United States: District Of Massachusetts Holds That Plaintiff Who Purchased Stock After Corrective Disclosure Lacks Standing To Pursue Putative Securities Class Action

Last Updated: October 8 2019
Article by Shearman & Sterling LLP

On September 23, 2019, Judge Denise J. Casper of the United States District Court for the District of Massachusetts denied class certification in a securities fraud action brought against a biopharmaceutical company (the “Company”) and several of its current and former officers and directors, and granted defendants’ motion for judgment on the pleadings in connection with plaintiff’s individual claim.  Karth v. Keryx Biopharmaceuticals, Inc., C.A. No. 16-11745-DJC (D. Mass. Sept. 23, 2019).  Plaintiff alleged that the Company misled investors about the number of entities that manufactured its FDA-approved drug and that its stock price declined when it revealed that it only had a single manufacturer, which was experiencing issues that affected the drug’s availability for sale.  The Court declined to certify the putative class, finding that plaintiff was an inadequate representative because the timing of his stock purchases made his claims atypical from those of the proposed class.  As to his individual claim, the Court granted defendants’ judgment on the pleadings, finding that plaintiff could not plead loss causation because the Company’s disclosures about the single manufacturer pre-dated the alleged stock drop by six months, and finding that plaintiff could not plead reliance because plaintiff purchased his shares two months after the curative disclosures.

Headquartered in Massachusetts, the Company sells an FDA-approved drug for the treatment of patients with chronic kidney disease.  In order to manufacture the drug, the Company must produce the active pharmaceutical ingredient and then convert it into tablet form.  The Company produced the active ingredient, but it engaged a third-party manufacturer to handle the conversion into tablet form.  In its public filings and various public statements from early 2013 through February of 2016, the Company allegedly referenced that it used multiple third-party manufacturers.  On August 1, 2016, the Company announced in a press release that it was halting the drug’s distribution until at least October 2016 due to a production issue with its contract manufacturer, and acknowledged on an investor conference call that it only had one manufacturer and that the manufacturer had been experiencing difficulties.  The value of the Company’s stock fell by 36% that same day. 

Plaintiff asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and SEC Rule 10b-5 on behalf of himself and a putative class of shareholders who bought the Company’s stock between May 8, 2013 and August 1, 2016 (the “Class Period”).  Defendants moved to dismiss on the ground that certain of the Company’s public filings during the Class Period had cured the alleged misrepresentations or omissions.  On July 19, 2018, the Court granted in part and denied in part defendants’ motion to dismiss, finding that plaintiff had stated claim in connection with alleged misstatements and omissions related to the number of manufacturers the Company had engaged to create the tablets.  Karth v. Keryx Biopharmaceuticals, Inc., C.A. No. 16-11745-DJC (D. Mass. July 18, 2019). 

Plaintiff moved for class certification under Rule 23.  Defendants opposed it and moved for a judgment on the pleadings, arguing for the first time that the Company made certain curative disclosures in February and April 2016 public filings, which stated that it had a “single source” for the manufacture of the tablets.  Based on these disclosures, defendants argued that plaintiff was not an adequate representative because he purchased shares in July 2016, which was months after the February and April 2016 curative disclosures.  In light of this timing, defendants argued that plaintiff was atypical and at odds with putative class members who purchased stock before the disclosures. 

The Court agreed with defendants, finding that, based on the timing of his stock purchases, plaintiff was an atypical class representative.  The Court explained that when plaintiff purchased shares in July 2016, he did so in a markedly different environment than other proposed class members who purchased shares before the disclosures.  Having found that the timing of plaintiff’s purchases make him atypical from those of the majority of proposed class members, the Court ruled that he lacked standing to bring claims on behalf of the proposed class and denied class certification.

As to plaintiff’s individual claims, the Court granted defendants’ motion for judgment on the pleadings because plaintiff failed to plead loss causation and reliance.  The Court explained that the February and April 2016 disclosures broke the causal link between the alleged misstatements and the drop in the share price in August 2016.  In addition, the Court held that plaintiff could not plausibly allege reliance because the Company had already disclosed that it had only one third-party manufacturer when he made his purchase in July 2016.  Finally, the Court denied plaintiff’s motion for leave to amend, finding that any amendment would be futile because he would be unable to plausibly allege the elements of reliance and loss causation.

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