As I have noted in prior posts (most recently here), since the outbreak of the coronavirus in the U.S. last March plaintiff shareholders have filed numerous COVID-19-related securities class action lawsuits. Relatively few of these cases have reached the motion to dismiss stage, but the few dismissal motion results so far are decidedly mixed, at best, from the plaintiffs’ perspective. In the latest of these cases to fail to survive the initial pleading hurdle, the court in the COVID-19-related securities suit against biopharma firm Sorrento Therapeutics has granted the defendants’ motion to dismiss, albeit with leave to amend. The court’s November 18, 2021 order can be found here.
Sorrento is a clinical stage biopharmaceutical company. In early 2020, the company was seeking to develop a monoclonal antibody known as STI-1499 as a treatment for COVID-19 patients. As discussed here, in May 2020, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of California against the company and certain of its executives, asserting that in a series of public comments in May 2020, the company allegedly made several misleading statements regarding the success of STI-1499 in treating COVID-19.
Thus, for example, on May 15, 2020, a Sorrento executive told Fox News, “We want to emphasize there is a cure. 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 society without fear.” This statement and three others on which the plaintiff relies in its complaint caused the company’s share price to rise sharply. Following the price rise, the company and these various statements were the subject of two short seller reports critical of the company and of the statements. The securities lawsuit followed.
The defendants moved to dismiss the plaintiffs’ complaint, arguing that the plaintiff had failed to allege particularized facts showing that the statements on which the plaintiff relies were false or misleading or supporting a strong inference of scienter.
The November 18, 2021 Opinion
In a November 18, 2021 opinion, Southern District of California Judge Anthony Battaglia granted the defendants’ motion to dismiss with leave to amend.
In granting the motion, Judge Battaglia first concluded that the statements on which the plaintiff sought to rely “fail to provide specific information to successfully argue that Defendants allegedly made false statements about the effectivity of the STI-1499 antibody, lied or mislead investors about its preclinical status, or schemed to bolster test results to increase Sorrento’s stock price.”
With respect to the statement that “there is a cure. There is a solution that works 100 percent,” Judge Battaglia found that this statement “is a statement of corporate optimism,” adding that “it is well established that generalized, vague and unspecific assertions of corporate optimism or statements of mere puffery cannot state actionable material misstatements of fact under federal securities laws.”
Judge Battaglia went on to note that “in reviewing the entirety of each quoted article, the Court finds nothing about the representation of STI-1499’s success that is inaccurate or misleading.” Judge Battaglia specifically referred to statements in the various articles about the preliminary nature of STI-199’s testing status. He said that “information indicating that STI-1499 was still in preclinical stages and had not yet received FDA approval was disclosed contemporaneously to the public.” Judge Battaglia said that “In reviewing each of these statements within the context of each entire article, the Court does not find Plaintiff has sufficiently pled the existence of false or misleading statements.”
Finally, Judge Battaglia also found that the plaintiff had failed to plead facts sufficient to establish a strong inference of scienter. He found that “Plaintiff does not provide any specific factual allegations that point to Defendants’ intent to manipulate preclinical trials or deceive investors.” The plaintiff had tried to argue that the supposedly misleading statements had enabled the company to complete various capital raising activities and to retire high-interest debt. Judge Battaglia found that these allegations were insufficient to establish scienter.
As I noted at the outset, the plaintiffs’ track record on motions to dismiss in COVID-19-related securities suits has so far been mixed at best. The plaintiffs’ track record against defendant companies that experienced coronavirus outbreaks in their facilities is particularly poor; thus, dismissal motions were granted in the COVID-19-related securities lawsuits that filed against Norwegian Cruise Lines (discussed here) and Carnival Corp. (here), as was the dismissal motion in the COVID-19-related securities suit that had been filed against private prison company The Geo Group (here). In addition, the COVID-19-related securities suit filed against Royal Caribbean was voluntarily dismissed.
Beyond these cases involving companies that had experienced coronavirus outbreaks in their facilities, there have also been a number of COVID-19-related securities suits filed against companies that allegedly had claimed that they would be able to profit from the pandemic. The lawsuit against Sorrento Therapeutics falls into this category; Judge Battaglia granted the defendants’ motion to dismiss in the Sorrento case. However, as discussed here, the coronavirus-related securities suit filed against Inovio survived the motion to dismiss.
As the Inovio decision shows, the plaintiffs have not been entirely shut out in the coronavirus securities lawsuit so far. However, even with that exception, the track record for the plaintiffs in these cases has not been great. As Judge Battaglia’s opinion in the Sorrento case shows, the judges in these cases have seemed skeptical of the lawsuits.
I will say that there is at least a part of Judge Battaglia’s opinion about which reasonable minds may differ. Judge Battaglia found that the defendants’ statement that “there is a cure. There is a solution that works 100 percent” represented only “generalized, vague and unspecific assertion of corporate optimism.” I am not sure about this characterization; a statement that there is “a cure” and that it “works 100 percent” sounds pretty specific to me, and constitutes more than mere optimism; rather, it sounds to me a lot like a declaration of a specific, tangible result or outcome.
The plaintiff in this case may or may not take Judge Battaglia up on his extension of leave to file an amended complaint; the plaintiff may prefer to go straight to the appellate court.