In re Vaxart, Inc. Securities Litigation

Background

The plaintiffs asserted securities claims against the Armistice Defendants based on alleged misleading statements by Vaxart concerning the Attwill press release and Vaxart’s participation in an Operation Warp Speed non-human primate study. The complaint alleged that the Armistice Defendants influenced Vaxart and its board, participated in preparing the Operation Warp Speed press release, worked to change an insider-trading blackout period, and sold most of their Vaxart shares after the press releases.

Judicial Notice

The Armistice Defendants asked the court to take judicial notice of 14 exhibits. The court granted the request as to the unopposed exhibits and as to Exhibits 2, 5, 6, 7, and 10 because those documents were incorporated into the complaint by reference. The court denied the request as to Exhibits 11 and 12 because the complaint did not rely on them and the defendants identified no other basis for judicial notice.

Rule 10b-5(b) Claim

The court granted the motion to dismiss the Rule 10b-5(b) claim. That rule prohibits making an untrue statement of a material fact in connection with the purchase or sale of securities. Under the Supreme Court’s rule, the maker of a statement is the person or entity with ultimate authority over it.

The court concluded that Vaxart, not the Armistice Defendants, made the statements at issue because the statements were attributed to Vaxart. The complaint did not plausibly allege that the Armistice Defendants had ultimate authority over the statements, even if they influenced their timing and content. The dismissal was with leave to amend, and the plaintiffs could file an amended complaint asserting this claim within 21 days. The court also stated that the plaintiffs could seek leave to amend later if discovery on the surviving claims produced a basis for the claim.

Section 20(a) Claim Concerning Vaxart

The court also granted the motion to dismiss the Section 20(a) claim concerning Vaxart. Section 20(a) imposes liability on certain control persons. The court held that the complaint did not plausibly allege that the Armistice Defendants were control persons of Vaxart. Although the complaint plausibly alleged that they influenced Vaxart and its board, the court said control requires the practical ability to direct the actions of people who issue or sell securities, not merely the ability to persuade them. This dismissal was with leave to amend, and the court again noted that the plaintiffs could seek leave to amend if discovery on the surviving claims revealed relevant information.

Insider-Trading Claims

The court denied the motion to dismiss the insider-trading claims under Section 20A and Rule 10b-5(a) and (c). These claims required allegations that the defendants violated another provision of the Securities Exchange Act of 1934 by trading while possessing material, nonpublic information and traded at the same time as the plaintiffs.

The court found that the complaint adequately alleged scienter, meaning the required fraudulent intent or knowledge. The complaint alleged that the Armistice Defendants sold almost all of their Vaxart shares and made a significant profit after the Attwill and Operation Warp Speed press releases. The court considered those sales together with allegations that the defendants knew the Attwill release overstated Attwill’s capabilities, knew that Vaxart did not view its selection for the non-human primate study as material, participated in drafting the Operation Warp Speed release, and worked to change the blackout period so they could sell before the market learned more about Operation Warp Speed. The court also found that the complaint plausibly alleged that Boyd and Maher were control persons of Armistice Capital, and that Boyd, Maher, and Armistice Capital were control persons of Armistice Master Fund.

Scheme-Liability Claims

The court denied the motion to dismiss the Rule 10b-5(a) and (c) claims for scheme liability. Those provisions prohibit using a device or scheme to defraud and engaging in conduct that operates as fraud or deceit. The court explained that scheme liability can be based on a scheme involving misleading statements, even though Rule 10b-5(b) separately addresses who actually made a statement.

Accepting the complaint’s allegations as true at this stage, the court found that the Armistice Defendants allegedly did more than trade while possessing nonpublic information. The complaint alleged that they participated in an intentional scheme to inflate Vaxart’s share price so they could sell at an artificially high price, including by helping appoint Floroiu as CEO, promoting an aggressive and misleading public-relations campaign, seeking to change the blackout period, pushing Vaxart to announce the non-human primate study, and selling shares. The court held that these allegations were sufficient to state a claim.

Disposition

The motion to dismiss was granted in part and denied in part. The Rule 10b-5(b) claim and the Section 20(a) claim concerning Vaxart were granted dismissal with leave to amend. The insider-trading claims under Section 20A and Rule 10b-5(a) and (c), and the Rule 10b-5(a) and (c) scheme-liability claims, were not dismissed.