On May 31, 2022, Judge Beth Labson Freeman of the Northern
District of California dismissed without prejudice a putative class
action asserting claims under the Securities Exchange Act against a
synthetic biology company and certain of its executives. Joseph
v. Precigen, Inc., No. 20-cv-06936-BLF (N.D. Cal. May 31,
2022). Plaintiff alleged that the company misrepresented the
efficiency and economic viability of its methane conversion
program. The Court held that plaintiff failed to adequately allege
scienter and failed to allege falsity with respect to certain
alleged misrepresentations; however, the Court granted leave to
replead.
With respect to falsity, the Court held that plaintiff's
allegations were sufficient with respect to challenged statements
regarding yield levels and the commercial viability of the methane
conversion program. Slip op. at 8-9. Such statements included that
the program was "in the money," had achieved
"commercially relevant yields," and had developed the
ability to "profitabl[y]" use natural gas. Id.
at 3. The Court rejected the company's argument that an SEC
order finding that those statements were inaccurate could not be
relied on to plead falsity, distinguishing this situation from
other cases in which allegations were drawn from mere complaints or
documents that did not contain factual findings. Id. at
8.
In addition, the Court held that plaintiff adequately alleged
falsity as to "general statements regarding a risk of
governmental investigations"—indicating that the company
"may" become subject to such investigations. Id.
at 4, 10. The Court found it "plausible" that such
statements gave a misleading impression of the company's
current state of affairs given that the company was already under
investigation by the SEC at that time. Id. at 10.
However, the Court held that plaintiff failed to adequately allege
falsity as to other challenged statements for which plaintiff
relied on confidential witness allegations. Id. at 9. The
Court noted that allegations regarding the company's failure to
meet internal deadlines and assessments of viability were "not
clearly within the expertise" of the confidential witnesses,
and allegations about "generalized 'challenges' facing
the ... program" were insufficient to show that statements
about the progress or viability of the program were false or
misleading. Id. Moreover, while plaintiff alleged that the
company's disclosures about the program's progress were
based on "cherry-picked" data, the Court explained that a
recent Ninth Circuit decision—addressed in our prior post—concluded that
allegations that data was "cherry-picked" were
insufficient without more because "we simply do not know what
the results would have been without the outlier data or what those
results would mean." Id. at 9 (citing In re
Nektar Therapeutics Sec. Litig., No. 21–15170, 2022 WL
1573821 (9th Cir. May 19, 2022)).
The Court also concluded that certain other alleged misstatements
were non-actionable puffery (such as describing the methane
conversion program as "a very breakthrough platform"),
protected forward-looking statements (such as that the company was
"working to create novel, highly engineered bacteria"),
or non-actionable statements of opinion (such as a statement that
one executive "personally believe[d]" that one
development represented "the most valuable biotechnology in
history"). Precigen, slip op. at 9-10.
With respect to scienter, the Court first determined that the
confidential witness allegations were insufficient to establish
scienter as to any of the individual defendants. As to two
executives, the Court noted, first, that the confidential witnesses
alleged "no direct interactions" and, second, that
allegations of "widespread knowledge" were insufficient
to plead scienter. Id. at 12. Regarding two other
executives, the Court emphasized that general allegations regarding
attendance at meetings, interactions with employees, or receipt of
certain reports lacked the requisite particularity. Id. at
12. Moreover, while the Court referred to allegations regarding
another executive as plaintiff's "strongest allegations of
scienter"—including regarding an "in-person
meeting" and that the executive was allegedly briefed on the
sources of the data being used in the company's public
statements—the Court concluded that they were still
"insufficiently specific or too indirect." Id.
at 12-13.
The Court also rejected plaintiff's theory of scienter based on
the "core operations" doctrine, which the Court
emphasized applies only in "rare circumstances where the
nature of the relevant fact is of such prominence that it would be
absurd to suggest that management was without knowledge of the
matter." Id. at 13. While plaintiff alleged that the
methane conversion program was "one of the company's
largest teams," that executives were kept informed about the
program, and that one executive had referred to the program as
"probably the most valuable biotechnology in history,"
the Court concluded that such allegations were insufficient because
the program was only one component of the company's operations
and plaintiff failed to allege facts showing that the program here
was one of those "rare circumstances" that justified
application of the core operations doctrine. Id. at
13-14.
In addition, the Court rejected plaintiff's motive theory of
scienter, based on alleged stock sales by executives, the
company's fund-raising and convertible note sales, the
company's acquisition of other companies using common stock,
and its losses and capitalization problems. Id. at 14.
While plaintiff argued that these allegations showed a motive to
inflate the company's stock price, the Court concluded that
such allegations "are insufficient to take [plaintiff's]
otherwise deficient scienter allegations over the line,
particularly without additional allegations indicating they were
suspicious." Id. at 14. The Court also noted that the
allegations based on stock sales were "particularly deficient
in light of the [company] stock purchases" those executives
made during the same period. Id.
Moreover, the Court rejected plaintiff's scienter argument as
to the statements regarding government investigations. While
plaintiff argued that it "defies credulity" that
defendants would not have known about the SEC inquiry at the time
of the alleged misstatements, the Court found allegations relating
to this theory to be "barebones" and "insufficient
at this stage, particularly in the context of [plaintiff's]
insufficient pleadings regarding scienter for the other challenged
statements." Id. at 15.
The Court also addressed plaintiff's loss causation
allegations, holding that plaintiff had adequately alleged loss
causation at this stage, concluding it was "plausible"
that investors could have "reasonably inferred" from at
least some of the alleged corrective disclosures that the company
had made false and misleading statements with respect to the
methane conversion program and the risk of government
investigations. Id. at 16-17.
Having concluded that plaintiff failed to adequately allege a
primary claim under the Exchange Act, the Court accordingly
dismissed plaintiff's "control person" claims against
the individual defendants. With respect to one executive, the Court
further explained that allegations regarding the executive's
ownership stake in and responsibilities at the company were
insufficient to establish control person liability without specific
factual allegations as to his involvement in the company's
"day-to-day affairs" or his role in preparing and
releasing the allegedly false or misleading statements.
Id. at 17-18.
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