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First Circuit Dismisses Securities Act Claims Under Rule 12(b)(6) For Failure To Plead Sufficient Facts To Plausibly Suggest Purchased Shares Are Traceable To Allegedly Misleading Registration Statement
12/05/2016On November 28, 2016, in In re ARIAD Pharm., Inc. Sec. Litig., —F.3d—, 2016 WL 6933788 (1st Cir. 2016), the United States Court of Appeals for the First Circuit affirmed the dismissal of securities class action claims brought against ARIAD Pharmaceuticals, Inc. (“ARIAD”) and certain individuals on the bases that (a) for all but one of the claims brought under the Securities Exchange Act of 1934, plaintiffs had failed to plead that the defendants had sufficient contemporaneous knowledge of facts underlying the alleged misrepresentations to establish a strong inference of scienter and (b) plaintiffs had failed to allege specific facts that plausibly suggested that their open-market share purchases could be “traced” to an allegedly misleading Registration Statement and, therefore, plaintiffs had not alleged a necessary element of their claims under the Securities Act of 1933. The unanimous opinion was authored by Chief Judge Howard and joined by retired U.S. Supreme Court Justice Souter.
Plaintiffs alleged that ARIAD made false statements concerning a drug ARIAD was developing to treat a unique form of leukemia and, in particular, with regard to how the drug performed in various stages of clinical testing and the status of the FDA’s approval of the drug’s label. The First Circuit affirmed that statements concerning the drug’s performance in clinical trials did not establish that ARIAD intended to deceive investors because plaintiffs did not specifically allege that ARIAD had discovered the results of those trials before issuing the alleged misstatements. For instance, while plaintiffs alleged generally that ARIAD had learned in the course of clinical testing that patients experienced negative side effects, plaintiffs had failed to allege how such knowledge was obtained or “any specific facts about when the defendants learned of these adverse [side effects] or even when the [side effects] occurred.” 2016 WL 6933788, at *4. The Court held similarly with regard to the bulk of such allegations but reversed the district court with regard to one misstatement. As to that, the Court held that, in light of plaintiffs’ allegations that the FDA had informed ARIAD it was rejecting the company’s proposed label and requiring additional safety disclosures, alleged statements by ARIAD executives to a Wall Street analyst that they were optimistic the drug would be approved by the FDA with a “favorable label” constituted an “expression of that hope without disclosure of recent troubling developments [that] created an impermissible risk of misleading investors” and was knowingly or recklessly misleading. Id. at *5.
The Court further held that plaintiffs’ Securities Act claims were properly dismissed because plaintiffs failed to plead “statutory standing.” ARIAD had 166 million shares outstanding at the time of the challenged issuance and plaintiffs made only “general allegations that their shares are traceable to the offering in question,” thereby failing to satisfy the requirement of Bell Atlantic Corp. v. Twombly, 550 U.S. 554 (2007), that a complaint must include “enough facts to state a claim to relief that is plausible on its face.” The Court noted that plaintiffs could have met this burden by pleading either that they purchased shares directly in the challenged offering or “by pleading facts sufficient to suggest” that their shares could be traced to that particular offering. Instead, plaintiffs’ allegations suggested the contrary: they purchased shares in the open market, did not pay the offering price, and largely purchased shares on different dates from the offering.
This decision provides a prudent reminder that executives must be mindful of the context in which they address business developments, as their statements may be closely scrutinized at a later time. It also shows the importance of studying shareholder plaintiffs’ allegations regarding how they acquired shares when defending against Securities Act claims.
