Honig v. Hansen

Background

The two related cases were brought by private investors who purchased MabVax Therapeutics, Inc. common and preferred stock and warrants directly from MabVax in private placements. The plaintiffs alleged that MabVax’s chief executive officer, John David Hansen, and chief financial officer, Gregory P. Hanson, made material misrepresentations and omissions during 2016 through 2018. The alleged subjects included the suspension of patient enrollment after an adverse event, the possible second $5 million tranche under the Oxford Finance loan, the defendants’ promised compensation reductions, an investigation by the Securities and Exchange Commission, and registration rights.

The Honig Plaintiffs asserted claims under Sections 25400(d), 25500, 25401, 25501, 25504, and 25504.1 of the California Corporations Code, as well as fraudulent inducement, common-law fraud, negligent misrepresentation, and tortious interference with contract. The Grander Plaintiffs asserted the same claims except for tortious interference with contract. The defendants moved to dismiss both complaints for failure to state a claim. Both groups of plaintiffs separately moved to strike materials included with or referenced in the dismissal motions.

Motions to Strike

The court denied both motions to strike. It held that the motions improperly sought to strike content from motions to dismiss and related materials. Federal Rule of Civil Procedure 12(f) permits striking certain matter from a pleading, but Federal Rule of Civil Procedure 7 does not define motions as pleadings. The court therefore concluded that the challenged materials were not properly subject to motions under Rule 12(f).

Motions to Dismiss

The court applied the rule requiring a complaint to allege enough facts to state a plausible claim for relief. Because the claims were based on alleged fraud, the court also applied the heightened requirement that fraud be pleaded with particularity, including facts supporting a strong inference of fraudulent intent where required.

The court held that the California Corporations Code claims were time-barred as they concerned registration rights and the defendants’ pay cuts. The court concluded that disclosures and other information had put the plaintiffs on notice of those alleged injuries by May 2018 for the registration-rights allegations and by July 2017 or April 2018 for the compensation allegations. The plaintiffs filed the two suits in July and October 2020. The court did not find the California claims time-barred as they concerned the Oxford Loan, reasoning that the cited statements did not clearly indicate to a reasonable investor that the plaintiffs had been defrauded.

The court held that the plaintiffs adequately alleged material misstatements or omissions concerning the Oxford Loan and the suspension of patient enrollment. In the court’s view, describing the second loan tranche as having “expired” could have created a materially misleading impression because it did not disclose Oxford’s rejection or the reason for that rejection. The court also accepted, at the pleading stage, the allegations that patient enrollment had been suspended because of an adverse event and that the defendants were involved in MabVax’s operations and disclosures.

The court nevertheless held that the plaintiffs failed to plead loss causation—the required connection between the alleged misconduct and the losses claimed. The complaints alleged that MabVax lost its ability to raise capital and went bankrupt after the problems became known, but did not provide factual allegations showing that disclosure of the alleged misconduct caused the bankruptcy. The complaints also did not identify a stock-price decline connected to a corrective disclosure about the enrollment suspension. On that basis, the court dismissed the claims for common-law fraud, fraudulent inducement, negligent misrepresentation, and tortious interference with contract, identified as Counts III through VII.

For Count I, involving Sections 25400(d) and 25500 of the California Corporations Code, the court held that the plaintiffs failed to plead facts supporting a strong inference of scienter, meaning fraudulent intent or knowing or reckless misconduct. The alleged desire to preserve compensation was a generalized motive common to corporate officers and was not enough. The plaintiffs also did not allege that the defendants made misstatements to profit from selling their own shares. The court therefore dismissed Count I.

For Count II, involving Sections 25401, 25501, 25504, and 25504.1, the court held that the plaintiffs failed to plead the required privity for the Sections 25401 and 25501 claims. Privity here required allegations that the defendants themselves sold the securities directly to the plaintiffs. The complaints instead alleged that the plaintiffs bought the securities directly from MabVax. The court also dismissed the secondary-liability claims under Sections 25504 and 25504.1 because those claims depended on primary liability and the plaintiffs asserted no primary-liability claims against MabVax.

Disposition

The amended order states that the defendants’ motions to dismiss were granted and that the plaintiffs’ motions to strike were denied. The court directed the clerk to close civil cases 20-cv-5872 and 20-cv-8618, close the open motions, and grant judgment to the defendants dismissing the complaints. The amended order corrected the court’s earlier order by adding the grant of judgment to the defendants.