Investors sued a biotech company and its CEO amid claims that the defendants had issued press releases that fraudulently under-stated the timeframes to begin and complete FDA trials. Defendants countered that the trials progressed as would have normally been expected. In the end, it came down to a duel between what was an inference, what was an implication, and what should have reasonably been inferred and what was (or was not) implied.
Ganem brought this action against InVivo and its former CEO, Reynolds, on behalf of a putative class "consisting of all persons and entities who purchased the common stock of [InVivo] - 11 - from April 5, 2013, through August 26, 2013, inclusive" -- i.e., all purchasers of stock between the dates of the initial announcement of the clinical trial and the press release nearly five months later that revealed problems with the timeline for the trial. The operative amended complaint asserted two claims: first, that InVivo and Reynolds deceived investors into buying common stock at high prices, artificially boosted by the false or misleading press releases, in violation of § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5; and, second, that Reynolds is liable as a "controlling person" under § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a).The district court rejected both claims, concluding that Ganem had failed adequately to plead material misrepresentations or scienter supporting a claim under § 10(b) and Rule 10b-5, and that, absent a primary violation under § 10(b), Ganem's derivative control person claim against Reynolds must be dismissed. Battle Constr. Co., Inc. v. InVivo Therapeutics Holdings Corp., 101 F. Supp. 3d 135, 141-42 & n.6 (D. Mass. 2015). We focus on the claim under § 10(b) and Rule 10-b5 (the "10(b) claim"). . . .
Page 9 of the 1Cir Opinion[H]istorical stock prices cited by both parties indicate that there was a relatively high volume of trading on Monday, April 8, 2013, after the press release the previous Friday. That day, the stock price rose from $2.85 per share to $3.19 per share.
Ganem alleges that InVivo's stock price dropped in reaction to the revised 2014 start date and estimated 21-month time for completion of the clinical trial revealed in this press release. Historical stock prices show that an unusually high volume of trading started on Friday, August 23, 2013, and continued from Monday, August 26 through the end of the class period on August 28. The stock price fluctuated during those four trading days, ultimately dropping from $4.00 per share at the opening of trading on August 23 to $2.07 at the close of trading on August 28.
InVivo also argues that its forward-looking statements are protected by the bespeaks caution doctrine, which "embodies the principle that when statements of 'soft' information such as forecasts, estimates, opinions, or projections are accompanied by cautionary disclosures that adequately warn of the possibility that actual results or events may turn out differently, the 'soft' statements may not be materially misleading under the securities laws." Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1213 (1st Cir. 1996); see also id. at 1213 n.23. InVivo does not, however, invoke the statutory safe harbor codifying the bespeaks caution doctrine, 15 U.S.C. § 78u-5(c)(1), because, it explains, "arguably, the [statutory] safe harbor does not apply to the challenged statements because, while InVivo is now listed on the NASDAQ, the Company could have been, at the time, considered an issuer of 'penny stock.'" See id. § 77z-2(b)(1)(C) (excluding issuers of "penny stock" from the statutory safe harbor). Because the absence of a material misrepresentation or omission is determinative, we need not decide the applicability of either the bespeaks caution doctrine or the statutory safe harbor to InVivo's statements.
[G]anem is left only with the inference that because, in retrospect, the test lagged significantly behind the proposed timeline, the timeline must have always been impossible to achieve. Yet, as the district court properly recognized, "fraud by hindsight" does not satisfy the pleading requirements in a securities fraud case. See ACA Fin. Guar. Corp. 512 F.3d at 62 ("A plaintiff may not plead 'fraud by hindsight'; i.e., a complaint 'may not simply contrast a defendant's past optimism with less favorable actual results' in support of a claim of securities fraud." (quoting Shaw 82 F.3d at 1223)); Gross v. Summa Four, Inc., 93 F.3d 987, 991 (1st Cir. 1996). The securities laws do not make it unlawful for a company to publicize an aggressive timeline or estimate for a proposed action without disclosing every conceivable stumbling block to realizing those plans. Hence, while "greater clairvoyance" might have led InVivo to propose a more conservative timeline, "failure to make such perceptions does not constitute fraud." Denny v. Barber, 576 F.2d 465, 470 (2d Cir. 1978) (Friendly, J.).