George Lehmann, Insured Benefit Plans, Inc. v. Ohr Pharmaceutical, Inc., 2020 WL 5988517 (2nd Cir. Oct. 9, 2020)

On October 9, 2020, the Second Circuit affirmed the dismissal of an action brought against Ohr Pharmaceutical, Inc. and certain of its executives.  Plaintiffs alleged that the defendants made misleading statements concerning the efficacy of Ohr’s core product, a Squalamine-based treatment for wet age-related macular degeneration (WetAMD), a condition that can cause vision loss.

The complaint pleaded that in January 2018, Ohr announced the results of a phase III clinical trial of its WetAMD treatment, that the results of this trial showed that the treatment arm actually performed worse than the control arm, and that the Company’s stock price fell by over 80% as a result.

In alleging securities fraud, the plaintiffs claimed that when making various announcements about the interim results of the clinical trial years earlier, Ohr failed to disclose that the control group results in the trial were allegedly inconsistent with prior trials, and that the alleged failure to make this disclosure inflated Ohr’s stock price.  In 2019, Judge Preska of the Southern District of New York granted defendants’ motion to dismiss, finding that plaintiffs did not adequately plead facts sufficient to show scienter, i.e., fraudulent intent.

On appeal, the Second Circuit affirmed that decision.  The Court agreed that plaintiffs’ allegations concerning “generic corporate interests such as increasing stock price, avoiding bankruptcy, or continuing to operate as a business,” did not give rise to a sufficiently strong inference that the defendants acted with a motive to commit securities fraud.  In addition, the Court reaffirmed the principle that alleging that defendants made certain statements while they were supposedly aware of a “variety of information that Plaintiffs say is inconsistent with those statements” cannot give rise to an inference of “conscious misbehavior or recklessness” sufficient to plead scienter.  Rather, at most, those allegations amounted to a claim of negligence by the defendants, which is insufficient to plead an inference of intent to defraud.

The Second Circuit also held that there could be no strong inference of intent to defraud based on the Company’s stock price relative to the timing of the Company’s disclosures and secondary stock offerings.  Specifically, the Court noted that while the Company’s share price rose from $6.86 to $10.97 after the allegedly misleading statements about the nature of the interim clinical trial results, it was not until seven months later that the Company made a stock offering, at $6.75 per share.  The Court found that it would defy “common sense” for the defendants to have waited until the stock price was even lower than before it made the relevant disclosures to offer stock to investors if it were acting with fraudulent intent.

After affirming the dismissal, the Court remanded the case to the district court to make an explicit determination, on the record, on whether to grant plaintiffs leave to file a second amended complaint.  On November 16, 2020, the district court denied plaintiffs’ motion for leave to amend.

This case is another reminder that while companies must take care in making disclosures concerning clinical trials, including in light of the focus of the plaintiffs’ bar on the life sciences industry, the bar for plaintiffs to plead fraudulent intent for purposes of securities fraud claims remains high.

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Photo of Peter Welsh Peter Welsh

Peter is co-head of the firm’s corporate and securities litigation practice, where he focuses his practice on the areas of transactional and securities litigation as well as government enforcement, corporate governance, and director and officer representations. Highly experienced at guiding public companies, directors…

Peter is co-head of the firm’s corporate and securities litigation practice, where he focuses his practice on the areas of transactional and securities litigation as well as government enforcement, corporate governance, and director and officer representations. Highly experienced at guiding public companies, directors and officers and investment management firms (including private equity, hedge and venture capital funds as well as university endowments) through high stakes litigation and complex corporate governance and transactional matters, Peter regularly represents such clients in all manners of litigation, pre-litigation, and regulatory matters.

Peter is an experienced advocate who has litigated several contested merger transactions, including strategic, financial, and going-private transactions. In addition, he frequently handles complex securities and corporate litigation matters, including representation of the directors and officers of public companies in securities class actions and breach of fiduciary duty actions. Peter has also handled a range of regulatory investigations, including investigations by the Securities and Exchange Commission, Department of Justice, and a number of state governments.

A trusted counselor, Peter advises boards of directors and board committees on mergers and acquisitions and other strategic alternatives, as well as related-party transactions, internal investigations, and litigation. Peter is also the head of a litigation risk management practice within the firm that is the leading global practice at structuring customized, complex insurance solutions for much of the private equity industry, where he also regularly advises hedge fund and mutual fund clients on indemnification and general partner liability insurance matters.

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Adam is partner in Ropes & Gray’s Litigation and Enforcement practice, based in New York. Adam focuses on complex business litigation, including securities class action defense, breach of contract cases, deal-related litigation, breach of fiduciary duty claims, corporate governance disputes, and civil fraud…

Adam is partner in Ropes & Gray’s Litigation and Enforcement practice, based in New York. Adam focuses on complex business litigation, including securities class action defense, breach of contract cases, deal-related litigation, breach of fiduciary duty claims, corporate governance disputes, and civil fraud and RICO claims.

Photo of Chloe Gordils Chloe Gordils

Chloe Gordils joined Ropes & Gray’s Litigation & Enforcement practice group in 2019.

During her time at Brooklyn Law School, Chloe served as an executive articles editor for the Brooklyn Law Review. Additionally, she was a member of both the Trial and…

Chloe Gordils joined Ropes & Gray’s Litigation & Enforcement practice group in 2019.

During her time at Brooklyn Law School, Chloe served as an executive articles editor for the Brooklyn Law Review. Additionally, she was a member of both the Trial and Appellate Divisions of the Moot Court Honor Society. Chloe was also a member of the Asylum Relief Project, where she traveled to Texas to provide legal support to detained mothers and children. She also participated in the Employment Law Clinic, where she represented clients in unemployment insurance hearings. Chloe received a Burton Law360 Distinguished Legal Writing Award for her article Google, Charlottesville, and the Need to Protect Private Employees’ Political Speech. Upon graduation, Chloe received Brooklyn Law School’s Scholarly Journal Writing Award, the Samuel Witte Prize in Literature and the Law, and the Judge Leonard P. Moore Memorial Prize.