Patel v. Seattle Genetics, Inc. et al, No. 2:2017cv00041 - Document 30 (W.D. Wash. 2017)
Court Description: ORDER granting Defendants' 22 Motion to Dismiss for Failure to State a Claim; and granting in part and denying in part Defendants' 24 Request for Judicial Notice. Plaintiff is granted leave to file a Second Consolidated Amended Compl aint curing the above-mentioned deficiencies no later than thirty (30) days from the date of this Order. Failure to file an Amended Complaint within this time period will result in dismissal of Plaintiff's claims. Signed by Judge Ricardo S Martinez. (TH)
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Patel v. Seattle Genetics, Inc. et al Doc. 30 1 2 3 4 5 6 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE 7 8 9 10 11 SAMIT PATEL, Individually and on Behalf of All Other Persons Similarly Situated, 12 13 Plaintiff, v. Case No. C17-41RSM ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS AND GRANTING IN PART REQUEST FOR JUDICIAL NOTICE 14 15 16 17 SEATTLE GENETICS, INC., CLAY B. SIEGALL, TODD E. SIMPSON, and JONATHAN DRACHMAN, Defendants. 18 19 I. INTRODUCTION 20 This matter comes before the Court on Defendants’ Motion to Dismiss, Dkt. #22, and 21 Defendants’ Request for Judicial Notice, Dkt. #24. Defendants argue that the Consolidated 22 23 Amended Complaint (“CAC”), Dkt. #18, fails to adequately plead its securities claims. 24 Defendants rely in part on documents outside the pleadings. In Response, Plaintiff argues that 25 the CAC is adequate to satisfy the pleading standards of Rule 12(b)(6), the Private Securities 26 Litigation Reform Act (“PSLRA”), and Rule 9(b). Plaintiff also argues that documents not 27 referenced in the CAC should either not be considered or acknowledged only for their 28 ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS AND GRANTING IN PART REQUEST FOR JUDICIAL NOTICE - 1 Dockets.Justia.com 1 authenticity. See Dkt. #26. For the reasons stated below, the Court GRANTS Defendants’ 2 Motion to DISMISS and GRANTS IN PART Defendants’ Request for Judicial Notice. The 3 Court will grant leave for Plaintiff to file a second consolidated amended complaint. 4 II. 5 BACKGROUND1 This is a putative class action filed on behalf of persons or entities who purchased or 6 7 otherwise acquired Seattle Genetics, Inc.’s common stock between October 27, 2016, and 8 December 27, 2016, both dates inclusive (the “Class Period”), seeking to pursue remedies under 9 §§10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”). Lead Plaintiff 10 Carl Johnson, individually and on behalf of all other persons similarly situated, bring this action 11 12 against Seattle Genetics and the individual defendants Clay B. Siegall, Todd E. Simpson, and 13 Jonathan Drachman. 14 Seattle Genetics is a development stage biopharmaceutical company traded on the 15 NASDAQ exchange under the symbol “SGEN.” Seattle Genetics has a type of cancer treatment 16 known as an antibody-drug conjugate (“ADC”) under development, specifically the drug SGN- 17 18 CD33A, which uses antibodies to target specific antigens on the surface of cancerous cells, and 19 deliver locally strong anticancer agents that would be too toxic to administer otherwise. Seattle 20 Genetics’ trials of SGN-CD33A focused on developing the drug to treat a type of blood cancer 21 called Acute Myeloid Leukemia (“AML”). 22 SGN-CD33A is the successor to an earlier ADC developed by the pharmaceutical 23 24 company Pfizer known as Mylotarg (Gemtuzumab ozogamicin). Mylotarg was manufactured 25 and marketed by Pfizer from 2000 to 2010 as a treatment for AML. In June 2010, Pfizer 26 withdrew Mylotarg from the market at the request of the FDA because an advanced stage 27 28 The following background facts are taken from Plaintiff’s Consolidated Amended Complaint (“CAC”), Dkt. #18, and accepted as true for purposes of ruling on Defendants’ Rule 12(b)(6) Motion to Dismiss. 1 ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS AND GRANTING IN PART REQUEST FOR JUDICIAL NOTICE - 2 1 clinical trial demonstrated that the fatal rate of treatment-related toxicity was significantly 2 higher than standard chemotherapy with no corresponding benefit to cancer patients. 3 Plaintiff alleges that throughout the Class Period, Defendants repeatedly claimed that 4 SGN-CD33A had a superior design and more advanced ADC technology than Mylotarg, 5 6 allowing it to kill cancerous cells effectively without the toxicity that doomed the earlier drug. 7 Specifically, throughout the Class Period, Defendants allegedly claimed SGN-CD33A did not 8 share the toxic side effects of Mylotarg, and touted the absence of liver disease in clinical trials, 9 while omitting that internal information disseminated to Defendants and others within Seattle 10 Genetics unquestionably demonstrated that SGN-CD33A caused liver toxicity (hepatotoxicity). 11 12 Plaintiff lists several sources of information available to Defendants indicating that 13 SGN-CD33A posed a high risk of hepatotoxicity. See CAC at ¶¶ 5, 38–47. This information in 14 part comes from a confidential witness working for Seattle Genetics, “CW1.” 15 seventeen years of experience in the biotechnology industry, and served as the Senior 16 CW1 has Environmental Health and Safety Engineer at Seattle Genetics from March 2015 to February 17 18 2017. 19 toxicologist to prepare Safety Data Sheets that listed specific levels of toxicity associated with 20 each organ in the human body. The CAC indicates that CW1 communicated his concerns about 21 the toxicity of SGN-CD33A to his superiors but not the named defendants directly. 22 23 CW1’s responsibilities included, e.g., coordinating with Seattle Genetics’ in-house Plaintiff provides several examples of allegedly materially false and misleading 24 statements made by Defendants to investors regarding SGN-CD33A. See id. at ¶¶ 48–57. 25 Generally speaking, these statements speak positively of SGN-CD33A’s promise as a treatment 26 but omit that SGN-CD33A had known risks of liver toxicity, and that as a result, a number of 27 28 ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS AND GRANTING IN PART REQUEST FOR JUDICIAL NOTICE - 3 1 patients exposed to SGN-CD33A in clinical trials were experiencing serious adverse 2 hepatotoxic events. 3 On December 27, 2016, the FDA placed a full clinical hold on Seattle Genetics’ Phase 4 I/II trial of SGN-CD33A administered to stem cell transplant patients (“Stem Cell Phase I/II”). 5 6 The FDA also placed partial clinical holds on two other Phase I trials of SGN-CD33A 7 administered in combination with chemotherapy regimens in AML patients. Seattle Genetics 8 issued a press release that same day stating that the trials subject to partial clinical holds would 9 not enroll new patients, and that existing patients could continue to participate if they signed a 10 revised consent form. The press release noted that six patients in the trials had been identified 11 12 with hepatotoxicity, with “four fatal events,” and that these six patients were out of more than 13 300 patients in the clinical trials. CAC at ¶ 58. Plaintiff does not plead exactly when these 14 hepatoxic events occurred, whether before or after the allegedly misleading statements above, 15 and has stated in briefing that this information has not been revealed by Defendants. See Dkt. 16 #25 at 12. 17 18 On this news, Seattle Genetics’ stock price declined by $9.50 per share, or by over 15%, 19 to close at $52.36 on December 27, 2016. That same day, Credit Suisse analyst Kennen McKay 20 lowered the Company’s price target by $10, and remarked that the announcement was 21 surprising given that Defendants had created the impression that SGN-CD33A had unique 22 23 technology to “avoid the [toxicity] pitfalls” of Mylotarg. CAC at ¶ 9. 24 On March 6, 2017, the Company announced that it would abandon the Stem Cell Phase 25 I/II trial and would adopt substantial risk mitigation measures to address hepatotoxicity in all 26 other trials of SGN-CD33A. With these hepatotoxicity risk mitigation measures in place, the 27 FDA lifted the partial clinical holds it had placed on two other Phase I trials. 28 ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS AND GRANTING IN PART REQUEST FOR JUDICIAL NOTICE - 4 1 On January 10, 2017, Plaintiff filed the initial complaint in this case. Dkt. #1. On April 2 7, 2017, the Court entered an Order appointing a lead plaintiff and approving the lead plaintiff’s 3 selection of counsel. Dkt. #8. On June 6, 2017, the lead plaintiff filed the Consolidated 4 Amended Complaint (“CAC”). Dkt. #18. the CAC alleges violations of §§10(b) and 20(a) of 5 6 the Exchange Act and violation of SEC Rule 10b-5. Plaintiff names certain individual 7 defendants in addition to Seattle Genetics. Defendant Siegall is Seattle Genetics’ co-founder, 8 President, Chief Executive Officer and Chairman of the Board of Directors. 9 Simpson was Seattle Genetics’ Chief Financial Officer during the relevant period. Defendant 10 Drachman was Seattle Genetics’ Chief Medical Officer and Executive Vice President, Research Defendant 11 12 and Development during the relevant period. III. 13 14 15 16 DISCUSSION A. Legal Standard In making a 12(b)(6) assessment, the court accepts all facts alleged in the complaint as true, and makes all inferences in the light most favorable to the non-moving party. Baker v. 17 18 Riverside County Office of Educ., 584 F.3d 821, 824 (9th Cir. 2009) (internal citations omitted). 19 However, the court is not required to accept as true a “legal conclusion couched as a factual 20 allegation.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 21 550 U.S. 544, 555 (2007)). The complaint “must contain sufficient factual matter, accepted as 22 23 true, to state a claim to relief that is plausible on its face.” Id. at 678. This requirement is met 24 when the plaintiff “pleads factual content that allows the court to draw the reasonable inference 25 that the defendant is liable for the misconduct alleged.” Id. The complaint need not include 26 detailed allegations, but it must have “more than labels and conclusions, and a formulaic 27 28 ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS AND GRANTING IN PART REQUEST FOR JUDICIAL NOTICE - 5 1 recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555. Absent 2 facial plausibility, a plaintiff’s claims must be dismissed. Id. at 570. 3 Securities fraud claims are subject to heightened pleading standards under Federal Rule 4 of Civil Procedure 9(b) and the Private Securities Litigation Reform Act (“PSLRA”). To satisfy 5 6 Rule 9(b), a claim of fraud must “state with particularity the circumstances constituting fraud.” 7 Fed. R. Civ. P. 9(b). Particularity under Rule 9(b) requires the plaintiff to plead the “who, what, 8 when, where, and how” of the misconduct alleged. Kearns v. Ford Motor Co., 567 F.3d 1120 9 (9th Cir. 2009). Pursuant to the PSLRA, a complaint alleging private securities fraud must 10 “plead with particularity both falsity and scienter.” In re Daou Systems, Inc., 411 F.3d 1006, 11 12 1014 (9th Cir. 2005) (quoting Gompper v. VISX, 298 F.3d 893, 895 (9th Cir. 2002)). A 13 securities fraud complaint must consequently “specify each statement alleged to have been 14 misleading, the reason or reasons why the statement is misleading, and, if an allegation 15 regarding the statement or omissions is made on information or belief, the complaint shall state 16 with particularity all facts on which that belief is formed.” Id.; 15 U.S.C. § 78u-4(b)(1). When 17 18 examining whether plaintiffs’ allegations of scienter are sufficient to survive a motion to 19 dismiss under the PSLRA, the Court “must consider all reasonable inferences to be drawn from 20 the allegations, including inferences unfavorable to the plaintiffs.” Gompper, 298 F.3d at 897. 21 22 23 24 Although required to apply heightened pleading standards, the Court will not be drawn into assessing the credibility of potential witnesses or answering questions of fact. B. Request for Judicial Notice 25 As an initial matter, the Court agrees with Plaintiff that Defendants’ request for judicial 26 notice should be granted only in part. The Court will deny Defendants’ request to take judicial 27 notice of a medical journal article not referenced in the CAC. Consideration of this kind of 28 ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS AND GRANTING IN PART REQUEST FOR JUDICIAL NOTICE - 6 1 factual evidence, related to a key fact in dispute, is inappropriate and unnecessary at the Rule 2 12(b)(6) stage. The remainder of the documents submitted by Defendants will be considered 3 for their existence and authenticity only. See United States ex rel. Lee v. Corinthian Colleges, 4 655 F.3d 984, 999 (9th Cir. 2011). 5 6 C. Claims brought under Section 10(b) and Rule 10b-5 7 To adequately state a claim under Section 10(b) of the Exchange Act and Rule 10b-5, 8 Plaintiff must allege facts sufficient to show: “(1) a material misrepresentation or omission by 9 the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the 10 purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic 11 12 loss; and (6) loss causation.” Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 13 148, 157 (2008). 14 15 16 1. Misrepresentations or Omissions To meet the first element of a claim under Section 10(b) or Rule 10b-5, a complaint must “specify each statement alleged to have been misleading, [and] the reason or reasons why 17 18 the statement is misleading.” 15 U.S.C. § 78u-4(b)(1)(B). A plaintiff must further show that 19 defendants made statements that were “misleading as to a material fact.” Matrixx Initiatives, 20 Inc. v. Siracusano, 131 S. Ct. 1309, 1318, 563 U.S. 27, 179 L. Ed. 2d 398 (2011) (quoting Basic 21 Incorporated, et al. v. Levison et al., 485 U.S. 224, 238, 108 S. Ct. 978, 99 L. Ed. 2d 194 (1988) 22 23 (emphasis in original). A statement is material when there is “a substantial likelihood that the 24 disclosure of the omitted fact would have been viewed by the reasonable investor as having 25 significantly altered the ‘total mix’ of information made available.” Basic, 485 U.S. at 231-32. 26 A statement is misleading if it gives a reasonable investor the “‘impression of a state of affairs 27 that differs in a material way from the one that actually exists.’” Berson v. Applied Signal 28 ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS AND GRANTING IN PART REQUEST FOR JUDICIAL NOTICE - 7 1 Tech., Inc., 527 F.3d 982, 985 (9th Cir. 2007) (quoting Brody v. Transitional Hospitals Corp., 2 280 F.3d 997, 1006 (9th Cir. 2002)). “Once defendants cho[o]se to tout positive information to 3 the market, they [are] bound to do so in a manner that wouldn’t mislead investors, including 4 disclosing adverse information that cuts against the positive information.” Schueneman v. 5 6 Arena Pharms., Inc., 840 F.3d 698, 705-06 (9th Cir. 2016) (internal quotation marks and 7 citations omitted). “Whether a statement is misleading and whether adverse facts are 8 adequately disclosed are generally questions that should be left to the trier of fact.” In re 9 Immune Response Sec. Litig., 375 F. Supp. 2d 983, 1017 (S.D. Cal. 2005) (citing Fecht v. Price 10 Co., 70 F.3d 1078, 1081 (9th Cir.1995)); In re Amgen Inc. Sec. Litig., 544 F. Supp. 2d 1009, 11 12 1018 (C.D. Cal. 2008) (“the truth-on-the-market defense is intensely fact-specific, so courts 13 rarely dismiss a complaint on this basis.”). 14 15 16 Plaintiff sets forth Defendants’ materially false and misleading statements and omissions in paragraphs 48 through 62 of the CAC. For example: 18 54. On December 3, 2016, Seattle Genetics issued a press release announcing partial results from the 7+3 Phase I study, which included the following statements: 19 … 17 20 21 22 23 24 25 26 27 28 “Our clinical trial data reported at ASH demonstrate that adding vadastuximab talirine, also known as 33A, to standard of care treatment results in a rapid, high rate of remissions in frontline, younger AML patients with poor prognosis. Notably, seventy-eight percent of patients who achieved remissions in this trial tested negative for minimal residual disease, which means no cancer could be detected with a sensitive test,” said Jonathan Drachman, M.D., Chief Medical Officer and Executive Vice President, Research and Development at Seattle Genetics. “In this trial, 33A in combination with 7+3 was well-tolerated, with a low early mortality rate. Based on these promising, early data, we plan to initiate a randomized phase 2 clinical trial in 2017 in younger newly diagnosed AML patients to further evaluate the potential benefit of adding 33A to standard of care.” ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS AND GRANTING IN PART REQUEST FOR JUDICIAL NOTICE - 8 1 2 3 4 5 6 7 8 9 10 “People with acute myeloid leukemia die of infections or bleeding within weeks or a few months of diagnosis without effective, aggressive chemotherapy. Even with current treatment regimens, fewer than 50% of younger adults are successfully treated. The phase 1 results of 33A in combination with standard of care show a high rate of remissions in younger newly diagnosed AML patients without significantly adding to the toxicity of the treatment. … No veno-occlusive disease/sinusoidal obstruction syndrome or significant hepatotoxicity was observed on treatment. Dkt. #18 at 16–18 (emphasis in original). 11 Defendants argue that the above press release related to a specific study, “Study 2,” and 12 that Plaintiff “has not alleged any facts indicating that these December 3 Study 2-specific 13 statements were false” or “that a single Study 2 patient experienced significant hepatotoxic 14 15 events or died from such events.” Dkt. #22 at 22. 16 In Response, Plaintiff argues that, under the PSLRA, “even literally true statements can 17 be misleading where, as here, they omit material information.” Dkt. #25 at 16 (citing Miller v. 18 Thane, Int’l Inc., 519 F.3d 879, 886 (9th Cir. 2008)). Plaintiff pleads and argues in briefing that 19 20 Defendants repeatedly failed to mention material information about SGN-CD33A’s toxicity that 21 was known to Defendants. Most persuasively, Plaintiff argues that the December 3, 2016, press 22 release, above, failed to disclose that patients in the trials had already experienced hepatotoxic 23 events while simultaneously touting the drug’s lack of “significant” hepatotoxicity, and that this 24 satisfies the standard for misleading statements under prior case law. 25 26 Id. at 19 (citing Schueneman, 840 F.3d at 705-06; Juno Therapeutics, 2017 U.S. Dist. LEXIS 91608, at *17-18). 27 On Reply, Seattle Genetics argues that Section 10(b) and Rule 10b-5 “prohibit only 28 misleading and untrue statements, not statements that are incomplete,” and “do not create an ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS AND GRANTING IN PART REQUEST FOR JUDICIAL NOTICE - 9 1 affirmative duty to disclose any and all material information.” Dkt. #28 at 12–13 (citing Brody, 2 280 F.3d at 1006; Matrixx, 563 U.S. at 44). 3 The Court finds that Plaintiff has more than adequately pled misrepresentations or 4 omissions under the PSLRA and Rule 9. Plaintiff has specified each statement alleged to have 5 6 been misleading, the reason or reasons why the statement is misleading, and when and how the 7 statements were made. See Gompper, 298 F.3d at 895. Taking all facts pled as true, the Court 8 finds that Plaintiff has made facially plausible claims of misrepresentations and omissions in 9 violation of §§10(b) and 20(a) of the Exchange Act and violation of SEC Rule 10b-5 based on a 10 duty to disclose the hepatotoxicity events at issue given the positive statements made during the 11 12 Class Period. See Schueneman, 840 F.3d at 705-06 (“Once defendants cho[o]se to tout positive 13 information to the market, they [are] bound to do so in a manner that wouldn’t mislead 14 investors, including disclosing adverse information that cuts against the positive information.”); 15 Matrixx, 131 S.Ct. at 1321 (the duty to disclose is triggered either by a specific requirement 16 under the relevant regulations or “when necessary to make statements made, in the light of the 17 18 circumstances under which they were made, not misleading.”). 19 Defendants’ statements were materially misleading is an intensely fact-specific inquiry. 20 Defendants have failed to show that the above statements could not have been materially 21 misleading. Based on the information before the Court, even if the risk of hepatotoxicity was 22 23 Whether or not each of known to investors, the disclosure of an actual death could be viewable by the reasonable 24 investor as having significantly altered the ‘total mix’ of information, and it appears investors 25 reacted negatively to the subsequent disclosure with a drop in Seattle Genetics’ stock price. 26 Accordingly, this is not a basis for dismissal. 27 28 ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS AND GRANTING IN PART REQUEST FOR JUDICIAL NOTICE - 10 1 2. Scienter 2 The PSLRA requires that the complaint “state with particularity facts giving rise to a 3 strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u- 4 4(b)(2)(A). To satisfy this state of mind element, the “complaint must allege that the defendant 5 6 made false or misleading statements either intentionally or with deliberate recklessness.” In re 7 Verifone Holdings, Inc. Sec. Litig., 704 F.3d 694 (9th Cir. 2012) (quoting Zucco Partners, LLC 8 v. Digimarc Corp., 552 F.3d 981, 991 (9th Cir. 2009) (internal alterations omitted)). While 9 facts showing a motive and opportunity to commit fraud “provide some reasonable inference of 10 intent,” they are “not sufficient to establish a strong inference of deliberate recklessness.” In re 11 12 Verifone, 704 F.3d at 701. The Supreme Court has instructed that allegations are to be reviewed 13 “holistically” in determining whether scienter has been adequately pled. Id. (quoting Matrixx, 14 131 S.Ct. at 1324). At the end of the day, “[a] complaint will survive... only if a reasonable 15 person would deem the inference of scienter cogent and at least as compelling as any opposing 16 inference one could draw from the facts alleged.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 17 18 551 U.S. 308, 324, 127 S. Ct. 2499, 168 L. Ed. 2d 179 (2007). 19 Defendants argue that the CAC lumps together Dr. Drachman, Dr. Siegall, and Mr. 20 Simpson, referring to them as “defendants,” and that this fails to satisfy the requirement that 21 scienter be alleged with particularity as to each defendant separately. Dkt. #22 at 25 (citing 15 22 23 U.S.C. § 78u-4(b)(2)(A); In re Silicon Graphics, Inc. Sec. Litig., 970 F. Supp. 746, 752 (N.D. 24 Cal. 1997)). Defendants argue that Plaintiff fails to allege any specifics about the individual 25 defendants’ knowledge or mental state at the time the challenged statements were made, instead 26 presenting evidence that CW1 communicated with other individuals in the company. Id. at 25– 27 26. Defendants argue that the following allegation is conclusory: that “[b]y virtue of their 28 ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS AND GRANTING IN PART REQUEST FOR JUDICIAL NOTICE - 11 1 positions” as “senior managers of Seattle Genetics,” the Individual Defendants “had actual 2 knowledge of the materially false and misleading statements and material omissions,” including 3 “SGN-CD33A and its known risk of hepatotoxicity.” Id. (citing CAC ¶ 76). Defendants argue 4 that Plaintiff fails to allege any motive for the misrepresentations/omissions, e.g. insider trading. 5 6 Id. at 27–28. Defendants argue that Plaintiff’s inference of scienter is unreasonable. 7 In Response, Plaintiff argues that the CAC adequately pleads that “Defendants were 8 aware of the deaths and other hepatotoxic events at the time they made statements to investors 9 omitting this information in their December 2016 press releases, or deliberately disregarded this 10 adverse information.” Dkt. #25 at 24. Plaintiff argues that “[s]peaking about drug safety 11 12 without disclosing the most important life-and-death safety information amounts to deliberate 13 recklessness.” Id. (citing Schueneman, 840 F.3d at 709; Juno Therapeutics, 2017 U.S. Dist. 14 LEXIS 91608, at *21). Plaintiff bases this conclusion on the facts that Defendants “abandoned 15 a clinical trial for a predecessor drug that was very close to 33A due to hepatotoxicity;” “had 16 access to Safety Data Sheets that indicated a risk of hepatotoxicity associated with 33A;” and 17 18 “were aware of a third party risk assessment that confirmed toxicity, especially after it caused a 19 contract manufacturer to suspend production of 33A’s key components.” Id. at 24–25. To 20 connect the negative information about SGN-CD33A to the individual Defendants’ knowledge 21 prior to making the above statements, Plaintiff argues that “[t]he Safety Data Sheets were 22 23 widely available to the Company’s employees, including Individual Defendants, and these 24 reports indicated a risk of hepatotoxicity associated with 33A. Id. at 21 (citing CAC ¶ 41). 25 Plaintiff argues that CW1 “sought to resolve these toxicity risks with both Defendants Simpson 26 and Siegall, who declined to meet with him.” Id. (citing CAC ¶ 46). Plaintiff also argues that 27 knowledge can be imputed to Defendants legally under the “Core Operations Doctrine.” Id. at 28 ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS AND GRANTING IN PART REQUEST FOR JUDICIAL NOTICE - 12 1 25 (citing South Ferry LP v. Killinger, 542 F.3d 776, 783–84 (9th Cir. 2008)). This Plaintiff 2 argues that absence of insider sales or other evidence of personal financial gain is “irrelevant” to 3 proving scienter. 4 interpreting their actions with an absence of scienter, are neither plausible nor compelling, and 5 6 Id. at 25–26. Plaintiff argues that Defendants’ competing inferences, rely on documents outside the CAC. Id. at 26–28. 7 On Reply, Defendants argue that “the allegations show that CW1 was not in a position 8 to know about hepatotoxicity in clinical study patients; never communicated CW1’s concerns 9 about hepatotoxicity to Siegall, Simpson, or Drachman; was not in a position to know about 10 hepatotoxicity in clinical studies; and that the Safety Data Sheets for 33A dealing with 11 12 environmental toxicity could not have informed Defendants of hepatotoxicity in clinical 13 studies.” Dkt. #28 at 14. Defendants argue the CAC relies too heavily on speculation of 14 fraudulent intent, which is insufficient to meet the requirements of the PSLRA. Id. (citing City 15 of Roseville Emps.’ Ret. Sys. v. Sterling Fin. Corp., 963 F. Supp. 2d 1092, 1134 (E.D. Wash. 16 2013), aff’d, 691 F. App’x 393 (9th Cir. 2017). 17 18 After reviewing the CAC holistically, the Court generally agrees with the above 19 assertions made by Defendants. The Court finds that Plaintiff has failed to plead scienter with 20 sufficient particularity through allegations that show intent or deliberate recklessness, and failed 21 to point to cogent possible motivations for the Defendants to make the alleged misleading 22 23 statements and omissions. See Tellabs, supra. The CAC fails to present allegations connecting 24 knowledge of the alleged risks of hepatotoxicity of SGN-CD33A, environmental or otherwise, 25 to the individual Defendants making the alleged misrepresentations, e.g. by pleading facts 26 showing when and how Defendants became aware of the information known to CW1. The Core 27 Operations Doctrine can only go so far. As the Ninth Circuit stated in South Ferry LP: 28 ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS AND GRANTING IN PART REQUEST FOR JUDICIAL NOTICE - 13 Where a complaint relies on allegations that management had an important role in the company but does not contain additional detailed allegations about the defendants’ actual exposure to information, it will usually fall short of the PSLRA standard. In such cases the inference that defendants had knowledge of the relevant facts will not be much stronger, if at all, than the inference that defendants remained unaware. As a general matter, corporate management's general awareness of the day-to-day workings of the company’s business does not establish scienter--at least absent some additional allegation of specific information conveyed to management and related to the fraud or other allegations supporting scienter. 1 2 3 4 5 6 7 8 9 542 F.3d at 784-785 (internal quotation marks omitted). By failing to plead a strong inference 10 of scienter, Plaintiff’s claims under Section 10(b) of the Exchange Act and Rule 10b-5 must be 11 dismissed. 12 13 D. Claims brought under Section 20(a) A Section 20(a) claim requires underlying primary violations of the securities laws. 15 14 15 U.S.C. §§ 78t(a); In re Rigel Pharms., Inc. Secs. Litig., 697 F.3d 869, 886 (9th Cir. 2012). 16 Because Plaintiff has failed to plead an underlying violation of the federal securities laws, this 17 claim will be dismissed as well. 18 19 20 E. Leave to Amend Where a complaint is dismissed for failure to state a claim, “leave to amend should be 21 granted unless the court determines that the allegation of other facts consistent with the 22 challenged pleading could not possibly cure the deficiency.” Schreiber Distrib. Co. v. Serv- 23 Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir. 1986). The Court finds that Plaintiff could 24 easily allege consistent facts that cure the above deficiencies and will grant leave to amend. 25 IV. 26 27 28 CONCLUSION Having reviewed the relevant pleadings and the remainder of the record, the Court hereby finds and ORDERS: ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS AND GRANTING IN PART REQUEST FOR JUDICIAL NOTICE - 14 1 (1) Defendants’ Motion to Dismiss, Dkt. #22, is GRANTED. Plaintiff is granted leave 2 to file a Second Consolidated Amended Complaint curing the above-mentioned 3 deficiencies no later than thirty (30) days from the date of this Order. Failure to 4 file an Amended Complaint within this time period will result in dismissal of 5 6 7 8 Plaintiff’s claims. (2) Defendants’ Request for Judicial Notice, Dkt. #24, is GRANTED IN PART as stated above. 9 10 DATED this 18 day of October, 2017. 11 12 13 14 15 A RICARDO S. MARTINEZ CHIEF UNITED STATES DISTRICT JUDGE 16 17 18 19 20 21 22 23 24 25 26 27 28 ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS AND GRANTING IN PART REQUEST FOR JUDICIAL NOTICE - 15
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