Ballesteros v. Galectin Therapeutics, Inc.
2016 U.S. App. LEXIS 22317
| 11th Cir. | 2016Background
- Hotz bought 16,000 shares of Galectin stock in Feb. 2014 and alleged he and a class were harmed when Galectin’s stock collapsed after reports that Galectin paid third-party promoters to tout the stock (price fell ~55% on July 28–29, 2014).
- Galectin sold shares via two “at-the-market” (ATM) offerings (Oct. 25, 2013 and Mar. 21, 2014) to raise capital; Hotz alleges the company timed/promoted the market to raise funds at inflated prices and minimize dilution to insiders.
- Galectin engaged four promoters (Dream Team, Patrick Cox, TDM, Acorn); some promoters disclosed payments (TDM, Acorn), others did not (Dream Team, Cox); Galectin itself did not disclose these promoter payments in SEC filings or ATM documents beyond vague consulting language.
- Hotz sued under § 10(b)/Rule 10b‑5(b) (misrepresentation/omission) and § 20(a) (control-person liability), alleging that failing to disclose payments and representing “no manipulation” were false or misleading; no allegation that promotional articles themselves contained false factual claims.
- The district court dismissed under Rule 12(b)(6); the Eleventh Circuit affirmed, holding (a) Galectin was not the “maker” of promoters’ statements under Janus; (b) hiring/promoting by issuer without more is not securities-market “manipulation”; (c) reporting ATM sale figures did not create a duty to disclose promoter payments; (d) absent a primary § 10(b) violation, § 20(a) claim fails.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Galectin can be liable under Rule 10b‑5(b) for statements in third‑party promotional articles | Promoters were agents of Galectin because Galectin paid them, so Galectin “made” or is responsible for the promoters’ statements/omissions | Under Janus, only the entity with ultimate authority over content “makes” a statement; payment alone doesn’t show control | Dismissed — payment to promoters insufficient to show Galectin “made” the statements (Janus controls) |
| Whether Galectin’s ATM representations that it had not manipulated the stock were false/misleading because it paid promoters to tout the stock | Hiring/promoters to pump price rendered the “no manipulation” statement false or misleading | Securities-law “manipulation” denotes deceptive market conduct (wash sales, matched orders, rigged prices); hiring promoters and publishing truthful/boastful articles is lawful and not manipulation | Dismissed — no alleged manipulative market activity; the “no manipulation” statement was not untrue as a matter of law |
| Whether omission of disclosure about promoter payments in 10‑K/10‑Q and ATM notices was a fraudulent omission under Rule 10b‑5(b) | By disclosing ATM sale figures, Galectin created a duty to disclose other facts (promoter payments) necessary to avoid misleading investors | Duty to disclose promoter payments lies with promoters under § 17(b); truthful reporting of sale figures did not render those figures misleading or create a duty to disclose payments | Dismissed — no duty to disclose payments; reporting of ATM figures did not make statements misleading |
| Whether § 20(a) control‑person claims survive absent a primary § 10(b) violation | Officers, directors, and 10X Fund controlled Galectin and so are secondarily liable | Control‑person liability is secondary and requires an underlying primary violation | Dismissed — no primary § 10(b) violation alleged, so § 20(a) claim fails |
Key Cases Cited
- Janus Capital Grp. v. First Derivative Traders, 564 U.S. 135 (2011) (defendant liable under Rule 10b‑5(b) only if it is the person with ultimate authority who "made" the statement)
- Halliburton Co. v. Erica P. John Fund, 134 S. Ct. 2398 (2014) (elements of Rule 10b‑5 claim and reliance/loss‑causation principles)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard under Rule 8)
- Basic Inc. v. Levinson, 485 U.S. 224 (1988) (silence not misleading absent duty to disclose; partial disclosures can create duty)
- Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (1977) (definition of market manipulation and requirement of deceptive market activity)
- Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) (scienter requirement and definition of manipulation as intentional deceptive conduct)
- Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011) (omissions can be material under Rule 10b‑5(b))
- FindWhat Investor Grp. v. FindWhat.com, 658 F.3d 1282 (11th Cir.) (disclosure of one fact may give rise to duty to speak fully; guidance on omissions)