Filed: Mar. 16, 2015
Latest Update: Mar. 02, 2020
Summary: PUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 13-2370 ROMAN ZAK, Individually and On Behalf of All Others Similarly Situated, Plaintiff - Appellant, and CAMERON MCINTYRE, Individually and On Behalf of All Others Similarly Situated Plaintiff, v. CHELSEA THERAPEUTICS INTERNATIONAL, LTD.; SIMON PEDDER; WILLIAM D. SCHWIETERMAN, Defendants – Appellees, and L. ARTHUR HEWITT; J. NICK RIEHLE, Defendants. Appeal from the United States District Court for the Western District of North
Summary: PUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 13-2370 ROMAN ZAK, Individually and On Behalf of All Others Similarly Situated, Plaintiff - Appellant, and CAMERON MCINTYRE, Individually and On Behalf of All Others Similarly Situated Plaintiff, v. CHELSEA THERAPEUTICS INTERNATIONAL, LTD.; SIMON PEDDER; WILLIAM D. SCHWIETERMAN, Defendants – Appellees, and L. ARTHUR HEWITT; J. NICK RIEHLE, Defendants. Appeal from the United States District Court for the Western District of North ..
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PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 13-2370
ROMAN ZAK, Individually and On Behalf of All Others
Similarly Situated,
Plaintiff - Appellant,
and
CAMERON MCINTYRE, Individually and On Behalf of All Others
Similarly Situated
Plaintiff,
v.
CHELSEA THERAPEUTICS INTERNATIONAL, LTD.; SIMON PEDDER;
WILLIAM D. SCHWIETERMAN,
Defendants – Appellees,
and
L. ARTHUR HEWITT; J. NICK RIEHLE,
Defendants.
Appeal from the United States District Court for the Western
District of North Carolina, at Charlotte. Max O. Cogburn, Jr.,
District Judge. (3:12-cv-00213-MOC-DCK)
Argued: December 10, 2014 Decided: March 16, 2015
Before TRAXLER, Chief Judge, and, KEENAN and THACKER, Circuit
Judges.
Vacated and remanded by published opinion. Judge Keenan wrote
the opinion, in which Chief Judge Traxler joined. Judge Thacker
wrote a separate dissenting opinion.
ARGUED: Richard William Gonnello, FARUQI & FARUQI, LLP, New
York, New York, for Appellant. Barry M. Kaplan, WILSON SONSINI
GOODRICH & ROSATI, Seattle, Washington, for Appellees. ON
BRIEF: Lee M. Whitman, Tobias S. Hampson, WYRICK ROBBINS YATES &
PONTON LLP, Raleigh, North Carolina; Gregory L. Watts, Seattle,
Washington, Ignacio E. Salceda, Cheryl W. Foung, WILSON SONSINI
GOODRICH & ROASATI, Palo Alto, California, for Appellees Chelsea
Therapeutics International, Ltd., Simon Pedder, and William D.
Schwieterman.
2
BARBARA MILANO KEENAN, Circuit Judge:
The plaintiffs in this case claim that Chelsea Therapeutics
International, LTD. (Chelsea) and several of its corporate
officers 1 (collectively, the defendants) violated Section 10(b)
of the Securities Exchange Act of 1934 (the Exchange Act), 15
U.S.C. § 78j(b). 2 Chelsea stockholder Roman Zak, both
individually and as a class representative for other investors
(the plaintiffs), alleged that the defendants made materially
misleading statements and omissions about the development and
likelihood of regulatory approval for a new drug, Northera.
After considering the defendants’ motion to dismiss filed under
Federal Rule of Civil Procedure 12(b)(6), the district court
dismissed the complaint, holding that the plaintiffs’
allegations were insufficient as a matter of law to establish
that the defendants acted with the required scienter.
On appeal, the plaintiffs contend that the district court
committed two errors. The asserted errors are: (1) the court’s
1
The complaint named as individual defendants Dr. Simon
Pedder, President and Chief Executive Officer; Dr. William
Schwieterman, Vice President and Chief Medical Officer; Dr.
Arthur Hewitt, Vice President and Chief Scientific Officer; and
Mr. Nick Riehle, Vice President and Chief Financial Officer.
However, Dr. Hewitt and Mr. Riehle are not parties to this
appeal.
2
In a derivative claim, the plaintiffs also alleged that
the individual defendants violated Section 20(a) of the Exchange
Act, 15 U.S.C. § 78t(a).
3
consideration of certain documents filed with the Securities and
Exchange Commission (SEC) that were submitted as exhibits with
the defendants’ motion to dismiss; and (2) the court’s
determination that the plaintiffs’ allegations of scienter were
legally insufficient.
Upon our review, we hold that the district court erred in
taking judicial notice of the challenged documents filed with
the SEC, because those documents did not relate to the contents
of the complaint. We further hold that this error was not
harmless, because the court incorrectly construed these
documents as supporting its holding that the plaintiffs’
allegations of scienter were legally insufficient. Finally, we
hold that based on the defendants’ failure to disclose critical
information about the weaknesses of the new drug application,
the plaintiffs’ allegations were sufficient to support a strong
inference of scienter. We therefore vacate the district court’s
judgment dismissing the plaintiffs’ complaint and remand the
case for further proceedings.
I.
The plaintiffs alleged in their pleadings the following
facts, which we accept as true in our review of the district
court’s dismissal of the complaint under Federal Rule of Civil
Procedure 12(b)(6). Matrix Capital Mgmt. Fund, LP v.
4
BearingPoint, Inc., 576 F.3d 172, 176 (4th Cir. 2009) (citing
Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U.S. 308, 322
(2007)). In 2006, Chelsea began its effort to gain approval
from the Food and Drug Administration (FDA) concerning the right
to market the drug Northera 3 as a treatment for symptomatic
neurogenic orthostatic hypotension (NOH). NOH is a condition in
which a dramatic drop in blood pressure occurs when a person
stands. This drop in blood pressure causes symptoms such as
dizziness, impaired vision, fatigue, weakness, nausea, and an
inability to think clearly. NOH is associated with the presence
of various disorders including Parkinson’s disease, multiple
systems atrophy, and pure autonomic failure.
After considering the “significant unmet need” for a
clinically beneficial treatment of symptomatic NOH, the FDA
assigned Northera “orphan drug status.” Such status provided
Chelsea with seven years of marketing exclusivity, and reduced
certain time and expense requirements related to clinical trials
mandated for FDA approval of the drug.
Before submitting its “new drug application” to the FDA,
Chelsea conducted numerous clinical trials with certain
“endpoints,” or goals, to demonstrate the drug’s efficacy and
3
The drug’s trade name is droxidopa.
5
safety. As relevant to this appeal, Chelsea conducted four
efficacy trials, namely, Studies 301, 302, 303, and 306. 4
Studies 301 and 302 began in 2008. Both those studies had
the same general efficacy endpoint of demonstrating a
statistically significant effect on lightheadedness and
dizziness for individuals suffering from NOH. The endpoint for
Study 301 was set forth in a “special protocol assessment”
(SPA), which was an agreement between Chelsea and the FDA that
the study design, trial size, and clinical goals could support
regulatory approval. The SPA involving Study 301 also stated
that the FDA expected two successful efficacy studies before it
would grant regulatory approval of the new drug.
The first study to conclude, Study 302, failed to meet its
primary endpoint. Later documents showed that the results of
Study 302 “clearly . . . dr[e]w the efficacy of [the drug] into
question,” and demonstrated that symptoms worsened for those
individuals taking the drug.
After Chelsea announced to investors the disappointing
results from Study 302, Chelsea petitioned the FDA to modify the
SPA’s endpoint for Study 301, which was ongoing. In November
2009, Chelsea representatives met with FDA officials, and later
4
Chelsea also conducted clinical trials to establish the
drug’s safety, but the results of those trials are not directly
relevant to our analysis in this appeal.
6
informed investors that the FDA had agreed to permit Chelsea to
use a different assessment scale for Study 301 than was used in
Study 302. The FDA officials also had recommended at the
November 2009 meeting that Chelsea submit “a confirmatory
pivotal study to support” the new drug application, because of
the failed results in Study 302. Based on this additional
recommendation, Chelsea announced plans to initiate a new
clinical trial, Study 306, which would involve an eight-week
treatment period.
In September 2010, Chelsea announced that Study 301 had
concluded, and successfully had met its revised endpoint by
showing a statistically significant improvement in participants’
symptoms. However, Study 301, which employed a treatment period
of only one week, was the sole efficacy study conducted by
Chelsea that met its primary endpoint. Study 303, which
included significantly longer treatment periods than Studies 301
and 302, did not meet its endpoint, and failed to demonstrate
that the drug provided any “duration effect” on symptoms. Study
306, which also included a significantly longer treatment
period, was abandoned after an interim analysis indicated that
the study would not meet its endpoint. 5
5
Study 306 was later continued with a revised endpoint,
focusing on the prevention of falls in patients suffering from
(Continued)
7
On December 10, 2010, Chelsea met with FDA officials to
assess the viability of submitting a new drug application based
on Study 301 (the December 2010 meeting). During the December
2010 meeting, FDA officials again warned Chelsea that a single
successful study typically was not sufficient to support
approval of a new drug. Nevertheless, Chelsea announced that
the FDA had “agreed” that Chelsea’s new drug application for
Northera could be submitted based on data from Study 301, the
only study to meet its primary endpoint, and data from Study
302, which had not met its primary endpoint, without the need
for any further efficacy studies.
During a conference call held with Chelsea investors, Dr.
Simon Pedder, Chelsea’s President and Chief Executive Officer,
described the December 2010 meeting as a “successful outcome”
that “reflect[ed] the strength of the data” generated by
Chelsea’s drug development program, and “mark[ed] a significant
step forward for Chelsea.” Dr. Pedder also stated that the FDA
officials had clarified “that additional efficacy studies were
not required” for a new drug application filing. On the same
conference call, Dr. William Schwieterman, Chelsea’s Vice
President and Chief Medical Officer, represented that after the
Parkinson’s disease, but the results of the study would not be
available until 2012.
8
December 2010 meeting, Chelsea was “very pleased” with the FDA’s
responses to Chelsea’s questions about its application and
supporting data. After these statements concerning the December
2010 meeting, Chelsea’s stock price rose about 28 percent.
In September 2011, Chelsea announced that it had submitted
to the FDA its new drug application based on purportedly
“robust” efficacy data from Studies 301 and 302. However, as
later observed by the FDA, these studies involved treatment
periods of only one week.
In accordance with the FDA’s initial evaluation process for
new drug applications, an FDA staff member prepared a briefing
document in advance of the meeting of the FDA’s Cardiovascular
and Renal Drugs Advisory Committee (the advisory committee),
which was held to review Chelsea’s application. The briefing
document included the staff member’s recommendation against
approval of Northera, which recommendation was based in part on
Chelsea’s failure to demonstrate that the drug had a “durable
effect (i.e., more than 4 weeks).”
On February 13, 2012, eight days before the FDA briefing
document was made available to the public, Chelsea issued a
press release. In the release, Chelsea stated that it was in
“receipt of [the] briefing document,” and that “several lines of
inquiry . . . have emerged as significant components of the
benefit-risk analysis of Northera,” including that Chelsea’s
9
drug development program “may not adequately establish a durable
treatment effect as a result of the short duration of” the
clinical trials. Notably, however, Chelsea’s press release did
not disclose that the FDA briefing document concluded with the
recommendation that Northera not be approved. Also in that
release, Chelsea stated that the advisory committee would review
the application on February 23, 2012. Finally, the release
included a website address where the FDA briefing document later
would be made available.
After the February 13, 2012 press release issued, Chelsea’s
stock price dropped about 37.5 percent. When the briefing
document became public eight days later on February 21, 2012,
Chelsea’s stock price dropped an additional 21 percent.
On February 23, 2012, however, the FDA advisory committee
announced its non-binding recommendation in favor of approving
Northera as a new drug. Several members of the advisory
committee raised the same concerns outlined in the staff
briefing document. Although the advisory committee chairperson
voted in favor of approving the drug, he nevertheless stated,
“virtually all [members of the advisory committee] agree that”
the failed studies “do not provide confirmatory evidence of
benefit. And the primary study, [Study] 301[,] also did not
provide evidence regarding the duration of effect in any direct
way.”
10
On March 28, 2012, the FDA denied the new drug application.
The FDA provided its decision in a “complete response letter,”
stating, among other things, that the FDA required an additional
successful study to support “durability of effect.”
About a week after the FDA’s decision, the initial
complaint in this case was filed. The plaintiffs later filed a
consolidated class action complaint (the complaint), asserting
violations of Section 10(b) of the Exchange Act and SEC Rule
10b-5, 17 C.F.R. § 240.10b-5 (Rule 10b-5). In their complaint,
the plaintiffs, who purchased Chelsea stock between November 3,
2008 and March 28, 2012 (the class period), asserted numerous
claims including that the defendants misled investors to believe
that the FDA would approve Northera based on the results of only
one successful efficacy study, even though the FDA repeatedly
had warned Chelsea that two successful studies and evidence of
“duration of effect” would be necessary for approval of the new
drug. In their complaint, the plaintiffs identified dozens of
allegedly misleading statements or material omissions by the
defendants.
In response, the defendants filed a motion to dismiss the
complaint under Rule 12(b)(6), contending that the complaint
failed to show that the defendants made any materially false
statements or omissions, and that any such statements or
omissions were not made with the required scienter. The
11
defendants attached to their motion several exhibits and asked
the court to take judicial notice of them.
The exhibits relevant to this appeal include three
documents that were filed with the SEC (collectively, the SEC
documents). Two of these documents are SEC “Form 4” reports,
filed by Dr. Schwieterman as the “Reporting Person,” showing
that while employed as a corporate officer he made two purchases
of Chelsea stock during the class period.
The third document submitted by the defendants, a
“Definitive Proxy Statement” that Chelsea filed with the SEC,
listed the amount of Chelsea stock shares held by the company’s
officers at the end of February 2012, near the end of the class
period. The Proxy Statement showed that Dr. Pedder owned 2.8
percent of all shares of Chelsea stock, while other officers
owned lesser amounts of Chelsea stock. However, the Proxy
Statement did not reflect whether any of these stock holdings
had been acquired or sold during the class period.
At a hearing on the motion to dismiss, the defendants
represented that none of the Chelsea officers had sold any
shares of Chelsea stock during the class period. The defendants
argued that the absence of such sales undermined any inference
of scienter on the part of the defendants. The plaintiffs
objected to the court’s consideration of the SEC documents,
asserting that the record did not show definitively “whether any
12
individual purchased stock or sold stock during the class
period” because there had not been any discovery in the case.
At the conclusion of the hearing, the district court took
judicial notice of the SEC documents, and granted the
defendants’ motion to dismiss. Applying the heightened pleading
standards of the Private Securities Litigation Reform Act
(PSLRA), 15 U.S.C. § 78u-4(b)(2), the court held that the
plaintiffs’ securities fraud claims failed because the
plaintiffs did not plead allegations sufficient to support a
strong inference of scienter.
The district court concluded that although the defendants’
statements to investors during the class period “may have been
overly optimistic about the [likelihood of the] FDA approving
Northera,” those statements did not demonstrate a strong
inference of scienter for two reasons. First, the court
observed that the defendants provided many warnings to investors
regarding the sufficiency of the new drug application.
Second, the court found that when weighing the competing
inferences regarding scienter, “the most glaring” inference was
“the fact that none of the individual defendants sold stock
during the class period.” (Emphasis in original). The court
concluded that the lack of stock sales “tip[ped] the scales in
favor of defendant[s’] motion” to dismiss, rendering the
plaintiffs’ allegations insufficient as a matter of law to
13
establish the required inference of scienter. After the
district court entered its order dismissing the case with
prejudice, the plaintiffs filed this timely appeal.
II.
In addressing the plaintiffs’ arguments, we first state the
applicable standard of review. We consider de novo the district
court’s dismissal of the plaintiffs’ complaint under Federal
Rule of Civil Procedure 12(b)(6). Wag More Dogs, LLC v. Cozart,
680 F.3d 359, 364 (4th Cir. 2012).
A.
The plaintiffs first argue that the district court erred by
considering the SEC documents submitted by the defendants that
were not integral to the complaint, and by concluding based on
those documents that none of the individual defendants sold
Chelsea stock during the class period. According to the
plaintiffs, the district court’s improper consideration and
incorrect interpretation of these documents contributed to the
court’s erroneous conclusion that the defendants failed to plead
sufficient facts supporting a strong inference of scienter.
In response, the defendants contend that the district court
properly considered the SEC documents submitted with their
motion to dismiss. Arguing that courts “routinely examine” SEC
filings at the pleading stage of securities fraud litigation,
14
the defendants assert that the district court did not err in
taking judicial notice of the contents of the two Form 4
exhibits and the Proxy Statement exhibit. The defendants submit
that these documents supported the district court’s findings
that the individual defendants failed to sell shares of Chelsea
stock, and did not knowingly or recklessly make misleading
statements. We disagree with the defendants’ arguments.
1.
As an initial matter, we set forth general legal principles
involving securities fraud claims that are pertinent to this
appeal. We also review principles addressing the scienter
required for such claims.
The Exchange Act and related regulations ensure that public
companies release information that will permit “investors to
make informed investment decisions.” Yates v. Mun. Mortg. &
Equity, LLC, 744 F.3d 874, 884 (4th Cir. 2014) (citing Taylor v.
First Union Corp. of S.C.,
857 F.2d 240, 246 (4th Cir. 1988)).
Under Section 10(b) of the Act, companies are prohibited from
using “any manipulative or deceptive device or contrivance” in
connection with the sale of a security in violation of SEC
rules. See 15 U.S.C. § 78j(b). Pursuant to regulatory
proscription in Rule 10b-5, the following conduct is unlawful in
connection with the sale of a security:
15
To make any untrue statement of a material fact or to
omit to state a material fact necessary in order to
make the statements made, in the light of the
circumstances under which they were made, not
misleading . . . .
17 C.F.R. § 240.10b-5(b).
Generally, a plaintiff asserting a claim under Section
10(b) must establish: “(1) a material misrepresentation or
omission by the defendant; (2) scienter; (3) a connection
between the misrepresentation or omission and the purchase or
sale of a security; (4) reliance upon the misrepresentation or
omission; (5) economic loss; and (6) loss causation.” Yates,
744 F.3d at 884 (citation omitted); see Matrixx Initiatives,
Inc. v. Siracusano,
131 S. Ct. 1309, 1322 (2011). Because the
district court dismissed the plaintiffs’ complaint solely based
on the sufficiency of the allegations of scienter, our review is
limited to that one element of the plaintiffs’ claims.
To demonstrate scienter, a plaintiff must show that the
defendant acted with “a mental state embracing intent to
deceive, manipulate, or defraud.” Tellabs, 551 U.S. at 319
(citation omitted). Allegations of reckless conduct can satisfy
the level of scienter necessary to survive a motion to dismiss.
See Matrix
Capital, 576 F.3d at 181. Reckless conduct
sufficient to establish a strong inference of scienter is
described as “severe,” Ottman v. Hanger Orthopedic Grp., Inc.,
353 F.3d 338, 344 (4th Cir. 2003), or conduct that is “so highly
16
unreasonable and such an extreme departure from the standard of
ordinary care as to present a danger of misleading the plaintiff
to the extent that the danger was either known to the defendant
or so obvious that the defendant must have been aware of it.”
Matrix Capital, 576 F.3d at 181 (citation and internal quotation
marks omitted).
Claims of securities fraud are subject to a heightened
pleading standard under the PSLRA. Yates, 744 F.3d at 885.
Under this heightened pleading standard, the allegations of a
securities fraud claim must “state with particularity facts
giving rise to a strong inference that the defendant acted with
the required state of mind” regarding the acts allegedly
violating the Exchange Act. 15 U.S.C. § 78u-4(b)(2). To
evaluate the strength of scienter inferences, courts engage in a
comparative analysis.
Yates, 744 F.3d at 885; see
Tellabs, 551
U.S. at 326-27. “[A]n inference of scienter can only be strong
. . . when it is weighed against the opposing inferences that
may be drawn from the facts in their entirety.”
Yates, 744 F.3d
at 885 (quoting Cozzarelli v. Inspire Pharms. Inc.,
549 F.3d
618, 624 (4th Cir. 2008)).
After comparing the “malicious and innocent inferences
cognizable from the facts pled,” a complaint will not be
dismissed so long as “the malicious inference is at least as
compelling as any opposing innocent inference.” Id. (quoting
17
Zucco Partners, LLC v. Digimarc Corp.,
552 F.3d 981, 991 (9th
Cir. 2009)). In evaluating these inferences, we consider the
scienter allegations holistically and accord those allegations
“the inferential weight warranted by context and common sense.”
Matrix
Capital, 576 F.3d at 183 (citing
Cozzarelli, 549 F.3d at
625-26).
2.
In view of these principles, we turn to address the
plaintiffs’ claims that the district court erred in its scienter
analysis by considering the SEC documents submitted by the
defendants that were not integral to the complaint. Generally,
when a defendant moves to dismiss a complaint under Rule
12(b)(6), courts are limited to considering the sufficiency of
allegations set forth in the complaint and the “documents
attached or incorporated into the complaint.” E.I. du Pont de
Nemours & Co. v. Kolon Indus., Inc., 637 F.3d 435, 448 (4th Cir.
2011); see Clatterbuck v. City of Charlottesville,
708 F.3d 549,
557 (4th Cir. 2013). Consideration of extrinsic documents by a
court during the pleading stage of litigation improperly
converts the motion to dismiss into a motion for summary
judgment. E.I. du Pont de Nemours &
Co., 637 F.3d at 448. This
conversion is not appropriate when the parties have not had an
opportunity to conduct reasonable discovery. Id.; see Fed. R.
Civ. P. 12(b), 12(d), and 56.
18
Courts therefore should focus their inquiry on the
sufficiency of the facts relied upon by the plaintiffs in the
complaint. Am. Chiropractic Ass’n v. Trigon Healthcare, Inc.,
367 F.3d 212, 234 (4th Cir. 2004). Consideration of a document
attached to a motion to dismiss ordinarily is permitted only
when the document is “integral to and explicitly relied on in
the complaint,” and when “the plaintiffs do not challenge [the
document’s] authenticity.”
Id. (quoting Phillips v. LCI Int’l
Inc.,
190 F.3d 609, 618 (4th Cir. 1999)); see
Cozzarelli, 549
F.3d at 625 (considering investment analyst reports attached to
the defendants’ motion to dismiss because the complaint quoted
from those reports and the plaintiffs did not challenge the
reports’ authenticity).
We have recognized a narrow exception to this standard,
under which courts are permitted to consider facts and documents
subject to judicial notice without converting the motion to
dismiss into one for summary judgment. Clatterbuck, 708 F.3d at
557. Under Federal Rule of Evidence 201, courts at any stage of
a proceeding may “judicially notice a fact that is not subject
to reasonable dispute,” provided that the fact is “generally
known within the court’s territorial jurisdiction” or “can be
accurately and readily determined from sources whose accuracy
cannot reasonably be questioned.” Nevertheless, when a court
considers relevant facts from the public record at the pleading
19
stage, the court must construe such facts in the light most
favorable to the plaintiffs. Id. Moreover, the determination
whether a fact properly is considered under this exception
depends on the manner in which a court uses this information.
Id. (holding that the district court improperly considered
contents of a public record as an established fact and as
evidence contradicting the complaint). With these principles in
mind, we turn to consider the district court’s use of the
challenged SEC documents.
The plaintiffs’ complaint stated in general terms that, in
investigating the case, plaintiffs’ counsel had reviewed the
public filings submitted to the SEC. However, the complaint did
not otherwise refer to any SEC filings, or the contents of such
filings, to support the plaintiffs’ allegations. In fact, the
complaint did not contain any allegation suggesting that the
individual defendants made any sales or purchases of Chelsea
stock during the class period.
Although plaintiffs asserting securities fraud claims
frequently bolster allegations regarding scienter by asserting
unusual sales of stock by individuals accused of committing
securities fraud, the plaintiffs in the present case did not
include this type of allegation in their complaint. And such
allegations of unusual stock sales are not required to
demonstrate a strong inference of scienter in a securities fraud
20
case. See Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1253 n.3
(11th Cir. 2008) (“[S]uspicious stock sales are not necessary to
create a strong inference of scienter.”) (citing
Tellabs, 551
U.S. at 325). Therefore, because the SEC documents were not
explicitly referenced in, or an integral part of, the
plaintiffs’ complaint, the district court should not have
considered those documents in reviewing the sufficiency of the
plaintiffs’ allegations.
Our conclusion is not altered by the defendants’ contention
that the district court was entitled to take judicial notice of
the contents of the SEC documents because the accuracy of those
documents cannot reasonably be questioned. Even if the SEC
documents and their contents could have been reviewed in
accordance with Rule 201, the district court in the present case
incorrectly construed the information contained in the SEC
documents.
Instead of considering the information in the light most
favorable to the plaintiffs, the court found that the documents
established the “fact that none of the individual defendants”
sold Chelsea stock during the class period. Notably, however,
the referenced SEC documents fail to establish any such fact.
The Form 4 documents merely indicate that a single Chelsea
corporate officer, Dr. Schwieterman, made two purchases of
Chelsea stock during the class period, while the Proxy Statement
21
shows that each corporate officer held some shares of Chelsea
stock at a certain point near the end of the class period. The
record does not reflect for comparative purposes how many shares
of stock the individual defendants held at the beginning of the
class period, or provide any other basis for determining whether
corporate officers other than Dr. Schwieterman purchased or sold
any of their Chelsea stock during that period.
Instead, the Form 4 documents list only Dr. Schwieterman as
the “Reporting Person,” and do not contain any reference to any
other corporate officer. And the Proxy statement provides only
a “snapshot in time” of stock shares owned by the various
Chelsea officers as of February 29, 2012. Therefore, regardless
whether the information contained in the SEC documents could be
considered under the judicial notice provisions of Rule 201,
such information did not provide a factual basis for the court’s
conclusion that no individual defendant sold Chelsea stock
during the class period. See Clatterbuck, 708 F.3d at 557-58.
We also disagree with the defendants’ argument that even if
the district court erred in this regard, the court’s
consideration of the SEC documents did not affect the outcome of
the court’s decision concerning the adequacy of the plaintiffs’
allegations. In weighing the competing inferences, the district
court concluded that the defendants’ purported failure to sell
Chelsea stock during the class period “tip[ped] the scales” of
22
the competing inferences of scienter. In fact, the district
court cited only one other competing inference when considering
the element of scienter, namely, that the defendants informed
investors regarding certain weaknesses of Chelsea’s drug
development program. Therefore, the district court’s comparison
of inferences undoubtedly was affected by its error relating to
the content of the SEC documents. Accordingly, we conclude that
the court’s consideration of the challenged SEC documents was
not harmless.
B.
The plaintiffs argue that in addition to the district
court’s error in relying on the challenged SEC documents, the
court further erred in concluding that their allegations of
scienter were insufficient as a matter of law. In asserting
that they pleaded facts permitting a strong inference of
scienter, the plaintiffs rely on their allegations that the
defendants intentionally or recklessly failed to disclose that
the FDA expected Chelsea to produce two successful studies
showing evidence of durability of effect. The plaintiffs place
particular emphasis on their allegation that the defendants
intentionally misled investors in the February 13, 2012 press
release, by failing to disclose that the FDA briefing document
included a recommendation against approval of Northera. The
plaintiffs assert that because the defendants were aware of this
23
adverse recommendation but withheld it, such conduct supports a
strong inference of wrongful intent.
In response, the defendants maintain that the plaintiffs
failed to allege sufficient facts to support a strong inference
of scienter. The defendants submit that because they disclosed
to investors various weaknesses of their new drug application,
the defendants’ omission of other information does not support a
strong inference of scienter. With respect to the February 13,
2012 press release, the defendants argue that their omission of
the adverse FDA staff recommendation does not demonstrate
wrongful intent, because the press release included a website
address where investors eight days later could locate the full
FDA briefing document. We disagree with the defendants’
position.
As the Supreme Court emphasized in Matrixx Initiatives,
“companies can control what they have to disclose under
[Section 10(b) and Rule 10b-5(b)] by controlling what they say
to the market.” 131 S. Ct. at 1322. Thus, while Chelsea and
its corporate officers may have lacked an independent,
affirmative duty to disclose the adverse FDA staff
recommendation and the shortcomings of Chelsea’s evidence of
efficacy, the defendants’ failure to do so must be viewed under
Section 10(b) and Rule 10b-5(b) in the context of the statements
that they affirmatively elected to make. See
id.
24
Based on our de novo review, we conclude that the
plaintiffs’ complaint, when viewed in its entirety, contains
sufficient allegations giving rise to a strong inference of
scienter. This strong inference of intentional or reckless
conduct is supported by the plaintiffs’ allegations that
material, non-public information known to the defendants about
the status of the new drug application and required efficacy
studies conflicted with the defendants’ public statements on
those subjects.
According to the plaintiffs’ allegations, although the
defendants knew that the FDA expected two successful efficacy
studies demonstrating durability of effect to support regulatory
approval of Northera, none of the defendants’ statements to
investors addressed this critical expectation. After the
defendants met with FDA officials in December 2010 to discuss
submission of the new drug application based only on Study 301,
the defendants instead informed investors that the FDA had
“agreed” that Chelsea could submit its new drug application for
Northera “without the need for any further efficacy studies.”
However, even assuming that this statement truthfully
represented an FDA communication that Chelsea’s new drug
application could be submitted, the statement was misleading
given the FDA’s continuing expectation that two successful
efficacy studies would be required for approval of Northera.
25
The defendants also were aware by December 2010 that the
lone successful efficacy trial, Study 301, involved a treatment
period of only one week, in contrast to the failed Study 303 and
the abandoned Study 306, which both involved much longer
treatment periods. Nonetheless, the defendants described their
December 2010 meeting with the FDA as a “successful outcome”
reflecting the “strength of the data” gathered during the
clinical trials.
The issue of durability of effect is a core component of
the plaintiffs’ allegations, along with the FDA’s expectation of
two successful studies. Critically, the plaintiffs alleged that
Chelsea knew that the FDA expected evidence of durability of
effect, not just evidence of efficacy, and that “Chelsea was
aware of Study 301 and Study 302’s durational-benefit
shortcomings.” JA 65 ¶ 106.
Although the FDA can approve a new drug based on results of
only one successful study, the study must be “adequate” and the
data must present “substantial evidence that the drug will have
the effect it purports.” See 21 U.S.C. § 355(d). Additionally,
the plaintiffs did not allege that Chelsea unreasonably sought
review by the FDA on the basis of one successful study. The
plaintiffs instead alleged that the defendants misled investors
regarding the risk of submitting the new drug application
26
supported only by a single, one-week study providing scant
evidence of durability of effect.
The plaintiffs also made a significant allegation
concerning the defendants’ failure to disclose in the February
13, 2012 press release that the FDA briefing document contained
a recommendation against approval of Northera. In its press
release, Chelsea instead stated that Chelsea had received the
briefing document and disclosed that “several lines of inquiry”
had emerged, including that the efficacy trials “may not
adequately establish a durable treatment effect.” 6 Chelsea’s
omission of the information regarding the adverse FDA staff
recommendation, when viewed in the context of the known problems
of the efficacy studies and Chelsea’s earlier remarks regarding
those studies, supports the inference that Chelsea intentionally
or recklessly misled investors.
These allegations are significantly stronger than the
allegations we considered in Cozzarelli, a case on which the
defendants rely. In Cozzarelli, which also involved a
pharmaceutical company’s attempt to gain FDA approval for a
drug, the plaintiffs’ primary allegation of scienter focused on
a corporate officer’s use of an imprecise medical term when
6
Contrary to the dissent’s assertion, the change in Chelsea
stock prices after Chelsea’s statements is relevant to the
element of materiality, and does not impact our consideration of
the allegations of scienter.
27
describing the endpoint of a clinical study, allegedly with the
intent to mislead investors to think that the study was likely
to succeed. 549 F.3d at 624-26. We concluded that not only was
the general term used by the corporate officer “more or less
interchangeable” with the precise term not referenced, but that
the pharmaceutical company also informed investors that it would
not disclose the details of the study for “competitive reasons.”
Id. at 626. Therefore, we concluded in Cozzarelli that the
corporate officer’s chosen language did not support a strong
inference of scienter. 7
Id. at 627-28.
In contrast, the present case involves numerous allegedly
misleading statements and omissions by the defendants that were
not caused by the use of imprecise language or the execution of
a legitimate business decision. Instead, the plaintiffs’
allegations, when considered in the context of the entire
complaint, permit a strong inference that the defendants either
7
After concluding that the plaintiffs’ allegations in
Cozzarelli failed to show scienter based on the allegedly
intentional false statement by a corporate officer, we proceeded
to consider the plaintiffs’ other allegations of scienter, which
involved the company’s financial motivations and the sales of
stock by corporate officers. 549 F.3d at 628. We concluded
that even considering these additional allegations, the
plaintiffs’ complaint failed to demonstrate a strong inference
of scienter.
Id. Here, however, because the nature of the
alleged misstatements and omissions themselves give rise to a
strong inference of scienter, we need not consider the
plaintiffs’ additional allegations regarding the defendants’
financial motivations.
28
knowingly or recklessly misled investors by failing to disclose
critical information received from the FDA during the new drug
application process, while releasing less damaging information
that they knew was incomplete. 8
We emphasize that our conclusion does not stand for the
proposition that a strong inference of scienter can arise merely
based on a defendant’s failure to disclose information.
Rather, the scienter inquiry necessarily involves consideration
of the facts and of the nature of the alleged omissions or
misleading statements within the context of the statements that
a defendant affirmatively made. 9 See Matrixx Initiatives, 131 S.
Ct. at 1322 (stating that “companies can control what they have
8
The dissenting opinion states that Dr. Pedder acknowledged
one of the obstacles to drug approval by stating, after the
December 2010 meeting, that the FDA was interested “in seeing
‘two additional studies.’” However, Dr. Pedder’s statement did
not acknowledge that the FDA expected to see two successful
studies showing durability of effect. Rather, Dr. Pedder stated
that the FDA “was clear that additional efficacy studies were
not required for an NDA filing,” but that the FDA was interested
in two specific types of studies unrelated to durability of
effect. Additionally, the dissent appears to rely on the
defendants’ statements made on March 28, 2012, after the FDA
denied the new drug application. The defendants’ statements at
that point, however, are not relevant to the plaintiffs’
allegations of scienter.
9
As observed in the dissenting opinion, this Court many
times has concluded that a plaintiff asserting securities fraud
claims failed to plead allegations demonstrating a strong
inference of scienter. Such conclusions, however, are
necessarily fact-dependent and do not compel a result in the
present case.
29
to disclose under [Section 10(b) and Rule 10b-5(b)] by
controlling what they say to the market”).
The inference of scienter here is at least as compelling as
the opposing inference that Chelsea officials had signaled to
investors that there were some weaknesses in their new drug
application regarding efficacy studies for Northera, and simply
failed to provide further details regarding information received
from the FDA. See Yates, 552 F.3d at 891. We therefore
conclude that the plaintiffs’ allegations are sufficient to
support the required inference of scienter. Our conclusion,
however, is limited to the sufficiency of the complaint
regarding the element of scienter, and does not address the
sufficiency of the allegations with respect to the remaining
elements of the plaintiffs’ securities fraud claims, which will
be considered by the district court in the first instance on
remand. 10
III.
For these reasons, we hold that the district court erred in
dismissing the plaintiffs’ complaint on the basis that the
allegations supporting an inference of scienter were legally
10
We do not address the plaintiffs’ derivative Section
20(a) claims, which also should be considered on remand.
30
insufficient. Accordingly, we vacate the district court’s
judgment and remand the case for further proceedings.
VACATED AND REMANDED
31
THACKER, Circuit Judge, dissenting:
Since the enactment of the PSLRA, we have published
eight decisions reviewing the dismissal of a securities fraud
suit for failure to plead facts supporting a strong inference of
scienter; in all of them, we concluded that the inference was
lacking. See Yates v. Mun. Mortg. & Equity, LLC, 744 F.3d 874,
894 (4th Cir. 2014); Matrix Capital Mgmt. Fund, LP v.
BearingPoint, Inc.,
576 F.3d 172, 176 (4th Cir. 2009); Pub.
Emps.’ Ret. Ass’n of Colo. v. Deloitte & Touche LLP,
551 F.3d
305, 306 (4th Cir. 2009); Cozzarelli v. Inspire Pharm. Inc.,
549
F.3d 618, 628 (4th Cir. 2008); Teachers’ Ret. Sys. of La. v.
Hunter,
477 F.3d 162, 184 (4th Cir. 2007); In re PEC Solutions,
Inc. Sec. Litig.,
418 F.3d 379, 388-90 (4th Cir. 2005); Ottmann
v. Hanger Orthopedic Grp., Inc.,
353 F.3d 338, 352-53 (4th Cir.
2003); Phillips v. LCI Int’l, Inc.,
190 F.3d 609, 620 (4th Cir.
1999). In my view, the inference is lacking in this case, too.
The PSLRA requires a plaintiff in a securities fraud
suit to “state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of
mind.” 15 U.S.C. § 78u-4(b)(2)(A). To establish this strong
inference, a plaintiff must persuade the court that it is as
likely as not that the defendant acted with fraudulent intent
or, at the very least, with “such severe recklessness that the
danger of misleading investors was either known to the defendant
32
or so obvious that the defendant must have been aware of it.”
Cozzarelli v. Inspire Pharm. Inc., 549 F.3d 618, 623 (4th Cir.
2008) (internal quotation marks omitted). Here, the allegations
do not strongly imply either fraudulent intent or severe
recklessness. Instead, the allegations suggest that Chelsea --
while acknowledging the various challenges and setbacks
encumbering its bid for FDA approval -- submitted the Northera
application with justifiable confidence in its chances for
success. I therefore respectfully dissent. 1
I.
A.
Scienter, as defined by the Supreme Court, is “a
mental state embracing intent to deceive, manipulate, or
defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12
(1976). The federal circuit courts agree that reckless behavior
may be enough to satisfy the scienter requirement in a
securities fraud suit, 2 but they “differ on the degree of
1
I do not object to the majority’s determination that the
district court misused the challenged SEC documents. However,
in my view, the court’s reliance on those documents is of no
consequence. The plaintiffs’ complaint ought to fail
regardless.
2
For its part, the Supreme Court has never stated whether
recklessness is enough to satisfy the section 10(b) scienter
requirement. See Matrixx Initiatives, Inc. v. Siracusano, 131
S. Ct. 1309, 1323 (2011) (noting that the Court has “not decided
whether recklessness suffices to fulfill the scienter
(Continued)
recklessness required.” Tellabs, Inc. v. Makor Issues & Rights,
Ltd.,
551 U.S. 308, 319 n.3 (2007). The distinctions among the
circuits include variations in terminology, with courts
“referring to the recklessness standard variously as
‘deliberate’ or ‘conscious recklessness,’ ‘severe recklessness,’
and ‘a high degree of recklessness.’” Ann Morales Olazábal,
Defining Recklessness: A Doctrinal Approach to Deterrence of
Secondary Market Securities Fraud,
2010 Wis. L. Rev. 1415, 1424
(footnotes omitted) (collecting cases).
In this circuit, we recognize that allegations of
recklessness can satisfy the scienter requirement, see Matrix
Capital Mgmt. Fund, LP v. BearingPoint, Inc., 576 F.3d 172, 181
(4th Cir. 2009); see also Ottmann v. Hanger Orthopedic Grp.,
Inc.,
353 F.3d 338, 344 (4th Cir. 2003) (recognizing for the
first time in this circuit that “a securities fraud plaintiff
may allege scienter by pleading not only intentional misconduct,
but also recklessness”), but we insist that the recklessness
must be “severe” -- that is, “a slightly lesser species of
intentional misconduct.”
Ottmann, 353 F.3d at 344 (internal
quotation marks omitted); see also
Cozzarelli, 549 F.3d at 623;
Teachers’ Ret. Sys. of La. v. Hunter,
477 F.3d 162, 184 (4th
requirement” and finding it unnecessary to settle the issue
under the circumstances of the case).
34
Cir. 2007). This definition of recklessness, we have stated,
“comports with the observation of the Supreme Court that ‘[t]he
words “manipulative or deceptive” used in conjunction with
“device or contrivance” strongly suggest that § 10(b) was
intended to proscribe knowing or intentional misconduct.’”
Ottmann, 353 F.3d at 344 (alteration in original) (quoting Ernst
&
Ernst, 425 U.S. at 197).
Our decision in Cozzarelli v. Inspire Pharmaceuticals,
Inc. makes clear that pleading scienter -- whether in the form
of fraudulent intent or severe recklessness -- requires a
showing of “wrongful intent.” 549 F.3d at 621. There, a group
of shareholders alleged that a drugmaker seeking FDA approval of
an experimental eye-disease treatment misled investors into
believing that an important clinical trial was likely to
succeed. See
id. at 624-25. The drugmaker allegedly nurtured
this false impression by withholding details about the trial’s
endpoint while simultaneously representing that the trial was
“very similar” to a previous successful trial.
Id. at 625
(internal quotation marks omitted). We concluded that the
allegations supported an inference that the drugmaker sought
only to protect its competitive advantage in the marketplace;
this inference, we stated, “is more powerful and compelling than
the inference that [the drugmaker] acted with an intent to
deceive.”
Id. at 626 (emphasis supplied).
35
In the years since Cozzarelli, our court has
occasionally neglected to note that the recklessness necessary
to support a finding of scienter must be “severe.” Compare
Yates v. Mun. Mortg. & Equity, LLC, 744 F.3d 874, 884 (4th Cir.
2014) (“At the pleading stage, alleging either intentional or
severely reckless conduct is sufficient.” (emphasis supplied)),
with Matrix
Capital, 576 F.3d at 181 (“Pleading recklessness is
sufficient to satisfy the scienter requirement.”). The
standard, though, remains unchanged. We have consistently
stated that an allegedly reckless act must be “so highly
unreasonable and such an extreme departure from the standard of
ordinary care as to present a danger of misleading the plaintiff
to the extent that the danger was either known to the defendant
or so obvious that the defendant must have been aware of it.”
Matrix
Capital, 576 F.3d at 181 (internal quotation marks
omitted); see also Pub. Emps.’ Ret. Ass’n of Colo. v. Deloitte &
Touche LLP,
551 F.3d 305, 314 (4th Cir. 2009) (“In order to
establish a strong inference of scienter, plaintiffs must do
more than merely demonstrate that defendants should or could
have done more. They must demonstrate that [defendants] were
either knowingly complicit in the fraud, or so reckless in their
duties as to be oblivious to malfeasance that was readily
apparent.”). This understanding of scienter -- that it
necessarily entails a “culpable state of mind,” Ottmann,
353
36
F.3d at 348 -- preserves section 10(b) as a prohibition on
securities fraud. It ensures that corporations and their
officers cannot escape liability through willful blindness --
that is, purposeful ignorance of the truth of their own
representations -- while, at the same time, it prevents section
10(b) from devolving into a penalty for business decisions that,
in hindsight, appear questionable.
B.
Here, under the PSLRA’s heightened pleading standard,
the plaintiffs were required to allege facts giving rise to a
strong inference of fraudulent intent or severe recklessness.
See 15 U.S.C. § 78u-4(b)(2)(A); Cozzarelli, 549 F.3d at 623.
This is “no small burden.”
Cozzarelli, 549 F.3d at 624. Though
the inference of scienter “need not be irrefutable,” it “must be
more than merely ‘reasonable’ or ‘permissible.’”
Tellabs, 551
U.S. at 324. Unless a “reasonable person would deem the
inference of scienter . . . at least as compelling as any
opposing inference” of nonfraudulent intent, the pleading fails.
Id. The plaintiffs’ complaint here does not satisfy this
standard.
1.
Reviewing the complaint in its entirety, it is clear
that Chelsea had plenty of reason to believe the FDA would be
37
receptive to its application. More importantly, the facts
strongly suggest that Chelsea acted on just such a belief.
To merit FDA approval, an application must present
“substantial evidence that the drug will have the effect it
purports or is represented to have under the conditions of use
prescribed, recommended, or suggested in the proposed labeling.”
21 U.S.C. § 355(d). Though here the plaintiffs’ complaint
states that the FDA generally “requires at least two adequate
and well-controlled studies,” J.A. 59, 3 federal law expressly
authorizes the FDA to make the requisite finding of “substantial
evidence” based solely on “data from one adequate and well-
controlled clinical investigation and confirmatory evidence
(obtained prior to or after such investigation),” 21 U.S.C.
§ 355(d). Likewise, as the complaint recognizes, the FDA
Guidelines note that the agency “may acknowledge the
persuasiveness of a single, internally consistent, strong
multicenter study.” J.A. 60.
Chelsea based its FDA application on two sets of data.
First and foremost, there was the data from Study 301, which
successfully demonstrated the drug’s efficacy. In addition,
Chelsea offered supplemental data from Study 302, which, though
failing to meet its primary endpoint, showed what Chelsea later
3
Citations to the “J.A.” refer to the Joint Appendix filed
by the parties in this appeal.
38
determined to be a “nominally statistically significant
improvement” in the score used to measure the drug’s clinical
efficacy. J.A. 42. These were the data that the advisory
committee reviewed in February 2012, and the committee voted,
seven to four, to recommend approving the drug. The
chairperson, who was among those voting in favor of approval,
explained that there was “no question in [his] mind that this
drug is efficacious, particularly in a subset of patients.”
J.A. 203. 4 Other members echoed those remarks. One said he saw
“substantial evidence of substantial benefit for some patients.”
Id. at 205. Another said he “could not in a clear conscience
vote no and deprive those patients from the benefits they can
derive at this point from this medication.”
Id. at 67.
Nonetheless, the plaintiffs assert that Chelsea knew
the FDA expected two successful studies. This claim rests, in
large part, on a discussion that took place at the advisory
committee meeting. There, one FDA administrator, Dr. Steve
Graham (“Graham”), recalled that the “very first thing we said”
in the special protocol assessment for Study 301 was “that the
study in and of itself wouldn’t be sufficient, that we wanted
4
The complaint quotes selectively from the advisory
committee meeting transcript. Accordingly, although this
comment does not appear in the complaint, we may consider it
here because it is incorporated into the complaint by reference.
See Cozzarelli, 549 F.3d at 625.
39
two studies.” J.A. 61. According to Graham, the FDA also “said
that we wanted durability,” a statement the agency “repeated on
at least two subsequent occasions on information letters to the
company.” Id. However, at that very same meeting, Graham
himself conceded that Study 301 alone, if successful, may be
sufficient to support the application. If, he said, that single
study presented “an overwhelming effect[,] . . . you’d be a fool
not to approve it.”
Id. at 62.
In its December 20, 2010 press release, Chelsea
announced that the FDA had “agreed” that the proposed
application “could be submitted” based on Studies 301 and 302
“without the need for any further efficacy studies.” J.A. 233.
The plaintiffs’ complaint does not dispute the literal truth of
this announcement. Nor is there any reason to doubt that
Chelsea interpreted the FDA’s feedback as highly encouraging.
The company’s actions are proof positive that it did. Rather
than wait to complete Study 306, Chelsea pressed ahead and
submitted its application exactly as it said it would, with only
Study 301 and supplemental support from Study 302 to its credit.
Against this backdrop, the most compelling inference is not that
Chelsea acted with wrongful intent, but that it believed its
prospects were good. See Kuyat v. BioMimetic Therapeutics,
Inc., 747 F.3d 435, 441 (6th Cir. 2014) (concluding that a
medical-device manufacturer “could legitimately believe that the
40
statistically significant results” of its study “would be
sufficient to obtain approval by the FDA,” despite private
communications in which the FDA indicated that it expected a
more expansive study than the one provided).
2.
The plaintiffs’ claim that Chelsea’s public statements
were intentionally fraudulent or severely reckless runs into
another problem, which is that those statements were not
unreservedly optimistic. On the contrary, the company
consistently acknowledged the obstacles in its path.
In a December 2010 conference call, Chelsea’s CEO
acknowledged that the FDA had expressed an interest in seeing
“two additional studies.” J.A. 81. Later, in its September 30,
2011 quarterly report to the SEC -- from which the plaintiffs’
complaint quotes -- the company listed numerous reasons why the
FDA “may not accept or approve” the Northera application. Id.
at 141. When the FDA staff issued its briefing document
opposing Chelsea’s application, the company issued a press
release noting its receipt of the document and explaining that
“several lines of inquiry . . . have emerged as significant
components of the benefit-risk analysis of Northera.”
Id. at
248 (internal quotation marks omitted). These issues, according
to the February 2012 press release, included “the short duration
of our clinical studies, the limited size of our study
41
population given the orphan indication and the challenges in
quantifying symptomatic and clinical benefit.” Id. (internal
quotation marks omitted). Similarly, when the FDA rejected
Chelsea’s application in March 2012, the company explained in a
press release that it had received the FDA’s complete response
letter, and that this letter requested data from an “additional
positive study to support efficacy.” 5
Id. at 68. The company
continued to say that it planned to “request a meeting with the
FDA to review the Agency’s comments, clinical trial
recommendations and to help determine appropriate next steps
toward securing approval of Northera.”
Id. at 69.
The market responded to these statements accordingly.
As the majority notes, Chelsea’s stock dropped 37.5 percent
following the February 2012 press release discussing the FDA
briefing document. Likewise, the stock fell 28 percent in
response to the March 2012 press release discussing the FDA’s
rejection of droxidopa. These reactions call into question
whether Chelsea’s press releases were misleading at all -- let
5
The company issued this press release on March 28, 2012.
This date is significant both because it is the same day that
Chelsea received the FDA’s complete response letter and because
it marks the final day of the class period. Despite the
majority’s claim to the contrary, see ante at 29 n.8, the
company’s statements on this date are indeed relevant to the
scienter inquiry because they undermine the plaintiffs’
assertion that Chelsea intentionally or recklessly failed to
disclose critical information during the class period.
42
alone whether the danger of misleading people was “so obvious”
that making those statements must have been severely reckless.
Cozzarelli, 549 F.3d at 623 (internal quotation marks omitted).
II.
As we stated in Cozzarelli, we do not infer scienter
“from every bullish statement by a pharmaceutical company that
was trying to raise funds.” 549 F.3d 618, 627 (4th Cir. 2008).
If we did, “we would choke off the lifeblood of innovation in
medicine by fueling frivolous litigation.”
Id. Today’s
decision clears the way for more litigation, heightening the
risk that shareholders will exploit the judicial process to
extract settlements from corporations they chose to fund. This
is exactly what Congress sought to prevent when it enacted the
PSLRA. See Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551
U.S. 308, 320 (2007). Accordingly, I would affirm the judgment
of the district court.
43
