Shah v. Fischer et al
MEMORANDUM OPINION. Signed by Chief Judge Deborah K. Chasanow on 9/20/13. (sat, Chambers)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
Civil Action No. DKC 12-0341
GENVEC, INC., et al.
Presently pending and ready for resolution in this putative
securities fraud class action is a motion to dismiss filed by
Defendants GenVec, Inc., and corporate officers Paul H. Fischer,
Douglas J. Swirsky, and Mark O. Thornton.
(ECF No. 21).
issues are fully briefed and the court now rules pursuant to
Local Rule 105.6, no hearing being deemed necessary.
reasons that follow, the motion will be granted.
On July 6, 2012, Plaintiffs Rob Ferry, Robert T. Schiff,
individually and on behalf of all purchasers of GenVec, Inc.,
common stock between March 12, 2009, and March 29, 2010 (“the
class period”), filed an amended complaint alleging violations
of sections 10(b) and 20(a) of the Securities Exchange Act of
1934, 15 U.S.C. §§ 78j(b) and 78t(a), and SEC Rule 10b-5, 17
C.F.R. § 240.10b-5.
(ECF No. 20).1
The following facts are
drawn from the amended complaint and documents incorporated by
Events Prior to the Class Period
GenVec is a small clinical stage biopharmaceutical company
based in Gaithersburg, Maryland, specializing in the development
of novel therapeutic drugs and vaccines.
At all times relevant,
its lead therapeutic product candidate was “TNFerade™ biologic”
trials for the treatment of cancer.
(Id. at ¶ 3).
an adenovector, or DNA carrier, which contains the gene for
The plaintiff identified in the caption, Satish Shah, was
named in the original complaint, but not the amended pleading.
Because the amended complaint names multiple plaintiffs, they
are collectively referred to herein as “Plaintiffs.”
In the context of securities fraud litigation, facts
outside the complaint may be considered where the “complaint
quotes selectively from various reports by investment analysts”
and the plaintiff does not “challenge the authenticity of the
analyst reports attached to defendants’ motion to dismiss and
cited in plaintiffs’ complaint.” Cozzarelli v. Inspire Pharms.,
Inc., 549 F.3d 618, 625 (4th Cir. 2008).
courts in this circuit ‘routinely take judicial notice of
newspaper articles, analysts’ reports, and press releases in
order to assess what the market knew at particular points in
time, even where the materials were not specifically referenced
in the complaint.’”
In re Human Genome Sciences Inc. Sec.
Litig., --- F.Supp.2d ----, ----, 2013 WL 1223344, at *5 (D.Md.
Mar. 26, 2013) (quoting Johnson v. Pozen Inc., No. 7:07CV599,
2009 WL 426235, at *5 (M.D.N.C. Feb. 19, 2009)).
protein with potent and well-documented anti-cancer effects, for
direct injection into tumors.”
(Id. at ¶ 42).
“TNFerade works by causing cells in the tumor to produce and
leading to the death of cells in the tumor.”
(Id. at ¶ 67).
locally delivering protein to cells, GenVec’s core technology
had the added advantage of “reduc[ing] side effects typically
associated with systemic delivery of proteins.”
(Id. at ¶ 41).
Plaintiffs acknowledge, the process of gaining FDA approval is
It takes on average 12 years and over $700
million to get a new drug from molecule to
market. Once a company develops a drug, it
generally undergoes years of laboratory
testing before an application is made to the
FDA to begin testing the drug on humans.
Only approximately one in 1,000 of the
compounds that enter laboratory testing will
ever reach human testing. Only 8% of drugs
that enter Phase I clinical trials are
eventually approved by the FDA.
(Id. at ¶ 38).
testing, “clinical trial programs for a pharmaceutical product
consist of three sequential phases of clinical trials, which can
Phase 1 trials are the first stage of
testing the drug in human subjects.
phase is designed to assess the safety,
body does to the drug), and pharmacodynamics
(what the drug does to the body) of a drug
on a small group of subjects.
confirmed through Phase 1 trials, the second
phase of testing is performed, usually on
larger groups, and designed to assess how
well the drug works, as well as to continue
Data from a Phase 
clinical trial or trials are normally used
to design the third and final phase of
A dose effect, increased
considered evidence of efficacy by the FDA,
and dose comparisons are a specified form of
controlled trials in FDA regulations.
third and final phase of clinical trials
normally proceeds only if the Phase 
trial or trials provide adequate evidence of
efficacy and safety of a pharmaceutical
(Id. at 39).
TNFerade was approved for testing on human subjects and
observed in more than 70% of patients in 12 different tumor
types, including pancreatic, rectal, melanoma, small cell lung,
breast, and sarcoma.”
(Id. at ¶ 44).
Based on those results,
patients with locally advanced pancreatic cancer to determine
(Id. at ¶ 45).
The results of that
testing also showed “an apparent dose related improvement in
GenVec next “initiated a randomized, controlled, Phase 2
study of 74 patients,” which, “[i]n consultation with the FDA, .
. . was amended in March 2006 to become a Phase 2/3, 330-patient
pivotal [Pancreatic Cancer Clinical Trial (“PACT Trial”)] that
As Plaintiffs describe it:
The PACT Trial [was] a study for the
treatment of unresectable, locally advanced
comparison of: 1) treatment using TNFerade
plus standard of care therapy; and 2)
therapy. Standard of care therapy consisted
of 5 ½-weeks of concurrent radiation therapy
5 days weekly and fluorouracil by continuous
approximately four weeks after completion of
The primary endpoint
for the PACT Trial was originally based on
GenVec “reported the preliminary analysis of safety data
based on the first 40 patients treated and survival data on the
first 51 patients treated” in December 2006.
(Id. at ¶ 46).
The safety analysis “indicated that there was no significant
(including thrombotic events) between the treatment and control
groups” and the efficacy data showed “a potentially emerging
trend of an overall survival advantage in patients receiving
In January 2008, GenVec reached an agreement with the FDA
approval of TNFerade for this indication.”
(Id. at ¶ 47).
independent Data Safety Monitoring Board (“DSMB”) would conduct
interim analyses of the PACT Trial at two specific points –
namely, “following one-third (92) and two-thirds (184) of the
total events (deaths) for the study, with the potential to stop
the trial for futility or if there was clear evidence of the
In other words, the study was to be
“unblinded,” i.e., data was to be collected and examined, only
after the deaths of 92 trial participants (“the first interim
Data safety monitoring boards “are responsible for
ensuring the safety of patients participating in clinical trials
and for monitoring such trials for possible early termination
due to excessive risks.”
In re Pfizer, Inc. Sec. Litig., Nos.
04 Civ. 9866 (LTS)(JLC), 05 md 1688 (LTS), 2010 WL 1047618, at
*5 (S.D.N.Y. Mar. 22, 2010); see also Bonds v. Leavitt, 629 F.3d
369, 374 (4th Cir. 2011) (a DSMB is “tasked with protecting study
analysis”) and again after the deaths of 184 trial participants
(“the second interim analysis”).
announcing survival data from the first interim analysis of the
The press release stated, in relevant part:
Interim data demonstrated an approximately
25% lower risk of death in the TNFerade plus
standard of care (SOC) arm relative to the
independent Data Safety Monitoring Board
reviewed the interim analysis data and
recommended the trial continue as planned.
The press release defined the term “hazard ratio” as “an
estimate of the treatment effect in the treated versus the
control group in a trial.”
(ECF No. 21-22, at 6).
explained, “[t]he hazard ratio reported means that, at the time
of the interim analysis, a TNFerade patient had 0.75 times the
chance of dying compared to someone in the standard of care
The “confidence interval” is “a limit above or below or a
range around the sample mean, beyond which the true population
is unlikely to fall.” Perez v. Mountaire Farms, Inc., 650 F.3d
350, 362 (4th Cir. 2011) (citing D. Barnes & J. Conley,
Statistical Evidence in Litigation, § 3.15 at 107 (1986)).
is, “in simple terms, the ‘margin of error.’” In re Bextra and
Celebrex Marketing Sales Practices and Product Liability Litig.,
524 F.Supp.2d 1166, 1174 (N.D.Cal. 2007).
With regard to the confidence interval at issue here,
Plaintiffs do not challenge Defendants’ interpretation that “the
[f]irst [i]nterim [a]nalysis suggested that, once the full PACT
study was concluded, patients receiving TNFerade would have
shown a risk of death between roughly 51% lower than patients on
[standard of care] ([i.e.], a highly effective treatment) and
15% higher than patients on [standard of care] (i.e., an
ineffective treatment).” (ECF No. 21-1, at 10-11 n. 32).
Kaplan-Meier analysis of data, based on this
interim analysis, demonstrated that overall
survival at 12 months was 39.9% in the
TNFerade plus SOC arm versus 22.5% in the
SOC arm. Overall survival at 18 months was
30.5% in the TNFerade plus SOC arm versus
11.3% in the SOC arm. At 24 months, overall
survival was 10.6% in the TNFerade plus SOC
arm versus 11.3% in the SOC arm.
survival was 9.9 months in both arms of the
“Successfully passing this milestone in the
PACT trial represents an important step
forward in the clinical development of
Ph.D., Senior Vice President of Product
Development at GenVec.
“We believe these data are encouraging and
justify moving forward with the trial.
continuation of the trial will allow the
data to mature and provide for future
We currently estimate we will
reach the required number of events needed
to conduct the next analysis of data in the
PACT study in late 2009.”
The next interim analysis will be conducted
after 184 deaths have occurred (two-thirds
of total expected events) in the PACT trial.
“At our current rate of enrollment we also
anticipate having enrolled over 300 out of
330 total patients planned for the trial by
the end of next year,” added Thornton.
announced that “TNFerade has been granted Fast Track product
designation by the U.S. Food and Drug Administration (FDA) for
its proposed use in the treatment of locally advanced pancreatic
(Id. at 6).6
While GenVec “called the first interim analysis of the PACT
November 19, 2008[,] press release was troubling, raising doubts
about the drug.”
(ECF No. 20 ¶ 53).
Indeed, these doubts were
reflected in the NASDAQ Global Market, as “the Company’s stock
declined from a close of $11.50 on November 18, 2008[,] to a
close of $6.50 on November 19, 2008[,] reaching a low of $3.80
Regarding “Fast Track” product designation, the United
States Court of Appeals for the D.C. Circuit explained:
The FDA has several  regulatory programs
designed to hasten research of the safety
and effectiveness of drugs for terminally or
severely ill patients and allow early access
warranted. For example, under its “Fast
Track” program, the agency has “established
development, evaluation, and marketing of
new therapies intended to treat persons with
life-threatening and severely-debilitating
illnesses, especially where no satisfactory
alternative therapy exists.” 21 C.F.R. §
312.80. Fast Track allows the FDA to waive
its [investigational new drug] application
requirement if it is “unnecessary or cannot
be achieved,” id. § 312.10, and even allows
a waiver request to be made “[i]n an
emergency . . . by telephone or other rapid
Abigail Alliance for Better Access to Developmental Drugs v. von
Eschenbach, 495 F.3d 695, 699 n. 4 (D.C. Cir. 2007) (en banc).
GenVec (GNVC) shares sank Wednesday despite
what the company said was a positive update
on its experimental pancreatic cancer drug
Patients with pancreatic cancer treated with
demonstrated a 25% lower risk of death than
similar patients treated with standard of
care alone, according to an interim analysis
of a phase III study released by GenVec on
encouraging and said the TNFerade study will
continue. On the surface, the data do look
After all, pancreatic cancer is
very difficult to treat, so if TNFerade is
reducing the risk of death, there’s reason
Yet, GenVec shares sank  after the company
released the new data and held a conference
call. Some potential concerns pop up once a
deeper look is taken of the interim TNFerade
The 25% lower risk of death attributed to
TNFerade corresponds to a “hazard ratio” of
. . . .
The problem that GenVec may run into,
however, is that the interim hazard ratio is
likely to increase as this study matures,
The interim analysis Wednesday was conducted
after the 92nd patient in the study died.
The next interim analysis will be conducted
after the 184th death, expected in late
When that second interim analysis
occurs, my guess is that the 25% reduction
in the risk of death observed Wednesday will
This is not just an off-the-cuff prediction.
Other TNFerade data announced by GenVec
Wednesday provides enough evidence to be
wary about the drug’s chances for success.
At 12 months, 39.9% of TNFerade-treated
patients were alive compared to 22.5% of
patients in the study’s control arm. At 18
months, overall survival for TNFerade was
30.5% compared to 11.3% in the control arm.
Both analyses favor TNFerade.
However, at 24 months, only 10.6% of
patients treated with TNFerade were still
alive compared to 11.3% of patients in the
control arm. In other words, the benefit of
Moreover, median survival in the study to
date was 9.9 months for both TNFerade and
the control arms. No difference.
(ECF No. 21-34, at 2).
Plaintiffs allege that, despite GenVec’s publically-stated
optimism for the first interim analysis results, its corporate
officers, privately, took a much dimmer view.
In support of
these allegations, they rely largely on the reports of a number
confidential witness (“CWs”), former GenVec employees who gave
meetings at around the time the results first became known.
February 2009” (ECF No. 20 ¶ 156), attended a November 2008
revealed the interim TNFerade results [and] . . . used a set of
graphs to explain [them]” (id. at ¶ 161).
“CW1 stated that all
[of] the attendees of the meeting understood that the results
were not good news because the numbers were marginal.”
CW1 was also present at an “all-employee meeting in November
2008” where the first interim results were discussed.
January 2009,” attended the all-employee meeting and “saw charts
presented by [D]efendant Thornton that showed that the distance
between the standard of care and the standard of care [plus]
TNFerade was not much[.]”
(Id. at ¶ 164).
Similarly, CW3, “a
Senior Analytical Associate working on the TNFerade program from
development work on TNFerade” and “did not see any significant
difference between the standard of care and the standard of care
with TNFerade, which s/he and [his or her] colleagues discussed
following the meeting.”
(Id. at ¶ 163).7
At least some of the reports of one CW cited by Plaintiffs
conflict with other facts alleged in the complaint and
Specifically, according to CW6, “in early January 2009, there
[was] an Emergency DSMB (Data Safety Monitoring Board) meeting”
following “an email message [that] had gone out to employees
that the 184 goal (targeted number of deaths) had been reached.”
(ECF No. 20 ¶ 165).
CW6 further reported that, “before
recruitment had reached its goal of 330 patients, the targeted
number of deaths was reached (in early January 2009) and that is
In January 2009, GenVec laid off twenty-two employees (from
its total workforce of 123 employees).
(Id. at ¶ 154).
purportedly told by “one of the full time [Clinical Research
Assistants,] . . . that TNFerade was not working and that was
the real reason for the layoffs that occurred.”
(Id. at ¶
Similarly, CW3 was advised by “her/his boss . . . that
the results from the TNFerade were bad and that was the reason
however, that the layoffs were merely one of a number of “steps
to lower  operating costs” in order to limit expenditures “not
critical to the clinical development of TNFerade.”
(ECF No. 21-
5, at 17).
Events during the Class Period
The class period set forth in the amended complaint – i.e.,
March 12, 2009, to March 29, 2010 – encompasses the time from
when GenVec decided to ‘pull the plug’ on the PACT Trial.” (Id.
at ¶ 164).
These statements are at odds with every other
account in the complaint and the documentary evidence, which
reflect that the 184th death, triggering the second interim
analysis, occurred in January 2010, not 2009.
(Id. at ¶ 114).
Moreover, the complaint reflects that CW6’s employment was
terminated in January 2009; thus, he or she could have had no
credible basis of knowledge as to events occurring internally at
GenVec in 2010.
“When the bare allegations of the complaint
conflict with any exhibits or other documents, whether attached
or adopted by reference, the exhibits or documents prevail.”
See Fare Deals, Ltd. v. World Choice Travel.com, Inc., 180
F.Supp.2d 678, 683 (D.Md. 2001). Accordingly, these allegations
will not be considered.
results were announced to the announcement of the second interim
continuing to enroll patients in the PACT Trial in an effort to
reach the total number of trial participants; awaiting the 184th
death of a trial participant, which would trigger the second
ostensibly, to prepare for regulatory approval of TNFerade.
it reported in a March 31, 2009, SEC Form 10-Q filing:
required to develop our product candidates
through clinical development, manufacturing,
continued advancement of TNFerade through
the pivotal trial for locally advanced
pancreatic cancer, the FDA regulatory review
process for TNFerade and the establishment
of manufacturing capabilities for TNFerade.
We may seek additional capital through
further public or private equity offerings,
combination of these financing alternatives.
The current domestic and global economic
conditions have made it more difficult for
companies like us to access capital from the
financial and credit markets, and have made
it more likely we will have to pursue
additional strategic alliances, licensing
product candidates, including TNFerade.
(ECF No. 20 ¶ 77).
On May 28, 2009, GenVec issued a prospectus supplement,
“which offered up to 9,615,385 shares of the Company’s common
stock, including the related preferred share purchase rights,
and warrants to purchase up to 9,615,385 shares of the common
(Id. at ¶ 79).
By another prospectus supplement issued
on August 27, 2009, GenVec “offered up to 8,000,000 shares of
share purchase rights, and warrants to purchase up to 4,000,000
shares of the common stock.”
(Id. at ¶ 95).
In fact, GenVec announced in an SEC Form 8-K filing
dated September 16, 2009, that it had
[r]eceived a notice from The [NASDAQ] Stock
Market stating that the minimum bid price of
the Company’s common stock was below $1.00
per share for 30 consecutive business days
and that the Company was therefore not in
requirement for continued listing set forth
in Marketplace Rule 5450.
. . . .
If the Company does not regain compliance by
written notification to the Company that the
Company’s common stock will be delisted.
(Id. at ¶ 102).8
One court explained the concepts of “bid price” and “ask
price” as follows:
designation to TNFerade for the treatment of pancreatic cancer.”
(Id. at ¶ 104).9
As reported in a November 4, 2009, article in
the Washington Business Journal:
[NASDAQ] market makers publicize the
prices at which they are willing to buy or
sell a stock by entering those “quotes” for
The price at which a
market maker is willing to buy a security is
called its “bid” or “bid price.” The price
at which a market maker is willing to sell a
security is called its “ask” or “ask price”
(or its “offer” or “offer price”).
market maker must simultaneously quote both
a bid and an offer price.
United States v. Alex Brown & Sons, Inc., No. 96 CIV 5313 (RWS),
1997 WL 314390, at *10 (S.D.N.Y. Apr. 24, 1997).
that has its Primary Equity Security listed on the [NASDAQ]
Global Market must continue to substantially meet all of the
requirements set forth in Rule 5450(a)” by maintaining a
“[m]inimum bid price of $1 per share” and “[a]t least 400 Total
See NASDAQ Manual, Rule 5450(a), available at
%2Dequityrules%2F (last viewed Sept. 17, 2013).
In In re NeoPharm, Inc. Sec. Litig., 705 F.Supp.2d 946,
950 (N.D.Ill. 2010), the United States District Court for the
Northern District of Illinois discussed the significance of
orphan drug designation:
The Orphan Drug Act, codified at 21 U.S.C. §
companies to develop and market drugs for
rare diseases – ones affecting fewer than
200,000 people in the United States, or “for
which there is no reasonable expectation
that the cost of developing and making the
Wednesday that the FDA had granted orphan
treatment of pancreatic cancer. Orphan drug
designation provides potential financial and
regulatory incentives including study design
credits, and up to seven years of market
exclusivity upon marketing approval.
The FDA grants orphan drug designation to
treatments and target conditions effecting
200,000 or fewer U.S. patients per year.
“Orphan drug designation is a critical step
for the development of TNFerade,” said
designation will strengthen the TNFerade
program at GenVec by offering potential
clinical development and commercialization
benefits,” Fischer said.
Investors appeared to agree with Fischer
significant development for GenVec.
company’s shares (NASDAQ: GNVC) rose as much
as 21 cents, 26 percent, to $1.01 in the
Wednesday morning trade.
drug available for treatment in the United
States would be recovered from the sales –
by designating certain drugs as “orphan
drugs.” Alliance Sec. Prods. v. Fleming Co.,
471 F.Supp.2d 452, 458 (S.D.N.Y. 2007). “The
treatments for rare diseases, grants a
seven-year marketing exclusion (or monopoly)
to the first drug to gain FDA approval.” SEC
v. Selden, 632 F.Supp.2d 91, 94 (D.Mass.
This number appears to refer to the minimum bid price for
There is no dispute that, on November 4, 2009,
(Id. at ¶ 104).
A Reuters article published on the same date
quoted one market analyst, who recommended GenVec stock in the
wake of the orphan drug designation:
“When combined with the unmet medical need
for these various indications, the overall
market potential quickly becomes meaningful
as well as attractive to a potential partner
for TNFerade,” Merriman Curhan Ford analyst
Joe Pantginis said in a note.
who has a “buy” rating on the stock, said
the company’s shares have the potential to
trade toward a range of $2.50 to $3.50.
(Id. at ¶ 105).
Indeed, the company was able to reestablish
compliance with NASDAQ listing requirements, as it announced in
an SEC Form 8-K filing and attached press release, dated January
(Id. at ¶ 113).
On January 15, 2010, GenVec announced that the 184th death
had occurred in the PACT Trial, thereby triggering the second
The company issued a press release, stating,
in relevant part:
This event, which represents two-thirds of
the total events expected in the trial,
overall survival in the trial.
expects data from this interim analysis to
be available in approximately 10-12 weeks.
“This is another significant milestone for
the PACT trial.
The data released at the
last interim look were encouraging and we
are looking forward to the top-line results
GenVec was trading at around $9.00 per share.
199; ECF No. 21-33, at 7).
(See ECF No. 20 ¶
of the upcoming data analysis,” stated Dr.
President of Product Development.
survival in the PACT trial was released in
These data demonstrated an
approximately 25% lower risk of death in the
TNFerade plus standard of care arm relative
to standard of care alone. . . .
(Id. at ¶ 114).
offering of “up to 14,000,000 shares of . . . common stock,
(Id. at ¶ 117).
It announced that it would “use the
net proceeds from the [o]ffering [over $26 million] to complete
Application for TNFerade’s use in locally advanced pancreatic
cancer, and other general corporate purposes.”
The market reacted skeptically.
(Id. at ¶ 121).
As reported in a January
27, 2010, article posted on TheStreet.com:
Shares of GenVec (GNVC) are down 23% after
the tiny drug maker said it had sold 14
million shares of stock and another 4.2
million warrants, raising net proceeds of
$26.2 million. . . . The stock closed
Tuesday at $2.47. In recent trading, shares
were down to $1.88. . . . Now, the $26
Wednesday’s financing implies anything about
the upcoming interim analysis of the phase
III study of TNFerade in pancreatic cancer.
Is GenVec simply being opportunistic about
raising money ahead of this important,
potentially stock-moving event?
Or, is the
company fearful that the TNFerade results
will be negative, so it’s getting the money
now while it can?
No one but GenVec knows
the answer, of course, and the executives
aren’t about to tell us.
(Id. at ¶ 119).
On February 11, 2010, GenVec again issued a stock offering
of “up to 150,000,000 [shares] in total of the Company’s common
shares of the common stock, and any combination of the common
stock, preferred stock or warrants.”
(Id. at ¶ 123).
supplemental prospectus stated, in part, that “GenVec expects
data from th[e] [second interim] analysis to be available in
March or April of 2010.”
The second interim analysis results became available, as
expected, in late March 2010, and the news was not good.
reported by GenVec on March 29, 2010, the final day of the class
approximately 8% lower risk of death in the
relative to the [standard of care] alone
Interval [0.678 – 1.252]).
these data strongly suggest the trial will
not achieve the statistical significance
required to form the basis for approval of a
warranting discontinuing the trial.
(Id. at ¶ 134).
In the wake of this announcement, GenVec’s “stock price
plunged $20.10 per share – from $28.10 per share on March 29,
2010[,] to close to $8.00 per share on March 30, 2010 – a
decline of more than 71.5% on unusually high volume.”
(Id. at ¶
This lawsuit followed.
Former plaintiff Satish Shah commenced the action by filing
the original complaint on February 3, 2012.
On April 3, 2012,
the current plaintiffs, calling themselves “the GenVec Investor
Group,” filed a motion for appointment as lead plaintiffs and
That motion was granted.
On July 20, 2012, prior to any response by Defendants to
the original pleading, Plaintiffs filed their amended complaint.
(ECF No. 20).
Defendants moved to dismiss on September 4, 2012
(ECF No. 21); Plaintiffs filed opposition papers on November 12,
2012 (ECF No. 24); and Defendants replied on December 20, 2012
(ECF No. 25).11
On February 7, 2013, Plaintiffs filed a motion to strike
a portion of Defendants’ reply memorandum.
(ECF No. 26).
Plaintiffs do not indicate the legal basis of this motion, but
the only candidate is Federal Rule of Civil Procedure 12(f),
which allows the court to strike certain matters “from a
Standard of Review
The purpose of a motion to dismiss under Rule 12(b)(6) is
to test the sufficiency of the complaint.
Presley v. City of
Charlottesville, 464 F.3d 480, 483 (4th Cir. 2006).
plaintiff’s complaint need only satisfy the standard of Rule
8(a), which requires a “short and plain statement of the claim
showing that the pleader is entitled to relief.”
“Rule 8(a)(2) still requires a ‘showing,’ rather than
a blanket assertion, of entitlement to relief.”
v. Twombly, 550 U.S. 544, 555 n. 3 (2007).
Bell Atl. Corp.
That showing must
consist of more than “a formulaic recitation of the elements of
a cause of action” or “naked assertion[s] devoid of further
Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009) (internal citations omitted).
At this stage, all well-pleaded allegations in a complaint
must be considered as true, Albright v. Oliver, 510 U.S. 266,
268 (1994), and all factual allegations must be construed in the
Pursuant to Federal Rule of Civil Procedure 7(a),
“pleadings” include a complaint, a counterclaim, a third-party
complaint, an answer, and a reply, if ordered.
Rule 12(f) may
only address the papers listed in Rule 7(a). See, e.g., Hrivnak
v. NCO Portfolio Mgmt., Inc., 723 F.Supp.2d 1020, 1029 (N.D.Ohio
2010) (“While some courts have employed Fed.R.Civ.P. 12(f) to
strike an affidavit or a brief, or portions thereof, there is no
basis in the Federal Rules for doing so.”). Because Defendants’
reply memorandum is not a pleading, Plaintiffs’ motion to strike
will be denied.
Westinghouse Savannah River Co., 176 F.3d 776, 783 (4th Cir.
1999) (citing Mylan Labs., Inc. v. Matkari, 7 F.3d 1130, 1134
(4th Cir. 1993)).
In evaluating the complaint, unsupported legal
Comm’rs, 882 F.2d 870, 873 (4th Cir. 1989).
Iqbal, 556 U.S. at 678, as are conclusory factual allegations
Firefighters v. Hirst, 604 F.2d 844, 847 (4th Cir. 1979).
Because Plaintiffs’ amended complaint alleges fraud under
§§ 10(b) and 20(a) of the Exchange Act, Plaintiffs must also
Civil Procedure 9(b).
See Cozzarelli, 549 F.3d at 629; In re
Medimmune, Inc. Sec. Litig., 873 F.Supp. 953, 960 (D.Md. 1995).
Rule 9(b) requires that “[i]n alleging fraud or mistake, a party
required with regard to the time, place, speaker and content of
the allegedly false statement, as well as the manner in which
inference of fraud.
See Medimmune, 873 F.Supp. at 960; In re
securities fraud actions.
As relevant here, the PSLRA requires
the complaint to “specif[y] the statements alleged to have been
misleading and the reasons why they were misleading” and to
“support a reasonable belief that the statements were in fact
Teachers’ Retirement System of LA v. Hunter, 477
F.3d 162, 174-75 (4th Cir. 2007).
Plaintiffs allege in the amended complaint that Defendants
essentially destined to fail and, consequently, that TNFerade
would never gain FDA approval.
Despite this knowledge, they
persisted in publicly expressing “optimism regarding the [first
interim analysis] results as being predictive of PACT meeting
commercialization of TNFerade, and of an expectation of GenVec
securing a strategic partnership for TNFerade” (ECF No. 24, at
18), thereby artificially inflating the company’s stock price.12
At no point did GenVec represent that it had an
“expectation” of a partnership for TNFerade.
reported that it was seeking a partnership and, at various
points, that it had engaged in discussions with potential
In their papers opposing the motion to dismiss, Plaintiffs
summarize the voluminous allegations of misleading statements
pleading, as follows:
Defendants’ materially misleading statements
to the investing public during the Class
commercialization of TNFerade, purportedly
supported by the data from the [first
prospects, included inter alia, that: there
were “encouraging interim data from the
trial” (March 12, 2009; [ECF No. 20 ¶ 61]);
there were “encouraging top-line results of
an interim analysis from . . . PACT” [id.];
“[e]ncouraging data in multiple indications
cancer” (March 13, 2009; [id. at ¶ 63]);
Defendants planned to “commercialize [its]
lead product candidate, TNFerade, for the
pancreatic cancer” (March 16, 2009; [id. at
¶ 67]); “[o]ur commitment to TNFerade is
based on encouraging clinical data . . .
suggesting that TNFerade has the potential
to become a significant new cancer drug”
(May 8, 2009; [id. at ¶ 74]); “[t]he data we
presented was encouraging and it gave us
comfort moving forward with the program”
[id.]; “we are encouraged by the survival
trend being observed at this point in the
trial” (June 1, 2009; [id. at ¶ 85]); “and
we’re hoping [the second interim analysis
will] confirm the encouraging trend and the
positive trend that we saw at the first look
at the data” (August 7, 2009; [id. at ¶
90]); “[a]nd we were encouraged last time,
and we were disappointed, as you were, as a
shareholder that the market reaction didn’t
reflect it” [id.]; “[w]e hope the data [in
the second interim analysis] will confirm
the encouraging survival results seen in the
first interim analysis and provide a clear
path to approval of TNFerade for the
treatment of locally advanced pancreatic
cancer” [id.]; “[b]ased on the survival data
obtained to date, we believe using TNFerade
pancreatic cancer represents a feasible path
to commercialization” (March 11, 2010; [id.
at ¶ 129]); and “[e]merging clinical data
suggest TNFerade may prolong the survival of
patients with locally advanced pancreatic
(ECF No. 24, at 3-4 (internal emphasis removed)).
conference calls – were “materially false and/or misleading when
made because Defendants knew but did not disclose” that:
(i) the PACT Trial of TNFerade in
patients with locally advanced pancreatic
cancer was a failure because it did not
increase survival in patients with locally
advanced pancreatic cancer;
effective in patients with locally advanced
(iii) there was no feasible path to
commercialization for the use of TNFerade
for locally advanced pancreatic cancer; and
(iv) the failure of the PACT Trial
Company’s financial condition because the
Company did not have any near-term prospects
of generating revenues from the commercial
sale of their product candidates in their
therapeutic or vaccine programs.
(ECF No. 20 ¶ 62(b)).13
The first count of the amended complaint asserts claims for
violations of § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b),
and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5.14
connection with the purchase or sale of any security registered
on a national securities exchange[,] . . . any manipulative or
deceptive device or contrivance in contravention of such rules
appropriate in the public interest or for the protection of
15 U.S.C. § 78j(b).
Its implementing regulation,
SEC Rule 10b-5, provides:
It shall be unlawful for any person,
directly or indirectly, by the use of any
commerce, or of the mails or of any facility
of any national securities exchange,
As to each allegedly materially misleading statement,
Plaintiffs assert that between two and four of these reasons
In count two, Plaintiffs allege violations by the
individual defendants of § 20(a) of the Exchange Act, which
imposes joint and several liability on a person who “controls
any person liable under any provision of this chapter[.]”
U.S.C. § 78t(a).
“[A] plaintiff must successfully allege a
predicate violation of the Act in order to proceed under §
20(a)[.]” Matrix Capital Mgmt. Fund, LP v. BearingPoint, Inc.,
576 F.3d 172, 181 [n. 1] (4th Cir. 2009) (King J., concurring).
successfully alleged a violation under § 10(b), their claim
under § 20(a) must fail as well.
(a) To employ any
artifice to defraud,
(b) To make any untrue statement of a
material fact or to omit to state a material
statements made, in the light of the
circumstances under which they were made,
not misleading, or
(c) To engage in any act, practice, or
course of business which operates or would
operate as a fraud or deceit upon any
in connection with the purchase or sale of
Group, Inc. Sec. Litig., 738 F.Supp.2d 614, 633 (D.Md. 2010)
(“Rule 10b-5 encompasses only conduct already prohibited by §
10(b)’” (quoting In re Mut. Funds Inv. Litig., 566 F.3d 111, 119
(4th Cir. 2009)).
“Section 10(b) affords, by implication, a right of action
to securities purchasers or sellers injured by its violations.”
Matrix Capital, 576 F.3d at 181.
To state a plausible claim
under § 10(b), the complaint must set forth facts showing:
(1) a material misrepresentation or omission
by the defendant; (2) scienter; (3) a
connection between the misrepresentation or
omission and the purchase or sale of a
misrepresentation or omission; (5) economic
loss; and (6) loss causation (that is, the
economic loss must be proximately caused by
the misrepresentation or omission).
Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552
U.S. 148, 157 (2008)).
Defendants contend that Plaintiffs’ amended complaint is
Specifically, they challenge the sufficiency of the allegations
that a material misrepresentation or omission was made, that the
Because the court agrees with Defendants as
to the first point, it need not address the other two.
conclusion that, “[b]ecause no misleading statement or omission
was sufficiently alleged, the defendants could not have made
misrepresentations or omissions intentionally or with sufficient
recklessness”); id. at 173 n. 2 (defining “loss causation” as “a
causal connection between the material misrepresentation and the
loss” (citing Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 34142)).
To establish misrepresentation, the amended complaint must
“specify each statement alleged to have been misleading, the
reason or reasons why the statement is misleading, and, if an
information and belief, . . . state with particularity all facts
on which that belief is formed.”
15 U.S.C. § 78u-4(b)(1).
omission must be “factual,” i.e., “one that is demonstrable as
being true or false”; it “must be false, or the omission must
omission of fact must be material.”
Longman v. Food Lion, Inc.,
197 F.3d 675, 682 (4th Cir. 1999) (emphasis in original); see
also Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 109196
demonstrably true or false).
As the court explained in Longman,
197 F.3d at 683:
These components – a factual statement
or omission that is false or misleading and
that is material – interact to provide a
core requirement for a securities fraud
claim. While opinion or puffery will often
not be actionable, in particular contexts
when it is both factual and material, it may
be actionable. Thus, for example, a CEO’s
expression of “comfort” with a financial
analyst’s prediction of his company’s future
earnings was held not to be factual in that,
as a future projection, it was not capable
of being proved false.
See Malone v.
Microdyne Corp., 26 F.3d 471, 479-80 (4th
Cir. 1994); see also Raab v. General Physics
Corp., 4 F.3d 286, 289 (4th Cir. 1993)
(holding similar statement predicting future
growth not material because “the market
price of a share is not inflated by vague
statements predicting growth”). On the other
hand, the Supreme Court has held that an
stockholders that the stock price of $42 for
the purchase of their shares was a “high
value” and represented a “fair” transaction
could be both factual and material. See
Virginia Bankshares, 501 U.S. at 1090-93,
111 S.Ct. 2749. In Virginia Bankshares, the
Court noted that the opinions could be false
and factual if the directors did not believe
what they said they believed and proof could
be had “through the orthodox evidentiary
process.” Id. at 1093, 111 S.Ct. 2749. In
question” that the statements could be
material in that shareholders, knowing that
expertise as well as a fiduciary duty to
shareholders, often act on what their board
members say they believe. Id. at 1090, 111
substantial likelihood that a reasonable purchaser or seller of
a security (1) would consider the fact important in deciding
whether to buy or sell the security or (2) would have viewed the
altered by disclosure of the fact.’”
In re PEC Solutions, Inc.
Sec. Litig., 418 F.3d 379, 387 (4th Cir. 2005) (quoting Longman,
willful, objectionable, or flatly false – of immaterial facts,
even if it induces reactions from investors that, in hindsight
Greenhouse v. MCG Capital Corp., 392 F.3d 650, 656
omissions] “would have misled a reasonable investor about the
nature of the securities.”
In re Constellation Energy, 738
F.Supp.2d at 624-25 (citing Recupito v. Prudential Securities,
Inc., 112 F.Supp.2d 449, 455 (D.Md. 2000)).
The instant case is, as Defendants assert, essentially an
(ECF No. 21-1, at 20).
Plaintiffs do not
challenge the truth of any aspect of the first interim analysis
data released to the public; indeed, they acknowledge that “the
affirmative misrepresentations alleged in the [c]omplaint [do
not arise] from the accuracy of the data, a poorly designed
trial[,] or inaccurate financial results[.]”
(ECF No. 24, at
They further acknowledge that investors were armed with
results and that the market knew they were a mixed bag.
analyst observed, the data “look[ed] positive” on the surface
TNFerade plus standard of care demonstrated a 25% lower risk of
(ECF No. 21-34, at 2).
Moreover, “the interim hazard ratio for
TNFerade of 0.75 [compared] favorably with similar hazard ratios
whether the drug would “produce a hazard ratio in the ballpark
of 0.75 at the final analysis of the study,” and there were
indications that it would not because the ratio was “likely to
increase as [the] study mature[d], with more patients enrolled
and more patients dying.”
(Id. at 2-3).
Notably, upon release
of the first interim analysis results, “GenVec shares sank[.]”
(Id. at 2).
The critical question as to the first element, then, is
privately held the opinion that the PACT Trial would ultimately
fail rendered their public statements of optimism misleading.
In arguing that it did not, Defendants cite Padnes v. Scios Nova
Inc., No. C 95-1693 MHP, 1996 WL 539711 (N.D.Cal. 1996).
clinical study, which did not later come to fruition.
The court determined, in relevant part, that “plaintiffs
have not pled facts sufficient to show there was no reasonable
basis for relying on the findings of the  study or that there
explained that “defendants’ opinions about the study’s findings
were not the only reasonable ones,” citing a negative market
could have disagreed with defendants’ beliefs nor the mere fact
that the Phase III tests were unsuccessful . . . amount to
allegations that there was no reasonable basis for the opinions
which were expressed.”
According to Defendants, Plaintiffs similarly “have alleged
Plaintiffs argue in rebuttal that, “[i]n contrast to Padnes,
where ‘[r]easonable minds could differ with respect to the value
of the  study in determining the therapeutic effects of [the
drug],’ here, there was no disagreement of opinion, reasonable
or otherwise, over how to interpret the [first interim analysis
(ECF No. 24, at 22).
They contend that “[t]hese
statistically insignificant data were in no way predictive that
feasible path to commercialization for TNFerade.”
Plaintiffs’ argument finds no support in the record, which
reflects that the market was fully aware of the potentially
negative implications of the first interim analysis, as was the
continued, and the FDA, which granted fast track approval and
orphan drug designation based on the same results.
statements of Plaintiffs’ CWs support that the first interim
analysis results may not have been what Defendants had hoped
for, there was certainly a reasonable basis for believing that
prolong the lifespan of pancreatic cancer patients, as compared
to those receiving standard of care alone.
“[T]he Supreme Court
Phillips v. LCI Intern., Inc., 190 F.3d 609, 615 (4th Cir. 1999)
(citing Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); TSC
patients with pancreatic cancer, a particularly fatal form of
ineffective; thus, any potential benefit to patients in terms of
extending lifespan represented cause for hope.
While the first
interim analysis data may have suggested that the benefits of
TNFerade would dissipate over time, it also showed that patients
receiving the drug experienced a 25% lower death rate at the
negligent, if not outright fraudulent, in continuing the trial
past the first interim analysis, as nothing more was known to
them until the second interim analysis results were available.15
proceeding with the second interim analysis, and the putative
after the first interim results were released.
By that time,
Defendants had already publicly expressed that the results were
“encouraging” and that they “justif[ied] moving forward with the
expression of similar opinions during the class period induced
Plaintiffs to purchase GenVec shares.
Indeed, it seems far more
indications that the trial might be successful, such as the
FDA’s fast track and orphan drug designations.
In Virginia Bankshares, 501 U.S. at 1095-96, the Supreme
Court held that a statement of belief can be actionable only “as
a misstatement of psychological fact of the speaker’s belief in
what he says” where there is “objective evidence” of the falsity
At one point in their opposition papers, Plaintiffs
suggest that optimistic statements made by Defendants after the
second interim analysis data became available were misleading
because, by that point, Defendants’ fear that the PACT Trial
would fail had been realized.
(See ECF No. 24, at 11 n. 9).
Because this argument finds no support in the amended complaint
– which relates entirely to misrepresentations based on the
first interim analysis data – the court will not consider it
There was, quite simply, a reasonable basis
for Defendants’ expressions of optimism, and the fact that the
See New Jersey Carpenters Pension & Annuity Funds v.
Biogen IDEC Inc., 537 F.3d 35, 48 (1st Cir. 2008) (“the investing
public is well aware that drug trials are exactly that: trials
to determine the safety and efficacy of experimental drugs.
so trading in the shares of companies whose financial fortunes
inherently carries more risk than some other investments.
is true even when the FDA has given fast-track approval to a new
drug.”); In re Pfizer, Inc. Sec. Litig., 538 F.Supp.2d 621, 631
overly gloomy or cautious picture’ so long as ‘public statements
are consistent with reasonably available data’” (quoting Novak
v. Kasaks, 216 F.3d 300, 309 (2d Cir. 2000)); In re Sierra
Wireless, Inc. Sec. Litig., 482 F.Supp.2d 365, 367 (S.D.N.Y.
2007) (“securities laws neither require corporate officers to
prospects nor permit dissatisfied shareholders to assert serious
allegations of fraud based on the perfect hindsight afforded by
the passage of time”).
Particularly when considered under the
the heightened pleading standards of Rule 9(b) and the PSLRA,
the allegations in the amended complaint are insufficient to
show that Defendants’ public statements were false at the time
they were made.
Generally, “‘[s]oft expressions of optimism which are analogous
misrepresentations” because they “are simply not material.”
re Constellation Energy, 738 F.Supp.2d at 625 (quoting In re
USEC Sec. Litig., 190 F.Supp.2d 808, 822 (D.Md. 2002)); see also
Rombach v. Chang, 355 F.3d 164, 174 (2d Cir. 2004) (“expressions
of puffery and corporate optimism do not give rise to securities
violations”); Glen Holly Entertainment, Inc. v. Tektronix, Inc.,
generalized, vague and unspecific assertions, constituting mere
‘puffery’ upon which a reasonable consumer could not rely”);
Phillips, 190 F.3d at 615 (“hyperbole and speculation cannot
give rise to a claim of securities fraud”); Raab, 4 F.3d at 289
(“‘Soft,’ ‘puffing’ statements . . . generally lack materiality
because the market price of a share is not inflated by vague
statements predicting growth”).
unjustifiably positive spin on the data available at the time of
the [first interim analysis] by using terms like ‘encouraging’
(ECF No. 24, at 5).
Such “vague and general
statements of optimism constitute no more than ‘puffery’ and are
understood by reasonable investors as such.”
In re Advanta
Corp. Sec. Litig., 180 F.3d 525, 538 (3rd Cir. 1999) (internal
marks and citation omitted).
Accordingly, they are immaterial
and not actionable under § 10(b).
See Greenhouse, 392 F.3d at
Plaintiffs have requested leave to amend their complaint in
the event that Defendants’ motion to dismiss were to be granted.
Pursuant to Federal Rule of Civil Procedure 15(a)(2), courts
justice so requires.”
Leave should be denied, however, where
“the amendment would be prejudicial to the opposing party, there
has been fad faith on the part of the moving party, or the
Plaintiffs further contend that Defendants violated Item
303 of SEC Regulation S-K, which requires a registrant to
“[d]escribe any known trends or uncertainties that have had or
that the registrant expects will have a material favorable or
unfavorable impact on net sales or revenues or income from
“[T]here is no private right of action under SEC Regulation SK,” however, and “because the materiality standards under [Rule]
10b-5 and Regulation S-K 303 differ significantly, a violation
of Regulation S-K does not lead to a failure to disclose under
Iron Workers Local 16 Pension Fund v. Hilb Rogal &
Hobbs Co., 432 F.Supp.2d 571, 583 (E.D.Va. 2006).
misrepresentation or omission under [Rule 10b-5], SK-303 cannot
provide a basis for liability.” Oran v. Stafford, 226 F.3d 275,
288 (3d Cir. 2000).
amendment would be futile.”
HCMF Corp. v. Allen, 238 F.3d 273,
276 (4th Cir. 2001) (quoting Edwards v. City of Goldsboro, 178
F.3d 231, 242 (4th Cir. 1999) (internal marks omitted)).
insufficient or frivolous on its face, or if the amended claim
would still fail to survive a motion to dismiss pursuant to
El-Amin v. Blom, Civ. No. CCB-11-3424,
2012 WL 2604213, at *11 (D.Md. July 5, 2012) (internal marks and
complaint would address the infirmities of the first amended
certainly no shortage of facts alleged in the amended complaint,
support that Defendants’ alleged misrepresentations or omissions
are actionable under the Exchange Act.
Thus, “in light of the
fundamental deficiencies in [P]laintiffs’ theory of liability,”
further amendment would be futile.
Cozzarelli, 549 F.3d at 630.
For the foregoing reasons, Defendants’ motion to dismiss
will be granted.
A separate opinion will follow.
DEBORAH K. CHASANOW
United States District Judge
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