Oracle Partners, L.P. v. Concentric Analgesics, Inc.

Background

Concentric Analgesics, Inc. was developing CA-008, an injectable pain-relief product. In 2017 and 2018, it conducted clinical trials involving several types of surgery, including total knee replacement surgery. According to the complaint, Concentric represented that the total-knee-replacement trial had the greatest commercial potential.

The plaintiffs alleged that information available in late 2018 showed that the trial’s results were not statistically significant. They alleged that Concentric nevertheless presented potential investors with materials stating that the trial had achieved its primary and secondary endpoints at high levels of statistical significance. The plaintiffs purchased 50.7% of the shares issued in Concentric’s Series B preferred-stock offering in May 2019. The opinion states that defendants conceded that statements about the trial’s statistically significant results were inaccurate.

Claims and Legal Standards

The plaintiffs asserted claims under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, which generally prohibit material misrepresentations or omissions in connection with securities transactions. They also asserted a Section 20(a) control-person claim and a Delaware equitable-fraud claim.

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), arguing that the complaint failed to adequately plead scienter, economic loss, and loss causation. Scienter means the required wrongful state of mind; for these securities claims, the complaint had to plead particular facts creating a strong inference that the defendants acted with at least deliberate recklessness. The court applied heightened pleading requirements under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act.

Scienter

The court held that the complaint did not adequately plead scienter as to Defendant Frank J. Bellizzi, Jr. Although the complaint alleged that both individual defendants received certain December 28, 2018 emails, it did not adequately allege that Bellizzi had access to the clinical-trial interim analysis or the later submission to the Food and Drug Administration. The court also rejected the plaintiffs’ argument that the company’s core operations necessarily made Bellizzi aware of those details. The court therefore granted defendants’ motion to dismiss Bellizzi on scienter grounds.

The court reached a different conclusion as to Defendant John Donovan. The complaint alleged that Donovan received information about the interim data and analysis, and that shortly afterward he requested help creating slides to persuade a potential investor that the first trial cohort might succeed. Viewed together, those allegations plausibly suggested that Donovan learned the results lacked statistical significance and then made statements contradicted by that information. The court therefore denied the motion to dismiss Donovan on scienter grounds.

Economic Loss and Related Securities Claim

The court held that the plaintiffs had not pleaded economic loss with sufficient particularity. The plaintiffs alleged that they would not have invested at the price they paid if they had known the truth, but they did not explain how they actually suffered a loss or identify the amount or other measure of the loss. The court stated that the private nature of Concentric’s shares did not excuse the plaintiffs from specifically alleging an actual economic loss connected to the alleged misrepresentations. The court granted defendants’ motion to dismiss on this ground.

Because the Section 20(a) claim was expressly based on the Section 10(b) claims, the court also dismissed the Section 20(a) control-person liability claim after finding that the Section 10(b) claim failed to meet the pleading requirements. The court did not need to decide the parties’ arguments about loss causation after finding that economic loss was inadequately pleaded.

Equitable Fraud

The court denied defendants’ motion to dismiss the equitable-fraud claim. Under Delaware law, equitable fraud does not require proof of scienter, but it generally requires special circumstances, such as a fiduciary relationship or a basis for equitable relief. The plaintiffs relied on their requests for rescission or contract reformation. The court was not persuaded that the claim necessarily failed as a matter of law, noting Delaware decisions allowing such claims when plaintiffs pleaded a special circumstance involving equitable remedies.

The opinion states that the court did not address the remaining state-law claims.

Disposition

The court granted in part and denied in part defendants’ motion to dismiss, with leave to amend. Any amended complaint had to be filed within 28 days of the order. The court also ordered the plaintiffs to include a statement-by-statement chart identifying the allegedly false or misleading statements, why they were false or misleading, the basis for allegations made on information and belief, which defendants were responsible, and the facts supporting the required state of mind and each defendant’s knowledge.