In re Axsome Therapeutics, Inc. Securities Litigation

Background

Lead Plaintiffs Thomas Giblin, Paul Berger, and Paul Sutherland brought a proposed class action under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. They alleged that Axsome Therapeutics, Inc. and executives Herriot Tabuteau, Nick Pizzie, Mark Jacobson, Cedric O’Gorman, and Kevin Laliberte misled investors during the period from May 10, 2021, through April 22, 2022.

The alleged misstatements concerned AXS-07, an Axsome drug candidate. The complaint alleged that Axsome experienced equipment problems at a supplier, causing supply delays that affected the company’s ability to conduct stability studies and prepare its application for Food and Drug Administration approval. The plaintiffs alleged that Axsome nevertheless made statements suggesting that its suppliers could provide enough product and that AXS-07 was approaching possible approval.

Axsome disclosed unresolved manufacturing issues on April 25, 2022. Its stock price fell approximately 22% that day. On May 2, 2022, Axsome announced that the FDA had issued a Complete Response Letter identifying the need for additional manufacturing and related data concerning AXS-07.

Rule 12(b)(6) Standard

The defendants moved to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). At that stage, the court generally accepts well-pleaded factual allegations as true and draws reasonable inferences for the plaintiffs, but it does not accept conclusory legal allegations. Securities-fraud complaints must also meet heightened pleading requirements under Rule 9(b) and the Private Securities Litigation Reform Act, including particularized allegations of misleading statements, the reasons they were misleading, and a strong inference that the defendants acted with the required state of mind, known as scienter.

Section 10(b) Claim

The court held that the complaint adequately pleaded a Section 10(b) and Rule 10b-5 securities-fraud claim against Axsome, Tabuteau, and Jacobson. The alleged manufacturing and supply problems were material because they could increase the likelihood of delayed FDA approval. The complaint plausibly alleged that statements about supplier capacity, manufacturing capability, and the prospects for the AXS-07 application were misleading because they omitted existing supply problems.

The court rejected the defendants’ arguments that the statements were protected forward-looking statements, opinions, accurate statements of fact, puffery, or statements accompanied by sufficient warnings. The court explained that warnings about possible future risks did not protect statements that allegedly failed to disclose that the risk had already occurred. The court also found that the complaint adequately alleged that the omitted information conflicted with what a reasonable investor would understand from the defendants’ statements.

The court found the allegations sufficient to plead scienter against Tabuteau, Jacobson, and Axsome. The complaint alleged that Tabuteau and Jacobson had access to information about AXS-07’s manufacturing and supply problems, including information from company personnel and the company’s vendor. The court concluded that these allegations supported a strong inference of recklessness or conscious misbehavior. It attributed Tabuteau’s and Jacobson’s alleged state of mind to Axsome.

The complaint did not adequately plead scienter against Pizzie or O’Gorman. The court found that it relied largely on their positions as chief financial officer and senior vice president, without alleging facts showing that either had access to information about the manufacturing problems or received reports about them. The court also held that Pizzie’s signing of certifications under the Sarbanes-Oxley Act, without additional facts showing awareness or recklessness, was insufficient.

The court also held that the complaint adequately pleaded loss causation—the required connection between the alleged fraud and the plaintiffs’ losses. The complaint alleged that the April 25 disclosure revealed the concealed manufacturing problems and was followed by the approximately 22% stock-price decline.

Section 20(a) Claim

Section 20(a) imposes potential control-person liability when a person controls someone who committed a primary securities-law violation. Because the Section 10(b) claim was adequately pleaded against Tabuteau and Jacobson, the court also allowed the Section 20(a) claim against them to proceed. Because the primary claim failed against Laliberte, O’Gorman, and Pizzie, the court dismissed the Section 20(a) claim against those defendants as well.

Disposition

The court denied Axsome, Tabuteau, and Jacobson’s motion to dismiss. It granted Laliberte, O’Gorman, and Pizzie’s motion to dismiss. The court also denied the plaintiffs’ request for oral argument as moot and directed the clerk to close the two motions.