Southern District of New York Dismisses Fraud Claims Against Auditor Related to de-SPAC Transaction

Southern District of New York Dismisses Fraud Claims Against Auditor Related to de-SPAC Transaction

On March 17, 2026, the US District Court for the Southern District of New York dismissed an action brought against Ernst & Young by shareholders of Brooge Petroleum and Gas Investment Company FZE. Brooge provides oil storage, heating, and blending services. It went public through a transaction with a special-purpose acquisition company (SPAC) in 2019 (commonly known as a “de-SPAC” transaction). The plaintiffs alleged violations of Section 10(b) of the Securities Exchange Act of 1934 in connection with Ernst & Young’s independent audit of Brooge in connection with the de-SPAC transaction.

The plaintiffs’ theory was that Brooge had engaged in financial fraud starting years before the de-SPAC transaction and that Ernst & Young nonetheless gave false audit opinions concerning the health of Brooge’s financials. In 2017 and 2018, Brooge allegedly engaged in a “round-tripping” scheme, entering into sham transactions to lease oil storage tanks for the sole purpose of generating revenue. Brooge then relied on this sham revenue in connection with the 2019 de-SPAC transaction, keeping the revenue on its books and touting the same revenue to investors during road shows. The plaintiffs alleged that Ernst & Young failed to verify invoices and ignored indicia of the fraudulent scheme, then issued an “unqualified” audit opinion regarding Brooge’s 2017–18 financial statements in connection with the de-SPAC transaction. In June 2020, after the transaction closed, Ernst & Young issued a similarly positive audit opinion for Brooge’s 2019 financials. A few months later, however, Ernst & Young resigned as Brooge’s auditor, citing “material weaknesses” in Brooge’s internal controls. 

Years later, in 2023, a spate of bad news emerged about Brooge’s financials. In January 2023, the auditor that succeeded Ernst & Young resigned, saying it had learned of “illegal acts” affecting Brooge’s financials. In April 2023, Brooge restated its financial results for 2018 through 2020. In December 2023, Brooge announced an SEC settlement related to “fraudulent accounting” and paid a $5 million civil penalty. Investors sued, alleging that Ernst & Young’s audit opinions had inflated Brooge’s stock price until the “truth” came out in 2023.

The court dismissed all but one of plaintiffs’ securities fraud claims as time-barred under the five-year statute of repose applicable to Section 10(b) claims. The complaint was filed on December 17, 2024, but most of the challenged statements by Ernst & Young occurred before December 2019. All those claims were time-barred.

The only timely claim concerned Ernst & Young’s audit opinion for 2019, which was issued in June 2020. That claim failed on the merits. The court explained that Ernst & Young’s audit opinions are just that: opinions. To challenge opinions as securities fraud, the plaintiffs had to allege that Ernst & Young subjectively disbelieved its opinions, that the opinions contained false embedded factual statements, or that they omitted context necessary to correct a misleading impression. The plaintiffs alleged none of these things. They also failed to adequately allege scienter, which in the independent auditor context requires conduct that approximates an actual intent to aid in the fraud. While plaintiffs alleged that Ernst & Young made internal observations about weaknesses in Brooge’s financial reporting, that did not mean Ernst & Young tried to aid the alleged fraud. It was just as likely that Ernst & Young identified defects, considered them, and exercised professional judgment in concluding that the financial statements nonetheless “fairly” represented the company’s financial position in all “material respects.” The court also noted that the auditor that succeeded Ernst & Young provided a clean audit opinion for fiscal year 2020, further undermining any inference that Ernst & Young had known about or aided a fraudulent scheme.

This decision reinforces the significant protections available to auditors facing securities fraud claims. Courts will not second-guess an auditor’s professional judgment based solely on the fact that, years later, it is discovered that the issuer committed financial fraud. The decision also underscores the power of the five-year statute of repose when plaintiffs try to assert stale Section 10(b) claims. 

Southern District of New York Dismisses ‘Channel Stuffing’ Securities Fraud Claims Against Auto Manufacturer

On March 13, 2026, the US District Court for the Southern District of New York dismissed a securities class action against Stellantis N.V. (a car and truck manufacturer) and its former CEO and CFO for alleged violations of Section 10(b) of the Exchange Act. The allegations focused on an alleged “channel stuffing” scheme and its effect on a key performance indicator called adjusted operating income (AOI) margins.

In January 2021, Stellantis announced a strategy to double revenue and maintain double-digit AOI margins, which is considered a key indicator of profitability in the auto industry. The company announced positive results for revenue and AOI margins from 2022 through early 2024. However, Stellantis announced reduced AOI margins in April 2024 and again in July 2024. Two months later, Stellantis issued revised 2024 guidance projecting even lower AOI margins, and its stock price declined 12.5%. Within weeks, the CFO departed, and the CEO announced his retirement.

The plaintiff alleged that, before 2024, Stellantis had propped up its AOI margins through “channel stuffing.” The complaint relied on confidential-witness statements from alleged former employees, who said that Stellantis overloaded dealerships in North America with more inventory than they could sell to boost short-term financial results (including AOI margins). Stellantis allegedly enticed dealers to take the unnecessary inventory through incentive programs, coupons, discounts, and direct payments. The plaintiff alleged that these practices rendered statements about “the health and sustainability of the Company’s pricing, inventory and margins” — including that Stellantis’s prices were “carefully calibrated,” its inventory levels were “significantly tightened,” and it had a “high and healthy profitability level” — materially misleading. 

The court rejected most of the alleged misstatements as inactionable. Many of them said nothing — directly or by implication — about the alleged channel-stuffing claim but spoke rather about different issues such as general market trends and distribution models outside of North America. Other statements were mere puffery, such as that Stellantis’s pricing was “healthy” and “carefully calibrated” and that its profits were “robust,” “sustainable,” and “strong.” Several other statements were protected by the Private Securities Litigation Reform Act of 1995 (PSLRA) safe harbor as forward-looking.

The only potentially actionable statements concerned the factors driving AOI margins and profitability — for example, statements attributing high AOI margins to delivering customer “value” and “cost reduction initiatives” — which were conceivably misleading without disclosing the alleged channel-stuffing scheme. The court dismissed these for failure to plead scienter. The plaintiff did not allege that the individual defendants had a motive to commit fraud because they, for example, sought to sell stock at inflated prices. On the contrary, Stellantis engaged in significant share buybacks during the class period, which made no sense if executives knew the price was inflated. While the plaintiff pointed to a June 2024 statement by the CEO acknowledging that Stellantis had been “arrogant” in failing to address “visible” inventory problems, that was a classic “fraud by hindsight” allegation, not an admission that the CEO knew of these problems earlier. Similarly, the defendants’ decision to disregard dealer warnings about pricing and inventory was more plausibly the product of strategic miscalculation than intentional deception.

This decision is an important reminder that poor business decisions are not securities fraud, even when they have dramatic outcomes. To survive dismissal, plaintiffs must plead specific facts demonstrating that executives knew their public statements were false when made.

District of Connecticut Largely Denies Motion to Dismiss Securities Fraud Claims Against Digital Currency Group Arising from Cryptocurrency Lending Program

The US District Court for the District of Connecticut largely denied defendants’ motions to dismiss a putative class action alleging violations of Sections 5, 12(a)(1), and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, brought by investors in a cryptocurrency lending program operated by Genesis Global Capital (Genesis). 

The case arises from the Genesis Yield Program, whereby investors provided Genesis with cash or digital currencies and Genesis promised to return the funds after a set period with interest. Genesis then lent the funds to other companies operating in the digital asset space. Genesis allegedly advertised its services as providing returns of over 10% for a 12-month period. The Yield Program was not registered with the SEC. 

Investors’ funds were allegedly deployed in risky, unsecured investments. Most notably, 30% of the funds were lent to a single hedge fund. After the fund defaulted in June 2022, Genesis was unable to collect approximately $1.1 billion and became insolvent. Genesis experienced a large number of withdrawals, stopped honoring redemption requests, and ultimately filed for bankruptcy in January 2023. Investors then sued, alleging the Yield Program was a security.

The court concluded that plaintiffs could proceed, holding that it was plausible that the Yield Program qualified as a security either as an “investment contract” (an issue evaluated under the Howey test) or as a “note” (evaluated under the Reves test). Under the Howey test, plaintiffs alleged that investors bore a genuine risk of loss because they relinquished control of their assets to Genesis and were exposed to the risk of insolvency or default, that there was a common enterprise because investors’ fortunes depended on Genesis’s continued success, and that investors had an expectation of profits. Under Reves, the plaintiffs alleged that the parties’ motivations were not commercial (such as facilitating the purchase of a business asset), but investment-oriented, as Genesis used investor funds for investment activities, that Genesis offered the investment to a broad segment of the public without enforcing investment minimums, and that Genesis executives advertised the Yield Program as an investment that generated high returns. 

After concluding that the Yield Program was a security, the court easily found that the Securities Act claims were viable because it was undisputed that Genesis did not file a registration statement for the Yield Program. The court also allowed the Section 10(b) claim to proceed. The plaintiffs alleged that the defendants misrepresented Genesis’s risk management by describing its lending practices as both conservative and overcollateralized, and plaintiffs supported these allegations by identifying undercollateralized, concentrated, and risky transactions. Likewise, the court concluded that the plaintiffs had adequately demonstrated that the defendants made misstatements in an effort to conceal Genesis’s insolvency after a $1 billion default by one of its debtors. The court found scienter adequately pled based on the defendants’ motive to attract further investment, their control over Genesis’s public disclosures, and the gap between internal knowledge of financial distress and public assurances made by the defendants to the market. 

The decision underscores the continued willingness of courts to extend the federal securities laws, enacted almost a century ago, to regulate novel digital asset strategies. Companies in the crypto and blockchain space should consult with experienced counsel to understand and address the risks that such decisions pose.

Northern District of California Jury Finds Elon Musk Liable for Securities Fraud in Connection With Twitter Acquisition

A federal jury in the US District Court for the Northern District of California found Elon Musk liable under Section 10(b) of the Exchange Act for defrauding a class of investors who sold or purchased Twitter’s stock from May 13, 2022, through October 4, 2022. The finding was based on two allegedly false and misleading tweets from May 2022: (1) a May 13 tweet stating his $44 billion purchase of Twitter was “temporarily on hold;” and (2) a May 17 tweet stating that fake and spam accounts make up at least 20% of Twitter’s users, that it could be “much” higher, and that Musk’s $44 million offer was based on Twitter’s SEC filings being accurate. The jury, however, did not find Musk liable based on statements made at a May 16, 2022, conference regarding the number of fake Twitter accounts, nor did it find that Musk had an overall “scheme to defraud Twitter investors.” 

Throughout the two-week trial, the plaintiffs’ attorneys argued that Musk made false statements with the intent to drive Twitter’s stock price down. They argued that Musk knew the deal was not on hold because he waived his right to due diligence when the $44 billion deal was executed, thereby relinquishing any potential revocation rights. They also relied on admissions that Musk made — in statements to his biographer and bankers — to the effect that he was trying to buy Twitter at a lower price. The plaintiffs’ lawyers also relied on deposition testimony by Twitter’s CEO, who stood by his 2022 statements that bots consisted of less than 5% of all Twitter accounts and that his contrary statements were false.

Musk’s attorneys countered that the investors failed to prove an intent to mislead stockholders. They highlighted the fact that Twitter later offered Musk a lower price, but he nonetheless chose to keep the original $44 billion price so he could preserve any fraud claims he may have against Twitter executives. In addition, they pointed out that Musk also tweeted on May 13, 2022, that he was “still committed” to the acquisition.

The jury was also asked to determine damages based on the amount of “artificial deflation” for Twitter’s stock price for each day of the 98-day class period as a result of Musk’s public statements. The jury concluded that the amount of such deflation ranged between $3 and $8 per share depending on the day. While the total amount of damages has yet to be determined and will likely not be finalized until the post-trial briefing has concluded, it is estimated that potential liability will exceed $2.6 billion, given the large number of outstanding shares and class members during the class period.

The verdict underscores the risks of making social media posts about publicly traded companies. Even though Musk insisted he believed the statements were true, the jury found that his statements were reckless and designed to manipulate Twitter’s stock price. The case is also a reminder of why securities class actions almost always settle before trial, given the massive potential exposure that defendants face.

Northern District of California Allows Channel-Stuffing and Backlog Fraud Claims to Proceed Against Computer Network Hardware Manufacturer

On March 23, 2026, the US District Court for the Northern District of California denied a motion to dismiss securities fraud claims against Extreme Networks, a developer and manufacturer of computer networking hardware, and its executives. The claims, brought under Section 10(b) of the Securities Exchange Act of 1934, concerned an alleged channel-stuffing scheme and allegedly false statements about Extreme Networks’ inventory backlog.

During the time period at issue, Extreme Networks publicly disclosed two relevant financial metrics: product revenue, which it recognized upon shipping products to customers or distributors, and “backlog,” which represented confirmed but not-yet-fulfilled customer orders. During the COVID-19 pandemic, supply chain issues caused Extreme Networks’ backlog to increase substantially, from about $100 million in fourth quarter 2021 to nearly $555 million by first quarter 2023. One might have expected the increase in backlog to correspond to a decline in revenue, as it would mean there were more orders that had not yet been fulfilled. Instead, Extreme Networks reported high revenue growth. The plaintiff alleged that both metrics were inflated by fraud. According to the plaintiff, more than 66% of the backlog consisted of “phantom” orders that would be canceled by distributors once a competitor delivered first (so-called “double ordering”). The revenue growth was allegedly the product of a fraudulent “channel stuffing” scheme: forcing distributors to purchase massive quantities of unneeded and even obsolete products in order to receive higher priority for shipments of products they actually wanted. The plaintiff alleged that the scheme was revealed through a series of corrective disclosures from January 2023 through January 2024, including reductions in the backlog and other negative news about the company’s financial performance.

The court found that the plaintiff had adequately pleaded several false or misleading statements. First, executives had lauded the company’s “organic” growth and “exceptionally strong” demand. The court found these statements misleading given allegations from confidential witnesses, including a report — supported by contemporaneous meeting notes — that a senior executive had overseen the “channel stuffing” efforts starting in March 2022. The court concluded these were not mere puffery and that these were statements of present fact falling outside the statutory safe harbor for forward-looking statements, despite the inclusion of boilerplate cautionary language. Second, executives had assured investors that the backlog was “firm,” of “high quality,” and “not cancelable,” and that there was no evidence of “double ordering.” Here, too, confidential witnesses reported that executives openly discussed a 10% cancellation rate on backlog orders at meetings and that it was well-known in the company that customers were canceling orders due to double ordering.

The court also held that scienter was adequately supported by the confidential-witness statements. The witnesses allegedly interacted directly with Extreme Networks’ executives and thus were in a position to credibly allege that executives were aware of the “channel stuffing” scheme and issues with the backlog. The court also found that executives’ access to sales data and motive to inflate their performance-based compensation supported scienter.

This decision reinforces the risks that tech companies face from allegations about their sales and distribution, including channel stuffing and overstated backlog figures. Companies should always take care to ensure that their statements are backed up by reliable internal data and consult with disclosure counsel about statements on these topics.

Massachusetts District Court Grants Dismissal of Securities Fraud Claims Against Biotech Company

On March 24, 2026, the US District Court for the District of Massachusetts dismissed claims brought under Section 10(b) of the Exchange Act against biotech company Agenus Inc. and its executives. The claims arose from allegedly misleading statements concerning BOT/BAL, an immunotherapy to treat colorectal cancer. 

BOT/BAL was Agenus’s primary product. In 2023, Agenus began conducting Phase 2 trials and was granted “Fast Track” status for BOT/BAL by the US Food and Drug Administration (FDA). Agenus also announced that it was focused on securing accelerated approval for BOT/BAL. In 2024, the FDA advised Agenus not to apply for accelerated approval. When Agenus disclosed the FDA’s advice and Phase 2 data for BOT/BAL, the company’s stock price fell by more than 58%.

The plaintiff attacked 32 different statements about BOT/BAL as false or misleading, and the court dismissed almost all of them. The statements at issue included statements concerning its clinical trial design (the plaintiff claimed the trials were flawed and doomed to fail because they did not meet certain requirements), its clinical trial outcomes (the plaintiff attacked statements regarding clinical data as well as survivability in clinical trials), and Agenus’s claimed operational capabilities (the plaintiff claimed Agenus did not actually have these capabilities). These allegations failed for many reasons. Agenus adequately disclosed details regarding the design of the trials, so investors could make up their own mind about how sound the design was. Many of the challenged statements were immaterial puffery or forward-looking predictions about how the trials would perform. And as to the statements about survivability, the court concluded that the plaintiff relied on classic “fraud by hindsight” pleading, asserting that because things did not turn out as well as Agenus hoped, the statements must have been false or misleading. That could not establish that any statements were false or misleading at the time when they were made. As to these statements, the plaintiff also failed to plead scienter because no facts suggested that the executives believed the trial designs were flawed and FDA approval was impossible. 

However, the court found that the plaintiff had adequately challenged one misstatement: a statement by Agenus’s CEO during an earnings call that “we have had significant input from our regulatory advisers” on minimum patient enrollment for BOT/BAL’s Phase 2 clinical trial. The court found that this statement could have led investors to believe that Agenus was actually following the advice it received from its regulatory advisors. In contrast, the plaintiff alleged — with support from confidential witnesses — that the CEO was ignoring the advice of Agenus’s regulatory advisers and, in some instances, firing those advisers after they raised concerns about the clinical trials. The confidential witnesses were reliable given their senior roles at the company, and some of them reported directly to the CEO. Scienter was also adequately pled as to the CEO because the court held that allegations that an executive is warned about potentially unlawful practices but dismisses the warning weighs in favor of scienter.

Ultimately, however, the court dismissed the lone remaining statement for failure to plead loss causation. The alleged corrective disclosure contained some details about the Phase 2 results and disclosed that the FDA had advised against applying for accelerated approval. These disclosures did not concern the flaws that the plaintiff claimed to have identified in the Phase 2 clinical trials, such as issues with minimum enrollment. While the plaintiff claimed these disclosures were within the “zone of risk” that Agenus had supposedly misrepresented, the reality was that Agenus had repeatedly warned of the very risk that materialized — that the FDA might disagree with the defendants’ interpretation of the data and that accelerated approval might not be granted. The materialization of a disclosed risk cannot support loss causation.

This case serves as a reminder that life sciences executives must exercise caution when describing ongoing clinical trials, given the risk that statements will later be challenged as misleading. But it is also a reminder of the potential power of loss causation arguments to dismiss otherwise-plausible securities fraud claims.

Second Circuit Affirms Dismissal of Securities Act Claims Arising From Reverse Securities Split, Holding That Reverse Split Was Not a ‘Sale’ And That Post-Split Securities Were Not Traceable to Allegedly Misleading Registration Statement

On March 24, 2026, the US Court of Appeals for the Second Circuit, resolving issues of first impression, affirmed the dismissal of a putative class action under the Securities Act against entities and individuals associated with Barclays. The plaintiffs were investors in exchange-traded notes (ETNs) issued by Barclays. They alleged that a 4:1 reverse split of the ETNs violated Sections 11 and 12(a)(1) of the Securities Act because the ETNs allegedly constituted unregistered securities and because Barclays allegedly issued a misleading registration statement for the ETNs. The US District Court for the Southern District of New York dismissed both claims, and the Second Circuit affirmed.

The ETNs at issue, which traded publicly under the ticker VXX, tracked expected future market volatility and were designed to enable sophisticated investors to manage daily trading risk. Before 2017, Barclays issued the ETNs under shelf registration statements, relying on its status as a well-known seasoned issuer (WKSI). Unlike normal issuers, WKSIs do not have to register each new batch of securities with the SEC. They instead can file open-ended shelf registration statements and then, when they want to access capital, can issue securities and pay the required SEC registration fees on a “pay as you go” basis.

Barclays gave up its WKSI status in 2017 after settling cease-and-desist proceedings brought by the SEC. In the confusion that followed, Barclays inadvertently issued more securities than it had pre-registered with the SEC. As a result, there was a period between July 2019 and October 2021 when Barclays issued ETNs that were not properly registered. During that time period, on April 23, 2021, Barclays executed a 4:1 reverse split consistent with the terms of an existing pricing supplement, exchanging every four ETNs for one of equivalent value. That same day, Barclays circulated a new pricing supplement (the “April Supplement”) disclosing the completed split and indicating it would govern Barclays’ future sales of post-split ETNs. The plaintiffs sued, alleging that the reverse split was a sale of unregistered securities actionable under Section 12(a)(1) and that the April Supplement was a misleading registration statement actionable under Section 11.

The Second Circuit rejected the Section 12(a)(1) claim, holding that “a split does not qualify as a statutory ‘sale’ unless it meaningfully changes the nature of the asset underlying the securities holders’ investment.” Here, the mandatory, value-neutral reverse split of the ETNs did not meet that standard: Barclays had an express contractual right to effect the split on any business day, investors received one ETN worth exactly as much as the four surrendered, and no meaningful investment decision was made. The court rejected plaintiffs’ argument that the split impaired redemption rights, noting that plaintiffs had themselves alleged an efficient and liquid secondary market for the ETNs and that the contractual right to complete a split had been priced into the original purchase. The court also declined to distinguish debt from equity securities, holding that the controlling inquiry applies to securities generally.

The Section 11 claim also failed because the plaintiffs had failed to plead traceability. In Slack Technologies, LLC v. Pirani (2023), the Supreme Court confirmed that Section 11 requires plaintiffs to plead that their securities are traceable to the challenged registration statement containing the alleged misstatement. The plaintiffs argued that the April Supplement was a new registration statement that incorporated prior allegedly misleading disclosures and that the new ETNs provided to investors in the reverse split were “offered” thereunder. The Second Circuit disagreed and held that, by its own terms, the April Supplement covered Barclays’ future sales from its own post-split inventory, not the ETNs delivered to investors through the reverse split itself. Because the ETNs at issue were not traceable to the April Supplement, and because that was the only registration statement the plaintiffs sought to challenge, the Section 11 claim failed.

In addition to charting new ground on the law applicable to reverse splits, the Second Circuit’s ruling is a reminder that Securities Act claims have highly technical legal elements that can be the basis for a successful motion to dismiss. Securities Act claims can often seem daunting at the pleading stage because they do not require pleading scienter and other elements often required under the Exchange Act. But here, the defendants prevailed by establishing that there was no “sale” for purposes of Section 12(a)(1) and no traceability for purposes of Section 11.

District of Massachusetts Denies Motions to Dismiss SEC’s Securities Fraud Claims Against Pharmaceutical Executives Who Allegedly Hid Negative FDA Feedback

On March 24, 2026, the US District Court for the District of Massachusetts denied motions to dismiss securities fraud claims brought by the SEC against the former CEO and the former chief business officer (CBO) of Allarity Therapeutics, Inc. (“Allarity”), a pharmaceutical company, although it granted the motion to dismiss of Allarity’s chief medical officer (CMO). According to the SEC, Allarity sought FDA approval for its cancer drug despite receiving unambiguous negative feedback from the FDA. The SEC alleged two theories of liability under Section 10(b) of the Exchange Act: misstatement liability as to the CEO and scheme liability as to the CEO, CBO, and CMO.

The case focused on a drug candidate (dovitinib) for renal cell carcinoma, which Allarity had licensed from a third-party pharmaceutical company. In December 2019, Allarity requested a meeting with the FDA to discuss filing an NDA for dovitinib. In advance of the meeting, the FDA expressed written concerns that Allarity’s proposed clinical data and statistical approach were inadequate to support the NDA. At the meeting, the FDA reiterated these concerns and recommended that Allarity undertake a new trial. Notwithstanding this negative feedback, the defendants drafted a press release claiming that “[the] FDA indicated that they would accept the [NDA] filing if submitted” and that Allarity “expects that dovitinib will be approved by [the] FDA as a safe and efficacious drug.” The CEO also characterized the meeting with the FDA as “positive” to Allarity’s board of directors (without disclosing the negative feedback). When a third party (the original developer of dovitinib) requested FDA meeting minutes, the CEO redacted all “negative information.” Allarity subsequently submitted an NDA for dovitinib without any new trial data. The same day, Allarity announced a $20 million investment, its stock began trading on NASDAQ, and the defendants received significant bonuses. 

Two months later, the FDA refused to file the NDA based on the same concerns it had previously expressed. Allarity’s stock price plummeted. In response to questions from Allarity’s board, the CEO acknowledged that filing the NDA had been critical to procuring the $20 million investment and helping Allarity avoid bankruptcy. 

First, the court found that the SEC adequately alleged fraudulent misstatements by the CEO. Statements that dovitinib was on the “fastest track to approval” and that Allarity “anticipate[d] . . . approval of” the NDA were misleading because the CEO failed to disclose the FDA’s unambiguously negative feedback. Moreover, the CEO’s later acknowledgment to the board — that filing the NDA was critical to procuring the $20 million investment — confirmed that statements about dovitinib’s prospects for approval were material. The SEC adequately alleged that the CEO was aware of the falsity of his statements and personally benefitted from them, adequately supporting scienter. 

Second, the court found that the SEC had adequately alleged scheme liability as to the CEO and CBO. Scheme liability cannot rest on the mere making of misstatements but requires “something extra” that shows a fraudulent scheme. The court found that the SEC alleged the “something extra” in two ways: through allegations that the CEO and CBO acted together to deceive the board into allowing the filing of a baseless NDA and through allegations the CEO redacted negative information in the meeting minutes provided to the third party. However, the court dismissed the claims against the CMO because she was not present at the board meeting where the CEO characterized the FDA meeting and did not disseminate the redacted minutes. While the CMO was copied on the email to the third party, that was not sufficient to support liability.

While many decisions emphasize that pharmaceutical companies need not disclose the ordinary back-and-forth discussion with the FDA, this decision provides an example in which the FDA’s negative feedback was so definitive that it rendered the company’s statements about the approval process misleading. Pharma and biotech companies should seek advice of disclosure counsel when they receive negative feedback from the FDA.