Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-14-55633/USCOURTS-ca9-14-55633-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

TODD SCHUENEMAN, on behalf of

himself and all others similarly

situated; WILLIAM SUTLIFF; JEAN

SUTLIFF; ARENA INVESTORS GROUP;

ANTHONY CARAVELLA,

Plaintiffs,

and

CARL SCHWARTZ,

Plaintiff-Appellant,

v.

ARENA PHARMACEUTICALS, INC.;

JACK LIEF; ROBERT E. HOFFMAN;

DOMINIC P. BEHAN; WILLIAM R.

SHANAHAN; CHRISTY ANDERSON,

Defendants-Appellees,

v.

CHRIS GEORGAKOPOULOS; LARRY

SPROWL; MAXAT AMANKOSSOV;

DAVID PRINCE; FORD L. WILLIAMS;

JOHN LEE; BABAK GHAYOUR,

Movants.

No. 14-55633

D.C. No.

3:10-cv-01959-

CAB-BLM

OPINION

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2 SCHWARTZ V. ARENA PHARMACEUTICALS

Appeal from the United States District Court

for the Southern District of California

Cathy Ann Bencivengo, District Judge, Presiding

Argued and Submitted May 4, 2016

Pasadena, California

Filed October 26, 2016

Before: Harry Pregerson, Jay S. Bybee,

and N. Randy Smith, Circuit Judges.

Opinion by Judge Bybee

SUMMARY*

Securities Fraud

The panel reversed the district court’s dismissal of a

putative securities class action in connection with defendants’

public statements about their weight-loss drug, lorcaserin.

The district court held that the plaintiffs did not

adequately plead scienter because defendants and the FDA

were engaged in a good-faith scientific dispute regarding the

cause of cancer in lab rats that were given the drug. 

The panel held that a strong inference of scienter was

properly pleaded under Federal Rule of Civil procedure 9(b)

* This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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SCHWARTZ V. ARENA PHARMACEUTICALS 3

and the Private Securities Litigation Reform Act because

when the defendants touted the safety and likely FDA

approval of lorcaserin, they referred to animal studies

supporting their FDA application. Once they raised the

animal studies, they were obligated to disclose the cancer

studies on rats.

COUNSEL

Peter K. Stris (argued), Dana Berkowitz, and Victor

O’Connell, Stris & Maher LLP, Los Angeles, California;

Laurence D. King and Mario M. Choi, Kaplan Fox &

Kilsheimer LLP, San Francisco, California; Robert N. Kaplan

and Jeffery P. Campisi, Kaplan Fox & Kilsheimer LLP, New

York, New York; for Plaintiff-Appellant.

John C. Dwyer (argued), Cooley LLP, Palo Alto, California;

Koji F. Fukumura, Mary Kathryn Kelley, and Ryan E. Blair,

Cooley LLP, San Diego, California; for DefendantsAppellees.

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4 SCHWARTZ V. ARENA PHARMACEUTICALS

OPINION

BYBEE, Circuit Judge:

Lead plaintiff Carl Schwartz filed a putative federal

securities class action against Defendants Arena

Pharmaceuticals, Jack Lief, Dominic Behan, William

Shanahan, and Christen Anderson1in connection with public

statements made about Arena’s weight-loss drug, lorcaserin. 

At various times, Defendants all made positive public

statements about lorcaserin’s safety and the likelihood of

FDA approval. On certain occasions, Defendants claimed

that lorcaserin was not carcinogenic and referred to

supporting “animal studies.” When Arena filed its

application with the FDA, the FDA’s advisory panel

published a briefing document that disclosed, for the first

time, that Arena had been in a “highly unusual” back-andforth with the FDA regarding the results of cancer studies on

rats (the “Rat Study”). For years, Arena knew that the rats

receiving lorcaserin were getting cancer. And the FDA

wanted evidence that it was not a threat to humans. The

market was surprised by the undisclosed Rat Study, and

Arena’s stock dropped significantly. Schwartz filed suit after

news of the Rat Study broke. After further study, the FDA

ultimately signed off on lorcaserin, and the product is now on

the market.

The district court dismissed the First, Second, and

ProposedThird Amended Complaints, holding that Arena and

the FDA were engaged in a good-faith scientific dispute

1 Lief, Behan, Shanahan, and Anderson were, during the Class Period,

Arena’s CEO, Chief Scientific Officer, Chief Medical Officer, and VP of

Clinical Development, respectively.

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SCHWARTZ V. ARENA PHARMACEUTICALS 5

regarding the cause of the rat cancer and that, therefore,

scienter was not adequately pleaded. Schwartz filed this

timely appeal. We conclude that Schwartz has properly

pleaded scienter, and we reverse.

I. BACKGROUND

A. Arena Pharmaceuticals and Lorcaserin

Arena is a bio-pharmaceutical company that developed

(and eventually marketed) a weight-loss drug called

lorcaserin. Lorcaserin is a “serotonin agonist,” and functions

in some ways similar to the notorious drug, “Fen-Phen.” 

Given the disastrous health consequences of Fen-Phen, the

FDA gives close scrutiny to serotonin agonists when it comes

to potential cardiovascular problems, and lorcaserin’s safety

was of obvious importance to investors for the same reason. 

Prior to approving a drug, the FDA requires extensive clinical

studies (testing on humans) and nonclinical studies (testing

on animals and in labs). Clinical testing is done in three

phases. Each phase of clinical testing attempts to gather more

information on drug safety and efficacy in human subjects,

and each phase requires a larger and larger population size.

Between September 2006 and July 2009, Arena

conducted two Phase III clinical tests with lorcaserin—known

as the “BLOOM” (Behavioral modification and Lorcaserin

for Overweight and Obesity Management) and “BLOSSOM”

(Behavioral modification and Lorcaserin Second Study for

Obesity Management) tests. They involved thousands of

patients who used lorcaserin for up to two years. At the same

time, Arena was conducting the Rat Study—a nonclinical

study in which lorcaserin was given to lab rats to test

lorcaserin’s carcinogenicity. The animal tests are run so that

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6 SCHWARTZ V. ARENA PHARMACEUTICALS

the FDA can see whether there is a risk of humans developing

cancer from the drug. If the rats develop cancer, the burden

is then on the drug developer to show the FDA that the

carcinogenic mechanism is not relevant to humans. This is

generally done in one of two ways: (a) demonstrating that the

biological mechanism causing the cancer is unique to rats (or

at least not present in humans), or (b) showing that there is a

sufficiently large safety threshold to make risk to humans

irrelevant (e.g., the cancer-causing dosage levels for rats is

significantly higher than human prescription-level dosages).

ByFebruary2007, the Rat Study’s initial results indicated

that lorcaserin was causing mammary tumors, brain cancer,

skin cancer, and nerve sheath cancer in the rats. In May

2007, Arena reported these results to the FDA. Arena

believed that the cause of the carcinogenic mechanism was

the hormone prolactin, a theory it deemed the “Prolactin

Hypothesis.” Prolactin is a hormone that has been linked to

cancer in rats. The FDA did not halt the clinical studies, but

requested follow-up testing and bi-monthly updates on

whether the rats taking lorcaserin experienced increased

prolactin levels.2 Arena complied and submitted “initial

readings” of the ongoing Rat Study.

In April 2008, Defendants Shanahan, Behan, and

Anderson sat down with the FDA to discuss these and other

matters. Once again, the FDA did not put the BLOOM and

BLOSSOM studies on hold, instead insisting that Arena

2 The FDA’s regulations permit this sort of request. See 21 C.F.R.

§ 312.32(c)(1)(v)(3) (giving FDA regulatory flexibility in demanding

interimsafety reports). Arena’s CEO, Jack Lief, however, later called this

request “highly unusual and not part of the normal process with the FDA.” 

He also referred to it as “an out-of-process type of procedure.”

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SCHWARTZ V. ARENA PHARMACEUTICALS 7

submit a draft of the final Rat Study report as soon as

possible. The FDA permitted the human testing to continue

because:

1) the updated informed consent forms

included the nonclinical [Rat Study] findings;

2) [it] learned that drug exposure in rats was

nearly twice as high as predicted, which

increased the safety margin to clinical

exposure; 3) preliminary data showed a

modest increase in serum prolactin levels after

a single dose in male rats . . . ; 4) [it]

acknowledged that the interim tumor

incidence data would change (e.g., might be

less worrisome) . . . ; 5) only with continued

clinical study was it possible to assess

whether long-term dosing with lorcaserin

increased serum prolactin levels in humans;

6) only with continuation of clinical dosing

would [it] obtain an accurate assessment of

lorcaserin’s weight-loss efficacy and safety in

diabetics; and 7) given that lorcaserin is nongenotoxic, [it] believed that cancer risk was

low under the conditions of use in the ongoing

clinical trials . . . .3

In February 2009, Arena put together the final report,

concluding that follow-up studies substantiated the

connection between prolactin and the cancer.

3 From the record before us, there is no evidence that the FDA said

anything further to Defendants about the Rat Study until September 2010.

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8 SCHWARTZ V. ARENA PHARMACEUTICALS

On March 12, 2009, less than one month after Arena put

together the final Rat Study report for the FDA, CEO Jack

Lief told investors that Arena was confident about

lorcaserin’s approval. That confidence was “based on the

Phase II data, the Phase I data, the preclinical studies that

was [sic] done, [and] all the animal studies that have been

completed.” (Emphasis added.) A May 2009 SEC filing,

signed by Lief, similarly represented that “the long-term

safety and efficacy” of lorcaserin had been “demonstrated,”

in part, through “long-term preclinical toxicity and

carcinogenicity studies. These preclinical, animal studies are

required to help us and regulatory authorities assess the

potential risk that drug candidates may be toxic or cause

cancer in humans.” (Emphasis added.) In a shareholder call

on September 18, 2009, Christen Anderson, Vice President of

Clinical Development, represented that Arena “ha[d]

favorable results on everything that we’ve compiled so far.” 

(Emphasis added.) During a shareholder call on November

10, 2009, Lief stated that “at [that] time [they] ha[d] all of the

data in hand that [would] be included” in the soon-to-besubmitted application. (Emphasis added.) Arena’s Chief

Scientific Officer, Dominic Behan, told investors that “[a]s

you can see from the data, we believe that lorcaserin is a

game changer.” And when discussing the upcoming

Advisory Committee meeting, Arena’s Chief Medical

Officer, William Shanahan, said, “we’re not expecting any

surprises associated with the panel.”

In December 2009, Arena submitted its final application

(which included all study data and the Rat Study conclusions)

to the FDA. The FDA scheduled an Advisory Committee

meeting to consider whether lorcaserin should be

recommended for FDA approval. In preparation for this

meeting, Arena hired Dr. Gary Williams, a world-renowned

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SCHWARTZ V. ARENA PHARMACEUTICALS 9

toxicologist (specializing in carcinogenicity) to answer

questions for the Committee.4

On September 14, 2010, the FDA published Arena’s and

the FDA’s briefing documents on the FDA’s website. In its

briefing documents, the FDA disclosed the existence of the

Rat Study and concerns about lorcaserin’s possible

carcinogenicity for the first time. Investors and analysts were

“caught off guard,” “surprised,” and “completely blindsided”

by the “unforseen,” “[un]disclosed,” “significant concern”

about “pre-clinical cancers in rats.” Arena’s stock took a

plunge, declining in value by 40% in a single day.

At a later meeting with the Advisory Committee, Arena

interpreted the data to support the safety of lorcaserin. Arena

explained that the Rat Study showed that (a) the dosage rates

for rats getting cancer were 82 times higher than human

exposure, thus creating an acceptable safety margin, and

(b) the timing of prolactin increases substantiated the

Prolactin Hypothesis and that the amount of prolactin

increase should not be the focus of the inquiry.

The FDA Advisory Committee disagreed, initially. It

believed that in order to prove the Prolactin Hypothesis, the

studies needed to show robust and sustained increases in

prolactin levels in the rats, which the data did not show. 

Advisory Committee members recognized that there was a

difference of opinion among its members regarding how to

4 Dr. Williams would explain that the timing of prolactin increase

relative to rat mammary development substantiated the Prolactin

Hypothesis and that the amount of prolactin increase (which turned out to

be pretty insubstantial in the Rat Study) should not be the focus of the

inquiry.

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10 SCHWARTZ V. ARENA PHARMACEUTICALS

translate the data to apply to humans, but ultimately voted 9

to 5 against recommending lorcaserin for approval. A month

later, the FDA denied the application and requested that

Arena provide further independent pathological review of the

Rat Study.

An independent panel of pathologists later uniformly

concluded that Arena had overreported the incidents of

tumors to the FDA. Moreover, after Arena submitted a new

application, the FDA Advisory Committee found that there

was a high-enough safety margin for the drug and that the

Prolactin Hypothesis was a “plausible” explanation for the rat

cancer. The FDA approved lorcaserin in June 2012, and it is

currently on the market.

B. The Suit

After the FDA posted the briefing documents online and

Arena’s stock plummeted, Schwartz filed suit alleging

violations of Sections 10(b) and 20(a) of the Securities

Exchange Act of 1934 and SEC Rule 10b-5. The district

court dismissed the First Amended Complaint (FAC) without

prejudice for failure to plead scienter. The court first held

that the FAC failed to plead sufficient details permitting the

court to infer that the Defendants had knowledge about the

Rat Study or the FDA’s concerns. Second, the court held that

reading the FAC holistically, it was more plausible that,

assuming they did know about the results, the Defendants

“reasonably believed the results to be positive” and thus they

did not act with deliberate recklessness regarding the

omissions.

Schwartz filed a Second Amended Complaint (SAC) in

May 2013, adding details regarding the Defendants and their

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SCHWARTZ V. ARENA PHARMACEUTICALS 11

personal knowledge of the Rat Study and allegations from

numerous confidential informantsregardingArena’s financial

health. The district court dismissed the SAC, holding that the

case boiled down to a scientific dispute between Arena and

the FDA regarding the safety of lorcaserin. The court then

invited a proposed Third Amended Complaint (TAC) to give

Schwartz the opportunity to plead facts to “show this case to

be about more than a difference of scientific opinion.”

Schwartz proffered a TAC, but the district court denied

leave to amend saying that amendment would be futile. In

the district court’s view, the strongest inference from the

alleged facts was that Arena experienced an unexpected

scientific disagreement with the FDA, and that because there

was a reasonable basis to believe that the data supported the

Prolactin Hypothesis, the Defendants did not make their

omissions with scienter. Schwartz filed a timely appeal.5

II. ANALYSIS

Schwartz’s theory is simple. At the same time

Defendants touted the safety and likely approval of

lorcaserin, they referred to the animal studies supporting the

FDA application. But once they raised the animal studies, 

Defendants were obligated to disclose the Rat Study’s

existence to the market. Failure to do so, in Schwartz’s view,

demonstrates scienter. Recognizing that this is a close case,

we agree. First, we set out the background legal principles

5 We review de novo the grant of a motion to dismiss, Nat’l Elevator

Indus. Pension Fund v. VeriFone Holdings, Inc. (In re Verifone Holdings,

Inc. Sec. Lit.), 704 F.3d 694, 700–01 (9th Cir. 2012), as well as denials of

leave to amend based on futility, Zucco Partners, LLC v. Digimarc Corp.,

552 F.3d 981, 1007 (9th Cir. 2009).

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governing private securities fraud claims. Second, we apply

these standards to conclude that Schwartz has adequately

alleged scienter.

A. Background Legal Principles

Under Section 10(b) of the Securities Exchange Act of

1934 (15 U.S.C. § 78j(b)) and SEC Rule 10b-5 (17 C.F.R.

§ 240.10b-5),6 Schwartz must allege “(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.” Lloyd v. CVB Financial Corp., 811 F.3d

1200, 1206 (9th Cir. 2016) (quoting Erica P. John Fund, Inc.

v. Halliburton Co., 563 U.S. 804, 810 (2011)). Only scienter

is at issue in this appeal.

Ordinarily, when we review a motion to dismiss under

Federal Rule of Civil Procedure 12(b)(6), we accept a

plaintiff’s allegations as true “and construe them in the light

most favorable” to the plaintiff, Zucco Partners, LLC v.

Digimarc Corp., 552 F.3d 981, 989 (9th Cir. 2009),

dismissing the complaint only if it fails “to ‘state a claim to

relief that is plausible on its face.’” Id. (quoting Bell Atl.

Corp. v. Twombly, 550 U.S. 544, 570 (2007)). But because

Schwartz here alleges that Defendants fraudulently violated

6 Schwartz has also raised a claim under Section 20(a) of the

Securities Exchange Act of 1934, for controlling-person liability. Such

claims hinge on an underlying violation ofsection 10(b). Zucco, 552 F.3d

at 990. Accordingly, because we reverse the district court and hold that

Schwartz has sufficiently pleaded scienter on his section 10(b) claim, we

similarly reverse, without analysis, the district court’s dismissal on the

section 20(a) claim. Id.

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SCHWARTZ V. ARENA PHARMACEUTICALS 13

federal securities laws, the equation is altered by the “dual

pleading requirements of Federal Rule of Civil Procedure

9(b) and the [Private Securities Litigation Reform Act

(PSLRA), 15 U.S.C. § 78u-4].” Zucco, 552 F.3d at 990.

Rule 9(b) imposes “a heightened pleading requirement,

which requires that a party ‘state with particularity the

circumstances constituting fraud.’” Nat’l Elevator Indus.

Pension Fund v. VeriFone Holdings, Inc. (In re Verifone

Holdings, Inc. Sec. Lit.), 704 F.3d 694, 701 (9th Cir. 2012)

(quoting Fed. R. Civ. P. 9(b)). Under the rule, however, the

“heightened pleading standard” only applies to the

circumstances of the fraud and not to the defendant’s state of

mind. ESG Capital Partners, LP v. Stratos, 828 F.3d 1023,

1031–32 (9th Cir. 2016). The PSLRA, however, ups the ante

by requiring that “‘the complaint . . . specify each statement

alleged to have been misleading, [and] the reason or reasons

why the statement is misleading,’” VeriFone, 704 F.3d at 701

(quoting 15 U.S.C. § 78u-4(b)(1)(B)) (alteration in original),

and by requiring that the allegations give “rise to a strong

inference that the defendant acted with the required state of

mind.” 15 U.S.C. § 78u-4(b)(2)(A) (emphasis added). These

“heightened pleading requirements for securities fraud cases

. . . present no small hurdle for the securities fraud plaintiff.” 

VeriFone, 704 F.3d at 701.

Schwartz’s burden, therefore, is to allege sufficiently

particular facts to demonstrate a strong inference of

scienter—a mental state that not only covers “intent to

deceive, manipulate, or defraud,” Matrixx Initiatives, Inc. v.

Siracusano, 563 U.S. 27, 48 (2011) (quoting Tellabs, Inc. v.

Makor Issues & Rights, Ltd., 551 U.S. 308, 319 (2007)), but

also “deliberate recklessness,” Zucco, 552 F.3d at 991

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14 SCHWARTZ V. ARENA PHARMACEUTICALS

(quotation marks omitted).7 We have defined “deliberate

recklessness” as more than “mere recklessness or a motive to

commit fraud.” Id. (emphasis added). Instead, deliberate

recklessness is “an extreme departure from the standards of

ordinary care . . . which presents a danger of misleading

buyers or sellers that is either known to the defendant or is so

obvious that the actor must have been aware of it.” Id.

(emphasis added) (internal quotation marks omitted); accord

Ottmann v. Hanger Orthopedic Grp., Inc., 353 F.3d 338, 343

(4th Cir. 2003). “A complaint will survive,” the Supreme

Court has instructed, “only if a reasonable person would

deem the inference of scienter cogent and at least as

compelling as any opposing inference one could draw from

the facts alleged.” Tellabs, 551 U.S. at 324. All in all,

though not impossible, this “is not an easy standard to comply

with—it was not intended to be—and plaintiffs must be held

to it.” Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d

1048, 1052 (9th Cir. 2003) (per curiam).

Of particular importance to Schwartz’s theory is the idea

that the securities laws “do not create an affirmative duty to

disclose any and all material information.” Matrixx, 563 U.S.

at 44. Instead, “companies can control what they have to

disclose under these provisions by controlling what they say

to the market.” Id. at 45. But “once defendants cho[o]se to

tout” positive information to the market, “they [are] bound to

do so in a manner that wouldn’t mislead investors,” including

7 Although the Supreme Court has never decided “whether reckless

behavior is sufficient for civil liability under § 10(b) and Rule 10b-5,”

Tellabs, 551 U.S. at 319 n.3, “[e]very Court of Appeals that has

considered the issue has held that a plaintiff may meet the scienter

requirement by showing that the defendant acted intentionally or

recklessly . . . .” Id.

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SCHWARTZ V. ARENA PHARMACEUTICALS 15

disclosing adverse information that cuts against the positive

information. Berson v. Applied Signal Tech., Inc., 527 F.3d

982, 987 (9th Cir. 2008). Three cases are particularly

relevant here: Matrixx, Berson, and In re AstraZeneca Sec.

Lit., 559 F. Supp. 2d 453 (S.D.N.Y. 2008).

In Matrixx, the makers of Zicam, Matrixx Initiatives,

began receiving complaints from doctors saying that patients

were losing their sense of smell when using Zicam to treat the

common cold. 563 U.S. at 31. A research doctor, Dr.

Linschoten, drew Matrixx’s attention to studies linking zinc

(the main active ingredient in Zicam) to loss of smell. Id. at

32. Matrixx told Dr. Linschoten that it had hired a consultant

to review Zicam. A second researcher, Dr. Jafek, soon

thereafter published an abstract noting about a dozen patients

who had all lost their sense of smell after using Zicam. Id. at

32–33. When Drs. Linschoten and Jafek prepared a

presentation on Zicam and loss of smell, Matrixx told Dr.

Jafek not to use Zicam’s name in the presentation. Id. at 33. 

Shortly thereafter, several product liability suits were filed by

plaintiffs complaining of damage to their sense of smell. Id.

Notwithstanding this information, Matrixx continued to

make public statements promoting its belief in Zicam’s

market growth in the upcoming months. Id. at 33–34. In all

of its public statements, Matrixx failed to mention either the

researchers’ concerns or the pending lawsuits over the loss of

smell. Id. at 33–34, 45–47. Moreover, once investment

analysts reported that the FDA was looking into the issue,

Matrixx put out press releases saying that the allegations were

“unfounded and misleading,” and that “[i]n no clinical trial”

had the kind of zinc in Zicam caused “a single report of lost

or diminished [smell].” Id. at 34. Within days, Good

Morning America highlighted Dr. Jafek’s findings. Id. at 35. 

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The defendants then told the SEC it had put together a panel

of doctors and scientists to review Zicam. Id. Because of the

volatility in Matrixx’s stock price, the plaintiffs filed suit. 

See id. at 36.

Matrixx argued that in order to meet the deliberate

recklessness standard of scienter, the plaintiffs would have to

plead that the defendants “knew of statistically significant

evidence of causation” of loss of smell. Id. at 48–49. In

other words, Matrixx argued it was not required to divulge

the information because the information was not strong

enough to raise alarm bells. The Supreme Court rejected that

argument, noting that there was a strong inference of

deliberate recklessness based on Matrixx’s (1) telling Dr.

Linschoten that it was having an outside consultant review

the matter; (2) getting a panel of physicians and scientists to

review Dr. Jafek’s presentation; (3) demanding that Dr. Jafek

remove Zicam’s name from the presentation; and

(4) suggesting that studies had been done that had not been

done. Id. at 49. Matrixx was obligated to disclose the issue

given its positive statements to the market and the fact that it

had “received information that plausibly indicated a reliable

causal link between Zicam and [loss of smell].” Id. at 45.

InBerson, the defendant, Applied Signal Technology, had

publically discussed the value of its “backlog”—defined as

“the dollar value of the work it ha[d] contracted to do but

ha[d]n’t yet performed”—to investors. 527 F.3d at 984. 

However, Applied Signal failed to disclose that “four stopwork orders” had been issued by its clients, leading to a

significant risk that the “stopped work” would be “cancelled

altogether” and that the company would never actually earn

the money from those backlogged orders. Id. We explained

that, generally, Applied Signal had no obligation to discuss

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SCHWARTZ V. ARENA PHARMACEUTICALS 17

the backlog at all: “Had [Applied Signal] released no backlog

reports, their failure to mention the stop-work orders might

not have misled anyone.” Id. at 987. “But,” we continued,

“once defendants chose to tout the company’s backlog, they

were bound to do so in a manner that wouldn’t mislead

investors as to what that backlog consisted of.” Id.

In contrast, the defendants in AstraZeneca were

developing a blood thinner, Exanta, to compete with the

existing gold-standard drug, Warfarin. 559 F. Supp. 2d at

457. The defendants released numerous press releases, made

SEC filings, and held teleconferences touting the likely

approval of the drug and its safety profile. Id. at 458–62. 

However, as an Advisory Committee meeting approached,

the FDA published a briefing document online that disagreed

with the safety profile of the drug and took an overall

negative view of it. Id. at 462. When the stock price

dropped, the plaintiff filed suit. But the district court

dismissed the complaint on scienter grounds. Id. at 472. The

court noted that the collective statements of the defendants

had disclosed risks of injury associated with the drug in

public statements, and that, in the end, the FDA simply had

a different interpretation of the safety profile. Id. at 470–71. 

Thus, because there were no allegations “to indicate that the

[public] statements made did not reflect the honest belief of

the authors,” the court held there was no strong inference of

deliberate recklessness. Id. at 471–72.

B. Analysis

Applying these principles, we conclude that Schwartz has

alleged scienter with sufficient particularity to survive a

motion to dismiss. There is no question that Schwartz has

alleged that Defendants knew that the Rat Study existed. See

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18 SCHWARTZ V. ARENA PHARMACEUTICALS

Matrixx, 563 U.S. at 31–32 (defendants made aware of

negative studies); Berson, 527 F.3d at 984 (defendants knew

of stop-work orders). Similarly, Schwartz has alleged that

Defendants knew that the FDA’s request for bi-monthly

reports and follow-up studies was “highly unusual” and “outof-process.” But in full knowledge of this, Defendants went

ahead and told investors about their confidence in lorcaserin’s

approval being based on “the preclinical studies that [were]

done, [and] all the animal studies that have been completed.” 

(Emphasis added.) The public was assured that lorcaserin’s

“long-term safety and efficacy” (and thus the likelihood of its

imminent approval) were “demonstrated” through “long-term

preclinical toxicity and carcinogenicity studies.” These

“preclinical, animal studies” were done, according to Arena,

“to help [Arena] and regulatory authorities assess the

potential risk that drug candidates may be toxic or cause

cancer in humans.”

Defendants may not have had a duty to disclose the Rat

Study had they not been representing that animal studies

supported lorcaserin’s safety and therefore its likelihood of

being approved. “[C]ompanies can control what they have to

disclose under these provisions by controlling what they say

to the market.” Matrixx, 563 U.S. at 45. But here, to

paraphrase our holding in Berson, “once defendants chose to

tout [lorcaserin’s likely approval by referencing allegedly

positive animal and preclinical studies], they were bound to

do so in a manner that wouldn’t mislead investors as to

[potentially negative information within their possession].” 

Berson, 527 F.3d at 987. Arena’s failure to inform the market

about the risk of non-approval or delayed approval based on

the FDA’s “concerns” about the Rat Study was “an extreme

departure from the standards of ordinary care . . . [that]

present[ed] a danger of misleading buyers or sellers that

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SCHWARTZ V. ARENA PHARMACEUTICALS 19

[was] either known to [Arena] or [was] so obvious that

[Arena] must have been aware of it.” Zucco, 552 F.3d at 991

(internal quotation marks omitted).

Arena did more than just express its confidence in

lorcaserin’s future. It affirmatively represented that “all the

animal studies that [had] been completed” supported Arena’s

case for approval. And at the time these statements were

made by various Arena officials in 2009, Arena knew that the

animal studies were the sticking point with the FDA. 

Contrary to Arena’s representations to investors, it was not

true that the “preclinical, animal studies” demonstrated the

“long-term safety and efficacy” of lorcaserin or “the potential

risk that [it] may be toxic or cause cancer in humans.” It was

also not true that Arena had “all of the data in hand” or that

“everything that [they had] compiled so far” was “favorable.” 

These statements were representations about lorcaserin that

Arena could not, in fact, support at the time they were made. 

Arena was free to express confidence in FDA approval. It

might have represented that Arena was working through some

requests from the FDA and was confident the data would

vindicate lorcaserin. But what it could not do was express

confidence by claiming that all of the data was running in

lorcaserin’s favor. It was not.

To be sure, as Defendants point out, there is not any

specific allegation about the content of the FDA’s concerns

with the Rat Study prior to the publication of the briefing

document. But as Arena’s 2010 disclosure, following the

FDA’s announcement, makes crystal clear:

[W]e conducted long-termcarcinogenicity

preclinical studies of lorcaserin. The FDA

identified in the [Complete Response Letter

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20 SCHWARTZ V. ARENA PHARMACEUTICALS

(“CRL”)] for lorcaserin issues related to such

studies. We intend to provide in our response

to the CRL data and other information to

support our view related to such issues, but

the FDA may disagree with our view or

impose conditions that could delay or

preclude approval of our lorcaserin

[Application].

(Emphasis added.) In other words, it seems quite clear that

Arena understood that the FDA did not entirely agree with

Arena’s views of the Rat Study. Indeed, FDA documents

note that “[Arena] was made aware of [the FDA’s] concerns”

and was asked to “defend continuation” of the clinical testing

in light of the “nonclinical tumor/cancer data.” (Emphasis

added.) Defendants obviously felt the need to respond by

complying with the follow-up test requests. And they

obviously felt the need to hire a pre-eminent expert to make

the case that the Prolactin Hypothesis was supported. 

Defendants’ own response to the issue contributes to an

inference of scienter here. Cf. Matrixx, 563 U.S. at 49–50

(defendant’s decision to “convene[] a panel of physicians and

scientists” in response to undisclosed allegations of negative

health effects from the defendants’ product contributed to a

“‘cogent and compelling’ inference that [the defendant]

elected not to disclose the reports of adverse events not

because it believed they were meaningless but because it

understood their likely effect on the market”). This further

buttresses our conclusion that Schwartz has adequately

alleged scienter.

Defendants attempt to avoid this conclusion bynoting that

all of the relevant statements contained in Schwartz’s

pleadings came afterthe sit-down meeting with the FDA, and

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SCHWARTZ V. ARENA PHARMACEUTICALS 21

that the result of that meeting was to permit Arena to go on

with the BLOOM and BLOSSOM studies. Moreover,

Defendants heard nothing between the time they submitted

the final Rat Study report in 2009 and the 2010 disclosure by

the FDA. Thus, in Defendants’ view, because the last thing

they heard from the FDA was “positive,” they were free to

make the comments they did without disclosing the Rat

Study. But the mere fact that the BLOOM and BLOSSOM

studies were allowed to continue is insufficient to override

the “highly unusual” nature of the procedures invoked by the

FDA concerning the Rat Study. Nor can the FDA’s silence

be taken as tacit approval such that Defendants were relieved

from the duty to disclose the Rat Study when they chose to

invoke “animal studies” as a grounds for their confidence in

lorcaserin’s approval.

Defendants contend that this case is really just like

AstraZeneca: a good-faith scientific disagreement between

the FDA and Arena about the meaning of the Rat Study and

support for the Prolactin Hypothesis. If it were simply the

case that this dispute turned on whether scienter could exist

based on the reasonableness of Arena’s interpretation of the

Rat Study versus the FDA’s interpretation, there would be

little question Defendants would have the better argument. 

See AstraZeneca, 559 F. Supp. 2d at 471 (“As of the time

when the FDA Advisory Committee met . . . , AstraZeneca

had its side of the case and the FDA staff had its side. The

FDA staff view prevailed before the Advisory Committee. 

This does not mean that AstraZeneca was not conscientious

in advocating the drug . . . before the FDA, nor does it mean

that the information issued publicly over the course of more

than a year was dishonest or recklessly disseminated.”). 

However, the simple fact that Arena had an explanation for

its view of the data does not mean investors would not want

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22 SCHWARTZ V. ARENA PHARMACEUTICALS

to know that Arena and the FDA were at odds. Arena could

have remained silent about the dispute or it could have

addressed its discussions with the FDA head-on. But it could

not represent that there was no controversy here because all

the data was favorable. As Schwartz explains, his “theory of

fraud is not that Defendants intentionally misled the market

about the objective safety of lorcaserin. Rather, [Schwartz’s]

theory of fraud is that Defendants intentionally withheld

information material to the market’s assessment of whether

and when the FDA would likely approve lorcaserin.” It is the

failure to disclose “issues” and “concerns” with the Rat Study

and the FDA’s interest in the outcome of those studies—not

who was ultimately right about the underlying science—that

matters. Cf. Matrixx, 563 U.S. at 43 (“Given that medical

professionals and regulators act on the basis of evidence of

causation that is not statistically significant, it stands to

reason that in certain cases reasonable investors would as

well.”). And it sure mattered to investors, who were

understandably concerned by the information revealed in the

FDA’s 2010 briefing documents.8

8 We reject Schwartz’s argument, however, that the vague and largely

unsubstantiated allegations from confidential informants support a strong

inference of scienter. We have cautioned securities plaintiffs that, absent

some truly compelling allegations, we will not consider routine business

behavior (like firing people or raising capital) to serve as the basis for

scienter. See In re Rigel Pharm., Inc. Sec. Lit., 697 F.3d 869, 884–85 (9th

Cir. 2012) (“[A]llegations of routine corporate objectives such as the

desire to obtain good financing and expand are not, without more,

sufficient to allege scienter.”). Holding otherwise “would support a

finding of scienter for any company that seeks to enhance its business

prospects.” Id. at 884. Although this deprives Schwartz’s complaint of

allegations about Defendants’ motives, “absence of a motive allegation,

though relevant, is not dispositive.” Matrixx, 563 U.S. at 48.

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SCHWARTZ V. ARENA PHARMACEUTICALS 23

III. CONCLUSION

Rule 9(b) and the PSLRA create a significant barrier for

private securities plaintiffs. But it is not an impossible

barrier; nor was it meant to be. We “must review all the

allegations holistically” to determine whether Schwartz has

met the relevant pleading standards. Matrixx, 563 U.S. at 48

(internal quotation marks omitted). We conclude that he has.9

REVERSED and REMANDED.

9 Because the district court also dismissed the Section 20(a),

controlling-person liability claim on scienter grounds, we reverse on that

point as well. See supra n.6; Zucco, 552 F.3d at 990.

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