In re Galectin Therapeutics, Inc. Securities Litigation

Citations: 157 F. Supp. 3d 1230; 2015 U.S. Dist. LEXIS 173767; 2015 WL 9647524Docket: CIVIL ACTION NO. 1:15-CV-29-SCJ

Court: District Court, N.D. Georgia; December 29, 2015; Federal District Court

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Galectin Therapeutics, Inc. and several individuals, including James C. Czirr and Rod D. Martin, have filed motions to dismiss the Consolidated Class Action Complaint (CCAC) brought by Lead Plaintiff Glyn Hotz, alleging violations of the Securities Exchange Act of 1934. The defendants argue for dismissal with prejudice under Federal Rules of Civil Procedure 12(b)(6) and 9(b), as well as the Private Securities Litigation Reform Act (PSLRA). 

The case began with Marissa Ballesteros filing a complaint on July 30, 2014, in Nevada, which was later consolidated with two other securities class actions against the same defendants. The venue was transferred to the Northern District of Georgia in January 2015. The CCAC, filed by Hotz on May 8, 2015, includes three counts alleging violations of Section 10(b) and Section 20(a) of the Exchange Act. Hotz claims to have suffered losses from his investment in Galectin shares during the class period from October 25, 2013, to July 28, 2014. 

Galectin, a Nevada corporation based in Georgia, focuses on developing therapies related to galectin proteins for cancer and liver diseases. The 10X Fund, which owns shares of Galectin, was co-founded by Czirr and Martin, both of whom held significant roles in Galectin’s management during the class period.

Traber held multiple executive roles at Galectin, including President and CEO, during the class period. Callicutt served as Chief Financial Officer, while Mauldin was a director and provided investment advice through Mauldin Economics, which employed various editors, including Patrick Cox, who focused on small-cap biotech research. On January 31, 2013, Galectin submitted an Investigational New Drug application for its drug candidate GR-MD-02, designed to treat fatty liver disease (NASH) with advanced fibrosis. Following this, on February 1, 2013, Galectin partnered with CTI Clinical Trial Services to conduct a Phase I clinical trial of GR-MD-02, starting patient enrollment in July 2013 after receiving FDA authorization.

On October 25, 2013, Galectin launched an at-the-market (ATM) offering for up to $30 million in stock, engaging MLV & Co. as the sales agent. By January 10, 2014, Galectin had sold 2,391,204 shares at an average price of $9.99, generating approximately $23.9 million in gross proceeds. A second ATM offering was initiated on March 21, 2014, with MLV again acting as agent, at a time when shares traded at an average of $15.31. By the end of 2014, Galectin reported issuing 217,622 shares from this offering, yielding around $1.2 million.

Throughout the class period, Galectin employed several stock promoters, including Acorn Management Partners, TDM Financial/Emerging Growth Corp., Cox, and The Dream Team/Mission IR, to promote its stock.

Stock promoters published articles regarding Galectin and its drug GR-MD-02, while the plaintiff claims Galectin failed to disclose its relationships with Dream Team, Cox, TDM, and Acorn, particularly regarding compensation paid to promoters and their economic interests in the company. Galectin released numerous press statements during the Phase I trial, coinciding with stock promotions and ATM offerings, leading to a substantial increase in share price from around $2 to $19. Following scrutiny from investment commentators regarding the use of compensated promoters, the stock price plummeted over 55% from $15.91 to $7.10 within a day. The plaintiff alleges that Galectin made false and misleading statements, asserting that it did not manipulate stock prices, which contradicts its SEC filings. Galectin claimed it had not engaged in actions to stabilize or manipulate share prices during its ATM offerings, yet the plaintiff points to various SEC forms and press releases as materially misleading for omitting the hiring of stock promoters. Both Galectin and the promoters have filed motions to dismiss the claims, and the court is now considering these motions after oral arguments.

A complaint may be dismissed if it fails to present a plausible claim for relief, as established by the Supreme Court in *Ashcroft v. Iqbal* and *Bell Atlantic Corp. v. Twombly*. The previous standard from *Conley v. Gibson* has been retired; now, a complaint must raise a right to relief above the speculative level, even if the facts are doubtful. Although Rule 8 of the Federal Rules of Civil Procedure does not require extensive factual details, it necessitates more than a mere assertion of harm. In cases involving securities fraud, the plaintiff must meet the heightened pleading requirements of Federal Rule of Civil Procedure 9(b), which demands specificity in alleging fraud, including details about the statements made, the timing and context of these statements, and the resulting consequences of the fraud. Additionally, the Private Securities Litigation Reform Act (PSLRA) imposes stringent requirements for pleading scienter, requiring facts that strongly suggest the defendant's required state of mind. The legal framework for securities fraud claims includes Section 10(b) of the Exchange Act and Rule 10b-5, which prohibit manipulative practices and deceptive statements in connection with the purchase or sale of securities. These rules define unlawful activities such as employing devices to defraud, making untrue statements of material facts, or engaging in practices that deceive investors.

To recover damages under section 10(b) of the Exchange Act and Rule 10b-5, a plaintiff must establish six elements: 1) a material misrepresentation or omission; 2) scienter; 3) a connection between the misrepresentation and a security transaction; 4) reliance on the misrepresentation; 5) economic loss; and 6) loss causation (Halliburton Co. v. Erica P. John Fund, Inc.). In Count I of the CCAC, the Plaintiff claims that Galectin, Callicutt, and Traber violated section 10(b) and Rule 10b-5(b) by making materially false statements and failing to disclose a fraudulent stock promotion scheme. Defendants allegedly misled investors by denying any manipulation of Galectin’s stock price. However, the Plaintiff’s reliance on stock promoters' articles is insufficient since the Supreme Court mandates that a defendant must have "made" the untrue statement to be liable, meaning they must have had ultimate authority over the content (Janus Capital Group, Inc. v. First Derivative Traders). Although the Plaintiff alleges collaboration between Defendants and stock promoters, there are insufficient allegations proving that Galectin had ultimate authority over the promoters' statements. Furthermore, the Plaintiff does not dispute the truthfulness of the statements in the stock promoters' articles and explicitly states that his claims are not based on those articles. The plaintiff has not adequately alleged that Defendants made untrue statements or omitted material facts. Additionally, section 17(b) of the Exchange Act requires that stock promoters disclose any consideration received for promoting a company's securities, emphasizing the need for transparency in communications regarding securities.

The duty to disclose in this case lies with stock promoters, not Defendants, as established by the statute. Imposing a disclosure duty on Defendants would conflict with the legislative intent to assign this responsibility to analysts. The Plaintiff has not provided sufficient factual allegations indicating that Defendants manipulated the company’s stock price or engaged in a fraudulent promotion scheme. While the Plaintiff claims Defendants employed stock promoters, these allegations do not substantiate a cause of action under Rule 10b-5(b). The securities laws permit issuers to compensate analysts for stock recommendations, as noted in Garvey v. Arkoosh, which emphasizes the need for disclosure regarding payment rather than prohibiting the practice itself. The purpose of stock promoters is to enhance the value of the company’s stock, which does not equate to impermissible manipulation by Defendants.

The Plaintiff's reliance on cases such as In re CytRx Corp. and In re Galena Biopharma is misplaced, as those cases involved more direct involvement and misleading practices by the defendants, unlike the current scenario where the Plaintiff merely alleges that Galectin used stock promoters without disclosing this to investors. Thus, the Plaintiff fails to establish a claim under Rule 10b-5(b) due to three main reasons: Defendants were not the authors of the articles in question, there was no obligation to disclose the retention of stock promoters, and Defendants did not engage in prohibited actions affecting stock price.

Furthermore, Count II, which alleges violations of Section 10(b) and Rules 10b-5(a) and (c), distinguishes itself from Rule 10b-5(b). Rules 10b-5(a) and (c) address schemes to defraud and deceptive business practices, respectively, and cannot rely on the same misrepresentations or omissions that underpin a Rule 10b-5(b) claim, as clarified by the Ninth Circuit in WPP Luxembourg Gamma Three Sarl v. Spot Runner.

The Ninth Circuit clarified that liability under Rule 10b-5(a) or (c) for misrepresentations and omissions requires the fraudulent scheme to involve conduct beyond the misrepresentations or omissions themselves. In Count II of the CCAC, the Plaintiff reiterates all allegations from prior paragraphs but does not provide distinct factual bases separate from Count I. Although the Plaintiff claims to have alleged separate conduct—such as engaging stock promoters and coordinating articles to inflate stock value—these actions are essentially omissions related to the promotion of the stock, failing to establish a valid claim under Rules 10b-5(a) and (c).

Count III alleges violations under Section 20(a) of the Exchange Act, which holds individuals who control others liable for their violations, provided the controlling person did not act in good faith. The Eleventh Circuit requires a plaintiff to demonstrate primary liability under Section 10(b), control over the corporation’s affairs, and influence over the specific policy causing the violation. The Court found that the Plaintiff did not establish primary liability under Section 10(b), negating any potential secondary liability under Section 20(a).

Finally, the Plaintiff requests leave to amend the CCAC if the Court identifies any deficiencies, referencing Rule 15(a)(2), which allows amendments under specific conditions.

A party may amend its pleading after a twenty-one-day period only with the opposing party’s written consent or the court’s permission, which should be granted liberally when justice requires, according to Federal Rule of Civil Procedure 15(a)(2). The Eleventh Circuit emphasizes that Rule 15(a) aims to ensure claims are heard on their merits, and courts should generally allow amendments unless there is undue delay, bad faith, prejudice to the opposing party, or futility of the amendment. Futility occurs if the amended complaint would still be subject to dismissal or summary judgment. The court found that the plaintiff failed to properly raise the issue of amendment and that any request for leave to amend would be futile, as the amended complaint did not state a viable claim under the Exchange Act. Consequently, the motions to dismiss filed by various defendants were granted, and the case was dismissed with prejudice. The court acknowledged that while it accepts the factual allegations as true, securities fraud claims require specific pleading standards that the plaintiff did not meet. The court criticized the complaint as a "shotgun pleading," which is defined as incorporating prior allegations into all claims, causing confusion and inefficiency in judicial proceedings.