Warshaw v. Xoma Corp., Nos. 94-16271

CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)
Writing for the CourtPREGERSON
Citation74 F.3d 955
Decision Date08 January 1996
Docket Number94-16297,Nos. 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.

Page 955

74 F.3d 955
64 USLW 2528, 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.
Nos. 94-16271, 94-16297.
United States Court of Appeals,
Ninth Circuit.
Submitted Jan. 8, 1996. *
Decided Jan. 25, 1996.

Page 956

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.

Page 957

PREGERSON, Circuit Judge:

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.

BACKGROUND

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.

Page 958

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

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. 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...

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  • Sec. & Exch. Comm'n v. Goldstone, No. CIV 12-0257 JB/GBW
    • United States
    • United States District Courts. 10th Circuit. District of New Mexico
    • August 22, 2015
    ...facts within the Defendants' possession contradicted their optimism. See SEC Goldstone Response at 24 (citing Warshaw v. XOMA Corp., 74 F.3d 955, 959-60 (9th Cir. 1996)).Page 343 The SEC asserts that Goldstone and Simmons acknowledged that they expected more margin calls and that large marg......
  • In re Immune Response Securities Litigation, No. 01CV1237JWMC.
    • United States
    • United States District Courts. 9th Circuit. United States District Court (Southern District of California)
    • June 7, 2005
    ...not disagree that the challenged statements were not misleading should the district court dismiss under 12(b)(6)." Warshaw v. Xoma Corp., 74 F.3d 955, 959 (9th (iv) Whether Plaintiffs Adequately Allege Falsity and Scienter Defendants challenge Plaintiffs' claims on elements one and three. S......
  • U.S. v. Jenkins, Nos. 09–10109
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • January 25, 2011
    ...regarding a company's financial condition is material to investment.” Reyes, 577 F.3d at 1076; see also Warshaw v. Xoma Corp., 74 F.3d 955, 959–60 (9th Cir.1996) (statements failing to disclose concerns regarding the safety of a product were material). A reasonable investor would have wante......
  • Leisnoi, Inc. v. Stratman, No. 97-35775
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • September 8, 1998
    ...on Kodiak Island. Because we are reviewing a Rule 12(b)(6) dismissal, we must accept this allegation as true. See Warshaw v. Xoma Corp. 74 F.3d 955, 957 (9th 7 Leisnoi urges the court to rely on another canon of statutory construction. According to Leisnoi, because Congress designed ANCSA f......
  • Request a trial to view additional results
495 cases
  • Sec. & Exch. Comm'n v. Goldstone, No. CIV 12-0257 JB/GBW
    • United States
    • United States District Courts. 10th Circuit. District of New Mexico
    • August 22, 2015
    ...facts within the Defendants' possession contradicted their optimism. See SEC Goldstone Response at 24 (citing Warshaw v. XOMA Corp., 74 F.3d 955, 959-60 (9th Cir. 1996)).Page 343 The SEC asserts that Goldstone and Simmons acknowledged that they expected more margin calls and that large marg......
  • In re Immune Response Securities Litigation, No. 01CV1237JWMC.
    • United States
    • United States District Courts. 9th Circuit. United States District Court (Southern District of California)
    • June 7, 2005
    ...not disagree that the challenged statements were not misleading should the district court dismiss under 12(b)(6)." Warshaw v. Xoma Corp., 74 F.3d 955, 959 (9th (iv) Whether Plaintiffs Adequately Allege Falsity and Scienter Defendants challenge Plaintiffs' claims on elements one and three. S......
  • U.S. v. Jenkins, Nos. 09–10109
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • January 25, 2011
    ...regarding a company's financial condition is material to investment.” Reyes, 577 F.3d at 1076; see also Warshaw v. Xoma Corp., 74 F.3d 955, 959–60 (9th Cir.1996) (statements failing to disclose concerns regarding the safety of a product were material). A reasonable investor would have wante......
  • Leisnoi, Inc. v. Stratman, No. 97-35775
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • September 8, 1998
    ...on Kodiak Island. Because we are reviewing a Rule 12(b)(6) dismissal, we must accept this allegation as true. See Warshaw v. Xoma Corp. 74 F.3d 955, 957 (9th 7 Leisnoi urges the court to rely on another canon of statutory construction. According to Leisnoi, because Congress designed ANCSA f......
  • Request a trial to view additional results

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