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Media Alerts - Zak v. Chelsea Therapeutics Intl. Ltd. -- Fourth Circuit
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April 30, 2015
  Zak v. Chelsea Therapeutics Intl. Ltd. -- Fourth Circuit
Headline: Worst Kept Secret -- Fourth Circuit Finds Drug Company's Failure to Disclose Information to Investors Demonstrated Intent to Defraud at Pleadings Stage of Lawsuit

Areas of Law: Civil Procedure, Securities Fraud

Issues Presented: Whether investors adequately demonstrated in heightened pleadings stage of securities fraud lawsuit that company intended to defraud them by making misleading and incomplete statements.

Brief Summary: Chelsea Therapeutics is the manufacturer of Northera, a drug treatment for symptomatic neurogenic orthostatic hypotension. Before submitting its initial "new drug application" to the Food and Drug Administration (FDA), Chelsea conducted numerous clinical trials to demonstrate Nothera's efficacy and safety. Unfortunately, all but one study found the drug to be unsafe or ineffective. In a meeting with FDA officials, the FDA warned Chelsea that a single successful study typically was not sufficient to support approval of a new drug. Despite this, Chelsea announced to its investors that the FDA "agreed" that Chelsea could submit its new drug application based upon existing data and "that additional efficacy studies were not required." After submitting its new drug application, Chelsea released numerous press releases to investors that mentioned the FDA's concerns, but failed to disclose that the FDA recommended voting against the drug's approval. Ultimately, the FDA denied Northera's application. In response, plaintiff investors filed suit asserting that Chelsea and several of its corporate officers violated Section 10(b) of the Securities Exchange Act by making materially misleading statements and omissions about Northera's development and the FDA's pending approval. The district court granted the defendants' motion to dismiss, holding that the plaintiffs' allegations were insufficient to meet the heightened pleading standard of the Private Securities Litigation Reform Act and failed to establish the defendants acted with the required scienter, or "intent to deceive, manipulate, or defraud."

On appeal, the United States Court of Appeals for the Fourth Circuit held the plaintiffs pleaded sufficient facts. The court therefore vacated the district court's judgment and remanded for further proceedings. Specifically, the Fourth Circuit held that the district court erred in considering documents allegedly indicating that no Chelsea officer sold stock while Northera's application was pending because the documents failed to establish such fact and because they did not relate to the contents of the complaint. According to the court, consideration of extrinsic documents is permitted only when the documents are integral to and explicitly relied upon in the complaint. The Fourth Circuit also found that the district court's error was not harmless because the district court relied on these documents in finding that the plaintiffs' allegations of scienter were insufficient. The Fourth Circuit found that here, the plaintiffs met their pleading burden by demonstrating that the defendants knowingly or recklessly misled investors by failing to disclose material, non-public information known to the defendants and by making conflicting, incomplete public statements about the status of the application.

Judge Thacker dissented, arguing that plaintiffs needed to more clearly demonstrate Chelsea acted with the required scienter to survive the heightened pleading requirement. Plaintiffs failed to meet their burden here, in Judge Thacker's view, because there was evidence suggesting that Chelsea believed the FDA would be receptive to its application, and Chelsea consistently acknowledged obstacles in its path to approval during the review process.

To read the full text of this opinion, please click here.

Panel: Chief Judge Traxler, and Judges Keenan and Thacker

Argument Date: 12/10/2014

Date of Issued Opinion: 03/16/2015

Docket Number: No. 13-2370

Decided: Vacated and remanded by published opinion.

Case Alert Author: Laura Koman, Univ. of Maryland Carey School of Law

Counsel: ARGUED: Richard William Gonnello, FARUQI & FARUQI, LLP, New York, New York, for Appellant. Barry M. Kaplan, WILSON SONSINI GOODRICH & ROSATI, Seattle, Washington, for Appellees. ON BRIEF: Lee M. Whitman, Tobias S. Hampson, WYRICK ROBBINS YATES & PONTON LLP, Raleigh, North Carolina; Gregory L. Watts, Seattle, Washington, Ignacio E. Salceda, Cheryl W. Foung, WILSON SONSINI GOODRICH & ROASATI, Palo Alto, California, for Appellees Chelsea Therapeutics International, Ltd., Simon Pedder, and William D. Schwieterman.

Author of Opinion: Judge Keenan

Dissenting Opinion:
Judge Thacker

Case Alert Circuit Supervisor: Professor Renée Hutchins

    Posted By: Renee Hutchins @ 04/30/2015 07:49 AM     4th Circuit  

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