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Pharmaceutical company defense lawyers have scored several recent victories in securities class actions in Boston federal court, but a pending U.S. Supreme Court case about the criteria for complaints in securities cases could expose the industry to a new round of securities litigation. Several dozen cases against about one dozen pharmaceutical companies have clogged Boston’s federal docket during the past four years, but recent defense victories have thinned the ranks of pending consolidated class actions. The cases allege that companies, executives and officers violated the disclosure requirements of the Securities Exchange Act of 1934 through false and misleading statements, or omissions, about U.S. Food and Drug Administration product concerns or investigations. The investors said the false communications led to stock price gains until a problem with the drug, such as a delayed release or FDA rejection, caused a steep stock drop that harmed investors. The risks and expense of litigation frequently prompts settlements, but three Massachusetts dismissals this year, including two since March 28, and another March decision denying class certification, highlight the challenges for plaintiffs. They must provide detailed facts that create a “strong inference” that the defendants had knowledge that their actions were fraudulent. The standards stem from the 1995 Private Securities Litigation Reform Act, which was intended to curb abusive practices in securities litigation. INNOCENT OPTIMISM An opinion in a recent Massachusetts decision illustrates how pharmaceutical companies can comply with public-company reporting requirements when many of their statements are projections about a product still in development and not yet producing revenue. Although it’s hard for pharmaceutical companies to avoid securities lawsuits if their products falter, courts don’t equate upbeat corporate statements with fraud if the company followed securities disclosure rules, said Jim Carroll, a Boston partner at New York-based Skadden Arps Slate Meagher & Flom. He served as defense counsel in In re Praecis Pharmaceuticals Inc. Securities Litigation, one of the cases, that was dismissed on March 28. “[The decision that] it’s perfectly OK to make optimistic forecasts, as long as you disclose things that are not so optimistic as well,” Carroll said. The Praecis decision rejects the plaintiffs’ assertions that the defendants made intentionally misleading statements and omitted information that would have changed investors’ opinions about the company. “Knowing omissions of information, even if material, are not necessarily actionable,” wrote Judge George O’Toole. Besides Praecis, In re Boston Scientific Corp. Securities Litigation was dismissed on March 30, and another involving EPIX Pharmaceuticals Inc. was thrown out in January. Of the handful of remaining cases, a motion to dismiss was heard in a case involving Biogen Idec Inc. last month. Also, a case against Transkaryotic, which has since been acquired by London-based Shire PLC, has been stayed while the parties mediate. Tom Shapiro, a partner with Boston-based plaintiffs firm Shapiro Haber & Urmy, said the Praecis case exemplifies the barriers for plaintiffs in securities fraud cases. Shapiro, whose firm represented plaintiffs in a few other Massachusetts securities cases against pharmaceutical companies, said the pleading standards exclude many legitimate cases against companies. “To make them harder would insulate companies from securities class actions,” he said. Surviving the motion to dismiss stage in a securities class action is much harder than in a personal injury case, for example, Shapiro said. Negligence lawsuits can be filed in personal injury cases simply because the accident happened, but securities cases require plaintiffs to outline how the defendant acted with fraudulent intent. Yet those standards are up for reinterpretation in a pending U.S. Supreme Court case heard last month, Tellabs Inc. v. Makor Issues and Rights Ltd. The legal question in the Tellabs case is whether a court must consider competing inferences when examining a securities fraud complaint to determine whether the lawsuit has enough facts to establish a “strong inference” that the defendant acted with scienter or knowledge that the actions were wrong or illegal. In its brief, Tellabs challenged the 7th U.S. Circuit Court of Appeals’ approach to securities fraud complaints “that rewards ambiguous pleading by reading such allegations exclusively in the plaintiff’s favor.” This article originally appeared in the National Law Journal , a publication of ALM.

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