It is extremely rare for securities class action lawsuits to go all the way through to a jury verdict. Since 1996, there have been more than 5,200 securities class action lawsuits filed, but, as detailed further below, fewer than 25 cases during that time have gone to trial. However, on February 4, 2019, a jury in the Central District of California entered a verdict in the securities class action lawsuit pending against Puma Biotechnology and certain of its directors and officers. While the jury found that the plaintiffs had not proven that three of the four allegedly misleading statements at issue were “false and misleading,” the jury found against the defendants and for the plaintiff as to a fourth statement. The jury specified damages of $4.50 a share with respect to the one misleading statement, which, according to the plaintiff’s counsel’s press release, amounts to a damages award of “up to $100 million,” although the actual damages amount remains to be calculated based on trading during the class period.
The jury’s February 4, 2019 verdict form can be found here. The company’s February 4, 2019 press release about the verdict can be found here. The plaintiff’s law firm’s February 4, 2019 press release about the verdict can be found here.
Puma is a development stage biotechnology company located in Los Angeles. As discussed here, plaintiff shareholders filed the first of several securities class action lawsuit against Puma and certain of its directors and officers in June 2015. In the various complaints, the plaintiffs alleged that the defendants had made a number of misrepresentations about the company’s lead drug candidate, neratinib, which was intended to provide a form of treatment for metastatic breast cancer. The complaints alleged that the company had made a number of allegedly misleading statements about the company’s application for approval of the drug as well as about the results of and timeline for the ExtenNET Phase III clinical trials of the drug.
In October 2015, after lead plaintiff had been appointed in the case, the plaintiff filed a consolidated securities class action complaint (here). The defendants moved to dismiss. In a September 30, 2016 opinion (here), Judge Andrew Guilford denied the motion to dismiss. In June 2017, the plaintiffs filed a first amended complaint, in order, they said, to conform the pleadings to the evidence adduced in the course of discovery. On July 25, 2017, Judge Guilford denied the defendants’ motion to dismiss the first amended complaint. On December 8, 2017, Judge Guilford granted the plaintiffs’ motion to certify a class, consisting of persons who had purchased securities of Puma between July 22, 2014 and May 29, 2015.
According to the court docket, the case proceeded to jury selection on January 14, 2019 and trial commenced on January 15, 2019. The parties presented their arguments to the jury on January 29, 2019, the eighth trial day, and the jury began deliberation that same day. The jury entered a verdict on February 4, 2019.
As reflected in the verdict form, the case had gone to the jury with respect to four allegedly misleading statements made in connection with Defendants’ July 2014 announcement of positive top-line results from a Phase III clinical trial of its breast cancer drug, neratinib, and relating to two stock drops in 2015, when the results of the clinical trial were presented at a medical conference. The jury found in the defendants’ favor with respect to three of the four statements and one of the two stock price drops.
However, the jury found the plaintiffs’ favor with respect to a fourth statement related to the “disease free survival rate.” With respect to this fourth statement, the jury found that the plaintiffs had proven that the statement was false or misleading; that defendants acted knowingly in making the false or misleading statement; and that the disclosures played a substantial part in causing the decline in the company’s share price on May 14, 2015. The plaintiff found that false and misleading statements caused damages of $4.50 per share of the Puma stock.
Given the split nature of the verdict, it is hardly surprising that the plaintiffs’ counsel and the company are each putting their own spin on the verdict. In the plaintiffs’ lawyers’ press release about the verdict, one of the members of the plaintiffs’ trial team is quoted as saying, “It’s hard to overstate the significance of this verdict because it confirms that jurors and investors alike demand integrity from corporations and their executives.”
On the other hand, the company’s press release includes a statement from the company’s CEO stating that “We are extremely pleased with the jury verdict. We are excited to return our focus to running the business, growing sales and providing our product to patients.”
The parties’ statements about the jury’s damages award also contrast interestingly. The plaintiffs’ lawyers’ press release states that the jury had awarded “up to $100 million in damages.” The company, in its press release, said only that the jury’s award of “no more than $4.50 per share” represents only “approximately 5% or less of the claimed damages” (suggesting that the plaintiffs were seeking damages of over $2 billion?). The actual amount of the damages will of course be a multiple of the share price decline determined by the jury times the number of shares traded during the class period (minus the in-and-out shares and other considerations), meaning that the amount of actual damages remains to be seen.
The case undoubtedly will now move to what likely will be an extended series of post-trial motions and, almost certainly after that, an appeal. While this case undoubtedly has much further to run, the fact of the jury verdict in and of itself is an unusual and noteworthy development. As I noted at the outset, the fact is that securities class action lawsuits only very rarely go all the way to verdict.
According to detailed information compiled by my good friend Adam Savett, Managing Partner of TXT Capital, including the just-completed trial against Puma, there have been only 25 securities class action lawsuits that have gone to verdict since Congress enacted the Private Securities Litigation Reform Act (PSLRA) in December 2005. There have been fewer than 16 trials during that period involving post-PSLRA conduct. As discussed here, the last time a securities class action lawsuit went all the way to verdict was in November 2014.
So few securities class action lawsuits go to trial because most cases that have survived a motion to dismiss settle. Which does beg the question of why this case did not settle but instead went all the way to verdict. I am sure there is some very interesting background on why this case did not settle but instead went all the way to the jury.
This case does provide some food for thought for the representatives of any other company thinking of pushing their case all the way to a jury. I suspect there is a lot more that might be said about the value of the damages the jury awarded here, but the fact is that the plaintiffs’ counsel has asserted the damages amount to as much as $100 million.
There is another consideration that might be relevant for another company thinking about whether or not to take a case all the way to the jury. That is, of the 25 cases that have gone to a verdict since 1996, and taking post-trial proceedings into account (including post-verdict appeals), 13 of the 25 cases that have resulted in a verdict have gone for the plaintiffs and 12 have gone in the defendants’ favor. The scoreboard does not suggest that either side has proven to have a reliable advantage at trial.
One of the many reasons that securities class action verdicts rarely go to trial is that the defendants usually do not want to run the risk of a trial verdict determination that might trigger the preclusive effect of the fraud exclusion. In the event that the jury’s verdict here is reduced to a judgment, the judgment would represent a judicial determination that potentially could trigger the fraud exclusion in the company’s D&O insurance policy. Of course, as long as the company has unexhausted appeal rights, the adjudication arguably would not be final. If and when the appeal rights are ultimately exhausted, the fraud exclusion could indeed come into play, potentially precluding coverage not only for the judgment amount but even possibly for the amounts the company incurred in defending this lawsuit. Considerations like these often come into play as companies, even those who feel strongly that they have done nothing wrong, decide to settle the cases against them. I am sure that in the interesting backstory on this case, there are probably considerations relating to the D&O insurance that potentially might have come into play as well.