Court: District Court, D. Massachusetts; August 9, 2016; Federal District Court
This legal memorandum addresses a motion to dismiss a putative class action lawsuit against Zafgen, Inc. and its CEO, Thomas E. Hughes, for alleged violations of the Securities Exchange Act and SEC Rule 10b-5. The lead plaintiffs claim that Zafgen's misleading statements about its anti-obesity drug, Beloranib, led to artificially inflated stock prices, causing harm when the truth was revealed. Specifically, the plaintiffs allege that Zafgen failed to disclose four adverse events (AEs) during a Phase II trial, instead of the two serious AEs disclosed, and that the company acted with scienter—intent to defraud or recklessness—by disregarding the known risks associated with the drug.
The lawsuit follows a significant stock drop after Zafgen announced a patient's death in a Phase III trial and revealed additional undisclosed AEs. The defendants have moved to dismiss, arguing that the complaint lacks plausible allegations of actionable misrepresentations or omissions and fails to show a strong inference of scienter. They assert that a defendant cannot be found liable if they lacked the information necessary to recognize the need for disclosure at the time of their statements, as established by First Circuit precedent regarding securities laws.
The complaint fails to meet the heightened pleading standard of the Private Securities Litigation Reform Act (PSLRA) regarding scienter, even if it plausibly alleges material misrepresentation or omission. The allegations of superficial thrombotic adverse events (AEs) during the ZAF-201 trial gained significance only after a patient death in a later trial, but the complaint cannot rely on hindsight to assert fraud. It lacks particularized facts demonstrating that the defendants had necessary information at the time to disclose the superficial AEs or that they intended to withhold such information. There are no specific allegations, such as confidential sources or internal communications, indicating that CEO Thomas E. Hughes knew or acted recklessly regarding the risks of thrombotic AEs in future trials. Additionally, the circumstantial evidence presented—comprising scientific literature and routine insider stock sales—does not adequately support a strong inference of fraudulent intent or recklessness. Consequently, the defendants' motion to dismiss the case will be granted.
Zafgen, Inc., a biopharmaceutical company focused on obesity and metabolic disorders, conducted multiple clinical trials for its sole product candidate, Beloranib. The lead plaintiffs purchased shares during the class period from June 19, 2014, to October 16, 2015. In the ZAF-201 trial, which involved 160 obese patients, four thrombotic AEs occurred, but the complaint does not assert that Beloranib caused these events, nor has a specific cause been identified.
In spring 2014, following the ZAF-201 trial, Zafgen prepared for its IPO, disclosing in its April 18 SEC Form S-1, signed by Hughes, that the ZAF-201 study assessed Beloranib's impact on cardiovascular disease biomarkers in severely obese patients. The findings suggested that Beloranib did not increase cardiovascular disease risk and might reduce it. This disclosure was reiterated in nine subsequent filings, and prior to October 16, 2015, Zafgen reported no thrombotic adverse events from Beloranib trials apart from two serious adverse events (AEs) in ZAF-201.
Zafgen also acknowledged in various filings the potential for significant setbacks in late-stage clinical trials despite earlier positive results, citing the possibility of undisclosed serious AEs until FDA submissions become public. The company expressed uncertainty regarding the impact of subsequent disclosures of serious AEs on its stock price.
In October 2015, Zafgen's stock price fell sharply after the announcement of a patient death in its Phase III trial of Beloranib for Prader-Willi Syndrome. The company reported the death, with details still unknown, and confirmed it was in discussion with the FDA about the implications for the trial. Zafgen expressed its commitment to patient safety but did not disclose whether the deceased patient had received Beloranib or a placebo. On October 16, Zafgen announced that the FDA had placed Beloranib on partial clinical hold following the patient death.
The patient in the study died under unknown circumstances, and it was revealed that the patient had been receiving Beloranib. In response to the death and prior thromboembolic events linked to Beloranib in other trials, the FDA issued a verbal partial clinical hold to improve patient safety. Current participants in the ZAF-311 study will be screened for thrombotic disease before receiving further doses and will be closely monitored until the study concludes. The company expects to report top-line results for the ZAF-311 study in the first quarter of 2016. Similar screening is under consideration for the ongoing Phase 2b study (ZAF-203) involving severely obese patients with type 2 diabetes. The Phase 3 trial (ZAF-312) for PWS will commence after the completion of ZAF-311 and subsequent safety evaluations by the FDA.
During a conference call, Zafgen's chief medical officer reported six thrombotic events in around 400 Beloranib-treated patients, including serious cases of pulmonary embolism and deep vein thrombosis (DVT). Notably, no thrombotic events were reported in approximately 150 placebo patients. He clarified that four of the six events occurred during the completed ZAF-201 trial, with the remaining two in ongoing trials.
The company emphasized patient confidentiality regarding the deceased patient, mentioning they became aware of the death approximately two weeks prior to the conference call and reported it to the FDA promptly. Following the news, Zafgen's stock price fell from $21.02 on October 15 to $10.36 on October 16.
The complaint alleges defendants made three materially false statements or omissions during the class period, despite evidence suggesting Beloranib does not increase cardiovascular disease risk and may reduce it. There were no deaths or serious adverse events linked to Beloranib, although two serious thrombotic adverse events were noted, reinforcing the need for careful assessment of patients' thrombotic histories in future trials.
The excerpt details the treatment-emergent adverse events (TEAEs) associated with Beloranib, highlighting gastrointestinal disorders (nausea, diarrhea, vomiting), nervous system disorders (dizziness), and psychiatric disorders (insomnia, sleep disturbances) as the most commonly reported. These TEAEs were generally mild and transient, with other noted events like headaches and injection site reactions occurring at rates comparable to placebo and showing no dose-related trends.
The complaint alleges that Zafgen made materially false or misleading statements in ten specific disclosures, all signed by Hughes, regarding the safety profile of Beloranib. These disclosures included various Form S-1 and Form 10-K filings from 2014 and 2015. The complaint asserts that Zafgen failed to adequately disclose critical adverse events from the ZAF-201 study, specifically four thrombotic events in patients treated with Beloranib, while only mentioning two such events and indicating they were not related to the drug. It contrasts this with the absence of thrombotic events in placebo patients, suggesting a significant risk that was not communicated to investors.
Furthermore, the complaint argues that the extensive but misleading list of minor adverse events could lead investors to incorrectly assume that all material adverse events were disclosed. This omission is deemed significant as the FDA considers the frequency of adverse events in evaluating drug safety. Analysts reportedly viewed this information as crucial for assessing Zafgen's stock value, with one noting concerns about the emerging association between Beloranib and thrombotic events after the full disclosure in October 2015.
Lastly, the complaint includes accusations of scienter, asserting that the defendants were either aware or recklessly indifferent to the risks of thrombotic events linked to Beloranib. These allegations are supported by references to news and scientific articles indicating the defendants' knowledge of potential risks and motivations to mislead investors to inflate the company's stock price.
The complaint asserts that Beloranib diverges from traditional weight-loss treatments by acting as a methionine aminopetidase 2 (MetAP2) enzyme inhibitor, purportedly leading to decreased fat biosynthesis and enhanced fat oxidation. It highlights that MetAP2 inhibitors, originally designed for anti-angiogenic cancer therapies, have been linked to thrombotic adverse events. Various scientific literature supports this association, noting that angiogenesis inhibitors can lead to severe complications such as arterial clots, strokes, and heart attacks. Specific studies cited include a 2002 trial of Avastin, where a significant proportion of patients experienced serious clotting issues, and a 2008 report identifying thrombotic events in patients treated with different angiogenesis inhibitors. Furthermore, a 2013 study indicated that Fumagillin, similar to Beloranib, might induce conditions conducive to thrombosis. The complaint emphasizes that the thrombotic risk is particularly concerning for the targeted morbidly obese adult Prader-Willi Syndrome (PWS) patients, who have heightened cardiovascular risks and reduced life expectancy.
Additionally, the complaint alleges that Zafgen executives, including Hughes, had a motive to mislead investors due to their compensation structure, which included significant stock options and performance-based bonuses linked to share price performance. For instance, Hughes received nearly $600,000 in options and $120,000 in bonuses in 2013, further incentivizing the inflation of the company's share price.
Plaintiffs allege that Zafgen's status as a one-drug company created a motive for defendants to misrepresent information regarding Beloranib, which was crucial for their job security. They highlight significant insider selling in September 2015, where Hughes sold 22,500 shares on September 17 and 23,126 shares on September 18 for a total of $1.8 million. Had he waited until October 16, he would have only received $472,658. While acknowledging that these sales were made under Rule 10b-5 plans, the complaint argues that it is likely these plans were established during the class period, which spans Zafgen's time as a public company. Notably, no officers sold shares prior to September 2015, and by selling before adverse events related to Beloranib were disclosed, executives avoided losses of nearly $3.5 million. After these sales, Hughes retained only 11,320 shares but kept 93% of his stock and options, while other insiders retained at least 85%.
Procedurally, plaintiff Aviad Bessler filed the initial complaint on October 21, 2015, and lead plaintiffs were appointed on January 7, 2016. An amended complaint was filed on February 22, 2016, alleging violations of Section 10(b) and Rule 10b-5 by Zafgen and Hughes, and Section 20(a) by Hughes. Defendants moved to dismiss the complaint, arguing that it failed to plausibly allege actionable misstatements or omissions, did not meet the Private Securities Litigation Reform Act (PSLRA) requirements for pleading specific facts indicating scienter, and lacked allegations of disclosure duty and loss causation.
Regarding legal standards, courts must accept plaintiffs' allegations as true in motion to dismiss, but the PSLRA raises the pleading standards for securities fraud claims. The complaint must specify misleading statements and reasons for their misleading nature, with materiality defined as information that significantly alters the total mix available to a reasonable investor. Misrepresentations are not actionable if the facts are insubstantial, and while companies are not required to disclose all information, they must provide enough context to avoid misleading investors. The PSLRA also demands rigorous standards for alleging scienter, requiring specific facts that indicate the requisite state of mind for each act or omission.
A strong inference of scienter (intent to deceive or defraud) must be compelling and at least as strong as any opposing inference of non-fraudulent intent for a complaint to survive a motion to dismiss. A plaintiff cannot be held to a standard that requires pre-discovery evidence but cannot solely rely on hindsight theories of fraud. When evaluating scienter, courts must consider the entirety of the complaint and weigh competing inferences, favoring the plaintiffs if inferences are equally strong.
The complaint alleges that defendants were aware of significant risks associated with thrombotic adverse events in clinical trials of Beloranib, particularly failing to disclose two superficial adverse events while discussing two serious ones. This omission is framed as intentional or reckless misrepresentation to investors.
In addition to the Rule 10b-5 claim (Count One), the complaint includes a control person claim against Hughes under Section 20(a) of the Exchange Act (Count Two). Defendants argue that Count One should be dismissed, asserting the complaint relies on an implausible fraud-by-hindsight theory, as Zafgen had disclosed serious adverse events and the need for vigilance regarding blood clotting but allegedly concealed minor adverse events. They contend that the allegations do not provide a strong inference of scienter and are outweighed by non-fraudulent inferences, particularly following a patient death that prompted a reassessment of thrombotic events in trials. Defendants also argue that Count One lacks sufficient allegations of actionable misrepresentation, loss causation, and a duty to disclose, referencing Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, which prohibit manipulative or deceptive practices in securities transactions.
To establish a claim for securities fraud under Section 10(b), a plaintiff must demonstrate several elements: a material misrepresentation or omission, scienter (wrongful intent), a connection to the transaction of a security, reliance, economic loss, and loss causation. The defendants challenge the validity of the first, second, and sixth elements and argue they had no obligation to disclose two superficial adverse events (AEs). The court will first evaluate the claims regarding material misrepresentations and omissions.
Under the Private Securities Litigation Reform Act (PSLRA), a complaint must specify that a statement is false or misleading, along with the reasons for this assertion. The complaint alleges three materially misleading statements made by the defendants during the relevant class period. The first statement claimed that Beloranib's treatment does not increase cardiovascular disease risk and may reduce it, based on biomarker measurements. However, the complaint fails to provide specific reasons why this statement is misleading or to present the underlying data.
The second alleged misrepresentation states that there were no deaths or serious AEs related to Beloranib. This claim is assessed as not misleading, even with hindsight, and the complaint does not establish a causal link between the serious AEs and Beloranib, leaving it as mere conjecture.
The third alleged misrepresentation involves two serious thrombotic AEs, which, while not attributed to Beloranib, suggest the need for heightened awareness regarding patients' thrombotic histories in future trials. The allegations lack sufficient detail to substantiate claims of misleading information.
The excerpt identifies the most frequently reported treatment-emergent adverse events (TEAEs) from a study, including gastrointestinal issues (nausea, diarrhea, vomiting), nervous system disorders (dizziness), and psychiatric disorders (insomnia, sleep disturbances). These TEAEs were generally mild and transient, with headaches and injection site reactions also noted, but their incidences were similar to those in the placebo group and not dose-related.
Defendants argue that the omission of two minor adverse events (AEs) is not actionable since Zafgen disclosed it may not report all serious AEs, claiming that this disclaimer protects them. However, if a company chooses to disclose some information, it must provide a complete picture to avoid misleading investors. The materiality of the omitted AEs is contested, with the court noting that determining materiality is typically a factual question for a jury. Despite the defendants' claims, the complaint sufficiently alleges that Zafgen's failure to disclose these AEs was material.
Additionally, for statements to be actionable under the Private Securities Litigation Reform Act (PSLRA), they must not only be materially misleading but also made with scienter, defined as the intent to deceive or a high degree of recklessness. The complaint must present specific facts that strongly infer the defendants acted with such intent. The court stressed the need for a comparative evaluation of competing inferences regarding scienter, rather than merely allowing for plausible inferences. Thus, the complaint raises adequate allegations of a material misrepresentation or omission, necessitating further examination of the defendants' intent.
A strong inference of scienter must be cogent and compelling, surpassing mere plausibility or reasonableness, particularly when balanced against opposing inferences of nonfraudulent intent. In the First Circuit, plaintiffs can meet the scienter requirement through evidence of conscious intent to defraud or a high degree of recklessness. Recklessness is defined as a significant deviation from ordinary care, presenting a known or obvious risk of misleading buyers or sellers. Knowingly omitting material information is indicative of scienter, but general allegations of hindsight fraud are insufficient. In clinical drug trials, defendants cannot be found to have committed fraud unless they were aware at the time of disclosure that their statements were misleading. The evaluation of scienter should consider all allegations collectively rather than in isolation, and there is no fixed pattern of facts that guarantees its establishment. Compelling evidence might include admissions, internal communications, or indications that defendants were aware they were withholding critical information. Relevant factors may include insider trading, timing of statements relative to later disclosures, and various circumstances that suggest fraudulent intent, such as motive and opportunity.
Insider trading can contribute to establishing scienter when combined with other evidence, but it cannot do so alone. The complaint alleges scienter based on both actual intent and recklessness theories. Two main allegations support this: defendants' knowledge of risks related to anti-angiogenics, as indicated by news and scientific articles, and a motive for securities fraud due to significant insider sales prior to a patient death. Defendants do not claim ignorance of the omitted thrombotic adverse events (AEs) but argue they could not have deemed them material. The plaintiffs overemphasize defendants' acknowledgment of superficial AEs, which detracts from the core issue of whether defendants acted with wrongful intent by not disclosing these AEs. The key inquiry is whether the defendants' decision to withhold information was intentionally misleading or reckless, based on their knowledge at the time of the disclosures, rather than in hindsight after the patient death. The allegations about the defendants' knowledge fall short of demonstrating a strong inference of scienter, as it would be inconsistent for them to disclose serious AEs while omitting superficial ones. The allegations under the intent-to-defraud theory are deemed barely plausible and insufficient to support a strong inference of scienter.
The complaint lacks evidence such as admissions, internal documents, emails, or corroborating witness accounts to suggest that Hughes or any Zafgen employee intentionally concealed superficial adverse events (AEs) to defraud investors. While allegations of recklessness are more plausible, they do not convincingly demonstrate scienter. The complaint relies primarily on news and scientific articles, most of which do not mention Beloranib, claiming that defendants were aware or reckless in not recognizing a significant risk of thrombotic AEs in future trials. The plaintiffs have not cited any precedent where publicly available articles established a strong inference of knowledge or intent to mislead among individual defendants, none of whom are said to have discussed or read these articles. Furthermore, even if the plaintiffs' interpretations of the articles were accurate, the articles do not prove that defendants knew they were misleading investors by not disclosing the superficial AEs at the relevant time or that the risk was apparent. The allegations argue that the articles indicated an elevated thrombotic risk associated with angiogenesis inhibitors like Beloranib, but fail to establish a direct causal link or that defendants were aware of such a connection during the disclosures. Many cited articles discuss other drugs or are general in nature, and the complaint does not claim that Zafgen employees engaged with these articles or received advice to disclose the AEs that was ignored. The allegations reflect a "should-have-known" theory of fraud, which the First Circuit has stated cannot constitute intentional misleading if the defendants lacked sufficient information at the time to recognize a need for disclosure. Therefore, without knowledge of misleading implications at the time of disclosure, the defendants cannot be deemed to have committed fraud.
The allegations regarding defendants' knowledge of omissions and the disclosure of two serious adverse events (AEs) do not convincingly demonstrate that they misled investors. The complaint lacks direct evidence of defendants’ awareness of misleading implications, relying instead on weak circumstantial evidence, including subjective interpretations of scientific articles following a patient’s death. Prior First Circuit rulings have dismissed similar complaints under the Private Securities Litigation Reform Act (PSLRA) even when stronger allegations were presented, such as claims of inflated revenues from confidential witnesses.
The complaint fails to show that defendants knew or should have known their failure to disclose certain superficial AEs would mislead investors. As for motive, allegations that defendants aimed to inflate Zafgen's stock price are considered too generic and lack context to support a strong inference of scienter. The assertion that performance-based bonuses incentivized executives to mislead about thrombotic AEs does not surpass the usual financial motivations that exist in corporate environments, especially prevalent in small healthcare and technology companies. Thus, the mere existence of financial incentives does not suffice to establish culpability under the PSLRA.
Insider trading allegations do not support a strong inference of scienter in the complaint. While allegations of insider trading can enhance inferences of scienter depending on context, they must be unusual or suspicious. The insider trades in question are deemed weak, as they are not unusual in timing or amount. The sales began over a year after Zafgen disclosed trial results, making it implausible that defendants aimed to manipulate share prices through delayed disclosures. The timing of the sales relative to a patient’s death was also not suspicious; disclosures to the FDA occurred within regulatory timelines after the final insider sale. Furthermore, Dr. Hughes retained 93% of his shares after selling, and other insiders retained at least 85%, which is not unusual. The complaint fails to allege any significant deviation from typical trading patterns, undermining claims of insider trading.
The complaint's allegations do not provide a strong inference of scienter, as required by law. The Court must consider both the plaintiff's inferences and any competing inferences that arise from the alleged facts. Defendants argue that following a patient death, Zafgen investigated a possible link between Beloranib and thrombotic episodes, leading them to reassess and disclose thrombotic adverse events (AEs) from completed and ongoing trials. This non-fraudulent inference is supported by several factors that diminish the likelihood of intentional or reckless misrepresentation by the defendants.
Key points include the marginal materiality of the alleged superficial AEs at the time of non-disclosure, which undermines claims of fraudulent intent. The First Circuit links materiality and scienter, indicating that if an omitted fact's materiality is questionable, it weakens the argument for defendants' intent or recklessness. The materiality of the omission regarding off-label marketing revenue is deemed marginal, and the plaintiffs' assertion that this would concern a reasonable investor relies on unsubstantiated inferences.
The Supreme Court noted that AEs in drug trials do not inherently indicate materiality, particularly when deemed superficial by third-party investigators. Moreover, the prevalence of AEs in the pharmaceutical industry means that their mere occurrence does not imply causation. For the nondisclosed information to significantly alter the information mix available to investors, more context is required beyond just the existence of AEs, which must consider the source, content, and context of the reports. Ultimately, without demonstrating a significant causal relationship, mere reports of AEs fail to meet the standard for materiality.
Certain adverse events (AEs) are expected in patients already undergoing treatment, and reasonable investors likely did not view the minor AEs as significantly altering the overall information landscape. This is reinforced by the existence of two serious AEs in the ZAF-201 trial and independent assessments indicating no connection between these AEs and Beloranib. The significance of the minor AEs only increased following a patient death. The marginal importance of these minor AEs undermines any inference of fraudulent intent (scienter) and supports a non-fraudulent interpretation of the defendants' actions. Additionally, the defendants' disclosures during the class period suggest they did not regard the minor AEs as warranting disclosure at that time. Zafgen informed investors that it might withhold disclosures of serious AEs until the FDA approval process was complete, acknowledging that previously unreported AEs could negatively impact the company. The document notes that setbacks in later-stage clinical trials are common in the pharmaceutical sector due to safety and efficacy concerns, including unreported AEs. The First Circuit has indicated that efforts to warn investors about risks can undermine claims of scienter. Zafgen promptly disclosed serious AEs from multiple trials, making the plaintiffs' claim that the company misled investors by failing to disclose minor AEs less convincing. Additionally, insiders, while reportedly selling shares, retained a substantial portion of their holdings, which suggests a lack of intent to deceive. Overall, the allegations of scienter in the complaint are considered weak, failing to present a compelling case against the defendants.
The complaint lacks a strong inference of intentional or reckless conduct necessary for a viable claim under the heightened pleading standard of the Private Securities Litigation Reform Act (PSLRA), leading to the dismissal of Count One for failure to state a claim. Count Two, which alleges liability against Hughes under Section 20(a) of the Exchange Act, is dependent on an underlying violation of the Exchange Act. Since Count One was dismissed and the Section 20(a) claim is derivative of it, Count Two is also dismissed. The plaintiffs have not formally requested leave to amend their complaint; they only expressed a desire to do so in a footnote during their opposition to the motion to dismiss. They have not indicated any new evidence or ongoing investigation that would make an amendment non-futile. The First Circuit notes that the plaintiffs were aware of their complaint's deficiencies before the motion to dismiss and failed to act, thus discouraging late requests for amendment. The district court's decision to dismiss the complaint with prejudice is acknowledged as within its discretion, despite concerns regarding the potential for a more lenient amendment policy under Rule 15(a). The plaintiffs had ample time—approximately four additional months—to investigate their claims after the initial filing before the amended complaint was due.
Plaintiffs had the opportunity to amend their complaint after defendants filed a motion to dismiss, as well as after the hearing on that motion. The Court noted that it is uncommon in legal practice for plaintiffs to litigate a motion to dismiss with prejudice without moving for leave to amend, then subsequently request leave to amend conditionally based on the outcome of the dismissal. This practice is deemed inefficient and burdensome, leading the Court to deny the plaintiffs' informal request for leave to amend following its ruling on the motion to dismiss. Consequently, the defendants’ motion to dismiss was granted.
The caption of the case was amended to reflect the appointment of lead plaintiffs, replacing Aviad Bessler. The excerpt addresses the requirement for securities fraud allegations to meet the heightened pleading standard under Federal Rule of Civil Procedure 9(b), which is strict. Defendants argued that they had no obligation to disclose certain omitted information and that the complaint failed to adequately allege loss causation. The motion to dismiss included thirteen exhibits, including SEC filings and conference call transcripts. The Court indicated it would consider these documents, as plaintiffs acknowledged that it's standard practice to examine such materials in securities fraud cases.
Additionally, the FDA's process for drug approval was outlined, emphasizing the necessity of clinical trials and the obligation of drug companies to report serious adverse drug experiences to the FDA and physicians during these trials. Results indicated a reduction in levels of a cardiovascular disease risk marker, C-reactive protein.
Patients treated with Beloranib at doses of 0.6 mg, 1.2 mg, and 2.4 mg experienced reductions in cardiovascular disease risk marker C-reactive protein levels by 2.5, 2.3, and 1.9 µg/ml, respectively, compared to a 1.0 µg/ml increase in the placebo group (p < 0.0001). Key executives, including chief medical officer Dennis Kim and chief commercial officer Alicia Secor, sold significant shares of the company shortly before the disclosure of adverse events related to Beloranib, although they are not named defendants in the case. Including 180,000 options vesting in March 2016 would increase Hughes's retained shares to 95%.
The legal context references 1995 Congressional legislation aimed at reducing frivolous securities fraud class action lawsuits by shifting control to institutional investors, raising the bar for plaintiffs to present cases to a jury. The relationship between materiality and scienter is emphasized, illustrating that if a fact's materiality is marginal, it weakens claims of defendants' intent or recklessness in nondisclosure.
Zafgen informed investors that external clinical investigators, not the company, assessed the severity of adverse events and their relation to Beloranib. Furthermore, a press release by Zafgen on October 14, 2015, regarding a patient's death during a trial was claimed to be misleading by plaintiffs because it did not clarify whether the patient received Beloranib or a placebo. However, the company did not know the treatment assignment until ordered by the FDA to unblind the information on October 16. To prove scienter through recklessness, plaintiffs must allege specific knowledge of risks and a deliberate choice to withhold that information from investors.
Plaintiffs selectively interpret an article by Hughes and others regarding anti-angiogenics, using it to assert that Hughes had knowledge of a link between Beloranib and thrombotic events. However, the article indicates that lower doses of Beloranib reduced side effects compared to higher doses used in cancer studies. Plaintiffs argue that adverse events (AEs) alone are sufficient to establish scienter, but this has been rejected by the First Circuit, which clarifies that merely receiving an adverse report does not demonstrate a causal link between a drug and an illness. The complaint does not claim Hughes's compensation was unusually high compared to peers, noting that over 70% of his 2014 compensation was salary, and while this percentage was greater in 2013, all alleged misrepresentations occurred in 2014 and 2015. Zafgen’s stock price rose nearly 30% in September 2015, coinciding with insider sales, which is not typically suspicious behavior for executives. Plaintiffs recognize that the executives sold shares under Rule 10b-5 trading plans, which typically diminish claims of scienter. Although these plans were adopted during the class period, the court finds that plaintiffs’ arguments about insider trading fail even without considering the trading plans, and therefore, it does not need to address issues of loss causation and duty to disclose, as the complaint fails to meet the PSLRA's scienter pleading standard.
