Putative Class Action Alleging False and Misleading Statements and Scienter Fails Under Section 10b-5 and Section 20(a) of the Securities Exchange Act
In Markette v. XOMA Corp., No. 15-cv-034250HSG, 2017 BL 345015 (N.D. Cal. Sept. 28, 2017), the United States District Court for the Northern District of California granted XOMA Corp.’s (“Defendant” or “XOMA”) motion to dismiss Joseph Markette’s (“Plaintiff”) class action complaint alleging violations for Sections 10(b) and 20(a) of the Securities Exchange Act (“Exchange Act”). The court held the Plaintiff failed to meet the heightened pleading standards under the Private Securities Litigation Reform Act (“PSLRA”).
Plaintiff brought a putative class action on behalf of anyone who purchased XOMA common stock between November 6, 2014 and July 21, 2015. According to the allegations, XOMA partnered with a pharmaceutical company to conduct a double-blind experiment on an antibody for the treatment of inflammatory eye diseases. XOMA was required to provide investors, including Plaintiff, a critical documentation of the study’s effectiveness; however, XOMA was delayed by a few months in reporting the data. Ultimately, the unblinded trial data revealed no difference between the tested and placebo groups. The Plaintiff challenged seven of the Defendant’s statements regarding the double-blind study on the grounds that the statements made material omissions or misrepresentations.
Section 10b-5 of the Exchange Act makes unlawful, any omission of a material fact or untrue statement of a material fact necessary to make the statement not misleading. To succeed on a claim of a 10b-5 violation the burden is on the plaintiff to prove (1) material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation. An omission is material when there is a substantial likelihood that a reasonable investor would view the disclosure as significantly altering the total mix of information available. All private securities fraud complaints are subject to the heightened pleading requirements of the PSLRA, requiring both falsity and scienter. Under the PSLRA, to plead scienter the complaint must state specific facts giving rise to a strong inference that the defendant acted with deliberate recklessness. 15 U.S.C. § 78u-4(b)(2)(A). Finally, Section 20(a) holds persons liable for the Exchange Act violations of entities they control.
The court examined Defendant’s seven statements under the Dearborn pleading standards which create three different pleading standards depending on the nature of the statement. Claims of material misrepresentation, must allege the “speaker did not hold the belief she professed and the belief is objectively untrue.” Claims based on opinion statements, must allege “the supporting fact the speaker supplied is untrue.” Finally, claims alleging misrepresentation through omission must allege the omission “makes the opinion statement misleading to a reasonable person reading the statement fairly and in context.” City of Dearborn Heights Act 345 Police & Retirement Sys. v. Align Tech., Inc., 856 F.3d 605 (9th Cir. 2017).
The court held the challenged statements were mere opinion statements, and Plaintiff’s allegations were insufficient because the facts suggested the Defendants believed the statements to be true at the time. Additionally, the court held that the Plaintiff insufficiently alleged that the seven challenged statements were materially false or misleading based on alleged omissions. The court held that a reasonable investor would have understood the Defendant’s statements as future projections subject to uncertainty. For two of Defendant’s statements, the court held that a reasonable investor would not have viewed the information as significantly altering the information available. Finally, the court found that the Plaintiff inadequately pled scienter. The court held that the Defendants believed in good faith the statements were accurate; transparent regarding the data’s limitations; and included “cautionary language” to put investors on notice that the blind data was potentially uncertain. Because Plaintiff did not adequately allege any primary violations of Section 10(b), the court dismissed the Section 20(a) claims.
For the above reasons, the court granted Defendant’s motion to dismiss with Leave to Amend.
The primary materials for this case may be found on the DU Corporate Governance website.