587 F. App'x 493
10th Cir.2014Background
- AspenBio, a biotech company, developed a diagnostic test called AppyScore and publicized preliminary study results in 2007 claiming very high sensitivity (94–98%) for detecting appendicitis.
- Investors sued in a putative class action under §10(b)/Rule 10b-5 (and §20(a) control-person claims), alleging the 2007 statements and Donnelly’s investor comments were false and misleading and that AspenBio rigged studies to inflate its stock price.
- After adverse FDA-regulated clinical trial results in January 2009 and July 2010, AspenBio’s stock plunged, prompting the securities-fraud claims.
- The district court dismissed the amended complaint under Fed. R. Civ. P. 12(b)(6) for failure to meet the PSLRA’s heightened pleading standards; plaintiffs appealed.
- The Tenth Circuit affirmed, holding plaintiffs failed to plead scienter with particularity; because no primary violation was adequately pleaded, the control-person claims also failed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiffs pleaded falsity of statements | February and September 2007 press releases and Donnelly’s statements were false/misleading about AppyScore’s sensitivity | Statements were not pleaded with the required particularity; district court dismissed on falsity grounds | Court did not decide falsity on appeal (assumed arguendo false) and affirmed on other grounds |
| Whether plaintiffs pleaded scienter under the PSLRA | Donnelly, as CEO and because AppyScore was focal, must have known the statements were false; also relied on founder Hurst’s 2005 remark that AppyScore “wasn’t working” | CEO status alone and a vague 2005 comment are insufficient to raise a strong, cogent inference of intent or recklessness | Plaintiffs failed to plead scienter with particularity; inference would require impermissible stacked speculation, so dismissal affirmed |
| Whether control-person claims under §20(a) survive absent primary violation | Control liability based on Donnelly and CFO McGonegal because they had control over AspenBio | Control claims depend on an underlying primary violation; if primary claim fails, control claims fail | Because primary §10(b) claim inadequately pleaded, §20(a) claims also fail |
| Judicial notice of company press releases | Investors sought judicial notice of two AspenBio press releases | AspenBio did not oppose; district court had already taken notice of related releases | Court granted investors’ uncontested motion for judicial notice of those releases |
Key Cases Cited
- Adams v. Kinder-Morgan, Inc., 340 F.3d 1083 (10th Cir. 2003) (discusses scienter and relevance of executive position among other allegations)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (sets standard for evaluating whether complaint gives rise to a "strong inference" of scienter)
- In re Level 3 Commc’ns, Inc. Secs. Litig., 667 F.3d 1331 (10th Cir. 2012) (requires against-stacked-inferences analysis; scienter allegations insufficient when multiple speculative inferences required)
- City of Philadelphia v. Fleming Cos., 264 F.3d 1245 (10th Cir. 2001) (positional allegations alone do not satisfy scienter pleading requirements)
- Maher v. Durango Metals, Inc., 144 F.3d 1302 (10th Cir. 1998) (control-person liability depends on existence of primary securities-law violation)