Brennan v. Zafgen, Inc., 199 F. Supp. 3d 444

Background

Zafgen, Inc., a small biopharmaceutical company, conducted a Phase IIA trial (ZAF-201) of its lead drug Beloranib (Aug 2012–May 2013). Four thrombotic adverse events (AEs) occurred in ZAF-201: two labeled “serious” and two labeled “superficial.”
In its IPO and subsequent filings (2014–2015) Zafgen disclosed the two serious thrombotic AEs, summarized biomarker data suggesting no increased cardiovascular risk, and warned that some AEs may not be publicly disclosed until FDA filings.
In Oct. 2015 Zafgen announced a death in a Phase III trial; after unblinding it disclosed the deceased had been on Beloranib and revealed, for the first time, the two previously undisclosed superficial thrombotic AEs. Stock fell ~50% and plaintiffs sued.
Lead plaintiffs alleged 10b‑5 and Section 20(a) claims, arguing Zafgen and CEO Hughes omitted two material AEs from prior disclosures and acted with scienter, citing scientific literature and insider sales as evidence.
Defendants moved to dismiss under Rule 12(b)(6), Rule 9(b), and the PSLRA for failure to plead actionable misstatements/omissions and failure to plead scienter with particularity; the court considered the PSLRA heightened standards and Zafgen’s public filings and call transcripts.
The court granted dismissal with prejudice: it found the complaint adequately alleged at least one material omission but failed to plead a strong, cogent inference of scienter; Section 20(a) claim was dismissed as derivative.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Zafgen’s omissions/misstatements about AEs were materially misleading	Plaintiffs: Omitting the two superficial thrombotic AEs (while disclosing two serious AEs and listing minor TEAEs) misled investors about the true frequency/risk of thrombotic events	Defendants: Disclosures were accurate; they warned investors that some AEs may not be publicly disclosed and investigators had not attributed AEs to Beloranib	Court: Complaint pleaded at least one potentially material omission (sufficient to survive the materiality pleading hurdle at motion stage) but materiality was marginal and linked to scienter analysis
Whether plaintiffs pleaded scienter (intent or severe recklessness) with particularity under the PSLRA	Plaintiffs: Scientific literature about angiogenesis inhibitors and insider sales show defendants knew or were reckless about thrombotic risk and had motive to conceal	Defendants: Allegations amount to impermissible fraud-by-hindsight; cited articles are general/not shown to have been read or acted upon; insider sales were routine and mostly pursuant to 10b5 plans	Court: Allegations were insufficient—no direct internal evidence, articles are circumstantial and post-hoc, insider sales not suspicious; inference of nonfraudulent conduct is more compelling
Whether insider trading / motive supports scienter	Plaintiffs: Executives (including Hughes) sold shares in Sept. 2015, avoiding large losses, showing motive/opportunity	Defendants: Sales were not unusual, mostly pursuant to Rule 10b5 plans, and sellers retained the vast majority of holdings	Court: Sales and compensation allegations were too generic/unsuspicious to bolster scienter
Whether dismissal should be with or without leave to amend	Plaintiffs: Requested leave to amend in opposition brief if dismissal granted	Defendants: Opposed; argued plaintiffs had time to investigate prior to amending	Court: Denied leave and dismissed with prejudice as plaintiffs had prior notice, time to investigate, and did not show any additional nonfutile allegations to add

Key Cases Cited

New Jersey Carpenters Pension & Annuity Funds v. Biogen Idec Inc., 537 F.3d 35 (1st Cir. 2008) (scienter requires defendants had sufficient information at the time to evaluate need to disclose)
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (plaintiff must plead facts giving rise to a "strong inference" of scienter that is at least as compelling as opposing inferences)
ACA Financial Guaranty Corp. v. Advest, Inc., 512 F.3d 46 (1st Cir. 2008) (discussing comparative evaluation of inferences and scienter standards under the PSLRA)
Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (U.S. 2011) (adverse event reports require contextual proof to be material; mere AE reports alone are insufficient)
Fire & Police Pension Ass’n of Colo. v. Abiomed, Inc., 778 F.3d 228 (1st Cir. 2015) (PSLRA scienter pleading requirements and treatment of risk warnings/insider sales)
Waters Corp. v. City of Dearborn Heights Act 345 Police & Fire Ret. Sys., 632 F.3d 751 (1st Cir. 2011) (materiality and scienter are related; risk warnings can weaken scienter inference)
Ezra Charitable Trust v. Tyco Int’l, Ltd., 466 F.3d 1 (1st Cir. 2006) (fraud-by-hindsight is insufficient to plead scienter)
Aldridge v. A.T. Cross Corp., 284 F.3d 72 (1st Cir. 2002) (motives tied to compensation may support scienter only when unusual or extraordinary)
In re Genzyme Corp. Securities Litigation, 754 F.3d 31 (1st Cir. 2014) (elements of a 10b‑5 claim and PSLRA pleading rigor)