On August 22, 2017, the United States Court of Appeals for the First Circuit affirmed an order from the District of Massachusetts, dismissing a putative securities class action that asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder against drug maker Sarepta Therapeutics Inc. (“Sarepta”) and certain of its current and former officers.  Corban, et al. v. Sarepta Pharmaceutical Inc., et al., No. 16-1658 (1st Cir. Aug. 22, 2017).  The complaint alleged that Sarepta deceived investors about the significance of trial data for the company’s new muscular dystrophy drug, eteplirsen, and the likelihood that the company would obtain United States Food and Drug Administration (“FDA”) approval for that drug.  The First Circuit held that plaintiffs failed to plead a “cogent inference of scienter” that Sarepta misled investors, and also held that while opinions implying false facts may suffice to allege a fraud claim, the opinions at issue were insufficient because they “came replete with caveats.”
 
The allegations in plaintiffs’ amended complaint focused primarily on Sarepta’s statements in its July 24, 2013 press release and related comments by its officers regarding a meeting Sarepta had with the FDA.  According to plaintiffs, these communications paved the company’s path to commit fraud because Sarepta allegedly disclosed too little of the concerns raised by the FDA and instead painted “too rosy” a picture of the FDA’s reaction to Sarepta’s trial data for eteplirsen.  For example, the amended complaint cited statements by Sarepta’s CEO that he was “very encouraged by the FDA feedback,” that he was hopeful that the FDA “would accept [an NDA] for filing,” and that the FDA was “open to considering an NDA filing based on the data [Sarepta had] shared with [the FDA] to date.”  Plaintiffs alleged that these statements were misleading because they failed to warn investors about “a number of concerns” of the FDA, and failed to disclose that the FDA had articulated “strong reservations” about the type of data upon which Sarepta was relying.
 
In denying plaintiffs’ appeal and affirming the lower court’s dismissal of the action, the First Circuit noted that “[t]he challenged statements that mark the beginning of the class period provide poor material for building a fraud claim,” because they “convey opinion more than fact.”  The First Circuit recognized that while an opinion that implies a false fact may suffice to state a claim under Section 10(b), the opinions at issue in this case “came replete with caveats” that contradicted plaintiffs’ claim that the statements were misleading and unduly optimistic.  In particular, the Court found that the following caveats “cut against the inference of scienter”:  (1) Sarepta’s CEO accurately reported that the FDA declined to offer “any guarantee or assurance that an NDA submission would be acceptable for filing,” (2) Sarepta’s stock price dropped nineteen percent after the CEO’s “mix of optimism and caution was communicated to investors,” and (3) three weeks following the July 24, 2013 press release, Sarepta reminded investors that it had been trying to convince the FDA that its method for quantifying a key protein essential for muscle function was acceptable and preferable, but acknowledged that its data set was limited.  The First Circuit observed that “[a]t worst, there was positive spin that put more emphasis in tone and presentation on the real signs of forward movement with the NDA than it did on causes for wondering if the journey would prove successful.”
 
The First Circuit further found that plaintiffs “misse[d] the mark” in adequately alleging material omissions to support their fraud claim because they merely pointed to details allegedly omitted from Sarepta’s statements but failed to explain how any of the alleged omitted details rendered the particular disclosures misleading.  The Court noted that mere possession of nonpublic information does not create a duty to disclose it, and further that defendants “had no legal obligation to loop the public into each detail of every communication with the FDA.”  Thus, the First Circuit found that defendants’ alleged failure to mention specific factors contributing to the FDA’s position, “while nonetheless faithfully representing that position (including by quoting directly from FDA sources at times), strikes us as more consistent with negligence than reckless or intentional concealment.”  Moreover, the Court rejected plaintiffs’ argument that Sarepta’s $125 million offering of common stock in July 2013 established a motive of scienter, finding that “something more” was required than the ordinary and “ever-present desire” to improve financial results.  Contrary to plaintiffs’ allegation that defendants needed this offering to provide Sarepta “essential funding,” the Court found that at the time of the July 2013 offering Sarepta had not been in dire financial condition but instead had sufficient cash, cash equivalents and working capital. 
 
Accordingly, in affirming the dismissal of the Section 10(b) and 20(a) claims, the Court held that it did not find “the malicious inference” to be “at least as compelling as any opposing innocent inference.”  Noting that the FDA ultimately did accept the NDA for filing in 2015 and granted accelerated approval for eteplirsen in 2016 after this litigation was underway, the Court concluded that “more plausible is the opposing innocent inference that the defendants, perhaps negligently, waxed too optimistically about the FDA’s expression of a willingness to consider an NDA for eteplirsen while emphasizing too little the FDA’s reservations about such an application.  This is simply a case in which the complaint focuses too much on nuance rather than false facts or material omissions to support the necessary strong inference of scienter.”