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Sarafin v. BioMimetic: Statements without Scienter are not Fraudulent

In Sarafin v. BioMimetic Therapeutics, Inc., the United States District Court for the Middle District of Tennessee found that Charles M. Sarafin and other holders of BioMimetic Therapeutics, Inc. (“BMTI”) stock (collectively, the “Plaintiffs”), failed to produce sufficient evidence that BMTI acted with scienter in connection with an action for securities fraud under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  No. 3:11-0653, 2013 WL 139521 (M.D. Tenn. Jan. 10, 2013).  The court, therefore, granted BMTI’s Motion to Dismiss.

According to the complaint, BMTI wanted to enter the United States healthcare market through its Augment Bone Grafting (“Augment”) device.  Augment is a device and biological drug that would stimulate the development of osteoblasts, which are the cells that form bones.  Between October 2009 and August 2010, BMTI stated that Augment would likely be successful in the Food and Drug Administration’s (the “FDA”) Premarket Approval process.  The FDA, however, expressed concerns about Augment’s effectiveness in a Deficiency Letter to BMTI on September 3, 2010.  The FDA also expressed concerns in briefing documents published on May 10, 2011, in advance of the public meeting before the panel of experts. In January 2012, BMTI announced that the FDA would not approve Augment without additional information.

Plaintiffs filed a lawsuit alleging fraud and that BMTI violated Section 10(b) and Rule 10b-5 by misstating or omitting material facts with scienter.  Specifically, Plaintiffs contended that BMTI knowingly made fraudulent statements about the FDA’s approval of Augment.  BMTI filed a Motion to Dismiss, alleging that Plaintiffs failed to establish fraud and scienter.

To assert a successful claim under Section 10(b) and Rule 10b-5, a plaintiff must allege, “in connection with the purchase or sale of securities, the misstatement or omission of a material fact, made with scienter, upon which the plaintiff justifiably relied and which proximately caused the plaintiff’s injury.”  Scienter requires “a knowing and deliberate intent to manipulate, deceive, or defraud, and recklessness.”  A misstatement “or an omission is material only if there is a substantial likelihood that a reasonable investor would have viewed the misrepresentation or omission as having significantly altered the total mix of information made available[; however,] obviously unimportant, vague, or puffing statements, expressions of corporate optimism, and obvious hyperbole are not actionable” (internal quotation marks omitted).  “The ‘total mix’ of information includes information in the public domain and facts known or reasonably available to investors.” 

The court ruled that Plaintiffs’ allegations did not sufficiently show that BMTI acted with scienter.  The court concluded that, while BMTI “perhaps, could have characterized things differently,” the challenged disclosures did “not suggest a knowing and deliberate intent to deceive or defraud, let alone highly unreasonable conduct on the part of BMTI.”  

As for the contention that BMTI “concealed numerous other serious deficiencies in their conduct of the clinical trials,” the claim did not “raise a strong inference of fraudulent intent as required by the [Private Securities Litigation Reform Act of 1995].”  As the court reasoned:

The notion that BMTI would recklessly forego necessary tests and studies or hide adverse events makes little sense, even disregarding [BMTI’s] assertion that they poured their own money into the company.  Plaintiffs’ own allegation is that Augment is BMTI’s flagship product and necessary to the [company’s] success, begging the question why it would sabotage all of the company's efforts to that point.

The court also pointed out that there had not been allegations that “individual defendants received any financial benefit as a result of BMTI’s alleged deception.”  

The primary materials for this case may be found on the DU Corporate Governance website.

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