Cohen v. Kitov Pharmaceutical: Court Denies Defendant’s Motion to Dismiss

In Cohen v. Kitov Pharmaceutical Holdings, Ltd., No. 17 Civ. 0917 (LGS), 2018 BL 94656 (S.D.N.Y. Mar. 20, 2018), the United States District Court for the Southern District of New York denied in part and granted in part a motion to dismiss a putative class-action suit against Kitov Pharmaceutical Holdings, Ltd. (“Kitov”), CEO Isaac Israel, and CFO Simcha Rock (collectively “Defendants”) brought by lead plaintiffs Rotem Cohen and Jason Bruening (collectively “Plaintiffs”). The complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Act”). The court denied the motion to dismiss with regard to defendants Kitov and Israel but granted the motion to dismiss concerning defendant Rock.

Kitov, an Israeli biopharmaceutical company, developed a drug candidate, KIT-302, for the treatment of hypertension and osteoporosis. The company hired an independent Data Monitoring Committee (“DMC”) to evaluate the likelihood of KIT-302’s approval by the Food and Drug Administration before it could be marketed. Kitov provided data related to the drug’s efficacy to the DMC. Subsequently, the DMC’s review and analysis revealed no additional tests were necessary and classified the drug as viable. According to the complaint, however, Kitov provided falsified data in a report to improve the likelihood of a favorable review by the DMC. On February 6, 2017, an Israeli newspaper article about defendant Israel’s arrest concerning the allegedly falsified report prompted a 30% decline in value of Kitov stock.

To adequately state a claim under Section 10(b) of the Exchange Act and successfully implement Rule 10b-5, a plaintiff must allege facts sufficient to show: (1) a 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.

With regard to the first element above, a statement or omission qualifies as material when a substantial likelihood exists that a reasonable investor would view the disclosure as significantly altering the 'total mix' of information made available. To properly allege scienter, the second element, a complaint must allege the defendant made false or misleading statements either intentionally or with deliberate recklessness, or that facts give rise to a strong inference of such. To meet the loss causation element, a plaintiff must show that the subject of the fraudulent statement or omission actually caused the loss. A plaintiff does not need to prove the fraudulent behavior emerged as the only possible cause of the stock price decline, but rather that the actions serve as one plausible explanation for the stock’s decline.

Additionally, according to Rule 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act (“PSLRA”), fraud assertions must meet a heightened pleading standard stating the “who, what, when, where, and how” the fraud occurred.

Finally, to properly allege a violation of Section 20(a), a plaintiff must allege both a primary violation of the Act and control over the primary violator.

In granting Plaintiffs’ motion in part, the court held that the complaint adequately pleaded material omissions with regard to Defendants Kitov and Israel. The court reasoned Defendants Kitov and Israel’s statements regarding the validity and results of the KIT-302 study qualified as material and misleading because information appeared falsified to create the impression that the drug was likely to receive FDA approval. The court also found the presence of the loss causation element evidenced by Kitov’s stock prices steeply declining immediately after the news reports of an investigation into Kitov’s statements came out. Finally, the court held Plaintiffs met the scienter element with respect to CEO Israel and Kitov, but not CFO Rock. Witness testimony revealed that Israel directed those conducting the study to falsify results to improve the drug’s market viability. Further, the evidence revealed that both Kitov and Israel appeared consciously aware the statements were misleading. Conversely, the court found that defendant Rock did not satisfy the scienter requirement because the allegations did not create a strong inference that he knew about the fraud or had access to information about it. Finally, the court ruled that Plaintiffs adequately alleged control person liability under their Section 20(a) claim, so Defendants Kitov and Israel’s motion to dismiss that claim was denied.

For the above reasons, the court denied defendants Kitov and Israel’s motion to dismiss and granted Rock’s motion to dismiss in full.

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