SAPIR v. AVERBACK et al
Filing
42
OPINION fld. Signed by Judge Jose L. Linares on 2/10/16. (sr, )
NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
ROY SAP IR, on behalf of himself and all other
similarly situated,
Plaintiff,
Civil Action No.: 14-7331 (JLL) (JAD)
OPINION
v.
PAUL A VERBACK and NYMOX
PHARMACEUTICAL CORPORATION,
Defendants.
LINARES, District Judge.
This matter comes before the Court by way of the Motion to Dismiss the Amended Class
Action Complaint (the "Amended Complaint" or "AC") filed by Defendants Paul A verback
("Averback") and Nyrnox Pharmaceutical Corporation ("Nyrnox" or "the Company'')
(collectively, "Defendants"). (ECF No. 32.) In this action, Lead Plaintiffs Harry Lattanzio,
PRS, Inc., Network Accreditation Services, Inc., Andrew Silverman, and Rock 49th Restaurant
Group (collectively "Lead Plaintiffs") allege claims under§§ lO(b) and 20(a) of the Securities
Exchange Act of 1934 (the "Securities Exchange Act"), arising from alleged fraudulent
misrepresentations about the design and conduct of two Phase 3 studies of Nyrnox's drug NX1207. The proposed Class Period is from January 31, 2011 to November 2, 2014. (AC at 1.)
The Court has considered the parties' submissions and decides this matter without oral
argument pursuant to Rule 78 of the Federal Rules of Civil Procedure. For the reasons set forth
below, the Court grants the Motion to Dismiss.
FACTUAL BACKGROUND 1
A. Company Background
Nymox is engaged in the research and development of therapeutics and diagnostics, with
an emphasis on products for the unmet needs of the aging population. (AC ii 18.) The Company
has two subsidiaries: the wholly-owned Nymox Corporation and the majority-owned Serex, Inc.,
both based in Hasbrouck Heights, New Jersey. (Id.
ii 15.) Throughout its operating history, the
Company's operations have primarily been funded through common stock private purchase
agreements. (Id.
ii 18.)
Dr. Paul Averback is Nymox's founder, has been the Company's President and a director
since 1995, and has served as its Chairman of the Board since 2001. (Id.
ii 19.) Dr. Averback is
also the Company's largest shareholder. (Id.) At or near the commencement of the Class Period,
he owned or controlled 13,115,395 shares (about 40.3%) of the Company's common stock, as
well as 2,750,000 in vested and unexercised stock options. (Id.; see also ECF No. 32-4, Ex A. to
Stroup Deel. ("2010 Form 20-F") at 41-42.) As of March 15, 2014, the number of common
shares owned or controlled by Averback was ll,402,048.
(AC
ii 19.) According to the
Amended Complaint, it was reported on August 6, 2014 that Averback sold 470,600 common
shares in a private transaction for proceeds of $2.4 million. (Id.)
B. Facts Relevant to the Class Period Allegations
Since 2002, the Company has been developing a novel proprietary drug candidate, NX1207, to treat benign prostatic hyperplasia (BPH), a condition found in older men whose
1
This background is derived from Plaintiff's Amended Complaint, which the Court must accept as true at this stage
of the proceedings, and "documents incorporated into the complaint by reference, and matters of which a court may
take judicial notice," such as SEC filings, press releases, and earnings call transcripts. Winer Family Trust v. Queen,
503 F.3d 319, 327 (3d Cir. 2007); Tellabs, 551 U.S. at 322.
2
prostates have become enlarged. (Id.
if 1.) There are competing drugs for treatment of BPH
already approved by the Food and Drug Administration (FDA), 2 but Nymox claims that NX1207 is superior due to ease of administration (a single injection with minimal discomfort) and
lack of serious side effects. (Id.)
Prior to the Class Period, Nymox successfully conducted Phase 1 and 2 clinical trials of
NX-1207 in the U.S. (Id.
if 26.) Indeed, the Company stated that "[c]ompleted Phase 2 studies
have shown that a single administration of NX-1207 resulted in symptomatic improvements
which reached statistical significance compared to double-blinded placebo and study controls .
. . . Follow-up studies have shown clinical efficacy effects lasting up to 71h years after a single
treatment." (ECF No. 32-7, Ex. D to Stroup Deel. ("2013 Form 20-F") at 15.)
In 2009, the Company began two large Phase 3 studies of NX-1207: NX02-0017 and
NX02-0018 (collectively the "Phase 3 Studies"). (AC if 26.) According the Company, the Phase
3 Studies specifically "incorporate[d] the specific protocol design recommendation provided to
the [Company] by the FDA." (2013 Form 20-F at 15.) Both NX02-0017 and NX02-0018 were
designed to include 500 men, who participated in their respective study for one year. (AC ilil 2627.) The Company completed patient enrollment for NX02-0017 in November 2012 and NX0018 in May 2013. (AC ilil 63, 68.)
2
The FDA is responsible for granting approval for new drugs. (AC , 20.) In order to obtain approval, FDA
regulations require the successful completion of three clinical trial phases, which assess the safety and efficacy of
the drug. 21 C.F.R. § 312.21. Phase 1 studies are conducted generally on a group "rang[ing] [from] 20 to 80"
healthy subjects and are designed mainly to test safety concerns. 21 C.F.R. § 312.2l(a); ECF No. 32-27, Ex. X to
Stroup Deel., The FDA 's Drug Review Process: Ensuring Drugs Are Safe and Effective, FDA, avail. at
www.fda.gov ("Ex. X"). Phase 2 studies largely attempt to evaluate the drug's efficacy by obtaining preliminary
data on "no more than several hundred subjects" who have the condition under study. 21 C.F.R. § 312.2l(b); Ex X.
These studies typically compare patients receiving the drug to another group receiving a different treatment, or a
placebo. Id. Phase 3 studies normally are expanded to "several hundred to several thousand subjects." 21 C.F.R. §
312.2l(c); Ex X. Phase 3 studies also use a comparative framework and are intended to gather additional
information about the drug's safety and efficacy. Id. Lead Plaintiffs allege that it is the generally accepted industry
standard and consistent with industry best practice for a sponsor to unblind Phase 3 study results as soon as they are
available upon completion of the study. (AC, 24.)
3
Lead Plaintiffs claim that enrollment of 1000 men in the two Phase 3 Studies was a "very
slow and difficult process" and allege that in order to "keep the market's interest in NX-1207
during the lengthy enrollment process and to obfuscate the problems with design and conduct of
the two Phase 3 studies" Defendants "began a campaign to disseminate as much positive
information about NX-1207, focusing on the two ongoing Phase 3 Studies and the results of
prior, smaller, shorter Phase 2 studies of NX-1207." (AC
if 28.)
Lead Plaintiffs allege that the
misrepresentations were made "through the publication of News Releases and reporting on
positive presentations at meetings of the American Urological Association made by ':friendly'
doctors, as well as through SEC filings." (AC if 28; see AC
ifif 29, 31, 34, 36, 38, 40, 42, 44, 46,
48,49,51,53,55,57,59,61,63,65,66,68, 70, 71, 73, 74, 76.)
On Sunday, November 2, 2014, the Company issued a press release stating as follows:
Nymox Pharmaceutical Corporation (NASDAQ: NYMX)
announced today that the Company's two Phase 3 U.S. studies of
NX-1207 for the treatment of BPH, NX02-0017 and NX02-0018,
failed to meet their primary efficacy endpoints. Full results will be
reported at a later date. The Company will hold a teleconference
for shareholders on Monday, November 3, 2014 at 4:30 pm
Eastern Time....
Nymox CEO, Paul A verback, said, "The two studies failed to meet
the pre-specified efficacy endpoints. Drug safety was acceptable.
Drug efficacy reached levels similar to earlier studies but was not
statistically significant in comparison to the placebo control due to
a higher placebo response than in earlier NX-1207 studies and in
other placebo-controlled BPH studies. The compound remains
promising for low grade localized prostate cancer where the Phase
2 results showed evidence that NX-1207 treatment had a positive
effect on biopsy results and clinical and biochemical progression."
(AC
if 78.)
On November 3, 2014, the Company's common stock price fell 82% to $0.93 per
share on trading volume of 19.6 million shares.
4
(AC
if
13.) Averback participated in the
conference call after the market closed on November 3, 2014. (See ECF No. 32-22, Ex. S to
Stroup Deel., Certified Transcript of Nymox's Shareholder Teleconference dated November 3,
2014 ("Nov. 3, 2014 Tr.").)
Lead Plaintiffs allege that the factual reasons given for failure of the Phase 3 Studies by
Averback on the November 3, 2014 conference call were all facts known to Defendants at the
beginning of, and throughout the Class Period.
(AC
if 9, 80.) In particular, the Amended
Complaint alleges that, during the Class Period, Defendants knowingly failed to disclose or
misrepresented in public statements that:
a. by November 2013, the drug had failed to show statistical significance in the first
Phase 3 trial;
b. the design of the Phase 3 studies was faulty in that it would lead to the exclusion of
those BPH patients with more serious conditions, thereby increasing the likelihood
that the difference in effect between placebo and drug would be minimized and would
cause significant if not overwhelming difficulties in patient enrollment and continued
patient participation for the required year-long period causing substantial delays in
the completion of the studies;
c. the design of the Phase 3 Studies would cause significant difficulties in accurately
measuring the difference in effect of the drug and the placebo on the patients due to
the highly subjective questionnaire each participant had to complete which was the
end point, that is, the only measure of the drug's effect on the patient;
d. the design of the Phase 3 Studies, both of which relied solely on highly subjective
questionnaires to be completed by the participants as the only end point, rendered
5
results from prior studies of NX-1207 inherently unreliable markers or predictors of
results in the Phase 3 Studies; and,
e. the design of the Phase 3 Studies, in which the placebo was an injection of saline
solution directly into the prostate, negated the standard role of a placebo in the Phase
3 Studies and increased the placebo effect, which presaged the failure of the drug in
the Phase 3 Studies due to a higher placebo effect.
(AC ,-r,-r 9, 80.)
PROCEDURAL BACKGROUND
This action was commenced on November 24, 2014. (ECF No. 1.) By Opinion and
Order dated February 26, 2015, this Court appointed Lead Plaintiffs, Lead Counsel, and Liaison
Counsel. (ECF No. 17.) In accordance with scheduling stipulations and Orders (ECF Nos. 24,
35): Lead Plaintiffs filed the Amended Complaint on June 9, 2015 (ECF No. 25); Defendants
filed the instant motion to dismiss on August 10, 2015 (see ECF No. 32-1 ("Mov. Br.")); Lead
Plaintiffs filed opposition on October 23, 2015 (ECF No. 36 ("Opp. Br.")); and Defendants
replied on December 14, 2015 (ECF No. 41 ("Reply Br.")).
The motion is now ripe for
resolution.
LEGAL STANDARD
To withstand a motion to dismiss for failure to state a claim, "a complaint must contain
sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face."'
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell At!. Corp. v. Twombly, 550 U.S. 544,
6
570 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows
the court to draw the reasonable inference that the defendant is liable for the misconduct
alleged." Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556). "The plausibility standard is
not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a
defendant has acted unlawfully." Id.
To determine the sufficiency of a complaint under Twombly and Iqbal in the Third
Circuit, the court must take three steps: first, the court must take note of the elements a plaintiff
must plead to state a claim; second, the court should identify allegations that, because they are no
more than conclusions, are not entitled to the assumption of truth; finally, where there are wellpleaded factual allegations, a court should assume their veracity and then determine whether they
plausibly give rise to an entitlement for relief. See Connelly v. Lane Const. Corp., 809 F.3d 780,
787 (3d Cir. 2016) (citations omitted).
"In deciding a Rule 12(b)(6) motion, a court must
consider only the complaint, exhibits attached to the complaint, matters of the public record, as
well as undisputedly authentic documents if the complainant's claims are based upon these
documents." Mayer v. Belichick, 605 F.3d 223, 230 (3d Cir. 2010).
The Court's role is not to determine whether the non-moving party "will ultimately
prevail" but whether that party is "entitled to offer evidence to support the claims." United
States ex rel. Wilkins v. United Health Grp., Inc., 659 F.3d 295, 302 (3d Cir. 2011). The Court's
analysis is a context-specific task requiring the court "to draw on its judicial experience and
common sense." Iqbal, 556 U.S. at 663-64.
7
ANALYSIS
A. Section lO(b) and Rule lOb-5 of the Securities Exchange Act
Section lO(b) of the Securities Exchange Act of 1934 prohibits the "use or employ[ment],
in connection with the purchase or sale of any security ... , [of] any manipulative or deceptive
device or contrivance in contravention of such rules and regulations as the Commission may
prescribe." 15 U.S.C. § 78j(b). Rule lOb-5, promulgated by the Securities and Exchange
Commission, makes it unlawful
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to
state a material fact necessary in order to make the 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 person, in
connection with the purchase or sale of any security.
17 C.F.R. § 240.lOb-5.
To state a claim under§ lO(b) and Rule lOb-5, a plaintiff must allege that defendants:
"[1] made a misstatement or an omission of material fact [2] with scienter [3] in connection with
the purchase or the sale of a security [4] upon which plaintiff reasonably relied and [5] plaintiffs
reliance was the proximate cause of their injury." Inst. Invs. Grp. v. Avaya, Inc., 564 F.3d 242,
251 (3d Cir. 2009) (quoting Winer Family Tr. v. Queen, 503 F.3d 319, 326 (3d Cir. 2007)).
Furthermore, "(a] corporation is liable for statements by employees who have apparent authority
to make them." Id. (quoting Makar Issues & Rights, Ltd. v. Tellabs Inc. (Tellabs II), 513 F.3d
702, 708 (7th Cir. 2008)).
Additionally, Lead Plaintiffs must meet the heightened pleading requirements under
Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act
8
("PSLRA"). See City of Edinburgh Council v. Pfizer, Inc., 754 F.3d 159, 168 (3d Cir. 2014).
Rule 9(b) provides, in relevant part, as follows: "In alleging fraud ... , a party must state with
particularity the circumstances constituting fraud." Fed. R. Civ. P. 9(b). Thus, at a minimum,
"plaintiffs [must] support their allegations of securities fraud with all of the essential factual
background that would accompany 'the first paragraph of a newspaper story' -that is, the 'who,
what, when, where and how' of the events at issue." In re Alpharma Inc. Sec. Litig., 372 F.3d
137,
(3d Cir. 2004) (citation omitted).
Similarly, as per the PSLRA, a plaintiff must satisfy heightened pleading requirements
and "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. Makar Issues & Rights, Ltd., 551 U.S. 308, 313, 321 (2007) (quoting Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 194, and n.12 (1976), and citing 15 U.S.C. § 78u-4(b)(l), (2)). First,
with regard to misleading statements and omissions of material fact, a plaintiff must "specify
each statement alleged to have been misleading, the reason or reasons why the statement is
misleading, and, if an allegation regarding the statement or omissions is made on information
and belief, the complaint shall state with particularity all facts on which that belief is formed."
15
§ 78u-4(b )(1 ). Further, the statement must have been misleading at the time it was
made, as "liability cannot be imposed on the basis of subsequent events." In re NAHC, Inc. Sec.
Litig., 306 F .3d 1314, 1330 (3d Cir. 2002). Additionally, "when assessing the sufficiency of
allegations made on information and belief pursuant to 15 U.S.C. § 78u-4(b)(l)," "plaintiffs
need only plead with particularity sufficient facts to support those beliefs." California Pub.
Employees' Ret. Sys. v. Chubb Corp., 394 F.3d 126, 146 (3d Cir. 2004) (adopting Novak v.
9
Kasaks, 216 F.3d 300 (2d Cir. 2000)). In other words, the facts alleged must be "sufficient to
support a reasonable belief as to the misleading nature of the statement or omission." Id.
As to the second requirement of scienter-the intent to deceive, manipulate, or defraud
investors-"each act or omission alleged to violate [Section lO(b)], [must] state with
particularity facts giving rise to a strong inference that the defendant acted with the required state
of mind." 15 U.S.C. § 78u4(b)(2). 3 In evaluating whether a complaint meets this requirement, a
court is required to consider inferences urged by the plaintiff as well as "competing inferences
rationally drawn from the facts alleged." Tellabs, 551 U.S. at 314. A "strong" inference is
"more than merely plausible or reasonable-it must be cogent and at least as compelling as any
opposing inference of nonfraudulent intent. ... The inference ... need not be irrefutable, i.e., of
the 'smoking-gun' genre, or even the 'most plausible of competing inferences."' Id. at 314, 324.
A court must consider the entirety of a complaint in determining ''whether all of the facts
alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual
allegation, scrutinized in isolation, meets this standard." Tellabs, 551 U.S. at 322; see also
Avaya, 564 F.3d at 273. The Third Circuit permits a plaintiff to satisfy this requirement with
allegations of strong circumstantial evidence of either conscious behavior or recklessness. S.E. C.
v. Infinity Grp. Co., 212 F.3d 180, 192 (3d Cir. 2000); see also In re Radian Sec. Litig., 612
F.Supp.2d 594, 607 (E.D. Pa. 2009) (noting that although in Tellabs the Supreme Court
specifically reserved the question of whether recklessness could give rise to civil liability under
1Ob-5, "every court of appeals to consider the issue has held that a plaintiff can meet the scienter
requirement by showing that a defendant acted intentionally or recklessly.") In this context,
3
To the extent that the PSLRA's scienter pleading requirements conflict with those of Federal Rule of Civil
Procedure 9(b), the PSLRA supersedes the latter as it relates to Rule lOb-5 actions. See Institutional Inv'rs Grp. v.
Avaya, Inc., 564 F.3d 242, 253 (3d Cir.2009); see also Alphanna, 372 F.3d at 148.
10
recklessness is "highly unreasonable [conduct], involving not merely simple, or even inexcusable
negligence, but an extreme departure from the standards of ordinary care, ... which presents a
danger of misleading buyers or sellers that is either known to the defendant or is so obvious that
the actor must have been aware of it." S.E.C. v. Infinity Grp. Co., 212 F.3d at 192. Additionally,
although motive or opportunity "may no longer serve as an independent route to scienter,"
Avaya, 564 F .3d at 277-78, "personal financial gain may weigh heavily in favor of a sci enter
inference." Tellabs, 551 U.S. at 325.
Aside from the two requirements pertaining to the facts surrounding the alleged violation
and scienter, the PSLRA imposes additional burdens with respect to allegations involving
forward-looking statements.
The PSLRA's Safe Harbor provision, 15 U.S.C. § 78u-5(c),
"immunizes from liability any forward-looking statement, provided that: the statement is
identified as such and accompanied by meaningful cautionary language; or is immaterial; or the
plaintiff fails to show the statement was made with actual knowledge of its falsehood." Avaya,
564 F.3d at 254. 4 However, a "'mixed present/future statement is not entitled to the safe harbor
with respect to the part of the statement that refers to the present."' Id. at 255 (quoting Tellabs
II, 513 F.3d at 705). If the statement is forward looking, cautionary language must be extensive
yet specific and touch upon the subject matter of the alleged misrepresentation in order for the
safe harbor to apply. See Semerenko v. Cendant Corp., 223 F.3d 165, 182 (3d Cir. 2000) ("[A]
vague or blanket (boilerplate) disclaimer which merely warns the reader that the investment has
risks will ordinarily be inadequate to prevent misinformation.
4
To suffice, the cautionary
The Court also notes that the "bespeaks caution" doctrine is relevant to interpreting the PSLRA safe harbor.
Avaya, 564 F.3d at 254-56; see also In re Anadigics, Inc., Sec. Litig., Civil Action No. 08-5572, 2011 WL 4594845,
at *10 n.4 (D.N.J. Sept. 30, 2011) (noting that the Third Circuit Court of Appeals has "incorporated much of the
[bespeaks caution] doctrine into its analysis of the PSLRA") (citing Nat'/ Junior Baseball League v. Pharmanet
Dev. Grp. Inc., 720 F. Supp. 2d 517, 533-34 (D.N.J. 2010))).
11
statements must be substantive and tailored to the specific future projections, estimates or
opinions in the prospectus which the plaintiffs challenge.") (quoting In re Trump Casino Sec.
Litig., 7 F.3d 357, 371-72 (3d Cir.1993)); see also Avaya, Inc., 564 F.3d at 256 (3d Cir. 2009)
(reiterating same). Thus, boilerplate language that merely warns readers of the risks associated
with investing is generally insufficient.
Id.
Cautionary language in SEC filings "may be
incorporated by reference" into the document containing the forward-looking statement, and
need not be contained within the same document as the forward-looking statement itself. In re
Aetna, Inc. Sec. Litig., 617 F.3d 272, 282 (3d Cir. 2010) (quoting In re Merck & Co. Sec. Litig.,
432 F.3d 261, 273 n.11 (3d Cir. 2005)).
Defendants generally do not dispute that the following elements of the cause of action are
properly pleaded: materiality, reliance, loss causation, and damages. Falsity, loss causation, and
scienter are disputed. The Court sets forth the arguments for each below, but analyzes scienter
only because the Court concludes that that the Amended Complaint fails to satisfy the heightened
scienter pleading requirements under the PSLRA .
. Falsity
The Amended Complaint contains a section entitled "Class Period Statements" which
sets forth in block quotations the particular statements (press releases, public filings, etc.) alleged
to contain misstatements or omissions of material fact. (See AC at 16-54, ifif 29, 31, 34, 36, 38,
40, 42, 44, 46, 48, 49, 51, 53, 55, 57, 59, 61, 63, 65, 66, 68, 70, 71, 73, 74, 76.) 5 Lead Plaintiffs
assert that, in essence, their claims are that "Defendants knew, at the outset of the Phase 3 trials,
5
As an initial matter, the Court agrees with Lead Plaintiffs that the Amended Complaint satisfies Rule 9 and
PSLRA' s particularity requirements. Even though the block quotations utilized by Lead Plaintiffs do not identify
the precise language at issue, the quotations are followed by explanatory paragraphs that explain why Lead Plaintiffs
believe the particular statement is false or misleading.
12
that significant obstacles existed to a successful outcome from the start, but chose to conceal
these obstacles." (Opp. Br. at 14.) Upon review of the Amended Complaint, the Court agrees
with Defendants that the claims generally fall into two buckets surrounding the Phase 3 Studies:
design and conduct. With respect to "design," the thrust of Lead Plaintiffs' claims is that the
Company knew or should have known that the Phase 3 Studies were destined to fail due to the
design of the studies: fulfilling enrollment was difficult because of the one-year enrollment and
requirement that the subjects not undergo any additional treatment; prior studies did not provide
"reliable markers" for the Phase 3 Studies given the reliance in Phase 3 on subjective
questionnaires; and the placebo effect was significantly higher than in previous studies. (See AC
~~
29, 31, 34, 36, 38, 40, 42, 44, 46, 48, 49, 51, 53, 55, 57, 59, 61, 65, 66.) With respect to
"conduct," the general allegations are that Defendants stalled in releasing the Top-Line results
from the Phase 3 Studies so that they could be manipulated in a way to make it appear that the
studies were a success. (See AC
~~
5, 63, 68, 70, 71, 73, 74, 76.) Defendants argue that Lead
Plaintiffs have failed to adequately allege falsity due to application of the Safe Harbor and
because of failure to establish that any of the statements were actually false or misleading when
made.
Defendants first move to dismiss the Amended Complaint on grounds that the challenged
statements fall within the Safe Harbor for forward-looking statements. (Mov. Br. at 10-15.)
Specifically, Defendants contend that the statements notified investors about the existence of
forward-looking statements and the inherent risks of drug development and incorporated by
reference the detailed Risk Factors in the Company's periodic filings. (Id.) As an example,
Defendants point to two Risk Factors set forth in the Company's filings, entitled "Our Clinical
13
Trials for Our Therapeutic Products, Such as NX-1207, May be Delayed, Making it Impossible
to Achieve Anticipated Development or Commercialization Timelines" and "Our Clinical Trials
for Our Therapeutic Products in Development, Such as NX-1207, May Not Be Successful and
We May Not Receive the Required Regulatory Approvals Necessary to Commercialize These
Products." (Id. at 13-14.)6 Defendants claim that in light of these "substantive and specific
warnings (plus, subsequent disclosures), any statements regarding the 'design and conduct of the
two Phase 3 Studies' that Plaintiff could have identified in the press releases block-quoted in the
Amended Complaint (but did not), are forward-looking statements shielded by the Reform Act's
safe harbor." (Id. at 15.)
In opposition, Lead Plaintiffs assert that that the statements in question were not forwardlooking because the risks being warned of had already come to pass at the time the statements
were made, such that the Safe Harbor is inapplicable. (Opp. Br. at 15-18.) Lead Plaintiffs
contend that Defendants' reliance on Risk Factors that "may" occur is misplaced because the
allegations contained in the Amended Complaint focus on misleading and incomplete statements
containing information already existing and already known to Defendants. (Id. (citing In re Cell
Pathways, Inc. Secs. Litig., 2000 U.S. Dist LEXIS 8584 (E.D. Pa. June 20, 2000).) According to
Lead Plaintiffs, the issues acknowledged by Averback on the November 3, 2014 conference
call-i.e., heightened placebo effect, difficulty achieving enrollment (including exclusion of
"sicker" patients), and subjective questionnaires--demonstrate that the statements in question
were not forward-looking. (Id. at 17-18.)
Defendants also argue that the Amended Complaint should be dismissed because of a
6
For the full extent of the Risk Factors, see 2010 Form 20-F at 5; ECF No. 32-5, Ex B. to Stroup Deel. ("2011 Form
20-F") at 5; ECF No. 32-6, Ex C. to Stroup Deel. ("2012 Form 20-F") at 5; 2013 Form 20-F at 5; ECF No. 32-9, Ex
F. to Stroup Deel. ("2014 Form 20-F") at 5.)
14
failure to plead facts showing that any statement was materially false or misleading when made.
(Mov. Br. at 15-23; Reply Br. at 2-7.)
With respect to the "design"-related statements,
Defendants contend that Lead Plaintiffs are essentially trying to plead fraud by hindsight since
the Amended Complaint lacks particularity and instead states only in conclusory fashion that
Defendants knew of the design flaws of the Phase 3 Studies.
(Mov. Br. at 15-17.) In fact,
according to Defendants, the full, certified transcript of the November 3, 2014 conference call
undermines the allegations in the Amended Complaint. (Mov. Br. at 17-18.) Furthermore,
Defendants argue that the securities laws do not permit second-guessing of the design
methodology of a clinical trial, and that any such claims are nothing more than a plaintiffs
criticism and personal opinion of how it should have been different. (Mov. Br. at 19-20 (citing
In re Keryx Biopharmaceuticals, Inc. Securities Litigation, Nos. 13-755 and 13-1307, 2014 WL
585658 (S.D.N.Y. Feb. 14, 2014).)
With respect to "conduct"-related statements (i.e., that
Defendants stalled in releasing the Top-Line results), Defendants point to multiple public filings
and the transcript of the November 3, 2014 conference call to discredit these claims. (Mov. Br.
at 20-22, 23.) Additionally, Defendants dispute Lead Plaintiffs' statement that it is "generally
accepted industry standard and consistent with industry best practice" to unblind Top-Line Phase
3 study results as soon as they are available. (Mov. Br. at 22.)
In opposition, Lead Plaintiffs argue that the Amended Complaint sufficiently pleads that
Defendants' Class Period statement were false when made. (Opp. Br. at 19-21.) In essence,
Lead Plaintiffs assert that the Amended Complaint alleges that highly material information, that
would have significantly reduced public expectations that the Phase 3 Studies would yield
successful results, was repeatedly omitted from Class Period statements. (Id.) For example,
15
Lead Plaintiffs state that Class Period statements were false and misleading when made because
they failed to mention the following, all of which increased the likelihood of clinical failure: that
using a procedure of directly injecting saline into the prostate as a placebo would increase the
placebo effect (id. at 19); that a one-year study that simultaneously prohibited alternative
treatments would be difficult to fill and would reduce the number of "sicker" patients in the
studies
at 19-20); that reliance on highly subjective questionnaires increased the likelihood of
increased placebo effect (id. at 20); and that the Phase 3 Studies were qualitatively different from
earlier trials (id.). In sum, Lead Plaintiffs "agree that Defendants were free to design any kind of
study they wanted" but state that Defendants "were not free to . . . make positive statements
about the drug and the progress of those Phase 3 studies, yet at the same time omit material
adverse information about the severe impairment to any chance of Phase 3 's success due to
factors inherent in the studies' design." (Id. at 21.) Lead Plaintiffs assert that the "factual
reasons" given by Averback on the November 3, 2014 conference call for the failure of the Phase
3 Studies "were all facts known to, or recklessly disregarded by defendant A verback and Nymox
through the Class Period, as Averback effectively admitted on the conference call, but which
Defendants intentionally chose to conceal and misrepresent throughout the Class Period." (Id. at
5 (citing AC iii! 9, 79).)
Although the Court has serious doubts as to whether Lead Plaintiffs have sufficiently
pled falsity, because the Court finds that the Amended Complaint fails to satisfy the heightened
scienter pleading requirements under the PSLRA and that dismissal is warranted on that basis, it
need not address the falsity arguments.
16
Loss Causation
The Amended Complaint alleges that the pnce of Nymox common stock "fell
precipitously, declining an aggregate 82%" on November 3, 2014, as a "direct result" of the
disclosures on November 2, 2014 (press release) and November 3, 2014 (conference call). (AC
iii! 85, 87.) However, the Amended Complaint acknowledges that the November 3, 2014
conference call occurred after the market had closed, such that disclosures made during the
conference call could not have affected the price of the stock during market hours on November
3, 2014. (Id.
iJ 79.)
In a fraud on the market case (as pled here), "a plaintiff may establish the element of loss
causation simply by showing that he or she purchased a security at a market price that was
artificially inflated due to a fraudulent misrepresentation." Semerenko v. Cendant Corp., 223
F.3d 165, 184 (3d Cir. 2000) (citing Scattergood v. Perelman, 945 F.2d 618, 624 (3d Cir. 1991)).
However, "[b ]ecause a plaintiff in an action under § 1O(b) and Rule 1Ob-5 must prove that he or
she suffered an actual economic loss, . . . an investor must also establish that the alleged
misrepresentations proximately caused the decline in the security's value to satisfy the element
ofloss causation." Semerenko, 223 F.3d at 185.
Defendants argue that loss causation cannot be established for the disclosures made
during the November 3, 2014 conference call because the conference call occurred after the
market had closed. (Mov. Br. at 29-30.) Defendants accordingly request that "all allegations
pertaining to the purported 'misrepresentations and omissions' about the Phase 3 studies that
were 'revealed to investors and the market' during the November 3, 2014 conference call should
be dismissed." (Id. at 30.)
17
opposition, Lead Plaintiffs contend that they have sufficiently alleged loss causation
since the statements made by Averback on the November 3, 2014 conference call merely "shed
light" on the misstatements made during the Class Period. (Opp. Br. at 29-30.) In other words,
Lead Plaintiffs assert that the explanations given on the conference call as to why the Phase 3
Studies failed do not negate their core allegations that they purchased Nymox common stock at
an inflated price due to the misrepresentations made during the Class Period regarding the Phase
3 Studies. (Id.)
Again, because the Court finds that the Amended Complaint fails to satisfy the
heightened scienter pleading requirements under the PSLRA and that dismissal is warranted on
that basis, it declines to address this issue.
3. Scienter
Defendants move to dismiss the Amended Complaint on grounds that Lead Plaintiffs
have failed to adequately plead scienter.
(Mov. Br. at 23-29; Reply Br. at 7-11.)
First,
Defendants argue that the Amended Complaint fails to adequately allege motive and opportunity,
since neither operational funding nor Averback's stock sales demonstrate a sufficient motive.
(Mov. Br. at 24-27.) Second, Defendants contend that the competing inference of non-fraudulent
intent is more compelling than an inference of scienter. (Mov. Br. at 27-29 (citing Tellabs, 551
U.S. at 314).)
In opposition, Lead Plaintiffs argue that the Amended Complaint, when viewed
holistically, adequately pleads allegations of scienter. (Opp. Br. at 21-29.) Specifically, Lead
Plaintiffs contend that Defendants were at least reckless for not disclosing the heightened
placebo effect resulting from an injectable placebo and subjective questionnaires, and that
18
enrollment difficulties were skewing the results by reducing the number of "sicker" participants
in the Phase 3 Studies. (Opp. Br. at 22-24.) Lead Plaintiffs assert that the "core operations
doctrine" allows the Court to impute knowledge of these alleged defects to senior management.
(Id. at 24.) Additionally, Lead Plaintiffs argue that when accepting the Amended Complaint as
true, the Court can infer scienter from Defendants' allegedly stalling the release of the Phase 3
Tope-Line results. (Id. at 25.) Furthermore, Lead Plaintiffs concede that although "goals and
aspirations" to maintain a high stock price are insufficient in and of themselves to establish
scienter, they contend that this case is different because the very viability of the Company was
dependent on maintaining a high stock price, and thus ensuring the success of the Phase 3
Studies. (Id. at 26-28.) Finally, Lead Plaintiffs argue that the strong inference of scienter is at
least as compelling as any other inference. (Id. at 28-29.)
noted, "each act or omission alleged to violate [Section lO(b)], [must] state with
particularity facts giving rise to a strong inference that the defendant acted with the required state
of mind
, scienter]." 15 U.S.C. § 78u4(b)(2). Scienter is a "mental state embracing intent to
deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976).
In evaluating whether a complaint meets this requirement on a Rule 12(b)(6) motion, a court
must accept all factual allegations in the complaint as true, consider the complaint in its entirety
and other documents properly before the court, and compare "plausible, nonculpable
explanations for the defendant's conduct, as well as inferences favoring the plaintiff." Tellabs,
551
at 322-24. "The inference ... need not be irrefutable, i.e., of the 'smoking-gun' genre,
or even the 'most plausible of competing inferences,"' but it "must be more than merely
'reasonable' or 'permissible'-it must be cogent and compelling, thus strong in light of other
19
explanations." Id. at 324. "The inquiry is inherently comparative: How likely is it that one
conclusion, as compared to others, follows from the underlying facts?" Id. Again, a court must
consider the entirety of a complaint in determining "whether all of the facts alleged, taken
collectively, give rise to a strong inference of scienter, not whether any individual allegation,
scrutinized in isolation, meets this standard." Tellabs, 551 U.S. at 322; see also Avaya, 564 F.3d
at
. Ultimately, 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.
The Third Circuit permits a plaintiff to demonstrate with allegations of strong
circumstantial evidence of either conscious behavior or recklessness. S.E. C. v. Infinity Grp. Co.,
212
180, 192 (3d Cir. 2000); see also In re Radian Sec. Litig., 612 F.Supp.2d 594, 607
(E.D.
2009) (noting that although in Tellabs the Supreme Court specifically reserved the
question of whether recklessness could give rise to civil liability under lOb-5, "every court of
appeals to consider the issue has held that a plaintiff can meet the scienter requirement by
showing that a defendant acted intentionally or recklessly.") In this context, recklessness is
"highly unreasonable [conduct], involving not merely simple, or even inexcusable negligence,
but an extreme departure from the standards of ordinary care, . . . which presents a danger of
misleading buyers or sellers that is either known to the defendant or is so obvious that the actor
must have been aware of it." S.E.C. v. Infinity Grp. Co., 212 F.3d at 192. Additionally, although
motive or opportunity "may no longer serve as an independent route to scienter," Avaya, 564
F .3d at 277-78, "personal financial gain may weigh heavily in favor of a scienter inference."
Tellabs, 551 U.S. at 325.
20
The Court finds that, when considered holistically, the Amended Complaint fails to give
rise to a strong inference that Defendants acted with scienter. In essence, Lead Plaintiffs' theory
is that Defendants knew all along that the Phase 3 Studies were unlikely to succeed but
concealed this information in order to prolong the viability of the Company.
In contrast,
Defendants suggest that the facts point to a more benign explanation: that Defendants designed
the Phase 3 Studies with input from the FDA in a manner they thought was appropriate; that they
kept
market abreast of the studies' progress through press releases and other filings; and that
Defendants immediately revealed the disappointing results of the Phase 3 Studies when they
became available. The Court finds that when comparing the competing inferences, the opposing
inference of non-fraudulent intent is more compelling than an inference of scienter. In other
words, when viewing all of the facts collectively, a reasonable person would not deem the
inference of scienter cogent and at least as compelling as any opposing inference one could draw
from the facts alleged. See Tellabs, 551 U.S. at 324.
First, the Court notes that Amended Complaint fails to cite a single document or witness
that corroborates allegations of scienter. Although, admittedly not necessary to state a claim, the
Court is cognizant that "'omissions and ambiguities count against inferring scienter' under the
PSLRA's particularity requirements." Avaya, 564 F.3d at 263 (quoting Tellabs, 551 U.S. at
326).
Second, the Court is not convinced that allegations surrounding the design and conduct of
the Phase 3 Studies necessarily support an inference of scienter. For example, with respect to
allegations that Defendants "must have" withheld the Phase 3 Top-Line results, Lead Plaintiffs
rely on two press releases. Specifically, Lead Plaintiffs point to a November 28, 2012 press
21
release in which the Company announced completion of enrollment for the NX02-0017 study
and that they "expected" Top-Line results in "late 2013." (AC ii 63.) Similarly, Lead Plaintiffs
rely on a May 3, 2013 press release in which the Company announced completion of enrollment
for the NX02-0018 study and that they "expected" Top-Line results in "early 2014." (AC ii 68.)
The Amended Complaint concludes that Defendants "must have" received the Top-Line results
in these "expected" time frames, and that they withheld the results in defiance of "industry
standard" and best practice," which demonstrates scienter according to Lead Plaintiffs. (See AC
irir
24.)
As an initial matter, it is not clear that withholding the Top-Line results supports an
inference of scienter. Although Lead Plaintiffs allege that it is "industry standard" and "best
practice" to immediately unblind Phase 3 study results as soon as they are available (AC if 24),
Defendants correctly point out that Lead Plaintiffs fail to support this allegation with any
relevant FDA regulation. Furthermore, the Court is not convinced that a general allegation that a
defendant violated industry standard and best practice, without more, can support a securities
fraud claim. See In re Milestone Sci. Sec. Litig., 103 F. Supp. 2d 425, 470 (D.N.J. 2000)
(allegations that Defendants acted with scienter because they violated generally accepted
accounting principles insufficient).
More significantly, the allegations that Defendants withheld the results are undermined
by other documents properly before the Court, leading the Court to conclude that the inference of
scienter is far less compelling than the opposing, non-fraudulent inference. Although on the one
hand courts generally must "accept all factual allegations in the complaint as true," Tellabs, 551
U.S. at 322, in the Third Circuit, allegations that are "no more than conclusions," as here, "are
22
not entitled to the assumption of truth." See Connelly v. Lane Const. Corp., No. 14-3792, --F.3d ---, 2016 WL 106159, at *4 (3d Cir. Jan. 11, 2016) (citations omitted). This is especially
true when the allegations are directly contradicted by "documents incorporated into the
complaint by reference, and matters of which a court may take judicial notice," such as SEC
filings, press releases, and earnings call transcripts. See Winer Family Trust v. Queen, 503 F.3d
319,
(3d Cir. 2007) (citing Tellabs, 551 U.S. at 322). Indeed, as this Court has previously
held, "[w ]hen allegations contained in a complaint are contradicted by the document it cites, the
document controls." Jn re PD! Sec. Litig., No. 02-0211, 2005 WL 2009892, at *21 (D.N.J. Aug.
17, 2005).
In sum, for purposes of the comparative sci enter inquiry, the Court takes into
consideration "all of the facts alleged, taken collectively"-including whether allegations are
contradicted by other documents properly before the Court. Tellabs, 551 U.S. at 322.
Putting aside whether the Company's expectations about when they would receive the
Top-Line results are forward-looking statements, Lead Plaintiffs' allegations that Defendants
"must have" withheld the Top-Line results are contradicted by other documents properly before
the Court, specifically subsequent public filings (of which the Court may take judicial notice)
and the November 3, 2014 conference call transcript (which is explicitly incorporated into the
Amended Complaint by reference).
As noted, Lead Plaintiffs rely on press releases dated
November 28, 2012 and May 3, 2013 to support their conclusion that Defendants withheld the
Phase 3 Top-Line results. (AC
iMf 63, 68.) However, as late as August 11, 2014, Defendants
publicly disclosed in a Form 6-K filed with the SEC that they were still awaiting the Phase 3
Top-Line results:
In June 2009, Nyrnox started the first of two pivotal double blind
placebo controlled Phase 3 trials for NX-1207 that incorporated
23
specific protocol design recommendations provided by the FDA.
The two pivotal Phase 3 studies for NX-1207 were conducted at
well-known investigational sites across the U.S. with a total
enrollment of approximately 1,000 patients. Patient enrollment and
participation was completed in December 2013 for the NX02-0017
study and in May 2014 for the NX02-0018 study.
Data
verification and auditing procedures are in progress for these
studies with unblinding and top line analysis of efficacy and safety
data to follow once these procedures have been concluded.
(ECF No. 32-8, Ex. E to Stroup Deel. ("Ql '2014 Form 6-K") at 1; see also ECF No. 32-20, Ex.
Q to Stroup Deel. ("Jan. 28, 2014 News Release") ("unblinding and data analyses of the two
[Phase 3 Studies] will commence at the appropriate time in Q2 2014 with top line results being
reported expeditiously when available").) 7 Additionally, on the November 3, 2014 conference
call, Averback repeatedly stated that the Company had only received the Top-Line results a few
days prior:
the top-line data was made available to use for the first time at the end
of last week. And, of course, as soon as we hand unblended data for
the very first time, we immediately put out the top-line data to be - get
it out as soon as possible to the public. And so we have not done the
in-depth analysis that would answer some of the questions like what
you just asked about the effect on skewing. And we just received the
top-line from arm's length analysis and we've reported it in a dutiful
immediate fashion. So that's an important background.
Nov.
2014 Tr. 8:19-9:11; see also id. at 13:21-22 ("We just got the top-lines[.]"); id. at 39:9-
40:4 (reiterating that the Company received the top-line results a few days prior, that they
released them right away, and that they could not have gotten the results sooner); id. at 58: 17-21
("Our purpose today is to communicate to the public the top-line as soon as we get it and we just
got it and that's as far as we know."); id. at 91 :4-6 ("[W]e've communicated [the top-line data]
7
The SEC filings and press releases are subject to judicial notice. See In re NAHC, Inc. Sec. Litig., 306 F.3d 1314,
1331 (3d Cir. 2002). However, the Court makes clear that it is not relying on them for the truth of their contents, but
only for their existence. Oran v. Stafford, 226 F.3d 275, 289 (3d Cir. 2000). In other words, what these documents
state, regardless of truth, is relevant to the Court in considering scienter. Tellabs, 551 U.S. at 322.
24
as quickly as we could."); id. at 110:23-24 ("We only got [the top-line data] a couple of days
ago[.]") In light of this, Lead Plaintiffs' conclusory allegations that Defendants "must have"
withheld the Phase 3 Top-Line results do not support an inference of scienter.
Additionally, with respect to the design of the Phase 3 studies, the November 3, 2014
conference call also undermines Lead Plaintiffs' allegations that Defendants knew of design
flaws all along but chose to conceal them. For example, with respect to the placebo effect:
Q: And it sounds like the placebo level, you were really -- it
sounds like you were kind of blindsided. Just from what you've
said and what I've inferred from your tone, that you -- you were
pretty shocked at the results, I guess; right.
A: Yeah. I could -- I could tell you in a hundred different ways
how shocked we are.
(Nov.
2014 Tr. at 69:9-20.)
Q: [D]o you have an idea of why the placebo behaved differently
in this trial than it did in the Phase 2s, and in retrospect, is there
something you could have done in designing the trial that would
have dampened down the effect?
A: [T]here are a number of approaches that people take to try and
dampen placebo effect . . . . We had never encountered any
problems before and we didn't want to further complicate our
studies because it took long enough to do. Nobody has ever
successfully enrolled a thousand people for an injectable prostate
study where you had to do placebos before and the more barriers
you put in, the more difficulty there would have been to enroll
such a large number of people. In the U.S., I'm referring. So yes,
there -- there are things that one could try with -- to dampen it, as
you say, but none had been identified before and there's no
guarantee that they would have helped, but some of the placebos
responses are clearly troublesome that were so off the dial that it's
hard to imagine that -- that there's any validity to them, but this -this will be things that we'll be examining in-depth starting right
away....
Q: Do you know why [the heightened placebo effect] happened in
25
these Phase 3 trials when it didn't seem to happen in the Phase 2's?
A: At this point, I can't give you an answer to that. We just got the
top-lines and we'll be looking into that and hopefully we'll find
something.
(Id. at 11:12-13:24.)
Unfortunately, we didn't beat the placebo on it and so we're trying
to do a little postmortem here, trying to understand what went
wrong and we're making hypothesis, but we can't be sure and we
certainly don't want to be perceived as saying that the measuring
stick was unfair or that there's anything like that. We didn't beat it
and we didn't beat it. That's all there is to it. Now, trying to
understand it, we will work hard on that and the goal for that will
be to see, can we design something that won't be quite as
susceptible to these types of -- of random risks? But you can talk
to 50 urologists, they'll all tell you that the symptom score is very
subjective and half of them don't believe in it, but that's just the
lay of the land. There's nothing better.
(Id. at 81: l 0-82 :9.) When asked about the use of a subjective questionnaire, Dr. Averback
continued:
Well, there's all kinds of errors and limitations in the field, but we
can't change that. These are the standard accepted ways, at least
right now, that this is how it's done. And the authorities want
standard things for good reasons. They want to compare them to
what other modalities have done in the past.
(Id. at 34:4-35:8.). In addressing the design of the Phase 3 Studies, Averback stated:
[NX-1207] had undergone U.S. studies in the past using many of
the same investigational sites and using the same formulations and
using the same -- very similar protocol. So we -- you know, our
goal was to just take what we'd done before and just repeat it in
larger numbers and then it was all agreed that if it -- if it did that
we would have a good dossier for approval. Unfortunately, we did
repeat it, but the placebo did better than what we'd seen before
and, in fact, did much better that we've seen in other studies as
well and that's -- that's the long and short of it.
(Id. at 55:23-56:17.) These passages undermine Lead Plaintiffs inference of scienter, and in fact
26
lend support to the competing non-fraudulent inference. Rather than showing that Defendants
knew all along that the Phase 3 Studies were destined to fail, the transcript demonstrates that
Averback's comments were grounded in "20/20 hindsight." (Id. 49:15.) 8
Third, allegations concerning Averback's stock sales and the Company's need for
continued operational funding do not convince the Court that Defendants possessed the requisite
state
mind. Although not explicitly framed as indicative of scienter, the Amended Complaint
notes that Averback "reduc[ed] his investment in the Company" during the Class Period. (AC i!
19.) When taking stock options into consideration, Averback sold less than 5.9% of his available
shares during the three-plus year Class Period. Stock he sold for $4.4 million would have been
worth only $767,000 immediately after the Phase 3 failure; at the same time his retained shares
lost over $62.8 million in value immediately after the Phase 3 failure.
Stock sales that are
''unusual in scope or timing ... may support an inference of scienter." In re Advanta, 180 F.3d
at 540 (citing In re Burlington Coat Factory, 114 F.3d at 1424) (internal citations and
punctuation marks omitted); see also In re Alpharma Inc. Sec. Litig., 372 F.3d 137, 152 (3d Cir.
2004) (reviewing complaint for allegations that stock sales were "unusual in scope (e.g.,
compared to their total level of compensation or the size of previous sales) or timing (e.g.,
compared to the timing of past trades)"). Here, he Amended Complaint does not specifically
allege that Averback's sales were unusual in scope or timing, and there is nothing to suggest to
the Court that they were, considering that Averback retained a large percentage of his holdings,
and that he is compensated mainly in stock.
8
Additionally, although it did not factor into the present analysis, the Court notes that some judges are skeptical of
allowing securities claims that are essentially premised on the design of clinical trials. See In re Keryx
Biophannaceuticals, Inc., Sec. Litig., No. 13-1307, 2014 WL 585658, at *1 (S.D.N.Y. Feb. 14, 2014) ("It would
indeed be unjust-and could lead to unfortunate consequences beyond a single lawsuit-if the securities laws
become a tool to second guess how clinical trials are designed and managed.").
27
Additionally, generalized motivations, such as maintaining a high stock price in order to
fund operations, are insufficient to establish scienter. See In re Intelligroup Sec. Litig., 527 F.
Supp. 2d 262, 284 (D.N.J. 2007) ("a plaintiff may not rely on facts indicating that the defendant
had certain goals or aspirations (or sought to engage in the industry practices) common to the
law-abiding business community, since such goals or practices cannot amount to a valid motive
for the purposes of showing scienter.") (citing GSC Partners CDO Fund v. Washington, 368
F.3d 228, 237 (3d Cir. 2004). To be sure, it is relevant to the Court that NX-1207 is alleged to be
the centerpiece of the Company. In re Vicuron Pharm., Inc. Sec. Litig., No. 04-2627, 2005 WL
2989674, at *8 (E.D. Pa. July 1, 2005) ("[W]e note that anidulafungin was [defendant's] lead
product in development, which in itself supports a finding of scienter for alleged
misrepresentations as to it.") However, the Company's focus on NX-1207 must be balanced
with the more generalized motivation for FDA approval. See Koncelik v. Savient Pharm., Inc.,
No.
0262, 2010 WL 3910307, at *6 (S.D.N.Y. Sept. 29, 2010) aff'd, 448 F. App'x 154 (2d
Cir.
(holding that "the alleged motive to maintain the perception of [a] drug's
approvability simply rises to a generalized motivation, and is not sufficiently concrete for
purposes of inferring scienter.") (internal quotation marks and citation omitted). When viewing
the operational funding component in light of the Amended Complaint in its entirety, the Court is
not convinced that NX-1207's prominence within the Company's strategy is enough to infer
scienter. Accordingly, the Court finds that Lead Plaintiffs' allegations that Defendants had
"strong motive to obfuscate and forestall timely disclosure of the adverse material facts
concerning the two Phase 3 Studies and the adverse results of those two Phase 3 Studies" in
order to "fund ongoing operations" (AC ifil 10, 12) do not support an inference of scienter.
28
sum, when considering the Amended Complaint holistically and in a light most
favorable to Lead Plaintiffs, the Court concludes that the competing inference of non-fraudulent
is more compelling than an inference of scienter.
Accordingly, the Court finds that Lead
Plaintiffs have failed to state a claim under Section 1O(b) and Rule 1Ob-5 of the Securities
Exchange Act.
B. Control Person Claim Against the Officer Defendants under§ 20(a) of the Securities
Exchange Act
Section 20(a) of the Securities Exchange Act of 1934 creates a cause of action against
individuals who exercise control over a "controlled person," including a corporation, that has
committed a violation of Section lO(b). 15 U.S.C. § 78t(a); In re Suprema, 438 F.3d at 284.
Accordingly, liability under Section 20(a) is derivative of an underlying violation of Section
1O(b) by the controlled person. Avaya, 564 F.3d at 252; In re Alpharma Inc. Sec. Litig., 372 F .3d
(3d Cir. 2004) ("[P]laintiffs must prove not only that one person controlled another
137, 1
person, but also that the 'controlled person' is liable under the Act.") (internal quotation marks
omitted).
Because the Court has found Lead Plaintiffs have failed to state a claim for a violation of
Section I O(b) and Rule 1Ob-5 of the Securities Exchange Act, it likewise finds that Lead
Plaintiffs have failed to state a claim for control liability under Section 20(a). See In re NU! Sec.
Litig., 314 F. Supp. 2d 388, 418 (D.N.J. 2004). Accordingly, the Court will grant Defendants'
Motion to Dismiss this claim.
29
DISMISSAL WITH OR WITHOUT PREJUDICE
Rule 15(a)(2) provides that leave to amend "should be freely given when justice so
requires." Fed. R. Civ. P. 15(a)(2). However, "a court may deny leave to amend when such
amendment would be futile"-i.e., "the amended complaint would not survive a motion to
dismiss for failure to state a claim." Budhun v. Reading Hosp. & Med. Ctr., 765 F.3d 245, 259
(3d
2014) (citations omitted).
In light of the deficiencies identified by the Court in this Opinion, the Court believes that
amendment may well be futile. However, in the interests of justice, if Lead Plaintiffs believe
that amending the complaint would not be futile, they shall file a motion in accordance with the
Local Rules for leave to amend within 14 days of the date of this Opinion and Order. Such
motion shall set forth precisely what new allegations they would include in a consolidated
second amended complaint to cure the deficiencies identified by the Court, and shall also include
a copy of a proposed second amended complaint that is blacklined against the current Amended
Complaint. Accordingly, dismissal shall be without prejudice at this time.
CONCLUSION
For the reasons above, the Court grants the Motion to Dismiss. An appropriate Order
accompanies this Opinion.
DATED:
February~ 2016
JO
. LINARES
UNITED STATES DISTRICT JUDGE
30
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