Roman Zak v. Chelsea Therapeutics Int
Filing
PUBLISHED AUTHORED OPINION filed. Originating case number: 3:12-cv-00213-MOC-DCK. [999546107]. [13-2370]
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PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 13-2370
ROMAN ZAK, Individually
Similarly Situated,
and
On
Behalf
of
All
Others
Plaintiff - Appellant,
and
CAMERON MCINTYRE, Individually and On Behalf of All Others
Similarly Situated
Plaintiff,
v.
CHELSEA THERAPEUTICS INTERNATIONAL,
WILLIAM D. SCHWIETERMAN,
LTD.;
SIMON
PEDDER;
Defendants – Appellees,
and
L. ARTHUR HEWITT; J. NICK RIEHLE,
Defendants.
Appeal from the United States District Court for the Western
District of North Carolina, at Charlotte. Max O. Cogburn, Jr.,
District Judge. (3:12-cv-00213-MOC-DCK)
Argued:
December 10, 2014
Decided:
March 16, 2015
Before TRAXLER, Chief Judge, and, KEENAN and THACKER, Circuit
Judges.
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Vacated and remanded by published opinion.
Judge Keenan wrote
the opinion, in which Chief Judge Traxler joined. Judge Thacker
wrote a separate dissenting opinion.
ARGUED: Richard William Gonnello, FARUQI & FARUQI, LLP, New
York, New York, for Appellant. Barry M. Kaplan, WILSON SONSINI
GOODRICH & ROSATI, Seattle, Washington, for Appellees.
ON
BRIEF: Lee M. Whitman, Tobias S. Hampson, WYRICK ROBBINS YATES &
PONTON LLP, Raleigh, North Carolina; Gregory L. Watts, Seattle,
Washington, Ignacio E. Salceda, Cheryl W. Foung, WILSON SONSINI
GOODRICH & ROASATI, Palo Alto, California, for Appellees Chelsea
Therapeutics International, Ltd., Simon Pedder, and William D.
Schwieterman.
2
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BARBARA MILANO KEENAN, Circuit Judge:
The plaintiffs in this case claim that Chelsea Therapeutics
International,
LTD.
(Chelsea)
and
several
of
its
corporate
officers 1 (collectively, the defendants) violated Section 10(b)
of the Securities Exchange Act of 1934 (the Exchange Act), 15
U.S.C.
§ 78j(b). 2
Chelsea
stockholder
Roman
Zak,
both
individually and as a class representative for other investors
(the plaintiffs), alleged that the defendants made materially
misleading statements and omissions about the development and
likelihood
of
regulatory
approval
for
a
new
drug,
Northera.
After considering the defendants’ motion to dismiss filed under
Federal Rule of Civil Procedure 12(b)(6), the district court
dismissed
the
complaint,
holding
that
the
plaintiffs’
allegations were insufficient as a matter of law to establish
that the defendants acted with the required scienter.
On appeal, the plaintiffs contend that the district court
committed two errors.
The asserted errors are: (1) the court’s
1
The complaint named as individual defendants Dr. Simon
Pedder, President and Chief Executive Officer; Dr. William
Schwieterman, Vice President and Chief Medical Officer; Dr.
Arthur Hewitt, Vice President and Chief Scientific Officer; and
Mr. Nick Riehle, Vice President and Chief Financial Officer.
However, Dr. Hewitt and Mr. Riehle are not parties to this
appeal.
2
In a derivative claim, the plaintiffs also alleged that
the individual defendants violated Section 20(a) of the Exchange
Act, 15 U.S.C. § 78t(a).
3
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consideration of certain documents filed with the Securities and
Exchange Commission (SEC) that were submitted as exhibits with
the
defendants’
motion
to
dismiss;
and
(2)
the
court’s
determination that the plaintiffs’ allegations of scienter were
legally insufficient.
Upon our review, we hold that the district court erred in
taking judicial notice of the challenged documents filed with
the SEC, because those documents did not relate to the contents
of the complaint.
We further hold that this error was not
harmless,
because
the
documents
as
court
supporting
incorrectly
its
holding
construed
that
these
the
plaintiffs’
allegations of scienter were legally insufficient.
Finally, we
hold that based on the defendants’ failure to disclose critical
information about the weaknesses of the new drug application,
the plaintiffs’ allegations were sufficient to support a strong
inference of scienter.
judgment
dismissing
the
We therefore vacate the district court’s
plaintiffs’
complaint
and
remand
the
case for further proceedings.
I.
The
plaintiffs
alleged
in
their
pleadings
the
following
facts, which we accept as true in our review of the district
court’s dismissal of the complaint under Federal Rule of Civil
Procedure
12(b)(6).
Matrix
Capital
4
Mgmt.
Fund,
LP
v.
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BearingPoint, Inc., 576 F.3d 172, 176 (4th Cir. 2009) (citing
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322
(2007)).
In 2006, Chelsea began its effort to gain approval
from the Food and Drug Administration (FDA) concerning the right
to
market
the
Northera 3
drug
as
a
treatment
neurogenic orthostatic hypotension (NOH).
for
symptomatic
NOH is a condition in
which a dramatic drop in blood pressure occurs when a person
stands.
This drop in blood pressure causes symptoms such as
dizziness, impaired vision, fatigue, weakness, nausea, and an
inability to think clearly.
of
various
disorders
NOH is associated with the presence
including
Parkinson’s
disease,
multiple
systems atrophy, and pure autonomic failure.
After
clinically
considering
beneficial
the
“significant
treatment
of
unmet
symptomatic
assigned Northera “orphan drug status.”
need”
NOH,
for
the
a
FDA
Such status provided
Chelsea with seven years of marketing exclusivity, and reduced
certain time and expense requirements related to clinical trials
mandated for FDA approval of the drug.
Before submitting its “new drug application” to the FDA,
Chelsea
conducted
numerous
clinical
trials
with
certain
“endpoints,” or goals, to demonstrate the drug’s efficacy and
3
The drug’s trade name is droxidopa.
5
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safety.
As
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relevant
to
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this
appeal,
Chelsea
conducted
four
efficacy trials, namely, Studies 301, 302, 303, and 306. 4
Studies 301 and 302 began in 2008.
the
same
general
statistically
efficacy
significant
endpoint
effect
Both those studies had
of
on
demonstrating
lightheadedness
dizziness for individuals suffering from NOH.
Study
301
was
set
forth
in
a
“special
a
and
The endpoint for
protocol
assessment”
(SPA), which was an agreement between Chelsea and the FDA that
the study design, trial size, and clinical goals could support
regulatory approval.
The SPA involving Study 301 also stated
that the FDA expected two successful efficacy studies before it
would grant regulatory approval of the new drug.
The first study to conclude, Study 302, failed to meet its
primary endpoint.
Later documents showed that the results of
Study 302 “clearly . . . dr[e]w the efficacy of [the drug] into
question,”
and
demonstrated
that
symptoms
worsened
for
those
individuals taking the drug.
After
Chelsea
announced
to
investors
the
disappointing
results from Study 302, Chelsea petitioned the FDA to modify the
SPA’s endpoint for Study 301, which was ongoing.
In November
2009, Chelsea representatives met with FDA officials, and later
4
Chelsea also conducted clinical trials to establish the
drug’s safety, but the results of those trials are not directly
relevant to our analysis in this appeal.
6
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informed investors that the FDA had agreed to permit Chelsea to
use a different assessment scale for Study 301 than was used in
Study
302.
November
The
2009
FDA
officials
meeting
that
also
Chelsea
had
recommended
submit
“a
at
the
confirmatory
pivotal study to support” the new drug application, because of
the
failed
results
recommendation,
in
Chelsea
Study
302.
announced
Based
plans
on
to
this
additional
initiate
a
new
clinical trial, Study 306, which would involve an eight-week
treatment period.
In September 2010, Chelsea announced that Study 301 had
concluded,
and
successfully
had
met
its
revised
endpoint
by
showing a statistically significant improvement in participants’
symptoms.
of
only
Chelsea
However, Study 301, which employed a treatment period
one
week,
that
met
was
its
the
sole
primary
efficacy
study
endpoint.
conducted
Study
303,
by
which
included significantly longer treatment periods than Studies 301
and 302, did not meet its endpoint, and failed to demonstrate
that the drug provided any “duration effect” on symptoms.
306,
which
also
included
a
significantly
longer
Study
treatment
period, was abandoned after an interim analysis indicated that
the study would not meet its endpoint. 5
5
Study 306 was later continued with a revised endpoint,
focusing on the prevention of falls in patients suffering from
(Continued)
7
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On December 10, 2010, Chelsea met with FDA officials to
assess the viability of submitting a new drug application based
on Study 301 (the December 2010 meeting).
During the December
2010 meeting, FDA officials again warned Chelsea that a single
successful
study
typically
approval of a new drug.
was
not
sufficient
to
support
Nevertheless, Chelsea announced that
the FDA had “agreed” that Chelsea’s new drug application for
Northera could be submitted based on data from Study 301, the
only study to meet its primary endpoint, and data from Study
302, which had not met its primary endpoint, without the need
for any further efficacy studies.
During a conference call held with Chelsea investors, Dr.
Simon Pedder, Chelsea’s President and Chief Executive Officer,
described the December 2010 meeting as a “successful outcome”
that
“reflect[ed]
the
strength
of
the
data”
generated
by
Chelsea’s drug development program, and “mark[ed] a significant
step forward for Chelsea.”
Dr. Pedder also stated that the FDA
officials had clarified “that additional efficacy studies were
not required” for a new drug application filing.
conference
call,
Dr.
William
Schwieterman,
On the same
Chelsea’s
Vice
President and Chief Medical Officer, represented that after the
Parkinson’s disease, but the results of the study would not be
available until 2012.
8
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December 2010 meeting, Chelsea was “very pleased” with the FDA’s
responses
to
Chelsea’s
supporting data.
questions
about
its
application
and
After these statements concerning the December
2010 meeting, Chelsea’s stock price rose about 28 percent.
In September 2011, Chelsea announced that it had submitted
to
the
FDA
its
new
drug
application
based
on
“robust” efficacy data from Studies 301 and 302.
later
observed
by
the
FDA,
these
studies
purportedly
However, as
involved
treatment
periods of only one week.
In accordance with the FDA’s initial evaluation process for
new drug applications, an FDA staff member prepared a briefing
document in advance of the meeting of the FDA’s Cardiovascular
and
Renal
Drugs
Advisory
Committee
(the
advisory
which was held to review Chelsea’s application.
document
included
the
staff
member’s
committee),
The briefing
recommendation
against
approval of Northera, which recommendation was based in part on
Chelsea’s failure to demonstrate that the drug had a “durable
effect (i.e., more than 4 weeks).”
On February 13, 2012, eight days before the FDA briefing
document
was
made
press release.
available
to
the
public,
Chelsea
issued
a
In the release, Chelsea stated that it was in
“receipt of [the] briefing document,” and that “several lines of
inquiry . . . have emerged as significant components of the
benefit-risk
analysis
of
Northera,”
9
including
that
Chelsea’s
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drug development program “may not adequately establish a durable
treatment
effect
as
clinical trials.
a
result
of
the
short
duration
of”
the
Notably, however, Chelsea’s press release did
not disclose that the FDA briefing document concluded with the
recommendation
that
Northera
not
be
approved.
Also
in
that
release, Chelsea stated that the advisory committee would review
the
application
on
February
23,
2012.
Finally,
the
release
included a website address where the FDA briefing document later
would be made available.
After the February 13, 2012 press release issued, Chelsea’s
stock
price
dropped
about
37.5
percent.
When
the
briefing
document became public eight days later on February 21, 2012,
Chelsea’s stock price dropped an additional 21 percent.
On February 23, 2012, however, the FDA advisory committee
announced its non-binding recommendation in favor of approving
Northera
as
committee
a
new
raised
drug.
the
briefing document.
same
Several
concerns
members
of
outlined
the
in
advisory
the
staff
Although the advisory committee chairperson
voted in favor of approving the drug, he nevertheless stated,
“virtually all [members of the advisory committee] agree that”
the
failed
benefit.
studies
“do
not
provide
confirmatory
evidence
of
And the primary study, [Study] 301[,] also did not
provide evidence regarding the duration of effect in any direct
way.”
10
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On March 28, 2012, the FDA denied the new drug application.
The FDA provided its decision in a “complete response letter,”
stating, among other things, that the FDA required an additional
successful study to support “durability of effect.”
About
a
week
after
the
FDA’s
complaint in this case was filed.
decision,
the
initial
The plaintiffs later filed a
consolidated class action complaint (the complaint), asserting
violations of Section 10(b) of the Exchange Act and SEC Rule
10b-5, 17 C.F.R. § 240.10b-5 (Rule 10b-5).
In their complaint,
the plaintiffs, who purchased Chelsea stock between November 3,
2008 and March 28, 2012 (the class period), asserted numerous
claims including that the defendants misled investors to believe
that the FDA would approve Northera based on the results of only
one successful efficacy study, even though the FDA repeatedly
had warned Chelsea that two successful studies and evidence of
“duration of effect” would be necessary for approval of the new
drug.
In their complaint, the plaintiffs identified dozens of
allegedly
misleading
statements
or
material
omissions
by
the
defendants.
In response, the defendants filed a motion to dismiss the
complaint
under
Rule
12(b)(6),
contending
that
the
complaint
failed to show that the defendants made any materially false
statements
or
omissions
were
omissions,
not
made
and
that
with
the
11
any
such
required
statements
scienter.
or
The
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defendants attached to their motion several exhibits and asked
the court to take judicial notice of them.
The
exhibits
relevant
to
this
appeal
include
three
documents that were filed with the SEC (collectively, the SEC
documents).
Two of these documents are SEC “Form 4” reports,
filed by Dr. Schwieterman as the “Reporting Person,” showing
that while employed as a corporate officer he made two purchases
of Chelsea stock during the class period.
The
third
document
submitted
by
the
defendants,
a
“Definitive Proxy Statement” that Chelsea filed with the SEC,
listed the amount of Chelsea stock shares held by the company’s
officers at the end of February 2012, near the end of the class
period.
The Proxy Statement showed that Dr. Pedder owned 2.8
percent of all shares of Chelsea stock, while other officers
owned
lesser
amounts
of
Chelsea
stock.
However,
the
Proxy
Statement did not reflect whether any of these stock holdings
had been acquired or sold during the class period.
At
a
hearing
represented
that
on
none
the
of
motion
the
to
Chelsea
dismiss,
officers
shares of Chelsea stock during the class period.
the
had
defendants
sold
any
The defendants
argued that the absence of such sales undermined any inference
of
scienter
objected
to
on
the
the
part
court’s
of
the
defendants.
consideration
of
the
The
plaintiffs
SEC
documents,
asserting that the record did not show definitively “whether any
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individual
Filed: 03/16/2015
purchased
stock
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or
sold
stock
during
the
class
period” because there had not been any discovery in the case.
At the conclusion of the hearing, the district court took
judicial
notice
of
the
SEC
defendants’ motion to dismiss.
standards
of
(PSLRA),
15
the
Private
U.S.C.
plaintiffs’
documents,
granted
the
Applying the heightened pleading
Securities
§ 78u-4(b)(2),
securities
and
fraud
Litigation
the
court
claims
Reform
held
failed
Act
that
the
because
the
plaintiffs did not plead allegations sufficient to support a
strong inference of scienter.
The district court concluded that although the defendants’
statements to investors during the class period “may have been
overly optimistic about the [likelihood of the] FDA approving
Northera,”
inference
those
of
statements
scienter
for
did
two
not
demonstrate
reasons.
First,
a
strong
the
court
observed that the defendants provided many warnings to investors
regarding
Second,
the
the
sufficiency
court
found
of
the
that
when
new
drug
weighing
application.
the
competing
inferences regarding scienter, “the most glaring” inference was
“the
fact
that
none
of
the
during the class period.”
individual
defendants
(Emphasis in original).
sold
stock
The court
concluded that the lack of stock sales “tip[ped] the scales in
favor
of
plaintiffs’
defendant[s’]
allegations
motion”
to
insufficient
13
dismiss,
as
a
rendering
matter
of
law
the
to
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establish
the
required
district
court
entered
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inference
of
its
dismissing
order
scienter.
After
the
the
case
with
prejudice, the plaintiffs filed this timely appeal.
II.
In addressing the plaintiffs’ arguments, we first state the
applicable standard of review.
court’s
dismissal
of
the
We consider de novo the district
plaintiffs’
Rule of Civil Procedure 12(b)(6).
complaint
under
Federal
Wag More Dogs, LLC v. Cozart,
680 F.3d 359, 364 (4th Cir. 2012).
A.
The plaintiffs first argue that the district court erred by
considering the SEC documents submitted by the defendants that
were not integral to the complaint, and by concluding based on
those
documents
Chelsea
none
during
the
stock
that
plaintiffs,
the
district
of
the
class
court’s
individual
period.
defendants
According
improper
sold
to
the
consideration
and
incorrect interpretation of these documents contributed to the
court’s erroneous conclusion that the defendants failed to plead
sufficient facts supporting a strong inference of scienter.
In response, the defendants contend that the district court
properly
considered
motion to dismiss.
the
SEC
documents
submitted
with
their
Arguing that courts “routinely examine” SEC
filings at the pleading stage of securities fraud litigation,
14
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the defendants assert that the district court did not err in
taking
judicial
notice
of
the
contents
exhibits and the Proxy Statement exhibit.
that
these
documents
supported
the
of
the
two
Form
4
The defendants submit
district
court’s
findings
that the individual defendants failed to sell shares of Chelsea
stock,
and
did
statements.
not
knowingly
or
recklessly
make
misleading
We disagree with the defendants’ arguments.
1.
As an initial matter, we set forth general legal principles
involving securities fraud claims that are pertinent to this
appeal.
We
also
review
principles
addressing
the
scienter
required for such claims.
The Exchange Act and related regulations ensure that public
companies
release
information
that
will
make informed investment decisions.”
permit
“investors
to
Yates v. Mun. Mortg. &
Equity, LLC, 744 F.3d 874, 884 (4th Cir. 2014) (citing Taylor v.
First Union Corp. of S.C., 857 F.2d 240, 246 (4th Cir. 1988)).
Under Section 10(b) of the Act, companies are prohibited from
using “any manipulative or deceptive device or contrivance” in
connection
rules.
with
See
15
the
sale
U.S.C.
of
§
a
security
78j(b).
in
violation
Pursuant
to
of
SEC
regulatory
proscription in Rule 10b-5, the following conduct is unlawful in
connection with the sale of a security:
15
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To make any untrue statement of a material fact or to
omit to state a material fact necessary in order to
make the statements made, in the light of the
circumstances
under
which
they
were
made,
not
misleading . . . .
17 C.F.R. § 240.10b-5(b).
Generally,
10(b)
must
omission
a
plaintiff
establish:
by
the
asserting
“(1)
defendant;
a
a
material
(2)
claim
under
Section
misrepresentation
scienter;
(3)
a
or
connection
between the misrepresentation or omission and the purchase or
sale of a security; (4) reliance upon the misrepresentation or
omission; (5) economic loss; and (6) loss causation.”
Yates,
744 F.3d at 884 (citation omitted); see Matrixx Initiatives,
Inc. v. Siracusano, 131 S. Ct. 1309, 1322 (2011).
Because the
district court dismissed the plaintiffs’ complaint solely based
on the sufficiency of the allegations of scienter, our review is
limited to that one element of the plaintiffs’ claims.
To demonstrate scienter, a plaintiff must show that the
defendant
deceive,
acted
with
manipulate,
(citation omitted).
“a
or
mental
state
defraud.”
embracing
Tellabs,
551
intent
U.S.
at
to
319
Allegations of reckless conduct can satisfy
the level of scienter necessary to survive a motion to dismiss.
See
Matrix
sufficient
Capital,
to
576
establish
F.3d
a
at
strong
181.
inference
Reckless
of
conduct
scienter
is
described as “severe,” Ottman v. Hanger Orthopedic Grp., Inc.,
353 F.3d 338, 344 (4th Cir. 2003), or conduct that is “so highly
16
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unreasonable and such an extreme departure from the standard of
ordinary care as to present a danger of misleading the plaintiff
to the extent that the danger was either known to the defendant
or so obvious that the defendant must have been aware of it.”
Matrix Capital, 576 F.3d at 181 (citation and internal quotation
marks omitted).
Claims
of
securities
fraud
are
subject
pleading standard under the PSLRA.
to
a
heightened
Yates, 744 F.3d at 885.
Under this heightened pleading standard, the allegations of a
securities
fraud
claim
must
“state
with
particularity
facts
giving rise to a strong inference that the defendant acted with
the
required
violating
state
the
of
Exchange
mind”
Act.
regarding
15
U.S.C.
the
§
acts
allegedly
78u-4(b)(2).
To
evaluate the strength of scienter inferences, courts engage in a
comparative analysis.
U.S. at 326-27.
Yates, 744 F.3d at 885; see Tellabs, 551
“[A]n inference of scienter can only be strong
. . . when it is weighed against the opposing inferences that
may be drawn from the facts in their entirety.”
Yates, 744 F.3d
at 885 (quoting Cozzarelli v. Inspire Pharms. Inc., 549 F.3d
618, 624 (4th Cir. 2008)).
After
cognizable
comparing
the
from
facts
the
“malicious
pled,”
and
a
innocent
complaint
inferences
will
not
be
dismissed so long as “the malicious inference is at least as
compelling as any opposing innocent inference.”
17
Id. (quoting
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Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 991 (9th
Cir. 2009)).
In evaluating these inferences, we consider the
scienter allegations holistically and accord those allegations
“the inferential weight warranted by context and common sense.”
Matrix Capital, 576 F.3d at 183 (citing Cozzarelli, 549 F.3d at
625-26).
2.
In
view
of
these
principles,
we
turn
to
address
the
plaintiffs’ claims that the district court erred in its scienter
analysis
by
considering
the
SEC
documents
submitted
defendants that were not integral to the complaint.
when
a
defendant
moves
to
dismiss
a
by
the
complaint
Generally,
under
Rule
12(b)(6), courts are limited to considering the sufficiency of
allegations
set
forth
in
the
complaint
and
attached or incorporated into the complaint.”
the
“documents
E.I. du Pont de
Nemours & Co. v. Kolon Indus., Inc., 637 F.3d 435, 448 (4th Cir.
2011); see Clatterbuck v. City of Charlottesville, 708 F.3d 549,
557 (4th Cir. 2013).
court
during
converts
judgment.
the
the
Consideration of extrinsic documents by a
pleading
motion
to
stage
dismiss
of
into
litigation
a
motion
improperly
for
summary
E.I. du Pont de Nemours & Co., 637 F.3d at 448.
This
conversion is not appropriate when the parties have not had an
opportunity to conduct reasonable discovery.
Civ. P. 12(b), 12(d), and 56.
18
Id.; see Fed. R.
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Courts
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therefore
should
Pg: 19 of 43
focus
their
inquiry
on
the
sufficiency of the facts relied upon by the plaintiffs in the
complaint.
Am. Chiropractic Ass’n v. Trigon Healthcare, Inc.,
367 F.3d 212, 234 (4th Cir. 2004).
Consideration of a document
attached to a motion to dismiss ordinarily is permitted only
when the document is “integral to and explicitly relied on in
the complaint,” and when “the plaintiffs do not challenge [the
document’s] authenticity.”
Id. (quoting Phillips v. LCI Int’l
Inc., 190 F.3d 609, 618 (4th Cir. 1999)); see Cozzarelli, 549
F.3d at 625 (considering investment analyst reports attached to
the defendants’ motion to dismiss because the complaint quoted
from
those
reports
and
the
plaintiffs
did
not
challenge
the
reports’ authenticity).
We have recognized a narrow exception to this standard,
under which courts are permitted to consider facts and documents
subject
to
judicial
notice
without
converting
dismiss into one for summary judgment.
557.
the
motion
to
Clatterbuck, 708 F.3d at
Under Federal Rule of Evidence 201, courts at any stage of
a proceeding may “judicially notice a fact that is not subject
to reasonable dispute,” provided that the fact is “generally
known within the court’s territorial jurisdiction” or “can be
accurately and readily determined from sources whose accuracy
cannot reasonably be questioned.”
Nevertheless, when a court
considers relevant facts from the public record at the pleading
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stage, the court must construe such facts in the light most
favorable to the plaintiffs.
Id.
whether
considered
a
fact
properly
is
Moreover, the determination
under
this
exception
depends on the manner in which a court uses this information.
Id.
(holding
contents
of
that
a
the
public
district
record
as
court
an
established
evidence contradicting the complaint).
mind,
we
turn
to
consider
the
improperly
considered
fact
and
as
With these principles in
district
court’s
use
of
the
challenged SEC documents.
The plaintiffs’ complaint stated in general terms that, in
investigating
the
case,
plaintiffs’
public filings submitted to the SEC.
counsel
had
reviewed
the
However, the complaint did
not otherwise refer to any SEC filings, or the contents of such
filings, to support the plaintiffs’ allegations.
In fact, the
complaint did not contain any allegation suggesting that the
individual defendants made any sales or purchases of Chelsea
stock during the class period.
Although
plaintiffs
asserting
securities
fraud
claims
frequently bolster allegations regarding scienter by asserting
unusual
sales
of
stock
by
individuals
accused
of
committing
securities fraud, the plaintiffs in the present case did not
include this type of allegation in their complaint.
allegations
of
unusual
stock
sales
are
not
And such
required
to
demonstrate a strong inference of scienter in a securities fraud
20
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See Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1253 n.3
(11th Cir. 2008) (“[S]uspicious stock sales are not necessary to
create a strong inference of scienter.”) (citing Tellabs, 551
U.S. at 325).
explicitly
Therefore, because the SEC documents were not
referenced
plaintiffs’
in,
the
complaint,
or
an
integral
district
court
part
should
of,
not
the
have
considered those documents in reviewing the sufficiency of the
plaintiffs’ allegations.
Our conclusion is not altered by the defendants’ contention
that the district court was entitled to take judicial notice of
the contents of the SEC documents because the accuracy of those
documents
cannot
documents
and
reasonably
their
be
contents
questioned.
could
have
Even
been
if
the
reviewed
SEC
in
accordance with Rule 201, the district court in the present case
incorrectly
construed
the
information
contained
in
the
SEC
documents.
Instead of considering the information in the light most
favorable to the plaintiffs, the court found that the documents
established the “fact that none of the individual defendants”
sold Chelsea stock during the class period.
Notably, however,
the referenced SEC documents fail to establish any such fact.
The Form 4 documents merely indicate that a single Chelsea
corporate
officer,
Dr.
Schwieterman,
made
two
purchases
of
Chelsea stock during the class period, while the Proxy Statement
21
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shows that each corporate officer held some shares of Chelsea
stock at a certain point near the end of the class period.
The
record does not reflect for comparative purposes how many shares
of stock the individual defendants held at the beginning of the
class period, or provide any other basis for determining whether
corporate officers other than Dr. Schwieterman purchased or sold
any of their Chelsea stock during that period.
Instead, the Form 4 documents list only Dr. Schwieterman as
the “Reporting Person,” and do not contain any reference to any
other corporate officer.
a
“snapshot
in
time”
And the Proxy statement provides only
of
stock
shares
owned
Chelsea officers as of February 29, 2012.
by
the
various
Therefore, regardless
whether the information contained in the SEC documents could be
considered under the judicial notice provisions of Rule 201,
such information did not provide a factual basis for the court’s
conclusion
that
no
individual
during the class period.
defendant
sold
Chelsea
stock
See Clatterbuck, 708 F.3d at 557-58.
We also disagree with the defendants’ argument that even if
the
district
court
erred
in
this
regard,
the
court’s
consideration of the SEC documents did not affect the outcome of
the court’s decision concerning the adequacy of the plaintiffs’
allegations.
In weighing the competing inferences, the district
court concluded that the defendants’ purported failure to sell
Chelsea stock during the class period “tip[ped] the scales” of
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the competing inferences of scienter.
In fact, the district
court cited only one other competing inference when considering
the element of scienter, namely, that the defendants informed
investors
regarding
development program.
certain
weaknesses
of
Chelsea’s
drug
Therefore, the district court’s comparison
of inferences undoubtedly was affected by its error relating to
the content of the SEC documents.
Accordingly, we conclude that
the court’s consideration of the challenged SEC documents was
not harmless.
B.
The
plaintiffs
argue
that
in
addition
to
the
district
court’s error in relying on the challenged SEC documents, the
court
further
erred
in
concluding
that
their
scienter were insufficient as a matter of law.
that
they
scienter,
pleaded
the
facts
plaintiffs
permitting
rely
on
a
their
strong
allegations
of
In asserting
inference
allegations
that
of
the
defendants intentionally or recklessly failed to disclose that
the
FDA
expected
Chelsea
to
produce
two
successful
studies
showing evidence of durability of effect.
The plaintiffs place
particular
that
emphasis
on
their
allegation
the
defendants
intentionally misled investors in the February 13, 2012 press
release, by failing to disclose that the FDA briefing document
included a recommendation against approval of Northera.
The
plaintiffs assert that because the defendants were aware of this
23
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adverse recommendation but withheld it, such conduct supports a
strong inference of wrongful intent.
In response, the defendants maintain that the plaintiffs
failed to allege sufficient facts to support a strong inference
of scienter.
The defendants submit that because they disclosed
to investors various weaknesses of their new drug application,
the defendants’ omission of other information does not support a
strong inference of scienter.
With respect to the February 13,
2012 press release, the defendants argue that their omission of
the
adverse
FDA
staff
recommendation
does
not
demonstrate
wrongful intent, because the press release included a website
address where investors eight days later could locate the full
FDA
briefing
document.
We
disagree
with
the
defendants’
position.
As
the
“companies
Supreme
can
Court
control
emphasized
what
they
in
Matrixx
have
to
Initiatives,
disclose
under
[Section 10(b) and Rule 10b-5(b)] by controlling what they say
to the market.”
its
corporate
affirmative
recommendation
131 S. Ct. at 1322.
officers
duty
and
to
the
may
have
disclose
shortcomings
Thus, while Chelsea and
lacked
the
of
an
adverse
Chelsea’s
independent,
FDA
staff
evidence
of
efficacy, the defendants’ failure to do so must be viewed under
Section 10(b) and Rule 10b-5(b) in the context of the statements
that they affirmatively elected to make.
24
See id.
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Based
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on
our
de
plaintiffs’
complaint,
sufficient
novo
allegations
scienter.
conduct
This
is
when
Pg: 25 of 43
review,
viewed
giving
strong
supported
its
to
a
rise
the
conclude
in
inference
by
we
of
entirety,
strong
the
contains
inference
intentional
plaintiffs’
that
or
of
reckless
allegations
that
material, non-public information known to the defendants about
the status of the new drug application and required efficacy
studies
conflicted
with
the
defendants’
public
statements
on
those subjects.
According
to
the
plaintiffs’
allegations,
although
the
defendants knew that the FDA expected two successful efficacy
studies demonstrating durability of effect to support regulatory
approval
of
investors
Northera,
addressed
none
this
of
the
critical
defendants’
statements
expectation.
After
to
the
defendants met with FDA officials in December 2010 to discuss
submission of the new drug application based only on Study 301,
the
defendants
instead
informed
investors
that
the
FDA
had
“agreed” that Chelsea could submit its new drug application for
Northera “without the need for any further efficacy studies.”
However,
represented
application
given
the
even
an
assuming
FDA
could
FDA’s
be
that
this
communication
submitted,
continuing
the
that
statement
Chelsea’s
statement
expectation
that
truthfully
new
was
misleading
two
successful
efficacy studies would be required for approval of Northera.
25
drug
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The defendants also were aware by December 2010 that the
lone successful efficacy trial, Study 301, involved a treatment
period of only one week, in contrast to the failed Study 303 and
the
abandoned
Study
treatment periods.
306,
which
both
involved
much
longer
Nonetheless, the defendants described their
December 2010 meeting with the FDA as a “successful outcome”
reflecting
the
“strength
of
the
data”
gathered
during
the
clinical trials.
The issue of durability of effect is a core component of
the plaintiffs’ allegations, along with the FDA’s expectation of
two successful studies.
Critically, the plaintiffs alleged that
Chelsea knew that the FDA expected evidence of durability of
effect, not just evidence of efficacy, and that “Chelsea was
aware
of
Study
shortcomings.”
301
and
Study
302’s
durational-benefit
JA 65 ¶ 106.
Although the FDA can approve a new drug based on results of
only one successful study, the study must be “adequate” and the
data must present “substantial evidence that the drug will have
the effect it purports.”
See 21 U.S.C. § 355(d).
Additionally,
the plaintiffs did not allege that Chelsea unreasonably sought
review by the FDA on the basis of one successful study.
The
plaintiffs instead alleged that the defendants misled investors
regarding
the
risk
of
submitting
26
the
new
drug
application
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supported
Filed: 03/16/2015
only
by
a
single,
Pg: 27 of 43
one-week
study
providing
scant
evidence of durability of effect.
The
plaintiffs
also
made
a
significant
allegation
concerning the defendants’ failure to disclose in the February
13, 2012 press release that the FDA briefing document contained
a recommendation against approval of Northera.
In its press
release, Chelsea instead stated that Chelsea had received the
briefing document and disclosed that “several lines of inquiry”
had
emerged,
including
that
the
efficacy
trials
adequately establish a durable treatment effect.” 6
omission
of
the
information
regarding
the
“may
not
Chelsea’s
adverse
FDA
staff
recommendation, when viewed in the context of the known problems
of the efficacy studies and Chelsea’s earlier remarks regarding
those studies, supports the inference that Chelsea intentionally
or recklessly misled investors.
These
allegations
are
significantly
stronger
than
the
allegations we considered in Cozzarelli, a case on which the
defendants
rely.
pharmaceutical
In
company’s
Cozzarelli,
attempt
to
which
gain
also
FDA
involved
approval
for
a
a
drug, the plaintiffs’ primary allegation of scienter focused on
a
corporate
officer’s
use
of
an
6
imprecise
medical
term
when
Contrary to the dissent’s assertion, the change in Chelsea
stock prices after Chelsea’s statements is relevant to the
element of materiality, and does not impact our consideration of
the allegations of scienter.
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describing the endpoint of a clinical study, allegedly with the
intent to mislead investors to think that the study was likely
to succeed.
549 F.3d at 624-26.
We concluded that not only was
the general term used by the corporate officer “more or less
interchangeable” with the precise term not referenced, but that
the pharmaceutical company also informed investors that it would
not disclose the details of the study for “competitive reasons.”
Id. at 626.
Therefore, we concluded in Cozzarelli that the
corporate officer’s chosen language did not support a strong
inference of scienter. 7
Id. at 627-28.
In contrast, the present case involves numerous allegedly
misleading statements and omissions by the defendants that were
not caused by the use of imprecise language or the execution of
a
legitimate
allegations,
business
when
decision.
considered
in
Instead,
the
context
the
of
plaintiffs’
the
entire
complaint, permit a strong inference that the defendants either
7
After concluding that the plaintiffs’ allegations in
Cozzarelli failed to show scienter based on the allegedly
intentional false statement by a corporate officer, we proceeded
to consider the plaintiffs’ other allegations of scienter, which
involved the company’s financial motivations and the sales of
stock by corporate officers.
549 F.3d at 628.
We concluded
that
even
considering
these
additional
allegations,
the
plaintiffs’ complaint failed to demonstrate a strong inference
of scienter.
Id.
Here, however, because the nature of the
alleged misstatements and omissions themselves give rise to a
strong inference of scienter, we need not consider the
plaintiffs’ additional allegations regarding the defendants’
financial motivations.
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knowingly or recklessly misled investors by failing to disclose
critical information received from the FDA during the new drug
application process, while releasing less damaging information
that they knew was incomplete. 8
We emphasize that our conclusion does not stand for the
proposition that a strong inference of scienter can arise merely
based
on
a
defendant’s
failure
to
disclose
information.
Rather, the scienter inquiry necessarily involves consideration
of the facts and of the nature of the alleged omissions or
misleading statements within the context of the statements that
a defendant affirmatively made. 9
See Matrixx Initiatives, 131 S.
Ct. at 1322 (stating that “companies can control what they have
8
The dissenting opinion states that Dr. Pedder acknowledged
one of the obstacles to drug approval by stating, after the
December 2010 meeting, that the FDA was interested “in seeing
‘two additional studies.’”
However, Dr. Pedder’s statement did
not acknowledge that the FDA expected to see two successful
studies showing durability of effect. Rather, Dr. Pedder stated
that the FDA “was clear that additional efficacy studies were
not required for an NDA filing,” but that the FDA was interested
in two specific types of studies unrelated to durability of
effect.
Additionally, the dissent appears to rely on the
defendants’ statements made on March 28, 2012, after the FDA
denied the new drug application. The defendants’ statements at
that point, however, are not relevant to the plaintiffs’
allegations of scienter.
9
As observed in the
times has concluded that a
claims failed to plead
inference
of
scienter.
necessarily fact-dependent
present case.
dissenting opinion, this Court many
plaintiff asserting securities fraud
allegations demonstrating a strong
Such
conclusions,
however,
are
and do not compel a result in the
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disclose
under
Pg: 30 of 43
[Section 10(b)
and
Rule
10b-5(b)]
by
controlling what they say to the market”).
The inference of scienter here is at least as compelling as
the opposing inference that Chelsea officials had signaled to
investors
that
there
were
some
weaknesses
in
their
new
drug
application regarding efficacy studies for Northera, and simply
failed to provide further details regarding information received
from
the
conclude
FDA.
See
that
the
Yates,
552
plaintiffs’
F.3d
at
891.
allegations
are
support the required inference of scienter.
however,
is
limited
regarding
the
element
to
the
sufficiency
of
scienter,
and
We
therefore
sufficient
to
Our conclusion,
of
does
the
not
complaint
address
the
sufficiency of the allegations with respect to the remaining
elements of the plaintiffs’ securities fraud claims, which will
be considered by the district court in the first instance on
remand. 10
III.
For these reasons, we hold that the district court erred in
dismissing
allegations
the
plaintiffs’
supporting
an
complaint
inference
on
basis
the
legally
We do not address the plaintiffs’ derivative
20(a) claims, which also should be considered on remand.
Section
30
scienter
that
were
10
of
the
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insufficient.
Filed: 03/16/2015
Accordingly,
we
Pg: 31 of 43
vacate
the
district
court’s
judgment and remand the case for further proceedings.
VACATED AND REMANDED
31
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THACKER, Circuit Judge, dissenting:
Since the enactment of the PSLRA, we have published
eight decisions reviewing the dismissal of a securities fraud
suit for failure to plead facts supporting a strong inference of
scienter; in all of them, we concluded that the inference was
lacking.
894
See Yates v. Mun. Mortg. & Equity, LLC, 744 F.3d 874,
(4th
Cir.
BearingPoint,
2014);
Inc.,
576
Matrix
F.3d
Capital
172,
176
Mgmt.
(4th
Fund,
Cir.
LP
2009);
v.
Pub.
Emps.’ Ret. Ass’n of Colo. v. Deloitte & Touche LLP, 551 F.3d
305, 306 (4th Cir. 2009); Cozzarelli v. Inspire Pharm. Inc., 549
F.3d 618, 628 (4th Cir. 2008); Teachers’ Ret. Sys. of La. v.
Hunter, 477 F.3d 162, 184 (4th Cir. 2007); In re PEC Solutions,
Inc. Sec. Litig., 418 F.3d 379, 388-90 (4th Cir. 2005); Ottmann
v. Hanger Orthopedic Grp., Inc., 353 F.3d 338, 352-53 (4th Cir.
2003); Phillips v. LCI Int’l, Inc., 190 F.3d 609, 620 (4th Cir.
1999).
In my view, the inference is lacking in this case, too.
The PSLRA requires a plaintiff in a securities fraud
suit to “state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of
mind.”
15 U.S.C. § 78u-4(b)(2)(A).
To establish this strong
inference, a plaintiff must persuade the court that it is as
likely as not that the defendant acted with fraudulent intent
or, at the very least, with “such severe recklessness that the
danger of misleading investors was either known to the defendant
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or so obvious that the defendant must have been aware of it.”
Cozzarelli v. Inspire Pharm. Inc., 549 F.3d 618, 623 (4th Cir.
2008) (internal quotation marks omitted).
do
not
strongly
recklessness.
while
imply
either
Here, the allegations
fraudulent
intent
or
severe
Instead, the allegations suggest that Chelsea --
acknowledging
the
various
challenges
and
setbacks
encumbering its bid for FDA approval -- submitted the Northera
application
with
justifiable
confidence
in
its
chances
for
I therefore respectfully dissent. 1
success.
I.
A.
Scienter,
mental
state
defraud.”
as
embracing
defined
by
intent
the
to
Supreme
deceive,
Court,
is
“a
manipulate,
or
Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12
(1976).
The federal circuit courts agree that reckless behavior
may
enough
be
securities
1
fraud
to
satisfy
suit, 2
but
the
they
scienter
“differ
requirement
on
the
in
degree
a
of
I do not object to the majority’s determination that the
district court misused the challenged SEC documents.
However,
in my view, the court’s reliance on those documents is of no
consequence.
The
plaintiffs’
complaint
ought
to
fail
regardless.
2
For its part, the Supreme Court has never stated whether
recklessness is enough to satisfy the section 10(b) scienter
requirement.
See Matrixx Initiatives, Inc. v. Siracusano, 131
S. Ct. 1309, 1323 (2011) (noting that the Court has “not decided
whether
recklessness
suffices
to
fulfill
the
scienter
(Continued)
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recklessness required.”
Pg: 34 of 43
Tellabs, Inc. v. Makor Issues & Rights,
Ltd., 551 U.S. 308, 319 n.3 (2007).
circuits
include
“referring
to
variations
the
in
The distinctions among the
terminology,
recklessness
standard
with
courts
variously
as
‘deliberate’ or ‘conscious recklessness,’ ‘severe recklessness,’
and ‘a high degree of recklessness.’”
Defining
Recklessness:
A
Doctrinal
Ann Morales Olazábal,
Approach
to
Deterrence
of
Secondary Market Securities Fraud, 2010 Wis. L. Rev. 1415, 1424
(footnotes omitted) (collecting cases).
In
this
circuit,
we
recognize
that
allegations
of
recklessness can satisfy the scienter requirement, see Matrix
Capital Mgmt. Fund, LP v. BearingPoint, Inc., 576 F.3d 172, 181
(4th Cir. 2009); see also Ottmann v. Hanger Orthopedic Grp.,
Inc., 353 F.3d 338, 344 (4th Cir. 2003) (recognizing for the
first time in this circuit that “a securities fraud plaintiff
may allege scienter by pleading not only intentional misconduct,
but also recklessness”), but we insist that the recklessness
must
be
“severe”
--
that
intentional misconduct.”
is,
“a
slightly
lesser
species
of
Ottmann, 353 F.3d at 344 (internal
quotation marks omitted); see also Cozzarelli, 549 F.3d at 623;
Teachers’ Ret. Sys. of La. v. Hunter, 477 F.3d 162, 184 (4th
requirement” and finding it unnecessary
under the circumstances of the case).
34
to
settle
the
issue
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Cir. 2007).
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Pg: 35 of 43
This definition of recklessness, we have stated,
“comports with the observation of the Supreme Court that ‘[t]he
words
“manipulative
“device
intended
or
or
deceptive”
contrivance”
to
proscribe
used
strongly
knowing
in
suggest
or
conjunction
that
with
§ 10(b)
intentional
was
misconduct.’”
Ottmann, 353 F.3d at 344 (alteration in original) (quoting Ernst
& Ernst, 425 U.S. at 197).
Our decision in Cozzarelli v. Inspire Pharmaceuticals,
Inc. makes clear that pleading scienter -- whether in the form
of
fraudulent
intent
or
severe
showing of “wrongful intent.”
recklessness
--
549 F.3d at 621.
requires
a
There, a group
of shareholders alleged that a drugmaker seeking FDA approval of
an
experimental
believing
succeed.
that
eye-disease
an
important
See id. at 624-25.
treatment
misled
clinical
investors
trial
was
into
likely
to
The drugmaker allegedly nurtured
this false impression by withholding details about the trial’s
endpoint while simultaneously representing that the trial was
“very
similar”
(internal
to
a
previous
quotation
allegations
marks
supported
an
successful
omitted).
inference
trial.
We
that
Id.
concluded
the
at
625
that
the
drugmaker
sought
only to protect its competitive advantage in the marketplace;
this inference, we stated, “is more powerful and compelling than
the
inference
deceive.”
that
[the
drugmaker]
acted
Id. at 626 (emphasis supplied).
35
with
an
intent
to
Appeal: 13-2370
Doc: 52
Filed: 03/16/2015
In
the
years
Pg: 36 of 43
since
Cozzarelli,
our
court
has
occasionally neglected to note that the recklessness necessary
to support a finding of scienter must be “severe.”
Compare
Yates v. Mun. Mortg. & Equity, LLC, 744 F.3d 874, 884 (4th Cir.
2014) (“At the pleading stage, alleging either intentional or
severely reckless conduct is sufficient.” (emphasis supplied)),
with Matrix Capital, 576 F.3d at 181 (“Pleading recklessness is
sufficient
standard,
stated
to
satisfy
though,
that
an
the
remains
allegedly
scienter
unchanged.
reckless
requirement.”).
We
act
have
must
be
The
consistently
“so
highly
unreasonable and such an extreme departure from the standard of
ordinary care as to present a danger of misleading the plaintiff
to the extent that the danger was either known to the defendant
or so obvious that the defendant must have been aware of it.”
Matrix
Capital,
576
F.3d
at
181
(internal
quotation
marks
omitted); see also Pub. Emps.’ Ret. Ass’n of Colo. v. Deloitte &
Touche LLP, 551 F.3d 305, 314 (4th Cir. 2009) (“In order to
establish a strong inference of scienter, plaintiffs must do
more than merely demonstrate that defendants should or could
have done more.
They must demonstrate that [defendants] were
either knowingly complicit in the fraud, or so reckless in their
duties
as
to
apparent.”).
be
oblivious
This
to
malfeasance
understanding
of
that
scienter
was
--
readily
that
it
necessarily entails a “culpable state of mind,” Ottmann, 353
36
Appeal: 13-2370
F.3d
Doc: 52
at
348
securities
Filed: 03/16/2015
--
preserves
fraud.
It
Pg: 37 of 43
section
ensures
10(b)
that
as
a
prohibition
corporations
and
on
their
officers cannot escape liability through willful blindness -that
is,
purposeful
ignorance
of
the
truth
of
their
own
representations -- while, at the same time, it prevents section
10(b) from devolving into a penalty for business decisions that,
in hindsight, appear questionable.
B.
Here, under the PSLRA’s heightened pleading standard,
the plaintiffs were required to allege facts giving rise to a
strong inference of fraudulent intent or severe recklessness.
See 15 U.S.C. § 78u-4(b)(2)(A); Cozzarelli, 549 F.3d at 623.
This is “no small burden.”
Cozzarelli, 549 F.3d at 624.
Though
the inference of scienter “need not be irrefutable,” it “must be
more than merely ‘reasonable’ or ‘permissible.’”
U.S.
at
inference
324.
of
Unless
a
“reasonable
scienter . . . at
least
person
as
Tellabs, 551
would
compelling
deem
the
as
any
opposing inference” of nonfraudulent intent, the pleading fails.
Id.
The
plaintiffs’
complaint
here
does
not
satisfy
this
standard.
1.
Reviewing the complaint in its entirety, it is clear
that Chelsea had plenty of reason to believe the FDA would be
37
Appeal: 13-2370
Doc: 52
receptive
Filed: 03/16/2015
to
its
Pg: 38 of 43
application.
More
importantly,
the
facts
strongly suggest that Chelsea acted on just such a belief.
To
“substantial
merit
FDA
evidence
approval,
that
the
an
application
drug
will
have
must
the
present
effect
it
purports or is represented to have under the conditions of use
prescribed, recommended, or suggested in the proposed labeling.”
21
U.S.C.
§ 355(d).
Though
here
the
plaintiffs’
complaint
states that the FDA generally “requires at least two adequate
and well-controlled studies,” J.A. 59, 3 federal law expressly
authorizes the FDA to make the requisite finding of “substantial
evidence”
based
controlled
(obtained
solely
clinical
prior
to
or
Likewise,
Guidelines
note
of
multicenter study.”
“data
from
investigation
§ 355(d).
persuasiveness
on
after
as
that
a
the
the
single,
such
one
and
adequate
confirmatory
investigation),”
complaint
agency
and
internally
evidence
21
recognizes,
“may
well-
U.S.C.
the
acknowledge
consistent,
FDA
the
strong
J.A. 60.
Chelsea based its FDA application on two sets of data.
First and foremost, there was the data from Study 301, which
successfully
demonstrated
the
drug’s
efficacy.
In
addition,
Chelsea offered supplemental data from Study 302, which, though
failing to meet its primary endpoint, showed what Chelsea later
3
Citations to the “J.A.” refer to the Joint Appendix filed
by the parties in this appeal.
38
Appeal: 13-2370
Doc: 52
determined
Filed: 03/16/2015
to
be
a
Pg: 39 of 43
“nominally
statistically
significant
improvement” in the score used to measure the drug’s clinical
efficacy.
J.A. 42.
These were the data that the advisory
committee reviewed in February 2012, and the committee voted,
seven
to
four,
to
recommend
approving
the
drug.
The
chairperson, who was among those voting in favor of approval,
explained that there was “no question in [his] mind that this
drug
is
efficacious,
J.A. 203. 4
particularly
in
a
subset
Other members echoed those remarks.
of
patients.”
One said he saw
“substantial evidence of substantial benefit for some patients.”
Id. at 205.
Another said he “could not in a clear conscience
vote no and deprive those patients from the benefits they can
derive at this point from this medication.”
Id. at 67.
Nonetheless, the plaintiffs assert that Chelsea knew
the FDA expected two successful studies.
This claim rests, in
large part, on a discussion that took place at the advisory
committee
meeting.
There,
one
FDA
administrator,
Dr.
Steve
Graham (“Graham”), recalled that the “very first thing we said”
in the special protocol assessment for Study 301 was “that the
study in and of itself wouldn’t be sufficient, that we wanted
4
The complaint quotes selectively from the advisory
committee meeting transcript.
Accordingly, although this
comment does not appear in the complaint, we may consider it
here because it is incorporated into the complaint by reference.
See Cozzarelli, 549 F.3d at 625.
39
Appeal: 13-2370
Doc: 52
Filed: 03/16/2015
two studies.”
J.A. 61.
Pg: 40 of 43
According to Graham, the FDA also “said
that we wanted durability,” a statement the agency “repeated on
at least two subsequent occasions on information letters to the
company.”
Id.
However,
at
that
very
same
meeting,
Graham
himself conceded that Study 301 alone, if successful, may be
sufficient to support the application.
If, he said, that single
study presented “an overwhelming effect[,] . . . you’d be a fool
not to approve it.”
In
announced
its
that
Id. at 62.
December
the
20,
had
FDA
2010
press
“agreed”
release,
that
the
Chelsea
proposed
application “could be submitted” based on Studies 301 and 302
“without the need for any further efficacy studies.”
J.A. 233.
The plaintiffs’ complaint does not dispute the literal truth of
this
announcement.
Nor
is
there
any
reason
to
doubt
that
Chelsea interpreted the FDA’s feedback as highly encouraging.
The company’s actions are proof positive that it did.
than
wait
to
complete
Study
306,
Chelsea
pressed
Rather
ahead
and
submitted its application exactly as it said it would, with only
Study 301 and supplemental support from Study 302 to its credit.
Against this backdrop, the most compelling inference is not that
Chelsea acted with wrongful intent, but that it believed its
prospects
Inc.,
747
were
F.3d
good.
435,
See
441
Kuyat
(6th
v.
Cir.
BioMimetic
2014)
Therapeutics,
(concluding
that
a
medical-device manufacturer “could legitimately believe that the
40
Appeal: 13-2370
Doc: 52
Filed: 03/16/2015
statistically
sufficient
significant
to
obtain
Pg: 41 of 43
results”
approval
by
of
its
the
study
FDA,”
“would
despite
be
private
communications in which the FDA indicated that it expected a
more expansive study than the one provided).
2.
The plaintiffs’ claim that Chelsea’s public statements
were
intentionally
another
problem,
unreservedly
fraudulent
which
is
or
severely
that
optimistic.
On
those
the
reckless
runs
statements
contrary,
into
were
the
not
company
consistently acknowledged the obstacles in its path.
In
a
December
2010
conference
call,
Chelsea’s
CEO
acknowledged that the FDA had expressed an interest in seeing
“two additional studies.”
J.A. 81.
Later, in its September 30,
2011 quarterly report to the SEC -- from which the plaintiffs’
complaint quotes -- the company listed numerous reasons why the
FDA “may not accept or approve” the Northera application.
at
141.
opposing
When
the
Chelsea’s
FDA
staff
application,
issued
the
its
briefing
company
issued
Id.
document
a
press
release noting its receipt of the document and explaining that
“several
lines
of
inquiry . . . have
emerged
as
significant
components of the benefit-risk analysis of Northera.”
248 (internal quotation marks omitted).
Id. at
These issues, according
to the February 2012 press release, included “the short duration
of
our
clinical
studies,
the
41
limited
size
of
our
study
Appeal: 13-2370
Doc: 52
Filed: 03/16/2015
Pg: 42 of 43
population given the orphan indication and the challenges in
quantifying symptomatic and clinical benefit.”
quotation
marks
omitted).
Similarly,
when
Id. (internal
the
FDA
rejected
Chelsea’s application in March 2012, the company explained in a
press release that it had received the FDA’s complete response
letter, and that this letter requested data from an “additional
positive study to support efficacy.” 5
Id. at 68.
The company
continued to say that it planned to “request a meeting with the
FDA
to
review
recommendations
the
and
to
Agency’s
help
comments,
determine
toward securing approval of Northera.”
clinical
appropriate
trial
next
steps
Id. at 69.
The market responded to these statements accordingly.
As
the
majority
notes,
Chelsea’s
stock
dropped
37.5
percent
following the February 2012 press release discussing the FDA
briefing
document.
Likewise,
the
stock
fell
28
percent
in
response to the March 2012 press release discussing the FDA’s
rejection
of
droxidopa.
These
reactions
call
into
question
whether Chelsea’s press releases were misleading at all -- let
5
The company issued this press release on March 28, 2012.
This date is significant both because it is the same day that
Chelsea received the FDA’s complete response letter and because
it marks the final day of the class period.
Despite the
majority’s claim to the contrary, see ante at 29 n.8, the
company’s statements on this date are indeed relevant to the
scienter
inquiry
because
they
undermine
the
plaintiffs’
assertion that Chelsea intentionally or recklessly failed to
disclose critical information during the class period.
42
Appeal: 13-2370
Doc: 52
Filed: 03/16/2015
Pg: 43 of 43
alone whether the danger of misleading people was “so obvious”
that making those statements must have been severely reckless.
Cozzarelli, 549 F.3d at 623 (internal quotation marks omitted).
II.
As we stated in Cozzarelli, we do not infer scienter
“from every bullish statement by a pharmaceutical company that
was trying to raise funds.”
549 F.3d 618, 627 (4th Cir. 2008).
If we did, “we would choke off the lifeblood of innovation in
medicine
by
fueling
frivolous
litigation.”
Id.
Today’s
decision clears the way for more litigation, heightening the
risk
that
shareholders
will
exploit
the
judicial
process
extract settlements from corporations they chose to fund.
to
This
is exactly what Congress sought to prevent when it enacted the
PSLRA.
See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551
U.S. 308, 320 (2007).
Accordingly, I would affirm the judgment
of the district court.
43
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