Kong v. Fluidigm Corporation

Background

Fluidigm Corporation manufactures and markets products and services used by researchers studying health and disease. Kwok Kong sought to represent a proposed class of people and entities that purchased or otherwise acquired Fluidigm securities between February 9, 2019, and November 5, 2019. The individual defendants included Stephen Christopher Linthwaite and Vikram Jog.

Kong alleged that defendants made materially false or misleading statements and failed to disclose adverse information about Fluidigm’s business, operations, and prospects. In particular, he alleged that defendants knew by late 2018 or early 2019 that sales of mass-cytometry instruments would decline during the second half of 2019, but continued making statements suggesting a strong sales pipeline. He alleged that the disclosures eventually made about declining demand caused Fluidigm’s stock price to fall and caused investor losses.

The second amended complaint asserted two claims: a claim under Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5 against all defendants, and a claim under Section 20(a) of the Exchange Act against the individual defendants. Defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not state a legally sufficient claim. They also sought judicial notice of company press releases, earnings-call transcripts, and filings with the Securities and Exchange Commission. Kong did not oppose judicial notice of the documents but argued that defendants should not use them to create a competing factual account of the allegations.

Judicial Notice

The court granted defendants’ request for judicial notice because the documents’ authenticity was not disputed and courts routinely take notice of those types of materials. The court stated, however, that it would not accept as established any facts in the documents that were reasonably disputed.

Analysis

To plead a Section 10(b) and Rule 10b-5 securities-fraud claim, a plaintiff must allege, among other things, a material misrepresentation or omission, scienter, a connection to the purchase or sale of a security, reliance, economic loss, and loss causation. Scienter means the required mental state, such as an intent to deceive or deliberate recklessness. Under the Private Securities Litigation Reform Act, the complaint had to plead facts giving rise to a strong inference of scienter with particularity.

The court assumed for purposes of its analysis that Kong’s amended allegations about the falsity of defendants’ statements were sufficient. It focused instead on whether the complaint adequately alleged scienter. The court evaluated the allegations as a whole rather than considering each allegation separately.

The court found that the absence of allegations of insider trading or suspicious stock sales weighed against scienter. It also noted that Linthwaite purchased Fluidigm shares in August 2019, which the court said undermined an inference that he knew the stock was overvalued because of concealed information. The court further held that the alleged desire to raise capital through a potential public offering was a routine corporate objective and, without more, did not establish scienter.

Considering all the allegations together, the court held that the complaint did not create the strong inference of scienter required for a Section 10(b) claim. The court therefore dismissed the Section 10(b) claim. Because a Section 20(a) control-person claim requires a primary violation of federal securities law, the court also held that Kong failed to state a Section 20(a) claim after the Section 10(b) claim failed.

Disposition

The court found that Kong had already been given an opportunity to correct the scienter deficiencies identified in the earlier order. It concluded that further amendment would be futile and dismissed the claims without leave to amend. The court granted defendants’ request for judicial notice and granted defendants’ motion to dismiss the second amended complaint with prejudice.