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Southern District Of California Dismisses Proposed Securities Class Action Against Celladon Finding Plaintiff Failed To Meet The PSLRA’s Heightened Pleading Standards
10/17/2016On October 7, 2016, Judge Anthony J. Battaglia of the United States District Court for the Southern District of California dismissed a putative class action against Celladon Corporation and two of its executives. Tadros v. Celladon Corporation et al., No. 15-cv-01458 (S.D. Cal. Oct. 7, 2016). The Court held that plaintiff failed to meet the heightened pleading requirements under the Private Securities Litigation Reform Act of 1995 (“PSLRA”) in alleging a material misrepresentation or omission and scienter in support of its securities fraud claims under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Securities and Exchange Commission Rule 10b-5. Plaintiff alleged that Celladon and its executives intentionally misled investors through false or misleading statements regarding the success of early clinical trials of Mydicar, the company’s prospective cardiovascular drug. According to plaintiff, Celladon’s stock price declined by 80% after announcements by the company in April 2015 that Mydicar failed to meet its goals in the second phase of the trial. Plaintiff brought this action in July 2015.
The Court here found that plaintiff, an investor in Celladon, provided “a great deal of facts but fail[ed] to sufficiently plead with particularity,” as required by the PSLRA, “how each statement is allegedly misleading.” In so finding, the Court rejected plaintiff’s assertion that the company’s statements regarding the “encouraging results” of Mydicar and its “unique characteristics” amounted to materially false and misleading statements. The Court emphasized that statements such as these were “generalized statements of corporate optimism” and constituted mere puffery not actionable as a material misstatement or omission.
Turning to the allegations concerning scienter, the Court found that plaintiff had not provided any specific factual allegations as to defendants’ purported intent to manipulate clinical trials or deceive the public. The Court found that, absent additional specific allegations regarding intent, plaintiff’s allegations that the company terminated a top executive shortly after the stock price dropped and that insider stock sales occurred during the purported class period were insufficient to meet the PSLRA’s heightened pleading standard. The Court further noted that management changes are common after stock tumbles, and intent could not be inferred from insider stock sales without a comprehensive analysis of the insider’s previous stock sale history. Finding that “[p]laintiff’s repetitive and conclusory analysis in stating an action for misrepresentation and scienter, though voluminous, do not plead with the particularity required” to survive a motion to dismiss, the Court dismissed plaintiff’s complaint without prejudice with leave to amend.
The decision serves as a reminder that unspecific and conclusory allegations, no matter how voluminous, are insufficient to plead fraud claims under the Exchange Act. Defendants may also point to this decision in defending against claims based on optimistic corporate statements regarding future performance – including, in particular, in the context of ongoing clinical trials, as to which disappointing results often trigger securities litigation.
