Battle Constr. Co. v. Invivo Therapeutics Holdings Corp., Civil Action No. 14–13180–RGS.

• Decision Date: 03 April 2015
• Docket Number: Civil Action No. 14–13180–RGS.
• Citation: 101 F.Supp.3d 135
• Parties: BATTLE CONSTRUCTION CO., INC., individually and on behalf of all others similarly situated v. INVIVO THERAPEUTICS HOLDINGS CORP. and Frank Reynolds.
• Court: U.S. District Court — District of Massachusetts

101 F.Supp.3d 135

BATTLE CONSTRUCTION CO., INC., individually and on behalf of all others similarly situated

v.INVIVO THERAPEUTICS HOLDINGS CORP. and Frank Reynolds.

Civil Action No. 14–13180–RGS.

United States District Court, D. Massachusetts.

Signed April 3, 2015.

Thomas G. Shapiro, Shapiro Haber & Urmy LLP, Christopher A. Duggan, Smith Duggan Buell & Rufo LLP, Boston, MA, for Battle Construction Co., Inc.

Michael G. Bongiorno, Wilmer Cutler Pickering Hale and Dorr LLP, New York, NY, Zachary C. Kleinsasser, Greenberg Traurig, LLP, Andrew S. Dulberg, James W. Prendergast, Peter A. Spaeth, Wilmer Hale LLP, Richard J. Rosensweig, Barbara L. Moore, David M. Zucker, Derek B. Domian, Matthew P. Horvitz, Goulston & Storrs, PC, Boston, MA, for InVivo Therapeutics Holdings Corp. and Frank Reynolds.

MEMORANDUM AND ORDER ON DEFENDANTS' MOTION TO DISMISS

STEARNS, District Judge.

This is a federal securities class action brought on behalf of purchasers of common stock of defendant InVivo Therapeutics Holdings Corp. during the period from April 5, 2013, through August 26, 2013. Lead plaintiff Edmond Ganem alleges that InVivo intentionally misrepresented in a company press release the conditions imposed by the Food and Drug Administration (FDA) in approving a first-in-human clinical study of InVivo's biopolymer scaffold spinal injury repair product. The Amended Complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. InVivo and individual defendant Frank Reynolds move to dismiss both counts pursuant to Fed.R.Civ.P. 12(b)(6)for failure to state an actionable claim.

BACKGROUND

InVivo is a Massachusetts-based biotechnology company that seeks innovative treatments for spinal cord injuries

. Defendant Frank Reynolds served as InVivo's Chairman, Chief Executive Officer, and Chief Financial Officer until August 22, 2013. On April 4, 2013, InVivo announced through a press release that FDA had designated its biopolymer Neuro–Spinal Scaffold as a Humanitarian Use Device.¹By the end of the day, InVivo stock closed at $2.75 a share, up 16 percent from the previous day's closing price of $2.36. Trading volume rose to 683,500 shares, compared to an average 71,000 shares over the previous three trading days.

On April 5, 2013, prior to the market opening, InVivo issued a second press release announcing that the FDA had additionally approved an Investigational Device Exemption²for a five-patient pilot study of the Neuro–Spinal Scaffold. The press release stated that InVivo “intend[ed] to commence a first-in-man clinical study in the next few months” and that it “expect[ed] the study to occur over approximately 15 months.” Am. Compl. ¶ 22. Reynolds was quoted in the press release as saying that “we expect to have all data to the FDA by the end of 2014.”Id.¶ 23. InVivo stock closed at $2.80 a share on April 5, 2013, trading at a volume of 504,900 shares. On the following trading day, April 8, 2013, InVivo stock closed at $3.19 a share with a volume of 1,333,800 shares, and continued to rise over the next month.

On May 9, 2013, in a press release reporting InVivo's first quarter financial results, Reynolds announced that that because InVivo stock “has appreciated significantly since [obtaining FDA approval for the clinical study, InVivo will] call investor warrants that will provide up to $16.1 million of equity capital, but more importantly will remove an accounting liability that has been an impediment to up-listing to a national securities exchange.” Id.¶ 30. InVivo also iterated that “[it] expect[ed] to commence the study in mid–2013 and submit data to the FDA by end of 2014.” Id.¶ 31.

On June 4, 2013, InVivo reported that the call period, which ended on June 3, 2013, had yielded the expected $16.1 million in additional capital. This combined with a warrant exchange offer completed on May 17, 2013, resulted in the elimination of a $24.6 million liability on InVivo's balance sheet. Reynolds was quoted in the press release as saying that “[w]ith the [ ] elimination of the $24.6 million warrant liability from our books, the last major obstacle to up-listing to a national securities exchange has been removed. We expect that an up-listing to a national security exchange will increase liquidity and unlock inherent value in our stock.” Id.¶ 33.

On August 27, 2013, before the market opened, InVivo's new management team³announced in a press release that it would be unable to complete the clinical trial within the originally contemplated 15 months.

Under the conditions of the FDA's approval of the Investigational Device Exemption, the five-person pilot trial will be staggered such that each patient will be followed for three months prior to requesting approval to enroll the next patient. Because the Company must obtain FDA approval to enroll each subsequent patient, the Company anticipates that from the date of the first enrolled patient, it will take at least 21 months to complete enrollment.

Id.¶ 36. By the end of the day, InVivo stock fell from $3.45 to $2.07 a share, trading on a volume of 4,486,500 shares. The following day, the price fell further to $1.71 per share, with a volume of 3,658,000 shares.

In November of 2013, InVivo stated in a press release that it expected to enroll the first patient in the clinical trial during the first quarter of 2014. However, a month later, InVivo disclosed that it would need additional time to supply revised study protocols, supporting materials, and contracts to the six sites where the clinical study was to be undertaken, and that the chosen sites would require from 4 to 12 weeks to review and finalize the contracts. In March of 2014, the first patient enrollment was again deferred to the second quarter of 2014. In April of 2014, InVivo further disclosed that the host sites would require additional surgical training with the Neuro–Spinal Scaffold before patient enrollment could begin. InVivo ultimately enrolled its first clinical study patient in October of 2014.

In the Amended Complaint, Ganem alleges that InVivo in April and May of 2013 publicly embraced an impossibly optimistic timeframe in which to complete the clinical trial because the company was in dire financial straits and desperate for an infusion of capital. Ganem alleges that InVivo was bleeding cash in the Spring of 2013 and had so little in reserve that one analyst predicted it had only a year left on the clock before depleting all of its available funds. Ganem also alleges that Reynolds was personally motivated to misrepresent the scope of the permission that the FDA had given for the clinical study to reap the profits of from InVivo's artificially inflated stock. Prior to April 5, 2013, and through June 13, 2013, with a two-day exception, Reynold sold 4,250 shares of InVivo common stock daily. After June 13, 2013, Reynold increased his sale of InVivo stock to 12,000 shares daily.

Battle Construction Co., Inc. brought this purported class action lawsuit on July 31, 2014. On October 7, 2014, the court appointed Ganem as the lead plaintiff. He filed the Amended Complaint on October 30, 2014. Defendants moved to dismiss under the Private Securities Litigation Reform Act of 1995 (PSLRA) on December 12, 2014. The court heard oral argument on the briefs on March 24, 2015.

DISCUSSION

Section 10(b) of the Securities Exchange Act forbids

(1) the “use or employ[ment] ... of any ... deceptive device,” “in connection with the purchase or sale of any security,” and (3) “in contravention of” Securities and Exchange Commission [ (SEC) ] “rules and regulations.” 15 U.S.C. § 78j(b). Commission Rule 10b–5 forbids, among other things, the making of any “untrue statement of a material fact” or the omission of any material fact “necessary in order to make the statements made ... not misleading.” 17 C.F.R. § 240.10b–5 (2004).

Dura Pharm., Inc. v. Broudo,544 U.S. 336, 341, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005). Under the PSLRA, to make out a section 10(b) claim, “plaintiffs [must] state with particularity both the facts constituting the alleged violation, and the facts evidencing scienter, i.e., the defendant's intention ‘to deceive, manipulate, or defraud.’ ” Tellabs, Inc. v. Makor Issues & Rights, Ltd.,551 U.S. 308, 313, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007), quoting Ernst & Ernst v. Hochfelder,425 U.S. 185, 194, and n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). “The effect of [PLSRA's pleading requirement] is to embody in the Act itself at least the standards of Rule 9(b), Fed.R.Civ.P.” Greebel v. FTP Software, Inc.,194 F.3d 185, 193 (1st Cir.1999). Under this heightened pleading standard, “[a] complaint will survive ... only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” Tellabs,551 U.S. at 324, 127 S.Ct. 2499.

Defendants contend that the challenged press releases contain non-actionable forward-looking statements falling under the protections of the “bespeaks caution” doctrine. The “bespeaks caution” doctrine “embodies the principle that when statements of ‘soft’ information such as forecasts, estimates, opinions, or projections are accompanied by cautionary disclosures that adequately warn of the possibility that actual results or events may turn out differently, the ‘soft’ statements may not be materially misleading under the securities laws.” Shaw v. Digital Equip. Corp.,82 F.3d 1194, 1213 (1st Cir.1996). Defendants rely on the press releases' use of predictive verbs such as “intends to,” “plan,” and “expects,” and the cautionary statements in the press releases themselves and in InVivo's Form 10–K Annual Reports to the SEC. The April 5 press release specifically cautions that statements relating to

the expected approval of the FDA to conduct human clinical trials for the Company's products, the expected commencement date of any approved human clinical trials, the expected size of the pilot study, the expectation that the

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