On June 20, 2016, the District Court of New Jersey dismissed a private securities fraud action against defendants in a putative class action. In doing so, the court provided further guidance as to the types of factual allegations that will and will not satisfy the pleading standards for such a cause of action.
Background on the Case
In Henry A. v. Aerie Pharms. Inc., Civil No. 15-3007 (D.N.J. June 20, 2016), the plaintiffs alleged that Aerie Pharmaceuticals Inc. (“Aerie”) and certain corporate officers and directors (collectively, “the Defendants”) defrauded investors by issuing false statements or omitting material facts relating to the development of Rhopressa, a glaucoma medication. The allegations focused on statements made during the clinical trial process and certain stock trades allegedly made by one member of the board of directors.
The Court’s Analysis: Emphasizing the Rigorous Pleading Standards for Securities Fraud Claims
The District Court reiterated the well-settled standard that a plaintiff in securities fraud action must allege: “(1) a material misrepresentation or omission, (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” (citing City of Edinburgh Council v. Pfizer, Inc., 754 F.3d 159, 167 (3d Cir. 2014)). The court also noted that the Private Securities Litigation Reform Act of 1995 (“PSLRA”) requires plaintiffs to meet heightened pleading standards and specify the allegedly misleading statements, identify why the statements are misleading, and, for those allegations made on information or belief, specify the facts supporting that belief. Additionally, the plaintiff must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind” (citing 15 U.S.C. § 78u-4(b)(2)).
Using this rubric and the established framework for evaluating a 12(b)(6) motion to dismiss, the court evaluated three categories of statements that plaintiffs alleged violated the securities laws. For each category, the Court held that the plaintiffs failed to sufficiently plead a securities fraud cause of action:
1) As to statements that Rhopressa was a “blockbuster” drug, the court found the defendants were protected by one of two safe harbors in the PLSRA for forward-looking statements. Specifically, the court applied 15 U.S.C. § 78u-5(c) and found the statements were accompanied by “meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement.”
2) The second category of statements dealt with how Rhopressa would perform during a Phase 3 clinical trial (referred to as “Rocket 1”), which later failed to produce desired results. As to these statements, the court found the plaintiffs failed to allege scienter with the requisite level of particularity. The court evaluated several different statements and dismissed the claims finding: a) a failure to demonstrate intentional or reckless statements, b) a failure to show motives beyond the general wish for a company’s success, and c) that one allegedly suspicious trade did not amount to a trading pattern that could support an inference of a deceptive plan.
3) The court likewise found the plaintiffs failed to meet the high bar for alleging scienter as to statements regarding Rhopressa’s previous performance against an existing drug. Specifically, the court found that the plaintiffs failed to show that there was any deceptive intent or recklessness behind the cited statements. Citing established law, the court wrote “material representations are what matter in a securities fraud complaint; opinions and general statements of are understood by reasonable investors to be mere puffery” (internal citations omitted).
Takeaway
The Henry A. case provides concrete examples of allegations that will not satisfy the stringent pleading requirements of a securities fraud action in the District of New Jersey. Practitioners who represent clients on either side of the "v" would be wise to take note.