KB Partners I, LP v. Pain Therapeutics, Inc.: A Short Lesson on Disclosing Material Developments to Shareholders

In KB Partners I, LP v. Pain Therapeutics, Inc., 2015 BL 193453 (W.D. Tex. June 16, 2015), the United States District Court for the Western District of Texas denied a motion for summary judgment filed by Pain Therapeutics Inc. (“PTI”) and three of PTI’s executives, Remi Barbier, Nadav Friedman, and Peter Roddy (collectively “Defendants”) in a class action for securities fraud brought by KB Partners I, LP (“Plaintiff”), an investment firm that purchased PTI securities.  

According to the allegations in the complaint, PTI is a biopharmaceutical company in the business of developing pharmaceutical products for commercial sale. After the FDA rejected PTI’s “leading candidate for FDA approval”, REMOXY, for a second time, Plaintiff brought a class action for securities fraud under Section 10(b) (15 U.S.C. § 78j(b)) and Rule 10b-5 (17 CFR 240.10b-5). Plaintiff claimed Defendants concealed information from the public regarding REMOXY’s FDA approval, which resulted in PTI’s shares trading at an artificially high price.

Following a motion to dismiss filed by Defendants, Plaintiff filed an amended complaint. The court granted Defendants’ motion to dismiss the amended complaint on September 26, 2012. The court then allowed Plaintiff to file a third and final complaint but informed Plaintiff that “if a third motion to dismiss was granted, this case would be dismissed with prejudice.” The Plaintiff did so on October 15, 2012 and that motion is the subject of this decision.

In the final amended complaint, Plaintiff alleged Defendants led the public to believe problems with REMOXY were fixed while Defendant reapplied for FDA approval, when Defendants knew the developer, King Pharmaceuticals, failed to resolve problems with REMOXY’s stability data—the same problem that precluded FDA approval of the first REMOXY New Drug Application (“NDA”). The complaint further alleged that, despite knowing the second NDA would be rejected by the FDA, PTI rewarded Remi Barbier, Nadav Friedman, and Peter Roddy with handsome compensation.

To prevail on a securities fraud claim grounded in Section 10(b) and Rule 10b-5 violations, a party must show: "(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” The Defendants’ filed a motion for summary judgment on the elements of material misrepresentation, scienter, and loss causation. A claim will be dismissed on summary judgment if “there is no genuine dispute as to any material fact.” There is a genuine dispute of a material fact if the evidence shows “that a reasonable jury could return a verdict in favor of the nonmoving party.”

First, the court held the Plaintiff raised a genuine issue as to whether statements made by the Defendants were materially misleading. The court referenced the fact that the Defendants allegedly knew as early as March 2010 that the new dissolution methodology developed by King Pharmaceuticals had similar stability issues as the methodology used in the first NDA. Nonetheless, “[d]espite this knowledge, Defendants failed to communicate details regarding the stability testing problems to the public.” As a result, a reasonable juror could conclude that PTI statements “kept investors ignorant of material risks associated with purchasing PTI stock,” because PTI provided inaccurate information on the stability problems that REMOXY was experiencing.

The court also held the Plaintiff raised a triable issue as to scienter. Plaintiff produced enough evidence to show there was regular communication between PTI and King Pharmaceuticals. The court found this, and other evidence, sufficient to establish a question as to whether Defendants were aware of the ongoing stability issues experienced by REMOXY at the time of the alleged misstatements and omissions.

Finally, the court held the Plaintiff raised a genuine issue of fact as to loss causation. The court accepted testimony in the form of an expert report assessing the cause-and-effect relationship between public disclosures regarding REMOXY and the price of PTI stock over a one-year period. The expert focused on the ten days in which PTI’s stock price experienced the largest changes, upward or downward. The analysis showed a causal relationship between the news disclosed by PTI on three specific days (May 3, June 24, and June 27, 2011) and the drastic changes in stock price following each disclosure. Ultimately, the court found the “FDA’s rejection of REMOXY . . . may have revealed previously concealed information - the ongoing stability problems with REMOXY - to the market.” Accordingly, the court denied Defendants’ motion to dismiss.

The primary materials for this post can be found at the DU Corporate Governance website.