Talk about some nice fellas. Well, at least it appears they started out that way. Back in 1987, a company called Immune Response Corporation ("IRC") invented a drug called REMUNE® to treat HIV. A noble cause no doubt. What wasn't so noble is what IRC did when "Study 806" showed that REMUNE® had "no effect on indicators of immune response and viral loads." Is that bad? We had better meet with these "science folk." At the meeting, IRC's representatives "feverishly reviewed" the data, but apparently could not put Humpty Dumpty back together again. So they did what we all do in dire straights -- they issued a press release. But somehow the release failed to mention "the negative results from Study 806." Oops. We just forgot to mention it, really. Oh, and what about the smaller, less "comprehensive" study that showed "significant improvements" in patients using REMUNE®. You know, the one our statistician told us not to "over-interpret." We mentioned that one.
Well, a series of other press releases went out, none of which disclosed Study 806, and eventually IRC conducted a Secondary Offering. $15 million later, still no real deep discussion of that pesky study. Then things got interesting. Seems the doctor in charge of Study 806 decided to publish a manuscript describing Study 806 in JAMA. The unmitigated gall. But before he could do so, IRC filed an arbitration to put a stop to that medical nonsense. Wow, an arbitration? Please no, not that! So, the next day, the manuscript appeared where? Very good, a gold star for you today -- in JAMA. Have these guys ever heard of a TRO?
The stock tanked 24% after the JAMA article was published. IRC trashed the article as "tabloid journalism," and said that "the truth in the long run will come out." Side Note: That was nearly five years ago, and well, you can take a quick peek here and see for yourself whether REMUNE® has been approved yet. Go ahead, it'll be fun, guaranteed.
Anyway, it was up to Judge Napoleon A. Jones (S.D. Cal.) to sort out the shareholder's complaint regarding all of this fun. He started out by denying Defendants' attempt to submit additional documents (the decision doesn't say what documents, but probably the usual suspects) at the motion to dismiss stage. Every document Plaintiffs challenged -- he ruled he would not consider. Just isn't proper he said. Moving to the merits, the court accepted Plaintiffs' position on falsity, recognizing that "Plaintiffs' criticism is not that what was said was inaccurate, but that it was incomplete, thus portraying the results of the clinical trial in an unduly optimistic light." If you're looking for an omisions case, this is it. In addressing scienter, Judge Jones distinguished Silicon Graphics, finding that the complaint properly "alleges that Defendants had knowledge of the circumstances concerning REMUNE's ineffectiveness." No inside trading here.
As for loss causation, the court started out by finding that Dura "did not create a heightened pleading standard for loss causation." The Judge then went on to find that "the conjunction of these two allegations makes clear that Plaintiffs claim the disclosures caused the drop in stock price": "(1) Defendants' wrongdoing caused stock prices to become artificially inflated; and (2) stock price dropped sharply when the truth became public." Sorry to you Dura fans camping out all night to get in, that's it. Really.
In two other notable rulings (both of which the Ninth Circuit has never decided), Judge Jones accepted the inquiry notice standard, but denied Defendants' statute of limitations arguments. Defendants did a lot better on their argument that the court should accept the group pleading doctrine though. The court accepted that one, holding that "Defendants liability, if any, is based solely on the statements directly attributed to them." But after those two rulings, Defendants didn't fare so well in their "truth-on-the-market" argument, as the court said it "cannot conclude as a matter of law that the market had sufficient credible information indicating that Defendants' optimism about REMUNE was unwarranted."
In a final interesting note, the court upheld Plaintiffs' 1933 Act claims, finding that they meet "the requirements of Rule 9(b) and sufficiently state a claim." Wait a minute. Did he say 9(b)? Never fear, the Nugget has looked into this. Turns out Judge Jones relied on Falkowski v. Imation Corp., 309 F.3d 1123 (9th Cir. Cal. 2002), which does in fact say "violations of the 1933 Act" are subject to Federal Rule of Civil Procedure 9(b)." However, four months later the Ninth Circuit amended that decision in Falkowski v. Imation Corp., 320 F.3d 905 (9th Cir. Cal. 2003). Another gold star if you guessed the amendment: "In the second sentence of part IVB, insert "to the extent the claims are grounded in fraud." Keep an eye out for a correction to the IRC decision soon too, and steer clear of a certain law clerk bound to be in a bad mood.
You can read the decision at 2005 U.S. Dist. LEXIS 12602.
Nugget: "Defendants would not be responsible if its investors' perceptions were based solely on Defendants' predictions about the prospects of REMUNE's efficacy or FDA approval. That is not the case, however. Rather, Plaintiffs allege that Defendants' misstatements of fact formed a false basis for its investors' perceptions."
Nugget: "Where negative clinical study results are fully available to the market, investors can better weigh positive predictions, and securities are more accurately valued."
Nugget: "In the present matter, Plaintiffs' Complaint contains the very allegations regarding share price decrease and public exposure to the truth the Supreme Court found lacking in the Dura complaint."
Note: The thoughts in italics above are manufactured for your entertainment by the Nugget, not the actual parties, but you knew that already.