On February 28, 2018, Judge Peter Sheridan of the United States District Court for the District of New Jersey granted class certification in an action against Aeterna Zentaris, Inc. and certain of its executives. Li V. Aeterna Zentaris, Inc., No. 3:14-CV-07081 (D.N.J. Feb. 28, 2018), ECF No. 144. Plaintiffs asserted claims under Section 10(b) of the Securities Exchange Act of 1934, based on allegations that Aeterna made false or misleading statements about the progress of certain clinical trials involving the drug Macrilen, a growth hormone stimulator intended to diagnose whether a person has adult growth hormone deficiency (“AGHD”).

Plaintiffs alleged that, after Aeterna acquired Macrilen from Ardana Bioscience, it made misleading positive statements about the progress of a Phase 3 clinical trial of the drug and, in particular, its compliance with the Special Protocol Assessment (“SPA”) that set forth the requirements that Aeterna had to satisfy to receive approval for the drug by the Food and Drug Administration (“FDA”). The Phase 3 trial consisted of two parts—the first had already been completed by Ardana and involved comparing Macrilen to a comparator drug already on the market, using 42 patients with AGHD and 10 subjects in a control group. After the comparator was removed from the market, Aeterna was required to enroll an additional 50 patients in the trial. Plaintiffs alleged that Aeterna’s upbeat statements regarding the progress of the Macrilen trial were misleading because Aeterna could only meet the statistical efficacy requirements in the SPA by excluding from the data set two patients in the original 42-person group who were found not to actually have AGHD. Plaintiffs further alleged that during the trial, the FDA informed Aeterna that it disagreed with the decision to exclude data from the two patients, but Aeterna’s upbeat statements continued. When the FDA ultimately denied Aeterna’s application for failure to meet the efficacy requirements in the SPA, Aeterna’s stock allegedly fell by more than 50%.

The Court focused in particular on whether the three named plaintiffs’ claims were typical of the putative class (as required under Rule 23(a) of the Federal Rules of Civil procedure) and on whether defendants had rebutted the fraud-on-the-market presumption and thereby prevented plaintiffs from satisfying the predominance requirement under Rule 23(b)(3). As to typicality, the Court held that arguments that named plaintiffs knew of the risks involved with clinical trials or had frequent trades (i.e., could be termed “day traders”) did not make them atypical. The named plaintiff who had testified he was aware of the risks also testified that he decided to invest based on evidence provided by Aeterna about the efficacy of Macrilen. Slip op. at 13. And as to the plaintiff who was alleged to have engaged in day trading, the Court noted that courts have found that unusually high-volume and high-frequency trading can raise challenges to the typicality requirement but that, in this instance, the plaintiff was not a “day trader” within the meaning of the securities laws—i.e., someone who purchases and sells all of his shares prior to a corrective disclosure—because his purchases were not followed by an immediate sale, were not made frequently, and were not made immediately prior to the corrective disclosure. Id. at 12. Moreover, the Court noted that the allegation that a plaintiff is a day trader, without more, is insufficient to prove that he is subject to a unique defense or should not be appointed as a lead plaintiff. Id. at 12–13.

With respect to the predominance requirement under Rule 23(b)(3), the Court found that plaintiffs were entitled to the fraud-on-the-market presumption of reliance, and that defendants failed to rebut it. First, the Court accepted the evidence of plaintiffs’ expert as satisfying the so-called Cammer factors, Cammer v. Bloom, 711 F. Supp. 1264 , 1286-87 (D.N.J. 1989), of average trading volume, analyst coverage, number of market makers, eligibility to file an SEC Form S-3, and price reaction to new information. Id. at 17–18. Defendants, in fact, did not challenge the efficiency of the market, but attempted to rebut the presumption of reliance by showing a lack of price impact from the alleged misstatements. Plaintiffs’ expert had put forward an event study with respect to two company statements, concluding with 84% confidence that one statement had a price impact on Aeterna stock price movements, and with 95% that another statement had a price impact. Id. at 19–20. Defendants argued, including through use of their own expert’s report, that an 84% level of confidence demonstrated a lack of price impact because it fell short of the 95% confidence level typically required to demonstrate price impact. Id. at 20. The Court rejected these arguments, noting that: (i) plaintiffs’ expert’s report was focused on market efficiency, not price impact, and it was defendants’ burden to show lack of price impact to rebut the fraud-on-the-market presumption of reliance; (ii) the failure of an event study to find price movement does not prove lack of price impact with “scientific certainty”; and (iii) defendants failed to carry their burden to put forward affirmative evidence showing lack of price impact, as their expert’s report contained no event study and merely attempted to discredit plaintiffs’ expert. Id. at 20–21.

This decision is a reminder that defendants seeking to rebut the fraud-on-the-market presumption of reliance have the burden of proving lack of price impact after an efficient market is established. Moreover, while plaintiffs subject to unique defenses may not satisfy the typicality requirement for class certification, more is required than pointing to frequent trading activity.

Li V. Aeterna Zentaris, Inc.