Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_04-cv-02675/USCOURTS-cand-3_04-cv-02675-4/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:78m(a) Securities Exchange Act

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1 The Court has not yet certified a class and refers to the time period involved as

the “Class Period” for ease of reference. 

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

In re INTRABIOTICS PHARMACEUTICALS,

INC. SECURITIES LITIGATION,

This document relates to:

All Actions

 /

No. C 04-02675 JSW

CLASS ACTION

ORDER (1) GRANTING IN PART

AND DENYING IN PART

DEFENDANTS’ MOTION TO

DISMISS CORRECTED

CONSOLIDATED AMENDED

COMPLAINT AND (2) DENYING

DEFENDANTS’ MOTION TO

REQUIRE UNDERTAKING

I. INTRODUCTION

Lead plaintiff Jack Kindregan (“Kindregan”) and representative plaintiffs Del F. La

Follette (“Follette”) and John Buche (“Buche”) (collectively “Plaintiffs”) bring this action

individually and on behalf of all other persons who purchased or otherwise acquired the

common stock of defendant IntraBiotics Pharmaceuticals, Inc. (“IntraBiotics”) between

September 5, 2003 and June 22, 2204 (the “Class Period”),1 pursuant to Sections 10(b) and

20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t(a), and the rules and

regulations promulgated thereunder, including SEC Rule 10b-5, 17 C.F.R. 240.10b-5. Plaintiffs

further bring claims on behalf of Buche and persons who purchased IntraBiotics’ stock on or

around May 5, 2004, pursuant to Sections 11 and 15 of the Securities Exchange Act of 1934, 15

U.S.C. §§ 77k and 77o.

Now before the Court is the motion to dismiss the Corrected Consolidated Amended

Class Action Complaint (“Complaint”) filed by defendants IntraBiotics, Henry J. Fuchs

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2 After Defendants filed a motion to dismiss the consolidated amended

complaint, Plaintiffs sought and were granted leave to file a corrected consolidated amended

complaint. The parties agreed that the pending motion was applicable to the corrected

consolidated amended complaint. 

2

(“Fuchs”), Detlef Albrecht (“Albrecht”), David J. Tucker (“Tucker”), Ernest Mario (“Mario”),

Kevin C. Tang (“Tang”), Mark L. Perry (“Perry”), Gary A. Lyons (“Lyons”), Jerry Jackson

(“Jackson”) and Jack S. Remington (“Remington”) (collectively “Defendants”).2 Defendants

move to dismiss asserting that Plaintiffs fail to meet the heightened pleading requirements of the

Private Securities Litigation Reform Act (“PSLRA”) and fail to state a claim upon which relief

can be granted under Federal Rule of Civil Procedure 12(b)(6). Defendants further assert that

further amendments to the Complaint would be futile and request that the Court dismiss this

action with prejudice. Also before the Court is Defendants’ motion to require an undertaking

pursuant to 15 U.S.C. § 77k(e) (Section 11(e) of the Securities Exchange Act of 1934).

Having carefully reviewed the parties’ papers, considered their arguments and relevant

legal authority, and having had the benefit of oral argument, the Court hereby GRANTS IN

PART and DENIES IN PART Defendants’ motion to dismiss. The Court GRANTS Plaintiffs

leave to amend the dismissed claims. The Court DENIES Defendants’ motion to require an

undertaking. 

II. FACTUAL BACKGROUND

IntraBiotics is a publicly traded biopharmaceutical company founded in 1994. (Compl. 

¶ 2.) During the relevant Class Period, IntraBiotics’ sole advanced drug candidate was iseganan

hydrochloride (“iseganan”). Defendant Fuchs is IntraBiotics’ Chief Executive Officer and has

served as a member of IntraBiotics’ Board of Directors since November 2001. Defendants

Albrecht, Tucker, Mario, Tang, Perry, Lyons, Jackson, and Remington are all officers and/or

directors of IntraBiotics. (Id. at ¶¶ 21-28.) 

Testing of Iseganan for Oral Mucositis

Prior to the Class Period, IntraBiotics tried but failed to bring iseganan to the market for

the treatment of oral mucositis, a common debilitating side effect of cancer therapy that is

characterized by severe mouth ulcers that often become infected. (Id. at ¶ 3.) IntraBiotics’ first

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Phase III trial tested iseganan on cancer patients undergoing chemotherapy. (Id. at ¶ 50.) 

According to confidential witnesses who are former IntraBiotics’ employees, including a

research scientist, the Vice President of Program Management, and the Vice President of

Business Operations, “Fuchs violated clinical trial protocol and secretly fixed the data in this

trial to indicate a positive trend for [iseganan] to justify continuing the trial. (Id.) On April 26,

2001, IntraBiotics announced that iseganan “did not meet its primary endpoint of reducing

ulceration, but did meet its secondary endpoint of reducing pain and was well tolerated.” 

However, IntraBiotics discounted these results due to a subcontractor’s error in assigning

iseganan or the placebo to 102 patients. (Id. at ¶ 51.) This error obscured Fuchs’ manipulation

of the data. (Id.) 

IntraBiotics conducted another Phase III trial of iseganan for the treatment of oral

mucositis on cancer patients receiving radiation therapy. (Id. at ¶ 53.) On May 3, 2002,

IntraBiotics announced the results from this Phase III trial, stating that the “trial showed no

difference between iseganan and placebo in the primary or secondary endpoints.” (Id.) 

According to a confidential witness who was a project manager at Pharmanet, the contract

research organization for IntraBiotics during the oral mucositis trials, and was familiar with the

results of these trials, iseganan was not a good product because it had a poor taste and added to

the nausea of the patients who tried it. (Id. at ¶¶ 51, 54.) On September 27, 2002, Mario

announced that the preliminary test results from the trial “indicated that iseganan did not meet

its primary endpoint of reducing oral mucositis,” and thus, IntraBiotics ceased pursuing

iseganan to treat this disease. (Id. at ¶ 55.)

Testing of Iseganan for Ventilator-Associated Pneumonia

By the beginning of the Class Period, “the fate of IntraBiotics hinged on the success of

iseganan” in Phase III clinical trials for the prevention of ventilator-associated pneumonia

(“VAP”), a bacterial pneumonia that can develop in patients receiving mechanical or artificial

ventilation. (Id. at ¶ 4.) 

On December 8, 2000, IntraBiotics commented that a Phase I trial of iseganan for the

treatment of VAP showed that the drug was well-tolerated and reduced the amount of bacteria in

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patients’ mouths and throats, and announced that it began patient enrollment for a Phase IIa trial

of iseganan for VAP. (Id. at ¶ 57.) In March 2001, IntraBiotics announced that the data from

the Phase IIa trial indicated that iseganan was well-tolerated and demonstrated antimicrobial

activity when administered to patients at risk for developing VAP. (Id. at ¶ 58.) 

On February 6, 2003, Intrabiotics issued a press release announcing its launch of a Phase

II/III trial of iseganan for the treatment of VAP and stated, in pertinent part: “[Intrabiotics]

recently concluded a productive meeting with the Food and Drug Administration to discuss the

development of iseganan for VAP. ... [I]seganan has been shown to be well tolerated in clinical

studies in cancer patients, and to effect significant reductions in the level of bacteria in the oral

cavity of cancer patients as well as patients who require artificial ventilation.” (Id. at ¶ 59.) 

In connection with its Phase II/III trial for VAP, Defendants established an independent

drug safety monitoring board (“DSMB”). The DSMB received the interim results of the trials,

which were double-blinded. The DSMB then “unblinded” the results and met monthly to

discuss the results. (Id. at ¶ 60.) According to a confidential witness who worked as a vice

president of biostatistics at Pharmanet, if the clinical investigators perceived any problems with

iseganan during the clinical trials, that information would be summarized for the DSMB, and

IntraBiotics would be notified of the overall toxicity profile of the problem. (Id.) 

On September 5, 2003, the start of the Class Period, IntraBiotics issued a press release

stating that Food and Drug Administration (“FDA”) granted fast track designation for the

development of iseganan for treating VAP, and that IntraBiotics previously had completed and

announced results of a Phase I/II study of the safety and efficacy of iseganan administered to

mechanically ventilated patients. (Id. at ¶ 62.) In the press release, IntraBiotics stated: 

Designation as a fast track drug indicates that the FDA will facilitate the

development and expedite the review of a new drug that is intended to treat a serious or

life-threatening condition and that demonstrates the potential to address an unmet

medical need. In a letter to the company, the FDA stated: “We are granting fast track

designation for the following reasons:

There are currently no products approved (topical or systematic) for the

prevention of ventilatory-associated pneumonia.

Ventilator-associated pneumonia is commonly recognized as a highly morbid

condition in critically ill patients. Prevention of this disorder is desirable.”

... “VAP is a devastating complication experienced by critically ill patients who

are vulnerable to infection because of the requirement for artificial ventilation,” said Dr.

Marin Kollef, Associate Professor of Medicine at Washington University School of

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 At the hearing on Defendants’ motion to dismiss, Plaintiffs clarified that they

contend the following two statements in the September 5, 2003 press release were false:

“[Iseganan] demonstrates the potential to address an unmet medical need” and “Because of

iseganan’s properties, VAP represents a logical an important potential application.”

4

 At the hearing on Defendants’ motion to dismiss, Plaintiffs clarified that they

contend the following statement in the September 19, 2003 press release was false:

“Agreement with the FDA on the design of these clinical trials is important to assure

expeditious registration if the trials are successful.”

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Medicine, Pulmonary and Critical Care Division in St. Louis. “Experts have long

believed that pneumonia in patients should be preventable through the use of antibiotic

decontamination of the mouth, but so far we have lacked the appropriate antibiotic - one

that can be safely applied into the mouth and not worsen problems of antibiotic

resistance. This approach has become more important as bacterial resistance to

antibiotics continues to grow and the development of new antibiotics to cope with

resistance has lagged. Because of iseganan’s properties, VAP represents a logical an

important potential application. We look forward to the results of the upcoming pivotal

clinical trials.”

... “We are pleased to be working with the FDA to finalize the protocol for [the

upcoming Phase II/III trial] because of the FDA’s expertise in trial design and review. 

We believe that patients with VAP will benefit from FDA input by virtue of assuring

that the collected data will support expeditious product registration if the trials are

successful,” said Dr. Henry Fuchs, President and CEO of IntraBiotics. 

(Id.)3

IntraBiotics announced it had reached a Special Protocol Agreement (“SPA”) with the

FDA in a press release issued on September 19, 2003. In the press release, IntraBiotics stated:

“We have appreciated our collaboration with the FDA throughout the SPA process on this

development program, which has been designed to address an unmet medical need for

mechanically-ventilated patients who are at high risk for developing VAP. ... Agreement with

the FDA on the design of these clinical trials is important to assure expeditious registration if

the trials are successful.” (Id. at ¶ 65.)4 

Plaintiffs allege that the statements in the press releases issued in September 2003 were

materially false and misleading because Defendants had no intention of complying with the

protocol for the trials that they were developing with the FDA to test iseganan, which included

FDA regulations and guidelines regarding monitoring and reporting adverse effects to the FDA,

and because Defendants failed to disclose that iseganan caused increased nausea in previous

trials. (Id. at ¶¶ 64, 67.)

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IntraBiotics planned to enroll approximately 900 patents in the Phase II/III trial for VAP. 

The patients in the trial were given either iseganan or a placebo six times a day for up to

fourteen days while they were mechanically ventilated. (Id. at ¶ 68.) Plaintiffs allege: 

Based on a 14-day cycle per patient, test results (i.e., the raw data) were available within

two weeks of the commencement of the trials. Any adverse effects of iseganan on the

tested patients, such as, for example, death or increased illness as opposed to

improvement from using the drug, would be apparent at that point. Similarly, a

comparison of the results of the tests on patients taking iseganan versus those taking a

placebo would be available as of 14 days into the start of the trials.

(Id.) 

On October 7, 2003, IntraBiotics issued a press release announcing that it had enrolled

the first patients in its first Phase II/III trial for VAP. In particular Fuchs stated: “we look

forward to working closely with our clinical investigators to expedite the development of

iseganan for the prevention of VAP....” (Id. at ¶ 70.) On October 29, 2003, IntraBiotics stated

in a press release that it had “achieved a series of milestones over the last three months which

have significantly strengthened and repositioned [IntraBiotics] for future growth[.] ... Our novel

lead product, iseganan, is now in late-stage pivotal clinical trials. Assuming successful

completion of these trials, iseganan has a clear path to registration for the prevention of VAP, a

major unmet medical need worldwide. ... Iseganan may also have potential applications for a

variety of other infections that we will begin to explore in the near future.” (Id. at ¶ 72.) 

On February 12, 2004, IntraBiotics announced in a press release that its ongoing Phase

II/III trial for VAP had been accepted for inclusion in the FDA’s Continuous Marketing

Application (“CMA”) Pilot 2 Program. Iseganan was the only Fast Track product selected by

the Center for Drug Evaluation and Research division of Anti-Infective Drug Products. In

response, Fuchs stated: “We are honored to have been selected for inclusion into this exclusive

and pioneering program. Our selection builds on iseganan’s Fast Track status and [SPA]

agreement to potentially further speed and clarify the pathway to approval for this agent for

VAP ....” IntraBiotics further stated: “The first of two planned pivotal trials is now well

underway to evaluate iseganan oral solution for the prevention of VAP ... and data is expected

by the end of this year. A completed Phase I/II trial in mechanically-ventilated patients

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demonstrated that iseganan was well tolerated, safe, and effective in decreasing the amount of

bacteria and yeast in the mouths of these patients.” (Id. at ¶¶ 74, 75.)

On March 4, 2004, IntraBiotics announced in a press release that it had already enrolled

450 patients in its Phase II/III trial for VAP and stated: “We have made significant progress in

2003, advancing our product candidate, [iseganan], and defining a clear pathway to registration

in the United states for a large unmet medical need....” (Id. at ¶ 78.) In an amended registration

statement filed with Securities and Exchange Commission on April 22, 2004 (the “Registration

Statement”), IntraBiotics further stated: “We believe that there are four features of iseganan that

will translate into important clinical benefits. ... Based on our experience to date, iseganan

appears to be safe and well-tolerated at therapeutically relevant doses when administered to the

oral cavity, the planned route of administration for the prevention of VAP. In particular,

iseganan has been delivered to the oral cavity of more than 800 patients to date, with no

differences in adverse events between the active and placebo groups observed consistently

among the trials.” (Id. at ¶ 80.) 

Plaintiffs allege that the statements alleged in paragraphs 72, 74, 75, 78, and 80 of the

Complaint were materially false and misleading because by the time such statements were

made, Defendants had access to the interim results of the Phase II/III trial for VAP, which were

based on a fourteen-day cycle per patient, and that as a result of such access, Defendants knew

or should have known that iseganan was not safe or well-tolerated. Plaintiffs also allege that

such statements were materially false and misleading because Defendants did not intend to

comply with, and were in violation of, their obligation to report adverse results to the FDA. (Id.

at ¶¶ 73, 77, 79, and 82.) 

On May 5, 2005, Defendants raised approximately $36.1 million in a public offering,

and then raised an additional $6.1 million around June 3, 2004, when they announced that the

underwriters of their public offering would exercise their option to purchase an additional

450,000 shares to cover over-allotments. (Id. at ¶¶ 7, 83, 84, 90.) Plaintiffs further allege that at

the time of the May 5, 2004 public offering and the June 3, 2004 over-allotment exercise:

[D]efendants were aware through their monitoring of the clinical trials that iseganan as a

treatment for VAP posed serious safety risks, including death. Defendants were aware

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of the risks because IntraBiotics received the interim results, was responsible for

monitoring the testing for, in particular, negative side effects and was informed when

adverse events occurred. In particular, [D]efendants were aware of the adverse results

by their receipt of the interim results from Robert Ott of Advance Clinical Trials, Inc.

(“ACT”), a contract research organization hired by [D]efendants to assist in the

management and monitoring of the Phase II/III trial. Mr. Ott was ACT’s Project

Manager of U.S. Operations throughout the duration of IntraBiotic’s (sic) Phase II/III

clinical trial of iseganan for the prevention of VAP and received interim data from

testing sites, data which, whether blinded or unblinded, would have indicated an increase

of serious adverse events in the patients enrolled in the trial. Furthermore, the trial

involved a 14-day cycle per patient, and by the time of the offering and the overallotment, the clinical trial had enrolled more than 450 patients. Thus, it had long been

the case that a statistically significant number of patients had been tested for the data to

reliably indicate that there were serious negative side effects to the use of iseganan for

the treatment of VAP.

(Id. at ¶ 91.)

The $42.2 million Defendants raised through the public offering and over-allotment

exercise on May 5, 2004 and June 3, 2004 enabled Defendants to dramatically reduce the

negative impact the disclosure of the failure of IntraBiotics’ sole drug candidate, iseganan,

would have on IntraBiotics’ future. The cash provided IntraBiotics with prospects, including

providing Defendants with means to make acquisitions, in-license another drug candidate or

make IntraBiotics a more attractive acquisition candidate. Plaintiffs allege that without this

cash, Defendants knew that IntraBiotics would have no drug candidate and no prospects

following the failure of the VAP trials, and that they would lose their jobs and be forced to

liquidate the company. (Id. at ¶¶ 7, 106.) 

On June 23, 2004, IntraBiotics announced it had to immediately discontinue the VAP

trials based on interim analysis of the data. (Id. at ¶¶ 8, 93.) The data revealed that a higher rate

of VAP and of mortality was observed to the patients who were administered iseganan. (Id. at ¶

8.) 

III. ANALYSIS

Plaintiffs allege that throughout the Class Period Defendants publicly made positive

statements concerning iseganan and the progress of the Phase II/III trial for VAP despite their

knowledge that patients did not tolerate the drug well and that the trial was indicating adverse

results. Plaintiffs also allege that Defendants engaged in a scheme to raise millions of dollars to

provide Defendants with the means to retain their jobs and avoid liquidation. (Compl. ¶¶ 6-7,

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35, 106.) Section 10(b) of the Securities Exchange Act provides, in part, that it is unlawful “to

use or employ in connection with the purchase or sale of any security registered on a national

securities exchange or any security not so registered, any manipulative or deceptive device or

contrivance in contravention of such rules and regulations as the [SEC] may prescribe.” 15

U.S.C. § 78j(b).

Rule 10b-5 makes it unlawful for any person to use interstate commerce:

(a) To employ any device, scheme, or artifice to defraud;

(b) To make any untrue statement of material fact or to omit to state a material fact

necessary in order to make the statements made, in light of the circumstances

under which they were made, not misleading, or;

(c) To engage in any act, practice, or course of business that operates or would

operate as a fraud or deceit upon any person, in connection with the purchase or

sale of any security.

17 C.F.R. § 240.10b-5.

To plead a claim under section 10(b) and Rule 10b-5, a plaintiff must allege (1) a

misrepresentation or omission, (2) of material fact, (3) made with scienter, (4) on which the

plaintiff justifiably relied, (5) that proximately caused the alleged loss. Binder v. Gillespie, 184

F.3d 1059, 1063 (9th Cir. 1999). Additionally, as in all actions alleging fraud, a plaintiff must

state with particularity the circumstances constituting fraud. Greebel v. FTP Software, Inc., 194

F.3d 185, 193 (9th Cir. 1999); Fed. R. Civ. P. 9(b). 

Plaintiffs also claim that individual defendants are liable pursuant to Section 20(a) of the

Securities Exchange Act, which provides for derivative liability for those who control others

found to be primarily liable under the provisions of that act. See In re Ramp Networks, Inc. Sec.

Lit., 201 F. Supp. 2d 1051, 1063 (N.D. Cal. 2002). Where a plaintiff asserts a Section 20(a)

claim based on an underlying violation of section 10(b), the pleading requirements for both

violations are the same. Id.

Finally, Plaintiffs bring claims under Sections 11 and 15 of the Securities Exchange Act

as well. Section 11 imposes liability for false statements or omissions of material fact made in

registration statements. 15 U.S.C. § 77k. To state a claim under Section 11, a plaintiff must

allege: “(1) that the registration statement contained an omission or misrepresentation, and (2)

that the omission or misrepresentation was material, that is, it would have misled a reasonable

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investor about the nature of his or her investment.” Kaplan v. Rose, 49 F.3d 1363, 1371 (9th

Cir.1994). Scienter is not required “for liability under § 11; defendants will be liable for

innocent or negligent material misstatements or omissions.” Id. However, a plaintiff who seeks

to bring a Section 11 claim faces an additional hurdle; purchasers of stock only have standing to

sue if they can trace their shares to an allegedly misleading statement. Hertzberg v. Dignity

Partners, Inc., 191 F.3d 1076, 1081 (9th Cir. 1999); see also In re SeeBeyond Technologies

Corp. Securities Litigation, 266 F. Supp. 2d 1150, 1171 (C.D. Cal. 2003). Section 15 imposes

joint and several liability upon every person who controls any person liable under Sections 11 or

12. See 15 U.S.C. § 77o; see also In re Daou Systems, Inc., 411 F.3d 1006, 1029 (9th Cir.

2005).

A. Applicable Pleading Standards. 

1. Rule 12(b)(6).

A motion to dismiss is proper under Rule 12(b)(6) where the pleadings fail to state a

claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). A motion to dismiss should

not be granted unless it appears beyond a doubt that a plaintiff can show no set of facts

supporting his or her claim. Conley v. Gibson, 355 U.S. 41, 45-46 (1957); see also De La Cruz

v. Tormey, 582 F.2d 45, 48 (9th Cir. 1978). 

2. Private Securities Litigation Reform Act.

In order to limit the number of frivolous private securities lawsuits, Congress enacted the

PSLRA in December of 1995, and created heightened pleading standards for such lawsuits. 15

U.S.C. § 78u-4(b). The PSLRA requires that “the complaint shall specify each statement

alleged to have been misleading, the reason or reasons why the statement is misleading, and, if

an allegation regarding the statement is made on information and belief, the complaint shall

state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1)(B).

Furthermore, the PSLRA requires that the plaintiff “state with particularity facts giving rise to a

strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u4(b)(2). 

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The heightened standard set by the PSLRA was intended to put an end to securities fraud

lawsuits that plead “fraud by hindsight.” In re Silicon Graphics, Inc. Sec. Lit., 183 F.3d 970,

988 (9th Cir. 1999). “The PSLRA significantly altered pleading requirements in private

securities fraud litigation by requiring that a complaint plead with particularity both falsity and

scienter.” In re Vantive Corp. Sec. Lit., 283 F.3d 1079, 1084 (9th Cir. 2002) (citing Ronconi v.

Larkin, 253 F.3d 423, 429 (9th Cir. 2001)) (emphasis added). “Thus the complaint must allege

that the defendant made false or misleading statements either intentionally or with deliberate

recklessness or, if the challenged representation is a forward looking statement, with ‘actual

knowledge . . . that the statement was false or misleading.’” Id. at 1085 (citing 15 U.S.C. § 78u5(c)(1)(B)(I)). This is often accomplished “by pointing to inconsistent contemporaneous

statements or information (such as internal reports) made by or available to the defendants.” 

Yourish v. California Amplifier, 191 F.3d 983, 993 (9th Cir. 1999) (quoting In re GlenFed Sec.

Lit., 42 F.3d 1541, 1549 (9th Cir. 1991) (en banc)); see also id. at 994 (discussing insufficiency

of plaintiffs’ allegations with regard to the non-disclosure of confidential non-public

information). 

Under the PSLRA, a complaint still is construed in the light most favorable to the nonmoving party and all material allegations in the complaint are taken to be true. Silicon

Graphics, 183 F.3d at 983. To determine whether a plaintiff has pled a strong inference of

scienter, however, “the court must consider all reasonable inferences to be drawn from the

allegations, including inferences unfavorable to the plaintiffs.” Gompper v. VISX, Inc., 298 F.3d

893, 897 (9th Cir. 2002). The Court “should consider all the allegations in their entirety,

together with any reasonable inferences therefrom, in concluding whether, on balance, the

plaintiffs’ complaint gives rise to the requisite inference of scienter.” Id. “Conclusory

allegations of law and unwarranted inferences, however, are insufficient to defeat a motion to

dismiss.” In re Northpoint Communications Group, Inc. Sec. Lit. (Northpoint II), 221 F. Supp.

2d 1090, 1094 (N.D. Cal. 2002). 

Finally, the Court may consider the facts alleged in the complaint, documents attached to

the complaint, documents relied upon but not attached to the complaint when the authenticity of

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 Throughout the Complaint, Plaintiffs engage in a pattern of quoting long excerpts

from documents which contain multiple statements. Plaintiffs are responsible for identifying

with particularity what statements are false and misleading. 15 U.S.C. § 78u-4(b)(1). They

have not fulfilled their responsibility in this regard. If Plaintiffs chose to file an amended

complaint, Plaintiffs should clearly identify which specific statements within the documents

or block quotes they contend are false or misleading.

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those documents is not questioned, and other matters for which the Court can take judicial

notice. Northpoint II, 221 F. Supp. 2d at 1094; see also Silicon Graphics, 183 F.3d at 986. 

B. Request for Judicial Notice.

Defendants request that the Court take judicial notice of IntraBiotics’ press releases,

SEC filings, and the FDA’s document entitled Guidance for Industry, all of which are

referenced in the Complaint or are publicly filed documents. Plaintiffs do not dispute the

accuracy of the documents attached to the request, and the requested documents are the types of

documents of which this Court properly make take judicial notice. See, e.g., In re Calpine

Corp. Sec. Lit., 288 F. Supp. 2d 1054, 1076 (N.D. Cal. 2003) (court “may properly take judicial

notice of SEC filings and documents expressly referenced” in a complaint”); see also Plevy v.

Haggerty, 38 F. Supp. 2d 816, 821 (C.D. Cal. 1998). Accordingly, the Court GRANTS

Defendants’ request.

C. Plaintiffs Fail To Plead Sufficient Facts to Demonstrate Falsity.

The PSLRA requires that Plaintiffs allege with the requisite particularity each statement

alleged to be false or misleading, the reason or reasons why the statement was false or

misleading, and if those allegations are made on information and belief, all facts on which that

belief is formed. See 15 U.S.C. § 78u-4(b)(1)(B); see also Employers Teamsters Local Nos. 175

and 505 Pension Trust Fund v. Clorox Co., 353 F.3d 1125, 1134 (9th Cir. 2004). Plaintiffs fail

to meet this standard.

Plaintiffs set forth the statements which they contend are materially false and misleading

in paragraphs 62, 65, 70, 72, 74, 75, 78, 80 of their Complaint. These paragraphs contain large

block quotes, but Plaintiffs clarified at the hearing on Defendants’ motion which specific

statements within these paragraphs Plaintiffs contend are false.5 The Court will address these

allegedly false statements.

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1. Statements Made in September 2003 Before the Phase II/III Trial Began.

On September 5, 2003, IntraBiotics issued a press release in which it stated: 

Designation as a fast track drug indicates that the FDA will facilitate the

development and expedite the review of a new drug that is intended to treat a serious or

life-threatening condition and that demonstrates the potential to address an unmet

medical need. In a letter to the company, the FDA stated: “We are granting fast track

designation for the following reasons:

There are currently no products approved (topical or systematic) for the

prevention of ventilatory-associated pneumonia.

Ventilator-associated pneumonia is commonly recognized as a highly morbid

condition in critically ill patients. Prevention of this disorder is desirable.”

... “VAP is a devastating complication experienced by critically ill patients who

are vulnerable to infection because of the requirement for artificial ventilation,” said Dr.

Marin Kollef, Associate Professor of Medicine at Washington University School of

Medicine, Pulmonary and Critical Care Division in St. Louis. “Experts have long

believed that pneumonia in patients should be preventable through the use of antibiotic

decontamination of the mouth, but so far we have lacked the appropriate antibiotic - one

that can be safely applied into the mouth and not worsen problems of antibiotic

resistance. This approach has become more important as bacterial resistance to

antibiotics continues to grow and the development of new antibiotics to cope with

resistance has lagged. Because of iseganan’s properties, VAP represents a logical an

important potential application. We look forward to the results of the upcoming pivotal

clinical trials.”

... “We are pleased to be working with the FDA to finalize the protocol for [the

upcoming Phase II/III trial] because of the FDA’s expertise in trial design and review. 

We believe that patients with VAP will benefit from FDA input by virtue of assuring

that the collected data will support expeditious product registration if the trials are

successful,” said Dr. Henry Fuchs, President and CEO of IntraBiotics. 

(Compl. ¶ 62.)

Plaintiffs argued at the hearing that there were two false statements within this press

release: (1) “[Iseganan] demonstrates the potential to address an unmet medical need;” and (2)

“Because of iseganan’s properties, VAP represents a logical an important potential application.” 

The press release does not actually contain a statement made by Defendants that Iseganan

“demonstrates the potential to address an unmet medical need.” Read carefully, the first

sentence merely describes what designation as a fast track drug by the FDA generally indicates. 

At most, the press release implies that the FDA concluded that isgenan has demonstrated the

potential to address an unmet need when it decided to designate it as a fast track drug. The

Court will not address the adequacy of a statement that was not actually made by Defendants. If

Plaintiffs chose to amend their complaint, they should clarify what exactly statement they

contend is false and why. If the allegedly false statement was not made directly by Defendants,

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or if the alleged falsity is an inference created by a statement, Plaintiffs should be prepared to

demonstrate how Defendants may be held liable. 

The second statement Plaintiffs allege is false in the September 5, 2003 press release was

made by Dr. Marin Kollef, rather than by Defendants. Plaintiffs have not provided any authority

or argument demonstrating how Defendants may be held liable for a statement made by a third

party that they quote in a press release. However, even assuming arguendo that Defendants

could be liable for a third-party’s statement, Plaintiffs’ complaint suffers from additional

defects.

Plaintiff alleges that the two statements from the September 5, 2003 press release, as

well as Defendants’ statement “Agreement with the FDA on the design of these clinical trials is

important to assure expeditious registration if the trials are successful” from a September 19,

2003 press release were false and misleading because (1) Defendants had no intention of

following the protocols of the Food and Drug Administration (“FDA”) to report adverse results

and (2) because Defendants failed to disclose that isgegan had failed in previous trials because it

caused increased nausea. (Compl. ¶¶ 64, 65, 67.) Because Plaintiffs’ allegations are made on

information and belief, the complaint must “state with particularity all facts on which that belief

is formed.” 15 U.S.C. § 78u-4(b)(1). Plaintiffs fail to do so.

It is not clear what allegations support Plaintiffs’ argument that Defendants had no

intention, even before the Phase II/III trial for VAP began, of reporting the results as they

became aware of them. Moreover, even if true, is not clear how Defendants’ alleged intention

to not follow the FDA’s protocols undermine the veracity of these three statements. Finally, it is

not clear why increased incidents of nausea when iseganan was used to treat oral mucositis

would have put Defendants on notice that iseganan would not be effective for treating VAP. 

The Complaint does not contain any allegations regarding whether the dosages of these two

trials were the same, whether iseganan was administered in the same manner in these trials

and/or whether administering the drug in a different manner would have made a difference. 

Additionally, considering the life-threatening nature of VAP, increased incidents of nausea may

or may not be considered problematic. On the other hand, if patients with VAP are on

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ventilators, perhaps increased nausea could be extremely dangerous. Plaintiffs do not allege any

facts to support drawing an inference either way. Therefore, the Court concludes that Plaintiffs

fails to sufficiently allege the reason or reasons why such statements were false or misleading or

to sufficiently allege the facts on which Plaintiffs’ beliefs were formed. See 15 U.S.C. § 78u4(b)(1).

2. Statements Made Between October 2003 and April 2004.

Plaintiffs allege Defendants made the following additional false statements: 

(1) “In addition to substantially increasing our cash resources, we achieved a series of major

milestones over the last three months which have significantly strengthened and

repositioned [IntraBiotics] for future growth,” made on October 29, 2003; 

(2) “Assuming successful completion of these trials, iseganan has a clear path to registration

for the prevention of VAP, a major unmet medical need worldwide,” made on October

29, 2003; 

(3) “Iseganan may also have potential applications for a variety of other infections that we

will begin to explore in the near future,” made on October 29, 2003; 

(4) “Our selection builds on iseganan’s Fast Track status and Special Protocol Assessment

(SPA) agreement to potentially further speed and clarify the pathway to approval for this

agent for VAP, an important unmet medical need,” made on February 12, 2004; 

(5) “We have made significant progress in 2003, advancing our product candidate,

[iseganan], and defining a clear pathway to registration in the United states for a large

unmet medical need,” made on March 4, 2004; 

(6) “Safe and Well-Tolerated. Based on our experience to date, iseganan appears to be safe

and well-tolerated at therapeutically relevant doses when administered to the oral cavity,

the planned route of administration for the prevention of VAP. In particular, iseganan

has been delivered to the oral cavity of more than 800 patients to date, with no

differences in adverse events between the active and placebo groups observed

consistently among the trials,” made on April 22, 2004; 

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 Plaintiffs also contend the following statements by Defendants are false: (1) “The

first of two planned pivotal trials is now well underway to evaluate iseganan oral solution for

the prevention of VAP in 900 patients in the U.S. and Europe, and data is expected by the

end of this year;” (2) “Patient accrual is now well underway and we expect to have results

from the first trial by the end of this year; (3) “The first pivotal trial began enrolling patients

in September 2003 and has enrolled more than 450 patients. It is anticipated that results from

this trial will be available in the fourth quarter of 2004;” and (4) “We are now more than

halfway through enrollment of the first two pivotal clinical trials for our lead product

candidate, iseganan, for the prevention of [VAP].” (Compl. ¶¶ 75, 78, 80, 86.) However, it

is not clear how, even if Plaintiffs had plead sufficient factual bases for all their allegations

and arguments, these statements would be false.

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(7) “We believe that these features will provide important benefits to patients and their

physicians. Iseganan may allow physicians to effectively prevent and treat infections

without: • precisely knowing the offending pathogen; • using multiple antimicrobial

drugs; • engendering resistence; and • compromising future use of antimicrobial drugs,”

made on April 22, 2004; 

(8) “We believe that iseganan has an attractive profile as an agent for the prevention of

VAP,” made on April 22, 2004; and 

(9) “The accomplishments will enable us to maintain our momentum, and meet a number of

key goals including the initiation of a Phase II trial for the potential treatment of lung

infections associated with cystic fibrosis in the second half of the year,” made on May

10, 2004. 

(Compl. ¶¶ 72, 74, 78, 80, 86).6

Plaintiffs allege these statements were materially false and misleading because

Defendants had no intention of complying with their obligation to report adverse results to the

FDA. (Id. at ¶¶ 73, 77, 79, 82.) As discussed above, Plaintiffs have not alleged sufficient facts

to support drawing such an inference. Plaintiffs further contend the above statements were false

because Defendants had access to the interim results of the Phase II/III trial for VAP and thus

knew or should have known that iseganan was not safe and well-tolerated at therapeutically

relevant doses when administered to the oral cavity and known that iseganan caused a higher

rate of VAP and mortality. (Id.) The Phase II/III trial for VAP was double blinded, meaning

that neither the participants nor the research team knew during the trial which participants

received isegenan and which participants received the placebo. (Id. at ¶¶ 43, 60.) The trial was

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conducted on a fourteen-day cycle per patient. (Id. at ¶ 68.) The Complaint does not allege

when the trial began or when it should have been clear, based on the interim results, even if they

remained blinded, that iseganan was causing adverse results. Although it is possible that

Defendants could have known of the adverse results sooner than when they terminated the trial

in June 2004, the Complaint does not allege sufficient facts to support an inference as to when

Defendants may have obtained such information.

With respect to the Defendants’ statements regarding the possible use of iseganan to

treat other diseases, Plaintiffs also fail to allege any facts to support an inference that Defendants

knew such statements were false. Although Plaintiffs allege that at the time of the Phase II/III

trial, Defendants were focusing on the use of iseganan to treat VAP, Plaintiffs do not allege any

facts indicating that Defendants had no intention of conducting additional research with respect

to other diseases in the future. 

In sum, Plaintiffs have not sufficiently plead facts to show that any of Defendants’

statements were materially false or misleading. However, the Court will grant Plaintiffs’ leave

to amend. At the hearing, Plaintiffs stated they could allege more details regarding the interim

results. Defendants’ reliance on In re Columbia Laboratories, Inc. Securities Litigation, 144 F.

Supp. 2d 1362, (S.D. Fla. 2001) for the proposition that Defendants could not have access to the

data prior to its termination because the trial was double blinded is misplaced. In that case, the

plaintiffs did not allege that the defendants were aware of the results of the studies before the

alleged misrepresentations were made. In fact, the plaintiffs’ counsel even conceded that the

defendants thought there was a chance the study would succeed. Id. at 1369-70. Moreover, in

Columbia Laboratories, the results of the study were analyzed and disclosed after the study was

completed. Here, it is undisputed that the trial was terminated mid-way. Thus, at some point

mid-way through the trial, the DSMB was able to determine that iseganan was not achieving its

goals and was unsafe and informed Defendants of such information. If the DSMB, and then

Defendants, were able to determine before the trial was completed that iseganan was not

achieving its goals and was unsafe, then it is possible that the DSMB and Defendants had such

information even sooner than the decision to terminate the trial was announced. The problem

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with Plaintiffs’ Complaint is that it provides no basis for determining, or even inferring, when,

Defendants may have had such information. Accordingly, the Court grants Defendants’ motion

to dismiss Plaintiffs’ Section 10(b) claim, as well as Plaintiffs’ Section 20(a) claim.

D. Scienter.

The PSLRA also requires a plaintiff to allege particular facts giving rise to a strong

inference that “the defendant made false or misleading statements either intentionally or with

deliberate recklessness.” Vantive, 283 F.3d at 1085; 15 U.S.C. § 78u-4(b)(2). Where the

pleadings are not sufficiently particularized or where, even taken as a whole, they do not raise a

strong inference of scienter, dismissal pursuant to Rule 12(b)(6) is proper. Lipton v.

Pathogenesis Corp., 284 F.3d 1027, 1038 (9th Cir. 2002). Moreover, to determine whether a

plaintiff has pled a strong inference of scienter, “the court must consider all reasonable

inferences to be drawn from the allegations, including inferences unfavorable to the plaintiffs.” 

Gompper, 298 F.3d at 897. 

Because Plaintiffs fail to allege false and misleading statements, the Court will not

address whether Plaintiffs sufficiently plead scienter. However, the Court notes that with

respect to pleading the requisite intent by Earnest Mario and Kevin Tang in particular,

Defendants point to some potentially insurmountable obstacles. Defendants submitted

documents of which the Court make take judicial notice which indicate that Tang and Mario

purchased IntraBiotics’ stock on October 6, 2003 and May 5, 2004, respectively. (Declaration

of Cheryl W. Foung, Exs. 10, 12.) Moreover, Plaintiffs themselves allege that Mario and

Tang’s firm, Tang Capital Partners, LP, were among the investors who helped raise $3.5 million

to help start the Phase II/III trial for VAP in February 6, 2003. (Compl. ¶ 59.) Personally

investing their own money near to the time when the company announced it was terminating the

trial tends to undermine any inference of scienter with respect to these defendants. If Plaintiffs

amend their Complaint, they should take care to plead facts which could demonstrate that Mario

and Tang invested less than they had at risk if the Phase II/III trial for VAP had not been funded

or had been terminated earlier.

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E. Plaintiffs’ Section 11 and 15 Claims Are Sufficiently Alleged

Defendants attack Plaintiffs’ Section 11 claim regarding false statements or omissions

made in a registration statement on two grounds: (1) Plaintiffs fail to allege fraud with sufficient

particularity, and (2) Plaintiffs fail to allege Representative Plaintiff Buche purchased stock that

is traceable to the registration statement. 

Plaintiffs’ Section 11 claim is not governed by the heightened pleading standards under

the PSLRA. Falkowski v. Imation Corp., 309 F.3d 1123, 1133 (9th Cir. 2002). Section 11

claims which are “grounded in fraud” are subject to the requirements under Federal Rule of

Civil Procedure 9(b) that allegations of fraud be pled with particularity. In re Stac Electronics

Securities Litigation, 89 F.3d 1399, 1404-1405 (9th Cir. 1996). However, Plaintiffs allege that

their Section 11 claim is not premised on fraudulent or intentional conduct. (Compl. ¶ 128.) 

Plaintiffs reiterate this point in their opposition to Defendants’ motion to dismiss. (Opp. at 25.) 

Defendants do not respond to this argument in their reply brief. Defendants may be held liable

for “innocent or negligent material misstatements or omissions” under Section 11. See Kaplan,

49 F.3d at 1371. Because Plaintiffs do not contend the alleged misstatements or omissions were

fraudulent for purposes of their Section 11 claim, this claim does not need to be pled with

particularity.

To maintain a Section 11 claim, Plaintiffs must allege, and eventually prove, that the

stocks Buche purchased were issued were issued under the registration statement containing the

misstatements or omissions. Hertzberg, 191 F.3d at 1080. In Hertzberg, the Ninth Circuit

noted that it might be difficult to prove stocks were issued pursuant to a particular registration

statement if a company issued stock under more than one registration statement. Id. Defendants

argue that Plaintiff have not and cannot allege, let alone prove, that Buche’s stocks are traceable

to the allegedly false registration statement. However, Plaintiffs allege that Buche purchased

stock pursuant to or traceable to the registration statement at issue in this case. (Compl. ¶ 132.) 

At this procedural stage, such allegations are sufficient. See In re SeeBeyond, 266 F. Supp. 2d at

1171 (denying motion to dismiss where plaintiff alleged it purchased stock pursuant to the

registration statement, and noting “whether the plaintiff is able to trace its stock is not a question

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that can be resolved on this motion.”); see also In re Global Crossing, Ltd. Securities Litigation,

313 F. Supp. 2d 189, 208 (S.D.N.Y. 2003) (“[T]he pleading requirement is not elaborate.

Plaintiffs have not been required to explain how their shares can be traced; general allegations

that plaintiff purchased ‘pursuant to’ or traceable to false registration statement have been held

sufficient to state a claim.”). Because the Court concludes that Plaintiffs have sufficiently

alleged their Section 11 claim, Plaintiffs’ Section 15 claim premised on the underlying Section

11 claim is sufficiently alleged as well. Accordingly, the Court denies Defendants’ motion to

dismiss Plaintiffs’ Section 11 and 15 claims.

F. Defendants’ Motion to Require an Undertaking.

Defendants argue that Buche cannot prove his stocks are traceable to the allegedly false

registration statement, and thus move pursuant to Section 11(e) to require Buche to furnish an

undertaking with respect to his Section 11 claim. Pursuant to Section 11(e), a district court has

“discretion to require a party to post security to cover the costs and attorneys fees of opposing

parties.” Weil v. Investment/Indicators, Research and Management, Inc., 647 F.3d 18, 22 (9th

Cir. 1981) (citing 15 U.S.C. § 77k(e)). A court may require an undertaking if a plaintiff files a

suit in bad faith or the plaintiff’s claim “borders on the frivolous.” Id. However “[r]equests for

an undertaking are generally disfavored.” Gould v. Harris, 929 F. Supp. 353, 361 (C.D. Cal.

1996), abrogated in part on other grounds by Hertzberg v. Partners, Inc., 191 F.3d 1076 (9th

Cir. 1999). Notably, even if the Court does not require an undertaking, the Court may assess

litigation costs against Plaintiffs if and when a judgment in favor of Defendants is entered. Id.

(citing 15 U.S.C. § 77k(e)). 

Here, Defendants only argue that Plaintiffs’ Section 11 claim is frivolous, not that it was

brought in bad faith. Defendants contend that Plaintiffs cannot prove standing (i.e. that Buche’s

shares are traceable) or that Defendants failed to disclose side effects. The Court has already

concluded that Plaintiffs sufficiently allege traceability. It is not yet known whether Plaintiffs

ultimately will be able to prove traceability. The Court declines to hold that there are no

circumstances under which Plaintiffs could prevail on this issue. As the court noted in Lilley v.

Charren, 936 F. Supp. 708, 716 (N.D. Cal. 1996), plaintiffs could establish standing for a

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Section 11 claim by identifying the purchasers of the unregistered shares. The Court further

declines to hold that Plaintiffs’ claims regarding false and misleading statements are frivolous.

Thus, the Court denies Defendants’ motion for an undertaking.

IV. CONCLUSION

For the foregoing reasons, the Court GRANTS IN PART and DENIES IN PART

Defendants’ motion to dismiss as follows: (1) the Court GRANTS Defendants’ motion to

dismiss Plaintiffs’ first and second claims with leave to amend; and (2) the Court DENIES

Defendants’ motion to dismiss Plaintiffs’ third and forth claims. Plaintiffs SHALL file any

amended complaint within thirty days of the date of this Order. If an amended complaint is

filed, Defendants shall either file an answer or move to dismiss within twenty days of service of

the amended complaint. If Plaintiffs do not file an amended complaint, Defendants shall file an

answer within twenty days after Plaintiffs’ time to file an amended complaint has expired. 

The Court DENIED Defendants’ motion for an undertaking.

IT IS SO ORDERED.

Dated: January 23, 2006 

JEFFREY S. WHITE

UNITED STATES DISTRICT JUDGE

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