In Kleinman v. Elan Corporation, No. 11-3706-cv, 2013 WL 388006 (2d Cir. Feb. 1, 2013), the United States Court of Appeals for the Second Circuit affirmed the dismissal of a securities class action lawsuit alleging that defendants violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities & Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder, by issuing a misleading press release describing the preliminary clinical trial results for an Alzheimer’s drug. The Second Circuit concluded that, in the context of the full presentation of details surrounding the study of the drug, nothing omitted from the press release rendered the release false or misleading to a reasonable investor. This decision reconfirms that in order to be actionable under Section 10(b) and Rule 10b-5, an alleged omission must be misleading, not just material.

Elan Corporation plc (“Elan”) is a neuroscience-based biotech company whose American Depository Receipts (“ADRs”) are traded on the New York Stock Exchange and whose publicly traded call options are derivative of, and trade in tandem with, its ADRs. During the relevant time period, Elan worked with Wyeth, Inc., which was later acquired by Pfizer, Inc., to develop an Alzheimer’s drug. After completing a successful Phase 1 trial for the drug, Wyeth and Elan began the Phase 2 study. In April 2008, Elan announced that while Phase 2 remained ongoing, it (and Wyeth) expected to present a “top line finding some time around mid-year” and a “full data review” of Phase 2 at the International Conference on Alzheimer’s Disease (“ICAD”) on July 29, 2008.

In line with that plan, Wyeth and Elan jointly issued a press release in June 2008 that stated, in general terms, what eventually came out at the ICAD in July. It informed the public that the drug had failed to achieve its primary endpoints, but that positive subgroup results were discovered as a result of post-hoc analysis. These results, according to the June 2008 press release, supported the decision to forge ahead into Phase 3 clinical trials. On the heels of this press release, the price of Elan’s ADRs rose from $27.11 to $30.00 in a single day. However, on July 30, 2008, the day after the ICAD, the price of Elan’s ADRs dropped by forty-two percent.

Plaintiff brought the putative securities class action on behalf of all those who had purchased Elan’s call options right after the June press release, claiming that the press release was overly optimistic in that it failed to disclose the full magnitude of negative Phase 2 trial results. Defendants moved to dismiss for failure to state a claim, arguing that plaintiff failed plausibly to allege false or misleading statements. The United States District Court for the Southern District of New York granted defendants’ motion. Plaintiff appealed.

The Second Circuit affirmed. The Court first held that plaintiff did not allege that anything in the June 2008 press release was literally false. The Court first addressed plaintiff’s argument regarding the headline of the June press release: “Encouraging Top-Line Results.” Plaintiff argued that this was an affirmative misstatement because “top-line results,” by definition, equate to the entire study population, which failed to achieve efficacy endpoints. The Court held, however, that plaintiff did not identify the headline in his amended complaint as misleading, which alone would fall short of the heightened pleading standard. In addition, the June 2008 press release, as a whole, clarified that the “overall study population” did not attain statistically significant results. Even if plaintiff’s definition of “top-line results” were correct, the Court held, no reasonable investor would have understood the headline to mean anything other than that there were positive subgroup results. The Court also held that words such as “encouraging” are the type of expressions of puffery and corporate optimism that do not generally give rise to securities violations.

With respect to plaintiff’s allegations regarding defendants’ alleged omission of clinical trial details from the June 2008 press release, the Court held that “none of what was omitted was necessary to make the June press release not misleading.” The Second Circuit noted that Section 10(b) and Rule 10b-5 do not create an affirmative duty to disclose any and all material information. Rather, disclosure is required “only when necessary to make statements made, in the light of the circumstances under which they were made, not misleading.” The Court held further that nothing in subsequent press releases or at the ICAD rendered the June 2008 press release false or misleading to a reasonable investor. For these reasons, the Court affirmed the district court’s dismissal of the Section 10(b) and Rule 10b-5 claims.

Kleinman reconfirms that in order to be actionable under Section 10(b) and Rule 10b-5, an alleged omission must render some affirmative statement misleading to investors. Simply alleging that the omitted information was material, in and of itself, is not sufficient to support a claim.