Monday, December 15, 2008

"Core Operations" Inference Works Against Plaintiffs: 4th Circuit

I have discussed in earlier posts how courts have reacted to pleadings that attempt to raise the requisite scienter inference by associating alleged misstatements with the "core operations" of the issuer. The 4th Circuit, however, turned the "core operations" influence around in an action against a drug maker in holding that a complaint failed to show scienter under the Tellabs guidelines. The court concluded that because the product involved in the alleged misstatements was so essential to the company's success that "[i]t is improbable that Inspire would stake its existence on a drug and a clinical trial that the company thought was doomed to failure."

As alleged, the maker of an experimental drug to treat dry eyes fraudulently misstated the results of its clinical trials. The appellate panel found after balancing the competing inferences as required by Tellabs that the innocent inferences that the company made limited disclosures about the "endpoints" of the studies for competitive purposes more compelling than suggestions of fraudulent reasons for the statements.

Securities Act claims also were insufficient, concluded the court. The plaintiffs failed to show why the statements in the prospectus and registration statement concerning the clinical trials were false or misleading.

Cozzarelli v. Inspire Pharmaceuticals Inc. (Link)