This week, my team and I again had the honor of writing for Washington Legal Foundation’s Legal Backgrounders series.
Here is a link to the full article:
After discussing the court’s important rulings on falsity and scienter, we identify three key takeaways:
“Bristol-Myers provides several insights that are helpful to defendants and defense counsel. First, use of contemporaneous public materials reflecting the market’s perception of a company’s public statements is crucial for providing the necessary context to undermine falsity. In this case, the Second Circuit affirmed the district court’s taking judicial notice of certain analyst reports presented by Defendants (and not cited in the complaint) for the proposition that market players equated the company’s statements concerning ‘strong’ expression with 5% PD-L1 expression. The court explained:
The Complaint refers to analyst reports that predicted a variety of possible PD-L1 expression thresholds higher than 5%, to argue that Bristol-Myers misled the market by describing a 5% threshold as capturing a population of strong expressors. The fact that other reports, relying on the same public information, correctly predicted Bristol-Myers’s use of a 5% threshold is relevant to that argument and properly considered on this motion to dismiss.
Second, the decision underscores the importance of the holdings in Omnicare and Tellabs that challenged statements must be evaluated in the context of market information and the customs and practices (and understandings) of the relevant industry. Falsity and scienter cannot be pleaded in a vacuum. Courts must reach outside the complaint to determine whether a challenged statement was false or misleading in context, and whether defendants acted with the requisite intent to defraud.
Third, the decision strengthens the defense that stock sales executed pursuant to 10b5-1 plans do not support an inference of scienter. As a general matter, the case law surrounding use of 10b5-1 plans as a defense was not particularly well-developed or unanimous. Bristol-Myers states definitively that ‘sales conducted pursuant to a 10b5-1 trading plan or [that] were executed for procedural purposes . . . could not be timed suspiciously.’ While courts have more or less taken that position when 10b5-1 plans are adopted prior to the beginning of the alleged fraud, Bristol-Myers addressed a 10b5-1 plan adopted during the class period. Courts typically do not find 10b5-1 plans adopted during the time of the alleged fraud a proper scienter defense because they may have been adopted in a way to capitalize on the alleged fraud. The Second Circuit explained, however, that even where a 10b5-1 plan is adopted during the class period, plaintiffs are still required to plead facts sufficiently alleging ‘that the purpose of the plan was to take advantage of an inflated stock price’ or that the plan was not ‘given or entered into in good faith.'”