On February 13, 2019, United States District Judge William H. Pauley III of the United States District Court for the Southern District of New York dismissed a putative securities class action against clinical stage biopharmaceutical company New Link Genetics Corporation (the “Company”) and its co-founders. Nguyen and Nguyen v. New Link Genetics Corp., et al., No. 16-cv-03545 (S.D.N.Y. Feb. 13, 2019). Plaintiffs contended that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making a series of alleged misrepresentations regarding the development of the Company’s flagship pancreatic cancer drug that “painted a rosier picture for investors, who were misled into thinking the drug would obtain FDA approval.” The Court dismissed without prejudice plaintiffs’ initial complaint, finding that, although plaintiffs adequately pled falsity concerning one alleged misstatement, plaintiffs had not sufficiently pled falsity as to any other statement and, in any event, failed to sufficiently plead loss causation for any of the alleged misstatements. Having reviewed plaintiffs’ amended complaint and defendants’ motion to dismiss that complaint, the Court again dismissed plaintiffs’ claims, holding that plaintiffs’ new allegations regarding misstatements failed to sufficiently plead falsity and that plaintiffs’ loss causation allegations “merely parrot” the defective allegations in their previous complaint.

The Court first addressed the issue of the adequacy of the falsity allegations, noting at the outset those allegations are subject to Rule 9(b)’s heightened pleading standard. The Court also focused on the distinction between alleged misstatements of fact, on the one hand, and alleged misstatements of opinion, on the other hand. Citing the U.S. Supreme Court’s decision in Omnicare as well as the Second Circuit’s decision in Tongue v. Sanofi, 816 F.3d 199 (2d Cir. 2016), the Court noted that an opinion is false if either the speaker did not hold the belief professed or the supporting fact supplied was untrue, and also noted that an opinion, even if sincerely held and otherwise true as a matter of fact, may be actionable if the speaker omits information whose omission makes the statement misleading to a reasonable investor. Plaintiffs’ amended complaint alleged three new misrepresentations and omissions: two relating to the alleged underreporting of the historical survival rate of pancreatic cancer patients during clinical trials, and a third regarding testing efficacy. The Court rejected plaintiffs’ characterization of a statement by one co-founder that “You can look at the last 30 years, all the major studies, pancreatic cancer survival … rates [were] between 15-20 months” in U.S.-based studies as false. While plaintiffs contended that this was a misstatement of fact, the Court instead found that the statement, which plaintiffs cited out of context, was a nonactionable statement of opinion because the speaker did not believe that the facts he stated were untrue and “interpretations of the results of various clinical studies . . . are essentially no different than opinions,” given that “[r]easonable persons may disagree over how to analyze data and interpret results, and neither lends itself to objective conclusions.” Moreover, the Court took issue with the lack of particularity of these allegations, citing the Second Circuit’s decision in Rombach v. Chang, 355 F. 3d 164 (2d Cir. 2004) for the principle that a plaintiff is required do more than allege that the statements were false and misleading, but rather “must demonstrate with specificity why and how that is so.” The Court similarly rejected plaintiffs’ allegation that one of the co-founders “falsely stated that the results of a recent Johns Hopkins Group study found that ‘for the last three decades going all the way back to the 1980s, 1990s and all the way up to 2011, the survival expectancy of pancreatic cancer was 19.2 months.’” The Court agreed with defendants that plaintiffs cited the wrong article in disputing the truth of the co-founder’s statement, and that the actual article referenced by the co-founder did in fact support his assertion and therefore the statement was not false. The Court also rejected plaintiffs’ argument that the Company’s decision to exclude certain patients with short life expectancies from its trial amounted to a material misstatement or omission, finding that defendants’ preference of a different methodology was not sufficient to allege falsity. The Court observed that the Company may have had good reason to exclude such patients from the trial, including that such patients would need to receive the drug for at least six months.

The Court next addressed the issue of loss causation. Noting that the Second Circuit has not resolved whether the notice pleading standard under Rule 8 or the heightened pleading standard under Rule 9(b) applies to the issue of loss causation, the Court observed that the “vast majority” of courts in the Southern District have required that loss causation only meet the notice of requirement of Rule 8. The Court then turned to plaintiffs’ argument that four alleged corrective disclosures made by defendants revealed the truth behind the alleged misrepresentations and were purportedly followed by dips in the Company’s stock price, and as a result demonstrated loss causation. The Court rejected that theory as to the first two alleged corrective disclosures, noting that the alleged misstatements were not false, and that even if they were, the corrective disclosures did not relate to the alleged misrepresentations concerning historical survival rates. Similarly, the Court rejected the third alleged corrective disclosure that one of the clinical trial sites may not have been in compliance with certain good clinical practices. The Court found that such disclosure “did nothing to ‘reveal’[] the truth behind the alleged fraud,” because the disclosure did not relate to the alleged misstatement and the Company had never disclosed that any patients were excluded from the study because of such good clinical practices violations. With respect to the last alleged corrective disclosure—that the last phase of the trial failed—the Court found that the “allegations merely parrot those already found to be insufficient” in the initial complaint and that “nothing in th[e] disclosure relates to [any] actionable misrepresentation.” The Court thus determined that plaintiffs failed to sufficiently allege loss causation as to any of the alleged misstatements.

Noting that Section 20(a) claims are dependent on the viability of the Section 10(b) claims, the Court dismissed all of plaintiffs’ claims with prejudice and marked the case closed.

Nguyen and Nguyen v. New Link Genetics Corp.