Carr v. Zosano Pharma Corporation

Background

This was a proposed securities-fraud class action concerning Zosano Pharma Corporation’s lead product, Qtrypta, also called M207, which was developed to treat migraine headaches. The plaintiffs alleged that, between February 13, 2017, and October 20, 2020, Zosano and three current or former chief executive officers—Steven Lo, John Walker, and Konstantinos Alataris—made misleading statements about Qtrypta’s clinical studies, regulatory pathway, timing for approval, and commercial prospects.

The plaintiffs alleged that the defendants failed to disclose clinical-data problems later identified by the Food and Drug Administration (FDA), including differences in drug exposure between product lots and unexpectedly high drug concentrations in five study subjects. The FDA later issued a review letter stating that approval was not likely on the anticipated timeline and then issued a letter formally rejecting the application. The plaintiffs brought claims under Section 10(b) of the Securities Exchange Act, Securities and Exchange Commission Rule 10b-5, and Section 20(a) of the Act.

Motion and Legal Standard

The defendants moved under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not state a legally sufficient claim. Securities-fraud complaints must satisfy heightened pleading requirements under Rule 9(b) and the Private Securities Litigation Reform Act (PSLRA). Among other things, the PSLRA requires particularized facts creating a “strong inference” that the defendants acted with scienter—the required fraudulent state of mind, shown by intentional misconduct or deliberate recklessness.

The defendants argued that the challenged statements were not actionable misrepresentations and that the complaint did not adequately plead scienter. The plaintiffs argued that scienter could be inferred from the defendants’ access to the clinical data, their focus on Qtrypta, and Zosano’s need to raise money.

Court’s Analysis

The court did not decide whether the challenged statements were materially misleading. It stated that it was doubtful the plaintiffs had pleaded that issue with sufficient particularity, but concluded that the claims necessarily failed because the complaint did not adequately plead scienter.

The court found that the plaintiffs had not specifically alleged who knew about the clinical-data problems, when the individual defendants learned of them, how they learned of them, or why they would have understood the information to threaten the regulatory timeline. The court rejected the theory that the defendants would knowingly promote FDA approval if they understood that approval was likely to be delayed or denied, particularly because the plaintiffs did not allege insider stock sales or other suspicious financial activity before the disclosures.

The court also held that Zosano’s need for financing and its desire to maintain a favorable stock price were routine corporate motivations and did not, by themselves, establish scienter. Nor did general access to clinical data or the fact that Qtrypta was central to the company’s future create the required strong inference. The court explained that the complaint contained no allegations from confidential witnesses or former Zosano employees and did not provide specific evidence that the individual defendants personally knew the relevant data or understood its importance to FDA approval.

The court concluded that the allegations amounted to an unsupported fraud theory based on hindsight. Because the Section 10(b) and Rule 10b-5 claim failed for lack of adequately pleaded scienter, the Section 20(a) claim for derivative liability also failed.

Disposition

The court GRANTED defendants’ motion to dismiss the Consolidated Amended Class Action Complaint on the ground that the complaint failed to plead scienter. The court also stated that the complaint appeared to lack the required specificity for its alleged fraudulent misrepresentations or omissions. The court did not conclude that amendment would necessarily be futile, so it gave the plaintiffs leave to amend and 30 days to file an amended complaint. The order disposed of Docket No. 71.