United States Court of Appeals
For the First Circuit
No. 19-1964
TIM KARTH,
Plaintiff, Appellant,
ABRAHAM KISWANI; RICHARD J. ERICKSON; RICHARD B. KING, JR.;
TERRELL JACKSON,
Plaintiffs,
v.
KERYX BIOPHARMACEUTICALS, INC.;
RON BENTSUR; SCOTT A. HOLMES;
GREGORY P. MADISON; JAMES OLIVIERO,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Denise J. Casper, U.S. District Judge]
Before
Thompson, Lipez, and Kayatta,
Circuit Judges.
Jeffrey Craig Block, with whom Jacob A. Walker, Nathaniel
Silver, and Block & Leviton LLP were on brief, for appellant.
Laurence Adam Schoen, with whom John F. Sylvia, Geoffrey A.
Friedman, and Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
were on brief, for appellees.
July 9, 2021
[REDACTED OPINION]*
*The full version of this opinion was filed on June 21, 2021,
and remains on file, under seal, in the Clerk's Office.
THOMPSON, Circuit Judge. Before us on appeal is a
dispute between Tim Karth, an investor who lost money when he
bought stock that saw its value plummet soon after that purchase,
and Keryx Biopharmaceuticals, Inc., and its executives, all of
whom allegedly swindled Karth out of his hard-earned cash by
misleading him about the likelihood that Keryx would be able to
continue to meet demand for its only drug product. Though, at
various points, the case contained a myriad of claims and
experienced a long procedural history, the parties agree that the
entirety of the appeal is resolved by addressing one question:
did Keryx sufficiently warn investors about the vulnerability of
its manufacturing infrastructure so that Karth knew of the
investment risks when he purchased his shares? The district court
answered that question in the affirmative and entered judgment for
the defendants, denied Karth's motion for class certification, and
denied Karth's motion to file a third amended complaint. Reviewing
the case with fresh eyes, we affirm.
BACKGROUND
We recite the alleged facts pertinent to our inquiry as
contained in Karth's complaint and attachments incorporated
therein in the light most favorable to the non-movant, Karth. See
Curran v. Cousins, 509 F.3d 36, 43-44 (1st Cir. 2007). Karth's
proposed class consists of anyone who purchased Keryx stock from
May 8, 2013, through August 1, 2016. Karth himself purchased Keryx
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stock at the end of that class period, on July 19, 2016. 1
Accordingly, the following recitation of the facts is limited to
occurrences during the purported class period, with a particular
focus on the events of 2016, the year of Karth's stock purchase
and Keryx's supply shortage. We set forth the facts
chronologically, interspersing information about manufacturing
difficulties with information Keryx made known to the public.
Keryx's Leadership and Manufacturing Process
At all relevant times, Keryx was a Boston-based
biopharmaceutical company. The four individual defendants served
in different corporate roles. Ron Bentsur was Keryx's CEO.
Gregory P. Madison was Keryx's COO starting February of 2014 and
took over for Bentsur as CEO at the end of April of 2015. James
Oliviero served as CFO for Keryx from May of 2003 until July of
2015, when he was replaced by Scott A. Holmes.
During the proposed class period, Keryx commenced
production and sale of its only product, a drug named Auryxia.
There were two steps in the Auryxia production process. Step one
was manufacturing the active pharmaceutical ingredient ("API") and
1Karth's First Amended Complaint (the operative pleading at
the time the district court granted judgment for the defendants)
pleads that the class period ends on August 1, 2016, but his
proposed Third Amended Complaint alleges a class period ending on
July 29, 2016, or July 31, 2016. We utilize the August 1, 2016,
date because that date seems to be the date he cites most
consistently, but the outcome would not be altered by the class
period ending on any of Karth's listed dates.
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step two was converting the API into its finished tablet form.
The tablet, when prescribed by a doctor, was used to treat kidney
disease. Keryx lacked the ability to complete any manufacturing
itself and relied upon third-party contractors for each step of
the process. Keryx appears to have enlisted several first-step
manufacturers to produce API. As for step two, during the relevant
time frame, Keryx only contracted with Norwich Pharmaceuticals,
Inc. ("Norwich"), whose principal place of business is Norwich,
New York, to complete the process of converting the API into the
final product, tablets of Auryxia.
The Early Days: 2013-2015
On May 8, 2013, the first day of Karth's proposed class
period, Keryx released a 10-Q form2 that warned investors of the
following risk:
We rely on third parties to manufacture and
analytically test our drug candidate. If
these third parties do not successfully
manufacture and test our drug candidate, our
business will be harmed. We have limited
experience in manufacturing products for
clinical or commercial purposes. We intend to
continue, in whole or in part, to use third
parties to manufacture and analytically test
our drug candidate for use in clinical trials
and for future sales. We may not be able to
enter into future contract agreements with
2 The SEC requires public companies to file a comprehensive
report about their financial performance, called a 10-Q, at the
end of the first three quarters of each fiscal year. 17 C.F.R.
§ 249.308a.
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these third[]parties on terms acceptable to
us, if at all. (Emphases added.)
Beginning in 2014, Norwich experienced problems with the
process of converting API into Auryxia tablets. In May, one API
contractor asked Keryx to "quarantine" the API that company had
produced pending the outcome of a quality control investigation.
In June, Norwich notified Keryx that it "rejected" two batches of
Auryxia due to contamination found in a tablet. In July, in
response to those reports, Keryx instructed Norwich to stop
production, but ordered it to resume the next day, which it did.
Shortly after Keryx began navigating these manufacturing
glitches, it was also preparing to meet with Food and Drug
Administration ("FDA") officials. To that end Keryx enlisted the
help of a consultant, Parexel International, to "assess the
readiness [of Norwich] in preparation for an FDA pre-approval
inspection." Parexel's work, which took place on August 14 and
15, 2014, consisted of a "conference room review of documentation
available relative to the production and controls [of Auryxia]
that would likely be reviewed during an FDA inspection." Parexel
did not visit Norwich's production facilities. Once it completed
its assessment, it sent Bentsur a report on August 22. In it,
Parexel found that Norwich had the "appropriate facilities and
expertise to meet the needs of Keryx," but warned that Norwich was
employing an uncommon system for validating the quality of each
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step of the production. Given Norwich's approach, the Parexel
Report warned that "[i]t has not been demonstrated that the
manufacturing process will consistently produce product that meet
final specifications."
The FDA approved Auryxia for commercial sales in
September of 2014 and in December of 2014, sales began. At that
time, the company had enough supply to meet patient demand.
Nevertheless, at a board of directors meeting, directors were
advised that investors had expressed disappointment that doctors
were not prescribing the drug at a high enough rate to make
investing in Keryx sufficiently profitable.
Two thousand and fifteen brought a couple of
manufacturing developments. One of the API manufacturers had to
discard approximately one-third of the API it produced because of
quality issues. API problems then caused batches of product
produced at Norwich to fail to meet quality standards, which caused
production to halt. By October of 2015, however, production had
so outpaced sales that Keryx had "too much inventory" and planned
to destroy up to 1,632 bottles of Auryxia before their expiration
date in March of 2016 if sales didn't pick up. In December of
2015, Keryx provided its board with an update on the company's
financial posture. Of import, it learned that the company had an
inventory of 14,000 bottles for commercial sale and more than
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18,000 bottles for patient samples.3 Additionally, the board
learned that Keryx had to pay a contractual penalty of $2.6 million
to Norwich because Keryx did not sell enough Auryxia to utilize
Norwich's full production capacity. During this same meeting, the
board discussed the company's draft five-year plan. One presenter
(who was not clearly identified in the record) reported to the
board about risks related to the company's sale of Auryxia. Among
those risks, the presenter identified that solely contracting with
Norwich for step two manufacturing posed a risk of a "[s]upply
disruption" and a "[l]oss of credibility with customers" and
characterized the "probability" of that risk materializing as
"medium." Because of this risk, the draft five-year plan contained
several "high" priorities, one of which was to contract with
additional second-step manufacturers.
Publicly, Keryx made written disclosures relevant to
Karth's claims. Through the end of 2015, whenever it informed
investors of the risks to the company's bottom line, Keryx used
the plural term "third parties" to characterize the number of
outside manufacturers responsible for producing Auryxia, just as
it had at the start of the class period. In its 2015 annual
report, Keryx reported on the status of its drug supply, including
3 Generally, each bottle of Auryxia for commercial sale
contained 200 pills and bottles for use as a sample contained 50
or 200 pills.
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the value of its inventory of Auryxia pills and raw materials to
produce more Auryxia, and included the need to destroy its excess
stock before expiration.
The Year of Keryx's Supply Shortage: 2016
In January of 2016, Keryx conducted an internal review
and concluded that since sales began in 2014, Norwich had produced
ninety-three "batches" of Auryxia and, of those, five were rejected
for "varying reasons." When February rolled around, one Keryx
employee sent an internal e-mail on the 16th, describing the
company's supply of sample-size bottles of Auryxia as "VERY
CRITICAL" because the stock was very low.
February 2016 Disclosure and Concurrent Problems
On February 25, 2016, Keryx issued a press release that
declared "the fundamentals of Auryxia are solid" and projected
between $31 million and $34 million in Auryxia sales in 2016. The
next day, Keryx released its 2015 10-K (what we'll call the
"February 2016 Disclosure" from here on out).4 In it, Keryx
reported $10.1 million in net sales of Auryxia in 2015 and warned
investors:
We currently depend on a single supply source
for Auryxia drug product. If any of our
suppliers were to limit or terminate
production, or otherwise fail to meet the
4 A 10-K is a comprehensive report filed annually by public
companies about their financial performance. The report is
required by the SEC and is far more detailed than an annual report.
17 C.F.R. § 249.310.
- 9 -
quality or delivery requirements needed to
supply Auryxia at levels to meet market
demand, we could experience a loss of revenue,
which could materially and adversely impact
our results of operations. (Emphasis added.)
The February 2016 Disclosure also announced that Keryx "believe[d]
that [it had] established contract manufacturing relationships for
the supply of Auryxia to ensure that [it would] have sufficient
material for clinical trials and ongoing commercial sales." That
same day, on a conference call with investors, Holmes reiterated
the projected 2016 sales figures and reported that Keryx was
"encouraged with the solid fundamentals [of] Auryxia."
The record is unclear as to how the sample-size shortage
got resolved but by the start of March of 2016, any previous issues
had been eliminated because Keryx recorded having a stock of 10,301
sample-size bottles to meet a projected demand of 5,574 bottles.5
Keryx also began March with 5,688 bottles of Auryxia for commercial
sale to meet a projected demand of 4,333 bottles. Keryx's internal
projections forecasted that, by the end of the month, Norwich would
produce an additional 12,540 bottles of Auryxia for commercial
use.
On March 23, 2016, an inspection of some of the API
batches Norwich had received from a first-step contractor revealed
Karth suggests that the sample-size bottle supply issue was
5
never resolved, but the Keryx documents attached to Karth's
complaint include records of production having resumed by the end
of February.
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they were contaminated so Norwich halted production to
investigate. The probe confirmed that one facility, referred to
as a "large batch" facility, was the source of contaminated API.
Nonetheless, another facility, referred to as a "small batch" API
supplier could still provide Norwich with untainted API for Auryxia
production, so it shifted to using that "small batch" facility.6
Despite this setback, Keryx's internal forecast at the
start of April projected that the company had enough supply to
meet commercial demand for the entire month. This apparently
proved to be true as Karth complains of no supply interruption in
April or May of 2016 and the records attached to the complaint
plainly reflect Keryx's supply outpacing demand through August.7
April 2016 Disclosure and Concurrent Problems
By April 27, 2016, Norwich had notified Keryx that it
had discovered contamination in a batch of API.8 Norwich
There is nothing in the record that explains the differences
6
between "large batch" and "small batch" facilities. As such, we
have no reason to assume (and Karth does not argue) that a "small
batch" facility produces a drastically different total amount of
API.
At the start of March, Keryx had intended for Norwich to
7
produce 3,300 bottles of Auryxia for commercial sale during the
month of April. By the start of April, Keryx increased its
projections for Norwich's monthly production to 7,154 bottles.
Norwich actually produced 3,920 commercial-use bottles during that
month to add to Keryx's existing stock of 6,188 commercial-use
bottles. This exceeded April sales of 4,944 bottles.
8 In
the proposed Third Amended Complaint, Karth summarizes an
e-mail between two Keryx employees (but not the defendants here)
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communicated to Keryx that it had found contamination, but had not
yet determined why and stopped production to investigate.
The next day, Keryx announced its financial results for
the first quarter of 2016 in a press release, a conference call,
and its 10-Q statement. In the 10-Q statement (or the "April 2016
Disclosure," as we'll call it from here), Keryx again warned
investors:
We currently depend on a single supply source
for Auryxia drug product. If any of our
suppliers, including the source of Auryxia
drug product, were to limit or terminate
production, or otherwise fail to meet the
quality or delivery requirements needed to
supply Auryxia at levels to meet market
demand, we could experience a loss of revenue,
which could materially and adversely impact
our results of operations. (Emphases added.)
On the conference call, Madison told investors that Keryx was "off
to a good start" and that the company had "established solid
fundamentals for Auryxia, including enhancing brand awareness."
Madison further reported that Keryx had expanded its sales force
and was "confident in [its] ability to achieve [its] net sales
guidance." At the same time, Keryx internally projected that it
in which those employees discussed Norwich's discovery of
contamination and noted Norwich's initial belief that this was "an
isolated incident." Karth does not allege that Keryx knew of the
contamination problem prior to those employees discussing the
problem via e-mail and his allegation, as best we tell, is that at
the time of the April 27, 2016, e-mail, Keryx thought Norwich had
found contamination and had stopped production to investigate the
cause of this problem.
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would continue to have sufficient stock to meet upcoming demand so
long as some production occurred, even with a projected increase
in sales.
The April 27, 2016, API issue at Norwich proved to not
be an "isolated incident" as first thought. The production
stoppage continued through May but was finally resolved and Norwich
planned to resume production on June 1, 2016. On May 24, 2016,
Keryx internally reviewed the potential for a supply shortage and
concluded that there would be no shortage if Norwich could adhere
to the planned schedule for restoration. However, if Norwich
experienced additional production issues, Keryx predicted its
supply of Auryxia would run out on June 19, 2016. Norwich was
able to resume production as planned and continued to do so,
apparently without incident, into July. Accordingly, Keryx
experienced no supply shortages in June or July of 2016.
Summer 2016 Production Problems
Notwithstanding the adequacy of the actual Auryxia
supply, July did usher in more production headaches. On July 12,
2016, Norwich notified Keryx that it observed a structural problem
with some Auryxia tablets during one step of the manufacturing
process. An investigation followed but production did not stop.
On July 22, Madison informed Keryx's board that Norwich's current
production run was proceeding without issue and that production
appeared to be on track for the next planned shipment of Auryxia.
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Norwich continued producing Auryxia until July 26, 2016, when it
again discovered the same structural problem during a different
step of the manufacturing process. Norwich then halted production
and commenced an exploration of the source of the structural
problem.
Once drug production stopped, Keryx estimated it would
run out of its Auryxia supply in one to two weeks if nothing
changed. Keryx wrote a letter to the FDA explaining as much and
describing the circumstances that led to this impending shortage.
Keryx reported that two problems with API in the Spring of 2016
had "constrained supply" but Keryx and Norwich had worked together
to correct and prevent the repetition of those API problems. The
structural problem that arose for the first time in July of 2016
presented a different issue. Because neither Norwich nor Keryx
had as yet identified its cause, they did not then have a solution.9
Meanwhile, on July 19, 2016, Karth enters the scene: he purchased
his Keryx stock. As of that date, Keryx had not released any
information to the public about these July production setbacks.
The Supply Shortage
With the manufacturing problems unresolved, on August 1,
2016, Keryx issued a press release withdrawing its 2016 financial
9 Keryx requested that the FDA expedite approval of an
alternative drug supplier or permit Keryx to use the sample-size
bottles to meet patient needs. The record does not contain the
FDA's response.
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projections and characterizing an Auryxia supply interruption as
"imminent" due to "a production-related issue . . . at its contract
manufacturer." On a call with investors that same day, Madison
explained that Norwich "[had] been successfully producing
commercial batches for approximately two years" and that "in [the]
past few months, [Norwich] began experiencing difficulties
converting [API] to finish[ed] drug product." Madison further
explained that, prior to that impending shortage, Keryx "had been
managing supply levels efficiently even with increased demand
. . . in the second quarter." Keryx's stock value decreased
thirty-six percent.
Karth Sues for Securities Fraud
From Karth's perspective as spelled out in his
complaint, Keryx and the individual defendants knew that the
company only employed a single manufacturer, Norwich, and that
relying solely on Norwich for the second step of production created
a much greater risk of a supply interruption than Keryx admitted
to investors. Keryx's inadequate disclosures about its
manufacturing defects, says Karth, amounted to securities fraud.
Accordingly, Karth sued Keryx and the individual defendants for a
violation of §§ 10(b), 20(a) of the Securities Exchange Act of
1934, 15 U.S.C. §§ 78j(b), 78t(a), and Securities Exchange
Commission Rule 10b-5, 17 CFR § 240.10b-5. As a reminder, Karth
brought the case as a class action with a putative class of
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investors who purchased Keryx stock between May 8, 2013, the day
Keryx first published a risk disclosure claiming, as Karth views
it, to have more than one second-step manufacturer, and August 1,
2016, the day Keryx announced an interruption of its supply of
Auryxia.
After litigation and quite a bit of discovery, the
defendants moved for judgment on the pleadings. The defendants
characterized the February and April 2016 Disclosures as
"corrective disclosures" and argued that, even if Keryx had misled
investors about the number of third-party manufacturers and the
appurtenant risk in earlier disclosures, those misrepresentations
were clearly corrected in February and April of 2016.10 So, the
argument goes, when Karth purchased Keryx stock in July of 2016,
he was fully informed about Keryx's single-manufacturer process
and the investment's resultant risk. Therefore, Keryx's
statements were not misleading when Karth purchased his stock.
Karth, naturally, disagreed and contended that Keryx's risk
disclosures from May 8, 2013, onward misled investors into
believing that the company employed multiple second-step
manufacturers when, in reality, it only contracted with Norwich.
And while the February and April 2016 Disclosures may have
To remind, each of those disclosures included the following
10
statement: "We currently depend on a single supply source for
Auryxia drug product." (Emphasis added.)
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accurately quantified the number of second-step manufacturers as
one, each undersold the true degree of investment risk because
Keryx knew that Norwich was having production problems when it
released those disclosures. As a result, Karth alleged, investors
purchased Keryx stock without appreciating the fragility of its
manufacturing infrastructure and the precarious nature of its
ability to consistently turn a profit. Therefore, he argues,
Keryx's August 1, 2016, revelation that it only contracted with
one second-step manufacturer, who was struggling to meet demand,
caused the stock price to precipitously drop. In addition to
opposing the defendants' motion, Karth moved for class
certification and to file a Third Amended Complaint (his motion to
file a second amended complaint having already been denied). The
proposed Third Amended Complaint relied on many of the same
documents as the operative complaint and beefed up the allegations
regarding the defendants' knowledge of Keryx's manufacturing
infrastructure struggles. These augmentations, Karth claimed,
were enough to demonstrate that the February and April 2016
Disclosures were insufficient.
When analyzing all of the pending motions, the district
court assumed, without deciding, that Keryx's risk disclosures
issued prior to February of 2016 were misleading but held that the
February and April 2016 Disclosures cured any prior
misrepresentations because each accurately stated that Keryx only
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employed one manufacturer, Norwich, for the second step of the
production process.11 Since Karth purchased his stock in July of
2016, after Keryx published both curative disclosures, the
district court held that Karth could not plead any relationship
between his own financial loss and the defendants' prior alleged
misrepresentations or omissions.
With the "corrective disclosures" at the core of its
reasoning, the district court issued an omnibus order, denying
both of Karth's motions and allowing the defendants' motion for
judgment on the pleadings. Specifically, the district court denied
Karth's motion for class certification because it found Karth to
be an atypical and inadequate class representative, reasoning that
Karth's claims would be too different from the claims of any
potential class members who purchased stock prior to the release
of the February and April 2016 Disclosures. The district court
allowed the defendants' motion for judgment on the pleadings
because Karth could not plead that he relied upon misleading
statements when he purchased his stock. Finally, citing futility,
the district court denied Karth's motion to file a Third Amended
11Early in the litigation, the defendants moved to dismiss,
arguing, among other things, that the plural "third-party
manufacturers" language could refer to Keryx's multiple first-step
manufacturers and was therefore not misleading. For reasons that
need not be detailed here, the district court did not allow the
defendants' motion on these grounds and neither side wrestles with
that contention before us.
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Complaint because nothing in the proposed Third Amended Complaint
changed the court's conclusion that the February and April 2016
Disclosures cured any earlier misrepresentations. After resolving
each of those motions, the district court entered judgment for the
defendants. Karth timely appealed.
OUR TAKE
Karth's notice of appeal lists all three decisions of
the district court as the orders he wants reversed. Typically, we
would review each decision thoroughly, likely beginning our
analysis by reviewing whether the district court erred in entering
judgment for the defendants on Karth's First Amended Complaint and
then turning to questions of class certification and the proposed
Third Amended Complaint. However, Karth appears to be as
dissatisfied with his First Amended Complaint as the district court
was because he makes no argument here that the district court's
grant of judgment on that pleading was erroneous. Karth also does
not contend that the motion for class certification, which was
analyzed based upon the allegations in the First Amended Complaint,
should have been granted. Rather, Karth is solely interested in
his case moving forward via the proposed Third Amended Complaint.
To that end, his only request for relief is that we declare the
February and April 2016 Disclosures to be "misleading" and remand
the case to the district court to proceed with the Third Amended
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Complaint.12 We accept Karth's invitation to focus on the proposed
Third Amended Complaint and freshly evaluate whether the district
court properly denied the motion to amend or whether the proposed
Third Amended Complaint does indeed state a claim.
Standard of Review and Analysis
Where the district court's denial of a motion to amend
is based on the legal conclusion that the proposed amended
complaint fails to state a claim, we review that decision de novo.
D'Agostino v. ev3, Inc., 845 F.3d 1, 6 (1st Cir. 2016). Where, as
here, there has been considerable written discovery (Karth calls
it "significant"), we "look more closely at the factual allegations
to see if they support the legal conclusions pled." Glassman v.
Computervision Corp., 90 F.3d 617, 628 (1st Cir. 1996) (evaluating
proposed amended complaint in securities fraud action after "three
years of litigation and full discovery"). In conducting our de
novo review, "we assume as true the raw facts as alleged in the
12Lest we think Karth believes his First Amended Complaint
does state a claim, the defendants note in their brief that Karth
offers us no reason to vacate the judgment on the pleadings or
reverse the motion for class certification. Karth, for his part,
does not bother to dispute this waiver argument in his reply brief.
Seeing no need to dig any deeper, we deem any challenges to the
district court's decisions, other than to the denial of the motion
to amend, waived and, consequently, affirm across the board.
United States v. Zannino, 895 F.2d 1, 17 (1st Cir. 1990) ("[T]he
settled appellate rule [is] that issues adverted to in a
perfunctory manner, unaccompanied by some effort at developed
argumentation, are deemed waived.").
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[proposed Third Amended Complaint] and draw reasonable inferences
in favor of [Karth]." In re Bos. Sci. Corp. Sec. Litig., 686 F.3d
21, 27 (1st Cir. 2012). We "may supplement the facts contained in
the pleadings by considering documents fairly incorporated
therein." R.G. Fin. Corp. v. Vegara-Nuñez, 446 F.3d 178, 182 (1st
Cir. 2006). There is no one-size-fits-all way of analyzing
securities fraud cases; rather, we take a "'fact-specific
approach' that proceeds case by case." In re Cabletron Sys., Inc.,
311 F.3d 11, 38 (1st Cir. 2002). All of this is to say that we
evaluate all facts in the complaint and the incorporated documents
to determine whether Karth's proposed Third Amended Complaint
states a claim.
The Private Securities Litigation Reform Act ("PSLRA")
plays an important role in our review. The PSLRA was "enacted 'to
curb frivolous, lawyer-driven litigation, while preserving
investors' ability to recover on meritorious claims.'" In re Bos.
Sci. Corp. Sec. Litig., 686 F.3d at 29–30 (quoting Tellabs, Inc.
v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007)). To
effectuate that goal, the PSLRA requires a plaintiff to "specify
each statement alleged to have been misleading, the reason or
reasons why the statement is misleading, [and to] state with
particularity facts giving rise to a strong inference that the
defendant acted with the required state of mind." 15 U.S.C. § 78u–
4(b); see In re Bos. Sci. Corp. Sec. Litig., 686 F.3d at 30 ("Taken
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together, the [PSLRA] requirements make it easier to identify the
issues and to dismiss flawed complaints at the complaint stage.").
"[A]lthough 'the PSLRA does not require plaintiffs to plead
evidence . . . a significant amount of "meat" is needed on the
"bones" of the complaint.'" Ganem v. InVivo Therapeutics Holdings
Corp., 845 F.3d 447, 455 (1st Cir. 2017) (quoting Hill v. Gozani,
638 F.3d 40, 56 (1st Cir. 2011)).
The Securities Exchange Act
Section 10(b) of the Securities Exchange Act makes it
unlawful for any person to "use or employ, in connection with the
purchase or sale of any security . . . any manipulative or
deceptive device or contrivance in contravention of such rules and
regulations as the Commission may prescribe as necessary or
appropriate in the public interest or for the protection of
investors." 15 U.S.C. § 78j(b). The Commission has promulgated
such a regulation, making it illegal to "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 the
circumstances under which they were made, not misleading." 17 CFR
§ 240.10b–5(b). Taken together, this means that a successful
securities fraud complaint will allege the following six elements:
"(1) a material misrepresentation or omission by the defendant[s];
(2) scienter; (3) a connection between the misrepresentation or
omission and the purchase or sale of a security; (4) reliance upon
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the misrepresentation or omission; (5) economic loss; and (6) loss
causation." Amgen Inc. v. Conn. Ret. Plans & Tr. Funds, 568 U.S.
455, 460-61 (2013) (citation omitted).13
"To establish a material misrepresentation or omission,
[Karth] must show that [the] defendants made a materially false or
misleading statement or omitted a material fact necessary to make
a statement not misleading." Ganem, 845 F.3d at 454 (citation
omitted). "[W]hether a statement is misleading depends on the
perspective of a reasonable investor." Omnicare, Inc. v. Laborers
Dist. Council Constr. Indus. Pension Fund, 135 S. Ct. 1318, 1327
(2015). Information is material "if a reasonable investor would
have viewed it as 'having significantly altered the total mix of
information made available.'" Miss. Pub. Emps.' Ret. Sys. v. Bos.
Sci. Corp., 523 F.3d 75, 85 (1st Cir. 2008) (quoting Basic, Inc.
v. Levinson, 485 U.S. 224, 232 (1988)). We consider the entirety
of the relevant facts available at the time of the allegedly
misleading statement, not simply the words of the statement itself.
See In re Smith & Wesson Holding Corp. Sec. Litig., 669 F.3d 68,
75-77 (1st Cir. 2012). "[I]f an alleged omission involves
speculative judgments about future events, materiality will depend
13 Karth's claim against the individual defendants pursuant
to § 20(a) is for each individual's alleged role in violations of
§ 10(b) and Rule 10b-5. See 15 U.S.C. § 78t. Therefore, if Karth
cannot make out a § 10(b) violation, his § 20(a) claim fails as
well.
- 23 -
at any given time upon a balancing of both the indicated
probability that the event will occur and the anticipated magnitude
of the event in light of the totality of the company activity."
Hill, 638 F.3d at 57 (alterations adopted) (emphases omitted)
(internal quotation marks and citations omitted). We review that
"totality" from the perspective of what the defendants knew at the
time, meaning "[Karth] 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." ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d
46, 62 (1st Cir. 2008) (quoting Shaw v. Dig. Equip. Corp., 82 F.3d
1194, 1223 (1st Cir. 1996)).
Karth's Case
Our analysis focuses on the "total mix of information
. . . available" to Karth at the time of his stock purchase in
July of 2016. See Basic, 485 U.S. at 232. The district court
based its decisions upon its conclusion that the February and April
2016 Disclosures cured any prior misrepresentations and the fact
that those disclosures (and the concurrent comments to investors)
were among the last public statements made by Keryx prior to
Karth's purchase.14 So, those statements are a large part of that
14The defendants argue that Karth waived any argument that
the February and April 2016 Disclosures were misleading because he
did not specifically allege that those disclosures were misleading
- 24 -
"total mix of information" available to Karth at the time of his
purchase. See id. Karth concedes that the singular language in
each of those risk disclosures resolved any confusion about how
many second-step manufacturers Keryx engaged but argues that those
risk disclosures were nonetheless misleading because each
understated the true risk of solely relying upon Norwich.
This is not our first occasion to consider whether a
risk disclosure sufficiently advised investors of possible
negative outcomes. Primarily, all agree, two decisions guide our
analysis here: Hill v. Gozani, 638 F.3d 40 (1st Cir. 2011) and
Tutor Perini Corp. v. Banc of Am. Sec. LLC, 842 F.3d 71 (1st Cir.
2016).
Hill involved a medical device company, NeuroMetrix,
whose profits were dependent on doctors purchasing the device and
receiving sufficient reimbursement from patients' health insurance
carriers. 638 F.3d at 46-49. For various reasons, there were
concerns that insurance providers would stop reimbursing
physicians for use of NeuroMetrix's product, which would lead to
in his proposed Third Amended Complaint and the high pleading
standard for Karth's claim requires him to specify each allegedly
misleading statement. Rather than wade into the nuances of that
argument, we address the issue directly because Karth's argument
"is wrong on the merits." United States v. Leavitt, 925 F.2d 516,
517 (1st Cir. 1991).
- 25 -
a drop in purchases, and, ultimately, profit.15 Id. at 50-51. The
plaintiffs alleged that, though the company "specifically . . .
disclosed" a possibility of that insurance risk materializing,
those disclosures were too vague to properly warn investors of
what could occur. Id. at 60. We affirmed dismissal, holding that
"although knowledgeable employees . . . believed the [insurance
reimbursement] strategy was both losing and potentially dangerous,
there is simply nothing in the complaint to suggest that . . . the
danger posed by the reimbursement strategy was, at the time the
statement was made, a near certainty of ruin." Id. at 59 (emphasis
added). Considering that, we held that while a generic, formulaic
disclosure of risk does not necessarily absolve the speaker of
liability, "neither does it create liability simply because it
does not disclose, at the level of detail the plaintiffs request
15 In Hill, NeuroMetrix staff attempted to advise physicians
about how to report procedures to insurance companies in ways that
maximized the likelihood of reimbursement, but there was internal
disagreement about whether that strategy was legal. 638 F.3d at
47-49. NeuroMetrix did warn investors that, if insurance companies
denied coverage of the procedures at issue, physicians would be
unlikely to purchase the product on a widespread basis.
NeuroMetrix presented this risk as something that "may" occur which
"could potentially adversely impact [its] future revenues." Id.
at 56, 66. When NeuroMetrix made these disclosures, some insurance
companies had already declined to reimburse physicians. Id. at
48-49. One employee at NeuroMetrix even began logging all
instances where reimbursement was an issue but was ordered to stop
so as not to create an obligation for NeuroMetrix to disclose any
of this to physicians. Id. at 49.
- 26 -
in retrospect, all of the factors that contribute to the risk
assessment." Id. at 60 (emphasis omitted).
In Tutor Perini Corp., the defendant, Banc of America
Securities, LLC ("BAS"), serving as the special banking advisor to
the plaintiff, Tutor, a giant construction company, recommended
investments that were intended to satisfy Tutor's investment
priorities of "avoiding risks and illiquidity." 842 F.3d at 76-
78. After a few years of guiding Tutor's investment strategies,
BAS persuaded Tutor to purchase auction rate securities ("ARS").16
Id. at 78. Eventually, the ARS market turned sour and BAS knew
that the market was on the "brink of collapse." Id. at 88. BAS
"knew about an impending collapse" and instructed its own personnel
to "protect" the company by encouraging investors to purchase ARS,
so that BAS would not be left holding these securities when the
market imploded. Id. at 81-83. Following that internal directive,
BAS sold quite a bit of ARS to Tutor and at the same time, assured
Tutor that it would continue to support ARS auctions, so that Tutor
would never be stuck with these investments when it needed cash.
Id. at 83. At the height of Tutor's ARS shopping spree, the market
16 ARS are investment vehicles that are bought and sold at
nonpublic auctions and, if an auction fails because there are not
enough bids within the applicable parameters, the ARS owner is
left holding onto its investment until the next auction. Id. at
77-79. If Tutor wanted to sell its ARS in order to have more cash
on hand and auctions for Tutor's ARS were to fail, Tutor would be
left illiquid, unable to sell its investment on its preferred
timeline. Id.
- 27 -
collapsed entirely (just as BAS knew it would). "Tutor Perini was
left holding 'illiquid' investments—its nightmare scenario." Id.
at 83.
With each of those ARS sales, BAS had included
disclosures that stated, "BAS offers 'no assurances' about the
outcome of any auction." Id. at 83. Tutor sued for securities
fraud and argued that those warnings, though they technically put
Tutor on notice that purchasing ARS was a risk, were insufficient
to absolve BAS of liability. Id. We agreed and held that BAS's
particular relationship with Tutor required far more than general
disclosures. Id. BAS had expressly promised to "provide
investment solutions that [met Tutor's] needs by clearly defining
the risk/reward of particular securities." Id. at 87 (internal
quotation marks omitted). Yet, when BAS saw the risk-to-reward
ratio of ARS shifting, it did not say so. Id. Rather, it continued
to push ARS on Tutor as if nothing had changed. Id. Considering
all of that, we held that BAS "knew (but elected not to disclose)
that the ARS market teetered on the brink of collapse when it
encouraged Tutor Perini to snatch up more ARS." Id. at 91.
Therefore, BAS could not hide behind generic disclosures and, when
it communicated the risk of purchasing ARS to Tutor, it had a duty
to disclose that the risks had "dramatically changed." Id. at 87.
Each of these cases, at least in their reasoning, invoke
the "Grand Canyon" metaphor, where one cannot tell a hiker that a
- 28 -
mere ditch lies up ahead, if the speaker knows the hiker is
actually approaching the precipice of the Grand Canyon. See id.
at 90. That (non-existent) Grand Canyon in Hill was the "near
certainty" (or lack thereof) that insurers would stop covering
NeuroMetrix's product and that physicians thereafter would not
purchase it. See Hill, 638 F.3d at 59. In Tutor Perini, the Grand
Canyon was the meltdown of the ARS market that BAS was so certain
was imminent that it pushed ARS onto Tutor to save itself. See
Tutor Perini, 842 F.3d at 93. Moreover, BAS knew Tutor's specific
financial goals, level of risk tolerance, and precisely what it
feared: illiquidity. Id. So, Tutor was more than just a hiker
near the Grand Canyon; it was a hiker that had hired BAS as a
wilderness guide with the explicit instruction to steer clear of
cliffs because of a fear of heights.
Examining Hill and Tutor Perini, as well as other,
similar cases, we can understand the contours of what makes a risk
so great that it is akin to the Grand Canyon (and therefore a
disclosure is misleading if it frames the risk as merely
hypothetical) and what makes a situation merely risky (i.e., simply
a ditch). A securities fraud defendant is at the edge of the Grand
Canyon where the alleged risk had a "near certainty" of causing
"financial disaster" to the company. Hill, 638 F.3d at 59-60;
accord Tutor Perini, 842 F.3d at 90. Of course, the defendant
company must have understood the near certainty of the risk at the
- 29 -
time it made the statements at issue. ACA Fin. Guar. Corp., 512
F.3d at 62. Such knowledge is often evidenced by a company's
frenzied, underhanded efforts "to keep the house of cards
standing." In re Cabletron Sys., Inc., 311 F.3d at 24. If a
company is "desperate[ly]" working to "protect itself" from
rapidly approaching harm, then it is at the edge of the Grand
Canyon and must warn investors of an imminent cliff. Tutor Perini,
842 F.3d at 88-91. A company must also disclose a relevant risk
if that risk had already begun to materialize. See id. at 86-88
(holding defendant company could be liable where warned-of risk
was actually occurring, but risk disclosures remained vague and
hypothetical); see also Berson v. Applied Signal Tech., Inc., 527
F.3d 982, 986 (9th Cir. 2008) (holding risk disclosure was
insufficient where company warned revenue could fall short of
projection, but omitted that it had already had its revenue stream
"immediately interrupt[ed]" by stop-work orders).
In contrast, a defendant company is merely approaching
a ditch where, internally, there was no "widely-accepted certainty
of failure" or "comprehensive cover-up." Hill, 638 F.3d at 59.
If the company did not "kn[ow] with certainty" that a risk would
materialize, it is not necessarily liable for characterizing that
risk as a "future risk." Wilson v. Merrill Lynch & Co., Inc., 671
F.3d 120, 130-31 (2d Cir. 2011). This standard does not require
a company to be omniscient, even if the company looks foolish in
- 30 -
hindsight for not properly predicting whatever harm befell it.
Greenstone v. Cambex Corp., 975 F.2d 22, 25-26 (1st Cir. 1992).
As we have said before, "fraud by hindsight" is not enough to
sustain a claim. ACA Fin. Guar. Corp., 512 F.3d at 62.
What This Means for Karth
The Grand Canyon in this case, according to Karth, is
the "supply interruption" that Keryx announced was imminent on
August 1, 2016. According to Karth, Keryx knew it was approaching
a cliff and failed to warn investors. Specifically, Karth argues
here that the February and April 2016 Disclosures were too general
and were misleading because each characterized the risk of a supply
interruption as hypothetical when, according to Karth, that
disruption was actively occurring. Karth additionally contends
that Keryx undersold the true risk of using a single manufacturer
by declaring in the February 2016 Disclosure that Keryx had enough
contract manufacturers. Karth also calls misleading various press
releases and statements made during conference calls in 2016, where
Keryx, generally, and Holmes and Madison, individually, touted the
"solid fundamentals" of Auryxia and reported that the company was
"off to a good start." Reading the allegations in the complaint
and attached records in the light most favorable to Karth's case,
we conclude that the facts alleged do not indicate that a supply
interruption was happening or was even close to a "near certainty."
Nor do they indicate a "widely-accepted certainty of failure" at
- 31 -
the time any of Keryx's statements were made. See Hill, 638 F.3d
at 59-60.
The February 2016 Disclosure and Concurrent Statements
Karth claims the February 2016 Disclosure and concurrent
statements were misleading because none informed investors that
Norwich was struggling to produce Auryxia.17 However, Karth sets
forth no facts in his complaint showing that a supply interruption
was looming at that time. Indeed, our review of the record shows
that in the month prior, Keryx's assessment of its manufacturing
protocol demonstrated that over ninety percent of the batches of
Auryxia produced at Norwich met all quality standards. Plus, it
shows Keryx was having no issues with production of Auryxia for
commercial sales and finished February of 2016 with over one
thousand commercial-use bottles beyond what the company predicted
it needed for the coming month. See id. at 57 (holding that
information may not be material if company did not internally
predict the event in question would come to pass).
The only production issue that Karth plausibly pleads is
that in early February, Norwich was struggling to produce enough
17As a reminder, on February 25, 2016, Keryx issued a press
release describing Auryxia's "fundamentals [as] solid" and its
leadership made similarly positive public statements; and on
February 26, 2016, Keryx released the February 2016 Disclosure,
which included a disclosure to investors that Keryx was relying on
"a single supply source."
- 32 -
sample-size bottles of Auryxia.18 Yet, Karth does not plead that
a supply interruption actually occurred (including of sample-size
bottles), that anyone at Keryx thought such an interruption was
approaching, or that these production problems impacted Keryx's
revenue at all. See Williams v. Globus Med., Inc., 869 F.3d 235,
242-43 (3d Cir. 2017) (holding that, where securities fraud
defendant warned of hypothetical risk to revenue, company was not
liable for failing to disclose the risk had actually occurred if
the risk did not impact revenue). Instead, Keryx understood from
historical experience that occasional production stoppages at
Norwich had not caused shortages of Auryxia. Recall that in 2014,
2015, and several times in 2016, Norwich stopped production, often
due to issues with API produced by first-step manufacturers, and
each time, Norwich resumed production before any supply shortage
panned out. Those stoppages were apparently so inconsequential
that Keryx had an excess stock of 1,632 bottles of Auryxia slated
for destruction by March of 2016. Karth pleads no facts suggesting
Keryx should have thought, for the first time, that a production
stoppage would necessarily yield an uncorrectable supply
interruption. See Hill, 638 F.3d at 59 (holding that omitted
18Karth pleads that one employee characterized the supply of
sample-size bottles as "very critical" but the records of the
actual number of sample-size bottles exceeded predicted demand and
(after that month ended) actual demand. Karth says nothing about
the supply of full-size commercial-use bottles at the time of the
February 2016 Disclosure.
- 33 -
information may not be material if the event was unlikely to
occur). For the same reasons, Karth has no case based upon the
February 25, 2016, public statements. Considering what Keryx and
the individual defendants knew at the time, those statements are
merely expressions of "past optimism" that Karth may not turn into
"fraud by hindsight." See Shaw, 82 F.3d at 1223.
The April 2016 Disclosure and Concurrent Statements
Moving closer to the time of Karth's stock purchase,
Karth pleads that for several reasons, the April 2016 Disclosure
and concurrent press statements touting Auryxia's viability were
inadequate, but as we view it, he sets forth insufficient facts as
to why that is so. For instance, Karth characterizes Norwich's
production stoppage on March 24, 2016, as yet another ongoing
supply interruption which should have caused Keryx to provide
heightened risk information to investors in its April disclosures.
But Karth's own complaint pleads that Norwich addressed that issue
by switching its source of API. Also, our record review shows
that just like in February of 2016, Keryx's internal forecast for
production in May of 2016, written in the middle of April,
projected that the company had enough supply to meet commercial
demand for the entire month of May. That prediction came true and
Keryx's supply exceeded demand until August. Therefore, at the
time the April disclosures were made, it seemed Keryx had solved
any production problem before anyone in the company thought the
- 34 -
patient supply of Auryxia was at risk. See Tutor Perini, 842 F.3d
at 90 (holding risk disclosures insufficient where company knew
with "near certainty" that risk was going to materialize). Karth
himself describes the risk as conditional, not impending, alleging
that, in March, the defendants "knew that if full production did
not resume within April, a supply interruption would occur by mid-
May." Appellant's Opening Br. at 31.
In further support of his argument to us that the April
2016 Disclosure is misleading, Karth repeatedly characterizes it
as being published "in the middle of a 5-week production stoppage."
However, his own complaint and its appended documents tell a very
different story. In truth, the earliest Karth alleges that Keryx
knew of the problem that yielded a five-week production stoppage
was April 27, 2016, and the April 2016 Disclosure was released the
next day, far from the middle of a production interruption. Plus,
at the time Keryx released the April 2016 Disclosure, Norwich, as
we gather from Karth's complaint, had given Keryx no reason to
think there was a likely systemic production problem. Compare
Wilson, 671 F.3d at 133-34 (affirming dismissal where defendants
did not "kn[ow] with certainty" that warned-of risk would occur),
with Berson, 527 F.3d at 986 (holding that hypothetical warning
was insufficient when defendant company knew that revenue was
already impacted at time of disclosure). Even Karth pleads that
Keryx "assum[ed] that the Norwich production issues would be
- 35 -
resolved." A risk disclosure is not fraudulent simply because a
company makes reasonable assumptions that, in retrospect, prove
incorrect. See ACA Fin. Guar. Corp., 512 F.3d at 62.
For that same reason, Keryx's positive public statements
about Auryxia in April are just as benign as the statements in
February — Keryx's own manufacturer, Norwich, from what we can
discern from the record before us, thought this might have been an
"isolated incident" and was investigating the issue. See Shaw, 82
F.3d at 1223. Further, at the point of the April 2016 Disclosure
and related public statements, Keryx had even more reason than in
February of 2016 (when it published the other challenged
disclosure) to think that Norwich would rectify any production
problems before they impacted supply, because Norwich had
successfully done so in February and March. See Tutor Perini, 842
F.3d at 90.
A Few Loose Ends
Karth raises two more arguments that merit some
discussion. First, he highlights the Parexel Report from 2014 as
evidence that Keryx knew all along that Norwich would have
production problems. This does not align with the text of the
Report, appended to the complaint. In reality, Parexel, after
conducting a "conference room review of documentation" but not
visiting Norwich, concluded that Norwich had the "appropriate
facilities and expertise to meet the needs of Keryx," but cautioned
- 36 -
that, because of Norwich's uncommon validation system, it "ha[d]
not been demonstrated that the manufacturing process w[ould]
consistently produce product that [met] final specifications." At
best (for Karth's case), the Parexel Report warned Keryx that 1)
Norwich's production process was not guaranteed to be flawless
and, 2) at least by implication, if Norwich experienced enough
production problems, Keryx's bottom line could suffer.19 This is
precisely the risk Keryx warned investors, like Karth, about in
the February and April 2016 Disclosures: if Norwich were to "fail
to meet the quality or delivery requirements needed to supply
Auryxia at levels to meet market demand, [Keryx] could experience
a loss of revenue." Therefore, even accepting Karth's
characterization of the 2014 Parexel Report, we do not see how it
amounts to any certainty that a 2016 supply interruption was
imminent. See Tutor Perini, 842 F.3d at 90.
Second, as to the February and April 2016 Disclosures,
Karth's argument that the language was "too boilerplate" simply
does not align with text of the disclosures. A disclosure can be
insufficient where it does not include any "meaningful cautionary
language," but merely warns investors that no results are
guaranteed. Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 244-45
If Keryx did not pick that up from the Parexel Report in
19
2014, it had certainly learned by 2016 that Norwich's work could
be inconsistent.
- 37 -
(5th Cir. 2009). In contrast, the disclosures here specifically
identify the risk — the use of a single manufacturer who could
fail to produce enough Auryxia "to meet market demand" — and
explained what that would mean for investors — "a loss of revenue."
Relatedly, Karth argues that the risk disclosures should have
specifically included the language "supply interruption." It is
difficult to see how that particular phrasing would be material to
investors, but the synonymous warning that the company might fail
"to meet market demand" would not be. See Basic, 485 U.S. at 232
(holding information is material if it would have "significantly
altered the total mix of information made available" (internal
quotation marks omitted)).
Though it may be a tough pill to swallow, the district
court properly denied Karth's motion to amend as futile. Karth's
proposed Third Amended Complaint fails to state a claim because
the pleadings and attachments, when appropriately scrutinized,
fail to show Keryx made material misrepresentations or omissions
upon which Karth relied when he purchased Keryx's stock.
WRAP UP
We affirm the entry of judgment and award costs to the
defendants.
- 38 -
Karth v. Keryx Biopharmaceuticals, Inc.
Combined Opinion