258 F. Supp. 3d 999
N.D. Cal.2017Background
- Plaintiffs filed a securities class action against KaloBios and executives (only Martin Shkreli remained after others settled), alleging violations of Sections 10(b), 20(a) and 20A and Rule 10b-5 based on statements and omissions during Nov 19–Dec 16, 2015 (the Class Period).
- KaloBios was in severe financial distress in 2015; Shkreli acquired a controlling stake in November 2015, was appointed CEO, and made optimistic public statements about company recovery and his funding/experience.
- Prior to and during the Class Period, mainstream press reported alleged misconduct by Shkreli arising from his roles at Retrophin and MSMB, including civil suits and a criminal investigation.
- On Dec 17, 2015, a federal indictment and SEC complaint against Shkreli were publicly filed, he was arrested and terminated as CEO, and KaloBios stock collapsed and was later delisted; Plaintiffs allege the arrest revealed the truth and caused losses.
- Shkreli moved to dismiss under Rules 12(b)(6), 9(b), and the PSLRA; he sought judicial notice of several press articles about his prior misconduct to rebut the fraud-on-the-market presumption.
- The court granted judicial notice of mainstream news articles, concluded the market was already aware of the allegations, and dismissed all claims with leave to amend.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiffs may invoke the fraud‑on‑the‑market presumption of reliance | Plaintiffs: market relied on Shkreli's positive statements and his omissions; the arrest/indictment was the corrective disclosure | Shkreli: prior mainstream press widely disseminated allegations about his misconduct, rebutting the presumption (truth‑on‑the‑market) | Court: granted judicial notice of news articles and found defendant rebutted the presumption; reliance not established |
| Whether statements about Shkreli’s reputation/qualifications were material omissions/misrepresentations | Plaintiffs: Shkreli’s failure to disclose prior misconduct rendered his statements about trustworthiness and qualifications misleading | Shkreli: those reputation-damaging facts were already public; no duty to disclose unrelated past misconduct beyond what was public | Court: dismissed these claims for lack of reliance (truth already public); did not decide duty-to-disclose question definitively |
| Whether optimistic statements about KaloBios’s recovery/funding were false or misleading | Plaintiffs: Shkreli’s promises (e.g., $100M funding, lenzilumab prospects) were unrealistic and deceptive given his background | Shkreli: plaintiffs fail to plead specific facts showing the statements were false when made; optimism alone is not fraud | Court: dismissed these claims for failure to plead falsity with particularity; statements were speculative/insufficiently pleaded |
Key Cases Cited
- Basic v. Levinson, 485 U.S. 224 (establishes fraud‑on‑the‑market presumption of reliance)
- Provenz v. Miller, 102 F.3d 1478 (truth‑on‑the‑market doctrine; defendant can rebut presumption if info was transmitted to market with intensity and credibility)
- In re Apple Computer Sec. Litig., 886 F.2d 1109 (discusses fraud‑on‑the‑market and when omitted information is reflected in stock price)
- Heliotrope Gen., Inc. v. Ford Motor Co., 189 F.3d 971 (taking judicial notice of news articles in securities cases to show market awareness)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (plausibility pleading standard for Rule 12(b)(6))