A district court granted a biotech company's motion to dismiss a complaint after finding that scienter was not sufficiently pleaded. The complaint alleged that the company knew of declining sales well in advance, but did not disclose this fact in order to raise funds in a public offering. Taking all of the allegations together, the court concluded that the officer defendants' routine fundraising objectives and their lack of insider trading severely undercut any inference of scienter. The complaint was dismissed without leave to amend (Kong v. Fluidigm Corporation, February 14, 2022, Hamilton, P.).
Declining sales. Fluidigm Corporation specializes in mass cytometry and microfluidics/genomics, which are used in the study of diseases and to help develop therapies. Since 2017, the company has relied on increasing revenues from mass cytometry. According to the complaint, Fluidigm knew, but did not disclose, that sales of its mass cytometry were expected to decline in the last two quarters of 2019. Specifically, the complaint alleged that Fluidigm was able to forecast the sales pipeline well in advance because the ordering sales cycle was typically six to 12 months, meaning that the defendants knew in late 2018 that an abrupt decrease in sales would occur in the second half of 2019.
According to the plaintiff, Fluidigm, through the second quarter of 2019, did not report what it knew—that the revenue from mass cytometry would decline through the rest of the year. The mass cytometry sales decline in fact continued into the first quarter of 2020. According to the complaint, the officer defendants were intimately involved with the company's most significant source of revenue and were motivated to maintain an appearance of financial health before public offerings. The amended complaint was dismissed with leave to amend in August 2021 after the court concluded that confidential witness statements failed to connect the witnesses’ disagreements about corporate strategy with any actually false statements or scienter.
Lack of motive. The second amended complaint alleged violations of the antifraud and controlling persons provisions of the Exchange Act. Fluidigm argued that the plaintiff failed to allege any actionable misrepresentations and scienter. The court said that it addressed falsity at length in the previous order and would not do so again, but even if the amendments regarding falsity were sufficient, the allegations regarding scienter fell short.
The court pointed out Ninth Circuit precedent stating that a lack of stock sales or the absence of insider trading can undermine any inference of scienter. In this case, there were no allegations of insider trading or suspicious stock sales. On the contrary, Fluidigm's CEO purchased company shares in August of 2019. Next, the plaintiff contended that Fluidigm was motivated to conceal declining sales so that it could raise funds in an imminent public offering. Even if this allegation were true, the court said, raising capital is a common corporate objective and is not, without more, sufficient to allege scienter. Taking all of the allegations into consideration, the court concluded that the complaint fell short of establishing a strong inference of scienter and accordingly dismissed the complaint without leave to amend.
The case is No. 20-cv-06617.