Eastern District of Wisconsin Grants Motion to Dismiss Securities Fraud Claims Against Pharmaceutical Company About Effectiveness of Prostate Cancer Drug Candidate

Eastern District of Wisconsin Grants Motion to Dismiss Securities Fraud Claims Against Pharmaceutical Company About Effectiveness of Prostate Cancer Drug Candidate

On July 15, 2026, the U.S. District Court for the Eastern District of Wisconsin granted a motion to dismiss a securities fraud class action under Section 10(b) of the Exchange Act against Essa Pharma Inc. (“Essa”), a clinical-stage pharmaceutical company that developed therapies for prostate cancer. The case centered on Essa’s development of masofaniten, a prostate cancer drug candidate. After an initial “monotherapy trial” involving masofaniten (i.e., testing masofaniten as a single agent), Essa pivoted to a clinical trial that combined masofaniten with enzalutamide, a standard-of-care prostate cancer drug (the “M-E combination trial”). On October 31, 2024, Essa announced that a futility analysis showed a low likelihood of meeting the study’s primary end point, so it was ending the M-E combination trial and terminating masofaniten’s development. After this announcement, Essa’s stock price fell by 73.08%.

The plaintiff filed suit, alleging that Essa had made misleading statements about masofaniten’s clinical performance in press releases, in SEC filings, and at conferences between March 14, 2023, and October 31, 2024. The plaintiff’s theory was that Essa had exaggerated masofaniten’s potential benefits and understated the negative effect of enzalutamide on masofaniten’s exposure levels. Specifically, the plaintiff alleged that Essa had targeted an “area under the curve” (AUC) metric of 300,000 for masofaniten’s exposure level, but that the defendants knew this could not be met based on existing data and interference from enzalutamide.

The court found that the amended complaint failed to allege a misstatement. The plaintiff’s theory hinged on mischaracterizing the 300,000 AUC figure as a minimum threshold for biological or clinical relevance, when in reality it was a target for maximum efficacy. In addition, Essa had disclosed enzalutamide’s effect on masofaniten exposure levels, explained efforts to address that effect through dosing adjustments, and never guaranteed that the M-E combination trial would have a positive outcome.

The court also found that the plaintiff failed to allege a strong inference of scienter. Here too, the plaintiff’s theory largely turned on an allegation that the defendants “knew or should have known their statements about masofaniten’s AUC were misleading since exposure in patients did not achieve the 300,000 AUC threshold.” But again, the 300,000 AUC was a target — not a minimum threshold for effectiveness — so masofaniten could be effective even if the threshold was not met. While the court granted leave to amend, the plaintiff declined to do so, ending the case.

This decision reinforces that false or misleading statements must be considered in context: Plaintiffs cannot state securities fraud claims against life sciences companies by distorting facts and data to allege, in hindsight, that clinical trials are doomed to fail.

Northern District of Illinois Grants Motion to Dismiss Securities Fraud Claims Concerning Generic Competition and Merger by a Pharmaceutical Company

On July 10, 2026, the U.S. District Court for the Northern District of Illinois granted a motion to dismiss in a putative securities class action under Sections 10(b) and 14(a) of the Exchange Act against pharmaceutical company Assertio Holdings Inc. (“Assertio”). The case focused on generic competition facing Assertio, as well as on its acquisition of Spectrum Pharmaceuticals Inc. (“Spectrum”).

Before the Spectrum acquisition, Assertio’s primary product was Indocin, an anti-inflammatory drug used to treat rheumatoid arthritis and similar conditions. Indocin was under intense pressure from generic competitors. In light of that competition, and in an effort to diversify its revenue stream, Assertio announced a stock-for-stock deal to acquire Spectrum, which sold a patented oncology drug, Rolvedon. Assertio and Spectrum issued a joint proxy statement to their stockholders, providing information about the transaction, including sales projections for Rolvedon.

After the acquisition closed, Assertio made three announcements that were followed by stock price declines. On August 3, 2023, Assertio issued a press release stating that a competitor had received approval for indomethacin suppositories (a generic competitor to Indocin) and that Assertio was withdrawing its 2023 financial outlook, after which the stock price fell 45.6%. On November 8, 2023, Assertio announced third-quarter results showing that Rolvedon’s actual net sales for the two months following the acquisition were much lower than projected in the proxy; Assertio’s stock price fell again. On January 3, 2024, Assertio announced the departure of its CEO. Plaintiffs sued. They alleged that, prior to the August 2023 announcement, Assertio had downplayed the competitive threat to Indocin by omitting two specific developments: pending FDA petitions for generic indomethacin suppositories and the weakness of litigation Assertio had brought against a compounder. They further alleged that Spectrum had inflated its pre-acquisition sales results and projections through “channel stuffing” (i.e., shipping more product to a distributor than a seller believes it can sell), which caused both the disappointing third-quarter 2023 results and the departure of Assertio’s CEO.

The court granted the defendants’ motion to dismiss. Insofar as the plaintiffs sought to sue Spectrum and its former executives, the court dismissed for lack of standing because the plaintiffs were Assertio stockholders, not Spectrum stockholders. As against the remaining defendants, the plaintiffs failed to plead a false or misleading statement. Assertio repeatedly disclosed the risk of generic competition facing Indocin, including that competitors were seeking FDA approval and that it was pursuing remedies against a compounder. Plaintiffs alleged that Assertio should have gone further, disclosing specific FDA petitions and the weakness of its lawsuit against the compounder. The court rejected these claims, noting that (i) both the FDA petitions and the lawsuit were publicly available, and (ii) Assertio had no duty to undermine its own litigation position in SEC filings. The court also rejected the plaintiffs’ theory that Spectrum’s sales were inflated based on alleged channel stuffing. As the court explained, channel stuffing is fraudulent only when returnable goods are booked as completed sales. Plaintiffs alleged no facts to support such a theory; for example, they did not allege excessive returns, fraudulently recorded sales, or any other specifics about particular transactions. While the plaintiffs relied on statements from alleged confidential witnesses, those statements did not provide particularized support for channel stuffing as opposed to innocent conduct (such as normal promotional discounts).

The decision underscores that securities claims cannot be based on disappointing post-acquisition performance alone. Where a company consistently discloses known competitive risks, plaintiffs must identify particularized facts showing that the company’s statements were misleading or that reported sales and projections were based on improper practices.

District of Massachusetts Dismisses Securities Act of 1933 Claims Against Biotechnology Company Where IPO Registration Statement Adequately Warned Investors About Rising R&D Costs

On June 29, 2026, the U.S. District Court for the District of Massachusetts dismissed with prejudice a putative securities class action brought by a stockholder of Zenas BioPharma Inc. (“Zenas”) against the company, its directors and officers, and the underwriters of its September 2024 initial public offering, alleging violations of Sections 11 and 15 of the Securities Act of 1933. Zenas is a clinical-stage biotechnology company developing obexelimab, a monoclonal antibody for autoimmune diseases.

At the time of its IPO, Zenas was conducting one Phase 3 trial, two Phase 2 trials, and one Phase 2/3 trial involving obexelimab. As the IPO registration statement disclosed, the trials were enormously expensive. During the first half of 2024, the company spent approximately $56.5 million on R&D, an increase of nearly 90% from the preceding six-month period. The registration statement also repeatedly warned that R&D expenses, operating losses, and capital requirements were expected to increase as development progressed and that additional financing would be required after the IPO.

The plaintiff challenged the level of detail in the registration statement. He complained that it reported financial information in annual and semiannual increments rather than by quarter, and that it omitted spending data for the in-progress third quarter of 2024. According to the plaintiff, quarterly data would have shown that the company’s R&D spending increased sharply between the first and second quarters of 2024 before plateauing in the in-progress third quarter. The plaintiff contended that this omission materially misled investors regarding the pace of spending and constituted the omission of a known trend required to be disclosed under Item 303 of Regulation S-K.

The court rejected those arguments, concluding that the registration statement was sufficiently detailed and not misleading, and that there was no SEC rule requiring the disclosure of quarterly financial results. The court found that investors were not misled: Zenas expressly informed investors that R&D spending had increased substantially, that multiple clinical trials were ongoing or newly initiated, and that expenses and losses were expected to continue increasing for the foreseeable future. Investors could not have reasonably inferred from the registration statement that spending had stabilized, declined, or represented only a temporary increase. The court also rejected the Item 303 claim. Even assuming the increase in R&D spending constituted a “known trend,” the court found that the trend had already been disclosed through the company’s financial results and other disclosures. The action was dismissed with prejudice.

This decision reinforces that Securities Act liability cannot be premised on the omission of granular financial information that is not required by SEC rules, provided the registration statement does not mislead investors about the company’s financial position.

Seventh Circuit Affirms Dismissal of Securities Class Action Against Animal Health Company Based on Inadequate Channel-Stuffing Allegations

On August 14, 2026, the U.S. Court of Appeals for the Seventh Circuit affirmed the dismissal of a putative securities class action alleging that Elanco Animal Health Inc. (“Elanco”) and certain of its officers and directors had made false and misleading statements. The complaint brought claims under Section 10(b) of the Exchange Act and Sections 11 and 12(a) of the Securities Act, alleging that Elanco failed to disclose “channel stuffing.”

Elanco sells animal health products, primarily to wholesale distributors. Before its September 2018 spinoff from Eli Lilly, Elanco shifted from a “move-out” sales model — which balanced distributor purchases with end-user demand — to a “move-in” model that incentivized distributors to purchase additional product through discounts, rebates, and extended payment terms. During 2019 and early 2020, Elanco’s executives repeatedly attributed revenue growth to strong underlying demand. But on May 7, 2020, Elanco announced that first-quarter revenues had declined 10% year over year, in part because the company had reduced channel inventory by approximately $60 million and expected additional reductions of $80 million to $100 million, principally during the second quarter. Elanco’s share price fell 13% following the announcement.

The plaintiffs alleged that the move-in model constituted improper channel stuffing. In support, they relied on five alleged confidential witnesses who described pressure to meet sales targets, distributors holding excess inventory, and management’s awareness of a gap between distributor sales and end-user demand. The district court dismissed the complaint, reasoning that only fraudulent channel stuffing is actionable, that the complaint failed to plead scienter, and that the Securities Act claims were subject to Rule 9(b) because the complaint was “bestrewn with averments of fraud.”

The Seventh Circuit affirmed, although it disagreed with some of the district court’s reasoning. Siding with the Second Circuit, the court held that a channel-stuffing scheme need not itself be fraudulent to be actionable as securities fraud. For purpose of securities fraud, the Seventh Circuit reasoned, what matters is whether investors were misled about what the company was doing, which could be true even if the underlying conduct was not independently fraudulent. The Seventh Circuit also disagreed with the district court’s view that COVID-19 was the most compelling nonfraudulent inference, noting that Elanco had already switched back to a move-out model in the fourth quarter of 2019, before the pandemic began.

Nonetheless, the Seventh Circuit ultimately agreed that scienter was not adequately alleged. Even while the move-in model was in effect, Elanco’s sales were real, product-return rates were low (declining from 0.6% of net revenues in 2018 to 0.2% in 2019), and the company never restated its financials. While senior executives were allegedly confronted about channel-stuffing concerns at monthly meetings, the complaint contained no information about how they responded. Ultimately, the more compelling inference was that the move-in model reflected a legitimate effort to incentivize distributors, not that executives “knew that their channel-stuffing practice was going to implode but kept saying demand was strong anyway.”

The Seventh Circuit also dismissed the Securities Act claims. It concluded that those claims “sounded in fraud” and thus were subject to the heightened pleading requirements of Rule 9(b) because they relied on the same alleged course of conduct as the Exchange Act claims. While the plaintiffs disavowed any allegation of intentional fraud in pleading their Securities Act claims, the Seventh Circuit concluded it was more appropriate to look to the substance of the claims as opposed to such “formalistic disavowals.” Finally, the plaintiffs relied on Item 303, alleging that the channel-stuffing scheme was a “known trend” that Elanco had to disclose. The Seventh Circuit disagreed, holding that Item 303 requires the disclosure of “external trends that might affect a company’s exposure, not internal business strategies for dealing with those trends.”

This decision reaffirms that plaintiffs cannot state securities claims based on generalized channel-stuffing allegations, even if they try to dress up such allegations with confidential witness statements. Rather, plaintiffs require particularized facts demonstrating that executives knew their distribution strategy was unsustainable or that their characterizations of demand were false.

Southern District of New York Grants Motion to Dismiss Securities Fraud Claims Against Fitness Company, Finding Failure to Plead Scienter

The U.S. District Court for the Southern District of New York granted Peloton Interactive Inc.’s (“Peloton”) motion to dismiss a putative securities class action brought against Peloton and certain of its officers. The district court dismissed the plaintiffs’ remaining claims under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5, which the Second Circuit had revived in part following the district court’s 2024 dismissal of the action. The Second Circuit had separately affirmed the dismissal of the plaintiffs’ insider trading claims under Section 20A.

The plaintiffs challenged the following statements by the defendants: (i) a statement by the CEO, during an August 2021 earnings call, that the company’s decision to reduce the price of its flagship bike by $400 was an “absolutely offensive,” rather than defensive, business strategy; and (ii) a risk disclosure regarding “excess inventory levels” in an August 2021 Form 10-K and November 2021 Form 10-Q. The plaintiffs contended these statements were false and misleading because, in reality, Peloton had reduced the bike’s price to address an inventory glut, not as an aggressive market-share play.

The court dismissed these claims for failure to plead scienter. The plaintiffs’ primary scienter argument was that the individual defendants were motivated to defraud investors in order to buy themselves time to cancel their Rule 10b5-1 trading plans before the alleged “truth” was disclosed. The court rejected this theory, finding that the majority of the allegedly suspicious stock sales occurred before the class period (which had been narrowed by the prior decision) and therefore could not demonstrate motive to inflate the price during that period. Further, the court concluded that the remaining class-period sales, which accounted for less than 5% of total sales during the original class period, were neither consequential nor unusual enough to establish motive, were made pursuant to preexisting 10b5-1 plans, and ceased more than six weeks before the alleged corrective disclosure.

The plaintiffs also relied on confidential witness statements, but the court found these allegations inadequate, particularly because they were undermined by Peloton’s detailed and accurate contemporaneous disclosures regarding inventory levels, demand forecasts, and pandemic-related risks. None of the confidential witnesses, individually or collectively, supported an inference that any individual defendant actually believed Peloton had excess inventory or that such inventory levels were the cause of the price cut. The more compelling inference was that the defendants genuinely believed that building inventory was necessary to meet expected demand during the pandemic and that any alleged deficiencies in the challenged statements were the result of forecasting difficulty rather than fraud.

The decision reinforces that insider sales under preexisting trading plans are often inadequate to plead scienter, as are sales occurring outside of the relevant class period. It is also a reminder that executives’ optimistic characterization of corporate strategy is often not actionable as fraud, even in the face of less-than-favorable business conditions, particularly where the company provides detailed, contemporaneous disclosures.

Southern District of New York Partially Denies Motion to Dismiss Securities Fraud Claims Against Pharmacy Company, Sustaining ‘Half-Truth’ Theory Based on Omission of AI-Driven Cost Savings

The U.S. District Court for the Southern District of New York partially denied a motion to dismiss a putative securities class action against CVS Health Corporation (CVS) and four of its current and former senior executives brought by CVS stockholders alleging violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5.

The case arose against the backdrop of CVS’s Medicare Advantage business, operated through its Health Care Benefits (HCB) division. Under the payment model governing Medicare Advantage, CVS received a fixed payment per enrollee regardless of an enrollee’s use of CVS’s services. The plaintiffs alleged that CVS profited by minimizing the cost of medical services utilized by enrollees — a dynamic measured principally by the medical benefits ratio (MBR). CVS enjoyed strong financial performance from 2019 to 2023, attributing its low MBR publicly to strong underlying performance and depressed utilization caused by the COVID-19 pandemic.

On May 1, 2024, however, CVS issued a Form 8-K disclosing that its MBR had spiked to 90.4% in the first quarter of 2024 — an increase of 580 basis points year over year — and that HCB’s adjusted operating income had decreased by 59.9%. CVS reduced its projected cash flow from operations by $1.5 billion. After the announcement, CVS’s stock price fell by 16.8%. Then, on October 17, 2024, the U.S. Senate’s Permanent Subcommittee on Investigations issued a report stating that starting in 2019, CVS had deployed AI and prior authorization requirements that generated $1.1 billion in medical cost savings. This allegedly included using AI tools to auto-approve claims without human review and to recommend costly procedures, as well as procedures known from prior years’ data to increase the likelihood of denial. CVS began phasing out these tools in 2023 and completed the phaseout in 2024.

The plaintiffs based their fraud theory on three categories of alleged misstatements: (i) statements that CVS complied with Medicare regulations and was “committed to responsible AI”; (ii) statements in late 2023 and early 2024 that CVS’s 2024 financial guidance fully accounted for known utilization trends; and (iii) statements attributing CVS’s financial success primarily to strong underlying performance and the COVID-19 pandemic depressing utilization.

The court dismissed the first category, holding that the plaintiffs had not pled with sufficient particularity that CVS’s use of AI was illegal or contrary to applicable Medicare regulations. The court likewise dismissed the “responsible AI” statements as inactionable puffery or opinion.

The court did, however, allow the second and third categories of misstatements to survive, finding that CVS’s alleged omissions about its use of AI tools plausibly rendered its public statements actionable “half-truths.” Specifically, the statements that CVS’s performance was driven by COVID-19 depressing utilization and “strong underlying performance,” and that the 2024 guidance had “fully baked in” all known utilization trends could be materially misleading because they failed to disclose that CVS had generated $1.1 billion in cost savings by deploying AI tools, which were now being phased out with predictable effects on CVS’s future utilization rates and financial performance. The court further found that scienter was adequately alleged as to the current and former CVS executives, given their familiarity with HCB’s operations and profitability, the former CEO’s own public statements about AI use, and a reasonable inference that defendants would be reluctant to disclose that they were generating massive cost savings by subjecting Medicare patients to prior authorization requirements.

This decision is a reminder that, when companies speak about the benefits of AI (such as significant savings and profits), robust disclosure about the risks, downsides, and limitations of AI is important to reduce risk. Companies navigating the rollout of AI workstreams, even temporarily or on a trial basis, should be conscious of the impact on their business and consult with counsel about how to disclose AI usage.

Sixth Circuit Vacates Denial of Class Certification and Reverses Grant of Summary Judgment in Securities Fraud Suit Against Freddie Mac

On August 21, 2026, the U.S. Court of Appeals for the Sixth Circuit reversed in part and vacated in part rulings by the U.S. District Court for the Northern District of Ohio that denied class certification and granted summary judgment to Freddie Mac and certain former executives in a securities fraud action brought by the Ohio Public Employees Retirement System (OPERS). The claims, brought under Sections 10(b) and 20(a) of the Exchange Act of 1934, alleged that Freddie Mac and its executives misled investors concerning the extent to which it was underwriting higher-risk mortgage products such as subprime and Alt-A mortgages before the 2008 financial crisis. The case, originally filed in January 2008, has yet to reach trial following a lengthy procedural history involving an initial dismissal that was reversed on appeal in 2016; subsequent appellate proceedings, including a 2023 appeal dismissed for lack of jurisdiction; and two district court rulings at issue in the present appeal: the denial of class certification in 2018 and the grant of summary judgment in favor of the defendants in 2025.

In denying class certification, the district court concluded that OPERS could not establish reliance on a class-wide basis because Freddie Mac’s stock did not trade in an efficient market and, alternatively, Freddie Mac had rebutted any presumption of reliance. The district court also concluded that OPERS had failed to establish that damages were measurable on a class-wide basis. In granting summary judgment, the district court concluded that OPERS had failed to establish material misrepresentations, scienter, reliance, loss causation, or damages.

On appeal, the Sixth Circuit found that the plaintiff established market efficiency and was accordingly entitled to a presumption of reliance on the defendants’ alleged misstatements. In so holding, the Sixth Circuit found that the district court had improperly rejected the plaintiff’s “price-maintenance” theory, under which the defendants’ alleged misstatements maintained Freddie Mac’s already-inflated stock price rather than causing it to increase. The court explained that the inability of the plaintiff’s expert to identify price increases following the alleged misstatements was therefore consistent with, rather than fatal to, the plaintiff’s theory. While the district court also concluded that Freddie Mac had rebutted the presumption of reliance, the Sixth Circuit ordered the district court to reconsider that issue in light of its rulings.

The court agreed that the district court “did not abuse its discretion” in concluding that the plaintiff failed to establish that damages could be measured on a class-wide basis because its expert did not identify a sufficiently specific damages methodology. However, the Sixth Circuit concluded that the district court’s ruling on reliance may have affected its ruling on damages methodology and remanded to give the plaintiff another chance to put forward a damages methodology.

As to the motion for summary judgment, the Sixth Circuit disagreed with the district court and found that a reasonable juror could conclude that Freddie Mac’s statements concerning its subprime and Alt-A exposure were misleading, where Freddie Mac publicly represented that it had little subprime exposure while failing to disclose certain loans that arguably cut against that statement. The Sixth Circuit also found that a reasonable juror could find scienter based on evidence that Freddie Mac’s internal reports reflected greater subprime and Alt-A exposure than it had publicly disclosed. Although the defendants argued that their purchases of additional Freddie Mac stock undermined scienter, the court held that this evidence only created a fact issue for trial. The court also vacated the district court’s loss-causation ruling and permitted the plaintiff to present evidence of loss causation and damages consistent with its price-maintenance theory.

This decision is a reminder that, under a price-maintenance theory, plaintiffs can sometimes establish price impact by showing that the alleged misstatements maintained existing stock-price inflation, although defendants may still rebut the presumption of reliance by demonstrating that the statements had no price impact.