Li v. KaloBios Pharmaceuticals, Inc. et al

Filing 94

ORDER Granting 61 Defendant Martin Shkreli's Motion to Dismiss. All claims are dismissed with leave to amend. Any amended complaint must be filed on or before 7/21/2017. Signed by Judge Edward J. Davila on 6/23/2017. (ejdlc3S, COURT STAFF) (Filed on 6/23/2017)

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1 2 3 UNITED STATES DISTRICT COURT 4 NORTHERN DISTRICT OF CALIFORNIA 5 SAN JOSE DIVISION 6 7 IN RE KALOBIOS PHARMACEUTICALS, INC. SECURITIES LITIGATION 8 Case No. 5:15-cv-05841-EJD ORDER GRANTING DEFENDANT MARTIN SHKRELI’S MOTION TO DISMISS 9 Re: Dkt. No. 61 10 United States District Court Northern District of California 11 12 Lead Plaintiffs Kaniz Fatema, Zeke Ingram, Bhaskar R. Gudlavenkatasiva, and Abuhena 13 M. Saifulislam, as well as Plaintiff Austin Isensee (collectively the “Plaintiffs”), individually and 14 on behalf of all the other persons similarly situated, bring this putative securities class action 15 against KaloBios Pharmaceuticals, Inc. (“KaloBios”) and individuals Ronald Martell, and Herb 16 Cross, and Martin Shkreli, alleging violations of Sections 10(b), 20(a) and 20A of the Securities 17 Exchange Act of 1934 and U.S. Securities and Exchange Commission (“SEC”) Rule 10b-5 18 promulgated thereunder. Defendants KaloBios, Ronald Martell, and Herb Cross reached a partial 19 settlement with Plaintiffs, which the court granted final approval of concurrently with the entry of 20 this order. Dkt. No. 93. Accordingly, Defendant Shkreli remains the sole non-settling defendant 21 in this case. 22 Presently before the court is Shkreli’s Motion to Dismiss for failure to state a claim 23 pursuant to Federal Rule of Civil Procedure 12(b)(6), and for failure to plead claims with the 24 requisite level of particularity under Federal Rule of Civil Procedure 9(b) and the Private 25 Securities Litigation Reform Act of 1995 (the “PSLRA”), 15 U.S.C. 78u-4 et seq. (1995). Def. 26 Shkreli Mot. to Dismiss (“MTD”), Dkt. No. 61. Having carefully considered the papers submitted 27 by both parties in this matter, Shkreli’s Motion will be granted for the reasons explained below. 28 1 Case No.: 5:15-cv-05841-EJD ORDER GRANTING MOTION TO DISMISS OF DEFENDANT MARTIN SHKRELI 1 2 I. REQUEST FOR JUDICIAL NOTICE As a preliminary matter, Shkreli requests that the court take judicial notice of certain 3 documents in connection with his Motion to Dismiss. See Dkt. No. 61-3 (“RJN”). Specifically, 4 Shkreli requests judicial notice of Exhibits 1-14 to the Declaration of Peter C. Buckley, filed in 5 support of Shkreli’s Motion. Exhs. 1-14, Buckley Decl., Dkt. Nos. 61-1, 61-2. Shkreli’s request 6 for judicial notice is unopposed as to Exhibits 1-4 and 7-10, and it is therefore GRANTED. 7 However, Plaintiffs oppose Shkreli’s request as to Exhibits 5 and 6, purported transcriptions of 8 interviews quoted in FAC, as well as Exhibits 11-14, four news articles Plaintiffs assert are not 9 cited in the FAC. See Opp. at 16. When ruling on a motion to dismiss, courts may consider documents incorporated by 11 United States District Court Northern District of California 10 reference in a complaint or upon which a complaint necessarily relies, as well as matters subject to 12 judicial notice. Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1061 (9th Cir. 13 2008) (citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 14 L.Ed.2d 179, (2007)). Federal Rule of Evidence 201 allows a court to take judicial notice of 15 adjudicative facts “not subject to reasonable dispute in that [they are] ... capable of accurate and 16 ready determination by resort to sources whose accuracy cannot reasonably be questioned.” Fed. 17 R. Evid. 201(b)(2). 18 Judicial notice of news articles may be appropriate in securities fraud cases to show “that 19 the market was aware of the information contained in news articles.’” In re Am. Apparel, 855 F. 20 Supp. 2d at 1062 (quoting Heliotrope Gen., Inc. v. Ford Motor Co., 189 F.3d 971, 981 n.18 (9th 21 Cir. 1999); see ScripsAmerica, Inc. v. Ironridge Glob. LLC, 119 F. Supp. 3d 1213 (C.D. Cal. 22 2015) (“Taking judicial notice of news reports and press releases is appropriate to show that the 23 market was aware of the information contained in news articles”); In re Splash Tech. Holdings, 24 Inc. Sec. Litig., No. C 99-00109 SBA, 2000 WL 1727405, at *7, n. 6 (N.D. Cal. Sept. 29, 2000) 25 (holding that because omitted information in the case had been disclosed elsewhere, “the Court 26 may take judicial notice that the market already was aware of the information.”); see also Benak 27 ex rel. All. Premier Growth Fund v. All. Capital Mgmt. L.P., 435 F.3d 396, 401 n. 15 (3d Cir. 28 2 Case No.: 5:15-cv-05841-EJD ORDER GRANTING MOTION TO DISMISS OF DEFENDANT MARTIN SHKRELI 1 2006) (“We see no basis to upset the District Court’s decision to take judicial notice of newspaper 2 articles supplied by appellees.”). However, judicial notice of news articles is generally “limited to 3 a narrow set of circumstances . . . e.g., in securities cases for the purpose of showing that particular 4 information was available to the stock market.” Gerritsen v. Warner Bros. Ent. Inc., 112 F. Supp. 5 3d 1011, 1028 (C.D. Cal. 2015). Here, Shkreli requests judicial notice of four news articles regarding his alleged 7 misconduct in connection with his other companies prior to the Class Period. See Exhs. 11-14, 8 Buckley Decl. Specifically, Exhibit 11 is an article published by The New York Times on 9 September 22, 2015 entitled “Martin Shkreli, the Mercurial Man Behind the Drug Price Increase 10 That Went Viral;” Exhibit 12 is an article published by FierceBioTech on August 17, 2015 entitled 11 United States District Court Northern District of California 6 “Retrophin goes after Shkreli with a $65M suit, claims of flagrant mismanagement;” Exhibit 13 is 12 an article published by Newsweek on September 13, 2015 entitled “Federal Prosecutors Target 13 Martin Shkreli in a Criminal Investigation;” and Exhibit 14 is an article published by Forbes on 14 August 18, 2015 entitled “Retrophin Sue Founder Martin Shkreli For $65M. His Reply: 15 ‘Preposterous.’” RJN at 2-3. 16 Shkreli does not offer these news reports for the truth of their content, but rather to refute 17 Plaintiffs’ “fraud-on-the-market” theory by demonstrating that public news sources had “already 18 widely disseminated the alleged omissions to the investing public” at the time of his arrest and 19 public release of the indictments on December 17, 2015. Id. at 3. Because Shkreli’s request is for 20 the purposes of showing “that the market was [already] aware of the information contained in 21 news articles,” it therefore fits the “narrow set of circumstances” in securities litigation where 22 judicial notice of newspaper articles is appropriate. See Gerritsen, 112 F. Supp. 3d at 1028; 23 Heliotrope, 189 F.3d at 981, 975-76 (explaining that where the market has already been made 24 aware of the purportedly concealed information “the facts allegedly omitted by the defendant 25 would already be reflected in the stock’s prices and the market will not be misled.”); Benak, 435 26 F.3d at 401 n. 15 (affirming district court’s decision to take judicial notice of news articles, 27 explaining “[w]hether appellants read the articles or were aware of them is immaterial” because 28 3 Case No.: 5:15-cv-05841-EJD ORDER GRANTING MOTION TO DISMISS OF DEFENDANT MARTIN SHKRELI 1 the articles “serve only to indicate what was in the public realm at the time, not whether the 2 contents of those articles were in fact true.”); In re Merrill Lynch & Co. Research Reports Sec. 3 Litig., 289 F.Supp.2d 416, 425 n. 15 (S.D.N.Y.2003) (“The Court may take judicial notice of 4 newspaper articles for the fact of their publication without transforming the motion into one for 5 summary judgment.”). Moreover, unlike in cases such as Gerritsen, where the court declined to take judicial 6 7 notice of articles published by third party sources like Wikipedia and Answers.com based in part 8 on the fact that such sources are not reliable, there can be little dispute as to the authenticity of the 9 articles here, which include publications by credible and mainstream sources like The New York Times, Forbes and Newsweek. Accordingly, the court GRANTS Shkreli’s request for judicial 11 United States District Court Northern District of California 10 notice as to Exhibits 11-14. As to Exhibits 5 and 6, Shkreli’s request for judicial notice is 12 DENIED because the court did not rely on these exhibits in reaching this decision. 13 II. BACKGROUND KaloBios is a biopharmaceutical company founded in 2000 and headquartered in South 14 15 San Francisco, California. FAC ¶ 4. KaloBios’s stock traded on the NASDAQ under the ticker 16 symbol “KBIO.” Id. Martin Shkreli served as the Chief Executive Officer (“CEO”) and 17 Chairman of KaloBios during the Class Period. Id. ¶ 29, 54. Prior to the Class Period, Shkreli 18 was a hedge fund manager and pharmaceutical investor who co-founded the investment company 19 MSMB in September 2009 and the biopharmaceutical company Retrophin in 2011.1 Id. ¶ 5. 20 Shkreli served as a managing partner of MSMB Capital until it ceased to operate in 2013, and 21 CEO of Retrophin from December 17, 2012 until October 13, 2014. Id. ¶¶ 62(a), 63. Beginning in early January 2015, prior to the Class Period, KaloBios was under “severe 22 23 financial distress,” and by mid-2015, the company’s leadership began searching for other potential 24 25 26 27 28 1 Pursuant to Plaintiffs’ FAC, “MSMB” refers to an umbrella of affiliated investment companies co-founded by Defendant Shkreli and Marek Biestek, including MSMB Capital LLC, MSMB Capital Management LLC, and MSMB Healthcare Management LLC. “Retrophin” refers to affiliated drug companies founded by Defendant Shkreli, including Retrophin, Inc. and Retrophin LLC. See FAC at 4, n. 1. The court adopts these definitions for the purposes of this Motion. 4 Case No.: 5:15-cv-05841-EJD ORDER GRANTING MOTION TO DISMISS OF DEFENDANT MARTIN SHKRELI 1 investors. Id. ¶¶ 43-44. On November 5, 2015, KaloBios announced “a 61% workforce reduction 2 and the pursuit of ‘strategic alternatives,’” including the potential sale of the company or its assets, 3 a corporate acquisition, further restricting its activities, winding down operations, and/or 4 bankruptcy proceedings. Id. ¶¶ 46-47. By November 9, 2015, KaloBios announced it was halting 5 enrollment in its clinical studies, and on November 13, 2015, KaloBios issued a press release 6 stating that its limited cash resources precluded continued investigation of strategic alternatives, 7 and as a result, it would begin efforts to “wind down its operations” and liquidate its assets. Id. ¶¶ 8 47, 48. As a result of this news, KaloBios’s stock further declined, closing at $0.90 on November 9 13, 2015. Id. ¶ 49. 10 Between November 10, 2015 and November 24, 2015, Shkreli purchased 2,075,200 shares United States District Court Northern District of California 11 of KaloBios common stock on “the open market,” making him the largest shareholder of 12 KaloBios, and prompting discussions with KaloBios’ “regarding possible direction for the 13 company to continue in operation.” Id. ¶¶ 6, 50. Just prior to the Shkreli’s purchase of the 14 majority shares of KaloBios stock, between August and September 2015, reports of criminal 15 investigations into Shkreli’s management of Retrophin and MSMB Capital were published by 16 mainstream news sources including The New York Times, Forbes and Newsweek. Buckley Decl., 17 Exhs. 11-14, Dkt. No. 61-2. For example, an article published by Newsweek on September 13, 18 2015 entitled “Federal Prosecutors Target Martin Shkreli in a Criminal Investigation;” stated that 19 Shkreli was under investigation for allegations of “insider trading, disguising the purpose of 20 corporate payments for his benefit, defrauding shareholders by snatching business opportunities 21 for himself, destruction of evidence, failure to disclose material facts to shareholders and other 22 potential crimes.” Id., Exh. 13. Nevertheless, by November 19, 2105, KaloBios’ Board had 23 accepted Shkreli’s financing proposal and appointed him as CEO. FAC ¶¶ 50-54. The existing 24 Board then resigned. See id. ¶ 62(b). 25 After Shkreli was appointed as CEO, he made a number of public statements regarding 26 KaloBios’ strong potential and positive progress, as well statements regarding his efforts to turn 27 the company around financially and why he was qualified to be the CEO. See id. ¶¶ 54, 57, 60, 28 5 Case No.: 5:15-cv-05841-EJD ORDER GRANTING MOTION TO DISMISS OF DEFENDANT MARTIN SHKRELI 1 62, 65, 68, 70, 73, 75, 78. Plaintiffs allege that these statements led to a recovery and rise in 2 KaloBios stock price. Id. However, on December 17, 2015, Shkreli was arrested for alleged 3 misconduct at his previous company, Retrophin, the details of which were outlined in a 30-page 4 federal indictment and a 22-page SEC Complaint made public the same day. Id. ¶¶ 15, 81-82. 5 Shkreli was immediately terminated as CEO. Id. ¶ 81. When the news of Shkreli’s arrest broke, 6 KaloBios stock price fell dramatically, “plummet[ing] 53% in pre-open trading before NASDAQ 7 halted all trading so it could request more information from KaloBios.” Id. ¶ 16. Soon thereafter 8 on December 24, 2015, NASDAQ announced that KaloBios’s stock would be delisted, and on 9 December 29, 2016 KaloBios filed for Chapter 11 bankruptcy. Id. ¶¶ 16, 88-89. When trading resumed on January 13, 2016, KaloBios stock “opened at $2.51, reached an intra-day low of 11 United States District Court Northern District of California 10 $1.02, and finally closed at $4.39.” Id. ¶ 90. This lawsuit followed. 12 III. LEGAL STANDARD 13 Federal Rule of Civil Procedure 8(a) requires a plaintiff to plead each claim with sufficient 14 specificity to “give the defendant fair notice of what the … claim is and the grounds upon which it 15 rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal quotations omitted). A 16 complaint which falls short of the Rule 8(a) standard may be dismissed if it fails to state a claim 17 upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). Dismissal of a claim under Rule 18 12(b)(6) may be based on a “lack of a cognizable legal theory or the absence of sufficient facts 19 alleged under a cognizable legal theory.” Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 20 1097, 1104 (9th Cir. 2008); Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1988). 21 Moreover, the factual allegations “must be enough to raise a right to relief above the speculative 22 level” such that the claim “is plausible on its face.” Twombly, 550 U.S. at 556-57. 23 At the motion to dismiss stage, the court must read and construe the complaint in the light 24 most favorable to the non-moving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337–38 (9th 25 Cir. 1996). The court must accept as true all “well-pleaded factual allegations.” Ashcroft v. Iqbal, 26 556 U.S. 662, 664 (2009). However, “courts are not bound to accept as true a legal conclusion 27 couched as a factual allegation.” Twombly, 550 U.S. at 555. “In all cases, evaluating a 28 6 Case No.: 5:15-cv-05841-EJD ORDER GRANTING MOTION TO DISMISS OF DEFENDANT MARTIN SHKRELI 1 complaint’s plausibility is a context-specific endeavor that requires courts to draw on ... judicial 2 experience and common sense.” Levitt v. Yelp! Inc., 765 F.3d 1123, 1135 (9th Cir. 2014) 3 (quoting Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 2011)). 4 Claims that sound in fraud are subject to a heightened pleading standard. Fed. R. Civ. P. 5 9(b) (“In alleging fraud or mistake, a party must state with particularity the circumstances 6 constituting fraud or mistake.”); Swartz v. KPMG LLP, 476 F.3d 756, 765 (9th Cir. 2007) (“Rule 7 9(b) imposes heightened pleading requirements where the object of the conspiracy is fraudulent”). 8 The allegations must be specific enough to give defendants notice of the particular misconduct 9 which is alleged to constitute the fraud charged. Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir. 1985). To that end, the allegations must contain “an account of the time, place, and specific 11 United States District Court Northern District of California 10 content of the false representations as well as the identities of the parties to the 12 misrepresentations.” Swartz, 476 F.3d at 764l; see Vess v. Ciba-Geigy Corp. USA, 317 F.3d 13 1097, 1106 (9th Cir.2003) (citation omitted) (explaining that averments of fraud must be 14 accompanied by the “who, what, when, where, and how” of the misconduct charged). In the 15 context of a securities litigation case, Rule 9(b) requires the particular circumstances indicating 16 falseness of the defendant’s statements to be pled, specifically, “an explanation as to why the 17 statement or omission complained of was false or misleading.” See In re GlenFed, Inc. Sec. Litig., 18 42 F.3d 1541, 1549 (9th Cir.1994) (en banc) (superseded by statute on other grounds). In other 19 words, fraud or claims asserting fraudulent conduct must generally contain more specific facts 20 than is necessary to support other causes of action. 21 When deciding whether to grant a motion to dismiss, the court generally “may not consider 22 any material beyond the pleadings.” Hal Roach Studios, Inc. v. Richard Feiner & Co., 896 F.2d 23 1542, 1555 n. 19 (9th Cir. 1990). However, the court may consider material submitted as part of 24 the complaint or relied upon in the complaint, and may also consider material subject to judicial 25 notice. See Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001). In the event that a 26 motion to dismiss is granted, “leave to amend should be granted ‘unless the court determines that 27 the allegation of other facts consistent with the challenged pleading could not possibly cure the 28 7 Case No.: 5:15-cv-05841-EJD ORDER GRANTING MOTION TO DISMISS OF DEFENDANT MARTIN SHKRELI 1 deficiency.’” DeSoto v. Yellow Freight Sys., Inc., 957 F.2d 655, 658 (9th Cir. 1992) (quoting 2 Schreiber Distrib. Co. v. Serv–Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986)). 3 IV. DISCUSSION 4 This is a federal securities class action brought by certain purchasers of KaloBios common 5 stock between the Class Period of November 19, 2015 and December 16, 2015 (the Class Period). 6 FAC ¶ 2. Plaintiffs allege that because of Shkreli’s “prior improprieties, frauds, and illegal and 7 criminal misconduct,” the public statements he made touting his leadership and the positive 8 prospects for KaloBios were materially false and misleading. See id. ¶¶ 55, 58, 61, 63, 66, 69, 71, 9 74, 76, 79. They further allege that Shkreli had an obligation to disclose his alleged misconduct in connection with Retrophin and MSMB Capital to shareholders when he made these statements 11 United States District Court Northern District of California 10 about KaloBios. Plaintiffs contend that as a result of Shkreli’s statements, as well as his failure to 12 disclose the allegations of misconduct against him, “KaloBios securities traded at inflated prices 13 during the Class Period.” Id. ¶¶ 17, 91. However, Plaintiffs assert that once the “truth” about 14 Shkreli’s fraudulent conduct was “revealed” to the public at the time of Shkreli’s arrest, 15 KaloBios’s stock “suffered a precipitous decline in market value, thereby causing significant 16 losses and damages to Plaintiffs and other Class members.” Id. 17 These allegations fall into two general categories: (1) “reputation and qualification” 18 allegations, asserting that Shkreli mislead investors regarding his reputation and qualifications to 19 lead KaloBios by failing to disclose his alleged misconduct at Retrophin and MSMB, and through 20 affirmative misstatements about his business experience, credibility, and trustworthiness; and (2) 21 “KaloBios recovery and success” allegations, asserting that Shkreli misled investors through 22 unrealistic statements touting KaloBios’ financial recovery, advancement potential and operational 23 successes. See FAC ¶¶15, 54-55, 57-58, 60-66, 68-69, 70-71, 74-76, 79, 82, 84. 24 To bring a private securities fraud action under Section 10(b) and Rule 10b–5, a plaintiff 25 must establish: “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a 26 connection between the misrepresentation or omission and the purchase or sale of a security; (4) 27 reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” 28 8 Case No.: 5:15-cv-05841-EJD ORDER GRANTING MOTION TO DISMISS OF DEFENDANT MARTIN SHKRELI 1 Lloyd v. CVB Financial Corp., 811 F.3d 1200, 1206 (9th Cir. 2016) (citations omitted). Shkreli 2 moves to dismiss on the grounds that Plaintiffs fail to plead facts sufficient to establish a material 3 misrepresentation or omission (falsity), or reliance. Statements and Omissions Regarding Shkreli’s “Reputation and Qualification” 4 A. 5 First, Shkreli argues that Plaintiffs’ claims arising from the “reputation and qualification” 6 statements and omissions should be dismissed because they fail to satisfy the element of reliance. 7 To plead reliance in a securities fraud case, a class action plaintiff may rely on the “fraud- 8 on-the-market presumption” set forth in Basic v. Levinson, 485 U.S. 224 (1988). This theory is 9 based on the assumption that “[t]he price of a stock traded in an efficient market fully reflects all publicly available information about the company and its business.” Connecticut Ret. Plans & 11 United States District Court Northern District of California 10 Trust Funds v. Amgen, Inc., 660 F.3d 1170, 1173 (9th Cir. 2011) (citing Basic, 485 U.S. at 241- 12 242). Assuming this premise, any purchaser of stock at the prevailing market prices is therefore 13 “presumed to have relied on that price – and, by extension, each piece of publicly available 14 information it reflects – as a measure of the stock’s value, even if the [purchaser] never saw that 15 information.” Id. (citing Basic, 485 U.S. at 247). Unlike pleading actual reliance, “[i]n a fraud on 16 the market case, the plaintiff claims that he was induced to trade stock not by any particular 17 representations made by corporate insiders, but by the artificial stock price set by the market in 18 light of statements made by the insiders as well as all other material public information.” In re 19 Apple Computer Sec. Litig., 886 F.2d 1109, 1114 (9th Cir. 1989). 20 However, because this presumption is based on the theory that the market was deceived by 21 a defendant’s misleading statements or omissions, the presumption may be rebutted where a 22 defendant can show that the truth had actually been made available to the market through a 23 different source. See Provenz v. Miller, 102 F.3d 1478, 1492 (9th Cir. 1996) (“In a ‘fraud on the 24 market’ case an omission is materially misleading only if the information has not already entered 25 the market.”); In re Convergent Techs. Sec. Litig., 948 F.2d 507, 513 (9th Cir. 1991) (“[A]n 26 omission is materially misleading only if the information has not already entered the market. If the 27 market has become aware of the allegedly concealed information, the facts allegedly omitted by 28 9 Case No.: 5:15-cv-05841-EJD ORDER GRANTING MOTION TO DISMISS OF DEFENDANT MARTIN SHKRELI 1 the defendant would already be reflected in the stock’s price and the market will not be misled.”) 2 (internal quotations omitted). This principle is often referred to as the “truth-on-the-market” 3 doctrine. Provenz, 102 F.3d at 1493. However, a defendant seeking to invoke the “truth-on-the- 4 market” doctrine to rebut a “fraud-on-the-market” presumption in a securities fraud case must 5 satisfy a heavy burden of proof. Id. Specifically, the Ninth Circuit has instructed that the “truth- 6 on-the-market” doctrine requires the defendant to “prove that the information that was withheld or 7 misrepresented was ‘transmitted to the public with a degree of intensity and credibility sufficient 8 to effectively counterbalance any misleading impression created by the insider’s one-sided 9 representations.’” Id. at 1492-93 (quoting In re Apple, 886 F.2d at 1116). Here, Shkreli acknowledges the high standard of proof required to show “truth-on-the- 11 United States District Court Northern District of California 10 market,” but contends that the significant media coverage of his alleged misconduct meets that 12 standard here. Shkreli argues that because information about his dubious reputation was already 13 well-documented in the press, and was therefore publicly available to the market prior to and 14 during the Class Period, Plaintiffs are not entitled to a presumption of reliance under the “fraud- 15 on-the-market” theory. The court agrees. 16 As discussed above, the court has taken judicial notice of four news articles in support of 17 Shkreli’s argument that information about the misconduct he ostensibly concealed or 18 misrepresented was already publically available to the market at the time of his arrest on 19 December 17, 2015. Supra; see Exhs. 11-14, Buckley Decl. These articles cover Shkreli’s public 20 termination from Retrophin and its subsequent lawsuit against him, identify a multitude of 21 personal and professional accusations of misconduct, and confirm the existence of an ongoing 22 criminal investigation into his actions, among other things. Id. For example, on September 22, 23 2015, The New York Times published the article “Martin Shkreli, the Mercurial Man Behind the 24 Drug Price Increase That Went Viral,” which reported the following: 25 26 27 28 The board of Retrophin fired Mr. Shkreli a year ago. In August Retrophin filed a federal lawsuit in New York accusing its former chief executive of breaching his duty of loyalty to the company. It accused Mr. Shkreli of arranging to pay off some angry investors in his hedge fund by having Retrophin enter into consulting 10 Case No.: 5:15-cv-05841-EJD ORDER GRANTING MOTION TO DISMISS OF DEFENDANT MARTIN SHKRELI agreements with them. 1 2 Exh. 11, Buckley Decl. The article also included information that “[a] former portfolio manager at 3 MSMB … said in an affidavit early last year that he and his family were repeatedly harassed on 4 social media by Mr. Shkreli in 2013.” Id. 5 Prior to that, on August 17, 2015, a news publication covering the biotech industry called FierceBioTech published the article “Retrophin goes after Shkreli with a $65M suit, claims of 7 flagrant mismanagement.” Exh. 12, Buckley Decl. This article reported that Retrophin fired 8 Shkreli and was now suing him for more than $65 million, alleging he mismanaged the company’s 9 funds, “us[ing] a series of self deals, falsified documents and extralegal maneuvers to transform 10 Retrophin into a personal bank that could clear his firm’s debts and line his pockets.” Id. A day 11 United States District Court Northern District of California 6 later on August 18, 2015, Forbes also published an article entitled “Retrophin Sues Founder 12 Martin Shkreli For $65M. His Reply: ‘Preposterous,’” reporting similar information. Exh. 14, 13 Buckley Decl. 14 And perhaps most pertinently, on September 13, 2015, Newsweek published its article, 15 “Federal Prosecutors Target Martin Shkreli in a Criminal Investigation.” Exh. 13, Buckley Decl. 16 The Newsweek article contained extensive discussion of the criminal investigation into Shkreli, 17 which it stated had been underway since at least January. Id. Newsweek wrote that “[t]he 18 criminal investigation involves Retrophin, a public company where Shkreli served as an officer, 19 director, and 10 percent owner of the outstanding stock before being ousted amid multiple 20 allegations of misconduct.” Id. The article goes on to detail many of the specific allegations 21 against Shkreli, writing: 22 23 24 25 26 27 28 The inquiry, according to court records and people with knowledge of the inquiry, involves such a vast number of suspected crimes it is difficult to know where to start. A quick summary of the government’s theory: If there was money, Shkreli took it. If there were facts to be revealed, Shkreli hid them. If there were securities laws, Shkreli broke them. … According to the court records and people with knowledge of the case, the allegations against Shkreli that are under investigation involve insider trading, disguising the purpose of corporate payments for his benefit, defrauding shareholders by snatching 11 Case No.: 5:15-cv-05841-EJD ORDER GRANTING MOTION TO DISMISS OF DEFENDANT MARTIN SHKRELI business opportunities for himself, destruction of evidence, failure to disclose material facts to shareholders and other potential crimes. 1 2 Id. Newsweek even included that after being notified of the investigation, Shkreli “invoked his 3 Fifth Amendment right against self-incrimination because of the criminal case whenever his 4 testimony has been sought in the many civil lawsuits filed against him about his business 5 dealings.” Id. 6 Based on the content of these articles, as well as the credibility and wide circulation of 7 their respective sources, the court agrees that the market was aware of the information Plaintiffs 8 accuse Shkreli of misrepresenting or failing to disclose. Any undisclosed information that might 9 have otherwise misled the market about Shkreli’s reputation would not have done so here because such information had already been substantively disseminated by the press. As to Shkreli’s 11 United States District Court Northern District of California 10 proactive statements referencing his trustworthiness, or touting his prior business ventures as 12 “attributes” and “indicators of his professional competence,” Plaintiffs argue that the “facts and 13 circumstances” of Shkreli’s alleged misconduct while at MSMB and Retrophin “made clear that 14 he and his cronies … had been utterly unfit to run KaloBios,” and therefore these statements were 15 “materially false and misleading when made.” Opp. at 12-13. Assuming that these statements 16 could be considered materially false and misleading, the market here would not have been misled 17 because the “truth”- or less positive considerations - regarding Shkreli’s reputation and prior 18 business dealings was already in the public domain. While Plaintiffs assert that the “facts and 19 circumstances” of Shkreli’s misconduct were first revealed to investors on December 17, 2015, the 20 articles published by the New York Times, Newsweek, FierceBioTech, and Forbes show 21 otherwise. See Exhs. 11-14, Buckley Decl. 22 In response, Plaintiffs argue that even if the articles exposed some of the relevant 23 information regarding Shkreli’s misconduct, the indictment and SEC Complaint that were made 24 public at the time of his arrest “set forth extensive, previously undisclosed details as to MSMB 25 and Retrophin misconduct not discussed in the articles Shkreli cites… such as fraudulent schemes 26 with outside legal counsel….’” Opp. at 19 (emphasis in original). Plaintiffs conclude that the 27 articles therefore could not have conveyed the misconduct to investors with the “degree of 28 12 Case No.: 5:15-cv-05841-EJD ORDER GRANTING MOTION TO DISMISS OF DEFENDANT MARTIN SHKRELI 1 intensity and credibility sufficient to effectively counterbalance any misleading impression” 2 created by his representations. Id. (citing In re Apple, 886 F.2d at 1116 and Provenz, 102 F.3d at 3 1492-1493). The court again disagrees. To the extent that Shkreli’s own public statements 4 conjured a misleading impression of his reputation and qualifications for managing KaloBios, that 5 impression would have been offset by the highly public allegations of fraud, insider trading, and 6 self-dealing, among others, that are now tied to Shkreli’s public image. See e.g. Exh. 13, Buckley 7 Decl. The fact that certain specific details of Shkreli’s alleged misconduct were not included in 8 the articles does not mean the articles were insufficient to convey the relevant information to the 9 market. To the contrary, the accusations included in the articles are largely consistent with the “previously undisclosed” details identified in Plaintiffs’ Opposition brief. And, even more 11 United States District Court Northern District of California 10 relevantly, they are consistent with the information Plaintiffs argue was misrepresented and 12 omitted during the Class Period – namely, that Shkreli had been involved in various fraudulent 13 schemes at MSMB and Retrophin that would make him unfit to be CEO of KaloBios. 14 Plaintiffs argue that “Shkreli’s Motion also ignores the important distinction between an 15 investigation, a fact referenced in the four articles he cites, versus a filed SEC complaint, filed 16 indictments, an arrest, and termination as KaloBios CEO, which together served as the alleged 17 corrective event on December 17, 2015.” Opp. at 20 (emphasis in original). However, this 18 distinction is largely irrelevant to the question of whether Shkreli misrepresented or omitted 19 material facts prior to that date. The statements and omissions at issue here would have occurred 20 prior to Shkreli’s indictment, arrest, and termination. As a result, to the extent that Shkreli had a 21 duty to disclose the allegations of misconduct against him, the obligation would be to disclose the 22 substance of the underlying misconduct allegations, not speculate as to the future consequences of 23 such allegations. Because the criminal investigation, the indictment, and the arrest all arose from 24 substantively the same allegations of misconduct against Shkreli, Plaintiffs’ attempt to distinguish 25 between the market’s awareness the investigation versus its lack of awareness that the 26 investigation would subsequently result in an indictment and arrest is unpersuasive. 27 28 While it is certainly true that KaloBios stock price suffered a dramatic hit as a result of 13 Case No.: 5:15-cv-05841-EJD ORDER GRANTING MOTION TO DISMISS OF DEFENDANT MARTIN SHKRELI 1 Shkreli’s arrest, this is not itself evidence of fraud. A company’s stock price is almost certainly 2 going to decline upon news that its CEO was arrested, regardless of whether the CEO had 3 fraudulently misled the market. Plaintiffs’ theory appears to be that Shkreli’s arrest and the public 4 release of the allegations contained in the indictment somehow revealed to the market the truth 5 about Shkreli’s lack of fitness to be CEO of KaloBios. However, Shkreli’s reputation – positive 6 and negative – was already widely known prior to his arrest. In other words, Shkreli’s arrest did 7 not disclose or correct material information about him or his reputation that was not previously 8 available to investors, other than the fact that he was actually arrested. 9 Finally, Plaintiffs argue that, notwithstanding the civil and criminal misconduct allegations discussed by the articles, “those very same articles include [Shkreli’s] strong denials of 11 United States District Court Northern District of California 10 wrongdoing and his threats to counter-sue,” and thus are insufficient to rebut the “fraud on the 12 market” presumption. Opp. at 18. Plaintiffs cite Berry v. Valence Tech., Inc., where the court 13 identified a CEO’s public response refuting the at-issue allegations as a relevant consideration in 14 finding that there was no inquiry notice. 175 F.3d 699, 706 (9th Cir. 1999). However, the court 15 also explained that absent more, a response or public denial “is insufficient to dissipate ‘storm 16 clouds’ over a company once they have gathered.” Id. Moreover, the article at issue in Berry was 17 distinguishable from those at issue here. There, the Ninth Circuit noted that the article “made no 18 allegation of actual fraud on the part of [the defendant] or its principals,” and explained that “[a] 19 press article’s general skepticism about a company’s future prospects is not sufficient to excite 20 inquiry into the specific possibility of fraud.” Id. at 705. In contrast, the articles offered here 21 include more than “general skepticism,” and contain specific references to the criminal 22 investigation into Shkreli and the various allegations against him. Indeed, the public scrutiny of 23 Shkreli was so significant during this time that it is highly improbable Shkreli’s denials of 24 wrongdoing would “dissipate the storm clouds” that had gathered around him. 25 In light of the significant publicity garnered by the criminal investigation and related 26 accusations of misconduct prior to Shkreli’s arrest on December 17, 2015, the court agrees that 27 the market was aware of the information Plaintiffs accuse Shkreli of withholding or 28 14 Case No.: 5:15-cv-05841-EJD ORDER GRANTING MOTION TO DISMISS OF DEFENDANT MARTIN SHKRELI 1 misrepresenting before any “corrective disclosure” occurred. Consequently, while a “truth-on-the- 2 market” defense is a heavy burden at this stage of proceedings, the court finds that Shkreli has met 3 that burden and rebutted the fraud-on-the-market presumption relied on by Plaintiffs here. 4 Heliotrope, 189 F.3d at 981, 975-76 (explaining that in a “fraud on the market” case “[i]f the 5 market has become aware of the allegedly concealed information, the facts allegedly omitted by 6 the defendant would already be reflected in the stock’s prices” and reliance will not be satisfied); 7 In re Apple, 886 F.2d at 1115 (“[I]n a fraud on the market case, the defendant’s failure to disclose 8 material information may be excused where that information has been made credibly available to 9 the market by other sources.”). Absent this presumption, Plaintiffs fail to adequately plead reliance. Shkreli’s Motion to Dismiss will therefore be GRANTED as to claims based on the 11 United States District Court Northern District of California 10 alleged “reputation and qualification” statements or omissions. 12 Because Plaintiffs fail to satisfy the element of reliance, the court need not reach the 13 question whether Shkreli actually had an obligation to disclose allegations of misconduct 14 unrelated to KaloBios to the KaloBios shareholders. It merits noting that courts have been 15 skeptical toward theories of liability based on broad duties to disclose allegations of misconduct, 16 especially when the connection between the liability sought and the alleged misconduct is 17 attenuated. See e.g., Retail Wholesale & Dep’t Store Union Local 338Retirement Fund v. 18 Hewlett-Packard Co., 52 F. Supp. 3d 961, 971 (N.D. Cal. 2014), aff’d sub nom. Retail Wholesale 19 & Dep’t Store Union Local 338 Ret. Fund v. Hewlett-Packard Co., 845 F.3d 1268 (9th Cir. 2017) 20 (“Plaintiff’s theory of liability appears to be that a corporation or senior executive is liable 21 whenever that executive is involved in misconduct that might lead to his or her resignation or 22 termination, regardless of the nature of that misconduct, unless the conduct is disclosed. But that is 23 not the law. …For an omission to be actionable, there must be a duty to disclose the underlying 24 noncompliance or misconduct.”); see also In re ITT Educ. Servs. Sec. & Derivative Litig., 859 F. 25 Supp. 2d 572, 579 (S.D.N.Y. 2012) (holding that “securities laws do not impose a general duty to 26 disclose corporate mismanagement or uncharged criminal conduct.”); Greenstone v. Cambex 27 Corp., 777 F. Supp. 88, 90-91 (D.Mass. 1991), aff’d, 975 F.2d 22 (1st Cir. 1992) (explaining that 28 15 Case No.: 5:15-cv-05841-EJD ORDER GRANTING MOTION TO DISMISS OF DEFENDANT MARTIN SHKRELI 1 because “defendants had no duty to disclose information about their illegal business practices,” 2 they therefore “cannot be liable under Rule 10b-5”). However, the court declines to address this 3 question at this time. 4 5 B. Statements Regarding KaloBios’ Financial Recovery and Promising Business Potential The second category of statements Plaintiffs identify as false and misleading concern more 6 specific representations regarding KaloBios’ financial recovery, advancement potential and 7 operational successes. See FAC ¶¶15, 55, 58. 61, 63, 66, 69, 71, 74, 76, 79, 82, 84. This includes 8 9 10 statements like Shkreli’s comment that he will “give” KaloBios $100 million of funding necessary to advance its drug trials (¶¶ 11, 68(e)), his stated belief that “I think we will grow KBIO into a large company” (¶57), and press releases or interviews highlighting the “very promising” potential 11 United States District Court Northern District of California of its primary drug candidate, lenzilumab (¶¶11, 54(a), 60, 68(a)). Plaintiffs contend that these 12 representations were so unrealistic in light of Shkreli’s prior misconduct that they amount to being 13 knowingly false and misleading. 14 While these more specific statements do offer, in the court’s view, a potentially stronger 15 basis for allegations that the market could have been misled by Shkreli, Plaintiffs do not actually 16 allege why these statements were false, or plead specific facts that would suggest why an 17 optimistic view of the company was patently misleading or disingenuous. For instance, with 18 respect to Shkreli’s remark that he will “give” KaloBios $100 million of funding in order to 19 advance its drug trials, Plaintiffs do not allege that, at the time he made the comment, Shkreli 20 could not follow through on this commitment. Similarly, Plaintiffs do not claim that lenzilumab 21 22 23 24 was not a “promising” drug or that its trial would not have proceeded as planned, had Shkreli not been arrested. The fact that Shkreli’s arrest prevented such plans from being realized does not render public statements about them fraudulent if they were reasonable when made. Plaintiffs’ argument that the plans were “unrealistic” is too speculative and vague to satisfy the pleading 25 standard. While Plaintiffs may be correct that the long-term success of KaloBios was unrealistic, 26 the reality is that Shkreli was arrested before proof of this theory had an opportunity to come to 27 28 16 Case No.: 5:15-cv-05841-EJD ORDER GRANTING MOTION TO DISMISS OF DEFENDANT MARTIN SHKRELI 1 light. Accordingly, the court concludes that Plaintiffs have failed allege a sufficient factual basis 2 for their allegations that the “KaloBios recovery and success” statements were false or misleading. 3 Accordingly, Shkreli’s Motion to Dismiss will be GRANTED with respect to claims these 4 statements as well. 5 6 V. ORDER For the foregoing reasons, Shkreli’s Motion to Dismiss (Dkt. No 61) is GRANTED. All 7 claims are DISMISSED WITH LEAVE TO AMEND. Any amended complaint must be filed on 8 or before July 21, 2017. 9 10 United States District Court Northern District of California 11 12 13 IT IS SO ORDERED. Dated: June 23, 2017 ______________________________________ EDWARD J. DAVILA United States District Judge 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 17 Case No.: 5:15-cv-05841-EJD ORDER GRANTING MOTION TO DISMISS OF DEFENDANT MARTIN SHKRELI

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