Hayden v. Portola Pharmaceuticals, Inc.

Background

Investors in Portola Pharmaceuticals brought a putative class action alleging securities violations. They claimed Portola overstated its 2018 revenue by reporting approximately $23.995 million in net Andexxa revenue without disclosing how much of its return reserve had already been used. Andexxa was a drug for treating certain emergency bleeding situations. Portola allowed hospitals and distributors to return unopened product during an extended return period.

Portola’s 2018 annual report stated that its revenue was net of a reserve for returns but did not disclose the reserve’s dollar amount. Portola later disclosed in its 2019 annual report that it had taken a $2.611 million reserve for returns of products sold in 2018 and that $2.312 million had already been paid to customers by December 31, 2018, leaving $299,000. The plaintiffs alleged that this information was important because the return period for 2018 products continued into 2020.

Portola conducted a public stock offering in August 2019. The offering’s registration statement and prospectus incorporated earlier company filings, including the 2018 annual report. The plaintiffs alleged that Portola and the offering’s underwriters—Goldman Sachs, Citigroup, Cowen, William Blair, and Oppenheimer—violated the Securities Act by including materially misleading information through omission.

Exchange Act claims

The plaintiffs asserted claims under Section 10(b) and Rule 10b-5 of the Securities Exchange Act. Those claims required allegations of a misleading statement or omission, the defendants’ wrongful state of mind, and loss causation—a connection between the alleged misconduct and the investors’ economic loss. The court also explained that the Private Securities Litigation Reform Act required the misleading statement and wrongful state of mind to be pleaded with particularity.

The court treated Portola’s revenue statements as opinions because revenue was an estimate of the amount Portola expected to keep after returns and other adjustments. Under the standards discussed in the opinion, an opinion can be misleading by omission when the omitted facts are important enough to make the statement misleading to a reasonable investor.

The court held that the plaintiffs plausibly alleged a material omission. In the court’s view, the near depletion of the reserve by the beginning of 2019 contradicted Portola’s March 1, 2019 statement that it expected to retain nearly $24 million in 2018 Andexxa revenue. The court also held that the plaintiffs adequately alleged scienter, meaning an intent to mislead or deliberate recklessness. It reasoned that it would be unreasonable to believe Portola’s officers and directors did not know the return information, given Andexxa’s importance to the company and the defendants’ responsibilities.

The court nevertheless held that the complaint did not adequately plead loss causation. The complaint tied the stock-price declines to January and February 2020 announcements about lower-than-expected 2019 sales, flat demand, lower utilization, and a reserve charge. But it did not adequately allege that investors suffered a further loss because of the specific disclosure that the reserve for 2018 product had been depleted. The specific disclosure occurred on February 28, 2020, after the proposed class period ended on February 26, 2020.

Securities Act claims

The plaintiffs also asserted claims under Sections 11 and 12 of the Securities Act. Unlike the Exchange Act claims, these claims did not require allegations of scienter or loss causation at this stage. The court concluded that the registration statement contained a materially misleading omission because it incorporated filings that stated Portola’s 2018 revenue without disclosing the depleted return reserves.

The court therefore denied the motion to dismiss the Securities Act claims.

Other motion and disposition

The court granted in part and denied in part defendants’ motion to dismiss the second amended consolidated class action complaint. It granted the motion as to the Exchange Act claims because loss causation was inadequately pleaded, while granting leave to amend those claims. Any amended complaint was due within 21 days of the order.

The court denied defendants’ motion for leave to file a sur-reply because the decision relied only on allegations and arguments already presented in the complaint and opposition brief. The court stated that the case would move forward and scheduled a case management conference.