MILLER v. GALENA BIOPHARMA, INC. et al

Filing 56

OPINION. Signed by Judge Kevin McNulty on 08/21/2018. (ek)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY

IN RE GALENA BIOPHARMA, INC.
SECURITIES LITIGATION

No. 2: 17-cv-92g-KM-JBC

OPINION

MCNULTY, U.S.D.J.:

The plaintiffs have filed a class-action complaint alleging securities fraud
against Galena Biopharma, Inc. (“Galena”) and several of its officers or key
employees. The complaint alleges that the defendants failed to make
appropriate disclosures under Item 303 of Regulation S-K and therefore
committed securities fraud. Now before the court are defendants’ motions to
dismiss the complaint. For the reasons expressed herein, those motions are
granted without prejudice to the submission of a second amended complaint
within 30 days.
I.

BACKGROUND’
A. Relevant Parties

Plaintiffs, holders of Galena common stock, allege that they suffered
damages because of defendants’ violations of securities laws. (AC ¶11 34-38).
They bring a class action on behalf of all persons and entities that acquired
Galena securities from August 11, 2014 through January 31, 2017 (the “Class
Period”). (AC

¶

1). Defendants are Galena and several officers or key employees

of Galena.

All facts and inferences are construed in favor of the nonmoving party on a
motion to dismiss. Citations to the amended complaint (ECF No. 40) are abbreviated
as “AC.”
1

Plaintiffs sue Mark J. Ahn (“Ahn”), who was the President, CEO, and a
Director at Galena until his resignation effective August 20, 2014; Mark W.
Schwartz (“Schwartz”), who was Qalena’s COO from 2011 until his
appointment as CEO, and who was President and CEO from August 20, 2014
through the end of the Class Period; Ryan M. Dunlap (“Dunlap”), who was the
Vice President and CEO of Galena until his resignation effective December 31,
2015; Christopher S. Lento (“Lento”), who was the Senior Vice President of
Oncology Commercial Operations at Galena from around May 2013 through
December 31, 2015; and Remy Bernarda (“Bernarda”), who was Senior Vice
President of Investor Relations at Galena throughout the Class Period. (AC

¶1J

40-44).
B. Abstral and Galena Patient Services

On October 3, 2013, Galena launched a new product—Abstral (fentanyl)
sublingual tablets. (AC

¶

47). Abstral is an opioid pain medication associated

with a high risk of addiction and dependence. (AC

¶

48). Abstral is indicated by

the FDA only for “the management of breakthrough pain in cancer patients 18
years of age and older who are already receiving and who are tolerant to
around-the-clock opioid therapy for their underlying persistent cancer pain.”
(AC
(AC

¶
9

51). Prescriptions written for any other purposes are deemed “off-label.”
51).2

On March 3, 2014, Galena launched “Galena Patient Services” (“OPS”), a
program designed to facilitate individuals obtaining prescriptions and
reimbursements for Abstral. (AC

¶

52). Mr. Ahn, President and CEO of Galena,

stated that GPS’s goal was “to make prescribing and receiving Abstral as simple
as possible.” (AC

¶

52).

Doctors are permitted to prescribe pharmaceuticals for an off-label purpose. It
is illegal, however, for companies to promote the off-label use of pharmaceuticals. See
Buckman Co. u. Plaintiffs’Legal Comm., 531 U.S. 341, 349-50 (2001). The complaint is
sometimes unclear about this distinction.
2

2

C. Dr. Ruan and Dr. Couch
Dr. Xiulu Ruan and Dr. John Patrick Couch jointly owned and operated
two pain-management clinics and a pharmacy. (AC

¶11

65-66). These two

doctors almost exclusively prescribed Abstral on an off-label basis for neck,
back, and joint pain. (AC

¶

68). Thirty percent of Galena’s Abstral revenues

were generated by these two doctors. (AC

¶J

65-66). Defendants Schwartz and

Lento visited these doctors several times during the Class Period and allegedly
encouraged them to prescribe Abstral off-label. (AC

¶

65). Drs. Ruan and

Couch purchased $1.6 million worth of stock in Galena and sought to
manipulate Galena’s stock price by inflating Abstral’s sales. (AC

¶

69).

When Galena’s stock price dropped, Drs. Ruan and Couch demanded
that Galena fire the board of directors, replace the CEO, and change its
leadership. (AC

9

87). One Galena employee claims that their demands were

taken seriously because they were the highest Abstral prescribers and were
“important individuals for Galena.” (AC
was fired around this time. (AC

¶

¶

87). Galena’s then-CEO, Mr. Ahn,

87). Drs. Ruan and Couch have since been

convicted on several criminal charges related to their practices in relation to
Abstral. (AC

¶

71).

D. Off-Label Promotion and Kickbacks
Former employees of Galena state that Galena executives “pushed”
salespeople to promote Abstral off-label. (AC

¶11

75-77). For instance, an

anonymous Galena employee was told to “visit” doctors who prescribed
Abstral’s competitor and “chase those prescriptions.” (AC

¶

79). These doctors

were mostly primary care doctors and thus the employee perceived that he or
she was “being challenged to go off-label.” (AC

¶

79).

Galena allegedly encouraged doctors, including Dr. Ruan, to enroll
non-cancer patients (i.e., off-label users) in Galena’s RELIEF program, which
tracked how patients responded to Abstral. (AC

¶

84). The RELIEF program

paid doctors $500 for every patient that enrolled. (AC

3

¶

84).

C&R Pharmacy, which was owned by Drs. Ruan and Couch, partnered
with Galena on a “rebate agreement.” (AC

¶

93). Galena would pay C&R

Pharmacy a certain percentage for the Abstral prescriptions they sold. (AC

¶

93). The patients of Drs. Ruan and Couch frequently obtained Abstral from

C&R Pharmacy. (AC

94). Galena wired $97,924 to C&R Pharmacy’s Wells

1

Fargo bank account on February 18, 2015, likely in connection with the rebate
agreement. (AC

1

95). According to plaintiffs, the rebate was in reality a

payment to Drs. Ruan and Couch for prescribing Abstral. (AC

¶

94).

Galena invited Drs. Ruan and Couch to attend Galena’s Advisory Board
Meetings. (AC

¶

97). Dr. Couch attended at least one meeting and was paid

$5,000, plus expenses. (AC ¶ 97). Dr. Ruan did not attend these meetings,
allegedly out of concern that he might hear inside information that would
prevent him from freely trading his Galena stock. (AC

¶

97).

The Department of Justice (“DOJ”) investigated Galena regarding
kickback allegations. A DOJ press release said the RELIEF program was
“nominally designed to collect data on patient experiences with Abstral, but
acted as a means to induce the doctors to prescribe Abstral.” (AC

¶

84). Galena

resolved the kickback allegations by paying more than S7.55 million to the
government. (AC

¶

72).

E. Stock Manipulation

Drs. Ruan and Couch purchased more than $1.6 million in Galena
stock. (AC

¶

99). Defendants were allegedly aware that these doctors were

trading in Galena stock while trying to inflate Abstral sales by over-prescribing
the medication. (AC

1

99). Dr. Ruan sent an email to defendant Lento

confirming that he had recently purchased Galena stock. (AC

1

100). Emails

between Drs. Ruan and Couch state that they could “play a big role” in helping
Abstral’s market share grow. (AC

¶

102).

Drs. Ruan, Couch, and Rho (a friend of Dr. Ruan) spoke with the Galena
board of directors. (AC

¶

105). Ruan told Rho that “[tjhe purposes of this talk is

to express our opinion to push them to replace their CEO” and “to give them
4

the impression that if they do not do it, we will switch to other Cos and its
(AC ¶ 107). Dr. Ruan implied that the board members
products altogether
....“

would listen to them because “as you know very well, they know who we are....”
(AC

¶

107). “Since [we

...]

are all shareholders of the [sic] and together we

represent a very significant portion of their business, we have a better chance
of making it if [wej team up together to get this done.” (AC

¶

107). Dr. Ruan

also emailed defendants Bernarda and Lento, stating that he agreed “with
many of other share holders that the executive team and BOD need to be
replaced ASAP.” (AC

¶

108).

Ahn, Dunlap, and Bernarda were defendants in a securities-fraud action,
In re Galena Biopharma Securities Litigation, No. 3: 124-cv-367-SI (D. Or.). The
plaintiffs in that action alleged that Galena and certain officers paid third-party
newsletters to promote Galena stock without disclosing that those newsletters
were in fact paid promotions. Galena’s stock price had nearly quadrupled and
Galena investors reaped approximately $16 million in profits when these they
sold their shares. The parties reached a settlement with the SEC under which
defendant Ahn disgorged $677,250 in profits, paid prejudgment interest of
$67,181, and paid a civil penalty of $600,000. Galena agreed to pay a civil
penalty of S200,000. (AC

¶

111).

F. Inflated and Unsustainable Sales
According to the complaint, the defendants knew that Abstral’s sales
were overwhelmingly driven by Drs. Ruan and Couch’s prescribing Abstral for
off-label purposes. (AC ¶j 113). Defendants allegedly knew, or should have
known, that “Abstral sales largely supported by two pain management doctors
prescribing inordinately large amounts of Abstral to non-cancer patients could
not be sustained given the government’s aggressive oversight of prescription
opioids.”(ACJ1 112-16, 119).
G. Statements During the Class Period
Plaintiffs propose a Class Period that begins on August 11, 2014. (AC

¶

125). On that day, Galena issued a press release entitled “Qalena Biopharma
D

Reports Second Quarter 2014 results.” (AC

¶

125). For the first half of 2014,

Galena reported $4.5 million in net revenue, $2.3 million of it earned in the
second quarter. By comparison, for the first half of 2013, the company had
reported no net revenue. (AC

¶

125).

In an August 11, 2014 press release, the company noted:
“With the recent acquisition of our second approved product,
Zuplenz, Galena now has two commercial products and three
clinical assets in development, providing our shareholders a
stratified and diversified pipeline as we look to enhance cancer
care and treat its often debilitating side-effects,” said Mark J. Ahn,
Ph.D., President and Chief Executive Officer. “We are excited for
the second half of the year as we continue to advance all of our
programs.... Commercially, we continue to gain traction with
Abstral, and we have begun preparations for the launch of Zuplenz
in early 2015.”
(AC

¶

125).
On the same date, August 11, 2014, Galena filed its quarterly Form lO-Q

with the SEC. The lO-Q, signed by defendants Ahn and Dunlap, confirmed
Galena’s financial results for the first half of the year, as announced in the
press release. (AC

¶

126).

Plaintiffs allege that, in those August 11, 2014 statements, defendants
violated their duty of disclosure. (AC

¶

127). According to plaintiffs, defendants

knew, but omitted to disclose, that it was reasonably likely that Galena’s sales
could not be sustained and thus Galena’s reported financial results were likely
not indicative of future performance. (AC

¶

127).

Also on August 11, 2014, Galena held an earnings conference call for the
quarter that ended June 30, 2014. (AC

¶

128). Defendants Schwartz, Dunlap,

Ahn, and Bernarda participated in the call. On this call, Schwartz stated that
Galena was experiencing “continued product expansion” and had a “stable
business foundation.” (AC

¶

128). He attributed this to “first, ensuring

availability, reimbursement, and insurance coverage; second, optimizing our
Patient Assistance program; third, strengthening our distribution and our
6

wholesale partnerships; and finally, continued development of our prescriber
base.” (AC

¶ 128).

Ten days later, on August 21, 2014, Galena announced that defendant
Schwartz had been named CEO, replacing defendant Ahn. (AC

¶ 130). Plaintiffs

claim that Ahn was “forced out” because of his involvement in the insider
trading scandal. (AC

¶ 130); see subsection I.E, supra.

On September 25, 2014, Galena held a press conference that was
attended by defendants Schwartz, Dunlap, and Bernarda. (AC

¶ 131).

Defendant Schwartz stated,
“Our strategy is focused on targeting oncology patients treated by
both pain medicine specialists and oncologists, thus remaining
true to the overall mission of the Company. We recognize that our
approach of primarily targeting oncology practices has resulted in
a slow, but a consistent growth pattern that we believe will result
in a viable and strategic business in the long term.”
(AC

¶ 131).
Defendants made similar statements in a November 3, 2014 press

release; November 3, 2014 earnings conference call; Form 10-Q filed with the
SEC on November 5, 2014; March 5, 2015 press release; March 5, 2015
earnings conference call; Form 10-K filed with the SEC on March 5, 2015; May
7, 2015 press release; May 7, 2015 Form lO-Q; and May 7, 2015 earnings
conference call. (AC

¶7 133-45).

Under the “Risk Factors” section of the March 5, 2015 Form 10-K,
Galena disclosed:
The FDA strictly regulates the promotional claims that may be
made about prescription drug products. In particular, a drug
product may not be promoted for uses that are not approved by the
FDA as reflected in the product’s approved labeling, although the
FDA does not regulate the prescribing practices of physicians. The
FDA and other agencies actively enforce the laws and regulations
prohibiting the promotion of off-label uses, and a company that is
found to have improperly promoted off-label uses may be subject

7

to significant liability, including substantial monetary penalties
and criminal prosecution.
If we are not able to achieve and maintain regulatory
compliance, we may not be permitted to market our products,
which would adversely affect our ability to generate revenue and
achieve or maintain profitability.
(AC

¶

140). Shortly aftenvard, on May 20, 2015, law enforcement raided the

offices of Drs. Ruan and Couch. (AC
shut down. (AC

¶

151). Their clinics and pharmacy were

¶

151).

On August 6, 2015, Galena issued a press release reporting “improved
Abstral sales quarter over quarter resulting in our strongest net revenue
quarter to date.” (AC

¶

153). It continued, “Based on current projections, we

anticipate that we will come in closer to the lower end of our guidance range, at
around $15 million for the year.” (AC

¶

153). Galena also filed its second-

quarter Form 10-Q report with the SEC on August 6, 2015. (AC 1154). Under
the “Risk Factors” section of the 10-Q, Galena disclosed: “We may be unable to
achieve profitability with our commercial operations in a timely manner, and
may have to make changes to our commercial strategy to maximize the value of
our commercial assets to our shareholders.” (AC

¶

155). The 10-Q did not

disclose that the clinics and pharmacy of Drs. Ruan and Couch had been
closed in May 2015—and that this represented 30% of the Abstral business.
(AC

¶

156). On August 6, 2015, Galena held an earnings conference call in

which it reported that “our metrics for Abstral are trending in the right
direction, although our sales growth has fluctuated quarter-over-quarter based
on field demand and wholesaler inventory levels.” (AC

¶

157).

After that earnings and reduced-revenue guidance, the Company’s stock
price fell $0.12, or 7.4%, from $1.63 on August 6,2015 to $1.51 on August 7,
2015. (AC

¶

158). Plaintiffs contend that the price of Galena’s stock would have

dropped even more if “the full truth” had been revealed. (AC

¶

159). On August

6, 2015, defendants stated that Abstral’s “underlying metrics are all trending
upwards” or in the “right direction” and that “our Abstral business is growing,”
8

but failed to disclose that the two doctors responsible for 30% of the
Company’s Abstral prescriptions were arrested and their businesses were shut
down. (AC j 159). Defendants also allegedly attributed disappointing earnings
to “ongoing market dynamics.” (AC

¶

159).

On November 9, 2015, Galena announced that it had decided to divest
its commercial business, which included Abstral. (AC

¶

160). Galena classified

its commercial business activities as “discontinued operations” and stated that
it anticipated exiting the commercial business by the end of the first quarter of
2016. (AC

160).

¶

On the same day, November 9, 2015, Galena filed its third-quarter Form
10-Q with the SEC. (AC
and Dunlap. (AC

¶

¶

161). The form was signed by defendants Schwartz

161). Galena disclosed that it had “assessed the commercial

business net asset group for impairment pursuant to PASS Topic 360,
determin[ed] that the carrying value exceeds the fair value of the assets, [andj
therefore ha[ve] recorded a $8.1 million impairment charge as of September 30,
2015.” (AC

¶

161).

The price of Galena common stock then fell $0.19 per share, or 11%, to
close at $1.53 per share on November 10, 2015. (AC

¶

162). Plaintiffs claim

that these disclosures “revealed the severity of those risks in the sales drop off
was so severe that Galena’s entire commercial business could not be
sustained.” Again, however, “the price of the stock would have dropped even
more if the full truth had been revealed.” (AC

¶

162-63).

On November 20, 2015, Galena announced that it had sold its Abstral
product to a private company in a deal valued at up to $12 million, with $8
million cash up front and up to $4 million in additional cash upon the
achievement of certain sales milestones. (AC

¶

164).

On December 11, 2015, Galena announced the departure of defendant
Dunlap, the then-CFO, effective December 31, 2015. (AC

¶

165). On this news,

the price of Galena common stock fell $0.07 per share, or 4.5%, to close at
$1.4g per share on December 11, 2015. (AC
9

¶

165).

On December 22, 2015, Galena announced the receipt of a federal
subpoena in connection with its Abstral sales. (AC

¶

167). The price of Galena

stock fell S0.06 per share, or 3.6%, to close at $1.57 per share on December
23, 2015. (AC

¶

168).

On March 10, 2016, Galena filed its annual report on Form 10-K/A with
the SEC. (AC

¶

170). This form was signed by defendant Schwartz. (AC

¶

170).

It provided, in relevant part:
We are subject to U.S. federal and state health care fraud and
abuse and false claims laws and regulations, and we recently have
been subpoenaed in connection with marketing and promotional
practices related to Abstral. Prosecutions under such laws have
increased in recent years and we may become subject to such
prosecutions or related litigation under these laws. If we have not
fully complied with such laws, we could face substantial
penalties....
A federal investigation of two of the high-prescribing physicians for
Abstral has resulted in the criminal prosecution of the two
physicians for alleged violations of the federal False Claims Act and
other federal statutes. The criminal trial is set for some time in
2016. We have received a trial subpoena for documents in
connection with that investigation....
[W]e have learned that the FDA and other governmental agencies
may be investigating our Abstral promotion practices. On
December 16, 2015, we received a subpoena issued by the U.S.
Attorney’s Office in Distirct of New Jersey requesting the
production of a broad range of documents pertaining to our
marketing and promotional practices for Abstral....
(AC

¶

170). The price of Galena common stock fell $0.03 per share, or 3.3%, to

close at $0.86 per share on March 11, 2016. (AC

¶

171).

On May 10, 2016, Galena filed its first-quarter Form 10-Q, which was
signed by defendant Schwartz. (AC
March 10, 2016 Form 10-K/A. (AC

¶
¶

172). It reiterated the content of the
172). It also added that the two

high-prescribing physicians were subject to a new, superseding indictment that
involved Galena’s rebate agreement and their ownership of Galena stock. (AC
10

¶

172). Galena’s stock fell $0.10, or 7.2%, to close at $1.38 on May 11, 2016.

(AC

¶

173).
On August 6, 2016, the Company filed its second-quarter Form 10-Q,

which was signed by defendant Schwartz. (AC

‘

174). The company identified

as “Risk Factors” that “We are, and in the future may be, subject to legal or
administrative actions that could adversely affect our financial condition and
our business.” (AC

¶

175). Galena stated that it was subject to government

investigations regarding Abstral promotion practices. (AC

¶

175).

On November 9, 2016, Galena filed its third-quarter Form 10-Q, which
was signed by defendant Schwartz. (AC

176). There the company made the

¶

same disclosures regarding ongoing investigations and prosecutions. (AC

¶

176).
On January 9, 2017, Galena filed with the SEC a Form 8-K which

updated Galena’s risk disclosures for the year that ended December 31, 2015.
(AC

¶

177). This 8-K disclosed that Galena was under criminal investigation by

the US Department of Justice. (AC

¶

177). Galena common stock fell $0.04 per

share, or 1.9%, to close at $2.03 per share on January 9, 2017. (AC

¶

178).

H. Disclosures at the End of the Class Period
January 31, 2017 is the end of the proposed Class Period. On that date,
Galena announced the resignation of defendant Schwartz as President, CEO,
and a member of the board. (AC

¶

180). Several business and financial writers

opined that Schwartz’s resignation was connected to the Abstral investigation.
(AC

¶1J

181-82). The price of Galena common stock fell $0.37 per share, or

22.4%, to close at $1.28 per share on February 1, 2017. (AC 183). The stock
price continued to decline, falling another $0.16 per share, or 12.5%, to close
at $1.12 on February 2, 2017. (AC

¶

183).

On May 26, 2017, Drs. Ruan and Couch were sentenced to 252 months
and 240 months in federal prison. (AC

¶

11

184).

I. Alleged Motive
Plaintiffs allege that defendants used Galena’s inflated stock price to
finance its operations. (AC

¶

185). On November 18, 2014, Galena entered into

a purchase agreement with Lincoln Park Capital, LLC (“LPC”) that gave Galena
the right to sell to LPC up to $50 million in shares of Galena’s common stock
over the 36-month term of the purchase agreement. (AC

¶

186). LPC initially

purchased 2.5 million shares of Galena common stock. (AC
received initial net proceeds of $4.6 million. (AC

¶

¶

186). Galena

186). Galena received net

proceeds of $8.5 million from LPC’s subsequent purchases of 4.6 million
shares, (AC

¶

186). During 2014 and 2015, Galena received $2.3 million in net

proceeds from the sale of 1.4 million shares of common stock through At
Market Issuance Sales Agreements. (AC

¶

187). In March 2015, Galena sold

units consisting of common stock and warrants at $1.56 per unit for proceeds
of $40.8 million. (AC

¶

188). Plaintiffs claim that each of the financings was

made possible and facilitated by the artificially inflated stock price. (AC

¶

189).

J. Claims and Current Motion
Plaintiffs seek to represent a class of all persons and entities that
acquired Galena securities from August 11, 2014 through January 31, 2017.
The Amended Complaint contains two counts. Count 1 claims that defendants
violated Item 303 of SEC Regulation S-K and thus are liable under Item 303 or,
alternatively, under Section 10(b) of the Exchange Act and Rule lob-S. (AC

¶fl

202-12). Count 2 alleges violations of Section 20(a) of the Exchange Act by

defendants Ahn, Schwartz, and Dunlap. (AC ¶j 2 13-16). Plaintiffs seek
compensatory damages; reasonable costs and expenses incurred in the action,
including attorney’s fees and expert fees; and such other relief as the court
deems proper.
Now before the court are the defendants’ motions to dismiss the
Amcnded Complaint for failure to state a claim. Defendants Galena, Schwartz,
Dunlap, Lento, and Bernarda filed a joint motion to dismiss. (ECF No. 46).

12

Defendant Ahn filed a separate motion to dismiss. (ECF No. 47). Plaintiffs
oppose these motions.
II.

LEGAL STANDARD

Federal Rule of Civil Procedure 12(b)(6) provides for the dismissal of a
complaint, in whole or in part, if it fails to state a claim upon which relief can
be granted. The moving party bears the burden of showing that no claim has
been stated. Hedges v. United States, 404 F.3d 744, 750 (3d Cir. 2005). In
deciding a motion to dismiss under Rule 12(b)(6), a court must take all
allegations in the complaint as true and view them in the light most favorable
to the plaintiff. See Warth v. Seldin, 422 U.S. 490, 501 (1975); see also Phillips
v. County of Allegheny, 515 F.3d 224, 231 (3d Cir. 2008).
In place of the normal pleading standard articulated in Federal Rule of
Civil Procedure 8, plaintiffs pleading securities fraud claims pursuant to
Section 10(b) of the Securities Exchange Act and Rule lob-S must meet the
heightened pleading standard of the Private Securities Litigation Reform Act
(“PSLRA”). See 15 U.S.C.

§ 78u-4(b)(1). Under the PSLRA, plaintiffs bringing a

claim involving an allegedly false or misleading statement must:
(1) ‘specify each statement alleged to have been misleading [and]
the reason or reasons why the statement is misleading,’ 15 U.S.C.
§ 78u-4(b)(1), and
(2) ‘state with particularity facts giving rise to a strong inference
that the defendant acted with the required state of mind,’ [Id.]
§ 78u-4(b)(2).
Rahman v. Kid Brands, Inc., 736 F.3d 237, 242 (3d Cir. 2013) (quoting Tellabs,
551 U.S. at 321) (internal quotations omitted; line break added). The required
state of mind is “scienter,” which is defined as “a mental state embracing intent
to deceive, manipulate, or defraud.” Id. (quoting Tellabs, 551 U.S. at 319).
Both provisions of the pleading standard require that facts be pled “with
particularity,” echoing the requirement set forth in Federal Rule of Civil
Procedure 9(b). Institutional Investors Group v. Avaya, Inc., 564 F.3d 242, 253
(3d Cir. 2009); see Fed. R. Civ. P. 9(b) (“IA] party must state with particularity
13

the circumstances constituting fraud or mistake.”). Therefore, although the
PSLRA supplanted Rule 9(b) as the pleading standard governing private
securities class actions, Rule 9(b)’s particularity requirement is effectively
subsumed by the requirements in Section 78u-4(b)(1) of the PSLRA. Avaya,
564 F.3d at 253 (citing Miss. Pub. Employees’ Ret. Sys. v. Boston Scientific
Corp., 523 F.3d 75, 85 n.5 (1st Cir. 2008)). This standard requires that
plaintiffs plead the “who, what, when, where and how.” Id. Section 78u-4(b)(1)
also adds an additional requirement where “an allegation regarding [a
defendant’s] statement or omission is made on information or belief.” Id.; 15
U.S.C.

§ 78u-4(b)(1). In such cases, plaintiffs must also “state with particularity

all facts on which that belief is formed”; that is, they must describe the sources
of information with particularity, including the who, what, when, where and
how of the sources, as well as the who, what, when, where, and how of the
information conveyed by those sources. Avaya, 564 F.3d at 253.
The PSLRA’s approach for pleading scienter sharply deviates from the
approach under Rule 9(b),

which

allows plaintiffs to plead the scienter element

generally. Id. Under the PSLRA, the court must evaluate whether all the facts
in the complaint as alleged, taken collectively, give rise to a “strong inference of
scienter”—not whether any individual allegation viewed in isolation meets that
standard. Tellabs, 551 U.S. at 323. In determining whether the pleaded facts
give rise to a strong inference of scienter, the court must account for plausible
opposing inferences. Id. This involves a comparative inquiry that evaluates how
likely is one conclusion as compared to others, in light of the pleaded facts. Id.
Therefore, the court must consider plausible, nonculpable explanations for the
defendant’s conduct as well as inferences favoring the plaintiff. Id. at 324.
Although the inference that the defendant acted with scienter need not be
irrefutable, the inference must be more than merely “reasonable” or
“permissible.” Id. 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.” Id.

14

These pleading requirements apply whether the alleged fraudulent
statement at issue is an assertion of current fact or a prediction of the future.
Avaya, 564 F.3d at 253-54. However, when an allegation involves a prediction,
the Safe Harbor Provision of the PSLRA immunizes from liability any
forward-looking statement provided that “the statement is identified as such
and accompanied by meaningful cautionan’ language; or is immaterial; or the
plaintiff fails to show the statement was made with actual knowledge of its
falsehood.” Id. at 254; see 15 U.S.C.
III.

§ 78-u-5(c).

DISCUSSION

Plaintiffs have identified several troubling practices regarding Galena,
Abstral sales, and Drs. Ruan and Couch. However, the complaint suffers from
fundamental defects that prevent the court from concluding that the plaintiffs
have stated a cognizable claim for securities fraud. In this opinion, I review
three fundamental, interrelated issues that must be addressed: (A) plaintiffs do
not clearly explain their reliance on Item 303 as the basis for their
securities-fraud suit and how their suit is cognizable under the Third Circuit
case of Oran a Stafford; (B) plaintiffs’ theory of liability shifts and remains
unclear throughout the complaint; and (C) plaintiffs fail to plead securities
fraud on a statement-by-statement basis, as required by the PSLRA.
Plaintiffs’ nondisclosure claims rest on Item 303(a) of SEC Regulation
S-K, which is alleged to be the source of a duty of disclosure. The Third Circuit
case of Oran v. Stafford, however, precludes plaintiffs from enforcing Item 303
through an independent private right of action. And although omissions under
Item 303 may independently violate Section 10(b) and Rule lob-5, they have
not been adequately alleged to do so here. Defendants’ motion to dismiss will
therefore be granted, without prejudice.

15

A. Securities Disclosure Requirements and Item 303
1.

10(b) and Item 303 disclosure requirements

Plaintiffs argue that defendants are liable because they failed to disclose

certain trends, uncertainties, and facts—for example, Galena’s over-reliance on
Drs. Ruan and Couch’s sales, Galena’s litigation risks, the unsustainability of
Abstral sales, and so on. See (ECF No. 51, pp. 16-3 1).
Federal law imposes disclosure requirements in connection with
securities. Section 10(b) of the Exchange Act 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 [SEC] may prescribe.” 15 U.S.C.

§

78j(b). SEC Rule

lob-S implements this provision by making it unlawful to, among other things,
“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.” 17 C.F.R.

§

240.lOb-5(b). The Supreme Court has extracted an implied private right of

action under Rule lOb-5 from the text and purposes of Section 10(b). See
Mat rin Initiatives, Inc. v. Siracusano, 563 U.S. 27, 37 (2011).
To state a claim for securities fraud under Section 10(b) and Rule lOb-5,
plaintiffs must allege (1) a material misrepresentation or omission, (2) scienter,
(3) a connection between the misrepresentation or omission and the purchase
or sale of a security, (4) reliance upon the misrepresentation or omission,
(5) economic loss, and (6) loss causation. Id. at 37-38; City of Edinburgh Council
v. Pfizer, Inc., 754 F.3d 159, 167 (3d Cir. 2014).
To be actionable, a misstatement or omission must be material. The
issue of materiality is a mixed question of law and fact, involving the
application of a legal standard to a specific set of facts. See TSC Indus., Inc.

ii.

Nodhway, Inc., 426 U.S. 438, 450 (1976); Craftmatic Sec. Litig. v. Kraftsow, 890
F.2d 628, 641 (3d Cir. 1989). “Only when the disclosures or omissions are so
clearly unimportant that reasonable minds could not differ should the ultimate
16

issue of materiality be decided as a matter of law.” Craftmatic, 890 F.2d at 641;
see Basic v. Levinson, 485 U.S. 224, 239 (1988). “[W)here there is room for
differing opinions on the issue of materiality, the question should be left for
jury determination.” leradi v. My/an Labs., Inc., 230 F.3d 594, 599 (3d Cir.
2000) (citing Ballan v. Wilfred Am. Ethic. Corp., 720 F. Supp. 241, 249 (E.D.N.Y.
1989)).
The Supreme Court has instructed that “[s}ilence, absent a duty to
disclose, is not misleading under Rule lOb-S.” Basic v. Leuinson, 485 U.S. 224,
239 n.17 (1988); see also Chiarella v. United States, 445 U.S. 222, 230-31
(1980). A duty to disclose may arise, however, when there is “a corporate
insider trad[ingj on confidential information,” a “statute or regulation requiring
disclosure,” or a corporate statement that, absent disclosure, would be
“inaccurate, incomplete, or misleading.” Glazer v. Formica Corp., 964 F.2d 149,
157 (2d Cir. 1992); accord Oran u. Stafford, 226 F.3d 275, 285-86 (3d Cir.
2000).
Item 303 of SEC Regulation S-K independently mandates the disclosure
of certain information. For full fiscal years, Item 303(a) requires the registrant
to, among other things:
(ii) Describe any known trends or uncertainties that have had or
that the registrant reasonably expects will have a material
favorable or unfavorable impact on net sales or revenues or income
from continuing operations.
(AC ¶J 120-21). For interim periods (e.g., quarterly reports), Item 303(b)
requires disclosure of material changes in those items listed in Item 303(a),
including known trends and uncertainties. (AC

¶ 121). Instruction 3 to

paragraph 303(a) provides that “[tjhe discussion and analysis shall focus
specifically on material events and uncertainties known to management that
would cause reported financial information not to be necessarily indicative of
future operating results or of future financial condition.” 17 C.F.R.

§ 229.303(a), Instruction 3. SEC’s interpretive release regarding the Regulation
imposes a disclosure duty “where a trend, demand, commitment, event or
17

uncertainty is both [1] presently known to management and [2] reasonably
likely to have material effects on the registrant’s financial condition or results
of operations.” Management’s Discussion and Analysis of Financial Condition
and Results of Operations, Securities Act Release No. 6835, Exchange Act
Release No. 26,831, Investment Company Act Release No. 16,961, 43 SEC
Docket 1330 (May 18, 1989). (AC 1123).

ii. No Private Right of Action Under Item 303
The first question, then, is whether there is a private right of action
based solely on a violation of the disclosure requirements of Item 303. There is
not.
Item 303 is enforced by the SEC through enforcement actions, not by
private plaintiffs through civil lawsuits. See Interpretation: Commission
Guidance Regarding Management’s Discussion and Analysis of Financial

Condition and Results of Operations, Securities and Exchange Commission, 17
C.F.R.

§

211, 231, 241 (Dec. 19, 2003), www.sec.gov/rules/interp/33-

8350.htm#P18_ 1728. The Third Circuit has held squarely in Oran v. Stafford,
226 F.3d 275, 285-86 (3d Cir. 2000), that there is no independent private right
of action under Item 303. “Neither the language of [Item 303] nor the SEC’s
interpretive releases construing it suggest that it was intended to establish a
private right of action

....“

Id. I of course follow this controlling precedent.

Plaintiffs do not possess an independent right of action under Item 3Q33

iii. Material omissions or misstatements in Item 303 that
independently violate lOb-5
A direct private right of action under Item 303 is not the only potential
route to liability, however. In this subsection, I consider the alternative theory

The Supreme Court granted certiorari to address a disagreement among the
Second, Third, and Ninth Circuits regarding the existence or scope of an independent
private right of action (or actionable disclosure mandate) under Item 303. Leidos, Inc.
v. Indiana Public Retirement System, 137 S. Ct. 1395 (2017). That case, however, was
voluntarily dismissed. 138 S. Ct. 2670 (2018).
3

18

that defendants’ alleged omissions in the Item 303 disclosures could
independently run afoul of Rule lob-S and therefore support a claim.
In Oran, the Third Circuit stated that Item 303’s disclosure requirements
surpass those of Rule lob-5, particularly as to materiality. It follows that not
all failures to disclose under Item 303 would give rise to a Rule lOb-5 claim.
226 F.3d at 288. Oran suggested, however, that some such omissions might be
actionable:
[The Item 303] test varies considerably from the general test
for securities fraud materiality set out by the Supreme Court in
Basic Inc. v. Levinson, which premised forward-looking disclosure
“upon a balancing of both the indicated probability that the event
will occur and the anticipated magnitude of the event in light of the
totality of the company activity.” As the SEC specifically noted,
“[t]he probability/magnitude test for materiality approved by the
Supreme Court in Basic ... is inapposite to Item 303 disclosure”;
rather, [Item] 303’s disclosure obligations extend considerably
beyond those required by Rule lOb-5.
Because the materiality standards for Rule lOb-5 and [Item]
303 differ significantly, the “demonstration of a violation of the
disclosure requirements of Item 303 does not lead inevitably to the
conclusion that such disclosure would be required under Rule
lOb-S. Such a duty to disclose must be separately shown.”
[Thus ...,] a violation of [Item] 303’s reporting requirements does
not automatically give rise to a material omission under Rule
lOb-5.
Id. (internal citations omitted). Under Oran, then, “a violation of 303’s reporting
requirements does not automatically give rise” to a private right of action, but
omissions from Item 303 disclosures could form the basis of a private
securities suit if “[s]uch a duty to disclose [is] separately shown.” Id. (emphasis
addedj.
Two Courts of Appeals—both citing Own—have reached differing
conclusions as to what is required to state a Rule lob-S claim based on Item
303 omissions.

19

The Ninth Circuit agrees that a material misrepresentation or omission
in an Item 303 disclosure may be actionable. It is not a defense to a Rule lOb-S
claim, for example, that the misrepresentation or omission occurred in the
context of an Item 303 disclosure. Item 303 does not, however, create an
independent duty to disclose. In re NVIDM Corp. Sec. Litig., 768 F.3d 1046,
1054 (9th Cir. 2014). To be actionable, an omitted fact under Item 303 must
meet the materiality requirements of Rule 10b-5: i.e., its disclosure must be
necessary in order to make the company’s statements, in the light of the
circumstances under which they were made, not misleading.
The Second Circuit’s interpretation is slightly more plaintiff-friendly. In
Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 103 (2d Cir. 2015), it held that
Item 303 creates an enforceable duty to disclose trends and uncertainties. The
omission of material information from an Item 303 form can therefore be the
basis of a securities action under Rule lob-S. Id. It is not required that such an
omission render other corporate statements misleading. Id.
To my mind, the Ninth Circuit’s interpretation is truer to the Third
Circuit’s holding in Oran that “a duty to disclose,” beyond Item 303’s
requirements, “must be separately shown.” 226 F.3d at 288. Under Oran, an
omission in the context of Item 303 can give rise to a Rule lob-5 claim if the
Rem 303 omission renders other statements materially misleading.
This amended complaint does not clearly, factually allege that defendants
have made material omissions under Item 303 that render other disclosures,
such as the earnings and revenue statements, materially misleading. It follows
that the Complaint fails to state a Rule lOb-5 claim with the requisite
specificity. Now that the Court has stated the governing standard, it may be
possible to do so, but I will not undertake to refine the allegations.
Defendants assert that the complaint suffers from two related defects
that stem, in large part, from the same lack of clarity: (B) The complaint posits
unclear and shifting theories of liability; and (C) The complaint does not
delineate a statement-by-statement analysis of disclosures that are allegedly

20

material misrepresentations because of Item 303 omissions. These defects,
discussed in the following sections, need to be rectified before the court can
evaluate whether the plaintiffs have sufficiently pled a securities-fraud claim.
B. Unclear and Shifting Theories of Liability
Plaintiffs claim that defendants are liable based on their failure to
disclose “trends or uncertainties” as required by Item 303. Plaintiffs do not
present clearly defined theories of liability and do not clearly connect each
allegedly false statement to each theory. Nonetheless, I can extract four
theories from the allegations of the complaint:
•

Theory One: (a) Defendants violated federal statutes by promoting the
off-label use of Abstral, paying kickbacks to prescribers, knowingly
manipulate Galena stock,
working with prescribers who
and failing to disclose the prescribers’ stock ownership; (b) Galena
was exposed to civil and criminal liability because of these actions;
and (c) defendants failed to disclose these “trends or uncertainties”
per Item 303. (d) Thus, (some or all ofl defendants’ statements about
earnings and revenue were materially false or misleading. (AC
were

¶11
•

to

26-28).

Theory Two: (a) Defendants knew that the government had taken an
increasingly strict and active stance against the over-prescription and
off-label prescription of powerful opioids such as Abstral;
(b) defendants knew that Dr. Ruan and Dr. Couch, who were
responsible for 30% of all Abstral sales, were over-prescribing Abstral
on an off-label basis; (c) defendants knew that Abstral’s success was
thus unsustainable; (d) defendants failed to disclose this “trend or
uncertainty” in Item 303 and thus (some or all ofl defendants’
statements about earnings and revenue were materially false or
misleading. (AC

•

trying

¶J

112-19).

Theory Three: (a) Dr. Ruan and Dr. Couch were over-prescribing
Abstral to manipulate Galena stock and personally profit;
(b) defendants knew about their stock manipulation and conspired
with them; and (c) defendants failed to disclose this conspiracy, and
the associated risks regarding litigation and revenue per Item 303.
(AC ¶ 129-44). (d) Thus, (some or all ofl defendants’ statements
about earnings and revenue were materially false or misleading.
21

•

Theory Four: (a) Dr. Ruan and Dr. Couch’s practices, clinics, and
pharmacy were shut down in May 2015; (b) these operations were
responsible for 30% of Abstral sales; (c) the closure of these
operations were reasonably likely to have a negative effect on Galena’s
earnings and revenue; (d) defendants released a disappointing
earnings and revenue guidance; (e) but also said that sales were
“fluctuat[ingj” and did not explicitly disclose what happened with Dr.
Ruan and Dr. Couch. (f) Defendants should have fully disclosed these
risks and uncertainties per Item 303. (AC ¶‘f 153-59). (g) As a result of
this omission, (some or all ofl defendants’ statements about earnings
and revenue were materially false or misleading.

Plaintiffs do not clearly articulate these theories or explicitly explain how the
failure to disclose any particular piece of information under Item 303 made
another specifically identified disclosure materially misleading. It is not the
court’s role to match these theories of omission with alleged material
misstatements in the complaint, and I will not do so.
C. Statement-by-Statement Analysis
Relatedly, the complaint fails to conduct a statement-by-statement
analysis of alleged material misstatements. Under the PSLRA, a complaint
must clearly identify the reason or reasons why each flagged statement is false
or misleading—or how an omission makes another disclosure false or
misleading. The PSLRA provides, in pertinent part:
(1) Misleading statements and omissions
In any private action arising under this chapter in which the
plaintiff alleges that the defendant—
(A) made an untrue statement of a material fact; or
(B) omitted to state a material fact necessary in order to
make the statement made, in the light of the circumstances
in which they were made, not misleading;
the complaint shall specfy each statement alleged to have been
misleading, the reason or reasons why the statement is misleading,
and, if an allegation regarding the statement or omission is made
on information and belief, the complaint shall state with
particularity all facts on which that belief is formed.
22

(2) Required state of mind
In any private action arising under this chapter in which the
plaintiff may recover money damages only on proof that the
defendant acted with a particular state of mind, the complaint
shall, with respect to each act or omission alleged to violate this
chapter, state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of mind.
15 U.S.C.

§

78u-4(b)(1),(2) (emphasis added). The PSLRA further requires

dismissal of any action that fails to meet any of the above statutory pleading
requirements:
In any private action arising under this chapter, the court shall, on
the motion of any defendant, dismiss the complaint if the
requirements of paragraphs (1) and (2) are not met.
15 U.S.C.

§

78u-4(b)(3).

Under the PSLRA, plaintiffs must address how each individual statement
is false or misleading. Institutional Investors Group v. Avaya, Inc., 564 F.3d 242,
259-60 & n.30 (3d Cir. 2009); see also In re Wilmington Tr. Sec. Litig., 852 F.
Supp. 2d 477, 490-9 1 (D. Del. 2012). “Shareholders must specify each
allegedly misleading statement [andj the reason or reasons why the statement
is misleading.” Avaya, 564 F.3d at 259 (citing Tellabs, 551 U.S. at 320-21).
Congress instituted this requirement “[ajs a check against abusive litigation by
private parties....” Tellabs, 551 U.S. at 313; see also In reAetna, Inc. Sec. Litig.,
617 F.Sd 272, 277-78 (3d Cir. 2010). As stated by the District of Delaware in a
PSLRA case:
While the Amended Complaint does specify each statement that
was allegedly misleading, it falls short of describing the reason or
reasons why each statement was misleading.... It is Plaintiffs’
burden to plead fraud on a statement-by-statement basis, and they
may not evade that requirement by requiring the Court to try to
match the allegedly fraudulent statements to the allegations of
Amended
wrongdoing that are scattered throughout the
Complaint.
...

23

In re Wilmington Tr. Sec. Litig., 852 F. Supp. 2d at 490 (quoting In re The
Goodyear Tire & Rubber Co. Sec. Litig., 436 F.Supp.2d 873, 904 (N.D. Ohio
2006)).

Like the Wilmington court, I find that the plaintiffs here have left too
much to the Court’s imagination. To prevail on this motion, they must match
statements with alleged omissions and state reasons why those omissions
made statements materially misleading or false. “Until plaintiffs specifically
identify the statements on which they would like to proceed and the reasons
why these statements are false or misleading, neither the defendants nor the
court can address these allegations with the degree of particularity required by
the PSLRA.” In re Wilmington Tr. Sec. Litig., 852 F. Supp. 2d at 490-9 1.
In sum, plaintiffs have generally identified troubling practices regarding
Galena. I dismiss the complaint without prejudice, however, for failure to
articulate clear theories of securities liability and failure to plead fraud on a
statement-by-statement basis.
IV.

CONCLUSION

For the foregoing reasons, defendants’ motions to dismiss are granted,
without prejudice to the filing of a second amended complaint within 30 days.
An appropriate order accompanies this opinion.
Dated: August 21, 2018

HON. KEVIN MCNULTY, U.S.D.

24