Hoffman v. Intrexon Corporation et al

Filing 57

ORDER by Judge Richard Seeborg Granting 46 Defendants' Motion to Dismiss. (cl, COURT STAFF) (Filed on 2/24/2017)

Download PDF
1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 IN RE INTREXON CORPORATION SECURITIES LITIGATION 8 Case No. 16-cv-02398-RS ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS 9 10 United States District Court Northern District of California 11 12 13 I. INTRODUCTION 14 Lead plaintiff Joe Seppen brings this putative class action for securities fraud against 15 defendants Intrexon Corp., Randal J. Kirk, Rick L. Sterling, and Krish S. Krishan (collectively 16 “Defendants”). Intrexon is a biotechnology company that focuses on developing tools for 17 designing, building, and regulating genes. In April 2016, an anonymous short-seller named 18 Spotlight Research published a report concluding that Intrexon’s core technology suite was 19 overhyped and its revenue was heavily driven by “round-tripping.” Almost exclusively on this 20 basis, Plaintiff alleges violations of the Securities Exchange Act of 1934. Defendants move to 21 dismiss the amended complaint on the grounds that Plaintiff fails to state a claim. For the reasons 22 stated below, Defendants’ motion to dismiss is granted with leave to amend. II. BACKGROUND1 23 Intrexon builds and acquires technologies that design, modify and regulate DNA 24 25 sequences. Intrexon’s technologies include UltraVector (a DNA design and fabrication platform), 26 27 28 1 This factual background is based on the averments in the amended complaint, which must be accepted as true at this stage, as well as public records properly subject to judicial notice. 1 RheoSwitch (a gene switch for regulation of level and timing of gene expression), AttSite 2 Recombinases (a tool for enabling targeted gene delivery), Cell Systems Informatics (a guide for 3 selection of pathways for genomic modification), Laser-Enabled Analysis and Processing 4 (“LEAP”) (a platform for imaging and laser-based purification of high-value cells), and others. 5 Intrexon’s business model is designed around collaborations with other companies. These 6 collaborations include exclusive channel collaborations, research collaborations, and joint 7 ventures. Intrexon licenses its tools to collaborators who provide product development expertise 8 in their specific industry sectors. Intrexon earns revenue from its partners through license fees, 9 reimbursement for research and development costs, milestone payments and future royalties. 10 In April 2016, an anonymous short-seller known as “Spotlight Research” released an eight- United States District Court Northern District of California 11 part report about Intrexon. The report concluded that Intrexon’s core technology suite consists of 12 an “overhyped, undifferentiated collection of commodity and failed products.” ACAC, Ex. B at 13 39. For example, it said UltraVector is a “common DNA synthesizer” and that “Rheoswitch 14 gained no traction over the years.” Id. at 76, 80. It also opined that Intrexon’s revenues were 15 overstated. It claimed that Intrexon “created an intricate web of microcap, zero revenue, free cash 16 flow negative companies that seem to exist solely for the purpose of inflating Intrexon’s revenue 17 and profitability.” Id. at 1. 18 This lawsuit was filed shortly after the Spotlight report’s publication. Plaintiff brings suit 19 against Intrexon, Kirk, Sterling, and Krishnan. Kirk has been Intrexon’s Chief Executive Officer 20 since 2009 and his investment management firm, Third Security LLC, has often invested 21 alongside Intrexon and other partners involved in various collaborations. Sterling has been 22 Intrexon’s Chief Financial Officer since 2007. Krishan was Intrexon’s Chief Operation Officer 23 from 2011 until his resignation in March 2016. The Amended Class Action Complaint (“ACAC”) 24 primarily recites the findings of the Spotlight report. It also includes brief statements from three 25 confidential witnesses. In his first claim, Plaintiff avers that Defendants violated section 10(b) of 26 the Securities Exchange Act and Rule 10b-5 promulgated thereunder. In his second claim, he 27 asserts a violation of section 20(a) of the Exchange Act. Plaintiff is suing on behalf of all persons ORDER RE: MOTION TO DISMISS CASE NO. 16-cv-02398-RS 28 2 1 who purchased Intrexon securities between May 11, 2015 and April 27, 2016. 2 III. LEGAL STANDARD 3 A complaint must contain “a short and plain statement of the claim showing that the 4 pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). While “detailed factual allegations are not 5 required,” a complaint must include sufficient facts to “state a claim to relief that is plausible on its 6 face.” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (citing Bell Atlantic Corp. v. Twombly, 550 7 US 544, 570 (2007)). A claim is facially plausible “when the pleaded factual content allows the 8 court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. 9 Claims grounded in fraud are also subject to Rule 9(b), which provides that “[i]n allegations of 10 United States District Court Northern District of California 11 12 13 14 15 16 fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). To satisfy that rule, a plaintiff must allege the “who, what, where, when, and how” of the charged misconduct. Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1997). A motion to dismiss a complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure tests the legal sufficiency of the claims alleged in the complaint. See Parks Sch. of Bus. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995). Dismissal under Rule 12(b)(6) may be based either on the “lack of a cognizable legal theory” or on “the absence of sufficient facts alleged under a cognizable legal theory.” Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 17 1988). When evaluating such a motion, the court must accept all material allegations in the 18 19 20 21 complaint as true, even if doubtful, and construe them in the light most favorable to the nonmoving party. Twombly, 550 US at 570). “[C]onclusory allegations of law and unwarranted inferences,” however, “are insufficient to defeat a motion to dismiss for failure to state a claim.” Epstein v. Wash. Energy Co., 83 F.3d 1136, 1140 (9th Cir. 1996); see also Iqbal, 129 S. Ct. at 22 1949 (citing Twombly, 550 US at 555 (“threadbare recitals of the elements of the cause of action, 23 supported by mere conclusory statements,” are not taken as true)). In actions governed by the 24 Private Securities Litigation Reform Act (“PSLRA”), such as this one, these general standards are 25 subject to further refinement, as discussed in more detail below. 26 27 IV. DISCUSSION A. Count I—Section 10(b) of the Exchange Act ORDER RE: MOTION TO DISMISS CASE NO. 16-cv-02398-RS 28 3 1 Section 10(b) makes it unlawful for “any person . . . [t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange . . . any 3 manipulative or deceptive device or contrivance in contravention of such rules and regulations as 4 the Commission may prescribe as necessary or appropriate in the public interest or for the 5 protection of investors.” 15 U.S.C. § 78j(b). Rule 10b-5 further provides: “It shall be unlawful 6 for any person . . . [t]o engage in any act, practice, or course of business which operates or would 7 operate as a fraud or deceit upon any person, in connection with the purchase or sale of any 8 security.” 17 C.F.R. § 240.10b-5(c). A claim for violation of Rule 10b-5 includes five elements: 9 “(1) a material misrepresentation or omission of fact, (2) scienter, (3) a connection with the 10 purchase or sale of a security, (4) transaction and loss causation, and (5) economic loss.” Id. 11 United States District Court Northern District of California 2 (quoting In re Daou Sys., Inc. Secs. Litig., 411 F.3d 1006, 1014 (9th Cir. 2005)) (internal quotation 12 marks omitted). Defendants move to dismiss the section 10(b) claim for failure to plead the 13 elements of a material misrepresentation or omission, scienter, and loss causation. 14 1. Material Misrepresentation or Omission (Falsity) 15 Under the PSLRA, plaintiffs must “specify each statement alleged to have been 16 misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding 17 the statement or omission is made on information and belief . . . state with particularity all facts on 18 which that belief is formed.” 15 U.S.C. 78u-4(b)(1). Plaintiff alleges three categories of 19 purportedly “false” statements: (1) statements concerning Intrexon’s suite of technologies; (2) 20 statements concerning Intrexon’s CAR-T collaborations; and (3) revenue disclosures. 21 Specifically, Plaintiff alleges that statements related to Intrexon’s technology suite are misleading 22 because the suite consisted of undifferentiated, commodity, and/or failed technologies. He alleges 23 that statements related to Intrexon’s CAR-T collaborations using the RheoSwitch technology are 24 misleading because RheoSwitch failed to function properly. Finally, he claims Intrexon’s revenue 25 disclosures are misleading because a material portion of revenues ascribable to collaborations are 26 the result of “round-trip” transactions. Plaintiff’s efforts to allege a material misrepresentation or 27 omission fail for several reasons. ORDER RE: MOTION TO DISMISS CASE NO. 16-cv-02398-RS 28 4 First, with respect to the statements regarding Intrexon’s suite of products, Plaintiff’s 1 allegations lack specificity. He argues repeatedly that Intrexon’s “core technology suite” is 3 worthless but nowhere defines the scope of that “suite.” The challenged statements make no 4 mention of a “core technology suite,” so the term appears to be one of Plaintiff’s (or Spotlight’s) 5 own making. The ACAC includes one slide from an investor presentation that is entitled 6 “Integrated Technology Suite,” which lists several technologies, but it does not allege facts related 7 to each technology listed therein and does include factual allegations related to unidentified 8 technologies, rendering that list both over and under inclusive and unenlightening on the scope of 9 the term “core technology suite.” See ACAC ¶¶ 108, 65-74. Moreover, the challenged statements 10 do not appear limited to any specific subset of Intrexon’s technologies. To the contrary, they refer 11 United States District Court Northern District of California 2 broadly to Intrexon’s “proprietary and complementary technologies” and those Intrexon has “built, 12 acquired and integrated.” Second, most of the challenged statements concerning CAR-T collaborations relate to 13 14 future expectations. See, e.g., ACAC ¶¶ 100 (“aims to develop”); 116 (“goal is to develop”); 161 15 (“intend to employ”); 165 (“plans to develop”); 168 (“plan to pursue”). The PSLRA Safe Harbor 16 protects projections of future performance and “the assumptions underlying or relating to” such 17 projections if they are identified and “accompanied by meaningful cautionary statements 18 identifying important factors that could cause actual results to differ materially from those in the 19 forward-looking statement.” 15 U.S.C. § 78u-5(i)(1)(D); 15 U.S.C. § 78u-5(c)(1). Here, Intrexon 20 identified such statements as forward-looking and accompanied them with cautionary statements 21 and/or a discussion of “risk factors.” See, e.g., RJN Exs. 1 at 4-5, 19-39; 18 at 4-5; 19 at 1; 20 at 22 4; 21 at 1-3; 22 at 3; 23 at 4.2 Plaintiff contends that these statements are of a mixed present/future 23 quality that are not entitled to the safe harbor. Yet, “examined as a whole . . . [they] relate[] to 24 25 26 27 2 Intrexon requests judicial notice of several SEC filings. Judicial notice of such public records is proper, so the request is granted. See Dreiling v. Am. Express Co., 458 F.3d 942, 946 n.2 (9th Cir. 2006). ORDER RE: MOTION TO DISMISS CASE NO. 16-cv-02398-RS 28 5 1 future expectations and performance.” Police Ret. Sys. v. Intuitive Surgical, Inc., 759 F.3d 1051, 2 1059 (9th Cir. 2014). As such, they are protected by the PSLRA’s Safe Harbor. 3 Third, a substantial portion of the statements quoted in the ACAC are best characterized as “puffery” or other non-specific assertions that cannot give rise to a fraud claim. For example, 5 Plaintiff takes issue with statements like: “We believe we are a leader in the field of synthetic 6 biology,” ACAC ¶¶ 106, 122, 125, 135, 138, 143, 153, “Intrexon has built, acquired and integrated 7 a suite of technologies creating a one-stop-shop for start-to-finish conceptualization, engineering 8 and production of bio-based solutions,” id. ¶ 109, and “We have accumulated extensive 9 knowledge and experience . . . [and] believe all of these factors, coupled with our suite of 10 proprietary and complementary technologies, provides us with a first-mover advantage in 11 United States District Court Northern District of California 4 synthetic biology.” Id. ¶ 159. These vague, general statements of optimism are non-actionable 12 puffery. See In re Cutera Securities Litigation, 610 F.3d 1103, 1111 (9th Cir. 2010) (“When 13 valuing corporations, however, investors do not rely on vague statements of optimism like ‘good,’ 14 ‘well-regarded,’ or other feel good monikers. This mildly optimistic, subjective assessment hardly 15 amounts to a securities violation.”). Even viewed in context, these challenged statements fail to 16 rise to more than general characterizations and opinions. 17 18 19 20 Finally, even if otherwise actionable, Plaintiff has not sufficiently alleged the falsity of the statements in any of the three categories: a. Suite of Technologies Plaintiff challenges statements related to Intrexon’s technology suite, such as: “Using our 21 suite of proprietary and complementary technologies, we design, build, and regulate gene 22 programs.” ACAC ¶¶ 106, 122, 125, 135, 138, 143. The challenged statements refer to Intrexon’s 23 “suite of proprietary and complementary technologies” or the suite of technologies Intrexon has 24 “built, acquired, and integrated.” On their face, these statements relate to Intrexon’s entire suite of 25 technologies and make no specific representations about the provenance or value of any specific 26 technology. Accordingly, even if Plaintiff’s allegations sufficed to establish that one or two of 27 Intrexon’s technologies were undifferentiated, or amounted to commodities with in some instances 28 ORDER RE: MOTION TO DISMISS CASE NO. 16-cv-02398-RS 6 1 track records of failure, that alone would not establish the falsity of the statements regarding 2 Intrexon’s suite of technologies. Plaintiff argues that this is an “overly literal” approach. He 3 claims that the challenged statements give a misleading impression about the value of each of the 4 technologies in the suite. Intrexon, however, specifically told investors: “There are companies that 5 have competing technologies for individual pieces of our suite of complementary technologies. 6 For example, there are companies that can synthesize DNA.” RJN, Ex. 1 at 14. At minimum, 7 Plaintiff’s argument that Intrexon misled consumers into believing that UltraVector, its DNA 8 synthesis product, had unique value is unavailing given Intrexon’s express disclaimer that other 9 companies synthesize DNA. Even for the remaining technologies, Plaintiff’s interpretation is 10 unpersuasive. In any event, Plaintiff fails to allege facts sufficient to establish that the remaining United States District Court Northern District of California 11 12 technologies identified in the complaint were worthless or nothing more than commodities. As 13 explained below, Plaintiff fails to advance sufficient facts to show that RheoSwitch failed. As for 14 the other technologies, Plaintiff relies almost exclusively on the Spotlight report, which primarily 15 attacks the companies that previously owned or researched those technologies. For example, for 16 Cell Systems Informatics, acquired by Intrexon in 2011, Spotlight reports that the former owner 17 licensed the core technology from a company with low licensing revenues. Likewise, for the 18 LEAP platform, acquired by Intrexon in 2011, Spotlight reports that a 2006 study paid for by the 19 former owner projected low total revenue and net selling prices in 2006. Plaintiff’s allegations 20 regarding the other technologies, such as Endometrial Regenerative Cells and mABLogix, 21 nowhere found in any of the challenged statements, are similar.3 Plaintiff alleges no facts related 22 to the function or value of these technologies, particularly in current times. 23 Instead, Plaintiff argues that “the proof is in the market outcomes.” He claims the market 24 reaction to the Spotlight report proves Intrexon’s technologies were “overhyped.” As Defendants 25 26 27 3 Plaintiff alleges that confidential witness number 1 (CW1) stated that “mAbLogic never worked,” but advances no facts to suggest CW1’s personal knowledge of the technology or the reliability of her opinion. ACAC ¶ 68. ORDER RE: MOTION TO DISMISS CASE NO. 16-cv-02398-RS 28 7 1 note, this is essentially a fraud-by-hindsight argument. A plaintiff cannot show that a prior 2 statement was false or misleading merely by pointing to the market reaction upon a subsequent 3 disclosure of information. See, e.g., In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1085 (9th Cir. 4 2002) abrogated on other grounds, S. Ferry LP v. Killinger, 542 F.3d 776 (9th Cir. 2008). 5 “[E]vidence of stock price movements provides no rational basis for determining whether [a 6 product’s] risks were adequately conveyed to the public.” In re Apple Comput. Sec. Litig., 886 7 F.2d 1109, 1116 (9th Cir. 1989); see also Retail Wholesale & Dep’t Store Union Local 338 Ret. 8 Fund v. Hewlett Packard Co., No. 14-16433, 2017 U.S. App. LEXIS 955, at *20-21 (9th Cir. Jan. 9 19, 2017) (rejecting argument that stock price drop indicates material misrepresentation). Plaintiff also claims that the “marginal value” of Intrexon’s technology suite is evidenced by the 11 United States District Court Northern District of California 10 company’s failure to attract collaborations with blue-chip companies. He acknowledges, however, 12 that Intrexon collaborates with companies like Merck and Sanofi and research centers like the 13 M.D. Anderson Cancer Center at the University of Texas and the National Cancer Institute. His 14 only response is that those collaborations make up a small percentage of Intrexon’s overall 15 revenue. The allegation that those collaborations drive only a small portion of Intrexon’s revenue 16 does not support the falsity of generic statements related to the value and provenance of Intrexon’s 17 amorphous “suite” of technologies. 18 19 b. CAR-T Collaborations & RheoSwitch Plaintiff alleges that RheoSwitch failed to function properly and thus challenges statements 20 related to the RheoSwitch platform, like “RheoSwitch gene regulation delivers precise control in 21 multiple biological systems” or “utilizing Intrexon’s . . . RheoSwitch platform, the collaboration 22 aims to develop leading-edge products.” ACAC ¶¶ 100, 110. In support of the claim that 23 RheoSwitch failed to function properly, Plaintiff relies primarily on the statement of CW1. That 24 individual stated that RheoSwitch was supposed to work like a light switch subject to being turned 25 on and off, but in reality worked more like a dimmer switch; “it turned the gene on, but it was 26 difficult to turn the gene completely off.” ACAC ¶ 53. This vague statement falls short. CW1 27 does not state, as Plaintiff contends, that RheoSwitch failed to work properly in multiple ORDER RE: MOTION TO DISMISS CASE NO. 16-cv-02398-RS 28 8 1 biological systems. Rather, she says that, in her experience, it did not work “as it should.” CW1 2 was an Associate Director in the Health Sector group from 2011-2016; she worked on one CAR-T 3 project in one division. That the technology might have been unsuccessful in one single 4 application does not suggest its uselessness for other applications. CW1 does not opine on 5 RheoSwitch’s functionality in any other context, including any other CAR-T collaborations. She 6 made no statements about RheoSwitch’s use by collaborators, nor did she deny that collaborators 7 developed cancer therapies using RheoSwitch. In fact, Plaintiff acknowledges that RheoSwitch 8 was used in several collaborations, including ones involving cancer therapies that are in Phase I 9 and II clinical trials. See ACAC ¶ 53; id., Ex. B at 37-38. Aside from the opinion of CW1, Plaintiff relies on Spotlight’s attack on the company that 11 United States District Court Northern District of California 10 formerly owned the RheoSwitch technology, RheoGene. Plaintiff alleges that RheoGene donated 12 the RheoSwitch technology to the University of Pittsburgh Medical Center (“UPMC”) for a tax 13 write-off in 2003. Defendants contend the primary sources relied upon by Spotlight reveal that 14 RheoGene’s transaction with UPMC was actually a strategic partnership in which UPMC agreed 15 to own and fund RheoGene and continue to develop its technology. Plaintiffs’ allegation relates to 16 a decade-old event and is insufficient to show that RheoSwitch, in its current form, constitutes a 17 failed technology. At most, the facts alleged might raise a question about the value of the 18 technology in 2003, but not its functionality. For these reasons, Plaintiff fails to allege facts 19 sufficient to suggest the falsity of Intrexon’s statements regarding its CAR-T collaborations 20 involving RheoSwitch. 21 22 c. Round-Tripping While conceding that Intrexon complied with applicable accounting and SEC disclosure 23 rules, Plaintiff alleges Intrexon nonetheless reported misleading revenue figures. In particular, he 24 alleges the revenue reports were deceptive because Defendants knew or recklessly ignored that a 25 material portion of collaboration revenues were the result of “round-trip” transactions. Plaintiff, 26 however, does not allege the usual “round-tripping” exchange of like services. A typical “round- 27 tripping” scheme “involves parties entering into reciprocal contracts to exchange similar amounts ORDER RE: MOTION TO DISMISS CASE NO. 16-cv-02398-RS 28 9 1 of money for similar services.” Teachers’ Ret. Sys. of LA v. Hunter, 477 F.3d 162, 178 (4th Cir. 2 2007)(citing In re Homestore.com, Inc. Sec. Litig., 252 F.Supp.2d 1018, 1024–25 (C.D. Cal. 3 2003)). “Such transactions can be improper because the parties book revenues even though the 4 transactions ‘wash out’ without any economic substance. But the basis for alleging ‘round- 5 tripping’ does not exist when either of the transactions have economic substance because those 6 transactions would not wash out.” Id. Here, Plaintiff does not allege that Intrexon’s collaboration 7 agreements involved reciprocal contracts to exchange similar amounts of money or that the 8 agreement lacked economic substance. 9 Principally, Plaintiff alleges that Intrexon’s revenue figures were materially misleading because the company failed to disclose that a substantial portion of its revenue was ultimately 11 United States District Court Northern District of California 10 sourced by Intrexon or Kirk, its CEO. Yet, as noted above, Intrexon disclosed its revenue 12 recognition policy and relationships with collaborators in detail as required by GAAP and SEC 13 regulations. Intrexon specifically disclosed that it has engaged in a variety of transactions with 14 companies in which Kirk and his affiliates have an interest. See RJN, Ex. 29. That Intrexon did 15 not disclose the specific source of each revenue dollar in order to dispel Plaintiff’s theory of 16 liability does not render its lawful and accurate revenue disclosures deceptive. See In re Rigel 17 Pharm., Inc. Sec. Litig., 697 F.3d 869, 880 (9th Cir. 2012) (no requirement to disclose every 18 relevant fact, “even if investors would consider the omitted information significant,” as long as 19 “the omissions do not make the actual statements misleading”). 20 2. Scienter 21 Scienter is “a mental state embracing intent to deceive, manipulate, or defraud.” Ernst & 22 Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). To plead 23 scienter, the complaint must “state with particularity facts giving rise to a strong inference that the 24 defendant acted with the required state of mind.” 15 U.S.C. § 78u–4(b)(2). In particular, the 25 complaint must allege the defendant “made false or misleading statements either intentionally or 26 with deliberate recklessness.” In re Daou Systems, Inc., 411 F.3d 1006, 1015 (9th Cir. 2005) 27 (citing In re Silicon Graphics Sec. Litig., 183 F.3d 970, 974 (9th Cir. 1999)). “Reckless conduct ORDER RE: MOTION TO DISMISS CASE NO. 16-cv-02398-RS 28 10 1 may be defined as a highly unreasonable omission, involving ... an extreme departure from the 2 standards of ordinary care ... that is either known to the defendant or is so obvious that the actor 3 must have been aware of it.” In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694, 702 (9th Cir. 4 2012) (quoting Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569 (9th Cir. 1990)). Here, the absence of an adequate pleading of material misstatements or omissions 5 6 necessarily means Plaintiff has failed to plead scienter as well. In essence, Plaintiff is alleging that 7 Defendants overhyped their core technologies, collaborations, and revenue, so that they could 8 acquire other valuable technologies. While Plaintiff is trying to argue that Intrexon management 9 was aware of the worthlessness of Intrexon’s technologies and collaborations at the time they were making the generally positive public statements, an equally plausible inference is that Intrexon 11 United States District Court Northern District of California 10 management believed the collaborations and technology suite had value. Moreover, the ACAC 12 does not include any allegations related to the individual defendants’ trading histories. Plaintiff 13 alleges no facts to suggest that the individual defendants’ trading practices during the class period 14 were “dramatically out of line” with prior trading practices. Zucco Partners, 552 F.3d at 1005.4 15 Plaintiff seeks to invoke the “core operations” doctrine by arguing that Defendants must 16 have known the minimal value of Intrexon’s technology suite given their roles at the company. 17 Allegations regarding management’s role in a company may conceivably satisfy the PSLRA 18 standard, “without accompanying particularized allegations, in rare circumstances where the 19 nature of the relevant fact is of such prominence that it would be ‘absurd’ to suggest that 20 management was without knowledge of the matter.” S. Ferry LP, No. 2 v. Killinger, 542 F.3d 21 776, 786 (9th Cir. 2008). Plaintiff has failed to advance facts suggesting that this is such a case. 22 23 24 25 26 27 4 Plaintiff argues that the individual defendants’ trading histories are irrelevant here because he has not pleaded motive. Yet, in the complaint and the opposition brief, he argues that Defendants had a financial motive for overhyping the technologies. In any event, even if motive is not required to plead scienter, the fact of stock sales (or lack thereof) during the class period is a consideration in the scienter analysis. See, e.g., In re Rigel Pharms., 697 F.3d at 884 (“because none of the defendants sold stock during the period between the allegedly fraudulent statements and the subsequent public disclosure . . . the value of the stock and stock options does not support an inference of scienter”); In re Apple Computer Sec. Litig., 886 F.2d at 1117 (“Apple’s massive investment [] demonstrates this good faith.”). ORDER RE: MOTION TO DISMISS CASE NO. 16-cv-02398-RS 28 11 1 “Where defendants make cheerful predictions that do not come to pass, plaintiffs may not argue, 2 based only on defendants’ prominent positions in the company, that they ought to have known 3 better. Instead, the PSLRA requires ‘particular allegations which strongly imply Defendant[s’] 4 contemporaneous knowledge that the statement was false when made.’” Berson v. Applied Signal 5 Technology Inc., 527 F.3d 982, 989 (9th Cir. 2008). As explained above, Plaintiff fails 6 sufficiently to allege the falsity of any challenged statement. 7 Plaintiff notes other facts that he claims add to the inference of scienter, such as Intrexon’s 8 stock offerings, which he acknowledges is insufficient to show scienter. See Anderson v. 9 Peregrine Pharms., Inc., 2016 WL 3212258 (9th Cir. June 8, 2016) (declining to find defendants’ attempts at securing capital to support an inference of scienter). He also notes Mr. Krishnan’s 11 United States District Court Northern District of California 10 resignation, but alleges no facts that show the resignation was accompanied by suspicious 12 circumstances. “[A]bsent allegations that the resignation at issue was uncharacteristic . . . or was 13 accompanied by suspicious circumstances,” the inference of a suspicious change in personnel will 14 never be as cogent or as compelling as the inference of a benign one. Zucco, 552 F.3d at 1002. 15 Finally, he relies on three witness accounts, which are lacking in detail and fail to establish 16 personal knowledge and reliability. See Zucco, 552 F.3d at 996-98. None of the three witnesses 17 had any contact with the individual defendants or claim to speak to their states of mind. Two of 18 the witnesses were not employed during the class period and allege no information about the 19 company during those years. CW3 does not criticize Intrexon’s products at all. CW2 was a junior 20 scientist who worked in one division who opined that UltraVector was a commodity product and 21 CW1 was a scientist in a different division who offered a similar opinion and also stated that 22 RheoSwitch did not work as intended in her case. As explained above, these opinions are 23 insufficient to make the inference of a material misrepresentation and likewise fail to suggest 24 scienter. Even considered holistically, the allegations in the complaint fail to support a strong 25 inference of scienter. 26 27 In Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499, 2510 (2007), the Supreme Court explained that a “strong inference” of the required intent means that a complaint will ORDER RE: MOTION TO DISMISS CASE NO. 16-cv-02398-RS 28 12 1 survive a motion to dismiss “only if a reasonable person would deem the inference of scienter 2 cogent and at least as compelling as any opposing inference one could draw from the facts 3 alleged.” As explained in Zucco, “[a] court must compare the malicious and innocent inferences 4 cognizable from the facts pled in the complaint, and only allow the complaint to survive a motion 5 to dismiss if the malicious inference is at least as compelling as any opposing innocent inference.” 6 552 F.3d at 991. At least at this juncture, even to the extent anything in the ACAC could be seen 7 as an adequate allegation of a material misrepresentation or omission, Plaintiff has not pleaded 8 facts to support a compelling inference that any such misrepresentations or omissions were the 9 result of an intent to deceive. Just as plausible, such statements or omissions represent a contrary valuation of the technologies and collaborations or a failure to analyze business conditions 11 United States District Court Northern District of California 10 correctly. 12 3. Loss Causation 13 “Loss causation” refers to a plaintiff’s obligation in a securities fraud action to establish “a 14 causal connection between the material misrepresentation and the loss.” Dura Pharmaceuticals, 15 Inc. v. Broudo, 544 U.S. 336, 342 (2005). The loss causation requirement was codified in the 16 PSLRA: “In any private action arising under this chapter, the plaintiff shall have the burden of 17 proving that the act or omission of the defendant alleged to violate this chapter caused the loss for 18 which the plaintiff seeks to recover damages. 15 U.S.C. § 78u–4(b)(4) (emphasis added). To 19 establish loss causation, Plaintiff must allege that Intrexon’s stock declined because of a 20 “corrective disclosure” that revealed to the market the “truth” of the alleged misstatements. Loos 21 v. Immersion Corp., 762 F.3d 880, 890 (9th Cir. 2014) (citing Meyer v. Greene, 710 F.3d 1189, 22 1192–93 (11th Cir. 2013)). 23 Here, the absence of an adequate pleading of material misstatements or omissions 24 necessarily means Plaintiff has not alleged sufficient facts to show loss causation. In any event, 25 Plaintiff fails to show how the Spotlight report constitutes a corrective disclosure. “The mere 26 repackaging of already-public information by an analyst or short-seller is simply insufficient to 27 constitute a corrective disclosure.” In re Herbalife, Ltd. Sec. Litig., No. CV 14-2850, 2015 WL ORDER RE: MOTION TO DISMISS CASE NO. 16-cv-02398-RS 28 13 1 1245191, at *5 (C.D. Cal. Mar. 16, 2015); see also Meyer, 710 F.3d at 1199 (“[I]f the information 2 relied upon in forming an opinion was previously known to the market, the only thing actually 3 disclosed to the market when the opinion is released is the opinion itself, and such an opinion, 4 standing alone, cannot ‘reveal[ ] to the market the falsity’ of a company’s prior factual 5 representations.”) Plaintiff argues that the Spotlight report discloses more than an opinion. Yet, 6 the report states that it “expresses our research opinions, which we have based upon interpretation 7 of certain facts and observations, all of which are based on publicly available information.” 8 ACAC, Ex. A at 29. The report does not “reveal to the market something previously hidden or 9 actively concealed.” In re Herbalife, at *5 n. 9. Throughout the report, Spotlight clearly attributes its findings to public filings, websites and other publicly available documents. Because the 11 United States District Court Northern District of California 10 Spotlight report “only collected and opined on already public information, it does not constitute 12 disclosure of ‘the truth’ as required for a corrective disclosure.” Bonanno v. Cellular Biomedicine 13 Grp., Inc., 2016 U.S. Dist. LEXIS 119194 (N.D. Cal. Sept. 2, 2016). Thus, Plaintiff fails 14 adequately to plead loss causation. 15 B. Count II—Section 20(a) of the Exchange Act 16 Section 20(a) of the Exchange Act makes certain “controlling” individuals liable for 17 violations of Section 10(b) and its underlying regulations. There is no dispute that any liability 18 under Section 20(a) in this action is dependent on the existence of an underlying violation of 19 Section 10(b). In view of the dismissal of the 10(b) claim, this count must also be dismissed. V. CONCLUSION 20 21 The motion to dismiss is granted with leave to amend. Any amended complaint shall be 22 filed within 30 days of the date of this order. 23 IT IS SO ORDERED. 24 25 26 27 Dated: February 24, 2017 ______________________________________ RICHARD SEEBORG United States District Judge ORDER RE: MOTION TO DISMISS CASE NO. 16-cv-02398-RS 28 14

Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.

Why Is My Information Online?