Karth v. Keryx Biopharmaceuticals, Inc.
6f4th123
| 1st Cir. | 2021Background
- Keryx sold Auryxia, a drug whose API and final-tablet production were outsourced; Norwich was the sole contractor for the second-step (tablet) manufacturing during the class period.
- From 2014–2016 Norwich and Keryx experienced intermittent manufacturing problems (API contamination, rejected batches, and later a tablet structural defect), but production historically resumed without disrupting commercial supply.
- Keryx issued risk disclosures (notably Feb. 26, 2016 10-K and Apr. 28, 2016 10-Q) stating it depended on a single supplier and warning that supplier failures could materially harm revenue; company executives also made positive public statements about Auryxia’s fundamentals.
- Plaintiff Karth bought Keryx shares on July 19, 2016 (before Keryx publicly disclosed July production setbacks) and alleged securities fraud, arguing earlier disclosures understated the true risk and that the Feb/Apr 2016 statements were misleading because Keryx already knew of serious manufacturing problems.
- On Aug. 1, 2016 Keryx announced an imminent supply interruption; the stock fell ~36%. The district court denied Karth’s motion to file a Third Amended Complaint, denied class certification, granted judgment for defendants; the First Circuit affirmed, holding amendment would be futile.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Were the Feb. and Apr. 2016 disclosures misleading? | Karth: they were misleadingly generic and understated the real, known risk of sole-supplier dependence. | Keryx: the disclosures accurately stated there was a single supplier and warned of the risk; they corrected any earlier ambiguity. | Held: Not misleading — the disclosures identified the single-supplier risk and did not omit a then-imminent, near-certain supply catastrophe. |
| Did defendants know a supply interruption was imminent (scienter/materiality)? | Karth: internal reports and prior problems showed defendants knew failure was likely, so disclosures were misleading. | Keryx: historical stoppages were resolved; no evidence showed defendants believed failure was near-certain. | Held: No strong inference of known, near-certain catastrophe; problems were not shown to be a "Grand Canyon" level imminent disaster. |
| Was Karth entitled to amend (Third Amended Complaint)? | Karth: proposed amendments added facts showing defendants knew of serious, ongoing manufacturing problems, curing earlier pleading defects. | Keryx: proposed amendments did not cure failures to plead a materially misleading statement or scienter; amendment would be futile. | Held: Denial of leave to amend was proper — proposed complaint still failed to state a viable §10(b) claim. |
| Did Karth (a July purchaser) plausibly rely on actionable misstatements causing his loss? | Karth: prior misleading disclosures and positive statements proximately caused his loss when the supply problem was revealed. | Keryx: corrective disclosures in Feb/Apr 2016 put investors (including Karth) on notice of the single-supplier risk before his purchase. | Held: Karth could not show he relied on earlier alleged misrepresentations because the Feb/Apr disclosures had already corrected the record before his purchase. |
Key Cases Cited
- Hill v. Gozani, 638 F.3d 40 (1st Cir. 2011) (generic risk warnings insufficient only when risk was a near-certainty or already occurring).
- Tutor Perini Corp. v. Banc of Am. Sec. LLC, 842 F.3d 71 (1st Cir. 2016) (special-relationship/context can render general warnings inadequate where the defendant knew risks had dramatically changed or collapse was imminent).
- In re Cabletron Sys., Inc., 311 F.3d 11 (1st Cir. 2002) (evidence of frantic efforts to "keep the house of cards standing" can support inference of knowledge of impending disaster).
- Amgen Inc. v. Connecticut Ret. Plans & Trust Funds, 568 U.S. 455 (U.S. 2013) (elements of a private §10(b) claim include material misstatement, scienter, transaction causation, reliance, economic loss, and loss causation).
- Basic, Inc. v. Levinson, 485 U.S. 224 (U.S. 1988) (materiality measured by whether information would have significantly altered the total mix of information available to a reasonable investor).