Kim v. Allakos Inc.

Background

Lead plaintiff Sung Kim and named plaintiffs Christian Mayo and Allison Skye brought a consolidated securities class action against Allakos Inc. and Robert Alexander, Leo Redmon, Henrik Rasmussen, and Adam Tomasi. The complaint asserted claims under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 against all defendants, as well as a Section 20(a) control-person claim against the individual defendants.

The proposed class consisted of people and entities who purchased Allakos common stock between March 14, 2019, and December 17, 2019, inclusive, and held the stock through the end of that period. Allakos was developing AK002, a drug intended to treat certain eosinophil and mast-cell diseases. Plaintiffs based their allegations largely on a report by Seligman Investments that criticized the company’s ENIGMA clinical trial. Plaintiffs alleged that Allakos had misled investors about the trial’s use of an independent contract research organization, whether the trial was properly blinded and controlled, patient steroid use, and the number of drug-related serious adverse events. They alleged that the statements inflated Allakos’s stock price and that the price declined after the Seligman report was published.

Motion-to-Dismiss Standard

The court evaluated the amended complaint under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not state a legally sufficient claim. Securities-fraud claims also must satisfy heightened pleading requirements under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act. Among other things, a plaintiff must identify each allegedly misleading statement, explain why it was misleading, and plead facts supporting the allegation.

Alleged Misrepresentations

The court rejected Plaintiffs’ allegations concerning an independent contract research organization. Allakos’s filings said that it generally relied on various third parties, including contract research organizations, clinical data organizations, medical institutions, and investigators. The court found that these statements were consistent with Allakos’s use of multiple third parties during the ENIGMA trial and that no reasonable investor could view the statements as false or misleading merely because Allakos did not use a single contract research organization.

The court also rejected the allegations concerning the trial’s description as randomized, double-blind, and placebo-controlled. In the court’s view, allegations criticizing the trial’s methodology generally questioned the study’s effectiveness rather than showing that the company’s statements about the study were false. The social-media statements cited by Plaintiffs included speculation by patients and families about whether they had received the drug or placebo, but other statements showed that participants were unsure of their treatment assignments. The court found these excerpts insufficient to plead that the trial was not conducted blind. It also did not find persuasive the argument that infusion reactions necessarily made participants or investigators know whether patients received AK002 or a placebo.

The court found that Plaintiffs had not adequately alleged that Allakos misrepresented patient steroid use. The 28 percent figure cited by Plaintiffs referred to acute steroid use, while the study allowed stable, low-dose steroid use. The court found that the company disclosed both types of steroid use. Plaintiffs also argued in their opposition that Alexander falsely said steroids had no effect on the results, but the court noted that this contention was not made in the amended complaint. The court further found that Plaintiffs had not shown why the statement was false or misleading, particularly because the complaint’s materials indicated that Allakos analyzed results both with and without patients who received acute steroid doses and found highly similar efficacy results.

Finally, the court rejected the allegations concerning serious adverse events. Allakos’s presentation identified one drug-related serious adverse event. The court explained that trial investigators, rather than the sponsoring company, were responsible for reporting serious adverse events and assessing whether they were drug-related. The Facebook reports cited by Plaintiffs were uncorroborated accounts from third parties and did not establish that the company’s representations, based on investigator reports, were false or misleading. The court also characterized disputes about how particular trial incidents should be classified as drug-related serious adverse events as insufficient to support a securities-fraud claim.

Scienter and Section 20(a)

Because Plaintiffs failed to adequately plead that the challenged statements were false or misleading, the court did not address scienter, meaning the required wrongful state of mind for the securities-fraud claim.

The court also held that the Section 20(a) claim against the individual defendants failed. That claim was derivative of the primary Section 10(b) and Rule 10b-5 claim. Because Plaintiffs had not alleged a primary securities-law violation by any defendant, they could not establish control-person liability under Section 20(a).

Disposition

The court GRANTED Defendants’ motion to dismiss with leave to amend. Any amended complaint was due no later than April 29, 2022.