Di Donato v. Insys Therapeutics Incorporated et al

MOTION to Dismiss Case and Memorandum of Points and Authorities

D. Ariz.August 19, 2016

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 SNELL & WILMER L.L.P. Don Bivens (#005134) Nicole E. Sornsin (#027321) One Arizona Center 400 East Van Buren Phoenix, AZ 85004-2202 Telephone: (602) 382-6000 dbivens@swlaw.com nsornsin@swlaw.com CRAVATH, SWAINE & MOORE LLP Daniel Slifkin (pro hac vice) David M. Stuart (pro hac vice) Worldwide Plaza 825 Eighth Avenue New York, NY 10019 Telephone: (212) 474-1000 dslifkin@cravath.com dstuart@cravath.com Attorneys for Defendants UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA Richard Di Donato, Individually and On Behalf of All Others Similarly Situated, Plaintiff, v. Insys Therapeutics, Inc.; Michael L. Babich; Darryl S. Baker; John N. Kapoor; and Alec Burlakoff Defendants. No. 16-cv-302-NVW DEFENDANTS’ MOTION TO DISMISS AND MEMORANDUM OF POINTS AND AUTHORITIES ORAL ARGUMENT REQUESTED Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 1 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 i TABLE OF CONTENTS Page I. INTRODUCTION .................................................................................................... 1 II. STATEMENT OF FACTS ....................................................................................... 1 A. Investors Were Repeatedly Warned of the Risks of Legal and Regulatory Problems Before the Class Period Began. .................................. 2 B. The Company Continued Warning Investors During the Time Plaintiff Alleges Information Was Concealed. ............................................. 5 1. Plaintiff Alleges That the “Truth Behind Subsys’s Success” Began to Be Revealed Even Before He Purchased Any Stock. ......... 5 2. Plaintiff Continues Purchasing Stock Even After More Allegedly “Corrective” Information Is Disclosed. ............................. 6 3. Insys Continued To Provide Investors Current Information Regarding Its Legal Matters. .............................................................. 7 4. Plaintiff Alleges That Four More Disclosures “Partially Corrected” Prior Fraudulent Statements. ........................................... 8 III. ARGUMENT ........................................................................................................... 9 A. Plaintiff’s Section 10(b) Claims Should Be Dismissed. ............................... 9 1. The Complaint Fails To Plead Actionable False or Misleading Statements. ......................................................................................... 9 (a) The Complaint Does Not Plead With Particularity Why the Challenged Statements, Taken in Context, Are False or Misleading. ....................................................... 10 (b) Forward-Looking Statements Are Protected by the Statutory Safe Harbor. ........................................................... 15 2. The Complaint Fails to Plead Facts Giving Rise to a “Strong Inference” of Scienter. ..................................................................... 16 (a) Plaintiff’s Inappropriate Group Pleading Fails to Plead Facts Giving Rise to a Strong Inference of Scienter. ............ 17 (b) Plaintiff’s Individualized Allegations Fail to Plead Facts Giving Rise to a Strong Inference of Scienter. ............ 21 3. The Complaint Fails to Plead Loss Causation. ................................ 24 B. Plaintiff’s Section 20(a) Claims Should Be Dismissed. ............................. 28 C. Plaintiff’s Claim Against Burlakoff Should Be Dismissed. ....................... 28 Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 2 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 ii IV. CONCLUSION ...................................................................................................... 30 Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 3 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 1 Defendants Insys Therapeutics, Inc. (“Insys” or the “Company”), Michael L. Babich, Darryl S. Baker, John N. Kapoor and Alec Burlakoff (collectively, the “Individual Defendants”) move to dismiss Plaintiff Clark Miller’s Amended Class Action Complaint (“Complaint”) for failure to state a claim, pursuant to Rules 9 and 12(b)(6) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u et seq. (“PSLRA”). MEMORANDUM OF POINTS AND AUTHORITIES I. INTRODUCTION The original complaint in this action was filed on February 2, 2016. Plaintiff’s amended complaint adds 111 pages to that 22-page complaint. Like the original, however, the amended complaint still attempts to recycle stale allegations of misconduct into a supposedly new case of securities fraud. Plaintiff continues to allege the same putative basis for securities fraud: Insys’s supposed failure to disclose that Company employees provided kickbacks and marketed an Insys product for unapproved uses. But, in fact, Insys disclosed both (1) the risk that such conduct could occur, and (2) the fact that Insys was under investigation for such conduct—all long before Plaintiff or other putative class members bought shares of the Company. Separate and apart from Insys’s own disclosures, the same information was also covered widely in the national news media. In sum, none of the information disclosed during the Class Period was “new” news that revealed any statement by any Defendant to be false or misleading. Because the Complaint does not sufficiently plead actionable misstatements, scienter or loss causation, it should be dismissed. II. STATEMENT OF FACTS Insys develops and sells Subsys, a fentanyl product indicated for the treatment of breakthrough pain (i.e., an intense increase or flare of otherwise stable and persistent Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 4 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 2 pain) experienced by opioid-tolerant adults with cancer. (See Compl. ¶¶ 1, 2.)1 Plaintiff alleges that the Company’s financial statements and other statements made by Defendants from August 12, 2014 through April 8, 2016 (the “Class Period”) were false and misleading because Defendants failed to inform investors that the Company was engaged in an illegal kickback scheme and off-label marketing of Subsys. (See, e.g., Compl. ¶¶ 12-15.) But the indisputable evidence appropriate for a motion to dismiss shows that, long before the Class Period, the information Plaintiff claims the Company should have disclosed had already been in the public domain. First, the Company had already disclosed that it was under federal investigation for such misconduct. Second, before the Class Period, lawsuits with the same allegations had been filed against the Company, and the national news media had criticized the Company for alleged illegal marketing of its product. Finally, even before the Company disclosed actual allegations of kickbacks and off-label marketing, Insys repeatedly warned investors of the risk that such improper conduct might occur. A. Investors Were Repeatedly Warned of the Risks of Legal and Regulatory Problems Before the Class Period Began. On May 2, 2013, over a year before any members of the putative class bought Insys stock, Insys explicitly informed investors of risks that could adversely affect the Company’s financial performance, including specifically that the Company’s “employees may engage in misconduct or other improper activities” and that the Company could be subject to regulatory actions for failing “to comply with federal and state healthcare laws, including fraud and abuse and health information privacy and security laws”, which 1 On a motion to dismiss, courts may consider “the complaint, materials incorporated into the complaint by reference, and matters of which the court may take judicial notice”. See Metzler Inv. GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049, 1061 & 1064 n.7 (9th Cir. 2008). Accordingly, solely for this motion, Defendants assume the well-pleaded allegations in the Complaint to be true, but refer also to court submissions, the Company’s Securities and Exchange Commission filings, and news articles and press releases cited by Plaintiff in his Complaint. Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 5 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3 prohibit kickbacks and the submission of false claims. (Ex. 1 at 30, 43-44.)2 This warning was repeated or reaffirmed in every subsequent quarterly or annual report filed by the Company, before and during the Class Period. (Exs. 2-13.) In July 2013, still over a year before the Class Period, a Qui Tam Complaint asserting that the Company had violated federal and state False Claims Acts was unsealed. (Ex. 14.) The relator, a former sales professional at the Company, alleged that the Company: (i) provided kickbacks to physicians in exchange for prescribing Subsys, (ii) promoted off-label usage of Subsys, and (iii) improperly encouraged physicians to prescribe Subsys at higher dosages than indicated by the FDA-approved label. (Id. ¶¶ 88-113.) The relator specifically alleged that he personally had witnessed Michael Babich and Alec Burlakoff, who were then the Company’s CEO and Vice President of Sales, respectively, participate in misconduct. (Id. ¶ 101.) On December 13, 2013, eight months before the Class Period, the Company issued a press release disclosing to investors that the Office of the Inspector General of the Department of Health and Human Services (“HHS”) was investigating potential violations related to the Company’s sales and marketing practices for Subsys. (Ex. 15.) On May 13, 2014, three months before the Class Period, The New York Times published an article entitled “Doubts Raised About Off-Label Use of Subsys, a Strong Painkiller”, which characterized the Company’s marketing practices as aggressive and potentially improper, and which referenced the then-recent arrest of a Michigan doctor charged with Medicare fraud in connection with prescriptions of Subsys. (Ex. 16.) On May 15, 2014 and May 19, 2014, still three months before the Class Period, two putative securities class actions were filed against the Company in this District. (Ex. 17; Ex. 18 (collectively, the “Prior Securities Complaints”).) The Prior Securities 2 All “Ex.” references herein are to the Exhibits to the Declaration of Nicole Sornsin, which is Exhibit A to Defendants’ Request for Judicial Notice in Support of the Motion to Dismiss the Amended Class Action Complaint, filed contemporaneously with this Motion. Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 6 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 4 Complaints, repeating allegations in the earlier Qui Tam Complaint, alleged that between May 1 or 2, 2013 to May 8, 2014, the Company made false and misleading statements indicating that its strong financial performance was attributable to a motivated sales force and the quality of its Subsys product, when in fact the Company’s performance was driven by off-label marketing of Subsys, kickbacks and efforts to persuade doctors to prescribe the medication at higher-than-indicated dosages. (See Ex. 17, ¶¶ 6, 23-35; Ex. 18, ¶¶ 7, 22-33, 42-44.) According to the Prior Securities Complaints: “(i) the Company engaged in illegal and/or unethical off label marketing of Subsys; (ii) the Company was exposed to potential fines and other disciplinary actions as a result of its Subsys marketing practices; and (iii) as a result, the Company’s financial statements were materially false and misleading at all relevant times.” (Ex. 17, ¶ 6; see also Ex. 18, ¶ 7.) They allege that when the “truth” was revealed in a series of negative filings and news articles, the price of shares of common stock in Insys dropped, causing harm to the putative class members. (Ex. 18, ¶¶ 46, 34-35; Ex. 17, ¶¶ 36-41.) The first disclosure was the December 12, 2013 Form 8-K disclosing the subpoena from HHS. (Ex. 17, ¶¶ 36-37.) The second disclosure was a May 8, 2014 Michigan local news report of a criminal complaint charging a Michigan doctor with Medicare fraud in connection with his prescriptions of Subsys. (Ex. 17, ¶¶ 38-39; Ex. 18, ¶¶ 34-35.) And the third disclosure was a May 11, 2014 report published by an analyst firm highlighting the claims against the Michigan doctor and the problems attendant to the marketing of Subsys, including alleged off-label marketing. (Ex. 17, ¶¶ 40-41.)3 3 On October 27, 2014, plaintiffs in the prior securities litigation filed an amended complaint (the “Prior Amended Securities Complaint”), which refers to a confidential witness who allegedly worked in the “prior authorization unit” and allegedly witnessed improper conduct. (Ex. 19 ¶¶ 84-85.) The consolidated class action litigation based on the Prior Amended Securities Complaint was settled on May 28, 2015. Larson v. Insys Therapeutics, Inc., 14-cv-0143, Dkt No. 66 (D. Ariz.) Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 7 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 5 B. The Company Continued Warning Investors During the Time Plaintiff Alleges Information Was Concealed. 1. Plaintiff Alleges That the “Truth Behind Subsys’s Success” Began to Be Revealed Even Before He Purchased Any Stock. The Class Period begins in August 2014, when Insys reported its financial results for the second quarter of 2014. Plaintiff alleges this report began a “fraudulent scheme to mislead investors” concerning the factors that affected Subsys sales. (Compl. ¶¶ 11, 13.) Plaintiff also alleges, however, that “[t]he truth behind Subsys’s success” began to be revealed almost immediately after the beginning of the Class Period. (Compl. ¶ 230.) On September 12, 2014, near the beginning of the Class Period, after having informed investors nine months earlier of an HHS investigation into the Company’s sales and marketing practices, the Company disclosed publicly that the U.S. Attorney’s Office for the District of Massachusetts was conducting an investigation related to the Company’s sales and marketing practices for Subsys. (Ex. 20.) Despite the additional multiple public disclosures discussed above, Plaintiff alleges that this disclosure was the one that began the revelation of “[t]he truth behind Subsys’s success”. (Compl. ¶ 230.) Other than the fact of another law enforcement authority investigating the Company’s sales and marketing practices for Subsys, this disclosure revealed nothing materially different from the Company’s disclosure nine months earlier that a federal investigation was underway. (Compare Ex. 15 with Ex. 20.) On November 27, 2014, The New York Times published an article entitled “Using Doctors with Troubled Pasts to Market a Painkiller”. (Compl. ¶ 231; Ex. 21.) The article reported that three doctors received payments through Insys’s speaker program and “were said to have inappropriately prescribed painkillers”. (Compl. ¶ 231; Ex. 21 at 2.) It also quoted from “former sales representatives” who were reported to have said that “the company” encouraged them “to call on pain doctors” and “to reward high-prescribing physicians with perks”. (Compl. ¶ 231; Ex. 21 at 3.) Most of the information in the article—including Insys’s prior disclosures that it had received subpoenas, reports about Insys’s aggressive marketing, and allegations of inappropriate physician prescription Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 8 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 6 behavior—was simply repackaged from previous articles and public filings from before the Class Period. (See Exs. 15-18.) Nonetheless, Plaintiff alleges that the article “partially (but incompletely) revealed . . . Insys’ illegal promotion of Subsys for off-label use [and] illegal kickback payments”. (Compl. ¶ 305.) On April 24, 2015, the Southern Investigative Reporting Foundation (“SIRF”) published an article entitled “Insys Therapeutics and the New ‘Killing It’”. (Ex. 22; Compl. ¶¶ 232-233.) The article referred to “data show[ing] that Subsys is proving lethal to a growing number of patients, many of whom . . . are taking it for so-called off-label indications”, and described the allegations in The New York Times articles, the Qui Tam Complaint and the Prior Amended Securities Complaint. (Ex. 22.) The article also discussed Heather Alfonso, a Connecticut-based nurse practitioner who surrendered her prescription-writing licenses during an investigation into her conduct related to Subsys, and noted that former Insys employees had been subpoenaed by the grand jury in Massachusetts or had interviewed with HHS. (Ex. 22 at 11.) Despite all of this negative public information about Insys that Plaintiff himself alleges revealed the “truth” about the Company, Plaintiff made his first purchase of close to $15,000 of stock on May 19, 2015. (Friedman Decl. Ex. A, ECF No. 34-1.) 2. Plaintiff Continues Purchasing Stock Even After More Allegedly “Corrective” Information Is Disclosed. On May 20, 2015, the U.S. Attorney’s Office for the Southern District of Alabama announced that two Alabama-based physicians had been indicted on healthcare fraud charges. (Compl. ¶ 234; Ex. 23.) Neither the press release nor the indictment mentioned Subsys or Insys. (Id.) And on June 23, 2015, Alfonso’s Information and Plea Agreement were entered onto the electronic docket in the U.S. District Court in Connecticut. (Compl. ¶ 236; Exs. 24-25.) As previously explained, news of the Alfonso investigation had already been public information. (See supra p. 6.) Subsequently, on June 25, an article published by The New York Times entitled “Nurse Pleads Guilty to Taking Kickbacks from Drug Maker”, reported on Alfonso’s guilty plea to receiving illegal Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 9 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 7 payments in exchange for writing Subsys prescriptions. (Compl. ¶ 236; Ex. 26.) The article noted that the Company had “previously acknowledged that it [was] under federal investigation”, and linked to and repeated information from the two prior Times articles, including the one from before the start of the Class Period. (Ex. 26.) Nonetheless, Plaintiff alleges that these events “revealed some of the relevant truth . . . concerning Subsys”. (Compl. ¶¶ 313, 317.) On June 8, 2015, Plaintiff sold all his shares for $17,690, a profit of $2,780. (Friedman Decl. Ex. A, ECF No. 34-1.) The next day, on July 9, 2015, Plaintiff purchased additional Insys stock. (Friedman Decl. Ex. A, ECF No. 34-1.) 3. Insys Continued To Provide Investors Current Information Regarding Its Legal Matters. Although not alleged by Plaintiff to be “corrective disclosures”, Insys provided investors current information about the continuing regulatory investigations during the time Defendants are alleged to have continued concealing facts about Insys. On August 5, 2015, the Oregon Attorney General’s Office announced that it had reached a settlement with Insys to resolve allegations that Insys had marketed Subsys off-label and provided improper financial incentives to doctors to increase Subsys prescriptions. (Ex. 27.) In the settlement, Insys did not admit to any violation of law or regulation. (See Ex. 35 at 3.) The next day, in its quarterly filing, the Company informed investors of the Oregon settlement and that Alfonso had pleaded guilty to violating the federal Anti-Kickback Statute in connection with payments of approximately $83,000 from the Company. (Ex. 11 at 10-11.) The Company stated that it was investigating the matter. (Id.) In the same filing, the Company also informed investors that the offices of the Attorneys General of the States of Arizona, Illinois and Massachusetts were each investigating the Company’s sales and marketing practices with respect to Subsys in each State. (Ex. 11 at 11.) Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 10 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 8 4. Plaintiff Alleges That Four More Disclosures “Partially Corrected” Prior Fraudulent Statements. Plaintiff then alleges several “partial corrective disclosures” around the date of Insys’s third quarter 2015 financial results. On November 4, 2015, the day before Insys released its third quarter financial results, CNBC published an article entitled “The pain killer: A drug company putting profits above patients”. (Compl. ¶¶ 320-322; Ex. 28.) The article, written with the assistance of the author of the prior SIRF article, relied on the Prior Amended Securities Complaint, past reporting by SIRF, the Company’s public filings, the Oregon settlement, the Alfonso plea and unnamed sources to describe the conduct that was alleged in those prior sources. (Ex. 28.) The article also stated that HHS had placed Subsys on a list of “new diversion drugs of concern”, indicating that Subsys may have been prescribed for unintended uses. (Ex. 28 at 2.) The next day, Insys announced its third quarter 2015 financial results and also disclosed that Defendant Babich was resigning from his position as CEO and that Defendant Kapoor had been appointed President and CEO of the Company. (Compl. ¶ 240; Exs. 29-30.) SIRF published two additional articles on December 3, 2015 and January 25, 2016 that Plaintiff alleges were also “partial corrective disclosures”. (Compl. ¶¶ 328, 332.) The December article, entitled “Murder Incorporated: Insys Therapeutics, Part I”, cited anonymous sources to allege that Michael Babich had been forced to resign by Kapoor and that the Company was operating an illegal kickback scheme to promote off-label marketing of Subsys. (Compl. ¶ 241; Ex. 31.) The January article, entitled “The Brotherhood of Thieves: Insys Therapeutics”, alleged that the Company was continuing to engage in improper off-label marketing of Subsys. (Compl. ¶ 245; Ex. 32.) Both articles cited and quoted from the prior articles and filings. (Exs. 31-32.) Plaintiff alleges that the final “corrective disclosure” occurred on April 11, 2016, when Insys announced that its first quarter 2016 revenues would be lower than expected. (Compl. ¶ 337.) The announcement said nothing about off-label marketing or kickbacks. Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 11 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 9 III. ARGUMENT Although the Court assumes, for purposes of a motion to dismiss, that all factual allegations in the complaint are true, the Court “need not . . . accept as true allegations that contradict matters properly subject to judicial notice or by exhibit. Nor is the court required to accept as true allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001) (citations omitted). Plaintiff’s claim for securities fraud should be dismissed because it fails to plead sufficiently three required elements of a § 10(b) claim: (1) a misrepresentation or omission of a material fact, (2) a strong inference of scienter, and (3) loss causation. A. Plaintiff’s Section 10(b) Claims Should Be Dismissed.4 1. The Complaint Fails To Plead Actionable False or Misleading Statements. To allege claims for securities fraud, the complaint must allege that a defendant made a false statement—“an untrue statement of a material fact”—or a misleading statement—a statement that omits a “material fact necessary in order to make the statements made, in light of the circumstances in which they were made, not misleading”. 15 U.S.C. § 78u-4(b)(1). The complaint must plead with particularity “each statement alleged to have been misleading” and “the reason or reasons why the statement is misleading”. Id. Although Plaintiff consistently conflates these two concepts throughout the Complaint by alleging that statements were “false and misleading” (see, e.g., Compl. ¶¶ 172, 179, 189, 195, 201), they are distinct, and Plaintiff fails to plead any misstatements with the particularity required, or explain why any statements were either false or misleading. Further, Plaintiff challenges statements that are “forward-looking” and thus are inactionable as a matter of law. 4 In the Amended Complaint, Plaintiff has added a new Defendant, Alec Burlakoff. Because Burlakoff is alleged only to have made misstatements attributed to him by a single article, the arguments for dismissal of the claim against him are presented separately at the end of this Memorandum. (See infra pp. 28-30.) Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 12 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 10 (a) The Complaint Does Not Plead With Particularity Why the Challenged Statements, Taken in Context, Are False or Misleading. Plaintiff challenges three categories of statements as “false and misleading”, none of which are properly pled. First, the Complaint challenges statements concerning the financial results, historical sales, growth, profitability and marketing strategy for Subsys.5 Plaintiff does not allege that any of this financial information (e.g., revenue or growth numbers) was actually false. In addition, Plaintiff does not allege that the reasons provided for the growth of Subsys revenues—the “successful execution” of the Company’s strategy, “a clinically superior product”, “change in the mix of prescribed dosages” or that Subsys “helps” patients—were not, in fact, factors that affected revenue. Plaintiff also alleges that Defendants’ statements that Insys marketed Subsys by “building awareness among oncologists” or had “some very unique programs in the oncology setting” were false because Insys sales representatives were instructed to “avoid meeting with oncology doctors and pain specialists at palliative care facilities”. (Compl. ¶ 190.) The cited allegations, however, do not support that claim. (See Compl. ¶¶ 83- 94.) Plaintiff’s allegations concerning the Company’s marketing focus, moreover, are internally inconsistent. Plaintiff alleges on one hand that it was improper for the Company to market Subsys to doctors who had already prescribed other fentanyl products approved for cancer pain. (Compl. ¶ 86.) On the other hand, Plaintiff alleges that it was also improper for the Company to educate healthcare professionals who had no prior experience prescribing Schedule II opioids about Subsys. (Compl. ¶ 190.) Under Plaintiff’s theory, Insys should not have been marketing to anyone. These inconsistent allegations do not render Defendants’ statements about Subsys marketing strategy false. As for being misleading, the Complaint alleges that each of these statements was “false and misleading” because the Company failed to disclose that Subsys revenues 5 (See Compl. ¶¶ 166, 169, 175-177, 182-183, 186-187, 197-198, 207, 211-213, 215- 216, 224.) Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 13 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 11 “were the result of Insys’s illegal promotion” or of “wide-ranging, pervasive insurance fraud”.6 The Ninth Circuit, however, has “consistently held that the PSLRA’s falsity requirement is not satisfied by conclusory allegations that a company’s class period statements regarding its financial well-being are per se false based on the plaintiff’s allegations of fraud generally”. Metzler, 540 F.3d at 1070. In Metzler, the plaintiff alleged that the company’s purported “fraudulent practices” rendered its public statements about its “financial well-being” “either affirmatively false” or “false by way of omission” (i.e., misleading). Id. The court held that the allegation in a complaint of fraud was insufficient to render a company’s public statements false or misleading for failing to disclose that supposed fraud. Id. at 1070-71 (rejecting the notion that “statements regarding [a company’s] financial status were false because they ‘create the false impression that defendants ran their business with proper financial reporting compliance’”). Plaintiff’s allegations here are similarly generalized as those found to be insufficiently pled in Metzler. Further, and most importantly, none of the Company’s statements could have been misleading because the Company explicitly disclosed that the conduct that Plaintiff claims the Company concealed was being investigated and challenged in civil proceedings. See In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1414 (9th Cir. 1994) (referring to the “unremarkable proposition that statements must be analyzed in context”). The Company never denied or misled investors about any investigation, but rather informed investors of specific law enforcement investigations into the very type of employee misconduct about which the Company had warned since going public in 2013.7 Cf. Metzler, 540 F.3d at 1071 (concluding that failing to disclose regulatory investigations did not render defendant company’s public statements about revenue and growth false or misleading because the connection between the statements and the 6 (See Compl. ¶¶ 172, 179, 189, 201, 209, 219, 225.) 7 (Ex. 7 at 12; Ex. 8 at 10-11; Ex. 9 at 84-85; Ex. 10 at 11-12; Ex. 11 at 10-11; Ex. 12 at 10-11; Ex. 13 at 85-86; Ex. 15; Ex. 35 at 4.) Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 14 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 12 investigations was “extraordinarily vague”). In addition, in each SEC filing since Insys went public, the Company informed investors of the significant risks associated with employee misconduct in marketing and sales practices and other activity in the highly regulated industry in which the Company operates.8 Investors were informed of these risks by each of the Company’s public filings starting before the Class Period. (Exs. 1-13.) Specifically, investors were expressly warned about the risk that “our employees may engage in misconduct or other improper activities” including “intentional failures to comply with FDA regulations . . . [and] with federal and state healthcare fraud and abuse laws and regulations” and that “[e]mployee misconduct could also involve . . . illegal promotion of a drug product for off-label use”. (Ex. 5 at 41; see also, e.g., Ex. 2 at 38; Ex. 9 at 39.) In light of this and other similar repeated disclosures, Defendants’ statements were not misleading as a matter of law, because the allegedly omitted information was in fact made public both by Insys and by others. Second, the Complaint challenges statements concerning the Company’s interactions with healthcare insurers. (See Compl. ¶¶ 167-168, 176, 184-185, 199, 208, 217, 228.) The Complaint repeatedly alleges that those statements were “false and misleading” because Defendants failed to disclose that Subsys revenues were the result of “the creation and utilization of” an Insurance Reimbursement Center (also known as the Patient Services Center or “IRC”) “to surreptitiously engage in wide-ranging, pervasive insurance fraud”. (See, e.g., Compl. ¶ 172.) When examined in context, many of the statements challenged by Plaintiff are not only not “false”, but have nothing to do with the IRC. For example, Defendant Babich stated that “We continue to proactively work with managed care providers to ensure coverage”. (Comp. ¶ 167.) The plain meaning of this statement, expressed in the very next sentence of the disclosure cited by Plaintiff, is that the Company had worked to 8 (Ex. 1 at 30, 38-39, 43-44; Ex. 2 at 38, 44-45,48; Ex. 3 at 27; Ex. 4 at 25; Ex. 5 at 41, 46-48; Ex. 6 at 27; Ex. 7 at 29; Ex. 8 at 29; Ex. 9 at 22, 39, 43-46; Ex. 10 at 29; Ex. 11 at 29-30; Ex. 12 at 29; Ex. 13 at 36, 40-42.) Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 15 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 13 “maintain Tier 3 coverage under nearly all major insurance plans”—i.e., to ensure that insurance plans covered Subsys in the first place, not to ensure that they granted prior authorizations. (Compl. ¶ 167.) Similarly, Defendant Babich’s statement that “we continue to properly communicate with all the major plans and the [pharmacy benefit managers] to ensure proper access for Subsys” also referred to the Company’s efforts to ensure Subsys would remain covered by health insurance plans. (Ex. 34 at 9; Compl. ¶ 12.) The statements made about the IRC—such as that the IRC was created to “provide administrative patient support assistance”—are not false because Plaintiff does not allege that the IRC does not exist or did not actually provide such assistance. (See Compl. ¶¶ 139, 184, 199, 208, 217.) All this leaves Plaintiff only with the argument that the statement was misleading because the statement omitted that the IRC’s “true purpose” was “defrauding third-party payers into approving insurance coverage for off-label prescriptions of Subsys”. (E.g., Compl. ¶ 139.) Plaintiff cannot base his claim of securities fraud, however, on the allegation that general statements about the Company left the misimpression that its performance was due to “legitimate business means that could be expected to continue”. See Metzler Inv., 540 F.3d at 1057, 1071. Moreover, before and throughout the Class Period, in many of the Company’s disclosures challenged as misleading, investors were given prominent, specific information concerning the risk of employee misconduct (see Ex. 5 at 41; see also, e.g., Ex. 2 at 38; Ex. 9 at 39), as well as the heightened regulatory risks posed by the Company’s utilization of an insurance reimbursement support hub, including that it is “subject to extensive and complex federal and state laws” and that “companies that violate such laws, regulations and standards may face substantial penalties”. (See, e.g., Ex. 9 at 24; Ex. 8 at 29; Ex. 7 at 17.) In light of these express disclosures, the challenged statements could not have been misleading because they omitted to mention the risk of misconduct involving the IRC. Third, the Complaint challenges as “false and misleading” statements made later in the Class Period about the Company’s investigation into employee misconduct and its Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 16 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 14 policies and procedures relating to compliance.9 These statements were not false. For example, Plaintiff challenges as “false and misleading” the Company’s statement in a press release and earnings call that the Company was “committed to complying with laws”. (Compl. ¶¶ 204, 206.) But these statements were made in the context of the Company announcing its settlement of claims with the Oregon Department of Justice. (Ex. 35 at 3; Ex. 36 at 6.) Plaintiff does not allege that the statements do not accurately reflect corporate policy and the Company’s aspirations. Similarly, Plaintiff challenges the statement in the Company’s Form 10-Q that the Company had “taken a number of remedial actions and implemented enhancements to the Company’s compliance controls regarding relationships with health care providers”, but would “continue to assess these matters to ensure we have an effective compliance program”. (Compl. ¶ 218; Ex. 12 at 11.) Plaintiff does not allege that the Company did not take remedial actions, nor does Plaintiff allege that Insys stopped assessing its compliance program or stopped working to make it effective. Further, these statements were not misleading because none was a guarantee that the risk of employee misconduct had been eliminated; rather, each was accompanied by disclosures of the very risks Plaintiff alleges were omitted. Throughout the Class Period, including in the very documents Plaintiff cites for these alleged misleading statements, the Company provided and referenced warnings about the risk of employee misconduct. (See Ex. 35 at 4 (citing the “Risk Factors” in the Company’s public filings, which included the risk of employee misconduct); Ex. 36 at 1 (citing risks noted in the press release and public filings) see, e.g., Ex. 5 at 41 (disclosing the risk of employee misconduct); Ex. 2 at 38 (same); Ex. 9 at 39 (same).)10 Finally, to the extent Plaintiff 9 (See Compl. ¶¶ 193, 204, 206, 218, 224, 228.) 10 Plaintiff alleges that Defendant Kapoor’s statement concerning Babich’s reasons for resigning in November 2015 was false and misleading, because it concealed that Babich “had been forced out as a result of the intensity and focus of multiple related regulatory investigations”. (Compl. ¶ 221.) However, the regulatory investigations were never concealed from investors but instead were fully described in multiple disclosures throughout the Class Period Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 17 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 15 alleges that such statements are misleading for failing to disclose the purported ongoing fraud, that type of allegation is, again, insufficient as a matter of law. See Metzler, 540 F.3d at 1071. (b) Forward-Looking Statements Are Protected by the Statutory Safe Harbor. Many of the statements challenged by Plaintiff are “forward-looking statements” that cannot form the basis of a claim under the securities laws.11 The PSLRA provides a “safe harbor” for “forward-looking statements” if the statement is “identified as a forward-looking statement, and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement” or plaintiffs do not plead that the statement was made “with actual knowledge” that the statement was false or misleading. 15 U.S.C. § 78u-5(c)(1); see In re Cutera Sec. Litig., 610 F.3d 1103, 1111-13 (9th Cir. 2010). For example, Plaintiff alleges that it was false and misleading when Defendant Babich stated on a March 3, 2015 earnings call that “I think Q4 is a great indication of what we can do with the product moving forward as well. . . . I’ve always talked about, from a market share, our next total is 50% market share. . . . So I think long term we can eventually get to that 60% market share for this product.” (Compl. ¶ 183.) Plainly, when “examined as a whole, the challenged statement[] relate[s] to future expectations and performance”. Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051, 1059 (9th Cir. 2014); In re Cutera, 610 F.3d at 1112. This and the other forward-looking statements are in the “safe harbor” because they were identified as forward-looking statements and were accompanied by meaningful cautionary statements in every SEC filing, press release and earnings announcement cited by the Complaint.12 In addition, the Company informed investors in its SEC filings that 11 (See Compl. ¶¶ 166, 182, 183, 184, 197, 199, 208, 212, 213, 217, 218.) 12 (See Ex. 9 at 39, 43, 57; Ex. 10 at 17, 29; Ex. 11 at 16-17, 29-30; 17-18, 29; Ex. 29 at 2; Ex. 30 at 4; Ex. 33 at 1-2; Ex. 35 at 5; Ex. 37 at 2-3; Ex. 38 at 3; Ex. 39 at 3-4; Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 18 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 16 there were “important factors that could cause actual results to differ materially from those in the forward-looking statement”. 15 U.S.C. § 78u-5(c)(1)(A); see Police Ret. Sys., 759 F.3d at 1058. In particular, the Company expressly warned investors of the same regulatory and compliance risks Plaintiff now erroneously contends were concealed. (See, e.g., Ex. 9 at 22, 39, 43; see also Exs. 10-12.) When forward-looking statements are accompanied by such cautionary statements, the statements cannot be used as the basis of a securities law claim, and “the state of mind of the individual making the statement is irrelevant”. In re Cutera, 610 F.3d at 1112.13 2. The Complaint Fails to Plead Facts Giving Rise to a “Strong Inference” of Scienter. The PSLRA requires a complaint to “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind” (i.e., scienter). 15 U.S.C. § 78u-4(b)(2) (emphasis added). “To qualify as ‘strong’ . . . an inference of scienter must be more than merely plausible or reasonable—it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007). “Where, as here, the Plaintiffs seek to hold individuals and a company liable on a securities fraud theory, we require that the Plaintiffs allege scienter with respect to each of the individual defendants.” Oregon Public Empls. Ret. Fund v. Apollo Grp., 774 F.3d 598, 607 (9th Cir. 2014). To plead scienter against Insys, the Court must examine the scienter allegations against the Company’s officers and directors. Glazer Capital Mgmt., LP v. Magistri, 549 F.3d 736, 744 (9th Cir. 2008) (“corporate scienter relies heavily on the awareness of the directors and officers”) (internal citation omitted). Ex. 40 at 5; Ex. 41 at 4-5; Ex. 42 at 4-6; Ex. 43 at 4-5; Ex. 44 at 5-6; Ex. 45 at 4; Ex. 46 at 4.) 13 Even if this Court were to conclude that these cautions were inadequate, however, the Complaint must still allege “facts that would create a strong inference that the defendants made the forecast(s) at issue with ‘actual knowledge . . . that the statement was false or misleading’”. Id. (quoting 15 U.S.C. § 78u-5(c)(1)(B)(i)). As set forth below, Plaintiff fails to allege facts showing any degree of scienter. Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 19 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 17 Although the Ninth Circuit has noted that a plaintiff may be able to plead scienter against a corporation without identifying a specific officer or director who had scienter, that would be possible only when “a company’s public statements were so important and so dramatically false that they would create a strong inference that at least some corporate officials knew of the falsity upon publication”. In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 1063 (9th Cir. 2014) (internal citations omitted). Plaintiff has not pled such dramatically false statements here.14 The Company’s consistent disclosures of the specific risk of off-label marketing, the very employee misconduct that forms the basis of the Complaint and the ongoing government investigations negate any inference that the Company or the Individual Defendants were attempting to perpetrate a secret fraudulent scheme. Rather, the most compelling inference from these consistent disclosures is the lack of intent to deceive, and for this reason all of Plaintiff’s claims must fail. Tellabs, 551 U.S. at 314. For most misstatements, Plaintiff points to the same paragraphs of the Complaint to allege that all sets of financial results, as well as the earnings calls and press releases that went with them, were false and misleading. (See Compl. ¶¶ 172-173, 179-180, 189-190, 192, 201-202, 209-210, 219-221, 225, 229 (citing Compl. ¶¶ 80-152, 255-301).) These paragraphs largely consist of inappropriate “group” pleading that fails to give rise to a strong inference of scienter. The paragraphs that refer to specific Individual Defendants also fail to plead facts giving rise to a strong inference of scienter. (a) Plaintiff’s Inappropriate Group Pleading Fails to Plead Facts Giving Rise to a Strong Inference of Scienter. The majority of Plaintiff’s scienter allegations lump “Defendants” together without distinguishing among them. (See Compl. ¶¶ 266-282, 286-287.) These allegations fail to connect specific Individual Defendants to scienter for specific 14 Because Burlakoff is not an officer or director of Insys, and because the Plaintiff only challenges two statements made by Burlakoff, arguments concerning the claims against him are discussed separately. (See infra pp. 28-30.) Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 20 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 18 misstatements. See Apollo Grp., 774 F.3d at 607. Further, Plaintiff’s group allegations fail to plead facts giving rise to a strong inference of scienter. Plaintiff alleges that “Defendants’” senior positions, hands-on management, and involvement in the day-to-day activities of the Company establish scienter. (Compl. ¶¶ 266-269.) It is well-settled, however, that allegations of scienter based on a defendant’s role as senior management are insufficient. See Metzler Inv., 540 F.3d at 1068. Similarly, Plaintiff’s allegation that “Defendants” had access to information (Compl. ¶¶ 271-282) is also insufficient to establish scienter. See Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1036 (9th Cir. 2002); South Ferry, 542 F.3d at 783 (concluding that plaintiffs must “bridge the gap” between a defendant’s mere access to information and an inference of knowledge). Plaintiff also attempts to rely on the “core operations” exception, which would allow the Court to draw a strong inference of scienter based on the principle that “corporate officers have knowledge of the critical core operations of the company”. Police Ret. Sys., 759 F.3d at 1062. The Ninth Circuit has held repeatedly, however, that the core operations exception can by itself establish scienter only “in rare circumstances where the nature of the relevant fact is of such prominence that it would be absurd to suggest that management was without knowledge of the matter”. Id. For example, the Ninth Circuit has drawn a strong inference of scienter when the defendants failed to disclose stop-work orders from its largest customers, which had a “devastating effect” on the company’s revenues and were “disastrous for the entire company”. South Ferry LP, No. 2 v. Killinger, 542 F.3d 776, 785 n.3. (9th Cir. 2008). It is insufficient to allege that Defendants “should have known” the information undermining their statements, because only information they “must have known” is “sufficient to meet the strict scienter pleading requirements”. See Glazer, 549 F.3d at 748. Plaintiff asserts that “Defendants” should be deemed to have knowledge of all the circumstances concerning the marketing of Subsys, primarily based on Subsys representing more than 98% of the Company’s revenues (Compl. ¶ 269) and a statement Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 21 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 19 by Kapoor on December 1, 2015 that he and unnamed executives at Insys reviewed the number of Insys prescriptions written each day as the Company competed for market share (Ex. 47 at 3; Compl. ¶ 270; see also Compl. ¶¶ 266-282). Plaintiff’s argument, however, “rests on a[] [flawed] inference that the [daily tracking of prescriptions] mutually excludes the possibility that [Defendants] were unaware of [alleged unlawful conduct]”. Metzler Inv., 540 F.3d at 1068 (rejecting allegations that because senior management was “regularly made aware of . . . enrollment and placement figures”, they must have known about alleged fraudulent practices related to those figures); Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 1000-01 (9th Cir. 2009), as amended (Feb. 10, 2009) (explaining that the fact “management analyzed the inventory numbers closely, do[es] not support the inference that management was in a position to know that such data was being manipulated”). Moreover, Kapoor’s statement was made in relation to his position as CEO, and thus cannot possibly raise an inference of scienter prior to his appointment as CEO on November 5, 2015, long after the start of the Class Period. Plaintiff also pleads allegations inconsistent with the theory that it would be “absurd” for Defendants not to be aware of a company-wide scheme to commit unlawful conduct. For example, Plaintiff relies on a source who says that sales training was “by the book, exactly like Merck or someone might do”, but that “district and regional managers”—not senior management—would later tell sales associates to “just sell”. (Compl. ¶ 99.) Such allegations of misconduct by more junior employees, not the Defendants, actually cut against Defendants’ alleged scienter. Plaintiff makes several additional group allegations, but none gives rise to a strong inference of scienter. He alleges that Defendants’ denial of wrongdoing in a press release, and Burlakoff’s similar denial in the April 2015 SIRF report, somehow give rise to an inference of scienter. (Compl. ¶¶ 285-286.) However, the only plausible inference from a denial of wrongdoing, without more, is that the speaker was not aware of wrongdoing. See Tellabs, 551 U.S. at 314. Plaintiff also alleges that Babich’s and Burlakoff’s resignations are indicative of Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 22 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 20 scienter (Compl. ¶ 288); however, where, as here, the resignations were not “accompanied by suspicious circumstances”, resignations do not support a strong inference of scienter. See Zucco Partners, 552 F.3d at 1002. Nor does Plaintiff’s reliance on vague double-hearsay concerning Babich’s resignation meet the required pleading standards. See id. (rejecting plaintiffs’ claim that a resignation was suspicious because it was based on “vague hearsay allegations” and explaining that inference would “never be as cogent or as compelling as the inference that the employees resigned or were terminated for unrelated personal or business reasons”). Plaintiff alleges that government investigations, criminal charges and guilty pleas by individual Insys employees demonstrate that the “Defendants” as a group all had scienter when they made the alleged statements. (Compl. ¶¶ 289-290.) But none of these events included facts indicating that any Defendant had any prior knowledge of any unlawful conduct. And, moreover, the Company had consistently disclosed all government investigations. (Exs. 7, 20.) Government investigations into company conduct alone do not demonstrate that specific individuals had scienter, see Thorpe v. Walter Inv. Mgmt., Corp., 111 F. Supp. 3d 1336, 1376 (S.D. Fla. 2015); Washtenaw Cnty. Emps. Ret. Sys.v. Avid Tech., Inc., 28 F. Supp. 3d 93, 115 (D. Mass 2014), and unproven allegations in charging documents are not “facts” that can give rise to a strong inference of scienter, see In re Connetics Corp. Secs. Litig., 542 F. Supp. 2d 996, 1005-06 (N.D. Cal. 2008); see also Kyung Cho v. UCBH Holdings, Inc., 890 F. Supp. 2d 1190, 1203 (N.D. Cal. 2012). Similarly, a case brought by a former employee alleging that he was terminated for raising concerns about potential misconduct (Compl. ¶ 293) does not aid Plaintiff, because such allegations are not “facts” that can give rise to a strong inference of scienter. See Kyung Cho, 890 F. Supp. 2d at 1203; In re Connetics Corp., 542 F. Supp. 2d at 1005-06. Finally, Plaintiff alleges that “Defendants’ Incentive Compensation” is a fact giving rise to a strong inference of scienter. (Compl. ¶¶ 299-301.) Not only is such an allegation plainly insufficient, see In re Tibco Software Secs. Litig., 2006 WL 1469654 Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 23 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 21 at *21 (N.D. Cal. May 24, 2006); In re Rigel Pharmaceuticals, Inc. Secs. Litig., 697 F.3d 869, 884 (9th Cir. 2012) (“it is common for executive compensation, including stock options and bonuses, to be based partly on the executive’s success in achieving corporate goals”), but Plaintiff’s allegations only mention Defendants Baker and Babich, and thus cannot give rise to an inference with respect to the other Individual Defendants (Compl. ¶¶ 299-301). (b) Plaintiff’s Individualized Allegations Fail to Plead Facts Giving Rise to a Strong Inference of Scienter. In addition to the insufficient group allegations, Plaintiff has also provided a few individualized allegations of scienter. None is sufficient to give rise to the strong inference required under the PSLRA. Kapoor. Kapoor was the Co-Founder and Chairman of Insys and became the CEO on November 5, 2015. (Compl. ¶ 255.) Plaintiff ignores this change in Kapoor’s role and erroneously treats statements made by Kapoor after he became CEO as if they should apply across the entire Class Period. For example, Plaintiff alleges that Kapoor’s November 5, 2015 statement that “we only call on REMS doctors” (i.e., doctors who have already qualified to prescribe Subsys under the FDA’s Risk Evaluation and Mitigation Strategies program) was false because of pre-November 2015 reports that Insys sales representatives were calling on non-REMS doctors. (Compl. ¶¶ 213, 221 (citing Compl. ¶¶ 83-94).) Plaintiff’s failure to show that Kapoor knew statements were false when made precludes both falsity and scienter with respect to Kapoor’s statements. Further, unattributed hearsay statements in news articles in which anonymous sources allege that Kapoor was “behind all this greed”, “built this whole thing”, and forced Babich to resign because he was “closest to the issues that federal prosecutors were looking at” (Compl. ¶¶ 257, 288), are not sufficient, because such anonymous hearsay statements are not facts that can support an inference of scienter. See Zucco Partners, 552 F.3d at 997 (hearsay statement from anonymous finance personnel is insufficient to establish scienter); Constr. Laborers Pension Trust of Greater St. Louis v. Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 24 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 22 Neurocrine Biosciences, Inc., 2008 U.S. Dist. LEXIS 38899, *17 (S.D. Cal. May 12, 2008) (anonymous witness’s statement that company vice president knew that certain information was incorrect was insufficiently reliable to establish scienter). Plaintiff also alleges that Kapoor’s understanding of FDA regulations and rules gives rise to a strong inference of scienter. (Compl. ¶ 258.) However, the allegation that Kapoor knows the rules, absent the allegation of facts showing that Kapoor had knowledge of activities that violated those rules, does not give rise to a strong inference of scienter. Finally, Plaintiff alleges, without any explanation, that the Company’s use of a restaurant owned by Kapoor to hold events (Compl. ¶ 111), and a third-party text message asking whether Kapoor had contacted a physician (Compl. ¶¶ 92-93) somehow demonstrate scienter. None of these allegations, individually or collectively, is a fact that gives rise to any inference, let alone a strong inference, of scienter with respect to Kapoor. Babich. Babich was the CEO of Insys until November 5, 2015 (Compl. ¶ 259.) Plaintiff makes many of the same allegations about Babich that have already been demonstrated above as insufficient: that Babich was CEO, had “access to information”, understood FDA rules and regulations, and received incentive-based compensation. (Compl. ¶¶ 259, 261, 299-300.) Plaintiff also repeats a vague double-hearsay statement from a news article that one Insys employee was “informed” by another employee that Babich was “aware” of a purported off-the-books credit card. (Compl. ¶¶ 133, 260, 283.) Plaintiff also quotes an excerpt from an email that was quoted in a complaint by the Oregon Department of Justice, which the Company eventually settled without admitting any wrongdoing. (Compl. ¶ 123; Ex. 35 at 3.) Hearsay and allegations from other litigation do not amount to “facts” sufficient to establish a strong inference of scienter. See Zucco Partners, 552 F.3d at 997; In re Connetics Corp., 542 F. Supp. 2d at 1005-06. Plaintiff also alleges that one might infer that Babich was involved in unlawful conduct because: (i) his wife was one of the sales representatives who worked with Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 25 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 23 Heather Alfonso, who was later indicted for receiving kickbacks; and (ii) Babich allegedly approved “budgeted kickback payments”. (Compl. ¶¶ 260, 283.) However, the SIRF article Plaintiff cites does not reference “budgeted kickback payments”, but only “budgeted payments”. (Ex. 31 at 2.) Babich’s approval of a speaker program budget as CEO does not lead to an inference that he had knowledge of any alleged employee misconduct. Similarly, the allegation that Babich’s wife was one of the sales representatives who called on Alfonso provides no basis to infer that Babich knew about any illegality or had scienter. Baker. Baker was the CFO throughout the Class Period. (Compl. ¶ 262.) The Complaint provides practically no allegations in support of Baker’s scienter. Plaintiff attempts to allege a strong inference of scienter based on Baker’s position as CFO, his access to information, and his receipt of incentive-based compensation (Compl. ¶¶ 262, 299-300), none of which come close to alleging scienter, as discussed previously. Plaintiff’s only other allegation against Baker relates to the Company’s withholding of 5% of his potential bonus in 2015. (Compl. ¶ 301.) It is implausible that Insys would reduce Baker’s bonus by only 5% because it had learned Baker had engaged in unlawful conduct. Indeed, as the Company’s proxy statement makes clear, the Company withheld 5% of “each named executive officer[‘s]” bonus because “notwithstanding the largely positive metrics[,] . . . the Company needed to improve in 2016 in instilling a culture of accountability in all areas including research and development and regulatory and compliance matters.” (Ex. 48 at 23 (2015 Proxy).) However, acknowledging the need to improve “instilling a culture of accountability” is a far cry from admitting knowledge of, or participation in, any long-running, company-wide scheme that Plaintiff alleges. Insys. Because Plaintiff has not alleged facts giving rise to a strong inference that any of Insys’s directors or officers had scienter, Plaintiff has failed to allege that Insys had scienter. In re NVIDIA Corp. Sec. Litig., 768 F.3d at 1063-64; see also Glazer Capital, 549 F.3d at 744. Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 26 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 24 3. The Complaint Fails to Plead Loss Causation. The Complaint also fails to plead another essential element of a securities fraud claim: loss causation. In Dura Pharmaceuticals, the Supreme Court made clear that plaintiffs must plead a causal link between alleged misrepresentations and actual economic loss by alleging that the revelation of the misrepresentation caused the price of the security to decrease. Dura Pharmaceuticals, Inc., v. Broudo, 554 U.S. 336, 342-46 (2005). Accordingly, with the particularity required by Rule 9(b) and the PSLRA, Plaintiff must “allege specific statements . . . that were made untrue or called into question by subsequent public disclosures”. Apollo Grp., 774 F.3d at 608. However, rather than plead a specific corrective disclosure that “made untrue or called into question” prior statements, Plaintiff has merely tracked stock price drops and then deemed whatever event occurred that day a “partial corrective disclosure”, even if it contains no new news that undermines prior statements. This approach does not sufficiently plead loss causation. The Complaint identifies nine specific statements and articles that Plaintiff refers to as “partial corrective disclosures”. Many of these so-called partial corrective disclosures repeat allegations that were contained in the Qui Tam Complaint or in the Prior Securities Complaints and, thus, were not new news. For example, the SIRF articles extensively quote or paraphrase allegations contained in the Qui Tam and Prior Securities Complaints, including allegations concerning kickbacks, off-label marketing of Subsys and efforts to persuade physicians to prescribe a higher-than-indicated dose. (Exs. 22, 31, 34.) The Prior Securities Complaints, which were filed in 2014 long before the Class Period, were obviously known to the market. Indeed, the Company specifically disclosed the underlying litigations in its August 12, 2014 Form 10-Q and in subsequent SEC filings. (Exs. 7-13.) The Prior Securities Complaints, in turn, repeated many of the allegations from the earlier Qui Tam Complaint that had become public well before the beginning of the Class Period. Examining each alleged “partial corrective disclosure” further demonstrates that Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 27 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 25 Plaintiff has failed to plead with the particularity required how any of the alleged disclosures contained new news that “made untrue or called into question” any of the alleged misstatements. See Apollo Grp., 774 F.3d at 608. The first two events—the November 27, 2014 New York Times article and the April 24, 2015 SIRF article—were published prior to Plaintiff’s stock purchases in May and July 2015, and therefore could not have caused his loss. (Compl. ¶¶ 304, 308.) Despite Plaintiff’s conclusory assertion that the Times article revealed an “illegal kickback scheme” (Compl. ¶ 304), the article does not reveal the existence of such a scheme, but rather focuses on individual doctors and sales representatives. (Ex. 21). Plaintiff admits as much when he notes that the article describes a practice that investors would “later learn” was an unlawful kickback scheme. (Compl. ¶ 304.) Not only did investors never “later learn” of such a scheme, the “later learn” allegation demonstrates that the Times article itself does not reveal any “unlawful kickback scheme”. Moreover, the only portion of the SIRF article that Plaintiff particularly claims was a corrective disclosure—a government investigation that the Company disclosed publicly on September 2014 (Compl. ¶¶ 308-309; Ex. 21)—has been rejected by the Ninth Circuit as insufficient to plead loss causation. See Loos v. Immersion Corp., 762 F.3d 880, 890 (9th Cir. 2014) (“While the disclosure of an investigation is certainly an ominous event, it simply puts investors on notice of a potential future disclosure of fraudulent conduct. Consequently, any decline in a corporation’s share price following the announcement of an investigation can only be attributed to market speculation . . . [and] cannot form the basis of a viable loss causation theory.”). The third event—a May 20, 2015 announcement that two doctors were indicted for unlawfully distributing unspecified Schedule II controlled substances—does not mention Insys, Subsys or any off-label marketing or kickback scheme. (Compl. ¶¶ 312- 314; Ex. 23.) The fourth event was the June 23, 2015 guilty plea by Heather Alfonso and a New York Times article about the plea two days later. (Compl. ¶¶ 316-318; Exs. 24-26.) Plaintiff points to nothing specific in either statement that disclosed new information Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 28 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 26 about the Company. Instead, he merely repeats in conclusory fashion that these events “revealed new information that was previously concealed”. (Compl. ¶¶ 313, 317.) Plaintiff’s only attempt at specificity is an allegation that the Times article states that the “guilty plea was a signal that prosecutors were intensifying their investigation of the Company’s marketing practices”. (Compl. ¶ 316.) But this is speculation, and, as explained, an investigation, “simply puts investors on notice of a potential future disclosure of fraudulent conduct” and is “insufficient to establish loss causation”. See Loos, 762 F.3d at 890. Furthermore, the revelation that an individual was punished for misconduct is not analogous to a disclosure of Company-wide unlawful conduct. See Metzler Inv., 540 F.3d at 1063 (investigation into one campus out of 88 was not a revelation of a company-wide scheme for purposes of loss causation). The fifth event was the publication of a CNBC article on November 4, 2015. (Compl. ¶¶ 320-322.) Plaintiff claims that this article disclosed that Subsys was placed, presumably alongside other drugs, on an internal HHS list of “new diversion drugs of concern”, where “diversion is defined as ‘a form of medical fraud that can include doctors prescribing drugs for unintended uses’”. (Compl. ¶ 320.) However, HHS labeling Subsys a diversion drug is not a disclosure that the Company had been engaged in off-label marketing or a kickback scheme. Rather, as Plaintiff himself alleges, this label only means that doctors might be prescribing the drug for unintended uses (Compl. ¶ 320), or, as another of Plaintiff’s sources indicates, this means that Subsys is “the most frequently stolen or fraudulently obtained” (Ex. 31 at 3). None of these accusations revealed that any prior statement by any Defendant was false or misleading. The sixth supposed disclosure was the resignation of Babich on November 5, 2015. (Compl. ¶¶ 324-326.) Unsurprisingly, Plaintiff provides no particular disclosure that arose out of Babich’s resignation, as there was nothing revealed except the fact that Babich was resigning. (Compl. ¶ 324.) Furthermore, although Plaintiff is correct that the stock price dropped from $26.38 to $25.43 between November 4 and November 5, by the end of trading on November 6, the price had not only recovered, but had increased to Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 29 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 27 close at $27.3915, negating any plausible inference that the resignation had revealed information that caused a loss to Plaintiff. See Metzler Inv., 540 F.3d at 1064. The seventh and eighth events were SIRF articles on December 3, 2015 and January 25, 2016, which Plaintiff claims revealed that Insys’ “prior authorization unit” provided false information to pharmacy benefit managers so that they would cover Subsys. (Compl. ¶¶ 328-336; Exs. 31, 32.) But those allegations were recycled from the Prior Amended Securities Complaint, which was filed on October 27, 2014, and which even refers to a confidential witness who allegedly worked in the “prior authorization unit” and witnessed improper conduct. (Ex. 19 ¶¶ 84-86.) Plaintiff also alleges that, contrary to Kapoor’s statement of November 5, 2015, the December 3, 2015 SIRF article revealed that Babich had been forced to resign because of the various government investigations into the Company. (Compl. ¶¶ 328-329.) However, this quote attributed to an anonymous “senior Insys executive” is wholly unreliable, and there is no allegation that Babich resigned because of a Company-wide off-label marketing or kickback scheme. Rather, the anonymous executive states only that Kapoor said that Babich had to resign because he was “closest to the issues that federal prosecutors were looking at and that a change had to be made should settlement talks become serious”. (Ex. 31 at 1; Compl. ¶¶ 241, 288.) Plaintiff’s final alleged event was a Company press release announcing net revenues on April 11, 2016, which Plaintiff alleges were lower than expected and thus somehow “revealed the remaining undisclosed relevant truth” of the Company’s alleged misconduct. (Compl. ¶¶ 247, 337-339.) However, the press release itself does not reveal anything about an alleged off-label marketing or kickback scheme. (Ex. 33.) Moreover, an announcement of lower earnings is not an implicit corrective disclosure of a fraudulent scheme that forms a basis for loss causation. See Metzler Inv., 540 F.3d at 1064-65 (rejecting announcement of lower earnings as implicit disclosure of an underlying fraudulent scheme). Although the Company’s stock price dropped after the April 11, 15 See http://www.nasdaq.com/symbol/insy/historical. Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 30 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 28 2016 announcement, the “far more plausible reason for the resulting drop” was not fraud, see id. at 1065, but is admitted in Plaintiff’s own allegations: “revenues [were] significantly lower than consensus expectations” (Compl. ¶ 337). In the alternative, Plaintiff invokes the “materialization of the risk theory”. (See, e.g., Compl. ¶¶ 333-334.) Under that theory, a plaintiff may plead loss causation, without a “corrective disclosure”, by alleging that a risk materialized that was “within the zone of risk concealed by the misrepresentations and omissions”. Nuveen Mun. High Income Opportunity Fund v. City of Alameda, 730 F.3d 1111, 1120 (9th Cir. 2013) (internal citation omitted). However, “[t]he Ninth Circuit has not adopted the materialization of the risk approach” for loss causation. Id. at 1122 n.5. Although some district courts in this Circuit have experimented with the theory, the Court of Appeals more recently required that plaintiffs allege “specific statements made by the Defendants that were made untrue or called into question by subsequent public disclosures” and rejected less particularized showings of loss causation. See Apollo Grp., 774 F.3d at 608. Moreover, the materialization of the risk theory is not adequately pled here. In this case, none of the risks were concealed by Defendants. Rather, the Defendants repeatedly warned of such risks throughout the Class Period. B. Plaintiff’s Section 20(a) Claims Should Be Dismissed. To state a claim of “control person liability” under § 20(a), Plaintiff must allege: (1) “a primary violation of federal securities law” and (2) that “the defendant exercised actual power or control over the primary violator”. Zucco Partners, LLC, 552 F.3d at 990 (internal citation omitted). Because Plaintiff fails to state a claim for a violation of Section 10(b), Plaintiff’s claim under Section 20(a) necessarily fails as well. C. Plaintiff’s Claim Against Burlakoff Should Be Dismissed. Burlakoff was the Vice President of Sales throughout the Class Period (Compl. ¶ 263) and is alleged to have made misstatements only in the April 24, 2015 SIRF report when he was quoted as allegedly stating that Insys was “selling a breakthrough cancer pain drug”, that such pain was “all we want to address with a doctor” and that “no one at Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 31 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 Insys wants to see anyone taking [Subsys] for anything other than cancer pain” (Compl. ¶¶ 193-194). Plaintiff’s claims based on Burlakoff’s statements must be dismissed for failure to allege falsity, scienter, loss causation and that the statements were made “in connection with” the purchase or sale of securities. First, Burlakoff’s statements in the SIRF report were not false or misleading. Burlakoff was addressing Company policy, not the actions of certain employees. The fact that individual employees may have engaged in misconduct does not render these statements of Insys’s policy materially false. Moreover, Burlakoff’s statements were undermined by reports on improper conduct at Insys included in that article. Plaintiff argues both that the SIRF report is a partial disclosure of the off-label marketing scheme and that it is the source of a misstatement for failing to disclose the very same scheme. (See Compl. ¶¶ 193-194, 308-310.) Read in the context of the entire report, Burlakoff’s statements could not have misled investors. See Worlds of Wonder, 5 F.3d at 1414. Second, with respect to intent, Plaintiff also fails to allege particular facts that support a strong inference that, at the time these statements were made, Burlakoff knew that they were false. Plaintiff attempts to paint an unflattering portrait of Burlakoff with allegations about Burlakoff’s “aggressive sales procedures”—e.g., wishing to speak with a doctor to ask him to join the speaker program (Compl. ¶ 93), hiring a former reality-tv star (Compl. ¶ 96), discussing the film The Wolf of Wall Street (Compl. ¶ 99), honoring top sales associates (Compl. ¶ 108), or seeking permission to review patient files (Compl ¶ 106). These allegations are too attenuated to show that Burlakoff had knowledge of widespread misconduct and illustrate a misunderstanding of legitimate conduct. For example, Plaintiff alleges that under “Burlakoff’s administration”, sales associates “were pressured to convince” doctors to increase dosages of Subsys. (Compl. ¶ 264.) But, in the very next paragraph, Plaintiff concedes that doctors are supposed to increase Subsys dosages over time as “necessary to ensure that the patient was comfortable”. (Compl. ¶ 265.) Plaintiff’s claim against Burlakoff also fails on loss causation. Simply put, Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 32 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 30 Plaintiff has not alleged any corrective disclosure of Burlakoff’s alleged misrepresentations that contains any information that was not already in the public domain before the Class Period. Finally, Burlakoff’s statements are not actionable because Plaintiff does not allege that they were made in a publication “on which an investor would presumably rely”. Therefore, Burlakoff’s statements were not made in connection with the purchase or sale of securities as required by the securities laws. See In re Galena Biopharma, Inc. Sec. Litig., 117 F. Supp. 3d 1145, 1179 (D. Or. 2015). Further, the Complaint does not allege that Burlakoff had any control over the quote in the article. See Raab v. General Physics Corp., 4 F.3d 286, 288-89 (4th Cir. 1993) (“Without control over [the] report, any statement made by [company] personnel could be taken out of context, incorrectly quoted, or stripped of important qualifiers”). IV. CONCLUSION For all the foregoing reasons, the Complaint should be dismissed, with prejudice. DATED: August 19, 2016 SNELL & WILMER L.L.P. s/Nicole E. Sornsin Don Bivens Nicole E. Sornsin One Arizona Center 400 E. Van Buren Phoenix, AZ 85004-2202 CRAVATH, SWAINE & MOORE LLP Daniel Slifkin David M. Stuart Worldwide Plaza 825 Eighth Avenue New York, NY 10019 Attorneys for Defendants Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 33 of 34 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 31 CERTIFICATE OF SERVICE I hereby certify that on August 19, 2016, I electronically transmitted the foregoing document to the Clerk’s Office using the CM/ECF System for filing and transmittal of a Notice of Electronic Filing to the following CM/ECF registrants: Francis J. Balint, Jr. Andrew S. Friedman BONNETT FAIRBOURN FRIEDMAN & BALINT, P.C. 2325 E. Camelback Road, Suite 300 Phoenix, Arizona 85016 Attorneys for Plaintiff Johnston de F. Whitman, Jr. Meredith L. Lambert Kessler Topaz Meltzer & Check, LLP 280 King of Prussia Road Radnor, PA 19087 Attorneys for Plaintiff Jennifer L. Joost Rupa Nath Cook Kessler Topaz Meltzer & Check, LLP 1 Sansome Street, Suite 1850 San Francisco, CA 94014 Attorneys for Plaintiff s/Nicole E. Sornsin Case 2:16-cv-00302-NVW Document 61 Filed 08/19/16 Page 34 of 34