Delaware Chancery Analyzes Scienter Requirement in Insider Trading Claim

In a derivative action alleging insider trading, the Delaware Court of Chancery recently held that demand was excused as futile where the stockholder plaintiff alleged that a majority of the corporation’s board members sold stock while in possession of non-public information indicating that physicians were reluctant to prescribe the company’s newly approved drug due to concerns over Medicare reimbursement.

On April 29, 2010, after fifteen years of testing, nominal defendant Dendreon Corporation (Dendreon) obtained and then publicly disclosed US Food and Drug Administration (FDA) approval for Provenge, a new drug designed to treat advanced prostate cancer. Shortly thereafter, several officers and directors sold significant quantities of stock. More than one year later, Dendreon disclosed that Provenge sales were slower than expected due to the fact that some physicians had expressed concern over Medicare reimbursement for Provenge prescriptions. Following that announcement, Dendreon’s stock price declined 67 percent.  

Plaintiff brought a Brophy insider trading claim alleging that Dendreon’s officers and directors knew of the “reimbursement risk” and its potential impact on Provenge sales at the time of the FDA approval and the ensuing stock sales. Prior to bringing the suit, plaintiff obtained documents from Dendreon pursuant to a “books and records” demand and thereby was able to provide sufficient detail such that the Chancery Court concluded that the claims were adequately particularized and demand was excused.  

In finding that the complaint adequately pleaded scienter, the court focused on the timing and size of the trades, 70 percent of which occurred within one day of FDA approval. Although the court noted that there are “entirely legitimate reasons” for such sales, (i) the absence of similar trading activity following previous milestones, (ii) the similarity of trades by insiders who possessed the same information and (iii) the failure to disclose that information to the market, all supported a reasonable inference of scienter.        

Silverberg v. Gold et al., C.A. No. 7646-VCP (Del. Ch. Dec. 31, 2013).