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WARSHAW v. XOMA CORP.

June 23, 1994

REGINA WARSHAW and JOHN D. KAUFMAN, on behalf of themselves and all others similarly situated, Plaintiff,
v.
XOMA CORPORATION and STEVEN C. MENDELL, Defendants.



The opinion of the court was delivered by: STANLEY A. WEIGEL

 I. BACKGROUND.

 Defendant Xoma Corporation ("Xoma") is a Delaware corporation with its principal offices in Berkeley, California. Xoma develops and produces protein therapeutic products using DNA technologies. Plaintiffs propose to represent a class of all persons who purchased Xoma common stock between March 2, 1992, and June 3, 1992, inclusive. Throughout the relevant period, Defendant Steven C. Mendell was Chairman of Xoma's Board of Directors.

 Plaintiffs claim that during the class period, Defendants made several misleading statements regarding E5, a drug developed by Xoma. *fn1" The allegedly misleading statements concerned the imminence of E5's approval by the Food and Drug Administration ("FDA"). Plaintiffs allege that as a result of Defendants' statements, the market price for Xoma stock was artificially inflated during the class period, reaching a high closing bid price of $ 22 1/4 per share. When the FDA refused to approve E5 on June 4, 1992, the price of Xoma stock dropped 4 and 3/4 points - or 24% - to close at 15 1/4 per share.

 On June 17, 1992, Plaintiffs filed a complaint, alleging that Defendants violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j ("Section 10(b)"), and 17 C.F.R. § 240.10b-5 ("Rule 10b-5"), promulgated under Section 10(b). On October 6, 1992, the Court dismissed Plaintiffs' complaint for failure to plead fraud with particularity and for failure to properly allege scienter. On April 1, 1993, the Court dismissed Plaintiffs' first amended complaint on similar grounds. On October 28, 1993, the Court granted Plaintiffs leave to file a third amended complaint, rendering Defendants' motion to dismiss Plaintiffs' second amended complaint moot.

 Defendants now attack Plaintiffs' third amended complaint. Defendants move to dismiss Plaintiffs' federal securities claims under Rule 12(b)(6) for failure to state a claim, and under Rule 9(b) for failure to adequately plead scienter. Defendants also move to dismiss Plaintiffs' newly inserted state law causes of action for fraud and negligent misrepresentation under Rule 12(b)(6). *fn2" Defendants further move to impose sanctions under Rule 11.

 II. DISCUSSION.

 A. Defendants' Motion to Dismiss under Rule 12(b)(6).

 Dismissal under Rule 12(b)(6) is appropriate when "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957); Moore v. City of Costa Mesa, 886 F.2d 260, 262 (9th Cir. 1989). In evaluating a motion to dismiss, a court must construe the complaint in the light most favorable to plaintiff. Russell v. Landrieu, 621 F.2d 1037, 1039 (9th Cir. 1980).

 1. Federal Securities Claims.

 To state a claim under the federal securities laws, a plaintiff must set forth specific misrepresentations; an allegation that taken together defendants' statements create a misleading impression will not suffice. See In re Rasterops Corp. Securities Litigation, [1992-93]Fed. Sec. L. Rep. (CCH) P 97,445, at 96,487 (N.D.Cal. 1993); In re Syntex Corp. Securities Litigation, Fed. Sec. L. Rep. (CCH) P 97,747, at 97,568-569 (N.D.Cal. 1993). Moreover, statements of general optimism accompanied by historical fact are not actionable. In re Verifone, 784 F. Supp. 1471, 1481 (N.D.Cal. 1992) (citing In re Convergent Technologies, 948 F.2d 507, 513 (9th Cir. 1991)). Further, a plaintiff may not reasonably rely on an implication which is directly contradicted by an express disclaimer. See, e.g., Sable v. Southmark Envicon Capital Corp., 819 F. Supp. 324, 339 (S.D.N.Y. 1993); see also, McGonigle v. Combs, 968 F.2d 810, 816-17 (9th Cir. 1992).

 Plaintiffs do not allege that any of Defendants' statements are false. Rather, Plaintiffs contend that the statements are misleading because they imply that FDA approval is imminent. However, Plaintiffs do not point to a single instance where Defendants speculated on when FDA approval might come. Plaintiffs rely exclusively on statements of general optimism, without alleging any basis for inferring that Defendants did not genuinely believe, or had no reason to believe, their optimistic statements. Given that the results of the two Phase III trials were publicly available, and Defendants repeatedly disclaimed any ability to predict the actions of the FDA, Plaintiffs fail to state a claim under the federal securities laws. *fn3"

 As an alternative basis for liability, Plaintiffs allege that Defendants had an obligation to correct statements made by third parties. This theory is similarly unavailing to Plaintiffs. "The securities laws require [a company] to speak truthfully to investors; they do not require the company to police statements made by third parties for inaccuracies, even if the third party attributes the statement to [the company]." Raab v. General Physics Corp., 4 F.3d 286, 288 (4th Cir. 1993); see also, In re Caere Corporate Securities Litigation, 837 F. Supp. 1054, 1993 U.S. Dist. LEXIS 16513, *10-*20 (N.D.Cal. 1993). In order to impose liability for the statement of a third party, a plaintiff must demonstrate that an insider adopted the statement, and that the insider knew that the analyst's forecasts were unreasonable when made, but failed to disclose their unreasonableness to investors. Id. at *11.

 None of the third party statements upon which Plaintiffs rely is directly attributed to Defendants. Moreover, Plaintiffs do not allege any basis for concluding that Defendants adopted ...


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