United States Court of Appeals
For the First Circuit
No. 16-2057
TERRY BRENNAN; RON KENNER;
KEVIN KOZIATEK; JEFFREY BUTERBAUGH;
DRAGON GATE MANAGEMENT, LTD; VINCENT RAMPE,
Plaintiffs, Appellants,
AVIAD BESSLER, individually and on behalf of all others
similarly situated; THEODORE J. DALY,
Plaintiffs,
v.
ZAFGEN, INC.; THOMAS E. HUGHES,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. F. Dennis Saylor, IV, U.S. District Judge]
Before
Kayatta, Circuit Judge,
Souter, Associate Justice,*
and Stahl, Circuit Judge.
Jeffrey C. Block, with whom Joel A. Fleming, Block & Leviton
LLP, Jacob A. Goldberg, Gonen Haklay, and The Rosen Law Firm, P.A.
were on brief, for appellants.
Deborah S. Birnbach, with whom Kevin P. Martin, Adam Slutsky,
Kate MacLeman, Joshua Bone, and Goodwin Procter LLP were on brief,
for appellees.
* Hon. David H. Souter, Associate Justice (Ret.) of the
Supreme Court of the United States, sitting by designation.
April 7, 2017
STAHL, Circuit Judge. Following a significant drop in
the share price of Zafgen, Inc., a biopharmaceutical developer
based in Boston, Massachusetts, its investors brought a securities
fraud class action suit against the company and its Chief Executive
Officer, Dr. Thomas Hughes ("defendants"), pursuant to
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
15 U.S.C. §§ 78j(b) and 78(t)(a), and Securities and Exchange
Commission Rule 10b-5, 17 C.F.R. § 240.10b-5. The investors'
complaint1 focuses on several allegedly misleading statements made
by the defendants regarding Zafgen's anti-obesity drug Beloranib.
Specifically, the complaint alleges that the defendants disclosed
some, but not all, of the thrombosis-related adverse events that
occurred during Beloranib's clinical trials. The investors claim
that these partial disclosures caused Zafgen's common stock to
trade at artificially-inflated prices -- prices that plunged after
a clinical patient taking Beloranib died and the Food and Drug
Administration ("FDA") placed the drug on a partial clinical hold.
Despite these allegations, the district court granted
the defendants' motion to dismiss, concluding that the investors'
complaint did not contain facts giving rise to a "cogent and
compelling" inference of scienter as required under the Private
1 The investors filed their original complaint on October 21,
2015, and amended that complaint on February 22, 2016. For the
sake of clarity, we refer to this amended complaint as the
"complaint" throughout this opinion.
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Securities Litigation Reform Act of 1995 ("PSLRA"). Brennan v.
Zafgen, Inc., 199 F. Supp. 3d 444, 471 (D. Mass. 2016) (quoting
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324
(2007)). We agree, and therefore affirm.
I.
We recite the facts as alleged in the complaint,
supplemented by certain "materials [the] defendants filed in the
district court in support of their motion to dismiss." Fire &
Police Pension Ass'n of Colo. v. Abiomed, Inc., 778 F.3d 228, 232
(1st Cir. 2015); see also Watterson v. Page, 987 F.2d 1, 3 (1st
Cir. 1993) (noting that courts, when ruling on a motion to dismiss
in securities fraud cases, often consider "documents the
authenticity of which are not disputed by the parties," along with
"official public records; . . . documents central to plaintiffs'
claim[s]; [and] documents sufficiently referred to in the
complaint").
Zafgen's stated goal is "to significantly improv[e] the
health and well-being of patients affected by obesity and complex
metabolic disorders." To that end, Zafgen has focused its efforts
on developing Beloranib, a drug aimed at combating these
conditions.2 Hughes, as Zafgen's Chief Executive Officer, oversaw
2 At all relevant times, Zafgen was a "one-drug company,"
meaning that Beloranib was Zafgen's only product candidate in
clinical development.
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Beloranib's clinical testing. While doing so, Hughes also steered
Zafgen towards its initial public offering ("IPO"), which the
company completed on June 19, 2014. The current dispute arises
from the intersection of these two strategic endeavors.
A. Beloranib and the FDA Approval Process
As part of the development process, the FDA requires
that any new drug "go through a series of clinical trials before
it can be approved for marketing and sales in the United States."
N.J. Carpenters Pension & Annuity Funds v. Biogen IDEC Inc., 537
F.3d 35, 39 (1st Cir. 2008) (citation omitted). After a
pharmaceutical developer finishes its initial testing of a drug on
animals, it must then "submit[] an application to the FDA for
approval to test the drug on humans." Id.; see also 21 C.F.R.
§ 312.20. If the FDA approves that request, human testing begins.
Typically, such testing consists of three phases of clinical
trials.3 Biogen IDEC, 537 F.3d at 39; see also 21 C.F.R. § 312.21.
3
Our decision in Biogen IDEC ably summarized the objectives
of these three phases:
Phase I studies generally involve twenty to
eighty subjects, and are designed to determine
how the drug works in humans and the side
effects associated with increasing doses.
Phase II studies usually involve no more than
several hundred subjects, and are designed to
evaluate the effectiveness of the drug, as
well as common short-term side effects and
risks. Phase III studies are large-scale
trials, usually involving several hundred to
several thousand subjects, and are intended to
gather the information necessary to provide an
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Each phase "requires the company to test the drug on a broader
population and results in more stringent monitoring and
evaluation." Biogen IDEC, 537 F.3d at 39. Throughout the course
of these trials, "the drug company must report to the FDA and to
all participating physicians any serious and unexpected adverse
drug experiences that occur." Id. (citing 21 C.F.R.
§ 312.32(c)(1)(i)(A)).
At the time the investors first brought this suit, Zafgen
had conducted three Phase I trials, four Phase II trials, and one
Phase III trial. The investors' complaint, however, concentrates
on Zafgen's ZAF-201 trial, a Phase II trial that consisted of 160
patients and lasted from August 2012 to May 2013. From this group
of 160 patients, Zafgen treated 122 of them with Beloranib. As
the ZAF-201 trial progressed, four of the patients given Beloranib
suffered adverse "thrombotic," or blood-clotting, events of
varying severity. Third-party clinical investigators classified
two of these adverse events as "superficial" and the other two as
"serious."4 Zafgen disclosed the two serious adverse events in
adequate basis for labeling the drug. . . .
After Phase III, the FDA considers the results
of all the clinical trials in determining
whether to approve a drug for market.
Id. (internal citations omitted).
4
An adverse event is "serious" if "it results in . . .
[d]eath, a life-threatening adverse event, inpatient
hospitalization or prolongation of existing hospitalization, a
persistent or significant incapacity or substantial disruption of
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advance of its IPO, noting their occurrence in its April 18, 2014
Form S-1 Registration Statement. The company did not, however,
directly disclose the two superficial adverse events at that time.
B. Zafgen's Stock Price Declines
Zafgen's share price began to decline in October 2015.
On October 12th, Zafgen's share price closed at $34.76. By the
close of trading the next day, Zafgen's share price had dropped to
$15.75. On October 14th, Zafgen announced that a patient in its
ongoing Phase III trial had died, and confirmed on October 16th
that the patient had been treated with Beloranib, not a placebo,
and that the FDA had placed Beloranib on a partial clinical hold.
During a conference call held that same day, Dr. Dennis Kim,
Zafgen's Chief Medical Officer, likewise informed analysts that a
total of six adverse thrombotic events had occurred throughout the
course of Beloranib's clinical testing: two in the company's
ongoing clinical trials and four in the completed ZAF-201 trial.
Dr. Kim's comments marked the first time that Zafgen or any of its
representatives had informed its investors of the two superficial
adverse thrombotic events that had occurred in the ZAF-201 trial.
By the close of trading on October 16th, Zafgen's share price
the ability to conduct normal life functions, or a congenital
anomaly/birth defect," or where it "may require medical or surgical
intervention to prevent one of [these] outcomes." 21 C.F.R.
§ 312.32(a).
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plummeted to $10.36 per share, a nearly 51% decline from the
previous day's closing price.
C. Zafgen's Disclosures
Based on these events, the investors brought a class
action suit against Zafgen and Hughes. The complaint asserted
claims on behalf of a putative class consisting of all persons who
purchased or otherwise acquired Zafgen common stock between
June 19, 2014, the date of Zafgen's IPO, and October 16, 2015, the
date the company announced the FDA's partial clinical hold. In
the complaint, the investors claimed that the defendants made false
or misleading statements concerning the results of the ZAF-201
trial, to wit:
As severely obese patients are at an increased
risk for cardiovascular disease, we measured
systemic biomarkers of cardiovascular disease
risk, including low density lipoprotein
cholesterol, HDL, CRP, triglycerides and blood
pressure in trial participants, to determine
[B]eloranib's impact on such biomarkers. The
results of these biomarker measurements in
this trial, as summarized below, suggest that
[B]eloranib treatment does not increase the
risk of cardiovascular disease and may be
associated with reduced cardiovascular
disease risk.
There were no deaths or any SAEs ["serious
adverse events"] deemed to be possibly,
probably, or definitely related to
[B]eloranib, although there were two serious
thrombotic adverse events which, while not
attributed to [B]eloranib treatment, may point
to the utility of assessment of prior history
of thrombotic events in patients enrolled in
subsequent trials and added vigilance for AEs
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related to blood clotting during future
clinical trials. The most commonly reported
TEAEs ["treatment-emergent adverse events"]
were gastrointestinal disorders, mainly
nausea, diarrhea, or vomiting, nervous system
disorders, mainly dizziness, and psychiatric
disorders, mainly insomnia, sleep disorder, or
abnormal dreams. TEAEs were generally mild in
severity and transient. Other frequently
reported TEAEs were headaches and injection
site bruising/itching, although the
incidences were comparable to placebo and not
observed to be dose-related.
The investors alleged that Zafgen made these statements
(and others that used substantially similar language) in ten
different documents, all of which Hughes signed. These
disclosures, the investors maintained, were materially misleading
because "the FDA considers the frequency/rate of adverse events in
determining whether a drug is causing those adverse events,"
meaning that the defendants should have disclosed even the
superficial adverse thrombotic events. Similarly, the investors
alleged that "[a]t all times during the Class Period, [d]efendants
knew -- or were reckless in not knowing -- that there was a
significant risk of thrombotic adverse events in future clinical
trials of [B]eloranib."
In response to the investors' allegations, the
defendants emphasize several other statements made by Zafgen in
its Form S-1 and its subsequent SEC filings, claiming that these
additional disclosures belie the investors' accusations of
fraudulent intent:
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SAEs that are not characterized by clinical
investigators as possibly related to
[B]eloranib or SAEs that occur in small
numbers may not be disclosed to the public
until such time the various documents
submitted to the FDA as part of the approval
process are made public. We are unable to
determine if the subsequent disclosure of SAEs
will have an adverse effect on our stock
price.
Many companies in the pharmaceutical and
biotechnology industries have suffered
significant setbacks in late stage clinical
trials after achieving positive results in
early-stage development, and we cannot be
certain that we will not face similar
setbacks. These setbacks have been caused by,
among other things, pre-clinical findings made
while clinical trials were underway or safety
or efficacy observations made in clinical
trials, including previously unreported
adverse events.
D. The District Court's Dismissal of the Complaint
On August 9, 2016, the district court granted Zafgen and
Hughes's motion to dismiss on the ground that the investors had
failed to adequately plead scienter.5 With respect to the
investors' Section 10(b) claim, the district court determined that
the complaint's allegations were only marginally material, thus
weakening any inference of scienter. The district court then also
5The district court found that the only materially misleading
statements alleged in the complaint concerned the defendants'
failure to disclose the non-serious adverse thrombotic events.
Neither the investors nor the defendants dispute this feature of
the district court's ruling.
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dismissed the investors' Section 20(a) claim against Hughes. This
appeal followed.
II.
The investors argue that the district court improperly
heightened the PSLRA's pleading requirements, applied these
heightened requirements to its complaint, and then mistakenly
dismissed both their claims for failing to plead facts giving rise
to a "strong inference" of scienter. We review whether a complaint
meets the PSLRA's pleading requirements de novo, accepting all
well-pled factual allegations as true and making all reasonable
inferences in a plaintiff's favor. See Miss. Pub. Emps.' Ret.
Sys. v. Bos. Sci. Corp., 523 F.3d 75, 85 (1st Cir. 2008). Even
through this lens, we agree with the district court that the facts
alleged in the investors' complaint do not give rise to a
sufficiently strong inference of scienter.
A. Section 10(b) and Rule 10b-5
Section 10(b) of the Securities Exchange Act "forbids
the 'use or employ, in connection with the purchase or sale of any
security . . . , [of] any manipulative or deceptive device.'"
Tellabs, Inc., 551 U.S. at 318 (alterations in original) (quoting
15 U.S.C. § 78j(b)). Pursuant to this statute, SEC Rule 10b-5
makes it unlawful to, among other things, "make any untrue
statement of a material fact or to omit to state a material fact
necessary in order to make the statements made, in the light of
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the circumstances under which they were made, not misleading." 17
C.F.R. § 240.10b-5(b). Therefore, to state a claim for securities
fraud under Section 10(b) and Rule 10b-5, "a plaintiff must allege:
(1) a material misrepresentation or omission; (2) scienter, or a
wrongful state of mind; (3) in connection with the purchase or
sale of a security; (4) reliance; (5) economic loss; and (6) loss
causation." In re Genzyme Corp. Sec. Litig., 754 F.3d 31, 40 (1st
Cir. 2014).
B. Scienter and the PSLRA
Scienter encompasses a "mental state embracing [an]
intent to deceive, manipulate, or defraud." Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 193 n.12 (1976). At the pleading stage,
the PSLRA requires plaintiffs to "state with particularity facts
giving rise to a strong inference that the defendant acted with"
scienter. 15 U.S.C. § 78u-4(b)(2)(A); see also ACA Fin. Guar.
Corp. v. Advest, Inc., 512 F.3d 46, 58 (1st Cir. 2008) (describing
the PSLRA's pleading standard for scienter as "rigorous"). In the
current setting, scienter encompasses both a "conscious intent to
defraud" and, alternatively, a "high degree of recklessness." ACA
Fin. Guar. Corp., 512 F.3d at 58 (quoting Aldridge v. A.T. Cross
Corp., 284 F.3d 72, 82 (1st Cir. 2002)). Specifically,
recklessness involves "a highly unreasonable omission" that
involves "not merely simple, or even inexcusable, negligence, but
an extreme departure from the standards of ordinary care, and which
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presents a danger of misleading buyers and sellers that is either
known to the defendant or is so obvious that the actor must have
been aware of it." Greebel v. FTP Software, Inc., 194 F.3d 185,
198 (1st Cir. 1999) (quoting Sundstrand Corp. v. Sun Chem. Corp.,
553 F.2d 1033, 1045 (7th Cir. 1977)).6
Meanwhile, "[t]o qualify as 'strong' . . . an inference
of scienter must be more than merely plausible or reasonable -- it
must be cogent and at least as compelling as any opposing inference
of nonfraudulent intent." Tellabs, 551 U.S. at 314. When
evaluating a complaint for compliance with this demanding
standard, a court "must consider the complaint in its entirety
. . . [Courts must ask] whether all the facts alleged, taken
collectively, give rise to a strong inference of scienter, not
whether any individual allegation, scrutinized in isolation, meets
that standard." Id. at 322-23. To that effect, we have found the
standard met where a complaint "contains clear allegations of
admissions, internal records or witnessed discussions suggesting
that at the time they made the statements claimed to be misleading,
the defendant[s] were aware that they were withholding vital
information or at least were warned by others that this was so."
6 "Even if plaintiffs wish to prove scienter by
'recklessness,' they still must allege, with sufficient
particularity, that defendants had full knowledge of the dangers
of their course of action and chose not to disclose those dangers
to investors." Maldonado v. Dominguez, 137 F.3d 1, 9 n.4 (1st
Cir. 1998).
- 13 -
In re Bos. Sci. Corp. Sec. Litig., 686 F.3d 21, 31 (1st Cir. 2012).
Likewise, a plaintiff "may combine various [other] facts and
circumstances indicating fraudulent intent," including those
demonstrating "motive and opportunity," to satisfy the scienter
requirement. Aldridge, 284 F.3d at 82.
Here, the investors maintain that they met the PSLRA's
requirements for pleading scienter. They hinge this argument on
their allegations that the defendants (1) knew, or were reckless
in not knowing, about news and scientific articles that purportedly
established a "link" between Beloranib and the occurrence of
thrombotic adverse events; and (2) had a motive to commit
securities fraud, as shown by Zafgen's compensation structure and
the "heavy" insider sales that occurred before the patient death.
We find these arguments unpersuasive, and therefore hold that the
complaint's allegations, viewed holistically, do not support a
strong inference of scienter under either a conscious intent or
recklessness theory.
1. News and Scientific Articles
To start, the investors' reliance on news and scientific
articles analyzing the effects of angiogenesis inhibitors, the
class of drug to which Beloranib belongs, is misplaced. "The key
question in this case is not whether defendants had knowledge of
certain undisclosed facts, but rather whether the defendants knew
or should have known that their failure to disclose those facts"
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risked misleading investors. City of Dearborn Heights Act 345
Police & Fire Ret. Sys. v. Waters Corp., 632 F.3d 751, 758 (1st
Cir. 2012) (internal citation omitted). Here, though the articles
may suggest that the defendants had an awareness of some connection
between Beloranib and thrombotic events, they do not show that the
defendants deliberately or recklessly risked misleading investors
by not disclosing the two superficial adverse thrombotic events
from the ZAF-201 study until October 16, 2015. See In re NVIDIA
Corp. Sec. Litig., 768 F.3d 1046, 1060 (9th Cir. 2014) (noting
that the articles cited by the plaintiffs did not contribute to a
strong inference of scienter, in part because they "d[id] not
reflect [the defendants'] knowledge" at the time of the alleged
misstatements).
For example, two of the cited articles simply analyze
the general effects of angiogenesis inhibitors. Three other
articles, meanwhile, examine clinical trials conducted for drugs
other than Beloranib which were used to treat cancer, not severe
obesity. Moreover, developers often administered these other
drugs at significantly higher dosage levels compared to those
dispensed in the ZAF-201 study.7 Of those articles that did discuss
Beloranib, several suggested that lower doses of the drug reduced
7 For instance, doses in the cancer trials often exceeded
50 mg of angiogenesis inhibitors, while Beloranib doses in the
2012-2013 ZAF-201 clinical trial, ranged from 0.6 mg to 2.4 mg.
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the risk of potential thrombotic-related side effects in patients
being treated for obesity-related ailments.
Taken together, the articles do not add much support for
the complaint's allegation that the defendants knew, or were
reckless in not knowing, that they risked misleading investors
unless they disclosed the two superficial adverse thrombotic
events. See In re Ariad Pharm., Inc. Sec. Litig., 842 F.3d 744,
751 (1st Cir. 2016) (noting that "[a] statement cannot be
intentionally misleading if the defendant did not have sufficient
information at the relevant time to form an evaluation that there
was a need to disclose certain information and to form an intent
not to disclose it" (alteration in original) (quoting Biogen IDEC,
537 F.3d at 45)). This conclusion is especially warranted where,
as here, the complaint contains no specific facts about any
"warnings by subordinates or expressions of concern by executives"
regarding the propriety of allegedly deceptive disclosures. See
Auto Indus. Pension Tr. Fund v. Textron Inc., 682 F.3d 34, 39 (1st
Cir. 2012).8
8This is not to say that a plaintiff in a securities case
governed by the PSLRA must plead the existence of direct evidence
of scienter to avoid dismissal. As the investors point out, an
investor's access to such information prior to discovery will often
be limited at best. Nonetheless, it stands to reason that where
a complaint is devoid of any direct-evidence allegations, the
indirect-evidence allegations in the complaint will need to do
more work to carry the burden of raising a "strong inference of
scienter" on their own. See Local No. 8 IBEW Ret. Plan & Tr. v.
Vertex Pharm., Inc., 838 F.3d 76, 83 n.9 (1st Cir. 2016)
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2. Motive and Insider Trading Allegations
The complaint's motive allegations are similarly
deficient. First, the investors focus on Zafgen's compensation
structure, namely that "a significant portion of [its] executives'
annual compensation consists of 'Option Awards' and 'Non-Equity
Incentive Plan Compensation' (i.e., 'performance-based cash
bonuses')." They allege that this structure resulted in Zafgen
insiders, armed with undisclosed information regarding the ZAF-
201 study results, selling substantial amounts of company shares
in September 2015. Hughes, for instance, sold 22,500 of his Zafgen
shares on September 17, 2015, and another 23,126 shares on
September 18, 2015, generating approximately $1.8 million in
personal proceeds.
Of course, even "weak[]" insider trading allegations
provide "some support against the defendants' motion to dismiss."
Miss. Pub. Emps.' Ret. Sys., 523 F.3d at 92 (quoting Shaw v. Dig.
Equip. Corp., 82 F.3d 1194, 1224 (1st Cir. 1996)). Still, "[t]he
vitality of the inference to be drawn depends on the facts, and
can range from marginal to strong." Greebel, 194 F.3d at 197-98
(internal citations omitted). Here, the district court found that
(acknowledging that "prior to discovery, few plaintiffs will be in
a position to make specific allegations about the form of internal
documents" or discussions, but also noting that Congress has
nonetheless "deliberately raised the entry bar to discovery . . .
through the PSLRA's heightened pleading standards" (alteration in
original) (quoting Textron, 682 F.3d at 40)).
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the insider trading alleged in the complaint was insubstantial.
On appeal, the investors do not challenge the district court's
finding to that effect, instead arguing that the district court
erroneously drew a negative inference against scienter based on
the weakness of their allegations. Not so. Rather, the district
court observed that the insider trading allegations in this case
"are relatively weak" and therefore found that the allegations
"d[id] not alter the conclusion that the complaint as a whole fails
to raise a strong inference of scienter." Brennan, 199 F. Supp.
3d at 468.
In any event, we agree with the district court that the
strength of the insider trading allegations drifts toward the
marginal end of that spectrum because Hughes and all other Zafgen
insiders kept the vast majority of their Zafgen holdings. After
accounting for Hughes's vested options, he retained at least 93%
of his Zafgen holdings even after the September 2015 sales, and
every other insider identified in the complaint retained at least
85%. See Waters Corp., 632 F.3d at 760-61 ("In calculating the
percent of holdings sold, . . . it is appropriate to consider not
only the shares of stock that [the defendants] held prior to their
sales, but also the shares that they could have sold through the
exercise of options . . . ."). Moreover, all of the insider sales
happened before the patient death that occurred during Zafgen's
Phase III testing. As the district court noted:
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During the October 16 conference call, which
occurred almost a month after the final
insider sale on September 18, Hughes stated
that Zafgen disclosed the patient death to the
FDA approximately two weeks earlier, and "well
within" the one week requirement from the
death to the FDA disclosure. Thus, even
liberally construed, the complaint's
allegations support an inference that the
patient death occurred at least a week after
the final insider sale.
Brennan, 199 F. Supp. 3d at 469. Therefore, neither the timing
nor the amount of insider sales is particularly unusual or
suspicious.9
Second, the complaint asserts that Zafgen was a one-drug
company, meaning Zafgen and Hughes had a motive to "shade the
truth" since all of the company's hopes, and a significant portion
of Hughes's compensation, hinged on Beloranib's success. However,
such "catch-all allegations," which merely assert the existence of
a motive and an opportunity to engage in fraudulent behavior, do
not satisfy the PSLRA "without something more." In re Cabletron
Sys., Inc., 311 F.3d 11, 39 (1st Cir. 2002) (quoting Greebel, 194
F.3d at 197); see also Aldridge, 284 F.3d at 83 (noting that
generalized financial incentive allegations are relevant to the
scienter analysis only if they "go far beyond the usual
arrangements of compensation based on the company's earnings").
9We decline to address the parties' arguments concerning the
defendants' 10b5-1 trading plans, see 17 C.F.R. § 240.10b5-1(c),
because the investors' allegations regarding the purported insider
trading are insufficient even without considering those plans.
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Here, the complaint only identifies "the usual concern by
executives to improve financial results." Cabletron, 311 F.3d at
39. Given that we must take into account the opposing inferences
stemming from a complaint's allegations, we find it difficult to
infer fraudulent intent simply because the defendants'
compensation structure rewards the achievement of corporate goals.
See In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869, 884 (9th
Cir. 2012) (noting that "it is common for executive compensation
. . . to be based partly on the executive's success in achieving
key corporate goals" and that it would be improper to "conclude
that there is fraudulent intent merely because a defendant's
compensation was based in part on such successes"). Consequently,
we assign these allegations little weight in the scienter calculus.
3. Other Considerations
Several other considerations also bolster our conclusion
that the complaint's allegations do not give rise to a sufficiently
strong inference of scienter. To start, the marginal materiality
of the two superficial adverse thrombotic events undermines such
a finding. As we have previously noted, "the materiality and
scienter inquiries are linked," Abiomed, 778 F.3d at 240, since
"the marginal materiality of an omitted fact 'tends to undercut
the argument that the defendants acted with the requisite intent
. . . in not disclosing' it," Ariad, 842 F.3d at 750 (citing
Abiomed, 778 F.3d at 242). Thus, we must consider whether there
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is "a substantial likelihood that" a reasonable investor would
have viewed the disclosure of the two superficial adverse
thrombotic events "as having significantly altered the total mix
of information made available." Basic Inc. v. Levinson, 485 U.S.
224, 231-32 (1988).
The investors' arguments to this effect are
unconvincing. "Adverse event reports are daily events in the
pharmaceutical industry." Matrixx Initiatives, Inc. v.
Siracusano, 563 U.S. 27, 43 (2011). To be sure, these reports may
be material even if they "d[o] not provide statistically
significant evidence of a causal link." Id. at 44. Nonetheless,
it remains unlikely that a reasonable investor in this case would
have viewed the two superficial adverse thrombotic events, at the
time they occurred, as having significantly altered the
information available to them. Zafgen forthrightly disclosed the
two serious adverse thrombotic events to investors, and third-
party investigators never linked any of the adverse events,
including the serious ones, to Beloranib. Indeed, the superficial
adverse thrombotic events took on the bulk of their significance
only after the patient death. 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)).
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In response, the investors claim that because the FDA
looks to the overall frequency of adverse thrombotic events when
evaluating a drug's safety, all adverse thrombotic events must be
material. This argument, however, ignores the Supreme Court's
observation that "the mere existence of reports of adverse events
-- which says nothing in and of itself about whether the drug is
causing the adverse events -- will not satisfy" the materiality
standard. Matrixx Initiatives, 563 U.S. at 44. Instead,
"[s]omething more is needed." Id. In this case, neither "the
source, content, [nor] context of the reports" provides that
"[s]omething more." Id. Although a pharmaceutical developer must
report all adverse events when filing a New Drug Application with
the FDA, it need not disclose every superficial adverse event until
it reaches that stage of clinical development. See 21 C.F.R. §
312.33(b)(1) (stating that developers, in their annual reports to
the FDA, must disclose summary information "showing the most
frequent and the most serious" adverse events observed during that
year's clinical and nonclinical drug investigations). Thus, even
the accuracy of the investors' core assumption, that the FDA cared
about the superficial adverse thrombotic events at the time they
occurred, seems doubtful, further diminishing the materiality of
these events to reasonable investors. See Bos. Sci. Corp., 686
F.3d at 31 (stating that "marginal materiality not only defeats
any independent inference of deliberate withholding but also makes
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the pled facts insufficient for a fact finder to find the 'extreme
recklessness in not disclosing the fact' that is the least that is
required to establish scienter" (quoting Waters Corp., 632 F.3d at
757)).
We also note that Zafgen's own disclosures both before
and during the class period weaken the complaint's scienter
showing. The defendants disclosed to investors the two serious
adverse thrombotic events, and noted on several occasions that the
company was not going to disclose all the adverse events as they
occurred. Although "[f]ragmentary information may be as
misleading . . . as active misrepresentation," V.S.H. Realty, Inc.
v. Texaco, Inc., 757 F.2d 411, 414-15 (1st Cir. 1985) (alteration
in original) (citation omitted), the facts alleged in the complaint
at the very least support a strong competing inference that the
defendants disclosed what they considered to be, at the time, the
most relevant information about Beloranib's clinical trials.
The investors respond by pointing to literature from the
Centers for Disease Control and Prevention ("CDC") that they claim
suggests that it is merely "fortuitous" for a blood clot to be
non-serious. According to the investors, this report, coupled
with the defendants' statement acknowledging the possible "utility
of assessment of prior history of thrombotic events . . . and added
vigilance for [adverse events] related to blood clotting during
future clinical trials," shows that their decision to not disclose
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the two non-serious thrombotic events was made intentionally or
recklessly. However, while the CDC's language cited in the
complaint suggests that it may be true that "[h]ow a clot affects
the body depends on the type and location of the clot," it does
not mean that good fortune is all that separates a superficial
thrombotic adverse event from a more serious one. Instead, the
FDA's regulations, which do not require the disclosure of all
thrombotic events, see 21 C.F.R. 312.33(b)(1), and the defendants'
own disclosures, which informed investors of the most serious
adverse events and warned investors that Zafgen would not disclose
all adverse events as they occurred, undercut the investors'
efforts to make this showing.
In short, although the investors maintain that Zafgen's
statements prove the company acknowledged that even superficial
adverse events were important to investors, the totality of the
company's disclosures produces a compelling counter-inference that
the company wished to "provide investors with warnings of risks,"
actions which "generally weaken the inference of scienter." Waters
Corp., 632 F.3d at 760 (quoting Ezra Charitable Tr. v. Tyco Int'l,
Ltd., 466 F.3d 1, 8 (1st Cir. 2006)). Thus, the defendants'
disclosures both before and during the class period further
"undercut any inference of fraudulent intent on the part of
defendants." Genzyme Corp., 754 F.3d at 42.
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III.
The investors concede that their Section 20(a) claim
against Hughes is derivative of their Section 10(b) and Rule 10b-5
claim. Because we hold that the complaint, considered as a whole,
does not present allegations giving rise to a "cogent and
compelling" inference of scienter, Tellabs, 551 U.S. at 324, we
conclude that the district court properly dismissed both claims.
Therefore, the judgment of the district court is affirmed.
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