• Northern District Of California Certifies Securities Class Action Based On Damages Model That Accounted For Varied Price Impact That Correlated With Plaintiffs’ Leakage Theory

  12/24/2024
  On December 17, 2024, Judge Vince Chhabria of the United States District Court for the Northern District of California granted a renewed motion for class certification in a securities action against a majority shareholder of a biotechnology company (the “Company”) under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. In re Vaxart, Inc. Sec. Litig., 20-cv-05949 (N.D. Cal. Dec. 17, 2024). Before plaintiffs moved for class certification, they settled with the Company and certain of its director and officer defendants, leaving the majority shareholder hedge fund and two directors appointed to the Company board by the fund as defendants. The Court, which previously denied certification and allowed plaintiffs to renew their motion to address the deficiencies identified by it, held that plaintiffs satisfied Rule 23(b)(3)’s predominance requirement with their expert damages model.
  
  Plaintiffs allege that the Company, which was in the business of developing vaccines, misled investors about its COVID-19 vaccine development initiatives and its participation in a federal government-funded program to develop COVID-19 vaccines (the “Program”). Specifically, the Company allegedly (i) touted that its partnership with a manufacturer and distributor would enable it to produce “a billion or more COVID-19 vaccine doses per year” when it had executed a memorandum of understanding with a manufacturer that lacked any FDA certifications or technical capacity to produce that amount of doses, and (ii) issued a press release with a title that allegedly misled the investors that it was selected as part of the Program, where the text below stated that it was participating in a separate study that left unclear whether it received any government funding (it did not). Plaintiffs further allege that the hedge fund defendant sold nearly all of its shares when the Company’s stock price went up on the purportedly misleading news and that the truth “leaked” into the market over several weeks including based on the text of the press releases themselves, the Company’s SEC filings, and a New York Times article that stated that the Company never had negotiations with the federal government regarding the Program. In denying plaintiffs’ initial class certification motion, the Court held that the evidence presented by plaintiffs did not match their “leakage” theory because it failed to consider that the market could have started adjusting right away and that plaintiffs’ expert’s damages model assumed that the stock price was inflated to the same extent between the different alleged corrective disclosures in the putative class period. According to the Court, this meant that plaintiffs failed to show that common issues predominated over individual issues.
  
  In the order granting the renewed motion for class certification, the Court held that plaintiffs fixed these problems. Specifically, the Court held that plaintiffs’ revised damages model reflected levels of inflation that varied throughout the class period in a way that damages could be apportioned on a class-wide basis and that it had factual bases for its conclusions of the varying impact on stock prices. In so holding, the Court rejected defendants’ argument that plaintiffs’ model failed to disaggregate the price impact of the undisputedly true portions of the press releases at issue from the impact of the allegedly fraudulent parts. The Court stated that whether some portion of the stock price increase could be attributed to the true portions of the press releases were merits issues that could later be factored into the damages calculation based on a jury’s finding. Similarly, the Court rejected defendants’ argument that the model incorrectly attributed all stock declines to the revelation of the alleged fraud, which it said “amounts to an argument that the plaintiffs have failed to establish loss causation.” According to the Court, plaintiffs did not need to do so for class certification.
  Categories: Class Certification, Predominance
  

Links & Downloads

• In re Vaxart, Inc. Sec. Litig.