Court Opinion

ID: 9954531
Source: CourtListenerOpinion
Date Created: 2024-03-26 16:00:59.447428+00
Date Added: 2024-06-11T08:11:55.390891
License: Public Domain

FOR PUBLICATION

   UNITED STATES COURT OF APPEALS
        FOR THE NINTH CIRCUIT

In re: SORRENTO                            No. 22-55641
THERAPEUTICS, INC.
SECURITIES LITIGATION,                        D.C. Nos.
________________________________           3:20-cv-00966-
                                              AJB-DEB
ANDREW R. ZENOFF, Lead                     3:20-cv-01066-
Plaintiff, individually and on behalf of      AJB-DEB
all others similarly situated,             3:21-cv-01331-
                                              AJB-DEB
               Plaintiff-Appellant,

 v.                                          OPINION

SORRENTO THERAPEUTICS, INC.;
HENRY JI; MARK R. BRUNSWICK,

               Defendants-Appellees.

      Appeal from the United States District Court
         for the Southern District of California
      Anthony J. Battaglia, District Judge, Presiding

         Argued and Submitted February 14, 2024
                  Pasadena, California

                   Filed March 25, 2024
2              ZENOFF V. SORRENTO THERAPEUTICS, INC.

     Before: Richard C. Tallman and Consuelo M. Callahan,
      Circuit Judges, and Robert S. Lasnik, * District Judge.

                   Opinion by Judge Callahan

                          SUMMARY **

                        Securities Fraud

     The panel affirmed the district court’s dismissal, for
failure to state a claim, of an action alleging violations of the
Securities Exchange Act and the Securities and Exchange
Commission’s Rule 10b-5 when Sorrento Therapeutics, Inc.,
its chief executive officer, and its vice president announced
that Sorrento might have discovered a “cure” for COVID-
19.
    The panel held that, in context, defendants’
representations in a press release, a Fox News article, and a
BioSpace.com article were not materially false or
misleading.
    The panel also held that the allegations in plaintiff’s
class-action complaint did not support the requisite strong
inference of scienter in defendants’ intent to improperly
manipulate the price of Sorrento’s shares.

*
 The Honorable Robert S. Lasnik, United States District Judge for the
Western District of Washington, sitting by designation.
**
  This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
            ZENOFF V. SORRENTO THERAPEUTICS, INC.          3

                        COUNSEL

Steven F. Hubachek (argued), Trig R. Smith, and Nicole Q.
Gilliland, Robbins Geller Rudman & Dowd LLP, San Diego,
California; for Plaintiff-Appellant.
Edward Han (argued), Sean D. Unger, and Austin M. Prouty,
Paul Hastings LLP, Palo Alto, California; Timothy D.
Reynolds, Paul Hastings LLP, Los Angeles, California; for
Defendants-Appellees.

                        OPINION

CALLAHAN, Circuit Judge:

    When on May 15, 2020, Sorrento Therapeutics, Inc.
(“Sorrento”) announced that it might have discovered a
“cure” for COVID-19, the price of its stock rose
precipitously but then declined a week later following
further explanations of Sorrento’s discovery. Andrew R.
Zenoff (“Zenoff”), individually, and on behalf of other
similarly situated individuals who purchased Sorrento
common stock between May 15 and May 21, 2020,
commenced this action alleging violations of the Exchange
Act and the Securities and Exchange Commission’s Rule
10b-5 by Sorrento, its Chief Executive Officer (Henry Ji),
and its Vice President (Mark Brunswick) (referred to
collectively as the “Defendants”). The district court granted
Defendants’ motion to dismiss pursuant to Federal Rule of
Civil Procedure 12(b)(6) finding that Zenoff had failed to
make plausible showings of falsity or scienter. We affirm
because, in context, Defendants’ representations were not
4            ZENOFF V. SORRENTO THERAPEUTICS, INC.

false, and Zenoff’s pleadings do not support the requisite
strong inference of scienter.
                               I
    Sorrento is a clinical-stage biopharmaceutical company
based in San Diego, California, that researches and develops
treatments for cancer, pain, and COVID-19. On May 15,
2020, at the height of the COVID-19 pandemic, Sorrento
announced a promising development of a COVID-19
antibody, STI-1499. This litigation arises from three
particular documents released that day: (1) Sorrento’s press
release entitled “STI-1499, A Potent Anti-SARS-COV-2
Antibody Demonstrates Ability to Completely Inhibit In
Vitro Virus Infection In Preclinical Studies” (the “May 15
Press Release”); (2) a Fox News article entitled “California
biopharmaceutical company claims coronavirus antibody
breakthrough” (the “Fox News article”); and (3) a
BioSpace.com article entitled “Sorrento IDS Antibody
Against COVID-19 That Appears 100% Effective” (the
“May 15 BioSpace article”).
    Within a week, several articles were published
questioning the importance of Sorrento’s development.
Among these were (1) a May 20 Yahoo!Finance interview
entitled “Sorrento Therapeutics CEO [Henry Ji] on focusing
on ‘the real deal’ antibody test rather than stock
performance”; (2) a May 20 Hindenburg Research article
entitled “Sorrento’s Pandemic Profiteering: Experts and
Former Employees Speak Out on Sensational Claims of
Covid-19 Cure”; 1 (3) a May 20 Viceroy Research article

1
  Hindenburg Research and Viceroy Research held “short” positions
against Sorrento, which means they would profit from a decline in
Sorrento’s stock price.
             ZENOFF V. SORRENTO THERAPEUTICS, INC.             5

entitled “Sorrento’s Predatory Propaganda”; and (4) a May
22 BioSpace.com article entitled “Sorrento Responds to
Criticism of COVID-19 Neutralizing Antibodies.”
     Sorrento’s stock prices responded to these
announcements and articles. On May 15, following the
initial announcement, Sorrento’s stock price increased to a
daily high of $9.00 per share—or 243.5% higher than the
prior trading day’s close of $2.62—and its common stock
traded hands at nearly seventy-eight times its daily volume.
Following the May 20 articles, Sorrento’s stock price
dropped from $6.82 per share to $4.55 per share. After
Defendant Ji’s interview on Yahoo!Finance, the price
increased to $5.70, but then dropped to $4.67 per share
following the May 22 BioSpace.com article.
     Meanwhile, Sorrento was experiencing some financial
difficulties. In March 2020, Sorrento’s independent auditor
had issued a “going concern” qualification to its 2019 audit
opinion noting Sorrento’s high cash burn rate and over-
leveraged capital structure. In its 2019 Form 10-K filed with
the Securities and Exchange Commission (“SEC”), Sorrento
had indicated that if it could not raise sufficient financing for
its day-to-day operations, it would have to shut down. This
condition was in part the result of Oak Tree Capital
Management, L.P. (“Oaktree,” Sorrento’s high-interest debt
holder) requiring Sorrento to raise certain amounts of outside
capital and repay debts in 2020.
    The district court noted that in response to its financial
situation, Sorrento: (1) on March 13, 2020, filed a shelf-
registration statement with the SEC, authorizing Sorrento to
sell up to $1 billion in securities; (2) on April 27, 2020,
entered into a sales agreement with Alliance Global Partners,
authorizing it to sell up to $250 million of Sorrento’s stock
6           ZENOFF V. SORRENTO THERAPEUTICS, INC.

in at-the-market (“ATM”) offerings; and (3) simultaneously
issued a prospectus stating it was offering up to 250 million
shares of its common stock to Arnaki Ltd. (“Arnaki”)
pursuant to a purchase agreement. The district court further
noted that under this agreement, “Sorrento could direct
Arnaki to purchase up to 650,000 shares of Sorrento’s
common stock per business day, and the purchase price was
equal to 97.5% of the daily volume weighted average
purchase price of the common stock on the purchase date.”
The court observed that during the second quarter of 2020,
Sorrento “raised over $67 million in ATM common stock
offerings and used these proceeds to retire the unpaid
balance of the Oaktree loan.”
     On May 26, 2020, Zenoff filed this securities fraud class-
action complaint against the Defendants. The proposed class
consisted of all purchasers of Sorrento common stock
between May 15 and May 21, 2020, and the complaint
alleged violations of §§ 10(b) and 20(a) of the Exchange Act
(15 U.S.C. §§ 78j(b) and 78t(a)), and SEC Rule 10b-5 (17
C.F.R. § 240.10b-5). Related actions were filed, and on
February 21, 2021, the district court consolidated the
actions, appointed Zenoff as lead plaintiff, and approved his
choice of lead counsel. On November 30, 2021, Zenoff filed
a “First Amended Consolidated Class Action” complaint
(“FAC”). The gravamen of the FAC was that Sorrento had
falsely claimed to have developed a cure for COVID-19,
misleading investors. It emphasized CEO Ji’s statements in
media articles on May 15 that: “We want to emphasize there
is a cure. There is a solution that works 100 percent,” and “if
we have the neutralizing antibody in your body, you don’t
need the social distancing. You can open up a society
without fear.”
                 ZENOFF V. SORRENTO THERAPEUTICS, INC.                   7

                                       II
   On April 11, 2022, the district court granted Sorrento’s
motion to dismiss the FAC. 2
    Addressing Zenoff’s claims of materially false and
misleading statements, the district court noted that Zenoff’s
claims were based on three particular statements, and
rejected Zenoff’s argument that Defendants had misled
investors through these statements. 3 The district court found
the assertion of a cure and a solution that works 100% to be
“a statement of corporate optimism”—in other words, mere

2
  The district court granted Sorrento’s motion to take judicial notice of
the various articles concerning STI-1499 and Sorrento’s SEC filing. On
appeal, Zenoff does not challenge the taking of judicial notice.
3
    Zenoff relied on:
           (1) CEO Ji’s May 15 statement to Fox News: “We
           want to emphasize there is a cure. There is a solution
           that works 100 percent . . . . If we have the neutralizing
           antibody in your body, you don’t need the social
           distancing. You can open up a society without fear.”
           (2) VP Brunswick’s May 15 statement to Fox News:
           “As soon as it is infused, that patient is now immune
           to the disease . . . . For the length of time, the antibody
           is in that system. So, if we were approved [by the
           FDA] today, everyone who gets that antibody can go
           back to work and have no fear of catching COVID-
           19.”
           (3) the May 15 BioSpace article’s quote of CEO Ji
           stating: “One of the antibodies is so powerful that at a
           very low concentration it is able to 100% completely
           prevent infection or inhibit the infection . . . . So what
           we’ve done is identified an antibody that recognizes
           the COVID-19 virus and completely inhibits its
           binding to the specific receptor.”
8           ZENOFF V. SORRENTO THERAPEUTICS, INC.

“puffery” which “cannot state an actionable material
misstatement of fact under federal securities law.” See Glen
Holly Ent. Inc. v. Tektronix, Inc., 352 F.3d 367, 379 (9th Cir.
2003). The court further found that there was “nothing about
the representation of STI-1499’s success that is inaccurate or
misleading.” It noted that on May 15, VP Brunswick was
quoted in the Fox News article as saying, “[w]e anticipate
having enough material to start a Phase I trial in patients in
the ICU within two months”; that the May 20
Yahoo!Finance article reported that Sorrento had found an
antibody “in a preclinical trial”; and the May 15 Fox News
article noted that “a quick approval from the [Federal Drug
Administration (“FDA”)] would be needed to make the
antibody treatment available within months.” The district
court concluded that “[i]n reviewing each of these statements
within the context of each entire article, [Zenoff has not]
sufficiently pled the existence of false or misleading
statements.”
    The district court next considered scienter, another
essential element of a § 10(b) claim. See Lipton v.
Pathogenesis Corp., 284 F.3d 1027, 1034 (9th Cir. 2002).
Scienter is the intent to deceive, manipulate or defraud.
Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 308, 319
(2007). To plead scienter for security fraud a complaint
must “state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of
mind.” 15 U.S.C. § 78u–4(b)(2). “A complaint will
survive . . . only if a reasonable person would deem the
inference of scienter cogent and at least as compelling as any
opposing inference one could draw from the facts alleged.”
Tellabs, Inc., 551 U.S. at 324.
    The district court determined that Zenoff had failed to
establish a strong inference of scienter. Zenoff asserted
             ZENOFF V. SORRENTO THERAPEUTICS, INC.            9

scienter based on allegations that: (1) the pandemic
represented a huge financial opportunity for Sorrento; (2) the
individual defendants had access to and knowledge of the
real-time data relating to STI-1499; (3) Sorrento needed to
raise capital to fund its operations; (4) Sorrento had an
ongoing ATM stock offering to fund its continued
operations; (5) Sorrento had a purchase agreement with
Arnaki; and (6) Sorrento needed to eliminate its high-interest
debt.
    The district court was not persuaded. First, it found that
Sorrento’s need to raise funds to retire its high-interest debt
did not give rise to a strong inference of scienter. See Mallen
v. Alphatec Holdings, Inc., 861 F. Supp. 2d 1111, 1137 (S.D.
Cal. 2012) (holding that generalized assertions of motive
based on potential profit are insufficient to meet the
heightened pleading requirement of scienter). Second, the
court noted that the FAC did not sufficiently allege any
contemporaneous statements by the Defendants showing
“their knowledge of purported falsity.” Finally, the district
court concluded that even upon a holistic review of all
scienter allegations, Zenoff had not adequately alleged a
strong inference of scienter in part because the facts that STI-
1499 was still in preclinical stages and had not yet received
FDA approval was disclosed contemporaneously with the
announcement of the development of STI-1499.
    The district court granted the motion to dismiss with
leave to amend. Zenoff, however, declined to amend the
complaint. Judgment was entered on June 3, 2022, and
Zenoff timely appealed on June 30, 2022.
                              III
   A Rule 10b-5 claim requires that plaintiff prove ‘“(1) a
material misrepresentation or omission by the defendant;
10           ZENOFF V. SORRENTO THERAPEUTICS, INC.

(2) scienter; (3) a connection between the misrepresentation
or omission and the purchase or sale of a security;
(4) reliance upon the misrepresentation or omission;
(5) economic loss; and (6) loss causation.”’ Mattrixx
Initiatives, Inc. v. Siracusano, 563 U.S. 27, 37–38 (2011)
(quoting Stoneridge Inv. Partners, LLC v. Scientific–
Atlanta, Inc., 552 U.S. 148, 157 (2008)). Both falsity and
scienter must be alleged with particularity. Zucco Partners,
LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009).
Thus, for falsity, a plaintiff must allege with particularity
each statement alleged to be misleading and the reasons why
it is misleading. See In re Rigel Pharm., Inc. Sec. Litig., 697
F.3d 869, 877 (9th Cir. 2012). For scienter, a plaintiff must
“state with particularity facts giving rise to a strong inference
that the defendant acted with the required state of mind.”
Zucco, 552 F.3d at 991(quoting 15 U.S.C. § 78u–4(b)(1)).
The inference must be “cogent and compelling, thus strong
in light of other explanations.” Tellabs, 551 U.S. at 324. “A
complaint will survive . . . only if a reasonable person would
deem the inference of scienter cogent and at least as
compelling as any opposing inference one could draw from
the facts alleged.” Id.
    Pursuant to Rule 12(b)(6), a complaint can be dismissed
for: “(1) lack of cognizable legal theory or (2) insufficient
facts under a cognizable legal claim.” SmileCare Dental
Grp. v. Delta Dental Plan of Cal., Inc., 88 F.3d 780, 783 (9th
Cir. 1996). When the complaint includes allegations of
fraud, a party must “state with particularity the
circumstances constituting fraud or mistake,” although
“[m]alice, intent, knowledge, and other conditions of a
person’s mind may be alleged generally.” Fed. R. Civ. P.
9(b). Furthermore, claims under the Exchange Act are
subject to the provisions of the Private Securities Litigation
             ZENOFF V. SORRENTO THERAPEUTICS, INC.            11

Reform Act of 1995 (“PSLRA”), which “requires that a
complaint alleging misleading statements or omissions
‘specify each statement alleged to have been misleading, the
reason or reasons why the statement is misleading, and, if an
allegation regarding the statement or omission is made on
information and belief, . . . all facts on which that belief is
formed.’” Reese v. BP Expl. (Alaska) Inc., 643 F.3d 681,
690 (9th Cir. 2011) (quoting 15 U.S.C. § 78u‒4(b)(1)).
    We review Rule 12(b)(6) dismissals de novo. Chavez v.
Robinson, 12 F.4th 978, 985 (9th Cir. 2021). We may
consider “the face of the complaint, materials incorporated
into the complaint by reference, and matters of which we
may take judicial notice.” Zucco, 552 F.3d at 989.
                              IV
    A. Falsity
     Zenoff contends that Sorrento “told the world multiple
whoppers” concerning a 100% cure for COVID-19. While
Defendants’ enthusiasm for STI-1499 might have been
overblown, in context, their statements were not materially
misleading. The May 15 Press Release starts with the
statement that its antibody “demonstrated 100% inhibition
of SARS-CoV-2 virus infection in an in vitro virus infection
experiment at a very low antibody concentration.”
(Emphasis added). The Fox News article’s headline is
“California biopharmaceutical company claims coronavirus
antibody breakthrough” and it has a subsection in bold print
entitled “possible coronavirus vaccine enters human testing
trial.” The article further states that Sorrento has partnered
with Mount Sinai Healthcare System to develop an antibody
cocktail, that STI-1499 is likely to be the first antibody in the
cocktail, and that Sorrento “can provide up to 200,000 doses
per month.” The May 15 BioSpace article commences with
12           ZENOFF V. SORRENTO THERAPEUTICS, INC.

the statement that Sorrento is “one of the companies deeply
involved in clinical antibody development against COVID-
19.” The article states that Sorrento is teaming with Mount
Sinai to develop an antibody cocktail, and notes that “if the
Phase 1 trial starts by the beginning of July, they will know
withing a week or two whether the antibody is having an
effect.”
     A fair reading of the press release and the articles reveals
that there was no promise of an immediate 100% cure.
Despite Defendants’ enthusiasm about STI-1499, in context,
all of the articles reveal that its development was at the stage
of an in vitro virus infection experiment, i.e., it had only been
tested in a laboratory. Zenoff has not shown that a
reasonable person reading the articles would think that
Defendants were representing that STI-1499, without further
testing, was an immediate cure for COVID-19.
    Moreover, the only basis that Zenoff offers to support his
claim that Defendants’ representations were knowingly false
is that there is still no cure for COVID-19. He does not
address whether, in May 2020, STI-1499 showed some
promise as a cure for COVID-19. Rather, he reasons from
the fact that there still is no cure for COVID-19, that
Defendants could not, in good faith, have thought that STI-
1499 was a cure. However, many initially promising
discoveries do not survive the testing required for FDA
approval; failure to survive testing is hardly evidence that the
developer’s initial enthusiasm was unwarranted or
inherently false at the time.
     B. Scienter
    Even if the Defendants’ statements could be construed to
be misleading, Zenoff would still not be entitled to relief
unless his allegations raised the requisite strong inference of
              ZENOFF V. SORRENTO THERAPEUTICS, INC.                  13

scienter. On appeal, Zenoff argues that he has made the
requisite showing through the combination of: (1) Ji’s and
Brunswick’s management roles; (2) Ji’s and Brunswick’s
undisputed access to STI-1499 data; (3) “the blatant falsity
of Defendants’ statements”; (4) “the extremely short time
period between Defendants’ false statements and their
admission of falsity”; and (5) “Sorrento’s dire financial
situation.”
    Certainly, Ji and Brunswick had management roles and
access to STI-1499 data, but there is no indication or
allegation that those roles gave them access to some
information about STI-1499 that was not mentioned in the
press release or the articles. In contrast, the cases cited by
Zenoff concern situations where senior executives were
alleged to have inside information that was not available to
others. 4 Here, Defendants were forthright in stating that
STI-1499 was at the in vitro experiment stage. Zenoff does
not suggest or allude to what other relevant information
Defendants had about STI-1499 that should have been
disclosed.
   As previously noted, Zenoff’s claim of “blatant falsity”
does not survive scrutiny. When viewed in context,
Defendants did not promise an immediate 100% cure to
COVID-19. Moreover, Defendants only “admitted falsity”

4
 For example, South Ferry LP, No. 2 v. Killinger, 542 F.3d 776 (9th Cir.
2008), concerned statements by high-ranking corporate officers as to
core corporate operations, including claims that the corporation “had
fully integrated the information systems that are central to WAMU’s
ability to maintain and update their various hedges.” Id. at 781. In re
Alphabet, Inc. Sec. Litig., 1 F.4th 687 (9th Cir. 2021), concerned
allegations that the defendants made materially misleading statements by
failing to disclose security problems. Both cases concerned critical
information that was known only to corporate insiders.
14            ZENOFF V. SORRENTO THERAPEUTICS, INC.

if their initial assertions are read as claiming an immediate
100% cure. The May 20 Yahoo!Finance interview reiterates
the prerequisite of clinical testing and asserts that Sorrento,
“instead of watching the stock going up or going down,” is
“focusing on mak[ing] sure we have the real deal.” The May
22 BioSpace.com article reported that CEO Ji did not say
STI-1499 was a cure. It reported that he stated that “if it gets
through safety studies, if it demonstrates efficacy, it
potentially is a cure—if you have the antibody in the blood
and it prevents infection.” The May 20 and May 22 articles
can only be read as retractions if Defendants’ prior
statements are interpreted—contrary to Sorrento’s
protestations—as a promise of an immediate 100% solution.
The more reasonable interpretation is that the later
statements are consistent elaborations of what was initially
stated. 5
     Next, although Sorrento’s financial situation was clearly
helped by the market’s response to the announcement of the
development of STI-1499, Sorrento had taken steps to meet
its “dire financial situation” well before the announcements
of STI-1499. It seems likely that the bump in the price of
Sorrento’s stock in the week of May 15 provided it with
more revenue from its agreement with Anarki to purchase
stock, but Zenoff does not allege any particular improper or
inflated sales. Indeed, as Defendants note, Zenoff identifies
no individual stock sales at all. Accordingly, Zenoff has not
made the requisite showing of trading history necessary to
raise an inference of scienter. See Zucco, 552 F.3d at 1005

5
  Zenoff cites a couple of cases for the proposition that temporal
proximity between a fraudulent statement and a later disclosure can be
circumstantial evidence of scienter. But this is so only if the first
statement is fraudulent.
            ZENOFF V. SORRENTO THERAPEUTICS, INC.           15

(holding that “for individual defendants’ stock sales to raise
an inference of scienter, plaintiffs must provide a
‘meaningful trading history’ for purposes of comparison to
the stock sales within the class period,” and that “[e]ven if
the defendant’s trading history is simply not available, for
reasons beyond a plaintiff’s control, the plaintiff is not
excused from pleading the relevant history”).
    Zenoff has not pled any allegations giving rise to the
requisite strong inference that Defendants intended to
improperly manipulate the price of Sorrento’s shares. At
best, we can infer that Defendants’ excitement about the
development of STI-1499 (and the public’s excitement)
produced a one-week bump in the price of Sorrento’s stock.
This may well have helped Sorrento’s efforts to raise capital,
but as Zenoff has failed to point to any particular sales or
purchases by Sorrento or its officers, there is no inference of
intent to manipulate. We have held that “[a] court must
compare the malicious and innocent inferences cognizable
from the facts pled in the complaint, and only allow the
complaint to survive a motion to dismiss if the malicious
inference is at least as compelling as any opposing innocent
inference.” Zucco, 552 F.3d at 991. Zenoff has not shown
that Sorrento’s promotion of its development of STI-1499
created a strong inference that Sorrento intended to
manipulate the price of its stock.
                              V
    The record shows that as a result of Defendants’
enthusiastic announcement of the development of STI-1499
as a possible cure for COVID-19, the price of Sorrento’s
stock rose sharply for about a week. Zenoff filed this lawsuit
asserting both that Sorrento falsely claimed that STI-1499
was a 100% cure for COVID-19 and did so with the intent
16          ZENOFF V. SORRENTO THERAPEUTICS, INC.

to manipulate the price of its stock. However, the PSLRA
requires that Zenoff allege both falsity and scienter with
particularity. On this record, Zenoff has not adequately pled
that Defendants’ statements about STI-1499, when viewed
in context, were false as opposed to overstated.
Furthermore, even if the allegations of falsity were deemed
plausible, Zenoff has failed to plead factual allegations that
give rise to a strong inference of scienter. He does not allege
any particular stock sales or purchases by Sorrento or either
of the individual defendants. Indeed, in the spring of 2020,
the possibility of a cure for COVID-19 generated many
innocent explanations for Defendants’ statements and the
market’s reaction to those statements. The district court’s
dismissal of Zenoff’s First Amended Complaint is
AFFIRMED.