Abadilla v. Precigen, Inc.

Background

Lead Plaintiff Raju Shah brought a securities-fraud class action against Precigen, Inc., Randal J. Kirk, Rick L. Sterling, Andrew Last, and Robert F. Walsh III. He asserted claims under Section 10(b) of the Securities Exchange Act and Section 20(a), which can impose liability on people who control a company or another person who violated Section 10(b).

Shah alleged that Precigen publicly promoted its methane bioconversion platform as commercially viable and profitable. The platform used organisms to convert methane into industrial products. Shah alleged that Precigen publicized results from experiments using pure methane while referring to natural gas, even though pure methane allegedly cost more than 200 times as much as natural gas. He also alleged that Precigen made misleading statements about yields, commercial viability, site selection, potential markets, and government investigations. The alleged class consisted of people or entities that purchased or otherwise acquired Precigen common stock between May 10, 2017, and September 25, 2020.

Precigen moved to dismiss the Second Amended Consolidated Class Complaint under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. Securities-fraud complaints also must meet heightened requirements requiring specific details about the misleading statements, why they were misleading, and facts supporting a strong inference that the defendants acted intentionally or with deliberate recklessness.

Judicial notice and incorporated documents

The court agreed that certain documents served as the basis for Shah’s claims and could be treated as part of the complaint. It granted Precigen’s request for judicial notice of Exhibits 1 and 25 for the limited purpose of showing the company’s public statements. It denied judicial notice of Exhibits 15 through 17, which were scientific articles, because the facts in those articles were subject to reasonable dispute. The court also limited its consideration of other cited filings to the fact that they made particular representations, not whether those representations were true.

Section 10(b) claim

A Section 10(b) claim requires allegations of a material misrepresentation or omission, scienter, a connection to a securities purchase or sale, reliance, economic loss, and loss causation. The court focused on falsity, scienter, and loss causation.

Falsity

The court held that Shah adequately alleged falsity as to certain 2017 statements about the platform’s yield levels and commercial viability. The court found that a September 2020 Securities and Exchange Commission cease-and-desist order, which characterized Precigen’s 2017 representations about converting natural gas as inaccurate because the reported results used pure methane, was sufficient at the pleading stage to support falsity allegations. The court also found adequate falsity allegations for May and August 2018 statements reporting that yields had increased since 2017, because those statements referred back to the 2017 statements.

The court found other post-2017 falsity allegations insufficient. In particular, allegations from confidential witnesses about missed internal timelines, commercial-viability assessments outside the witnesses’ demonstrated expertise, and generalized challenges facing the program did not adequately show that the challenged statements were false or misleading. The court also noted that many alleged statements were non-actionable promotional language, forward-looking statements protected by the securities-law safe harbor, or opinions. It suggested that an amended complaint focus on testing results and statements that the program was “in the money.”

The court separately found that Shah adequately alleged falsity for statements indicating that Precigen might face government investigations. It considered it plausible that those statements created a misleading impression by describing investigations as a future risk even though Precigen was allegedly already under investigation by the Securities and Exchange Commission.

Scienter

Scienter means the required state of mind for securities fraud—here, intentional or deliberately reckless conduct. The court found that Shah’s allegations did not adequately plead scienter under any of his theories.

First, the confidential-witness allegations were insufficient. The allegations did not show enough direct interaction with Last or Sterling. As to Kirk and Walsh, the allegations about meeting attendance, access to information, general employee knowledge, and a meeting involving one confidential witness lacked sufficient detail or were too indirect. The court also questioned whether some information attributed to a confidential witness fell within that witness’s expertise.

Second, the court rejected Shah’s reliance on the “core operations” doctrine. That doctrine can support an inference of management knowledge in rare circumstances when the subject is so prominent that it would be unreasonable to suggest management did not know about it. The court found that the methane bioconversion program was one of several Precigen enterprises and that the allegations about management participation and communications did not meet that standard.

Third, the court found that allegations about stock sales, fundraising, acquisitions using common stock, and Precigen’s financial condition did not establish scienter. The allegations lacked additional facts showing that the conduct was suspicious, and the court noted that certain defendants or entities associated with them purchased Precigen shares during the class period.

Finally, the court found that the allegations supporting scienter for the government-investigation statements were too bare. It stated that it would reassess those allegations if Shah filed an amended pleading.

Loss causation

Loss causation asks whether the alleged misstatement, rather than some unrelated event, foreseeably caused the investor’s loss. The court found that Shah adequately pleaded this element. It was plausible that disclosures about spinning off the methane bioconversion program, suspending its operations, and writing off its assets revealed problems with the program’s progress and claimed profitability. The court also found adequate allegations concerning the March 2020 disclosure of the investigation and the September 2020 order, because Shah alleged both the investigation disclosure and a later order finding that Precigen’s 2017 statements were inaccurate.

Despite finding adequate allegations of loss causation and some adequate falsity allegations, the court concluded that Shah failed to adequately plead a Section 10(b) claim against any defendant because the complaint’s falsity and scienter allegations were insufficient overall.

Section 20(a) claim

Because a Section 20(a) claim requires an underlying Section 10(b) or Rule 10b-5 violation, the failure to adequately plead the Section 10(b) claim also defeated the Section 20(a) claim. The court additionally found that Shah’s allegations about Walsh’s title, management of the methane bioconversion program, and internal communications did not provide specific facts showing that Walsh controlled the company’s daily affairs or the preparation and release of the challenged statements. The court stated that more specific allegations would be required to plead Walsh’s status as a controlling person.

Disposition

The court granted the defendants’ motion to dismiss. It ordered that Shah’s Section 10(b) and Section 20(a) claims were dismissed with leave to amend. Shah was ordered to file an amended complaint within 60 days of the order and to include a chart identifying each challenged statement, the person alleged to have made it, and the allegations supporting scienter. The order also required Precigen, if it chose to move to dismiss the amended complaint, to provide copies of its exhibits with the cited portions highlighted.

Classification

This is a procedural order because the court dismissed the claims under Rule 12(b)(6) for inadequate pleading and allowed amendment; it did not make a final merits determination about whether securities fraud occurred.