This week, the Ninth Circuit is reviewing what constitutes securities fraud in relation to published data from a pharmaceutical clinical trial and deciding whether Arizona has standing to challenge the terms of federal grants to states to deal with the COVID.
Court finds plaintiffs’ pension funds failed to argue that Nektar Therapeutics committed securities fraud by relying on outlier data from a single patient in its drug’s Phase 1 clinical trial cancer drug, NKTR-214.
Sign: Justices M. Smith, Lee and Forrest, with Justice Lee writing the opinion.
Climax“Experimental drug candidates don’t always live up to their potential, even if early clinical trials show very promising results. But, as this case illustrates, that doesn’t mean a pharmaceutical company has defrauded the investing public.
Background: Nektar Therapeutics, a company that researches and develops new drugs, has completed a Phase 1 clinical trial for a drug candidate for the treatment of cancer, NKTR-214. In 2017, Nektar created and widely distributed a table summarizing the results of the phase 1 clinical trial, showing the effectiveness of its drug on these 10 patients. Nektar then launched a second clinical trial and published new data in 2018. These data “showed that” the overall response rate for NKTR-214 in the treatment of melanoma had decreased from the 85% rate presented. [in the first
chart, now] 50%.” Nektar’s stock price fell 42% when markets opened on Monday. About four months later, anonymous short sellers released a report claiming that Nektar’s initial chart was misleading because one patient, patient 14, had outliers, distorting the On the same day, Nektar’s stock price fell by 7%.
Two pension funds, the Oklahoma Firefighters Pension and Retirement System and the El Paso Firemen & Policemen’s Pension Fund, filed a lawsuit, alleging that Nektar violated federal securities laws by making statements or omissions materially misleading by including Patient 14’s data in the table following his Phase 1 Clinical Trial. The District Court granted Nektar’s motion to dismiss.
Result: The Ninth Circuit confirmed. First, the Court held that the Complaint does not adequately allege why Nektar’s use of the chart would have misled a reasonable investor under Rule 10(b) or Rule 10b-5. Although the plaintiffs attempted to demonstrate how the results would have been different without this data, the Court found that their arguments failed to meet the heightened pleading standard imposed by Rule 9(b) and the Private Securities Litigation Reform Act ( PSLRA), which require special explanations. of allegations. Even if the plaintiffs had met that standard, the court explained, they did not explain how an investor’s valuation of Nektar would have changed if Patient 14’s data had not been included.
Second, the Court also held that the plaintiffs did not allege causation of the losses because their claims demonstrated no more than a tenuous casual link between the Phase 1 clinical trial data and the stock drop that followed. The panel found that the results of the second clinical trial “somewhat tarnished the data from the original trial”, but did not demonstrate that the data from the first trial was wrong. The Court also found that the subsequent anonymous report on the short sellers could also not establish the causation of the losses, as it did not provide new information to the market.
The Court finds that Arizona has standing to challenge the American Rescue Plan Act.
Sign: Justices Gould, Bennett and R. Nelson, with Justice Gould writing the opinion and Justice R. Nelson writing an agreement.
Climax“We believe that Arizona has standing to challenge the American Rescue Plan Act…both because there is a real danger of ARPA enforcement and because there is a justiciable challenge to the sovereignty of the state, which alleges a violation of its power to define tax policy and its interest in being free from any coercion having an impact on its tax policy.
Background: Adopted in March 2021 to help state, local and tribal governments mitigate the effects of the COVID-19 pandemic, ARPA provides nearly $200 billion in federal grants to states. Arizona expects to receive $4.7 billion in total aid from law, which limits use of funds to COVID response, bonuses for essential workers, government services to compensate revenue reductions caused by COVID and to investments in water, sewer or broadband infrastructure. States are expressly prohibited from using ARPA funds to, among other things, subsidize a tax reduction or otherwise offset a reduction in net state tax revenue.
Arizona sued the federal defendants, alleging that ARPA violates the Expenses Clause and the Tenth Amendment. Arizona alleged that the law is unconstitutionally ambiguous because the law does not specify what it means to “indirectly offset a reduction in [State’s] net tax revenue,” violates the Spending Clause by being unduly coercive and unconstitutionally commandeering Arizona’s sovereign power to set its own tax policy in violation of the Tenth Amendment. Damage under Article III.
Result: The Ninth Circuit overthrown and returned. Arizona presented three main theories of harm: (1) compliance costs imposed by enforcement regulations; (2) the potential for future harm if the offset provision is enforced against the state; and (3) “sovereign wounds” caused by unconstitutional vagueness and coercion. The compliance cost theory failed, the court said, because “quality is measured at the time of the complaint,” and the Treasury Department had not yet enacted its compliance rules when Arizona filed its lawsuit. .
With respect to the “realistic danger of execution” theory, the Court noted that to establish standing for a pre-enforcement challenge, a plaintiff must allege (1) an “intent to s ‘engage in conduct that may be affected by a constitutional interest’, (2) ‘but prohibited by law’ and (3) there must be ‘a credible threat of prosecution’ under the law. Without expressing an opinion on the merits, the Court concluded that the first prong was satisfied by “Arizona’s claims that the condition is unconstitutionally ambiguous and coercive”. Arizona satisfied the second prong because it “accepted ARPA funds, certified that it will abide by ARPA’s terms, and passed a $1.9 billion tax reduction.” Because the state could not be expected to allege an intent to violate ARPA by using grant funds to offset the resulting net revenue reduction, enacting the tax reduction was sufficient. The third prong was also satisfied, the court said, because “[t]Arizona’s $1.9 billion tax cut is a concrete enough plan,” “the federal government has not disavowed the application of the offset provision,” and the Treasury Department had pointed out some intention to enforce the offset provision against the states.
The Ninth Circuit also found that the “sovereign prejudice” alleged by Arizona was sufficient to establish standing. The Court said more attendance may be required at summary judgment, but agreed with Arizona that “[w]Hen Congress. . . extends a federal grant with ambiguous or coercive terms to the states”, it “impairs state sovereignty and gives rise to recognizable harm in fact”.[I]f the set-off provision is as ambiguous and coercive as [Arizona] alleges, he will face serious consequences by losing control of his tax policies and being held to an offer of financing he does not understand.” This was sufficient at this point and referred for further proceedings without reaching the merits of Arizona’s constitutional claims.
Justice R. Nelson agreed. He agreed that Arizona had standing to challenge the offset provision on its theory of sovereign harm, but disagreed “with the majority’s finding that Arizona alleged ‘an intent to harm itself. engage in a line of conduct undoubtedly affected by a constitutional interest, but proscribed by a statute. “Because Arizona ‘did not allege a reduction in net tax revenue, nor make any allegations about how a potential budget after the tax reduction would be structured,’ Judge R. Nelson expressed the opinion that “the spectrum of application is too hypothetical” to establish injury under Article III.
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