117 F. Supp. 3d 1145
D. Or.2015Background
- Plaintiffs (Galena shareholders) allege a paid "pump-and-dump" promotional scheme: Galena, certain officers/directors, and investor-relations firms (DreamTeam and Lidingo) arranged undisclosed paid articles, social posts, and email blasts to inflate Galena’s stock so insiders could sell at artificial prices.
- Galena hired DreamTeam and Lidingo in 2013; Plaintiffs allege Galena approved draft articles, paid above-market fees (including stock options), and required nondisclosure of the paid relationship.
- Significant insider option grants and insider sales occurred in late 2013–early 2014 (many insiders sold large percentages of holdings within weeks), contemporaneous with the promotional campaign and before public disclosures that the campaign was paid.
- Media and analyst reports (Feb–Mar 2014) revealed the paid promotions and insider sales; Galena’s stock fell sharply and the SEC opened an investigation; Galena later announced Ahn’s departure and fired DreamTeam.
- Court considered motions to dismiss by multiple defendants and, applying Rule 9(b), the PSLRA, and Tellabs, granted dismissal in part and denied in part; plaintiffs were granted leave to amend.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiffs pleaded scienter adequate under PSLRA/Tellabs | Allegations of extensive communications, approvals of drafts, payments (cash and options), cover-ups, unusually timed option grants, and large, suspicious insider sales create a strong inference of scienter for many defendants | Defendants argued lack of specific allegations showing knowledge of nondisclosure, innocuous explanations (fact-checking, diversification), and that insider sales alone are insufficient | Court found scienter sufficiently pleaded for Ahn, Bernarda, Kriegsman, Chin, Nisi, Hillsberg, Galliker, Galena, DreamTeam/McCarthy/Meyer (as to DreamTeam-related conduct), and Bjorlin/Lidingo (as to Lidingo conduct); not sufficient for Dunlap and Schwartz |
| Whether Rule 10b-5(b) claims were pleaded (material misstatements/omissions; "maker" of statements) | Misleading public statements/omissions in underwriting agreement, prospectus, 10-Q/A, and paid articles (DreamTeam) were alleged; Galena/officers had final authority over some published articles so they are “makers” | Defendants argued some statements (e.g., private contract warranties) were not "in connection with" securities transactions or not made by defendants (Janus), and that PLSRA particularity was lacking for Lidingo and social media posts | Court held: actionable material misstatements/omissions sufficiently alleged for underwriting agreement, prospectus, 10-Q/A, and DreamTeam-published articles; Ahn, Dunlap (as signer), Bernarda and Galena are makers for identified filings/articles; allegations against Lidingo publications and some social posts lacked PSLRA particularity and were dismissed as to 10b-5(b) |
| Whether scheme (10b-5(a) & (c)) liability was adequately pleaded (conduct beyond misstatements; reliance; loss causation) | Plaintiffs alleged a cohesive deceptive scheme (hiring promoters, paying writers/aliases, coordinating postings, insider option timing and sales, cover-up) that was public and inflated the market; reliance can be presumed (fraud-on-the-market); disclosures in Feb–Mar 2014 revealed the scheme and caused price drops | Defendants argued conduct is not the type of manipulation covered by 10b-5(a)/(c), that plaintiffs merely recast misstatements as a scheme, and Stoneridge precludes reliance where conduct wasn’t publicly disclosed by the defendant | Court held scheme liability adequately pleaded against Ahn, Bernarda, Galena, DreamTeam/McCarthy/Meyer (for DreamTeam conduct), and Lidingo/Bjorlin (for Lidingo conduct); loss causation and fraud-on-the-market reliance adequately pleaded given market drops after disclosures; Dunlap lacked required scienter for scheme liability |
| Whether control-person (§20(a)) and §20A insider-trading claims were pleaded | Plaintiffs asserted control-person liability for officers/directors who exercised day-to-day authority, signed filings, or oversaw PR; insider trading claims alleged contemporaneous trades by plaintiffs and insiders who traded on material nonpublic info (the promotion and preliminary earnings) | Defendants argued many directors/officers lacked operational control over PR/promotional decisions and that earnings prelim were not shown to be material; some defendants lacked contemporaneous trades or scienter | Court held control-person liability survived for Ahn, Bernarda, and Dunlap (and McCarthy as to DreamTeam); dismissed control claims as to Bjorlin/Lidingo, Meyer, Outside Directors, Schwartz. Insider-trading claims sustained against all Selling Defendants except Schwartz based on the alleged promotional scheme; insider-trading claims based on the preliminary earnings report were dismissed for failure to plead materiality |
Key Cases Cited
- Shroyer v. New Cingular Wireless Servs., Inc., 622 F.3d 1035 (9th Cir. 2010) (Rule 12(b)(6) standard)
- Wilson v. Hewlett-Packard Co., 668 F.3d 1136 (9th Cir. 2012) (pleading and inference standard)
- Daniels-Hall v. National Education Ass'n, 629 F.3d 992 (9th Cir. 2010) (construing allegations in plaintiff's favor)
- Starr v. Baca, 652 F.3d 1202 (9th Cir. 2011) (Rule 9(b) and particularity requirement)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (pleading: legal conclusions not accepted as true)
- Bell Atlantic v. Twombly, 550 U.S. 544 (U.S. 2007) (facial plausibility standard)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (strong inference of scienter standard)
- Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009) (totality-of-allegations for scienter)
- Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (U.S. 2011) (definition of the "maker" of a statement)
- Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (U.S. 2008) (scheme liability and reliance limits)
- Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (U.S. 1994) (aiding and abetting not private basis under §10(b))
- Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (U.S. 2005) (loss causation requirement)