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Court Allows Suit Over Chances for Chronic Fatigue Drug

Tuesday, February 4, 2014

Jan. 27 — Investors may proceed with a proposed securities fraud class action alleging that Hemispherx Biopharma, Inc. (HEB) and key officers misrepresented or concealed that it was unlikely that the development-stage pharmaceutical company would obtain regulatory approval of Ampligen as a treatment for chronic fatigue syndrome the U.S. District Court for the District of Eastern Pennsylvania ruled Jan. 24 (Frater v. Hemispherx Biopharma, Inc., 2014 BL 19201, E.D. Pa., No. 2:12-cv-07152-WY, 1/24/14).

Judge William Yohn said that in the wake of regulators’ two-time rejection of the Ampligen submission, the plaintiffs sufficiently alleged a 1934 Securities Exchange Act Section 10(b) claim, including the requisite element of scienter. 

‘Sophisticated Scientists.'

The defendants, the court said, “are sophisticated scientists running a regulated, publicly traded corporation; they are alleged to have misrepresented their regulator’s feedback, misrepresented the legal context in which they operated, heralded scientific results which they knew to be the product of empirically faulty procedures and manipulated statistical analysis, and claimed a level of external review that simply did not exist.”

If the defendants have good faith explanations for these misstatements such that they make the element of scienter “less than strong,” the court said, “they do not emerge from the complaint. 

Materiality

Meanwhile, the court said that the plaintiffs’ allegations also support a finding of materiality. Collectively, the court said, it is reasonable to find that these alleged statements “would make an attentive investor far more sanguine” about the prospects of Ampligen approval than was merited by the reality.

The court also said that when the defendants’ allegedly misleading statements were “contradicted” by the [Food and Drug Administration] at the end of the class period the price of Hemispherx stock plummeted. This drop, subsequent to disclosure, “strongly suggests that the withheld and/or misrepresented information was material to investors,” the court said.

The court rejected various additional objections to the complaint, and denied the defendants’ motion to dismiss.

To see the opinion, go to http://www.bloomberglaw.com/public/document/Frater_v_Hemispherx_Biopharma_Inc_No_212cv07152WY_2014_BL_19201_E

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