On September 3, 2024, Judge Mitchell S. Goldberg of the United States District Court for the Eastern District of Pennsylvania granted in part and denied in part a motion to dismiss a putative securities class action against a pharmaceutical company (the “Company”) and its CEO and CFO. Kranthi Gorlamari v. Verrica Pharm., Inc., et al., No. 22-cv-2226 (E.D. Pa. Sept. 3, 2024). Plaintiff asserted claims on behalf of a putative class of investors in the Company under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 thereunder. The Court denied in part the motion to dismiss the second amended complaint and allowed certain claims to proceed on the basis of confidential witness allegations. In doing so, the Court refused to consider at the motion to dismiss stage declarations from those purported confidential witnesses, submitted by defendants, in which the witnesses recanted the purported statements attributed to them in the complaint, and the Court credited those allegations in finding that a strong inference of scienter was sufficiently alleged by the complaint.
Plaintiff alleged that defendants misled investors regarding obstacles that the Company faced in obtaining FDA approval for its leading product in 2021 and 2022. Defendants previously moved to dismiss the amended complaint, and the Court granted the motion in part for failure to adequately allege scienter but granted leave to amend. Plaintiff filed a second amended complaint and substantiated the allegations of scienter with statements from confidential witnesses who were allegedly former employees of the Company (the “CWs”). Defendants moved again for dismissal and supported their motion with declarations from individuals claiming to be the CWs recanting the statements attributed to them in the second amended complaint.
Though the Court held that the second amended complaint failed to adequately substantiate the allegations of scienter as to the CFO, it held that the allegations attributed to the CWs adequately gave rise to a strong inference that the Company and its CEO understood their statements were misleading. The Court explained that the declarations submitted by defendants were extrinsic to the complaint and thus could not be considered at the pleading stage, rejecting defendants’ argument that such evidence should be admissible under the PSLRA due to the requirement to establish a strong inference of scienter. Accordingly, the Court denied the motion to dismiss with respect to the Company and the CEO.
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