On March 25, 2024, the United States Court of Appeals for the Ninth Circuit unanimously affirmed a trial court decision dismissing a putative securities class action brought by investors against a biopharmaceutical company ("Company") and certain of its officers and executives, alleging violations Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5. In re Sorrento Therapeutics, Inc. Securities Litigation, No. 22-55641 (9th Cir. Mar. 25, 2024). Plaintiff alleged that defendants made false statements about developments regarding the Company's new COVID-19 antibody treatment, which allegedly misled investors and the public to believe that the Company had discovered a "cure" for the virus in order to boost the Company's stock prices to improve its allegedly "dire financial situation." Judge Anthony J. Battaglia of the United States District Court for the Southern District of California dismissed plaintiff's claims without prejudice, holding that plaintiff had not plausibly pleaded falsity or scienter. The trial court entered judgment after plaintiff failed to file an amended pleading. Plaintiff appealed and the Ninth Circuit affirmed, holding that (1) the allegedly misleading statements were inactionable puffery and (2) standing alone, the Company's allegedly poor financial position was not sufficient to warrant an inference of scienter.
The Company, a clinical-stage biopharmaceutical company, allegedly announced on May 15, 2020, that it had identified an antibody that demonstrated "100% inhibition" against the COVID-19 virus "in an in vitro virus infection experiment." The press release allegedly disclosed contemporaneously that the antibody was still in preclinical stages and had not received FDA approval. That same day, in interviews with several media outlets, the individual defendants allegedly made statements touting the Company's findings that the new antibody had demonstrated the ability to "100% completely prevent infection" and that, if approved, the antibody could end the need to socially distance. The Company's stock price allegedly "rose precipitously" on May 15. However, when, on May 20, 2020, several other media outlets published stories questioning the importance of the Company's development, the Company's stock price dropped.
Plaintiff filed the operative complaint on November 30, 2021, which pressed claims against defendants under Sections 10(b) and 20(a) and Rule 10-b(5). The gravamen of the complaint alleged that the Company falsely claimed to have developed a cure for COVID-19, purposefully misleading investors to invest in the Company so that it could raise capital it allegedly needed to stay afloat. The district court granted the Company's motion to dismiss, finding plaintiff failed to plausibly allege falsity because the Company contemporaneously disclosed that its antibody was in the early stages of development and testing and because the allegedly misleading statements about the antibody's efficacy and potential at most amounted to inactionable "corporate optimism." It further found that the Company's need to raise funds did not give rise to a strong inference of scienter and that plaintiffs' failure to allege falsity further cut against an inference of scienter. The district court also dismissed the Section 20(a) claim for plaintiff's failure to state a predicate violation under Section 10(b).
Reviewing the district court order de novo, the Ninth Circuit affirmed dismissal on both grounds. With respect to falsity, the Ninth Circuit concluded that, although defendants' "enthusiasm" for the new antibody "might have been overblown," taken within the context of the Company's surrounding disclosures, "their statements were not materially misleading." The Ninth Circuit found it particularly significant that both the Company's press release and statements by the individual defendants during interviews on May 15, 2020, allegedly expressed that the antibody still was in the early stages of development and testing. Hence, when read within their broader context, the Ninth Circuit held that plaintiff failed to show a reasonable person would construe the allegedly false statements to mean that the Company was representing that their antibody "without further testing, was an immediate cure for COVID-19."
With respect to scienter, the Ninth Circuit rejected plaintiff's argument that the combination of (1) the individual defendants' alleged roles and access to testing data, (2) the allegedly "blatant falsity" of defendants' statements concerning the efficacy and potential of the antibody, and (3) the Company's allegedly "dire financial situation," taken together, sufficed to raise the requisite strong inference of scienter. First, the Court held that plaintiffs failed to allege that the individual defendants had access to any information about the antibody that was not disclosed by the Company in its press release. Second, the Court reiterated that plaintiff failed to show any of the defendants' alleged misstatements were objectively false and, thus, could not support a finding of scienter. Finally, the Court found that, although plaintiffs had alleged the Company "was clearly helped by the market's response to the announcement" about its antibody, plaintiff failed to identify "any particular improper or inflated sales." The Ninth Circuit reasoned that, without these complementary allegations, plaintiff could not plead a strong inference that the Company sought to improperly manipulate its stock price.
In re Sorrento Therapeutics, Inc. Securities Litigation
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