Brennan v. Zafgen, Inc.
853 F.3d 606
| 1st Cir. | 2017Background
- Zafgen, a one-drug biotech, developed Beloranib for obesity; it completed multiple clinical trials including the Phase II ZAF-201 trial (122 treated patients) in which four thrombotic events occurred (two classified as serious, two as superficial).
- Zafgen disclosed the two serious thrombotic events in its April 2014 Form S-1 but did not disclose the two superficial events until October 16, 2015, when a patient death in a Phase III trial and an FDA partial clinical hold were announced.
- After the October 2015 disclosures Zafgen stock fell sharply; investors filed a class action under §10(b)/Rule 10b-5 and §20(a) alleging misleading partial disclosures and failure to report the superficial thrombotic events earlier.
- The district court dismissed for failure to plead scienter with the PSLRA's required particularity; plaintiffs appealed.
- The First Circuit reviewed de novo and held the complaint failed to plead a "cogent and compelling" inference of scienter (intent or extreme recklessness) and affirmed dismissal of both §10(b)/Rule 10b-5 and derivative §20(a) claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Sufficiency of scienter allegations under the PSLRA/Tellabs | Investors alleged defendants knew or were reckless about thrombotic risk (citing articles) and withheld non-serious events to mislead | Disclosures, context, and lack of direct warnings show no conscious intent or extreme recklessness | Complaint fails: inference of scienter not "cogent and compelling" |
| Materiality of omitted superficial thrombotic events | All thrombotic events are material because FDA considers event frequency in safety decisions | Two superficial events were marginal, not linked to drug, and not required to be disclosed pre-NDA; company disclosed serious events and warned it would not disclose all AEs | Held not plausibly material at the time; omission’s marginality undercuts scienter inference |
| Motive/insider trading support for scienter | Executive compensation and September 2015 insider sales show motive and suspicious trading | Sales were modest relative to holdings; insiders retained most shares; timing preceded reported death and hold | Motive/insider-trading allegations are weak/marginal and do not support strong scienter inference |
| §20(a) claim against CEO Hughes (control-person liability) | Derivative: Hughes liable if underlying §10(b) claim stands | Liability depends on underlying §10(b) scienter showing | Dismissed as derivative because §10(b) dismissal affirmed |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (establishes "cogent and compelling" standard for scienter inference)
- Biogen IDEC Inc. v. N.J. Carpenters Pension & Annuity Funds, 537 F.3d 35 (FDA reporting duties and clinical-trial disclosure context)
- Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (adverse event reports can be material but require "something more")
- In re Genzyme Corp. Sec. Litig., 754 F.3d 31 (elements of a §10(b)/Rule 10b-5 claim)
- Greebel v. FTP Software, Inc., 194 F.3d 185 (recklessness standard and weighing insider-trading inference)
- In re Bos. Sci. Corp. Sec. Litig., 686 F.3d 21 (examples of facts that can support scienter: admissions, internal records, warnings by subordinates)