PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
DAVID COZZARELLI; STEPHANIE
COZZARELLI; FRANKFURT-TRUST
INVESTMENT GESELLSCHAFT MBH;
CAROLE SWOBODA; ROBERT
SWOBODA,
Plaintiffs-Appellants,
v.
INSPIRE PHARMACEUTICALS
INCORPORATED; CHRISTY L.
SHAFFER, PH.D.; GREGORY L.
MOSSINGHOFF; GARY D. NOVACK, No. 07-1851
PH.D.,
Defendants-Appellees,
and
DEUTSCHE BANK SECURITIES
INCORPORATED; MORGAN STANLEY &
COMPANY, INCORPORATED; PIPER
JAFFRAY & CO; SG COWEN & CO,
LLC,
Defendants.
Appeal from the United States District Court
for the Middle District of North Carolina, at Durham.
William L. Osteen, Senior District Judge.
(1:06-cv-00201)
Argued: October 30, 2008
Decided: December 12, 2008
2 COZZARELLI v. INSPIRE PHARMACEUTICALS
Before WILKINSON, Circuit Judge, Irene M. KEELEY,
United States District Judge for the Northern District of
West Virginia, sitting by designation, and Henry E.
HUDSON, United States District Judge for the Eastern
District of Virginia, sitting by designation.
Affirmed by published opinion. Judge Wilkinson wrote the
opinion, in which Judge Keeley and Judge Hudson joined.
COUNSEL
ARGUED: Maya Saxena, SAXENA WHITE, P.A., Boca
Raton, Florida, for Appellants. Barry M. Kaplan, WILSON,
SONSINI, GOODRICH & ROSATI, Seattle, Washington, for
Appellees. ON BRIEF: Christopher L. Nelson, Jennifer
Keeney, SCHIFFRIN, BARROWAY, TOPAZ & KESSLER,
L.L.P., Radnor, Pennsylvania; Joseph E. White, III, Christo-
pher S. Jones, SAXENA WHITE, P.A., Boca Raton, Florida,
for Appellants. Nicholas I. Porritt, C. Paul Chalmers, Scott A.
Lowry, WILSON, SONSINI, GOODRICH & ROSATI,
Washington, D.C., for Appellees.
OPINION
WILKINSON, Circuit Judge:
This case involves claims that a pharmaceutical company
and three of its directors violated federal securities laws.
Plaintiffs’ primary allegation is that Inspire Pharmaceuticals,
Inc. committed securities fraud by overstating the prospects
for an experimental drug that the company was developing to
treat dry eye disease. When we apply the careful scrutiny
required by Congress in the Private Securities Litigation
COZZARELLI v. INSPIRE PHARMACEUTICALS 3
Reform Act of 1995 and by the Supreme Court in Tellabs,
Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007),
we conclude that plaintiffs’ allegations are lacking. In particu-
lar, plaintiffs fail to raise the "strong inference" of wrongful
intent that is necessary to support their securities fraud claims.
We thus affirm the district court’s dismissal of the complaint.
I.
Inspire is in the business of developing prescription drugs
to treat diseases of the eyes, lungs, and sinuses. One of the
company’s flagship products is diquafosol tetrasodium
("diquafosol"), a treatment for dry eye disease. Inspire
designed diquafosol both to prevent and to heal the long-term
damage that dry eye disease causes to the cornea of the eye.
Over-the-counter eye drops, in contrast, provide only short-
term relief of dry eye symptoms.
Before Inspire could market diquafosol, the company had
to demonstrate the drug’s safety and efficacy to the satisfac-
tion of the Food and Drug Administration. The FDA generally
requires drug companies to conduct clinical trials with prede-
termined goals, or "endpoints," that must be satisfied. End-
points may be either subjective or objective. A subjective
endpoint is a goal relating to a symptom experienced by the
patient, such as itchiness of the eye. An objective endpoint is
a goal relating to a verifiable test.
A common objective test for dry eye drugs is known as
"corneal staining," a procedure in which a fluorescent dye is
used to highlight damaged areas of the cornea. The result of
the test (or its "score") varies from zero to five depending on
the number of highlighted areas. A score of zero is known as
"corneal clearing." Clearly, a showing that diquafosol causes
an improvement in patients’ corneal staining scores would
help the drug’s chances for FDA approval. Even better would
be a demonstration that diquafosol causes patients’ number of
4 COZZARELLI v. INSPIRE PHARMACEUTICALS
stained corneal areas to fall to zero, thus achieving corneal
clearing.
To that end, Inspire performed a series of clinical trials for
diquafosol. Of significance here is Study 105, a Phase III trial
designed to demonstrate efficacy in a large patient population.
Diquafosol met its primary objective endpoint in Study 105:
patients using diquafosol showed a statistically significant
improvement in their corneal staining scores. Importantly, a
statistically significant number of patients also exhibited cor-
neal clearing. But diquafosol failed to meet its subjective end-
point. While patients using the drug showed improvement
with respect to a subjective symptom—the sensation of a for-
eign body in the eye—the subjective results were not statisti-
cally significant.
With these results in hand, Inspire sought approval to mar-
ket diquafosol by submitting a New Drug Application to the
FDA in June 2003. The FDA had no written guidance for
approving dry eye treatments at the time, and the agency’s
requirements for approval were not altogether clear. It had
been thought historically that the FDA would only approve a
dry eye treatment that met both an objective endpoint and a
subjective endpoint in two trials. But the only prescription
treatment for dry eye ever to be approved, Restasis, had
gained the FDA’s blessing in 2002 despite failing to meet that
rigorous standard. Thus, Inspire surmised that diquafosol
might be approved despite missing its subjective endpoint in
Study 105.
The FDA responded by telling Inspire that it had to conduct
at least one more study to obtain approval. In private commu-
nications, the FDA gave Inspire two options. Inspire could
conduct two additional trials that met both an objective end-
point and a subjective endpoint. Or it could conduct one addi-
tional trial that replicated—this time as a primary endpoint—
the corneal clearing that Inspire had achieved in Study 105.
COZZARELLI v. INSPIRE PHARMACEUTICALS 5
Inspire chose the latter option and commenced Study 109 in
June 2004 with a primary endpoint of corneal clearing.
Inspire announced publicly that it was performing Study
109. But Inspire was tight-lipped regarding the details of the
trial, as investment analysts noted at the time. In particular,
Inspire stated that it would not disclose the primary endpoint
of Study 109 because the company did not want to divulge the
FDA’s requirements for approval to the company’s competi-
tors, who could have used that information to plan their own
studies.
However, Inspire did make a handful of public comments
regarding Study 109. In prospectuses for stock offerings in
July and November 2004, the company stated that it had a
"clear understanding of the FDA’s additional requirement" for
approval of diquafosol. Inspire also referred to Study 109 as
a "confirmatory" Phase III trial in those prospectuses and
other public statements. Inspire CEO and Director Christy
Shaffer further expressed in a conference call with investors
and analysts on May 10, 2004 that Study 109’s design was
"very similar" to that of Study 105. And Shaffer stated in
another conference call on November 4, 2004 that the primary
endpoint of Study 109 was "a corneal staining endpoint."
Despite the fact that Inspire had declined to disclose the exact
endpoint of Study 109, and despite the fact that Inspire also
had announced that Study 105 had achieved corneal clearing,
some stock analysts speculated that the primary endpoint of
Study 109 was only a relative improvement in corneal stain-
ing scores and that Study 109 was likely to meet that end-
point.
While Study 109 was ongoing, Shaffer and two other
Inspire directors sold some of their shares in Inspire. Shaffer
sold 2,000 shares in July 2004, 2,000 shares in August, and
10,000 shares in November (together, about 3% of her total
holdings of shares and vested options). Also in November
2004, Gregory Mossinghoff sold 35,000 shares (12% of his
6 COZZARELLI v. INSPIRE PHARMACEUTICALS
total holdings), and Gary Novack sold 5,700 shares (13%).
Despite the sales, all three of the directors actually increased
their net holdings in Inspire while Study 109 was pending
through the acquisition of vested stock options.
On February 9, 2005, Inspire announced the results of
Study 109. Diquafosol had failed to meet its primary end-
point, a statistically significant amount of corneal clearing.
Inspire’s stock price fell 44.5% from $16.00 on February 8 to
$8.88 on February 9. On February 15, this action ensued.
Plaintiffs—David and Stephanie Cozzarelli, Robert and
Carole Swoboda, and Frankfurt-Trust Investment-
Gesellschaft mbH—filed a Consolidated Class Action Com-
plaint on behalf of purchasers of Inspire stock. Plaintiffs
alleged numerous violations of federal securities laws by
Inspire, Shaffer, Mossinghoff, and Novack. In particular,
plaintiffs claimed that defendants had violated Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, as well as
Rule 10b-5, by fraudulently misleading investors as to Study
109’s likelihood of success. See 15 U.S.C. §§ 78j(b), 78t(a);
17 C.F.R. § 240.10b-5. Plaintiffs also alleged that defendants
had violated Sections 11, 12(a)(2), and 15 of the Securities
Act of 1933 (15 U.S.C. §§ 77k, 77l(a)(2), 77o) by similarly
misleading investors about Study 109 in the prospectuses
relating to the company’s July and November 2004 stock
offerings. Plaintiffs further claimed that Shaffer had commit-
ted insider trading in violation of Section 20A of the
Exchange Act, 15 U.S.C. § 78t-1.
On defendants’ motion, the magistrate judge issued a rec-
ommendation that the complaint be dismissed. See In re
Inspire Pharm., Inc. Sec. Litig., 515 F. Supp. 2d 631, 634
(M.D.N.C. 2007). Applying the heightened pleading stan-
dards of the Private Securities Litigation Reform Act, the
judge held that plaintiffs’ claims under the Exchange Act
failed because plaintiffs had not established a strong inference
of scienter. See id. at 639-40. Further, plaintiffs’ entire action
COZZARELLI v. INSPIRE PHARMACEUTICALS 7
warranted dismissal because plaintiffs had insufficiently pled
the requisite element that was common to all of plaintiffs’
claims: a false or misleading statement by defendants. See id.
at 640-41. The district court accepted the magistrate’s recom-
mendation and dismissed the complaint with prejudice. See id.
at 633. This appeal followed.
II.
A.
We begin with plaintiffs’ claims under Section 10(b) of the
Exchange Act and Rule 10b-5. Those provisions act to protect
the integrity of the market in securities and prohibit fraud in
connection with the purchase or sale of a security. See 15
U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. A successful securi-
ties fraud plaintiff must show that: "(1) the defendant made a
false statement or omission of material fact (2) with scienter
(3) upon which the plaintiff justifiably relied (4) that proxi-
mately caused the plaintiff’s damages." Teachers’ Ret. Sys. of
La. v. Hunter, 477 F.3d 162, 172 (4th Cir. 2007) (internal
quotations omitted). To prove the necessary mental state of
scienter, negligence is not enough. A plaintiff must show
either "intentional misconduct" or such "severe recklessness"
that the danger of misleading investors was "either known to
the defendant or so obvious that the defendant must have been
aware of it." Ottmann v. Hanger Orthopedic Group, Inc., 353
F.3d 338, 343-44 (4th Cir. 2003) (internal quotations omit-
ted).
These substantive elements of a securities fraud claim are
demanding. But the potential liability for defendants also can
be significant. As a result, there is a danger that some
Exchange Act suits seek only valuable settlements and fees
rather than success on the merits. Indeed, securities fraud
actions, "if not adequately contained, can be employed abu-
sively to impose substantial costs on companies and individu-
8 COZZARELLI v. INSPIRE PHARMACEUTICALS
als whose conduct conforms to the law." Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 127 S. Ct. 2499, 2504 (2007).
To eliminate such abuse, Congress enacted the Private
Securities Litigation Reform Act of 1995, Pub. L. No. 104-67,
109 Stat. 737. See Tellabs, 127 S. Ct. at 2504. Through the
"[e]xacting pleading requirements" of the PSLRA, Congress
charged courts to be vigilant in preventing meritless securities
fraud claims from reaching the discovery phase of litigation.
Id. at 2504, 2508. In particular, Congress required that plain-
tiffs make specific allegations of false statements or else face
dismissal. See 15 U.S.C. § 78u-4(b). And Congress instructed
courts to dismiss any securities fraud complaint that does not
"state with particularity facts giving rise to a strong inference
that the defendant acted" with scienter. Id. § 78u-4(b)(2).1
1
15 U.S.C. § 78u-4(b) provides in relevant part:
(1) In any private action arising under this chapter in which the
plaintiff alleges that the defendant —
(A) made an untrue statement of a material fact; or
(B) omitted to state a material fact necessary in order to make the
statements made, in the light of the circumstances in which they
were made, not misleading;
the complaint shall specify each statement alleged to have been
misleading, the reason or reasons why the statement is mislead-
ing, and, if an allegation regarding the statement or omission is
made on information and belief, the complaint shall state with
particularity all facts on which that belief is formed.
(2) In any private action arising under this chapter in which the
plaintiff may recover money damages only on proof that the
defendant acted with a particular state of mind, the complaint
shall, with respect to each act or omission alleged to violate this
chapter, state with particularity facts giving rise to a strong infer-
ence that the defendant acted with the required state of mind.
(3) (A) In any private action arising under this chapter, the court
shall, on the motion of any defendant, dismiss the complaint if
the requirements of paragraphs (1) and (2) are not met.
COZZARELLI v. INSPIRE PHARMACEUTICALS 9
The Supreme Court in Tellabs underscored that "meritori-
ous private actions to enforce federal antifraud securities laws
are an essential supplement to criminal prosecutions and civil
enforcement actions." 127 S. Ct. at 2504. But it also made
clear that raising a "strong inference" of scienter is no small
burden. The Court recognized that the PSLRA "unequivocally
raised the bar for pleading scienter." Id. at 2509 (internal quo-
tations omitted). And in defining just how "strong" an infer-
ence of scienter must be, the Court gave that standard teeth,
using adjectives like "cogent," "compelling," "persuasive,"
"effective," and "powerful." Id. at 2510. The Court held that
the test applied by the Seventh Circuit below—requiring only
that a reasonable person could infer that scienter existed—did
not demand a strong enough inference of scienter to satisfy
the statutory language. See id. at 2509-10. Instead, the Court
held that an inference of scienter can only be strong—and
compelling, and powerful—when it is weighed against the
opposing inferences that may be drawn from the facts in their
entirety. See id.
Tellabs therefore prescribed the following test: "A com-
plaint will survive, we hold, only if a reasonable person would
deem the inference of scienter cogent and at least as compel-
ling as any opposing inference one could draw from the facts
alleged." Id. at 2510. Thus, when the facts as a whole more
plausibly suggest that the defendant acted innocently—or
even negligently—rather than with intent or severe reckless-
ness, the action must be dismissed. Only then, the Court held,
will the PSLRA serve its purpose of derailing "frivolous,
lawyer-driven litigation." Id. at 2509.
To sum up, Tellabs recognized that securities fraud actions
serve an important purpose—but only when those actions are
meritorious. See id. at 2504, 2509. The PSLRA balances these
concerns by requiring courts to sort out the meritorious claims
from the abusive ones early in litigation, and Tellabs obligates
courts do so with care. Keeping in mind the duty that Con-
gress and the Supreme Court have thus placed upon us, we
10 COZZARELLI v. INSPIRE PHARMACEUTICALS
turn to the specific allegations of securities fraud in plaintiffs’
complaint.
B.
The theory underlying plaintiffs’ securities fraud claims
amounts to this: Inspire and its directors intentionally misled
the public to believe that Study 109 was likely to succeed,
thereby artificially inflating Inspire’s stock price to the finan-
cial benefit of the company and the individual directors. To
support that theory, plaintiffs allege that certain statements by
defendants misled investors regarding the endpoint of Study
109. Plaintiffs rely primarily on Shaffer’s statement on a con-
ference call in November 2004 that Study 109 had "a corneal
staining endpoint." They also point to statements that Study
109 was a "confirmatory" trial and that Study 109 was "very
similar" to Study 105.
The district court held that plaintiffs had not satisfied the
PSLRA because they had not alleged with sufficient particu-
larity that defendants’ statements were misleading. We agree
with the district court that the PSLRA establishes strict
requirements for pleading falsity with specificity and that
there is a substantial question as to whether plaintiffs’ allega-
tions of falsity were adequate. See Hunter, 477 F.3d at 171-
75. But we also find it quite clear—and the district court did
as well—that plaintiffs failed to allege facts giving rise to a
strong inference of scienter. We therefore assume for the sake
of argument that defendants’ statements were misleading and
turn to plaintiffs’ theory of scienter.
C.
Plaintiffs attempt to establish a strong inference of scienter
through the following allegations. Plaintiffs’ primary claim is
that defendants knew both that the primary endpoint of Study
109 was "corneal clearing" and that "corneal clearing" was
different than "corneal staining," so Shaffer’s statement that
COZZARELLI v. INSPIRE PHARMACEUTICALS 11
Study 109 had "a corneal staining endpoint" must have been
intentionally false. Plaintiffs also claim that corneal clearing
is "almost impossible" to achieve—based on quotations from
anonymous doctors who worked on Studies 105 and 109—
and that defendants therefore knew that Study 109 would
likely fail. Plaintiffs also argue that defendants had multiple
financial motivations to commit fraud. Plaintiffs allege that
Inspire was losing money in 2004 and needed to raise capital,
and they allege that Shaffer’s compensation was tied to the
performance of the company and diquafosol. Plaintiffs also
claim that the individual defendants sold large numbers of
their own Inspire shares while Study 109 was pending. When
all of these allegations are combined, plaintiffs contend that
a strong inference of scienter emerges.
We disagree. Plaintiffs’ proposed inference of scienter
depends on stringing together a series of isolated allegations
without considering the necessary context. Plaintiffs insist
that we should rely solely on their discrete allegations, and
they urge us not to look beyond the complaint for additional
facts. In particular, the complaint quotes selectively from vari-
ous reports by investment analysts, and plaintiffs argue that
we should not consider the reports in full. That argument is
erroneous. While we must accept plaintiffs’ factual allega-
tions as true, the Supreme Court in Tellabs held that we
should not decide the issue of scienter by viewing individual
allegations in isolation. See 127 S. Ct. at 2509. Rather, we
must examine the facts as a whole, including facts found in
"documents incorporated into the complaint by reference." Id.
Furthermore, plaintiffs nowhere challenge the authenticity of
the analyst reports attached to defendants’ motion to dismiss
and cited in plaintiffs’ complaint. Our consideration of such
documents is undoubtedly proper. See Am. Chiropractic Ass’n
v. Trigon Healthcare, Inc., 367 F.3d 212, 234 (4th Cir. 2004).
The content of these analyst reports makes clear why plain-
tiffs urge us not to look beyond the complaint itself: the
reports demonstrate the fundamental weakness of plaintiffs’
12 COZZARELLI v. INSPIRE PHARMACEUTICALS
case. The reports reveal that Inspire "never confirmed the pri-
mary endpoint" of Study 109 publicly and that the company
even expressly stated that it would not announce the specifics
of Study 109 for "competitive reasons." As Morgan Stanley
explained in August 2004: "Inspire does not want to disclose
details, such as endpoints, that its competitors could use in
their development programs." In addition, that same report by
Morgan Stanley makes clear that Inspire had achieved "clear-
ing of corneal staining" in Study 105 and had announced that
result to the public. Finally, the analysts did opine that the
endpoint for Study 109 was a reduction in corneal staining
scores. But the analysts also admitted that—due to Inspire’s
refusal to disclose the endpoint—their opinions were just that:
opinion, "assum[ption]," and "belief."
These facts suggest an inference that defendants withheld
information from the market with the intent to protect
Inspire’s competitive interests. As the analyst reports suggest,
Inspire had expended substantial time and resources to learn
the FDA’s requirements for approval of a dry eye treatment,
and the company did not want to divulge that information to
its rivals. It is beyond our purview to determine whether that
decision was correct as a matter of business judgment. But a
decision to seek a competitive advantage, whether wise or
not, is quite different from an intent to deceive. Indeed, plain-
tiffs do not suggest that withholding information to protect
one’s competitive interests is anything other than a legitimate
business call. Rather, plaintiffs suggest only that it is the
wrong inference to draw from the facts alleged.
We thus have two competing inferences based on the facts
as a whole. Plaintiffs argue that the facts support a nefarious
intent, and defendants argue that the facts support an innocent
one. Under the PSLRA and Tellabs, we must weigh those
competing inferences and determine whether plaintiffs’ infer-
ence of scienter is "cogent and at least as compelling" as
defendants’ inference of a legitimate business judgment. 127
S. Ct. at 2510. As explained below, we conclude that no
COZZARELLI v. INSPIRE PHARMACEUTICALS 13
strong inference of scienter exists because the inference that
defendants acted with the nonfraudulent intent to protect their
competitive advantage is more powerful and compelling than
the inference that defendants acted with an intent to deceive.
D.
Upon examination, Inspire’s legitimate business motiva-
tions explain each of the facts alleged in the complaint more
convincingly than plaintiffs’ tenuous theory of wrongful
intent. We shall address each of those allegations in turn, but
we first note that plaintiffs have not alleged the existence of
any internal documents from Inspire or other direct statements
contradicting the inference that defendants acted with a lawful
intent based on their competitive interests. While that sort of
"smoking-gun" allegation is not necessary to support an infer-
ence of scienter, see Tellabs, 127 S. Ct. at 2510, plaintiffs do
have the difficult task of establishing a countervailing, cogent
inference of scienter through indirect and circumstantial alle-
gations.
Plaintiffs’ scienter theory depends principally on Shaffer’s
statement that Study 109 had "a corneal staining endpoint."
Plaintiffs insist that Shaffer was intentionally lying because
she knew both that the endpoint of Study 109 was "corneal
clearing" and that there was an irreconcilable distinction
between the terms "corneal clearing" and "corneal staining."
But that argument ignores reality. In fact, the two terms are
more or less interchangeable—or at least interchangeable
enough to dispel a strong inference of fraud. "Corneal stain-
ing" is a procedure, and "corneal clearing" is one possible
result of that procedure. "[A] corneal staining endpoint" is
thus a general, descriptive phrase that encompasses a spec-
trum of possible endpoints, including corneal clearing. It is
difficult to infer intent to deceive from Shaffer’s reference to
the general phrase rather than the specific result at the end of
the spectrum. Furthermore, Shaffer had a perfectly legitimate
reason to refer to "corneal staining" generally rather than to
14 COZZARELLI v. INSPIRE PHARMACEUTICALS
"corneal clearing" in particular—protection of Inspire’s com-
petitive interests. Shaffer’s reference to "a corneal staining
endpoint" therefore supports at most an inference of imprecise
or even negligent use of language, not an inference of
scienter.
We also find unpersuasive plaintiffs’ other primary allega-
tion supporting its theory of scienter. Plaintiffs argue that
defendants knew that the corneal clearing endpoint of Study
109 was "almost impossible" to achieve and thus acted with
wrongful intent by leading investors to believe that Study 109
would succeed. Again, the facts in their entirety belie plain-
tiffs’ theory. Morgan Stanley’s report in August 2004 makes
clear that Study 105 had achieved corneal clearing. That fact
bears more significantly on defendants’ outlook regarding
Study 109 than statements from anonymous doctors who said
that corneal clearing was nearly impossible to achieve. Based
on the fact that defendants achieved corneal clearing in Study
105 and then set out to achieve it again in Study 109, it is
much more likely that defendants thought that Study 109
would succeed than that they thought it would fail. Further
proving the point, much of the complaint portrays diquafosol
as the "lead development product" on which Inspire’s future
as a company depended. Consolidated Class Action Com-
plaint ¶ 101. It is improbable that Inspire would stake its exis-
tence on a drug and a clinical trial that the company thought
was doomed to failure. Plaintiffs’ inference of fraud based on
the supposed impossibility of corneal clearing is thus not even
plausible, much less convincing.
Plaintiffs’ conclusory allegations regarding defendants’
motives to defraud also lack merit. Plaintiffs claim that
Inspire was motivated to make public statements about diqua-
fosol that were overly optimistic because the company needed
to raise money to fund its operations. They also claim that
Shaffer had an incentive to puff up the outlook of Study 109
falsely because her compensation was tied to the company’s
performance. But a strong inference of fraud does not arise
COZZARELLI v. INSPIRE PHARMACEUTICALS 15
merely from seeking capital to support a risky venture.
Indeed, the motivations to raise capital or increase one’s own
compensation are common to every company and thus add lit-
tle to an inference of fraud. See Ottmann v. Hanger Orthope-
dic Group, Inc., 353 F.3d 338, 352 (4th Cir. 2003). All
investments carry risk, particularly in a field like biophar-
maceuticals. If we inferred scienter from every bullish state-
ment by a pharmaceutical company that was trying to raise
funds, we would choke off the lifeblood of innovation in med-
icine by fueling frivolous litigation—exactly what Congress
sought to avoid by enacting the PSLRA. Furthermore, the fact
that some analysts relied on defendants’ hopeful statements to
speculate—as the analysts admitted they were doing—that
Study 109 would succeed adds little to an inference of
scienter. Speculation by investors and subsequent buyers’
remorse cannot support an Exchange Act suit alone.
Finally, the individual defendants’ sales of Inspire stock
were not "unusual or suspicious" and thus do not add support
to an inference of scienter. In re PEC Solutions, Inc. Sec.
Litig., 418 F.3d 379, 390 (4th Cir. 2005). When we consider
the directors’ total number of shares and vested stock options
as stated in SEC filings, the stock sales highlighted by plain-
tiffs were modest to de minimis: Novack, Mossinghoff, and
Shaffer sold 13%, 12%, and 3% of their holdings, respec-
tively. See id. at 390 n.10; Teachers’ Ret. Sys. of La. v.
Hunter, 477 F.3d 162, 185 (4th Cir. 2007). Moreover, the
total holdings of each defendant increased while Study 109
was ongoing, hardly suggesting that the defendants sought to
dump their shares at an inflated price. And as the district court
observed, both Mossinghoff and Novack "resigned from
Inspire around the time of their sales, indicating that their
departures, rather than an intent to defraud, may have
prompted them to sell their stock." In re Inspire Pharm., Inc.
Sec. Litig., 515 F. Supp. 2d 631, 640 (M.D.N.C. 2007) (inter-
nal citation omitted).2
2
Plaintiffs make two additional allegations in support of their scienter
claims, but those allegations also lack persuasive force. Plaintiffs allege
16 COZZARELLI v. INSPIRE PHARMACEUTICALS
Thus, even when we accept all of plaintiffs’ factual allega-
tions as true, the record as a whole does not support a strong
inference of scienter. The most persuasive inference is that
defendants acted with a lawful intent to protect their competi-
tive interests—an intent that plaintiffs do not suggest is ille-
gitimate. And that inference is more compelling than the
inference that defendants acted with an intent to mislead or
deceive. The district court therefore properly dismissed plain-
tiffs’ claims under Section 10(b) and Rule 10b-5. Plaintiffs’
claims under Sections 20(a) and 20A of the Exchange Act are
derivative of their Section 10(b) and Rule 10b-5 claims, so the
20(a) and 20A claims were properly dismissed as well. See 15
U.S.C. §§ 78t(a), 78t-1; Hunter, 477 F.3d at 188; N.J. Car-
penters Pension & Annuity Funds v. Biogen Idec, Inc., 537
F.3d 35, 58 (1st Cir. 2008).
III.
We turn next to plaintiffs’ claims under the Securities Act.
Sections 11 and 12(a)(2) of the Securities Act apply to regis-
tration statements and prospectuses for securities, respec-
tively. Both provisions prohibit materially false statements or
omissions, although proof of scienter is not required. See 15
U.S.C. §§ 77k, 77l; Herman & MacLean v. Huddleston, 459
U.S. 375, 381-82 (1983); Newcome v. Esrey, 862 F.2d 1099,
1106 (4th Cir. 1988) (en banc).
that the SEC is investigating Inspire and Shaffer for fraud, but that asser-
tion is too speculative to add much, if anything, to an inference of scienter.
In fact, defendants represented at oral argument—and plaintiffs did not
dispute—that the SEC’s investigation has already settled without a finding
of culpability for securities fraud. Plaintiffs further allege that Shaffer lied
when she certified Inspire’s financial statements in accordance with the
Sarbanes-Oxley Act of 2002, but that bare allegation does not provide
independent support for an inference of scienter. See Cent. Laborers’ Pen-
sion Fund v. Integrated Elec. Servs., Inc., 497 F.3d 546, 555 (5th Cir.
2007); Garfield v. NDC Health Corp., 466 F.3d 1255, 1265-67 (11th Cir.
2006).
COZZARELLI v. INSPIRE PHARMACEUTICALS 17
Plaintiffs claim that Inspire and Shaffer violated Sections
11 and 12(a)(2) because the company’s registration statement
and prospectuses for its July and November 2004 stock offer-
ings were false and misleading.3 The prospectuses stated that
Inspire had a "clear understanding of the FDA’s additional
requirement for the regulatory approval of diquafosol." And
the prospectuses referred to Study 109 as a "confirmatory"
Phase III trial. Plaintiffs allege that these statements were mis-
leading because Inspire failed to disclose that the primary
endpoint of Study 109, corneal clearing, was different than
the primary endpoint of Study 105, an improvement in cor-
neal staining scores.4 We hold that plaintiffs’ claims fail
because plaintiffs have not alleged that the prospectuses were
false with the particularity required by Federal Rule of Civil
Procedure 9(b).
Rule 9(b) provides: "In alleging fraud or mistake, a party
must state with particularity the circumstances constituting
fraud or mistake." As almost every circuit court to examine
the issue has held, Rule 9(b) applies to allegations under the
Securities Act where those allegations sound in fraud. See
ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46, 68 (1st
Cir. 2008) (collecting cases); Wagner v. First Horizon Pharm.
Corp., 464 F.3d 1273, 1277-78 (11th Cir. 2006) (collecting
additional cases). But see In re NationsMart Corp. Sec. Litig.,
130 F.3d 309, 314-15, 318-19 (8th Cir. 1997). Although
claims under Sections 11 and 12(a)(2) may not have fraud as
an element, Rule 9(b) refers to "alleging fraud," not to causes
of action or elements of fraud. When a plaintiff makes an alle-
gation that has the substance of fraud, therefore, he cannot
3
Plaintiffs do not appeal the dismissal of their Securities Act claims
against Mossinghoff and Novack.
4
We note that plaintiffs claim only that the statements in the prospec-
tuses were false without specifying any additional false statements in a
registration statement. Because defendants have not raised the issue, we
assume that the prospectuses were incorporated into the registration state-
ment for the July and November offerings, thus allowing for a claim under
Section 11.
18 COZZARELLI v. INSPIRE PHARMACEUTICALS
escape the requirements of Rule 9(b) by adding a superficial
label of negligence or strict liability. Allowing a plaintiff to
do so would undermine one of the primary purposes of Rule
9(b): protecting defendants from the reputational harm that
results from frivolous allegations of fraudulent conduct. See
Harrison v. Westinghouse Savannah River Co., 176 F.3d 776,
784 (4th Cir. 1999); Wagner, 464 F.3d at 1277-78.
Here, plaintiffs’ allegations sound in fraud and thus are
subject to Rule 9(b). The complaint treats the allegedly false
statements in Inspire’s prospectuses as part of a single, coor-
dinated scheme to defraud investors. Indeed, plaintiffs’ alle-
gations regarding the prospectuses—that they were
misleading because they failed to disclose the primary end-
point of Study 109—are exactly the same as plaintiffs’ allega-
tions of fraud under the Exchange Act. The complaint also
claims that the false statements in the prospectuses support
plaintiffs’ Exchange Act counts. But plaintiffs cannot make
that claim with a straight face without also admitting that the
complaint alleges the prospectuses to be fraudulent. Plaintiffs
argue that Rule 9(b) should not apply because the complaint
"expressly exclude[s] and disclaim[s] any allegation that
could be construed as alleging fraud" with respect to the
Securities Act claims. Consolidated Class Action Complaint
¶¶ 73, 77. However, a conclusory disclaimer cannot alter the
substance of plaintiffs’ allegations, which sound in fraud. See
Cal. Pub. Employees’ Ret. Sys. v. Chubb Corp., 394 F.3d 126,
160 & n.24 (3d Cir. 2004); Wagner, 464 F.3d at 1278.
Applying Rule 9(b), plaintiffs have not explained with the
necessary particularity why the statements that they cite in the
prospectuses were false or misleading. See Hillson Partners
Ltd. P’ship v. Adage, Inc., 42 F.3d 204, 209 (4th Cir. 1994);
Rombach v. Chang, 355 F.3d 164, 170, 172 (2d Cir. 2004).
Plaintiffs argue only that the prospectuses should have dis-
closed that Study 109’s endpoint was different than Study
105’s endpoint. But plaintiffs have not alleged that the pro-
spectuses even mentioned the endpoints of either study. Plain-
COZZARELLI v. INSPIRE PHARMACEUTICALS 19
tiffs have thus failed to provide any reason to think that
describing Study 109 as "confirmatory" suggested that the
endpoints of the studies were the same. Rather, that phrase
implies only that Study 109 was meant to "confirm" the effi-
cacy of diquafosol—which was true. And regardless of what
the "FDA’s additional requirement" for approval of diquafo-
sol was, we are at a loss to understand how Inspire’s state-
ment that it had a "clear understanding" of that requirement
could be false or misleading. Because plaintiffs have not pro-
vided credible explanations of the falsity of these statements,
we have serious doubts that plaintiffs have even "nudged the-
[se] claims across the line from conceivable to plausible," as
required by the minimal pleading standards of Rule 8. Bell
Atl. Corp. v. Twombly, 127 S. Ct. 1955, 1974 (2007). Regard-
less, plaintiffs have failed to plead the falsity of the prospec-
tuses with the particularity required by Rule 9(b), so their
allegations under Sections 11 and 12(a)(2) must fail.
Rather than explaining the merits of their allegations, plain-
tiffs take issue with the precise language used by the district
court when it dismissed plaintiffs’ Securities Act claims.
Plaintiffs argue that the district court improperly held that
their claims under the Securities Act required a predicate vio-
lation of the Exchange Act. Plaintiffs are incorrect. The dis-
trict court explained that plaintiffs’ Securities Act claims
"cannot succeed in the absence of misleading statements." In
re Inspire Pharm., Inc. Sec. Litig., 515 F. Supp. 2d 631, 641
(M.D.N.C. 2007). And the district court held that plaintiffs’
claims were lacking these "predicate statements," not a predi-
cate Exchange Act violation. Id. Thus, the district court com-
mitted no error in dismissing plaintiffs’ claims under Sections
11 and 12(a)(2). The district court also correctly dismissed
plaintiffs’ Section 15 claim against Shaffer because that sec-
tion creates control-person liability only where Sections 11 or
12 have been violated. See 15 U.S.C. § 77o; Greenhouse v.
MCG Capital Corp., 392 F.3d 650, 656 n.7 (4th Cir. 2004).5
5
We need not address defendants’ arguments that plaintiffs’ Securities
Act claims were deficient for other reasons, namely that plaintiffs lacked
standing under Sections 11 and 12(a)(2) and that defendants did not "offer
or sell" stock to plaintiffs within the meaning of Section 12(a)(2).
20 COZZARELLI v. INSPIRE PHARMACEUTICALS
IV.
Finally, plaintiffs claim that that the district court erred by
dismissing their complaint with prejudice rather than granting
plaintiffs leave to amend. We hold that the district court did
not abuse its discretion in denying leave to amend. See In re
PEC Solutions, Inc. Sec. Litig., 418 F.3d 379, 391 (4th Cir.
2005). Although the district court did not state its reasons for
dismissing the complaint with prejudice, it is clear that
amendment would be futile in light of the fundamental defi-
ciencies in plaintiffs’ theory of liability. See id. Furthermore,
plaintiffs never filed a motion for leave to amend before the
district court, nor did they present the district court with a pro-
posed amended complaint. Plaintiffs instead requested leave
to amend only in a footnote of their response to defendants’
motion to dismiss, and again in the final sentence of their
objections to the recommendation of the magistrate judge.
Those requests did not qualify as motions for leave to amend,
see Fed. R. Civ. P. 7(b), 15(a), and we cannot say that the dis-
trict court abused its discretion by declining to grant a motion
that was never properly made. See, e.g., United States ex rel.
Williams v. Martin-Baker Aircraft Co., 389 F.3d 1251, 1259
(D.C. Cir. 2004).
The district court’s judgment of dismissal with prejudice is
therefore
AFFIRMED.