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KESSLER TOPAZ 

MELTZER & CHECK, LLP 

Johnston de F. Whitman, Jr. 

jwhitman@ktmc.com 

Meredith L. Lambert 

mlambert@ktmc.com 

280 King of Prussia Road 

Radnor, PA 19087 

Telephone: (610) 667-7706 

Facsimile: (610) 667-7056 

-andJennifer L. Joost 

jjoost@ktmc.com 

Rupa Nath Cook 

rcook@ktmc.com 

1 Sansome Street, Suite 1850 

San Francisco, CA 94104 

Telephone: (415) 400-3000 

Facsimile: (415) 400-3001

BONNETT, FAIRBOURN, 

FRIEDMAN & BALINT, P.C. 

Francis J. Balint, Jr. 

Andrew S. Friedman 

2325 E. Camelback Road, Ste. 300 

Phoenix, AZ 85016 

Telephone: (602) 274-1100 

Facsimile: (602) 274-1199 

fbalint@bffb.com 

afriedman@bffb.com 

Attorneys for Lead Plaintiff and the 

Proposed Class 

UNITED STATES DISTRICT COURT 

DISTRICT OF ARIZONA 

RICHARD DI DONATO, Individually and 

On Behalf of All Others Similarly Situated, Plaintiff, 

 v. 

INSYS THERAPEUTICS, INC.; MICHAEL 

L. BABICH; DARRYL S. BAKER; JOHN 

N. KAPOOR; and ALEC BURLAKOFF, 

Defendants. 

No. 16-cv-00302-NVW

CLASS ACTION 

MEMORANDUM OF POINTS 

AND AUTHORITIES IN 

OPPOSITION TO MOTION TO 

DISMISS 

ORAL ARGUMENT 

REQUESTED 

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TABLE OF CONTENTS 

Page 

I. INTRODUCTION ................................................................................................... 1

II. STATEMENT OF FACTS ...................................................................................... 4

A. Insys and Subsys .......................................................................................... 4

B. Defendants’ Off-Label Marketing/Kickback Scheme and IRC 

Fraud ............................................................................................................. 5

1. Insys’ Off-Label Marketing/Kickback Scheme ................................ 6

2. The IRC Fraud ................................................................................... 7

C. The Misrepresented and Concealed Fraud is Gradually Revealed .............. 8

III. ARGUMENT .......................................................................................................... 9

A. The AC Pleads Actionable Misstatements ................................................. 10

1. Defendants Misstated Insys’ Relationships with PBMs ................. 10

2. Defendants Misled Investors Concerning Subsys Sales ................. 11

3. Defendants Misstated Insys’ Compliance Measures ...................... 13

4. Defendants’ Challenges to Falsity Fail ........................................... 14

B. The AC Sufficiently Alleges Scienter ........................................................ 18

1. Insys, Babich, and Burlakoff’s Direct Knowledge ......................... 18

2. The Importance of Subsys to Insys and Defendants’ Access to 

Information Raise a Strong Inference of Scienter ........................... 20

3. Other Indicia of Scienter Support a Strong Inference ..................... 23

4. Defendants Offer No Plausible Competing Inference .................... 24

C. The AC Adequately Pleads Loss Causation............................................... 25

IV. CONCLUSION ..................................................................................................... 30

 

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TABLE OF AUTHORITIES 

Page(s) 

CASES

Acticon AG v. China N.E. Petroleum Hldgs., Ltd., 

692 F.3d 34 (2d Cir. 2012) ......................................................................................... 29

In re Amgen Inc. Sec. Litig., 

544 F. Supp. 2d 1009 (C.D. Cal. 2008) ............................................................... passim 

In re Amgen Sec. Litig., 

2014 U.S. Dist LEXIS 183034 (C.D. Cal. Aug. 4, 2014) ............................... 26, 28, 30

In re Amylin Pharm., Inc. Sec. Litig., 

2003 WL 21500525 (S.D. Cal. May 1, 2003)............................................................. 15

In re Apollo Grp., Inc. Sec. Litig., 

395 F. Supp. 2d 906 (D. Ariz. 2005) .................................................................... 11, 17

Ashcroft v. Iqbal, 

556 U.S. 662 (2009) ...................................................................................................... 9 

Asher v. Baxter, Int’l Inc., 

377 F.3d 727 (7th Cir. 2004) ...................................................................................... 29

Berson v. Applied Signal Tech., Inc., 

527 F.3d 982 (9th Cir. 2008) ............................................................................... passim 

Brody v. Transitional Hosps. Corp., 

280 F.3d 997 (9th Cir. 2002) ...................................................................................... 11

In re Cadence Design Sys. Inc. Sec. Litig., 

692 F. Supp. 2d 1181 (N.D. Cal. 2012) ................................................................ 19, 22

In re Cobalt Int’l Energy Inc. Securities Litig., 

2016 WL 215476 (S.D. Tex. Jan. 19, 2016) ............................................................... 16 

In re Connectics Corp. Sec. Litig., 

257 F.R.D. 572 (N.D. Cal. 2009) ................................................................................ 27

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In re Countrywide Fin. Corp. Deriv. Litig., 

554 F. Supp. 2d 1044 (C.D. Cal. 2008) ................................................................ 21, 22

Curry v. Hansen Med., Inc., 

2012 WL 3242447 (N.D. Cal. Aug. 10, 2012) ........................................................... 19

In re CytRx Corp. Sec. Litig., 

2015 WL 5031232 (C.D. Cal. July 13, 2015) ............................................................. 10

In re Daou Sys., Inc., 

411 F.3d 1006 (9th Cir. 2005) .............................................................................. 21, 26

In re Diamond Foods, Inc., 

2012 WL 6000923 (N.D. Cal. Nov. 30, 2012) ......................................................... 22 

Dura Pharms., Inc. v. Broudo, 

544 U.S. 336 (2005) ............................................................................................. passim 

In re Energy Recovery Inc. Sec. Litig., 

2016 WL 324150 (N.D. Cal. Jan. 27, 2016) ............................................................... 19

Flynn v. Sientra, Inc., 

2016 WL 3360676 (C.D. Cal. June 9, 2016) .................................................. 16, 21, 25

In re Galena Biopharma, Inc. Sec. Litig., 

117 F. Supp. 3d 1145 (D. Ore. 2015) ................................................................... 23, 24

In re Gentiva Sec. Litig., 

932 F. Supp. 2d 352 (E.D.N.Y. 2013) ........................................................................ 13

In re Gilead Scis. Sec. Litig., 

2009 WL 1561584 (N.D. Cal. June 3, 2009) ........................................................ 12, 17

In re Gilead Sec. Litig., 

536 F.3d 1049 (9th Cir. 2008) .............................................................................. 28, 30

Glazer Capital Mgmt., LP v. Magistri, 

549 F.3d 736 (9th Cir. 2008) ................................................................................ 13, 19

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Halliburton Co. v. Erica P. John Fund, Inc., 

134 S. Ct. 2398 (2014) ................................................................................................ 15 

Hollinger v. Titan Capital Corp., 

914 F.2d 1564 (9th Cir. 1990) .................................................................................... 19

In re Immune Response Sec. Litig., 

375 F. Supp. 2d 983 (S.D. Cal. 2005) ......................................................................... 15

In Adaptive Broadband Sec. Litig., 

2002 WL 989478 (N.D. Cal. Apr. 2, 2002) ................................................................ 23

Kyung Cho v. UCBH Hldgs., Inc., 

890 F. Supp. 2d 1190 (N.D. Cal. 2012) ...................................................................... 19

In re LDK Solar Sec. Litig., 

584 F. Supp. 2d 1230 (N.D. Cal. 2008) ...................................................................... 30

Livid Hldgs. Ltd. v. Salomon Smith Barney, Inc., 

416 F.3d 940 (9th Cir. 2005) ................................................................................ 14, 15 

Lloyd v. CVB Fin. Corp. 

811 F.3d 1200 (9th Cir. 2016) ....................................................................... 25, 26, 29 

Matrix Capital Mgmt. Fund. L.P. v. BearingPoint, Inc., 

576 F.3d 172 (4th Cir. 2009) ...................................................................................... 19

Mauss v. NuVasive, Inc., 

2015 WL 10857519 (S.D. Cal. Aug. 28, 2015) .......................................................... 12

Mauss v. NuVasive, Inc., 

2016 WL 3681831 (S.D. Cal. July 12, 2016) ................................................. 26, 28, 29

In re McKesson HBOC, Inc. Sec. Litig., 

126 F. Supp. 2d 1248 (N.D. Cal. 2000) ...................................................................... 23

Metzler Investment GMBH v. Corinthian Colleges, Inc., 

540 F.3d 1049 (9th Cir. 2008) .............................................................................. 16, 29

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Meyer v. JinkoSolar Hldgs. Co., Inc., 

761 F.3d 245 (2d Cir. 2014) ................................................................................. 14, 15

Middlesex Ret. Sys. v. Quest Software, Inc., 

2008 WL 7084629 (C.D. Cal. July 10, 2008) ............................................................. 23

Middlesex Ret. Sys. v. Quest Software Inc., 

527 F. Supp. 2d 1164 (C.D. Cal. 2007) ................................................................ 24, 25

Minneapolis Firefighters’ Relief Ass’n v. Medtronic, Inc., 

2010 U.S. Dist. LEXIS 10029 (D. Minn. Feb. 3, 2010) ....................................... 12, 20

In re Montage Tech. Grp. Ltd. Sec. Litig., 

78 F. Supp. 3d 1215 (N.D. Cal. 2015) ........................................................................ 27

Mulligan v. Impax Labs., Inc., 

36 F. Supp. 3d 942 (N.D. Cal. 2014) .............................................................. 13, 21, 22

Nathanson v. Polycom, 

87 F. Supp. 3d 966 (N.D. Cal. 2015) .......................................................................... 29

Neborsky v. Valley Forge Composite Techs., Inc., 

2014 WL 3767011 (S.D. Cal. July 29, 2014) ............................................................. 12

In re New Century, 

588 F. Supp. 2d 1206 (C.D. Cal. 2008) ...................................................................... 10

No. 84 Emp’r-Teamster Joint Council Pension Tr. Fund v. Am. W. Holding Corp., 

320 F.3d 920 (9th Cir. 2003) ...................................................................................... 14

Nursing Home Pension Fund, Local 144 v. Oracle Corp., 

380 F.3d 1226 (9th Cir. 2004) .................................................................................... 21

Nuveen Mun. High Income Opportunity Fund v. City of Alameda, 

730 F.3d 1111 (9th Cir. 2013) .............................................................................. 25, 26

In re NVIDIA Corp. Sec. Litig., 

768 F.3d 1046 (9th Cir. 2014) .................................................................................... 19

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OPERS v. Federal Home Mortgage Corp., 

2016 WL 3916011 (6th Cir. Jul. 20, 2016) ................................................................. 26

Oregon Pub. Emps. Ret. Fund v. Apollo Grp., Inc., 

774 F.3d 598 (9th Cir. 2014) ..................................................................................... 19 

In re Pfizer Inc. S’holder Deriv. Litig., 

722 F. Supp. 2d 453 (S.D.N.Y. 2010) ........................................................................ 24

Reese v. Malone, 

747 F.3d 557 (9th Cir. 2014) ............................................................................... passim 

Roberti v. OSI Sys., Inc., 

2015 WL 1985562 (C.D. Cal. Feb. 27, 2015) ...................................................... 21, 22

S. Ferry, LP #2 v. Killinger, 

542 F.3d 776 (9th Cir. 2008) ...................................................................................... 21

S. Ferry LP #2 v. Killinger, 

687 F. Supp. 2d 1248 (W.D. Wash. 2009) ............................................................ 18, 20

Smilovits v. First Solar, Inc., 

119 F. Supp. 3d 978 (D. Ariz. 2015) .......................................................................... 26

In re Stratosphere Corp. Sec. Litig., 

1 F. Supp. 2d 1096 (D. Nev. 1998) ............................................................................. 25

In re Sunpower Sec. Litig., 

2011 WL 7404238 (N.D. Cal. Dec. 19, 2011) ............................................................ 23

Swartz v. KPMG LLP, 

476 F.3d 756 (9th Cir. 2007) ...................................................................................... 10

In re Syncor Int’l Corp. Sec. Litig., 

239 F. App’x 318 (9th Cir. 2007) ............................................................................... 11

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 

551 U.S. 308 (2007) .................................................................................... 9, 18, 23, 24

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Thorpe v. Walter Inv. Mgmt., Corp., 

111 F. Supp. 3d 1336 (S.D. Fla. 2015) ....................................................................... 24 

United States ex rel. Lee v. Corinthian Colleges, 

655 F.3d 984 (9th Cir. 2011) ...................................................................................... 10

In re UTStarcom, Inc. Sec. Litig., 

617 F. Supp. 2d 964 (N.D. Cal. 2009) ........................................................................ 23

In re VeriFone Hldgs. Sec. Litig., 

704 F.3d 694 (9th Cir. 2012) ...................................................................................... 18

Washtenaw Cty. Emps. Ret. Sys. v. Avid Tech., Inc., 

28 F. Supp. 3d 93, 115 (D. Mass. 2014) ..................................................................... 24

In re Worlds of Wonder Sec. Litig., 

35 F.3d 1407 (9th Cir. 1994) ...................................................................................... 15

STATUTES

15 U.S.C. §78u-4(b)(1)(B) ............................................................................................... 10 

28 U.S.C. §1292(b) ........................................................................................................... 26 

OTHER AUTHORITIES

Fed. R. Evid. 201 ................................................................................................................ 9 

Fed. R. Civ. P. 9(b) ........................................................................................................... 10 

Fed. R. Civ. P. 12(b)(6) ................................................................................................ 9, 14

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I. INTRODUCTION 

During the Class Period, Insys derived no less than 98% of its quarterly revenues 

from selling Subsys, a sublingual fentanyl spray that the FDA approved only for treating 

breakthrough cancer pain (“BTCP”) in adult patients already receiving around-the-clock 

opioid pain medication. Fentanyl is 50 times stronger than heroin, is at the center of this 

country’s ongoing opioid epidemic, and kills people every day. Because it is so 

dangerous, Subsys’ label warns that it can be fatal at any dose in persons who do not 

have BTCP, and Insys must comply with heightened regulations governing its 

promotion and sale of the drug. Subsys is also very expensive, and Defendants informed 

investors that Insys’ sales revenues from Subsys largely depended upon prescription 

coverage approval from third-party payers (“PBMs”).1

Despite these challenges, Defendants reported that Subsys sales revenues—the 

single most important factor influencing Insys’ stock price—grew by more than 90% 

each quarter during the Class Period. Defendants’ public statements consistently 

attributed Insys’ impressive sales results to the facts that Subsys was a “clinically 

superior product,” for which there were “increased prescriptions” as a result of the 

Company’s “focused market penetration strategy” that “expanded the usage of Subsys 

for BTCP.” Defendants also claimed that Insys achieved its burgeoning Subsys sales 

from “proper” communications with PBMs, who helped patients afford their 

prescriptions. These were lies. 

In truth, the Subsys sales revenues that Insys publicly reported during the Class 

Period were the byproduct of two interdependent components of a deliberate fraud that 

elevated Defendants’ profit motive over patient safety. First, Insys violated federal law 

 1

 Unless otherwise noted: (i) capitalized terms and abbreviations have the 

meanings ascribed to them in the Amended Complaint for Violation of the Federal 

Securities Laws (“AC”) (Doc. 49); (ii) all references to “¶_” are to paragraphs in the 

AC; (iii) all references to “DB” are to Defendants’ Motion to Dismiss and 

Memorandum of Points and Authorities (Doc. 61); (iv) all references to “DX_” are to 

exhibits to Defendants’ Request for Judicial Notice (Docs. 62-63); (v) all internal 

citations and quotation marks are omitted; and (vi) all emphasis is added. 

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by promoting Subsys for off-label use through a nationwide campaign that included: (i) 

instructing the Company’s sales force to avoid oncologists, and instead focus on doctors 

who did not treat patients with BTCP; (ii) paying millions of dollars in illegal kickbacks 

to doctors in exchange for high dose off-label Subsys prescriptions; and (iii) rewarding 

its sales staff with outsized commissions for obtaining off-label Subsys prescriptions at 

potentially lethal doses (the “Off-Label/Kickback Scheme”). Second, to “help” patients 

pay for dangerous off-label Subsys prescriptions, Insys’ IRC systematically defrauded 

PBMs by, among other things, falsely claiming that patients had cancer and that doctors 

wrote the high-dose scripts to treat BTCP (the “IRC Fraud”). 

The twin elements of Defendants’ fraud to boost Subsys revenues were so 

pervasive that more than 80% of Subsys prescriptions during the Class Period were for 

off-label conditions, such as knee or back pain and headaches—none of which is 

appropriately treated with a drug 50 times stronger than heroin. As the Class Period 

proceeded, however, increased scrutiny gradually eroded the success of Defendants’ 

fraud, leading Insys to report at the end of the Class Period that it expected Subsys net 

revenues for 1Q16 would be $61 million to $62 million—significantly lower than 

consensus expectations of $86 million for the same period. In response, Insys’ stock 

price declined by approximately 20% on April 11, 2016, and analysts concluded that 

Insys “appeared to present a picture for Subsys that did not entirely square with reality.” 

Faced with the AC’s well-pled allegations demonstrating their fraud, Defendants 

premise their dismissal arguments upon the implausible notion that all Class Period 

investors knew that Insys was an active criminal enterprise and that the AC, therefore, 

contains only “recycled” facts and does not allege any “new news.” Noticeably absent 

from Defendants’ factually and legally unsupported position is any reference to the IRC 

Fraud, upon which Plaintiff’s claims could stand alone. In any event, the AC adequately 

alleges each element of all of Plaintiff’s claims, and Defendants’ motion should be 

denied in its entirety. 

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First, the AC alleges with particularity each of Defendants’ false or misleading 

statements addressing Insys’: (i) sources of sales revenues; (ii) interactions with PBMs; 

and (iii) compliance with regulations. As set forth below in Section III.A, Defendants’ 

statements addressing each of these topics were false or misleading because Defendants 

misrepresented and/or omitted material facts pertaining to the Off-Label/Kickback 

Scheme and IRC Fraud, which were the cornerstones of Insys’ Class Period business. 

Defendants cite no authority whatsoever for their broad contention that all of their 

misstatements “were not misleading as a matter of law” (DB 12) based upon prior 

allegations of misconduct, and Defendants’ sweeping request for dismissal on this basis 

raises factual issues that cannot be resolved at this stage. Equally unavailing is 

Defendants’ suggestion that Insys’ warning that it was potentially exposed to the risk of 

employee misconduct insulates Defendants from their fraud. Such generic, boilerplate 

risk disclosures provide no shelter here, where Defendants were engaged in an ongoing 

fraud and none of Defendants’ misstatements was forward-looking. 

Second, the AC adequately alleges that each Defendant acted with scienter when 

making the alleged misstatements. In addition to pleading facts demonstrating 

Defendants’ direct knowledge and access to information undermining their public 

statements, the AC alleges the indisputable fact that Subsys accounted for 98% or more 

of Insys’ Class Period revenues, rendering it absurd to suggest that Defendants did not 

know or were not deliberately reckless in disregarding that the Off-Label/Kickback 

Scheme and IRC Fraud gave rise to the increasing Subsys sales that Defendants 

celebrated during the Class Period. See Berson v. Applied Signal Tech., Inc., 527 F.3d 

982, 988 n.5, 989 (9th Cir. 2008). Having challenged the AC’s falsity allegations on the 

basis that all investors supposedly knew of the fraud, Defendants cannot credibly claim 

that they, alone, were ignorant. In light of Defendants’ admission that Subsys was “so 

important” to Insys that Defendants met “every single day” to discuss Subsys 

prescriptions, Defendants simply fail to muster any inference of non-fraudulent intent 

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that is more cogent and compelling than the inference of scienter that the AC’s 

collective allegations raise. See §III.B, infra. 

Third, the AC’s loss causation allegations are sufficient, as they plainly provide 

“some indication of the loss and the causal connection that that the plaintiff has in 

mind.” Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 347 (2005). For each of the nine 

partial corrective disclosures and/or materializations of foreseeable risks that removed 

portions of the artificial inflation in Insys’ stock price, the AC: (i) identifies the new 

information revealed that undermined Defendants’ prior statements; (ii) connects this 

new information to the Off-Label/Kickback Scheme and/or IRC Fraud; and (iii) alleges 

the foreseeable negative impact that the new information had upon Insys’ stock price. 

Nothing more is required. See §III.C, infra. Defendants’ contention that none of the nine 

disclosures revealed new news is factually incorrect and belied by the AC’s allegations 

demonstrating the significant declines in Insys’ stock price in response to each. 

Defendants concede that Insys common stock traded in an efficient market during the 

Class Period, and a company’s stock price in such a market does not react to “old 

news.” Accordingly, Defendants’ motion should be denied. 

II. STATEMENT OF FACTS 

A. Insys and Subsys 

Insys is a pharmaceutical company, and its common stock trades on the 

NASDAQ—an efficient securities market. ¶¶27, 347-52. The Company’s only FDAapproved product during the Class Period was Subsys, a sublingual fentanyl spray. ¶¶6-

8, 57-58. Fentanyl is an opioid pain medication that is 50 times stronger than heroin, 

causes daily overdose deaths, and is at the center of the United States’ opioid epidemic. 

¶¶3-5, 50-55. Approved by the FDA in January 2012, the only “on-label” use of Subsys 

is to treat BTCP in opioid-tolerant adults, and it is contraindicated for “acute or 

postoperative pain including headache/migraine.” ¶¶7-8, 60-62. Subsys single-use 

sprays are available in doses ranging from 100mcg to 1600mcg. ¶59. 

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Subsys is so dangerous that its “black box warning” label cautions that “[l]ife 

threatening respiratory depression and death could occur at any dose in opioid nontolerant patients.” ¶¶7-8, 60-62. As a result, “[t]he initial dose of Subsys is always 

100mcg,” unless the patient already has used fentanyl; then, it is never higher than 

400mcg, and physicians should increase doses only where the current dose is 

ineffective. ¶60. Due to its serious risks, Subsys is subject to, and doctors who prescribe 

it must be enrolled in, the TIRF-REMS Access Program. ¶¶6, 10, 63-78. 

Subsys also is extremely expensive, costing over $21,000 per month for 240 

doses of Subsys 1,200mcg (¶59), leading Defendants to acknowledge that “sales of, and 

revenue from, Subsys depend in significant part on the coverage and reimbursement 

policies of third-party payers” (¶¶9, 74, 184, 199, 217). PBMs require prior 

authorization of Subsys prescriptions. ¶137. Based on the PBMs’ formularies, 

appropriate authorizations are limited to on-label use. Id. 

During the Class Period, Subsys generated more than 98% of Insys’ revenues, 

and was “so important” to Defendants that they met to discuss Subsys prescriptions 

“every single day.” ¶¶57, 79, 256, 269-70, 287. Stock analysts relied upon Subsys sales 

to gauge Insys’ performance, and the publicly reported sales revenue drove the price of 

Insys common stock. ¶¶182, 270. 

B. Defendants’ Off-Label Marketing/Kickback Scheme and IRC Fraud 

Insys launched Subsys into a mature market with a limited on-label indication 

and patient population in March 2012. ¶79. Despite these headwinds, Insys revenues 

from Subsys grew by more than 90% every quarter during the Class Period. Id.

Defendants consistently attributed Subsys revenues and “increased prescriptions” to the 

“successful execution of [Insys’] Subsys strategy,” including a “focused market 

penetration strategy” that “expand[ed] the usage of Subsys for BTCP.” ¶¶80, 176-77, 

187, 197-98, 207, 212. Unbeknownst to investors, however, Subsys’ revenues depended 

upon Insys’ Off-Label/Kickback Scheme and IRC Fraud. 

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1. Insys’ Off-Label Marketing/Kickback Scheme 

Despite reassuring investors that BTCP was “all we want to address with a 

doctor” (¶¶193, 285), Defendants pursued the Off-Label/Kickback Scheme, which was 

so pervasive that approximately 80% of Subsys prescriptions were written for off-label 

use. ¶¶15, 94, 173. For example, Defendants instructed Insys’ sales force to promote 

Subsys for off-label use by, among other things: (i) targeting doctors who had neither 

cancer patients nor prior experience prescribing TIRFs; (ii) avoiding doctors who could 

prescribe Subsys for BTCP because their “patients would die soon . . . and couldn’t 

titrate” to a higher dose; and (iii) encouraging doctors to write higher than 

recommended doses of Subsys. ¶¶84-93, 95-100. Defendants also urged the sales force 

to review doctors’ files for Subsys candidates, irrespective of whether the prescription 

would be on-label (¶106), and if a doctor prescribed a low initial dose, Insys’ sales 

representatives received an automatic email, copying “top management,” and 

instructing the sales representative to “report back to your manager within 24 hours . . . 

on HOW the doctor plans to titrate the patient to an effective dose.” ¶104. 

Defendants also financially motivated Insys’ sales force to promote Subsys offlabel, including paying a base salary 50% below the industry standard, which forced 

employees to earn sales commissions to make a decent wage. ¶¶101-03. These 

commissions were based on the number of prescriptions, and higher doses generated 

higher payouts. Id. One sales representative, Perhacs, who pled guilty in February 2016 

to paying kickbacks to two Alabama doctors for off-label Subsys prescriptions, received 

$700,000 in commissions from 2013 to 2015. ¶¶19, 37, 101-03, 143-44, 242, 246. 

Likewise, Insys paid prescribers millions of dollars in illegal kickbacks for offlabel Subsys prescriptions. ¶¶109-20. Through its “speakers program,” for example, 

Insys paid doctors up to $2,400 for each “educational” event. ¶¶89, 114. In reality, these 

events were a “front” for kickbacks, hosted by inexperienced “speakers,” who rarely 

discussed Subsys, and were often attended by the speaker’s own staff, the Insys sales 

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representative who recruited the speaker, and/or prescribers who did not treat cancer 

patients or were not qualified to prescribe TIRFs. ¶¶109-120. Defendants and program 

participants understood that speaker fees were a quid pro quo (e.g., ¶123), with 

Defendants constantly assessing Insys’ “return on investment” (¶¶122-23, 125-29), and 

doctors acknowledging that their kickbacks were in exchange for prescribing Subsys at 

high doses (¶¶122-23, 130). Defendants also provided prescribers with meals, drinks, 

and other “entertainment” in exchange for off-label Subsys prescriptions. ¶¶131-35. 

2. The IRC Fraud 

Defendants’ Off-Label/Kickback Scheme would not have increased Subsys 

revenues without the parallel IRC Fraud. ¶¶15, 136-64. Deliberately kept separate from 

the rest of the Company, the IRC systematically defrauded PBMs to obtain coverage for 

off-label Subsys prescriptions (id.), and IRC staff received bonuses for succeeding in 

their fraud (¶¶19, 143-44). From its inception until December 2013, the IRC used a 

script that required employees to lie to PBMs about a patient’s diagnosis, substituting 

BTCP diagnoses for non-cancer pain, and falsely replying “yes” when PBMs asked 

whether the patient had BTCP. ¶¶145-50. Insys subtly changed this “script” after the 

DHHS issued a subpoena regarding Subsys in December 2013, and these changes 

allowed Insys to maintain high rates of insurance coverage for off-label Subsys 

prescriptions through the spring of 2014. ¶152. 

By the start of the Class Period, however, Insys faced increasing scrutiny from 

regulators and PBMs, leading to declining off-label Subsys authorizations. ¶¶153-54. In 

response, Insys instituted “the spiel,” which directed IRC employees to respond to direct 

questions about the patient’s diagnosis as follows: “The physician has stated that Subsys 

is approved for treating breakthrough cancer pain so [he] is treating breakthrough pain.” 

¶¶154-55. Additionally, Insys instructed IRC staff to purposefully substitute cancer 

pain-related codes for general pain codes. ¶156. These tactics stabilized approvals for 

off-label Subsys prescriptions in the fall of 2014. Id. 

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However, Insys again experienced declining PBM approvals for Subsys in the 

spring of 2015 (¶¶158-59), which dropped to two dozen per week for the entire unit by 

early autumn 2015, as compared to 25 per employee per week in 2014 (¶160). In 

response, Insys developed “Statement 13,” which directed IRC staff to continue to use 

“the spiel,” but instructed them for the first time to state the correct insurance pain code 

if pressed by the PBM. ¶¶160-61. Statement 13, however, did not stabilize Subsys 

approvals, leading to brainstorming sessions to develop new tactics in November 2015. 

¶162. One such session, a recording of which was made public in a January 25, 2016 

SIRF article, revealed Insys’ fraudulent means of obtaining authorizations for off-label 

Subsys prescriptions during the Class Period. ¶¶162-63. With the IRC Fraud 

foundering, Subsys prescriptions flattened, but the inevitable decline in Subsys revenues 

was temporarily stemmed by higher dose off-label Subsys prescriptions written to 

existing patients with approved insurance coverage for the drug. ¶164. 

C. The Misrepresented and Concealed Fraud is Gradually Revealed 

The relevant truth of Defendants’ misconduct began leaking out in November 

2014, when the New York Times highlighted the amount of kickbacks Insys paid to topSubsys prescribers based on data from a new federal database. ¶¶304-05; DX21. New 

information regarding Defendants’ conduct continued to surface throughout the first 

half of 2015, culminating in the disclosure of the arrests of two top Subsys prescribers 

for improper prescriptions (¶312; DX23) and the guilty plea of Alfonso, a nurse who 

admitted to receiving $83,000 in Insys kickbacks (¶¶316-19; DX24-26). Thereafter, 

several news articles published from November 2015 through January 2016 provided 

previously undisclosed details of Defendants’ misconduct based on first-hand accounts, 

documents, and recorded conversations. ¶¶238-45, 320-36. Kapoor terminated Babich 

in November 2015 because he was “closest to the issues” under investigation, as 

reflected by, among other things, his approval of the “budgeted payments” that Alfonso 

pled guilty to receiving. ¶¶240-42, 260, 283, 324-26, 328-30; DX31. 

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Despite the gradual emergence of previously misrepresented and concealed 

information partially revealing their misconduct and the risks concealed thereby, 

Defendants denied marketing Subsys off-label. See, e.g., ¶¶193-94. Likewise, after 

announcing a settlement with the ODOJ related to Subsys (¶¶237-238), Defendants 

claimed that they were “committed to complying with laws governing [Subsys’] sales, 

marketing and promotional practices” (¶¶204, 206, 224). Additionally, in press releases 

dated November 23, 2015 and January 25, 2016 responding to the new details of their 

misconduct, Defendants lied about the primary driver of Subsys revenues (e.g., citing 

“the clinical attributes of Subsys,” ¶224), and claimed that “the recent media reports’ 

account of the Company’s practices [were] unreliable”(¶228). 

By 1Q16, Insys could no longer match the revenues earned through the OffLabel/Kickback Scheme and IRC Fraud. On April 11, 2016, Insys significantly lowered 

its expectations for 1Q16, reducing Subsys net revenues from $86 million to $61 million 

to $62 million. ¶¶247-51, 337-38. Analysts were quick to report, among other things, 

that the decline in scripts was due to “price and payer coverage considerations,” with 

“fewer patients . . . initiating therapy (¶251), and that “INSY appeared to present a 

picture for Subsys that did not entirely square with reality” (¶249). In response to this 

news revealing that the Company’s Class Period revenues were propelled by a 

concealed fraud, the price of Insys common stock declined by 19.37%. ¶339. 

III. ARGUMENT 

In assessing a Rule 12(b)(6) motion, courts consider the complaint in its entirety, 

“accept all factual allegations . . . as true” and construe them in the light most favorable 

to plaintiff. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007). A 

complaint should not be dismissed if it contains sufficient factual matter that, accepted 

as true, states a claim for relief that is plausible on its face. See Ashcroft v. Iqbal, 556 

U.S. 662, 678 (2009).2

 2

 Plaintiff does not object to the incorporation by reference or judicial notice of 

Defendants’ exhibits consistent with Fed. R. Evid. 201, which does not permit 

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A. The AC Pleads Actionable Misstatements 

A complaint pleads falsity where it “specif[ies] each statement alleged to have 

been misleading” and “the reason or reasons why the statement is misleading.” 15 

U.S.C. §78u-4(b)(1)(B). Such allegations must be particularized and are subject to Rule 

9(b), which requires plaintiffs to plead “the time, place, and content” of the false 

representations as well as the identities of the parties to the misrepresentations. Swartz 

v. KPMG LLP, 476 F.3d 756, 764 (9th Cir. 2007). The relevant question is “whether the 

facts alleged are sufficient to support a reasonable belief” that the alleged misstatements 

were misleading. In re CytRx Corp. Sec. Litig., 2015 WL 5031232, at *3 (C.D. Cal. July 

13, 2015). As set forth below, Plaintiff satisfies these requirements.3

1. Defendants Misstated Insys’ Relationships with PBMs 

The AC adequately alleges that Defendants repeatedly misled investors 

concerning Insys’ interactions with PBMs during the Class Period. ¶¶167- 68, 184, 199, 

208, 217, 228. These relationships were critical—Subsys was expensive for consumers, 

leading Defendants to concede that “[o]ur sales of, and revenue from, Subsys, depend in 

significant part upon . . . third party payers.” ¶¶9, 74, 199, 208, 217. Defendants thus 

reassured investors that “[w]e continue to properly communicate with all the major 

plans and the PBMs to ensure proper access for Subsys” (¶168); and that the IRC 

“provides administrative support assistance to help patients work with their insurance 

companies” (¶¶184, 199, 208, 217). 

Each of these statements was misleading because Defendants failed to disclose 

the IRC Fraud (¶¶173, 180, 192, 202, 210, 220), which involved deceiving PBMs into 

 inferences from these documents to be drawn in Defendants’ favor. See United States 

ex rel. Lee v. Corinthian Colleges, 655 F.3d 984, 999 (9th Cir. 2011). 3

 Defendants argue for dismissal because the AC alleges statements were both 

“false and misleading.” DB 9-10, 12-13. But, a statement that is false also is 

misleading. See, In re New Century, 588 F. Supp. 2d 1206, 1225 (C.D. Cal. 2008) 

(“statements were false and misleading when made.”). Regardless, the AC, in fact, 

alleges that all of the challenged statements were “materially false and misleading when 

made or omitted material information such that they were rendered misleading.” See, 

e.g., ¶¶172, 179, 189, 195, 201, 209, 219, 225, 229. 

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authorizing coverage for off-label Subsys prescriptions by, among other tactics: (i) 

deliberately falsifying patient diagnoses (¶¶145-46, 148, 150, 156, 163); and (ii) using 

Company-generated scripts to lie during telephone conversations with PBM personnel 

(¶¶145-46, 151, 155, 160-61, 163). See also ¶¶136-59, 255-71, 276-77, 285-90, 299-

301. As a result of these efforts, more than 80% of Subsys prescriptions during the 

Class Period were for off-label uses that the PBMs would not have covered absent 

Defendants’ lies. ¶¶15, 94, 173. 

By concealing the IRC Fraud when discussing Insys’ PBM interactions, 

Defendants “affirmatively create[d] an impression of a state of affairs that differ[ed] in a 

material way from the one that actually exist[ed].” Brody v. Transitional Hosps. Corp., 

280 F.3d 997, 1006 (9th Cir. 2002); see In re Apollo Grp., Inc. Sec. Litig., 395 F. Supp. 

2d 906, 921 (D. Ariz. 2005) (falsity adequately pled where defendants “not only failed 

to disclose important negative facts in their possession, but actually painted a picture 

that was contrary to the facts they possessed”). In particular, statements that the IRC 

engaged in “proper” business practices to “help” patients obtain insurance coverage for 

Subsys materially “misled investors by implicitly and falsely warranting that there were 

no illegal practices contributing to [Insys’] success.” In re Amgen Inc. Sec. Litig., 544 F. 

Supp. 2d 1009, 1034 (C.D. Cal. 2008); see also In re Syncor Int’l Corp. Sec. Litig., 239 

F. App’x 318, 320 (9th Cir. 2007) (“By attributing Syncor’s success solely to legitimate 

practices, defendants implicitly (and falsely) warranted that there were no illegal 

practices contributing to that success.”). Insys’ statements rejecting the facts revealing 

the IRC Fraud set forth in the January 25, 2016 SIRF article misled investors for the 

same reasons. ¶¶158-63, 227-29. 

2. Defendants Misled Investors Concerning Subsys Sales 

Defendants also misled investors when discussing the bases for the increasing 

Subsys sales—the source of almost 100% of Insys’ revenues during the Class Period. 

For instance, Defendants attributed Subsys’ sales growth to: (i) “successful execution of 

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our Subsys strategy” (e.g., ¶¶166, 175); (ii) Subsys’ “superior” “clinical attributes” 

(e.g., ¶¶167, 176, 182-83, 224); (iii) Insys’ “focused market penetration strategy” (e.g., 

¶¶167, 176, 182); (iv) a “change in mix of prescribed dosages” (e.g., ¶¶169, 177, 198, 

207, 215-16); and (v) “expanding the usage of Subsys for BTCP by building awareness 

among oncologists” regarding Subsys’ benefits (¶¶183, 187). 

In truth, Insys’ growing Subsys revenues were due to the IRC Fraud (discussed 

above) and the Off-Label/Kickback Scheme (¶¶172, 179, 189-91, 201, 219, 225), which 

included: (i) instructing and incentivizing Insys’ sales force to promote off-label uses of 

Subsys to doctors who already wrote off-label fentanyl prescriptions, did not treat 

cancer patients, and/or were not qualified to prescribe Schedule II opioids (¶¶83-94; 

101-03, 191); and (ii) paying millions of dollars in illegal kickbacks to doctors in 

exchange for high-dose off-label Subsys prescriptions (e.g., ¶¶109-35).4

 

Defendants’ omission of these facts from their statements addressing the putative 

reasons for Subsys’ sales success created the misimpression that such sales were “driven 

by strong demand, when in fact those sales were attributable in large part to illegal ‘offlabel’ marketing of the drug.” In re Gilead Scis. Sec. Litig., 2009 WL 1561584, at *1 

(N.D. Cal. June 3, 2009); see also Mauss v. NuVasive, Inc., 2015 WL 10857519, at *9 

(S.D. Cal. Aug. 28, 2015) (allegations that “investors were led to believe that the 

[company’s] reported revenues and expenditures were attributable to legal activity, 

when that was not the case” were “sufficient”); Neborsky v. Valley Forge Composite 

Techs., Inc., 2014 WL 3767011, at *6 (S.D. Cal. July 29, 2014) (false statements 

concerning revenues sustained where defendants “deliberately withheld complete 

information related to those revenues with the intent to conceal illegal conduct”).5

 4

 The AC does not allege that Insys improperly marketed to all fentanyl 

prescribers, as Defendants incorrectly contend. DB 10. Rather, the AC alleges that it 

was improper for Insys to target doctors who had previously written off-label fentanyl 

prescriptions for, among others, Cephalon, which paid $425 million to settle civil and 

criminal charges related to improper off-label fentanyl marketing. ¶86. 5

 Accord Minneapolis Firefighters’ Relief Ass’n v. Medtronic, Inc., 2010 U.S. 

Dist. LEXIS 10029, *21-22 (D. Minn. Feb. 3, 2010) (statements attributing sales growth 

to increased on-label use and new FDA approvals actionable where growth “was due to 

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3. Defendants Misstated Insys’ Compliance Measures 

Defendants falsely denied the allegations related to regulatory and public 

scrutiny of the Off-Label/Kickback Scheme and the IRC Fraud, claiming that Insys: (i) 

was “committed to complying with laws governing its sales, marketing and promotional 

practices” (¶¶204, 206); (ii) maintained “controls regarding relationships with health 

care providers” (¶218); and (iii) had protocols “designed to ensure its sales and 

marketing practices comply with applicable laws” (¶224). When information emerged 

in the January 25, 2016 SIRF article partially revealing the IRC Fraud, Insys similarly 

claimed that IRC staff “undergo specific training on applicable laws and regulations” 

and that Insys “continues to strive to comply with applicable laws.” ¶228. 

Statements regarding a company’s efforts “to achieve and maintain . . . 

compliance” are false where the complaint alleges material adverse facts demonstrating 

the company “was not equipped to address and remedy” its compliance-related 

deficiencies. Mulligan v. Impax Labs., Inc., 36 F. Supp. 3d 942, 958-959 (N.D. Cal. 

2014). Here, the AC alleges that Subsys revenues were still elevated by the OffLabel/Kickback Scheme and IRC Fraud when Defendants made these statements (from 

August 6, 2015 through January 25, 2016). ¶¶209, 222, 226. At this time, Insys’ IRC 

continued to devise and employ strategies to dupe PBMs into approving off-label 

Subsys prescriptions in the face of increasing resistance. ¶¶159-63, 209, 222, 226, 229. 

Accordingly, these statements are actionable under §10(b). See Reese v. Malone, 747 

F.3d 557, 578 (9th Cir. 2014) (statement that company was “in compliance” with laws 

actionable where complaint alleged numerous violations); Glazer Capital Mgmt., LP v. 

Magistri, 549 F.3d 736, 742 (9th Cir. 2008) (same); Impax, 36 F. Supp. 3d at 960 

(statements about compliance with FDA regulations actionable where recurring 

violations “call into question whether there was ever a true commitment to remedy” 

 off-label use”); In re Gentiva Sec. Litig., 932 F. Supp. 2d 352, 368-69 (E.D.N.Y. 2013) 

(statements putting source of Medicare revenue at issue actionable where defendants 

failed to disclose that a portion was derived from Medicare fraud). 

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such issues); accord Meyer v. JinkoSolar Hldgs. Co., 761 F.3d 245, 251 (2d Cir. 2014) 

(statement about compliance with environmental regulations actionable where measures 

failed to prevent violations). 

4. Defendants’ Challenges to Falsity Fail 

Defendants’ efforts to discredit the AC’s falsity allegations are factually baseless 

and legally unsupported. First, relying on the “bespeaks caution” doctrine and the 

PSLRA safe-harbor for forward-looking statements, Defendants erroneously contend 

that many of their misstatements were forward-looking and therefore could not have 

been misleading in light of the vague “disclosure” that Insys is “exposed to the risk of 

employee misconduct.” DB 12-14. As an initial matter, neither the bespeaks caution 

doctrine nor the PSLRA safe harbor insulates any of the statements at issue here 

because none was forward-looking. See Livid Hldgs. Ltd. v. Salomon Smith Barney, 

Inc., 416 F.3d 940, 949 (9th Cir. 2005). In their only example, Defendants selectively 

quote Babich’s March 3, 2015 statement (DB 15), but when “examined as a whole,” this 

statement plainly addressed Insys’ current putative marketing efforts: “[w]e have some 

very unique programs within the oncology setting that we continue to execute on[.]” 

¶183; see No. 84 Emp’r-Teamster Joint Council Pension Tr. Fund v. Am. W. Holding 

Corp., 320 F.3d 920, 937 (9th Cir. 2003).

6

 

However, even if the bespeaks caution doctrine or the PSLRA safe harbor 

applied (they do not), they are rarely, if ever, appropriate bases for a Rule 12(b)(6) 

dismissal because “there must be sufficient cautionary language or risk disclosure 

[such] that reasonable minds could not disagree that the challenged statements were not 

 6

 Defendants purport to flag other allegedly forward-looking misstatements 

without explaining how the PSLRA safe harbor applies. DB 15 n.11. Nevertheless, the 

PSLRA safe harbor provides no insulation here because each statement misrepresented 

a present or historical fact, or omitted material information. See ¶¶166, 182, 197, 212 

(reasons for past Subsys sales growth); ¶¶184, 199, 208, 217 (putative services that the 

IRC presently provides); ¶213 (statement of present fact, “[w]e only call on REMS 

doctors”) ¶218 (explaining past putative remedial actions “we have taken”).

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misleading.” Livid Hldgs., 416 F.3d at 947.7 Defendants fail to make the requisite 

“stringent showing.” Id. Instead, Defendants assert that a boilerplate warning of Insys’ 

potential exposure to employee misconduct allows them to sidestep the securities laws. 

Numerous courts have rejected similar arguments. See, e.g., Meyer, 761 F.3d at 251 

(“generic warning of risk will not suffice when undisclosed facts on the ground would 

substantially affect a reasonable investor’s calculations of probability”); In re Immune 

Response Sec. Litig., 375 F. Supp. 2d 983, 1035 (S.D. Cal. 2005) (warning that study 

results for drug may never become available was too generic “to present investors with 

any indications as to the likelihood of future . . . studies facing obstacles”); In re Amylin 

Pharm., Inc. Sec. Litig., 2003 WL 21500525, at *7 (S.D. Cal. May 1, 2003). 

Moreover, none of Defendants’ purported “risk” disclosures alerted the market to 

the specific facts that Plaintiff alleges were misrepresented and concealed. For example, 

Insys’ generalized warning that “[o]ur employees may engage in misconduct” said 

nothing to investors regarding the ongoing IRC Fraud or the continued involvement of 

the Company’s executives in the Off-Label/Kickback Scheme. See, e.g., Berson, 527 

F.3d at 987 (representation that something “might” occur is “quite different” from 

statement that it has “in fact” occurred because “[o]ne indicates a risk, the other a 

certainty[,]” and “investors would treat the two differently”).8

 Nor did Insys’ broad 

assertions that the IRC is “subject to extensive and complex federal and state laws” and 

 7

 Tellingly, the case Defendants cite for their inherently fact-specific bespeaks 

caution defense, In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994), was 

decided at the summary judgment stage. DB 11. 8

 Burlakoff’s complicity in the Off-Label/Kickback Scheme renders baseless his 

argument that his statements in ¶194 were not false or misleading because he “was 

addressing Company policy, not the actions of certain employees.” DB 29. See ¶195 & 

supra at II.A.2. Burlakoff’s contention that the April 24, 2015 SIRF article purportedly 

“undermined” the falsity of these outright lies also should be swiftly rejected. Id. Burlakoff likewise incorrectly asserts that Plaintiff has failed to establish that investors 

relied on his statements in the April 24, 2015 SIRF article. DB 30. The AC, however, 

sufficiently alleges that Insys common stock traded in an efficient market (which 

Defendants do not challenge) and invokes the fraud-on-the-market presumption of 

reliance. ¶¶347-52. See, e.g., Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 

2398, 2408 (2014) (in fraud-on-market case, “reliance on any public 

misrepresentations” is presumed). 

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“companies that violate such laws, regulations and standards may face substantial 

penalties” (DB 13), alert investors to the IRC’s actual violations of the laws. See Flynn 

v. Sientra, Inc., 2016 WL 3360676, at *10 (C.D. Cal. June 9, 2016) (disclosure merely 

addressing risks of regulatory and legal non-compliance “in the abstract, with no 

indication that th[is] risk[] may already have come to fruition” insufficient). Finally, 

Defendants’ suggestion that Insys’ disclosure of “specific law enforcement 

investigations” somehow alerted investors to the conduct forming the basis of Plaintiff’s 

claims (DB 11), is belied by Defendants’ denials of those allegations and false 

assurances that Insys complied with applicable laws. See, e.g., ¶¶218, 224, 228; In re 

Cobalt Int’l Energy Inc. Securities Litig., 2016 WL 215476, *4-5 (S.D. Tex. Jan. 19, 

2016) (falsity of statements denying allegations of wrongdoing published in news 

articles adequately alleged).9

 

Second, Defendants’ contentions that their statements concerning Insys’ 

revenues, PBM relationships, and compliance measures were not misleading also fail. 

DB 10-11. In support, Defendants principally rely upon Metzler Investment GMBH v. 

Corinthian Colls., Inc., 540 F.3d 1049 (9th Cir. 2008). Metzler is factually inapposite, 

however, because the plaintiff there offered only the conclusory allegation that all of the 

company’s financial results were overstated as a result of a company-wide scheme to 

inflate student-enrollment figures. See id. at 1070-71. Here, Plaintiff does not allege that 

Insys’ financial results were false, as Defendants recognize. DB 10. Rather, Plaintiff 

challenges statements concerning the putative sources of Insys’ revenues. See ¶¶166, 

169, 175-77, 182-83, 186-87, 197-98, 207, 212-13, 215-16, 224. 

Nor does Plaintiff rely upon a broad “allegation that general statements about the 

Company left the misimpression that its performance was due to ‘legitimate business 

 9

 Defendants’ contention that the reasons given for Babich’s “resignation” were 

not false because “the regulatory investigations were never concealed from investors” 

(DB 14 n.10), misses the mark. Instead, the putative reasons given for Babich’s 

“resignation” were misleading because Defendants concealed that Kapoor fired Babich 

due to his role in the misconduct being investigated, not because Defendants failed to 

disclose the investigations themselves. ¶¶44-45, 124, 236, 241, 260. 

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means that could be expected to continue.’” DB 13, 15. To the contrary, the AC: (i) 

identifies Defendants’ specific statements regarding the IRC’s efforts to “help” patients 

obtain insurance coverage for Subsys through “proper” business practices (¶¶167, 168, 

184, 199, 208, 217, 228) and the measures taken by the Company to achieve and 

maintain legal compliance (¶¶204, 206, 218, 224); and (ii) explains why, having put 

each of these topics at issue, Defendants were obligated to disclose these concealed 

facts, including the particular misconduct underlying the Off-Label/Kickback Scheme 

and the IRC Fraud, the nondisclosure of which rendered those statements materially 

misleading (supra at III.A.2). 

Third, ignoring the AC’s allegations, Defendants incorrectly contend that certain 

of their misrepresentations are not false because the statements do not implicate either 

off-label marketing or the IRC unit. See DB 10, 12-14. For example, Defendants assert 

that a statement concerning Defendants’ interactions with insurance providers is not 

false because it does not specifically mention the IRC. DB 12-13 (citing ¶167). Plaintiff, 

however, alleges that this statement omitted the material fact that the IRC helped 

patients obtain “access” to Subsys by systematically lying to PBMs about patients’ 

diagnoses. ¶¶136-61, 255-71, 276-77, 285-90; see, e.g., Apollo, 395 F. Supp. 2d at 921-

22. Defendants also contend that their claimed commitment “to complying with laws” 

cannot be false because the AC does not allege facts demonstrating that these statements 

did not “accurately reflect corporate policy and the Company’s aspirations.” DB 14 

(citing ¶¶204, 206). The AC, however, alleges that these statements were misleading 

when made in August 2015 because Insys was actively marketing Subsys for off-label 

uses, paying kickbacks to doctors, and defrauding PBMs. ¶¶159-63, 229. Thus, even if 

it were the Company’s policy to comply with the law, Insys was clearly violating it at 

the time Defendants made these statements. Gilead, 2009 WL 1561584, at *3.10 

 10 The distinction that Defendants attempt to draw between Insys’ efforts “to 

ensure that insurance plans covered Subsys in the first place” versus the IRC’s efforts 

“to ensure that [the PBMs] granted prior authorizations” (DB 13) is meaningless. Under 

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B. The AC Sufficiently Alleges Scienter 

Facts raising a strong inference that Defendants were at least deliberately 

reckless “as to the possibility of misleading investors” allege scienter. Berson, 527 F.3d 

at 987. A defendant is deliberately reckless “if he had reasonable grounds to believe 

material facts existed that were misstated or omitted, but nonetheless failed to obtain 

and disclose such facts although he could have done so without extraordinary effort.” 

Reese, 747 F.3d at 569. Pleading that defendants had actual knowledge of the fraud is 

not required. See S. Ferry LP #2 v. Killinger, 687 F. Supp. 2d 1248, 1257 (W.D. Wash. 

2009) (sufficient allegations “identify the problem that the individual defendants ought 

to have known about—not that they, in fact, know about it”). 

In evaluating scienter allegations, courts must consider the totality of 

circumstances, rather than scrutinize each scienter allegation separately. See In re 

VeriFone Hldgs., Inc. Sec. Litig., 704 F.3d 694, 703 (9th Cir. 2012) (courts must avoid 

“undu[e] focus” on separate allegations “to the exclusion of the whole picture”). 

Scienter is sufficiently pled where the allegations, taken collectively, would lead a 

reasonable person to “deem the inference of scienter at least as strong as any opposing 

inference[.]” Tellabs, 551 U.S. at 324, 326 (inference “need not be irrefutable” or “most 

plausible”). 

1. Insys, Babich, and Burlakoff’s Direct Knowledge 

The AC’s detailed facts demonstrate Babich and Burlakoff’s direct knowledge of 

the Off-Label/Kickback Scheme. For example, Burlakoff instructed the sales force to 

increase off-label Subsys prescriptions by reviewing doctors’ files for new Subsys 

patients (irrespective of whether they had BTCP) and for current Subsys patients whose 

doses could be increased (irrespective of the effectiveness of the current dose). ¶106; 

see Amgen 544 F. Supp. 2d at 1020. Babich and Burlakoff also knew Insys’ “speakers 

program” was an illegal kickback scheme—i.e., doctors were paid to write high-dose 

 either interpretation, Defendants’ failure to disclose the IRC Fraud rendered this 

statement materially misleading. See, e.g., Amgen, 544 F. Supp. 2d at 1034. 

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off-label Subsys prescriptions, and many of the paid “speakers” did not treat cancer 

patients and/or were not trained to prescribe TIRFs. ¶¶91-93, 123; see Amgen, 544 F. 

Supp. 2d at 1020. Babich and Burlakoff likewise knew that the sales force used an offthe-books credit card to ply doctors with in-kind kickbacks. ¶133. 

As CEO and VP of Sales, respectively, Babich and Burlakoff’s direct knowledge 

of the Off-Label/Kickback Scheme is imputed to Insys. See Hollinger v. Titan Capital 

Corp., 914 F.2d 1564, 1576-78 (9th Cir. 1990) (a corporation’s scienter is derived from 

its employees and agents); In re Energy Recovery Inc. Sec. Litig., 2016 WL 324150, at 

*24 (N.D. Cal. Jan. 27, 2016) (collecting cases).11 Likewise, other Insys executives’ 

scienter can be imputed to the Company. See Matrix Capital Mgmt. Fund. L.P. v. 

BearingPoint, Inc., 576 F.3d 172, 189-90 (4th Cir. 2009); accord Kyung Cho v. UCBH 

Hldgs., Inc., 890 F. Supp. 2d 1190, 1204-05 (N.D. Cal. 2012) (imputing scienter of 

former vice president and unnamed individuals to company). 

For example, the AC alleges that the Director of Sales, Rich Simon, and Subsys 

sales executive, Karen Hill, were responsible for ensuring that Insys obtained a “return 

on investment” from doctors paid kickbacks through the “speakers program” by, among 

other things, threatening to cease paying kickbacks if the doctors did not write more 

scripts. ¶¶116, 122-123. The AC also alleges that district and regional managers orally 

instructed sales representatives to disregard sales training and promote off-label, telling 

employees to “[d]o what you need to do” to “[j]ust sell” (¶99), and pressured them 

through automatic emails (which included “top management”) to persuade doctors to 

increase off-label Subsys doses when they prescribed initial doses of 100mcg or 

 11 Defendants’ “group pleading” arguments rely on inapplicable cases where the 

plaintiff failed to allege scienter for any individual defendant. See DB 16-17 (citing 

Oregon Pub. Emps. Ret. Fund v. Apollo Grp., Inc., 774 F.3d 598, 607-08 (9th Cir. 

2014); Glazer, 549 F.3d at 745; In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 1063 

(9th Cir. 2014)). Indeed, Glazer did not address the viability of collective scienter and, 

since Glazer was decided, many courts in this Circuit have imputed to companies the 

scienter of their employees. See, e.g., In re Cadence Design Sys. Inc. Sec. Litig., 692 F. 

Supp. 2d 1181, 1192 n.8 (N.D. Cal. 2010); Curry v. Hansen Med., Inc., 2012WL 

3242447, at * 13 (N.D. Cal. Aug. 10, 2012). 

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200mcg (¶104). See Amgen, 544 U.S. at 1020. Further, the AC contains particularized 

allegations demonstrating the direct knowledge of Elizabeth Gurrieri, the head of the 

IRC (and that of her supervisor, Michael Gurry, and her successor, Jeff Kabos), of the 

IRC Fraud, including the IRC’s use of “the spiel” and falsification of insurance codes. 

¶¶141-42, 145-49, 151-57, 160-63. 

2. The Importance of Subsys to Insys and Defendants’ Access to 

Information Raise a Strong Inference of Scienter 

Scienter also is adequately pled through allegations that: (i) “the nature of the 

relevant fact is of such prominence that it would be absurd to suggest that management 

was without knowledge of the matter”; and/or (ii) “suggest [] defendants had actual 

access to the disputed information.” Reese 747 F.3d at 575, 576. Plaintiff sufficiently 

pleads both scenarios. See S. Ferry, 687 F. Supp. 2d at 1256-57. 

The Importance of Subsys Sales to Insys. Subsys was the heart of Insys’ 

business, with the drug’s rapid revenue growth (e.g., averaging 91% per quarter, yearover-year until 1Q16) responsible for no less than 98% of Insys’ quarterly revenues

during the Class Period. ¶79; see, e.g., Medtronic, 2010 U.S. Dist. LEXIS 10029 at *7 

(medical device generating 6% of total sales raises a plausible inference that senior 

management would have known about the product’s off-label marketing). Indeed, 

Defendants discussed Subsys prescriptions, 80% of which were off-label, “every single 

day, because Subsys is so important to us.” ¶¶2, 9, 57, 79, 256, 269-70; Berson, 527 

F.3d at 988.12 Further, given Subsys’ costs, the high number of off-label prescriptions, 

and strict formularies preventing PBMs from authorizing coverage for off-label 

prescriptions, the IRC’s approval rate (and the methods by which it was achieved) 

would have been important to and known by Defendants. ¶¶59, 76-77, 140, 276-77. 

 12 Defendants baselessly suggest that they only began meeting every single day 

to discuss Subsys prescriptions after Kapoor replaced Babich as CEO in November 

2015. DB 19. Not only is this nowhere alleged in the AC, but it also depends upon an 

implausible inference that the Company’s sole revenue-generating product only became 

“so important” three years after FDA approval. 

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As such, it would be absurd to suggest that Defendants were unaware of the OffLabel/Kickback Scheme and IRC Fraud. See supra at §II.B; Berson, 527 F.3d at 988; 

Impax, 36 F. Supp. 3d at 969 (“it is ‘absurd’ to think that the CEO and CFO of a 

pharmaceutical company would be unaware of the alleged substandard, non-compliant 

conditions pervading their company’s manufacturing and quality control divisions—the 

heart of a company”); Flynn, 2016 WL 3360676, *15 (executives presumed to know 

about problems with product generating all of company’s net sales); Roberti v. OSI Sys., 

Inc., 2015 WL 1985562, at *13 (C.D. Cal. Feb. 27, 2015) (defendants charged with 

knowledge of “largest and most profitable division”); accord Forest Labs., 2006 WL 

5616712, at *10 (knowledge presumed drugs at issue were company’s core business). 

Defendants’ Access to Information. The AC also alleges that the Individual 

Defendants, and therefore Insys, had actual access to information undermining their 

public statements. See S. Ferry, LP #2 v. Killinger, 542 F.3d 776, 786 (9th Cir. 2008). 

Significantly, Kapoor publicly admitted that he and others monitored Subsys 

prescription data daily. ¶¶256, 270, 278; see Nursing Home Pension Fund, Local 144 v. 

Oracle Corp., 380 F.3d 1226, 1231 (9th Cir. 2004) (defendants’ admission that “[w]e 

know exactly how much we have sold in the last hour around the world” indicative of 

scienter).13 Each Defendant also had access to and relied upon daily sales numbers and 

market share information from the TIRF-REMS Access Program, which Defendants 

repeatedly referenced. ¶¶6, 69-70; In re Daou Sys., Inc., 411 F.3d 1006, 1022-23 (9th 

Cir. 2005) (scienter alleged where defendants monitored data that was subject of 

misrepresentations); Oracle, 380 F.3d at 1231 (defendants’ monitoring of portions of a 

global database sufficient to infer knowledge of improprieties); In re Countrywide Fin. 

Corp. Deriv. Litig., 554 F. Supp. 2d 1044, 1065 (C.D. Cal. 2008) (in “a highly regulated 

industry . . . the company, it can be inferred, constantly monitors reports.”). Given the 

 13 Kapoor’s admission, together with his understanding of FDA rules, further 

demonstrates his scienter. See Reese, 747 F.3d at 572 (“little room for misunderstanding 

on [defendant’s] part . . . given her role and responsibility”). Accordingly, Defendants’ 

contrary assertion (DB 22) must be rejected. 

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specificity of the information to which Defendants had access, the cases cited at DB 19 

are factually inapposite. See, e.g., In re Diamond Foods, Inc., 2012 WL 6000923, at *12 

(N.D. Cal. Nov. 30, 2012). 

Additionally, as VP of Sales, Burlakoff hired, trained, and motivated the sales 

force to promote Subsys off-label. ¶¶96, 99, 106, 133, 260, 263-64; Countrywide, 554 F. 

Supp. 2d at 1065 (compensation incentivizing employees to increase loan volume at the 

expense of generating quality loans supported scienter). Similarly, Burlakoff, Kapoor, 

and Babich participated in recruiting and supervising doctors under the “speakers 

program.” ¶¶91-93, 123; see Amgen, 544 F. Supp. 2d at 1020, 1029 (scienter established 

where defendants created a “speakers program”). Likewise, Babich and Baker certified 

Insys’ financial results, in which the Company reported that no less than 98% of its 

revenues were from sales of Subsys (at least 80% of which were off-label). See ¶¶169, 

261-62; Impax, 36 F. Supp. 3d at 969. Thus, any suggestion that Defendants “innocently 

missed the most important details,” regarding the Off-Label/Kickback Scheme or the 

IRC Fraud is simply implausible. See Cadence, 692 F. Supp. 2d at 1191.14

Moreover, any “inference that [Defendants] did not have access to the [relevant] 

data is directly contradicted by the fact that [they] specifically addressed it in [their] 

statement[s].” Reese, 747 F.3d at 572. Here, as set forth in Section III.A.2, Defendants 

made detailed factual statements concerning Subsys revenues and third-party coverage 

of prescriptions (¶¶166-69, 176-77, 182-87, 193-94, 196-99, 206-08, 212-18), while 

misrepresenting and omitting the sources of those revenues (¶¶172-73, 179-80, 189-92, 

195, 201-02, 209-10, 219-22). See Reese, 747 F.3d at 572; OSI, 2015 WL 1985562, at 

*12 (scienter adequately alleged where individual defendants made “detailed factual 

statement[s], contradicting important data to which [they] had access”). By repeatedly 

referencing the source of Subsys revenues and the Company’s interactions with PBMs, 

 14 Defendants do not explain how allegations regarding Burlakoff’s aggressive 

sales practices are “too attenuated” to show his knowledge of “widespread misconduct.” 

DB 29. As VP of Sales, Burlakoff must have known about all aspects of Insys’ 

nationwide promotion of Subsys. See, e.g., Reese, 747 F.3d at 572. 

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Defendants “bridge[] the [scienter] gap.” Reese, 747 F.3d at 572. 15

3. Other Indicia of Scienter Support a Strong Inference 

The AC alleges other indicia of scienter that also support a strong inference. See 

In re Sunpower Sec. Litig., 2011 WL 7404238, at *4 (N.D. Cal. Dec. 19, 2011) (the 

“combined weight” of the allegations demonstrated scienter). 

Executive Resignations. Under “highly suspicious” circumstances, executive 

resignations support a strong inference of scienter. See Middlesex Ret. Sys. v. Quest 

Software, Inc., 2008 WL 7084629, at *8-9 (C.D. Cal. July 10, 2008); In re UTStarcom, 

Inc. Sec. Litig., 617 F. Supp. 2d 964, 976 (N.D. Cal. 2009) (“the proximity of 

Defendants’ departures to the [] investigations adds one more piece to the scienter 

puzzle”). Here, the AC alleges that Babich’s “resignation” occurred shortly after one of 

the “speakers” (Alfonso), for whom Babich personally approved two years’ worth of 

kickbacks (tied, in part, to speaking events Babich’s wife attended), pled guilty to 

receiving those kickbacks. ¶¶241, 260.16 The AC also alleges that Kapoor fired Babich 

because he was “closest to the issues” under federal investigation. Id. Moreover, unlike 

most long-tenured executives’ resignations (Babich served as Insys’ CEO for 8 years), 

Babich’s November 5, 2015 resignation took effect the day before it was announced. 

¶¶28, 214, 259. See In re Adaptive Broadband Sec. Litig., 2002 WL 989478, at *14 

(N.D. Cal. Apr. 2, 2002) (scienter alleged where immediate restructuring of important 

executive position coincided with disclosure of company’s improprieties); In re Galena 

 15 Defendants’ argument that the Court should not consider allegations based on 

purported hearsay (DB 20-22), overlooks that it is improper to “transpose to the 

pleading stage” evidentiary standards “used at the summary judgment and judgment-asa-matter-of-law stages.” Tellabs, 551 U.S. at 324, n.5. Thus, when a “newspaper article 

includes numerous factual particulars and is based on an independent investigative 

effort, it is a source that may be credited” in analyzing scienter allegations. In re 

McKesson HBOC, Inc. Sec. Litig., 126 F. Supp. 2d 1248, 1272 (N.D. Cal. 2000). 

Defendants’ cases are not to the contrary. 16 Defendants attempt to distinguish “budgeted payments” from “budgeted 

kickback payments” to argue that Babich’s approval of “a speaker program budget” was 

innocent. DB 23. But the AC alleges that the entire speakers program was an illegal 

kickback scheme. See ¶¶68, 71-73, 110-30. In any event, Babich knew that Insys 

expected a “return on [] investment” from illicit speaker kickbacks (¶123). 

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Biopharma, Inc. Sec. Litig., 117 F. Supp. 3d 1145, 1167 (D. Ore. 2015) (scienter alleged 

where CEO’s resignation announced “after the conduct came to light”). Accordingly, 

Defendants’ assertion that Babich’s resignation was not “accompanied by suspicious 

circumstances” (DB 20) ignores the AC’s plain allegations. 

Government Investigations. Government investigations addressing the alleged 

misconduct can “bolster the inference of scienter.” Reese, 747 F.3d at 575; accord DB 

20 (citing Thorpe v. Walter Inv. Mgmt., Corp., 111 F. Supp. 3d 1336, 1376 (S.D. Fla. 

2015) (government investigations “can be seen as one more piece of the [scienter] 

puzzle”); Washtenaw Cty. Emps. Ret. Sys. v. Avid Tech., Inc., 28 F. Supp. 3d 93, 115 

(D. Mass. 2014) (collecting cases)). Here, Plaintiff alleges that prior to and during the 

Class Period, Insys was the subject of government investigations related to its OffLabel/Kickback Scheme. See, e.g., ¶¶230, 232, 234, 236-37, 246, 252, 289-90. 

Defendants’ cooperation in these regulatory investigations before and during the Class 

Period (see, e.g., DX20 at 3) further supports an inference that they knew of the 

misconduct.17

4. Defendants Offer No Plausible Competing Inference 

When viewed holistically, Plaintiff’s inference of scienter is far more 

compelling. Tellabs, 551 U.S. at 326; Reese, 747 F.3d at 577 (“looking at the totality of 

the circumstances under the Tellabs analysis makes the [plaintiff’s] inference 

irresistible”). In fact, Defendants have not offered any plausible inference that they did 

not know, or were not deliberately reckless in disregarding, that Subsys sales during the 

Class Period were the byproduct of the Off-Label/Kickback Scheme and IRC Fraud. See

Middlesex Ret. Sys. v. Quest Software Inc., 527 F. Supp. 2d 1164, 1188 (C.D. Cal. 2007) 

(allegations raised inference of scienter where defendants had “not offered any plausible 

 17 Contrary to Defendants’ assertion (DB 20), Insys’ retaliation against 

whistleblowers can support an inference of scienter. See, e.g., In re Pfizer Inc. S’holder 

Deriv. Litig., 722 F. Supp. 2d 453, 456 (S.D.N.Y. 2010) (the company “kept careful 

track” of illegal activities demonstrated by its “retaliat[iation] against employees who 

reported internally that Pfizer’s [off-label] marketing practices were illegal”). 

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argument . . . to lean away from a finding of scienter”). Instead, Defendants’ inferences 

ignore the facts alleged in the AC. See id. at 1181 (“all reasonable inferences must be 

drawn from the allegations”). 

For instance, Defendants argue that the “only plausible inference” from their 

denials of wrongdoing is that they were not aware of any contrary facts (DB 19), but

nothing in the AC supports this inference. Rather, the AC alleges that Defendants 

conceived, implemented, and monitored the Off-Label/Kickback Scheme and IRC 

Fraud. ¶¶80-164. Further, as discussed supra at III.A.4, Defendants’ repeated denials 

clearly implicate their scienter—Defendants either concealed Insys’ illegal conduct with 

respect to Subsys or deliberately disregarded it. Likewise, Defendants’ assertion that 

Insys’ boilerplate warnings of its exposure to the potential risk of employee misconduct 

evidences a lack of intent to defraud (DB 17) ignores that Insys issued these generic 

warnings while Defendants were engaged in the Off-Label/Kickback Scheme and IRC 

Fraud. See, e.g., Flynn, 2016 WL 3360676, at *10 (disclosures that “speak[] about [] 

risks . . . in the abstract, with no indication that the risk[s] ‘may already have come to 

fruition,” do not shield the speaker from liability); In re Stratosphere Corp. Sec. Litig., 1 

F. Supp. 2d 1096, 1118 (D. Nev. 1998) (when potential risks are ongoing, defendants 

“cannot insulate these statements with general language about the risks inherent in every 

[pharmaceutical] enterprise”). 

C. The AC Adequately Pleads Loss Causation 

Loss causation allegations must show “a causal connection between the material 

misrepresentation and the loss.” Dura, 544 U.S. at 342. Allegations demonstrating that 

the relevant truth was revealed “through ‘corrective disclosures’ which ‘caused the 

company’s stock price to drop and investors to lose money’” are sufficient. Lloyd v. 

CVB Fin. Corp., 811 F.3d 1200, 1209 (9th Cir. 2016). Loss causation also can be 

established under the “materialization of the risk” theory where “‘a misstatement or 

omission is the ‘proximate cause’ of an investment loss if the risk that caused the loss 

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was within the zone of risk concealed by the misrepresentations and omissions.’” 

Nuveen Mun. High Income Opportunity Fund v. City of Alameda, 730 F.3d 1111, 1120 

(9th Cir. 2013).18 

A plaintiff must provide “some indication of the loss and the causal connection 

that that the plaintiff has in mind.” Dura, 544 U.S. at 347. However, “loss causation is a 

‘context-dependent’ inquiry . . . as there are an ‘infinite variety’ of ways for a tort to 

cause a loss.” Lloyd, 811 F.3d at 1210. Thus, “[d]isclosure of the fraud is not a sine qua 

non of loss causation, which may be shown even where the alleged fraud is not 

necessarily revealed prior to the economic loss.” Nuveen, 730 F.3d at 1120. Loss 

causation is established if the disclosures are a substantial factor in causing the price 

declines. See, e.g., Daou, 411 F.3d at 1026. 

The AC alleges nine partial corrective disclosures and/or materializations of 

foreseeable risks (each herein a “Disclosure”) concealed by Defendants’ misconduct. 

See ¶¶231-36, 238-45, 247-51, 302-46; Daou, 411 F.3d at 1026 (loss causation pled 

through partial disclosures); Mauss v. NuVasive, Inc., 2016 WL 3681831, at *12 (S.D. 

Cal. July 12, 2016) (partial disclosures spanning 20 months allege loss causation). For 

each Disclosure, the AC: (i) identifies the new information that undermined Defendants’ 

prior statements; (ii) connects this new information to the Off-Label/Kickback Scheme 

and/or IRC Fraud; and (iii) alleges the foreseeable negative impact that the new 

information had upon Insys’ stock price. ¶¶231-36, 238-45, 247-51, 302-46. 

For example, the AC connects price declines after the Disclosures on November 

27, 2014 (8.58% decline), April 24, 2015 (9.61% decline), May 20, 2015 (4.43% 

 18 Courts within this Circuit have more than “experimented” with the 

materialization of the risk theory (DB 28). See, e.g., In re Amgen Sec. Litig., 2014 U.S. 

Dist LEXIS 183034, at *70 (C.D. Cal. Aug. 4, 2014) (collecting cases). Further, a 

“decisive majority of circuits” have adopted the materialization of the risk theory of loss 

causation. OPERS v. Federal Home Mortgage Corp., 2016 WL 3916011, at *6 (6th Cir. 

Jul. 20, 2016). Perceiving inconsistency in the Ninth Circuit’s post-Dura decisions, 

Judge Campbell certified the question of the appropriate test for loss causation under 28 

U.S.C. §1292(b). See Smilovits v. First Solar, Inc., 119 F. Supp. 3d 978, 992-93 (D. 

Ariz. 2015). That appeal is pending with the Ninth Circuit, No. 15-17282. 

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decline), and June 23 & 25, 2015 (12.64% decline) to Defendants’ misconduct. ¶¶304-

06, 308-10, 312-14. On each of these days, investors learned new information regarding 

the Off-Label/Kickback Scheme (e.g., specific amounts of kickbacks Insys paid doctors 

based on information from “a new federal database,” revealed on November 27, 2014) 

and the consequences thereof, including the arrests of Drs. Ruan and Couch for 

prescribing fentanyl “not for a legitimate medical purpose” (May 20, 2015 Disclosure), 

and Alfonso’s guilty plea to receiving approximately $83,000 in kickbacks from Insys 

(June 23 & 25, 2015 Disclosures). ¶¶231-36, 304-19; DX21-23, 25, 26. These events 

revealed the findings and expanding scope of the government’s investigation of Insys’ 

practices (the April 24, 2015 Disclosure) and served as “a strong indication” to the 

market “that prosecutors [were] moving aggressively in their investigation.” ¶¶232-33, 

236, 308-09, 316-17; see In re Montage Tech. Grp. Ltd. Sec. Litig., 78 F. Supp. 3d 

1215, 1227 (N.D. Cal. 2015).19

The AC also connects the price declines after the Disclosures on November 4, 

2015 (8.5% decline), November 5, 2015 (3.60% decline), December 3, 2015 (18.54% 

decline), and January 25, 2016 (4.74% decline) to Defendants’ misconduct by alleging 

that these Disclosures revealed new information regarding Insys’ Off-Label/Kickback 

Scheme and the IRC Fraud. Specifically, the November 4, 2015 Disclosure revealed 

that the DHHS had identified Subsys as a source of a form of medical fraud (known as 

“diversion”) that includes prescribing drugs for unintended uses. See ¶¶238, 320; DX28; 

Amgen, 544 F. Supp. 2d at 1026 (loss causation alleged where disclosure was FDA 

expression of concern regarding reports of off-label marketing). The November 5, 2015 

and December 3, 2015 Disclosures revealed Defendant Babich’s unexpected and 

 19 Defendants’ apparent assertion that Plaintiff cannot represent investors who 

sustained losses causally linked to the April 24, 2015 and May 20, 2015 Disclosures 

because Plaintiff’s purchases of Insys common stock took place thereafter (DB 25) 

provides no basis for dismissing any of the alleged claims. See, e.g., In re Connectics 

Corp. Sec. Litig., 257 F.R.D. 572, 576-77 (N.D. Cal. 2009) (proposed class 

representative who purchased stock after partial corrective disclosure could represent 

class as defined) (collecting cases). 

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immediate “resignation” from Insys due to his proximity “to the issues” under federal 

investigation (i.e., Subsys off-label marketing and kickbacks) and his approval of two 

years’ worth of budgeted kickback payments to Alfonso (who hosted 70 speaker events, 

many of which were attended by Babich’s wife, an Insys sales representative). See

¶¶240-43, 324-26, 328-30; DX31; Mauss, 2016 WL 3681831, at *10 (resignation of 

CEO and accompanying stock price decline qualified as corrective disclosure). With 

respect to the IRC Fraud, the AC alleges the December 3, 2015 and January 25, 2016 

Disclosures revealed the bonus compensation IRC employees received for defrauding 

PBMs, and the Company’s evolving IRC Fraud strategy from the second half of 2014 

through the fall of 2015 based on first-hand accounts, Insys documents, and audio 

recordings of IRC meetings. See ¶¶241-43, 245, 328-30, 332-35; DX31-32. 

Finally, the AC connects the 19.37% price decline on April 11, 2016 to 

Defendants’ misconduct by alleging that Insys’ disclosure that Subsys 1Q16 net 

revenues would be significantly lower than expected—$61 million to $62 million 

instead of $86 million for the same period—revealed that Defendants had presented “a 

picture of Subsys that did not entirely square with reality” during the Class Period. 

¶¶247-51, 337-38. The lower Subsys revenues resulted from a decline in new 

prescriptions due to “price and payer considerations,” including the IRC Fraud, with 

“fewer patients . . . initiating therapy.” ¶¶162, 164, 247-51; see In re Gilead Sec. Litig., 

536 F.3d 1049, 1058 (9th Cir. 2008) (disclosure of “less-than-expected revenues” 

connected to waning demand due to disclosure of off-label marketing scheme). 

In response, Defendants make several unavailing arguments. First, Defendants 

incorrectly contend that none of the Disclosures revealed either “new news” or 

previously concealed risks. DB 24-28. This argument ignores Defendants’ consistent 

(and false) denials of their Class Period misconduct. See, e.g., ¶¶168, 193-94, 213, 224, 

228; Gilead, 536 F.3d at 1058 (certain corrective events insufficient by themselves to 

undermine company’s positive statements); In re Amgen Inc. Sec. Litig., 2014 U.S. Dist. 

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LEXIS 183034, at *50 (rejecting “truth-on-the-market” causation defense where 

withheld information was not provided to investors “with a degree of intensity and 

credibility sufficient to effectively counterbalance any misleading impression” provided 

by defendants). Defendants also fail to account for the steep declines in the price of 

Insys stock in response to each of the Disclosures, including nearly 20% drops on 

December 3, 2015 and April 11, 2016. ¶¶231, 233, 235-36, 239-40, 242, 245, 247; 

Asher v. Baxter, Int’l Inc., 377 F.3d 727, 734 (7th Cir. 2004) (if no Disclosure contained 

new news, then “it is hard to understand the sharp drop in the price of [Insys’] stock” in 

response to each).20 

Second, Defendants’ assertion that the announcement of an investigation, 

standing alone, cannot support loss causation (DB 25-26), ignores the law and the AC’s 

allegations. Disclosures of investigations are sufficient to allege loss causation where, 

as alleged here, subsequent disclosures reveal the expanding scope and/or findings of 

misconduct. See ¶¶232, 234-36; Lloyd, 811 F.3d at 1210; Mauss, 2016 WL 3681831, at 

*9. Significantly, in addition to the Disclosures discussed above, the AC alleges that: (i) 

Insys settled the ODOJ’s claims regarding its Subsys marketing on August 5, 2015 

(¶237); (ii) former Subsys sales representative Perhacs pled guilty on February 17, 2016 

to illegally paying Drs. Ruan and Couch kickbacks (¶246); and (iii) two former New 

York sales representatives were indicted for illegally paying kickbacks to doctors 

(¶252). Each of these events affirms the causal connection between the Disclosures and 

the alleged fraud. See Lloyd, 811 F.3d at 1210. 

Third, Defendants incorrectly assert that facts about the IRC Fraud revealed for 

the first time in the December 3, 2015 and January 25, 2016 SIRF articles were 

“recycled” from the Prior Securities Complaints (“PSC”) and therefore already known. 

 20 Defendants’ suggestion that the temporary recovery in Insys’ stock price 

negates any inference that Babich’s resignation caused investors’ losses is based “on 

dicta from Metzler, and [] basic economic principles preclude dismissing a complaint on 

these grounds.” Nathanson v. Polycom, 87 F. Supp. 3d 966, 985 (N.D. Cal. 2015); see 

also Acticon AG v. China N.E. Petroleum Hldgs., Ltd., 692 F.3d 34, 26 (2d Cir. 2012) 

(price recovery does not negate inference that plaintiff suffered losses). 

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See DB 27. Both of these Disclosures, however, revealed new information concerning 

the IRC Fraud that did not exist at the time the PSC was filed. Indeed, these 

Disclosures addressed facts in 2015, more than a year after the end of the Class Period 

alleged in the PSC and nearly 2.5 years after the witness to whom the handful of IRC 

allegations in the PSC were attributed had left the Company. See Doc. 41 in 14-cv01043-GMS (D. Ariz.) at ¶¶184-96. The only plausible inference is that the facts 

revealed on December 3, 2015 and January 25, 2016 were new. See, e.g., Amgen, 2014 

U.S. Dist. LEXIS 183034, at *49. 

Finally, Defendants’ premature factual challenges are improper. See Gilead, 536 

F. 3d at 1057 (loss causation is a matter of proof at trial). Defendants’ suggestion that 

the November 27, 2014 Disclosure did not address a Company-wide practice (DB 25) 

ignores the wide geographic dispersion of the misconduct revealed therein. See, ¶¶115, 

231; DX21. Likewise, Defendants’ assertion that the May 20, 2015 Disclosure of Ruan 

and Couch’s arrests is not corrective because it did not mention Insys or Subsys (DB 

25), ignores that the arrests were for improper fentanyl prescriptions and that investors 

already knew Drs. Ruan and Couch were the largest Subsys prescribers. See ¶¶42-43, 

233; DX22 at 9. Defendants’ contentions that the December 3, 2015 Disclosure is 

“unreliable” (DB 27) and the April 11, 2016 price decline was due to lower revenues 

alone also seek the improper resolution of factual issues. See Gilead, 536 F.3d at 1054, 

1057-58 (loss causation adequately alleged through decline in sales caused by increased 

scrutiny of off-label marketing).21

IV. CONCLUSION 

For the reasons stated herein, Defendants’ Motion should be denied. If the Court 

determines that any of the AC’s allegations are deficient, Plaintiff respectfully requests 

leave to amend. 

 21 Because the AC pleads a primary violation of §10(b), Defendants’ argument 

against §20(a) liability (DB 28) fails. See In re LDK Solar Sec. Litig., 584 F. Supp. 2d 

1230, 1252 (N.D. Cal. 2008). 

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DATED: September 6, 2016 KESSLER TOPAZ 

 MELTZER & CHECK, LLP 

s/ Johnston de F. Whitman, Jr. 

Johnston de F. Whitman, Jr. (admitted Pro Hac Vice) 

jwhitman@ktmc.com 

Meredith L. Lambert (admitted Pro Hac Vice) 

mlambert@ktmc.com 

280 King of Prussia Road 

Radnor, PA 19087 

Telephone: (610) 667-7706 

Facsimile: (610) 667-7056 

-andJennifer L. Joost (admitted Pro Hac Vice) 

jjoost@ktmc.com 

Rupa Nath Cook (admitted Pro Hac Vice) 

rcook@ktmc.com 

1 Sansome Street, Suite 1850 

San Francisco, CA 94104 

Telephone: (415) 400-3000 

Facsimile: (415) 400-3001 

Lead Counsel for Lead Plaintiff and the Proposed 

Class 

BONNETT, FAIRBOURN, 

 FRIEDMAN & BALINT, P.C.

Francis J. Balint, Jr. 

Andrew S. Friedman 

2325 E. Camelback Road, Ste. 300 

Phoenix, AZ 85016 

Telephone: (602) 274-1100 

Facsimile: (602) 274-1199 

fbalint@bffb.com 

afriedman@bffb.com 

Liaison Counsel for Lead Plaintiff and the Proposed 

Class 

GOLDBERG LAW PC 

Michael Goldberg 

Brian Schall 

13650 Marina Pointe Drive 

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Suite 708 

Marina Del Rey, CA 90292 

Telephone: (800) 977-7401 

Facsimile: (800) 536-0065 

michael@goldberglawpc.com 

brian@goldberglawpc.com 

Additional Counsel for Lead Plaintiff Clark Miller 

 

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CERTIFICATE OF SERVICE

I hereby certify that on September 6, 2016, I electronically transmitted the foregoing 

document to the Clerk’s Office using the CM/ECF System for filing and transmittal of a 

Notice of Electronic Filing those persons who are CM/ECF registrants: 

Daniel Slifkin

David M. Stuart 

Cravath Swaine & Moore LLP 825 8th Ave. 

New York, NY 10019 

Tel: 212-474-1000 

Fax: 212-474-3700 

Email: dslifkin@cravath.com 

Email: dstuart@cravath.com 

Donald Wayne Bivens 

Nicole Elizabeth Sornsin 

Snell & Wilmer LLP 1 Arizona Center 

400 E Van Buren 

Phoenix, AZ 85004-2202 

Tel: 602-382-6549 

Fax: 602-382-6070 

Email: dbivens@swlaw.com 

Email: nsornsin@swlaw.com

s/ Johnston de F. Whitman, Jr 

Case 2:16-cv-00302-NVW Document 67 Filed 09/06/16 Page 41 of 41