District of Massachusetts Reaffirms the Principle That Legitimate Scientific Disagreement Does Not Give Rise to a Securities Fraud Claim

In this Issue

• Fourth Circuit Affirms Dismissal of Putative Class Action, Finding Stockholders Failed to Adequately Plead Loss Causation on Securities Fraud Claims Predicated on Unreliable Short-Seller Report
• Ninth Circuit Partially Reverses Dismissal of Claims to Revive Lawsuit Against Avalara Over Alleged Misstatements in Connection With Its Private Equity Sale
• Delaware Supreme Court Affirms Dismissal of Controlling Stockholder Claims Against AstraZeneca, Confirming High Bar to Pleading That Minority Shareholders Owe Fiduciary Duties
• District of Massachusetts Reaffirms the Principle That Legitimate Scientific Disagreement Does Not Give Rise to a Securities Fraud Claim
• Northern District of Illinois Dismisses Putative Class Action Complaint Against Discover After Plaintiffs Fail to Sufficiently Identify Misleading Statements About Compliance Efforts to Plead a Violation of Securities Laws
• District of Massachusetts Finds That the Plaintiffs’ Interpretation of FDA Guidance Does Not Give Rise to a Securities Fraud Claim

Fourth Circuit Affirms Dismissal of Putative Class Action, Finding Stockholders Failed to Adequately Plead Loss Causation on Securities Fraud Claims Predicated on Unreliable Short-Seller Report

The United States Court of Appeals for the Fourth Circuit recently affirmed the U.S. District Court for the District of Maryland’s dismissal of a putative class action complaint brought by stockholders of IonQ Inc., a public company that develops quantum computers, against the company and certain individual defendants for violations of sections 10(b), 14(a), and 20(a) of the Securities and Exchange Act of 1934 (the Exchange Act) and Securities and Exchange Commission (SEC) rules 10b-5 and 14a-9.

In May 2022, Scorpion Capital LLC, a company that held a short position against IonQ, published a report online finding that “IonQ was ‘[a] scam built on phony statements about nearly all key aspects of the technology and business’” and concluding that IonQ was running a “‘quantum Ponzi scheme.’” The report, which was based on “certain public information and selective interviews of unnamed former IonQ employees, customers, and quantum computing experts,” also contained a number of disclosures, including that Scorpion Capital stood “‘to realize significant gains’” if IonQ’s stock and other securities declined in price and that the nonpublic information contained in the report may be inaccurate. The next day, IonQ issued a press release rebuking the report for its inaccuracies and encouraging investors not to trade based on the report. Thereafter, IonQ’s stock price continued to drop over a 10-day period.

The plaintiffs alleged that IonQ’s stock price plummeted when the report unveiled the truth behind several material facts about its business forecast. The defendants moved to dismiss, and the District Court granted the motion, holding, among other things, that the plaintiffs failed to plead loss causation. The District Court also denied “a ‘post[-]judgment motion for leave to file’ a proposed second amended complaint,” on the grounds that the plaintiffs could not plead loss causation.

Focusing on the issue of loss causation, the Fourth Circuit affirmed the District Court’s holdings, finding that the plaintiffs failed “to clear the high bar” that plaintiffs must meet of showing that the report — which was “self-interested,” relied on anonymous sources, and disclaimed accuracy — could adequately reveal any alleged truth to the market. The question of whether a short-seller publication could plausibly expose the truth of a company’s fraud to plead loss causation, was a matter of first impression for the Fourth Circuit.

Ultimately, the Fourth Circuit followed Ninth Circuit precedent, which does not impose a “categorical ban on using short-seller reports to plead loss causation,” reasoning that “in appropriate circumstances, a short-seller report’s financial motivation may not disqualify it from use in litigation as alleging that it exposed a company’s fraud to the market.” However, it is not an appropriate circumstance “when a short seller makes the kinds of disclaimers the [r]eport does here, [because] its potential evidentiary value evaporates.” The court further held that the operative complaint did “no more than suggest a possible correlation between the [r]eport’s publication and IonQ’s stock price decline” and that “correlation does not equal causation.” Finally, the court rejected the plaintiffs’ argument that IonQ’s press release was a corrective disclosure because the press release could not be reasonably read as a concession that the report was accurate insofar as it revealed IonQ’s fraud to the market.

This case should give companies more comfort that they likely cannot create liability — and, in fact, may help avoid liability — by denouncing public reports about the company that are untrue and could be viewed negatively by the market. Calling out personal financial motives of the publisher of such a report could also help undermine a report’s credibility and reduce the likelihood that a court would determine that a report revealed the “truth” to the market, which then caused a company’s stock price to drop.

Ninth Circuit Partially Reverses Dismissal of Claims to Revive Lawsuit Against Avalara Over Alleged Misstatements in Connection With Its Private Equity Sale

The United States Court of Appeals for the Ninth Circuit recently affirmed in part and reversed in part the U.S. District Court for the Western District of Washington’s dismissal of a putative class action against Avalara Inc. and its board of directors alleging they violated sections 14(a) and 20(a) of the Exchange Act and SEC Rule 14a-9 by misrepresenting “the fairness of [its] $8.4 billion sale to Vista Equity Partners Management, LLC.”

In an unpublished, non-precedential decision, the Ninth Circuit largely affirmed the lower court’s dismissal, agreeing that many of Avalara’s statements leading up to the purchase were inactionable puffery and neither objectively false nor misleading. But the Ninth Circuit disagreed with the District Court’s holding that the plaintiff failed to “adequately plead the objective falsity or misleading nature” of certain of Avalara’s statements and reversed the dismissal of the plaintiff’s claims that were predicated upon theories that the company (a) misled the public by claiming that a report from a proxy advisory firm recommended the sale, while omitting various warnings about the sale in the same report, and (b) omitted inorganic growth from its projections in the proxy statement.

First, the Ninth Circuit noted that, crediting the plaintiff’s allegations as true, it was plausible that Avalara might have downplayed concerns about the acquisition that the proxy advisory firm, Institutional Shareholder Services (ISS), expressed in its report. The Ninth Circuit noted that the fact that “some of the [ISS] report’s unfavorable excerpts” were made public in an SEC filing by a third-party did not relieve Avalara’s obligation not to make false or misleading statements about the report. And, although it was true that the report recommended the sale, reducing it to simple approval could still be misleading without the context provided by the doubts also included in the report.

Second, the Ninth Circuit directed the District Court to reexamine the plaintiff’s allegations that Avalara’s forecasts in the proxy statement were misleading because it failed to include inorganic growth through M&As. The Ninth Circuit agreed with the plaintiff that, because Avalara had previously always included such growth in its assessment of the company’s prospects and the plaintiff alleged that prior acquisitions were a big part of the company’s growth, pleading its failure to include such growth in its projections or to explicitly state that it was not doing so plausibly suggested an actionable omission.

The Ninth Circuit’s reversal and remand with respect to these two alleged omissions serve as a reminder that when a company relies upon and summarizes statements by third parties, glossing over or ignoring the negative aspects of those statements can be construed as an actionable omission of material information on the company’s part. Companies should proceed with caution when excerpting such materials and consider whether choosing to include certain statements and exclude others could be construed as misrepresenting their overall message. And when disclosing financial data such as forecasts in connection with an M&A transaction, companies should clearly disclose when they depart from prior methodologies.

Delaware Supreme Court Affirms Dismissal of Controlling Stockholder Claims Against AstraZeneca, Confirming High Bar to Pleading That Minority Shareholders Owe Fiduciary Duties

Earlier this year, the Supreme Court of the State of Delaware summarily the Delaware Court of Chancery’s dismissal of a putative class action complaint brought by a former stockholder of Viela Bio Inc. against AstraZeneca and the Viela board of directors alleging breaches of fiduciary duties, adopting in full the reasoning of the Court of Chancery that AstraZeneca — a noncontrolling, minority shareholder in Viela — did not owe fiduciary duties to Viela shareholders and the board could not be liable for breach of fiduciary duty because the transaction was ratified by a majority of fully informed shareholders.

AstraZeneca created Viela in February 2018 but worked to separate itself following Viela’s 2019 initial public offering (IPO) and held only 26.72% of Viela’s equity. Notwithstanding this effort, the plaintiffs filed this action after Viela merged with Horizon Therapeutics plc in 2021, alleging that AstraZeneca pushed “Viela into a rushed and unfair merger” so AstraZeneca could secure antitrust approval for “its acquisition of Viela’s rival.”

Because AstraZeneca did not have a majority interest in Viela at the time of the Viela-Horizon merger, the Court of Chancery focused its analysis on whether AstraZeneca met the requirements for a controlling stockholder that would owe Viela stockholders fiduciary duties despite its minority interest. Ultimately, it held that it did not, which the Delaware Supreme Court affirmed through its decision.

Reiterating that the “actual control test ‘is not easy to satisfy,’” the Court of Chancery rejected the plaintiff’s assertion that AstraZeneca had general control over Viela because (a) its 26.72% interest gave it the ability to unilaterally veto stockholder-initiated bylaw amendments or any attempt to amend or repeal Viela’s certificate of incorporation and (b) it appointed two of its former executives to the Viela board. The Court of Chancery explained that this theory failed because AstraZeneca never exercised any of its veto powers and only had one remaining former executive on the eight-member Viela board at the time of the Viela-Horizon merger. The Court of Chancery further held that Viela being “substantially reliant” on AstraZeneca — through the placement of five of its former executives in top managerial positions, including CEO, at Viela and its many commercial agreements with Viela — alone was insufficient to allege AstraZeneca was a controlling shareholder absent additional well-pleaded allegations of voting influence or domination over the board.

The Court of Chancery also rejected the plaintiff’s allegations that AstraZeneca “exercised transaction-specific control over the [m]erger” by sending a letter to Viela threatening to terminate agreements with Viela unless the company was sold to pressure Viela’s board into “‘a rushed, single-bidder process.’” Instead, the Court of Chancery deemed the letter as a mere “‘proposal’ to facilitate a business separation that had been in the works since Viela’s IPO” and found that it did not threaten to terminate any agreements with Viela or to otherwise abandon Viela. The Court of Chancery distinguished the letter from precedents the plaintiff sought to rely on because, unlike those other cases, the letter “did not place Viela in the position of having ‘no other alternatives’” outside of the Viela-Horizon merger.

Finally, the Court of Chancery dismissed the claims against the Viela board members on the grounds that any breaches of fiduciary duties were “cleansed” under Corwin v. KKR Financial Holdings LLC through the approval of the merger by “a fully informed, uncoerced, and disinterested majority of Viela” shareholders. The Court of Chancery rejected various theories advanced by the plaintiff that certain material information was not disclosed to shareholders, holding that there was no reasonable basis to infer that shareholders were not fully informed prior to their vote.

The decision indicates that Delaware courts will look not only at the power that a minority interest could leverage to control an entity but also whether that minority interest did in fact leverage that power in analyzing whether shareholders can satisfy the “actual control test.” It also reiterates the continuing high bar that plaintiffs must meet to establish that minority ownership interests constitute controlling shareholders.

District of Massachusetts Reaffirms the Principle That Legitimate Scientific Disagreement Does Not Give Rise to a Securities Fraud Claim

The U.S. District Court for the District of Massachusetts recently dismissed, with prejudice, a putative class action lawsuit brought by stockholders of Apellis Pharmaceuticals Inc. — a commercial-stage biopharmaceutical company — against the company and its CEO, rejecting the plaintiffs’ theory that the defendants violated sections 10(b) and 20(a) of the Exchange Act as well as SEC Rule 10b-5 through material omissions about safety protocols for clinical trials of its lead product candidate, pegcetacoplan (known commercially as SYFOVRE), used to treat geographic atrophy — an advanced form of age-related macular degeneration.

Following two Phase 3 clinical trials for SYFOVRE, Apellis repeatedly announced that there were no reported cases of retinal vasculitis, a potential serious side effect involving inflammation of the retinal blood vessels that can lead to complete vision loss. However, on July 15, 2023, five months after Food and Drug Administration (FDA) approved pegcetacoplan for treatment of geographic atrophy, the American Society of Retina Specialists (ASRS) reported six cases of retinal vasculitis in pegcetacoplan-treated patients. Apellis’ stock price dropped 38% from $84.50 to $52.46. By July 31, 2023, following another reported case of retinal vasculitis, Apellis’ stock price fell to $25.75.

The plaintiffs alleged that Apellis’ representations that there were no observed cases of retinal vasculitis during clinical trials were materially misleading because Apellis did not disclose (a) “how frequently [it] was testing for retinal vasculitis” and (b) that the infrequency of such testing rendered the clinical trial protocol “inadequate to detect the condition.”

The court dismissed the plaintiffs’ claims in their entirety, concluding that the plaintiffs failed to establish a materially misleading omission. First, the court rejected the plaintiffs’ omission-based theories because the protocol for the trials (containing information about frequency and manner of testing for retinal vasculitis) was publicly available to investors throughout the class period on the ClinicalTrials.gov website and through investor presentations. The court explained that “‘it is not a material omission to fail to point out information of which the market is already aware’” and reasonable investors were on notice of the protocol and would not have been misled by the challenged statements. The court was also unpersuaded by the opinion of the plaintiffs’ expert that the company should have known that a risk of retinal vasculitis existed and held that scientific disagreement over adequacy of the company’s FDA-approved trial methodology was “‘insufficient to state a claim for securities fraud, particularly where there [wa]s no showing of an intent to deceive or improper manipulation of results.’”

Next, the court held that the plaintiffs failed to plead direct evidence of scienter to support their allegations because the operative complaint did not allege that Apellis or its employees knew there were cases of retinal vasculitis during the clinical trials or that its FDA-approved protocol was inadequate. The mere fact that SYFOVRE was Apellis’ lead product candidate and, thus, they were paying close attention to it, did not, in the court’s view, mean that “the defendants knew, or were reckless in not knowing, that their statements about the absence of retinal vasculitis were misleading.” The court also rejected the plaintiffs’ “propensity-to-lie theory,” which focused on actions taken by the defendants after the ASRS report was published, because such actions did not give rise to an inference that the defendants’ statements about the absence of retinal vasculitis during the clinical trials were misleading at the time they were made.

This decision reaffirms the principle that a legitimate scientific disagreement over methodology does not by itself give rise to securities fraud claims. However, biopharmaceutical companies should take care to ensure their press releases and SEC filings clearly reflect any uncertainties or ongoing scientific debates.

The plaintiffs appealed this decision to the United States Court of Appeals for the First Circuit, filing their opening brief on July 1, 2025, to which Apellis responded on August 8, 2025. The date is not yet set for oral argument, and we will continue to watch this case as it unfolds.

Northern District of Illinois Dismisses Putative Class Action Complaint Against Discover After Plaintiffs Fail to Sufficiently Identify Misleading Statements About Compliance Efforts to Plead a Violation of Securities Laws

On March 31, 2025, the U.S. District Court for the Northern District of Illinois dismissed a putative class action complaint brought by stockholders of Discover Financial Services, a digital banking and payment services company, against the company and certain of its officers and directors, alleging violations of sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5.

Before plaintiffs filed the lawsuit, several problems with Discover’s compliance efforts were revealed. On October 18, 2021, the Federal Deposit Insurance Corporation (FDIC) issued a report identifying alleged violations of various federal laws and implementing regulations. On September 25, 2023, Discover entered into a consent order with the FDIC and agreed to “undertake specific measures to ‘eliminate or correct, and prevent the unsafe or unsound banking practices and the violations of law[s] or regulation[s]’” that the FDIC identified in the 2021 report. Discover also came under scrutiny from the Consumer Financial Protection Bureau (CFPB) for its failure to fully comply with a 2015 CFPB consent order regarding its student loan servicing practices and the Consumer Financial Protection Act. On December 22, 2020, Discover entered into another consent order with the CFPB and “agreed to pay $10 million in consumer redress and $25 million in fines” and take “specific measures” to ensure compliance with the consent order and federal consumer financial laws.

Then, on July 20, 2022, Discover announced it was “‘suspending […] its existing share repurchase program [until further notice] because of an internal investigation relating to its student loan servicing practices and related compliance matters.’” Discover’s stock price dropped 9% when this news broke. Finally, on July 19, 2023, Discover issued a press release revealing that, since 2007, it had “‘incorrectly classified certain credit card accounts.’” To rectify these errors, Discover agreed to provide refunds, which resulted in an initial $365 million liability. Discover’s stock price dropped 16% on the day of its press release and its CEO/President resigned a month later.

A few months after the July 2023 press release, the plaintiffs brought this lawsuit, alleging that the defendants misled investors by portraying Discover’s compliance efforts as effective, despite allegedly knowing they were deficient. The court analyzed dozens of challenged statements finding, among other things, that “no reasonable investor would interpret [general statements in public filings] describing the purposes and goals of Discover’s compliance program […] to convey specific predictions and assurances” or results. The court also held that a more specific statement that Discover implemented its risk governance framework “‘such that bank-level risk governance requirements are satisfied’” did not “negate abundant and unambiguous language” found throughout the filings, “acknowledging that Discover’s efforts on the compliance front were ongoing, and that its exposure to compliance-related setbacks persisted.”

The court further held that other challenged statements, including scripted remarks by the CEO to investors, were too vague, generic, or aspirational to be actionable or were “forward-looking statement[s] protected by the [Private Securities Litigation Reform Act’s] safe harbor provision.” For example, the court held that the statement “‘we’ll continue to strengthen and fine-tune our processes and comply with all the regulations required of a large national bank,’” which was made at an annual shareholder meeting, was an inactionable forward-looking statement, rejecting the plaintiffs’ argument that the term “continue” turns the statement into “an assertion of present fact” that the company had achieved “perfect compliance.” Rather, the court held that the statement — even if partly phrased in the present tense — was forward-looking because it conveyed a prediction, was identified as a forward-looking statement, and was accompanied by meaningful cautionary language.

The court dismissed the complaint without prejudice, but it has not yet determined whether it will allow the plaintiffs to amend the complaint. The plaintiffs moved for leave to amend; their motion is now fully briefed but has not yet been ruled upon. This case reinforces that generalized statements about compliance policies and procedures are unlikely to support a shareholder lawsuit without particularized and misleading claims about a specific area of compliance. Even when a company addresses past or ongoing lapses in compliance, as in Discover’s case, a general description of how a company’s compliance process works is unlikely to amount to an actionable misstatement, especially when compliance issues are otherwise disclosed.

District of Massachusetts Finds That the Plaintiffs’ Interpretation of FDA Guidance Does Not Give Rise to a Securities Fraud Claim

The U.S. District Court for the District of Massachusetts recently dismissed with prejudice a putative securities class action against biotechnology company Aldeyra Therapeutics Inc. and certain of its officers, based on their allegedly false and misleading statements about the progress and prospects for two of Aldeyra’s drug candidates, reproxalap (a dry eye topical solution) and ADX-2191 (an ocular cancer treatment). As to both drug candidates, the plaintiffs asserted that Aldeyra knew or should have known that its new drug application (NDA) submissions had not complied with FDA’s published nonbinding guidance. The court concluded that the plaintiffs’ interpretation of this FDA guidance did not support a claim for securities fraud.

During the relevant period (January 2021 through October 2023), Aldeyra made public disclosures to investors about plans to seek FDA approval for both reproxalap and ADX-2191. As to reproxalap, Aldeyra described its Phase 3 clinical trials and its regulatory strategy. In November 2022, Aldeyra announced the submission of an NDA for reproxalap, which FDA accepted for review in February 2023. As to ADX-2191, Aldeyra explained that, because ADX-2191 was a modification of an existing drug, Aldeyra planned to pursue FDA approval based on existing medical literature, not new clinical trials. In December 2022, Aldeyra submitted an NDA for ADX-2191, which FDA accepted for review in March 2023. Throughout this period, Aldeyra warned investors that FDA approval was not guaranteed and that FDA could deny the NDA submissions and require further clinical trials.

These risks came to pass during the course of 2023. In June 2023, Aldeyra disclosed that FDA had issued a complete response letter (CRL) for ADX-2191, which indicated a “‘lack of substantial evidence of effectiveness.’” In October 2023, Aldeyra disclosed the results of a late-cycle review meeting with the FDA concerning the reproxalap NDA, in which FDA indicated that further clinical trials were needed. Aldeyra’s stock price dropped following both announcements. A CRL for reproxalap followed in November 2023.

In their complaint, the plaintiffs claimed that Aldeyra executives had misled investors by failing to disclose that the NDAs for reproxalap and ADX-2191 did not comply with published FDA guidance and, thus, were bound to be rejected. The reproxalap NDA was deficient, the plaintiffs alleged, because Aldeyra’s reproxalap clinical trials were insufficient under FDA guidance. Similarly, the plaintiffs contended that Aldeyra’s “‘literature-based’” approach to the ADX-2191 NDA was inconsistent with FDA guidance. The plaintiffs alleged that Aldeyra executives must have known about these deficiencies and hidden them from investors.

The court dismissed the case with prejudice for failure to plead scienter, falsity, and loss causation.

As to scienter, the court concluded that the plaintiffs had not advanced a well-pleaded theory of fraud, just a “scientific disagreement” with Aldeyra’s regulatory strategy based on their own interpretation of FDA guidance. The plaintiffs had not identified any particularized facts — such as internal documents or witness statements — supporting a claim that Aldeyra executives hid material facts from investors. Instead, the plaintiffs relied on facts that Aldeyra itself disclosed to investors during the relevant period. For example, while the plaintiffs challenged Aldeyra’s “‘literature-based’” approach to the ADX-2191 NDA, Aldeyra had told investors that it was taking this approach and explained why it believed the approach might work. That left the plaintiffs with nothing more than “their own scientific opinion” about how to interpret and apply FDA guidance. Such differences of opinion cannot support a securities fraud claim. Moreover, other facts in the record created opposing inferences inconsistent with scienter. For example, Aldeyra invested substantial resources in the NDAs and in the reproxalap clinical trials, which Aldeyra would not have done if its executives believed that the NDAs violated FDA guidance and were doomed to fail.

As to falsity, the court reasoned that the plaintiffs had not explained how any statement to investors was false or misleading when made. Here too, the plaintiffs relied solely on information that Aldeyra publicly disclosed at the time. Investors cannot have been misled when the relevant facts were disclosed. The court further noted that many of the challenged statements concerned future events (such as the potential of FDA approval) and, as such, were protected by the statutory safe harbor for forward-looking statements.

Finally, as to loss causation, the court observed that the stock drops in June and October 2023 followed the materialization of a risk Aldeyra had repeatedly warned about: the risk that FDA might not approve the NDAs as initially submitted. This materialization of a disclosed risk was not a “corrective disclosure” about a prior misstatement and could not support a causal link between the alleged fraud and the stock drops.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.