Securities Snapshot
March 9, 2021

New York Federal Court Dismisses Securities Fraud Claims Against Alkermes For Lack Of Fraudulent Intent

New York Federal Court Dismisses Securities Fraud Claims Against Alkermes for Lack of Fraudulent Intent; Fourth Circuit Affirms District Court’s Denial of Leave to File Amended Complaint Against Triangle Capital as Futile; Federal Judge Rules that Weil Must Turn Over Certain Work Product Related to Walgreens-Rite Aid Failed Merger; Delaware Supreme Court Issues Landmark Decision in D&O Insurance Case.

On February 26, 2021, in In re Alkermes Public Limited Company Securities Litigation, Judge LaShann Dearcy Hall of the United States District Court for the Eastern District of New York dismissed a putative securities class action lawsuit filed by stockholders of Alkermes PLC. In dismissing the case, the court held that plaintiff failed to adequately allege that Alkermes, or its directors, acted with fraudulent intent with respect to any public statements made regarding clinical trials of ALKS 5461, an opioid combination product originally intended to treat Major Depressive Disorder (“MDD”) and cocaine dependence.

Following the FDA Advisory Committees’ vote against the approval of ALKS 5461, in November 2018, plaintiff brought suit against the company and its directors, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Specifically, plaintiff alleged that Alkermes and its directors misled investors about the FDA’s purported “concerns” about the company’s trial designs for the drug and that Alkermes knowingly moved forward with clinical trials and the filing of a New Drug Application that were doomed to fail while painting an optimistic picture for investors.

In seeking dismissal, defendants argued that plaintiff failed to sufficiently allege that defendants made any material misstatement or omission, acted with scienter, or caused any loss. Defendants also maintained that the lack of scienter alone justified dismissal as plaintiff selectively quoted from FDA correspondence to exaggerate the agency’s purported “concerns” about Alkermes’s clinical trial design and made allegations amounting to nothing more than “fraud by hindsight.”

Agreeing with defendants, the court dismissed the case in its entirety, with prejudice, for failing to sufficiently allege defendants acted with scienter. In particular, the court noted that plaintiff “overstated the import of the information — the ‘concerns’ — conveyed by the FDA” about the clinical trials and that the court was “troubled by Plaintiff’s blatant mischaracterization” of the “FDA briefing document, upon which [plaintiff] rel[ied] exclusively to support [its] argument for scienter.” The court held that “[s]cienter arises in this context, where the management knows that certain facts will necessarily prevent regulatory approval ... and conceals [them] from the investing public,” and nothing in the FDA briefing document “reveal[s] any information ... that should reasonably have been interpreted to suggest that FDA approval of ALKS 5461 was not possible.” Instead, the dialogue between the FDA and Alkermes reflected a “collective expectation that the process was an iterative one.” Far from supporting a “strong inference of scienter” as required, the court held that these facts failed to support “even an inference of fraudulent intent that is cogent and at least as compelling as the opposing inference of nonfraudulent intent.”

Fourth Circuit Affirms District Court’s Denial Of Leave To File Amended Complaint Against Triangle Capital As Futile

On February 22, 2021, in LifeWise Family Fin. Sec., Inc. v. Triangle Capital Corp., a three-judge panel of the Fourth Circuit Court of Appeals affirmed the district court’s denial of plaintiff investors’ request for leave to file a proposed second amended complaint against Triangle Capital Corp., a business development company (“BDC”) that focused primarily on mezzanine financing between 2013 to 2015. The panel agreed that amendment would be futile because plaintiffs had failed to adequately allege defendants’ scienter, or intention to mislead investors. Plaintiffs alleged that Triangle and its directors misled investors about the quality of its mezzanine deals and the contracting nature of the mezzanine lending market in 2014 and 2015, which ultimately caused Triangle’s shares to decrease by twenty-one percent. The district court dismissed the action without prejudice for failure to allege that any of the statements made by the defendants were in fact false when made. Plaintiffs moved for leave to file an amended complaint, but the district court held that any amendment would be futile because, while the proposed amendments may have remedied the issues identified with respect to the purported misrepresentations, such amendments would not have cured plaintiffs’ failure to adequately allege scienter.

The Fourth Circuit affirmed the district court’s ruling. Specifically, the panel held that even if the amended complaint alleged that Triangle’s executives knew of the industry opinions that the mezzanine lending market was contracting (assuming, for the sake of argument, that this information was material to investors), it lacked sufficient allegations that any of the defendants acted with fraudulent intent. The panel rejected plaintiffs’ interpretation of their self-styled “key” piece of evidence, a 2015 industry report compiling the opinions of various middle market BDCs, holding instead that the report contained “just as many optimistic statements about the state of the mezzanine lending market as it does those expressing concern.”

The panel also concluded that the amended complaint’s attempt to use Triangle’s 2017 admissions that the investment strategy turned out to be a poor one was nothing more than “fraud by hindsight” of the type that “Congress intended for the PLSRA to eliminate.” The panel reasoned that “[e]ach day, executives must make difficult judgment calls,” and sustaining plaintiffs’ complaint would “allow investors [] to use the benefit of 20-20 hindsight to turn management’s business judgment into securities fraud.” The panel emphasized the numerous disclosures that Triangle had made to investors regarding the level of risk involved in their investments, and agreed with the district court’s finding that these “contextualized” the challenged statements and undermined any inference of scienter.

Federal Judge Rules That Weil Must Turn Over Certain Work Product Related To Walgreens-Rite Aid Failed Merger

On February 25, 2021, in Chabot v. Walgreens Boots Alliance, Inc., a United States Magistrate Judge for the Middle District of Pennsylvania ruled that Weil, Gotshal & Manges LLP must turn over documents describing or referencing written or oral communications between Weil attorneys and defendants, including internal law firm communications, to plaintiffs in a class action lawsuit arising from the failed merger between Rite Aid and Walgreens that was announced in late 2015 but ultimately called off in 2017.

In the ongoing lawsuit, plaintiffs, Rite Aid shareholders, allege that Walgreens’ CEO and CFO artificially inflated the value of Rite Aid stock by claiming that they knew the FTC would approve the proposed merger. Four months before the close of fact-discovery, plaintiffs served Weil with a subpoena seeking “all documents drafted by, received by, possessed by, or sent from” three Weil attorneys “concerning the FTC review of the Proposed Transactions.”

Weil moved to quash the subpoena on the basis of undue burden, relevance, and privilege. Weil argued that only those documents that contained actual communications between Weil and Walgreens executives were relevant to the case and such documents had already been produced. Weil further argued that the documents were protected by the work product privilege and fell outside the scope of any waiver by Walgreens. In response, plaintiffs asserted that Walgreens opened the door to production given its reliance on an advice of counsel defense, and, thus, all documents relating to Weil’s advice regarding the FTC approval process were relevant, subject to waiver, and must be produced.

The court denied Weil’s motion to quash the subpoena, in part, holding that the requested materials relating to the FTC review process were relevant and that Walgreens had waived the work product doctrine as to certain of the materials. Citing the Federal Circuit’s decision in In re EchoStar Communications Corp., the court reasoned that the requested documents could be parsed into three categories: (1) communications between Weil and Walgreens; (2) internal Weil documents analyzing the law, facts, trial strategy, and so forth; and (3) documents that discuss a communication between attorney and client concerning the subject matter of the case but are not themselves communications to or from the client. The first category of documents had already been produced. With respect to the second category, the court determined that such materials need not be produced, as “opinion work product deserves the highest protection from disclosure[,] ... outweigh[ing] the potential sword-and-shield litigation tactics.” With respect to the third category, the court held that “[d]efendants opened the door to production of all materials which reference communications between [d]efendants and conveyors of FTC review information ... [b]y claiming that their statements reflected their genuine beliefs regarding the FTC review process.” Thus, the court held that privilege was waived as to the third category of documents, and ordered Weil to produce internal documents referencing or describing written or oral communications between Weil attorneys and defendants regarding the FTC review process, but allowed Weil to redact any legal analyses or mental impressions within such material that were not communicated to Walgreens.

Delaware Supreme Court Issues Landmark Decision In D&O Insurance Case

On March 3, 2021, in RSUI Indemnity Co. v. Murdock, a unanimous Delaware Supreme Court issued a landmark decision regarding the scope of directors’ and officers’ liability insurance coverage. The Delaware Supreme Court upheld several lower state court rulings in favor of the insureds, clarifying that Delaware law permits coverage for claims of fraudulent conduct, resulting in RSUI having to pay out the full $10 million excess directors and officers policy it had issued to Dole Food Company, Inc., plus more than $2.3 million in interest.

The lawsuit stems from a controversial 2013 “going-private” transaction executed by Dole’s CEO, David Murdock. Following the transaction, various Dole stockholders sued in the Delaware Court of Chancery for breach of fiduciary duty and brought a separate appraisal action. Following a nine day trial, the court issued a 106-page memorandum opinion on the breach of fiduciary duty claims, finding that defendants had “engaged in fraud” and that the two director defendants were jointly and severally liable for approximately $150 million in damages. The parties entered into settlement negotiations but, before the Delaware Court of Chancery approved the parties’ agreed upon settlement, former shareholders who had sold their Dole shares prior to the merger, and were thus not included in the prior suit, filed a securities fraud action in connection with the transaction in federal court in Delaware. Following mediation of the federal action, Dole negotiated an additional settlement of $74 million, plus interest.

Meanwhile, six of Dole’s eight D&O insurers filed suit in Delaware Superior Court, seeking a declaratory judgment that the settlements were not covered under their insurance policies. All but RSUI ultimately settled and the Delaware Superior Court entered a judgment requiring RSUI to pay out its full $10 million policy limit plus pre-judgment interest. RSUI then appealed to the Delaware Supreme Court.

The Delaware Supreme Court upheld the lower court’s rulings in all respects. Critically, the Supreme Court agreed that Delaware law, rather than California law (which expressly disallows insurance coverage for fraudulent conduct), governed the policy. While Dole’s principal place of business and operations were in California, the Delaware Supreme Court stressed the importance of the company’s state of incorporation — Delaware. The court reasoned that, “in the vast majority of cases, Delaware law governs the duties of the directors and officers of [a] Delaware corporation to the corporation, its stockholders and its investors” and, thus, “corporations must assess their need for D&O coverage with reference to Delaware law.”

The court also rejected RSUI’s argument that fraud should be uninsurable as a contravention of public policy in Delaware. Instead, “reaffirming [Delaware’s] respect for the right of sophisticated parties to enter into insurance contracts as they deem fit,” the court held that the Delaware General Assembly had expressed the opposite policy when it enacted legislation authorizing corporations to purchase D&O insurance “against any liability.” The court pointed out that adopting a “blanket prohibition” against D&O coverage for fraud “would leave many injured parties without a means of recovery” in stockholder litigation.

The court also agreed that the policy’s fraud exclusion did not preclude insurance coverage as it applied only to fraud “established by a final and non-appealable” judgment. Although the parties clashed as to whether the exclusion applied to the stockholder action in the Delaware Court of Chancery, given that the securities class action was a separate proceeding and did not implicate the final judgment exclusion, the court agreed that the $75 million securities action settlement was more than enough to exhaust RSUI’s policy limit.

Finally, the Delaware Supreme Court rejected RSUI’s argument that it need not pay the full loss unless the insureds proved what portion of the loss should be allocated to covered matters rather than uncovered matters. Once again endorsing the lower court’s reasoning, the Delaware Supreme Court held that it had properly applied the “larger settlement rule,” under which a loss is fully recoverable unless the insurer can show that the liability for non-covered conduct increases the insurer’s liability. Because RSUI could not show that the acts of uninsured parties increased the amount of the settlement, the court held that the full amount of the settlement was covered.

Morgan Mordecai

Dylan Schweers