Bradley v. ARIAD Pharmaceuticals, Inc.

United States Court of Appeals
For the First Circuit
No. 15-1491
IN RE: ARIAD PHARMACEUTICALS, INC. SECURITIES LITIGATION
JOSEPH BRADLEY; PENSION TRUST FUND FOR OPERATING ENGINEERS; CITY
OF FORT LAUDERDALE POLICE & FIRE RETIREMENT SYSTEM; AUTOMOTIVE
INDUSTRIES PENSION TRUST FUND; WILLIAM A. GAUL, D.M.D.,
Plaintiffs, Appellants,
NABIL ELMACHTOUB, individually and on behalf of all others
similarly situated; JAMES L. BURCH, individually and on behalf
of all others similarly situated; GREATER PENNSYLVANIA
CARPENTERS' PENSION FUND, individually and on behalf of all
others similarly situated; JIMMY WANG, individually and on
behalf of all others similarly situated,
Plaintiffs,
v.
ARIAD PHARMACEUTICALS, INC; HARVEY J. BERGER; FRANK G. HALUSKA;
TIMOTHY P. CLACKSON; EDWARD M. FITZGERALD; JEFFERIES & COMPANY,
INC.; WAYNE WILSON; JAY R. LAMARCHE; BMO CAPITAL MARKETS CORP.;
ATHANASE LAVIDAS; COWEN AND COMPANY, LLC; RBC CAPITAL MARKETS,
LLC; JP MORGAN SECURITIES LLC; LEERINK SWANN LLC; NORBERT G.
RIEDEL; MASSIMO RADAELLI; ROBERT M. WHELAN, JR.; UBS SECURITIES
LLC,
Defendants, Appellees,
DAVID E. I. PYOTT; MIKE R. BOWLIN; JOHN T. CARDIS; WESLEY W.
VONSCHACK; ROBERT A. INGRAM; WILLIAM J. LINK; MICHAEL A.
MUSSALLEM; BARBARA J. MCNEIL,
Defendants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William G. Young, U.S. District Judge]
Before
Howard, Chief Judge,
Souter, Associate Justice,*
Lipez, Circuit Judge.
John C. Browne, with whom Kristin Ann Meister, Bernstein
Litowitz Berger & Grossmann, LLP, Ariana J. Tadler, Arvind Khurana,
Melissa Ryan Clark, Milberg LLP, Johnathan Gardner, Carol
Villegas, Labaton Sucharow LLP, Glen DeValerio, and Berman
DeValerio were on brief, for appellants.
John F. Sylvia, with whom Andrew N. Nathanson, Matthew D.
Levitt, Rebecca L. Zeidel, and Mintz, Levin, Cohn, Ferris, Glovsky
and Popeo, P.C. were on brief, for appellees ARIAD Pharmaceuticals,
Inc., Harvey J. Berger, Frank G. Haluska, Timothy P. Clackson,
Edward M. Fitzgerald, Wayne Wilson, Jay R. Lamarche, Athanase
Lavidas, Norbert G. Reidel, Massimo Radaelli, and Robert M. Whelan,
Jr.
Brian E. Pastuszenski, with whom Mark Holland, Brian C.
Devine, and Goodwin Procter LLP were on brief, for appellees
Jefferies & Company, Inc., BMO Capital Markets Corp., Cowen and
Company, LLC, RBC Capital Markets, LLC, JP Morgan Securities LLC,
Leerink Swann LLC, and UBS Securities LLC.
November 28, 2016
* Hon. David H. Souter, Associate Justice (Ret.) of the
Supreme Court of the United States, sitting by designation.
HOWARD, Chief Judge. When a company's stock declines,
a shareholder lawsuit often follows. This case is no exception.
Following a drop in the share price of ARIAD Pharmaceuticals, Inc.,
investors filed suit against the company and four corporate
officers (together "ARIAD"), alleging securities fraud in
violation of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a), as
well as the Securities and Exchange Commission's ("SEC") Rule 10b-
5, 17 C.F.R. § 240.10b-5. The complaint also raised claims under
Sections 11 and 15 of the Securities Act of 1933 ("Securities
Act"), 15 U.S.C. §§ 77k and 77o, against ARIAD, its directors, and
various underwriters involved in the company's January 2013
offering of common stock. The district court stopped the
litigation in its tracks by dismissing the complaint in its
entirety. See In re ARIAD Pharm., Inc., 98 F. Supp. 3d 147 (D.
Mass. 2015). The plaintiffs timely appealed.
We affirm the district court's dismissal of the
securities fraud counts, except with respect to one particular
alleged misstatement for which we find the allegations set forth
in the complaint sufficient to state a claim. We also affirm the
disposition of the plaintiffs' claims under Sections 11 and 15,
albeit on different grounds than those articulated by the district
court.
- 3 -
I. Facts
Fairly read, the complaint alleges the following. ARIAD
Pharmaceuticals, Inc. is a publicly traded company headquartered
in Cambridge, Massachusetts. At all times relevant to this
litigation, Defendant-Appellee Harvey Berger served as ARIAD's
Chairman and Chief Executive Officer ("CEO"), Defendant-Appellee
Edward Fitzgerald served as the company's Executive Vice President
and Chief Financial Officer ("CFO"), Defendant-Appellee Frank
Haluska served as its Senior Vice President and Chief Medical
Officer, and Defendant-Appellee Timothy Clackson served as its
President of Research and Development, Senior Vice President, and
Chief Scientific Officer.
In 2008, ARIAD embarked on the development of ponatinib,1
a tyrosine kinase inhibitor ("TKI") designed to treat patients
suffering from chronic myeloid leukemia ("CML"). As with any
experimental drug, the development process entailed a series of
clinical trials. See N.J. Carpenters Pension & Annuity Funds v.
Biogen IDEC Inc., 537 F.3d 35, 39 (1st Cir. 2008) (discussing
typical three-phase trial structure). The first trial, dubbed
"PACE 1," was intended to determine the maximum tolerable dose
("MTD") of ponatinib. After settling on 45mg as the MTD, ARIAD
began a second trial, "PACE 2." The purpose of this follow-on
1 ARIAD markets and sells ponatinib under the moniker
"Iclusig."
- 4 -
study was to determine the safety, efficacy, and durability of
ponatinib, in order to support its limited approval for CML
patients who are resistant to or intolerant of other TKI
treatments. In November 2012, with PACE 2 on-going, ARIAD began
to screen subjects for its third clinical trial, "EPIC," which was
designed to compare ponatinib directly against the leading CML
drug on the market, Gleevec.
In July 2012, ARIAD began the process of submitting a
rolling application to the FDA for limited approval to market
ponatinib. In conjunction with the application, ARIAD submitted
a July 2012 Interim Report consisting of data from the on-going
PACE 2 trial, with a cut-off date of July 23, 2012. The Center
for Drug Evaluation and Research ("CDER"), located within the FDA,
subsequently analyzed the data and issued a series of reports of
its own (collectively the "CDER Report").
By October 2012, ARIAD and the FDA began corresponding
in earnest about potential approval of ponatinib for limited
applications. As part of this process, ARIAD submitted a proposed
label. The FDA, however, rejected ARIAD's proposal, citing
concerns about adverse cardiovascular events and dosage
reductions. On December 14, 2012, after some additional back-and-
forth, ARIAD announced that the FDA had approved the marketing of
ponatinib on a limited basis. It was not all good news, however,
as the FDA required ARIAD to include a "black box" warning on
- 5 -
ponatinib's label about the risk of adverse cardiovascular events.
Following disclosure of these developments, ARIAD's per share
stock price fell from $23.88 to $18.93.
In the wake of the black box warning, ARIAD nevertheless
continued to publicly project confidence in ponatinib. But more
troubling news arose in October 2013. First, on October 9, ARIAD
informed investors that, based on additional data from an August
2013 Interim Report, it was pausing enrollment in all clinical
studies of ponatinib due to increased instances of medical
complications in the PACE 2 trial. Days later, on October 18,
ARIAD issued a Form 8-K and accompanying press release indicating
that it had agreed to halt the EPIC trial entirely. Finally, on
October 31, ARIAD announced that it was "temporarily suspending
the marketing and commercial distribution" of ponatinib at the
direction of the FDA. The market reacted harshly, and ARIAD's
stock price fell to $2.20 per share. The instant shareholder
lawsuit followed.
II. Procedural History
On the defendants' motion, the district court dismissed
the complaint in its entirety. As to the Exchange Act claims, the
court found that the complaint sufficiently alleged material
misrepresentations or omissions about ponatinib, but that it
failed to give rise to a "strong inference" of scienter as required
by the Private Securities Litigation Reform Act of 1995 ("PSLRA").
- 6 -
For the Securities Act claims, the district court held that the
complaint did not plausibly allege any material misrepresentations
or omissions in relation to ARIAD's January 2013 common stock
offering.
We review the grant of a motion to dismiss for failure
to state claim de novo.2 See Aldridge v. A.T. Cross Corp., 284
F.3d 72, 78 (1st Cir. 2002). In doing so, we assume the truth of
"the raw facts" set forth in the complaint. In re Bos. Sci. Corp.
Sec. Litig., 686 F.3d 21, 27 (1st Cir. 2012). By contrast, we
need not credit the plaintiffs' "legal conclusions or
characterizations." Id.
III. Exchange Act Claims
Section 10(b) of the Exchange Act "forbids the 'use or
employ, in connection with the purchase or sale of any security
. . . , [of] any manipulative or deceptive device . . . ." Tellabs
Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 318 (2007)
(alteration in original) (quoting 15 U.S.C. § 78j(b)). The SEC
has implemented this provision via Rule 10b-5, which proscribes,
among other things, "any untrue statement of a material fact" or
omission of any "material fact necessary in order to make the
statements made . . . not misleading." 17 C.F.R. § 240.10b-5. To
2
Because our review is de novo, we need not specifically
address each of the plaintiffs' quibbles with the district court's
analysis. See Fire & Police Pension Ass'n of Colo. v. Abiomed,
Inc., 778 F.3d 228, 241 & n.5 (1st Cir. 2015).
- 7 -
state a claim under Section 10(b) and Rule 10b-5, a plaintiff must
plead the following elements: (1) a material misrepresentation or
omission; (2) scienter; (3) a connection with the purchase or sale
of a security; (4) reliance; (5) economic loss; and (6) loss
causation. ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46, 58
(1st Cir. 2008) (citing Dura Pharm., Inc. v. Broudo, 544 U.S. 336,
341-42 (2005)).
The only two elements implicated by this appeal are the
existence of a material misrepresentation and scienter.
Ultimately, because we find that the complaint fails to adequately
plead scienter with respect to most of the alleged misstatements,
we need not determine whether those statements contained any
misrepresentations or, if so, whether such misrepresentations were
material.
We have, however, recognized that "the materiality and
scienter inquiries are linked." Abiomed, 778 F.3d at 240. This
is because the marginal materiality of an omitted fact "tends to
undercut the argument that defendants acted with the requisite
intent . . . in not disclosing" it. Id. at 242 (citation omitted).
Accordingly, we must bear in mind that a fact is material where
there is "a substantial likelihood that" its disclosure "would
have been viewed by the reasonable investor as having significantly
altered the total mix of information made available." Basic Inc.
v. Levinson, 485 U.S. 224, 231-32 (1988) (citation omitted).
- 8 -
The Supreme Court has described scienter as "a mental
state embracing intent to deceive, manipulate, or defraud."
Tellabs, 551 U.S. at 319 (citation omitted). The plaintiffs
correctly point out that scienter also encompasses "a high degree
of recklessness." Miss. Pub. Emps.' Ret. Sys. v. Bos. Sci. Corp.,
649 F.3d 5, 20 (1st Cir. 2011) (citation omitted). But, in this
context, recklessness requires "an extreme departure from the
standards of ordinary care, . . . which presents a danger of
misleading buyers . . . that is either known to the defendant or
is so obvious the actor must have been aware of it." Id. (citation
omitted).
At the pleading stage, the PSLRA requires plaintiffs to
"state with particularity facts giving rise to a strong inference
that the defendant acted with" scienter. 15 U.S.C. § 78u-
4(b)(2)(A) (emphasis added). "To qualify as 'strong' . . . an
inference of scienter must be more than merely plausible or
reasonable—it must be cogent and at least as compelling as any
opposing inference of nonfraudulent intent." Tellabs, 551 U.S. at
314. We have found this exacting standard satisfied where the
complaint "contains clear allegations of admissions, internal
records or witnessed discussions suggesting that at the time they
made the statements claimed to be misleading, the defendant
officers were aware that they were withholding vital information
or at least were warned by others that this was so." Bos. Sci.,
- 9 -
686 F.3d at 31. In imposing this heightened pleading standard,
Congress recognized and accepted the "[i]nherent" risk of leaving
"without remedy some wrongs that discovery or trial might have
disclosed." Id. at 32.
Here, ARIAD's alleged misstatements fall into two broad
categories: (1) those made before the FDA's December 14, 2012
limited approval of ponatinib and the corresponding disclosures;
and (2) those made after such approval. We address each of these
categories in turn below, and, with the exception of one pre-
approval statement, we agree with the district court that the
complaint fails to give rise to the required strong inference of
scienter. We also find the plaintiffs' allegations of insider
trading insufficient to resuscitate the inadequate fraud claims.
A. Pre-Approval
The first alleged misstatement identified during the
pre-approval period occurred in a December 11, 2011 press release
about the PACE 2 trial data. The release indicated that "[i]nitial
safety data show ponatinib to be well tolerated." It went on to
list the rates of some adverse events, including rash,
thrombocytopenia, dry skin, abdominal pain, headache, and
pancreatitis, but it did not mention the rate of cardiovascular
events. As required by the PSLRA, the complaint purports to
explain "why the statement [wa]s misleading," 15 U.S.C. § 78u-
4(b)(1), by referencing the CDER Report based on data collected
- 10 -
through July 23, 2012. The complaint identifies several similar
statements by ARIAD about the safety of ponatinib between December
2011 and mid-July 2012. The plaintiffs claim that each of these
statements was materially misleading in light of the data reflected
in the CDER Report.
But the plaintiffs' theory of fraud suffers from a
glaring omission. The complaint contains conclusory allegations
that the defendants possessed "contemporaneous[]" knowledge of
various facts in the CDER Report, including the 8% rate of serious
cardiovascular events, "based on their continuous monitoring of
the PACE 2 trial data." The plaintiffs do not, however, allege
any specific facts about when the defendants learned of these
adverse events or even when the adverse events occurred. Rather,
they impermissibly seek to establish fraud by hindsight,
suggesting that, as early as December 2011, the defendants must
have known about adverse events occurring up until the July 23,
2012 cut-off date. Not only does this theory defy logic, it also
ignores our caselaw's instruction that "[a] statement cannot be
intentionally misleading if the defendant did not have sufficient
information at the relevant time to form an evaluation that there
was a need to disclose certain information and to form an intent
not to disclose it." Biogen, 537 F.3d at 45; see also id. at 50
(finding complaint insufficient to support inference of scienter
where the plaintiffs "failed to allege when" the relevant adverse
- 11 -
events "became known"); Auto. Indus. Pension Tr. Fund v. Textron
Inc., 682 F.3d 34, 39 (1st Cir. 2012) (affirming dismissal where
"warnings by subordinates or expressions of concern by executives"
were "notably absent").
The complaint's allegations about access to the PACE 2
data do not fill this gap. Only one such allegation relates to
the pre-approval period, and it stands for the unremarkable
proposition that, as of May 9, 2012, ARIAD was "in the process of
collecting, QCing, [and] processing the data." The paragraph is
silent on the crucial questions of when the serious adverse events
occurred and when the defendants became aware of them.
In addition to statements about ponatinib's safety, the
complaint also cites various allegedly misleading statements about
dose reductions. For example, on December 12, 2011, Haluska,
ARIAD's Chief Medical Officer, told investors, "we haven't
quantified yet the number of dose interruptions or dose reductions"
in the PACE 2 study. The plaintiffs' theory of fraud follows a
familiar pattern: this statement was purportedly misleading
because of the defendants' contemporaneous knowledge of certain
facts in the CDER Report, including the fact that 73% of patients
required a dose interruption or dose reduction. Subsequent
paragraphs contain similar allegations. We are, however, left to
guess as to precisely when the defendants became aware of the dose
reductions.
- 12 -
For these reasons, we have little trouble concluding
that the complaint fails to create a compelling inference of
scienter with respect to statements made before the July 23, 2012
cut-off date for the CDER Report. Indeed, the plaintiffs come
close to conceding as much by alleging that the defendants
possessed knowledge of the relevant adverse events and dosage
reductions "[b]y no later than July 23, 2012."
Arguably, the analysis could be different for time
periods after that date if the defendants were familiar with the
data that ARIAD provided to the FDA. But the complaint contains
no such allegation. In fact, aside from a conclusory statement
that Haluska "participated in the creation" of ARIAD's July
submission, the complaint fails to indicate whether and to what
extent the defendants were involved in collecting or reviewing the
relevant data. Accordingly, we find the plaintiffs' allegations
insufficient to state a claim with respect to the purported
misstatements from July 23 through October 2012.
On October 25, 2012, the FDA sent an email to unspecified
individuals at ARIAD rejecting the company's proposed label for
ponatinib due to inadequate safety disclosures. The agency cited
the 8% rate of serious cardiovascular events in the PACE 2 trial
data, as well as the 73% dose reduction rate. A follow-up meeting
was held on November 1, 2012, which included FDA personnel,
Haluska, and Clackson, ARIAD's Chief Scientific Officer, among
- 13 -
others. After that meeting, the FDA directed ARIAD to submit a
revised label with a black box warning.
In light of these later communications with the FDA, the
plaintiffs' allegations are sufficient to support a strong
inference of scienter with respect to one particular material
misstatement.3 On December 11, 2012, an investment bank published
a report on ARIAD based on a breakfast meeting the previous day
with Chairman and CEO Berger, Haluska, and Clackson, among others.
The report stated, in pertinent part, that "management continues
to be optimistic about ponatinib's prospects for approval in the
U.S. . . . with a favorable label." It further indicated that the
drug's "profile continues to look very benign, with few worrisome
3 The plaintiffs point to two other purported misstatements
between October 25 and December 11, 2012. The complaint fails to
create an inference that these statements were knowingly false.
First, the plaintiffs cite Berger's November 7 response on an
analyst conference call, "I can't speak to what the label [for
ponatinib] is going to look like." Because ARIAD was, at the time,
in negotiations with the FDA about the label, this statement was
literally true. Nor was it materially misleading for Berger to
omit certain details of the company's interactions with the FDA.
See Abiomed, 778 F.3d at 244 (citing the need for "give and take"
with the regulator).
Second, the plaintiffs take issue with ARIAD's November 9,
2012 Form 10-Q, which indicated that there had been "no material
changes to the risk factors" included in the prior Form 10-K. Even
assuming that this statement was materially misleading, the
plaintiffs point to no allegation that Berger or CFO Fitzgerald,
the two defendants who signed the document, were involved in the
October 25 or November 1 communications with the FDA. Accordingly,
the complaint fails to support a compelling inference of scienter.
- 14 -
signals." The report cited pancreatitis as "the most prevalent"
serious adverse event (occurring in 5% of patients) and noted "low
rates of cardiovascular issues."
Assuming these allegations are true, it was knowingly or
recklessly misleading for Haluska and Clackson to express optimism
about ponatinib's chances for approval with a "favorable label"
weeks after learning that the FDA had rejected ARIAD's proposed
label. While management may have held out hope of achieving this
result, the expression of that hope without disclosure of recent
troubling developments created an impermissible risk of misleading
investors. See Zak v. Chelsea Therapeutics Int'l, Ltd., 780 F.3d
597, 610 (4th Cir. 2015) (finding "a strong inference that the
defendants either knowingly or recklessly misled investors by
failing to disclose critical information received from the FDA .
. . , while releasing less damaging information that they knew was
incomplete"). Similarly, after the FDA specifically noted the 8%
rate of serious cardiovascular events, it was knowingly or
recklessly misleading for ARIAD to cite pancreatitis as the most
prevalent serious adverse event. See Aldridge, 284 F.3d at 83
("[T]he fact that the defendants published statements when they
knew facts suggesting the statements were inaccurate or
misleadingly incomplete is classic evidence of scienter.").
ARIAD fails to develop any argument that these
misstatements were not material, and, in any event, we have little
- 15 -
difficulty concluding that disclosure of the FDA's concerns or the
rate of serious cardiovascular events with respect to ARIAD's
leading product would have altered the total mix of information
available to investors. For these reasons, we reverse the district
court's dismissal of the Section 10(b) and Rule 10b-5 claims
predicated upon this December 11, 2012 press release.4
B. Post-Approval
The plaintiffs' post-approval allegations rely on the
same type of fraud by hindsight theory that doomed the majority of
their pre-approval claims. It is undisputed that, on December 14,
2012, ARIAD disclosed to investors the 8% rate of serious
cardiovascular events as well as the FDA's requirement of a black
box warning. The complaint nonetheless identifies various
subsequent statements about ponatinib that were purportedly
misleading for failure to disclose an increase in the rate of
adverse events after the July 2012 cut-off date. More
specifically, the rate of serious cardiovascular events is said to
have increased from 8% to 11.8%. The alleged misstatements
occurred between March 1 and August 9, 2013, but the plaintiffs
rely on data collected through an unspecified date in August to
claim that those statements were fraudulent. Because the complaint
4
Because the district court dismissed the Section 10(b) and
Rule 10b-5 claims, it also dismissed the derivative Section 20(a)
claims without any additional analysis. We vacate that dismissal
with respect to the December 11, 2012 release.
- 16 -
fails to indicate when the adverse events occurred, let alone when
the defendants became aware of them, it fails to create a strong
inference of scienter.
Nor do the plaintiffs' allegations of access to post-
approval data get them over the PSLRA's pleading hurdle. To be
sure, these allegations are more extensive and detailed than their
pre-approval counterparts. But the plaintiffs still fail to allege
specifically when the defendants became aware of any adverse
events. See Police Ret. Sys. of St. Louis v. Intuitive Surgical,
Inc., 759 F.3d 1051, 1063 (9th Cir. 2014) (affirming dismissal
despite alleged access to undisclosed data absent "allegations
linking specific reports and their contents to the executives").
And, more fundamentally, the defendants self-evidently could not
have been aware of adverse events that had not yet occurred. The
complaint is silent with respect to the rate of adverse events at
the time that each of the alleged misstatements was made. This
omission is fatal where, as here, the collection of data may have
continued after the last of the purported misstatements and the
total increase was a relatively modest 3.8%.5
5 The plaintiffs cite the FDA's finding that, "[i]n some
patients," adverse events "occurred as early as 2 weeks" after
taking ponatinib. But the agency's indication that some patients
experienced adverse events as early as two weeks into therapy tells
us nothing about whether the rate of overall adverse events had
increased and, if so, by how much as of the relevant dates.
- 17 -
C. Insider Trading
The plaintiffs seek to bolster their fraud claims with
allegations of insider trading by the officer defendants. As an
initial matter, while such insider trading may be "probative of
scienter," it is not sufficient to establish an inference of
scienter on its own. Greebel v. FTP Software, Inc., 194 F.3d 185,
197-98 (1st Cir. 1999).
Here, during the pre-approval period, the complaint
alleges that Haluska, Clackson, and Fitzgerald sold "irregular
amounts of shares."6 These three defendants made their last pre-
approval trades on May 2, August 15, and October 1, 2012,
respectively. Thus, both Haluska and Clackson ceased pre-approval
sales more than a month and a half before the October 5 high-point
of ARIAD's share price. Accordingly, the timing of their trades
"does not appear very suspicious." Id. at 206. Fitzgerald, the
defendant who traded closest to that date, was ARIAD's CFO and the
least likely of the three to have been privy to material non-
public information about the clinical trials. Moreover, the
defendants' trades are readily explainable by the steady increase
in ARIAD's share price during the class period, which "create[d]
6 We note at the outset that the defendants' use of 10b5-1
trading plans, see 17 C.F.R. § 240.10b5-1(c), is not dispositive
in light of the plaintiffs' allegation that those plans were
executed after the beginning of the fraudulent scheme. See Emps.'
Ret. Sys. of Gov't of the V.I. v. Blanford, 794 F.3d 297, 309 (2d
Cir. 2015).
- 18 -
a substantial incentive for holders to sell" regardless of any
material non-public information. Local No. 8 IBEW Ret. Plan & Tr.
v. Vertex Pharm., Inc., No. 15-2250, 2016 WL 5682548, at *7 (1st
Cir. Oct. 3, 2016).
Plaintiffs' insider trading allegations with respect to
the post-approval period do not fare any better. For one thing,
the post-approval trades, by definition, occurred after the
December 14, 2012 disclosure of the black box warning and the
corresponding decline in share price. Additionally, Berger,
Fitzgerald, Haluska, and Clackson are all alleged to have entered
into the operative 10b5-1 plans within days of that disclosure.
At this early date, any information about an undisclosed increase
in the rate of serious adverse events would likely have been
minimal. Where, as here, the complaint is otherwise devoid of
facts supporting the defendants' knowledge of material non-public
information, these alleged insider sales are insufficient to
salvage the plaintiffs' fraud claims.
IV. Securities Act Claims
The second set of claims allege violations of Section 11
of the Securities Act stemming from a January 2013 common stock
offering. The Securities Act "was designed to provide investors
with full disclosure of material information concerning public
offerings." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 195 (1976).
Section 11 advances this goal by creating virtually strict
- 19 -
liability for any "untrue statement" or misleading omission of
material fact in a registration statement. 15 U.S.C. § 77k(a).
The right to sue under Section 11 is limited to "any
person acquiring such security." Id. Thus, "an action . . . may
be maintained only by those who purchase securities that are the
direct subject of the prospectus and registration statement."
Plumbers' Union Local No. 12 Pension Fund v. Nomura Asset
Acceptance Corp., 632 F.3d 762, 768 n.5 (1st Cir. 2011) (citation
omitted). But, in order to state a claim, the plaintiffs "need
not have purchased shares in the offering." In re Century Aluminum
Co. Sec. Litig., 729 F.3d 1104, 1106 (9th Cir. 2013). Rather,
"those who purchased shares in the aftermarket have standing to
sue provided they can trace their shares back to the relevant
offering." Id. (citing cases); see also, e.g., Krim v.
pcOrder.com, Inc., 402 F.3d 489, 495-96 & n.28 (5th Cir. 2005)
(citing cases). This requirement is satisfied where, for example,
"all of a company's shares have been issued in a single offering
under the same registration statement." Century, 729 F.3d at 1106;
see also Nomura, 632 F.3d at 766 (involving alleged misstatements
in offering documents for "trust certificates representing
mortgage-backed securities," each of which was associated with one
of two challenged registration statements).
- 20 -
This "statutory standing"7 inquiry becomes more
complicated where, as here, the company has issued shares under
multiple registration statements. In these circumstances, "the
plaintiff must prove that [his or] her shares were issued under
the allegedly false or misleading registration statement, rather
than some other registration statement." Century, 729 F.3d at
1106. The parties disagree about the import of this requirement
at the pleading stage. The plaintiffs cite cases for the
proposition that mere "general allegations" that their shares are
traceable to the offering in question are sufficient to avoid
dismissal. The defendants counter that these cases fail to account
appropriately for the Supreme Court's decisions in Bell Atlantic
Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556
U.S. 662 (2009). Because we agree with the defendants on this
point, we affirm the dismissal of the Section 11 claims.8
7
The parties refer to this issue as statutory standing, and
the district court correctly noted that it does not implicate
Article III. See Cooperman v. Individual Inc., 171 F.3d 43, 47
n.3 (1st Cir. 1999). Rather, the defendants' attack on the
sufficiency of the complaint is appropriately analyzed under Fed.
R. Civ. P. 12(b)(6). See Century, 729 F.3d at 1109.
8
The complaint also includes derivative claims under Section
15. See Shaw v. Dig. Equip. Corp., 82 F.3d 1194, 1201 n.2 (1st
Cir. 1996), superseded by statute on other grounds, 15 U.S.C.
§ 78u-4(b)(2). Because the Section 11 claims were properly
dismissed, we affirm the dismissal of the derivative claims as
well.
- 21 -
Twombly teaches that, in order to survive a motion to
dismiss, a complaint must include "enough facts to state a claim
to relief that is plausible on its face." 550 U.S. at 570. This
standard requires more than a mere "formulaic recitation of the
elements of a cause of action." Id. at 555; see also Iqbal, 556
U.S. at 681 (holding that "conclusory" allegations are "not
entitled to be assumed true"). Accordingly, "allegations that
merely parrot the relevant legal standard are disregarded."
Manning v. Bos. Med. Ctr. Corp., 725 F.3d 34, 43 (1st Cir. 2013).
Moreover, "[w]here a complaint pleads facts that are 'merely
consistent with' a defendant's liability, it 'stops short of the
line between possibility and plausibility of "entitlement to
relief."'" Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at
557).
We find this binding precedent difficult to square with
the plaintiffs' contention that general allegations of
traceability, without more, are sufficient at the pleading stage.
Indeed, traceability is an element of a Section 11 claim. See,
e.g., Nomura, 632 F.3d at 768 n.5; Century, 729 F.3d at 1106. And,
almost by definition, a general allegation that a plaintiff's
shares are traceable to the offering in question is nothing more
than a "formulaic recitation" of that element. Twombly, 550 U.S.
at 555. Accordingly, we agree with the other circuit that has
squarely addressed this issue and hold that such general
- 22 -
allegations alone are not sufficient to avoid dismissal. See
Century, 729 F.3d at 1107; see also Yates v. Mun. Mortg. & Equity,
LLC, 744 F.3d 874, 901 (4th Cir. 2014) (reaching same result under
the analogous, though not identical, Section 12(a)(2)).
The question now becomes whether the complaint sets
forth sufficient facts to plausibly suggest that the shares
purchased by the plaintiffs were issued as part of the January
2013 offering. The plaintiffs could have met this bar by pleading
that they "purchased their shares directly in the secondary
offering itself." Century, 729 F.3d at 1106. But the complaint
expressly precludes this possibility, instead alleging that the
named plaintiffs all bought their shares "on the open market."
Accordingly, they must plead sufficient facts to suggest that
"their shares, although purchased in the aftermarket, can be traced
back to the secondary offering." Id. About 15.3 million shares
were issued in connection with the January 2013 offering, but an
additional 166 million were already outstanding at that time.
Moreover, only one of the named plaintiffs bought on the day of
the offering and none of them paid the offering price. See Yates,
744 F.3d at 900 n.13 (noting price difference). In these
circumstances, the complaint fails to give rise to a plausible
inference that the plaintiffs' shares were issued as part of the
January 2013 offering. Indeed, the "'obvious alternative
explanation' is that they could instead have come from the pool of
- 23 -
previously issued shares." Century, 729 F.3d at 1108 (quoting
Twombly, 550 U.S. at 567).9
V. Conclusion
For the foregoing reasons we REVERSE the district
court's dismissal of the Section 10(b), Rule 10b-5, and Section
20(a) claims predicated upon the December 11, 2012 press release.
We otherwise AFFIRM the dismissal of the fraud claims. Similarly,
we AFFIRM the dismissal of the Section 11 and Section 15 claims.
The case is remanded for further proceedings consistent with this
opinion. The parties shall bear their own costs.
9 The complaint fails to allege traceability sufficient to
state a Section 11 claim for any member of the purported class;
accordingly, we need not address the lead plaintiffs' contention
that they should be permitted to pursue such a claim on behalf of
the class irrespective of their individual statutory standing.
- 24 -