LOVE v. ALFACELL CORPORATION et al
Filing
42
MEMORANDUM OPINION filed. Signed by Judge Mary L. Cooper on 10/17/2011. (eaj)
NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
ROBERT D. LOVE,
:
:
Plaintiff,
:
:
v.
:
:
ALFACELL CORPORATION, et al., :
:
Defendants.
:
:
CIVIL ACTION NO. 09-5199 (MLC)
MEMORANDUM OPINION
COOPER, District Judge
Plaintiff, Robert D. Love, brings this action against
Defendants, Alfacell Corporation (“Alfacell”), Lawrence Kenyon,
James Loughlin, Kuslima Shogen, David Sidransky, Paul Weiss, John
Brancaccio, Stephen Carter, and Donald Conklin (together with
Kenyon, Loughlin, Shogen, Sidransky, Weiss, Brancaccio, and
Carter, “Individual Defendants” and, collectively,“Defendants”).1
Love alleges that Defendants: (1) violated Section 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (“Section
10(b)”), and Securities and Exchange Commission (“SEC”) Rule
10b-5, 17 C.F.R. § 240.10b-5 (“Rule 10b-5”); (2) violated Section
49:3-71 of the New Jersey Uniform Securities Law, N.J.S.A. §
49:3-71; (3) committed fraud ; (4) committed negligent
1
Although Love originally named Charles Muniz as a
Defendant, Love did not name Muniz as a Defendant in the Amended
Complaint. (Compare dkt entry. no. 1, Compl., with dkt entry no.
31, Am. Compl.) The Court will accordingly direct that the
action insofar as it was brought against Muniz be terminated.
misrepresentation; and (5) breached various fiduciary duties.
(Am. Compl.)
Love also alleges that the Individual Defendants:
(1) violated Section 20(b) of the Securities Exchange Act of
1934, 15 U.S.C. § 78t(a) (“Section 20(b)”); (2) committed fraud;
(3) breached various fiduciary duties; (4) committed gross
negligence; and (5) committed corporate waste.
(Id.)
Defendants move to dismiss the Amended Complaint pursuant to
Federal Rule of Civil Procedure (“Rule”) 9(b), Rule 12(b)(6), and
the Private Securities Litigation Reform Act of 1995, Section
78u-4, et seq. (“PSLRA”).
entry no. 33, Defs. Br.)
(Dkt. entry no. 32, Mot. Dismiss; dkt.
They argue, inter alia, that Love has
not presented a claim under Section 10(a) and Rule 10b-5 upon
which relief can be granted.
opposes the motion.
(Defs. Brief at 11-17.)2
Love
(See dkt. entry no. 36, Plt. Opp. Br.)
The Court, pursuant to Local Civil Rule 78.1(b), decides the
motion on the papers.
For the reasons set forth below, the Court
will: (1) grant the motion with respect to Love’s claims under
Section 10(b), Rule 10b-5, and Section 20(a), and dismiss such
claims with prejudice; and (2) dismiss the remaining state law
claims without prejudice to recommence that part of the action in
state court.
2
The Court, below, discusses the merits of Defendants’
arguments and the impact of such arguments upon on Love’s Section
20(a) claim. The Court will not, however, discuss Defendants’
other arguments in support of the motion because the Court has
determined that they are not necessary to resolve the motion.
2
BACKGROUND
I.
Love’s Relationship With Alfacell
Alfacell, a Delaware corporation maintaining its principal
place of business in Somerset, New Jersey, is a biopharmaceutical
company engaged in the discovery, development, and
commercialization of therapies for cancer and other diseases.
(Am. Compl. at ¶ 16.)
During the periods relevant to this
action, Individual Defendants served as Alfacell’s corporate
officers, members of Alfacell’s board of directors, or both.
(Id. at ¶¶ 17-26.)
Love joined Alfacell in May of 2005 as its Vice President
and Chief Financial Officer (“CFO”).
(Am. Compl. ¶ 9).
Alfacell Form 8-K, filed on May 26, 2006, at 2.3
See also
As
compensation, Love received stock options that vested subject to
an established schedule.
Upon vesting, the options permitted him
to purchase up to 400,000 shares of Alfacell stock at $1.87 per
share.
(Am. Compl. at ¶ 10.)
May 26, 2006, at 2.
See Alfacell Form 8-K, filed on
While employed by Alfacell, Love vested
3
The Court, as permitted by the Federal Rules of Evidence,
takes judicial notice of several Alfacell SEC filings. See
F.R.E. 201; Oran v. Stafford, 226 F.3d 275, 289 (3d Cir. 2000)
(noting that Federal Rule of Evidence 201(b)(2) “permits a court,
in deciding a motion for judgment on the pleadings, to take
judicial notice of properly-authenticated public disclosure
documents filed with the SEC.”). The SEC provides public access
to such documents through its Electronic Data Gathering,
Analysis, and Retrieval (“EDGAR”) System. EDGAR is available
online at http://www.sec.gov/edgar/searchedgar/webusers.htm.
3
interests in and purchased 20,000 shares of Alfacell stock.
Compl. at ¶ 12).
(Am.
He also vested an interest in 125,000
additional shares.
His option to purchase these shares, if not
exercised, would have expired on July 19, 2007.
(Id. at ¶ 11.)
Love worked for Alfacell for approximately twenty months and
announced his resignation in November of 2006. (See id. at
¶ 13.)
See Alfacell Form 8-K, filed on Nov. 9, 2006, at 2.
ceased working for Alfacell on January 19, 2007.
¶ 13.)
He
(Am. Compl. at
Love was not thereafter involved in Alfacell’s day-to-day
operations and he thus lacked access to “inside information”
about Alfacell.
II.
(Id. at ¶ 14.)
Alfacell’s Experimental Cancer Drug, ONCONASE
At all times relevant to this action, Alfacell sought to
commercialize ONCONASE, an experimental drug developed to treat
unresectable malignant mesothelioma.
(Id. at ¶¶ 1, 37). See
Alfacell Form 8-K, filed on Oct. 31, 2006, at 4, 7.4
To further
the development of ONCONASE, Alfacell conducted clinical trials.
Such trials served as necessary predicates to the submission of a
New Drug Application to the United States Food and Drug
Administration (“FDA”).
(See Am. Compl. at ¶¶ 34-35).
4
Defendants, in support of the motion, submitted portions
of the October 31, 2006 filing as an exhibit to the Declaration
of Jeffrey A. Simes, Esq. (“Simes Decl.”). (Dkt. entry no. 34,
Simes Decl., Ex. A.)
4
Pharmaceutical drug trials traditionally include three
phases.
(Id. at ¶ 33.)
Phase I consists of safety studies,
administered to healthy volunteers.
(Id.)
Phase II consists of
“proof of concept” studies, administered to patients presenting
the disease, to determine the new drug’s safety and efficacy, and
the optimum therapeutic dose.
(Id.)
Phase III then measures the
extent of the new drug’s efficacy and side effects against the
standard treatment for a given medical condition, as determined
by randomized and/or double-blind trials.
(Id. at 34.)
The
endpoint of a Phase III trial is survival, i.e., the length of
time that patients enrolled in the study live.
Q, filed June 9, 2006, at 20.5
Alfacell Form 10-
Pharmaceutical drug development
companies typically include Phase III trial results with their
FDA New Drug Applications.
(Am. Compl. at ¶ 34.)
Alfacell established and conducted a Phase III clinical
trial between 2006 and 2008, hoping to measure the efficacy and
side effects of ONCONASE as compared to standard treatments for
unresectable malignant mesothelioma.
Alfacell Form 8-K, Oct. 30, 2006.
(Id. at ¶ 35.)
See
To achieve statistical
significance, it concluded and that the Phase III trial required
316 “patient events,” i.e., patient deaths.
35.)
(See Am. Compl. at
See Alfacell Form 10-Q, filed June 9, 2006, at 20.
5
Defendants submitted portions of the June 9, 2006 filing
in support of the motion. (Simes Decl., Ex. B.)
5
III. Alfacell’s Oversight of the Phase III Clinical Trial
During Love’s tenure with Alfacell,
Alfacell issued five
quarterly reports, i.e., SEC Form 10-Q, and two annual reports,
i.e., SEC Form 10-K.
Each report, which was electronically
signed by Love and filed with the SEC, chronicled the progress of
the Phase III clinical trial.
See Alfacell Form 10-Q, filed Dec.
11, 2006; Alfacell Form 10-K, filed Oct. 16, 2006; Alfacell Form
10-Q, filed June 9, 2006; Alfacell Form 10-Q, filed Mar. 13,
2006; Alfacell Form 10-Q, filed Dec. 12, 2005; Alfacell Form 10K, filed Oct. 14, 2005; Alfacell Form 10-Q, filed June 9, 2005.
Through these reports, Alfacell repeatedly stated that it “could
not predict with certainty when a sufficient number of [clinical
patient] deaths will occur to achieve statistical significance.”
Alfacell Form 10-Q, filed Dec. 11, 2006, at 12; Alfacell Form 10K, filed Oct. 16, 2006, at 27; Alfacell Form 10-Q, filed June 9,
2006, at 13; Alfacell Form 10-Q, filed Mar. 13, 2006, at 11;
Alfacell Form 10-Q, filed Dec. 12, 2005, at 10; Alfacell Form 10K, filed Oct. 14, 2005, at 19; Alfacell Form 10-Q, filed June 9,
2005, at 11; see also Alfacell Form S-3, filed Aug. 16, 2006, at
5.6
It clarified that it could not “predict how long it will
take us nor how much it will cost us to complete our Phase III
trial because it is a survival study . . . .”
6
Alfacell Form 10-
Defendants submitted portions of the August 16, 2006
filing in support of the motion. (Simes Decl., Ex. C.)
6
Q, filed Dec. 11, 2006, at 12; Alfacell Form 10-K, filed Oct. 16,
2006, at 27; Alfacell Form 10-Q, filed June 9, 2006, at 13;
Alfacell Form 10-Q, filed Mar. 13, 2006, at 11; Alfacell Form 10Q, filed Dec. 12, 2005, at 10; Alfacell Form 10-K, filed Oct. 14,
2005, at 19; Alfacell Form 10-Q, filed June 9, 2005, at 11.7
And
it further clarified:
According to the [trial] protocol, a sufficient number
of patient deaths must occur in order to perform the
required statistical analyses to determine the
efficiency of ONCONASE® in patients with unresectable
(inoperable) malignant mesothelioma. Since it is
impossible to predict with certainty when these
terminal events in the Phase III trial will occur, we
do not have the capability of reasonably determining
when a sufficient number of deaths will occur.
Alfacell Form 10-K, filed Oct. 16, 2006, at 18; Alfacell Form 10Q, filed June 9, 2006, at 19; Alfacell Form 10-Q, filed Mar. 13,
2006, at 19; Alfacell Form 10-Q, filed Dec. 12, 2005, at 17;
Alfacell Form 10-K, filed Oct. 14, 2005, at 26; Alfacell Form 10Q, filed June 9, 2005, at 16.8
7
Alfacell included this sentence in its June 9, 2005 and
March 13, 2006 quarterly reports with minor variations. In the
June 9, 2005 filing, it appeared in capital letters. Alfacell
Form 10-Q, filed June 9, 2005, at 16. In the March 13, 2006
filing, Alfacell clarified that it was nearing completion of
“part two of our Phase III trial[.]” Alfacell Form 10-Q, filed
Mar. 13, 2006, at 19 (emphasis added). The sentence did not
appear in Alfacell’s December 11, 2006 quarterly report.
8
Alfacell also included this disclaimer in its August 2006
registration statement and prospectus. Alfacell Form 424B3,
filed Aug. 28, 2006, at 5; Alfacell Form S-3, filed Aug. 16,
2006, at 5.
7
To provide adequate oversight of the Phase III trial,
Alfacell created a Research and Clinical Oversight Committee
(“the Committee”), which it announced in a February 12, 2007
press release.
(Am. Compl. at ¶¶ 38, 40.)
Alfacell stated that
the Committee would “work closely with management and the
scientific advisory board to provide support and direction to
the company’s research and development programs,” thereby
providing watchful and responsible care of the Phase III trial.
(Id. at ¶¶ 38, 40.)
After creating the Committee, Alfacell continued to advise
the SEC and the public of the status of the Phase III trial
through its ongoing quarterly and annual reports.
Through those
reports, it began to cautiously estimate an end-date for the
Phase III trial:
The primary endpoint of the trial is overall survival.
. . . At this time, we cannot predict with certainty
the timing of the occurrence of the required number of
deaths, but currently estimate that this will occur in
the third quarter of 2007.
(Id. at ¶ 48.)
See Alfacell Form 10-Q, filed Mar. 12, 2007.9
At
a June 5, 2007 investor meeting, Alfacell reiterated its
estimate.
(Am. Compl. ¶ 49.)
The company’s acting Chief
Executive Officer, Shogen, and its acting CFO, Kenyon, provided
information about the creation of the Committee and an estimated
9
Defendants submitted portions of Alfacell’s March 12, 2007
filing in support of the motion. (Simes Decl., Ex. D.)
8
(or targeted) end-date for the Phase III trial.
49-50.)
(Id. at ¶¶ 41,
In a slide deck presented to investors that day, Shogen
and Kenyon, on behalf of Alfacell, noted:
This presentation includes statements that may
constitute “forward-looking” statements, usually
containing the words “believe,” “estimate,” “project,”
“expect” or similar expressions. Forward-looking
statements involve risks and uncertainties that could
cause actual results to differ materially from the
forward-looking statements. Factors that would cause
or contribute to such differences include the risks
discussed in the Company’s periodic filings with the
Securities and Exchange Commission. . . .
(See Am. Compl. at ¶ 49-50.) See Alfacell Form 8-K, Ex-99.1,
filed on June 5, 2007, at 2.
Alfacell thereafter noted that it
anticipated completing the Phase III trial in the third quarter
of 2007.
Alfacell Form 8-K, EX-99.1, filed on June 5, 2007 at 2,
25 (“Phase III Results Expected 3rd Quarter 2007”).10
In its next quarterly report, Alfacell repeated its
expectation that it would complete the Phase III trial in the
third quarter of 2007.
Alfacell Form 10-K, filed June 8, 2007,
at 18 (“At this time, we cannot predict with certainty the timing
of the occurrence of the required number of deaths, but currently
estimate that this will occur in the third quarter of 2007.”).
10
Defendants submitted portions of the slides presented at
the June 5, 2007 investor meeting in support of the motion.
(Simes Decl., Ex. E.)
9
IV.
Love Exercised of His Remaining Stock Options
Love learned of Alfacell’s estimate for completion of the
Phase III trial. (See Am. Compl. at ¶ 81.)
Because Love believed
that the estimate for completion of the Phase III trial was
reliable, he exercised his remaining stock options on June 17,
2007, two days before they expired.
(Id. at ¶¶ 80, 82.)
Love
thus purchased 125,000 shares for $1.87 per share, $0.62 per
share below the then-current market price.
V.
(Id. at 80).
Alfacell Did Not Complete the Phase III Trial as Predicted,
But Predicted Completion by Year’s End
Through a September 12, 2007 press release, Alfacell
announced that the Phase III trial had reached 316 “total
events.”
(Am. Compl. at ¶ 57.)
filed Sept. 18, 2007, at 1.
See Alfacell Form 8-K, EX-99.1,
It further stated, however, that
only 290 of the 316 “total events” constituted “evaluable events
(patient deaths)[.]”
(Am. Compl. at ¶¶ 58-59.)
See Alfacell
Form 8-K, EX-99.1, filed September 18, 2007, at 1.
The remaining
twenty-six patients had either not qualified for the study or
failed to received at least one dose of ONCONASE.
See Alfacell
Form 8-K, EX-99.1, filed Sept. 18, 2007, at 1 (“To be considered
evaluable, patients must meet all of the eligibility requirements
for the study and receive at least one dose of study drug.”)
Alfacell nevertheless projected that it would reach 316
“evaluable events” before the end of 2007.
10
Id.
In its Annual Report filed in October of 2007, Alfacell
reaffirmed its estimate and declared that it would complete the
Phase III trial before the end of 2007.
filed Oct. 15, 2007, at 5.
Alfacell Form 10-K,
As before, it tempered the estimate
by noting its inability to “predict with certainty when a
sufficient number of deaths will occur . . .”
Id. at 31.
During an October 15, 2007 earnings call, Kenyon explained
that Alfacell had not completed the Phase III trial by its
original target date, i.e., during the third quarter of 2007,
because
once we got to 316 total events, we were able to
determine that some patients had been technically lost
to follow-up, meaning that they hadn’t been in contact
with any of the particular sites where they were
treated for an extended period of time. This is not a
large number. It’s less than 10 but we are taking
efforts right now and taking measures to track down
those patients and determine their status.
(Am. Compl. at ¶ 64.)
VI.
As Alfacell Missed its Targeted End-Date for the Phase III
Trial, Love Attempted to Communicate with Alfacell’s
Directors
Love met with Kenyon in October of 2007 and inquired about
the status of the Phase III trials.
During that meeting, Kenyon
represented that Alfacell still expected to complete the Phase
III trial before the end of 2007.
11
(Id. at ¶ 66.)
Alfacell, however, did not complete the Phase III trial by
its targeted end-date.
Love, as a result, called, sent letters,
and sent e-mails to each of the Individual Defendants between
September 20, 2007 and February 27, 2008, expressing concern
about Alfacell’s ability to complete the Phase III trial and
requesting more information.
(Am. Compl. at ¶¶ 91-98.)
Love
also sent an e-mail to the Alfacell Board of Directors on
February 4, 2008, asking them to hire a Chief Medical Officer
(“CMO”) to oversee the Phase III trial to ensure its “clinical,
regulatory, and fiscal compliance[.]”
(Id. at ¶¶ 99, 104.)
Kenyon, then acting as a member of Alfacell’s Board of Directors
and as its Chief Operating Officer, responded by e-mail on March
3, 2008, stating:
Beginning with our conference call in early December,
we are no longer in the business of projecting when the
final event will occur. Frankly, the timing of when
316 events occurs has become completely irrelevant and
I only hear one investor focusing on that issue.
(Id. at ¶ 104.)
Kenyon, in a separate e-mail on March 3, 2008,
further stated that:
. . . as for projections, a qualified CMO would tell
you that we should not have been in the projections
business in the first place. There are more effective
ways to provide guidance as to clinical trial status.
(Id. at ¶ 105) (emphasis omitted).
Alfacell reached 316 “evaluable events” and, with them, the
end of the Phase III trial on April 2, 2008.
12
(Id. at ¶ 89.)
VII. Procedural History of this Action
Love commenced this action on October 9, 2009.
entry no. 1, Compl.)
(See dkt.
After seeking leave of the Court and
receiving such leave from the Magistrate Judge, he filed an
Amended Complaint on October 10, 2010.
Order; Am. Compl.)
(See dkt entry no. 30,
Through the Amended Complaint, Love seeks
compensatory and punitive damages for Defendants’ alleged
violations of Section 10(b) and Rule 10b-5, Section 20(a), and
Section 49:3-71 of the New Jersey Uniform Securities Law,
N.J.S.A. § 49:3-71, and for Defendants’ commission of acts
allegedly constituting fraud, gross negligence, negligent
misrepresentation, breach of fiduciary duties, and corporate
waste.
(Id. at ¶¶ 137-93, 196-99.)
from Alfacell.
He also seeks an accounting
(Id. at ¶¶ 194-95.)
As the Amended Complaint pertains to Defendants’ alleged
violations of Section 10(b) and Rule 10b-5, Love contends that
Defendants knowingly and/or recklessly made and/or disseminated
false and misleading statements concerning the creation of the
Committee and the completion of the Phase III clinical trial.
(Id. at ¶ 139.)
He alleges that the Committee discovered that
the Phase III clinical trial was flawed because the trial did not
incorporate a reliable data management and collection system, or
a quality assurance program, and that “Defendants were in
exclusive possession of this information and knew for certainty
13
[sic] that the trial could not complete before 2008.”
44-45.)
(Id. at ¶¶
He further alleges that Defendants concealed this
information “and made false and misleading statements concerning
the timeline for the completion of the Phase [III] trial.”
at ¶¶ 45, 47.)
(Id.
He finally alleges that he learned for the first
time “that Defendants could not accurately project trial
completion dates and that Defendants had deliberately mislead
[Love] concerning Defendants’ timeline for the completion of the
Phase [III] trial” upon receiving and reading Kenyon’s June 3,
2008 e-mails.
(Id. at ¶ 74.)
To support his claim under Section 10b and Rule 10b-5, Love
asserts that he relied on Alfacell’s alleged misrepresentations
and omissions when he purchased and, later, chose not to sell
Alfacell stock.
(Id. at ¶¶ 81, 83, 142-43.)
With respect to the
purchase of Alfacell stock, Love claims that his reliance upon
Alfacell’s misrepresentations and omissions caused him harm
because he exercised his stock options and purchased 125,000
shares of Alfacell stock, which subsequently lost value.
¶¶ 81-82, 142.)
(Id. at
With respect to the sale of Alfacell stock, Love
claims that he relied upon Defendants’ continued statements
regarding the completion of the Phase III trial and that, but for
such statements and/or related omissions, he would have known
that Alfacell could not complete the Phase III trial before the
end of 2007 and he would have sold his shares.
14
(Id. at ¶ 83.)
As the Amended Complaint pertains to the Individual
Defendants’ alleged violations of Section 20(a), Love contends
that the Individual Defendants, as officers and directors of
Alfacell, acted as “controlling persons” and are thus liable to
Love.
(Id. at ¶¶ 146-48.
He specifically argues that because
Individual Defendants “had direct and supervisory involvement in
the day-to-day operations of Alfacell,” they “are presumed to
have had the power to control or influence the particular
transactions giving rise to the securities violations” alleged in
the Amended Complaint.
(Id. at ¶ 147.)
Defendants filed the motion in response to the Amended
Complaint, arguing, inter alia, that Love cannot state a claim
under Section 10(b) and Rule 10b-5 upon which relief can be
granted.
(Mot. Dismiss.)
Defendants specifically dispute that
Love has adequately pleaded such claims with respect to the
elements of falsity, materiality, scienter, and loss causation.
(Defs. Br. at 9, 43, 72, 80-81.)
Love’s claims under Section 20(a).
They do not argue the merits of
motion.
(Id.)
Love opposes the
(Plt. Opp. Br.)
DISCUSSION
I.
Standard of Review
A court may generally dismiss a complaint pursuant to Rule
12(b)(6) for “failure to state a claim upon which relief can be
granted.”
Fed.R.Civ.P. 12(b)(6).
15
In addressing such a motion,
the Court must “accept all factual allegations as true, construe
the complaint in the light most favorable to the plaintiff, and
determine, whether under any reasonable reading of the complaint,
the plaintiff may be entitled to relief.”
Phillips v. Cnty. of
Allegheny, 515 F.3d 224, 233 (3d Cir. 2008).
At this stage, a
complaint must contain sufficient factual matter,
accepted as true to ‘state a claim to relief that is
plausible on its face.’ 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.
Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (quoting Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 556 (2007)).
“[W]here the well-
pleaded facts do not permit the court to infer more than the mere
possibility of misconduct, the complaint has alleged--but it has
not ‘show[n]’--that the ‘pleader is entitled to relief.’”
Iqbal,
129 S.Ct. at 1950 (quoting Rule 8(a)(2)).
Courts employ a stricter standard, however, when considering
a motion to dismiss a securities fraud action.
Such actions are
governed by Rule 9(b) and the PSLRA, which “require[] more than
mere reference to the conventional standard applicable to motions
under Rule 12(b)(6).”
C.W. Sommer & Co. v. Rockefeller (In re
Rockefeller Ctr. Props., Inc.), 311 F.3d 198, 215 (3d Cir. 2002).
A claim that fails to meet the requirements of Rule 9(b) and the
PSLRA may be defeated by a motion to dismiss.
See, e.g., In re
Advanta Corp. Sec. Litig., 180 F.3d 525, 531 (3d Cir. 1999).
16
Rule 9(b) directs a party “alleging fraud or mistake” to
“state with particularity the circumstances constituting fraud or
mistake.”
Fed.R.Civ.P. 9(b).
“This particularity requirement
has been rigorously applied in securities fraud cases.”
In re
Burlington Coat Factory, 114 F.3d 1410, 1417 (3d Cir. 1997).
Though plaintiffs need not plead every material detail of the
fraud, Rule 9(b) “requires, at a minimum, that plaintiffs support
their allegations of securities fraud with all of the essential
factual background that would accompany the first paragraph of
any newspaper story – that is, the who, what, when, where and how
of the events at issue.”
Cal. Pub. Emps.’ Ret. Sys. v. Chubb
Corp., 394 F.3d 126, 144 (3d Cir. 2004) (“Cal.P.E.R.S.”).
Plaintiffs alleging securities fraud must also comply with
the heightened pleading requirements of the PSLRA.
Id.
The
PSLRA requires plaintiffs to: “(1) specify each statement alleged
to have been misleading [and] the reason or reasons why the
statement is misleading[;] and (2) state with particularity facts
giving rise to a strong inference that the defendant acted with
the required state of mind[.]”
Tellabs, Inc. v. Makor Issues &
Rights, Ltd., 551 U.S. 308, 321 (2007) (citing and expounding
upon 15 U.S.C. § 78u-4(b)(1)-(2)).
This “particularity
[requirement] extends that of Rule 9(b) and requires plaintiffs
to set forth the details of allegedly fraudulent statements or
omissions, including who was involved, where the events took
17
place, when the events took place, and why any statements were
misleading.”
In re Rockefeller, 311 F.3d at 218.
Taken together, the heightened pleading requirements set
forth by Rule 9(b) and the PSLRA have established a standard
justifying dismissal of a complaint, apart from dismissal as set
forth in Rule 12(b)(6).
Cal.P.E.R.S., 394 F.3d at 145; see In re
Intelligroup Sec. Litig., 527 F.Supp.2d 262, 276 (D.N.J. 2007)
(“In sum, Rule 9(b) and the [PSLRA] modified the traditional Rule
12(b)(6) analysis for the purposes of pleading
‘misrepresentation’ and ‘scienter’ elements” of a securities
fraud claim.).
The Court, when presented with a motion to
dismiss a securities fraud claim, thus employs a modified Rule
12(b)(6) analysis, under which the Court disregards “catch-all”
or “blanket” assertions that fail to comply with the
particularity requirements of Rule 9(b) and the PSLRA.
Cal.P.E.R.S., 394 F.3d at 145.
“[U]nless plaintiffs in
securities fraud actions allege facts supporting their
contentions of fraud with the requisite particularity mandated by
Rule 9(b) and [the PSLRA], they may not benefit from inferences
flowing from vague or unspecific allegations--inferences that may
arguably have been justified under a traditional Rule 12(b)(6)
analysis.”
Id.
18
II.
Elements of Claims Raised Under Section 10(b) and Rule 10b-5
Section 10(b) and Rule 10b-5 create liability for securities
fraud.11
Section 10(b) provides, in pertinent part, that:
[i]t shall be unlawful for any person, directly or
indirectly, by the use of any means or
instrumentality of interstate commerce or of the
mails, or of any facility of any national
securities exchange-–
* * *
(b) To use or employ, in connection with the
purchase or sale of any security registered on a
national securities exchange or any security not
so registered, . . . any manipulative or deceptive
device or contrivance in contravention of such
rules and regulations as the [Securities and
Exchange] Commission may prescribe as necessary or
appropriate in the public interest or for the
protection of investors.
15 U.S.C. § 78j.
Rule 10b-5, which establishes a private cause
of action for securities fraud, was promulgated by the Securities
and Exchange Commission in order to implement Section 10(b).
Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 729 (1975).
Rule 10b-5 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 light of
11
Before the 1934 Act was codified, the contents of Section
78j appeared in section 10(b) of Public Law 73-291. See 73
Pub.L.No. 291, 48 Stat. 881 (1934). As a result, this provision
is commonly referred to as Section 10(b).
19
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. § 240.10b-5.
To state a claim for relief under Section 10(b) and Rule
10b-5, a plaintiff must establish six elements: “(1) a material
misrepresentation or omission by the defendant; (2) scienter; (3)
a connection between the misrepresentation or omission and the
purchase or sale of a security; (4) reliance upon the
misrepresentation or omission; (5) economic loss; and (6) loss
causation.”
Erica P. John Fund, Inc. v. Halliburton Co., 131
S.Ct. 2179, 2184 (2011) (citations omitted); see also In re
Aetna, Inc. Sec. Litig., 617 F.3d 272, 277 (3d Cir. 2010)
(reciting elements and clarifying that “scienter” is “a wrongful
state of mind” and that “loss causation” is “a causal connection
between the material misrepresentation and the loss.”).
As noted
above, a plaintiff raising such a claim must plead the elements
of misrepresentation and scienter with particularity.
15 U.S.C.
§ 78u-4(b); In re Intelligroup, 527 F.Supp.2d at 277 (“It appears
that the heightened pleading requirements of PSLRA are
inapplicable to the remaining elements of a 10b-5 claim.”).
20
With respect to the first element, Rule 10b-5 liability may
arise either from affirmative misstatements or misleading
omissions.
Such omissions, however, only give rise to liability
where the defendant had an affirmative duty to disclose the
information in question, such as “when there is insider trading,
a statute requiring disclosure, or an inaccurate, incomplete or
misleading prior disclosure.”
Oran v. Stafford, 226 F.3d 275,
285-86 (3d Cir. 2000); see Matrixx Initiatives, Inc. v.
Siracusano, 131 S.Ct. 1309, 1321 (2011) (“Disclosure is required
. . . only when necessary ‘to make . . . statements made, in the
light of the circumstances under which they were made, not
misleading.’”) (quoting 17 C.F.R. § 240.10b-5(b)).
“The task of
determining whether a given omission is material is especially
difficult when the plaintiff alleges nondisclosure of ‘soft’
information.
The term soft information refers to statements of
subjective analysis or extrapolation, such as opinions, motives,
and intentions, or forward looking statements, such as
projections, estimates, and forecasts.”
Craftmatic Sec. Litig.
v. Kraftsow, 890 F.2d 628, 642 (3d Cir. 1989).
Under Section 10(b) and Rule 10b-5, the Court must analyze
each of the statements and omissions at issue to determine
whether the plaintiff pleaded, with the requisite particularity,
that those statements and omissions constituted material
misrepresentations.
In re Westinghouse Sec. Litig., 90 F.3d 696,
21
712 (3d Cir. 1996); see In re Rockefeller, 311 F.3d at 211
(noting that Rule 10b-5 “explicitly require[s] a well-pleaded
allegation that the purported misrepresentations or omissions at
issue were material.”)
A fact is material only if “there [is] a
substantial likelihood that [it] would have been viewed by the
reasonable investor as having significantly altered the ‘total
mix’ of information made available” to the investing public.
Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).
TSC
The
“materiality of disclosed information may be measured post hoc by
looking to the movement, in the period immediately following
disclosure, of the price of the firm’s stock.”
In re Merck &
Co., Inc. Sec. Litig., 432 F.3d 261, 269 (3d Cir. 2005) (citation
omitted) (discussing the efficient market hypothesis).
III. The PSLRA’s Safe Harbor for Forward-Looking Statements
The PSLRA contains a safe harbor provision, which protects
certain forward-looking statements from Section 10(b) and Rule
10b-5 liability.
The safe harbor provision states:
in any private action arising under [the PSLRA] that is
based on an untrue statement of a material fact or
omission of a material fact necessary to make the
statement not misleading, a person . . . shall not be
liable with respect to any forward-looking statement,
whether written or oral, if and to the extent that–
(A) the forward-looking statement is–
(i)
identified as a forward-looking statement,
and is accompanied by meaningful cautionary
statements identifying important factors that
22
could cause actual results to differ
materially from those in the forward-looking
statement; or
(ii) immaterial; or
(B) the plaintiff fails to prove that the forwardlooking statement–
(i)
if made by a natural person, was made with
knowledge by that person that the statement
was false or misleading.
15 U.S.C. § 78u-5(c)(1).
Such safe harbor was designed to, inter
alia, prevent statements regarding future business plans from
causing liability.
In re Merck & Co., Inc., 432 F.3d at 272.
The safe harbor provision therefore applies to statements
that are forward-looking as defined by the statute, provided that
they are “(1) identified as such, and accompanied by meaningful
cautionary statements; or (2) immaterial; or (3) made without
actual knowledge that the statement was false and misleading.”
In re Aetna, Inc., 617 F.3d at 278-79.
Such statements are:
(A)
a statement containing a projection of revenues,
income (including income loss), earnings
(including earnings loss) per share, capital
expenditures, dividends, capital structure, or
other financial items;
(B)
a statement of the plans and objectives of
management for future operations, including plans
or objectives relating to the products or services
of the issuer;
* * *
23
(D)
any statement of the assumptions underlying or
relating to any statement described in
subparagraph (A), (B), or (C)[.]
15 U.S.C. § 78u-5(i)(1).
Cautionary language relating to forward-looking statements
must be “extensive and specific[.]”
Inst’l Investors Grp. v.
Avaya, 564 F.3d 242, 256 (3d Cir. 2009).
“[A] vague or blanket
(boilerplate) disclaimer which merely warns the reader that the
investment has risks will ordinarily be inadequate to prevent
misinformation.”
IV.
Id.
Elements of Claims Raised Under Section 20(a)
Section 20(a) creates a private cause of action against
individuals who are “control persons” of companies liable for
securities fraud.
Jones v. Intelli-Check, Inc., 274 F.Supp.2d
615, 644 (D.N.J. 2003).12
It states:
Every person who, directly or indirectly, controls any
person liable under any provision of this chapter or of
any rule or regulation thereunder shall also be liable
jointly and severally with and to the same extent as
such controlled person to any person to whom such
controlled person is liable, . . . unless the
controlling person acted in good faith and did not
directly or indirectly induce the act or acts
constituting the violation or cause of action.
15 U.S.C. § 78t(a).
12
Before the 1934 Act was codified, the contents of Section
78t(a) appeared in section 20(a) of Public Law 73-291. See 73
Pub.L.No. 291, 48 Stat. 881 (1934). As a result, this provision
is commonly referred to as Section 20(a).
24
Section 20 thus imposes liability on individuals who
exercised control over a company that committed securities fraud.
In re MobileMedia Sec. Litig., 28 F.Supp.2d 901, 940 (D.N.J.
1998).
Plaintiffs alleging a Section 20(a) violation “must plead
facts showing:
(1) an underlying violation by the company; and
(2) circumstances establishing defendant’s control over the
company’s actions.”
Jones, 274 F.Supp.2d at 645.
If plaintiffs
fail to establish that the company committed an underlying
violation, the controlling person(s) of that company therefore
cannot be held liable under Section 20(a).
In re Suprema
Specialties, Inc. Sec. Litig., 438 F.3d 256, 287 (3d Cir. 2006);
Inst’l Investors Grp., 564 F.3d at 252 (“[L]iability under
Section 20(a) is derivative of an underlying violation of Section
10(b) by the controlled person.”).
V.
Application to this Case
A.
Claims Raised Under Section 10(b) and Rule 10b-5
1.
Defendants’ Allegedly False and Misleading
Statements and/or Omissions Concerning the
Creation of the Committee
Love asserts that Defendants “intentionally and/or
recklessly made . . . materially false and misleading
statements[,]” “disseminated materially false and misleading
statements, and omitted information concerning the creation of”
the Committee.
(Am. Compl. at ¶¶ 139-40.)
25
Such claims do not
meet the pleading burdens imposed by the PSLRA and, as such, must
be dismissed.
As noted above, a plaintiff’s claim for securities fraud
must “specify each statement alleged to have been misleading
[and] the reason or reasons why the statement is misleading[.]”
Tellabs, 551 U.S. at 321 (citing 15 U.S.C. § 78u-4(b)) (emphasis
added).
Although Love has identified three statements regarding
the creation of the Committee, he fails to specify whether any or
all of these statements are misleading or note the reason(s) why
such statements may be misleading.
(See Am. Compl. at ¶¶ 38, 40-
41 (noting Alfacell announcement of creation of Committee and
declaring purpose of Committee to be “to ‘work closely with
management and the scientific advisory board to provide support
and direction to the company’s research and development programs’
and thereby provide watchful and responsible care of the Phase
[III] trial.”).)
The Court will accordingly dismiss Love’s claim
under Section 10(b) and Rule 10b-5, inasmuch as he relies on
these statements and/or omissions.
2.
Defendants’ Allegedly False and Misleading
Statements and/or Omissions Concerning the
Completion of the Phase III trial for ONCONASE
Love also asserts that Defendants “knowingly and/or
recklessly made and/or disseminated materially false and
misleading statements, and omitted material information
concerning . . . the completion of the Phase [III] clinical trial
26
of ONCONASE.”
(Am. Compl. at ¶ 139.)
Love cites to
approximately fifteen examples of such misrepresentations and/or
omissions.
(See Am. Compl. at ¶¶ 45-51, 53, 55-62, 64-66.)
The Court, after carefully examining these statements in the
full context of both the Amended Complaint and the total mix of
information available to investors, has determined that the
Amended Complaint is deficient because Love cannot demonstrate
that Defendants’ statements and omissions constituted material
misrepresentations.
The Court will accordingly dismiss the
remainder of Love’s claim under Section 10(b) and Rule 10b-5.
A plaintiff pursuing a securities fraud action must “show
that the statements were misleading as to a material fact.
It is
not enough that a statement is false or incomplete, if the
misrepresented fact is otherwise insignificant.”
Levinson, 485 U.S. 224, 238 (1988).
Basic Inc. v.
As noted above, a fact is
material only if “there [is] a substantial likelihood that [it]
would have been viewed by the reasonable investor as having
significantly altered the ‘total mix’ of information made
available” to the investing public.
TSC Indus., 426 U.S. at 449.
Where “alleged misrepresentations and omissions . . . are so
obviously unimportant to an investor that reasonable minds cannot
differ on the question of materiality, the allegations are not
actionable as a matter of law.”
28 F.Supp.2d at 932.
In re MobileMedia Sec. Litig.,
“When assessing materiality, not only the
27
statement or omission itself but, as well, the context in which
it occurs must be considered.”
Id.
Even assuming arguendo that the statements at issue are
false, Love cannot demonstrate that such statements (or
omissions) were material because a reasonable investor would not
view such statements as altering the total mix of information
that was available about Alfacell.
449.
See TSC Indus., 426 U.S. at
Between June 9, 2005 and December 5, 2006, Alfacell filed
multiple Quarterly and Annual Reports that, inter alia, noted
that Alfacell “could not predict with certainty when a sufficient
number of [clinical patient] deaths [would] occur,” such that it
could complete the Phase III trial of ONCONASE.
Alfacell Form
10-Q, filed Dec. 11, 2006, at 12; Alfacell Form 10-K, filed Oct.
16, 2006, at 27; Alfacell Form 10-Q, filed June 9, 2006, at 13;
Alfacell Form 10-Q, filed Mar. 13, 2006, at 11; Alfacell Form 10Q, filed Dec. 12, 2005, at 10; Alfacell Form 10-K, filed Oct. 14,
2005, at 19; Alfacell Form 10-Q, filed June 9, 2005, at 11; see
also Alfacell Form S-3, filed Aug. 16, 2006, at 5.
It also
noted, repeatedly, that it was “impossible to predict with
certainty when [the] terminal events in the Phase III trial will
occur[.]”
Alfacell Form 10-K, filed Oct. 16, 2006, at 18
(emphasis added); Alfacell Form 10-Q, filed June 9, 2006, at 19
(same); Alfacell Form 10-Q, filed Mar. 13, 2006, at 19 (same);
Alfacell Form 10-Q, filed Dec. 12, 2005, at 17 (same); Alfacell
28
Form 10-K, filed Oct. 14, 2005, at 26 (same); Alfacell Form 10-Q,
filed June 9, 2005, at 16 (same).
When Alfacell began offering
estimates as to the end-date for the Phase III trial, it tempered
its statements with ongoing disclaimers that it was unable to
predict the end-date of the trial with certainty.
See, e.g.,
Alfacell Form 10-Q, filed Mar. 12, 2007 (“The primary endpoint of
the trial is overall survival. . . . At this time, we cannot
predict with certainty the timing of the occurrence of the
required number of deaths, but currently estimate that this will
occur in the third quarter of 2007.”).
Shogen and Kenyon, when meeting with investors on behalf of
Alfacell, similarly tempered their statements about the
completion of the Phase III trial.
As discussed above, Shogen
and Kenyon met with investors on June 5, 2007 at a conference in
Chicago.
While there, they discussed the progress of and
potential end-date for the trial.
(Am. Compl. at ¶ 49.)
Before
beginning their discussion, however, Shogen and Kenyon presented
a slide that stated:
This presentation includes statements that may
constitute “forward-looking” statements, usually
containing the words “believe,” “estimate,” “project,”
“expect” or similar expressions. Forward-looking
statements involve risks and uncertainties that could
cause actual results to differ materially from the
forward-looking statements. Factors that would cause
or contribute to such differences include the risks
discussed in the Company’s periodic filings with the
Securities and Exchange Commission. . . .
29
Alfacell Form 8-K, EX-99.1, filed on June 5, 2007, at 2.
Alfacell also continued to provide such disclaimers to its
investors in its SEC filings.
See, e.g., Alfacell Form 10-K,
filed June 8, 2007, at 18 (“At this time, we cannot predict with
certainty the timing of the occurrence of the required number of
deaths, but currently estimate that this will occur in the third
quarter of 2007.”).
Love alleges that he relied on Alfacell’s predictions as to
the end-date of the Phase III trial, and that, but for those
predictions--and but for the related omission of information
pertaining to Alfacell’s inability to accurately forecast the
end-date of the Phase III trial until sometime in 2008--he would
not have exercised his options and purchased 125,000 shares of
Alfacell stock on July 17, 2007.
He also claims that he did not
learn of Defendant’s inability to accurately predict the end-date
for completion of the Phase III trial until he received and read
Kenyon’s March 3, 2008 e-mails.
Despite Alfacell’s repeated
warnings that it could not predict the timeline for patient
deaths with accuracy, Love contends that he “reasonably relied
upon the [alleged] misstatements because Love believed that, with
the establishment of [the Committee], providing watchful and
responsible care . . . the timeline for completing the
confirmatory Phase [III] registration trial . . . was reliable.”
(Am. Compl. at ¶ 82.)
30
Given the total mix of information available to Love, which
was publicly available to and accessible by all investors, the
Court has determined that Love’s reliance upon the aforementioned
statements was unreasonable.
A reasonable investor, viewing all
of the information made available by Alfacell, would not have
considered Alfacell’s projections as “having significantly
altered the ‘total mix’ of information made available” about
Alfacell to the investing public.
449.
See TSC Indus., 426 U.S. at
A reasonable investor would, instead, have considered such
predictions in light of the repeated disclaimers regarding its
inability to provide accurate forecasts and, as such, would not
have made investment decisions based upon those forecasts.13
13
Because the Phase III trial was a survival study, the
Court notes that Alfacell’s inability to accurately forecast an
end-date for the trial--that is, Alfacell’s inability to
determine when patients in the study would die--may have induced
reasonable investors to purchase Alfacell stock. A prolonged
Phase III trial could be indicative of ONCONASE’s efficacy.
The Court further notes that the statements discussed in
this subsection likely qualified as “forward-looking statements,”
protected by Alfacell’s repeated warnings and disclaimers and
thus shielded by the safe harbor provisions of the PSLRA. The
Court will not, however, further explore this theory because the
parties have not raised or briefed it.
Finally–-although the Court does not rely upon this note in
resolving the motion–-the Court notes that Love’s assertion that
he first learned of Alfacell’s inability to accurately project an
end-date for the Phase III trial, read in light of the entire
Amended Complaint and all of the allegations and materials
considered, lacks credibility. (See Am. Compl. at ¶ 74.) Love
electronically signed several of the SEC filings discussed above,
certifying Alfacell’s disclosures therein regarding its inability
to accurately predict a time line or end-date for the Phase III
trial. See, e.g., Alfacell Form 10-Q, filed Dec. 11, 2006.
31
B.
Claims Raised Under Section 20(a)
Love alleges that the Individual Defendants, by nature of
their
“direct and supervisory involvement in the day-to-day
operations of Alfacell,” “are presumed to have had the power to
control or influence the particular transactions giving rise to
the securities violations” alleged in the Amended Complaint.
(Id. at ¶ 147.)
He alleges, accordingly, that the Individual
Defendants are control persons of Alfacell under Section 20(a).
(Am. Compl. at ¶¶ 146-48.)
Love, however, has not pleaded facts
adequate to establish that Alfacell is liable under Section 10(b)
or Rule 10b-5 with the particularity required by the PSLRA.
Thus, because there can be no liability for the underlying
company, there can be no “controlling person” liability under
Section 20(a) for any of the Individual Defendants.
See In re
Suprema Specialties, Inc., 438 F.3d at 287; Chubb Corp., 394 F.3d
at 159 n.21.
CONCLUSION
The Court, for the reasons detailed above, will dismiss
Plaintiff’s claims under Section 10(b), Rule 10b-5, and Section
20(a), with prejudice.
Because Love has already amended his
Complaint once, and because it appears that he has already
included all of the facts available to support his claims,
allowing him to take another bite at the apple would be
fruitless.
See Treppel v. Biovail Corp., No. 03-3002, 2005 WL
32
2086339, at *12 (S.D.N.Y. Aug. 30, 2005); see also In re Alpharma
Inc. Sec. Litig., 372 F.3d 137, 153-54 (3d Cir. 2004) (noting
futility of further amended pleadings).
The Court will also dismiss Love’s remaining claims-–i.e.,
his claims for securities fraud under Section 49:3-71 of the New
Jersey Uniform Securities Law, N.J.S.A. § 49:3-71, fraud,
negligent misrepresentation, breach of fiduciary duties, gross
negligence, and corporate waste, and his demand for an
accounting--as such claims arise under state law, pursuant to 28
U.S.C. § 1367(c)(3).
See 28 U.S.C. § 1367(c)(3); Figueroa v.
Buccaneer Hotel, 188 F.3d 172, 181 (3d Cir. 1999).
The Court
will dismiss these claims, however, without prejudice to Love to
recommence the action, insofar as it concerns these claims, in
state court within thirty days of the entry of the Court’s Order
and Judgment.
28 U.S.C. § 1367(d).
The Court offers no opinion
on the merits or the viability of these claims and will not
address the part of the motion seeking dismissal of these claims.
The Court will issue an appropriate order and judgment.
s/ Mary L. Cooper
MARY L. COOPER
United States District Judge
Dated:
October 17, 2011
33
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