Opinion ID: 2777754
Heading Depth: 4
Heading Rank: 1

Heading: Statements Regarding Increased Revenues

Text: 7 The district court reached the same conclusion. See Simon, 2014 WL 1413638, at  (finding that, [t]o the extent that defendants made statements concerning the Protect II study in order to promote off-label marketing, the statements may be actionable because Abiomed claimed that it did not engage in off-label marketing, [b]ut to the extent defendants simply gave accurate information about the study, it cannot form the basis of a claim of misrepresentation). -28- We assume arguendo that the district court correctly found that plaintiffs had alleged enough to survive dismissal on claims that Abiomed provided false explanations for Impella revenue growth. See Simon, 2014 WL 1413638, at . We hold that the statements are not actionable on scienter grounds. We do address the strength of the materiality of the statements because [t]he question of whether a plaintiff has pled facts supporting a strong inference of scienter has an obvious connection to the question of the extent to which the omitted information is material. Waters Corp., 632 F.3d at 757. If it is questionable whether a fact is material or its materiality is marginal, that tends to undercut the argument that defendants acted with the requisite intent or extreme recklessness in not disclosing the fact. Id. The materiality of the impugned omission here -- Abiomed's failure to state that some of the increased revenues were due to off-label marketing -- is marginal at best. Plaintiffs' contention that the omission would have mattered to a reasonable investor depends on a long chain of inferences, most of which are not sufficiently substantiated by the allegations in the complaint. First, we would have to infer that, of the 85% of Abiomed revenue due to sales of Impella products, a substantial portion is due to sales of the Impella 2.5. The complaint alleges that the Impella 2.5 accounted for most of that revenue, but provides no specifics. Second, we would have to infer that, of the revenues -29- from the Impella 2.5, a substantial portion was due to purchases for off-label use by health care professionals. The complaint provides no indication of the proportion of Impella 2.5 use that was off-label. Third, we would have to infer that, of the revenues from off-label use, a substantial portion of that use was due to off-label marketing of the device, and, further, that the portion was so significant as to undercut the company's projected growth figures. And fourth, we would have to infer that the resulting undercutting of the growth figures was substantial enough to have a material effect on the stock price. Again, the complaint provides no basis in fact for making these inferences. Plaintiffs do allege that off-label promotion was widespread, but they do not state or even suggest what proportion of sales were made as a result of such efforts, or the significance of the contribution of those sales to Abiomed's stock price. The marginal materiality of the alleged statements and omissions concerning revenues weighs against an argument that defendants here possessed the requisite scienter. See Waters Corp., 632 F.3d at 757.8 8 Plaintiffs' counsel contended at oral argument that we can infer that Abiomed's failure to disclose its off-label marketing activities was material because the company scaled back its revenue projections on November 1, after it purged all of its off-label marketing materials. We think that unlikely, but more than that, it is much more plausible to infer that Abiomed lowered its revenue projections in light of the simultaneous announcement that the U.S. Attorney's Office had begun an investigation into the company. -30- Plaintiffs attempt an argument that defendants made statements about Abiomed's revenues with the intent to deceive investors or with reckless disregard as to whether investors would be deceived. The argument is undercut by the fact that Abiomed explicitly warned investors both (a) that the FDA might disagree with the company's assessment of the legality of its marketing practices and (b) that, if the FDA took enforcement action against it, that could result in reduced demand for our products and would have a material adverse effect on our operations and prospects. See Genzyme Corp., 754 F.3d at 42-43 (noting that a corporation's informative disclosures undercut any inference of fraudulent intent on the part of defendants); Waters Corp., 632 F.3d at 760 ('[A]ttempts to provide investors with warnings of risks generally weaken the inference of scienter.' (alteration in original) (quoting Ezra Charitable Trust v. Tyco Int'l, Ltd., 466 F.3d 1, 8 (1st Cir. 2006))). Further, the company did not withhold information about the FDA's concerns once the FDA issued a Warning Letter.9 Abiomed promptly disclosed receipt of the June 2011 Warning Letter and stated repeatedly throughout the Class Period that the FDA could 9 Section 10(b) does not create an affirmative duty to disclose. Genzyme Corp., 754 F.3d at 41. Thus, there is no per se rule that a company immediately disclose receipt of any correspondence with the FDA. See id. at 42 (holding that a company need not immediately disclose a Form 483 issued by the FDA because it was merely observational in nature, and d[id] not represent the FDA's final word). -31- disagree [with Abiomed's position that its marketing was lawful] and conclude that we have engaged in off-label promotion. Abiomed did not promise a positive resolution of the matter; rather, it acknowledged that if similar matters come up in the future, we may not be able to resolve them without facing significant consequences. These are not the actions of a company bent on deceiving investors as to their future earnings prospects.10 Under plaintiffs' theory of the case, Abiomed should have affirmatively admitted widespread wrongdoing rather than stating that the outcome of its regulatory back-and-forth with the FDA was uncertain. That would be a perverse result; such an admission would have been misleading, since the off-label marketing issues had the potential to be resolved with no adverse action from the FDA. We made a similar point in In re Boston Scientific Corp. Securities Litigation, 686 F.3d 21 (1st Cir. 2012), where we noted that a company may behave 'irresponsibly' if it issues an ominous warning about an uncertain risk that 'had not yet been adequately investigated.' Id. at 31 (quoting N.J. Carpenters Pension & Annuity Funds v. Biogen IDEC Inc., 537 F.3d 35, 58 (1st Cir. 10 This court reached a similar conclusion in the parallel derivative action brought by Abiomed shareholders against Abiomed and its directors. See Bryceland, 557 F. App'x at 5 (holding that the shareholders' complaint did not allege facts showing that the directors hid from investors the trouble that th[e alleged offlabel] marketing had created; indeed, as the reproduced sections of Abiomed's SEC filings make clear, the company was not shy in disclosing its exposure to liability). -32- 2008)). There must be some room for give and take between a regulated entity and its regulator.11 2. Statements About Abiomed's Policy with Respect to Off-Label Marketing and its Interaction with the FDA Again, we assume arguendo that Abiomed had an actual policy or practice of off-label marketing, while its public statements were that its policy was to refrain from such marketing, Simon, 2014 WL 1413638, at , and that defendants stated that they were cooperating with the FDA when they were not doing so. But we conclude that plaintiffs have failed to allege that defendants made these statements with the requisite scienter. First, there are Abiomed's substantial disclosures about its correspondence with the FDA. As said, these disclosures undercut any inference of scienter. Plaintiffs' brief glosses over these disclosures in an effort to make the case for scienter more compelling. According to the brief, Abiomed said that it did not engage in off-label marketing and that all of the FDA's concerns had been resolved. But this characterization is inaccurate, both as to the complaint and as to what the actual statements were. The complaint actually says that Abiomed stated its policy was to refrain from statements that could be considered off-label 11 That the company did not disclose the receipt of the Untitled Letter from the FDA is not proof of scienter. The FDA gradates its levels of inquiry and does not itself make Untitled Letters public. -33- promotion, but that the FDA could disagree with Abiomed's view on that question; and that while it believe[d] the issue had been resolved, it could come up again in the future and could entail significant consequences. In resolving this appeal, we focus, as did the district court, on the allegations of the complaint, not on plaintiffs' characterization of those allegations. Other evidence supports Abiomed's argument that it was not involved in a scheme to defraud investors but rather in finding a solution amenable to the FDA while meeting its need to market its products. It was Abiomed which asked for meetings with the FDA. And an agreement was reached. The FDA in fact sent a close-out letter in February 2013 saying that Abiomed's corrective actions undertaken in response to the June 2011 Warning Letter had adequately addressed the FDA's concerns. This significantly undercuts any inference that defendants purposefully or recklessly misled investors about the extent of Abiomed's cooperation with the FDA. Scienter is not established because there were statements from confidential witnesses that Abiomed management was in fact intentionally violating FDA regulations. These witnesses said that Abiomed senior management knew that Abiomed was improperly marketing the Impella 2.5, did not take the FDA's warnings -34- seriously, and blew off the concerns of lower-level employees.12 The confidential witnesses are not described with sufficient particularity for their statements to give rise to the requisite strong inference of scienter on the part of Abiomed and its management. As the district court noted, none of the witnesses were in senior management positions, and they appear to have had relatively little ongoing contact with senior management. Simon, 2014 WL 1413638, at . CW2, CW3, CW4, and CW6 did not even work at Abiomed during the Class Period and so would not have had firsthand knowledge of the state of mind of Abiomed's management during that period. And CW1, CW5, and CW7, who stated that the training and marketing materials Abiomed provided were improper under FDA regulations, did not identify the time period to which most of their statements related. Cf. Biogen IDEC, 537 F.3d at 52- 12 That the witnesses were confidential did not disqualify them. [W]here plaintiffs rely on confidential personal sources but also on other facts, they need not name their sources as long as the latter facts provide an adequate basis for believing that the defendants' statements were false. Moreover, even if personal sources must be identified, there is no requirement that they be named, provided they are described in the complaint with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged. Mesko v. Cabletron Sys., Inc. (In re Cabletron Sys., Inc.), 311 F.3d 11, 29 (1st Cir. 2002) (alteration in original) (quoting Novak v. Kasaks, 216 F.3d 300, 314 (2d Cir. 2000)). -35- 53 (discounting probative value of observations by confidential sources in part because the sources did not disclose when those observations were made). The CWs' statements are also undermined by the fact that the FDA eventually closed out its investigation of Abiomed without taking any action adverse to the company. More fundamentally, even if the CWs' statements plausibly suggest that Abiomed was acting improperly, they do not show that defendants' statements about company policy and the FDA's inquiries were made with conscious intent to defraud or recklessly. As we said in Waters Corp., [t]he key question . . . is not whether defendants had knowledge of certain undisclosed facts, but rather whether defendants knew or should have known that their failure to disclose those facts 'present[ed] a danger of misleading buyers or sellers.' 632 F.3d at 758 (third alteration in original) (emphasis added) (citation omitted) (quoting Greebel, 194 F.3d at 198). For example, CW7's statements, far from suggesting an intent to defraud investors, suggest instead that Abiomed was aggressively marketing the Impella 2.5 every which way in order to sell more units.13 3. Insider Trading Allegations The plaintiffs' allegations of insider trading do not alter our conclusion as to lack of scienter. Depending on 13 At oral argument, plaintiffs' counsel disavowed any reliance on the argument, based on an efficient market hypothesis, that any statements regarding the Impella 2.5 aimed at potential buyers of the device were also effectively aimed at investors in Abiomed. -36- context, allegations of insider trading may offer some support for inferences of scienter. Waters Corp., 632 F.3d at 760. 'The vitality of the inference to be drawn depends on the facts, and can range from marginal to strong.' Id. (quoting Greebel, 194 F.3d at 197–98). For stock sales by corporate officials to bolster an inference of scienter, the trading must be, [a]t a minimum, . . . unusual, well beyond the normal patterns of trading by those defendants. Id. at 761 (quoting Greebel, 194 F.3d at 198) (internal quotation marks omitted); accord Greebel, 194 F.3d at 206-07 (sales must be out of the ordinary or suspicious). Here, the trading cited in the complaint was neither unusual nor suspicious. Minogue increased his holdings of Abiomed stock by 9.2% during the Class Period, which negates any inference that he had a motive to artificially inflate Abiomed's stock during that period. Cf. ACA Fin., 512 F.3d at 66-67 (declining to find a strong inference of scienter in part because defendants would not have been personally enriched by defrauding investors). Bowen made his first sales of Abiomed stock (totaling 6.5% of his holdings) between January 2010 and the end of the Class Period. But those sales are hardly suspicious given that he had just joined the company in December 2008 and first became eligible to trade in December 2009.14 Plaintiffs list the amounts of stock sales made 14 We need not address the parties arguments concerning defendants' 10b5-1 trading plans because plaintiffs' arguments concerning the purported insider trading fail even without -37- by other senior executives during that period, but they do not provide sufficient evidence about those trades to allow the court to draw from them a strong inference of scienter. For example, the complaint is silent as to the percentage of holdings sold or the circumstances surrounding the trades. It is also unclear whether all of the cited executives would have had detailed knowledge about Abiomed's marketing practices. Cf. Waters Corp., 632 F.3d at 762 n.5 (finding that allegations regarding non-defendant insider sales were not probative because the complaint listed only bare facts about the shares sold). 4. Conclusion Abiomed's promotional and marketing activities for its core product might have been a risky course in terms of its likelihood of prompting sanctions from the FDA. Still, [a]llegations of corporate mismanagement are not actionable under Rule 10b-5. Nor are allegations of mere negligence. Id. at 760 (citations omitted); see also Greebel, 194 F.3d at 188 (noting that the mens rea required for securities fraud does not include ordinary negligence, but is closer to being a lesser form of intent). As the district court correctly noted, this case is not about whether or not defendants violated the FDCA or FDA regulations. It concerns alleged violations of securities considering those plans. -38- law . . . . Simon, 2014 WL 1413638, at . Plaintiffs' Rule 10b-5 claim fails.