Despite the complexities involved in securities fraud actions, the Sixth Circuit recently reminded litigants that adequately pleading facts to support elements of claims is still important. This is particularly true when the statute under which plaintiffs are seeking relief requires a “strong inference of scienter.”

On March 28, 2014, the Sixth Circuit held that investors suing under the Private Securities Litigation Reform Act of 1995 (PSLRA) had not pled facts indicating a strong inference of scienter as required under the PSLRA. Paula Kuyat, et al. v. BioMimetic Therapeutics Inc., et al., No. 13-5602, 6th Cir. The defendant medical company was seeking FDA approval for a product that promotes bone growth in patients that undergo foot and ankle surgeries. But despite clinical trials and several responses to the FDA regarding the new product, the FDA declined approval. 

The plaintiffs filed suit against BioMimetic claiming that the “rosy assessments” of the new product amounted to securities fraud. The district court granted the company’s motion to dismiss holding that the plaintiffs had not pled facts “indicating a strong inference of scienter” as required by the PSLRA.  

The Sixth Circuit agreed holding that the reasonable person would conclude that the “inference of scienter in this case is not as strong as the opposing inference.” Turning to the evidence, the Sixth Circuit referenced the letters from the FDA and other evidence to conclude that BioMimetic was “justified in expressing optimism” about the product and FDA approval despite clinical challenges. The plaintiffs twice attempted to remedy this issue but the Sixth Circuit reasoned that those efforts were procedurally flawed and untimely.