Local No. 8 IBEW Retirement Pl v. Vertex Pharmaceuticals, Inc. , 838 F.3d 76 ( 2016 )

United States Court of Appeals
For the First Circuit
No. 15-2250
LOCAL NO. 8 IBEW RETIREMENT PLAN & TRUST, on behalf of itself
and all others similarly situated,
Plaintiff, Appellant,
v.
VERTEX PHARMACEUTICALS, INC.; JOSHUA BOGER, Ph.D.; JEFFREY
LEIDEN, Ph.D.; PETER MUELLER, Ph.D.; PAUL SILVA; ELAINE ULLIAN;
NANCY J. WYSENSKI,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. F. Dennis Saylor IV, U.S. District Judge]
Before
Torruella, Kayatta, and Barron,
Circuit Judges.
Amanda F. Lawrence, with whom David R. Scott, Joseph P.
Guglielmo, Beth A. Kaswan, Donald A. Broggi, and Scott + Scott,
Attorneys at Law, LLP, were on brief, for appellant.
John F. Sylvia, with whom Andrew Nathanson, Matthew D. Levitt,
Rebecca L. Zeidel, and Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo, P.C., were on brief, for appellees.
October 3, 2016
KAYATTA, Circuit Judge. During the course of clinical
trials for an experimental drug combination intended to treat a
fatal lung disease, Vertex Pharmaceuticals, Inc. ("Vertex")
announced interim results that overstated the improvement in lung
function exhibited in a group of patients receiving the combination
treatment. Following this announcement, Vertex's stock price rose
from $37.41 per share to close at $64.85 three weeks later. It
then lost some of its gain, dropping to $57.80, after Vertex
corrected the initial release's overstatement. Acting on behalf
of all those who acquired Vertex stock during the period in which
the overstatement stood uncorrected, Local No. 8 IBEW Retirement
Plan & Trust ("Local No. 8") filed this securities fraud class
action complaint against Vertex and six past and current Vertex
employees. The district court dismissed the complaint, finding
that it failed to create a strong inference that the defendants
had acted with scienter, the requisite mental state. See Local
No. 8 IBEW Ret. Plan v. Vertex Pharm., Inc., 140 F. Supp. 3d 120,
137 (D. Mass. 2015). We agree and so affirm.
I. Background1
As one of the world's largest biotechnology companies,
Vertex researches, develops, and sells treatments for a variety of
1
Because Local No. 8 appeals from a judgment granting the
defendants' motion to dismiss, we take the facts alleged in the
complaint as true and draw all reasonable inferences from those
- 2 -
ailments. In 1998, Vertex began working on drugs to combat cystic
fibrosis, a fatal and as yet incurable lung disease. In early
2012 it gained Food and Drug Administration ("FDA") approval to
market a drug, Kalydeco, to treat patients with a rare form of the
disease. This approval, along with a contemporaneous drop in the
value of Vertex's stock due to Vertex's diminishing returns from
another product line, prompted Vertex to focus its energies on
developing a more broadly marketable cystic fibrosis treatment.
In pursuit of this aim, Vertex explored a "combination
therapy," in which a cystic fibrosis patient first undergoes a
course of treatment with an experimental drug called VX-809 and
only then begins taking Kalydeco. Hoping that this combination
would be effective against the most common form of cystic fibrosis,
Vertex began a three-phase clinical investigation required for FDA
approval. See N.J. Carpenters Pension & Annuity Funds v. Biogen
IDEC Inc., 537 F.3d 35, 39 (1st Cir. 2008) (describing the FDA
approval process); 21 C.F.R. § 312.21 (describing the three phases
of clinical investigation). On May 7, 2012, while the second phase
of this process was ongoing, Vertex issued a press release
announcing interim results drawn from roughly half of the 108
enrolled patients.2 The press release focused in particular on
facts in favor of Local No. 8. See In re Bos. Sci. Corp. Sec.
Litig., 686 F.3d 21, 27 (1st Cir. 2012).
2Phase 2 trials are typically closely controlled, small-
scale studies designed to evaluate an experimental treatment's
- 3 -
one of the principal markers used to evaluate the effectiveness of
a cystic fibrosis treatment: lung function, as measured by the
amount of air a patient is capable of exhaling in one second.
According to the press release,
[o]f those who received [the combination
therapy], approximately 46 percent (17/37)
experienced an absolute improvement from
baseline to Day 56 [of the trial period] in
lung function of 5 percentage points or more,
and approximately 30 percent (11/37)
experienced an absolute improvement from
baseline to Day 56 of 10 percentage points or
more. None of the patients treated with
placebo (0/11) achieved a 5-percentage point
or more improvement from baseline to Day 56 in
lung function.
The press release described these results as "exceed[ing]
[Vertex's] expectations," although it cautioned that "complete
data" were not yet available and that "the final outcomes of this
clinical trial or future clinical trials . . . may be less
favorable than the interim analysis reported today, or may not be
favorable at all."3
efficacy, as well as its short-term side effects and potential
risks. See 21 C.F.R. § 312.21(b).
3Although the text of the press release was not incorporated
into Local No. 8's complaint and was instead submitted by the
defendants in support of their motion to dismiss, we may--as the
district court did--nevertheless consider it at this stage because
it is referenced in the complaint, it is central to Local No. 8's
claim, and no party disputes its authenticity. See Schaefer v.
Indymac Mortg. Servs., 731 F.3d 98, 100 n.1 (1st Cir. 2013). We
also consider the subsequent press releases issued by Vertex on
May 29, 2012 and June 28, 2012, both of which were submitted to
the court below without objection.
- 4 -
The same day, Vertex held a conference call for media
and investors. On the call, Vertex's Executive Vice President and
Chief Scientific Officer, Peter Mueller ("Mueller"), described the
interim results as "really, really fantastic" and went on to say,
"I have never seen anything like this." Vertex's Chief Executive
Officer ("CEO"), Jeffrey Leiden ("Leiden"), also expressed
confidence in the results, saying that they were "driving us
to . . . plan for potential market entries sooner than we had
previously planned" and that, "[p]ending final data this summer
and discussions with regulators, we look forward to accelerating
the development of our [cystic fibrosis] combination regimen."
Nancy Wysenski ("Wysenski"), at that time Vertex's Chief
Commercial Officer and Executive Vice President, further noted
that the number of patients who stood to benefit from the
combination treatment under review exceeded 70,000--a market that
could translate into billions of dollars in potential sales.4
Vertex's stock price swiftly responded to the
announcement of the promising interim results. On May 7, 2012,
the day of the announcement, Vertex stock closed at $58.12 per
share--up from the prior close of $37.41, with a trading volume
4
Vertex's Chief Financial Officer confirmed in a call the
following day that "the data [were] beyond our expectations" and
that Vertex sought "to drive . . . quickly into" the next phase of
the clinical investigation in order to "get to . . . patients as
fast as possible with this combination therapy."
- 5 -
forty times higher than average. By May 25, 2012, the closing
price had risen to $64.85 per share. Meanwhile, five Vertex
employees named as defendants in this suit--Joshua Boger
("Boger"), then Vertex's Director; Paul Silva ("Silva"), who had
formerly served as Vertex's Vice President and Corporate
Controller; Elaine Ullian ("Ullian"), Vertex's co-lead independent
director; Mueller; and Wysenski--sold a total of 539,313 shares of
Vertex stock, collecting almost $32 million in all.
On May 29, 2012, Vertex announced in a press release
that the interim results that had so energized its market prospects
had overstated the improvement in lung function exhibited among
the Phase 2 patients receiving the combination treatment. The
error, as Vertex acknowledged that day in a conference call,
stemmed from a "misinterpretation" as to whether the results Vertex
had received from the third-party statistical analysis vendor
reflected the absolute improvement in the patients' lung function
or, rather, the improvement relative to the patients' baseline
levels of lung function.5 When evaluated properly, Vertex's press
release explained, the data showed that 35 percent of the patients
5 According to the complaint, a relative improvement means "a
percentage change from baseline," whereas an absolute improvement
is "the numerical distance between the baseline measurement and
the improved measurement." For our purposes, it appears that we
need only understand the distinction to mean that an absolute
improvement is more favorable than a relative improvement of the
same percentage.
- 6 -
taking the combination treatment (rather than 46 percent, as had
initially been reported experienced an absolute improvement of 5
percent or more, and that 19 percent (rather than 30 percent, as
had initially been reported) experienced an absolute improvement
of 10 percent or more. Immediately following the announcement of
the corrected results, the closing price of Vertex stock
experienced its greatest decline in three years, dropping to $57.80
per share, down from $64.85 per share on May 25, yet still well up
from the May 4 close of $37.41.
Just short of two years later, Local No. 8 filed a class-
action complaint against Vertex--as well as Boger, Leiden,
Mueller, Silva, Ullian, and Wysenski--on behalf of all those who,
like Local No. 8, had acquired Vertex stock between the
announcement of the overstated interim results on May 7, 2012, and
the announcement of the corrected results on May 29, 2012. The
complaint charged all defendants with securities fraud under
section 10(b) of the Securities Exchange Act of 1934 ("Exchange
Act"), 15 U.S.C. § 78j(b), and the Securities and Exchange
Commission's Rule 10b-5, 17 C.F.R. § 240.10b-5. It also charged
the six individual defendants with joint and several liability
under section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), for
the alleged securities fraud, on the theory that these defendants
"controlled Vertex, and/or controlled other Individual
Defendants"; and charged Boger, Mueller, Silva, Ullian, and
- 7 -
Wysenski with insider trading under section 20A of the Exchange
Act, id. § 78t-1(a). The gravamen of the alleged fraud, according
to the complaint, is that, "[w]hen faced with . . . study results
that seemed too good to be true, Defendants, rather than checking
the results, turned a blind eye, accepting and promoting unlikely
data that offered them a windfall on the sale of their stock."
The defendants moved to dismiss for failure to state a
claim, see Fed. R. Civ. P. 12(b)(6), arguing that the facts alleged
in the complaint fail to generate a strong inference that the
defendants acted with the mental state required to render them
liable under section 10(b) and Rule 10b-5. The district court
agreed. It found as well that Local No. 8's section 20(a) and
section 20A claims could not survive in the absence of a proper
section 10(b) and Rule 10b-5 claim, and dismissed the complaint.
See Local No. 8, 140 F. Supp. 3d at 137. This timely appeal
ensued.
II. Analysis
We review de novo the district court's grant of the
defendants' motion to dismiss for failure to state a claim.
Aldridge v. A.T. Cross Corp., 284 F.3d 72, 78 (1st Cir. 2002).
A. Section 10(b) and Rule 10b-5
To successfully state a securities fraud claim under
section 10(b) and Rule 10b-5, a plaintiff must adequately allege,
among other things, scienter. "Scienter . . . is 'a mental state
- 8 -
embracing intent to deceive, manipulate, or defraud.'" Id. at 82(quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12
(1976)). A plaintiff can establish scienter "by showing that
defendants either 'consciously intended to defraud, or . . . acted
with a high degree of recklessness.'" Miss. Pub. Emps.' Ret. Sys.
v. Bos. Sci. Corp. ("Boston I"), 523 F.3d 75, 85 (1st Cir. 2008)
(quoting Aldridge, 284 F.3d at 82). "Recklessness in this context
is 'a highly unreasonable omission, involving not merely simple,
or even inexcusable negligence, but an extreme departure from the
standards of ordinary care.'" In re Smith & Wesson Holding Corp.
Sec. Litig., 669 F.3d 68, 77 (1st Cir. 2012) (quoting Miss. Pub.
Emps.' Ret. Sys. v. Bos. Sci. Corp. ("Boston II"), 649 F.3d 5, 20
(1st Cir. 2011)). The omission must "present[] a danger of
misleading buyers or sellers that is either known to the defendant
or is so obvious the actor must have been aware of it." Id.(quoting Boston II, 649 F.3d at 20). This form of recklessness
is "closer to a lesser form of intent" than it is to ordinary
negligence. Greebel v. FTP Software, Inc., 194 F.3d 185, 199 (1st
Cir. 1999).6
6 Local No. 8 attempts to dilute this stringent standard by
citing to a Ninth Circuit case, In re Oracle Corp. Sec. Litig.,
627 F.3d 376 (9th Cir. 2010), which stated that recklessness arises
where the defendant "had reasonable grounds to believe material
facts existed that were misstated or omitted, but nonetheless
failed to obtain and disclose such facts although he could have
done so without extraordinary effort," id. at 390 (quoting Howard
v. Everex Sys., Inc., 228 F.3d 1057, 1064 (9th Cir. 2000)). While
- 9 -
To determine whether the complaint here adequately
alleges that the defendants acted with this culpable mental state,
we eschew the ordinary standards of Federal Rule of Civil
Procedure 8(a)(2), which require only that the plaintiff "plead[]
factual content that allows the court to draw the reasonable
inference that the defendant[s] [are] liable for the misconduct
alleged," Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Instead,
Congress has directed us to evaluate section 10(b) and Rule 10b-5
claims of this type under the heightened pleading standards of the
Private Securities Litigation Reform Act of 1995 ("PSLRA"), Pub.
L. No. 104-67, 109 Stat. 737. See Aldridge, 284 F.3d at 78. As
is relevant here, the PSLRA provides that a complaint must "state
with particularity facts giving rise to a strong inference that
the defendant[s] acted with [scienter]." 15 U.S.C.
§ 78u-4(b)(2)(A). Under this standard, "[a] complaint will
survive . . . only if a reasonable person would deem the inference
of scienter cogent and at least as compelling as any opposing
the Ninth Circuit has indeed recently applied this formulation of
recklessness in assessing the adequacy of a complaint under the
PSLRA, Reese v. Malone, 747 F.3d 557, 569 (9th Cir. 2014), even
more recently it has rejected this same formulation as insufficient
for assessing such a complaint, applying instead the formulation
used in this circuit. In re NVIDIA Corp. Sec. Litig., 768 F.3d
1046, 1053 & n.7 (9th Cir. 2014), cert. denied sub nom. Cohen v.
Nvidia Corp., 135 S. Ct. 2349 (2015). In any event, however one
might describe the law in the Ninth Circuit, we see no reason not
to continue to apply a standard that makes clear that allegations
of merely unreasonable conduct do not sufficiently plead scienter.
- 10 -
inference one could draw from the facts alleged." Tellabs, Inc.
v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007).
Local No. 8 argues on appeal that the complaint
adequately alleges facts making it as likely as not that the
defendants recklessly turned a blind eye to an obvious danger that
the announced interpretation of the initial results was wrong.7
To support this argument, Local No. 8 points to the cumulative
probative force of seven facts alleged in the complaint. We are
mindful that "[e]ach individual fact about scienter may provide
only a brushstroke," but it is our obligation to consider "the
resulting portrait." In re Cabletron Sys., Inc., 311 F.3d 11, 40
(1st Cir. 2002). Accordingly, we examine each alleged fact in
turn, and then conclude by assessing them cumulatively.
First, Vertex itself described the results as
unexpected, or as "exceed[ing] . . . expectations." The results
were unexpected because, the complaint alleges, it was known
"within Vertex" that VX-809 caused Kalydeco to "work less well."
The fact remains, though, that Vertex made the investment necessary
to design and perform a study testing the two drugs in combination.
So, its puffing professions of surprise notwithstanding, Vertex
7 Local No. 8 contends that the district court improperly
conflated the recklessness standard with an actual knowledge
standard. We do not find the district court to have done so, but
because we review the dismissal of Local No. 8's complaint de novo
under the proper standard, the outcome of this appeal in no way
depends on our so finding.
- 11 -
must have thought that positive results were possible, even if not
probable. We suspect, too, that many studies of new pharmaceutical
products result in surprises, both good and bad.
This moves us to Local No. 8's second and related point,
which arises from the complaint's allegations concerning the
science of cystic fibrosis research. Local No. 8 alleges that
cystic fibrosis research focuses on both "lung function and sweat
chloride." Because cystic fibrosis progressively and eventually
fatally obstructs the lungs, "pulmonary function is an important
marker of cystic fibrosis lung disease severity." As a measure of
pulmonary function, scientists test the patient for "Forced
Expired Volume" ("FEV"). Local No. 8 alleges that scientists
studying cystic fibrosis also measure "sweat chloride levels"
because cystic fibrosis impairs the tissues of the sweat glands,
thereby elevating the concentration of chloride in the patient's
sweat.
The interim results reported to and by Vertex showed
increased FEV measurements, but no material drop in sweat chloride
levels. Local No. 8 argues that some people have described sweat
chloride levels to be the "gold standard" in cystic fibrosis
research, and that "individuals at the Company were 'highly
skeptical' of the study results because of the lack of sweat
chloride improvements." Therefore, reasons Local No. 8, it was
obvious that there was something wrong with the results.
- 12 -
Missing from the allegations is any contention that any
defendant viewed the sweat chloride levels as incompatible with
the FEV measurements, or that any of the unnamed individuals
conveyed any such skepticism to any defendant. Greebel, 194 F.3d
at 199; cf. Auto. Indus. Pension Trust Fund v. Textron Inc., 682
F.3d 34, 39 (1st Cir. 2012) (inference that defendants suspected
a statement was misleading is weaker where "warnings by
subordinates or expressions of concern by executives are notably
absent"). The complaint does not even allege that scientists in
general, much less those at Vertex, regarded the reported results
as implausible. And given that the final results reflected the
same phenomenon (improved FEV and steady sweat chloride levels),
there is no reason given here to presume that scientists in general
must view the possibility of such results as obviously wrong.
Notably, too, Vertex reported the sweat chloride levels in the
same press release in which it reported the positive FEV results.
So it would seem most likely that Vertex itself did not view the
former as belying the latter, and neither apparently did the
market.8
8 Contrary to Local No. 8's assertion, Boston I is not
"particularly on point." In Boston I, we reversed the dismissal
of a section 10(b) claim, 523 F.3d at 94, finding that the
defendants' own statements in connection with a manufacturing
change to a medical device could be read as an admission that the
change had been made in response to a design defect that the
defendants had not previously disclosed, see id. at 88. No such
potentially facially incriminating statements are at issue here.
- 13 -
Third, Local No. 8 alleges that the study was very
important to Vertex, and that it would therefore "be 'absurd' to
suggest that Defendants were not aware of the suspect nature of
the results." It is true that the importance of a particular item
to a defendant can support an inference that the defendant is
"paying close attention" to that item. Institutional Inv'rs Grp.
v. Avaya, Inc., 564 F.3d 242, 271 (3d Cir. 2009). Such an
inference, however, is only helpful in establishing scienter if
that close attention would have revealed an incongruity so glaring
as to make the need for further inquiry obvious. See id. at 270–
71 (noting that a "steep decline" in operating margins creates
inference that Chief Financial Officer, who "was paying close
attention to these numbers," would investigate the cause). We
have already discussed why the complaint fails to establish that
the announced results, on their face, contained such an obvious
incongruity.
Similarly, some cases have recognized that certain key
facts known to lower-level company managers concerning a company's
flagship product, such as whether a $100 million contract has been
signed to sell the product, or that sales are falling fast rather
than rising, are very likely known to senior management who made
repeated public announcements concerning sales of the product.
See, e.g., Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d
702, 706-10 (7th Cir. 2008). But the complaint here does not
- 14 -
allege that anybody at Vertex responsible for receiving,
reviewing, and reporting the results had actually spotted the error
in the interpretation of the results before the discovery that led
to the second announcement.
Fourth, Local No. 8 points to its allegation that the
specific error in the publicly reported results--namely, the
substitution of relative improvement for absolute improvement in
lung function--was so "fundamental" that it should have been
apparent to the Vertex pulmonologist responsible for receiving the
raw data from the third-party vendor "regardless of how [the data]
w[ere] presented by the vendor." The pulmonologist is not a
defendant, however, and there is no allegation that any party
responsible for the decision to announce the interim results
received the raw data. The fact that a Vertex pulmonologist was
the one who received the raw data actually cuts sharply against
Local No. 8 because there is no allegation that even this
pulmonologist noticed or suspected that Vertex's reported
interpretation of the results was incorrect, or told anyone of any
skepticism. The complaint does assert in conclusory fashion that
the pulmonologist "should have known" of the error. Yet, the
complaint tells us nothing about the precise form of the
information conveyed by the vendor, or the vendor's reliability.
Negligence by the pulmonologist, too, hardly gets Local No. 8
anywhere. Rather, it adds a concrete reason why the erroneous
- 15 -
interpretation of the study results would not have been obvious to
the executives to whom the pulmonologist reported the results.
Even making the reasonable inference, as Local No. 8
urges, that the defendants had access to the raw data--review of
which would allegedly have rendered the error obvious through
"simple math"--we have already determined that the complaint's
allegations are insufficient to establish that the erroneously
interpreted end results (which are all the individual defendants
are alleged to have received) were themselves so obviously suspect
that we can draw a strong inference that the defendants were
reckless in failing to consult the raw data themselves for
verification.9
Fifth, in its appellate brief, Local No. 8 also observes
that it is "rare[]" to publish interim results and implies that
Vertex's decision to do so here is probative of scienter. However,
the complaint nowhere alleges that the publication of interim
results was anomalous, and so we do not consider this argument in
assessing whether the complaint has stated a claim. Nor does Local
No. 8 point to any legal requirement, or any undertaking by Vertex,
9 At oral argument, counsel for Local No. 8 noted that, prior
to discovery, few plaintiffs will be in a position to make specific
allegations about the form of internal documents. "But while a
trawl through archives may sometimes catch a few fish, Congress,"
for reasons of its own, "deliberately raised the entry bar to
discovery . . . through the PSLRA's heightened pleading standards."
Textron, 682 F.3d at 40.
- 16 -
that obligated the company to double-check the interim results
before announcing them.
Sixth, we have considered Local No. 8's allegations that
the defendants had a financial motive to "turn[] a blind eye" to
the erroneous interpretation of the interim results because of the
stock price spike precipitated by the error. Cf. Aldridge, 284
F.3d at 83 ("When financial incentives to exaggerate [material
information] go far beyond the usual . . . , they may be considered
among other facts to show scienter." (emphasis supplied)). Here,
several facts strongly suggest that at least Vertex's CEO, Leiden,
had no motive to ignore an error that was obvious and that would
therefore soon become known. Leiden, who touted the erroneous
interim results as driving Vertex "to accelerat[e] the development
of [its] [cystic fibrosis] combination regimen," is not alleged to
have sold any stock during the class period. Local No. 8 contends
that this was "a major study that . . . was central to [Vertex's]
prospects." Announcing good results on such a study would have
been clearly better for Vertex than announcing great results only
to reduce them to good results by shortly thereafter confessing
error, thereby harming the company's credibility and its
reputation for competence. Combined with the foregoing points,
this fact makes it quite unlikely (and certainly less than 50-50)
that any error was so obvious that Leiden must have known that the
- 17 -
results were mistaken (and would therefore soon have to be
withdrawn or corrected).
Local No. 8 therefore places its focus on the fact that
the other five defendants sold almost $32 million worth of stock
following release of the overstated interim results. According to
the complaint, these sales were "unusual when compared to [the
individual defendants'] trading history before and after" the
three-week class period. Local No. 8 argues that this unusual
activity, together with the inferences that can be drawn from the
defendants' failure to double-check the interim results, makes
"the inference that Defendants turned a blind eye to the suspect
test results to line their own pockets . . . at least as strong"
as an inference of negligence.
It is well settled that "[i]nsider trading in suspicious
amounts or at suspicious times may be probative of scienter."
Boston I, 523 F.3d at 92 (citing Greebel, 194 F.3d at 197;
Greenstone v. Cambex Corp., 975 F.2d 22, 26 (1st Cir. 1992)). At
the outset, however, it bears noting that, in addition to Leiden,
defendant Boger did not engage in any inconsistent trading behavior
during the class period. Boger, who was Vertex's Director at the
time, sold consistently small amounts of stock on a more or less
weekly basis before, during, and after the class period.
So, to regard the stock sales as either motive for the
fraud or evidence of the defendants' knowledge that the interim
- 18 -
study results had been misinterpreted, we must hypothesize either
that the error was obvious only to those defendants who made
unprecedented sales, or that it was obvious to all, yet the
Director and CEO nevertheless went along with announcing obviously
flawed results. The complaint, though, offers no fact suggesting
that the sellers knew more than the nonsellers. To the contrary,
the largest seller, Wysenski, was not a scientist. And our
discussion of Leiden's salient interests and motive renders a
stretch any inference that he would have gone along with announcing
obviously erroneous results.
The complaint's chronology also offers a simple
alternative explanation of the stock sales. After a long period
of steady or dropping stock prices, the stock price suddenly jumped
a large amount. Such an increase--no matter what its cause--
creates a substantial incentive for holders to sell unless they
believe the price will continue to rise and are willing to wait.
Sales in the historical context described in the complaint carry
little force in implying knowledge that the stock will drop.10 All
in all, the presence of this perfectly understandable, innocent
10By contrast, consider a case of more or less steady stock
price, followed by a nonpublic adverse event, inside sales, and
then public disclosure of the adverse event. See, e.g., SEC v.
Rocklage, 470 F.3d 1, 3–4 (1st Cir. 2006).
- 19 -
reason to sell, combined with the poor fit between the facts and
Local No. 8's theory, leaves us short of the scienter mark.11
Seventh, there is, finally, the fact that Vertex
announced the retirement of Wysenski, aged fifty-four at the time,
"suddenly and without any forewarning" on June 8, 2012--just one
day after Iowa Senator Charles Grassley had sent a letter to
Securities and Exchange Commission Chairwoman Mary Shapiro asking
her to probe whether "Vertex . . . executives . . . took advantage
of the spike in the stock knowing the news of the clinical data
being overstated would be made public eventually, which in turn
would negatively affect the stock value." From these
circumstances, Local No. 8 asks us to infer (1) that the defendants
were aware of Senator Grassley's letter, and (2) that the letter
prompted Wysenski's retirement (3) because it correctly exposed
that Wysenski, at a minimum, had deliberately turned a blind eye
to the risk that the announced interim results were erroneous.
11
Local No. 8 cites a Ninth Circuit case, No. 84 Employer-
Teamster Joint Council Pension Trust Fund v. America West Holding
Corp., 320 F.3d 920 (9th Cir. 2003), which it describes as
"analogous." However, a major factor in the America West court's
determination that the stock sales at issue were "unusual and
suspicious," id. at 940, was the fact that "[m]ost of the [alleged
insiders] sold 100% of their shares, with the lowest percentage
being 88%," id. at 939. Here, by contrast, the two most senior
defendants made no sales out of the ordinary course, and the
complaint contains no allegation as to what proportion of his or
her total stock any other defendant sold during the class period.
- 20 -
These allegations both point a finger at Wysenski and
tend to exculpate the others who did not retire or leave the
company. The question is whether they add enough to permit a claim
against Wysenski; i.e., whether they make "the inference of
scienter . . . at least as compelling as any opposing inference
one could draw from the facts alleged." Tellabs, 551 U.S. at 324.
It is reasonable to infer that Vertex knew of Senator Grassley's
letter,12 and that Wysenski's departure had something to do with
her stock sales. But Local No. 8 must take us a step further.
For Local No. 8 to prevail, we would need to infer that Wysenski
left or was pushed out for a particular reason; i.e., because she
had unlawfully misled the market. If that were the reason, though,
it would have applied to all defendants because the complaint makes
no suggestion that Wysenski (a nonscientist handling marketing)
knew anything more about the test results than did the others (who
neither left nor were forced out in this timeframe).
12When asked about this point at oral argument, counsel for
Local No. 8 stated, wrongly, that the complaint alleged that
Senator Grassley's letter was publicly available, rather than
asking us to take judicial notice of contemporaneous news reports
establishing that the letter was indeed public. See, e.g., Beth
Healy, US Senator Charles Grassley Raises Vertex Stock Profits
Issue with SEC Chief, Boston Globe, June 7, 2012, available at
https://www.bostonglobe.com/business/2012/06/07/senator-charles-
grassley-raises-vertex-stock-profits-issue-with-sec-
chief/cogtZEGDw2GhiDGt5DNbIK/story.html. Because we do not find
this point to be dispositive, we do not decide whether we would
otherwise elect to take such notice sua sponte.
- 21 -
Alternative explanations abound. Wysenski's very large
sales and the spotlight focused on those sales could have given
rise to her retirement without any hint of fraud. Large insider
sales by a senior manager, regardless of the reason for such sales,
can present a major embarrassment for a company. Perhaps
negligence by Wysenski in preparing the erroneous press release
prompted a forced retirement. Picking among these explanations,
without the benefit of factual allegations suggesting Wysenski
knew something the other defendants did not know, depends on a
degree of guesswork inconsistent with the PSLRA pleading standard.
Cumulatively, the brushstrokes here do not paint the
required strong inference of scienter. Vertex's public
description of a scientific study contained an error that made
unexpectedly good results look even better than they were; there
is no claim that the pulmonologist who received and reviewed the
raw data behind the results noticed or reported the error to
company executives; the company's CEO, a scientist, had no
plausible reason to announce results infected with an error that
would most likely soon mar otherwise good news and harm Vertex by
leading to an embarrassing correction; and there is no claim that
the other defendants possessed any additional information. Given
the foregoing, the stock sales by some of the individual defendants
and the timing of Wysenski's retirement (which might otherwise
look very different) cover too little canvas to evoke inferences
- 22 -
of scienter strong enough to equal the alternative inference that
Vertex was negligent in viewing very good results as being even
better than they in fact were.
Accordingly, the allegations underlying Local No. 8's
claim that the defendants acted with scienter fall short of what
Congress demands in the securities fraud context. We therefore
affirm dismissal of the section 10(b) and Rule 10b-5 claim.
B. Section 20(a) and 20A
Local No. 8 concedes that its remaining claims are
derivative of its section 10(b) and Rule 10b-5 claim. Because we
conclude that the district court properly dismissed the latter, it
follows that the district court properly dismissed the former. We
therefore affirm the dismissal of Local No. 8's remaining claims.
III. Conclusion
Under the PSLRA, this action can only move forward if we
find that the allegations make it at least as likely as not either
that the defendants knew the results as reported were wrong, or
that it was obvious to the defendants that they would discover the
error if they looked. Because we, like the district court, cannot
so find, we affirm the dismissal of the complaint.
- 23 -