Wolfe v. Aspenbio Pharma, Inc. ( 2014 )

FILED
United States Court of Appeals
Tenth Circuit
October 17, 2014
UNITED STATES COURT OF APPEALS
Elisabeth A. Shumaker
Clerk of Court
TENTH CIRCUIT
JOHN WOLFE, individually and on
behalf of all others similarly situated;
MIKE MARNHOUT, individually and
on behalf of all others similarly
situated; SHAZI IQBAL, individually
and on behalf of all others similarly
situated,
Plaintiffs - Appellants,
No. 12-1406
v. (D.C. No. 1:11-CV-00165-REB-KMT)
(D. Colo.)
ASPENBIO PHARMA, INC., a
Colorado corporation; RICHARD G.
DONNELLY; GREGORY PUSEY;
JEFFREY G. MCGONEGAL; MARK
COLGIN; ROBERT CASPARI,
Defendants - Appellees.
ORDER AND JUDGMENT *
Before BRISCOE, Chief Judge, HOLLOWAY ** and HOLMES, Circuit Judges.
*
This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. It may be cited,
however, for its persuasive value consistent with Fed. R. App. P. 32.1 and 10th
Cir. R. 32.1.
**
The late Honorable William J. Holloway, Jr., United States Senior
Circuit Judge, participated as a panel member when oral argument was heard on
this case but passed away before having an opportunity to vote on or otherwise
participate in the consideration of this order and judgment. “The practice of this
court permits the remaining two panel judges if in agreement to act as a quorum
in resolving the appeal.” United States v. Wiles, 106 F.3d 1516, 1516 n.* (10th
Plaintiffs John Wolfe, Mike Marnhout, and Shazi Iqbal filed a class action
complaint against AspenBio Pharma, Inc. (“AspenBio”) and several of its current
and former executives. Suing on behalf of a putative class of all persons who
purchased that company’s common stock between February 2007 and July 2010,
the plaintiffs (hereinafter “the Investors”) alleged that AspenBio had violated
section 10(b) of the Securities Exchange Act of 1934 (“the Act”), 15 U.S.C.
§ 78j(b), and Securities and Exchange Commission (“SEC”) Rule 10b-5, 17
C.F.R. § 240.10b-5. Together, these provisions “prohibit fraudulent acts done in
connection with securities transactions.” Adams v. Kinder-Morgan, Inc., 340 F.3d
1083, 1094–95 (10th Cir. 2003). The Investors also asserted “control person”
claims under section 20(a) of the Act, 15 U.S.C. § 78t(a), against the individual
defendants. The present appeal addresses only the section-10 allegations against
AspenBio and Richard Donnelly (the company’s Chief Executive Officer from the
beginning of the class period until February 2009) and the control person claims
against Mr. Donnelly and Jeffrey McGonegal (the company’s Chief Financial
Officer during the class period).
To state a claim under section 10(b) and Rule 10b-5, a complaint must
Cir. 1997); see also 28 U.S.C. § 46(c)–(d) (permitting a circuit court to adopt
procedure allowing for the disposition of an appeal where remaining quorum of
panel agrees on the disposition). The remaining panel members have acted as a
quorum with respect to this order and judgment.
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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.
Amgen Inc. v. Conn. Retirement Plans & Trust Funds, --- U.S. ----, 133 S. Ct.
1184, 1192 (2013) (quoting Matrixx Initiatives, Inc. v. Siracusano, --- U.S. ----,
131 S. Ct. 1309, 1317 (2011)) (internal quotation marks omitted). In the Private
Securities Litigation Reform Act (“PSLRA”), Congress subjected the first and
second of these elements to heightened pleading requirements. See 15 U.S.C.
§§ 78u-4(b)(1), 78u-4(b)(2); Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551
U.S. 308, 321 (2007).
In the case on appeal, the district court granted AspenBio’s Federal Rule of
Civil Procedure 12(b)(6) motion to dismiss the Investors’ claims based on a
finding that the Investors failed to allege facts establishing the first element of a
section-10 claim, the existence of a false or misleading statement. We do not
reach that issue, however. “We have long said that we may affirm on any basis
supported by the record, even if it requires ruling on arguments not reached by
the district court or even presented to us on appeal.” Richison v. Ernest Grp.,
Inc., 634 F.3d 1123, 1130 (10th Cir. 2011). And we conclude that the Investors
failed to adequately plead here the second element—viz., scienter. On that basis,
and exercising jurisdiction under 28 U.S.C. § 1291, we affirm the judgment of
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the district court.
I1
AspenBio is a self-described “bio-pharmaceutical company” whose
business is the “discovery, development, manufacture, and marketing of novel
proprietary products.” Aplt. App. at 19 (Am. Compl., filed Aug. 23, 2011)
(internal quotation marks omitted). The present litigation concerns alleged
misrepresentations relating to one such product, a diagnostic test called
“AppyScore.” Id. at 14. AppyScore was conceived as a screening test that could
help physicians rule out appendicitis in patients presenting the symptoms of that
disease by testing for elevated levels of a specific protein. AspenBio began work
on the test some time around 2003, and by early 2006, the company issued a press
release announcing its work on the product and touting the potential market for a
new appendicitis test.
In 2007, AspenBio issued a number of press releases relating to its ongoing
research involving AppyScore. The allegedly false content of these releases, and
of an additional comment made by Mr. Donnelly, forms the core of the Investors’
claim. The first press release, issued on February 22 (the “February 2007 Press
Release”), announced the results of three studies that had purportedly been
1
Because we review here a decision granting a motion to dismiss, we
must accept as true, for purposes of this appeal, all of the Investors’ factual
allegations in the amended complaint. See Leatherman v. Tarrant Cnty. Narcotics
Intelligence & Coordination Unit, 507 U.S. 163, 164 (1993).
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conducted in the preceding 30 months, as well as preliminary results of an
additional ongoing study. The reported results were, by and large, extremely
promising. Indeed, AspenBio reported that “[b]ased on the data obtained to-
date,” AppyScore “appears able to identify patients with appendicitis at a very
high sensitivity level of 94% to 97%.” 2 Id. at 36. In a second press release a few
months later (the “September 2007 Press Release”), AspenBio again struck an
optimistic tone, claiming that the large ongoing study referenced in its earlier
press release had been completed, and quoting Mr. Donnelly to the effect that this
study had demonstrated sensitivity for AppyScore of 98%. In a presentation to
investors on May 22, 2007, Mr. Donnelly stated that, under the system of
categorization for appendices that AspenBio was using, cases were divided into
four numerical categories—with 1s being normal appendices, 4s reflecting highly
2
Sensitivity is one of several basic measures of a diagnostic’s
effectiveness. The present case involves both sensitivity and the related concept
of specificity. Simply put,
[i]n studies of diagnostic accuracy, the sensitivity of [a] test is
estimated as the proportion of subjects with the target condition
in whom the test is positive. Similarly, the specificity of the test
is estimated as the proportion of subjects without the target
condition in whom the test is negative[.]
Food & Drug Administration (“FDA”), Guidance for Industry & FDA Staff:
Statistical Guidance on Reporting Results from Studies Evaluating Diagnostic
Tests 7–8 (Mar. 2007) (second and fourth emphases added), available at
http://www.fda.gov/downloads/RegulatingInformation/Guidances/ucm071287.pdf
(last visited Oct. 16, 2014).
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symptomatic cases of appendicitis, and 2s and 3s representing the difficult-to-
detect cases in between—and AppyScore was capable of detecting 2s and 3s.
In their amended complaint, the Investors alleged that these sanguine
reports were in fact false, 3 and that they actually reflected “rigged studies
designed to make AppyScore look good rather than to test its capabilities, so that
AspenBio could sell its stock at [an] inflated price.” Id. at 44. The Investors
alleged that these false reports artificially inflated the price of AspenBio stock,
and that when the truth came out, the Investors were left in the lurch.
As the Investors tell it, the facade ultimately began to crumble when
AspenBio undertook the process of seeking FDA approval to market AppyScore
in the United States. When AspenBio released the results of its first clinical trial
(i.e., its first “official” trial, conducted pursuant to FDA regulations, and intended
for use in a regulatory submission) in January 2009, “[t]he reported results were
devastating,” id. at 55, and the company’s stock lost more than 75% of its value
in a single day. Even then, however, AspenBio purportedly refused to give up the
ghost, choosing instead to issue yet another press release, this one claiming that
the first clinical trial’s negative results could be traced to “an unexpected number
of patients who presented with mild appendicitis when compared to peer reviewed
3
As noted above, the district court found that the Investors failed to
allege sufficient facts to establish falsity; we take no position on that question for
purposes of the present appeal.
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published literature statistics.” Id. at 57. It was not until July 2010, when
AspenBio released the unimpressive results of its second clinical trial, that the
scales allegedly fell fully from the market’s eyes. AspenBio’s stock price fell a
further 27%.
The Investors filed a putative class action against AspenBio on the basis of
the foregoing allegations, asserting claims under sections 10(b) and 20(a) of the
Act, as well as under SEC Rule 10b-5. AspenBio filed a motion to dismiss
pursuant to Rule 12(b)(6). The district court granted the motion, finding that the
Investors failed to state a claim under the heightened pleading standards
established by the PSLRA. It dismissed the Investors’ complaint, and entered
judgment for AspenBio. The Investors timely filed this appeal.
II
A
We review de novo a district court’s dismissal of a complaint pursuant to
Rule 12(b)(6). See McDonald v. Kinder-Morgan, Inc., 287 F.3d 992, 997 (10th
Cir. 2002). In doing so we “accept as true ‘all well-pleaded factual allegations in
[the] complaint and view these allegations in the light most favorable to the
plaintiff.’” Schrock v. Wyeth, Inc., 727 F.3d 1273, 1280 (10th Cir. 2013) (quoting
Kerber v. Qwest Grp. Life Ins. Plan, 647 F.3d 950, 959 (10th Cir. 2011)).
To adequately plead scienter under the PSLRA’s heightened pleading
standard, a complaint must, “with respect to each act or omission alleged to
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violate this chapter, state with particularity facts giving rise to a strong inference
that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-
4(b)(2)(A). In a securities fraud case, that state of mind is “a mental state
embracing intent to deceive, manipulate, or defraud, or recklessness.” In re Level
3 Commc’ns, Inc. Secs. Litig., 667 F.3d 1331, 1343 (10th Cir. 2012) (quoting
Adams, 340 F.3d at 1105) (internal quotation marks omitted). Although “[a]n
inference of scienter ‘need not be irrefutable,’ . . . we will draw a ‘strong
inference’ of recklessness only if, based on plaintiff’s allegations, ‘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. (quoting
Tellabs, 551 U.S. at 324).
B
In the present case, the Investors failed to adequately allege that the
challenged statements—which we assume arguendo were false or
misleading—were made intentionally or recklessly. The Investors’ theory of
scienter in this case ultimately turns on Mr. Donnelly’s knowledge. They claim
that Mr. Donnelly knew that the statements in the February 2007 and September
2007 Press Releases, as well as his own statements to investors about
AppyScore’s ability to detect 2s and 3s, were untrue at the time they were made,
and they argue that this knowledge can be imputed to AspenBio as well.
Unfortunately for the Investors, they fail to allege facts that could establish that
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Mr. Donnelly had the requisite mental state.
Indeed, the Investors rely solely on two allegations in the amended
complaint to establish Mr. Donnelly’s scienter. First, the Investors argue that
because Mr. Donnelly was the CEO of AspenBio, and because AppyScore was a
singularly important project for that company, it is a reasonable inference that
“[Mr.] Donnelly would closely monitor it.” Aplt. Opening Br. at 68 (citing Aplt.
App. at 22, 26). Second, they rely on the allegation that in late August 2005,
Roger Hurst, the founder and former CEO of AspenBio, told Mr. Donnelly that
AppyScore “just wasn’t working.” Id. (citing Aplt. App. at 34–35). These two
allegations simply cannot carry the Investors over the PSLRA’s heightened bar.
With respect to the Investors’ first argument—in essence that we should
infer Mr. Donnelly’s knowledge from the fact of his position and the importance
of AppyScore to AspenBio—we have previously rejected the notion that
knowledge may be imputed solely from an individual’s position within a
company. See City of Phila. v. Fleming Cos., 264 F.3d 1245, 1263–64 (10th Cir.
2001) (“[A]llegations that a securities fraud defendant, because of his position
within the company, must have known a statement was false or misleading are
precisely the types of inferences which [courts], on numerous occasions, have
determined to be inadequate to withstand Rule 9(b) scrutiny. Generalized
imputations of knowledge do not suffice, regardless of defendants’ positions
within the company.” (second alteration in original)) (quoting In re Advanta
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Corp. Secs. Litig., 180 F.3d 525, 539 (3d Cir. 1999), abrogated on other grounds
by Tellabs, 551 U.S. at 325) (internal quotation marks omitted). Although
“standing alone, the fact that a defendant was a senior executive in a company
cannot give rise to a strong inference of scienter,” Mr. Donnelly’s status as
AspenBio’s CEO is nonetheless “a fact relevant in our weighing of the totality of
the allegations.” Adams, 340 F.3d at 1106. Accordingly, we turn to the
Investors’ other argument, focusing on Mr. Hurst’s alleged remark that
AppyScore “just wasn’t working.”
We agree with the district court that Mr. Hurst’s comment was “so vague
and global as to be unhelpful as a benchmark for scienter.” Aplt. App. at 112
n.20 (Order Granting Mot. to Dismiss, filed Sept. 13, 2012). Although Mr. Hurst
may have communicated in this remark that AppyScore “wasn’t working,” his
statement provided no insight as to why it wasn’t working. It is of course
possible that this observation referred to the problems relating to achieving the
desired sensitivity and specificity that were later revealed in the clinical trials, but
it would eviscerate the heightened PSLRA pleading standard to find that this mere
possibility satisfies the requirement that a plaintiff “state with particularity facts
giving rise to a strong inference that the defendant acted with the required state of
mind.” 15 U.S.C. § 78u-4(b)(2)(A) (emphases added). Moreover, Mr. Hurst’s
remark was made in August 2005, fully a year and a half before the first
challenged statement in this litigation, in February 2007. Thus, even if Mr. Hurst
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had identified the problems with AppyScore as of August 2005 with greater
particularity, the alleged facts would provide us with no basis for inferring that
these problems continued eighteen months later. And, even supposing these
problems continued, we would still be left to speculate as to whether Mr.
Donnelly knew that the problems continued when the challenged statements were
made.
All of these details belie the Investors’ contention that the present case is
“indistinguishable” from Adams. Aplt. Opening Br. at 68. As the Investors note,
we concluded in Adams that the complaint in that case had adequately pleaded
scienter as to a defendant whose knowledge was based on communications from
another employee. See Adams, 340 F.3d at 1105. Yet Adams is clearly
distinguishable. The information provided to the Adams defendant—who served
as the chief financial officer of the company—about the profitability of a
company enterprise was virtually the obverse of what the defendant subsequently
stated to be true, giving rise to “a strong inference that [the defendant] acted with
intent to deceive.” Id. In the present case, in order to conclude that Mr. Donnelly
actually knew that the challenged statements were false, and thus possessed the
requisite scienter, one would need to make a series of inferences that were
unnecessary in Adams: about the nature of the problem adverted to by Mr. Hurst,
about the continued existence of that problem 18 months later when the first of
the challenged statements was made, and about Mr. Donnelly’s knowledge at that
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later time.
We have previously held that allegations of scienter are insufficient when
the complaint requires the court to “stack inference upon inference to even
conclude that the statements were false—much less that defendants knew or were
reckless in not knowing they were false.” Level 3 Commc’ns, 667 F.3d at 1345.
The critical fact alleged here—Mr. Hurst’s statement that AppyScore wasn’t
working—is “open to multiple interpretations,” and “even with the benefit of
hindsight” it is not clear “whether a conflict actually existed between” the
challenged statements and that observation. Id. Accordingly, the Investors failed
to meet the heightened pleading standard set by the PSLRA, and failed to state a
claim under section 10(b) and Rule 10b-5.
C
Because we conclude that the Investors’ amended complaint failed to allege
a primary violation of the securities laws, the section-20(a) control person claims
necessarily also fail. See id. at 1347 (citing Maher v. Durango Metals, Inc., 144
F.3d 1302, 1305 (10th Cir. 1998)).
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III
For the foregoing reasons, we AFFIRM the district court’s order
dismissing the Investors’ amended complaint. 4
Entered for the Court
Jerome A. Holmes
Circuit Judge
4
One motion remains pending in this case—a motion by the Investors
to take judicial notice of two press releases issued by AspenBio. AspenBio does
not oppose this motion, and notes that it actually moved in the district court to
take judicial notice of these same press releases (among others), a motion that the
district court granted. We GRANT this uncontested motion.
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