Kader v. Sarepta Therapeutics, Inc.
887 F.3d 48 (2018)
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Rule of Law:
Under the Private Securities Litigation Reform Act (PSLRA), a securities fraud claim fails to plead a strong inference of scienter when a company discloses the general nature of regulatory risks and concerns, even if it omits certain specific details of its back-and-forth communications with the regulator.
Facts:
- Sarepta Therapeutics, Inc. was developing a drug, eteplirsen, to treat Duchenne Muscular Dystrophy (DMD).
- On April 21, 2014, Sarepta issued a press release announcing its goal to submit a New Drug Application (NDA) to the FDA by the end of the year, while also disclosing that the FDA had 'concerns about methodological problems' and remained 'skeptical' about its key data.
- Following this announcement, Sarepta's stock price rose by over 39%, and on April 29, 2014, the company sold 2,650,000 shares of common stock in a public offering, raising approximately $94.5 million.
- On July 29, 2014, the FDA requested that 'independent pathologists at independent labs' review Sarepta's primary dystrophin data; Sarepta did not disclose this specific request to the public at that time.
- On August 7, 2014, Sarepta's CEO, Christopher Garabedian, held a conference call reminding investors that the FDA needed to conduct a 'further detailed review' and that Sarepta was working 'to provide greater assurance of the quality and reliability of our dystrophin data.'
- On October 27, 2014, Sarepta announced it would not submit the NDA until mid-2015 because the FDA now required additional data, including an 'independent assessment of dystrophin images.'
- Following the October 27 announcement, Sarepta's stock price declined by more than 32%.
Procedural Posture:
- William Kader and other lead plaintiffs filed a putative class action suit against Sarepta Therapeutics, Inc. and two of its executives in the U.S. District Court.
- The plaintiffs filed a First Amended Complaint (FAC) alleging violations of federal securities laws.
- The defendants filed a motion to dismiss the FAC for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6).
- The district court granted the defendants' motion to dismiss, concluding the FAC failed to sufficiently allege misleading statements or scienter.
- The plaintiffs subsequently moved for leave to file a Proposed Second Amended Complaint (PSAC).
- The district court denied the motion for leave to amend, finding both undue delay by the plaintiffs and futility of the amendment.
- The plaintiffs, as appellants, appealed the district court's dismissal of the FAC and the denial of leave to amend to the U.S. Court of Appeals for the First Circuit.
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Issue:
Under the Private Securities Litigation Reform Act (PSLRA), have plaintiffs pleaded facts giving rise to a strong inference of scienter when a company discloses the FDA's general concerns and skepticism about its drug data but does not disclose a specific subsequent FDA request for an independent review of that data?
Opinions:
Majority - Torruella, Circuit Judge.
No. The complaint fails to plead facts giving rise to a strong inference of scienter as required by the PSLRA. The court reasoned that the inference of fraudulent intent was not 'cogent and at least as compelling as any opposing inference of nonfraudulent intent.' Sarepta had repeatedly disclosed the FDA's general skepticism and concerns about the quality and reliability of its dystrophin data from the beginning of the class period. These disclosures put investors on notice of the risks. The failure to disclose the specific July 29th request for an 'independent' review did not render the prior statements materially misleading, as it was consistent with the ongoing 'further detailed review' that Sarepta had already told investors about. The court stated that companies have no legal obligation 'to loop the public into each detail of every communication with the FDA,' allowing for 'give and take' between a company and its regulator. Furthermore, the cautionary nature of Sarepta's public statements weakened, rather than supported, an inference of scienter. Finally, the alleged motive—raising capital through a stock offering—was a general corporate desire and not specific enough to suggest the 'very survival of the company' was at stake, which is the high bar required to support an inference of scienter.
Analysis:
This decision reinforces the high pleading standard for scienter under the PSLRA, particularly for life sciences companies interacting with regulatory bodies like the FDA. The court's willingness to tolerate the non-disclosure of specific negative regulatory feedback, so long as general risks are disclosed, provides significant protection for corporate defendants. It signals that cautionary language and disclosures about general regulatory uncertainty can defeat scienter allegations, even when a company's communications are not perfectly transparent. This ruling makes it more difficult for plaintiffs to survive a motion to dismiss by alleging fraud through omission in cases involving complex and ongoing regulatory dialogues.
