On June 14, 2022, the U.S. Court of Appeals for the Third Circuit affirmed the dismissal of a securities suit brought by investors in pharmaceutical company, Amarin Corporation, PLC, holding that the investors had failed to sufficiently plead that the company made any materially false or misleading statements in connection with clinical trial results for an Amarin drug product.
The putative class action suit stemmed from a final Phase 3 trial involving Amarin’s lead product, Vascepa — a drug intended to treat heart disease. The trial, titled “REDUCE-IT” was intended to evaluate whether Vascepa, when combined with statin therapy, could reduce major adverse cardiac events. The Phase 3 trial used a mineral oil placebo in the control group, despite the FDA’s concerns that the placebo data from an earlier trial “indicated that the mineral oil placebo may not have been inert . . . and thus may have biased the treatment effect of Vascepa.” On September 24, 2018, Amarin announced in a press release that the topline results for the REDUCE-IT trial showed an approximately 25% relative risk reduction in major adverse cardiac events when compared to the placebo group. Amarin’s share price increased from $2.99 to $12.40 following the announcement. When the full results were made available, however, health experts and medical professionals echoed the FDA’s concerns that the mineral oil placebo was chemically active, and could have affected the trial’s results by exaggerating Vascepa’s efficacy. Amarin’s share price subsequently dropped by approximately 27%.
Amarin investors filed suit on February 22, 2019, asserting claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, alleging that Amarin’s reporting of the trial’s topline results in the September 24, 2018 press release and in a conference call the same day were materially misleading. Specifically, the investors claimed that because Amarin failed to tell investors that the mineral oil placebo was not inert, the company’s reporting of the topline results overstated the relative risk reduction in major adverse cardiac events for patients receiving Vascepa as compared to the placebo group. Upon Amarin’s motion to dismiss, the U.S. District Court for the District of New Jersey dismissed all claims, concluding that the complaint failed to adequately allege a materially false or misleading statement and scienter.
Following the investors’ appeal, the Third Circuit affirmed this decision. The court first determined that the statements of opinion that Amarin made when disclosing the trial’s topline results were not false or misleading, because the Amarin announcements did not make any characterizations regarding the impact of the mineral oil placebo. Moreover, the interpretations of the results by health and medical professionals upon which the investors relied were “not sufficient” in the court’s eyes “to establish that [Amarin’s own] interpretations” of the results “‘lacked a reasonable basis.’” The court also concluded that the company did not make any material omissions in its reporting, given: (1) Amarin’s contemporaneous disclosures regarding the mineral oil placebo; (2) the company’s statement that the full results of the REDUCE-IT trial would be released at a later date; and (3) the fact that Amarin warned of the exact risk that the investors argued Amarin failed to disclose — i.e., that use of the mineral oil placebo may have exaggerated Vascepa’s effectiveness — in its quarterly and annual SEC filings. The court further rejected the argument that Amarin put the mineral oil placebo “in play” when announcing the topline results, which investors claimed gave rise to a duty to disclose further information when announcing the REDUCE-IT trial results, reasoning that no duty existed because Amarin had not made any affirmative characterizations regarding the placebo’s effectiveness.
Finally, the court rejected the investors’ argument that Amarin’s disclosures in its quarterly and annual SEC filings were misleading because the company continued to “reiterate theoretical risks, without disclosing that they had already shown signs of manifesting.” According to the court, not only did the complaint fail to identify any materially false or misleading statements in Amarin’s SEC filings, but it was clear that the risks of which investors complained had not actually materialized at the time those statements were made.
Finding that the investors had not alleged any actionable misrepresentations or omissions, the Third Circuit declined to address the remaining dispute as to whether scienter had been adequately pled, affirming the district court’s dismissal.
Northern District of California Dismisses Investor’s Complaint Against Ozy Media and Executives, Finding Insufficient Allegations to Support Securities Violations
On June 13, 2022, the U.S. District Court for the Northern District of California dismissed a complaint brought by investor LifeLine Legacy Holdings, LLC against digital media company OZY Media, Inc., OZY Media’s Chief Executive Director, Carlos Watson, and Chief Operating Officer, Samir Rao. The court held that LifeLine did not sufficiently allege the existence of omissions from its stock purchase agreements with OZY Media so as to render the representations and warranties therein false and misleading.
This case arose from LifeLine’s investments in OZY Media following Watson and Rao’s representations to LifeLine allegedly touting OZY Media’s financial performance, investment interest in the company from large institutions such as Goldman Sachs, and an alleged $30 million investment from a Google affiliate. On February 24, 2021, LifeLine entered into a stock purchase agreement with OZY Media for the purchase of approximately $2 million of Series C Preferred Shares. On May 13, 2021, LifeLine and OZY Media entered into a second stock purchase agreement, with LifeLine purchasing approximately $250,000 of Series D Preferred Shares. In September 2021, it became publicly known that Rao had attempted to impersonate a YouTube executive in an effort to obtain an investment from Goldman Sachs, and that OZY Media was under government investigation.
On October 4, 2021, LifeLine filed suit against OZY Media and Rao, and later amended the complaint to add Watson as a defendant. Against all defendants, LifeLine claimed, among other counts, violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and also violations of California Corporations Code section 25401, seeking rescission of the two stock purchase agreements as well as damages. Defendants moved to dismiss on the basis that none of the claims were adequately pled.
The court, dismissed the federal securities claims with leave to amend, holding that LifeLine (1) had not sufficiently alleged any material misrepresentation or omission; (2) had not pled allegations sufficient to establish the requisite level of scienter; (3) was not entitled to a presumption of reliance on any of the purported omissions or misstatements, and failed to allege facts showing that it actually relied on the allegedly false or misleading representations when making its investment decision; and (4) set forth insufficient factual allegations demonstrating that it had incurred economic loss caused by defendants’ conduct.
First, the court held that LifeLine failed to explain how the only representation and warranty in the stock purchase agreements identified in the amended complaint was made false or misleading by OZY Media’s alleged failure to disclose Rao’s impersonation and the resulting government investigation. The representation and warranty at issue in the agreements was that “[t]o [OZY Media’s] knowledge, the Company is not in violation of any federal or state statute, rule or regulation applicable to the Company.” The court held that LifeLine failed to identify any statute, rule, or regulation that was violated by Rao’s impersonation of a YouTube executive. As such, LifeLine had not sufficiently alleged that this representation was rendered false by the omission.
Second, the court determined that LifeLine failed to adequately allege that OZY Media’s senior controlling officers, Rao and Watson, acted with scienter by “omit[ing] material information knowingly, intentionally, or with deliberate recklessness” — specifically, the information that Rao had impersonated a YouTube executive and that a government investigation had followed. According to the court, the amended complaint never alleged that Rao or Watson knew that Rao’s conduct violated a statute, rule, or regulation applicable to the company. Although defendants had actual knowledge of Rao’s conduct, the court reasoned that LifeLine had not pointed to any specific representation or warranty in the stock purchase agreements that gave rise to a duty to disclose such information. Moreover, the court found that LifeLine’s failure to allege a plausible motive weighed against a strong inference of scienter.
Third, the court agreed with defendants that because this was a “mixed” case — i.e., involving both alleged omissions and misrepresentations — that LifeLine was not entitled to a presumption of reliance on defendants alleged representations. LifeLine was therefore required to allege sufficient facts showing it relied on the false or misleading representations in the stock purchase agreements when it decided to invest in OZY Media, but failed to do so.
Fourth, the court rejected LifeLine’s loss causation argument that, had it known about Rao’s impersonation, it “would never have invested in Ozy Media” and it was therefore entitled to rescission of the stock purchase agreements and damages. Although LifeLine was not required to allege a “great amount of factual detail,” that court held that it was still required to allege facts sufficient to provide “some assurance that it suffered economic loss” as a result of the alleged material omissions and misrepresentations. The court did not find such facts alleged in the amended complaint, and concluded that LifeLine’s a conclusory allegation of economic loss was insufficient.
Finally, because the state law claims “merely repackage[d]” the federal securities claims, the court concluded that dismissal of the federal securities claims warranted dismissal of the state law claims as well, and likewise dismissed the state law claims with leave to amend. The court thus gave OZY Media a chance to replead its claims, but only to the extent they were premised on a theory that the alleged omissions rendered the representations in the stock purchase agreements false and misleading. In so doing, the court denied OZY Media the chance to reallege any claims premised upon the company’s oral representations or an alleged fiduciary duty.
Terraform and CEO Ordered to Comply with SEC Investigative Subpoenas
On June 8, 2022, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s grant of the SEC’s application for an order requiring cryptocurrency company Terraform and its Chief Executive Officer, Do Kwon, to comply with investigative subpoenas for documents as part of an investigation into whether Terraform and Kwon violated federal securities laws by participating in the creation, promotion, and offer to sell digital assets related to Terraform’s Mirror Protocol blockchain technology.
On September 20, 2021, the SEC served investigative subpoenas directed to Terraform and Kwon by hand upon Kwon, the authorized agent for Terraform, while he was exiting an escalator on his way to participate in a panel discussion at a crypto conference in New York, with copies of the subpoenas also sent to Terraform and Kwon’s counsel by electronic mail. Kwon and Terraform did not comply with the subpoenas. The SEC subsequently applied for an order requiring compliance with the subpoenas, which the U.S. District Court for the Southern District of New York granted. Terraform and Kwon appealed the order, arguing that the SEC violated its Rules of Practice when it attempted personal service of the subpoenas on Kwon, and that the district court lacked personal jurisdiction because Terraform and Kwon lacked sufficient contacts with the United States. The Second Circuit affirmed the district court’s ruling, holding that service was proper under the SEC’s Rules of Practice, which authorized service by delivery of a personal service copy “handed to the person”; and that Terraform and Kwon had “purposeful and extensive” contacts with the U.S. such that the exercise of personal jurisdiction “was reasonable and would not offend traditional notions of fair play and substantial justice.”
The Second Circuit first rejected the argument that, because Terraform and Kwon were represented by counsel, the SEC was required under its Rules of Practice to effectuate service on them through counsel or otherwise obtain an order from the Commission or a hearing officer to serve Terraform or Kwon directly. The court reasoned that this reading of the Rules was “contrary to the[ir] text,” and that accepting such an interpretation “would produce absurd results” by allowing a party to insist on service through counsel but then block service by not authorizing counsel to receive filings, especially where Kwon conceded that his counsel were not authorized to accept service on his behalf at the time he was served or at any time thereafter. The court also rejected Kwon’s alternative argument that the electronic service upon his counsel was not effective, holding that, under the text of the rules, the subpoena copies sent by email to Terraform and Kwon’s counsel would have constituted proper service.
The court also rejected the argument that the district court lacked personal jurisdiction over Terraform, a Singapore-incorporated company, and Kwon, a resident of the Republic of Korea. In the court’s view, the exercise of specific personal jurisdiction was justified by Terraform and Kwon’s “purposeful and extensive” contacts with the U.S., including through: (1) marketing and promoting Terraform’s digital assets to U.S. consumers; (2) retaining U.S.-based employees who worked directly on the digital assets at issue and the Mirror Protocol; (3) having extensive contractual relationships with U.S. entities and individuals, including agreements with U.S.-based entities to facilitate the trade and promotion of the digital assets at issue; (4) providing the Mirror Protocol to users in the U.S. and being aware that at least 15% of Mirror Protocol users are from the U.S.; and (5) making business trips to the U.S. The court found that the conduct was purposefully directed toward residents of the U.S., and the lawsuit arose from and related directly to those forum contacts. Finding the district court’s exercise of personal jurisdiction would be reasonable under the circumstances, the court declined to address the question of whether Terraform’s digital assets are securities and could be subject to federal securities laws.
Chancery Court Finds Principles of Corporate Neutrality Violated in Contentious Aerojet Board Election
On June 16, 2022, the Delaware Court of Chancery in In re Aerojet Rocketdyne Holdings, Inc. issued a post-trial opinion finding that the Chief Executive Officer of Aerojet Rocketdyne Holdings Inc. (Aerojet) and her three supporters on the eight-person Aerojet board violated a temporary restraining order (TRO) by deploying company resources in connection with a dispute over board control.
The litigation arises out of a fractured relationship between Aerojet CEO, Eileen Drake, and the Executive Chairman of Aerojet’s Board of Directors, Warren Lichtenstein. The two initially disagreed on how the company should respond to an attempted acquisition by Lockheed Martin Corp. and the relationship continued to deteriorate after the FTC sued to block the merger in January 2022.
Shortly thereafter, Steel Partners (a longtime Aerojet stockholder controlled by Lichtenstein) nominated a slate of seven candidates, including Lichtenstein and three incumbent directors, for an upcoming board election. Drake and the three board members who supported her responded by issuing a press release that purported to express the company’s disappointment in the nomination and suggested Lichtenstein’s nomination among the slate of candidates on behalf of Steel was driven by his personal concerns and desire to secure his board position.
Lichtenstein and his board supporters brought claims in the Delaware Court of Chancery against Drake and her board supporters, seeking a declaration that neither half of the board was authorized to act for the company in connection with the election, as well as a TRO preventing either faction from using the company’s name or resources to advantage itself in the election. The court granted the TRO on February 24, 2022, requiring that the company remain neutral with respect to the board’s deadlock. Following the TRO, Drake nominated her own slate of candidates, including three board supporters.
The case proceeded to trial in May 2022. As plaintiffs, Lichtenstein and his supporters asked the court to declare certain of defendants’ actions as unauthorized and order that no defendant nor any Aerojet employee may direct legal counsel to take any action on behalf of the company in connection with the election. Plaintiffs also requested various forms of equitable relief, and asked that the defendants be held in contempt [for violation of the TRO] by using Aerojet’s advisors, funds, and employees to advantage Drake’s slate of candidates. For example, certain high-level employees participated alongside Drake in election-related strategy sessions and joined her for calls with Aerojet investors intended to solicit support for her slate of candidates.
In a post-trial opinion, the court opened with a cautionary note regarding the “perils that can befall a board with an even number of directors.” The court also included an express disclaimer that the opinion should not be construed as an “endorsement” for the Steel slate of director candidates, but nevertheless declared that the Drake board faction lacked necessary board authorization to take certain actions in connection with the dispute, including retaining a law firm to represent Aerojet in threatening and pursuing litigation against Lichtenstein and his supporters. The court emphasized that, because the board was deadlocked in the contested election, Aerojet was required to remain neutral as to the election’s outcome. The court explained that it was violative of neutrality principles for Drake to use company resources to respond to Steel’s nominations — regardless of Drake’s view that the nominations posed a “threat” to the company. The court imposed an injunction to preserve corporate neutrality until Aerojet stockholders elect a new board of directors, and ordered a corrective disclosure to retract statements made in a press release by defendants. The court also declared defendants violated the TRO by authorizing company employees to transfer shares of her Aerojet stock into record name but declined to find them in contempt on the grounds that it would not serve any remedial purpose.
Securities Class Action by GoodRx Investors Dismissed with Prejudice
On June 9, 2022, the U.S. District Court for the Central District of California dismissed with prejudice an amended complaint by investors in GoodRx, a healthcare technology platform that provides consumers with price information and discounts on prescription drugs. The complaint alleged that GoodRx, its directors, and the underwriters of GoodRx’s IPO inflated the company's IPO price by concealing information about a rival Amazon program that was in the works, citing the plaintiffs’ failure to provide sufficient facts demonstrating that defendants were aware of Amazon’s plans to launch a competitor service.
The putative class action complaint alleged that GoodRx (1) knew that Amazon had plans to enter the online pharmaceutical market but failed to disclose those plans to investors, and (2) made misleading representations on investor calls about its market position in light of the anticipated Amazon launch. An initial complaint brought by investors on these grounds was dismissed in January 2022, with the court finding that plaintiffs did not allege facts establishing that GoodRx and its underwriters were aware of Amazon’s plans to launch Amazon Pharmacy when GoodRx announced its IPO. Specifically, the court noted that, although “plaintiffs allege[d] that GoodRx ‘had access to inside information’ and communicated with Amazon regularly due to its partnerships with Inside Rx" (a company in which Good Rx was a founding partner and which partnered with Amazon to help launch Amazon’s Prime Rx Service) and an Amazon subsidiary, plaintiffs failed to “allege how or when defendants learned any insider information from those partnerships or what specific information they learned.”
The court provided plaintiffs with leave to amend, and renewed motions to dismiss from the GoodRx and underwriter defendants followed the amended complaint. The court agreed with defendants that the amended complaint again failed to provide facts demonstrating that defendants were aware of Amazon’s plans to launch a competitor service, and instead “merely emphasize[d]” claims made in the first complaint about the business relationship between GoodRx and Amazon, which was not enough to meet the pleading standard under the PSLRA. The court held that plaintiffs were required to plead “direct evidence of GoodRx's purported knowledge — such as correspondence between GoodRx and Amazon detailing Amazon's plans, or private reports revealing details about Amazon Pharmacy ahead of its launch” in order to reach “the level of specificity needed for a claim to be considered sufficient,” which plaintiffs failed to do.
Given this failure, and plaintiffs’ previous opportunity to replead, the court dismissed the claim with prejudice.