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In re KaloBios Pharmaceuticals, Inc. Securities Litigation

United States District Court, N.D. California, San Jose Division

June 23, 2017




         Lead Plaintiffs Kaniz Fatema, Zeke Ingram, Bhaskar R. Gudlavenkatasiva, and Abuhena M. Saifulislam, as well as Plaintiff Austin Isensee (collectively the “Plaintiffs”), individually and on behalf of all the other persons similarly situated, bring this putative securities class action against KaloBios Pharmaceuticals, Inc. (“KaloBios”) and individuals Ronald Martell, and Herb Cross, and Martin Shkreli, alleging violations of Sections 10(b), 20(a) and 20A of the Securities Exchange Act of 1934 and U.S. Securities and Exchange Commission (“SEC”) Rule 10b-5 promulgated thereunder. Defendants KaloBios, Ronald Martell, and Herb Cross reached a partial settlement with Plaintiffs, which the court granted final approval of concurrently with the entry of this order. Dkt. No. 93. Accordingly, Defendant Shkreli remains the sole non-settling defendant in this case.

         Presently before the court is Shkreli's Motion to Dismiss for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6), and for failure to plead claims with the requisite level of particularity under Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 (the “PSLRA”), 15 U.S.C. 78u-4 et seq. (1995). Def. Shkreli Mot. to Dismiss (“MTD”), Dkt. No. 61. Having carefully considered the papers submitted by both parties in this matter, Shkreli's Motion will be granted for the reasons explained below.


         As a preliminary matter, Shkreli requests that the court take judicial notice of certain documents in connection with his Motion to Dismiss. See Dkt. No. 61-3 (“RJN”). Specifically, Shkreli requests judicial notice of Exhibits 1-14 to the Declaration of Peter C. Buckley, filed in support of Shkreli's Motion. Exhs. 1-14, Buckley Decl., Dkt. Nos. 61-1, 61-2. Shkreli's request for judicial notice is unopposed as to Exhibits 1-4 and 7-10, and it is therefore GRANTED. However, Plaintiffs oppose Shkreli's request as to Exhibits 5 and 6, purported transcriptions of interviews quoted in FAC, as well as Exhibits 11-14, four news articles Plaintiffs assert are not cited in the FAC. See Opp. at 16.

         When ruling on a motion to dismiss, courts may consider documents incorporated by reference in a complaint or upon which a complaint necessarily relies, as well as matters subject to judicial notice. Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1061 (9th Cir. 2008) (citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179, (2007)). Federal Rule of Evidence 201 allows a court to take judicial notice of adjudicative facts “not subject to reasonable dispute in that [they are] ... capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned.” Fed.R.Evid. 201(b)(2).

         Judicial notice of news articles may be appropriate in securities fraud cases to show “that the market was aware of the information contained in news articles.'” In re Am. Apparel, 855 F.Supp.2d at 1062 (quoting Heliotrope Gen., Inc. v. Ford Motor Co., 189 F.3d 971, 981 n.18 (9th Cir. 1999); see ScripsAmerica, Inc. v. Ironridge Glob. LLC, 119 F.Supp.3d 1213 (C.D. Cal. 2015) (“Taking judicial notice of news reports and press releases is appropriate to show that the market was aware of the information contained in news articles”); In re Splash Tech. Holdings, Inc. Sec. Litig., No. C 99-00109 SBA, 2000 WL 1727405, at *7, n. 6 (N.D. Cal. Sept. 29, 2000) (holding that because omitted information in the case had been disclosed elsewhere, “the Court may take judicial notice that the market already was aware of the information.”); see also Benak ex rel. All. Premier Growth Fund v. All. Capital Mgmt. L.P., 435 F.3d 396, 401 n. 15 (3d Cir. 2006) (“We see no basis to upset the District Court's decision to take judicial notice of newspaper articles supplied by appellees.”). However, judicial notice of news articles is generally “limited to a narrow set of circumstances . . . e.g., in securities cases for the purpose of showing that particular information was available to the stock market.” Gerritsen v. Warner Bros. Ent. Inc., 112 F.Supp.3d 1011, 1028 (C.D. Cal. 2015).

         Here, Shkreli requests judicial notice of four news articles regarding his alleged misconduct in connection with his other companies prior to the Class Period. See Exhs. 11-14, Buckley Decl. Specifically, Exhibit 11 is an article published by The New York Times on September 22, 2015 entitled “Martin Shkreli, the Mercurial Man Behind the Drug Price Increase That Went Viral;” Exhibit 12 is an article published by FierceBioTech on August 17, 2015 entitled “Retrophin goes after Shkreli with a $65M suit, claims of flagrant mismanagement;” Exhibit 13 is an article published by Newsweek on September 13, 2015 entitled “Federal Prosecutors Target Martin Shkreli in a Criminal Investigation;” and Exhibit 14 is an article published by Forbes on August 18, 2015 entitled “Retrophin Sue Founder Martin Shkreli For $65M. His Reply: ‘Preposterous.'” RJN at 2-3.

         Shkreli does not offer these news reports for the truth of their content, but rather to refute Plaintiffs' “fraud-on-the-market” theory by demonstrating that public news sources had “already widely disseminated the alleged omissions to the investing public” at the time of his arrest and public release of the indictments on December 17, 2015. Id. at 3. Because Shkreli's request is for the purposes of showing “that the market was [already] aware of the information contained in news articles, ” it therefore fits the “narrow set of circumstances” in securities litigation where judicial notice of newspaper articles is appropriate. See Gerritsen, 112 F.Supp.3d at 1028; Heliotrope, 189 F.3d at 981, 975-76 (explaining that where the market has already been made aware of the purportedly concealed information “the facts allegedly omitted by the defendant would already be reflected in the stock's prices and the market will not be misled.”); Benak, 435 F.3d at 401 n. 15 (affirming district court's decision to take judicial notice of news articles, explaining “[w]hether appellants read the articles or were aware of them is immaterial” because the articles “serve only to indicate what was in the public realm at the time, not whether the contents of those articles were in fact true.”); In re Merrill Lynch & Co. Research Reports Sec. Litig., 289 F.Supp.2d 416, 425 n. 15 (S.D.N.Y.2003) (“The Court may take judicial notice of newspaper articles for the fact of their publication without transforming the motion into one for summary judgment.”).

         Moreover, unlike in cases such as Gerritsen, where the court declined to take judicial notice of articles published by third party sources like Wikipedia and based in part on the fact that such sources are not reliable, there can be little dispute as to the authenticity of the articles here, which include publications by credible and mainstream sources like The New York Times, Forbes and Newsweek. Accordingly, the court GRANTS Shkreli's request for judicial notice as to Exhibits 11-14. As to Exhibits 5 and 6, Shkreli's request for judicial notice is DENIED because the court did not rely on these exhibits in reaching this decision.


         KaloBios is a biopharmaceutical company founded in 2000 and headquartered in South San Francisco, California. FAC ¶ 4. KaloBios's stock traded on the NASDAQ under the ticker symbol “KBIO.” Id. Martin Shkreli served as the Chief Executive Officer (“CEO”) and Chairman of KaloBios during the Class Period. Id. ¶ 29, 54. Prior to the Class Period, Shkreli was a hedge fund manager and pharmaceutical investor who co-founded the investment company MSMB in September 2009 and the biopharmaceutical company Retrophin in 2011.[1] Id. ¶ 5. Shkreli served as a managing partner of MSMB Capital until it ceased to operate in 2013, and CEO of Retrophin from December 17, 2012 until October 13, 2014. Id. ¶¶ 62(a), 63.

         Beginning in early January 2015, prior to the Class Period, KaloBios was under “severe financial distress, ” and by mid-2015, the company's leadership began searching for other potential investors. Id. ¶¶ 43-44. On November 5, 2015, KaloBios announced “a 61% workforce reduction and the pursuit of ‘strategic alternatives, '” including the potential sale of the company or its assets, a corporate acquisition, further restricting its activities, winding down operations, and/or bankruptcy proceedings. Id. ¶¶ 46-47. By November 9, 2015, KaloBios announced it was halting enrollment in its clinical studies, and on November 13, 2015, KaloBios issued a press release stating that its limited cash resources precluded continued investigation of strategic alternatives, and as a result, it would begin efforts to “wind down its operations” and liquidate its assets. Id. ¶¶ 47, 48. As a result of this news, KaloBios's stock further declined, closing at $0.90 on November 13, 2015. Id. ¶ 49.

         Between November 10, 2015 and November 24, 2015, Shkreli purchased 2, 075, 200 shares of KaloBios common stock on “the open market, ” making him the largest shareholder of KaloBios, and prompting discussions with KaloBios' “regarding possible direction for the company to continue in operation.” Id. ¶¶ 6, 50. Just prior to the Shkreli's purchase of the majority shares of KaloBios stock, between August and September 2015, reports of criminal investigations into Shkreli's management of Retrophin and MSMB Capital were published by mainstream news sources including The New York Times, Forbes and Newsweek. Buckley Decl., Exhs. 11-14, Dkt. No. 61-2. For example, an article published by Newsweek on September 13, 2015 entitled “Federal Prosecutors Target Martin Shkreli in a Criminal Investigation;” stated that Shkreli was under investigation for allegations of “insider trading, disguising the purpose of corporate payments for his benefit, defrauding shareholders by snatching business opportunities for himself, destruction of evidence, failure to disclose material facts to shareholders and other potential crimes.” Id., Exh. 13. Nevertheless, by November 19, 2105, KaloBios' Board had accepted Shkreli's financing proposal and appointed him as CEO. FAC ¶¶ 50-54. The existing Board then resigned. See id. ¶ 62(b).

         After Shkreli was appointed as CEO, he made a number of public statements regarding KaloBios' strong potential and positive progress, as well statements regarding his efforts to turn the company around financially and why he was qualified to be the CEO. See id. ¶¶ 54, 57, 60, 62, 65, 68, 70, 73, 75, 78. Plaintiffs allege that these statements led to a recovery and rise in KaloBios stock price. Id. However, on December 17, 2015, Shkreli was arrested for alleged misconduct at his previous company, Retrophin, the details of which were outlined in a 30-page federal indictment and a 22-page SEC Complaint made public the same day. Id. ¶¶ 15, 81-82. Shkreli was immediately terminated as CEO. Id. ¶ 81. When the news of Shkreli's arrest broke, KaloBios stock price fell dramatically, “plummet[ing] 53% in pre-open trading before NASDAQ halted all trading so it could request more information from KaloBios.” Id. ΒΆ 16. Soon thereafter on December 24, 2015, NASDAQ announced that KaloBios's stock would be delisted, and on ...

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