On May 16, 2023, the United States Court of Appeals for the Second Circuit affirmed a district court’s dismissal of a putative class action asserting claims against a pharmaceutical company (the “Company”) under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Nandkumar v. AstraZeneca PLC, No. 22-2704-CV, 2023 WL 3477164 (2d Cir. May 16, 2023). Plaintiffs alleged that the Company made misstatements and omissions about the progress of their clinical trials for the COVID-19 vaccine. The district court held that plaintiffs failed to plead falsity or scienter, a decision we previously covered. The Second Circuit, in a summary order, affirmed the dismissal, holding that plaintiffs failed to plead with specificity facts that would explain why and how investors were misled.
Plaintiffs alleged that the Company misled investors by omitting information regarding vaccine dosages and the participation of older patients in their clinical trials in various statements made in the Company’s press releases, earnings calls, and SEC filings. They argued that the Company did so to artificially inflate its stock price to fund the acquisition of another pharmaceutical company. The district court determined that plaintiffs failed to adequately explain how omission of these pieces of information rendered the Company’s statements misleading. Plaintiffs further alleged that scienter should be inferred on a theory of “motive and opportunity” or, in the alternative, a theory of “conscious misbehavior and recklessness.” The district court held that increasing a company’s stock price to facilitate the acquisition of another company was a common and accepted practice, and therefore did not rise to the “motive and opportunity” threshold for scienter. The district court also noted that the Company had disclosed this information to the Food and Drug Administration (“FDA”), undermining plaintiffs’ argument that the Company omitted this information with “fraudulent intent.” The district court also held that plaintiffs failed to specifically identify whether the Company had access to facts contrary to the challenged statements. On appeal, plaintiffs argued that the district court mistakenly required plaintiffs to allege fraudulent intent, when an allegation that the Company acted with recklessness would have sufficed.
The Second Circuit affirmed the district court’s decision, determining that plaintiffs failed to plead falsity or scienter. First, the Court held that plaintiffs failed to adequately plead falsity because they did not adequately explain (i) “how omission of the additional information from the identified statements (regarding, for example, the participation of older patients in clinical trials) render[ed] the statements inaccurate or misleading” or (ii) “how investors were misled because they lacked the details.”
As to scienter, the Court agreed that plaintiffs’ argument about the Company’s motivation to artificially inflate its stock price failed to meet the “motive and opportunity” standard for scienter, as plaintiffs had not shown that the Company would receive a “concrete and personal benefit.” Rather, the Court noted that this type of motive is true of directors and officers of any corporation. The Court also rejected plaintiffs’ claim on appeal that the district court mistakenly required “a heightened recklessness standard” in the absence of motive and opportunity. Rather, the Second Circuit held that the “district court properly applied the ‘conscious misbehavior or recklessness’ standard, which . . . is ‘a state of mind approximating actual intent.’” The Court also agreed with the district court that the Company’s disclosure to the FDA “weakens the inference that there was conscious misbehavior or recklessness.” Finally, the Court held that plaintiffs had failed to adequately plead “corporate scienter,” by alleging “facts that give rise to a strong inference that someone whose intent could be imputed to the corporation acted with the requisite scienter.” The Court noted that the statements identified by plaintiffs were “not so ‘dramatic’ or egregious as to permit an inference of collective corporate scienter.”
Accordingly, the Second Circuit affirmed the district court’s decision in its entirety.
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Nandkumar v. AstraZeneca PLC
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