Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_03-cv-03709/USCOURTS-cand-3_03-cv-03709-0/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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United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

DAVID CROSSEN,

Plaintiff,

 v.

CV THERAPEUTICS, et al.,

Defendants.

 /

No. C 03-03709 SI

ORDER GRANTING PLAINTIFF’S

MOTION TO CERTIFY THE CLASS AND

APPOINT LEAD PLAINTIFF, AND

DENYING PLAINTIFF’S MOTION FOR

CONTEMPT AND SANCTIONS

Currently pending before the Court is plaintiff David Crossen’s motion to certify a class and appoint

him as lead plaintiff, and plaintiff’s motion to hold defendants in contempt. Having carefully considered the

arguments of counsel and the papers submitted, the Court hereby GRANTS plaintiff’s motion to certify the

class and appoint David Crossen as lead plaintiff and DENIES plaintiff’s motion for a contempt finding.

BACKGROUND

Thisis a securities class action against CV Therapeutics, Inc. ("the Company") and certain ofits officers

(the "individual defendants") under Sections 10(b) and 20(a), and Rule 10b-5 ofthe Securities Exchange Act

of 1934 (the "Exchange Act"). The case is brought on behalf all purchasers of the publicly-traded securities

of the Company between December 30, 2002 and December 5, 2003 ("the class period"). 

CV Therapeutics is a Palo Alto, California biopharmaceutical company “focused on the discovery,

development and commercializationofnew small molecule drugs forthe treatment of cardiovascular diseases.”

Consol Compl. ¶ 2, 16. Plaintif alleges that, throughout the class period, defendants misled analysts, the

investing public and even the FDA [ Food and Drug Administration] into believing that their novelanti-anginal

drug, Ranexa, “was safe and effective for public use in an unrestricted population, and that the Company had

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 According to the Complaint, "Ranexa is an anti-anginal therapy drug, known to extend the QT

interval. Adverse pro-arrhythmic effectslinked to QT interval prolongation are of concern to the FDA. Side

effects linked to QT interval prolongation include torsade de pointes, ventricular tachycardia, ventricular

arrhythmia, ventricular ectopy, ventricularfibrillationand flutter, cardiac arrest,suddendeath, syncope, dizziness

and palpitations." Consol. Compl. ¶ 34.

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conducted sufficient clinicalstudies to prove it.” Consol. Compl. ¶ 3. The complaint alleges that defendants'

false and misleading statements artificially inflated the Company's stock. Consol. Compl. ¶ 4. 

 Plaintiffs allege that in July, 2003, defendants misrepresented that the FDA had scheduled Ranexa for

review by its Cardiovascular-Renal Advisory Committee (the "Advisory Committee") on September 15-16,

2003, "an event which signifies that the FDA is ready to act on the drug."Consol. Compl. ¶ 5. Yet "[i]nternal

FDA notes . . . reveal that . . . there was little likelihood that such a meeting could take place." Id. When the

Company acknowledged on August 1, 2003, that "this alleged meeting was 'cancelled,'" the stock price fell

20.8%. Id. On October 23, 2003, the Company announced that the Advisory Committee would review

Ranexa on December 9, 2003, resulting in a stock price increase from$18. 22 per share on October 22, 2003

to $22.45 per share on October 23, 2003. Consol. Compl. ¶ 6. 

On October 30, 2003, the FDA issued an “approvable letter with conditions” indicating that additional

clinical information was needed prior to approval. Consol. Compl. ¶ 7, citing Ex. 2. On this news, the stock

price fell 21.7%. Id. On the eve of the December 9, 2003 hearing, the FDA released internal documents in

connection with its review of the Company's Ranexa New Drug Application (NDA). Documents released

included the October 30, 2003 Approvable Letter, and revealed that the FDA found “major deficiencies

pertaining to the Company's clinicalstudies, including the QT prolongation,1the efficacyin women, and the fact

that 98% ofthe study populationwas Caucasian.” Consol. Compl. ¶ 9, citing Ex. 4. On December 8, 2003,

the stock price fell 27%. Consol. Compl. ¶ 10. According to the complaint, the defendants engaged in the

following conduct: first, the Company's July 7, 2003 announcement of a forthcoming Advisory Committee

meeting was "misleading because neither the FDA nor CV Therapeutics had in fact yet decided to go ahead

with a September 2003 Advisory Committee meeting for Ranexa because of severe deficienciesin the NDA";

second, the Company "was aware that its data regarding itsfindings ofQT interval prolongation posed serious

concerns and had been portrayed in a misleading fashion to the investing public"; third, because "of the serious

safety concerns regarding QT/QTc prolongation limiting chances of approval for the drug, the FDA had

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encouragedCVTherapeuticsto study the drug as a second-line therapy"; and finally, defendants knew that"the

safety and efficacydata ofRanexa were so flawed and deficient that the NDA would not be approved without

additional clinical trials." Consol. Compl. ¶ 14. 

David Crossen was initially appointed as lead plaintiffin this action in November 2003. The defendants

are Louis G. Lange, a Company founder and its Chairman and Chief Executive Officer ("CEO"); Daniel K.

Speigelman, a Senior Vice President of the Company and its Chief Financial Officer (CFO); and CV

Therapeutics. See August 5, 2004 Order. 

Plaintiffs partly relied on four confidential witness interviews (CW 1-4) for the complaint's factual

allegations. According to the witness interview statements, each confidential witness is a former employee or

independent contractor of the Company. Consol. Compl. (Witness Interviews) at 53. 

Now before the Court is plaintiff’s motion to certify the class and appoint David Crossen as lead

plaintiff. Plaintiff has also filed a motion for a finding of civil contempt and sanctions against defendant for

allegedly disclosing to CW3 the identities of CW1 and CW2.

LEGAL STANDARDS

1. Class certification

A court may certify a class if the plaintiff demonstrates that all of the requirements of Federal Rule of

Civil Procedure 23(a) are satisfied and at least one of the requirements ofRule 23(b) is satisfied. See Fed. R.

Civ. P. 23; Valentino v. Carter-Wallace, Inc., 97 F.3d 1227, 1234 (9th Cir. 1996). Rule 23(a) provides that

a court may certify a class only if (1) the class is so numerous that joinder ofall members is impracticable, (2)

there are questions of law or fact common to the class, (3)the claims or defenses ofthe representative parties

are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately

protect the interests of the class. Fed. R. Civ. P. 23(a). 

In addition to demonstrating that the Rule 23(a) requirements are met, plaintiff must establish one or

more of the following grounds for maintaining the suit as a class action pursuant to Rule 23(b): (1) that there

is a risk of substantial prejudice from separate actions; (2) that declaratory or injunctive relief benefitting the

class as a whole would be appropriate; or (3) that common questions oflaw or fact predominate and the class

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action is superior to other available methods of adjudication. Fed. R. Civ. P. 23(b). 

In determining the propriety of a class action, the question is not whether the plaintiffs have stated a

cause of action or will prevail on the merits, but, rather, whether the requirements of Rule 23 are met. Eisen

v. Carlisle & Jacquelin, 417 U.S. 156, 178 (1974) (citing Miller v. Mackey Int'l, Inc., 452 F.2d 424, 427 (5th

Cir. 1971)). The Court is obliged to accept as true the substantive allegations made in the complaint. See In

re Coordinated PretrialProceedings in Petroleum Prods. AntitrustLitig., 691 F.2d 1335, 1342 (9th Cir. 1982);

Blackie v. Barrack, 524 F.2d 891, 901 (9th Cir. 1975). However, it "need not blindly rely on conclusory

allegations which parrot Rule 23 requirements [and] may . . . consider the legal and factual issues presented

byplaintiff'scomplaints."2 Herbert Newberg & Alba Conte, Newberg on Class Actions § 7.26 (3d ed. 1992).

The Court will consider the allegations of the complaint, but going beyond the pleadings to analyze the claims,

defenses, relevant facts, and applicable substantive law may be necessary in order to evaluate whether

certification is appropriate. Castano v. American Tobacco Co., 84 F.3d 734, 744 (5th Cir. 1996). The

decision to certify a class is committed to the discretion of the district court. Doninger v. Pacific Northwest

Bell, Inc., 564 F.2d 1304, 1309 (9th Cir. 1977). 

2. Motion for sanctions

A district court has broad discretion to issue sanctions for violationofits discovery orders pursuant to

FederalRule ofCivil Procedure 37. See Lew v. Kona Hospital, 754 F.2d 1420, 1425 (9th Cir. 1985); United

States v. Sumitomo Marine & Fire Ins. Co., Ltd., 617 F.2d 1365, 1369 (9th Cir. 1980). The district court

may issue monetary sanctions or an order "refusing to allow the disobedient party to support or oppose

designated claims or defenses." Fed. R. Civ. P. 37(b)(2)(B); Sumitomo, 617 F.2d at 1369. 

DISCUSSION

1. Motion for Class Certification

The question presented by plaintiff’s class certification motion is whether this action meets Rule 23's

requirements of commonality, numerosity, typicality, and adequacy. Defendants oppose plaintiff’s motion for

class certification on one specific ground: that lead plaintiff David Crossen, who both sold uncovered call

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 According to defendants, while sellers of call options are harmed by significant gains in stock price,

sellers of uncovered call options are at greater risk if the stock price rises dramatically, because they would

have to purchase stock to cover the call at a great loss.

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options and bought CVT common stock, is subject to unique defenses, and is therefore an atypical and

inadequate class representative.

According to defendants, Crossen primarily sold CVT call options,whichare optioncontractsthat give

the buyer the right to purchase CVT stock from Crossen for a fixed price. See Defs.’ Opp’n at 3:7-9. Since

Crossen’s appointment as lead plaintiffin November 2003, he has supplemented his disclosures and revealed

call option contracts, including a high percentage of call options that were “uncovered” by stock he owned.

A seller of call options – particularly ofuncovered call options – may be harmed by significant gains in the stock

price and will profit only ifthe stock price falls or does not materially rise.2 Moreover, Crossen’s day trading

strategy, defendants contend,wasintended “to profit fromshort-termprice volatility rather than long-termgains

in share value.” Defs.’ Opp’n at 8:20-22. They argue that this trading strategy differentiates Crossen from the

typical CVT investor, who bought CVT common stock believing it was a good investment and is therefore

entitled to the presumption of reliance under the fraud-on-the-market theory. 

The primary focus of defendants’ argument is that Crossen is subject to the unique defense of lack of

reliance. Under the ordinary fraud-on-the-market theory, a plaintiff is entitled to the presumption that he or she

buys orsells stock “in reliance on the integrity of [the market] price.” Basic, Inc. v. Levinson, 485 U.S. 224,

247 (1988). This presumption may be rebutted if the defendant can make a showing that “severs the link”

between the alleged misrepresentation and either the price received by the plaintiff or his decision to trade at

a fair market price. Id. at 248. According to defendants, the link between Crossen’s trading decisions and

defendants’ misrepresentations has been severed by several facts: (1) that Crossen sold a significant number

ofuncovered call options, making him akin to a short seller; (2) that Crossen was a day trader who traded on

short-term volatility in stock price rather than relying on the integrity of the market price; (3) that Crossen

continued to trade in CVT stock and options after the class periods ended; and (4)Crossen’s apparentstrategy

of “betting against” FDA approval of Ranexa. Defendants also contend that Crossen is subject to a second

unique defense based on his credibility, because he previously disclosed only transactions involving CVT

common stock but few sales of call options, and only since his appointment as class representative has he

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3 During his deposition, however, Crossen admitted that he “would call [him]self a day trader.”

Johnson Decl., Ex. F at 38:10-11. 

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disclosed the true extent of his uncovered call option sales.

A. Lack of reliance

Plaintiff contends that Crossen’s trading strategy itself does not rebut the presumption of reliance or

present a unique defense, and that defendants have not actually shown a lack of reliance on the integrity of the

market price. According to plaintiff, Crossen’s deposition testimony clearly establishes that he relied on market

information and market price for his investment decisions, including information about CVT contained in

financial statements and news and industry publications. Moreover, plaintiff disputes defendants’

characterization of Crossen’s options trading as “day trading,” and the equivalent of short-selling, and they

contend that his post-class period purchases do not make him atypical. In support of its reply brief, plaintiff

submits the expert declaration of Jane D. Nettesheim and a further declaration of David Crossen stating that

he was not a day trader ofCVT stock.3 Defendants have filed a surreply brief, arguing that the expert admits

that Crossen was betting against FDA approval of Ranexa and that he did sell many uncovered call options,

differentiating him from other options traders who might be adequate class representatives. 

The typicality requirement is usually met if the representative’s claims arise from the same event or

course of conduct that gives rise to the claims of other class members. The Ninth Circuit has held that typical

claims need only be “reasonably co-extensive with those of absent class members; they need not be

substantially identical.” Hanlon v. Chrysler Corp., 150 F.3d 1011, 1020 (9th Cir. 1988). The test is “whether

other members have the same or similar injury, whether the action is based on conduct which is not unique to

the named plaintiffs, and whether other class members have been injured by the same course of conduct.”

Hanon v. DataproductsCorp., 976 F.2d 497, 508 (9th Cir. 1992) (citation omitted). Generally, investors who

trade options are entitled to the fraud-on-the-market presumption because the value of options is directly

related to the value of common stock. The question is whether Crossen’s frequent transactions involving

uncovered call options, his continued sale of options after the class period, and his alleged strategy of betting

against Ranexa’s approval make him unable to represent the class. 

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 Defendants also extrapolate this point from the reasoning in Deutschman v. Beneficial Corp., 132

F.R.D. 359, 370 (D. Del. 1990), where the court stated thatpurchases ofcall option contracts are more similar

to purchases of stock than to short sales. According to defendants, this observation suggests that the sale of

a call option is more like a short sale than like a purchase of stock. 

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First, the Court finds that Crossen’s sale of uncovered call options does not, on its own, rebut the

presumption of reliance. Defendants rely on Silverstein v. Digital Equip. Corp., 1990 WL 71385, at *1 (D.

Mass. May 22, 1990), where an investorwho purchased stock and then sold covered call options two weeks

later was deemed atypical by the district court. The Silverstein court did not explain its reasoning or supply

sufficient facts for this Court to find it applicable here. There appears to be no direct authority regarding

investors who sold uncovered call options, but defendants argue that Crossen’s sale of these options makes

him akin to a short seller. Short sellers have been rejected as adequate class representatives by several courts.

See, e.g., In re Critical Path, Inc., 156 F. Supp. 2d 1102, 1109-10 (N.D. Cal. 2001); In re Terayon Coms.

Sys., Inc., 2004 WL 413277, at *7-8 (N.D. Cal. Feb. 23, 2004). According to defendants, sellers of

uncovered call options are like short sellers because they face potentially limitlesslosses ifthe stock increases

significantly in price, and reap profits if the stock decreases in value.4 

The Court does notreach the issue of whether sellers ofuncovered call options are subject to the same

potential defenses as short sellers, because even assuming arguendo that defendants’ analogy is sound,

Crossen’s sale of call options does not make him atypical. Short sales do not in and of themselves render a

lead plaintiff’s claims atypical. Indeed, in Danis v. USN Communications, Inc., 189 F.R.D. 391 (N.D. Ill.

1999), on which plaintiff relies, the Court found adequate a plaintiff who both engaged in short selling of stock

and made ordinary purchases during the class period. See also In re Cirrus Logic Sec., 155 F.R.D. 654, 660

(N.D. Cal. 1994). Danis is factually similar to this case, and the Court is persuaded by it. While the

motivations behind short selling may be inconsistent with the assumptions underlying the fraud on the market

theory, see Zlotnick v. Tie Communications, 836 F.2d 818, 822-23 (3d Cir. 1988), a plaintiff may still be

entitled to the presumption ofreliance if he makes ordinary purchases of common stock and sustains losses on

these holdings. In addition to his call options, Crossen purchased CVT stock and suffered losses on that stock.

These facts also distinguish this case from Terayon, where the putative lead plaintiff had engaged in a

“campaign[] devised to lower the price of the stock in question.” 2004 WL 413277, at *8. Here, there has

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 Defendants also argue thatCrossen continued to trade CVT stock after the class period and that this

behavior demonstrates his lack ofreliance. In reply, plaintiff points out that the December 11, 2003 date cited

by defendants as the time of his last trade is the settlement date, not the transaction date, of his last call sale.

Plaintiff states that Crossen’s final stock purchase was on December 5, 2003, and his final call sale was on

December 8, 2003, the day the fraud was revealed. Pl.’s Reply at 11:21-12:2. 

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been no allegation that Crossen’s trading strategy was intended to adversely affect the stock price. Contrary

to defendants’ claim, therefore, Crossen’s trading strategy itself does not render him an atypical plaintiff.

The Court also disagreeswithdefendants thatCrossen’s day trading activitiesrender him atypical. The

parties dispute the proper definition of the term “day trader,” but the relevant question is whether Crossen

focused on“technicalprice movements” or on fundamentals and on defendants’ statements in deciding whether

to buy or sell. Crossen has testified that he focused on fundamentals, and defendants have not successfully

rebutted the presumption, and his testimony, that he did. Crossen Depo. 79-80; Crossen Decl. ¶¶ 14-15.5

The finalissue is defendants’ argument thatCrossen’s trading patterns demonstrate that he was betting

against Ranexa’s approval, and whether such a trading pattern would make him an atypical plaintiff.

Defendants state that Crossen sold 60 call option contracts between October 14 and October 24, 2003, at

strike prices between $1.58 to $6.47 higher than current trading prices, and each call had an expiration date

after the October 30, 2003 expected approval date. They argue that, ifCrossen had actually believed that the

FDA would approve Ranexa in October, he would not have bet that the stock price would either decrease or

increase less than two dollars. 

While plaintiff does not directly address this argument in the reply, the record demonstrates that

Crossen did rely on the integrity of the market for his decision to purchase CVT stock, and his investment

decision to also sell uncovered call options does not defeat the presumption ofreliance. Defendants have not

shown that Crossen’s “core investment strategy” was to “bet against” FDA approvalofRanexa and therefore

against appreciation of CVT’s stock price. Rather, Crossen’s testimony shows that he sought to profit from

his investment in CVT stock but to manage the risk of his investment by also participating in call option

transactions. Crossen Depo at 78-80; Nettesheim Decl. ¶ 11-14. It thus goes without saying that Crossen

would have benefitted financially had the FDA approved Ranexa immediately, as expected; his call options

reduced the loss he suffered when FDA approval did not come through. Crossen suffered $118,553 in loss

on his CVT stock as of December 5, 2003; his net gain from call option sales was $68,599, leaving him with

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net losses of approximately $50,000. Nettesheim Decl. ¶¶ 8, 9; Pl.’s Reply at 1 n. 1. Undoubtedly, then,

Crossenexperienced lossesfromthe failure ofFDA approval, and the “success” ofhis investmentstrategy does

not make him an atypical plaintiff. Accordingly, Crossen is entitled to the presumption of reliance.

The Court hereby GRANTS plaintiff’s motion to certify the class and appoint Crossen as lead plaintiff.

B. Crossen’s credibility

Defendants also contend that Crossen is subject to a unique defense regarding his credibility, because

his original and amended certifications understated the correct number of his trades and did not mention call

options at all. Plaintiff argues that, as Crossen has testified, his updates to his certifications were made in good

faith and were belated because ofdifficulty obtaining informationfromhis brokerage company. The Court does

not consider there to be serious questions about Crossen’s credibility thatwould give rise to a unique defense.

2. Plaintiff’s Motion for Contempt and Sanctions

Plaintiff asks the Court to hold defendants in contempt and impose sanctions based on their alleged

violation of this Court’s December 7, 2004 order restricting disclosure of the identities of the confidential

witnesses (“CWS”) in this case. According to plaintiff, defendants’ counsel disclosed to CW3 the identities

ofCW1 and CW2; plaintiffsubmitsthe declarationofCW3 attesting to this fact. In that declaration, CW3 also

states that defense counsel made the potential threatthat, if he did not provide a declaration retracting his prior

statements to plaintiff, he would be deposed. CW3 Decl. ¶ 6. Plaintiff asks the Court to hold defendants in

contempt and, as a sanction, to foreclose defendants from deposing any of the CWs. 

Defendants submit a declaration from their counsel stating that he has no recollection of making this

disclosure and that he believes it never occurred. See Pomerantz Decl. ¶ 4. They suggest that CW3 instead

learned the identities of CW1 and CW2 through the biographical information in the CW statements, which

defense counselprovided to CW3. In addition, defendants deny that defense counsel’s statement constituted

a threat of deposition, and argue that counsel was merely explaining that an affidavit would avoid the need for

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a deposition. Defendants speculate that plaintiff’s proposed sanction is merely an attempt to gain a litigation

advantage in light of the recent refutation of the complaint’s CW statements by two of the four CWs.

Taking CW3's and Jay Pomerantz’s declarations together, the Court concludes that counsel did

disclose the identities of CW2 and CW1 to CW3. CW3 states unequivocally that Mr. Pomerantz did so;

counsel states merely that he does not recall revealing the names and does not believe he did so. However,

the Court does not find that defense counsel’s disclosure was a willful or blatant violation of its order. In

addition, it does not consider defense counsel’s statement about a deposition of CW3 to be a threat. 

Accordingly, the Court declines to make the requested contempt finding or to impose the drastic

sanction proposed by plaintiff. Plaintiff’s motion is DENIED.

CONCLUSION

For the foregoing reasons and for good cause shown, the Court hereby GRANTS plaintiff’s motion

to certify the class and appoint David Crossen as lead plaintiff and DENIES plaintiff’s motion for sanctions.

[Docket ## 138, 149]

IT IS SO ORDERED.

Dated: August 9, 2005

 

SUSAN ILLSTON

United States District Judge

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