Page 1
Ninth Circuit:
Claim in 2020 of COVID-19 Cure Was Not Securities Fraud
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals held yesterday that statements by a biopharmaceutical company and two of its officers in May 2020 announcing that it might have discovered a cure for COVID-19—followed by a week-long uptick in the valuation of the company’s stock—were allowable corporate puffery and did not amount to fraudulent statements by the financially ailing company.
Circuit Judge Consuelo M. Callahan wrote the opinion which affirms a dismissal, for failure to state a claim, by Senior District Court Judge Anthony J. Battaglia of the Southern District of California. The judge granted leave to amend but judgment was entered in favor of the defendants on June 3, 2022, after plaintiff Andrew R. Zenoff opted to stand on his pleading.
The opinion was joined by Senior Circuit Judge Richard C. Tallman and Senior District Court Judge Robert S. Lansick of the Western District of Washington, sitting by designation.
Press Release Issued
Zenoff’s lawsuit stems from a press release, issued on May 15, 2020, by the San Diego-based Sorrento Therapeutics, Inc., bearing the heading, “STI-1499, A Potent Anti-SARS-COV-2 Antibody Demonstrates Ability to Completely Inhibit In Vitro Virus Infection In Preclinical Studies.” Related news stories were published the same day.
Prior to dissemination of the press release, Fox News reported:
“A California-based biopharmaceutical company claims to have discovered an antibody that could shield the human body from the coronavirus and flush it out of a person’s system within four days, Fox News has exclusively learned.
“Later Friday, Sorrento Therapeutics will announce their discovery of the STI-1499 antibody, which the San Diego company said can provide “100% inhibition” of COVID-19, adding that a treatment could be available months before a vaccine hits the market.”
An article on BioSpace.com was titled, “Sorrento IDS Antibody Against COVID-19 That Appears 100% Effective.”
Stock Value Soars
After the press release and news publications, the price of the company’s stock rose to $9 per share—243.5 percent higher than the $2.62 price per share from the close of trading the day prior—and its common stock traded hands at nearly 78 times its previous daily volume. However, the stock price then declined a week later after additional news stories questioned the importance of Sorrento’s development.
Sorrento had been experiencing financial difficulties and, in March 2020, an independent auditor had issued a “going concern” qualification to its 2019 audit opinion noting the company’s high cash burn rate and over-leveraged capital structure. In its 2019 Form 10-K filed with the Securities and Exchange Commission, Sorrento indicated that it may have to shut down operations if it could not raise sufficient financing.
On May 26, 2020, Zenoff filed a securities-fraud class action against Sorrento and its chief executive officer, Henry Ji, as well as its vice president, Mark Brunswick. The putative class action consisted of all purchasers of Sorrento common stock between May 15 and May 21, 2020.
Other related actions were consolidated.
Zenoff alleged that Sorrento had falsely claimed to have developed a cure for COVID-19, misleading investors in violation of 17 Code of Federal Regulations §240.10b-5, He emphasized CEO Ji’s statements to the media.
Among other statements, Zenoff highlighted Ji’s statements to Fox News that “We want to emphasize there is a cure.”
He added:
“There is a solution that works 100 percent….If we have the neutralizing antibody in your body, you don’t need the social distancing. You can open up a society without fear.”
Securities Fraud Action
Battaglia noted that the published stories cited by Zenoff explained that the promising antibody had been found in a pre-clinical trial and that the antibody cocktail was pending FDA approval.
Finding that the assertion of a cure and a solution that works “100%” not to be sufficiently specific or misleading to support a fraud claim, he said:
“Considering the entirety of each article and the context of each statement, these statements amount to no more than generalized assertions of corporate optimism as to the initial success of STI-1499 against COVID-19.”
He also found that the plaintiffs had failed to establish a strong inference of scienter. The judge rejected Zenoff’s assertion of an inference of scienter based on allegations arising from the company’s financial difficulties and the financial opportunities presented in the pandemic for a biopharmaceutical company. In her opinion affirming the judgment, Callahan explained that a Rule 10b-5 claim requires falsity and that facts be stated that give rise to a strong inference that a defendant acted with the required state of mind.
As to the falsity element, she said:
“A fair reading of the press release and the articles reveals that there was no promise of an immediate 100% cure. Despite Defendants’ enthusiasm about STI-1499, in context, all of the articles reveal that its development was at the stage of an in vitro virus infection experiment, i.e., it had only been tested in a laboratory. Zenoff has not shown that a reasonable person reading the articles would think that Defendants were representing that STI-1499, without further testing, was an immediate cure for COVID-19.”
Turning to scienter, Callahan wrote:
“Defendants were forthright in stating that STI-1499 was at the in vitro experiment stage. Zenoff does not suggest or allude to what other relevant information Defendants had about STI-1499 that should have been disclosed.”
Scienter Not Inferable
She was unpersuaded that the financial woes of the company could give rise to the necessary inference of scienter, noting that Sorrento had entered into an agreement for a significant purchase of stock by a third party before the May 15 releases.
“Although Sorrento’s financial situation was clearly helped by the market’s response to the announcement of the development of STI-1499, Sorrento had taken steps to meet its ‘dire financial situation’ well before the announcements of STI-1499,” Callahan said.
She continued:
“Zenoff identifies no individual stock sales at all. Accordingly, Zenoff has not made the requisite showing of trading history necessary to raise an inference of scienter.”
The jurist added:
“On this record, Zenoff has not adequately pled that Defendants’ statements about STI-1499, when viewed in context, were false as opposed to overstated. Furthermore, even if the allegations of falsity were deemed plausible, Zenoff has failed to plead factual allegations that give rise to a strong inference of scienter. He does not allege any particular stock sales or purchases by Sorrento or either of the individual defendants.”
Sorrento filed for Chapter 11 bankruptcy protection in February 2023 after two significant legal awards totaling $173.5 million, unrelated to this matter, were entered against it.
The case is Zenoff v. Sorrento Therapeutics, Inc., 22-55641.
Similar Litigation
Zenoff was a representative plaintiff in a similar securities fraud class action in the U.S. District Court for the Eastern District of Pennsylvania against Inovio Pharmaceuticals, Inc. That litigation was settled in 2022 for $30 million in cash and 7,000,000 shares of the company’s common stock.
According to a settlement document:
“…Plaintiffs allege that during the Class Period, Defendants misled investors through a series of public statements regarding how quickly Inovio had designed and/or constructed the vaccine candidate, Inovio’s capacity to manufacture large quantities of the vaccine candidate, the effectiveness of the vaccine candidate, and the expected timeline for regulatory approval of the vaccine candidate, and that these statements allegedly inflated or maintained inflation in Inovio’s stock price.” He said in a declaration:
“Over the course of the litigation, I spent 168.25 hours working on the case at a rate of $450 per hour (which is less than what my effective hourly rate is as the Chief Executive Officer at Beam Authentic). Based on my compensation, background, and experience, I believe a fair estimate of the value of the time and effort I expended on this litigation is $75,712.50.”
On Feb. 1, 2023, Judge Gerald J. Pappert awarded both Zenoff and the lead plaintiff $77,450.
He declared that the San Diego/San Francisco law firm of Robbins Geller Rudman & Dowd LLP would receive 27.5 percent of the settlement amount and expenses in the amount of $814,374.95. That law firm also represented the plaintiffs in the lawsuit in which a judgment for the defendant was affirmed by the Ninth Circuit yesterday.
Other Lawsuit
Zenoff was also the lead plaintiff in a securities fraud class action against Fastly Inc. based on a nondisclosure that ByteDance Ltd., a Chinese technology company that owns the video streaming application TikTok, was its major customer. On Nov. 23, 2021, District Court Judge Phyllis J. Hamilton of the Northern District of California dismissed the action based on a lack of an adequate pleading of scienter.
No inference could be drawn, she ruled, that Fastly could have anticipated that then-President Donald Trump would, on Aug. 6, 2020, issue an executive order banning U.S. companies to engage in transactions with ByteDance.
Zenoff claimed to have lost $105,848 as a result of the drop in the value of Fastly stock.
Copyright 2024, Metropolitan News Company