Local No. 8 IBEW Retirement Plan & Trust v. Vertex Pharmaceuticals, Inc., 2016 U.S. App. LEXIS 17832

Background

Vertex announced interim Phase 2 results (May 7, 2012) for a combination cystic fibrosis therapy reporting notably strong improvement in lung function (FEV) for treated patients versus placebo. The release cautioned data were incomplete.
Market reaction: Vertex stock jumped from ~$37 to ~$58 the day of the announcement and peaked at $64.85 within weeks; trading volume spiked. Several Vertex executives sold stock after the announcement, netting nearly $32 million.
On May 29, 2012 Vertex corrected the interim results, acknowledging a vendor misinterpretation: previously reported percentages reflected relative (not absolute) improvement, reducing the reported effectiveness figures. The stock dropped but remained above preannouncement levels.
Local No. 8 filed a securities-fraud class action under §10(b)/Rule 10b-5, and related §20(a) and §20A claims, alleging defendants knowingly or recklessly misreported results and insiders sold on that misstatement.
The district court dismissed for failure to plead scienter with particularity under the PSLRA; the First Circuit affirmed, finding the complaint’s facts insufficient to create a strong inference of intent or conscious recklessness.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether complaint pleads scienter under §10(b)/Rule 10b-5 (PSLRA strong-inference standard)	Defendants either knew the reported results were wrong or recklessly ignored obvious signs (inconsistent sweat chloride data, fundamental vendor error, and large insider sales)	The allegations show at most negligence: no allegations that executives saw raw data or were alerted to an obvious inconsistency; sales had innocent explanations; CEO did not sell	Dismissed: plaintiff failed to plead a strong inference of scienter as required by the PSLRA (affirmed)
Whether insider stock sales and timing establish motive/knowledge	Insider sales soon after announcement are suspicious and support inference defendants knew results were flawed	Sales were explainable by sudden price jump after good news; two most senior executives made no unusual sales	Sales alone insufficient to establish scienter; innocent explanations prevail
Whether inconsistent biomarkers (FEV vs. sweat chloride) rendered results obviously false	Lack of sweat-chloride improvement made the FEV results implausible and should have prompted inquiry	No allegation that executives or relevant scientists viewed the biomarker pattern as implausible; Vertex disclosed sweat-chloride data alongside FEV	Biomarker pattern did not, as pled, establish obvious error or that defendants were aware of it
Whether related §20(a) and §20A claims survive absent a §10(b) violation	These claims derive from the primary fraud claim and rely on pleaded scienter	Without a viable §10(b) claim, derivative control-person and insider-trading claims fail	Dismissed as derivative of the §10(b) dismissal

Key Cases Cited

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (PSLRA strong-inference test: inference must be cogent and at least as compelling as opposing inferences)
Aldridge v. A.T. Cross Corp., 284 F.3d 72 (First Circuit standard for scienter pleading)
Ernst & Ernst v. Hochfelder, 425 U.S. 185 (scienter defined as intent to deceive, manipulate, or defraud)
Miss. Pub. Emps.' Ret. Sys. v. Bos. Sci. Corp., 523 F.3d 75 (recklessness as high degree of negligence; insider sales may be probative)
Miss. Pub. Emps.' Ret. Sys. v. Bos. Sci. Corp., 649 F.3d 5 (further discussion of recklessness standard)
Greebel v. FTP Software, Inc., 194 F.3d 185 (recklessness is closer to intent than negligence)
In re Smith & Wesson Holding Corp. Sec. Litig., 669 F.3d 68 (definition of extreme departure from ordinary care)
In re Cabletron Sys., Inc., 311 F.3d 11 (considering cumulative weight of scienter allegations)
Schaefer v. Indymac Mortg. Servs., 731 F.3d 98 (judicial consideration of documents integral to the complaint)
N.J. Carpenters Pension & Annuity Funds v. Biogen IDEC Inc., 537 F.3d 35 (context on FDA clinical trial process)