Free Order on Motion to Dismiss - District Court of California - California

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1 2 3 4 5 6 7 8 FOR THE NORTHERN DISTRICT OF CALIFORNIA 9 10 United States District Court For the Northern District of California 11 12 13 14 15 16 17 18 Defendants Threshold Pharmeceuticals, Inc., Harold E. "Barry" 19 Selick and Janet I. Swearson have filed a motion to dismiss the 20 Consolidated Amended Class Action Complaint (CAC). 21 Michael Hentosh1 opposes the motion. 22 19, 2008. 23 argument on the motions, the Court grants Defendants' motion and 24 grants Lead Plaintiff leave to amend the complaint. 25 26 27 28 In an order dated November 5, 2007, the Court granted Michael Hentosh's unopposed motion to serve as Lead Plaintiff.
1

IN THE UNITED STATES DISTRICT COURT

JERRY TWINDE, on behalf of himself and all others similarly situated, Plaintiff, v. THRESHOLD PHARMACEUTICALS INC., HAROLD E. "BARRY" SELICK, and JANET I. SWEARSON, Defendants. /

No. C 07-4972 CW CLASS ACTION ORDER GRANTING DEFENDANTS' MOTION TO DISMISS AND GRANTING PLAINTIFF LEAVE TO AMEND

Lead Plaintiff

The motion was heard on June

Having considered all of the parties' papers and oral

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BACKGROUND2 Defendant Threshold Pharmaceuticals is a development-stage drug company that was founded in 2001. Threshold's research

focuses on a process it describes as "metabolic targeting," in which drugs target abnormal glucose metabolism to starve and kill off diseased cells while leaving healthy cells with normal glucose metabolism unharmed. Defendant Selick is Threshold's Chief

Executive Officer (CEO) and a member of its Board of Directors. Defendant Swearson was Threshold's Chief Financial Officer (CFO) during the class period. Lead Plaintiff Michael Hentosh purports to represent a class of persons and entities who purchased Threshold's publicly traded common stock between February 4, 2005 and July 14, 2006, including those who purchased stock in or traceable to Threshold's February, 2005 initial public offering (IPO) or its October, 2005 follow-on offering. Lead Plaintiff alleges that in the months leading up to its IPO, Threshold was in the process of developing three drugs, including TH-070, a drug intended to treat Benign Prostatic Hyperplasia (BPH). BPH is disease common among middle-aged and This enlargement

older men that causes the prostate to enlarge.

can partially or completely block the urethra, leading to a variety of urinary and bladder symptoms. Lead Plaintiff characterizes BPH

as "a common and relatively non-serious, though bothersome, side effect of aging that affects nearly all men by the time they reach All facts are taken from Lead Plaintiff's CAC and are assumed to be true for purposes of these motions. 2
2

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70 years old."

CAC ¶ 33.

If left untreated, severe BPH can lead

to kidney and bladder damage, bladder stones and incontinence. The estimated market for a fast, safe and effective treatment for BPH is $1.6 billion. Lead Plaintiff alleges that, at the time

of the IPO, one of Threshold's other two drugs in development, glufosfamide, was farther along in the development process, but that the market for that drug, which was intended to treat pancreatic cancer, was only $400 million. Therefore, Threshold

elected to emphasize its progress with TH-070, despite the drug's early stage of development, in its efforts to convince investors to purchase shares through its IPO. TH-070 was a preparation of

lonidamine, a drug that has never been approved for distribution in the United States and had, at the time Threshold began developing TH-070, been approved only in Italy and for treating seriously ill cancer patients. Lead Plaintiff further alleges that when Threshold realized it would need public investors to support its clinical trials for TH070 and glufosfamide, it planned a quick study of 60 patients in Bari, Italy treated with lonidamine. Before the Bari Study was complete, Threshold got the results it wanted [and] cancelled the second half of the study . . . . CAC ¶ 4. As alleged, Threshold initiated the Bari Study in Later in 2004, after enrolling and observing a

22 January, 2004. 23 group of thirty patients who received a low dose of lonidamine, 24 Threshold cancelled the second half of the study, in which another 25 group of thirty patients was to receive a higher dose of 26 lonidamine. 27 28 3 The results of the Bari Study were available to

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Defendants at the time of the IPO and, in the IPO documents, Threshold predicted that it would "publish results of this trial in the second quarter of 2005." Lyon Decl., Ex. A at 49. Lead

Plaintiff alleges that Threshold misused the results of the abbreviated Bari Study when it told investors it had statistically significant results demonstrating that TH-070 worked better than existing BPH treatments, including blockbuster drugs Flomax and Proscar. Threshold also told investors that TH-070 was well tolerated and safe, with no serious side effects. Threshold repeatedly trumpeted the purportedly positive results of the Bari Study to the market, permitting it to complete both its IPO and the Followon Offering and raising more than $100 million in cash. . . . Threshold used this money to fund phase 2 and 3 clinical trials of TH-070 and glufosfamide, as well as to pay generous salaries and bonuses and provide potentially lucrative stock options to its senior management, including Selick and Swearson. CAC ¶ 4-5. Lead Plaintiff alleges that, through these communications, Defendants misrepresented the likelihood that TH-070 would be approved by the Food and Drug Administration (FDA) and failed to disclose negative information already in their possession. More

specifically, Lead Plaintiff alleges that Defendants negligently published materially false and misleading information in the prospectuses and registration statements related to the February, 2005 IPO and the October, 2005 follow-on offering when they emphasized the positive results of the Bari Study with respect to the safety of TH-070 and downplayed or failed to mention "specific risks and uncertainties inherent in the design of that study." Opposition at 8. For example, Lead Plaintiff alleges that, in the February 3, 4

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2005 prospectus relating to the IPO, Defendants misleadingly stated that the "primary objective" of the Bari Study was "to determine the safety and tolerability of TH-070 in patients with BPH." ¶ 63. CAC

However, Lead Plaintiff alleges that "the Bari Study was not To the

designed to demonstrate the safety and efficacy of TH-070.

contrary, the safety of TH-070 was assumed based on its prior use in treating cancer patients in Europe, while trends in prior animal and human studies indicating that the drug might cause abnormal liver functions were overloaded [sic] or disregarded." 65(f). On May 19, 2005, after the IPO, but before the follow-on offering, Threshold announced the publication of the results of the Bari Study. In a press release issued that day, Threshold Id. at ¶

summarized the results of the study and advised, Detailed results of the study will be published by MedReviews in the quarterly journal of Reviews in Urology available at the American Urology Association (AUA) annual meeting in San Antonio, Texas May 22-28, 2005. The information will also be available May 18th online at the MedReviews website http://www.medreviews.com. Lyon Decl., Ex. C.

19 Lead Plaintiff alleges that, in 2005 and into 2006, after the 20 IPO and follow-on offering, Defendants "repeatedly trumpeted the 21 positive results of the Bari Study," including in press releases 22 dated March 20, 2006 and April 5, 2006 "announcing the completion 23 of enrollment and other milestones in ongoing phase 2 and 3 trials 24 of TH-070" as well as in a March 1, 2006 conference call and 25 related press release discussing Threshold's financial results for 26 the fourth quarter of 2005. 27 28 5 Id. at 83. Lead Plaintiff alleges

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that these press releases announced only the completion of enrollment in Threshold's clinical trials, but "did not warn investors of any potential issues with respect to the safety or the efficacy of TH-070." CAC ¶ 87.

Similarly, Lead Plaintiff alleges that its May 10, 2006 press release announcing Threhold's financial results for the first quarter of 2006 "were materially false and misleading to investors because the release failed to warn investors that liver problems had already arisen in the ongoing clinical trials of TH-070." ¶ 101. Lead Plaintiff asserts that Defendants had a duty to CAC

disclose that six individuals in their clinical trials had demonstrated problems related to liver toxicity. Further, Lead

Plaintiff alleges that, on May 10, 2006, Defendants must have known about these individuals because they reported these serious adverse events (SAEs) to the FDA on May 11, 2006. Lead Plaintiff alleges

that by April, 2006, three of the six SAEs were being discussed within the Company. Moreover, Lead Plaintiff alleges that

Threshold knew that it had not achieved its clinical milestones with respect to TH-070 as of May 10, and that Defendants knew that such milestones would not be reached. On May 11, 2006, Threshold issued a press release announcing that its TH-070 trials had been placed on "partial clinical hold" by the FDA due to the abnormal liver test results reported by six patients in the trials. Lead Plaintiff alleges that this "sudden

and unexpected news caused Threshold's stock to collapse, falling $10.56 or 75.4% in a single day." CAC ¶ 103. Nonetheless, Lead

Plaintiff alleges that "the Company sought to stem further losses 6

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by falsely reassuring the market that TH-070 was safe and effective, and that the Company already had plans to reinitiate clinical trials under a modified dosing regimen." Id. Moreover,

Defendant Selick and Alan Colowick, Threshold's Chief Medical Officer (CMO), downplayed known trends of liver problems among dogs and people dosed with lonidamine. However, Lead Plaintiff asserts

that these reassurances were false or misleading because "the liver toxicity problems with the drug were much more significant than revealed on that call" and "the drug did not work any better than a placebo in treating BPH." CAC ¶ 106.

Lead Plaintiff alleges that, as soon as the clinical trials were placed on hold, Threshold instructed every clinical site to stop administering TH-070 to patients in the study. Threshold

gathered and analyzed the data collected by May 11, 2006 and, on July 17, 2006, the last day of the class period, announced that it planned to discontinue its development of TH-070 for BPH. The

press release states that the decision was based on "the safety and efficacy results" of its trials. CAC ¶ 117. Threshold's stock

fell $1.63, a 51.3% drop in value. LEGAL STANDARD A complaint must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Civ. P. 8(a). Fed. R.

On a motion under Rule 12(b)(6) for failure to state

a claim, dismissal is appropriate only when the complaint does not give the defendant fair notice of a legally cognizable claim and the grounds on which it rests. See Bell Atl. Corp. v. Twombly,

__ U.S. __, 127 S. Ct. 1955, 1964 (2007). 7

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1 2 3 4 5 6 7 8 9 10 United States District Court For the Northern District of California 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 I.

In considering whether the complaint is sufficient to state a claim, the court will take all material allegations as true and construe them in the light most favorable to the plaintiff. Indus., Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986). Although the court is generally confined to consideration of the allegations in the pleadings, when the complaint is accompanied by attached documents, such documents are deemed part of the complaint and may be considered in evaluating the merits of a Rule 12(b)(6) motion. Durning v. First Boston Corp., 815 F.2d 1265, 1267 (9th NL

Cir. 1987). When granting a motion to dismiss, the court is generally required to grant the plaintiff leave to amend, even if no request to amend the pleading was made, unless amendment would be futile. Cook, Perkiss & Liehe, Inc. v. N. Cal. Collection Serv. Inc., 911 F.2d 242, 246-47 (9th Cir. 1990). In determining whether amendment

would be futile, the court examines whether the complaint could be amended to cure the defect requiring dismissal "without contradicting any of the allegations of [the] original complaint." Reddy v. Litton Indus., Inc., 912 F.2d 291, 296 (9th Cir. 1990). DISCUSSION Sections 11 and 12(2) of the Securities Act Plaintiff brings allegations under §§ 11 and 12(2) of the Securities Act for statements Defendants made in documents related to the IPO and the follow-on offering. Under § 11 of the Securities Act, anyone who buys a security pursuant to a false and misleading registration statement may sue for damages. Section 11 states that any signer of the registration statement, any partner or director of the issuer, any professional 8

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involved in preparing or certifying the statement, and any underwriter of a registration statement may be liable "[i]n case any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading. Kaplan v. Rose, 49 F.3d 1363, 1371 (9th Cir. 1994) (quoting 15

6 U.S.C. § 77k (1988)). 7 demonstrate (1) that the registration statement contained an 8 omission or misrepresentation, and (2) that the omission or 9 misrepresentation was material, that is, it would have misled a 10 United States District Court For the Northern District of California reasonable investor about the nature of his or her investment." 11 Id. 12 will be liable for innocent or negligent material misstatements or 13 omissions." 14 "Under § 12(2) of the Securities Act buyers have an express 15 cause of action for rescission against sellers who make material 16 misstatements or omissions 'by means of a prospectus.'" 17 v. Alloyd Co., Inc., 513 U.S. 561, 564 (1995) (quoting 15 U.S.C. 18 § 77l(a)(2). 19 those persons who sell a security 'by means of a prospectus or oral 20 communication, which includes an untrue statement of material fact 21 or omits to state a material fact necessary in order to make the 22 statements, in light of the circumstances under which they were 23 made, not misleading." 24 868 (9th Cir. 1993). 25 liability provision, in that the purchaser need not prove scienter, 26 fraud, or negligence on the part of the seller." 27 28 9 George F. Gabel, Section 12(2) has been called "a strict In re Verifone Sec. Litig., 11 F.3d 865, More specifically, "§ 12(2) establishes liability for Gustafson Id. "No scienter is required for liability under § 11; defendants "The plaintiff in a § 11 claim must

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Jr., Annotation, Defense of Ignorance of Untruth or Omission in Civil Actions Under § 12(2) of Securities Act of 1933, 109 A.L.R. Fed. 444 (1992); see also Casella v. Webb, 883 F.2d 805, 809 (9th Cir. 1989). "However, once the purchaser establishes a prima facie

case under § 12(2), the seller of the security is provided with a statutory defense to liability if he establishes that he did not know, and in the exercise of reasonable care could not have known, of the misstatements or omissions." Casella, 883 F.2d at 809. A. Pleading Standard 109 A.L.R. 444; see also

Defendants argue that Lead Plaintiff's claims sound in fraud and are therefore subject to Federal Rule of Civil Procedure 9(b)'s heightened pleading standards. See Falkowski v. Imation Corp., 309

F.3d 1123, 1133 (9th Cir. 2002); In re Stac Elec. Sec. Litig., 89 F.3d 1399, 1404-05 (9th Cir. 1996). Lead Plaintiff counters that

the §§ 11 and 12(2) claims expressly state that they are based on allegations of negligence. Indeed, both claims specifically state

that they are not based on allegations "that defendants committed intentional or reckless misconduct or that defendants acted with scienter or fraudulent intent." CAC ¶¶ 157, 165. However, Lead

Plaintiff's complaint clearly states that Defendants included in their Prospectuses and Registration Statements assertions that the drug showed "statistically significant improvements with no therapy related side effects," had "demonstrate[d] tolerability" in prior clinical trials, had demonstrated the ability to "kill[] prostate cells disproportionately" and worked better at increasing urine flow, reducing prostate size, and improving International Prostate Symptom Scores than either Flomax or Proscar. In fact, as the Company later admitted, TH-070 had no statistically 10

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significant benefit to BPH patients, worked no better than a placebo, and caused significant serious side effects in the livers of patients taking the drug. CAC ¶ 6 (emphasis in original). Such claims of factual misstatements cannot be construed as allegations of negligent conduct in this context. Reports in

prospectuses and registration statements of statistically significant improvements in the absence of such results cannot be deemed negligent. Moreover, simple disclaimers "are unconvincing

where the gravamen of the complaint is plainly fraud and no effort is made to show any other basis for the claims." In re Stac Elecs.

Sec. Litig., 89 F.3d 1399, 1405 n.2 (9th Cir. 1996). Therefore, the Court finds that Lead Plaintiff's claims must comply with Rule 9(b), which provides, "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed. R. Civ. P. 9(b). The

allegations must be "specific enough to give defendants notice of the particular misconduct which is alleged to constitute the fraud charged so that they can defend against the charge and not just deny that they have done anything wrong." F.2d 727, 731 (9th Cir. 1985). Semegen v. Weidner, 780

Statements of the time, place and

nature of the alleged fraudulent activities are sufficient, Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439 (9th Cir. 1987), provided the plaintiff sets forth "what is false or misleading about a statement, and why it is false." In re GlenFed, Inc., Sec. Scienter may be See id. at

Litig., 42 F.3d 1541, 1548 (9th Cir. 1994).

averred generally, simply by saying that it existed.

1547; see Fed. R. Civ. P. 9(b) ("Malice, intent, knowledge, and 11

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other condition of mind of a person may be averred generally"). to matters peculiarly within the opposing party's knowledge,

As

pleadings based on information and belief may satisfy Rule 9(b) if they also state the facts on which the belief is founded. 818 F.2d at 1439. Nonetheless, as Lead Plaintiff argues, the complaint identifies with particularity the statements within the documents related to the IPO and follow-on offering that Lead Plaintiff alleges were misleading and why those statements were misleading. See CAC ¶¶ B. 64-74, 77-78. Bari Study Wool,

Lead Plaintiff alleges five general categories of misrepresentation regarding the Bari Study. Defendants argue that

they disclosed all of the relevant information Lead Plaintiff alleges they misrepresented or omitted. alleges, Although the designers of the Bari Study had specifically warned that there was a "significant" possibility that the study results were "misleading," this warning was not included in the registration statement or prospectus for either the IPO or the Follow-on Offering. Opposition at 8; CAC ¶ 65(d), 66-67, 78(e) 82. Here, Lead Lead Plaintiff first

21 Plaintiff is referring to the published report of the Bari Study, 22 which warned, 23 24 25 26 27 28 This is a "proof of concept study" in which, however, a placebo arm was not used. The drawback in this design is the placebo effect that may elicit misleading results, if not properly corrected for, especially considering the small number of patients and the absence of a blind run-in period. Lyon Decl., Ex. D at 532. However, as Defendants point out, the 12

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registration statements and prospectuses clearly stated that the Bari Study was "open-label," meaning that no placebo was used. Lyon Decl., Ex. A at 48 and Ex. G. at 46. Moreover, the documents

disclosed that only thirty patients were enrolled in the study and both sets of documents stated that further testing would be necessary to determine the safety and efficacy of TH-070. Id.

Next, Lead Plaintiff argues that the documents falsely stated that "[t]he primary objective of [the Bari Study] is to determine the safety or tolerability of TH-070." Lyon Decl., Ex. A at 3.

Instead, Lead Plaintiff alleges, the Bari Study "assumed the safety of the drug based on limited and undisclosed prior clinical trial data." Opposition at 8. Nonetheless, even if Lead Plaintiff's

allegations are proven to be true, it is not clear how this misrepresentation "would have misled a reasonable investor about the nature of his or her investment." Kaplan, 49 F.3d at 1371. In

the same paragraph, the document states, "The safety and efficacy of TH-070 for the treatment of symptomatic BPH will need to be demonstrated in subsequent trials." Lyon Decl., Ex. A at 3.

Lead Plaintiff further contends that the documents improperly compared the results of the Bari Study to the results of Proscar and Flomax clinical trials because those trials "were placebocontrolled studies in which an unusually strong placebo effect had been recognized." Opposition at 8. However, Lead Plaintiff does The only references

not indicate where such a comparison occurred.

in the IPO documents to Proscar and Flomax state that (1) the Bari Study measured "specific variables that have been used in clinical trials of currently marketed BPH drugs to support their FDA 13

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approval," Lyon Decl., Ex. A at 3; (2) Threshold was "using Metabolic Targeting to develop a new class of drugs for BPH that may offer an improvement over current treatments," id. at 44; and (3) a general discussion of the revenues generated by Proscar and Flomax and the ways in which the drugs work, id. at 47, 56. None

of these statements purport to compare the results of the Bari Study to the clinical trials for Proscar or Flomax. At the hearing, Lead Plaintiff argued that the follow-on documents were misleading because they compared the results of Flomax trials to the results of the Bari Study. However, when

asked to identify where such a comparison was located, Lead Plaintiff identified two separate sections of the follow-on registration statement. The first section, titled "Current

Therapies for BPH," states, In clinical studies of Flomax for the treatment of BPH symptoms, the average increase in urine flow was approximately 1.8 mL/sec. after four weeks of treatment. . . . In clinical studies of Avodart the average increase in urine flow was approximately 1.6mL/sec. and the average decrease in prostate size was approximately 8% after four weeks of treatment. Lyon Decl., Ex. G at 46. Two sections later, under the heading

"Prior Clinical Trials," the document describes the results of the Bari Study. First, it discloses the design of the Bari Study,

stating that the phase 2 "trial was an open-label, two-arm study designed to enroll a total of 60 patients in two 30-patient dosing schedules of TH-070, 150 mg once a day and 150 mg three times a day" and explains the decision not to enroll the second, high-dose group of patients. Id. The document goes on to state that, within

those parameters, the study observed a statistically significant 14

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decrease of 11.2% in prostate size and an average increase in flow rate of 3.2mL/sec.3 Id. at 47. In addition to the implicit

differences between the clinical study results for a drug that has already been approved by the FDA and the results of an open-label phase 2 trial with thirty patients for a drug that has not yet been approved, the document disclosed that Threshold had begun two additional "randomized, placebo controlled, double blinded clinical studies." Id. The document's description of the Bari Study,

together with its description of Threshold's ongoing trials, was sufficient to indicate that the results of the Bari Study were not directly comparable to the results of the clinical studies of other BPH drugs already on the market. Lead Plaintiff next argues that the "representation that `TH070 kills prostate cells, reducing the size of the prostate' was false because TH-070 works no better than a placebo in reducing the size of the prostate." at 47). Opposition at 9 (quoting Lyon Decl., Ex. A

However, the sentence Lead Plaintiff quotes in part states

in full, "By inhibiting glycolysis, TH-070 kills prostate cells, reducing the size of the prostate, and therefore may provide an effective treatment for symptomatic BPH." Lyon Decl., Ex. A at 47.

This complete statement again reiterates that the testing on TH-070 was not complete and might not show that the drug was more effective than a placebo. Finally, Lead Plaintiff asserts that it was misleading to

The IPO documents contain the same information under the headings "BPH Market Opportunity" and "Ongoing Clinical Program." Lyon Decl., Ex. A at 47-48. 15

3

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claim that the results of the Bari Study were a "`statistically significant' indicator of the safety or efficacy of TH-070 as a treatment for BPH" because of the small sample size, the lack of placebo control and other shortcomings of the study. First,

Defendants did not claim that the Bari Study results were a statistically significant indicator of TH-070's safety. The IPO

document states only, "We observed statistically significant improvements in all variables measured by day 28." A at 3. Lyon Decl., Ex.

The only other instance in which the documents addressed

the concept of statistical significance with respect to TH-070 was in their later disclosure of the numerical results of the study. See id. at 48. However, both of the statements regarding

statistical significance were prefaced by disclosures of each of the shortcomings Lead Plaintiff alleges made the statements misleading. The Court finds that Lead Plaintiff has failed to allege any material omission or misleading statement in the IPO and follow-on offering documents regarding the Bari Study.4 The Court finds inapposite Defendants' argument that because the publication of the results of the Bari Study disclosed the information Lead Plaintiff alleges to have been omitted, it put Lead Plaintiff on notice of his claims, therefore making his claims untimely. "[I]nvestors are not generally required to look beyond a given document to discover what is true and what is not." Miller v. Thane, 519 F.3d 879, 887 (9th Cir. 2008) (citing multiple cases). Taking all of Plaintiff's allegations as true, a dispute remains whether the May, 2005 publication of the results of the Bari Study was sufficient to put investors on notice of their claims. Similarly, the question of whether the May, 2006 disclosure of the partial hold on the clinical trials put investors on notice of the allegedly misleading statements in the IPO and follow-on offering documents cannot be resolved at this stage. Moreover, the challenged statements in the IPO and follow-on offering documents are not forward-looking and therefore are not 16
4

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2.

Liver Toxicity

Lead Plaintiff also alleges that Defendants were obliged to report that liver toxicity was a potential side effect of TH-070 because they had "gone to great lengths to tout the apparent safety of lonidamine based on its prior use to treat cancer patients." Opposition at 21. Lead Plaintiff presents evidence that Defendants

were aware of various studies in which there was anecdotal evidence of liver toxicity in cancer patients taking lonidamine and a study in dogs that "found significant liver malfunction occurred at high intravenous doses and suspicious lesions[] and unpredictable toxicity occurred even after oral dosing." CAC ¶ 70. Defendants

concede that they were aware of these studies at the time of the IPO and the follow-on offering but argue that the studies cited did not indicate that liver toxicity was a "known material risk to TH070's development." Reply at 10.

Moreover, Defendants argue that both the IPO and the follow-on offering documents disclosed that Threshold's "drug candidates may have undesirable side effects that prevent their regulatory approval or limit their use if approved." and Ex. G at 9. Lyon Decl., Ex. A at 10

With respect to TH-070, the IPO documents stated,

TH-070, which we are developing to treat patients with BPH, has been investigated as a male contraceptive and is known to cause reversible effects on fertility in animals. In human clinical trials at doses significantly higher than the dose of TH-070 we contemplate investigating for BPH, muscle and testicular pain have been observed. These side effects protected under the PSLRA's safe harbor or the bespeaks caution doctrine. See 15 U.S.C. § 78u-5(c)(A)(I) ("forward-looking statements"); In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1413 (9th Cir. 1994) (same). 17

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or others that could be identified in the course of our clinical trials or that may otherwise be associated with our product candidates may outweigh the benefits of our product candidates and prevent regulatory approval or limit their market acceptance if they are approved. Id., Ex. A at 10. In the follow-on offering documents, Threshold

5 provided additional detail, stating that BPH had been investigated 6 as a male contraceptive "because of its effects on spermatogenesis, 7 fertility and shrinkage of testes in animals. 8 these may be significant side effects that may or may not be 9 reversible in patients treated with TH-070 for BPH." 10 United States District Court For the Northern District of California 9. 11 Id. 12 Defendants argue that these disclosures, together with the 13 lack of statistically significant evidence linking lonidamine to 14 liver toxicity in humans, establish that Threshold did not fail to 15 disclose any material information regarding TH-070. 16 evidence that falls short of statistical significance only 17 demonstrates that there is a chance that a drug is unsafe. 18 re Carter-Wallace Inc. Sec. Litig., 150 F.3d 153 (2d Cir. 1988) 19 (Carter-Wallace I); In re Carter-Wallace Sec. Litig., 220 F.3d 36 20 (2d Cir. 2000) (Carter-Wallace II). 21 Defendants were required to disclose the non-statistically 22 significant anecdotal evidence of liver toxicity in the human 23 subjects of the already published studies, they would also be 24 required to disclose any other non-statistically significant 25 evidence of potential side effects. 26 drug under development, such disclosures likely would not aid 27 28 18 As Defendants note, with a If, as Lead Plaintiff alleges, See In Indeed, Again, Threshold warned that other side effects could exist. Id. Ex. G at As a consequence,

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investors in their evaluation of the total mix of information available to them. Such "a minimal standard might bring an

overabundance of information within its [the public's] reach, and lead management simply to bury the shareholders in an avalanche of trivial information -- a result that is hardly conducive to informed decision making." Basic Inc. v. Levinson, 485 U.S. 224,

231 (1988) (internal quotation marks omitted); see also SEC v. Todd, 2006 US Dist. LEXIS 41182, *12 (S.D. Cal.) ("An excess of disclosure can have the same net effect as a dearth of it -- the shareholder misses the relevant information."). The Court finds that Lead Plaintiff has failed to allege any misstatements or omissions regarding liver toxicity in the IPO or follow-on offering documents. Because Lead Plaintiff has not alleged any material misstatement or omission in the IPO or follow-on offering documents, the Court grants Defendants' motion to dismiss Lead Plaintiff's claims under §§ 11 and 12(2) of the Securities Act. The Court will grant Lead Plaintiff leave to amend. II. Section 10(b) of the Exchange Act and Rule 10b-5 Section 10(b) of the Exchange Act makes it unlawful for any person to "use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe." 15 U.S.C. § 78j(b); see also 17 C.F.R. To state a claim under § 10(b), a

§ 240.10b-5 (Rule 10b-5).

plaintiff must allege: "(1) a misrepresentation or omission of material fact, (2) reliance, (3) scienter, and (4) resulting 19

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damages."

Paracor Fin., Inc. v. Gen. Elec. Capital Corp., 96 F.3d

1151, 1157 (9th Cir. 1996); see also McCormick v. Fund Am. Cos., 26 F.3d 869, 875 (9th Cir. 1994). Some forms of recklessness are sufficient to satisfy the element of scienter in a § 10(b) action. 576 F.2d 1332, 1337 (9th Cir. 1978). See Nelson v. Serwold,

Within the context of § 10(b)

claims, the Ninth Circuit defines "recklessness" as a highly unreasonable omission [or misrepresentation], involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it. Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569 (9th Cir. 1990) (en banc) (quoting Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977)). As explained by the Ninth

Circuit in In re Silicon Graphics Inc. Securities Litigation, 183 F.3d 970 (9th Cir. 1999), recklessness, as defined by Hollinger, is a form of intentional conduct, not merely an extreme form of negligence. See Silicon Graphics, 183 F.3d at 976-77. Thus,

although § 10(b) claims can be based on reckless conduct, the recklessness must "reflect[] some degree of intentional or conscious misconduct." See id. at 977. The Silicon Graphics court

refers to this subspecies of recklessness as "deliberate recklessness." See id. at 977.

As stated above, Lead Plaintiff must plead any allegations of fraud with particularity, pursuant to Rule 9(b) of the Federal Rules of Civil Procedure. In re GlenFed, Inc. Sec. Litig., 42 F.3d Pursuant to the requirements

1541, 1543 (9th Cir. 1994) (en banc). 20

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of the Private Securities Litigation Reform Act of 1995 (PSLRA), Pub. L. No. 104-67, the complaint must "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." 15 U.S.C. § 78u-4(b)(1).

Further, pursuant to the requirements of the PSLRA, a complaint must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). The PSLRA thus requires that a

plaintiff plead with particularity "facts giving rise to a strong inference that the defendant acted with," at a minimum, deliberate recklessness. F.3d at 977. See 15 U.S.C. § 78u-4(b)(2); Silicon Graphics, 183 Facts that establish a motive and opportunity, or

circumstantial evidence of "simple recklessness," are not sufficient to create a strong inference of deliberate recklessness. See 183 F.3d at 979. In order to satisfy the heightened pleading

requirement of the PSLRA for scienter, plaintiffs "must state specific facts indicating no less than a degree of recklessness that strongly suggests actual intent." A. Id.

Misrepresentation or Omission of a Material Fact

Thus, to state a claim pursuant to § 10(b) of the Exchange Act, Lead Plaintiff must allege, among other things, a misrepresentation or omission of a material fact. Lead Plaintiff

claims that four sets of statements made in conference calls conducted and press releases issued between March 1, 2006 and May 21

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11, 2006 misled investors by making positive statements about the ongoing clinical trials and omitting negative information about toxicity and efficacy problems. statements in turn. 1. TH-070 is a "Home Run" The Court addresses each set of

Lead Plaintiff first asserts, "On March 1, 2006, Selick told investors that TH-070 was a 'home run' and that the Bari Study data had been 'replicated' in the ongoing clinical trials." at 22, citing CAC ¶ 84-90. Opposition

However, Defendants have submitted an

audio recording of the conference call, which makes clear that the complaint misquotes Selick. Lead Plaintiff alleges that Selick

stated, "The ongoing studies replicate what we've already demonstrated in our single center Phase II study and TH-070 lonidamine is going to be truly a home run for patients." ¶ 87. CAC

In fact, Selick stated, "If the ongoing studies replicate

what we've already demonstrated in our single center Phase II study, then TH-070 in my opinion is going to be truly a home run for patients." Lyon Decl., Ex. H at 9:35. Lead Plaintiff does not Rather he

dispute that this is what the recording actually states.

relies on a transcript of the call prepared by a third party and posted on the internet. However, that transcript expressly

concedes that it "may not be 100 percent accurate and may contain misspellings and other inaccuracies." Herman Decl., Ex. A at 6.

The Court finds that it is appropriate to take judicial notice of the audio recording of the conference call and that there is no

22

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reasonable dispute that Defendants' version is correct.5 In the alternative, Lead Plaintiff argues that, even if Defendants' version of Selick's statement is correct, "[c]alling a drug a 'home run,' even if only potentially so, is misleading when the speaker knows or is deliberately reckless to, and does not disclose significant risks to overcome before it can be approved." Opposition at 24, n.24. However, this theory is belied by Selick's

qualification that in his opinion the drug would be a home run if the studies could replicate the earlier results. Such a statement

of opinion cannot form the basis for a fraud claim. Therefore, the Court grants Defendants' motion to dismiss with respect to this challenged statement. 2. March 20 and April 5, 2006 Announcement of Completion of Enrollment in Ongoing Clinical Trials and May 10, 2006 Announcement that TH-070 Trials were On Track

Lead Plaintiff next alleges, "On March 20 and April 5, 2006, 16 Threshold announced the completion of enrollment in the ongoing 17 clinical trials ­ a significant milestone on the road to FDA 18 approval ­ but failed to disclose that liver toxicity problems had 19 arisen in those trials." 20 Similarly, Lead Plaintiff alleges, "On May 10, 2006, after the 21 liver toxicity issues had been reported to the FDA and just one day 22 23 24 25 26 27 28 Lead Plaintiff has filed a motion to lift the PSLRA discovery stay to allow him to seek limited discovery with respect to the audio recordings of the two conference calls at issue. The Court GRANTS the motion (Docket No. 44). Lead Plaintiff may seek production of any audio recordings maintained by the third parties that created the transcripts upon which Lead Plaintiff relies. If Lead Plaintiff obtains evidence that the audio recordings produced by Defendants are not accurate, he may seek appropriate relief from the Court. 23
5

Opposition at 22, citing CAC ¶¶ 91-99.

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before the trials were placed on clinical hold, Threshold reiterated that the TH-070 trials were on track with expectations, again without disclosing the liver toxicity issues." 22, citing CAC ¶ 100-01.6 that Defendants announced seemingly positive news about the ongoing clinical trials of TH-070 without revealing the hidden risks to approval of the drug ­ i.e., that the drug was prone to causing liver toxicity in patients. CAC ¶ 95. Opposition at

In particular, Lead Plaintiff alleges

9 Defendants counter that any information they possessed with 10 United States District Court For the Northern District of California respect to liver toxicity at the time of the March 20, April 5 and 11 May 10 press releases was not material. 12 argue that any allegations based on the reporting of SAEs fail as a 13 matter of law because, absent statistical significance, SAEs do not 14 establish that a drug is unsafe. 15 157; Carter-Wallace II, 220 F.3d at 40-41. 16 17 18 19 20 21 22 23 24 25 26 27 28 In his complaint, Lead Plaintiff also alleges that the March 20, April 5 and May 10 statements were misleading because they failed to disclose that TH-070 "did not work any better than a placebo in treating BPH" and "reiterat[ed] the positive results of the Bari Study without revealing either the limitations of that study or any results of the ongoing clinical trials revealing toxicity issues and lack of efficacy of the drug." CAC ¶ 95 (emphasis in original). However, in his opposition, Lead Plaintiff appears to abandon allegations based on the efficacy of TH-070 and Defendants' continued reliance on the Bari Study. See Opposition at 24-28 (asserting that these documents were misleading because they "failed to disclose that liver toxicity issues had arisen in those trials"). Even if Lead Plaintiff has not abandoned these bases for his claims, the Court finds that they must be dismissed. The ongoing clinical trials were blinded, placebo-controlled studies. Until the studies were completed, Defendants could not have evaluated the efficacy of TH-070 in comparison to a placebo. Lead Plaintiff has not alleged any facts to support a finding that Defendants had access to the unblinded results of those studies. Moreover, as discussed above, Defendants had earlier disclosed the limitations of the Bari Study. 24
6

In particular, Defendants

See Carter-Wallace I, 150 F.3d at This is because SAEs

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are broadly defined and may be caused by preexisting conditions or other factors aside from the drug being tested. § 312.32. While it is true that only statistically significant test results are conclusive, non-statistically significant SAEs together with other evidence are sometimes considered material. For See 21 C.F.R.

example, in In re Bayer AG Sec. Litig., 2004 U.S. Dist. LEXIS 19593, *28 (S.D.N.Y.), a court in the Southern District of New York found that several SAEs, together with evidence that the defendant's executives had met to discuss the SAEs and concluded that "the potential dangers were `putting the brand at risk,'" were sufficient to require the defendant to disclose those SAEs. However, Lead Plaintiff does not allege additional information sufficient to establish that potential liver toxicity issues had to be disclosed at the time of the March 20, 2006 press release. Indeed, Lead Plaintiff does not even allege that Defendants had identified any SAEs at the time of the March 20, 2006 press release. The only allegation of Defendants' knowledge of potential

liver toxicity issues prior to March 20 is based on Lead Plaintiff's erroneous quotation of Selick's statement in the March 1, 2006 conference call. See FAC ¶ 97. Even accepting Lead

Plaintiff's version, that statement does not establish that Defendants had identified any liver toxicity issues at the time of the March 20, 2008 press release. Otherwise, Lead Plaintiff

alleges only that "[i]t is certain that defendants knew about these issues at the time of the April 5, 2006 announcement." Id.

Without more, the later investigation and reporting of SAEs to the 25

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FDA are not sufficient to establish that, at the time of the March 20 press release, Defendants were under a duty to disclose any incidents of liver toxicity. Defendants also note that, because

the test in which the SAEs occurred was a blinded, placebocontrolled study, it would not have been possible for Defendants to know whether any incidents of liver toxicity were caused by TH-070. Lead Plaintiff asserts that Defendants somehow had the unblinded results but don't allege any facts to support this. Therefore, the

Court dismisses Lead Plaintiff's claims based on the March 20 press release. Although his allegations regarding the March 20 press release are deficient, Lead Plaintiff has alleged additional information sufficient to support a finding that the SAEs should have been disclosed in the April 5 and May 10 announcements. In particular,

Lead Plaintiff has alleged that, on April 10, Threshold reported to the FDA that a patient in its European study "had developed elevated levels of the liver transamine ALT that were thirty times higher than normal." CAC ¶ 99. Lead Plaintiff alleges,

At the very least, the toxicity issues that had arisen with the drug alerted defendants that clinical trials were likely to be delayed or that additional clinical trials would have to be conducted, such that the final results from the clinical trials would not come as quickly after completion of enrollment or be as meaningful as the market expected. CAC ¶ 98. Moreover, Lead Plaintiff alleges that Defendants likely

knew about the incident of liver toxicity for some time and had conducted considerable investigation to determine that the toxicity was significant, because they elected to report the incident to the FDA even though the European study was not within the FDA's 26

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jurisdiction.

Based on Defendants' decision to report the

patient's condition on April 10, it is reasonable to infer that five days earlier, at the time of the April 5 press release, Defendants knew of and had a duty to disclose potential liver toxicity problems. There is an even stronger inference that Defendants were obliged to disclose potential liver toxicity issues by the time Threshold released its May 10, 2006 quarterly report. Not only had

Defendants reported the European patient's elevated liver enzymes, but they were undoubtedly aware of the severity of the SAEs that, one day later, led the FDA to place a partial hold on the clinical trials. Therefore, the Court finds that Lead Plaintiff has

adequately alleged material misstatements in the April 10, 2006 press release and May 10, 2006 quarterly report based on Defendants' failure to disclose evidence of liver toxicity in the ongoing clinical trials. 3. May 11, 2006 Announcement that Trials were Placed on Hold

Finally, Lead Plaintiff alleges, "On May 11, 2006, when 19 Threshold announced that the clinical trials had been placed on 20 hold by the FDA, its officers minimized the event, including by 21 falsely reassuring investors that 'the FDA agrees' that a modified 22 dosing schedule would permit the trials to proceed such that the 23 clinical hold did not represent the end of the road for TH-070." 24 Opposition at 22-23, citing CAC ¶¶ 102-16. 25 made in a press release and a conference call held later the same 26 day. 27 28 27 Lead Plaintiff alleges that this "sudden and unexpected news The announcement was

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caused Threshold's stock to collapse, falling $10.56 or 75.4% in a single day." CAC ¶ 103.

Although the disclosure of the FDA hold led to a dramatic decrease in Threshold's stock price, Lead Plaintiff alleges that Defendants prevented a greater decrease by making additional misleading statements "suggesting that the concerns with TH-070's liver toxicity and the FDA's action in response were not as great as they might otherwise seem, and that even the FDA was on board with a plan that would allow the clinical trials to continue." Opposition at 29. Lead Plaintiff also faults Defendants for

seeking "to reassure the market that the FDA action did not mean the end of TH-070." CAC ¶ 104.

However, Lead Plaintiff's allegations that Defendants stated that "the FDA agrees" and that "the FDA was on board" appear to be based on Colowick's statement during the conference call that Defendants had discussed the meaning of the partial clinical hold with the FDA. Colowick went on to state,

[W]e have not received the formal letter from the FDA. However, we think we have a reasonable sense of what those issues are and the issues are primarily related around determining what is a safe both dose and duration of the drug to move forward. We believe and I think the FDA agrees that the plan would look something like a shorter-duration certainly than has been used in the current European study. CAC ¶ 104 (emphasis added). In other words, Colowick presented his

23 perception of the FDA's position and did not, as Lead Plaintiff 24 asserts, represent that the FDA actually agreed with Defendants' 25 assessment of the situation. 26 sufficiently alleged that the FDA hold actually did end the 27 28 28 Moreover, Lead Plaintiff has not

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viability of TH-070 as a marketable drug.

Indeed, as Lead

Plaintiff alleges, Defendants continued one of the trials that was already underway at the time of the hold and only later decided not to pursue TH-070 when the results of the clinical trials demonstrated that TH-070 was not effective. Finally, Lead Plaintiff argues that Colowick "downplay[ed] the significance of the SAEs that had led to the hospitalization of clinical trial patients, by suggesting that one of the patients was an alcoholic and . . . that Threshold didn't agree with the decision to classify the incidents as SAEs." n.27. Opposition at 29

However, Colowick's report that one of the patients had "a

history of recent increased alcohol consumption" was made in response to an analyst's question regarding the medical history of the patients identified as having SAEs. Moreover, Defendants have

submitted an audio recording of the conference call which clearly indicates that Colowick stated, I think the magnitude of the elevation of the liver enzymes, even in the absence of significant clinical symptoms, were concerning enough to the investigators that they classified these as SAEs, and we, quite frankly, were in agreement with that. Lyon Decl. Ex. L at 16:41-16:57 (emphasis added).7 The Court finds that Lead Plaintiff has failed to allege that Defendants made any materially false or misleading statements in their May 11, 2006 announcement of the FDA hold on Threshold's clinical trials.

As discussed above, the Court takes judicial notice of the recordings of the March 1 and May 11, 2006 conference calls. 29

7

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B.

Requisite Mental State

As discussed above, to state a claim pursuant to § 10(b) of the Exchange Act, Lead Plaintiff must also allege that Defendants acted with "deliberate recklessness." at 977. Silicon Graphics, 183 F.3d

The PSLRA requires that these allegations be plead with 15 U.S.C. § 78u-4(b)(2). The parties dispute

particularity.

whether, assuming Lead Plaintiff can allege false or misleading statements, he has adequately plead that Defendants acted with the requisite intent. Lead Plaintiff claims that Defendants "were deliberately reckless to the misleading nature of the statements," Opposition at 30, and that the following allegations support a finding that Defendants acted with the requisite state of mind: (1) Threshold was a small company without any approved products to sell and TH070 was its lead product candidate; (2) Defendants had a "desire to assist Threshold's early stage non-public venture capital investors to obtain a return on their investments, together with the fact that they were precluded from doing so by a 180-day `lock-up' agreement, provided a further motive for defendants to keep Threshold's stock price inflated through April 2006," Opposition at 30; and (3) although neither of the Individual Defendants sold any stock during the class period, they were awarded "rich compensation packages" demonstrating that "there were significant rewards available to Threshold's management, without them having to resort to insider stock sales that might call attention to the fact that there were problems in the clinical trials," Opposition at 32. As Defendants note, each of these three sets of allegations 30

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can be characterized as "routine business objectives, [which] without more, cannot normally be alleged to be motivations for fraud." Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1038 (9th Indeed, if such allegations were sufficient,

Cir. 2002).

"virtually every company in the United States that experiences a downturn in stock price could be forced to defend securities fraud actions." Id. (quoting Acito v. IMCERA Group, Inc., 47 F.3d 47, 54

(2d Cir. 1995)). Lead Plaintiff also points to the stock sales by two of Threshold's initial investors, Sofinnova and Three Arch. Lead

Plaintiff alleges that these large stock sales constitute evidence of scienter because Threshold founder George Tidmarsh was a member of Three Arch and Selick was a "venture partner" of Soffinova. Lead Plaintiff alleges that Three Arch sold one million shares on March 2, 2006 and that Tidmarsh resigned from Threshold's board of directors within that month. However, as Defendants point out,

Three Arch's sale of one million shares constituted only twentynine percent of its holdings. It retained 2.44 million shares.

Moreover, Sofinnova's March 16, 2006 sale of 2.5 million shares, representing seventy-five percent of its investment in Threshold, is not itself evidence of deliberate recklessness. Although Selick

invested money in Sofinnova, there are no allegations that he shared material or inside information with Sofinnova prior to the March 16 sale. The Court finds that, even to the extent Lead Plaintiff has successfully alleged false or misleading statements of material facts, his § 10(b) claim fails for failure to allege sufficient 31

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facts to support a finding of deliberate recklessness. C. Defendant Swearson

Finally, Defendants argue that Lead Plaintiff's § 10(b) claim against Swearson must be dismissed because she did not make any of the challenged statements. Lead Plaintiff argues that Swearson can

be held liable for all statements made in the challenged press releases and conference calls under the group pleading doctrine. However, assuming the group pleading doctrine is a viable legal theory, it is not entirely clear that Swearson, as the CFO, was involved in decisions regarding which clinical trial results should be released or the meaning of those results. Indeed, Lead

Plaintiff's response itself demonstrates this weakness in applying the group pleading doctrine to Swearson. Lead Plaintiff asserts

that "Swearson was responsible for and communicated to investors regarding the costs of clinical trials, which is suggestive of her involvement to some extent in those activities, as would be expected in a small, start-up pharmaceutical company . . ." Opposition at 34. The Court finds that Lead Plaintiff fails to plead facts either to demonstrate that his claims against Swearson fall within the group pleading doctrine or to state a claim against Swearson as an active participant in a fraudulent scheme. Because the CAC's allegations do not sufficiently allege that Defendants acted with the requisite intent and, in some instances, fail to allege a misstatement or omission of material fact, the Court grants Defendants' motions to dismiss Lead Plaintiff's claims pursuant to § 10(b) of the Exchange Act. 32 However, the Court will

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grant Lead Plaintiff leave to amend these claims. III. Section 20(a) of the Exchange Act and § 15 of the Securities Act Both the Exchange Act and the Securities Act provide for joint

4 and several liability for every person who, directly or indirectly, 5 controls any person found liable under other provisions of the 6 Acts. 7 indirectly, controls any person liable under any provision of [the 8 Exchange Act] or of any rule or regulation thereunder shall also be 9 liable jointly and severally with and to the same extent as such 10 United States District Court For the Northern District of California controlled person."); 15 U.S.C. § 77o ("Every person who, by or 11 through stock ownership, agency, or otherwise or who, pursuant to 12 or in connection with an agreement or understanding with one or 13 more other persons by or through stock ownership, agency, or 14 otherwise, controls any person liable under [§ 11 of the Securities 15 Act or § 12 of the Securities Act] shall also be liable jointly and 16 severally with and to the same extent as such controlled person."). 17 These control person liability provisions are "given the same 18 interpretation." 19 1987). 20 'controlling person' the complainant must show that there was a 21 relationship between the controlling and controlled person and that 22 actual power or influence was exerted over the alleged controlled 23 person." 24 complainant must first show that the controlled person violated 25 either the Exchange Act or the Securities Act. 26 Pathogenesis Corp., 284 F.3d 1027, 1035 n.15 (9th Cir. 2002). 27 28 33 See Lipton v. Id. at 1503-04. Further, to succeed on such a claim, the In both instances, "[t]o establish that someone is a Durham v. Kelly, 810 F.2d 1500, 1503 (9th Cir. 15 U.S.C. § 78t(a) ("Every person who, directly or

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Defendants Selick and Swearson move to dismiss the claims brought against them pursuant to § 15 of the Securities Act and § 20 of the Exchange Act on the sole basis that Lead Plaintiff has not sufficiently plead an underlying primary violation. Lipton, 284 F.3d at 1035 n.15. See

Because the Court agrees with

Defendants that Lead Plaintiff has not sufficiently plead an underlying violation of the Securities Act or the Exchange Act, the Court grants Defendants Selick and Swearson's motions to dismiss the § 20 claims and § 15 claims and grants leave to amend. CONCLUSION For the foregoing reasons, the Court GRANTS Defendants' motion to dismiss (Docket No. 24). to amend. The Court grants Lead Plaintiff leave

Lead Plaintiff may file an amended complaint within A further case If

forty-five days of the date of this order.

management conference will be held on October 16, 2008.

Defendants file a motion to dismiss the amended complaint, they shall notice it for that date. The Court GRANTS Lead Plaintiff's motion to lift the PSLRA discovery stay for the limited purpose discussed above (Docket No. 44). IT IS SO ORDERED.

22 23 Dated: 24 25 26 27 28 34 CLAUDIA WILKEN United States District Judge 7-11-08 _____________________________