And even more, what a bunch of crap to put on the
Post# of 72440
Posted On: 03/14/2016 6:14:56 PM
And even more, what a bunch of crap to put on the board:
2. The Complaint Alleges the Falsity of the Claim that Brilacidin was
Effective Against Gram Negative Bacteria
The Complaint alleges that by claiming that Brilacidin has “coverage” of gram negative
bacteria, Defendants falsely told investors that it was effective against gram-negative bacteria such
as Escherichia coli (“E. coli”). ¶ 25. Defendants claim that the poster containing this information
was peer reviewed and accepted for presentation and display at the European Congress of Clinical
Microbiology and Infectious Diseases in (“ECCMID”). That claim appears nowhere in the Complaint.
Defendants have provided no evidence for this claim, but even if they had, such factual assertion is a
matter outside the Complaint, and may not be considered on a motion to dismiss. Chandler v. Coughlin,
763 F.2d 110, 113 (2d Cir. 1985).
Defendants’ arguments against the falsity of this misstatement are nonsensical. Defendants
assert that the Complaint’s use of the word “tout” to describe their misstatement is inaccurate. Why
this would be grounds to dismiss the complaint is unclear. Defendants assert that their stating that
Brilacidin has “gram negative coverage” does not mean that it is effective against gram negative
bacteria. But this argument is nonsensical. In this context the term “coverage” can only refer to
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Brilacidin’s effectiveness. The poster is titled “Results”. Beneath the title is a sentence that reads
“Brilacidin has broad spectrum in vitro antimicrobial activity”. The poster also prominently features a
chart touting Brilacidin’s positive results on E. coli, which is a gram negative bacteria. ¶ 25.
Defendants also argue that the statement is not false because Brilacidin’s Phase 2 clinical trial
was focused on gram positive bacteria. But that does not mean that Brilacidin was not also effective
against gram negative bacteria. Nor does the poster cite the Phase 2 trial as the source of the results.
So a reasonable investor would have believed that Brilacidin was effective against gram negative
bacteria. Defendants note that this claim was made in connection with Defendants’ claim about oral
mucositis, but it is not clear what relevance this has to the motion to dismiss. Defendants also claim
that this misstatement was immaterial, but if Brilacidin was potentially effective against gram negative
bacteria, such as E. coli, it would be significantly more valuable. Therefore, it is material to investors.
3. The Complaint Alleges the Falsity of the Claim that Brilacidin’s
Antibiotic Properties Were Effective in Treating Oral Mucositis
Defendants alleged, throughout the class period, that “Brilacidin and related compounds
have shown antibacterial, anti-biofilm and anti-inflammatory properties in various pre-clinical
studies. We believe that the combination of these attributes contribute to the efficacy of Brilacidin”
in treating oral mucositis. ¶27. In their August 7 press release, however, Defendants admitted that
Brilacidin’s anti-inflammatory properties were the basis for its claim that it had a positive clinical
impact on oral mucositis. ¶28. Instead, the press release clarified that Oral Mucositis leads to open
ulcers, which sometimes leads to bacterial infections, and the antibiotic properties can treat those
infections. ¶46. But stating that Brilacidin can treat infections that can come from open unlcers
that can come from oral mucositis is a far cry from stating that it can treat oral mucositis.
In the motion to dismiss, Defendants try to get out of this clear contradiction by claiming
that while Brilacidin’s antibiotic properties cannot treat oral mucositis, those antibiotic properties
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are instrumental in treating lesions caused by infections that accompany oral mucositis. But
defendants do not have that quite right. As stated in their August 7 press release, Defendants state
that it is the lesions (open ulcers) that cause the infections, not the other way around. Therefore,
when Defendants point to a presentation that states that the antibacterial properties of oral
mucositis treat the lesions, that is not accurate either – it treats one of the possible effects of the
lesions. By analogy, if someone had a cut from a knife that was infected, and a doctor applied
antibacterial ointment and stitched the wound, nobody would say the ointment treated the cut. It is
the stitches that treated the cut. The ointment treated the infection. Defendants object that
Brilacidin’s antibiotic properties could not have possibly treated oral mucositis because oral
mucositis is not caused by bacterial infection. But this argument amounts to an objection that
investors should have seen through defendants fraud because they misrepresented basic science.
But it would be unfair to place the burden of catching corporate officers’ scientific lies on
shareholders, rather than placing the burden on officers to not lie about science.
The misrepresentation is material because antibiotics are subject to special programs by
the FDA that make it more efficient to obtain marketing approval, and as a result of Defendants’
misstatements a reasonable investor might have believed that Brilacidin was eligible for those
benefits if approved for the treatment of oral mucositis. ¶28 Defendants ague that this
misstatement was not material because Brilacidin for Oral Mucositis received a fast track
designation. This argument is flawed for several reasons. First, Defendants rely on matters outside
the pleading for the truth of the matters asserted. This is improper. See Opposition to Request for
Judicial Notice, filed concurrently herewith. Second, the Complaint identifies other benefits that
potential antibiotic treatments are eligible for, including priority review and an extension of
marketing exclusivity. ¶28, n.2.
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4. The Complaint Alleges the Falsity of the Claim that Kevetrin’s
Activation of P21 was Clinically Meaningful
The Complaint alleges that Defendants falsely claimed that P21 was a “biomarker” for
cancer, which means that activation of P21 would be clinically meaningful. Defendants sometimes
used the phrase “potential biomarker” but elsewhere referred to P21 simply as a biomarker. ¶¶31-
33. The Complaint alleges that biomarker has a specific meaning in the medical community – it is
a surrogate for a clinically meaningful outcome. ¶34. And it is clear that this is exactly what
Defendants intended to convey. For instance, one 8-K on September 24, 2014 stated that “ he
biomarker p21 increased in 6 of 14 patients at relatively low doses of Kevetrin and we expect a
higher percentage of p21 expression when the data is evaluated from higher doses. Another tumor
marker, CEA, was decreased and the tumor size remained stable over 4 months in a pancreatic
carcinoma patient.” The implication of referring to “another tumor marker” is that P21 is a marker
to indicate tumor size. In an interview, when asked about the expectations regarding the “P21
biomarker” Ehrlich stated “f p21 activity is shown, we think that we have hit a home run “. ¶30.
Defendants mischaracterize what the complaint really alleges. The Complaint does not
fault the Dana Farber institute for examining P21 activation. Instead, the Complaint faults
Defendants for claiming that activation of P21 is an indication that Kevetrin is an effective cancer
treatment. Therefore, it is simply not relevant that Dana Farber approved the use of P21 as a trial
parameter. Defendants cite to a listing of the Kevetrin trial on clinicaltrials.gov to show that Dana
Farber selected the “P21 Biomarker” but that very web page shows that the data was submitted by
Cellceutix, not Dana Farber. Defendants argue that the Court should not second guess trial
parameters, but that is not what the Complaint does – it questions Defendants’ characterization of
the significance of those parameters. Defendants argue that a reasonable interpretation of scientific
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data cannot be an actionable false statement, citing Kleinman v. Elan Corp., plc, 706 F.3d 145,
154 (2d Cir. 2013), but Defendants never explain how their use of the term “biomarker” was based
on any interpretation of data at all, let alone a reasonable one. Defendants also assert that the
statement is subject to the PSLRA’s safe harbor but do not explain how 1) use of the word potential
is per se subject to the safe harbor, 2) Defendants included any meaningful cautionary language.
5. The Complaint Alleges the That Defendants Misrepresented the
Clinical Outcome of a Patient in a Clinical Trial
The Complaint alleges that Defendants misleadingly presented one patient’s results in the
Kevetrin Phase 1 trial. Defendants reported “the near complete disappearance of a metastatic lesion
in the spleen of a Stage 4 ovarian cancer patient who was enrolled in the Company’s Phase 1
clinical trial of anti-cancer drug candidate Kevetrin.” ¶35. A reasonable investor would have
concluded that this press release indicated that, as of the time it was issued, the Kevetrin treatment
was apparently successful.
Defendants assert that they disclosed the allegedly withheld information, but this is
inaccurate. While Defendants are correct that they did disclose that the patient had an elevated
CA125 count, what they did not disclose, until after the class period, was that the CA125 count
was so high that it caused the patient’s physician to discontinue treatment, indicating that the
treatment was stopped because it wasn’t working. Merely disclosing that the patient had an
elevated CA125 count did not dispel the false impression that Kevetrin had effectively stopped the
cancer. Defendants also argue that this statement was subject to the PSLRA safe harbor, but the
complaint alleges that the statements were false because the patient was already sick and the
treatment with Kevetrin had failed at the time the false statements were made.
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6. The Complaint Properly Alleges that Defendants Failed to Disclose
Material Risks Posed by the Purchase of Rights to Brilacidin
Cellceutix’s purchase of Brilacidin created two significant uncertainties for its business.
First, because of the high cost of completing Brilacidin’s two required Phase 3 trials, Cellceutix’s
fundraising needs substantially increased. Second, the risk of failing a Phase 3 trial was increased
because nobody at Cellceutix had experience running a Phase 3 trial. Failure to disclose a material
trend or uncertainty is actionable under 10(b)(5). Stratte-McClure v. Morgan Stanley, 776 F.3d 94,
102 (2d Cir. 2015). This requirement stems from 17 CFR § 229.303 (“Item 303”). Instruction 3 of
Item 303 states that disclosure “shall focus specifically on material events and uncertainties known
to management that would cause reported financial information not to be necessarily indicative of
future operating results or of future financial condition.”
Given that the acquisition of Brilacidin quickly increased Defendants’ financing needs,
they had an obligation to disclose that fact under Item 303. Defendants argue that they adequately
disclosed the risk of the need to raise additional funding. But the Complaint alleges not merely
that Defendants needed to raise additional funding, but that their funding needs were greatly
increased by the purchase of a drug that was almost at Phase 3. It is the increase in funding needs,
in particular the great magnitude of that increase, that was required to be disclosed, and neither the
increase, nor its magnitude, was disclosed. Panther Partners Inc. v. Ikanos Commc'ns, Inc., 681
F.3d 114, 122 (2d Cir. 2012) (issuer’s disclosure of a negative trend of increasing customer
complaints violated Item 303 where issuer failed to disclose specific facts describing the trend and
uncertainties and their potential impact, even where issuer could not determine with precision what
that that impact would be); In re Facebook, Inc. IPO Sec. & Derivative Litig., 986 F. Supp. 2d
487, 510-11 (S.D.N.Y. 2013) (disclosure of worrisome mobile trend inadequate where “Facebookused generalized and indefinite terms…when describing the impact [the trend] could have had on
the Company’s revenues and financial results. Such terms fail to constitute sufficient disclosure
where Facebook knew of the certainty of the trends in mobile usage.”).
Defendants argue that their disclosures regarding their total lack of experience in
conducting Phase 3 trials were adequate because in 2013 they disclosed that they had no experience
at all conducting clinical trials, and in 2014, after hiring individuals with experience conducting
clinical trials, but not Phase 3 trials, they disclosed that they had “limited” experience conducting
clinical trials. But this is inadequate. In 2014, with a Phase 3 trial imminent, reasonable investors
would not have known that their hiring of people with clinical trial experience included no
individuals with Phase 3 experience. The lack of phase 3 experience posed a serious risk, as
Defendants acknowledged in their 2015 10-K, filed on the last day of the class period. But this
belated disclosure could not remedy the harm caused by failing to disclose this information in
2014. Defendants’ reliance on the bespeaks caution doctrine is superfluous, because the entire
issue is whether Defendants’ disclosures were sufficient under Item 303.
D. The Complaint Demonstrates Scienter
The complaint alleges numerous bases for Menon’s scienter. First, the Complaint notes
that Menon has a history of lying to investors. This is relevant because a pattern of deceptive
behavior “demonstrates a high degree of sciener.” U.S. S.E.C. v. E. Delta Res. Corp., No. 10-CV-
310 SJF WDW, 2012 WL 3903478, at *8 (E.D.N.Y. Aug. 31, 2012); In re Symbol Techs., Inc.
Sec. Litig., No. 05-CV-3923 DRH AKT, 2013 WL 6330665, at *10 (E.D.N.Y. Dec. 5, 2013)
(“prior misconduct establishes a pattern of culpable conduct on the part of Symbol and its
management which supports a strong inference of scienter.”). Menon has lied about his role in
developing commercially successful drugs, ¶52, his role in the creation of Kevetrin, ¶54, and his
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receiving a PhD at Harvard. ¶53. The Cellceutix website also falsely claimed that Dr. Emil Frei
and Har Gobind Khorana, were scientific advisors of the Company. ¶55. Defendants claim that
Frei and Khorana were founding shareholders of the company, relying on a stock transfer report
purporting to show that. However, Defendants have not provided any justification for why such a
document would be judicially noticeable, particularly to demonstrate the truth of the matter
asserted, and even if Khorana and Frei were shareholders, that does not make them scientific
advisors. Menon failed to disclose to Cellceutix investors his role at another pharmaceutical
company, Nanoviricides, in violation of SEC regulations and the securities laws. This omission
violates Item 401(e)(1) of Reg. S-K, which required Cellceutix to “describe the business
experience during the past five years of each … executive officer …including: each person’s
principal occupations and employment during the past five years.” Menon also made contradictory
statements about his health and reasons for resigning from Nanoviricides. ¶56. The Complaint also
shows that Menon had motive to commit fraud, because he was using Cellceutix stock to settle the
various lawsuits against him. Defendants claim that such motives are generally possessed by most
officers or directors. But most officers and directors do not try to freeze out their co-inventors and
placate them with company stock after being sued.
Defendants argue that it was improper to rely on the Mako Report to establish scienter, but
the Southern District has repeatedly held that it is appropriate to rely on short seller reports in
formulating a complaint, and that the reliability of such a report is not a question for a motion to
dismiss. McIntire v. China MediaExpress Holdings, Inc., 927 F. Supp. 2d 105, 123 (S.D.N.Y.
2013); Ho v. Duoyuan Glob. Water, Inc., 887 F. Supp. 2d 547, 563 (S.D.N.Y. 2012); see also In
re China Educ. Alliance, Inc. Sec. Litig., No. CV 10–9239, 2011 WL 4978483, *4 (C.D.Cal. Oct.
11, 2011). Defendants’ claim that Plaintiffs failed to provide witness interviews or attach
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evidentiary documents to their complaint, but there is no authority for the proposition that Plaintiffs
are required to do so. Defendants cite to authority that indicates that sources relied upon in a
complaint must have been likely to know the relevant facts. But the complaint sets forth just such
a basis. The allegation that Menon exaggerated his role in the creation of drugs at Ely Lily was
based on an India New England article that cited to interviews with people who worked on the
drugs that Menon claimed to have worked on. ¶52. The allegations that Frei and Khorana were not
really advisors for Cellceutix was derived from interviews of Frei and Khorana conducted by India
New England. ¶55. Defendants do not identify a single inadequately sourced allegation, but instead
merely conclusorily allege that the Complaint mirrors the Mako Report.
The complaint properly alleges Ehrlich’s scienter. The Complaint alleges that Ehrlich
violated Regulation FD. “Regulation FD requires an issuer, to make public material information
disclosed to security market professionals or holders of the issuer's securities who are reasonably
likely to trade on the basis of that information.” S.E.C. v. Siebel Sys., Inc., 384 F. Supp. 2d 694,
696 (S.D.N.Y. 2005). Defendants claimed that the Complaint does not so demonstrate, but
Defendants wholly ignore most of the illegal statements. Most egregiously, Ehrlich reassured an
investor nervous about the price of Cellceutix stock that Cellceutix was “catching up” and that
events would be made public in the coming weeks that Menon hoped would “show the potential
of CTIX”. ¶52. Defendants argue that Ehrlich’s reassurances that various trials or the NASDAQ
listing are still “on track” are not material, but it is of course material to an investor to learn that
no delays have arisen since the last public status report on a corporate project. Finally, Defendants
argue Ehrlich did not violate Regulation FD because “Dr. Alexander had disclosed the same
information previously (which then was posted on the Company’s website).” Defendants neither
clarify what information is being referred to or where on the website this information appears. It
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appears that Defendants are referring to Ehrlich’s disclosure that patients in “cohort 10” has been
dosed. Ehrlich refers to a statement by “Dr. Alexander” that “cohort 10” was starting, but there is
no evidence that Dr. Alexander had made public that cohort 10 had already been dosed.
The Complaint also alleges that Ehrlich’s scienter can be inferred from his artful
description of his tenure at StatSure Diagnostic Systems. While Defendant did disclose being a
director of Statsure, and holding various positions including CFO, he omitted the fact that he was
in fact the CFO through the company’s total failure. ¶64. The Complaint also shows Ehrlich’s
scienter through his support of Menon’s lies. Ehrlich claimed that Menon had an “unparalleled
track record of taking a compound from the chemist’s bench to FDA approval.” ¶63. Of course,
Menon had no track record of obtaining FDA approval. Ehrlich continued to defend the claims
that Frei and Khorana were advisors of Cellceutix after the lie had been exposed. Id.
“High level corporate officers who signed the SEC filings containing the company’s
financial statements have a duty to familiarize themselves with the facts relevant to the core
operations of the company.” In re Winstar Commc’ns, No. 01 CV 3014, 2006 WL 473885 at *7
(S.D.N.Y. Feb. 27, 2006). Therefore, when a misstatement involves such “core operations”, courts
take this fact as providing additional support for scienter. New Orleans Employees Ret. Sys. v.
Celestica, Inc., 455 F. App'x 10, 14, n. 3 (2d Cir. 2011). In this case, the fraud undoubtedly related
to core operations of the company. The allegations relate to 1) the efficacy of Brilacidin, 2) the
efficacy of Kevetrin, and 3) the cost and risk of a phase 3 trial for Brilacidin. As the Complaint
notes, Cellceutix is a development stage biotech company without any revenues. ¶62. Essentially
all of Defendants’ business is the development of drugs. Therefore, these statements go to the very
foundations of Defendants’ operations.
Further supportive of scienter is the very small size of the company. Batwin v. Occam
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Networks, Inc., No. CV 07-2750 CAS (SHX), 2008 WL 2676364, at *12 (C.D. Cal. July 1, 2008)
(finding scienter more likely where company had “relatively small” size of 80 to 100 employees);
In re Commtouch Software Ltd. Sec. Litig., No. C 01-00719 WHA, 2002 WL 31417998, at *9
(N.D. Cal. July 24, 2002) (“In a company of Commtouch's modest size, it is unlikely that
transactions of this scope would fly below the radar of top management”). Given the tiny number
of employees, 9-14 throughout the class period, it is unlikely that Ehrlich, as CEO, or Menon, as
Chief Scientific Officer, were unaware of large details of their company’s operations. ¶58.
4
E. The Complaint Establishes Loss Causation
Because loss causation is often a fact-intensive inquiry, it is generally inappropriate
to rule on loss causation on a motion to dismiss. The Second Circuit has held that loss causation
"is a matter of proof at trial and not to be decided on a Rule 12(b)(6) motion to dismiss." Emergent
Capital Inv. Mgmt., LLC. v. Stonepath Group, Inc., 343 F.3d 189, 197 (2d Cir. 2003). Courts all
over the country have agreed. For example, the Third Circuit in McCabe v. Ernst & Young, LLP,
494 F.3d 418, 427 n. 4 (3rd Cir. 2007) stated that "loss causation becomes most critical at the proof
stage," and cited scholarly authority stating that it is normally inappropriate to rule on loss
causation at the pleading stage. (internal quotation marks omitted). The Ninth Circuit held in In re
Gilead Sciences Sec. Litig., 536 F.3d 1049, 1057-58 (9th Cir. 2008) that "so long as the complaint
alleges facts that, if taken as true, plausibly establish loss causation, a Rule 12(b)(6) dismissal is
inappropriate." The Gilead court explained that "this is not 'a probability requirement...it simply
calls for enough facts to raise a reasonable expectation that discovery will reveal evidence' of loss
causation." Id. (internal citation omitted).
The Complaint alleges that the filing of the Mako Report on Seeking Alpha caused thprice of Cellceutix to decline on August 6, 2015. ¶¶39, 44. This Court has recognized that a short
seller’s report can constitute a corrective disclosure, even when the disclosure does not contain
any non-public information, but rather just a detailed analysis of publicly available information.
In re Winstar Commc'ns, No. 01 CV 11522, 2006 WL 473885, at *15 (S.D.N.Y. Feb. 27, 2006).
In Winstar, Asensio & Company, a short seller, issued several reports questioning Winstar's
accounting practices and concluding that Winstar's existing cash flow would likely not be enough
to fund its operations (the "Asensio Reports"
. Id. at *15. The findings in the Asensio Reports were
derived entirely from Winstar's published financials. Id. Defendants there argued that there was no
loss causation because the Asensio Reports were based on public information and could not
possibly be a corrective disclosure. The court disagreed and held that "the claimed ability of
Asensio to arrive at its findings by an examination of the publicly reported financials does not
mean that a reasonable investor could have drawn those same conclusions based on the total mix
of the available information." Id. Moreover, the court held that "there is no basis to conclude, as a
matter of law, that the findings in the Asensio reports were already reflected in the price of Winstar
securities. In fact, plaintiffs' allegations that the price of Winstar's stock fell in the immediate wake
of the issuance of those reports belies such a conclusion." Id. "While the court in In re Omnicom
could point to particular articles explicitly stating that the Wall Street Journal article disclosed no
new information", here the market was clearly surprised by the revelation that the VIE structure
was concealing a fraud. In re Vivendi Universal, S.A. Sec. Litig., 634 F.Supp.2d 352, 372 (S.D.N.Y.
2009) ("facts available to the public are not necessarily well disseminated to the market". To the
extent that the Mako Report was based on analyses of facts in the public domain, that does not
prevent it from being a corrective disclosure. "Allegations that the market reacted negatively to an
opinion or speculation which in fact exposes the falsity of defendants' representations can be
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sufficient to plead loss causation." In re Winstar Commc'ns, 2006 WL 473885, at *14.
Fogarazzo v. Lehman Bros., Inc. is also instructive. There, plaintiffs sued several
investment banksfor issuing falsely optimistic analyst reports about RSL Communications, Inc.
341 F.Supp.2d 274, 277 (S.D.N.Y. 2004). Essentially, in an effort to win investment banking
business from RSL, the banks instructed their equities research division to issue fraudulentlypositive
"buy" ratings for RSL, and the equities research divisions complied. Id. at 281-84. This
was done despite the fact that RSL was actually mired in financial woes, until it became a penny
stock and was eventually delisted by NASDAQ. Id. at 284. RLS shareholders sued the Banks for
their investment losses in RSL. The court held that loss causation was adequately pled against the
Banks because: "even though [RSL's true financial condition was] available for the world to see,
… [they] affirmatively opin[ed] on the meaning of those facts the Banks obscured the logical
conclusion that RSL was failing." Id. at 290. Indeed, just because certain facts are public, does not
mean that the average investor can draw all necessary insights from those facts.
Moreover, Mako conducted their own research, contacting Harvard Student Clearing
House to learn that Menon never received a PhD. ¶40. It also included scientific analysis that a
reasonable investor could not be expected to conduct on their own. ¶¶42-43. For this reason,
Defendants’ citation to Omnicom is inapposite. In fact, Defendants quote Omnicom out of context.
If Defendants’ quotation is included with just the following sentence, Omnicom reads as follows:
“[a] negative journalistic characterization of previously disclosed facts does not constitute a
corrective disclosure of anything but the journalists' opinions. After all, no hard fact in the June 12
article suggested that the avoidance of the write-down was improper.” In re Omnicom Grp., Inc.
Sec. Litig., 597 F.3d 501, 512 (2d Cir. 2010). Here, by contrast, Mako points to hard facts that do
much more than suggest that Defendants’ conduct was improper. In addition, Omnicom was
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decided on summary judgment–where both parties had the opportunity for full fact discovery and
to submit expert testimony concerning the impact of the alleged corrective disclosure and any
confounding factors. Indeed, as indicated supra, courts generally agree that loss causation is better
decided at the proof stage than at the pleading stage, where a complaint need only satisfy the
modest pleading standards of Rule 8. As Omnicom was adjudicated at summary judgment, loss
causation allegations survived a motion to dismiss.
As to the second disclosure date, when Defendants filed their 10-K, Defendants also
complain that plaintiffs failed to disaggregate the loss caused by the 10-K and the loss caused by
the Rosen Law firm filing an initial complaint. However, at the pleading stage, there is no
requirement for Plaintiffs to “rule out other contributing factors or alternative causal explanations.”
Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 797 F.3d 160, 189 (2d Cir. 2015).
Instead, all that is required is to “allege enough facts regarding [the] loss to support the inference
that [Plaintiffs] ‘would have been spared all or an ascertainable portion of that loss absent the
fraud.’” Id. quoting Lentell v. Merrill Lynch & Co., 396 F.3d 161, 175 (2d Cir. 2005).
F. The Complaint States A Control Person Claim
Defendants do not challenge control person liability except to claim that control person
liability cannot exist because there is no primary violation. For the reasons set forth above, control
primary liability, and therefore control person liability, exist.
IV. CONCLUSION
For the foregoing reasons, the motion to dismiss should be denied. If it is granted, Plaintiffs
request leave to replead. Leave to amend a complaint should be liberally given, unless the Court
is convinced that an amendment would be futile. Loreley, 797 F.3d at 191.
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Dated: March 11, 2016 Respectfully submitted,
THE ROSEN LAW FIRM, P.A.
/s/Jonathan Stern
Phillip Kim, Esq.
Laurence M. Rosen, Esq.
Jonathan Stern, Esq.
275 Madison Avenue, 34th Floor
New York, NY 10016
Phone: (212) 686-1060
Fax: (212) 202-3827
Counsel for Plaintiff and the Class
2. The Complaint Alleges the Falsity of the Claim that Brilacidin was
Effective Against Gram Negative Bacteria
The Complaint alleges that by claiming that Brilacidin has “coverage” of gram negative
bacteria, Defendants falsely told investors that it was effective against gram-negative bacteria such
as Escherichia coli (“E. coli”). ¶ 25. Defendants claim that the poster containing this information
was peer reviewed and accepted for presentation and display at the European Congress of Clinical
Microbiology and Infectious Diseases in (“ECCMID”). That claim appears nowhere in the Complaint.
Defendants have provided no evidence for this claim, but even if they had, such factual assertion is a
matter outside the Complaint, and may not be considered on a motion to dismiss. Chandler v. Coughlin,
763 F.2d 110, 113 (2d Cir. 1985).
Defendants’ arguments against the falsity of this misstatement are nonsensical. Defendants
assert that the Complaint’s use of the word “tout” to describe their misstatement is inaccurate. Why
this would be grounds to dismiss the complaint is unclear. Defendants assert that their stating that
Brilacidin has “gram negative coverage” does not mean that it is effective against gram negative
bacteria. But this argument is nonsensical. In this context the term “coverage” can only refer to
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Brilacidin’s effectiveness. The poster is titled “Results”. Beneath the title is a sentence that reads
“Brilacidin has broad spectrum in vitro antimicrobial activity”. The poster also prominently features a
chart touting Brilacidin’s positive results on E. coli, which is a gram negative bacteria. ¶ 25.
Defendants also argue that the statement is not false because Brilacidin’s Phase 2 clinical trial
was focused on gram positive bacteria. But that does not mean that Brilacidin was not also effective
against gram negative bacteria. Nor does the poster cite the Phase 2 trial as the source of the results.
So a reasonable investor would have believed that Brilacidin was effective against gram negative
bacteria. Defendants note that this claim was made in connection with Defendants’ claim about oral
mucositis, but it is not clear what relevance this has to the motion to dismiss. Defendants also claim
that this misstatement was immaterial, but if Brilacidin was potentially effective against gram negative
bacteria, such as E. coli, it would be significantly more valuable. Therefore, it is material to investors.
3. The Complaint Alleges the Falsity of the Claim that Brilacidin’s
Antibiotic Properties Were Effective in Treating Oral Mucositis
Defendants alleged, throughout the class period, that “Brilacidin and related compounds
have shown antibacterial, anti-biofilm and anti-inflammatory properties in various pre-clinical
studies. We believe that the combination of these attributes contribute to the efficacy of Brilacidin”
in treating oral mucositis. ¶27. In their August 7 press release, however, Defendants admitted that
Brilacidin’s anti-inflammatory properties were the basis for its claim that it had a positive clinical
impact on oral mucositis. ¶28. Instead, the press release clarified that Oral Mucositis leads to open
ulcers, which sometimes leads to bacterial infections, and the antibiotic properties can treat those
infections. ¶46. But stating that Brilacidin can treat infections that can come from open unlcers
that can come from oral mucositis is a far cry from stating that it can treat oral mucositis.
In the motion to dismiss, Defendants try to get out of this clear contradiction by claiming
that while Brilacidin’s antibiotic properties cannot treat oral mucositis, those antibiotic properties
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are instrumental in treating lesions caused by infections that accompany oral mucositis. But
defendants do not have that quite right. As stated in their August 7 press release, Defendants state
that it is the lesions (open ulcers) that cause the infections, not the other way around. Therefore,
when Defendants point to a presentation that states that the antibacterial properties of oral
mucositis treat the lesions, that is not accurate either – it treats one of the possible effects of the
lesions. By analogy, if someone had a cut from a knife that was infected, and a doctor applied
antibacterial ointment and stitched the wound, nobody would say the ointment treated the cut. It is
the stitches that treated the cut. The ointment treated the infection. Defendants object that
Brilacidin’s antibiotic properties could not have possibly treated oral mucositis because oral
mucositis is not caused by bacterial infection. But this argument amounts to an objection that
investors should have seen through defendants fraud because they misrepresented basic science.
But it would be unfair to place the burden of catching corporate officers’ scientific lies on
shareholders, rather than placing the burden on officers to not lie about science.
The misrepresentation is material because antibiotics are subject to special programs by
the FDA that make it more efficient to obtain marketing approval, and as a result of Defendants’
misstatements a reasonable investor might have believed that Brilacidin was eligible for those
benefits if approved for the treatment of oral mucositis. ¶28 Defendants ague that this
misstatement was not material because Brilacidin for Oral Mucositis received a fast track
designation. This argument is flawed for several reasons. First, Defendants rely on matters outside
the pleading for the truth of the matters asserted. This is improper. See Opposition to Request for
Judicial Notice, filed concurrently herewith. Second, the Complaint identifies other benefits that
potential antibiotic treatments are eligible for, including priority review and an extension of
marketing exclusivity. ¶28, n.2.
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4. The Complaint Alleges the Falsity of the Claim that Kevetrin’s
Activation of P21 was Clinically Meaningful
The Complaint alleges that Defendants falsely claimed that P21 was a “biomarker” for
cancer, which means that activation of P21 would be clinically meaningful. Defendants sometimes
used the phrase “potential biomarker” but elsewhere referred to P21 simply as a biomarker. ¶¶31-
33. The Complaint alleges that biomarker has a specific meaning in the medical community – it is
a surrogate for a clinically meaningful outcome. ¶34. And it is clear that this is exactly what
Defendants intended to convey. For instance, one 8-K on September 24, 2014 stated that “ he
biomarker p21 increased in 6 of 14 patients at relatively low doses of Kevetrin and we expect a
higher percentage of p21 expression when the data is evaluated from higher doses. Another tumor
marker, CEA, was decreased and the tumor size remained stable over 4 months in a pancreatic
carcinoma patient.” The implication of referring to “another tumor marker” is that P21 is a marker
to indicate tumor size. In an interview, when asked about the expectations regarding the “P21
biomarker” Ehrlich stated “f p21 activity is shown, we think that we have hit a home run “. ¶30.
Defendants mischaracterize what the complaint really alleges. The Complaint does not
fault the Dana Farber institute for examining P21 activation. Instead, the Complaint faults
Defendants for claiming that activation of P21 is an indication that Kevetrin is an effective cancer
treatment. Therefore, it is simply not relevant that Dana Farber approved the use of P21 as a trial
parameter. Defendants cite to a listing of the Kevetrin trial on clinicaltrials.gov to show that Dana
Farber selected the “P21 Biomarker” but that very web page shows that the data was submitted by
Cellceutix, not Dana Farber. Defendants argue that the Court should not second guess trial
parameters, but that is not what the Complaint does – it questions Defendants’ characterization of
the significance of those parameters. Defendants argue that a reasonable interpretation of scientific
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data cannot be an actionable false statement, citing Kleinman v. Elan Corp., plc, 706 F.3d 145,
154 (2d Cir. 2013), but Defendants never explain how their use of the term “biomarker” was based
on any interpretation of data at all, let alone a reasonable one. Defendants also assert that the
statement is subject to the PSLRA’s safe harbor but do not explain how 1) use of the word potential
is per se subject to the safe harbor, 2) Defendants included any meaningful cautionary language.
5. The Complaint Alleges the That Defendants Misrepresented the
Clinical Outcome of a Patient in a Clinical Trial
The Complaint alleges that Defendants misleadingly presented one patient’s results in the
Kevetrin Phase 1 trial. Defendants reported “the near complete disappearance of a metastatic lesion
in the spleen of a Stage 4 ovarian cancer patient who was enrolled in the Company’s Phase 1
clinical trial of anti-cancer drug candidate Kevetrin.” ¶35. A reasonable investor would have
concluded that this press release indicated that, as of the time it was issued, the Kevetrin treatment
was apparently successful.
Defendants assert that they disclosed the allegedly withheld information, but this is
inaccurate. While Defendants are correct that they did disclose that the patient had an elevated
CA125 count, what they did not disclose, until after the class period, was that the CA125 count
was so high that it caused the patient’s physician to discontinue treatment, indicating that the
treatment was stopped because it wasn’t working. Merely disclosing that the patient had an
elevated CA125 count did not dispel the false impression that Kevetrin had effectively stopped the
cancer. Defendants also argue that this statement was subject to the PSLRA safe harbor, but the
complaint alleges that the statements were false because the patient was already sick and the
treatment with Kevetrin had failed at the time the false statements were made.
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6. The Complaint Properly Alleges that Defendants Failed to Disclose
Material Risks Posed by the Purchase of Rights to Brilacidin
Cellceutix’s purchase of Brilacidin created two significant uncertainties for its business.
First, because of the high cost of completing Brilacidin’s two required Phase 3 trials, Cellceutix’s
fundraising needs substantially increased. Second, the risk of failing a Phase 3 trial was increased
because nobody at Cellceutix had experience running a Phase 3 trial. Failure to disclose a material
trend or uncertainty is actionable under 10(b)(5). Stratte-McClure v. Morgan Stanley, 776 F.3d 94,
102 (2d Cir. 2015). This requirement stems from 17 CFR § 229.303 (“Item 303”). Instruction 3 of
Item 303 states that disclosure “shall focus specifically on material events and uncertainties known
to management that would cause reported financial information not to be necessarily indicative of
future operating results or of future financial condition.”
Given that the acquisition of Brilacidin quickly increased Defendants’ financing needs,
they had an obligation to disclose that fact under Item 303. Defendants argue that they adequately
disclosed the risk of the need to raise additional funding. But the Complaint alleges not merely
that Defendants needed to raise additional funding, but that their funding needs were greatly
increased by the purchase of a drug that was almost at Phase 3. It is the increase in funding needs,
in particular the great magnitude of that increase, that was required to be disclosed, and neither the
increase, nor its magnitude, was disclosed. Panther Partners Inc. v. Ikanos Commc'ns, Inc., 681
F.3d 114, 122 (2d Cir. 2012) (issuer’s disclosure of a negative trend of increasing customer
complaints violated Item 303 where issuer failed to disclose specific facts describing the trend and
uncertainties and their potential impact, even where issuer could not determine with precision what
that that impact would be); In re Facebook, Inc. IPO Sec. & Derivative Litig., 986 F. Supp. 2d
487, 510-11 (S.D.N.Y. 2013) (disclosure of worrisome mobile trend inadequate where “Facebookused generalized and indefinite terms…when describing the impact [the trend] could have had on
the Company’s revenues and financial results. Such terms fail to constitute sufficient disclosure
where Facebook knew of the certainty of the trends in mobile usage.”).
Defendants argue that their disclosures regarding their total lack of experience in
conducting Phase 3 trials were adequate because in 2013 they disclosed that they had no experience
at all conducting clinical trials, and in 2014, after hiring individuals with experience conducting
clinical trials, but not Phase 3 trials, they disclosed that they had “limited” experience conducting
clinical trials. But this is inadequate. In 2014, with a Phase 3 trial imminent, reasonable investors
would not have known that their hiring of people with clinical trial experience included no
individuals with Phase 3 experience. The lack of phase 3 experience posed a serious risk, as
Defendants acknowledged in their 2015 10-K, filed on the last day of the class period. But this
belated disclosure could not remedy the harm caused by failing to disclose this information in
2014. Defendants’ reliance on the bespeaks caution doctrine is superfluous, because the entire
issue is whether Defendants’ disclosures were sufficient under Item 303.
D. The Complaint Demonstrates Scienter
The complaint alleges numerous bases for Menon’s scienter. First, the Complaint notes
that Menon has a history of lying to investors. This is relevant because a pattern of deceptive
behavior “demonstrates a high degree of sciener.” U.S. S.E.C. v. E. Delta Res. Corp., No. 10-CV-
310 SJF WDW, 2012 WL 3903478, at *8 (E.D.N.Y. Aug. 31, 2012); In re Symbol Techs., Inc.
Sec. Litig., No. 05-CV-3923 DRH AKT, 2013 WL 6330665, at *10 (E.D.N.Y. Dec. 5, 2013)
(“prior misconduct establishes a pattern of culpable conduct on the part of Symbol and its
management which supports a strong inference of scienter.”). Menon has lied about his role in
developing commercially successful drugs, ¶52, his role in the creation of Kevetrin, ¶54, and his
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receiving a PhD at Harvard. ¶53. The Cellceutix website also falsely claimed that Dr. Emil Frei
and Har Gobind Khorana, were scientific advisors of the Company. ¶55. Defendants claim that
Frei and Khorana were founding shareholders of the company, relying on a stock transfer report
purporting to show that. However, Defendants have not provided any justification for why such a
document would be judicially noticeable, particularly to demonstrate the truth of the matter
asserted, and even if Khorana and Frei were shareholders, that does not make them scientific
advisors. Menon failed to disclose to Cellceutix investors his role at another pharmaceutical
company, Nanoviricides, in violation of SEC regulations and the securities laws. This omission
violates Item 401(e)(1) of Reg. S-K, which required Cellceutix to “describe the business
experience during the past five years of each … executive officer …including: each person’s
principal occupations and employment during the past five years.” Menon also made contradictory
statements about his health and reasons for resigning from Nanoviricides. ¶56. The Complaint also
shows that Menon had motive to commit fraud, because he was using Cellceutix stock to settle the
various lawsuits against him. Defendants claim that such motives are generally possessed by most
officers or directors. But most officers and directors do not try to freeze out their co-inventors and
placate them with company stock after being sued.
Defendants argue that it was improper to rely on the Mako Report to establish scienter, but
the Southern District has repeatedly held that it is appropriate to rely on short seller reports in
formulating a complaint, and that the reliability of such a report is not a question for a motion to
dismiss. McIntire v. China MediaExpress Holdings, Inc., 927 F. Supp. 2d 105, 123 (S.D.N.Y.
2013); Ho v. Duoyuan Glob. Water, Inc., 887 F. Supp. 2d 547, 563 (S.D.N.Y. 2012); see also In
re China Educ. Alliance, Inc. Sec. Litig., No. CV 10–9239, 2011 WL 4978483, *4 (C.D.Cal. Oct.
11, 2011). Defendants’ claim that Plaintiffs failed to provide witness interviews or attach
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evidentiary documents to their complaint, but there is no authority for the proposition that Plaintiffs
are required to do so. Defendants cite to authority that indicates that sources relied upon in a
complaint must have been likely to know the relevant facts. But the complaint sets forth just such
a basis. The allegation that Menon exaggerated his role in the creation of drugs at Ely Lily was
based on an India New England article that cited to interviews with people who worked on the
drugs that Menon claimed to have worked on. ¶52. The allegations that Frei and Khorana were not
really advisors for Cellceutix was derived from interviews of Frei and Khorana conducted by India
New England. ¶55. Defendants do not identify a single inadequately sourced allegation, but instead
merely conclusorily allege that the Complaint mirrors the Mako Report.
The complaint properly alleges Ehrlich’s scienter. The Complaint alleges that Ehrlich
violated Regulation FD. “Regulation FD requires an issuer, to make public material information
disclosed to security market professionals or holders of the issuer's securities who are reasonably
likely to trade on the basis of that information.” S.E.C. v. Siebel Sys., Inc., 384 F. Supp. 2d 694,
696 (S.D.N.Y. 2005). Defendants claimed that the Complaint does not so demonstrate, but
Defendants wholly ignore most of the illegal statements. Most egregiously, Ehrlich reassured an
investor nervous about the price of Cellceutix stock that Cellceutix was “catching up” and that
events would be made public in the coming weeks that Menon hoped would “show the potential
of CTIX”. ¶52. Defendants argue that Ehrlich’s reassurances that various trials or the NASDAQ
listing are still “on track” are not material, but it is of course material to an investor to learn that
no delays have arisen since the last public status report on a corporate project. Finally, Defendants
argue Ehrlich did not violate Regulation FD because “Dr. Alexander had disclosed the same
information previously (which then was posted on the Company’s website).” Defendants neither
clarify what information is being referred to or where on the website this information appears. It
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appears that Defendants are referring to Ehrlich’s disclosure that patients in “cohort 10” has been
dosed. Ehrlich refers to a statement by “Dr. Alexander” that “cohort 10” was starting, but there is
no evidence that Dr. Alexander had made public that cohort 10 had already been dosed.
The Complaint also alleges that Ehrlich’s scienter can be inferred from his artful
description of his tenure at StatSure Diagnostic Systems. While Defendant did disclose being a
director of Statsure, and holding various positions including CFO, he omitted the fact that he was
in fact the CFO through the company’s total failure. ¶64. The Complaint also shows Ehrlich’s
scienter through his support of Menon’s lies. Ehrlich claimed that Menon had an “unparalleled
track record of taking a compound from the chemist’s bench to FDA approval.” ¶63. Of course,
Menon had no track record of obtaining FDA approval. Ehrlich continued to defend the claims
that Frei and Khorana were advisors of Cellceutix after the lie had been exposed. Id.
“High level corporate officers who signed the SEC filings containing the company’s
financial statements have a duty to familiarize themselves with the facts relevant to the core
operations of the company.” In re Winstar Commc’ns, No. 01 CV 3014, 2006 WL 473885 at *7
(S.D.N.Y. Feb. 27, 2006). Therefore, when a misstatement involves such “core operations”, courts
take this fact as providing additional support for scienter. New Orleans Employees Ret. Sys. v.
Celestica, Inc., 455 F. App'x 10, 14, n. 3 (2d Cir. 2011). In this case, the fraud undoubtedly related
to core operations of the company. The allegations relate to 1) the efficacy of Brilacidin, 2) the
efficacy of Kevetrin, and 3) the cost and risk of a phase 3 trial for Brilacidin. As the Complaint
notes, Cellceutix is a development stage biotech company without any revenues. ¶62. Essentially
all of Defendants’ business is the development of drugs. Therefore, these statements go to the very
foundations of Defendants’ operations.
Further supportive of scienter is the very small size of the company. Batwin v. Occam
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Networks, Inc., No. CV 07-2750 CAS (SHX), 2008 WL 2676364, at *12 (C.D. Cal. July 1, 2008)
(finding scienter more likely where company had “relatively small” size of 80 to 100 employees);
In re Commtouch Software Ltd. Sec. Litig., No. C 01-00719 WHA, 2002 WL 31417998, at *9
(N.D. Cal. July 24, 2002) (“In a company of Commtouch's modest size, it is unlikely that
transactions of this scope would fly below the radar of top management”). Given the tiny number
of employees, 9-14 throughout the class period, it is unlikely that Ehrlich, as CEO, or Menon, as
Chief Scientific Officer, were unaware of large details of their company’s operations. ¶58.
4
E. The Complaint Establishes Loss Causation
Because loss causation is often a fact-intensive inquiry, it is generally inappropriate
to rule on loss causation on a motion to dismiss. The Second Circuit has held that loss causation
"is a matter of proof at trial and not to be decided on a Rule 12(b)(6) motion to dismiss." Emergent
Capital Inv. Mgmt., LLC. v. Stonepath Group, Inc., 343 F.3d 189, 197 (2d Cir. 2003). Courts all
over the country have agreed. For example, the Third Circuit in McCabe v. Ernst & Young, LLP,
494 F.3d 418, 427 n. 4 (3rd Cir. 2007) stated that "loss causation becomes most critical at the proof
stage," and cited scholarly authority stating that it is normally inappropriate to rule on loss
causation at the pleading stage. (internal quotation marks omitted). The Ninth Circuit held in In re
Gilead Sciences Sec. Litig., 536 F.3d 1049, 1057-58 (9th Cir. 2008) that "so long as the complaint
alleges facts that, if taken as true, plausibly establish loss causation, a Rule 12(b)(6) dismissal is
inappropriate." The Gilead court explained that "this is not 'a probability requirement...it simply
calls for enough facts to raise a reasonable expectation that discovery will reveal evidence' of loss
causation." Id. (internal citation omitted).
The Complaint alleges that the filing of the Mako Report on Seeking Alpha caused thprice of Cellceutix to decline on August 6, 2015. ¶¶39, 44. This Court has recognized that a short
seller’s report can constitute a corrective disclosure, even when the disclosure does not contain
any non-public information, but rather just a detailed analysis of publicly available information.
In re Winstar Commc'ns, No. 01 CV 11522, 2006 WL 473885, at *15 (S.D.N.Y. Feb. 27, 2006).
In Winstar, Asensio & Company, a short seller, issued several reports questioning Winstar's
accounting practices and concluding that Winstar's existing cash flow would likely not be enough
to fund its operations (the "Asensio Reports"
. Id. at *15. The findings in the Asensio Reports were derived entirely from Winstar's published financials. Id. Defendants there argued that there was no
loss causation because the Asensio Reports were based on public information and could not
possibly be a corrective disclosure. The court disagreed and held that "the claimed ability of
Asensio to arrive at its findings by an examination of the publicly reported financials does not
mean that a reasonable investor could have drawn those same conclusions based on the total mix
of the available information." Id. Moreover, the court held that "there is no basis to conclude, as a
matter of law, that the findings in the Asensio reports were already reflected in the price of Winstar
securities. In fact, plaintiffs' allegations that the price of Winstar's stock fell in the immediate wake
of the issuance of those reports belies such a conclusion." Id. "While the court in In re Omnicom
could point to particular articles explicitly stating that the Wall Street Journal article disclosed no
new information", here the market was clearly surprised by the revelation that the VIE structure
was concealing a fraud. In re Vivendi Universal, S.A. Sec. Litig., 634 F.Supp.2d 352, 372 (S.D.N.Y.
2009) ("facts available to the public are not necessarily well disseminated to the market"
. To the extent that the Mako Report was based on analyses of facts in the public domain, that does not
prevent it from being a corrective disclosure. "Allegations that the market reacted negatively to an
opinion or speculation which in fact exposes the falsity of defendants' representations can be
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sufficient to plead loss causation." In re Winstar Commc'ns, 2006 WL 473885, at *14.
Fogarazzo v. Lehman Bros., Inc. is also instructive. There, plaintiffs sued several
investment banksfor issuing falsely optimistic analyst reports about RSL Communications, Inc.
341 F.Supp.2d 274, 277 (S.D.N.Y. 2004). Essentially, in an effort to win investment banking
business from RSL, the banks instructed their equities research division to issue fraudulentlypositive
"buy" ratings for RSL, and the equities research divisions complied. Id. at 281-84. This
was done despite the fact that RSL was actually mired in financial woes, until it became a penny
stock and was eventually delisted by NASDAQ. Id. at 284. RLS shareholders sued the Banks for
their investment losses in RSL. The court held that loss causation was adequately pled against the
Banks because: "even though [RSL's true financial condition was] available for the world to see,
… [they] affirmatively opin[ed] on the meaning of those facts the Banks obscured the logical
conclusion that RSL was failing." Id. at 290. Indeed, just because certain facts are public, does not
mean that the average investor can draw all necessary insights from those facts.
Moreover, Mako conducted their own research, contacting Harvard Student Clearing
House to learn that Menon never received a PhD. ¶40. It also included scientific analysis that a
reasonable investor could not be expected to conduct on their own. ¶¶42-43. For this reason,
Defendants’ citation to Omnicom is inapposite. In fact, Defendants quote Omnicom out of context.
If Defendants’ quotation is included with just the following sentence, Omnicom reads as follows:
“[a] negative journalistic characterization of previously disclosed facts does not constitute a
corrective disclosure of anything but the journalists' opinions. After all, no hard fact in the June 12
article suggested that the avoidance of the write-down was improper.” In re Omnicom Grp., Inc.
Sec. Litig., 597 F.3d 501, 512 (2d Cir. 2010). Here, by contrast, Mako points to hard facts that do
much more than suggest that Defendants’ conduct was improper. In addition, Omnicom was
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decided on summary judgment–where both parties had the opportunity for full fact discovery and
to submit expert testimony concerning the impact of the alleged corrective disclosure and any
confounding factors. Indeed, as indicated supra, courts generally agree that loss causation is better
decided at the proof stage than at the pleading stage, where a complaint need only satisfy the
modest pleading standards of Rule 8. As Omnicom was adjudicated at summary judgment, loss
causation allegations survived a motion to dismiss.
As to the second disclosure date, when Defendants filed their 10-K, Defendants also
complain that plaintiffs failed to disaggregate the loss caused by the 10-K and the loss caused by
the Rosen Law firm filing an initial complaint. However, at the pleading stage, there is no
requirement for Plaintiffs to “rule out other contributing factors or alternative causal explanations.”
Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 797 F.3d 160, 189 (2d Cir. 2015).
Instead, all that is required is to “allege enough facts regarding [the] loss to support the inference
that [Plaintiffs] ‘would have been spared all or an ascertainable portion of that loss absent the
fraud.’” Id. quoting Lentell v. Merrill Lynch & Co., 396 F.3d 161, 175 (2d Cir. 2005).
F. The Complaint States A Control Person Claim
Defendants do not challenge control person liability except to claim that control person
liability cannot exist because there is no primary violation. For the reasons set forth above, control
primary liability, and therefore control person liability, exist.
IV. CONCLUSION
For the foregoing reasons, the motion to dismiss should be denied. If it is granted, Plaintiffs
request leave to replead. Leave to amend a complaint should be liberally given, unless the Court
is convinced that an amendment would be futile. Loreley, 797 F.3d at 191.
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Dated: March 11, 2016 Respectfully submitted,
THE ROSEN LAW FIRM, P.A.
/s/Jonathan Stern
Phillip Kim, Esq.
Laurence M. Rosen, Esq.
Jonathan Stern, Esq.
275 Madison Avenue, 34th Floor
New York, NY 10016
Phone: (212) 686-1060
Fax: (212) 202-3827
Counsel for Plaintiff and the Class
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