Cortina v. Anavex Life Sciences Corp et al
OPINION AND ORDER re: #69 MOTION For Judicial Notice re: #60 MOTION to Dismiss Plaintiffs' Amended Complaint filed by Christopher U Missling, Anavex Life Sciences Corp, Athanasios Skarpelos, Sandra Boenisch, #66 LETTER MOTION for Oral Argument addressed to Judge Jesse M. Furman from Adam M. Apton dated July 13, 2016 filed by Arina Davliatshina, Michael Yu, Lam Truong, #60 MOTION to Dismiss Plaintiffs' Amended Complaint filed by Christopher U Missling, Anavex Life Sciences Corp, Athanasios Skarpelos, Sandra Boenisch, #61 LETTER MOTION for Oral Argument re: Defendants' Motion to Dismiss addressed to Judge Jesse M. Furman from David H. Kistenbroker dated June 13, 2016 filed by Christopher U Missling, Anavex Life Sciences Corp, Athanasios Skarpelos, Sandra Boenisch. For all of the reasons stated above, Plaintiffs' claims under Section 10(b) and Rule 10b-5 must be and are dismissed. It follows that their claims for control person liability under Section 20(a), which depend upon the existence of a "primary violation," also fail. See, e.g., First Jersey Sec., Inc., 101 F.3d at 1472. That leaves only the question of whether Plaintiffs' should be granted leave to amend their complaint for a second time, as they perfunctorily request in a footnote at the end of the memorandum of law in opposition to Defendants' motion. (See Pls.' Opp'n 19 n.13). The Court declines to grant Plaintiffs' request for a combination of three reasons. First, amendment here would likely be futile. Indeed, given the various grounds for the Court's decision, there is nothing to suggest that Plaintiffs would be able to state a valid claim should the Court grant them leave to amend. See, e.g., Ruffolo v. Oppenheimer & Co., 987 F.2d 129, 131 (2d Cir. 1993) ("Where it appears that granting leave to amend is unlikely to be productive... it is not an abuse of discretion to deny leave to amend."). Second, and related, Plaintiffs have not "given any indication that [they are] in possession of facts that would cure the problems identified in this opinion." Clark v. Kitt, No. 12-CV-8061 (CS), 2014 WL 4054284, at *15 (S.D.N.Y. Aug. 15, 2014); see also TechnoMarine SA v. Giftports, Inc., 758 F.3d 493, 505 (2d Cir. 2014) ("A plaintiff need not be given leave to amend if it fails to specify... how amendment would cure the pleading deficiencies in its complaint."). Finally, in granting leave to file a first amended complaint, the Court expressly warned that Plaintiffs would not be given another opportunity to address the issues raised in Defendants' motion to dismiss. (See Docket No. 64). See, e.g., Clark, 2014 WL 4054284, at *15 (holding that the plaintiff's failure to remedy the complaint's deficiencies identified by an earlier motion to dismiss "is alone sufficient grounds to deny leave to amend"); see also, e.g., Ruotolo v. City of N.Y., 514 F.3d 184, 191 (2d Cir. 2008) (affirming the district court's denial of leave to amend in part because of the previous opportunities that the plaintiff had received to amend the complaint). The Clerk of Court is directed to terminate Docket Nos. 60, 61, 66, and 69, and to close this case. (Signed by Judge Jesse M. Furman on 12/29/2016) (cla)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
KEVIN CORTINA, et al.,
ANAVEX LIFE SCIENCES CORP., et al.,
OPINION AND ORDER
JESSE M. FURMAN, United States District Judge:
In this putative class action, Plaintiffs bring securities fraud claims against Anavex
Life Sciences Corp., Inc. (“Anavex”) and three of its executives, Christopher Missling, Sandra
Boenisch, and Athanasios Skarpelos (collectively, the “Individual Defendants” and, together
with Anavex, “Defendants”). Plaintiffs allege that, by orchestrating a paid promotional
scheme, Defendants committed securities fraud in violation of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, 15 U.S.C. §§ 78(b), 78(t)(a), and Securities Exchange
Commission (“SEC”) Rule 10b-5, 17 C.F.R. § 240. Defendants now move, pursuant to Rule
12(b)(6) of the Federal Rules of Civil Procedure, to dismiss Plaintiffs’ claims. For the reasons
stated below, Defendants’ motion is GRANTED and the Amended Complaint is dismissed.
The following facts, which are taken from the Amended Complaint, documents it
incorporates, and matters of which the Court may take judicial notice, are construed in the
light most favorable to Plaintiffs. See, e.g., Kleinman v. Elan Corp., PLC, 706 F.3d 145, 152
(2d Cir. 2013); LaFaro v. N.Y. Cardiothoracic Grp., PLLC, 570 F.3d 471, 475 (2d Cir. 2009);
Aurecchione v. Schoolman Transp. Sys., Inc., 426 F.3d 635, 638 (2d Cir. 2005).
Anavex is a “biopharmaceutical company” that develops drugs to treat Alzheimer’s
disease. (Docket No. 59 (“Am. Compl.”) ¶¶ 22-23). According to the Amended Complaint,
the company has generated no revenue since it entered the biopharmaceutical industry in
2007. (Id. ¶ 23). Indeed, only one of its drugs, Anavex 2-73, has even advanced into clinical
trials. (Id.). As a result of that performance, the company amassed large deficits; its
accumulated deficit as of December 31, 2015, for example, was in excess of $67 million. (Id.
¶ 168). To continue funding its operations, Anavex relied on financing arrangements that
were “largely dependent” upon the price of Anavex’s stock. (Id. ¶ 24). Originally, that stock
was traded on an over-the-counter market; in October 2015, the company’s stock began
trading on the NASDAQ. (Id. ¶ 25).
Plaintiffs allege that, between May 17, 2013, and December 30, 2015 (the “Class
Period”), Defendants engaged in “an extreme stock promotion and market manipulation
scheme” to inflate the price of Anavex’s stock. (Id.). Specifically, Defendants “caused,
directed, and authorized” a paid-promotional campaign to increase the price of the company’s
stock and thus enable the company to receive equity financing. (Id. ¶¶ 60, 169). The
campaign included bulletins, videos, newsletters, and reports from third-party publishers, and
was timed to coincide with significant financing events, including Anavex’s “uplisting” to the
NASDAQ. (Id. ¶¶ 33-59, 60, 170, 180). One promoter in particular, “Dr. Kanak Kanti De,”
published at least sixteen reports — including interviews with Missling (Anavex’s Chief
Executive Officer) and Anavex’s clinical trial investigator — and ramped up his unduly
positive coverage of Anavex in the weeks leading up to and immediately following the
Company’s NASDAQ listing. (Id. ¶¶ 39-56).
Although some of the promoters disclosed that they had been compensated, others did
not, and at no time — either in their public filings or in the media — did Defendants admit to
being behind the paid-promotion scheme. (See, e.g., id. ¶¶ 33, 201). In fact, at one point,
Missling explicitly denied being responsible for a promotional campaign. (Id. ¶ 154).
Moreover, according to Plaintiffs, Defendants “[s]neakily” stopped reporting “investor
relations” fees as a line item in the company’s expense tables and eventually provided no
information at all about these fees. (Id. ¶ 173). The result of Defendants’ efforts, Plaintiffs
allege, was a dramatic rise in the price of Anavex’s stock, which went from $0.65 per share in
late 2014 to more than $14 per share on November 2, 2015. (Id. ¶ 181).
Toward the end of 2015, however, market analysts began publishing articles
suggesting that Anavex was the beneficiary of a paid-promotion scheme. (Id. ¶¶ 148-165).
One of the articles also revealed that Dr. De was not, in fact, a medical doctor. (Id. ¶ 164).
Further, on December 29, 2015, Anavex disclosed in its annual Form 10-K that it had
received a subpoena from the SEC and that the SEC was “conducting a formal investigation”
based on “recent unusual activity in the market for the Company’s shares.” (Id. ¶ 162).1
These revelations caused a sharp decline in the company’s stock price; on December 30,
In 2013, Anavex was also investigated by the British Columbia Securities
Commission (“BSCS”). (Am. Compl. ¶ 184). On June 4, 2013, the BSCS issued a “Halt
Trade Order” stating that “circumstances exist[ed] that could result in other than an orderly
trading of Anavex’s securities.” (Id. (alteration in original)). On June 20, 2013, the “Halt
Trade Order” was revoked following a press release from the company addressing “the recent
promotion of its shares by third parties that appeared to have a significant effect on Anavex’s
share price and trading volume.” (Id.).
2015, its shares were trading at $5.50. (Id. ¶ 165). As a result, certain investors in Anavex’s
stock sustained heavy losses, losses that Plaintiffs claim are directly attributable to
Defendants’ misconduct. (Id. ¶ 166).
“In reviewing a motion to dismiss pursuant to Rule 12(b)(6), the Court must accept the
factual allegations set forth in the complaint as true and draw all reasonable inferences in
favor of the plaintiff.” Cohen v. Avanade, Inc., 874 F. Supp. 2d 315, 319 (S.D.N.Y. 2012).
The Court will not dismiss any claims pursuant to Rule 12(b)(6) unless the plaintiff has failed
to plead sufficient facts to state a claim to relief that is facially plausible, see Bell Atlantic
Corp. v. Twombly, 550 U.S. 544, 570 (2007), that is, one that contains “factual content that
allows the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged,” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). More specifically, a
plaintiff must allege facts showing “more than a sheer possibility that a defendant has acted
unlawfully.” Id. A complaint that offers only “labels and conclusions” or “a formulaic
recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555.
Further, if a plaintiff has not “nudged [its] claims across the line from conceivable to
plausible, [those claims] must be dismissed.” Id. at 570.
Because they allege securities fraud, Plaintiffs must also satisfy the heightened
pleading requirements of both Rule 9(b), which requires that the circumstances constituting
fraud be “state[d] with particularity,” Fed. R. Civ. P. 9(b), and the PSLRA, which requires
that scienter — that is, a defendant’s “intention to deceive, manipulate, or defraud” — also be
pled with particularity, Tellabs, Inc. v Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007)
(internal quotation marks omitted). To satisfy Rule 9(b), a plaintiff “must ‘(1) specify the
statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where
and when the statements were made, and (4) explain why the statements were fraudulent.’”
Anschutz Corp. v. Merrill Lynch & Co., 690 F.3d 98, 108 (2d Cir. 2012) (quoting Rombach v.
Chang, 355 F.3d 164, 170 (2d Cir. 2004)). To satisfy the PSLRA, a complaint must, “with
respect to each act or omission alleged to [constitute securities fraud], state with particularity
facts giving rise to a strong inference that the defendant acted with the required state of
mind.” ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007) (quoting 15
U.S.C. § 78u-4(b)(2)(A)).
Plaintiffs seek to hold Defendants liable for securities fraud under Section 10(b) of the
Securities Exchange Act and various sections of Rule 10b-5. Section 10(b) of the Securities
Exchange Act makes it unlawful “for any person, directly or indirectly, . . . [t]o use or
employ, in connection with the purchase or sale of any security . . . , any manipulative or
deceptive device or contrivance in contravention of such rules and regulations as the
[Securities and Exchange] Commission may prescribe.” 15 U.S.C. § 78j(b). Rule 10b-5,
promulgated thereunder, makes it unlawful (a) “[t]o employ any device, scheme, or artifice to
defraud”; (b) “[t]o make any untrue statement of a material fact or to omit to state a material
fact necessary in order to make the statements made, in the light of the circumstances under
which they were made, not misleading”; or (c) “[t]o 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. Here, Plaintiffs allege that
Defendants (1) perpetrated a market manipulation scheme, in violation of Rule 10b-5(a) and
(c); and (2) made false and misleading statements and omissions, in violation of Rule 10b-
5(b). Plaintiffs also allege that each of the Individual Defendants should be held liable as
“control persons” under Section 20(a).
A claim of market manipulation under Rule 10b-5(a) and (c) “requires a plaintiff to
allege (1) manipulative acts; (2) damage (3) caused by reliance on an assumption of an
efficient market free of manipulation; (4) scienter; (5) in connection with the purchase or sale
of securities; (6) furthered by the defendant’s use of the mails or any facility of a national
securities exchange.” ATSI Comm’cns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 101 (2d Cir.
2007). To state a claim that Defendants made material misrepresentations or omissions in
violation of Rule 10b-5(b), Plaintiffs must allege “(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.” Matrixx Initiatives, Inc. v. Siracusano,
563 U.S. 27, 37-38 (2011) (internal quotation marks omitted); see IBEW Local Union No. 58
Pension Trust Fund & Annuity Fund v. Royal Bank of Scotland Grp., PLC, 783 F.3d 383, 389
(2d Cir. 2015). Finally, to state a claim under Section 20(a), Plaintiffs must, at a minimum,
plead a plausible “primary violation” of Section 10(b). See, e.g., SEC v. First Jersey Sec.,
Inc., 101 F.3d 1450, 1472 (2d Cir. 1996); Total Equity Capital, LLC v. Flurry, Inc., No. 15CV-4168 (JMF), 2016 WL 3093993 (S.D.N.Y. June 1, 2016).
Defendants argue that Plaintiffs’ market manipulation claims fail because Plaintiffs do
not adequately plead a manipulative act and that their material misrepresentation or omission
claim fails because they do not adequately plead a material misrepresentation or omission. In
the alternative, Defendants contend that all claims should be dismissed because Plaintiffs do
not adequately allege scienter under the PSLRA’s heightened pleading standards. The Court
will address each of these arguments in turn.
A. Rule 10b-5(a) and (c): Market Manipulation
The Supreme Court has explained that manipulation is “virtually a term of art when
used in connection with securities markets.” Santa Fe Indus., Inc. v. Green, 430 U.S. 462,
476 (1977) (internal quotation marks omitted). It “refers generally to practices, such as wash
sales, matched orders, or rigged prices, that are intended to mislead investors by artificially
affecting market activity.” Id. That is, manipulation “connotes intentional or willful conduct
designed to deceive or defraud investors by controlling or artificially affecting the price of
securities.” ATSI Comm’cns, 493 F.3d at 100 (quoting Ernst & Ernst v. Hochfelder, 425 U.S.
185, 199 (1976)); see also, e.g., Wilson v. Merrill Lynch & Co., 671 F.3d 120, 130 (2d Cir.
2011) (“In order for market activity to be manipulative, that conduct must involve
misrepresentation or nondisclosure.”). A manipulative act is, therefore, any act — as opposed
to a statement — that has such an “artificial” effect on the price of a security. See ATSI
Comm’cns, 493 F.3d at 100. Accordingly, a market manipulation claim “cannot be based
solely upon misrepresentations or omissions.” Id. at 101. Moreover, to satisfy the heightened
pleading standards for fraud under Rule 9(b), a plaintiff must specify “what manipulative acts
were performed, which defendants performed them, when the manipulative acts were
performed, and what effect the scheme had on the market for the securities at issue.” Id. at
102 (internal quotation marks omitted). In other words, “[g]eneral allegations not tied to the
defendants or resting upon speculation are insufficient.” Id.
Applying these principles here, and mindful of the heightened pleadings standards of
Rule 9(b), Plaintiffs’ claims fall short. Plaintiffs fail to identify a single bulletin, video,
newsletter, or report written by, edited by, or commissioned by Defendants. In fact, far from
specifying Defendants’ “manipulative acts” with particularity, Plaintiffs resort to broad and
conclusory innuendo to place Anavex and its leadership behind the alleged promotional
scheme. Rule 9(b)’s heightened pleading standard for fraud cases, however, requires more
than superficial accusations that Defendants “caused, directed, and authorized” a paid
promotional scheme. (Am. Compl. ¶ 60). It requires Plaintiffs to “set forth the who, what,
when, where and how of the alleged fraud.” U.S. ex rel. Kester v. Novartis Pharm. Corp., 23
F. Supp. 3d 242, 252 (S.D.N.Y. 2014) (internal quotation mark omitted). Plaintiffs fail to
meet that exacting standard because the few allegations they marshal in support of the
existence of a scheme — namely, a slew of third-party statements touting Anavex and a
corresponding rise in the company’s stock price — do not directly implicate the Defendants.
The allegations that do relate to Defendants — namely, two interviews that company officials
did with promoters and Anavex’s generic desire to keep its stock price high (Docket No. 65
(“Pls.’ Opp’n”) at 8-9) — are even more scarce, and are patently insufficient to nudge
Plaintiffs’ claims “across the line from conceivable to plausible.” Twombly, 550 U.S. at 570.
In arguing otherwise, Plaintiffs rely heavily on In re Galena Biopharma, Inc. Sec.
Litig., 117 F. Supp. 3d 1145, 1204 (D. Or. 2015), and In re CytRx Corp. Sec. Litig., No. 14CV-1956 (GHK) (PJW), 2015 WL 5031232 (C.D. Cal. July 13, 2015), in which courts upheld
market manipulation schemes based on alleged paid-promotional campaigns. (Pls.’ Opp’n 9).
But the differences between the allegations in those cases and those here merely underscore
the inadequacy of Plaintiffs’ claims. In both Galena Biopharma and CytRx Corp., the
plaintiffs alleged particularized facts showing that the defendants had personally reviewed,
edited, and approved the promotional pieces before they were published; forbade the
promoters from disclosing their involvement in the articles; executed surreptitious stock
transactions to enrich themselves; and even took steps to cover up their fraudulent dealings.
See In re Galena, 117 F. Supp. 3d at 1168-69, 1174; In re CytRx, 2015 WL 5031232, at *2.
Further, in In re Galena, an “undercover” investigator had posed as a writer for the promoter
to expose the mechanics of the scheme, and one defendant had even admitted that she had
known articles were part of a paid-promotional campaign. In re Galena, 117 F. Supp. 3d at
1161, 1168. Similarly, in In re CytRx, the plaintiffs’ allegations were supported by two
whistleblowers who detailed the entire paid-promotion scheme with specificity. In re CytRx,
2015 WL 5031232, at *2. By contrast, Plaintiffs here provide only bare assertions and
conclusory statements, and thus fail to plausibly allege that Defendants perpetrated a
fraudulent stock promotion scheme.
B. Rule 10b-5(b): Material Misrepresentations or Omissions
That leaves Plaintiffs’ Rule 10b-5(b) claim based on material misrepresentations and
omissions. Significantly, Plaintiffs do not appear to base their claim on the promotional
articles or statements themselves. That is wise, as the vast majority of the statements
referenced in the Amended Complaint were made by third parties, and the law is clear that a
defendant may be held liable under Rule 10b-5(b) only if it “made” the statement itself. See
Janus Capital Grp. v. First Derivative Traders, 564 U.S. 135, 142 (2011) (“One ‘makes’ a
statement by stating it. . . . For purposes of Rule 10b-5, the maker of a statement is the person
or entity with ultimate authority over the statement, including its content and whether and
how to communicate it. Without control, a person or entity can merely suggest what to say,
not ‘make’ a statement in its own right.”); see also, e.g., In re Time Warner Inc. Sec. Litig., 9
F.3d 259, 265 (2d Cir. 1993) (affirming the district court’s dismissal of allegedly fraudulent
statements that were unattributed to a particular speaker, even though the plaintiff “allege[d]
on information and belief that the unattributed statement was made by an agent of the
defendant”); Zagami v. Cellceutix Corp., No. 15-CV-7194 (KPF), 2016 WL 3199531, at *6-7
(S.D.N.Y. June 8, 2016) (rejecting the plaintiffs’ claim that statements in an Internet article
were attributable to the defendant for lack of a showing that the defendant had “ultimate
authority” over the publication of the article in question); Schwartz v. Novo Indus. A/S, 658 F.
Supp. 795, 799 (S.D.N.Y. 1987) (“[P]laintiff fails to demonstrate how . . . it would be fair to
draw an inference of fraud from a statement appearing in a news article over which defendant
had less than complete control.”). To the extent that Plaintiffs cite any statements made by
Defendants — for example, in interviews — they make no allegation that the statements were
false or misleading. (See Pls.’ Opp’n 12-16).
Instead, the theory of Plaintiffs’ claim is one of omission — namely, that Defendants
failed to disclose the alleged paid-promotional scheme in the risk disclosure sections of their
SEC filings. (Pls.’ Opp’n 12-16). But that theory assumes that there was a paid-promotional
scheme to disclose. Yet, as discussed above, the Amended Complaint fails to adequately
allege that Defendants orchestrated such a scheme. See, e.g., In re Axis Cap. Holdings Ltd.
Sec. Litig., 456 F. Supp. 2d 576, 585 (S.D.N.Y. 2006) (dismissing an omission-based claim on
the ground that the plaintiffs had “offer[ed] nothing more than conclusory allegations that an
anticompetitive scheme existed”). Additionally, it is well established “that an omission is
actionable under the securities laws only when the corporation is subject to a duty to disclose
the omitted facts.” Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 101 (2d Cir. 2015)
(internal quotation marks omitted). Here, however, Plaintiffs fail to identify any duty that
Defendants would have owed to disclose even if they had played role in a paid-promotional
scheme. Notably, Section 17(b) of the Securities Exchange Act imposes a duty to disclose
payment on the promoter who receives payment, but not on the issuer who hired and paid the
promoter. See 15 U.S.C. § 77q(b); see also United States v. Wenger, 427 F.3d 840, 850 (10th
Cir. 2005) (“[T]he promoter must provide a disclaimer as to each security he touts at the time
he promotes the security.” (emphasis added)). As another district court reasoned, “[f]or the
Court to impose a duty to disclose” on stock issuers in circumstances like those here “would
encroach on the drafter’s decision to create a duty to disclose on analysts, such as stock
promoters, rather than the issuer of a regulated security.” In re Galectin Therapeutics, Inc.
Sec. Litig., 157 F. Supp. 3d 1230, 1237-38 (N.D. Ga. 2015); see also Garvey v. Arkoosh, 354
F. Supp. 2d 73, 83 (D. Mass. 2005) (“[T]he burden to disclose rests on the person who
publishes the analyst’s report; by contrast, there is no duty imposed by the statute on the
issuer who has paid for the puffery.”).
Plaintiffs’ last-ditch effort to salvage their claim is to argue — again relying on CytRx
and Galena — that Defendants had a duty to disclose the existence of a paid-promotional
scheme because they disclosed in their SEC filings a “lengthy list” of other reasons “why
[Anavex’s] stock price might fluctuate.” (Pls.’ Opp’n 13-16). It is true that Rule 10b-5(b)
“prohibits the telling of material half-truths, where the speaker ‘omit[s] 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.’” United States v. Laurenti, 611 F.3d 530, 539 (9th Cir.
2010) (quoting Rule 10b-5(b)) (alteration in original). Once again, however, CytRx and
Galena are easily distinguished. In each of those cases, the company’s risk disclosure
included a detailed list of factors that could explain stock price fluctuations, but omitted any
mention of a paid-promotional scheme. See In re Galena, 117 F. Supp. 3d at 1180 (“Galena
then explained that price fluctuations are caused by many reasons and provided twelve
possible reasons, none of which included the alleged promotional campaign.”); In re CytRx,
2015 WL 5031232, at *9 (finding an actionable omission where the defendants’ SEC filing
“list[ed] factors that may affect the market price of [defendants’] common stock (internal
quotation marks omitted)). By contrast, the risk disclosure in this case did not contain a list of
specific factors; instead, it included only a generic, boilerplate description of why over-thecounter stocks tend be volatile investments.2 That statement did not create a duty to disclose
if Defendants had engaged in a paid-promotional scheme. Accordingly, Plaintiff’s Rule 10b5(b) claim must be and is dismissed.
Although the Court could stop there, Plaintiffs’ claims under Section 10(b) and Rule
10b-5 are subject to dismissal for a related, albeit independent, reason: failure to adequately
Anavex’s disclosure stated in full as follows:
Trading of our common stock may be volatile and sporadic, which could
depress the market price of our common stock and make it difficult for our
stockholders to resell their shares. There is currently a limited market for our
common stock and the volume of our common stock traded on any day may
vary significantly from one period to another. Our common stock is quoted on
OTC Market’s OTCOB. Trading in stock quoted on OTC Market’s OTCOB is
often thin and characterized by wide fluctuations in trading prices, due to many
factors that may have little to do with our operations or business prospects.
The availability of buyers and sellers represented by this volatility could lead
to a market price for our common stock that is unrelated to operating
performance. Moreover, OTC Market’s OTCOB is not a stock exchange, and
trading of securities quoted on OTC Market’s OTCOB is often more sporadic
than the trading of securities listed on a stock exchange like NASDAQ. There
is no assurance that a sufficient market will develop in the stock, in which case
it could be difficult for our stockholders to resell their stock.
(Am. Compl. ¶ 65).
plead scienter. As noted above, the PSLRA requires a plaintiff to plead scienter — that is, a
defendant’s “intention to deceive, manipulate, or defraud” — with particularity. Tellabs, 551
U.S. at 313 (internal quotation marks omitted). To meet that requirement, a complaint must,
“‘with respect to each act or omission alleged to [constitute securities fraud], state with
particularity facts giving rise to a strong inference that the defendant acted with the required
state of mind.’” ATSI Commc’ns, 493 F.3d at 99 (quoting 15 U.S.C. § 78u-4(b)(2)(A)).
Additionally, a plaintiff must “allege facts supporting a strong inference with respect to each
defendant.” In re Lions Gate Entm’t Corp. Sec. Litig., 165 F. Supp. 3d 1, 22 (S.D.N.Y. 2016)
(emphasis added). The “strong inference” must be “more than merely plausible or
reasonable.” Tellabs, 551 U.S. at 314. The necessary inquiry is “inherently comparative.”
Id. at 323. That is, the Court “must consider plausible nonculpable explanations for the
defendant’s conduct, as well as inferences favoring the plaintiff.” Id. at 324. A complaint
alleging securities fraud 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.
In this Circuit, a plaintiff may satisfy the scienter pleading requirement in either of two
ways: “by alleging facts (1) showing that the defendants had both motive and opportunity to
commit the fraud or (2) constituting strong circumstantial evidence of conscious misbehavior
or recklessness.” ATSI Comm’cns, 493 F.3d at 99. The former requires a plaintiff to allege
that the defendant “benefitted in some concrete and personal way from the purported fraud.”
ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d
187, 198 (2d Cir. 2009) (internal quotation marks omitted). The latter requires allegations of
either actual intent or “conscious recklessness — i.e., a state of mind approximating actual
intent, and not merely a heightened form of negligence.” Stratte-McClure, 776 F.3d at 106.
More specifically, a plaintiff must allege conduct by a defendant, “which is at the least,
conduct which is highly unreasonable and which represents an extreme departure from the
standards of ordinary care to the extent that the danger was either known to the defendant or
so obvious that the defendant must have been aware of it.” Kalnit v. Eichler, 264 F.3d 131,
142 (2d Cir. 2001) (internal quotation marks omitted). As a general matter, courts have
approved of claims when plaintiffs “have specifically alleged defendants’ knowledge of facts
or access to information contradicting their public statements. Under such circumstances,
defendants knew or, more importantly, should have known that they were misrepresenting
material facts related to the corporation.” Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir. 2000).
In this case, Plaintiffs’ allegations fall short under both prongs. They argue first that
Defendants had a motive to commit fraud because the company’s financing was largely
dependent on its stock price; if the stock price fell, they assert, the company and the
Individual Defendants’ salaries would have been in jeopardy. (Pls.’ Opp’n 17). As the
Second Circuit has held, however, “it is not sufficient to allege goals that are ‘possessed by
virtually all corporate insiders,’ such as the desire to maintain a high credit rating for the
corporation or otherwise sustain the appearance of corporate profitability or the success of an
investment, or the desire to maintain a high stock price in order to increase executive
compensation.” South Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98, 109 (2d Cir.
2009) (internal quotation marks omitted); see also Acito v. IMCERA Grp., Inc., 47 F.3d 47, 54
(2d Cir. 1995) (noting that, “[i]f scienter could be pleaded” solely on the basis that
“defendants were motivated to defraud the public because an inflated stock price would
increase their compensation,” then “virtually every company in the United States that
experiences a downturn in stock price could be forced to defend securities fraud actions”).
Notably, Plaintiffs make no allegation that any Defendant sold shares during the Class Period.
See, e.g., San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos.,
Inc., 75 F.3d 801, 814 (2d Cir. 1996) (noting that the failure of some individual defendants to
sell stock during class period undermined the plaintiffs’ allegations that any defendant
intended to inflate stock for personal profit); see also Rombach, 355 F.3d at 177 (finding “no
personal interest sufficient to establish motive” where “[p]laintiffs [did] not allege that
defendants sold stock or profited in any way during the relevant period”).3 In short, because
Plaintiffs fail to allege that Defendants received a “concrete and personal” benefit from the
alleged scheme, and certainly do not allege that each Defendant received such a benefit, they
fail to demonstrate a motive to commit fraud. See ECA, 553 F.3d at 198.
Turning to the conscious-misbehavior-and-recklessness prong of the scienter test,
Plaintiffs assert that Defendants “knew facts or had access to information evidencing that a
stock promotion scheme was in place.” (Pls.’ Opp’n 19 (internal quotation marks omitted)).
Specifically, Plaintiffs rely on the following seven “facts” in contending that they have
sufficiently alleged Defendants’ “knowledge of facts or access to information contradicting
their public statements,” Novak, 216 F.3d at 308: (1) that Missling participated in two
In fact, Missling purchased additional shares during the Class Period (see Docket No.
63, Ex. 9; see also Pls.’ Opp’n 18 n.12), a fact that serves to further undermine any plausible
allegation of scienter. See, e.g., See Avon Pension Fund v. GlaxoSmithKline PLC, 343 F.
App’x 671, 673 (2d Cir. 2009) (concluding that the acquisition of stock by three defendants,
and a lack of sales by a fourth defendant, did not support a finding of scienter); Turner v.
MagicJack VocalTec, Ltd., No. 13-CV-0448, 2014 WL 406917, at *11 (S.D.N.Y. Feb. 3,
2014) (“That three of the four individual Defendants, all high-ranking executives at the
Company, did not sell stock during the Class Period, and that two of these Defendants instead
purchased stock during the relevant period, rebuts an inference of scienter.”).
promotional interviews; (2) that Missling denied the existence of a promotional scheme
during one of the interviews; (3) that Anavex’s stock price was of “critical importance to the
Company”; (4) that “Anavex paid millions of dollars for ‘investor relations’ and ‘consultant’
services”; (5) that Anavex “stopped reporting its investor relations expenses”; (6) that Anavex
had a history of involvement in stock promotion schemes; and (7) that the company was
investigated by both the BCSC (in 2013) and the SEC (in 2015). (Pls.’ Opp’n 19-21).
Whether viewed individually or together, however, these “facts” do not constitute sufficiently
strong circumstantial evidence of conscious misbehavior or recklessness to satisfy Plaintiffs’
burden under the PSLRA.
To begin, the first and second “facts” — that Missling participated in two interviews
and denied the existence of a promotional scheme in one — do not constitute “strong
circumstantial evidence of conscious misbehavior or recklessness.” ATSI Comm’cns, 493
F.3d at 99. As noted above, Plaintiffs allege no particularized facts suggesting that Missling
knew or should have known about the alleged promotional campaign or that the interviewers
were participating in any such campaign. And even if they did make such a showing,
Plaintiffs do not point to any statements made during the interviews suggesting that Missling
“knew facts or had access to information evidencing that a stock promotion scheme was in
place.” (Pls.’ Opp’n 19). If anything, the fact that Missling agreed to be openly interviewed
actually cuts against Plaintiffs’ claim, as there is no suggestion in the Amended Complaint
that he or any other Defendant took steps to distance themselves from the promotion of
Anavex stock. Cf. In re Galena, 117 F. Supp. 3d at 1159 (detailing the defendants’ elaborate
efforts to distance themselves from the promotional schemes, including the use of “many
different fraudulent aliases and third parties”); In re CytRx, 2015 WL 5031232, at *2
(describing how the defendants would heavily edit the promotional pieces but pass them
through an intermediary “in an effort to conceal the Insider Defendants’ direct involvement in
the stock manipulation scheme” (footnote omitted)).
Plaintiffs’ third and fourth points — that Anavex’s stock price was of “critical
importance to the Company” and that “Anavex paid millions of dollars for ‘investor relations’
and ‘consultant’ services” — implicate the “core operations doctrine,” which “permits an
inference that a company and its senior executives have knowledge of information concerning
the ‘core operations’ of a business, which include matters critical to the long term viability of
the company and events affecting a significant source of income.” Hensley v. IEC Elecs.
Corp., No. 13-CV-4507 (JMF), 2014 WL 4473373, at *5 (S.D.N.Y. Sept. 11, 2014) (internal
quotation marks omitted). But “there is considerable doubt whether the core operations
doctrine survived enactment of the PSLRA, and many courts have held that it is no longer
valid.” Id. And even if the doctrine is still valid, it would provide no help to Plaintiffs here
for three reasons. First, core operations allegations “constitute supplementary but not
independently sufficient means to plead scienter.” In re Wachovia Equity Sec. Litig., 753 F.
Supp. 2d 326, 353 (S.D.N.Y. 2011). Second, Plaintiffs fail to cite any authority for the
proposition that Anavex’s stock prices or its investor relations expenditures would constitute
“core operations” of the company’s business. Finally, courts applying the doctrine generally
require “that the operation in question constitute nearly all of a company’s business before
finding scienter.” Tyler v. Liz Claiborne, Inc., 814 F. Supp. 2d 323, 343 (S.D.N.Y. 2011). In
this case, however, the company at issue is a developer of Alzheimer’s drugs, and neither its
stock price nor its investor relations budget constitute “nearly all” of its business operations.
Relatedly, Plaintiffs’ fifth “fact” — that Anavex changed the way it reported its
investor relations expenses and then stopped reporting them altogether — does not give rise to
a strong inference that Defendants acted with the required state of mind. As a general matter,
“allegations of . . . accounting irregularities, standing alone, are insufficient to state a
securities fraud claim . . . . Only where such allegations are coupled with evidence of
corresponding fraudulent intent might they be sufficient.” ECA, 553 F.3d at 200 (internal
quotation marks and alteration omitted). Here, Plaintiffs do not even allege “accounting
irregularities.” Indeed, there is no suggestion that Defendants had a duty to disclose their
investor relations expenses in any particular manner. See Kalnit, 264 F.3d at 144 (holding
that where a complaint “does not present facts indicating a clear duty to disclose” it does not
establish “strong evidence of conscious misbehavior or recklessness”). Moreover, Plaintiffs
plead no facts to suggest that the decision to change the way the company reported its investor
relations expenses was motivated by fraudulent intent.
Sixth, the fact that Anavex had a history of involvement in stock promotion schemes
does not come close to suggesting that Defendants had knowledge of the alleged scheme
during the Class Period. As Plaintiffs concede, Anavex’s earlier promotion efforts occurred
in 2007, well before the Class Period began. (Pls.’ Opp’n 20). Furthermore, the resignation
of the Anavex executive alleged to have initiated those efforts, Harvey Lalach, predated not
only the Class Period, but also the dates on which the Individual Defendants joined the
company. Compare Amended Compl. ¶ 177 (alleging that Lalach resigned in 2012), with id.
¶¶ 18-20 (alleging that Defendants all joined the firm in 2013 or later). Given that
chronology, it is a non sequitur to suggest that Defendants knew or should have known about
the alleged promotional scheme because Anavex had previously engaged in such a scheme. If
anything, the timing “actually cuts against a finding of scienter.” Hensley, 2014 WL
4473373, at *5 (finding that the timing of accounting errors cut against a finding of scienter as
to one defendant because the company had restated its financial results dating back to before
that defendant had joined the company). The allegations regarding Anavex’s stock promotion
history certainly falls short of providing “strong circumstantial evidence of conscious
misbehavior or recklessness.” ATSI Comm’cns, 493 F.3d at 99.
Finally, the BCSC and SEC investigations, by themselves, do not give rise to a
compelling inference of scienter. See, e.g., City of Rockton Retirement Sys. v. Avon Products,
Inc., 11-CV-4665 (PGG), 2014 WL 4832321, at *24 (Apr. 24, 2015) (“[T]he existence of an
investigation alone is not sufficient to give rise to a requisite cogent and compelling inference
of scienter.”). Indeed, “government investigations cannot bolster allegations of scienter that
do not exist, and, as currently plead, the government investigations are just that,
investigations.” Lipow v. Net1 UEPS Techs., Inc., 131 F. Supp. 3d 144, 167 (S.D.N.Y. 2015).
Additionally, the precise nature and outcomes of the investigations are unclear, as Plaintiffs
do not plead any facts suggesting that Defendants’ actions were even the focus of the inquiries
or that Defendants were sanctioned as a result of them.4 Instead, the Amended Complaint
merely asserts in conclusory terms that the investigations were focused on Anavex’s
In connection with the SEC investigation, Defendants ask the Court to take judicial
notice of two documents: (1) Anavex’s Quarterly Report, filed August 11, 2016, and (2) an
Anavex press release, also dated August 11, 2016. (Docket No. 69). Both documents state
that SEC has “advised the Company’s legal counsel that the [Commission] did not intend to
recommend enforcement action by the Commission against the Company in connection with
the investigation” at issue here. (Id.). The Court need not decide whether it can take judicial
notice of them. See Ganino v. Citizens Utils. Co., 228 F.3d 154, 168 n.9 (2d Cir. 2000)
(refusing to decide whether to take judicial notice when doing so would not affect the
outcome of the case).
promotional activity. (Am. Compl. ¶¶ 184-185 (“[T]he British Columbia Securities
Commission previously cited Anavex for involvement in a stock promotion scheme . . . .
[T]he SEC has commenced a formal investigation into Anavex’s stock manipulation.”)).
Defendants’ fraudulent intent cannot be inferred from the mere existence of two inconclusive
investigations separated by over two years, especially in the absence of allegations of motive.
See, e.g., Kalnit, 264 F.3d at 142 (noting that, in the absence of a motive allegation, “the
strength of circumstantial allegations [of scienter] must be correspondingly greater” (internal
quotation marks omitted)).
Even viewing all of the foregoing allegations “holistically,” — as the Court must,
Tellabs, 551 U.S. at 326 — the Amended Complaint falls far short of alleging “conduct which
is highly unreasonable and which represents an extreme departure from the standards of
ordinary care,” Kalnit, 264 F.3d at 142. Additionally, Plaintiffs do not even attempt to
establish scienter with respect to each Individual Defendant, as required. See, e.g., In re
C.D.T.S. v. UBS AG, No. 12-CV-4924 (KBF), 2013 WL 6576031, *6 (S.D.N.Y. Dec. 13,
2013) (noting that scienter “must be separately pled and individually supportable as to each
defendant”). Ultimately, their allegations of misconduct are less “compelling” than the
nonculpable explanations presented by Defendants: that the ups and downs of Anavex’s stock
price were driven by a combination of the company’s press releases and the writings of third
parties not under the direction of Anavex or its management. For that reason, Plaintiffs’
claims fail to adequately plead scienter as required for suits brought pursuant to Section 10(b)
and Rule 10b-5 and must be dismissed.
For all of the reasons stated above, Plaintiffs’ claims under Section 10(b) and Rule
10b-5 must be and are dismissed. It follows that their claims for control person liability under
Section 20(a), which depend upon the existence of a “primary violation,” also fail. See, e.g.,
First Jersey Sec., Inc., 101 F.3d at 1472. That leaves only the question of whether Plaintiffs’
should be granted leave to amend their complaint for a second time, as they perfunctorily
request in a footnote at the end of the memorandum of law in opposition to Defendants’
motion. (See Pls.’ Opp’n 19 n.13).
The Court declines to grant Plaintiffs’ request for a combination of three reasons.
First, amendment here would likely be futile. Indeed, given the various grounds for the
Court’s decision, there is nothing to suggest that Plaintiffs would be able to state a valid claim
should the Court grant them leave to amend. See, e.g., Ruffolo v. Oppenheimer & Co., 987
F.2d 129, 131 (2d Cir. 1993) (“Where it appears that granting leave to amend is unlikely to be
productive . . . it is not an abuse of discretion to deny leave to amend.”). Second, and related,
Plaintiffs have not “given any indication that [they are] in possession of facts that would cure
the problems identified in this opinion.” Clark v. Kitt, No. 12-CV-8061 (CS), 2014 WL
4054284, at *15 (S.D.N.Y. Aug. 15, 2014); see also TechnoMarine SA v. Giftports, Inc., 758
F.3d 493, 505 (2d Cir. 2014) (“A plaintiff need not be given leave to amend if it fails to
specify . . . how amendment would cure the pleading deficiencies in its complaint.”). Finally,
in granting leave to file a first amended complaint, the Court expressly warned that Plaintiffs
would not be given another opportunity to address the issues raised in Defendants’ motion to
dismiss. (See Docket No. 64). See, e.g., Clark, 2014 WL 4054284, at *15 (holding that the
plaintiff’s failure to remedy the complaint’s deficiencies identified by an earlier motion to
dismiss “is alone sufficient grounds to deny leave to amend”); see also, e.g., Ruotolo v. City of
N.Y., 514 F.3d 184, 191 (2d Cir. 2008) (affirming the district court’s denial of leave to amend
in part because of the previous opportunities that the plaintiff had received to amend the
The Clerk of Court is directed to terminate Docket Nos. 60, 61, 66, and 69, and to
close this case.
Date: December 29, 2016
New York, New York