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Sarepta Therapeutics, a drug research and development company, won the recent federal appeal over the securities fraud lawsuit against them that was dismissed by the lower federal district court. The lawsuit was filed after the company's stock took a large dive after bad news was announced about the FDA denying approval.
The First Circuit Court of Appeals affirmed the dismissal and confirmed that the plaintiffs failed to allege sufficient facts inferring the defendants intentionally or recklessly deceived investors. In fact, the appellate went into great detail reviewing the facts which show that Sarepta advised investors of the risks, and though optimistic, were transparent about the items of caution.
Sarepta was trying to get a approval from the FDA for a novel gene therapy drug to fight a type of muscular dystrophy, however, when the news that FDA deemed their application for approval as "premature," Sarepta stocked dropped 64 percent.
The shareholders that purchased stock prior to this drop, and particularly during a fourth month time period where Sarepta was openly "cautiously optimistic" of the FDA's approval, were naturally rather upset, and brought this class action for securities fraud. They alleged the company misled investors into believing approval was all but assured.
As the appellate court noted, the FDA did later grant approval for the drug, but that happened well after this litigation commenced, but objectively still seems to play in Sarepta's favor. Also playing in Sarepta's favor, despite having an optimistic outlook on approval, the court clearly explained that Sarepta clearly explained to investors that there were challenges, and obstacles left to overcome before approval.
What both courts specifically found to be lacking was the element of scienter necessary to prove securities fraud. Given the clear information provided by Sarepta, both courts failed to find the requisite mindset that Sarepta recklessly or intended to deceive the public, given that the information about the potential problems were clearly disclosed.
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