United States: In Action Asserting Parallel Securities Act And Exchange Act Claims, Massachusetts District Court Dismisses IPO-Based Securities Act Claims With Prejudice For Failure To Plead A Misstatement, And Post-IPO Exchange Act Claims Without Prejudice For Lac

On August 23, 2018, Judge F. Dennis Saylor IV of the United States District Court for the District of Massachusetts dismissed the claims asserted in a putative class action against ReWalk Robotics and its officers, directors, and IPO underwriters under the Securities Act of 1933 (“Securities Act”) for misrepresentations made in a registration statement with prejudice, but dismissed the claims asserted under the Securities Exchange Act of 1934 (“Exchange Act”) for alleged post-IPO misstatements without prejudice.  Yan v. ReWalk Robotics Ltd., No. 17 Civ. 10169, slip op. (D. Mass. Aug. 23, 2018), ECF No. 107.

ReWalk Robotics is a medical device company that manufacturers devices to assist individuals with spinal cord injuries.  Prior to the IPO, the U.S. Food and Drug Administration approved a ReWalk device for marketing, but ordered the company to conduct a post-market surveillance study to determine the product’s risks.  ReWalk’s IPO registration statement stated that the company’s device was a “breakthrough product,” but, according to plaintiff, failed to disclose that the FDA had ordered the post-market surveillance study because the device posed a threat of serious injury or death.  Plaintiff further alleged that, two weeks after the IPO, the FDA informed the company that its proposed study was deficient.  The company responded to the FDA in November 2014, but the FDA also found this submission to be deficient.  In September 2015, following further communications on the issue, the FDA advised the company that, as a result of the failure to address the FDA’s concerns, the product was “misbranded.”  When the FDA’s September 2015 letter was publicly released in March 2016, the company’s stock dropped.  Plaintiff alleged that, from February 2015 through February 2016, the company had made various public statements about the product’s prospects but did not disclose its interactions with the FDA about the device.

With respect to the Securities Act claims regarding the post-market surveillance study, the Court held that plaintiff had not identified any material facts omitted from the registration statement, and had mischaracterized the company’s pre-IPO correspondence with the FDA in trying to argue that the registration statement was misleading.  The Court observed that various statements the company made concerning “compelling data” about its “breakthrough” product were non-actionable puffery because they were unquestionably subjective, optimistic statements that a reasonable investor would not consider material.  The Court also noted that the company’s expressed intentions to conduct further clinical studies concerning its product were forward-looking statements that fell within the safe harbor of the Private Securities Litigation Reform Act (“PSLRA”) because they concerned management’s plans and objectives for future operations.  Finally, the Court found that the company had appropriately detailed the regulatory risks that might be associated with an FDA determination that the company’s proposals were deficient.  Slip op. at 18-22.

As to plaintiff’s Exchange Act claims regarding the company’s post-IPO statements, the Court held plaintiff lacked standing because he had exclusively purchased company stock in the IPO.  Although the Court recognized that there was authority holding that a lead plaintiff in an action subject to the PSLRA need not have standing to bring every claim available under the securities laws, id. at 24 (citing Hevesi v. Citigroup Inc., 366 F.3d 70, 82 (2d Cir. 2004)), it held that principle could not save the case at bar because plaintiff lacked “standing to sue on any remaining claim,” given the Court’s dismissal of the Securities Act claim.  Id.

The Court also noted that a line of Massachusetts district court cases suggested that class representatives may have standing to assert Exchange Act claims arising from statements made after their share purchase date “as long as the statements allegedly made were in furtherance of a common scheme to defraud.”  Id. at 23.  But it was unclear, the Court held, whether that precedent could apply, given that the complaint disclaimed that the Securities Act claims relied on the Exchange Act allegations and plaintiff’s counsel had argued that the case concerned “two separate classes”—one for the Securities Act claims and one for the Exchange Act claims.  Id.

Accordingly, and in light of the lack of briefing on the issue, the Court dismissed the Exchange Act claims without prejudice and permitted plaintiff to file supplemental briefing on the standing issue and/or to seek the appointment of a substitute or supplemental lead plaintiff.

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