In Local No. 8 IBEW Ret. Plan & Tr. v. Vertex Pharm., Inc., 838 F.3d 76 (1st Cir. 2016), the United States Court of Appeals for the First Circuit affirmed the dismissal of Local No. 8 IBEW Retirement Plan & Trust’s (“Plaintiff”) claims against Vertex and six of its current and past employees (collectively “Defendants”). The court found that Plaintiff failed to plead facts that would allow the court to draw a reasonable inference that Defendants acted with the scienter required to show fraud under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) when Defendants allegedly misstated the interim results of its study on a cystic fibrosis combination treatment.
According to the allegations, Vertex received approval from the Food and Drug Administration (FDA) in early 2012 to market its drug, Kalydeco. Thereafter, Vertex began a three-phase clinical investigation on the effectiveness of the combination of Kalydeco and VX-809 in cystic fibrosis patients. During the second phase of the investigation, Vertex discovered forty-six percent patients improved by five percent and thirty percent improved by ten percent. Vertex issued a press release May 7, 2012 on the findings, which was followed by a stock increase from $58.12 per share to $64.85.
Shortly thereafter, Vertex discovered the results had been overstated; only thirty-five percent of patients improved by five percent improvement and nineteen percent of the patients improved ten percent. Vertex issued a second press release May 29, 2012 correcting the findings. Subsequently, its stock dropped to $57.80 per share.
Plaintiff acquired Vertex stock in reliance on the press release issued May 7, 2012. Two years later, Plaintiff filed a class action against Defendants on behalf of everyone who also acquired stock relying on the May 7, 2012 press release. Plaintiff alleged Defendants committed securities fraud under Section 10(b) by not double-checking interim results that seemed implausible before announcing results to the public. Plaintiff claimed the error was so obvious Defendants knew or should have been aware of the error. The complaint further alleged the increase in stock sales and the retirement of the Executive Vice president showed Defendants acted with a motive.
Under Section 10(b), a securities fraud claim is found when alleged facts show a strong and compelling inference Defendants acted with scienter. Scienter is established “by showing that [D]efendants either consciously intended to defraud, or acted with a high degree of recklessness.”
The court held Plaintiff failed to plead facts that showed Defendants acted with the requisite scienter. Plaintiff did not state facts that suggested the results were not obvious and implausible (i.e. there was no proof that cystic fibrosis scientist would have regarded the facts as obviously mistaken). Nor did the complaint allege facts which showed Defendants noticed the error. While the press release was followed with an increase in stock sales and the retirement of Vertex’s Executive Vice President, these facts were insufficient to demonstrate scienter. Particularly with the retirement of the executive, the court noted that “[a]lternative explanations” to fraudulent intent “abound[ed].”
For the above reasons, the United States Court of Appeals for the First Circuit granted Defendants’ motion, dismissing Plaintiff’s complaint.
The primary materials for this case may be found on the DU Corporate Governance Website.