Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-18-56322/USCOURTS-ca9-18-56322-0/pdf.json

Parties Involved:
Endologix, Inc.
Appellee
Vaseem Mahboob
Appellee
John McDermott
Appellee
Vicky Nguyen
Appellant

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

VICKY NGUYEN, Individually and on 

behalf of all others similarly situated,

Plaintiff-Appellant,

v.

ENDOLOGIX, INC.; JOHN 

MCDERMOTT; VASEEM MAHBOOB,

Defendants-Appellees.

No. 18-56322

D.C. No.

2:17-cv-00017-

AB-PLA

OPINION

Appeal from the United States District Court

for the Central District of California

André Birotte, Jr., District Judge, Presiding

Argued and Submitted February 11, 2020

Pasadena, California

Filed June 10, 2020

Before: Jay S. Bybee, Daniel P. Collins,

and Daniel A. Bress, Circuit Judges.

Opinion by Judge Bress

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2 NGUYEN V ENDOLOGIX

SUMMARY*

Securities Fraud

Affirming the district court’s dismissal of a putative 

securities class action under §§ 10(b) and 20(a) of the 

Securities Exchange Act of 1934 and SEC Rule 10b-5, the 

panel held that the plaintiff failed sufficiently to plead facts 

giving rise to a strong inference that defendants made false 

or misleading statements either intentionally or with 

deliberate recklessness.

Plaintiff alleged that a medical device company misled 

the investing public about whether the Food and Drug 

Administration would approve the company’s new 

aneurysm sealing product. Plaintiff’s central theory was that 

company executives knew the device had encountered 

problems in Europe that would manifest again in U.S. 

clinical trials, which would in turn lead the FDA to deny 

premarket approval.

The panel held that allegations that are implausible do 

not create a strong inference of scienter under the Private 

Securities Litigation Reform Act. Finding persuasive a 

decision of the Fourth Circuit, the panel concluded that 

plaintiff’s core theory had no basis in logic or common 

experience. Based on plaintiff’s complaint, the more 

plausible inference was that the company made optimistic 

statements about its prospects for FDA approval because its 

U.S. testing looked promising, not because the company was 

* 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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NGUYEN V ENDOLOGIX 3

quixotically seeking FDA approval for a medical device 

application it knew was destined for defeat.

COUNSEL

Laurence M. Rosen (argued), The Rosen Law Firm P.A., Los 

Angeles, California, for Plaintiff-Appellant.

Jason de Bretteville (argued), Justin N. Owens, Aaron C. 

Humes, and Sheila Mojtehedi, Stradling Yocca Carlson & 

Rauth P.C., Newport Beach, California, for DefendantsAppellees.

OPINION

BRESS, Circuit Judge:

In this putative securities class action, the plaintiff 

alleges that a medical device company misled the investing 

public about whether the Food and Drug Administration 

(FDA) would approve the company’s new aneurysm sealing 

product. Plaintiff’s central theory is that company 

executives knew the device had encountered problems in 

Europe that would manifest again in U.S. clinical trials, 

which would in turn lead the FDA to deny premarket 

approval. In a securities fraud case, the plaintiff must plead 

scienter, namely, that defendants made false or misleading 

statements either intentionally or with deliberate 

recklessness. In this case, and for all the complaint’s girth, 

it lacks a critical ingredient under the Private Securities 

Litigation Reform Act (PSLRA): allegations that “state with 

particularity facts giving rise to a strong inference that the 

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4 NGUYEN V ENDOLOGIX

defendant acted with the required state of mind.” 15 U.S.C. 

§ 78u-4(b)(2)(A) (emphasis added).

Allegations that are implausible do not create a strong 

inference of scienter. Under the facts alleged, plaintiff’s 

core theory—that the company invested in a U.S. clinical 

trial and made promising statements about FDA approval, 

yet knew from its experience in Europe that the FDA would 

eventually reject the product—has no basis in logic or 

common experience. Based on plaintiff’s complaint, the 

more plausible inference is that the company made 

optimistic statements about its prospects for FDA approval 

because its U.S. testing looked promising, not because the 

company was quixotically seeking FDA approval for a 

medical device application it knew was destined for defeat. 

We therefore affirm the district court’s judgment dismissing 

the complaint and denying leave to amend.

I

The following factual allegations are taken from 

plaintiff’s second amended complaint, which we refer to 

generally as the “complaint.” In the present posture, we treat 

the complaint’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).

A

Defendant Endologix is a publicly traded company that 

manufactures and sells medical devices for the treatment of 

abdominal aortic aneurysms. The company focuses on 

treating disorders of the aorta, the largest artery in the body, 

which runs from the chest to the abdomen. One such 

disorder is atherosclerosis, a disease that weakens the walls 

of blood vessels and can cause them to expand outward. 

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NGUYEN V ENDOLOGIX 5

This expansion is known as an aneurysm and results in an 

unwanted bulge, called an aneurysm sac. An abdominal 

aortic aneurysm occurs in the abdominal section of the aorta 

and can result in dangerous internal bleeding if the aneurysm 

ruptures. Traditional methods of treating abdominal aortic 

aneurysms include surgery and endovascular repair. A new, 

more innovative method is endovascular sealing.

Endologix’s endovascular sealing product is called 

Nellix. The device is placed directly into a patient and works 

somewhat like a stent. But rather than repair the aneurysm 

like traditional devices, Nellix instead seals the aneurysm 

sac, reducing the likelihood that the aneurysm will rupture. 

This method of treatment is thought to reduce postprocedure complications that can occur with the use of 

aneurysm repair devices. Complications include endoleaks, 

when blood leaks into the aneurysm sac, and “migration,” 

when a device moves from the location where it was initially 

placed. Untreated migration can result in blood flow into the 

aneurysm sac, further aneurysm expansion, and rupture. 

Remember the term “migration,” because it becomes a focal 

point in plaintiff’s allegations.

Endologix first introduced Nellix in Europe in February 

2013, after regulators there granted “CE Mark” approval. 

Plaintiff acknowledges that “[g]enerally, CE marking is 

thought to be a much quicker, less rigorous process than 

FDA approval.” Beginning in October 2013, Endologix 

tracked the device’s real-world performance through a 

global registry. The global registry was designed to include 

300 patients in up to 30 international centers. By September 

2016, Endologix had acquired two years of data from this 

registry.

So that it could market Nellix in the United States, 

Endologix sought premarket approval from the FDA. 

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Premarket approval, or “PMA,” is a stringent process in 

which the FDA determines whether scientific evidence 

demonstrates that a given device is safe and effective for its 

intended use. A premarket approval application must 

include a device’s indications for use (“IFU”), which 

describe “the disease or condition the device will diagnose, 

treat, prevent, cure, or mitigate, including a description of 

the patient population for which the device is intended.” 

21 C.F.R. § 814.20(b)(3)(i). Nellix initially had a broad IFU 

because it was thought to be compatible with all types of 

patients, including those with complex anatomies who could 

not receive treatment using traditional endovascular repair 

devices.

As part of the FDA process, Endologix in December 

2013 received approval from the FDA to conduct a clinical 

trial for Nellix. See generally 21 C.F.R. § 812, et seq. This 

clinical trial, which the complaint refers to as the “EVAS 

Forward IDE,” began in January 2014 and involved 

179 patients across 29 centers, approximately 25 of which 

were in the United States. After one year of monitoring these 

patients, Endologix submitted the clinical trial results to the 

FDA. By November 2016, the two-year data were available. 

The results of the clinical study are discussed below. But 

first, it is necessary to backtrack a little in time and switch 

continents to Europe, where Endologix first deployed Nellix.

B

The complaint alleges that device migration in European 

patients had “implications for FDA approval of Nellix,” 

because “[i]f Nellix was unsafe for European patients it 

would prove equally unsafe for U.S. patients.” The 

complaint alleges that while the FDA approval process was 

ongoing, Endologix, its Chief Executive Officer John 

McDermott, and its Chief Financial Officer Vaseem 

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NGUYEN V ENDOLOGIX 7

Mahboob, became aware that Nellix was migrating in 

European patients.

The complaint identifies several sources for this 

allegation. It relies heavily on allegations from Confidential 

Witness 1, referred to as “CW1,” a former Endologix 

employee who served first as Director of Research and 

Development and later as the company’s head of Aortic 

Procedure Development. Shortly after plaintiff filed her first 

amended complaint citing allegations from CW1, CW1 

submitted a declaration in the district court disavowing the 

plaintiff’s allegations, denying having “ma[de] many of the 

statements attributed to me,” and stating that “most of the 

factual assertions attributed to me . . . are contrary to my 

understandings of fact and my opinions.” The district court 

did not consider this later declaration in granting 

Endologix’s motion to dismiss and neither do we.1

The complaint alleges that CW1 was involved with the 

development of Nellix from the start. According to CW1, 

European doctors in 2015 began sending Endologix a 

“stream of complaints and incident reports” claiming that 

Nellix was migrating in their patients. CW1 alleged that by 

the fall of 2015, migration was a “serious problem,” and 

McDermott and Mahboob became “very involved.” CW1 

characterized the European migration issue as the “biggest 

thing we had going at the company” and stated that 

McDermott and Mahboob were “given everything” the 

company put together in an attempt to solve the problem, 

including “thousands of pages of paper with studies and 

reports.” In December 2015, McDermott held a series of 

1 We therefore deny plaintiff’s motion to strike defendant’s 

answering brief and supplemental excerpts of record.

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8 NGUYEN V ENDOLOGIX

meetings with senior staff to discuss the migration issue. 

Despite these efforts, Endologix could not find a solution.

Relying still on CW1, the complaint further alleges that 

the company’s investigation into migration issues in Europe 

revealed that Nellix was dangerous for certain patients, 

especially those with thrombosis, a condition that causes 

blood clots in blood vessels. In November 2015, CW1 and 

two other Endologix employees pushed McDermott to 

modify the IFU, but McDermott refused.

In early 2016, CW1 and others compiled weekly reports 

about Nellix migration for McDermott and Mahboob in 

preparation for Endologix’s annual symposium, which was 

“attended by experts in the field of endovascular aneurysm 

sealing.” McDermott signed off on a presentation for this 

symposium that documented the scope of the migration 

problem. This non-public event was held in London on 

March 10–11, 2016, and CW1 attended the presentations and 

discussions.

The complaint alleges that, according to CW1, during 

one presentation at this symposium, an Endologix consultant 

stated that “[w]e are having some unexplained migrations, a 

lot of them.” Another Endologix representative admitted 

that the company had no solutions to the problem of Nellix 

migration. A Latvian vascular surgeon who had used Nellix 

in his patients also gave a presentation in which he stated 

that “in a lot of cases” the devices were “slipping” and 

“moving.” This surgeon met with CW1 and others after the 

presentation and characterized the situation as “urgent,” 

saying “look, I’m telling you now, this is not good.” After 

the symposium, CW1 and others met with McDermott to 

relay these warnings, but McDermott took no action.

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NGUYEN V ENDOLOGIX 9

In addition to relying on CW1, the complaint also points 

to two European reports in alleging that Endologix was 

aware of Nellix migration in Europe. The complaint alleges 

that a 2016 United Kingdom case report “warned of the 

ominous risks of migration” of Nellix and discussed one 

patient whose Nellix device migrated eleven millimeters. 

This case report also cited a 2016 University of Liverpool 

study, which examined thirty-five Nellix devices across 

eighteen patients. Migration occurred in six of these 

devices, resulting in a 17% migration rate. As discussed 

further below, however, the Liverpool study used a 

definition of migration different than the one used in the 

FDA clinical trial.

C

Despite the issues in Europe, the complaint alleges that 

Endologix executives repeatedly assured investors that the 

FDA would likely approve Nellix. These statements form 

the basis for plaintiff’s allegations of securities fraud.

The statements in question began in May 2016. At a 

health care conference on May 5, 2016, Mahboob reported 

that the company expected FDA approval of Nellix in the 

fourth quarter of 2016 or the first quarter of 2017. On May 

9, 2016, Endologix held its first quarter investor conference 

call, during which Mahboob stated that “Nellix continues to 

do a fantastic performance outside of the U.S.,” and “Nellix 

is doing as expected. No surprises.” CW1 alleges that he 

and other employees were “disgusted” that migration was 

not mentioned on this call, which led to “a race to the door.” 

In a press release issued that same day, Endologix stated that 

it “remain[ed] on track with our timeline for potential FDA 

approval at the end of 2016 or early 2017.” At a health care 

conference on May 10, 2016, McDermott reiterated that the 

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company “expect[ed] the [FDA] PMA approval around the 

end of this year, first part of next year.”

On May 26, 2016, Endologix released the data from the 

first year of the FDA clinical trial. The complaint alleges 

that the results showed a “100% procedural technical 

success” and a 94% treatment success rate, achieving the 

FDA’s primary safety and effectiveness endpoints. The 

device migration rate was 2.3%. Further, the data showed 

that after one year, endoleaks were present in 3.1% of 

patients, “the lowest rate ever reported” for a clinical study 

of an endovascular abdominal aortic aneurysm device.

Endologix submitted these results to the FDA on June 

11, 2016. During a conference call that same day to discuss 

the clinical trial data, McDermott addressed the University 

of Liverpool study discussed above. Although that study 

showed a 17% migration rate, McDermott explained that the 

study defined migration as a movement of four millimeters, 

which would not qualify as migration under the FDA’s tenmillimeter definition.

During Endologix’s second quarter investor call on 

August 2, 2016, McDermott stated “we remain very positive 

about the likelihood of approval . . . and the significant 

growth we expect to drive with Nellix.” McDermott also 

addressed the fact that the FDA was considering referring 

the Nellix premarket approval to an outside panel of experts, 

which would delay FDA approval by about six months. See 

generally 21 C.F.R. § 814.44. An analyst asked whether the 

prospect of this referral had been driven by any “sort of red 

flag raised in terms of data” submitted to the FDA. 

McDermott responded that while one reason for panel 

referral was “new clinical issues of safety,” in the case of 

Nellix “everyone has seen the data so we know there aren’t 

any issues there.”

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NGUYEN V ENDOLOGIX 11

In response to another analyst’s inquiry about the types 

of questions Endologix received from the FDA after 

Endologix submitted its first set of clinical data, McDermott 

explained:

[N]one of the questions we got asked are 

what I would characterize as big surprises. 

There is clarification on some things, some 

requests for additional analysis, some 

additional testing. Nothing that would 

suggest in our view any question or risk of 

approvability, just some more blocking and 

tackling and clarification of the data we 

submitted. So, we don’t see anything in there 

that’s given us heartburn.

Although he was no longer at the company at this point, 

CW1 stated that McDermott’s answer “could not have been 

further from the truth” because by the time of this call, 

Endologix had been working for seven or eight months on 

the migration issue, and McDermott knew about the 

situation.

Endologix held its third quarter investor call on 

November 1, 2016. On this call, Endologix revealed that 

after providing the FDA with an “updated data cut,” 

Endologix had narrowed Nellix’s IFU. McDermott stated:

Regarding Nellix, we’ve recently ran an 

updated data cut from the IDE clinical 

database and noticed an increase in migration 

in aneurysm enlargement in some patients 

with two-year follow-up. We’re learning that 

migration can occur in patients with small 

flow lumens and a lot of thrombus because 

there isn’t enough space to inject sufficient 

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polymer to support the stents. Our solution is 

a simple update to the patient’s selection 

criteria that measures the ratio of aneurysm 

diameter to the flow lumen to ensure there is 

enough space for polymer.

McDermott explained that when the company examined the 

clinical data for patients with this updated selection criteria, 

it saw “extremely positive safety and durability results out to 

two years, which gives us confidence that Nellix can be a 

leading device in the treatment of abdominal aortic 

aneurysms.”

On this November 1, 2016 call, McDermott further 

explained that the company provided the FDA with its 

“updated patient selection criteria and have had positive 

discussion[s] so far.” He indicated that the FDA “had some 

questions about migration,” but emphasized that this issue 

was “a very easy situation to address just by narrowing for 

those particular anatomies” that did not experience 

migration. Finally, McDermott represented that “the Nellix 

PMA approval timelines are unchanged, although we think 

a panel is more likely now given the updated indications.” 

McDermott estimated that a panel meeting would occur in 

April or May of 2017, “which would lead to a potential PMA 

approval in the third quarter of 2017,” several months later 

than Endologix had initially estimated.

On November 16, 2016, however, Endologix issued a 

press release disclosing that the FDA would not approve 

Nellix within the timeline the company had previously 

presented. Instead, the FDA had requested that Endologix 

provide it with two years of follow-up data for patients in the 

clinical trial. As a result, PMA approval could not occur 

until the second quarter of 2018 at the earliest, an eighteenCase: 18-56322, 06/10/2020, ID: 11716943, DktEntry: 44-1, Page 12 of 28
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month delay from what Endologix originally announced. 

That day, Endologix’s share price fell more than 20.5%, or 

$2.02 per share.

Endologix held its 2016 investor meeting the next day. 

There, McDermott explained that, although the clinical trial 

showed a 2.3% migration rate after year one, the migration 

rate increased in year two. He noted “[i]t was the increase 

in the rate from year one to year two” that “drove the 

discussion” with the FDA and led to the FDA’s request for 

additional data. The complaint alleges that McDermott 

presented this discovery as new information when, in reality,

the company was aware that Nellix experienced increased 

migration after more than one year in use, based on 

Endologix’s experience with Nellix in the European 

commercial channel.

On May 17, 2017, Endologix announced that it would 

not seek FDA approval of Nellix at all. Instead, the company 

decided to focus its efforts on a second-generation Nellix 

device, which it estimated would not receive FDA approval 

until 2020. That same day, Endologix’s share price fell more 

than 36%, or $2.47 per share.

Two months later, the Securities and Exchange 

Commission (SEC) initiated an investigation into the events 

surrounding Nellix’s FDA approval. After Endologix 

revealed this investigation in a public filing in August 2017, 

one of its executives resigned. Plaintiff’s complaint does not 

allege the status of the SEC investigation, but according to 

Endologix, the SEC has closed it.

D

On January 3, 2017, Vicky Nguyen filed this putative 

class action against Endologix, McDermott, and Mahboob, 

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alleging securities fraud. Following her appointment as lead 

plaintiff, Nguyen filed a first amended complaint. The 

district court dismissed this complaint for failure to state a 

claim, but granted Nguyen leave to amend. Nguyen then 

filed a second amended complaint, the operative complaint 

here, on behalf of persons who bought or acquired Endologix 

securities between May 5, 2016 and May 18, 2017.

The complaint alleged violations of §§ 10(b) and 20(a) 

of the Securities Exchange Act of 1934 and SEC Rule 10b5. See 15 U.S.C. §§ 78j(b), 78t(a); 17 C.F.R. § 240.10b-5. 

The thrust of the complaint is that the defendants made 

statements about Nellix migration and the prospects of FDA 

approval that were false and misleading in light of 

Endologix’s knowledge of Nellix migration in Europe.

The district court dismissed the second amended 

complaint under Federal Rule of Civil Procedure 12(b)(6) 

because Nguyen had not satisfied the PSLRA’s heightened 

pleading standard for scienter. The district court also denied 

Nguyen’s request for leave to amend to file what would have 

been her fourth complaint. Nguyen timely appealed.

II

Reviewing de novo and construing the allegations in the 

complaint in the light most favorable to the plaintiff, Zucco

Partners, 552 F.3d at 989, we agree with the district court 

that plaintiff has not adequately alleged a “strong inference” 

of scienter. 15 U.S.C. § 78u-4(b)(2)(A). The precedents of 

the Supreme Court and this court teach that the PSLRA’s 

heightened pleading requirements are meaningful ones, 

requiring courts carefully to evaluate securities fraud 

complaints to ensure compliance with the statute’s elevated 

pleading standards. See, e.g., Tellabs, Inc. v. Makor Issues 

& Rights, Ltd., 551 U.S. 308, 321 (2007); Dura Pharm., Inc. 

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v. Broudo, 544 U.S. 336, 345–46 (2005); Zucco Partners, 

552 F.3d at 990–91; Ronconi v. Larkin, 253 F.3d 423, 437 

(9th Cir. 2001). We hold that in this case, the complaint does 

not pass muster under the PSLRA.

A

Section 10(b) of the Securities Exchange Act of 1934 

provides that it is unlawful for any person “[t]o use or 

employ, in connection with the purchase or sale of any 

security registered on a national securities exchange . . . any 

manipulative or deceptive device or contrivance in 

contravention of such rules and regulations as the [SEC] may 

prescribe as necessary or appropriate in the public interest or 

for the protection of investors.” 15 U.S.C. § 78j(b). The 

SEC in turn promulgated Rule 10b-5, which provides that it 

is unlawful for any person:

(a) To employ any device, scheme, or artifice 

to defraud,

(b) To make any untrue statement of a 

material fact or to omit to state a material fact 

necessary in order to make the statements 

made, in the light of the circumstances under 

which they were made, not misleading, or

(c) To engage in any act, practice, or course 

of business which 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. Section 20(a) of the Act makes 

certain “controlling person[s]” liable for violations of 

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§ 10(b) and Rule 10b-5. 15 U.S.C. § 78t(a); see also Zucco

Partners, 552 F.3d at 990.

To plead a claim under § 10(b) and Rule 10b-5, a 

plaintiff must allege “(1) a material misrepresentation or 

omission; (2) scienter; (3) a connection between the 

misrepresentation or omission and the purchase or sale of a 

security; (4) reliance; (5) economic loss; and (6) loss 

causation.” Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc., 

774 F.3d 598, 603 (9th Cir. 2014).

This case centers on the critical element of scienter, 

which in this context is “a mental state embracing intent to 

deceive, manipulate, or defraud.” Tellabs, 551 U.S. at 319 

(quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 

n.12 (1976)). To allege the required scienter, a complaint 

must “allege that the defendants made false or misleading 

statements either intentionally or with deliberate 

recklessness.” Zucco Partners, 552 F.3d at 991 (quotations 

omitted). “[D]eliberate recklessness” is more than “mere

recklessness or a motive to commit fraud.” Schueneman v. 

Arena Pharm., Inc., 840 F.3d 698, 705 (9th Cir. 2016) 

(emphasis in original) (quoting Zucco Partners, 552 F.3d at 

991). It is instead “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 in original) (quoting Zucco Partners, 552 F.3d 

at 991).

Securities fraud complaints are subject to heightened 

pleading requirements. One source of these higher standards 

is Federal Rule of Civil Procedure 9(b), which requires a 

plaintiff to “state with particularity the circumstances 

constituting fraud.” See also Schueneman, 840 F.3d at 705; 

Zucco Partners, 552 F.3d at 990. Another source is the 

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NGUYEN V ENDOLOGIX 17

PSLRA, which was enacted in 1995 as part of Congress’s 

desire to “curb perceived abuses of the § 10(b) private 

action—‘nuisance filings, targeting of deep-pocket 

defendants, vexatious discovery requests and manipulation 

by class action lawyers.’” Tellabs, 551 U.S. at 320 (quoting 

Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 

547 U.S. 71, 81 (2006)).

Under the PSLRA, “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 or omission is made on information 

and belief, the complaint shall state with particularity all 

facts on which that belief is formed.” 15 U.S.C. § 78u4(b)(1). Importantly for purposes here, the complaint must 

also “state with particularity facts giving rise to a strong 

inference that the defendant acted with the required state of 

mind.” Id. § 78u-4(b)(2)(A).

The PSLRA’s “strong inference” requirement has teeth. 

It is an “exacting” pleading obligation, Zucco Partners, 

552 F.3d at 990, that “present[s] no small hurdle for the 

securities fraud plaintiff.” Schueneman, 840 F.3d at 705 

(quotations omitted). As the Supreme Court has explained, 

“[t]he strong inference standard unequivocally raised the bar 

for pleading scienter.” Tellabs, 551 U.S. at 321 (quotations 

omitted) (alteration adopted). Given the substantial costs 

that securities fraud litigation can impose, the “strong 

inference” standard reflects Congress’s attempt to halt early 

on securities litigation that lacks merit or is even abusive, 

while allowing plaintiffs with potentially winning claims to 

proceed to discovery. See id. at 323–24.

Acknowledging these interests, the Supreme Court has 

held that under the PSLRA’s “strong inference” standard, a 

complaint will survive a motion to dismiss “only if a 

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18 NGUYEN V ENDOLOGIX

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.” Id. at 324. It is to 

this analysis that we now turn.

B

Plaintiff’s core theory is that defendants made false and 

misleading statements about whether the FDA was likely to 

approve Nellix because defendants knew, based on their 

experience in Europe, that Nellix would encounter migration 

issues. The central theory of the complaint is thus that 

defendants knew the FDA would not approve Nellix, or at 

least that it would not do so on the timeline defendants were 

telling the market. That is the theory of falsity on which the 

complaint attacks defendants’ various statements about the 

prospect of FDA approval: based on Nellix’s performance in 

Europe, defendants “knew that there was absolutely no hope 

of receiving FDA PMA approval by the end of 2016 or the 

first part of 2017” and knew “the FDA would not approve 

[Nellix] for use in the U.S. because of the unacceptable 

safety risks device migration posed.”

These allegations encounter an immediate first-level 

problem: why would defendants promise the market that the 

FDA would approve Nellix if defendants knew the FDA 

would eventually figure out that Nellix could not be 

approved due to “intractable” and “unresolvable” device 

migration problems? The theory does not make a whole lot 

of sense. It depends on the supposition that defendants 

would rather keep the stock price high for a time and then 

face the inevitable fallout once Nellix’s “unsolvable” 

migration problem was revealed. If defendants had sought 

to profit from this scheme in the interim, such as by selling 

off their stock or selling the company at a premium, the 

theory might have more legs. See, e.g., In re Rigel Pharm., 

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Inc. Sec. Litig., 697 F.3d 869, 884–85 (9th Cir. 2012). There 

are no factual allegations like that here. Instead, we are 

asked to accept the theory that defendants were promising 

FDA approval for a medical device application they knew 

was “unapprovable,” misleading the market all the way up 

to the point that defendants were “unable to avoid the 

inevitable.”

The allegation does not resonate in common experience. 

And the PSLRA neither allows nor requires us to check our 

disbelief at the door. “Plausibility” is a concept more 

commonly associated with the base-level “non-fraud” 

pleading standards in Rule 12(b)(6). See Ashcroft v. Iqbal, 

556 U.S. 662, 678 (2009); Bell Atl. Corp. v. Twombly, 

550 U.S. 544, 556–57 (2007). But plausibility is no less 

relevant in the context of the heightened pleading standards 

of Rule 9(b) or the PSLRA. See In re NVIDIA Corp. Sec. 

Litig, 768 F.3d 1046, 1058 (9th Cir. 2014) (rejecting a theory 

of scienter because of the “implausibility of the timing in 

CW1’s account of events”); Cafasso, U.S. ex rel. v. Gen. 

Dynamics C4 Sys., Inc., 637 F.3d 1047, 1055 (9th Cir. 2011) 

(“[C]laims of fraud or mistake . . . must, in addition to 

pleading with particularity, also plead plausible 

allegations.”). Treating the allegations in the complaint in 

the light most favorable to the plaintiff, the notion that a 

company would promise FDA approval that it knew would 

not materialize does not, without more, create a strong 

inference of intent to deceive or deliberate recklessness.

The Fourth Circuit addressed a similar claim about 

prospective FDA approval in Cozzarelli v. Inspire 

Pharmaceuticals Inc., 549 F.3d 618 (4th Cir. 2008), and its 

analysis is persuasive here. In Cozzarelli, a pharmaceutical 

company sought FDA approval of a drug for the treatment 

of dry eye disease. Id. at 621. To gain approval, the FDA 

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required the company to conduct a study on the effectiveness 

of the product. Id. at 622. The study ultimately failed. Id.

Plaintiffs alleged that, while the study was ongoing, 

company executives made misleading statements that the 

study would succeed. Id. at 624–25. The Fourth Circuit held 

that these allegations did not plead a “strong inference” of 

scienter under the PSLRA. Id. at 626.

Underpinning the Fourth Circuit’s reasoning in 

Cozzarelli was the point we recognize here: “[i]t is 

improbable that [a company] would stake its existence on a 

drug and a clinical trial that the company thought was 

doomed to failure.” Id. at 627. The plaintiffs’ “inference of 

fraud based on the supposed impossibility of [a successful 

trial] [wa]s thus not even plausible, much less convincing.” 

Id. This was so in Cozzarelli even though the defendants 

there, unlike those here, sold some of their stock in the 

company while the study was ongoing. Id. at 622, 627–28; 

see also City of Edinburgh Council v. Pfizer, Inc., 754 F.3d 

159, 170 (3d Cir. 2014) (affirming dismissal of securities 

fraud complaint because, inter alia, “the initiation of Phase 

3 cost millions of dollars and required FDA approval, 

rendering it improbable that defendants would have 

continued if they did not believe their interpretation of the 

interim results or if they thought the drug a complete 

failure”).

C

Plaintiff does not surmount her plausibility problem, and 

does not plead a strong inference of scienter, through 

reliance on confidential witness “CW1.” There is, at the 

outset, reason to question CW1’s foundation. He left the 

company in June 2016, around the time that Endologix 

reported to the FDA the favorable data from the first year of 

the U.S. clinical trial, but well before the company narrowed 

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Nellix’s IFU and reported the less favorable second-year 

data. Many of the statements that plaintiff alleges are false 

and misleading were made after CW1 left Endologix. There 

is thus ample basis to question aspects of CW1’s claimed 

knowledge and his effort to impute scienter to the 

defendants. See, e.g., Zucco Partners, 552 F.3d at 995–96.

Even so, CW1 does not get plaintiff where she needs to 

be under the PSLRA. The central problem with the 

information attributable to CW1 is that it lacks any detail 

about the supposed device migration problems that Nellix 

encountered in the European channel. See id. at 995 

(explaining that “we look to the level of detail provided by 

the confidential sources”) (quotations omitted).

The allegations sourced to CW1 are high on alarming 

adjectives—“serious and unsolvable,” “dangerous,” 

“urgent,” and so on. But they are short on the facts about 

Nellix migration that would establish a strong inference that 

defendants’ later statements about FDA approval were 

intentionally false or made with deliberate recklessness. 

Nowhere does CW1 identify, for example, the number of 

European patients that experienced device migration, how 

much Nellix was migrating in these patients, whether the 

alleged device migration led to any further medical issues, 

whether the patients had particular conditions that 

exacerbated the migration, and whether the patients were 

within or outside either the original or revised IFU. As we 

have held, “negative characterizations of reports relied on by 

insiders, without specific reference to the contents of those 

reports, are insufficient to meet the heightened pleading 

requirements of the PSLRA.” Lipton v. Pathogenesis Corp., 

284 F.3d 1027, 1036 (9th Cir. 2002). Strong rhetoric is not 

a substitute for “particular[] facts giving rise to a strong 

inference” of scienter. 15 U.S.C. § 78u-4(b)(2)(A).

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The same is true of CW1’s allegations that Endologix 

was evaluating Nellix migration in Europe. While CW1 

suggests general turmoil within Endologix over an 

undefined migration issue, much of this is sourced to a 

March 2016 conference in London, where “experts in the 

field of endovascular aneurysm sealing” had a “full and 

honest discussion” with Endologix scientists and directors, 

who provided “responses to questions concerning 

migration.” The complaint provides no explanation as to 

why a company supposedly bent on concealment in the 

United States would have open discussions with numerous 

company outsiders in Europe on the same underlying issue.

In short, while CW1 references a “stream of complaints 

and incident reports” and a general concern that these reports 

supposedly caused, the complaint does not plead any details 

about these reports that would demonstrate a strong 

inference of scienter in Endologix’s later statements about 

FDA approval or Nellix migration. See, e.g., Police Ret. Sys. 

of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051, 1063 

(9th Cir. 2014) (holding that plaintiffs failed to plead scienter 

by relying on witness accounts that “[did] not detail the 

actual contents of the reports the executives purportedly 

referenced or had access to”); Lipton, 284 F.3d at 1036; In 

re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 985 (9th 

Cir. 1999) (“We would expect that a proper complaint which 

purports to rely on the existence of internal reports would 

contain at least some specifics from those reports.”), 

abrogated on other grounds by S. Ferry LP, No. 2 v. 

Killinger, 542 F.3d 776, 784 (9th Cir. 2008).

The only concrete facts plaintiff alleges from the 

European channel actually confirm the absence of a strong 

inference of scienter. The complaint relies most heavily on 

a 2016 University of Liverpool study that showed device 

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migration in 6 out of 35 devices studied, a 17% migration 

rate exceeding the 2.3% migration rate that Endologix 

observed in the first year of its U.S. clinical trial. But 

plaintiff is hard-pressed to build a fraud case around the 

Liverpool study when she admits in her complaint that 

defendant McDermott acknowledged and discussed this 

very study on an investor conference call in June 2016. 

McDermott also explained that the Liverpool study defined 

migration as four millimeters of movement, whereas the 

Society for Vascular Surgery and the FDA clinical study 

treated ten millimeters as the appropriate benchmark for 

material migration. Plaintiff does not dispute the fact that, 

as the Liverpool study itself makes clear, applying the tenmillimeter metric there “would have generated a zero rate of 

migration,” because all devices in the study migrated less 

than ten millimeters. The Liverpool study thus does not 

demonstrate that defendants’ statements about FDA 

approval were made with wrongful scienter.

The only other data point plaintiff provides is a 2016 

United Kingdom case report about a single patient who was 

reported to have experienced an eleven-millimeter device 

migration. But once again, the complaint provides no details 

on the circumstances of this patient or why this case report 

should have alerted Endologix to a broader problem with 

Nellix that would have complicated the prospects for FDA 

approval. A case report is a report about a single person’s 

medical situation. E.g., Rider v. Sandoz Pharm. Corp., 

295 F.3d 1194, 1199 (11th Cir. 2002). There are 

understandable limitations associated with building a broadbased fraud claim around the unelaborated experiences of 

just one patient, given the individualized features of any one 

person’s medical profile. But at the very least, plaintiff here 

has not pleaded facts showing that the United Kingdom case 

report creates a strong inference of scienter. Indeed, plaintiff 

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effectively acknowledges that some amount of device 

migration may occur, in casting the 2.3% migration rate in 

the first year of the U.S. clinical trial as favorable, or at least 

not problematic.2

Plaintiff’s reliance on Matrixx Initiatives, Inc. v. 

Siracusano, 563 U.S. 27 (2011), is inapt. Matrixx rejected 

the argument that “reports of adverse events associated with 

a pharmaceutical company’s products cannot be material 

absent a sufficient number of such reports to establish a 

statistically significant risk that the product is in fact causing 

the events.” Id. at 39 (footnotes omitted). No such “brightline” rule is being applied here. Id.

Matrixx also differs from this case in important ways. 

Matrixx did not involve allegedly false statements about the 

prospects for FDA approval, but rather, inter alia, statements 

denying reports of adverse events as “completely unfounded

and misleading,” which contradicted information of which 

the company was aware. Id. at 47 (quotations omitted). 

Here, by contrast, the plaintiff’s own allegations show that 

Endologix acknowledged the reports of Nellix migration in 

the Liverpool study and U.S. clinical trial.

In Matrixx, moreover, the complaint alleged that the 

defendant pharmaceutical company was made aware of 

reports that over ten patients had lost their sense of smell 

after using the company’s drug, and that the company had 

both followed up on these reports and tried to squelch them, 

only to then deny there was any issue. Id. at 32–33. The 

2 Plaintiff alternatively alleges that the FDA was relying on reports 

from the European channel or that Endologix failed to provide such 

reports, contrary to FDA regulations. See 21 C.F.R. § 814.20(b)(8)(ii).

But plaintiff fails to plead sufficient facts to support either theory.

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NGUYEN V ENDOLOGIX 25

allegations here, which are based on the Liverpool study, one 

case report, and CW1’s general description of the European 

commercial experience, lack comparable detail to generate a 

strong inference of scienter.

Our decision in Schueneman, 840 F.3d 698, also 

provides no assistance to plaintiff. In that case, a company 

conducted a clinical trial using rats as part of the FDA 

approval process. Id. at 701. Although the rat study revealed 

that the drug might cause cancer, the company publicly 

stated that the results of the study made it confident that the 

FDA would approve the drug. Id. at 708. Because the rat 

studies were “the sticking point with the FDA,” we held that 

the complaint adequately alleged scienter. Id. (emphasis in 

original). In this case, by contrast, there are no particularized 

allegations that FDA approval of Nellix turned on studies or 

case reports from Europe, as opposed to the U.S. clinical 

trial.3

Where all of this leaves us is that to the extent plaintiff’s 

allegations raise any inference of scienter, we cannot say this 

inference is “at least as compelling as any opposing 

inference one could draw from the facts alleged.” Tellabs, 

551 U.S. at 324. The more plausible inference to be drawn 

3 Mahboob’s May 9, 2016 statement that “Nellix continues to do a 

fantastic performance outside of the U.S.” also does not create a strong 

inference of scienter. In context, and based on the analyst question that 

led to it, Mahboob’s statement appears to concern Nellix’s sales abroad. 

Regardless, when considered individually and within the complaint as a 

whole, Mahboob’s statement is too unclear to support a strong inference 

of scienter. See, e.g., Police Ret. Sys. of St. Louis, 759 F.3d at 1063; 

Zucco Partners, 552 F.3d at 1000. Plaintiff also does not plead sufficient 

facts about the alleged departure of certain Endologix employees, see 

Zucco Partners, 552 F.3d at 1002, or the SEC’s investigation, see 

Cozzarelli, 549 F.3d at 628 n.2, to give rise to a strong inference of 

scienter on these bases.

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from the allegations in the complaint is that defendants made 

promising statements about the timing of FDA approval 

based on the initial results of the U.S. clinical trial, but then 

modulated their optimism when the results began to raise 

more questions.

In late May 2016, at the beginning of the class period and 

shortly after it first made positive statements about FDA 

approval, Endologix released the results from the first year 

of the U.S. clinical trial. By plaintiff’s own allegations, the 

results were favorable: “100% procedural technical success 

achieved;” “[a]t the year, the treatment success rate was 

94%, achieving the primary effectiveness endpoint;” 

“[f]reedom from device related secondary interventions was 

96.6%, the highest rate ever reported for an IDE study of an 

endovascular AAA device;” and “[e]ndoleaks were present 

in 3.1% of patients at 1-year, the lowest rate ever reported 

for an IDE study of an endovascular [abdominal aortic 

aneurysm] device.” The first-year data showed a 

2.3% migration rate, which plaintiff does not characterize as 

unfavorable and which defendants disclosed.

Then, when Endologix obtained two-year data from the 

clinical trial showing “an increase in migration” in “some 

patients,” defendants disclosed that information and 

expressed their belief that the issue could be addressed with 

a narrowed IFU that excluded patients with “particular 

anatomies” that were more susceptible to device migration. 

Plaintiff identifies no sufficient factual basis as to why 

defendants could not have believed that a revised IFU would 

allow the FDA to approve the product. (And contrary to 

plaintiff’s argument, McDermott did not then say that 

Endologix had only “recently” learned about Nellix 

migration; his comment referred to the “updated data cut” 

Endologix had “recently” run from the clinical trial 

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NGUYEN V ENDOLOGIX 27

database.) Regardless, defendants at this time extended the 

timeline for estimated FDA approval to the third quarter of 

2017. Then, when the FDA requested additional data, 

Endologix disclosed this development, stating “[i]t was the 

increase in the rate from year one to year two” that “drove 

the discussion.”

Under the PSLRA, “[a] court must compare the 

malicious and innocent inferences cognizable from the facts 

pled in the complaint, and only allow the complaint to 

survive a motion to dismiss if the malicious inference is at 

least as compelling as any opposing innocent inference.” 

Zucco Partners, 552 F.3d at 991. The complaint cannot go 

forward here because the more plausible inference from the 

facts alleged is that defendants based their statements about 

FDA approval on the status and progress of the U.S. clinical 

trial, not that defendants were intentionally or with 

deliberate recklessness seeking to mislead the market about 

an FDA approval that they knew would never come through. 

Viewing the allegations in the complaint both individually 

and collectively, id. at 1006, plaintiff has therefore failed to 

plead a strong inference of scienter. Because the complaint 

fails to plead scienter, we have no occasion to address 

defendants’ other arguments as to why the complaint may 

fail to plead other necessary elements.

We hold that the district court properly dismissed 

plaintiff’s claims under Section 10(b) and Rule 10b-5. 

Because plaintiff’s Section 20(a) “controlling person” 

claims against McDermott and Mahboob require a violation 

of Section 10(b) or Rule 10b-5, the Section 20(a) claims 

necessarily fail as well. See, e.g., In re NVIDIA Corp. Sec. 

Litig., 768 F.3d at 1052; Zucco Partners, 552 F.3d at 990.

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III

In the alternative, Nguyen argues that the district court 

erred in dismissing her second amended complaint with 

prejudice. Reviewing for abuse of discretion, Zucco 

Partners, 552 F.3d at 989, we hold that the district court did 

not err.

“[W]here the plaintiff has previously been granted leave 

to amend and has subsequently failed to add the requisite 

particularity to its claims, the district court’s discretion to 

deny leave to amend is particularly broad.” Id. at 1007 

(quotations omitted). Here, the district court had already 

given Nguyen leave to amend. There was thus no abuse of 

discretion because “it was clear that the plaintiff[] had made 

[her] best case and had been found wanting.” Id.

* * *

The judgment of the district court is therefore

AFFIRMED.

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