Malkoff v. Sequenom, Inc. et al, No. 3:2016cv02054 - Document 138 (S.D. Cal. 2023)
Court Description: ORDER Granting Defendants' Amended Motion to Dismiss. Plaintiffs may file an Amended Complaint no later than September 11, 2023.. Signed by Judge John A. Houston on 7/27/2023. (anh) (Main Document 138 replaced on 7/27/2023) (anh).
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Malkoff v. Sequenom, Inc. et al Doc. 138 1 2 3 4 5 6 7 UNITED STATES DISTRICT COURT 8 SOUTHERN DISTRICT OF CALIFORNIA 9 10 11 In re SEQUENOM, INC. STOCKHOLDER LITIGATION 12 Lead Case No. 16-cv-02054-JAH-DDL 13 ORDER GRANTING DEFENDANTS’ AMENDED MOTION TO DISMISS 14 This Document Relates To: CLASS ACTION ALL ACTIONS. 15 16 17 INTRODUCTION 18 19 20 21 22 23 24 In this shareholder class action lawsuit, Plaintiffs allege that Defendant Sequenom, Inc. and seven of its former board members (“Defendants”) violated Sections 14(e) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) by issuing a false and misleading recommendation statement advising Sequenom shareholders to tender their shares pursuant to a tender offer. Pls.’ Consolidated Amended Class Action Complaint (“AC”), Doc. No. 54.1 Specifically, Plaintiffs allege that Defendants relied on a lower set of financial projections (and excluded 25 26 1 Those seven individuals are Kenneth F. Buechler, Myla Lai-Goldman, Ronald M. Lindsay, Catherine J. Mackey, David Pendarvis, Charles P. Slacik. and Dirk van den Boom (collectively, 27 “Individual Defendants”). The parties stipulated to the dismissal of claims against Richard A. Lerner, another former board member, following his death. Doc. No. 129. 28 1 16-cv-02054-JAH-DDL Dockets.Justia.com 1 an oncology program) as the most accurate view of the company’s prospects, and 2 therefore misled Plaintiffs concerning the fairness of Laboratory Corporation of 3 America Holding’s (“LabCorp”) tender offer. Pending before the Court is 4 Defendants’ Amended Motion to Dismiss (“Mot.”) and Request for Judicial Notice 5 (“RJN”). Doc. Nos. 123, 124. Plaintiffs opposed both. Doc. No. 126 (“Opp’n”); 6 Doc. No. 127 (“Opp’n to RJN”). Defendants filed replies. Doc. No. 132 (“Reply”), 7 Doc. No. 133 (“Reply to RJN”). The motion is fully briefed. The Court found this 8 motion suitable for determination on the papers submitted and without oral 9 argument. Civ. LR 7.1(d.1). For the reasons set forth below, the Court GRANTS 10 Defendants’ Amended Motion to Dismiss and DISMISSES the Amended Complaint 11 without prejudice. 12 13 FACTUAL BACKGROUND Sequenom was a molecular diagnostic testing and genetics analysis company. 14 AC ¶ 2. In 2011, it launched the first noninvasive prenatal test (“NIPT”) in the 15 United States that could screen pregnant women for Down syndrome and other 16 chromosomal abnormalities through a blood test. Id. ¶ 39. Sequenom subsequently 17 expanded this test (“MaterniT21 PLUS”) to detect a myriad of additional fetal 18 chromosomal abnormalities. Id. ¶ 40. 19 Sequenom had a “breakout year” in 2014. Id. at 8. The company sold its 20 Bioscience segment to focus exclusively on its NIPT business and launched a new, 21 lower cost NIPT called VisibiliT, which targeted women with average-risk 22 pregnancies, in the international market. Id. ¶¶ 44, 48. Sequenom planned to sell 23 VisibiliT in the United States market in 2015. Id. ¶ 49. Sequenom also entered into 24 several agreements with other companies. In June 2014, Quest Diagnostics Inc. 25 agreed to exclusively offer the MaterniT21 PLUS test to its network in exchange for 26 access to Sequenom’s NIPT patents. Id. ¶¶ 45–46. Under this agreement, Quest 27 could develop its own NIPT so long as it paid Sequenom licensing and royalty fees 28 2 16-cv-02054-JAH-DDL 1 per test. Id. In December 2014, Sequenom entered into a pooled patents agreement 2 with Illumina, Inc. as part of the settlement of a protracted lawsuit in which Illumina 3 sued Sequenom for patent infringement. Id. ¶ 51. Among the terms of the 4 agreement, Sequenom and Illumina would pool together their patents. Id. Illumina 5 had the right to use the patent pool to develop its own NIPT kits and could also 6 license the patents in the pool to other labs. Id. In exchange, Sequenom would 7 receive licensee fees and royalties, as well as a lump sum payment from Illumina of 8 $50 million upfront and at least $80 million by 2020. Id. 9 Sequenom had a “transition year” in 2015. Id. at 11. The company launched 10 several new tests, including VisibiliT (mentioned above), HerediT Universal (a 11 carrier screening test), and MaterniT GENOME (a test that could analyze every 12 chromosome). Id. ¶¶ 62, 68, 80, 118. The company cautioned investors that it 13 expected short-term revenue loss as customers increasingly converted to licensees, 14 but reaffirmed the company’s long-term growth potential. See, e.g., id. ¶¶ 63, 70, 15 79. For example, Sequenom told investors that the patent pool was growing; that it 16 expected major growth for MaterniT GENOME; and that there was significant long17 term value in the average risk market, which was significantly bigger than the high18 risk market. Id. ¶ 86, 125. At a presentation to investors and analysts on September 19 28, 2015, one of Sequenom’s slides indicated “[o]ver $500M [in] revenues by 2020.” 20 Ex. 10 to Mot. at 17, Doc. No. 123-12. 21 Meanwhile, Sequenom’s financial reports for this period reflected 22 consistently negative revenue growth. See AC ¶ 70 (2015 Q1), ¶ 77 (2015 Q2), 23 ¶ 105 (2015 Q3), ¶ 123 (2015 Q4), ¶ 132 (2016 Q1). By the time Sequenom held its 24 full-year 2015 earnings call, its stock was trading at $1.45 per share, down from 25 $3.83 at the beginning of 2015. Ex. 22 to Mot. at 10–16, Doc. No. 123-24. 26 Sequenom also decided to expand its business into the field of oncology. AC 27 ¶¶ 57–59. In 2015, the company began a process to develop liquid biopsy oncology 28 3 16-cv-02054-JAH-DDL 1 tests that could detect tumor cells from a blood test. Id. This involved “building a 2 clinical foundation” and engaging medical leaders to develop a test that could 3 eventually be submitted for validation. Id. ¶ 58. Although the process was at its 4 early stages, Sequenom told the public that it expected long-term value for the 5 oncology program, given that this market size was significantly higher than that of 6 NIPT. Id. 7 Sequenom’s Board also began taking actions to address its $130 million 8 convertible debt, which was due in 2017 and 2018. Id. ¶ 75. The Board engaged 9 J.P. Morgan Securities LLC (“JPM”) as its financial advisor to explore refinancing 10 opportunities as well as opportunities for “spinning off” Sequenom’s oncology 11 program. Id. ¶ 76, 82, 88. JPM reached out to approximately twenty-five parties 12 and entered into confidentiality agreements with four companies, one of which was 13 LabCorp. Schedule 14D-9, Sequenom, Inc. (“Rec.”) at 13–14, Ex. 16 to Mot., Doc. 14 No. 123-18. By the end of the 2015, LabCorp and a few other companies had made 15 offers to acquire all of Sequenom. Id. at 14–15; AC ¶ 108. But the Board instructed 16 Sequenom management and JPM to not pursue any proposals for a sale of Sequenom 17 because it wanted to eliminate its $130 million convertible debt overhang and focus 18 on operations as a stand-alone business. AC ¶ 108. 19 At the start of 2016, Sequenom announced a restructuring plan. Id. ¶ 116. 20 This included reducing its workforce by approximately 20%, closing its North 21 Carolina lab, and seeking to partner its oncology program while reducing research 22 and development in that area. Rec. at 15–16; AC ¶ 116. In response to this news, 23 over twenty companies expressed interest in the oncology program. Six of these 24 companies signed confidentiality agreements and engaged in due diligence review 25 over the period of five months. Id. ¶ 117. In the end, however, none of these parties 26 27 28 4 16-cv-02054-JAH-DDL 1 submitted a licensing, partnering, or acquisition proposal. Amendment No. 6 to 2 Schedule 14D-9, Sequenom, Inc. (“Am.”) at 4, Ex. 17 to Mot., Doc. No. 123-19.2 Sequenom continued to explore refinancing opportunities. AC ¶ 136. In May 3 4 2016, the CEO of LabCorp contacted Sequenom’s CEO to express interest in a 5 potential transaction. Id. ¶ 137. On June 7, 2016, Sequenom received a proposal 6 from a debt source for a proposed senior secured loan for up to $150 million. Id. 7 ¶ 140. The next day, the Board asked JPM to contact companies interested in 8 Sequenom and offer a price per share in the $3.00 range. Rec. at 17. Based on 9 interest from LabCorp and two other companies, Sequenom opened a virtual data 10 room with preliminary due diligence information. Id. at 18. The Board met on June 15 and 16, 2016. Sequenom management presented 11 12 the Board the following revenue projections for its oncology program (“Oncology 13 Projections”): $0 (2016), $5 million (2017), $20 million (2018), $45 million (2019), 14 and $73 million (2020). AC ¶ 147. 15 On June 21, LabCorp offered $1.70 to $2.00 per share to acquire Sequenom. 16 Rec. at 18. The next day, another company offered $2.00 per share. Id. The Board 17 instructed JPM to redirect the parties to submit revised proposals with higher offers. 18 Id. On July 19, LabCorp offered $2.30 per share. Id.; AC ¶ 149. After a series of 19 counteroffers, Sequenom and LabCorp agreed on a final price of $2.40 per share. 20 Rec. at 19; AC ¶ 151. 21 On July 26, 2016, the Board unanimously approved the merger. AC ¶ 156. 22 Sequenom’s stock traded at $0.84 per share the day before. Ex. 22 at 18. The 23 Board’s decision to approve the merger relied on one set of financial projections 24 (“Management Projections”) instead of another (“Optimistic Case Projections”).3 25 Rec. at 25. Sequenom management provided the Board and JPM these sets of 26 2 Page citations to this document refer to the ECF pagination. Plaintiff refers to these projections as the “Reduced Forecast” and the “Expected Forecast,” respectively. AC ¶ 83. 28 5 16-cv-02054-JAH-DDL 27 3 1 projections beginning in the second half of 2015 and through the time of LabCorp’s 2 offer. AC ¶¶ 83, 114; Rec. at 23, 25. Neither set of projections included the 3 oncology program. AC ¶ 83. The Board decided to use only the Management 4 Projections in evaluating the fairness of LabCorp’s offer. Rec. at 25.4 Per the 5 Board’s direction, JPM relied on the Management Projections and not the Optimistic 6 Case Projections for purposes of rendering its fairness opinion; it calculated a value 7 between $2.00 and $2.55 per share. Id.; AC ¶¶ 12, 154. On August 9, 2016, LabCorp commenced the tender offer and Sequenom filed 8 9 the Board’s recommendation statement (“Recommendation”) with the SEC. Id. 10 ¶¶ 164–65. Sequenom filed an amendment to the Recommendation on August 30, 11 2016. Am. at 8. The Recommendation provided shareholders the Management 12 Projections, Optimistic Case Projections, and Oncology Projections. Rec. at 24–25; 13 Am. at 5–6. LabCorp subsequently announced the completion of the acquisition on 14 September 7, 2016, with approximately 69% of Sequenom shares tendered. AC 15 ¶¶ 166–67. 16 PROCEDURAL BACKGROND 17 The Court assumes familiarity with the long-running history of this dispute 18 up until its last substantive order. See In re Sequenom, Inc. S’holder Litig., No. 1619 cv-2054, 2019 WL 1200091, at *1 (S.D. Cal. Mar. 13, 2019) (granting Defendants’ 20 motion to stay pending Supreme Court review of Varjabedian v. Emulex Corp., 888 21 F.3d 399 (9th Cir. 2018), which held that claims under Section 14(e) do not require 22 a showing of scienter). After the Supreme Court in Varjabedian dismissed the writ 23 of certiorari as improvidently granted, 139 S. Ct. 1407 (2019), this Court lifted the 24 stay and ordered supplemental briefing. Doc. No. 97. On May 31, 2022, the Court 25 4 At the time of the merger, the Management Projections predicted revenues of: $126 million 26 (2016), $161 million (2017), $210 million (2018), $257 million (2019), and $330 million (2020). Rec. at 24. The Optimistic Case Projections predicted revenues of: $126 million (2016), $173 27 million (2017), $240 million (2018), $329 million (2019), and $426 million (2020). Id. at 25. 28 6 16-cv-02054-JAH-DDL 1 ordered a briefing schedule concerning Defendants’ amended motion to dismiss and 2 asked the parties to incorporate all arguments from previous briefs and notices of 3 authority that they wished the Court to consider. Doc. No. 118. Defendants’ 4 amended motion to dismiss and request for judicial notice are now ripe for decision. 5 6 LEGAL STANDARD The proper pleading standards in this case are Rule 12(b)(6), “Rule 9(b), 7 Section 4(b)(1) of PSLRA, and Twombly/Iqbal.” In re Finjan Holdings, Inc. 8 (“Finjan II”), 58 F.4th 1048, 1059 (9th Cir. 2023). 9 Pursuant to Federal Rule of Civil Procedure 12(b)(6), a complaint may be 10 dismissed against a defendant when the plaintiff fails to state a claim upon which 11 relief may be granted. Intake Water Co. v. Yellowstone River Compact Comm’n, 12 769 F.2d 568, 569 (9th Cir. 1985). Dismissal may be based on either the lack of a 13 cognizable legal theory or the absence of sufficient facts alleged under a cognizable 14 theory. Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 533–34 (9th Cir. 15 1984). When evaluating a motion to dismiss, the court “must presume all factual 16 allegations of the complaint to be true and draw all reasonable inferences in favor of 17 the nonmoving party.” Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 18 1987). The complaint must plead “enough facts to state a claim to relief that is 19 plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A 20 claim is plausible on its face “when the plaintiff pleads factual content that allows 21 the court to draw the reasonable inference that the defendant is liable for the 22 misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation omitted). 23 Therefore, for a complaint to survive a motion to dismiss, the non-conclusory facts 24 and reasonable inferences from those facts must plausibly suggest the plaintiff is 25 entitled to relief. Moss v. U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 2009). 26 In addition, “[i]t is undisputed that Section 4(b)(1) [of the PSLRA] applies to 27 all Section 14(e) actions.” Finjan II, 58 F.4th at 1058. That provision provides, 28 7 16-cv-02054-JAH-DDL 1 2 3 4 5 In any private action arising under [the Exchange Act] in which the plaintiff alleges that the defendant . . . made an untrue statement of a material fact . . . the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed. 6 15 U.S.C. § 78u-4(b)(1). The Ninth Circuit has described this as a “heightened 7 standard which requires increased particularity for allegations of untrue statements 8 of material fact.” Finjan II, 58 F.4th at 1057. 9 Finally, Rule 9(b) of the Federal Rules of Civil Procedure also applies here. 10 That rule provides that “[i]n alleging fraud or mistake, a party must state with 11 particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). 12 Because Plaintiffs allege that Defendants acted with scienter, AC ¶ 230, their claim 13 “sounds in fraud” so “the pleading of [their] claim must comply with Rule 9(b), even 14 if fraud is not an essential element of the claim.” Finjan II, 58 F.4th at 1057. 15 DISCUSSION 16 I. 17 Request for Judicial Notice and Incorporation by Reference Defendants attached twenty-two exhibits they request the Court to consider in 18 resolving the amended motion to dismiss. Plaintiffs oppose admitting Exhibits 1– 19 21. For the reasons that follow, the Court GRANTS IN PART and DENIES IN 20 PART Defendants’ request. 21 “[W]hen ruling on Rule 12(b)(6) motions to dismiss,” courts should consider 22 “documents incorporated into the complaint by reference[] and matters of which a 23 court may take judicial notice.” Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 24 308, 322 (2007). In the Ninth Circuit, “[b]oth of these procedures permit district 25 courts to consider materials outside a complaint, but each does so for different 26 reasons and in different ways.” Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 27 998 (9th Cir. 2018). 28 8 16-cv-02054-JAH-DDL “[I]ncorporation-by-reference is a judicially created doctrine that treats 1 2 certain documents as though they are part of the complaint itself. The doctrine 3 prevents plaintiffs from selecting only portions of documents that support their 4 claims, while omitting portions of those very documents that weaken—or doom— 5 their claims.” Id. at 1002. Incorporation is proper “if the plaintiff refers extensively 6 to the document or the document forms the basis of the plaintiff’s claim.” Id. 7 (quoting United States v. Ritchie, 342 F.3d 903, 907 (9th Cir. 2003)). Judicial notice, by comparison, “permits a court to notice an adjudicative fact 8 9 if it is ‘not subject to reasonable dispute.’” Id. at 999 (quoting Fed. R. Evid. 201(b)). 10 “A fact is ‘not subject to reasonable dispute’ if it is ‘generally known,’ or ‘can be 11 accurately and readily determined from sources whose accuracy cannot reasonably 12 be questioned.’” Id. (quoting Fed. R. Evid. 201(b)). There are limits to this doctrine: 13 “a court cannot take judicial notice of disputed facts,” and “[j]ust because the 14 document is susceptible to judicial notice does not mean that every assertion of fact 15 within that document is judicially noticeable for its truth.” Id. The Court finds that Exhibits 4–12 and 16–17 are incorporated by reference.5 16 17 The Recommendation (Ex. 16) and Amendment (Ex. 17) are extensively cited in the 18 Amended Complaint and also form the basis of Plaintiffs’ claims because they are 19 “what inspired [Plaintiffs’] claims as the sources of the allegedly fraudulent 20 statements.” In re Ocera Therapeutics, Inc. Sec. Litig. (“Ocera I”), No. 17-cv-6687, 21 2018 WL 7019481, at *5 (N.D. Cal. Oct. 16, 2018), aff’d, 806 F. App’x 603 (“Ocera 22 II”) (9th Cir. 2020). Exhibits 4–12 consist of earnings call transcripts, conference 23 transcripts, and an investor slide deck. Plaintiffs extensively quoted and discussed 24 the content of these documents to “bolster” their claim that Defendants objectively 25 and subjectively knew that the Recommendation was false. Id. The press releases 26 27 5 The Court notes that Plaintiffs’ opposition to Defendants’ first motion to dismiss conceded the propriety of incorporating Exhibits 1–15. RJN at 6–7. 28 9 16-cv-02054-JAH-DDL 1 (Exs. 1–3) and SEC forms (Exs. 13–15), however, are not incorporated because they 2 are not extensively referenced in the Amended Complaint. Plaintiffs also oppose 3 judicial notice of Exhibits 13–15 and 18–21. “Since these exhibits are not necessary 4 to this decision, however, judicial notice is not appropriate.” Ocera I, 2018 WL 5 7019481, at *6. 6 II. Plaintiffs’ Section 14(e) Claim 7 Section 14(e) provides in full, 8 It shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer or request or invitation for tenders, or any solicitation of security holders in opposition to or in favor of any such offer, request, or invitation. 9 10 11 12 13 14 15 U.S.C. § 78n(e). “To state a claim under Section 14(e), a plaintiff must allege that (1) the 15 16 defendant made a false statement of material fact or misleadingly incomplete 17 statement, (2) shareholders relied on the false or misleadingly incomplete statement 18 in accepting or rejecting the tender offer, and (3) shareholders suffered an economic 19 loss as a result of the acceptance or rejection of the tender offer.” Finjan II, 58 F.4th 20 at 1055 (citations omitted). “Section 14(e) was enacted as one of the 1968 Williams 21 Act amendments to the Exchange Act, for the purpose of ‘insur[ing] that public 22 shareholders who are confronted by a cash tender offer for their stock will not be 23 required to respond without adequate information.’” Rubke v. Capitol Bancorp Ltd, 24 551 F.3d 1156, 1167 (9th Cir. 2009) (citation omitted). 25 The parties in this case agree that the alleged falsity at issue is a statement of 26 opinion, not a statement of fact. Mot. at 11–12; Opp’n at 10. Thus, it is undisputed 27 that Plaintiffs must adequately allege both “subjective falsity” and “objective 28 10 16-cv-02054-JAH-DDL 1 falsity.” Finjan II, 58 F.4th at 1056. In other words, “the plaintiff must allege both 2 that the speaker did not hold the belief she professed and that the belief is objectively 3 untrue.” Id. (cleaned up) (quoting City of Dearborn Heights Act 345 Police & Fire 4 Ret. Sys. v. Align Tech., Inc., 856 F.3d 605, 615–16 (9th Cir. 2017)). 5 Here, Plaintiffs argue that Defendants violated Section 14(e) because the 6 Recommendation materially misled Sequenom shareholders about the fairness of 7 LabCorp’s offer. Plaintiffs aver that the Recommendation is objectively false 8 because: (1) the Management Projections failed to take into account Sequenom’s 9 oncology program; and (2) the Optimistic Case Projections offered the most accurate 10 view of Sequenom’s future prospects. Plaintiffs argue that the Recommendation is 11 subjectively false because Defendants knew about the oncology program and the 12 Optimistic Case Projections and therefore did not believe the Recommendation’s 13 conclusion that $2.40 per share was a fair price. Plaintiffs also argue that the 14 Recommendation contained misleading omissions. Finally, Plaintiffs contend that 15 they relied on the materially misleading Recommendation and suffered an economic 16 loss equal to the difference between what they actually received and Sequenom’s 17 true value at the time of the acquisition. 18 Defendants argue that Plaintiffs failed to plead particularized facts showing 19 that the Recommendation was objectively and subjectively false or that it contained 20 misleading omissions. In Defendants’ view, Plaintiffs’ case is nothing more than a 21 disagreement with the Board’s business judgment. Defendants also contend that 22 Plaintiffs failed to adequately plead loss causation. The Court will analyze each of 23 these arguments in turn. 24 A. 25 To establish objective falsity, Plaintiffs must adequately allege that “the Objective Falsity 26 revenue projections/share-value estimations did not reflect [the company’s] likely 27 future performance.” Finjan II, 58 F.4th at 1056; see also Dearborn, 856 F.3d at 28 11 16-cv-02054-JAH-DDL 1 615 (objective falsity inquiry turns on whether “the belief is objectively incorrect”). 2 Defendants argue that Plaintiffs failed to allege particularized facts showing that the 3 Recommendation was objectively false. They claim that the Management 4 Projections accurately reflected Sequenom’s true value. Plaintiffs counter that the 5 Optimistic Case Projections better reflected Sequenom’s public statements about its 6 future growth and that the Oncology Projections demonstrated Sequenom’s 7 continued commitment to a viable part of its business model. The Court will discuss 8 the Oncology Projections first before turning to the Optimistic Case Projections. 9 10 1. Oncology Projections JPM’s fairness opinion did not rely on the Oncology Projections. The 11 Recommendation explained that neither the Management nor Optimistic Case 12 Projections included the oncology program “due to the significant investment which 13 would have been required to realize the potential revenue opportunity for that 14 business and Sequenom’s lack of available cash to make such an investment.” Rec. 15 at 5. And “even if such an investment were made in the oncology business,” the 16 Recommendation continued, “any projections relating to that business would reflect 17 an operating loss through 2020.” Id. Plaintiffs argue that the projections should 18 have included the oncology program because: Sequenom’s public statements 19 demonstrated that it was a “key component” of its future growth; Sequenom was on 20 track with the program’s “technical milestones”; and Sequenom’s management had 21 developed “specific revenue expectations” for the program. Opp’n at 14. 22 Plaintiffs, however, rely on a “selective reading” of public statements to 23 support their theory. Ocera I, 2018 WL 7019481, at *6. Plaintiffs harp on the fact 24 that “Sequenom spent a significant amount of effort in 2015 developing its oncology 25 program” but neglect to discuss the company’s noticeable shift in 2016. AC ¶ 178. 26 In January 2016, Sequenom told the public that it had “refocused [its] commercial 27 strategy” and decided to “seek partners” for the oncology program. Ex. 11 to Mot. 28 12 16-cv-02054-JAH-DDL 1 at 6, Doc. No. 123-13; see Ex. 8 to Mot. at 4–5, Doc. No. 123-10 (acknowledging 2 the “significant reduction of [it]s oncology program” so it could “focus [its] efforts 3 on [its] reproductive health business”); Ex. 12 to Mot. at 5, Doc. No. 123-14 4 (announcing “we are not going to continue funding clinical utility studies” in its 5 oncology program to “focus[] as a Company on rebuilding the growth in 6 reproductive health”). 7 Even though the oncology program made significant process in 2015, its 8 “potential clinical utility” was still developing at an “early” stage. Ex. 8 to Mot. at 9 5. Sequenom cautioned that “the clinical validation work for something like this is 10 significant” and, in Sequenom’s case, required “partnering opportunities.” Ex. 11 11 to Mot. at 5. It explained that a “partnering strategy” would allow it to “retain[]” the 12 oncology program’s value and “allow[] [it] to participate in the future growth 13 potential of that.” Id. at 6. But no partnering strategy emerged. “Over 20 companies 14 expressed interest,” and “six parties signed confidentiality agreements and began 15 confidential due diligence review” lasting through May 2016. Am. at 4. Yet “none 16 of the parties moved forward with draft licensing, partnering or acquisition terms.” 17 Id. Accordingly, Sequenom’s decision not to incorporate the Oncology Projections 18 into its valuation of the company was not objectively false. 19 Montanio v. Keurig Green Mountain, Inc., 237 F. Supp. 3d 163 (D. Vt. 2017), 20 offers some insight here. Defendants rely on it for the proposition that a company’s 21 “general statements” of optimism about a new product line cannot on its own 22 demonstrate that its subsequent decision to discount the value of that product is 23 objectively false. Id. at 173. Plaintiffs counter that unlike the 50% probability 24 discount that Keurig applied to its new product’s financial projections (which the 25 court found not objectively false), Sequenom inappropriately chose to omit the 26 Oncology Projections altogether. Opp’n at 15–16. On balance, Defendants’ reading 27 is more persuasive. Whereas Keurig applied a 50% probability discount after 28 13 16-cv-02054-JAH-DDL 1 launching its new appliance line, Sequenom stopped “funding clinical utility 2 studies” of its oncology program altogether and could not find any investor that was 3 willing to pour into the program so that it could potentially reach a commercially 4 viable outcome. Ex. 12 to Mot. at 5. In other words, whereas Keurig’s new product 5 faced risks and uncertainty in the market, Sequenom did not have a new product to 6 offer at all. Because Sequenom never encountered a “recent history of success” or 7 “past experience” with a commercialized oncology program, much less market 8 interest in pushing the program to commercial viability in the future, Plaintiffs have 9 failed to offer a basis to infer that the Board’s decision to exclude the Oncology 10 Projections was objectively false. Keurig, 237 F. Supp. 3d at 173–74. 11 Plaintiffs point to the Oncology Projections’ five-year revenue figures as 12 evidence of the program’s ongoing value. But the Recommendation addressed this 13 issue head on. First, it explained that the potential revenue that the oncology 14 program could generate was contingent on “significant investment”—the same tune 15 that Sequenom had conveyed to the public prior to LabCorp’s tender offer. Am. at 16 5. No company in the market wanted to commit to the oncology program, however, 17 so no commercialization was in sight. Second, the Recommendation explained that 18 even if an investment was made, the projections relating to that business would 19 reflect an operating loss through 2020. Id. Besides simply disagreeing with the 20 Board’s position, Plaintiffs have not pled facts showing it was objectively false. 21 22 2. Optimistic Case Projections Sequenom’s decision not to use the Optimistic Case Projections was also not 23 objectively false. According to Plaintiffs, Sequenom consistently maintained 24 positive long-term revenue expectations for its reproductive health business from 25 September 2015 until the Board’s approval of the merger in July 2016. Plaintiffs 26 contend that this shows that the Board’s adoption of the Management Projections 27 28 14 16-cv-02054-JAH-DDL 1 was objectively false. Opp’n at 19. But Plaintiffs’ position requires inferential leaps 2 in reasoning and is not supported by caselaw. Plaintiffs’ leading case, Brown v. Papa Murphy’s Holdings Inc. (“Papa 3 4 Murphy’s III”), No. 19-cv-5514, 2021 WL 1574446 (W.D. Wash. Apr. 22, 2021), is 5 inapposite.6 That case also involved a shareholder class action under Section 14(e) 6 against a company (Papa Murphy’s) and its directors for recommending a tender 7 offer as fair. Id. at *1. The company directed its financial advisor to create and use 8 a set of lower projections (“Base Case Projections”) rather than the company’s 9 higher projections (“Management Case Projections”) in assessing the fairness of the 10 buyer’s offer. Id. The district court ruled that the plaintiffs adequately pled that the 11 Base Case Projections were objectively false because “the slashing of the 12 Management Case to create the Base Case was inconsistent with various statements 13 [a director] and Papa Murphy’s made during the relevant time period indicating that 14 the Company’s prospects were strong and expected to significantly improve.” Id. at 15 *2 (citation omitted). 16 Although Papa Murphy’s shares some surface-level similarities with this 17 case, it is distinguishable in several important ways. First, unlike Papa Murphy’s, 18 the alleged facts show that Sequenom did not create (much less direct its financial 19 advisor to create) the Management Projections for the purpose of assessing 20 LabCorp’s tender offer. Instead, the Board had access to both the Management 21 Projections and the Optimistic Case Projections since the second half of 2015, long 22 before LabCorp’s offer in July 2016. AC ¶ 83; Rec. at 25. Thus, the Management 23 Projections in this case were not “create[d]” by “slashing” a preexisting set of 24 projections downward to justify a tender offer. Papa Murphy’s III, 2021 WL 25 1574446, at *2. Cf. Hot Topic, 2014 WL 7499375, at *2 (finding plaintiff 26 6 Papa Murphy’s I and II are magistrate judge decisions, and Papa Murphy’s III’s is a district 27 court decision affirming Papa Murphy’s II. The Court will refer to the case generally as Papa 28 Murphy’s but cite the specific decisions accordingly. 15 16-cv-02054-JAH-DDL 1 shareholders adequately alleged objective falsity where company created “revised 2 set of projections” after the buyer “first expressed interest” in the company). Second, unlike Papa Murphy’s, the Management Projections in this case are 3 4 not “hard to square” with Sequenom’s optimistic statements about its growth and 5 future prospects. Papa Murphy’s II, 2021 WL 235865, at *5. The Management 6 Projections presented a bright outlook on Sequenom’s future growth: revenue was 7 predicted to increase 28% in 2017 (identical to the Optimistic Case Projection’s 8 figure for 2017), 30% in 2018, 22% in 2019, and 28% in 2020. Rec. at 24. These 9 figures are not shabby by any measure. That Sequenom did not rely on the 10 Optimistic Case Projections—which anticipated even greater annual revenue 11 growth, as high as 39% in one year—does not on its own lead to the inference that 12 the lower projections were objectively false. That inference is implausible where, 13 as here, the Board had access to both the Management Projections and the Optimistic 14 Case Projections in the second half of 2015, before any offer was made. See City of 15 Hialeah Employees’ Ret. Sys. v. FEI Co., 289 F. Supp. 3d 1162, 1176 (D. Or. 2018) 16 (rejecting objective falsity argument where defendant company used lower of two 17 financial projections that were “developed during the same internal review process” 18 and “projected identical performance” in the first year). 19 In addition, Sequenom’s optimism about its long-term growth was not 20 boundless. Throughout 2015 and into 2016, Sequenom experienced consistently 21 negative revenue growth. See AC ¶ 70 (2015 Q1), ¶ 77 (2015 Q2), ¶ 105 (2015 Q3), 22 ¶ 123 (2015 Q4), ¶ 132 (2016 Q1).7 Sequenom told the public that 2015 would be a 23 “transition year,” AC ¶¶ 55–114, explaining that it had anticipated short-term 24 7 It appears that Sequenom took in less revenue in 2015 than it expected. See Ex. 4 to Mot. at 4, Doc. No. 123-6 (predicting $150 to $170 million in 2015 revenue); Ex. 7 to Mot. at 5, Doc. No. 26 123-9 (reporting actual 2015 revenue of $128.2 million). Cf. Hot Topic, 2014 WL 7499375, at *6 (finding shareholder plaintiffs adequately alleged objective falsity where company relied on 27 lower, “moderated downwards” set of financial projections despite, among other things, the company’s “strong improvement” in revenue growth in previous two years). 28 16 16-cv-02054-JAH-DDL 25 1 declines in NIPT revenue as customers increasingly converted to licensees. See, 2 e.g., id. ¶¶ 70, 78. But declining revenue was not the only change that Sequenom 3 experienced. At the start of 2016, Sequenom announced significant restructuring 4 plans, including shutting down its North Carolina lab and cutting its workforce by 5 20%. Rec. at 15–16; AC ¶ 116. Sequenom also confronted a $130 million 6 convertible debt overhang. AC ¶ 108; see also Ex. 8 to Mot. at 8 (discussing debt), 7 Ex. 12 to Mot. at 2 (same). Cf. Finjan II, 58 F.4th at 1062 (noting that a company’s 8 “pre-COVID revenue figures are too remote to create the reasonable inference that 9 [the company’s] post-COVID revenue would be similar” due to reductions in 10 operations). Thus, when Sequenom announced in May 2016 that it was “in the early 11 stages of a turnaround,” that was hardly a guarantee that the company was on the 12 road to its most successful scenario. AC ¶ 133. Actually, Sequenom’s stock fell 13 steadily from around $1.60 per share to under $1.00 during the first half of 2016. 14 Ex. 22 at 15–19. Cf. Papa Murphy’s II, 2021 WL 235865, at *4 (noting that in the 15 months leading up to the merger, Papa Murphy had “herald[ed]” successful quarterly 16 results, and the company’s “stock price increased 36%”). 17 Plaintiffs make much of the $500 million-in-2020-revenues statement that 18 Sequenom made to investors in 2015. AC ¶¶ 98, 148; see Ex. 10 to Mot. at 17. 19 According to Plaintiffs, this statement reveals that the company anticipated 2020 20 revenues of $427 million in its reproductive health business. Opp’n at 18–19. 21 Because $427 million is very close to the 2020 revenue figure in the Optimistic Case 22 Projections, Plaintiffs contend that the Optimistic Case Projections must therefore 23 be the most accurate picture of the company’s future prospects. Id. Although this 24 statement supports Plaintiffs’ theory of the case, it is far from dispositive. At best, 25 it confirms that at one point in time, Sequenom gave the public an estimate of one 26 revenue figure from the Optimistic Case Projections. That is insufficient to infer 27 that Sequenom’s reliance on the Management Projections at the time of the merger 28 17 16-cv-02054-JAH-DDL 1 was objectively false. Plaintiffs did not plead, for example, particular facts 2 suggesting that Sequenom relied on the $427 million figure leading up to LabCorp’s 3 offer, or particular facts showing that it was in some way more reliable than the 4 Management Projections at the time of the merger. 5 One final point exposes the weakness in Plaintiffs’ position: LabCorp’s offer 6 was the product of an arms-length deal. “A ‘price resulting from arms-length 7 negotiations where there are no claims of collusion is a very strong indication of fair 8 value.’” Finjan II, 58 F.4th at 1060 (quoting M.P.M. Enterprises, Inc. v. Gilbert, 9 731 A.2d 790, 797 (Del. 1999)). In this case, LabCorp expressed interest in 10 purchasing Sequenom as early as December 2015. Rec. at 14. LabCorp and several 11 companies engaged Sequenom through the end of June 2016 to discuss strategic 12 transactions and purchasing the company itself. Id. at 14–18. After LabCorp offered 13 the highest purchase price among the bidders, Sequenom continued to negotiate with 14 it to arrive at an even higher price. Id. at 19. The final sale price reflected a 185% 15 premium over Sequenom’s market price on the day before the Board approved the 16 merger. Id. at 21. While Plaintiffs desired the price to be even higher, they have 17 failed to adequately plead facts to draw that inference. See Ocera I, 2018 WL 18 7019481, at *8 (finding company’s support for arms-length transaction at 52% stock 19 price premium was not objectively false). Thus, the Recommendation was not 20 objectively false. 21 B. 22 To allege subjective falsity, Plaintiffs must show that Defendants “did not Subjective Falsity 23 actually believe the revenue projections/share-value estimations they issued” in the 24 Recommendation. Finjan II, 58 F.4th at 1051. Plaintiffs argue that “each Individual 25 Defendant knew that the Company’s oncology program was valuable and the 26 [Management Projections were] inaccurate.” AC ¶ 205. For many of the same 27 reasons discussed in the previous section, the Court disagrees. See Opp’n at 16 28 18 16-cv-02054-JAH-DDL 1 (acknowledging that “significant overlap” may exist between “underlying facts” in 2 subjective and objective falsity analyses (citation omitted)).8 The Court only 3 emphasizes two points here. First, the arms-length nature of Sequenom’s merger with LabCorp strongly 4 5 dispels Plaintiffs’ contention that Defendants did not believe in the fairness of the 6 final offer. “It is unreasonable to infer from these factual allegations that [Sequenom 7 directors] subjectively believed that the revenue projections or the estimated share 8 values produced [from an arms-length sales process] were too low.” Finjan II, 58 9 F.4th at 1064; accord Ocera I, 2018 WL 7019481, at *8. Second, the Amended Complaint insinuates that the Individual Defendants 10 11 were conflicted. AC ¶¶ 157–59, 206. Plaintiffs did not plausibly plead that the 12 Individual Defendants were conflicted. According to the merger agreement, any 13 Sequenom employee or director’s outstanding and unexercised stock and restricted 14 stock units would accelerate and become fully vested at the consummation of the 15 merger. Id. ¶ 158. But that is unremarkable and not a basis for questioning the 16 Individual Defendants’ motives where, as here, those options “w[ere] not a benefit 17 unique to” the Directors because the agreement stated that “any employee . . . was 18 entitled to that benefit.” In re Finjan Holdings, Inc. Sec. Litig., No. 20-cv-4289, 19 2021 WL 4148682, at *10 (N.D. Cal. Sept. 13, 2021) (emphasis added); see AC ¶ 20 158. 21 C. 22 Section 14(e) also prohibits “omit[ting] to state any material fact necessary in Misleading Omissions 23 order to make the statements made, in the light of the circumstances under which 24 they are made, not misleading.” 15 U.S.C. § 78n(e). “[W]hen a plaintiff relies on a 25 theory of omission, the plaintiff must allege ‘facts going to the basis for the issuer’s 26 8 Even if Plaintiffs adequately alleged subjective falsity, there is no harm if the alleged 27 misrepresentation was not also objectively false. See Finjan II, 58 F.4th at 1056 (describing this 28 as “akin to a harmless error rule”). 19 16-cv-02054-JAH-DDL 1 opinion . . . whose omission makes the opinion statement at issue misleading to a 2 reasonable person reading the statement fairly and in context.’” Dearborn, 856 F.3d 3 at 616 (quoting Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension 4 Fund, 575 U.S. 175, 194 (2015)); see Finjan II, 58 F.4th at 1055–56 (applying 5 Omnicare’s reasoning to Section 14(e) context). 6 The Amended Complaint highlights two omissions that made the 7 Recommendation allegedly misleading. First, it alleges that the Recommendation 8 should have provided more details about the oncology program’s investment needs 9 and operating costs. AC ¶¶ 212–13. Second, it alleges that the Recommendation 10 omitted details of the various financing terms that the Board received in 2016. Id. 11 ¶ 214. Plaintiffs assert that “[t]his omitted information, if disclosed, would have 12 demonstrated to shareholders that the oncology program was viable, and therefore 13 would have exposed the falsity of the Reduced Forecast’s omission of the oncology 14 program.” Opp’n at 18. 15 This Court is not impressed with Plaintiffs’ omissions theory of liability. The 16 omissions clause of Section 14(e) is “not a general disclosure requirement.” 17 Ominicare, 575 U.S. at 194. “Section 14(e) . . . prohibit[s] only misleading and 18 untrue statements, not statements that are incomplete.” Brody v. Transitional Hosps. 19 Corp., 280 F.3d 997, 1006 (9th Cir. 2002) (emphasis in original). “No matter how 20 detailed and accurate disclosure statements are, there are likely to be additional 21 details that could have been disclosed but were not. To be actionable under the 22 securities laws, an omission must be misleading; in other words it must affirmatively 23 create an impression of a state of affairs that differs in a material way from the one 24 that actually exists.” Id. 25 Here, Sequenom disclosed the Oncology Projections and provided detailed 26 reasons why they were not considered in the Board’s decision and JPM’s fairness 27 analysis. Am. at 5–6. In addition, Sequenom told shareholders that it was looking 28 20 16-cv-02054-JAH-DDL 1 for an investor to make the oncology program commercially viable, and that not a 2 single company moved forward with a licensing, partnering, or acquisition proposal. 3 Id. at 4; Rec. at 21. Besides speculating that this information would be revelatory, 4 Plaintiffs do not explain how learning more details about the oncology program’s 5 investment needs and operating costs (much less details about loan financing terms) 6 would change a shareholder’s impression of the company’s state of affairs. Plaintiffs 7 in essence want the Board to show their work in addition to summarizing it, but 8 Section 14(e) requires no such thing. See Omnicare, 575 U.S. at 194 (noting that to 9 adequately plead an omissions theory of liability, “the investor cannot just say that 10 the issuer failed to reveal [the] basis” for its opinion). 11 D. 12 The Amended Complaint fails for the separate and independent reason that it Loss Causation 13 does not adequately allege loss causation. Loss causation is “an economic loss as a 14 result of the acceptance or rejection of the tender offer.” Finjan II, 58 F.4th at 1055 15 & n.2 (citations omitted). Plaintiffs allege that the Recommendation’s defects 16 “induced the Company’s shareholders into accepting an offer that was unfair 17 compared to the actual intrinsic value of the Company.” AC ¶ 14. They aver that 18 their economic loss is “the difference between the price Sequenom stockholders 19 received and Sequenom’s true value at the time of the Acquisition.” Id. ¶ 230. This 20 “mere legal conclusion” cannot withstand a motion to dismiss. Ocera I, 2018 WL 21 7019481, at *11. 22 The Ninth Circuit’s decision in Ocera II is instructive. 806 F. App’x 603. In 23 that case, the plaintiff shareholders argued that the defendant company and its 24 directors misled them by claiming that a tender offer was fair based on a lower set 25 of management projections about the company’s value. Id. at 604. The plaintiffs 26 alleged that they suffered economic loss “measured as ‘the difference between the 27 price [plaintiff] stockholders received and the true value of their shares at the time 28 21 16-cv-02054-JAH-DDL 1 of the [acquisition.]” Id. at 604–05. According to Plaintiffs, securities analysts 2 believed that the true price of a share ranged from $2.67 to $4.50 at or about the time 3 of the tender offer, whereas the actual merger price was $1.52 per share upfront with 4 a maximum potential value of $4.10. Id. at 605. The Ninth Circuit ruled that 5 Plaintiffs’ argument was “too speculative to plead with particularity that 6 shareholders experienced losses.” Id. Plaintiffs also argued that the higher (unused) 7 set of management projections represented the “true value” of the company. Id. But 8 the Ninth Circuit found this argument “speculative in the extreme,” given the fact 9 that during the sale process, “numerous potential acquirers . . . lost interest,” leaving 10 only one buyer “which was still willing to pay more than the existing market price 11 of $1.00 per share on the date of the entry into the merger agreements.” Id. 12 Here, Plaintiffs’ allegations of loss causation do not fare any better than those 13 in Ocera II. Plaintiffs do not even attempt to identify the true value of the shares at 14 the time of the tender offer. Their reliance on the Optimistic Case Projections to 15 assert that a hypothetically higher share price exists is “speculative in the extreme” 16 because LabCorp’s $2.40 per share bid was the highest offer at the conclusion of an 17 arms-length sales process—and a significant premium over the market price of $0.84 18 per share on the day before the Board approved the merger. Ocera II, 806 F. App’x 19 at 605. 20 Plaintiffs’ primary cases on loss causation are inapposite. Unlike Papa 21 Murphy’s II, Plaintiffs do not allege that “another company actually assessed the 22 value of [the company] at a higher value at the time of the [ ] merger.” 2021 WL 23 235865, at *8. In fact, Plaintiffs expressly disclaim relying on any analyst reports 24 of the true value of Sequenom’s stock. Opp’n at 23; cf. In re Hot Topic, Inc. Sec. 25 Litig., No. 13-cv2939, 2014 WL 7499375, at *10 (C.D. Cal. May 2, 2014) (ruling 26 that plaintiffs adequately pled loss causation in Section 14(a) case where plaintiffs 27 claimed that analysts valued company shares at higher price than tender offer); Baum 28 22 16-cv-02054-JAH-DDL 1 v. Harman Int’l Indus., Inc., 408 F. Supp. 3d 70, 92 (D. Conn. 2019) (ruling that 2 plaintiffs adequately pled loss causation in Section 14(a) case where plaintiff pointed 3 to greater share price calculated from a different set of projections). Where, as here, 4 Plaintiffs allege loss as simply “[t]he difference between the value” of the merger 5 and “the speculative ‘true value’ of the shares,” that “may not alone establish loss 6 causation.” Papa Murphy’s II, 2021 WL 235865, at *8 (quoting Ocera I, 2018 WL 7 7019481, at *11). CONCLUSION AND ORDER 8 9 Plaintiffs’ Section 20(a) claim derives from their Section 14(e) claim and 10 therefore also fails. See Varjabedian, 888 F.3d at 409. Because Defendants’ falsity 11 and loss causation arguments require dismissal of the Amended Complaint, the 12 Court has no occasion to consider Defendants’ additional arguments at this moment. 13 The Court dismisses the Amended Complaint in its entirety without prejudice. 14 See Ocera I, 2018 WL 7019481, at *11. Based on the foregoing, IT IS HEREBY 15 ORDERED: 16 17 1. Defendants’ Request for Judicial Notice (Doc. No. 124) is GRANTED IN PART AND DENIED IN PART; 18 2. Defendants’ Amended Motion to Dismiss (Doc. No. 123) is GRANTED; 19 3. The Amended Complaint (Doc. No. 54) is DISMISSED WITHOUT 20 21 22 PREJUDICE; 4. Plaintiffs may file an Amended Complaint no later than September 11, 2023. 23 IT IS SO ORDERED. 24 DATED: July 27, 2023 25 ______________________________ JOHN A. HOUSTON United States District Judge 26 27 28 23 16-cv-02054-JAH-DDL
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