Lead Plaintiffs Kaniz Fatema, Zeke Ingram, Bhaskar R. Gudlavenkatasiva, and Abuhena M. Saifulislam, as well as Plaintiff Austin Isensee (collectively the “Plaintiffs”), individually and on behalf of all the other persons similarly situated, bring this putative securities class action against Ka-loBios Pharmaceuticals, Inc. (“KaloBios”) and individuals Ronald Martell, and Herb Cross, and Martin Shkreli, alleging violations of Sections 10(b), 20(a) and 20A of the Securities Exchange Act of 1934 and U.S. Securities and Exchange Commission (“SEC”) Rule 10b-5 promulgated thereunder. Defendants KaloBios, Ronald Martell, and Herb Cross reached a partial settlement with Plaintiffs, which the court granted final approval of concurrently with the entry of this order. Dkt. No. 93. Accordingly, Defendant Shkreli remains the sole non-settling defendant in this case.
Presently before the court is Shkreli’s Motion to Dismiss for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6), and for failure to plead claims with the requisite level of particularity under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 (the “PSLRA”), 15 U.S.C. §§ 78u-4 et seq. (1995). Def. Shkreli Mot. to Dismiss (“MTD”), Dkt. No. 61. Having carefully considered the papers submitted by both parties in this matter, Shkreli’s Motion will be granted for the reasons explained below.
I. REQUEST FOR JUDICIAL NOTICE
As a preliminary matter, Shkreli requests that the court take judicial notice of certain documents in connection with his Motion to Dismiss. See Dkt. No. 61-3 (“RJN”). Specifically, Shkreli requests judicial notice of Exhibits 1-14 to the Declaration of Peter C. Buckley, filed in support of Shkreli’s Motion. Exhs. 1-14, Buckley
When ruling on a motion to dismiss, courts máy consider documents incorporated by reference in a complaint or upon which a complaint necessarily relies, as well as matters subject to judicial notice. Metzler Inv. GMBH v. Corinthian Colls., Inc.,
Judicial notice of news articles may be appropriate in securities fraud cases to show “that the market was aware of the information contained in news articles.’ ” In re Am. Apparel, Inc. Shareholder Litigation,
Here, Shkreli requests judicial notice of four news articles regarding his alleged misconduct in connection with his other companies prior to the Class Period. See Exhs. 11-14, Buckley Decl. Specifically, Exhibit 11 is an article published by The New York Times on September 22, 2015 entitled “Martin Shkreli, the Mercurial Man Behind the Drug Price Increase That Went Viral;” Exhibit 12 is an article published by FierceBioTeeh on August 17, 2015 entitled “Retrophin goes after Shkreli with a $65M suit, claims of flagrant mismanagement;” Exhibit 13. is an article published by .Newsweek, on September 13, 2015 entitled “Federal Prosecutors Target Martin Shkreli in a Criminal Investiga-tionf and Exhibit 14 is an article published by Forbes on August 18, 2015 entitled “Retrophin Sue Founder Martin Shkreli For $65M. His Reply: ‘Preposterous.’ ” RJN at 2-3.
Shkreli does not offer these news reports for the truth of their content, but rather to refute Plaintiffs’ “fraud-on-the-market” theory by demonstrating that public news sources had “already widely disseminated the alleged omissions to the investing public” at the time of his arrest and public release of the indictments on December 17, 2015. Id. at 3. Because
Moreover, unlike in cases such as Ger-ritsen, where the court declined to také judicial notice of articles published by third party sources like Wikipedia and Answers.com based in part on the fact that such sources are not reliable, there can be little dispute as to the authenticity of the articles here, which include publications by credible and mainstream sources like The New York Times, Forbes and Newsweek. Accordingly, the court GRANTS Shkreli’s request for judicial notice as to Exhibits 11-14. As to Exhibits 5 and 6, Shkreli’s request for judicial notice is DENIED because the court did not rely on these exhibits in reaching this decision.
II. BACKGROUND
KaloBios is a biopharmaceutical company founded in 2000 and headquartered in South San Francisco, California.' FAC ¶ 4. KaloBios’s stock traded on the NASDAQ under the ticker symbol “KBIO.” Id. Martin Shkreli served as the Chief Executive Officer (“CEO”) and Chairman of KaloBios during the Class Period. Id. ¶ 29, 54. Prior to the Class Period, Shkreli was a hedge fund manager and pharmaceutical investor who co-founded the investment- company MSMB in September 2009 and the bio-pharmaceutical company Retrophin in 2011.
Beginning in early January 2015, prior to the Class' Period, KaloBios was under “severe financial distress,” and by mid-2015, the company’s leadership began searching-for other potential investors. Id. ¶¶ 43-44. On November 5, 2015, KaloBios announced “a 61% workforce reduction and the pursuit of ‘strategic alternatives,’ ” including the potential sale of the company or its assets, a corporate acquisition, further restricting its activities, winding down operations, and/or bankruptcy proceedings.. Id. ¶¶ 46-47. By November 9, 2015, KaloBios announced it was halting enrollment in its clinical studies, and on November 13, 2015, KaloBios issued a press re
Between November 10, 2015 and November 24, 2015, Shkreli purchased 2,075,-200 shares of KaloBios common stock on “the open market,” making him the largest shareholder of KaloBios, and prompting discussions with KaloBios’ “regarding possible direction for the company to continue in operation.” Id. ¶¶ 6, 50. Just prior to the Shkreli’s purchase of the majority shares of KaloBios stock, between August and September 2015, reports of criminal investigations into Shkreli’s management of Re-trophin and MSMB Capital.were published by mainstream news sources including The New York Times, Forbes and Newsweek, Buckley Deck, Exhs. 11-14, Dkt. No. 61-2. For example, an article published by Newsweek on September 13, 2015 entitled “Federal Prosecutors Target ■ Martin Shkreli in a Criminal Investigationstat-ed that Shkreli was under investigation ’for allegations of “insider trading, disguising the purpose of corporate payments for his benefit, defrauding shareholders by snatching business opportunities for himself,, destruction of evidence, failure to. disclose material facts to shareholders and other potential crimes.” Id, Exh. 13. Nevertheless, by November 19,2105, KaloBios’ Board had accepted Shkreli’s financing proposal and appointed him as CEO. FAC ¶¶ 50-54. The existing Board then resigned. See id. ¶ 62(b).
After Shkreli was appointed as CEO, he made a number of public statements regarding KaloBios’ strong potential and positive progress, as well statements regarding his efforts to turn the company around financially and. why he was qualified to be the CEO. See id. ¶¶ 54, 57, 60, 62, 65, 68, 70, 73, 75, .78. Plaintiffs allege that these statements led to a recovery and rise in KaloBios stock price. Id, However, on December 17, 2015, Shkreli was arrested for alleged misconduct at his previous company, Retrophin, the details of which were outlined in a 30-page' federal indictment and a 22-page SEC Complaint made public the same day. Id. ¶¶ 15, 81-82. Shkreli was immediately terminated as CEO, Id, ¶ 81. When the news of Shkreli’s arrest broke, KaloBios stock price fell dramatically, “plummeting] 53% in pre-open trading before NASDAQ halted all trading so it could request more information from KaloBios.” Id ¶ 16. Soon thereafter on December 24, 2015,’NASDAQ announced that KaloBios’s stock would be delisted, and on December 29, 2016 KaloBios filed for Chapter 11 bankruptcy. Id. ¶¶16, 88-89. When trading resumed on January 13, 2016, KaloBios stock “opened at $2,51, reached an intra-day low of $1.02, and finally closed at $4.39.” Id, ¶ 90. This lawsuit followed.
III. LEGAL STANDARD
Federal Rule of Civil Procedure 8(a) requires a plaintiff. to plead each claim with sufficient specificity to “give the defendant fair notice of what the ... claim is and the grounds upon which it rests.” Bell Atl. Corp. v. Twombly,
At the motion to dismiss stage, the court must read and construe the complaint in the light most favorable to the non-moving party. Cahill v. Liberty Mut. Ins. Co.,
' Claims that sound in fraud are subject to a heightened pleading standard. Fed. R. Civ. P. 9(b) (“In alleging fraud or mistake, a party must state with particularity the' circumstances constituting fraud or mistake.”); Swartz v. KPMG LLP,
When deciding whether to grant a motion to dismiss, the court generally “may not consider any material beyond the pleadings.” Hal Roach Studios, Inc. v. Richard Feiner & Co.,
IV. DISCUSSION
This is a federal securities class action brought by certain purchasers of KaloBios common stock between the Class Period of November 19, 2015 and December 16, 2015 (the' Class Period). FAC ¶2. Plaintiffs al
These allegations fall into two general categories: (1) “reputation and qualification” allegations, asserting that Shkreli mislead investors regarding his reputation and qualifications to lead KaloBios by failing to disclose his alleged misconduct at Retrophin and MSMB, and through affirmative misstatements about his business experience, credibility, and trustworthiness; and (2) “KaloBios recovery and success” allegations, asserting that Shkreli misled investors through unrealistic statements touting KaloBios’ financial recovery, advancement potential and operational successes. See FAC ¶¶ 15, 54r-55, 57-58, 60-66, 68-69, 70-71, 74-76, 79, 82, 84.
To bring a private securities fraud action under Section 10(b) and Rule 10b-5, a plaintiff must establish: “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or-sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Lloyd v. CVB Financial Corp.,
A. Statements and Omissions Regarding Shkreli’s “Reputation and Qualification”
First, Shkreli argues that Plaintiffs’ claims arising from the “reputation and qualification” statements and omissions should be dismissed because they fail to satisfy-the element of reliance.
To plead reliance in a securities fraud'case, a class action plaintiff may rely on the “fraud-on-the-market presumption”'set forth in Basic v. Levinson,
However, because this presumption is based on the theory that the market was deceived by a defendant’s'misleading statements or omissions, the presumption may be rebutted where a'defendant can show that the truth had actually been made available to the market through a different source. See Provenz v. Miller,
Here, Shkreli acknowledges the high standard of proof required to show “truth-on-the-market,” but contends that the significant-media coverage of his alleged misconduct meets that standard here. Shkreli argues that because .information about his dubious reputation was already well-documented, in the press, and was therefore publicly available to the market prior to and during the Class Period, Plaintiffs are not entitled to a presumption of reliance under the “fraud-on-the-market” theory. The court agrees.
As discussed above, the court has taken judicial notice of four' news articles in support’'of Shkreli’s argument that information about the misconduct he ostensibly concealed or misrepresented was already publically available to the market at the time of his arrest on December 17, 2015. Supra-, see Exhs. 11-14, Buckley Decl, These articles cover Shkreli’s public termination from Retrophin and its subsequent lawsuit against him, identify a multitude of personal and professional accusations of misconduct, and confirm the existence of an ongoing criminal investigation into' his actions, among other things. Id. For example, on September 22, 2015, The New York Times published the article “Martin Shkreli, the Mercurial Mm Behind the Drug Price Increase That Went Viral,” which reported the following;
The board of Retrophin fired Mr, Shkre-li a year ago. In August Retrophin filed a federal lawsuit in New York accusing its former chief executive of breaching his duty of loyalty to the company. It accused Mr, Shkreli of arranging to pay off some angry investors in his hedge fund by having Retrophin enter into consulting agreements with them.
Exh. 11, Buckley Deck The article also included information that “[a] former portfolio manager at MSMB ... said in an affidavit early last year that he and his family were repeatedly harassed on social media by Mr, Shkreli in 2013.” Id,
And perhaps most pertinently, on September 13, 2015, Newsweek published its article, “Federal Prosecutors Target Martin Shkreli in a Criminal Investigation.” Exh. 13, Buckley Deck The Newsweek article contained extensive discussion of the criminal investigation into Shkreli, which it stated had been underway since 'at least January. Id. Newsweek wrote that “[t]he criminal investigation involves Retrophin, a public company where Shkreli served as an officer, director, and 10 percent owner of the outstanding stock before being ousted amid multiple allegations of misconduct.” Id. The article goes on to detail many of -the specific allegations against Shkreli, writing:
The inquiry, according to court records and people with knowledge of the inquiry, involves such a vast number of suspected crimes it is difficult to know where to start, A quick summary of the government’s theory: If there was money, Shkreli took it. If there were facts to be revealed, Shkreli hid them. If there were securities laws, Shkreli broke them.
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According to the court records and peo-pie with knowledge of the case, the allegations against Shkreli that are under investigation- involve insider trading, disguising the purpose of corporate payments for his benefit, defrauding shareholders by snatching business opportunities for himself, destruction of evidence, failure to ■ disclose material facts to shareholders and other potential crimes.
Id. Newsweek even included that after being notified of the investigation, Shkreli “invoked his Fifth ' Amendment right against self-incrimination because of the criminal case whenever his testimony has been sought'in the marly civil lawsuits filed against him about his business dealings.” ML
, Based on the content of these articles, as well as the credibility and wide circulation of their respective sources, the court agrees that the market was.aware of the information Plaintiffs accuse Shkreli of misrepresenting or failing to disclose. Any undisclosed .information that might have otherwise misled the market about Shkre-li’s reputation would not have done so here because such information had. already been substantively disseminated by the . press. As to Shkreli’s proactive statements referencing his trustworthiness, or touting his prior business ventures as “attributes” and “indicators of his professional competence” Plaintiffs argue that the “facts and circumstances” of Shkreli’s alleged misconduct while at MSMB and Retrophin “made clear that he and his cronies ... had been utterly unfit to.run KaloBios,” and therefore these statements were “materially false and misleading when made.” Opp. at 12-13. Assuming that these statements could be considered materially false and misleading, the market here \yould not have been misled because the “truth” — or
In response, Plaintiffs argue that even if the articles exposed some of the relevant information regarding Shkreli’s misconduct, the indictment and SEC Complaint that were made public at the time of his arrest “set forth extensive, previously undisclosed details as to MSMB and Retro-phin misconduct not discussed in the articles, Shkreli cites ... such as fraudulent schemes with outside legal counsel...” Opp. at 19 (emphasis in original). Plaintiffs conclude that the articles therefore could not have conveyed the misconduct to investors with the “degree of intensity and credibility sufficient to effectively counterbalance any misleading impression” created by his representations. Id. (citing In re Apple,
Plaintiffs argue that “Shkreli’s Motion also ignores the important distinction between an investigation, a fact referenced in the four articles he cites, versus a filed SEC complaint, filed indictments, an arrest, and termination as KaloBios CEO, which together served ás the alleged corrective event on December 17, 2015.” Opp. at 20 (emphasis in original). However, this distinction is largely irrelevant to the question of whether Shkreli misrepresented or omitted material facts prior to that daté. The statements and omissions at issue here would have occurred prior to Shkre-li’s indictment, arrest, and termination. As a result, to the extent that Shkreli had a duty to disclose the allegations of misconduct against him, the obligation would be to disclose the substance of the underlying misconduct allegations, not speculate as to the future consequences of such allegations. Because the criminal investigation, the indictment, and the arrest all arose from substantively the same allegations of misconduct against Shkreli, Plaintiffs’ attempt to distinguish between the market’s awareness the investigation versus its lack of awareness that the investigation would subsequently result in an indictment and arrest is unpersuasive.
While it is certainly true that KaloBios stock price suffered a dramatic hit as a result of Shkreli’s arrest, this is not itself evidence of fraud. A company’s stock price is almost certainly going to decline upon news that its CEO was arrested, regardless of whether the CEO had fraudulently misled the market. Plaintiffs’ theory appears to be that Shkreli’s arrest and the
Finally, Plaintiffs argue that, notwithstanding the civii and criminal misconduct allegations discussed by the articles, “those very same articles include [Shkre-li’s] strong denials of wrongdoing and his threats to counter-sue,” and thus are insufficient to rebut the “fraud on the market” presumption. Opp. at 18.' Plaintiffs cite Berry v. Valence Tech., Inc., where the court identified, a CEO’s public response refuting the at-issue allegations as a relevant consideration in finding, that there was no inquiry notice.
In light of the significant publicity garnered by the criminal investigation and related accusations of misconduct prior to Shkreli’s arrest on December 17, 2015, the court agrees that the market was aware of the information Plaintiffs accuse Shkreli of withholding or misrepresenting before any “corrective disclosure” occurred. Consequently, while a “truth-on-the-market” defense is a heavy burden at this stage of proceedings, the court finds that Shkreli has met that burden and rebutted the fraud-on-the-market presumption relied on by Plaintiffs here. Heliotrope,
Because Plaintiffs fail to satisfy the element of reliance, the court need not reach the question whether Shkreli actually had an obligation to disclose allegations of misconduct unrelated to KaloBios to the Ka-loBios shareholders. It merits noting that courts have been skeptical toward theories of liability based on broad duties to disclose allegations of misconduct, especially when the connection between the liability sought and the alleged misconduct is' attenuated. See e.g., Retail Wholesale & Dep’t Store Union Local 338Retirement
B. Statements Regarding KaloBios’ Financial Recovery and Promising Business Potential
The second category of statements Plaintiffs identify as false and misleading concern more specific representations regarding KaloBios’ financial recovery, advancement potential, and operational successes. See FAC ¶¶ 15, 55, 58. 61, 63, 66, 69, 71, 74, 76, 79, 82, 84. This includes statements like Shkreli’s comment that he will “give” KaloBios $100 million of funding necessary to advance its drug trials (¶¶ 11, 68(e)), his stated belief that.“I think we. will grow KBIO into a large company” (¶ 57), and press releases or interviews highlighting the “very promising” potential of its primary drug candidate, lenzilumab (¶¶ 11, 54(a), 60, 68(a)). Plaintiffs contend that these representations were so unrealistic in light of Shkreli’s prior misconduct that they amount to being knowingly false and misleading.
While these more specific statements do offer, in the court’s view, a potentially stronger basis for allegations that the market could have been misled by Shkreli, Plaintiffs do not actually allege why these statements were false, or plead specific facts that would suggest why an optimistic view of the company was patently misleading or disingenuous’. For instance, with respect to Shkreli’s remark that he will “give” KaloBios $100 million of funding in order to advance its drug trials, Plaintiffs do not allege that, at the time he made the comment, Shkreli could not follow through on this’ commitment. Similarly, Plaintiffs do not claim that lenzilumab was not a “promising” drug or that its trial would not have proceeded as planned, had Shkre-li not been arrested. The fact that Shkreli’s arrest prevented such plans from being realized does not' render public statements about them fraudulent if they were reasonable when made. Plaintiffs’ argument that the'plans were “unrealistic” is too speculative and vague to satisfy the pleading standard. While Plaintiffs may be correct that the long-term success of KaloBios was unrealistic, the reality is that Shkreli was arrested before proof of this theory had an opportunity to come to light. Accordingly, the court concludes that Plaintiffs have failed allege' a sufficient factual basis for their allegations that the “KaloBios recovery and success” statements were false or misleading. Accordingly, Shkreli’s Motion to Dismiss will be GRANTED with respect to claims these statements as well.
V. ORDER,
For the foregoing reasons, Shkreli’s Motion to Dismiss (Dkt. No 61) is GRAISTT-
IT IS SO ORDERED.
Notes
. Pursuant to Plaintiffs’ FAC, "MSMB” refers to an umbrella of affiliated investment companies co-founded by Defendant Shkreli and Marelc Biestek, including MSMB Capital LLC, MSMB Capital Management LLC, and MSMB Healthcare Management LLC. "Retrophin” refers to affiliated drug companies founded by Defendant Shkreli, including Retrophin, Inc, ánd Retrophin LLC. See FAC at 4, n. 1. The-court adopts these definitions for the purposes of this Motion.