or leave the
company. The question is whether they add enough to permit a claim
against

Wysenski;

i.e.,

whether

they

make

"the

inference

of

scienter . . . at least as compelling as any opposing inference
one could draw from the facts alleged."

Tellabs, 551 U.S. at 324.

It is reasonable to infer that Vertex knew of Senator Grassley's
letter,12 and that Wysenski's departure had something to do with
her stock sales.

But Local No. 8 must take us a step further.

For Local No. 8 to prevail, we would need to infer that Wysenski
left or was pushed out for a particular reason; i.e., because she
had unlawfully misled the market. If that were the reason, though,
it would have applied to all defendants because the complaint makes
no suggestion that Wysenski (a nonscientist handling marketing)
knew anything more about the test results than did the others (who
neither left nor were forced out in this timeframe).

12

When asked about this point at oral argument, counsel for
Local No. 8 stated, wrongly, that the complaint alleged that
Senator Grassley's letter was publicly available, rather than
asking us to take judicial notice of contemporaneous news reports
establishing that the letter was indeed public. See, e.g., Beth
Healy, US Senator Charles Grassley Raises Vertex Stock Profits
Issue with SEC Chief, Boston Globe, June 7, 2012, available at
https://www.bostonglobe.com/business/2012/06/07/senator-charlesgrassley-raises-vertex-stock-profits-issue-with-secchief/cogtZEGDw2GhiDGt5DNbIK/story.html. Because we do not find
this point to be dispositive, we do not decide whether we would
otherwise elect to take such notice sua sponte.

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Alternative explanations abound.

Entry ID: 6037291

Wysenski's very large

sales and the spotlight focused on those sales could have given
rise to her retirement without any hint of fraud.

Large insider

sales by a senior manager, regardless of the reason for such sales,
can

present

a

major

embarrassment

for

a

company.

Perhaps

negligence by Wysenski in preparing the erroneous press release
prompted a forced retirement.

Picking among these explanations,

without the benefit of factual allegations suggesting Wysenski
knew something the other defendants did not know, depends on a
degree of guesswork inconsistent with the PSLRA pleading standard.
Cumulatively, the brushstrokes here do not paint the
required

strong

inference

of

scienter.

Vertex's

public

description of a scientific study contained an error that made
unexpectedly good results look even better than they were; there
is no claim that the pulmonologist who received and reviewed the
raw data behind the results noticed or reported the error to
company

executives;

the

company's

CEO,

a

scientist,

had

no

plausible reason to announce results infected with an error that
would most likely soon mar otherwise good news and harm Vertex by
leading to an embarrassing correction; and there is no claim that
the other defendants possessed any additional information.

Given

the foregoing, 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

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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.
Accordingly, the allegations underlying Local No. 8's
claim that the defendants acted with scienter fall short of what
Congress demands in the securities fraud context.

We therefore

affirm dismissal of the section 10(b) and Rule 10b-5 claim.
B.

Section 20(a) and 20A
Local No. 8 concedes that its remaining claims are

derivative of its section 10(b) and Rule 10b-5 claim.

Because we

conclude that the district court properly dismissed the latter, it
follows that the district court properly dismissed the former.

We

therefore affirm the dismissal of Local No. 8's remaining claims.
III.

Conclusion

Under the PSLRA, this action can only move forward if we
find that the allegations make it at least as likely as not either
that the defendants knew the results as reported were wrong, or
that it was obvious to the defendants that they would discover the
error if they looked.

Because we, like the district court, cannot

so find, we affirm the dismissal of the complaint.

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