Beal v. Gritstone bio, Inc.

Background

The plaintiffs were a purported class of investors in Gritstone Bio, Inc. They alleged that they bought Gritstone securities at artificially high prices because of misleading statements by Gritstone’s chief executive officer, Andrew Allen, and chief financial officer, Vassiliki Economides. Gritstone was not named as a defendant in the amended complaint.

Gritstone was developing the CORAL self-amplifying messenger RNA vaccine for COVID-19. The company announced in September 2023 that the Biomedical Advanced Research and Development Authority had awarded it a contract valued at up to $433 million for a 10,000-participant Phase 2b trial. Gritstone said it expected to begin that trial in the first quarter of 2024.

The Food and Drug Administration later placed the trial on hold and required Gritstone to use materials meeting good manufacturing practices. Gritstone delayed the trial, announced a workforce reduction, and later conducted a stock offering. The plaintiffs alleged that Gritstone’s earlier statements about manufacturing, the value of the contract, the company’s financial outlook, and the trial timeline were materially false or misleading.

Claims and legal standard

The plaintiffs asserted claims under section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5, as well as a control-person claim under section 20(a). To proceed under section 10(b), the plaintiffs had to adequately allege a material misrepresentation or omission, the defendants’ intent to deceive or deliberate recklessness, a connection to the purchase or sale of securities, reliance, economic loss, and loss causation. Securities-fraud claims also had to identify each misleading statement and explain why it was misleading.

The defendants moved to dismiss under Rule 12(b)(6), arguing that the complaint failed to state a legally sufficient claim. They challenged whether the statements were actionable, whether the complaint adequately alleged the defendants’ required mental state, and whether it adequately alleged loss causation.

Court’s analysis

The court grouped the challenged statements into three categories: statements before the government contract about manufacturing practices, statements about the contract’s financial value, and statements about the expected timing of the Phase 2b trial.

For the pre-contract statements, the court rejected the defendants’ argument that later events could not show that earlier statements were false. The court explained that later events could reveal that a statement was false when made, rather than make the statement false only in hindsight. The court also concluded that statements about compliance with good manufacturing practices were specific enough to potentially be actionable.

However, the court found that most of the pre-contract statements were not adequately alleged to be false or misleading when read in context. Gritstone had disclosed that it lacked the resources to manufacture certain components and relied on third-party suppliers. The plaintiffs did adequately allege, at the pleading stage, that Gritstone’s statement that all internal and third-party contract manufacturing was performed under good manufacturing practices or similar guidelines was misleading. They also adequately challenged related risk disclosures that described the risk as hypothetical even though, according to the allegations, the risk had already occurred.

The court rejected the plaintiffs’ claims concerning the contract’s value and the Phase 2b timeline. The plaintiffs did not adequately allege that, when those statements were made, Gritstone or the defendants knew that the lack of compliant source materials would interfere with the contract or necessarily delay the trial. The court characterized those arguments as impermissible fraud by hindsight.

Scienter and disposition

“Scienter” is the required fraudulent mental state, such as an intent to deceive or deliberate recklessness. The court held that the plaintiffs did not plead a strong inference of scienter as to either Allen or Economides.

As to Economides, the complaint alleged her executive position, public-health education, and general awareness of Gritstone’s operations, but did not provide specific facts showing that she knew whether the contractors complied with good manufacturing practices. The court also noted that the plaintiffs had not repeatedly provided specific facts connecting her to the alleged securities fraud. The court therefore denied leave to amend the claim against Economides.

As to Allen, the plaintiffs relied in part on an account from Gritstone’s director of quality assurance. The court found that the account did not provide enough detail to establish that Allen knew, or should have known, about the manufacturing problems when the challenged statements were made. Allen’s position, experience, certification of company filings, and Gritstone’s earlier interactions with the Food and Drug Administration did not, individually or together, create the required strong inference of fraudulent intent or deliberate recklessness.

Because the section 10(b) claim failed, the dependent section 20(a) claim also failed. The court did not need to decide the defendants’ loss-causation argument. The court granted the defendants’ motions to dismiss without prejudice as to Allen and with prejudice as to Economides. The plaintiffs had 28 days from issuance of the order to file an amended complaint against Allen.