b'The Second Circuit also rejected plaintiffs secondThe Second Circuit concluded that thereargumentthat the MicroCool gown was so import-ant to Avanos and Kimberly-Clark that their executives was no connective tissue betweenmust have known of the alleged falsity of the repre-the testifying employees knowledge ofsentations at issue. On this point, the court held that plaintiffs naked assertion that the MicroCool gowns the problems with the MicroCool gownwere key product[s] was plainly insufficient to raise a and the corporate defendants allegedstrong inference of collective corporate scienter.misstatements. Lehmann v. Ohr Pharmaceutical Inc., Case No. 19-3486, 830 Fed. Appx. 349 consumer fraud trial concerning the MicroCool gown(2d Cir. 2020) that took place in 2014. The employees testified thatSubsequent Clinical Trial Results they had prepared documents for senior Kimberly-Clark executives that detailed manufacturing problemsBefore its 2019 merger with NeuBase Therapeutics, and resulting product compliance failures, and thatInc., Ohr Pharmaceutical Inc. (Ohr) was a biotech-those documents had been presented to senior man- nology company focused on developing products for agement. Despite these new proposed allegations, thethe treatment of cancer cachexia and wet age-related district court ruled that the proposed amended com- macular degeneration (wet AMD). In 2009, Ohr pur-plaint did not adequately allege scienter against anychased the rights to Squalamine, a drug being devel-defendant and denied plaintiffs motion on that basis. oped to treat wet AMD by a company named Genera. Plaintiff appealed the decision to the Second CircuitOhr subsequently began developing Squalamine to as to the company defendants only, arguing that thebe delivered through an eye drop rather than Generas proposed amended complaint raised a strong inferenceintravenous delivery method. In 2012, Ohr began its of corporate scienter based on the testimony of thefirst testing of Squalamine in humans in a Phase 2 three employees in the 2014 consumer fraud trial, whichclinical trial. In June and August 2014, Ohr announced plaintiff contended may be imputed to Avanos andinterim results from the Phase 2 trial, which reflected Kimberly-Clark. Plaintiff also advanced a core opera- that Squalamine was producing beneficial results and tions argumentthat the MicroCool gowns were sopatients were experiencing significant improvements. central to the companies business that senior manage- The company highlighted that participants in the treat-ment would be expected to be familiar with defects andment arm of the trial showed a marked improvement poor testing. The Second Circuit affirmed the districtversus the placebo arm, and touted the trial as truly courts decision in full. remarkable. In March 2015, the company announced final results of the Phase 2 clinical trial, which continued With respect to plaintiffs first argument, the Secondto show positive outcomes. Throughout 2014 to 2017, Circuit held that the testimony from the 2014 trial wasthe company continued to describe the results from insufficient to show that any individual whose knowl- the Phase 2 trial in numerous SEC filings. However, in edge could be imputed to the corporate defendantsJanuary 2018, Ohr announced the results of a Phase 3 had acted with scienter. Although the testifying employ- trial of Squalamine, which showed that trial participants ees stated that they had prepared documents detailingreceiving Squalmine fared worse on eye exams than compliance failures and presented those documentsparticipants receiving placebo eye drops. The compa-to senior executives, the court determined that thisnys stock price fell more than 81% on the news.testimony was not sufficiently particularized to raiseOn February 14, 2018, investors filed a putative class a strong inference of scienter against any individual,action complaint against Ohr and certain of its officers much less one whose knowledge may be imputedin the Southern District of New York, alleging violations to the Corporate Defendants. Nor could corporateof Section 10(b) and 20(a) and Rule 10b-5 of the 1934 scienter be imputed from the state of mind of the threeAct. Plaintiffs alleged that defendants statements high-testifying employees themselves, because the stepslighting the interim and final Phase 2 data misleadingly those individuals took to raise concern about thefailed to disclose that the trials placebo arm did not MicroCool gowns testing failures belie any inference ofperform as well as could be expected based on exist-fraudulent intent. The Second Circuit concluded thating wet AMD data, which made the improvement attrib-there was no connective tissue between the testify- utable to Squalamine look much larger than it would ing employees knowledge of the problems with thehave been had the placebo arm performed as expect-MicroCool gown and the corporate defendants allegeded. Plaintiffs alleged that if the placebo arm had per-misstatements. formed as expected, the improvement in participants 25'