George Lehmann, Insured Benefit Plans, Inc. v. Ohr Pharmaceutical, Inc., 2020 WL 5988517 (2nd Cir. Oct. 9, 2020)
On October 9, 2020, the Second Circuit affirmed the dismissal of an action brought against Ohr Pharmaceutical, Inc. and certain of its executives. Plaintiffs alleged that the defendants made misleading statements concerning the efficacy of Ohr’s core product, a Squalamine-based treatment for wet age-related macular degeneration (WetAMD), a condition that can cause vision loss.
The complaint pleaded that in January 2018, Ohr announced the results of a phase III clinical trial of its WetAMD treatment, that the results of this trial showed that the treatment arm actually performed worse than the control arm, and that the Company’s stock price fell by over 80% as a result.
In alleging securities fraud, the plaintiffs claimed that when making various announcements about the interim results of the clinical trial years earlier, Ohr failed to disclose that the control group results in the trial were allegedly inconsistent with prior trials, and that the alleged failure to make this disclosure inflated Ohr’s stock price. In 2019, Judge Preska of the Southern District of New York granted defendants’ motion to dismiss, finding that plaintiffs did not adequately plead facts sufficient to show scienter, i.e., fraudulent intent.
On appeal, the Second Circuit affirmed that decision. The Court agreed that plaintiffs’ allegations concerning “generic corporate interests such as increasing stock price, avoiding bankruptcy, or continuing to operate as a business,” did not give rise to a sufficiently strong inference that the defendants acted with a motive to commit securities fraud. In addition, the Court reaffirmed the principle that alleging that defendants made certain statements while they were supposedly aware of a “variety of information that Plaintiffs say is inconsistent with those statements” cannot give rise to an inference of “conscious misbehavior or recklessness” sufficient to plead scienter. Rather, at most, those allegations amounted to a claim of negligence by the defendants, which is insufficient to plead an inference of intent to defraud.
The Second Circuit also held that there could be no strong inference of intent to defraud based on the Company’s stock price relative to the timing of the Company’s disclosures and secondary stock offerings. Specifically, the Court noted that while the Company’s share price rose from $6.86 to $10.97 after the allegedly misleading statements about the nature of the interim clinical trial results, it was not until seven months later that the Company made a stock offering, at $6.75 per share. The Court found that it would defy “common sense” for the defendants to have waited until the stock price was even lower than before it made the relevant disclosures to offer stock to investors if it were acting with fraudulent intent.
After affirming the dismissal, the Court remanded the case to the district court to make an explicit determination, on the record, on whether to grant plaintiffs leave to file a second amended complaint. On November 16, 2020, the district court denied plaintiffs’ motion for leave to amend.
This case is another reminder that while companies must take care in making disclosures concerning clinical trials, including in light of the focus of the plaintiffs’ bar on the life sciences industry, the bar for plaintiffs to plead fraudulent intent for purposes of securities fraud claims remains high.