Circuit Upholds Dismissal of Fraud Claims Against Genzyme

Circuit Upholds Dismissal of Fraud Claims Against Genzyme Photo: Denis Kot/iStockphoto.com.

A securities fraud action against a pharmaceutical company that sells natural biological drugs failed because the plaintiffs did not “convey a cogent and compelling inference of deceitful intent, or reckless disregard of the truth, on the part of defendants,” the U.S. Circuit Court of Appeals for the First Circuit has ruled.

Judge Juan Torruella, writing for a three-judge panel in Deka International S.A. Luxembourg v. Genzyme Corp., said the plaintiffs did not make a case for a wrongful state of mind on the part of Genzyme and its executives sufficient to withstand the heightened pleading standards under the Private Securities Litigation Reform Act.

Genzyme’s main products at the time were biologics used to treat metabolic disorders resulting from the absence of enzymes. All three products came with limited monopolies intended to entice companies like Genzyme to treat orphan diseases that otherwise might not lead to commercially viable drugs.

The plaintiffs cited the company’s failure to disclose right away that the U.S. Food and Drug Administration found in October 2008 that it failed to comply with established good manufacturing practices at its Allston, Mass., plant. The plaintiffs also cited failure to disclose multiple failures by its bioreactors due to a rare virus.

But the First Circuit ruled that the defendants had no affirmative duty to disclose those events—and that Genzyme did inform investors of its engagement with FDA concerning regulatory issues and supply shortages.

“A corporation cannot be expected to inform the market of any and all developments that might possible affect stock value,” the panel said. “Where Genzyme kept the market apprised of supply shortages, we are not compelled to infer that defendants acted with fraudulent intent by taking the time to investigate, and discover, what was essentially unknown to them” concerning the reason for the reactors’ failure.

It did not constitute evidence of intent to commit securities fraud that Genzyme used “rather rosy language to express optimism” that the FDA would approve its Lumizyme biologic drug, the court said. Those statements were not categorial, it found.

“Plaintiffs’ account is plausible,” Tourrella wrote. “However their allegations do not muster sufficient strength to meet the formidable pleading standard set by Congress for securities fraud claims.”

Tourrella also held that U.S. District Judge George O’Toole did not abuse his discretion in dismissing the complaint with prejudice, at the same time noting “our discomfort” with his decision.

The panel included Judge Ojetta Rogeriee Thompson and Senior Judge Kenneth Francis Ripple of the Circuit Court of Appeals for the Seventh Circuit, sitting by designation.

Amaris Elliott-Engel contributes to law.com.

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