In re Axsome Therapeutics, Inc. Securities Litigation

Background

Evy Gru brought a proposed class action against Axsome Therapeutics, Inc., Herriot Tabuteau, Nick Pizzie, Mark Jacobson, Cedric O’Gorman, and Kevin Laliberte. He alleged violations of Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5.

The alleged fraud concerned AXS-07, a drug under development for the acute treatment of migraines. The complaint alleged that Axsome’s public filings, press releases, and investor calls failed to disclose manufacturing problems and therefore misled investors about the timing and prospects of approval by the Food and Drug Administration. The complaint relied in part on information from a former Axsome employee identified as Confidential Witness 1.

Axsome disclosed on April 25, 2022, that manufacturing-related chemistry, manufacturing, and controls issues remained unresolved. Axsome’s stock price fell approximately 22 percent that day. Gru, however, had sold all his Axsome securities by August 17, 2021, before that disclosure. A second plaintiff withdrew from the case before the motion was fully briefed, leaving Gru as the only remaining plaintiff.

Legal Standard

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint adequately states a claim. The court explained that securities-fraud claims must meet the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act. Those rules require particular details about the allegedly misleading statements and facts supporting a strong inference that the defendants acted with the required state of mind, known as scienter.

Court’s Analysis

The court held that the Section 10(b) claim did not adequately plead loss causation—the required connection between the alleged misrepresentation and the plaintiff’s financial loss. Gru bought and sold his shares while, according to the complaint, the alleged fraud continued to inflate the stock price. He sold all his shares before the April 2022 disclosure revealed the manufacturing problems and caused the later price decline. The court therefore concluded that he did not suffer a loss from that corrective disclosure.

Gru argued that a November 5, 2020, announcement delaying submission of the AXS-07 application caused a roughly 7 percent stock-price decline and served as a partial corrective disclosure. The court rejected that argument. It stated that the November announcement did not reveal manufacturing problems and that the complaint itself said investors were not told the nature or extent of those problems. The court also found that the complaint did not provide facts showing that serious manufacturing problems had emerged or were known to the defendants in November 2020. Instead, the allegations suggested that serious problems emerged or became understood later, at least by the second quarter of 2021.

The court stated that the complaint’s deficiencies could also be characterized as failures to adequately plead a material misstatement or omission and scienter. It dismissed the Section 20(a) control-person claim because that claim required an underlying Exchange Act violation, and the court found that the primary Section 10(b) claim failed.

Disposition

The court granted the defendants’ motion to dismiss. It dismissed both the Section 10(b) securities-fraud claim and the Section 20(a) control-person claim. It denied Gru’s request for oral argument as moot. The court stated that, if Gru sought to file another amended complaint, he had to submit a letter and proposed pleading by October 13, 2023, explaining how the deficiencies identified in the opinion and other issues raised by the defendants would be cured. The opinion did not itself grant leave to amend.