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(Article from Securities Law Alert, May 2015)

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On May 5, 2015, the Southern District of New York dismissed a securities action brought under Sections 11 and 15 of the Securities Act against Prosensa Holding on the grounds that plaintiffs had failed to allege any misstatements or omissions in the company’s registration statement concerning the clinical trials for drisapersen, a muscular dystrophy drug. Singh v. Schikan, 2015 WL 2070222 (S.D.N.Y. 2015) (Buchwald, J.).[1] The court found that plaintiffs were “essentially” demanding “an extra level of disclosure spelling out inferences and drawing conclusions for investors” with respect to the likelihood that the Phase III trial for drisapersen would succeed. The court held that “defendants were not required to draw out such inferences or to make such forecasts in order to provide complete and accurate disclosures.”

Court Finds Prosensa Disclosed All Material Information Concerning the Phase II and Phase III Clinical Trials for Drisapersen, and Had No Obligation to Analyze That Information for Investors

At the outset of its analysis, the court observed that plaintiffs did not allege “any affirmative misstatements” in Prosensa’s registration statement. Rather, plaintiffs “only alleged omissions regarding certain differences between” the Phase II and Phase III clinical trials for drisapersen (“DEMAND-II” and “DEMAND-III” respectively). Specifically, plaintiffs alleged that because of “DEMAND-III’s reduced enrollment criteria and . . . its expanded testing locations,” “defendants knew or should have known . . . the DEMAND-III study was fundamentally flawed and was not likely to produce positive results as DEMAND-II had.” Plaintiffs claimed that “the Registration Statement should have highlighted these differences and should have disclosed the negative impact these differences would likely have on the study’s findings and therefore on the drug’s prospects.”

The court determined that “no facts per se were omitted from the prospectus.” Plaintiffs did not dispute that “the key details of both studies, including their respective enrollment criteria and DEMAND-III’s expanded testing universe, were disclosed in the Registration Statement.” The court found that what plaintiffs were “essentially” challenging was defendants’ failure to “spell[ ] out inferences” and “draw[ ] conclusions” based on the differences between the DEMAND-II and DEMAND-III studies. The court held that the disclosure obligations of the securities laws do not require defendants to “draw out such inferences” or “make such forecasts.”

Court Clarifies That Companies Have No Obligation to Present Material Facts in a Negative Light

The court found meritless plaintiffs’ contention that defendants were required to “emphasize” the differences between the DEMAND-II and DEMAND-III studies and “to note that these changes were likely to negatively impact” the DEMAND-III study. The court explained that there was no need for defendants to “highlight these differences” because “the relevant information — each study’s design and results, if available — was easily located and . . . accurately described” in the Registration Statement, “allowing investors to compare the trials themselves.” Moreover, the court held that “defendants’ disclosures” were not actionable simply “because they failed to characterize the differences between the studies in a certain way.” The court stated that “the law is clear that companies need not depict facts in a negative or pejorative light or draw negative inferences to have made adequate disclosures.” 

Court Finds Defendants Are Not Required to Speculate About the Possibility of Failure 

The court also rejected “[p]laintiffs’ broader claim that defendants should have disclosed that the differences in the DEMAND-III study would cause it to fail.” The court found that plaintiffs had “made no allegations suggesting that defendants could have known that the study would in fact produce worse results.” Given “the absence of data establishing that DEMAND-III would not meet its endpoints,” the court held that “defendants were not required to predict negative results or to hypothesize [the study’s] failure.” The court found this conclusion “all the more appropriate where, as here, such speculation would have been based solely on facts disclosed in the Registration Statement, from which investors were equally free to assess the study’s likelihood of success.”

The court determined that “defendants [had] disclosed the facts known at the time of the IPO that would subsequently affect the study and the stock price, and were not required to foresee the failure of the study or the specific reasons for its hypothetical failure.” The court held that defendants had “fulfilled their disclosure obligations” and therefore dismissed plaintiffs’ claims.