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Aug. 10 — Zafgen Inc. dodged class action allegations that it didn't disclose adverse events in a clinical trial of its obesity drug beloranib when a federal district court dismissed the case Aug. 9, calling the litigation “pleading fraud by hindsight” ( Brennan v. Zafgen, Inc. , 2016 BL 257594, D. Mass., Civil Action No. 15-13618-FDS, 8/9/16 ).
Shareholders in Boston-based Zafgen alleged in the U.S. District Court for the District of Massachusetts that public statements prior to the report of a death during a beloranib clinical trial had mentioned two “serious thrombotic events” during the trial. In announcing the patient's death in October 2015 (9 LSLR 1161, 10/16/15), Zafgen then referenced four prior adverse events (AEs), and the report of the death and this pattern of AEs caused Zafgen's stock to fall 50 percent the next day, the plaintiffs said.
The court concluded that the plaintiffs' complaint didn't adequately allege that at the time of disclosure, Zafgen or its executives knew or were reckless by not knowing that their failure to provide additional information was misleading.
On July 19, Zafgen announced that it is refocusing its resources on the development of a differentiated second-generation MetAP2 inhibitor, ZGN-1061, for treating severe and complicated obesity, saying that ZGN-1061's opportunities are “more robust” for the company than those of beloranib. The Food and Drug Administration has placed beloranib on a “clinical hold,” suspending the study (9 LSLR 24, 12/11/15).
According to court records, before Zafgen became a public company in June 2014, it conducted a phase II trial of beloranib from August 2012 to May 2013. In the prospectus for its 2014 initial public offering, Zafgen disclosed that two “serious thrombotic events” occurred during that trial. Zafgen repeated that disclosure multiple times from June 19, 2014, through Oct. 16, 2015, while a second clinical trial was in progress, and said that serious AEs “that are not characterized by clinical investigators as possibly related to beloranib or that occur in small numbers may not be disclosed to the public” until the FDA approval process.
During a conference call with analysts on the day it announced the patient's death, Zafgen disclosed, for the first time, that two “superficial” thrombotic AEs had occurred during the trial, in addition to the two previously disclosed “serious” AEs. Zafgen’s stock price fell, and the litigation followed five days later.
The complaint against the company and its executives alleged that Zafgen’s disclosures contained materially false misrepresentations and omissions. It also alleged that the defendants made those false disclosures with scienter, that is, with an intent to defraud or a high degree of recklessness. The complaint alleged that, when the defendants made the statements, they knew or recklessly disregarded “that there was a significant risk of thrombotic adverse events in future clinical trials of Beloranib.”
The defendants moved to dismiss the complaint under Fed. R. Civ. P. 12(b)(6) and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. §78u-4. They contended that the complaint didn't set forth plausible allegations that Zafgen’s disclosures contain actionable misrepresentations or omissions and to allege specific facts that give rise to a strong inference of scienter.
In an opinion authored by Judge F. Dennis Saylor IV, the court cited the U.S. Court of Appeals for the First Circuit's ruling in New Jersey Carpenters Pension & Annuity Funds v. Biogen IDEC, Inc. 2008 BL 164704, 537 F.3d 35, 45 (1st Cir. 2008). That ruling found that a complaint is insufficient under the PSLRA if it doesn't contain particularized factual allegations raising a strong inference that at the time of disclosure defendants knew or were reckless by not knowing that their failure to provide additional information was misleading.
Saylor also cited the First Circuit's ruling in Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1223 (1st Cir. 1996), that a plaintiff may not simply rely on a “fraud by hindsight” theory of scienter.
“Even assuming that the complaint plausibly alleges a material misrepresentation or omission, its allegations as a whole fail to clear the PSLRA’s relatively high hurdle of pleading a strong inference of scienter,” Saylor wrote. “In hindsight, the superficial thrombotic AEs that occurred during the clinical trial perhaps took on added significance more than two years later when a patient died during the Phase III trial.”
The complaint didn't point to a single confidential-source allegation, internal e-mail or any other direct evidence that would suggest the company's chief executive officer knew or was reckless in not knowing that there was a significant risk of thrombotic adverse events in future clinical trials of beloranib, Saylor wrote.
Accordingly, the court dismissed the complaint.
The plaintiffs were represented by Block & Leviton LLP, Boston; Hurwitz, Richard & Sencabaugh LLP, Boston; the Rosen Law Firm, Jenkintown, Pa., and Rob Levine & Associates, Providence, R.I. Zafgen and the individual defendants were represented by Goodwin Procter LLP, Boston.
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