Securities & Exchange Comm'n v. Johnston ( 2021 )

United States Court of Appeals
For the First Circuit
No. 19-2264
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff, Appellee,
v.
DAVID JOHNSTON,
Defendant, Appellant,
AVEO PHARMACEUTICALS, INC.; TUAN HA-NGOC; WILLIAM SLICHENMYER,
Defendants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nathaniel M. Gorton, U.S. District Judge]
Before
Thompson and Kayatta,
Circuit Judges.
John F. Sylvia, with whom Andrew N. Nathanson, Matthew D.
Levitt, Emily Kanstroom Musgrave, Kerime S. Akoglu, and Mintz,
Levin, Cohn, Ferris, Glovsky and Popeo, P.C., were on brief, for
appellant.
 Judge Torruella heard oral argument in this matter and
participated in the semble, but he did not participate in the
issuance of the panel's opinion in this case. The remaining two
panelists therefore issued the opinion pursuant to 28 U.S.C.
§ 46(d).
John Pagliaro and Martin J. Newhouse on brief for New England
Legal Foundation, amicus curiae.
Paul G. Alvarez, Senior Counsel, with whom Robert B. Stebbins,
General Counsel, John W. Avery, Deputy Solicitor, and Hope Hall
Augustini, Senior Litigation Counsel, were on brief, for appellee.
January 22, 2021
KAYATTA, Circuit Judge. The Food and Drug
Administration (FDA) expressed concerns to AVEO Pharmaceuticals
about the results of AVEO's clinical trial for tivozanib, a kidney
cancer drug candidate. In light of those concerns, the FDA
recommended that AVEO conduct another clinical trial. AVEO opted
not to disclose that recommendation to the markets until the FDA
itself revealed the recommendation eleven months later, at which
point AVEO's stock dropped thirty-one percent. In this subsequent
civil enforcement action brought by the Securities and Exchange
Commission, the principal issue is whether AVEO's CFO, David
Johnston, knowingly misled investors by the manner in which he
responded to investor inquiries about the substance of AVEO's
discussions with the FDA. After an eight-day trial, a jury found
against Johnston. On appeal, Johnston argues that he was entitled
to judgment as a matter of law because he had no duty to disclose
the FDA's recommendation, and because the evidence of scienter was
insufficient. Alternatively, Johnston argues that he is entitled
to a new trial because the district court improperly instructed
the jury on the law of materiality and the duty to disclose. For
the following reasons, we find the evidence of fraud and scienter
sufficient to support the verdict, and the challenged instructions
appropriate.
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I.
We begin with a summary of the evidence. Because
Johnston challenges the sufficiency of the evidence to support the
jury's verdict, we view the evidence in the light most favorable
to the verdict and draw any inferences in the verdict's favor.
Blomquist v. Horned Dorset Primavera, Inc., 925 F.3d 541, 546 (1st
Cir. 2019).
From 2007 to 2013, Johnston served as the Chief Financial
Officer of AVEO Pharmaceuticals. As CFO, Johnston was responsible
for AVEO's communications to the investing public, including
communications about its drug development efforts.
In the spring of 2012, AVEO's financial future largely
turned on the success of its lead drug candidate, tivozanib, a
drug intended to treat a form of kidney cancer called renal cell
carcinoma. The FDA determines whether a drug such as tivozanib
may be marketed in the United States. The FDA approval process
requires a sponsor such as AVEO to prepare and submit a new drug
application (the "NDA"). See 21 U.S.C. § 355(a). Approval
generally requires the application's sponsor to demonstrate the
drug's clinical benefit. See 21 U.S.C. § 355(d). As announced in
its 2011 Form 10-K, AVEO expected to submit an NDA for tivozanib
to the FDA during the third quarter of 2012.
In May 2012, AVEO published results from TIVO-1, a
Phase 3 clinical trial comparing tivozanib to sorafenib, an
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approved kidney cancer treatment. TIVO-1's primary endpoint was
to measure progression-free survival (the length of time from when
the patient enters the study until the occurrence of either tumor
growth or the patient's death). TIVO-1's secondary endpoint was
to measure overall survival (the length of time from when the
patient starts treatment until the patient dies from any cause).
TIVO-1's results showed that tivozanib performed better than
sorafenib on progression-free survival but worse than sorafenib on
overall survival.
AVEO's representatives met with FDA officials on May 11,
2012, to discuss the prospects of AVEO's anticipated NDA (the "pre-
NDA meeting"). During that meeting, the FDA expressed concern
about the trend in the available overall survival data for TIVO-1
patients who received tivozanib. The FDA informed AVEO that
"[f]urther discussion of these findings will be required at the
time of filing and if the application is filed they will be a
review issue that could affect approvability." One FDA
representative, Dr. Amna Ibrahim, suggested that if AVEO submitted
an NDA for tivozanib with the same troubling overall survival data,
the FDA might refuse to file it. See 21 C.F.R. § 314.101(a)(1)
(providing that an "NDA may be filed" once the "FDA has made a
threshold determination that the NDA is sufficiently complete to
permit a substantive review").
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AVEO argued at the pre-NDA meeting that the overall
survival data trend could be explained by the study's one-way
crossover design, which gave patients assigned to receive
sorafenib the option to take tivozanib if they experienced disease
progression but did not allow patients assigned to receive
tivozanib to receive sorafenib. But this explanation did not
persuade the FDA.
During the pre-NDA meeting, the FDA made two specific
recommendations to AVEO. First, the FDA recommended that AVEO
conduct a second Phase 3 study for tivozanib ("a second adequately
powered randomized trial in a population comparable to that in the
US"). Second, the "FDA also recommended that [AVEO] conduct the
final analysis of overall survival in the current trial." The
meeting minutes jointly prepared with input from both FDA personnel
and AVEO representatives memorialized both of these
recommendations.
Hours after the pre-NDA meeting, Dr. William
Slichenmyer, AVEO's Chief Medical Officer, shared the FDA's
feedback on a call with AVEO's executive committee. Slichenmyer
repeated "[v]erbatim" the FDA's recommendation at the pre-NDA
meeting that AVEO conduct a second Phase 3 study for TIVO. He
also informed the committee that "stay[ing] the course" by filing
the NDA in the third quarter of 2012 ran a "High Risk of [Refusal
to File] or Non-Approval." During the next several weeks,
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Slichenmyer also presented the FDA's feedback to the AVEO/Astellas
Joint Steering Committee1 and to AVEO's Board of Directors.
Johnston was privy to all of these presentations.
On June 26, 2012, AVEO's Board approved a plan and a
budget for the second trial recommended by the FDA. AVEO
nevertheless still hoped to obtain approval of its forthcoming NDA
before the second trial's end, which would not be for several
years. On July 2, 2012, AVEO sent briefing documents to the FDA
proposing a post-approval trial (rather than a second pre-approval
trial). AVEO also requested a meeting to discuss the FDA's
feedback on the proposal (the "Type A meeting").
On August 2, 2012, AVEO filed a Form 8-K and issued a
press release that discussed TIVO-1's results. Rather than simply
remaining largely silent on the substance of its discussions with
the FDA, AVEO issued a "Regulatory Update" disclosing that "[t]he
FDA has expressed concern regarding the [overall survival] trend
in the TIVO-1 trial and has said that it will review these findings
at the time of the NDA filing as well as during the review of the
NDA." AVEO told investors that it believed it could "directly
address this issue" by "conducting additional analyses to be
included in the NDA submission that demonstrate that the [overall
1 AVEO had entered into a joint venture with Astellas Pharma,
Inc., to develop tivozanib and obtain regulatory approval for the
drug.
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survival] data from TIVO-1 are consistent with improved clinical
outcomes in [renal cell carcinoma] patients receiving more than
one line of therapy." Although AVEO was "continuing to work toward
submitting the NDA by end of the third quarter," it noted there
was "a chance that the additional [overall survival] analyses may
cause the submission to move into the fourth quarter."
That same day, AVEO held a conference call for investment
analysts. In preparation for the call, Johnston and his
communications staff created a document scripting responses to
anticipated analyst questions. The script gave specific guidance
on how to answer questions about whether the FDA had recommended
further trials:
Additional Studies Requested by Agency
• At this time the Agency has not required
an additional study for approval.
• We are comfortable with our plans to
address the [overall survival] concerns and
are moving forward with the NDA submission.
IF PUSHED...details on discussions with FDA
• We wouldn't want to speculate on what the
Agency would do in the future.
With Johnston present on the call, Slichenmyer answered
analysts' questions in accordance with the script. When Thomas
Wei, an investment analyst, asked:
[W]ould you be able to help us understand,
based on your discussions with the agency,
let's say that these additional analyses that
you're submitting actually are ultimately not
sufficient to address their concerns on
overall survival. What are the different
pathways that you would have going forward to
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get TIVO approved? Is it waiting for the
overall survival data to mature, or [are]
there . . . other possibilities that maybe the
FDA outlined to you as a way to fix this issue?
Slichenmyer responded:
Yes. So first I want to reaffirm that we
believe that the current data package should
be sufficient to gain approval. But in the
unlikely scenario that we might get into
something like you described there[,] I can't
speculate on what the agency might be thinking
or what additional actions might be necessary.
But obviously, it would be tail[or]ed to what,
if any, concerns they had.
Wei reasonably understood Slichenmyer's response to mean that "he
ha[d] no idea what the FDA might outline as a way to fix the
issue."
Salveen Richter, an investment analyst, followed up on
Wei's question:
So, when you met with the FDA and they brought
up their concerns, did they kind of point you
towards a direction of what studies they
wanted you to acquire? And when you commented
on these analyses that you're doing, were they
comfortable with that or did they kind of push
you into a different direction of maybe doing
some additional new analyses or additional
studies?
Slichenmyer answered:
Yes. So, we're not going to get into the
details of our ongoing discussions with the
agency at this point. And really, the key
thing about our updating today is because of
the potential impact on our NDA submission
timeline. And so regarding any future study,
I think -- again, I just can't speculate on
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what the agency might want us to do in the
future.
Later that day, Richter wrote an investment report stating that
"new trials will not be required" for tivozanib, and that report
was sent to Johnston on August 3. Another analyst on the call,
Adnan Butt, reasonably understood Slichenmyer's answer to
Richter's question to mean "[t]hat a discussion of another study
has not come up." Following AVEO's August 2 disclosures, AVEO's
stock price declined twenty-seven percent.
In a 10-Q filing on August 7, 2012, AVEO repeated the
information it had included in its press release regarding the
FDA's pre-NDA meeting feedback and revised its planned timeline
for filing the NDA from the third quarter to the "second half" of
2012. The August 2012 10-Q also stated that AVEO "cannot be
certain as to what type and how many clinical trials the FDA . . .
will require us to conduct before we may successfully gain approval
to market tivozanib." AVEO noted that "[p]rior to approving a new
drug, the FDA generally requires that the efficacy of the drug be
demonstrated in two adequate and well-controlled clinical trials."
AVEO's subsequent public statements about the FDA's pre-NDA
meeting feedback followed the same pattern; when Johnston spoke at
investment conferences in August and September, he never mentioned
the FDA's recommendation to conduct a second study.
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On August 29, 2012, the FDA responded to AVEO's Type A
meeting request. The response stated that the FDA had "significant
concerns regarding the trial design described in [AVEO's] meeting
package" and offered no encouragement that the recommended second
study could be done post-marketing. After receiving that feedback,
AVEO canceled the Type A meeting.
On September 27, 2012, AVEO submitted an NDA for
tivozanib. AVEO's Form 10-Q filing on November 8, 2012, noted the
NDA's submission, but it contained a risk disclosure statement
much like the one in AVEO's August 2012 Form 10-Q. Later in
November, the FDA issued a "Day 74 Letter" notifying AVEO that the
NDA submission contained adequate information for the FDA to review
the NDA. But the FDA also indicated that the TIVO-1 overall
survival data would be a "review issue[]" considered by the
Oncologic Drugs Advisory Committee (ODAC).
In January 2013, AVEO conducted a public offering that
raised over $53 million. In connection with the offering, the
underwriters' legal counsel2 and AVEO's legal counsel3 wrote
negative assurance letters informing the underwriters that based
on their conversations with AVEO's officers and review of AVEO's
2 Ropes & Gray, LLP, served as counsel to the underwriters.
3 Wilmer Cutler Pickering Hale and Dorr, LLP, served as
counsel to AVEO.
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registration statement, pricing disclosure package, and
prospectus,4 no facts that came to their attention caused them to
believe that the offering documents omitted "a material fact
necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading."
On February 26, 2013, the FDA announced in the Federal
Register that tivozanib's overall survival data would be reviewed
by the ODAC at a meeting on May 2, 2013. The day after the FDA's
announcement, Johnston spoke at an investment conference. Adnan
Butt, an investment analyst, asked Johnston point-blank: "Have
you -- either your partner or the FDA discussed any further trials
in kidney cancer so far?" Rather than answering forthrightly, or
refusing to answer, Johnston gave the following response:
We have not had any formal discussions, no.
But that brings up an interesting question.
There's a whole range of possibilities that
might come out of this. On the most positive
[end] is that ODAC and the FDA each say, yes,
we understand, we believe this is what's
happening, very credible, go forth and sell
[the] drug. On the other end, they could say,
this sounds plausible but we would like to see
a confirmatory trial before you start
marketing this. That's what we call the bad
news scenario. But in between, there's a
whole series of things and it's fairly
conceivable that they might want a
confirmatory trial post-marketing. And it's
important for people to understand that that
4 AVEO's prospectus incorporated by reference several of
AVEO's public filings, including the August and November
Form 10-Qs.
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would fit in well with our strategy that we
already have in our operating plans anyway.
On March 11, 2013, AVEO filed a Form 10-K for 2012, which
did not disclose the FDA's recommendation to conduct another study.
One week later, AVEO participated in a Type A meeting with the FDA
to discuss a second clinical trial for tivozanib. The FDA
"encourage[d]" AVEO to "design the trial properly as soon as
possible and [to] initiate it independent of the action taken on
the current NDA submission," and the FDA added that "[t]he design,
conduct, and results of this trial will determine whether this one
additional trial will be sufficient for approval purposes." AVEO
inquired at the Type A meeting whether the FDA was requiring a
second trial before the FDA would approve the tivozanib NDA. The
FDA responded that the NDA remained "under review" and that "no
final decision ha[d] yet been made on the application."
On April 30, 2013, the FDA released the briefing
documents submitted to the ODAC in advance of the May 2 meeting.
The briefing documents revealed to the public that the FDA had
recommended at the May 2012 pre-NDA meeting that AVEO conduct
another trial. After that disclosure, AVEO's stock price dropped
thirty-one percent. In May 2013, the ODAC rejected the adequacy
of TIVO-1.
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II.
The operative complaint in this matter alleged
violations of section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b)
and Rule 10b-5, 17 C.F.R. § 240.10b-5; section 17(a)(1)–(3) of the
Securities Act, 15 U.S.C. § 77q(a); and Exchange Act Rule 13a-14,
17 C.F.R. § 240.13a-14.5 The case went to trial, and, after the
SEC rested, Johnston unsuccessfully moved for judgment as a matter
of law. The jury returned a verdict in favor of the SEC and
against Johnston on all claims. The district court thereafter
entered judgment against Johnston, barring him from serving as an
officer or director of a public company for two years, ordering
disgorgement of $5,677 plus prejudgment interest, imposing a
$120,000 civil penalty, and permanently enjoining him from
violating securities laws. The district court subsequently denied
Johnston's timely renewed motion for judgment as a matter of law
pursuant to Fed. R. Civ. P. 50(b) and for a new trial pursuant to
Fed. R. Civ. P. 59. Johnston timely appealed.
III.
"A motion for judgment as a matter of law may be granted
only if a reasonable person, on the evidence presented, could not
reach the conclusion that the jury reached." Visible Sys. Corp.
v. Unisys Corp., 551 F.3d 65, 71 (1st Cir. 2008). Johnston
5 Johnston was not the only defendant sued, but the others
settled the claims against them.
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challenges the denial of his motion for judgment as a matter of
law on two grounds. Johnston first argues that he had no duty to
disclose the FDA's recommendation to conduct another clinical
trial for tivozanib. Second, he contends that the evidence of
scienter was insufficient. We address each argument in turn.
A.
We begin with Johnston's duty-to-disclose argument. The
SEC had to prove, among other things, that in connection with the
purchase or sale of securities Johnston used or employed "any
manipulative or deceptive device or contrivance in contravention
of such rules and regulations as the [SEC] may prescribe." 15
U.S.C. § 78j(b). Pursuant to that statutory authority, the SEC
promulgated Rule 10b-5(b), which provides in relevant part that
"[i]t shall be unlawful for any person, directly or
indirectly, . . . [t]o make any untrue statement of a material
fact or to omit to state a material fact necessary in order to
make the statements made, in the light of the circumstances under
which they were made, not misleading." 17 C.F.R. § 240.10b-5(b).
Section 17(a)(2) of the Securities Act prohibits securities
sellers from making the same type of statements prohibited by
Rule 10b-5(b). 15 U.S.C. § 77q(a)(2). A fact is "material" within
the meaning of these provisions if it is substantially likely to
be viewed by a reasonable investor as "significantly altering the
total mix of information made available." In re Smith & Wesson
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Holding Corp. Sec. Litig., 669 F.3d 68, 74 (1st Cir. 2012); Basic
Inc. v. Levinson, 485 U.S. 224, 231–32 (1988).
Johnston's argument starts out on solid footing. It is
well-settled that the "mere possession of . . . nonpublic
information does not create a duty to disclose it." In re Smith
& Wesson Holding Corp. Sec. Litig., 669 F.3d at 74 (alteration
omitted). This is so even when that nonpublic information is
material. Id.6 And we have observed on several occasions that a
company such as AVEO is not, in the ordinary case, "under an
affirmative obligation to disclose 'each detail of every
communication with the FDA.'" Yan v. ReWalk Robotics Ltd., 973
F.3d 22, 40 (1st Cir. 2020) (quoting In re Bos. Sci. Corp. Sec.
Litig., 686 F.3d 21, 40 (1st Cir. 2012)); Corban v. Sarepta
Therapeutics, Inc., 868 F.3d 31, 40 (1st Cir. 2017) ("The
defendants had no legal obligation to loop the public into each
detail of every communication with the FDA."); see also Fire &
Police Pension Ass'n of Colo. v. Abiomed, Inc., 778 F.3d 228, 244
(1st Cir. 2015) ("There must be some room for give and take between
a regulated entity and its regulator.").
So far, so good. The problem for Johnston is that the
SEC finds no need to argue in this case that AVEO's mere knowledge
of the FDA's recommendation required AVEO to disclose it. To the
6 Amicus curiae New England Legal Foundation emphasizes this
point in its brief in support of Johnston.
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contrary, the SEC assumes, arguendo, that until AVEO spoke as it
did on the substance of its communications with the FDA, it was
not required to disclose the recommendation. The SEC instead
points to the fact that Johnston chose to make statements to
analysts and investors about its discussions with the FDA. So the
pivotal question is whether those statements were knowingly
misleading. Statements can be misleading if they are materially
untrue. See 17 C.F.R. § 240.10b-5(b) ("It shall be unlawful . . .
[t]o make any untrue statement of material fact . . . ."). They
can also be misleading if they are half-truths, painting a
materially false picture in what they say because of what they
omit. Id. ("It shall be unlawful . . . to omit to state a material
fact necessary in order to make the statements made, in the light
of the circumstances under which they were made, not
misleading . . . ."); see generally Corban, 868 F.3d at 40.
When investment analysts inquired about whether the FDA
had "outlined" "other possibilities" to address overall survival
concerns, such as "additional studies," Johnston knew that there
were two readily apparent, non-deceptive answers: "Yes" or "we
choose not to answer that question." Likely fearing (or so the
jury could have found) that either answer would effectively convey
the unhelpful truth, Johnston opted for neither. Instead, he
prepped Slichenmyer to respond that he could not "speculate" about
"what the agency might be thinking" or "what additional actions
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might be necessary," clearly implying that AVEO lacked knowledge
short of speculation. And when another investment analyst asked
whether the FDA "push[ed] [AVEO] into a different direction of
maybe doing . . . additional studies," Slichenmyer again said that
he could not "speculate on what the agency might want us to do in
the future." The SEC presented evidence that no speculation was
necessary on these topics after the FDA recommended in May 2012
that AVEO conduct a second study.
Whether Slichenmyer's foregoing responses as crafted by
Johnston and given in his presence could by themselves support the
jury's verdict, we need not finally decide. Rather, we point, as
the SEC does, to the doubling-down that occurred at the investment
conference on February 27, 2013. Johnston was asked, "Have you
-- either your partner or the FDA discussed any further trials in
kidney cancer so far?" Johnston fielded this question over nine
months after AVEO's pre-NDA meeting with the FDA, at which the FDA
specifically recommended that AVEO conduct a second trial; about
eight months after AVEO proposed to the FDA plans for a second
trial; and about six months after the FDA criticized AVEO's
proposed design for a second trial. Yet, he responded, "[w]e have
not had any formal discussions, no." Offered in the wake of
Slichenmyer's scripted deflections, this answer plus Johnston's
subsequent description of an additional trial as one outcome in
the "range of possibilities that might come out of this" reinforced
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the misleading impression that the FDA had not even discussed with
AVEO an additional trial during the pre-NDA meeting.
Johnston seeks to insulate his statements from the
jury's consideration by pointing to cases posing the issue of
whether a company misleads by providing a general acknowledgement
of a risk that an adverse event could occur in the future without
further explaining its likelihood. See Hill v. Gozani, 638 F.3d
40, 56 (1st Cir. 2011) (disclosing "risk[] associated with . . .
reimbursement by third party payors" without explaining that
people within the company disagreed about the risk's severity); In
re Sanofi Sec. Litig., 87 F. Supp. 3d 510, 540–41 (S.D.N.Y 2015)
(disclosing that approval depended on "hav[ing] an extremely
convincing set of results" without explaining that FDA had
indicated need for "a heightened showing of proof . . . to
compensate for the less reliable testing methodology used"), aff'd
sub nom. Tongue v. Sanofi, 816 F.3d 199, 209 (2d Cir. 2016). These
cases explain that identifying the risk of a future adverse event
without volunteering an assessment of its likelihood generally
will not, by itself, constitute an actionable misrepresentation
unless the risk of the event's occurrence "approaches a certainty."
Hill, 638 F.3d at 60 (explaining that broad disclosure of risk
related to reimbursement was sufficient where the level of risk
was unknown); In re Sanofi Sec. Litig., 87 F. Supp. 3d at 540–41
(concluding that company was not required to disclose FDA feedback
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where such feedback was not "tantamount to a statement that [the
company's drug] could not or would not obtain timely FDA
approval"). Here, though, the question is not whether Johnston
refused to quantify a generally identified risk of what the future
might bring, but rather whether Johnston communicated to investors
a false statement about the past: that the FDA had not formally
discussed, much less recommended, a second study.
Johnston also points to our decisions in Kader v. Sarepta
Therapeutics, Inc., 887 F.3d 48 (1st Cir. 2018), and Corban v.
Sarepta Therapeutics, Inc., 868 F.3d 31 (1st Cir. 2017), as
supporting his position. We disagree. In Kader, the plaintiffs
complained that the defendant had failed to disclose that it was
not going to accede to a request by the FDA. See 887 F.3d at 59.
But there was no attempt to pretend that the FDA had not made the
request, or that the defendant was acceding to it. See id. And,
in Corban, we found that the defendant "faithfully represent[ed]"
the FDA's position, and that the plaintiff had failed to show how
not providing even more information was recklessly or
intentionally misleading. 868 F.3d at 40. Neither holding helps
a defendant who sketches a false picture of the FDA’s feedback on
a plainly material point.
In sum, a reasonable jury could find that Johnston used
carefully crafted half-truths and distortions to convey a false
understanding of the FDA's feedback on the company's clinical trial
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and thereby violated his duty to make accurate statements regarding
material facts. See Hill, 638 F.3d at 57 ("[E]ven a voluntary
disclosure of information that a reasonable investor would
consider material must be complete and accurate." (alteration in
original) (quoting Backman v. Polaroid Corp., 910 F.2d 10, 16 (1st
Cir. 1990) (en banc))).
B.
We consider next Johnston's argument that the evidence
of scienter was insufficient. Proof of scienter is required to
establish violations of section 10(b), Rule 10b-5, and
section 17(a)(1), but negligence is sufficient to establish
liability under section 17(a)(2) or section 17(a)(3). SEC v.
Ficken, 546 F.3d 45, 47 (1st Cir. 2008). Scienter can be
established by showing "either that the defendants consciously
intended to defraud, or that they acted with a high degree of
recklessness." Corban, 868 F.3d at 37 (quoting Aldridge v. A.T.
Cross Corp., 284 F.3d 72, 82 (1st Cir. 2002)). A high degree of
recklessness "demands 'a highly unreasonable omission,' one that
not only involves 'an extreme departure from the standards of
ordinary care,' but also 'presents 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 In re Smith
& Wesson Holding Corp. Sec. Litig., 669 F.3d at 77).
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As this court has observed, a defendant's publication of
statements when that defendant "knew facts suggesting the
statements were inaccurate or misleadingly incomplete is classic
evidence of scienter." Aldridge, 284 F.3d at 83 (citing Fla. State
Bd. Of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 655 (8th
Cir. 2001)). Johnston's own testimony reflects that he learned of
the FDA's recommendation to conduct another study shortly after
the pre-NDA meeting. So he knew about the FDA's recommendation
when Slichenmyer stuck to Johnston's question-and-answer script
during the conference call on August 2, 2012, by stating, when
asked whether the FDA had suggested another study, that he "[could
not] speculate on what the agency might want us to do in the
future." Most importantly, Johnston knew about the FDA's
recommendation at the pre-NDA meeting when he denied on
February 27, 2013, that AVEO had engaged in "formal discussions"
with the FDA about another study. Because that too cleverly
crafted denial conflicted with a fact known to him, a reasonable
jury considering this evidence could conclude that Johnston
"consciously intended to defraud, or that [he] acted with a high
degree of recklessness." Id. at 82.
Our decision in Yan v. ReWalk Robotics Ltd., 973 F.3d
22, 40–41 (1st Cir. 2020), is not to the contrary. There, a
medical device manufacturer did not disclose an FDA letter warning
that noncompliance with a deadline to conduct a postmarket
- 22 -
surveillance study "rendered [its] device misbranded." Id. at 40.
The manufacturer had already told investors that failure to comply
with the postmarket surveillance study requirement could have the
consequences described in the letter. Id. And, importantly, the
complaint did not allege that the manufacturer "made any claim
concerning its progress with the FDA that was inconsistent with
its receipt of the letter." Id.Johnston makes several other arguments, all of which
fail to persuade. First, Johnston repurposes his duty-to-disclose
argument as a scienter argument, contending that a reasonable jury
could not conclude he acted with scienter because he had no clear
obligation to disclose the FDA's recommendation. But even assuming
Johnston had no duty to disclose the FDA's pre-NDA meeting feedback
in the first instance, he had a duty not to mislead when he
described that feedback. It was not, as Johnston puts it, "a close
call" whether he breached that duty by denying that AVEO and the
FDA had "formal discussions" about another study.
Second, Johnston argues that no reasonable jury could
find that he acted with scienter because he and AVEO disclosed the
TIVO-1 data, the FDA's overall survival concerns, and their
uncertainty about whether a second study would be necessary to
obtain NDA approval. But a defendant's disclosure of a subset of
unfavorable facts does not prevent that defendant from misleading
investors, with scienter, about another known and material
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unfavorable fact. Nor does the contention that AVEO would have
disclosed the FDA's recommendation in the event the FDA
"require[d]" another trial relieve Johnston of the obligation to
speak truthfully when discussing whether the FDA had already made
a recommendation for such a trial. A reasonable jury would thus
be free to reject Johnston's evidence of good faith and conclude
that Johnston, with scienter, presented a materially distorted
picture of the FDA's feedback.
Third, Johnston argues that no reasonable jury could
conclude that he acted with the requisite scienter because he
adhered to AVEO's corporate governance protocols. Johnston
contends that he could not have made a misleading statement with
scienter because legal counsel for AVEO and the underwriters knew
of the FDA's recommendation and nevertheless wrote negative
assurance letters to the underwriters of AVEO's January 2013 public
offering. Johnston also argues that he could not have intended
for AVEO's disclosures to mislead because many sophisticated
actors working on AVEO's behalf reviewed and approved AVEO's
disclosures.
Johnston's claimed adherence to corporate governance
protocols, while relevant and perhaps helpful in building a defense
based on good faith, does not preclude liability for
misrepresentations about the FDA's recommendation to conduct a
second study. There was certainly no protocol, after all, saying
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that Johnston could make statements designed to cause investors to
reasonably believe that which was not true. As for the attorneys'
letters, chronology (among other things) defeats the logic of
Johnston's attempt to hide behind them. Counsel for AVEO and the
underwriters provided the negative assurance letters on
January 23, 2013. Johnston made the false and misleading statement
that suffices to support the jury's verdict more than a month
later. The negative assurance letters simply could not have
assessed whether Johnston made a misleading statement of material
fact when he said that AVEO and the FDA had not engaged in "formal
discussions" about another study.
The negative assurance letters' circumscribed scope also
limits their probative value with respect to the statements made
prior to January 23, 2013. Both letters made assurances that "the
Registration Statement," "the Pricing Disclosure Package," and
"the Prospectus," which incorporated AVEO's August and November
Form 10-Qs by reference, were truthful and non-misleading based on
the information the law firms gathered during their respective due
diligence processes. But Johnston does not point to, nor have we
found, anything in the record to show that the negative assurance
letters made representations about whether AVEO's statements
during its various conference calls with or presentations to
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investment analysts contained material falsehoods or misleadingly
omitted material facts.7
Nor does AVEO's review process for disclosures compel
the conclusion that the scienter evidence was insufficient. AVEO
had no review process vetting Johnston's misleading answers to
analysts' questions at investment conferences. A reasonable jury
could therefore conclude that Johnston made his misleading
statement with scienter on February 27, 2013. This is hardly a
case, after all, where the subject of FDA recommendations and a
second drug trial came out of the blue. Even where Johnston relied
on AVEO's review process before making statements, a reasonable
jury could reject Johnston's evidence of good faith and credit the
SEC's evidence of scienter.
In summary, because Johnston's calculated statements
were inconsistent with known facts, a reasonable jury could
conclude that he made those statements at least with a high degree
of recklessness. That showing of scienter satisfies the SEC's
burden on its section 10(b), Rule 10-b(5), and section 17(a)(1)
claims, and it is more than sufficient to satisfy the burden for
claims under section 17(a)(2) and (a)(3). Because the SEC
7We do not imply that letters of this type from counsel
would in other circumstances provide a complete defense. See
Markowski v. SEC, 34 F.3d 99, 105 (2d Cir. 1994) (noting that
reliance on the advice of counsel "is not a complete defense, but
only one factor for consideration").
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presented sufficient evidence on each element of its claims, we
affirm the denial of Johnston's renewed motion for judgment as a
matter of law.8
IV.
In the alternative, Johnston seeks a new trial on the
basis that the jury instructions contained prejudicial errors. In
Johnston's view, a new trial is warranted because the district
court (1) failed to describe materiality and the duty to disclose
as separate elements and (2) failed to explain that no duty to
disclose can arise with respect to interim FDA communications that
do not reflect certain outcomes. In considering such preserved
arguments, we "afford de novo review to questions as to whether
jury instructions capture the essence of the applicable law, while
reviewing for abuse of discretion . . . the court's choice of
phraseology." Teixeira v. Town of Coventry, 882 F.3d 13, 16 (1st
Cir. 2018) (alteration in original) (internal quotation marks
omitted) (quoting Ira Green, Inc. v. Mil. Sales & Serv. Co., 775
8 The SEC also brought a claim against Johnston under
Exchange Act Rule 13a-14 for falsely certifying that three AVEO
documents -- its Form 10-K filed in March 2013, Form 10-Q filed in
November 2012, and Form 10-Q filed in August 2012 -- did not
contain any untrue statement of material fact or omit to state a
material fact necessary to render the statements made not
misleading. See 17 C.F.R. § 240.13a-14. Johnston offers no
independent argument for why the verdict against him should be set
aside on the SEC's claim under Rule 13a-14. So, in light of his
statement on February 27, 2013, Johnston's certification of AVEO's
2012 Form 10-K on March 11, 2013, provides a sufficient basis for
the jury's verdict on the SEC's claim under Rule 13a-14.
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F.3d 12, 18 (1st Cir. 2014)). We also limit our review to the
specific challenges raised by Johnston.
The district court opened with the following:
With respect to . . . untrue statements of
material fact or omissions of material fact,
the SEC must prove that Mr. Johnston committed
fraud by making one or more statements that
were not true when they were made or show that
Mr. Johnston failed to disclose a material
fact that he had a duty to disclose in order
to make the other statements not misleading.
For the SEC to prevail, you must unanimously
agree on which statement was untrue or which
undisclosed fact was misleading and find that
the untrue statement or undisclosed fact was
material.
See 17 C.F.R. § 240.10b-5(b); 15 U.S.C. § 78j(b); 15 U.S.C.
§ 77q(a). The court then explained that, "I will now describe the
terms 'material' and 'duty to disclose' in a little more detail."
First, the court addressed materiality:
A fact is material if there is a substantial
likelihood that a reasonable investor would
consider the fact important when making a
decision about whether to invest his money in
a particular security. In other words, a
statement leaves out a material fact if there
is a substantial likelihood that a reasonable
investor would view the absent fact as
significantly altering the total mix of the
information available. When information
merely creates a possibility that an event
affecting a company will later occur,
materiality will depend upon a balancing of
both the indicated probability that the event
will occur and the anticipated magnitude of
the event in light of the totality of the
company activity.
The court next addressed the duty to disclose:
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You cannot find a Defendant liable if he did
not have a duty to disclose the information.
Information that is disclosed must be complete
and accurate, but not all information that is
material and nonpublic must be disclosed.
Thus, even if an omitted statement was
material, a Defendant cannot be liable for
securities fraud if there was no duty to
disclose the information at issue. For
example, a Defendant does not have a duty to
disclose facts that would be interesting to
the market, nor must every discussion between
a regulated entity and its regulator be
disclosed. Rather, a Defendant has a duty to
disclose information when it is material and
when the fact or facts would need to be
revealed so as not to mislead. The fact that
a statement is literally accurate does not
preclude liability. Some statements, although
literally accurate, can become misleading if,
in their context and manner of presentation,
they would mislead investors.
No reasonable jury listening to these instructions would
fail to understand that materiality is a description of the
importance of a fact to investors, while the duty to disclose
refers to the responsibility to affirmatively reveal some facts.
Far from conflating the two elements, the instructions expressly
state that "not all information that is material and nonpublic
must be disclosed." As for Johnston's second complaint, the
instructions also made clear that not every discussion with
regulators need be disclosed. A district court certainly has no
duty to give an incorrect instruction. Nor is a district court
"obliged either to embellish legally correct statements or to cover
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every factual permutation." DeCaro v. Hasbro, Inc., 580 F.3d 55,
62 (1st Cir. 2009).
V.
For the foregoing reasons, we affirm the district
court's denial of Johnston's motion for judgment as a matter of
law and for a new trial.
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