Abrams v. MiMedx Group, Inc. et al
Filing
47
ORDER denying 41 Motion to Dismiss for Failure to State a Claim; denying 46 Motion for Oral Argument. Signed by Judge Thomas W. Thrash, Jr on 8/13/2014. (ss)
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
SPENCER ABRAMS
Individually and on Behalf of All
Others Similarly Situated, et al.,
Plaintiffs,
v.
CIVIL ACTION FILE
NO. 1:13-CV-3074-TWT
MIMEDX GROUP, INC., et al.,
Defendants.
OPINION AND ORDER
This is a securities fraud class action. The Plaintiffs allege that MiMedx Group,
Inc., a developer of therapeutic biomaterials, falsely stated that its injectable products
qualified for an FDA exemption from drug regulation, and that the Defendants failed
to disclose an FDA investigation of the products. The Defendants argue that they
properly disclosed the risks associated with marketing the injectable products without
FDA approval, and that the Plaintiffs did not incur economic losses from any alleged
misrepresentations.
I. Background
MiMedx Group, Inc., develops and markets biomaterials and bioimplants to
help the healing process. Two of its injectable products, AmnioFix and EpiFix, are at
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issue in this case. These products seek to hasten the healing process and reduce the
development of scar tissue.1 The Plaintiffs contend that MiMedx misled its
shareholders by stating that AmnioFix and EpiFix would be qualified as “human cells,
tissues, and cellular and tissue-based products” under FDA regulations.2 These
products, also called “361 HCT/Ps,” are exempt from FDA regulation of drugs,
devices, or biological products. To obtain 361 HCT/P status, the cell or tissue-based
product can only be “minimally manipulated.” Tissue products are more than
“minimally manipulated,” according to FDA regulations and guidelines, when the
tissue’s original characteristics have been altered during processing.3 MiMedx
allegedly did not inform investors that AmnioFix and EpiFix could not meet the
“minimal manipulation” criterion for exemption under Section 361 although MiMedx
pulverizes or grinds the amniotic tissues and cells in making the products.4
Additionally, MiMedx did not disclose that the FDA performed an on-site inspection
in 2012 to scrutinize whether the injectable products were indeed 361 HCT/Ps.5
1
MiMedx 2011 Annual Report, Defs.’ Mot. to Dismiss, Ex. C.
2
See 21 C.F.R. § 1271.1(a).
3
Am. Compl. ¶¶ 36-42.
4
Am. Compl. ¶¶ 61-70.
5
Id.
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On September 3, 2013, the FDA sent MiMedx an “Untitled Letter,” stating that
AmnioFix and EpiFix did not meet the requirements for Section 361 exemption.6
“Untitled Letters” notify the regulated company that current violations exist but are
not significant enough to warrant a more severe “Warning Letter.”7 When MiMedx
publicized the letter, its stock fell 36%, from $6.06 per share to $3.85 per share.8 In
December 2013, MiMedx announced that it would seek FDA approval for its
injectable products as if they were regulated biologics, not 361 HCT/Ps.9 At close on
December 4, 2013, when MiMedx made this announcement, its stock price had
rebounded to $6.76 per share.10
The Plaintiffs filed suit on September 13, 2013, and their amended complaint
brings claims against MiMedx and its executives under §§ 10(b) and 20(a) of the
Securities Exchange Act of 1934, as well as under Rule 10b-5. The individual
defendants are Parker H. Petit, the Chairman, CEO, and President of MiMedx,
6
Am. Compl. ¶ 71.
7
See U.S. Food & Drug Admin., “Untitled Letters (CBER)”,
http://www.fda.gov/biologicsbloodvaccines/guidancecomplianceregulatoryinforma
tion/complianceactivities/enforcement/untitledletters/default.htm (last visited Feb.
25, 2014).
8
Am. Compl. ¶¶ 72-74.
9
See Defs.’ Br. in Supp. of Defs.’ Mot. to Dismiss, Ex. G.
10
See id. Exs. G, H.
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Michael J. Senken, the CFO, and William C. Taylor, the COO. The Plaintiffs seek to
represent a class of all purchasers of MiMedx common stock from March 29, 2012
through September 4, 2013. The Defendants, collectively, have moved to dismiss the
amended complaint.
II. Legal Standard
A complaint should be dismissed if, even accepting all well-pleaded factual
allegations as true, it fails to state a claim upon which relief can be granted.11
Complaints that allege fraud under federal securities law must satisfy the heightened
pleading requirements of both Rule 9(b) and the Private Securities Litigation Reform
Act of 1995. “A complaint satisfies Rule 9(b) if it sets forth precisely what statements
or omissions were made in what documents or oral representations, who made the
statements, the time and place of the statements, the content of the statements and
manner in which they misled the plaintiff, and what benefit the defendant gained as
a consequence of the fraud.”12
11
Fed. R. Civ. P. 12(b)(6); Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009).
12
In re Theragenics Corp. Securities Litigation, 105 F. Supp. 2d 1342, 1348
(N.D. Ga. 2000) (citing Brooks v. Blue Cross and Blue Shield of Fla., Inc., 116 F.3d
1364, 1371 (11th Cir. 1997)).
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III. Discussion
MiMedx argues that the Plaintiffs have not stated a claim under the Private
Securities Litigation Reform Act’s (the “PSLRA”) enhanced pleading standards. To
state a claim, a securities fraud plaintiff must plead six elements: “(1) a material
misrepresentation or omission; (2) made with scienter; (3) a connection with the
purchase or sale of a security; (4) reliance on the misstatement or omission; (5)
economic loss; and (6) a causal connection between the material misrepresentation or
omission and the loss.”13 According to MiMedx, the amended complaint fails to
identify a culpable misrepresentation or omission of material fact, the amended
complaint fails to plead economic loss and loss causation, and the amended complaint
fails to properly allege a strong inference of scienter. Additionally, because the
Plaintiffs’ securities fraud claims fail, their claims under Section 20(a) must be
dismissed as well.
A.
Does the Amended Complaint Identify a Material Misrepresentation
or Omission?
The PSLRA requires that a “securities fraud class action complaint specify each
statement alleged to have been misleading [and] the reason or reasons why the
13
Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1236-37 (11th Cir. 2008).
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statement is misleading.”14 According to MiMedx, the two misrepresentations
identified in the amended complaint – that MiMedx misrepresented the feasibility of
its AmnioFix and EpiFix products as being capable of obtaining Section 361
exemption and that MiMedx failed to disclose the FDA’s 2012 site inspection – were
not misleading.
MiMedx’s characterizations of the Plaintiffs’ allegations do not capture the
extent of the misrepresentation described in the amended complaint. According to the
Plaintiffs, MiMedx and its officers could never have reasonably believed that
AmnioFix and EpiFix would be classified as 361 HCT/Ps. Rather than being
“minimally manipulated,” as Section 361 requires, the AmnioFix and EpiFix products
are produced by grinding up and processing amniotic tissue taken from human
placenta.15 And FDA regulations provide that when the salient characteristics of the
tissue are altered, the tissue is no longer “minimally manipulated.”16
Several allegations in the Plaintiffs’ complaint support their contention that
MiMedx misrepresented the feasibility of AmnioFix and EpiFix’s Section 361
eligibility. The Plaintiffs allege that, despite holding AmnioFix and EpiFix out as
14
Id. at 1238 (quoting 15 U.S.C. § 78u-4(b)(1)(B)).
15
Am. Compl. ¶ 2.
16
See Am. Compl. ¶¶ 38-42.
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minimally manipulated under Section 361, MiMedx never sought an initial or formal
determination from the FDA’s Tissue Reference Group that the products qualified as
361 HCT/Ps.17 Additionally, in 2006, the Tissue Reference Group released a public
recommendation stating that, in general, products made from amniotic membrane –
AmnioFix and EpiFix are made from amniotic tissue – are not minimally manipulated
and therefore not 361 HCT/Ps.18 The Plaintiffs contend that MiMedx sought to skirt
FDA regulations to avoid the significant costs and time involved in obtaining a license
from the FDA.19
The Plaintiffs also allege that MiMedx tried to hide the fact that it was seeking
to skirt the regulatory process. In 2012, the FDA performed a site inspection of
MiMedx’s Surgical Biologics unit to scrutinize AmnioFix. The result of the inspection
was an establishment inspection report stating that the purpose of the inspection was
to gather information for the FDA’s Center for Biologics Evaluation and Research
(“CBER”), which determines whether a product is ultimately fit for the 361 HCT/P
exemption.20 Although the report, which was sent to Defendant Taylor, ended with a
17
Am. Compl. ¶¶ 41-43.
18
Am. Compl. ¶ 44.
19
Am. Compl. ¶ 45.
20
See Am. Compl. ¶¶ 46-54.
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“no action indicated” notice, the Plaintiffs allege that such notices only relate to
quality control issues, not issues pertaining to Section 361 eligibility itself.21 Despite
the report, MiMedx continued to report in its SEC filings that it believed AmnioFix
was Section 361 eligible.22 MiMedx did not disclose the establishment inspection
report in its SEC filings following the inspection, and in general MiMedx only
published boilerplate disclaimers that the FDA may not agree with MiMedx’s
classifications.23
These allegations are sufficient to conclude at this stage of the litigation that
the Defendants’ representations were misleading. In FindWhat Investor Group v.
FindWhat.com, the Eleventh Circuit held that a company’s statements assuring
investors of the feasibility of its computer monitoring system were misleading in the
face of contrary information that the company possessed.24 The statements in the SEC
filings led investors to believe that the defendant produced an advanced monitoring
system capable of detecting fraudulent revenue-generating practices. However,
according to the plaintiffs’ allegations, that system contained substantial defects and
21
Am. Compl. ¶¶ 76-77.
22
Am. Compl. ¶ 70.
23
See Am. Compl. ¶¶ 61-68.
24
See 658 F.3d 1282, 1298-99 (11th Cir. 2011).
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could not function as touted. The court held that the company’s “failure to disclose
these defects rendered their statements materially misleading, which was not cured by
any general cautionary or risk-disclosing language.”25
Here, too, MiMedx’s failure to disclose clear hurdles, or even barriers, in
achieving Section 361 exemption was misleading to investors. After the FDA visited
the site and issued the establishment inspection report, MiMedx knew that AmnioFix
was coming under increased scrutiny, especially given the fact that modified amniotic
fluid had been specifically classified as not “minimally manipulated” in 2006.
Likewise, MiMedx stated that the FDA may not agree with MiMedx’s classification
and that the FDA regulatory process was “evolving.” But MiMedx never formally or
informally filed for Section 361 status. And stating that the process was “evolving”
suggested to investors that MiMedx had in fact begun formal discussions with the
FDA. Considering these statements and actions, MiMedx may have misled investors
when it continued touting AmnioFix and EpiFix as exempt under Section 361 just as
the company in FindWhat misled investors by failing to disclose defects in the
computer system it was touting. Accordingly, the Court concludes that the amended
complaint does identify misleading statements.
25
Id. at 1299.
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B.
Does the Amended Complaint Properly Allege Loss Causation and
Economic Loss?
The Plaintiffs must allege facts demonstrating that the Defendants’
misrepresentations caused the losses for which the Plaintiffs seek to recover.26
MiMedx argues that the Plaintiffs cannot show loss causation because they have not
alleged any post-disclosure sale and because the stock price bounced back to predisclosure levels within a few months. MiMedx relies on this Court’s decision in In
re Immucor, Inc. Securities Litigation27 to support its arguments.
However, Immucor does not stand for the propositions that MiMedx claims.
First, in Immucor, this Court did not hold that plaintiffs in a securities fraud action
must allege a post-disclosure sale. Indeed, the Court specifically stated that it did not
require the plaintiffs to allege a post-disclosure sale in a subsequent order denying a
motion for reconsideration.28
Further, although this Court held in Immucor that an almost immediate rebound
in a stock price could preclude plaintiffs from alleging economic loss, that holding
does not preclude the plaintiffs from alleging economic loss here by alleging that the
26
See 15 U.S.C. § 78u-4(b)(4).
27
No. 1:09-cv-2351, 2011 WL 2619092 (N.D. Ga. June 30, 2011).
28
See In re Immucor, Inc. Sec. Litig., No. 1:09-cv-2351, 2011 WL
3844221, at *2 (N.D. Ga. Aug. 29, 2011).
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Plaintiffs paid inflated prices for their stock. In addition, MiMedx’s stock price did
not “rebound” to the pre-disclosure price until almost three months after the
disclosure.29 The PSLRA itself includes a “bounce-back” provision that specifically
addresses how damages should be measured when the stock price returns to its predisclosure prices.30 The provision provides that damages shall not exceed the
difference between the price the plaintiff paid for the stock and “the mean trading
price of that security during the 90-day period beginning on the date” of disclosure.31
Thus, the calculation of damages under the PSLRA allows defendants to mitigate
damages when share prices have recovered, but it does not preclude investors from
recovering altogether when the share prices rebound.
The Second Circuit thoroughly explored the requirements for establishing
economic loss in a securities fraud action where the price rebounded following a
disclosure in Acticon AG v. China North East Petroleum Holdings, Ltd.32 The court
reversed the district court’s determination that the plaintiffs could not show any
economic loss because they could have sold their shares for a profit after the
29
See Defs.’ Mot. to Dismiss, Ex. H.
30
See 15 U.S.C. § 78u-4(e)(1).
31
Id.
32
692 F.3d 34 (2d. Cir. 2012).
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disclosure of negative information, even if the disclosure initially caused the price to
fall. The court stated it was “improper to offset gains that the plaintiff recovers after
the fraud becomes known against losses caused by the revelation of the fraud if the
stock recovers for completely unrelated reasons.”33 Because the court could not know
at the motion to dismiss stage whether the price rebound reflected a market reaction
to the disclosure, the court concluded that the recovery of the stock price did not
negate economic losses.34
Here, although MiMedx’s stock price returned to pre-disclosure levels by the
end of November 2013, the Court cannot conclude that the Plaintiffs suffered no
economic loss from the alleged misrepresentations and omissions. According to
MiMedx, its AmnioFix and EpiFix products only account for 15 percent of the
company’s business, which suggests that other factors could account for the price
rebound. In any event, based on Acticon, the Court will not hold that the Plaintiffs
cannot establish economic loss as a matter of law. The allegations in the amended
complaint that MiMedx shares dropped in value following the release of the
September 3, 2013, letter from the FDA are sufficient to establish loss causation and
33
Id. at 41.
34
Id.
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economic loss, and the Defendants’ motion to dismiss will not be granted on those
grounds.
C.
Does the Amended Complaint Properly Allege Scienter?
A securities fraud plaintiff must allege facts, with particularity, that give rise
to an inference that the defendant acted with scienter, which is either the intent to
defraud or severe recklessness in allowing fraudulent activity.35 MiMedx argues that
the Plaintiffs only conclusorily allege that the Defendants acted with the requisite
intent and that the allegations do not even support a finding of severe recklessness on
the part of the Defendants. However, the Court concludes that the Plaintiffs have
alleged particular facts supporting an inference of scienter.
The Plaintiffs’ allegations support an inference that the Defendants had no
reasonable basis to consistently represent to investors that AmnioFix and EpiFix were
eligible for Section 361 exemption. First, the Plaintiffs allege that MiMedx never
sought an initial or formal determination from the FDA concerning the exemptions.36
Next, the Defendants knew that the FDA was scrutinizing their products for Section
361 status following the 2012 inspection.37 The establishment inspection report issued
35
15 U.S.C. § 78u-4(b)(2); Edward J. Goodman Life Income Trust v. Jabil
Cir., Inc., 594 F.3d 783, 790 (11th Cir. 2010).
36
Am. Compl. ¶ 43.
37
See Am. Compl. ¶¶ 54, 60.
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following the inspection specifically stated that the FDA was sending information to
the CBER to continue reviewing MiMedx’s contentions that the products were 361
HCT/Ps.38 The “no action indicated” conclusion of the report should not have
convinced the Defendants that the FDA would not continue scrutinizing Section 361
status because the “no action indicated” segment only addresses health and sanitation
concerns.39 Finally, Defendant Taylor, after receiving the establishment inspection
report, and in the month before September 3, 2013, sold a significant amount of
MiMedx shares.40
To support a strong inference of scienter, the Plaintiffs must show that a
reasonable person would be more likely to infer that the Defendants acted with
scienter than to infer otherwise.41 In Mizzaro, the court concluded that the inference
of scienter was not stronger than any opposing inference because the alleged fraud
could have been carried out without the knowledge of senior management, because
the amount of the fraud was speculative, and because there were no suspicious stock
38
Am. Compl. ¶ 76.
39
Am. Compl. ¶ 76.
40
Pls.’ Resp. in Opp’n to Defs.’ Mot. to Dismiss, Ex. B.
41
Mizzaro, 544 F.3d at 1239.
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sales.42 Here, by contrast, the alleged fraud – misrepresenting the feasibility of
AmnioFix and EpiFix as 361 HCT/Ps – could only have been carried out by senior
management. According to the complaint, management never sought to have the
products actually classified as 361 HCT/Ps, and management was aware that the FDA
was scrutinizing the products. Further, the allegations show that MiMedx was
pulverizing and grinding amniotic tissue to make AmnioFix and EpiFix, and the FDA
had stated that products that destroy original characteristics or are made from amniotic
fluid are generally not 361 HCT/Ps. Likewise, the extent of the fraud is connected
solely to the development, promotion, and sales of AmnioFix and EpiFix and no other
MiMedx product, unlike the sprawling fraud alleged in Mizzaro that spanned
hundreds of stores and countless products. Further, the allegations in the complaint
support an inference that the individual defendants knew or should have known that
the FDA would never approve AmnioFix and EpiFix for Section 361 exemption. As
noted, the products appear to fall squarely into a category the FDA had previously
announced would not be exempt from regulation. Finally, Defendant Taylor sold a
substantial amount of MiMedx shares after the FDA sent the establishment inspection
report, suggesting that Taylor knew that the true status of AmnioFix and EpiFix had
been hidden from the market until then. Accepting the allegations as true, the Court
42
See id. at 1251-54.
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concludes that a reasonable person would conclude that the Defendants more likely
than not acted with scienter. Because the amended complaint states a claim for relief
under the PSLRA, the Plaintiffs’ claims, including their claims for liability under
Section 20(a), should not be dismissed.
IV. Conclusion
For the reasons set forth above, the Defendants’ Motion to Dismiss for Failure
to State a Claim [Doc. 41] is DENIED. The Plaintiff Tim Kelly’s Motion for Oral
Argument [Doc. 46] is also DENIED.
SO ORDERED, this 13 day of August, 2014.
/s/Thomas W. Thrash
THOMAS W. THRASH, JR.
United States District Judge
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