The Pleading Bar for Securities Fraud Cases Is Higher Than It Looks

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Cases involving securities fraud in the United States District Court for the District of Maryland have become rare, much rarer than in the past.  The Plaintiffs’ bar might attribute this to passage of the Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. § 78u-4(b)(1).  Among other things, the PSLRA requires that Plaintiffs plead facts in the complaint warranting a strong inference of “scienter,” which means “a mental state embracing intent to deceive, manipulate, or defraud.” 

In re Human Genome Sciences, Inc. Securities Litigation, Civil Action No. RWT 11-cv-3231 tested how PSLRA applies to disclosures related to clinical trials of a drug.  In re Human Genome Sciences, Inc. Secs. Litig., 2013 U.S. Dist. LEXIS 42049 (D. Md. March 26, 2013).  The drug, Benlysta, was the first FDA-approved treatment for lupus in 56 years.  Id.  But during the course of several clinical trials involving more than 1,900 patients, three participants committed suicide.  Id.  The class shareholders serving as plaintiffs in this case claimed that the companies who developed and marketed Benlysta deliberately misrepresented the results of these clinical trials.  Id.

The Honorable Roger W. Titus of the United States District Court for the District of Maryland disagreed and dismissed the complaint.  Id.  What is interesting about this decision is it highlights the degree to which courts will now look at matters outside the pleadings to determine whether “scienter” exists and thus whether a cause of action exists under Section 10(b) of the Securities and Exchange Act.  Citing two decisions from the United States District Court for the Middle District of North Carolina, the Court noted that, in the Fourth Circuit, district courts “routinely take judicial notice of newspaper articles, analysts’ reports, and press releases in order to assess what the market knew at particular points in time, even where the materials were not specifically referenced in the complaint.”  Id.

Considering those materials, the Court found that the drug companies did not “selectively disclose” only favorable aspects of the studies at issue.  Id.  The companies actually disclosed at least one suicide, albeit concluding that it was unrelated to the use Benlysta.  Id.  This conclusion was shared by the operators of the study.  Id.  This is not the same as, for example, a drug company deliberately failing to disclose side effects of a drug that become evident after numerous trials and independent studies.  Id.  Thus, “[i]n securities litigation cases premised upon a drug company’s partial non-disclosure of drug trials to the investing public, the key inquiry is whether the non-disclosure at issue results in a suspiciously incomplete data set that yields a strong inference of scienter.”  Id.  The Court did not find that such scienter existed in this case.  Id.

The Court granted the Motion to Dismiss on March 26, 2013.  We will watch this decision to see whether it is appealed to the Fourth Circuit. 

Read the full opinion here.

http://www.mdd.uscourts.gov/Opinions/Opinions/InReHumanGenomeSciencesInc._Securities%20Litigation_0313_MemoOpinion.pdf