Battle Construction Co., Inc. v. InVivo Therapeutics Holdings Corp. et al

Filing 57

Judge Richard G. Stearns: ORDER entered granting 39 Motion to Dismiss for Failure to State a Claim. "For the foregoing reasons, defendants' motion to dismiss is ALLOWED. The Clerk will record the dismissal and close the case." (RGS, int2)

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
CIVIL ACTION NO. 14-13180-RGS
BATTLE CONSTRUCTION CO., INC.,
individually and on behalf of all others similarly situated
v.
INVIVO THERAPEUTICS HOLDINGS CORP. and
FRANK REYNOLDS
MEMORANDUM AND ORDER
ON DEFENDANTS’ MOTION TO DISMISS
April 3, 2015
STEARNS, D.J.
This is a federal securities class action brought on behalf of
purchasers of common stock of defendant InVivo Therapeutics Holdings
Corp. during the period from April 5, 2013, through August 26, 2013. Lead
plaintiff Edmond Ganem alleges that InVivo intentionally misrepresented
in a company press release the conditions imposed by the Food and Drug
Administration (FDA) in approving a first-in-human clinical study of
InVivo’s biopolymer scaffold spinal injury repair product. The Amended
Complaint alleges violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934. InVivo and individual defendant Frank Reynolds

move to dismiss both counts pursuant to Fed. R. Civ. P. 12(b)(6) for failure
to state an actionable claim.
BACKGROUND
InVivo is a Massachusetts-based biotechnology company that seeks
innovative treatments for spinal cord injuries. Defendant Frank Reynolds
served as InVivo’s Chairman, Chief Executive Officer, and Chief Financial
Officer until August 22, 2013. On April 4, 2013, InVivo announced through
a press release that FDA had designated its biopolymer Neuro-Spinal
Scaffold as a Humanitarian Use Device.1 By the end of the day, InVivo
stock closed at $2.75 a share, up 16 percent from the previous day’s closing
price of $2.36. Trading volume rose to 683,500 shares, compared to an
average 71,000 shares over the previous three trading days.
On April 5, 2013, prior to the market opening, InVivo issued a second
press release announcing that the FDA had additionally approved an
Investigational Device Exemption2 for a five-patient pilot study of the

The Humanitarian Use Device designation was created by the 1990
Safe Medical Devices Act to encourage the introduction to market of
medical devices intended to treat or diagnose rare diseases manifested in
populations of 4,000 or fewer individuals in the United States. 21 U.S.C. §
350j(m).
1

According to the FDA: “An investigational device exemption (IDE)
allows the investigational device to be used in a clinical study in order to
collect safety and effectiveness data.”
2
2

Neuro-Spinal Scaffold. The press release stated that InVivo “intend[ed] to
commence a first-in-man clinical study in the next few months” and that it
“expect[ed] the study to occur over approximately 15 months.” Am. Compl.
¶ 22. Reynolds was quoted in the press release as saying that “we expect to
have all data to the FDA by the end of 2014.” Id. ¶ 23. InVivo stock closed
at $2.80 a share on April 5, 2013, trading at a volume of 504,900 shares.
On the following trading day, April 8, 2013, InVivo stock closed at $3.19 a
share with a volume of 1,333,800 shares, and continued to rise over the
next month.
On May 9, 2013, in a press release reporting InVivo’s first quarter
financial results, Reynolds announced that that because InVivo stock “has
appreciated significantly since [obtaining FDA approval for the clinical
study, InVivo will] call investor warrants that will provide up to $16.1
million of equity capital, but more importantly will remove an accounting
liability that has been an impediment to up-listing to a national securities
exchange.” Id. ¶ 30. InVivo also iterated that “[it] expect[ed] to commence
the study in mid-2013 and submit data to the FDA by end of 2014.” Id. ¶
31.

http://www.fda.gov/medicaldevices/deviceregulationandguidance/howto
marketyourdevice/investigationaldeviceexemptionide/default.htm
(accessed April 3, 2015).
3

On June 4, 2013, InVivo reported that the call period, which ended on
June 3, 2013, had yielded the expected $16.1 million in additional capital.
This combined with a warrant exchange offer completed on May 17, 2013,
resulted in the elimination of a $24.6 million liability on InVivo’s balance
sheet. Reynolds was quoted in the press release as saying that “[w]ith the []
elimination of the $24.6 million warrant liability from our books, the last
major obstacle to up-listing to a national securities exchange has been
removed. We expect that an up-listing to a national security exchange will
increase liquidity and unlock inherent value in our stock.” Id. ¶ 33.
On August 27, 2013, before the market opened, InVivo’s new
management team3 announced in a press release that it would be unable to
complete the clinical trial within the originally contemplated 15 months.
Under the conditions of the FDA’s approval of the
Investigational Device Exemption, the five-person pilot trial will
be staggered such that each patient will be followed for three
months prior to requesting approval to enroll the next patient.
Because the Company must obtain FDA approval to enroll each
subsequent patient, the Company anticipates that from the date
of the first enrolled patient, it will take at least 21 months to
complete enrollment.

3

Reynolds had resigned on August 22, 2013, ostensibly for medical

reasons.

4

Id. ¶ 36. By the end of the day, InVivo stock fell from $3.45 to $2.07 a
share, trading on a volume of 4,486,500 shares. The following day, the
price fell further to $1.71 per share, with a volume of 3,658,000 shares.
In November of 2013, InVivo stated in a press release that it expected
to enroll the first patient in the clinical trial during the first quarter of 2014.
However, a month later, InVivo disclosed that it would need additional
time to supply revised study protocols, supporting materials, and contracts
to the six sites where the clinical study was to be undertaken, and that the
chosen sites would require from 4 to 12 weeks to review and finalize the
contracts.

In March of 2014, the first patient enrollment was again

deferred to the second quarter of 2014. In April of 2014, InVivo further
disclosed that the host sites would require additional surgical training with
the Neuro-Spinal Scaffold before patient enrollment could begin. InVivo
ultimately enrolled its first clinical study patient in October of 2014.
In the Amended Complaint, Ganem alleges that InVivo in April and
May of 2013 publicly embraced an impossibly optimistic timeframe in
which to complete the clinical trial because the company was in dire
financial straits and desperate for an infusion of capital. Ganem alleges
that InVivo was bleeding cash in the Spring of 2013 and had so little in
reserve that one analyst predicted it had only a year left on the clock before
5

depleting all of its available funds. Ganem also alleges that Reynolds was
personally motivated to misrepresent the scope of the permission that the
FDA had given for the clinical study to reap the profits of from InVivo’s
artificially inflated stock. Prior to April 5, 2013, and through June 13, 2013,
with a two-day exception, Reynold sold 4,250 shares of InVivo common
stock daily. After June 13, 2013, Reynold increased his sale of InVivo stock
to 12,000 shares daily.
Battle Construction Co., Inc. brought this purported class action
lawsuit on July 31, 2014. On October 7, 2014, the court appointed Ganem
as the lead plaintiff. He filed the Amended Complaint on October 30, 2014.
Defendants moved to dismiss under the Private Securities Litigation
Reform Act of 1995 (PSLRA) on December 12, 2014. The court heard oral
argument on the briefs on March 24, 2015.
DISCUSSION
Section 10(b) of the Securities Exchange Act forbids
(1) the “use or employ[ment] . . . of any . . . deceptive device,”
(2) “in connection with the purchase or sale of any security,”
and (3) “in contravention of” Securities and Exchange
Commission [(SEC)] “rules and regulations.” 15 U.S.C. § 78j(b).
Commission Rule 10b-5 forbids, among other things, the
making of any “untrue statement of a material fact” or the
omission of any material fact “necessary in order to make the
statements made . . . not misleading.” 17 CFR § 240.10b-5
(2004).
6

Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341 (2005). Under the PSLRA,
to make out a section 10(b) claim, “plaintiffs [must] state with particularity
both the facts constituting the alleged violation, and the facts evidencing
scienter, i.e., the defendant’s intention ‘to deceive, manipulate, or defraud.’”
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007),
quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194, and n.12 (1976).
“The effect of [PLSRA’s pleading requirement] is to embody in the Act itself
at least the standards of Rule 9(b), Fed. R. Civ. P.”

Greebel v. FTP

Software, Inc., 194 F.3d 185, 193 (1st Cir. 1999). Under this heightened
pleading standard, “[a] complaint will survive . . . only if a reasonable
person would deem the inference of scienter cogent and at least as
compelling as any opposing inference one could draw from the facts
alleged.” Tellabs, 551 U.S. at 324.
Defendants contend that the challenged press releases contain nonactionable forward-looking statements falling under the protections of the
“bespeaks caution” doctrine. The “bespeaks caution” doctrine “embodies
the principle that when statements of ‘soft’ information such as forecasts,
estimates, opinions, or projections are accompanied by cautionary
disclosures that adequately warn of the possibility that actual results or
events may turn out differently, the ‘soft’ statements may not be materially
7

misleading under the securities laws.” Shaw v. Digital Equip. Corp., 82
F.3d 1194, 1213 (1st Cir. 1996). Defendants rely on the press releases’ use of
predictive verbs such as “intends to,” “plan,” and “expects,” and the
cautionary statements in the press releases themselves and in InVivo’s
Form 10-K Annual Reports to the SEC.

The April 5 press release

specifically cautions that statements relating to
the expected approval of the FDA to conduct human clinical
trials for the Company’s products, the expected commencement
date of any approved human clinical trials, the expected size of
the pilot study, the expectation that the scaffold product will be
regulated under a HDE pathway, and the expected acceleration
of commercialization of the Company’s products resulting
therefrom
are “based on current expectations, but are subject to a number of risks and
uncertainties.” Defs.’ Ex. D at 2; see also See Alt. Energy, Inc. v. St. Paul
Fire and Marine Ins. Co., 267 F.3d 30, 33 (1st Cir. 2001) (In resolving a
motion to dismiss, the court may properly consider “documents the
authenticity of which are not disputed by the parties; [] official public
records; [] documents central to plaintiffs’ claim; or [] documents
sufficiently referred to in the complaint.”). The Safe Harbor Statement
further warns that
[t]he factors that could cause actual future results to differ
materially from current expectations include, but are not
limited to, risks and uncertainties relating to the Company’s
ability to obtain FDA approval to conduct human clinical trials;
8

whether the human clinical trials produce acceptable results;
the Company’s ability to develop, market and sell products
based on its technology; the expected benefits and efficacy of
the Company’s products and technology in connection with
spinal cord injuries; the availability of substantial additional
funding for the Company to continue its operations and to
conduct research and development, clinical studies and future
product commercialization; and, the Company’s business,
research, product development, regulatory approval, marketing
and distribution plans and strategies.
Defs’ Ex. D at 2; see also Slayton v. Am. Exp. Co., 604 F.3d 758, 769 (2d
Cir. 2010) (“[T]he use of linguistic cues like ‘we expect’ or ‘we believe,’ when
combined with an explanatory description of the company’s intention to
thereby designate a statement as forward-looking, generally should be
sufficient to put the reader on notice that the company is making a forwardlooking statement.”).
Plaintiff maintains that by concealing the provisional nature of the
FDA approval letter and offering a timeline that would have been physically
impossible to meet while satisfying the FDA’s conditions, defendants
misrepresented hard historical facts, and thereby forfeited their shelter
under the safe harbor exception. See Roeder v. Alpha Indus., Inc., 814 F.2d
22, 26 (1st Cir. 1987) (“When a corporation does make a disclosure –
whether it be voluntary or required – there is a duty to make it complete
and accurate. . . . If . . . a company chooses to reveal relevant, material
information even though it had no duty to do so, it must disclose the whole
9

truth.”). In particular, plaintiff argues that it would have been out of the
question to begin the study “in the next few months,” as suggested in the
April 5 press release, given the pre-commencement requirements imposed
by the FDA, and the bureaucratic process required to finalize arrangements
with the investigational site partners (as experience proved). Plaintiff also
asserts that the projected fifteen-month timeline was chimerical because it
failed to factor in the time required to seek approval from the FDA to
proceed with the next sequential human study subject, which would be
forthcoming only after the prior patient had been safely followed for three
months.

(Plaintiff notes in this regard the August 27 corrective press

release revising the 15-month study period to 21 months, which was also
not achieved). According to plaintiff, these two alleged falsehoods rendered
the assertion that InVivo would have study data to the FDA by the end of
2014 a complete no-go from the outset.
However, it is axiomatic that “a securities plaintiff does not satisfy the
requirements of Rule 9(b) merely by pleading ‘fraud by hindsight.’” Gross
v. Summa Four, Inc., 93 F.3d 987, 991 (1st Cir. 1996). “In other words, a
general averment that defendants knew earlier what later turned out badly
does not convey the necessary particularity that Rule 9(b) requires.” Id.
(internal quotation marks omitted). Plaintiff agrees that the court must
10

confine its enquiry to the FDA letter itself and what InVivo knew at the time
it issued the contested press releases. Here is where plaintiff missed the
mark. Although it is true that approval was granted “on the condition that,
within 45 days from the date of this letter, [InVivo] submit[s] information
correcting the following [thirteen] issues,”4 the FDA also authorized
“[InVivo] [to] begin [its] investigation, using a revised informed consent
document . . . at an institution in accordance with the investigational site
waiver granted below.” Defs.’ Ex. C. at 2. The approval letter went on to
state that “[InVivo] should follow [the first] subject for 3 months before
requesting approval for an additional subject, who should also be followed
for three months before requesting another subject. This will result in a
total of 5 subject[s] enrolled over a minimum 15 month period.” Id.
Plaintiff faults the press releases for failing to make clear that the
FDA’s approval came with conditions. But any objective reading of the
letter makes clear that the FDA erected no material barriers to an
immediate enrollment of the first patient for the exploratory study. While
the FDA did require additional information of a corrective nature from
InVivo, it did not condition the first enrollment on the prior receipt of this
Eight additional Study Design Considerations were suggested to
support a future follow-up study that was not the subject of the press
releases. Defs.’ Ex. C. at 2, 7-8.
4

11

information. Indeed, the letter explicitly stated that “[InVivo] may enroll
one subject at this time.” Id. (emphasis added).
Plaintiff’s next challenge is to the statement that the study would
begin “in a few months,” or “in mid-2013.” In this regard, plaintiff objects
to the failure of InVivo to own up to the time it would take to make an
adequate response to the FDA, and to finalize arrangements (physical and
contractual) with the host sites. With respect to the thirteen conditions, the
FDA asked for a response within 45 days and plaintiff has alleged no facts
that would suggest that InVivo believed at the time that it would be unable
to conform to the FDA’s target date. The site approval process proved
prolonged only in retrospect. Plaintiff does not dispute InVivo’s statement
in the April 5 press release that “work to gain Institutional Review Board
(IRB) approval at Massachusetts General Hospital in Boston [was] already
underway.” Defs.’ Ex. D at 1. Nor does plaintiff (again) allege any facts that
would suggest that InVivo knew in April of 2013 that it could not obtain site
approval within a reasonable timeframe consistent with the necessary
sequencing of the studies.
With respect to the duration of the study, plaintiff relies heavily on
the assertion that the 15-month forecast was unrealistic. However, the
estimate of the study length came from the FDA itself: “This [sequential
12

enrollment process] will result in a total of 5 subject[s] enrolled over a
minimum of 15 month period.” Defs.’ Ex. C at 2. At best, the press release
statements reflect an overly-optimistic opinion on the part of InVivo and
Reynolds that they could meet the FDA’s suggested timeline, or at worse a
parroting of the FDA’s own opinion as to the time that would be required.5
Cf. Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund,
2015 WL 1291916, at *7 (U.S. Mar. 24, 2015) (“[A] sincere statement of pure
opinion is not an ‘untrue statement of material fact,’ regardless whether an
investor can ultimately prove the belief wrong.”).
Because the projected timeline set out in the April 5 and May 9 of
2013 press releases was not implausible (even in light of the conditions
imposed

by

the

FDA

approval

letter),

there

was

no

material

misrepresentation supporting a claim under Section 10(b). 6 Having failed

Plaintiff also contends that the projection that InVivo would have
data in the hands of the FDA in 2014 was also false because it failed to
account for the time that would be required to analyze the study data before
its submission. However, nothing in the FDA approval letter mandated a
particular quantity or duration of analysis.
5

Without facts to establish that defendants knew the falsity of the
statements in the April 5 and May 9 of 2013 press releases, plaintiff’s
allegations of scienter also miss the mark. See Greebel, 194 F.3d at 197
(“[M]erely pleading motive and opportunity, regardless of the strength of
the inferences to be drawn of scienter, is not enough.”). Moreover, as
defendants point out, the desire to raise capital is possessed by virtually all
corporations and is too generic to support a strong inference of motive. See
13
6

to plead a viable claim of a primary violation, plaintiff’s control person
claim against Reynolds under Section 20(a) must also be dismissed. See
Aldridge v. A.T. Cross Corp., 284 F.3d 72, 84 (1st Cir. 2002) (“[T]here must
be a primary violation for liability under [S]ection 20(a).”).
ORDER
For the foregoing reasons, defendants’ motion to dismiss is
ALLOWED. The Clerk will record the dismissal and close the case.
SO ORDERED.
/s/ Richard G. Stearns
___________________________
UNITED STATES DISTRICT JUDGE

Tabak v. Canadian Solar Inc., 549 F. App’x 24, 28-29 (2d Cir. 2013); see
also Cozzarelli v. Inspire Pharm. Inc., 549 F.3d 618, 627 (4th Cir. 2008)
(“All investments carry risk, particularly in a field like biopharmaceuticals.
If we inferred scienter from every bullish statement by a pharmaceutical
company that was trying to raise funds, we would choke off the lifeblood of
innovation in medicine by fueling frivolous litigation – exactly what
Congress sought to avoid by enacting the PSLRA.”). Finally, despite the
small uptick in daily stock sales, Reynolds sold less than 7% of his InVivo
stock during the class period, and his holdings lost more than $21 million in
value between August 26 and August 28, 2013.
14