Chauhan v. Intercept Pharmaceuticals, Inc.

Background

The plaintiffs alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. The proposed class consists of persons and entities, other than the defendants, who purchased or otherwise acquired Intercept securities from September 28, 2019, through October 7, 2020.

The complaint alleged that Intercept and its president, chief executive officer, and director Mark Pruzanski, and its chief financial officer Sandip Kapadia, made false or misleading statements or failed to disclose safety concerns about Ocaliva, a drug used to treat primary biliary cholangitis and under development for other conditions. The complaint also alleged that these statements affected the likelihood of regulatory approval for Ocaliva’s use in treating liver fibrosis related to nonalcoholic steatohepatitis. Intercept’s stock price allegedly fell after partial disclosures on May 22, June 29, and October 8, 2020.

Legal standard

The Private Securities Litigation Reform Act requires the court to presume that the most adequate lead plaintiff is the timely applicant with the largest financial interest who also makes a preliminary showing that the proposed claims satisfy the typicality and adequacy requirements of Federal Rule of Civil Procedure 23. That presumption can be rebutted by proof that the applicant cannot fairly and adequately protect the class or faces unique defenses.

The court also explained that, although the statute permits a group to serve as lead plaintiff, the group must be able to work cohesively and manage the litigation independently of its lawyers. Relevant considerations include the group members’ prior relationship, involvement in the litigation, plans for cooperation, sophistication, and selection of counsel.

Lead-plaintiff applications

Seven putative class members or groups initially sought appointment. Four motions were withdrawn. Sapan and Awaida claimed the largest combined loss, $1,088,875.87 calculated on a last-in, first-out basis. Rice, as trustee of the Richard E. and Melinda Rice Revocable Family Trust 5/9/90, claimed a loss of $384,567.76. Wu claimed a loss of $174,705.68. Other candidates included Teamsters Union No. 142 Pension Fund and City of Cape Coral Municipal General Employees’ Retirement Plan, Paul Weller, City of Fort Lauderdale Police and Fire Retirement System, and Margaret Neale.

The court declined to treat Sapan and Awaida as a proper group. The opinion found no evidence of a pre-litigation relationship, indicated that they first communicated with each other and counsel on the deadline for lead-plaintiff applications, and found their statements about cooperation and litigation plans too general. The court also found that their proposal of two law firms, along with an unexplained reference to a third firm, did not show that they could effectively supervise the litigation apart from their lawyers. Because neither Sapan nor Awaida separately moved to be considered as an individual lead plaintiff, the court declined to consider them individually.

Rice’s eligibility

The competing applicants argued that Rice’s frequent trading, options trading, and alleged short sales created unique defenses concerning whether he relied on the integrity of Intercept’s stock price. Rice responded that he used a covered-call strategy, which the opinion described as an options strategy intended to hedge risk. The court found that the competing applicants offered no evidence of high-frequency trading, substantial options trading, material short sales, or a lack of reliance on the market price.

The court also noted that Rice claimed losses from common stock, not options. His options trading produced a stated gain of $179,584, while his common-stock losses totaled $564,151.76. The court concluded that his investment strategy did not disqualify him or make him atypical or inadequate at this stage. Rice therefore became the applicant with the largest remaining financial interest who satisfied the relevant requirements.

Class counsel and disposition

The court approved Rice’s selection of Glancy Prongay & Murray LLP as class counsel, finding that the firm was highly experienced in securities class-action litigation and appeared able to represent the class adequately.

The court GRANTS the motion at Dkt. No. 33, appoints Richard Rice as Trustee of the Richard E. and Melinda Rice Revocable Family Trust 5/9/90 as lead plaintiff, and appoints Glancy Prongay & Murray LLP as class counsel. The court therefore DENIES the remaining motions for appointment as lead plaintiff. The newly appointed lead plaintiff was ordered to meet and confer with the defendants about a schedule for a consolidated amended complaint and any motion to dismiss. The opinion selected class leadership; it did not decide the merits of the securities-fraud allegations.