Opinion
No. C 04-02675 JSW.
January 23, 2006
I. INTRODUCTION
Lead plaintiff Jack Kindregan ("Kindregan") and representative plaintiffs Del F. La Follette ("Follette") and John Buche ("Buche") (collectively "Plaintiffs") bring this action individually and on behalf of all other persons who purchased or otherwise acquired the common stock of defendant IntraBiotics Pharmaceuticals, Inc. ("IntraBiotics") between September 5, 2003 and June 22, 2204 (the "Class Period"), pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t(a), and the rules and regulations promulgated thereunder, including SEC Rule 10b-5, 17 C.F.R. 240.10b-5. Plaintiffs further bring claims on behalf of Buche and persons who purchased IntraBiotics' stock on or around May 5, 2004, pursuant to Sections 11 and 15 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 77k and 77o.
The Court has not yet certified a class and refers to the time period involved as the "Class Period" for ease of reference.
Now before the Court is the motion to dismiss the Corrected Consolidated Amended Class Action Complaint ("Complaint") filed by defendants IntraBiotics, Henry J. Fuchs ("Fuchs"), Detlef Albrecht ("Albrecht"), David J. Tucker ("Tucker"), Ernest Mario ("Mario"), Kevin C. Tang ("Tang"), Mark L. Perry ("Perry"), Gary A. Lyons ("Lyons"), Jerry Jackson ("Jackson") and Jack S. Remington ("Remington") (collectively "Defendants"). Defendants move to dismiss asserting that Plaintiffs fail to meet the heightened pleading requirements of the Private Securities Litigation Reform Act ("PSLRA") and fail to state a claim upon which relief can be granted under Federal Rule of Civil Procedure 12(b)(6). Defendants further assert that further amendments to the Complaint would be futile and request that the Court dismiss this action with prejudice. Also before the Court is Defendants' motion to require an undertaking pursuant to 15 U.S.C. § 77k(e) (Section 11(e) of the Securities Exchange Act of 1934).
After Defendants filed a motion to dismiss the consolidated amended complaint, Plaintiffs sought and were granted leave to file a corrected consolidated amended complaint. The parties agreed that the pending motion was applicable to the corrected consolidated amended complaint.
Having carefully reviewed the parties' papers, considered their arguments and relevant legal authority, and having had the benefit of oral argument, the Court hereby GRANTS IN PART and DENIES IN PART Defendants' motion to dismiss. The Court GRANTS Plaintiffs leave to amend the dismissed claims. The Court DENIES Defendants' motion to require an undertaking.
II. FACTUAL BACKGROUND
IntraBiotics is a publicly traded biopharmaceutical company founded in 1994. (Compl. ¶ 2.) During the relevant Class Period, IntraBiotics' sole advanced drug candidate was iseganan hydrochloride ("iseganan"). Defendant Fuchs is IntraBiotics' Chief Executive Officer and has served as a member of IntraBiotics' Board of Directors since November 2001. Defendants Albrecht, Tucker, Mario, Tang, Perry, Lyons, Jackson, and Remington are all officers and/or directors of IntraBiotics. ( Id. at ¶¶ 21-28.)
Testing of Iseganan for Oral Mucositis
Prior to the Class Period, IntraBiotics tried but failed to bring iseganan to the market for the treatment of oral mucositis, a common debilitating side effect of cancer therapy that is characterized by severe mouth ulcers that often become infected. ( Id. at ¶ 3.) IntraBiotics' first Phase III trial tested iseganan on cancer patients undergoing chemotherapy. ( Id. at ¶ 50.) According to confidential witnesses who are former IntraBiotics' employees, including a research scientist, the Vice President of Program Management, and the Vice President of Business Operations, "Fuchs violated clinical trial protocol and secretly fixed the data in this trial to indicate a positive trend for [iseganan] to justify continuing the trial. ( Id.) On April 26, 2001, IntraBiotics announced that iseganan "did not meet its primary endpoint of reducing ulceration, but did meet its secondary endpoint of reducing pain and was well tolerated." However, IntraBiotics discounted these results due to a subcontractor's error in assigning iseganan or the placebo to 102 patients. ( Id. at ¶ 51.) This error obscured Fuchs' manipulation of the data. ( Id.)
IntraBiotics conducted another Phase III trial of iseganan for the treatment of oral mucositis on cancer patients receiving radiation therapy. ( Id. at ¶ 53.) On May 3, 2002, IntraBiotics announced the results from this Phase III trial, stating that the "trial showed no difference between iseganan and placebo in the primary or secondary endpoints." ( Id.) According to a confidential witness who was a project manager at Pharmanet, the contract research organization for IntraBiotics during the oral mucositis trials, and was familiar with the results of these trials, iseganan was not a good product because it had a poor taste and added to the nausea of the patients who tried it. ( Id. at ¶¶ 51, 54.) On September 27, 2002, Mario announced that the preliminary test results from the trial "indicated that iseganan did not meet its primary endpoint of reducing oral mucositis," and thus, IntraBiotics ceased pursuing iseganan to treat this disease. ( Id. at ¶ 55.)
Testing of Iseganan for Ventilator-Associated Pneumonia
By the beginning of the Class Period, "the fate of IntraBiotics hinged on the success of iseganan" in Phase III clinical trials for the prevention of ventilator-associated pneumonia ("VAP"), a bacterial pneumonia that can develop in patients receiving mechanical or artificial ventilation. ( Id. at ¶ 4.)
On December 8, 2000, IntraBiotics commented that a Phase I trial of iseganan for the treatment of VAP showed that the drug was well-tolerated and reduced the amount of bacteria in patients' mouths and throats, and announced that it began patient enrollment for a Phase IIa trial of iseganan for VAP. ( Id. at ¶ 57.) In March 2001, IntraBiotics announced that the data from the Phase IIa trial indicated that iseganan was well-tolerated and demonstrated antimicrobial activity when administered to patients at risk for developing VAP. ( Id. at ¶ 58.)
On February 6, 2003, Intrabiotics issued a press release announcing its launch of a Phase II/III trial of iseganan for the treatment of VAP and stated, in pertinent part: "[Intrabiotics] recently concluded a productive meeting with the Food and Drug Administration to discuss the development of iseganan for VAP. . . . [I]seganan has been shown to be well tolerated in clinical studies in cancer patients, and to effect significant reductions in the level of bacteria in the oral cavity of cancer patients as well as patients who require artificial ventilation." ( Id. at ¶ 59.)
In connection with its Phase II/III trial for VAP, Defendants established an independent drug safety monitoring board ("DSMB"). The DSMB received the interim results of the trials, which were double-blinded. The DSMB then "unblinded" the results and met monthly to discuss the results. ( Id. at ¶ 60.) According to a confidential witness who worked as a vice president of biostatistics at Pharmanet, if the clinical investigators perceived any problems with iseganan during the clinical trials, that information would be summarized for the DSMB, and IntraBiotics would be notified of the overall toxicity profile of the problem. ( Id.)
On September 5, 2003, the start of the Class Period, IntraBiotics issued a press release stating that Food and Drug Administration ("FDA") granted fast track designation for the development of iseganan for treating VAP, and that IntraBiotics previously had completed and announced results of a Phase I/II study of the safety and efficacy of iseganan administered to mechanically ventilated patients. ( Id. at ¶ 62.) In the press release, IntraBiotics stated:
Designation as a fast track drug indicates that the FDA will facilitate the development and expedite the review of a new drug that is intended to treat a serious or life-threatening condition and that demonstrates the potential to address an unmet medical need. In a letter to the company, the FDA stated: "We are granting fast track designation for the following reasons:
There are currently no products approved (topical or systematic) for the prevention of ventilatory-associated pneumonia.
Ventilator-associated pneumonia is commonly recognized as a highly morbid condition in critically ill patients. Prevention of this disorder is desirable."
. . . "VAP is a devastating complication experienced by critically ill patients who are vulnerable to infection because of the requirement for artificial ventilation," said Dr. Marin Kollef, Associate Professor of Medicine at Washington University School of Medicine, Pulmonary and Critical Care Division in St. Louis. "Experts have long believed that pneumonia in patients should be preventable through the use of antibiotic decontamination of the mouth, but so far we have lacked the appropriate antibiotic — one that can be safely applied into the mouth and not worsen problems of antibiotic resistance. This approach has become more important as bacterial resistance to antibiotics continues to grow and the development of new antibiotics to cope with resistance has lagged. Because of iseganan's properties, VAP represents a logical an important potential application. We look forward to the results of the upcoming pivotal clinical trials."
. . . "We are pleased to be working with the FDA to finalize the protocol for [the upcoming Phase II/III trial] because of the FDA's expertise in trial design and review. We believe that patients with VAP will benefit from FDA input by virtue of assuring that the collected data will support expeditious product registration if the trials are successful," said Dr. Henry Fuchs, President and CEO of IntraBiotics.
At the hearing on Defendants' motion to dismiss, Plaintiffs clarified that they contend the following two statements in the September 5, 2003 press release were false: "[Iseganan] demonstrates the potential to address an unmet medical need" and "Because of iseganan's properties, VAP represents a logical an important potential application."
IntraBiotics announced it had reached a Special Protocol Agreement ("SPA") with the FDA in a press release issued on September 19, 2003. In the press release, IntraBiotics stated: "We have appreciated our collaboration with the FDA throughout the SPA process on this development program, which has been designed to address an unmet medical need for mechanically-ventilated patients who are at high risk for developing VAP. . . . Agreement with the FDA on the design of these clinical trials is important to assure expeditious registration if the trials are successful." ( Id. at ¶ 65.)
At the hearing on Defendants' motion to dismiss, Plaintiffs clarified that they contend the following statement in the September 19, 2003 press release was false: "Agreement with the FDA on the design of these clinical trials is important to assure expeditious registration if the trials are successful."
Plaintiffs allege that the statements in the press releases issued in September 2003 were materially false and misleading because Defendants had no intention of complying with the protocol for the trials that they were developing with the FDA to test iseganan, which included FDA regulations and guidelines regarding monitoring and reporting adverse effects to the FDA, and because Defendants failed to disclose that iseganan caused increased nausea in previous trials. ( Id. at ¶¶ 64, 67.)
IntraBiotics planned to enroll approximately 900 patents in the Phase II/III trial for VAP. The patients in the trial were given either iseganan or a placebo six times a day for up to fourteen days while they were mechanically ventilated. ( Id. at ¶ 68.) Plaintiffs allege:
Based on a 14-day cycle per patient, test results (i.e., the raw data) were available within two weeks of the commencement of the trials. Any adverse effects of iseganan on the tested patients, such as, for example, death or increased illness as opposed to improvement from using the drug, would be apparent at that point. Similarly, a comparison of the results of the tests on patients taking iseganan versus those taking a placebo would be available as of 14 days into the start of the trials.
( Id.)
On October 7, 2003, IntraBiotics issued a press release announcing that it had enrolled the first patients in its first Phase II/III trial for VAP. In particular Fuchs stated: "we look forward to working closely with our clinical investigators to expedite the development of iseganan for the prevention of VAP. . . ." ( Id. at ¶ 70.) On October 29, 2003, IntraBiotics stated in a press release that it had "achieved a series of milestones over the last three months which have significantly strengthened and repositioned [IntraBiotics] for future growth[.] . . . Our novel lead product, iseganan, is now in late-stage pivotal clinical trials. Assuming successful completion of these trials, iseganan has a clear path to registration for the prevention of VAP, a major unmet medical need worldwide. . . . Iseganan may also have potential applications for a variety of other infections that we will begin to explore in the near future." ( Id. at ¶ 72.)
On February 12, 2004, IntraBiotics announced in a press release that its ongoing Phase II/III trial for VAP had been accepted for inclusion in the FDA's Continuous Marketing Application ("CMA") Pilot 2 Program. Iseganan was the only Fast Track product selected by the Center for Drug Evaluation and Research division of Anti-Infective Drug Products. In response, Fuchs stated: "We are honored to have been selected for inclusion into this exclusive and pioneering program. Our selection builds on iseganan's Fast Track status and [SPA] agreement to potentially further speed and clarify the pathway to approval for this agent for VAP. . . ." IntraBiotics further stated: "The first of two planned pivotal trials is now well underway to evaluate iseganan oral solution for the prevention of VAP . . . and data is expected by the end of this year. A completed Phase I/II trial in mechanically-ventilated patients demonstrated that iseganan was well tolerated, safe, and effective in decreasing the amount of bacteria and yeast in the mouths of these patients." ( Id. at ¶¶ 74, 75.)
On March 4, 2004, IntraBiotics announced in a press release that it had already enrolled 450 patients in its Phase II/III trial for VAP and stated: "We have made significant progress in 2003, advancing our product candidate, [iseganan], and defining a clear pathway to registration in the United states for a large unmet medical need. . . ." ( Id. at ¶ 78.) In an amended registration statement filed with Securities and Exchange Commission on April 22, 2004 (the "Registration Statement"), IntraBiotics further stated: "We believe that there are four features of iseganan that will translate into important clinical benefits. . . . Based on our experience to date, iseganan appears to be safe and well-tolerated at therapeutically relevant doses when administered to the oral cavity, the planned route of administration for the prevention of VAP. In particular, iseganan has been delivered to the oral cavity of more than 800 patients to date, with no differences in adverse events between the active and placebo groups observed consistently among the trials." ( Id. at ¶ 80.)
Plaintiffs allege that the statements alleged in paragraphs 72, 74, 75, 78, and 80 of the Complaint were materially false and misleading because by the time such statements were made, Defendants had access to the interim results of the Phase II/III trial for VAP, which were based on a fourteen-day cycle per patient, and that as a result of such access, Defendants knew or should have known that iseganan was not safe or well-tolerated. Plaintiffs also allege that such statements were materially false and misleading because Defendants did not intend to comply with, and were in violation of, their obligation to report adverse results to the FDA. ( Id. at ¶¶ 73, 77, 79, and 82.)
On May 5, 2005, Defendants raised approximately $36.1 million in a public offering, and then raised an additional $6.1 million around June 3, 2004, when they announced that the underwriters of their public offering would exercise their option to purchase an additional 450,000 shares to cover over-allotments. ( Id. at ¶¶ 7, 83, 84, 90.) Plaintiffs further allege that at the time of the May 5, 2004 public offering and the June 3, 2004 over-allotment exercise:
[D]efendants were aware through their monitoring of the clinical trials that iseganan as a treatment for VAP posed serious safety risks, including death. Defendants were aware of the risks because IntraBiotics received the interim results, was responsible for monitoring the testing for, in particular, negative side effects and was informed when adverse events occurred. In particular, [D]efendants were aware of the adverse results by their receipt of the interim results from Robert Ott of Advance Clinical Trials, Inc. ("ACT"), a contract research organization hired by [D]efendants to assist in the management and monitoring of the Phase II/III trial. Mr. Ott was ACT's Project Manager of U.S. Operations throughout the duration of IntraBiotic's (sic) Phase II/III clinical trial of iseganan for the prevention of VAP and received interim data from testing sites, data which, whether blinded or unblinded, would have indicated an increase of serious adverse events in the patients enrolled in the trial. Furthermore, the trial involved a 14-day cycle per patient, and by the time of the offering and the over-allotment, the clinical trial had enrolled more than 450 patients. Thus, it had long been the case that a statistically significant number of patients had been tested for the data to reliably indicate that there were serious negative side effects to the use of iseganan for the treatment of VAP.
( Id. at ¶ 91.)
The $42.2 million Defendants raised through the public offering and over-allotment exercise on May 5, 2004 and June 3, 2004 enabled Defendants to dramatically reduce the negative impact the disclosure of the failure of IntraBiotics' sole drug candidate, iseganan, would have on IntraBiotics' future. The cash provided IntraBiotics with prospects, including providing Defendants with means to make acquisitions, in-license another drug candidate or make IntraBiotics a more attractive acquisition candidate. Plaintiffs allege that without this cash, Defendants knew that IntraBiotics would have no drug candidate and no prospects following the failure of the VAP trials, and that they would lose their jobs and be forced to liquidate the company. ( Id. at ¶¶ 7, 106.)
On June 23, 2004, IntraBiotics announced it had to immediately discontinue the VAP trials based on interim analysis of the data. ( Id. at ¶¶ 8, 93.) The data revealed that a higher rate of VAP and of mortality was observed to the patients who were administered iseganan. ( Id. at ¶ 8.)
III. ANALYSIS
Plaintiffs allege that throughout the Class Period Defendants publicly made positive statements concerning iseganan and the progress of the Phase II/III trial for VAP despite their knowledge that patients did not tolerate the drug well and that the trial was indicating adverse results. Plaintiffs also allege that Defendants engaged in a scheme to raise millions of dollars to provide Defendants with the means to retain their jobs and avoid liquidation. (Compl. ¶¶ 6-7, 35, 106.) Section 10(b) of the Securities Exchange Act provides, in part, that it is unlawful "to use or employ in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe." 15 U.S.C. § 78j(b).
Rule 10b-5 makes it unlawful for any person to use interstate commerce:
(a) To employ any device, scheme, or artifice to defraud;
(b) To make any untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, or;
(c) To engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.17 C.F.R. § 240.10b-5.
To plead a claim under section 10(b) and Rule 10b-5, a plaintiff must allege (1) a misrepresentation or omission, (2) of material fact, (3) made with scienter, (4) on which the plaintiff justifiably relied, (5) that proximately caused the alleged loss. Binder v. Gillespie, 184 F.3d 1059, 1063 (9th Cir. 1999). Additionally, as in all actions alleging fraud, a plaintiff must state with particularity the circumstances constituting fraud. Greebel v. FTP Software, Inc., 194 F.3d 185, 193 (9th Cir. 1999); Fed.R.Civ.P. 9(b).
Plaintiffs also claim that individual defendants are liable pursuant to Section 20(a) of the Securities Exchange Act, which provides for derivative liability for those who control others found to be primarily liable under the provisions of that act. See In re Ramp Networks, Inc. Sec. Lit., 201 F. Supp. 2d 1051, 1063 (N.D. Cal. 2002). Where a plaintiff asserts a Section 20(a) claim based on an underlying violation of section 10(b), the pleading requirements for both violations are the same. Id.
Finally, Plaintiffs bring claims under Sections 11 and 15 of the Securities Exchange Act as well. Section 11 imposes liability for false statements or omissions of material fact made in registration statements. 15 U.S.C. § 77k. To state a claim under Section 11, a plaintiff must allege: "(1) that the registration statement contained an omission or misrepresentation, and (2) that the omission or misrepresentation was material, that is, it would have misled a reasonable investor about the nature of his or her investment." Kaplan v. Rose, 49 F.3d 1363, 1371 (9th Cir. 1994). Scienter is not required "for liability under § 11; defendants will be liable for innocent or negligent material misstatements or omissions." Id. However, a plaintiff who seeks to bring a Section 11 claim faces an additional hurdle; purchasers of stock only have standing to sue if they can trace their shares to an allegedly misleading statement. Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076, 1081 (9th Cir. 1999); see also In re SeeBeyond Technologies Corp. Securities Litigation, 266 F. Supp. 2d 1150, 1171 (C.D. Cal. 2003). Section 15 imposes joint and several liability upon every person who controls any person liable under Sections 11 or 12. See 15 U.S.C. § 77o; see also In re Daou Systems, Inc., 411 F.3d 1006, 1029 (9th Cir. 2005).
A. Applicable Pleading Standards.
1. Rule 12(b)(6).
A motion to dismiss is proper under Rule 12(b)(6) where the pleadings fail to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). A motion to dismiss should not be granted unless it appears beyond a doubt that a plaintiff can show no set of facts supporting his or her claim. Conley v. Gibson, 355 U.S. 41, 45-46 (1957); see also De La Cruz v. Tormey, 582 F.2d 45, 48 (9th Cir. 1978).
2. Private Securities Litigation Reform Act.
In order to limit the number of frivolous private securities lawsuits, Congress enacted the PSLRA in December of 1995, and created heightened pleading standards for such lawsuits. 15 U.S.C. § 78u-4(b). The PSLRA requires that "the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1)(B). Furthermore, the PSLRA requires that the plaintiff "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).
The heightened standard set by the PSLRA was intended to put an end to securities fraud lawsuits that plead "fraud by hindsight." In re Silicon Graphics, Inc. Sec. Lit., 183 F.3d 970, 988 (9th Cir. 1999). "The PSLRA significantly altered pleading requirements in private securities fraud litigation by requiring that a complaint plead with particularity both falsity and scienter." In re Vantive Corp. Sec. Lit., 283 F.3d 1079, 1084 (9th Cir. 2002) (citing Ronconi v. Larkin, 253 F.3d 423, 429 (9th Cir. 2001)) (emphasis added). "Thus the complaint must allege that the defendant made false or misleading statements either intentionally or with deliberate recklessness or, if the challenged representation is a forward looking statement, with `actual knowledge . . . that the statement was false or misleading.'" Id. at 1085 (citing 15 U.S.C. § 78u-5(c)(1)(B)(I)). This is often accomplished "by pointing to inconsistent contemporaneous statements or information (such as internal reports) made by or available to the defendants." Yourish v. California Amplifier, 191 F.3d 983, 993 (9th Cir. 1999) (quoting In re GlenFed Sec. Lit., 42 F.3d 1541, 1549 (9th Cir. 1991) ( en banc)); see also id. at 994 (discussing insufficiency of plaintiffs' allegations with regard to the non-disclosure of confidential non-public information).
Under the PSLRA, a complaint still is construed in the light most favorable to the non-moving party and all material allegations in the complaint are taken to be true. Silicon Graphics, 183 F.3d at 983. To determine whether a plaintiff has pled a strong inference of scienter, however, "the court must consider all reasonable inferences to be drawn from the allegations, including inferences unfavorable to the plaintiffs." Gompper v. VISX, Inc., 298 F.3d 893, 897 (9th Cir. 2002). The Court "should consider all the allegations in their entirety, together with any reasonable inferences therefrom, in concluding whether, on balance, the plaintiffs' complaint gives rise to the requisite inference of scienter." Id. "Conclusory allegations of law and unwarranted inferences, however, are insufficient to defeat a motion to dismiss." In re Northpoint Communications Group, Inc. Sec. Lit. ( Northpoint II), 221 F. Supp. 2d 1090, 1094 (N.D. Cal. 2002).
Finally, the Court may consider the facts alleged in the complaint, documents attached to the complaint, documents relied upon but not attached to the complaint when the authenticity of those documents is not questioned, and other matters for which the Court can take judicial notice. Northpoint II, 221 F. Supp. 2d at 1094; see also Silicon Graphics, 183 F.3d at 986.
B. Request for Judicial Notice.
Defendants request that the Court take judicial notice of IntraBiotics' press releases, SEC filings, and the FDA's document entitled Guidance for Industry, all of which are referenced in the Complaint or are publicly filed documents. Plaintiffs do not dispute the accuracy of the documents attached to the request, and the requested documents are the types of documents of which this Court properly make take judicial notice. See, e.g., In re Calpine Corp. Sec. Lit., 288 F. Supp. 2d 1054, 1076 (N.D. Cal. 2003) (court "may properly take judicial notice of SEC filings and documents expressly referenced" in a complaint"); see also Plevy v. Haggerty, 38 F. Supp. 2d 816, 821 (C.D. Cal. 1998). Accordingly, the Court GRANTS Defendants' request.
C. Plaintiffs Fail To Plead Sufficient Facts to Demonstrate Falsity.
The PSLRA requires that Plaintiffs allege with the requisite particularity each statement alleged to be false or misleading, the reason or reasons why the statement was false or misleading, and if those allegations are made on information and belief, all facts on which that belief is formed. See 15 U.S.C. § 78u-4(b)(1)(B); see also Employers Teamsters Local Nos. 175 and 505 Pension Trust Fund v. Clorox Co., 353 F.3d 1125, 1134 (9th Cir. 2004). Plaintiffs fail to meet this standard.
Plaintiffs set forth the statements which they contend are materially false and misleading in paragraphs 62, 65, 70, 72, 74, 75, 78, 80 of their Complaint. These paragraphs contain large block quotes, but Plaintiffs clarified at the hearing on Defendants' motion which specific statements within these paragraphs Plaintiffs contend are false. The Court will address these allegedly false statements.
Throughout the Complaint, Plaintiffs engage in a pattern of quoting long excerpts from documents which contain multiple statements. Plaintiffs are responsible for identifying with particularity what statements are false and misleading. 15 U.S.C. § 78u-4(b)(1). They have not fulfilled their responsibility in this regard. If Plaintiffs chose to file an amended complaint, Plaintiffs should clearly identify which specific statements within the documents or block quotes they contend are false or misleading.
1. Statements Made in September 2003 Before the Phase II/III Trial Began.
On September 5, 2003, IntraBiotics issued a press release in which it stated:
Designation as a fast track drug indicates that the FDA will facilitate the development and expedite the review of a new drug that is intended to treat a serious or life-threatening condition and that demonstrates the potential to address an unmet medical need. In a letter to the company, the FDA stated: "We are granting fast track designation for the following reasons:
There are currently no products approved (topical or systematic) for the prevention of ventilatory-associated pneumonia.
Ventilator-associated pneumonia is commonly recognized as a highly morbid condition in critically ill patients. Prevention of this disorder is desirable."
. . . "VAP is a devastating complication experienced by critically ill patients who are vulnerable to infection because of the requirement for artificial ventilation," said Dr. Marin Kollef, Associate Professor of Medicine at Washington University School of Medicine, Pulmonary and Critical Care Division in St. Louis. "Experts have long believed that pneumonia in patients should be preventable through the use of antibiotic decontamination of the mouth, but so far we have lacked the appropriate antibiotic — one that can be safely applied into the mouth and not worsen problems of antibiotic resistance. This approach has become more important as bacterial resistance to antibiotics continues to grow and the development of new antibiotics to cope with resistance has lagged. Because of iseganan's properties, VAP represents a logical an important potential application. We look forward to the results of the upcoming pivotal clinical trials."
. . . "We are pleased to be working with the FDA to finalize the protocol for [the upcoming Phase II/III trial] because of the FDA's expertise in trial design and review. We believe that patients with VAP will benefit from FDA input by virtue of assuring that the collected data will support expeditious product registration if the trials are successful," said Dr. Henry Fuchs, President and CEO of IntraBiotics.
(Compl. ¶ 62.)
Plaintiffs argued at the hearing that there were two false statements within this press release: (1) "[Iseganan] demonstrates the potential to address an unmet medical need;" and (2) "Because of iseganan's properties, VAP represents a logical an important potential application." The press release does not actually contain a statement made by Defendants that Iseganan "demonstrates the potential to address an unmet medical need." Read carefully, the first sentence merely describes what designation as a fast track drug by the FDA generally indicates. At most, the press release implies that the FDA concluded that isgenan has demonstrated the potential to address an unmet need when it decided to designate it as a fast track drug. The Court will not address the adequacy of a statement that was not actually made by Defendants. If Plaintiffs chose to amend their complaint, they should clarify what exactly statement they contend is false and why. If the allegedly false statement was not made directly by Defendants, or if the alleged falsity is an inference created by a statement, Plaintiffs should be prepared to demonstrate how Defendants may be held liable.
The second statement Plaintiffs allege is false in the September 5, 2003 press release was made by Dr. Marin Kollef, rather than by Defendants. Plaintiffs have not provided any authority or argument demonstrating how Defendants may be held liable for a statement made by a third party that they quote in a press release. However, even assuming arguendo that Defendants could be liable for a third-party's statement, Plaintiffs' complaint suffers from additional defects.
Plaintiff alleges that the two statements from the September 5, 2003 press release, as well as Defendants' statement "Agreement with the FDA on the design of these clinical trials is important to assure expeditious registration if the trials are successful" from a September 19, 2003 press release were false and misleading because (1) Defendants had no intention of following the protocols of the Food and Drug Administration ("FDA") to report adverse results and (2) because Defendants failed to disclose that isgegan had failed in previous trials because it caused increased nausea. (Compl. ¶¶ 64, 65, 67.) Because Plaintiffs' allegations are made on information and belief, the complaint must "state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1). Plaintiffs fail to do so.
It is not clear what allegations support Plaintiffs' argument that Defendants had no intention, even before the Phase II/III trial for VAP began, of reporting the results as they became aware of them. Moreover, even if true, is not clear how Defendants' alleged intention to not follow the FDA's protocols undermine the veracity of these three statements. Finally, it is not clear why increased incidents of nausea when iseganan was used to treat oral mucositis would have put Defendants on notice that iseganan would not be effective for treating VAP. The Complaint does not contain any allegations regarding whether the dosages of these two trials were the same, whether iseganan was administered in the same manner in these trials and/or whether administering the drug in a different manner would have made a difference. Additionally, considering the life-threatening nature of VAP, increased incidents of nausea may or may not be considered problematic. On the other hand, if patients with VAP are on ventilators, perhaps increased nausea could be extremely dangerous. Plaintiffs do not allege any facts to support drawing an inference either way. Therefore, the Court concludes that Plaintiffs fails to sufficiently allege the reason or reasons why such statements were false or misleading or to sufficiently allege the facts on which Plaintiffs' beliefs were formed. See 15 U.S.C. § 78u-4(b)(1).
2. Statements Made Between October 2003 and April 2004.
Plaintiffs allege Defendants made the following additional false statements:
(1) "In addition to substantially increasing our cash resources, we achieved a series of major milestones over the last three months which have significantly strengthened and repositioned [IntraBiotics] for future growth," made on October 29, 2003;
(2) "Assuming successful completion of these trials, iseganan has a clear path to registration for the prevention of VAP, a major unmet medical need worldwide," made on October 29, 2003;
(3) "Iseganan may also have potential applications for a variety of other infections that we will begin to explore in the near future," made on October 29, 2003;
(4) "Our selection builds on iseganan's Fast Track status and Special Protocol Assessment (SPA) agreement to potentially further speed and clarify the pathway to approval for this agent for VAP, an important unmet medical need," made on February 12, 2004;
(5) "We have made significant progress in 2003, advancing our product candidate, [iseganan], and defining a clear pathway to registration in the United states for a large unmet medical need," made on March 4, 2004;
(6) "Safe and Well-Tolerated. Based on our experience to date, iseganan appears to be safe and well-tolerated at therapeutically relevant doses when administered to the oral cavity, the planned route of administration for the prevention of VAP. In particular, iseganan has been delivered to the oral cavity of more than 800 patients to date, with no differences in adverse events between the active and placebo groups observed consistently among the trials," made on April 22, 2004;
(7) "We believe that these features will provide important benefits to patients and their physicians. Iseganan may allow physicians to effectively prevent and treat infections without: • precisely knowing the offending pathogen; • using multiple antimicrobial drugs; • engendering resistence; and • compromising future use of antimicrobial drugs," made on April 22, 2004;
(8) "We believe that iseganan has an attractive profile as an agent for the prevention of VAP," made on April 22, 2004; and
(9) "The accomplishments will enable us to maintain our momentum, and meet a number of key goals including the initiation of a Phase II trial for the potential treatment of lung infections associated with cystic fibrosis in the second half of the year," made on May 10, 2004.
(Compl. ¶¶ 72, 74, 78, 80, 86).
Plaintiffs also contend the following statements by Defendants are false: (1) "The first of two planned pivotal trials is now well underway to evaluate iseganan oral solution for the prevention of VAP in 900 patients in the U.S. and Europe, and data is expected by the end of this year;" (2) "Patient accrual is now well underway and we expect to have results from the first trial by the end of this year; (3) "The first pivotal trial began enrolling patients in September 2003 and has enrolled more than 450 patients. It is anticipated that results from this trial will be available in the fourth quarter of 2004;" and (4) "We are now more than halfway through enrollment of the first two pivotal clinical trials for our lead product candidate, iseganan, for the prevention of [VAP]." (Compl. ¶¶ 75, 78, 80, 86.) However, it is not clear how, even if Plaintiffs had plead sufficient factual bases for all their allegations and arguments, these statements would be false.
Plaintiffs allege these statements were materially false and misleading because Defendants had no intention of complying with their obligation to report adverse results to the FDA. ( Id. at ¶¶ 73, 77, 79, 82.) As discussed above, Plaintiffs have not alleged sufficient facts to support drawing such an inference. Plaintiffs further contend the above statements were false because Defendants had access to the interim results of the Phase II/III trial for VAP and thus knew or should have known that iseganan was not safe and well-tolerated at therapeutically relevant doses when administered to the oral cavity and known that iseganan caused a higher rate of VAP and mortality. ( Id.) The Phase II/III trial for VAP was double blinded, meaning that neither the participants nor the research team knew during the trial which participants received isegenan and which participants received the placebo. ( Id. at ¶¶ 43, 60.) The trial was conducted on a fourteen-day cycle per patient. ( Id. at ¶ 68.) The Complaint does not allege when the trial began or when it should have been clear, based on the interim results, even if they remained blinded, that iseganan was causing adverse results. Although it is possible that Defendants could have known of the adverse results sooner than when they terminated the trial in June 2004, the Complaint does not allege sufficient facts to support an inference as to when Defendants may have obtained such information.
With respect to the Defendants' statements regarding the possible use of iseganan to treat other diseases, Plaintiffs also fail to allege any facts to support an inference that Defendants knew such statements were false. Although Plaintiffs allege that at the time of the Phase II/III trial, Defendants were focusing on the use of iseganan to treat VAP, Plaintiffs do not allege any facts indicating that Defendants had no intention of conducting additional research with respect to other diseases in the future.
In sum, Plaintiffs have not sufficiently plead facts to show that any of Defendants' statements were materially false or misleading. However, the Court will grant Plaintiffs' leave to amend. At the hearing, Plaintiffs stated they could allege more details regarding the interim results. Defendants' reliance on In re Columbia Laboratories, Inc. Securities Litigation, 144 F. Supp. 2d 1362, (S.D. Fla. 2001) for the proposition that Defendants could not have access to the data prior to its termination because the trial was double blinded is misplaced. In that case, the plaintiffs did not allege that the defendants were aware of the results of the studies before the alleged misrepresentations were made. In fact, the plaintiffs' counsel even conceded that the defendants thought there was a chance the study would succeed. Id. at 1369-70. Moreover, in Columbia Laboratories, the results of the study were analyzed and disclosed after the study was completed. Here, it is undisputed that the trial was terminated mid-way. Thus, at some point mid-way through the trial, the DSMB was able to determine that iseganan was not achieving its goals and was unsafe and informed Defendants of such information. If the DSMB, and then Defendants, were able to determine before the trial was completed that iseganan was not achieving its goals and was unsafe, then it is possible that the DSMB and Defendants had such information even sooner than the decision to terminate the trial was announced. The problem with Plaintiffs' Complaint is that it provides no basis for determining, or even inferring, when, Defendants may have had such information. Accordingly, the Court grants Defendants' motion to dismiss Plaintiffs' Section 10(b) claim, as well as Plaintiffs' Section 20(a) claim.
D. Scienter.
The PSLRA also requires a plaintiff to allege particular facts giving rise to a strong inference that "the defendant made false or misleading statements either intentionally or with deliberate recklessness." Vantive, 283 F.3d at 1085; 15 U.S.C. § 78u-4(b)(2). Where the pleadings are not sufficiently particularized or where, even taken as a whole, they do not raise a strong inference of scienter, dismissal pursuant to Rule 12(b)(6) is proper. Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1038 (9th Cir. 2002). Moreover, to determine whether a plaintiff has pled a strong inference of scienter, "the court must consider all reasonable inferences to be drawn from the allegations, including inferences unfavorable to the plaintiffs." Gompper, 298 F.3d at 897.
Because Plaintiffs fail to allege false and misleading statements, the Court will not address whether Plaintiffs sufficiently plead scienter. However, the Court notes that with respect to pleading the requisite intent by Earnest Mario and Kevin Tang in particular, Defendants point to some potentially insurmountable obstacles. Defendants submitted documents of which the Court make take judicial notice which indicate that Tang and Mario purchased IntraBiotics' stock on October 6, 2003 and May 5, 2004, respectively. (Declaration of Cheryl W. Foung, Exs. 10, 12.) Moreover, Plaintiffs themselves allege that Mario and Tang's firm, Tang Capital Partners, LP, were among the investors who helped raise $3.5 million to help start the Phase II/III trial for VAP in February 6, 2003. (Compl. ¶ 59.) Personally investing their own money near to the time when the company announced it was terminating the trial tends to undermine any inference of scienter with respect to these defendants. If Plaintiffs amend their Complaint, they should take care to plead facts which could demonstrate that Mario and Tang invested less than they had at risk if the Phase II/III trial for VAP had not been funded or had been terminated earlier.
E. Plaintiffs' Section 11 and 15 Claims Are Sufficiently Alleged
Defendants attack Plaintiffs' Section 11 claim regarding false statements or omissions made in a registration statement on two grounds: (1) Plaintiffs fail to allege fraud with sufficient particularity, and (2) Plaintiffs fail to allege Representative Plaintiff Buche purchased stock that is traceable to the registration statement.
Plaintiffs' Section 11 claim is not governed by the heightened pleading standards under the PSLRA. Falkowski v. Imation Corp., 309 F.3d 1123, 1133 (9th Cir. 2002). Section 11 claims which are "grounded in fraud" are subject to the requirements under Federal Rule of Civil Procedure 9(b) that allegations of fraud be pled with particularity. In re Stac Electronics Securities Litigation, 89 F.3d 1399, 1404-1405 (9th Cir. 1996). However, Plaintiffs allege that their Section 11 claim is not premised on fraudulent or intentional conduct. (Compl. ¶ 128.) Plaintiffs reiterate this point in their opposition to Defendants' motion to dismiss. (Opp. at 25.) Defendants do not respond to this argument in their reply brief. Defendants may be held liable for "innocent or negligent material misstatements or omissions" under Section 11. See Kaplan, 49 F.3d at 1371. Because Plaintiffs do not contend the alleged misstatements or omissions were fraudulent for purposes of their Section 11 claim, this claim does not need to be pled with particularity.
To maintain a Section 11 claim, Plaintiffs must allege, and eventually prove, that the stocks Buche purchased were issued were issued under the registration statement containing the misstatements or omissions. Hertzberg, 191 F.3d at 1080. In Hertzberg, the Ninth Circuit noted that it might be difficult to prove stocks were issued pursuant to a particular registration statement if a company issued stock under more than one registration statement. Id. Defendants argue that Plaintiff have not and cannot allege, let alone prove, that Buche's stocks are traceable to the allegedly false registration statement. However, Plaintiffs allege that Buche purchased stock pursuant to or traceable to the registration statement at issue in this case. (Compl. ¶ 132.) At this procedural stage, such allegations are sufficient. See In re SeeBeyond, 266 F. Supp. 2d at 1171 (denying motion to dismiss where plaintiff alleged it purchased stock pursuant to the registration statement, and noting "whether the plaintiff is able to trace its stock is not a question that can be resolved on this motion."); see also In re Global Crossing, Ltd. Securities Litigation, 313 F. Supp. 2d 189, 208 (S.D.N.Y. 2003) ("[T]he pleading requirement is not elaborate. Plaintiffs have not been required to explain how their shares can be traced; general allegations that plaintiff purchased `pursuant to' or traceable to false registration statement have been held sufficient to state a claim."). Because the Court concludes that Plaintiffs have sufficiently alleged their Section 11 claim, Plaintiffs' Section 15 claim premised on the underlying Section 11 claim is sufficiently alleged as well. Accordingly, the Court denies Defendants' motion to dismiss Plaintiffs' Section 11 and 15 claims.
F. Defendants' Motion to Require an Undertaking.
Defendants argue that Buche cannot prove his stocks are traceable to the allegedly false registration statement, and thus move pursuant to Section 11(e) to require Buche to furnish an undertaking with respect to his Section 11 claim. Pursuant to Section 11(e), a district court has "discretion to require a party to post security to cover the costs and attorneys fees of opposing parties." Weil v. Investment/Indicators, Research and Management, Inc., 647 F.3d 18, 22 (9th Cir. 1981) (citing 15 U.S.C. § 77k(e)). A court may require an undertaking if a plaintiff files a suit in bad faith or the plaintiff's claim "borders on the frivolous." Id. However "[r]equests for an undertaking are generally disfavored." Gould v. Harris, 929 F. Supp. 353, 361 (C.D. Cal. 1996), abrogated in part on other grounds by Hertzberg v. Partners, Inc., 191 F.3d 1076 (9th Cir. 1999). Notably, even if the Court does not require an undertaking, the Court may assess litigation costs against Plaintiffs if and when a judgment in favor of Defendants is entered. Id. (citing 15 U.S.C. § 77k(e)).
Here, Defendants only argue that Plaintiffs' Section 11 claim is frivolous, not that it was brought in bad faith. Defendants contend that Plaintiffs cannot prove standing (i.e. that Buche's shares are traceable) or that Defendants failed to disclose side effects. The Court has already concluded that Plaintiffs sufficiently allege traceability. It is not yet known whether Plaintiffs ultimately will be able to prove traceability. The Court declines to hold that there are no circumstances under which Plaintiffs could prevail on this issue. As the court noted in Lilley v. Charren, 936 F. Supp. 708, 716 (N.D. Cal. 1996), plaintiffs could establish standing for a Section 11 claim by identifying the purchasers of the unregistered shares. The Court further declines to hold that Plaintiffs' claims regarding false and misleading statements are frivolous. Thus, the Court denies Defendants' motion for an undertaking.
IV. CONCLUSION
For the foregoing reasons, the Court GRANTS IN PART and DENIES IN PART Defendants' motion to dismiss as follows: (1) the Court GRANTS Defendants' motion to dismiss Plaintiffs' first and second claims with leave to amend; and (2) the Court DENIES Defendants' motion to dismiss Plaintiffs' third and forth claims. Plaintiffs SHALL file any amended complaint within thirty days of the date of this Order. If an amended complaint is filed, Defendants shall either file an answer or move to dismiss within twenty days of service of the amended complaint. If Plaintiffs do not file an amended complaint, Defendants shall file an answer within twenty days after Plaintiffs' time to file an amended complaint has expired.
The Court DENIED Defendants' motion for an undertaking.
IT IS SO ORDERED.