Brennan v. Zafgen, Inc.

United States Court of Appeals
For the First Circuit

No. 16-2057

TERRY BRENNAN; RON KENNER;
KEVIN KOZIATEK; JEFFREY BUTERBAUGH;
DRAGON GATE MANAGEMENT, LTD; VINCENT RAMPE,

Plaintiffs, Appellants,

AVIAD BESSLER, individually and on behalf of all others
similarly situated; THEODORE J. DALY,

Plaintiffs,

v.

ZAFGEN, INC.; THOMAS E. HUGHES,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. F. Dennis Saylor, IV, U.S. District Judge]

Before

Kayatta, Circuit Judge,
Souter, Associate Justice,*
and Stahl, Circuit Judge.

Jeffrey C. Block, with whom Joel A. Fleming, Block & Leviton
LLP, Jacob A. Goldberg, Gonen Haklay, and The Rosen Law Firm, P.A.
were on brief, for appellants.
Deborah S. Birnbach, with whom Kevin P. Martin, Adam Slutsky,
Kate MacLeman, Joshua Bone, and Goodwin Procter LLP were on brief,
for appellees.

* Hon. David H. Souter, Associate Justice (Ret.) of the
Supreme Court of the United States, sitting by designation.
April 7, 2017
 STAHL, Circuit Judge. Following a significant drop in

the share price of Zafgen, Inc., a biopharmaceutical developer

based in Boston, Massachusetts, its investors brought a securities

fraud class action suit against the company and its Chief Executive

Officer, Dr. Thomas Hughes ("defendants"), pursuant to

Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,

15 U.S.C. §§ 78j(b) and 78(t)(a), and Securities and Exchange

Commission Rule 10b-5, 17 C.F.R. § 240.10b-5. The investors'

complaint1 focuses on several allegedly misleading statements made

by the defendants regarding Zafgen's anti-obesity drug Beloranib.

Specifically, the complaint alleges that the defendants disclosed

some, but not all, of the thrombosis-related adverse events that

occurred during Beloranib's clinical trials. The investors claim

that these partial disclosures caused Zafgen's common stock to

trade at artificially-inflated prices -- prices that plunged after

a clinical patient taking Beloranib died and the Food and Drug

Administration ("FDA") placed the drug on a partial clinical hold.

Despite these allegations, the district court granted

the defendants' motion to dismiss, concluding that the investors'

complaint did not contain facts giving rise to a "cogent and

compelling" inference of scienter as required under the Private

1 The investors filed their original complaint on October 21,
2015, and amended that complaint on February 22, 2016. For the
sake of clarity, we refer to this amended complaint as the
"complaint" throughout this opinion.

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Securities Litigation Reform Act of 1995 ("PSLRA"). Brennan v.

Zafgen, Inc., 199 F. Supp. 3d 444, 471 (D. Mass. 2016) (quoting

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324

(2007)). We agree, and therefore affirm.

I.

We recite the facts as alleged in the complaint,

supplemented by certain "materials [the] defendants filed in the

district court in support of their motion to dismiss." Fire &

Police Pension Ass'n of Colo. v. Abiomed, Inc., 778 F.3d 228, 232

(1st Cir. 2015); see also Watterson v. Page, 987 F.2d 1, 3 (1st

Cir. 1993) (noting that courts, when ruling on a motion to dismiss

in securities fraud cases, often consider "documents the

authenticity of which are not disputed by the parties," along with

"official public records; . . . documents central to plaintiffs'

claim[s]; [and] documents sufficiently referred to in the

complaint").

Zafgen's stated goal is "to significantly improv[e] the

health and well-being of patients affected by obesity and complex

metabolic disorders." To that end, Zafgen has focused its efforts

on developing Beloranib, a drug aimed at combating these

conditions.2 Hughes, as Zafgen's Chief Executive Officer, oversaw

2 At all relevant times, Zafgen was a "one-drug company,"
meaning that Beloranib was Zafgen's only product candidate in
clinical development.

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Beloranib's clinical testing. While doing so, Hughes also steered

Zafgen towards its initial public offering ("IPO"), which the

company completed on June 19, 2014. The current dispute arises

from the intersection of these two strategic endeavors.

A. Beloranib and the FDA Approval Process

As part of the development process, the FDA requires

that any new drug "go through a series of clinical trials before

it can be approved for marketing and sales in the United States."

N.J. Carpenters Pension & Annuity Funds v. Biogen IDEC Inc., 537

F.3d 35, 39 (1st Cir. 2008) (citation omitted). After a

pharmaceutical developer finishes its initial testing of a drug on

animals, it must then "submit[] an application to the FDA for

approval to test the drug on humans." Id.; see also 21 C.F.R.

§ 312.20. If the FDA approves that request, human testing begins.

Typically, such testing consists of three phases of clinical

trials.3 Biogen IDEC, 537 F.3d at 39; see also 21 C.F.R. § 312.21.

3
Our decision in Biogen IDEC ably summarized the objectives
of these three phases:
Phase I studies generally involve twenty to
eighty subjects, and are designed to determine
how the drug works in humans and the side
effects associated with increasing doses.
Phase II studies usually involve no more than
several hundred subjects, and are designed to
evaluate the effectiveness of the drug, as
well as common short-term side effects and
risks. Phase III studies are large-scale
trials, usually involving several hundred to
several thousand subjects, and are intended to
gather the information necessary to provide an

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Each phase "requires the company to test the drug on a broader

population and results in more stringent monitoring and

evaluation." Biogen IDEC, 537 F.3d at 39. Throughout the course

of these trials, "the drug company must report to the FDA and to

all participating physicians any serious and unexpected adverse

drug experiences that occur." Id. (citing 21 C.F.R.

§ 312.32(c)(1)(i)(A)).

At the time the investors first brought this suit, Zafgen

had conducted three Phase I trials, four Phase II trials, and one

Phase III trial. The investors' complaint, however, concentrates

on Zafgen's ZAF-201 trial, a Phase II trial that consisted of 160

patients and lasted from August 2012 to May 2013. From this group

of 160 patients, Zafgen treated 122 of them with Beloranib. As

the ZAF-201 trial progressed, four of the patients given Beloranib

suffered adverse "thrombotic," or blood-clotting, events of

varying severity. Third-party clinical investigators classified

two of these adverse events as "superficial" and the other two as

"serious."4 Zafgen disclosed the two serious adverse events in

adequate basis for labeling the drug. . . .
After Phase III, the FDA considers the results
of all the clinical trials in determining
whether to approve a drug for market.
Id. (internal citations omitted).
4
An adverse event is "serious" if "it results in . . .
[d]eath, a life-threatening adverse event, inpatient
hospitalization or prolongation of existing hospitalization, a
persistent or significant incapacity or substantial disruption of

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advance of its IPO, noting their occurrence in its April 18, 2014

Form S-1 Registration Statement. The company did not, however,

directly disclose the two superficial adverse events at that time.

B. Zafgen's Stock Price Declines

Zafgen's share price began to decline in October 2015.

On October 12th, Zafgen's share price closed at $34.76. By the

close of trading the next day, Zafgen's share price had dropped to

$15.75. On October 14th, Zafgen announced that a patient in its

ongoing Phase III trial had died, and confirmed on October 16th

that the patient had been treated with Beloranib, not a placebo,

and that the FDA had placed Beloranib on a partial clinical hold.

During a conference call held that same day, Dr. Dennis Kim,

Zafgen's Chief Medical Officer, likewise informed analysts that a

total of six adverse thrombotic events had occurred throughout the

course of Beloranib's clinical testing: two in the company's

ongoing clinical trials and four in the completed ZAF-201 trial.

Dr. Kim's comments marked the first time that Zafgen or any of its

representatives had informed its investors of the two superficial

adverse thrombotic events that had occurred in the ZAF-201 trial.

By the close of trading on October 16th, Zafgen's share price

the ability to conduct normal life functions, or a congenital
anomaly/birth defect," or where it "may require medical or surgical
intervention to prevent one of [these] outcomes." 21 C.F.R.
§ 312.32(a).

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plummeted to $10.36 per share, a nearly 51% decline from the

previous day's closing price.

C. Zafgen's Disclosures

Based on these events, the investors brought a class

action suit against Zafgen and Hughes. The complaint asserted

claims on behalf of a putative class consisting of all persons who

purchased or otherwise acquired Zafgen common stock between

June 19, 2014, the date of Zafgen's IPO, and October 16, 2015, the

date the company announced the FDA's partial clinical hold. In

the complaint, the investors claimed that the defendants made false

or misleading statements concerning the results of the ZAF-201

trial, to wit:

 As severely obese patients are at an increased
risk for cardiovascular disease, we measured
systemic biomarkers of cardiovascular disease
risk, including low density lipoprotein
cholesterol, HDL, CRP, triglycerides and blood
pressure in trial participants, to determine
[B]eloranib's impact on such biomarkers. The
results of these biomarker measurements in
this trial, as summarized below, suggest that
[B]eloranib treatment does not increase the
risk of cardiovascular disease and may be
associated with reduced cardiovascular
disease risk.

 There were no deaths or any SAEs ["serious
adverse events"] deemed to be possibly,
probably, or definitely related to
[B]eloranib, although there were two serious
thrombotic adverse events which, while not
attributed to [B]eloranib treatment, may point
to the utility of assessment of prior history
of thrombotic events in patients enrolled in
subsequent trials and added vigilance for AEs

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 related to blood clotting during future
clinical trials. The most commonly reported
TEAEs ["treatment-emergent adverse events"]
were gastrointestinal disorders, mainly
nausea, diarrhea, or vomiting, nervous system
disorders, mainly dizziness, and psychiatric
disorders, mainly insomnia, sleep disorder, or
abnormal dreams. TEAEs were generally mild in
severity and transient. Other frequently
reported TEAEs were headaches and injection
site bruising/itching, although the
incidences were comparable to placebo and not
observed to be dose-related.

The investors alleged that Zafgen made these statements

(and others that used substantially similar language) in ten

different documents, all of which Hughes signed. These

disclosures, the investors maintained, were materially misleading

because "the FDA considers the frequency/rate of adverse events in

determining whether a drug is causing those adverse events,"

meaning that the defendants should have disclosed even the

superficial adverse thrombotic events. Similarly, the investors

alleged that "[a]t all times during the Class Period, [d]efendants

knew -- or were reckless in not knowing -- that there was a

significant risk of thrombotic adverse events in future clinical

trials of [B]eloranib."

In response to the investors' allegations, the

defendants emphasize several other statements made by Zafgen in

its Form S-1 and its subsequent SEC filings, claiming that these

additional disclosures belie the investors' accusations of

fraudulent intent:

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  SAEs that are not characterized by clinical
investigators as possibly related to
[B]eloranib or SAEs that occur in small
numbers may not be disclosed to the public
until such time the various documents
submitted to the FDA as part of the approval
process are made public. We are unable to
determine if the subsequent disclosure of SAEs
will have an adverse effect on our stock
price.

 Many companies in the pharmaceutical and
biotechnology industries have suffered
significant setbacks in late stage clinical
trials after achieving positive results in
early-stage development, and we cannot be
certain that we will not face similar
setbacks. These setbacks have been caused by,
among other things, pre-clinical findings made
while clinical trials were underway or safety
or efficacy observations made in clinical
trials, including previously unreported
adverse events.

D. The District Court's Dismissal of the Complaint

On August 9, 2016, the district court granted Zafgen and

Hughes's motion to dismiss on the ground that the investors had

failed to adequately plead scienter.5 With respect to the

investors' Section 10(b) claim, the district court determined that

the complaint's allegations were only marginally material, thus

weakening any inference of scienter. The district court then also

5The district court found that the only materially misleading
statements alleged in the complaint concerned the defendants'
failure to disclose the non-serious adverse thrombotic events.
Neither the investors nor the defendants dispute this feature of
the district court's ruling.

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dismissed the investors' Section 20(a) claim against Hughes. This

appeal followed.

II.

The investors argue that the district court improperly

heightened the PSLRA's pleading requirements, applied these

heightened requirements to its complaint, and then mistakenly

dismissed both their claims for failing to plead facts giving rise

to a "strong inference" of scienter. We review whether a complaint

meets the PSLRA's pleading requirements de novo, accepting all

well-pled factual allegations as true and making all reasonable

inferences in a plaintiff's favor. See Miss. Pub. Emps.' Ret.

Sys. v. Bos. Sci. Corp., 523 F.3d 75, 85 (1st Cir. 2008). Even

through this lens, we agree with the district court that the facts

alleged in the investors' complaint do not give rise to a

sufficiently strong inference of scienter.

A. Section 10(b) and Rule 10b-5

Section 10(b) of the Securities Exchange Act "forbids

the 'use or employ, in connection with the purchase or sale of any

security . . . , [of] any manipulative or deceptive device.'"

Tellabs, Inc., 551 U.S. at 318 (alterations in original) (quoting

15 U.S.C. § 78j(b)). Pursuant to this statute, SEC Rule 10b-5

makes it unlawful to, among other things, "make any untrue

statement of a material fact or to omit to state a material fact

necessary in order to make the statements made, in the light of

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the circumstances under which they were made, not misleading." 17

C.F.R. § 240.10b-5(b). Therefore, to state a claim for securities

fraud under Section 10(b) and Rule 10b-5, "a plaintiff must allege:

(1) a material misrepresentation or omission; (2) scienter, or a

wrongful state of mind; (3) in connection with the purchase or

sale of a security; (4) reliance; (5) economic loss; and (6) loss

causation." In re Genzyme Corp. Sec. Litig., 754 F.3d 31, 40 (1st

Cir. 2014).

B. Scienter and the PSLRA

Scienter encompasses a "mental state embracing [an]

intent to deceive, manipulate, or defraud." Ernst & Ernst v.

Hochfelder, 425 U.S. 185, 193 n.12 (1976). At the pleading stage,

the PSLRA requires plaintiffs to "state with particularity facts

giving rise to a strong inference that the defendant acted with"

scienter. 15 U.S.C. § 78u-4(b)(2)(A); see also ACA Fin. Guar.

Corp. v. Advest, Inc., 512 F.3d 46, 58 (1st Cir. 2008) (describing

the PSLRA's pleading standard for scienter as "rigorous"). In the

current setting, scienter encompasses both a "conscious intent to

defraud" and, alternatively, a "high degree of recklessness." ACA

Fin. Guar. Corp., 512 F.3d at 58 (quoting Aldridge v. A.T. Cross

Corp., 284 F.3d 72, 82 (1st Cir. 2002)). Specifically,

recklessness involves "a highly unreasonable omission" that

involves "not merely simple, or even inexcusable, negligence, but

an extreme departure from the standards of ordinary care, and which

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presents a danger of misleading buyers and sellers that is either

known to the defendant or is so obvious that the actor must have

been aware of it." Greebel v. FTP Software, Inc., 194 F.3d 185,

198 (1st Cir. 1999) (quoting Sundstrand Corp. v. Sun Chem. Corp.,

553 F.2d 1033, 1045 (7th Cir. 1977)).6

Meanwhile, "[t]o qualify as 'strong' . . . an inference

of scienter must be more than merely plausible or reasonable -- it

must be cogent and at least as compelling as any opposing inference

of nonfraudulent intent." Tellabs, 551 U.S. at 314. When

evaluating a complaint for compliance with this demanding

standard, a court "must consider the complaint in its entirety

. . . [Courts must ask] whether all the facts alleged, taken

collectively, give rise to a strong inference of scienter, not

whether any individual allegation, scrutinized in isolation, meets

that standard." Id. at 322-23. To that effect, we have found the

standard met where a complaint "contains clear allegations of

admissions, internal records or witnessed discussions suggesting

that at the time they made the statements claimed to be misleading,

the defendant[s] were aware that they were withholding vital

information or at least were warned by others that this was so."

6 "Even if plaintiffs wish to prove scienter by
'recklessness,' they still must allege, with sufficient
particularity, that defendants had full knowledge of the dangers
of their course of action and chose not to disclose those dangers
to investors." Maldonado v. Dominguez, 137 F.3d 1, 9 n.4 (1st
Cir. 1998).

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In re Bos. Sci. Corp. Sec. Litig., 686 F.3d 21, 31 (1st Cir. 2012).

Likewise, a plaintiff "may combine various [other] facts and

circumstances indicating fraudulent intent," including those

demonstrating "motive and opportunity," to satisfy the scienter

requirement. Aldridge, 284 F.3d at 82.

Here, the investors maintain that they met the PSLRA's

requirements for pleading scienter. They hinge this argument on

their allegations that the defendants (1) knew, or were reckless

in not knowing, about news and scientific articles that purportedly

established a "link" between Beloranib and the occurrence of

thrombotic adverse events; and (2) had a motive to commit

securities fraud, as shown by Zafgen's compensation structure and

the "heavy" insider sales that occurred before the patient death.

We find these arguments unpersuasive, and therefore hold that the

complaint's allegations, viewed holistically, do not support a

strong inference of scienter under either a conscious intent or

recklessness theory.

1. News and Scientific Articles

To start, the investors' reliance on news and scientific

articles analyzing the effects of angiogenesis inhibitors, the

class of drug to which Beloranib belongs, is misplaced. "The key

question in this case is not whether defendants had knowledge of

certain undisclosed facts, but rather whether the defendants knew

or should have known that their failure to disclose those facts"

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risked misleading investors. City of Dearborn Heights Act 345

Police & Fire Ret. Sys. v. Waters Corp., 632 F.3d 751, 758 (1st

Cir. 2012) (internal citation omitted). Here, though the articles

may suggest that the defendants had an awareness of some connection

between Beloranib and thrombotic events, they do not show that the

defendants deliberately or recklessly risked misleading investors

by not disclosing the two superficial adverse thrombotic events

from the ZAF-201 study until October 16, 2015. See In re NVIDIA

Corp. Sec. Litig., 768 F.3d 1046, 1060 (9th Cir. 2014) (noting

that the articles cited by the plaintiffs did not contribute to a

strong inference of scienter, in part because they "d[id] not

reflect [the defendants'] knowledge" at the time of the alleged

misstatements).

For example, two of the cited articles simply analyze

the general effects of angiogenesis inhibitors. Three other

articles, meanwhile, examine clinical trials conducted for drugs

other than Beloranib which were used to treat cancer, not severe

obesity. Moreover, developers often administered these other

drugs at significantly higher dosage levels compared to those

dispensed in the ZAF-201 study.7 Of those articles that did discuss

Beloranib, several suggested that lower doses of the drug reduced

7 For instance, doses in the cancer trials often exceeded
50 mg of angiogenesis inhibitors, while Beloranib doses in the
2012-2013 ZAF-201 clinical trial, ranged from 0.6 mg to 2.4 mg.

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the risk of potential thrombotic-related side effects in patients

being treated for obesity-related ailments.

Taken together, the articles do not add much support for

the complaint's allegation that the defendants knew, or were

reckless in not knowing, that they risked misleading investors

unless they disclosed the two superficial adverse thrombotic

events. See In re Ariad Pharm., Inc. Sec. Litig., 842 F.3d 744,

751 (1st Cir. 2016) (noting that "[a] statement cannot be

intentionally misleading if the defendant did not have sufficient

information at the relevant time to form an evaluation that there

was a need to disclose certain information and to form an intent

not to disclose it" (alteration in original) (quoting Biogen IDEC,

537 F.3d at 45)). This conclusion is especially warranted where,

as here, the complaint contains no specific facts about any

"warnings by subordinates or expressions of concern by executives"

regarding the propriety of allegedly deceptive disclosures. See

Auto Indus. Pension Tr. Fund v. Textron Inc., 682 F.3d 34, 39 (1st

Cir. 2012).8

8This is not to say that a plaintiff in a securities case
governed by the PSLRA must plead the existence of direct evidence
of scienter to avoid dismissal. As the investors point out, an
investor's access to such information prior to discovery will often
be limited at best. Nonetheless, it stands to reason that where
a complaint is devoid of any direct-evidence allegations, the
indirect-evidence allegations in the complaint will need to do
more work to carry the burden of raising a "strong inference of
scienter" on their own. See Local No. 8 IBEW Ret. Plan & Tr. v.
Vertex Pharm., Inc., 838 F.3d 76, 83 n.9 (1st Cir. 2016)

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 2. Motive and Insider Trading Allegations

The complaint's motive allegations are similarly

deficient. First, the investors focus on Zafgen's compensation

structure, namely that "a significant portion of [its] executives'

annual compensation consists of 'Option Awards' and 'Non-Equity

Incentive Plan Compensation' (i.e., 'performance-based cash

bonuses')." They allege that this structure resulted in Zafgen

insiders, armed with undisclosed information regarding the ZAF-

201 study results, selling substantial amounts of company shares

in September 2015. Hughes, for instance, sold 22,500 of his Zafgen

shares on September 17, 2015, and another 23,126 shares on

September 18, 2015, generating approximately $1.8 million in

personal proceeds.

Of course, even "weak[]" insider trading allegations

provide "some support against the defendants' motion to dismiss."

Miss. Pub. Emps.' Ret. Sys., 523 F.3d at 92 (quoting Shaw v. Dig.

Equip. Corp., 82 F.3d 1194, 1224 (1st Cir. 1996)). Still, "[t]he

vitality of the inference to be drawn depends on the facts, and

can range from marginal to strong." Greebel, 194 F.3d at 197-98

(internal citations omitted). Here, the district court found that

(acknowledging that "prior to discovery, few plaintiffs will be in
a position to make specific allegations about the form of internal
documents" or discussions, but also noting that Congress has
nonetheless "deliberately raised the entry bar to discovery . . .
through the PSLRA's heightened pleading standards" (alteration in
original) (quoting Textron, 682 F.3d at 40)).

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the insider trading alleged in the complaint was insubstantial.

On appeal, the investors do not challenge the district court's

finding to that effect, instead arguing that the district court

erroneously drew a negative inference against scienter based on

the weakness of their allegations. Not so. Rather, the district

court observed that the insider trading allegations in this case

"are relatively weak" and therefore found that the allegations

"d[id] not alter the conclusion that the complaint as a whole fails

to raise a strong inference of scienter." Brennan, 199 F. Supp.

3d at 468.

In any event, we agree with the district court that the

strength of the insider trading allegations drifts toward the

marginal end of that spectrum because Hughes and all other Zafgen

insiders kept the vast majority of their Zafgen holdings. After

accounting for Hughes's vested options, he retained at least 93%

of his Zafgen holdings even after the September 2015 sales, and

every other insider identified in the complaint retained at least

85%. See Waters Corp., 632 F.3d at 760-61 ("In calculating the

percent of holdings sold, . . . it is appropriate to consider not

only the shares of stock that [the defendants] held prior to their

sales, but also the shares that they could have sold through the

exercise of options . . . ."). Moreover, all of the insider sales

happened before the patient death that occurred during Zafgen's

Phase III testing. As the district court noted:

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 During the October 16 conference call, which
occurred almost a month after the final
insider sale on September 18, Hughes stated
that Zafgen disclosed the patient death to the
FDA approximately two weeks earlier, and "well
within" the one week requirement from the
death to the FDA disclosure. Thus, even
liberally construed, the complaint's
allegations support an inference that the
patient death occurred at least a week after
the final insider sale.

Brennan, 199 F. Supp. 3d at 469. Therefore, neither the timing

nor the amount of insider sales is particularly unusual or

suspicious.9

Second, the complaint asserts that Zafgen was a one-drug

company, meaning Zafgen and Hughes had a motive to "shade the

truth" since all of the company's hopes, and a significant portion

of Hughes's compensation, hinged on Beloranib's success. However,

such "catch-all allegations," which merely assert the existence of

a motive and an opportunity to engage in fraudulent behavior, do

not satisfy the PSLRA "without something more." In re Cabletron

Sys., Inc., 311 F.3d 11, 39 (1st Cir. 2002) (quoting Greebel, 194

F.3d at 197); see also Aldridge, 284 F.3d at 83 (noting that

generalized financial incentive allegations are relevant to the

scienter analysis only if they "go far beyond the usual

arrangements of compensation based on the company's earnings").

9We decline to address the parties' arguments concerning the
defendants' 10b5-1 trading plans, see 17 C.F.R. § 240.10b5-1(c),
because the investors' allegations regarding the purported insider
trading are insufficient even without considering those plans.

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Here, the complaint only identifies "the usual concern by

executives to improve financial results." Cabletron, 311 F.3d at

39. Given that we must take into account the opposing inferences

stemming from a complaint's allegations, we find it difficult to

infer fraudulent intent simply because the defendants'

compensation structure rewards the achievement of corporate goals.

See In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869, 884 (9th

Cir. 2012) (noting that "it is common for executive compensation

. . . to be based partly on the executive's success in achieving

key corporate goals" and that it would be improper to "conclude

that there is fraudulent intent merely because a defendant's

compensation was based in part on such successes"). Consequently,

we assign these allegations little weight in the scienter calculus.

3. Other Considerations

Several other considerations also bolster our conclusion

that the complaint's allegations do not give rise to a sufficiently

strong inference of scienter. To start, the marginal materiality

of the two superficial adverse thrombotic events undermines such

a finding. As we have previously noted, "the materiality and

scienter inquiries are linked," Abiomed, 778 F.3d at 240, since

"the marginal materiality of an omitted fact 'tends to undercut

the argument that the defendants acted with the requisite intent

. . . in not disclosing' it," Ariad, 842 F.3d at 750 (citing

Abiomed, 778 F.3d at 242). Thus, we must consider whether there

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is "a substantial likelihood that" a reasonable investor would

have viewed the disclosure of the two superficial adverse

thrombotic events "as having significantly altered the total mix

of information made available." Basic Inc. v. Levinson, 485 U.S.

224, 231-32 (1988).

The investors' arguments to this effect are

unconvincing. "Adverse event reports are daily events in the

pharmaceutical industry." Matrixx Initiatives, Inc. v.

Siracusano, 563 U.S. 27, 43 (2011). To be sure, these reports may

be material even if they "d[o] not provide statistically

significant evidence of a causal link." Id. at 44. Nonetheless,

it remains unlikely that a reasonable investor in this case would

have viewed the two superficial adverse thrombotic events, at the

time they occurred, as having significantly altered the

information available to them. Zafgen forthrightly disclosed the

two serious adverse thrombotic events to investors, and third-

party investigators never linked any of the adverse events,

including the serious ones, to Beloranib. Indeed, the superficial

adverse thrombotic events took on the bulk of their significance

only after the patient death. See ACA Fin. Guar. Corp., 512 F.3d

at 62 ("A plaintiff may not plead 'fraud by hindsight'; i.e., a

complaint 'may not simply contrast a defendant's past optimism

with less favorable actual results' in support of a claim of

securities fraud." (quoting Shaw, 82 F.3d at 1223)).

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 In response, the investors claim that because the FDA

looks to the overall frequency of adverse thrombotic events when

evaluating a drug's safety, all adverse thrombotic events must be

material. This argument, however, ignores the Supreme Court's

observation that "the mere existence of reports of adverse events

-- which says nothing in and of itself about whether the drug is

causing the adverse events -- will not satisfy" the materiality

standard. Matrixx Initiatives, 563 U.S. at 44. Instead,

"[s]omething more is needed." Id. In this case, neither "the

source, content, [nor] context of the reports" provides that

"[s]omething more." Id. Although a pharmaceutical developer must

report all adverse events when filing a New Drug Application with

the FDA, it need not disclose every superficial adverse event until

it reaches that stage of clinical development. See 21 C.F.R. §

312.33(b)(1) (stating that developers, in their annual reports to

the FDA, must disclose summary information "showing the most

frequent and the most serious" adverse events observed during that

year's clinical and nonclinical drug investigations). Thus, even

the accuracy of the investors' core assumption, that the FDA cared

about the superficial adverse thrombotic events at the time they

occurred, seems doubtful, further diminishing the materiality of

these events to reasonable investors. See Bos. Sci. Corp., 686

F.3d at 31 (stating that "marginal materiality not only defeats

any independent inference of deliberate withholding but also makes

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the pled facts insufficient for a fact finder to find the 'extreme

recklessness in not disclosing the fact' that is the least that is

required to establish scienter" (quoting Waters Corp., 632 F.3d at

757)).

We also note that Zafgen's own disclosures both before

and during the class period weaken the complaint's scienter

showing. The defendants disclosed to investors the two serious

adverse thrombotic events, and noted on several occasions that the

company was not going to disclose all the adverse events as they

occurred. Although "[f]ragmentary information may be as

misleading . . . as active misrepresentation," V.S.H. Realty, Inc.

v. Texaco, Inc., 757 F.2d 411, 414-15 (1st Cir. 1985) (alteration

in original) (citation omitted), the facts alleged in the complaint

at the very least support a strong competing inference that the

defendants disclosed what they considered to be, at the time, the

most relevant information about Beloranib's clinical trials.

The investors respond by pointing to literature from the

Centers for Disease Control and Prevention ("CDC") that they claim

suggests that it is merely "fortuitous" for a blood clot to be

non-serious. According to the investors, this report, coupled

with the defendants' statement acknowledging the possible "utility

of assessment of prior history of thrombotic events . . . and added

vigilance for [adverse events] related to blood clotting during

future clinical trials," shows that their decision to not disclose

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the two non-serious thrombotic events was made intentionally or

recklessly. However, while the CDC's language cited in the

complaint suggests that it may be true that "[h]ow a clot affects

the body depends on the type and location of the clot," it does

not mean that good fortune is all that separates a superficial

thrombotic adverse event from a more serious one. Instead, the

FDA's regulations, which do not require the disclosure of all

thrombotic events, see 21 C.F.R. 312.33(b)(1), and the defendants'

own disclosures, which informed investors of the most serious

adverse events and warned investors that Zafgen would not disclose

all adverse events as they occurred, undercut the investors'

efforts to make this showing.

In short, although the investors maintain that Zafgen's

statements prove the company acknowledged that even superficial

adverse events were important to investors, the totality of the

company's disclosures produces a compelling counter-inference that

the company wished to "provide investors with warnings of risks,"

actions which "generally weaken the inference of scienter." Waters

Corp., 632 F.3d at 760 (quoting Ezra Charitable Tr. v. Tyco Int'l,

Ltd., 466 F.3d 1, 8 (1st Cir. 2006)). Thus, the defendants'

disclosures both before and during the class period further

"undercut any inference of fraudulent intent on the part of

defendants." Genzyme Corp., 754 F.3d at 42.

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 III.

The investors concede that their Section 20(a) claim

against Hughes is derivative of their Section 10(b) and Rule 10b-5

claim. Because we hold that the complaint, considered as a whole,

does not present allegations giving rise to a "cogent and

compelling" inference of scienter, Tellabs, 551 U.S. at 324, we

conclude that the district court properly dismissed both claims.

Therefore, the judgment of the district court is affirmed.

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