Warshaw v. Xoma Corp.
| Decision Date | 08 January 1996 |
| Docket Number | 94-16297,Nos. 94-16271,s. 94-16271 |
| Parties | , Fed. Sec. L. Rep. P 99,013, 96 Cal. Daily Op. Serv. 525, 96 Daily Journal D.A.R. 847 Regina WARSHAW and John D. Kaufman, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. XOMA CORPORATION; Steven C. Mendell, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Eric A. Isaacson, Milberg, Weiss, Bershad, Hynes & Lerach, San Diego, California, Reed R. Kathrein, Milberg, Weiss, Bershad, Hynes & Lerach, San Francisco, California, Alan R. Plutzik, Gold & Bennett, San Francisco, California, and Irving Malchman, Kaufman, Malchman, Kirby & Squire, New York City, for plaintiffs-appellants.
Anthony I. Fenwick, Latham & Watkins, San Francisco, California and Laurence A. Silverman, Cahill, Gordon & Reindel, New York City, for defendants-appellees.
Appeals from the United States District Court for the Northern District of California.
Before: LAY, ** GOODWIN, and PREGERSON, Circuit Judges.
This is a class action brought under Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), and Rule 10b-5 promulgated by the Securities and Exchange Commission, 17 C.F.R. Sec. 240.10b-5. The district court allowed plaintiffs to amend their complaint three times and then dismissed the third amended complaint (the Complaint) under Fed.R.Civ.Pro. 12(b)(6) for failure to state a claim upon which relief can be granted.
We review a district court's 12(b)(6) dismissal of a federal securities claim de novo. Holden v. Hagopian, 978 F.2d 1115, 1118 (9th Cir.1992). Our review is limited to the contents of the complaint. Argabright v. United States, 35 F.3d 472, 474 (9th Cir.1994). We take as true all allegations of material fact stated in the complaint and construe them in the light most favorable to the nonmoving party. National Wildlife Federation v. Espy, 45 F.3d 1337, 1340 (9th Cir.1995).
We have jurisdiction under 28 U.S.C. Sec. 1291. We reverse and remand.
For the purposes of reviewing this 12(b)(6) dismissal, we relate the facts in this case as stated in the Complaint.
Xoma Corporation is a biotech company that develops and produces protein therapeutic pharmaceuticals based on DNA technology. Complaint pp 6, 14. Steven Mendell is Xoma's chief executive officer. Complaint p 7. Before 1992, the United States Food and Drug Administration (FDA) had never approved any Xoma-developed drugs. As a result, Xoma had never made a profit on its research. Complaint p 15. Xoma's financial success depended on FDA approval of the drug "E5." Complaint pp 16-17, 25-26. According to Xoma, E5 is "an anti-endotoxin monoclonal antibody designed to treat gram-negative sepsis, an acute illness that is a major cause of death and serious disease in hospitalized patients." Appellee's Brief at 6; see Complaint p 6. Prompt FDA approval of E5 in 1992 would have allowed Xoma to capture the lucrative sepsis-treatment market. Complaint pp 24-25.
Plaintiffs represent a class of persons who purchased Xoma common stock between March 2, 1992 and June 3, 1992. Complaint p 5. During this period, plaintiffs assert that Xoma made repeated assurances that FDA approval of E5 was "imminent." Complaint p 2. The Complaint asserts that Xoma intentionally made these reassuring public statements even after serious doubts were raised about E5's effectiveness and the chances for prompt FDA approval. Complaint pp 34-35. Xoma's reassurances about E5, according to the Complaint, catalyzed a rapid rise in Xoma share prices as stock analysts and the press reacted positively to Xoma's confidence that E5 would be approved. Complaint pp 39-42. An abbreviated chronology of the events as stated in the Complaint is as follows.
On March 2, 1992, a securities analyst for Oppenheimer and Co., Inc., Jeffrey Casdin, reported that there was "no hope for any approval of E5." Complaint p 34. Casdin based his report on his examinations of data from two "Phase III" clinical studies of E5 that had been presented to the FDA advisory committee on September 4, 1991. He reported a disturbing possibility that "E5 actually increases mortality in a large percentage of gram-negative sepsis patients." Complaint p 34. Casdin also expressed doubts on whether "the FDA would allow a meta-analysis combining this [second Phase III] study with the previous Phase III study to overcome a glaring safety issue." Complaint p 34.
On the same day, Xoma responded to Casdin's criticisms over Dow Jones News Wire. Dr. Patrick Scannon, then President of Xoma and Vice Chairman for scientific and medical affairs, attacked Casdin's report as "scientifically wrong" and "irresponsible." Complaint p 35. He allayed shareholders fears about FDA approval, stating "everything is going fine." Complaint p 35.
On April 14, 1992, Xoma issued a press release that announced that the FDA had rejected the first Phase III study of E5. Complaint p 37. This announcement triggered a downward slide in Xoma stock price does not in any way imply a delay or setback in the agency's review of E5. In fact, we are encouraged by the progress FDA is making in its review.... When the two trials are combined, we believe the safety and effectiveness of E5 is clearly demonstrated.
Complaint p 37. On the same day, CEO Mendell and Dr. Scannon issued a series of statements to reassure the market. Mendell stated that the market's "concerns are unfounded; we think the market misunderstood the earlier announcement and overreacted to it." Complaint p 37. Scannon announced that the negative news
Complaint p 37. Mendell also told Reuters news service that the FDA's notification "shows positive forward progress." Complaint p 37. On May 5, 1992, Mendell made similar optimistic statements regarding the safety of E5 and the "positive forward progress" of the FDA review. Complaint p 40; see generally Complaint pp 37-43.
The market responded favorably to Xoma's assurances that E5 was safe, effective and that FDA approval of the drug was "imminent." Complaint p 43. Based on these statements and information from Xoma, other securities analysts began to give favorable evaluations of Xoma stock. Complaint pp 43-43C. These endorsements resulted in an upward movement in Xoma stock price. Xoma stock rose to a high of 23 points on May 22, 1992. Complaint p 39B. Part of this rise in the value of Xoma stock was attributable to the analysts' reports that E5 would be approved by the FDA. Complaint pp 43B-43C.
On June 4, 1992, the FDA denied approval of E5 because it found the Phase III clinical studies to be inconclusive. Mendell issued a statement reported over Dow Jones News Wire that the FDA had advised Xoma that "based on their review, they felt there wasn't sufficient efficacy." Complaint p 45. On this news, Xoma stock plummeted and lost twenty-four percent of its value. It was the most actively traded NASDAQ stock for that day. Complaint p 47. On June 11, Xoma announced that the FDA required additional information and analyses; this process would delay approval for months if not years. Complaint p 48. Delayed approval greatly diminished Xoma's chances of capturing the sepsis-treatment market. Xoma was trading at 6 points per share when the Complaint was filed. Complaint p 48.
The Complaint alleges in Count I that Xoma and CEO Mendell knew during this course of events that there was no chance for timely FDA approval of E5. Complaint pp 51-54. The Complaint asserts that Xoma's statements and failure to inform the public of shortcomings in its E5 analyses, when taken in context, were part of an intentional and fraudulent omission of material information. Complaint pp 52-54. In short, the Complaint asserts that Xoma manipulated the market by intentionally issuing the "false and misleading representations and omissions described above." Complaint p 53.
The district court dismissed the Complaint with prejudice. The court explained that the Complaint failed to allege facts sufficient to state a claim under section 10(b) and rule 10b-5. Plaintiffs now appeal.
Defendants argue that we should affirm the dismissal on two independent grounds: (1) the Complaint does not meet 12(b)(6) requirements for stating a claim under the federal securities laws; and (2) the Complaint fails to meet Fed.R.Civ.Pro. 9(b) pleading requirements. We address each argument in turn.
Our recent decision in Fecht v. The Price Co., 70 F.3d 1078 (9th Cir.1995), clarifies the standard to be applied by the trial court in deciding a 12(b)(6) motion to dismiss a federal securities claim. 1 Fecht controls the disposition of this case.
In Fecht, the plaintiffs asserted in their complaint that a "mix" of statements and Here, the district court decided that the Complaint failed to allege that Xoma had made false or misleading statements. The district court rejected the plaintiffs' argument that Xoma's comments, taken as a whole and in context, misled Xoma shareholders. But if we construe the facts alleged in the Complaint in the light most favorable to plaintiffs, under Fecht, the Complaint survives a 12(b)(6) motion.
omissions by securities analysts and Price officials misrepresented the actual financial position of the company. 70 F.3d at 1081. These misrepresentations, the Fecht plaintiffs argued, were fraudulent because they gave Price shareholders the false impression that Price was financially strong. Id. at 1080. Specifically, stock analysts and Price officials issued optimistic statements about Price's future, even though a truthful analysis of the company's financial position indicated otherwise. Id. at 1080-81. We explained that even optimistic statements, when taken in context, might constitute a basis for a claim under section 10(b) and rule 10b-5. Id. at 1080
Plaintiffs allege in the Complaint that Xoma knew, based on its clinical studies, that...
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