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Northern District Of California Dismisses Securities Class Action Against Biopharmaceutical Company For Failure To Adequately Plead Scienter
05/13/2025On May 5, 2025, Judge Yvonne Gonzalez Rogers of the United States District Court for the Northern District of California granted a motion to dismiss a proposed class action asserting claims against a biopharmaceutical company (the “Company”) and certain of its officers (the “Individual Defendants”) under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5. Klobus v. Akero Therapeutics, Inc., No. 4:24-cv-02534-YGR (N.D. Cal. May 5, 2025). Plaintiffs alleged that defendants made misrepresentations regarding the population of clinical trials for a drug the Company was developing to treat nonalcoholic steatohepatitis (“NASH”). The Court granted defendants’ motion to dismiss without prejudice, holding that plaintiffs failed to adequately plead scienter.
Plaintiffs alleged that defendants repeatedly stated that the Company’s clinical trial enrolled only patients with biopsy-confirmed, NASH-induced cirrhosis, when, in fact, approximately 20% of participants allegedly were patients with a more severe and distinct type of cirrhosis called “cryptogenic cirrhosis.” Plaintiffs claimed that these alleged misstatements were material because the inclusion of other patients was contrary to Federal Drug Administration (“FDA”) guidance and relevant medical literature, and because investors would be less likely to purchase the Company’s stock if they knew that the Company’s trials included participants with cryptogenic cirrhosis.
The Court first found that the complaint sufficiently alleged that the supposed misstatements left the impression that the trial participants had a confirmed diagnosis of NASH-induced cirrhosis and thus that participants with cirrhosis of different origins would be excluded. Although the Court did dismiss some of the alleged misstatements as inactionable opinions, the Court rejected defendants’ categorical argument that any statements about NASH diagnoses were statements of opinion involving “judgment calls” based on “subjective and uncertain assessments of clinical data.” The involvement of judgment in a diagnosis, according to the Court, did not transform every diagnostic statement into an opinion, “especially where the speaker expresses certainty about the diagnosis.” Cases the Court described as addressing statements about how companies “felt about clinical data” were held to be distinguishable.
Although the Court also found that the complaint adequately pleaded loss causation, it held that plaintiffs failed to plead facts sufficient to give rise to a strong inference of scienter. The complaint claimed that defendants made misleading statements so that the Company could raise the funds needed to complete the trials for the drug, which was the Company’s sole asset. But the Court noted that an inference of scienter nevertheless was not warranted because defendants “always knew they would ultimately have to report [the trial] results in a detailed enough fashion to include the trial design”—and defendants did, in fact, disclose the inclusion of patients with cryptogenic cirrhosis 36 weeks into the 96-week trial. The Court was further persuaded by defendants’ argument that FDA filings “often . . . contain a lot more detail that is not disclosed to the general public and certainly not disclosed at the beginning of the announcement of a study,” concluding that plaintiffs’ theory that defendants acted with scienter to conceal the nature of the study was no more compelling than the opposing inference that defendants planned to disclose additional details about participants later on. The Court also noted the lack of confidential witness allegations.
Having found that plaintiffs failed to adequately plead scienter, the Court dismissed the derivative control person claims against the Individual Defendants under Section 20(a). The Court granted plaintiffs leave to further amend their complaint.
