Free Memorandum in Opposition - District Court of California - California

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1 COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP 2 DENNIS J. HERMAN (220163) DANIEL J. PFEFFERBAUM (248631) 3 100 Pine Street, Suite 2600 San Francisco, CA 94111 4 Telephone: 415/288-4545 415/288-4534 (fax) 5 [email protected] [email protected] 6 Lead Counsel for Plaintiffs 7 UNITED STATES DISTRICT COURT 8 NORTHERN DISTRICT OF CALIFORNIA 9 OAKLAND DIVISION 10 JERRY TWINDE, On Behalf of Himself and ) No. 4:07-cv-04972-CW 11 All Others Similarly Situated, ) ) CLASS ACTION 12 Plaintiff, ) ) 13 vs. ) ) 14 THRESHOLD PHARMACEUTICALS, INC., ) et al., ) 15 ) Defendants. ) 16 ) ) No. 4:07-cv-04971-CW RAYNOLD L. GILBERT, On Behalf of 17 Himself and All Others Similarly Situated, ) ) CLASS ACTION 18 ) Plaintiff, ) 19 ) vs. ) DATE: June 12, 2008 20 THRESHOLD PHARMACEUTICALS, INC., ) TIME: 2:00 p.m. ) COURTROOM: Hon. Claudia Wilken et al., 21 ) ) Defendants. 22 ) 23 24 25 26 27 28 PLAINTIFFS' BRIEF IN OPPOSITION TO DEFENDANTS' MOTION TO DISMISS

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1 2 3 I. 4 II. 5 III. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 C. 3. 2. B. 2. b. c.

TABLE OF CONTENTS Page INTRODUCTION ...............................................................................................................1 SUMMARY OF ALLEGATIONS ......................................................................................4 ARGUMENT.......................................................................................................................6 A. Defendants Initially Violated the Securities Act by Negligently Publishing Materially False and Misleading Information About TH-070 in the Registration Statements for Threshold's Initial Public Offering and Prospectus/Follow-On Offering...............................................................................6 1. The Prospectuses and Registration Statements Misled Investors About the Reliability and Significance of the Bari Study Results...............8 a. Defendants Did Not Disclose "All Relevant Details" of the Bari Study ........................................................................................9 The Publication of the Bari Study Report Did Not Reveal the Truth to the Market ..................................................................11 Plaintiffs' Claims Are Not Time-Barred........................................14

The Risk Warnings in the Registration Statements Were Neither Meaningful Nor Complete .........................................................................15 a. b. Neither the Safe Harbor Nor the Bespeaks Caution Doctrine Supports Dismissal of the Complaint .............................16 Threshold Was Required to Disclose the Specific Risk of Liver Toxicity Associated with TH-070 ........................................18

Defendants Committed Fraud by Deliberately Concealing Known Liver Toxicity Problems After They Arose and Making Baseless Claims About the Efficacy of TH-070 in the Ongoing Clinical Trials .........................................21 1. Defendants' Denial that Selick Falsely Claimed TH-070 Was a "Home Run" Because Phase 2 Data Had Been "Replicated" in the Clinical Trials Provides No Ground to Dismiss the Complaint.................23 Threshold Misled Investors by Making Positive Announcements About the Clinical Trials Without Disclosing the Negative Liver Toxicity Problems that Had Arisen............................................................24 When the FDA Hold Was Announced, Defendants Made Baseless Claims About the Continued Prospects for TH-070 ..................................28

Defendants' Exorbitant Bonuses and Rich Compensation Packages, Together with Stock Sales by Related Parties, Lends Additional Support for a Strong Inference of Scienter..........................................................................30

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1 2 3 4 E. 5 6 IV. 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 PLAINTIFFS' BRIEF IN OPPOSITION TO DEFENDANTS' MOTION TO DISMISS 4:07-cv-04972-CW

Page D. The Individual Defendants "Made" the Misleading Statements Giving Rise to Plaintiffs' Claims .......................................................................................33 Defendants Concede that They Are Control Persons Within the Meaning of §15 of the Securities Act and §20(a) of the Exchange Act ...............................34

CONCLUSION..................................................................................................................35

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1 2

TABLE OF AUTHORITIES Page

3 Asher v. Baxter Int'l Inc., 377 F.3d 727 (7th Cir. 2004) .............................................................................................16 4 Basic, Inc. v. Levinson, 5 485 U.S. 224 (1988)...........................................................................................................18 6 Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (2007).......................................................................................................22 7 Cahill v. Liberty Mut. Ins. Co., 8 80 F.3d 336 (9th Cir. 1996) .................................................................................................6 9 City Nominees, Ltd. v. Macromedia, Inc., No. 98-16058, 2000 U.S. App. LEXIS 8201 10 (9th Cir. Apr. 21, 2000) .....................................................................................................15 11 Commc'ns Workers of Am. Plan for Employees' Pensions & Death Benefits v. CSK Auto Corp., 12 No. CV06-1503-PHX-DGC (Lead), 2007 U.S. Dist. LEXIS 72424 (D. Ariz. Sept. 27, 2007)....................................................................................................22 13 Danis v. USN Commc'ns Inc., 14 73 F. Supp. 2d 923 (N.D. Ill. 1999) ...................................................................................30 15 Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048 (9th Cir. 2003) ...........................................................................................35 16 Ernst & Ernst v. Hochfelder, 17 425 U.S. 185 (1976).............................................................................................................6 18 Fecht v. Price Co., 70 F.3d 1078 (9th Cir. 1995) .................................................................................16, 18, 25 19 Fla. State Bd. of Admim. v. Green Tree Fin. Corp., 20 270 F.3d 645 (8th Cir. 2001) .............................................................................................33 21 Gargiulo v. Demartino, 527 F. Supp. 2d 384 (E.D. Pa. 2007) .....................................................................15, 16, 19 22 Hanon v. Dataproducts Corp., 23 976 F.2d 497 (9th Cir. 1992) .............................................................................................33 24 Herman & MacLean v. Huddleston, 459 U.S. 375, 381-82 (1983) ...........................................................................................6, 7 25 Hollinger v. Titan Capital Corp., 26 914 F.2d 1564 (9th Cir. 1990) ...........................................................................................34 27 Howard v. Everex Sys., Inc., 228 F.3d 1057 (9th Cir. 2000) ...........................................................................................34 28 PLAINTIFFS' BRIEF IN OPPOSITION TO DEFENDANTS' MOTION TO DISMISS 4:07-cv-04972-CW

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1 2 3 4 5 6 7 8 9 10 In re Bank of Boston Corp. Sec. Litig., 762 F. Supp. 1525 (D. Mass. 1991) ...................................................................................11 In re Amylin Pharm., Inc. Sec. Litig., No. 01cv1455 BTM(NLS), 2002 U.S. Dist. LEXIS 19481 (S.D. Cal. Oct. 10, 2002) .................................................................................21, 27, 30, 33 In re Amylin Pharm., Inc. Sec. Litig., No. 01cv1455 BTM(NLS), 2003 U.S. Dist. LEXIS 7667 (S.D. Cal. May 1, 2003).........................................................................................11, 17, 19 In re Amgen, Inc. Sec. Litig., No. CV 07-2536 PSG (PLAx), 2008 U.S. Dist. LEXIS 24611 (C.D. Cal. Feb. 1, 2008)...............................................................................................13, 25 Page

11 In re Bayer AG Sec. Litig., No. 03 Civ. 1546 (WHP), 2004 U.S. Dist. LEXIS 19593 12 (S.D.N.Y. Sept. 30, 2004)..................................................................................................25 13 In re Carter-Wallace, Inc. Sec. Litig., 150 F.3d 153 (2d Cir. 1988)...............................................................................................25 14 In re Carter-Wallace Sec. Litig., 15 220 F.3d 36 (2d Cir. 2000).................................................................................................26 16 In re Daou Sys., Inc. Sec. Litig., 411 F.3d 1006 (9th Cir. 2005) ................................................................................... passim 17 In re Entropin, Inc., Sec. Litig., 18 487 F. Supp. 2d 1141 (C.D. Cal. 2007) .......................................................................30, 33 19 In re GlenFed, Inc. Sec. Litig., 60 F.3d 591 (9th Cir. 1995) ...............................................................................................34 20 In re Immune Response Sec. Litig., 21 375 F. Supp. 2d 983 (S.D. Cal. 2005)....................................................................... passim 22 In re Impax Labs., No. C 04-04802 JW, 2007 U.S. Dist. LEXIS 52356 23 (N.D. Cal. July 18, 2007).............................................................................................28, 31 24 In re Intrabiotics Pharm., Inc. Sec. Litig., No. C 04-02675 JSW, 2006 U.S. Dist. LEXIS 56427 25 (N.D. Cal. Aug. 1, 2006)....................................................................................................19 26 In re Intrabiotics Pharm., Inc. Sec. Litig., No. C 04-02675 JWS, 2006 U.S. Dist. LEXIS 15753 27 (N.D. Cal. Jan. 23, 2006) .....................................................................................................7 28 PLAINTIFFS' BRIEF IN OPPOSITION TO DEFENDANTS' MOTION TO DISMISS 4:07-cv-04972-CW

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1 2 Page

3 In re JDS Uniphase Corp. Sec. Litig., No. C 02-1486 CW, 2005 U.S. Dist. LEXIS 20831 4 (N.D. Cal. Jan. 6, 2005) .......................................................................................................7 5 In re Livent, Inc. Sec. Litig., 148 F. Supp. 2d 331 (S.D.N.Y. 2001)................................................................................14 6 In re Medimmune, Inc., Sec. Litig., 7 873 F. Supp. 953 (D. Md. 1995) ........................................................................................10 8 In re NPS Pharm., Inc. Sec. Litig., No. 2:06-cv-00570, 2007 U.S. Dist. LEXIS 48713 9 (D. Utah July 3, 2007)................................................................................................ passim 10 In re Oak Tech. Sec. Litig., No. 96-20552 SW, 1997 U.S. Dist. LEXIS 18503 11 (N.D. Cal. Aug. 1, 1997)....................................................................................................26 12 In re PETsMART, Inc. Sec. Litig., 61 F. Supp. 2d 982 (D. Ariz. 1999) ...................................................................................33 13 In re Portal Software, Inc. Sec. Litig., 14 No. C-03-5138 VRW, 2006 U.S. Dist. LEXIS 61589 (N.D. Cal. Aug. 17, 2006)....................................................................................................7 15 In re Regeneron Pharm., Inc. Sec. Litig., 16 No. 03 Civ. 3111 (RWS), 2005 U.S. Dist. LEXIS 1350 (S.D.N.Y. Feb. 3, 2005) .....................................................................................................17 17 In re Silicon Graphics, Inc. Sec. Litig., 18 183 F.3d 970 (9th Cir. 1999) .......................................................................................21, 32 19 In re SmarTalk Teleservices, Inc. Sec. Litig., 124 F. Supp. 2d 527 (S.D. Ohio 2000) ..............................................................................34 20 In re Stac Elecs. Sec. Litig., 21 89 F.3d 1399 (9th Cir. 1996) ...............................................................................................7 22 In re Stratosphere Corp. Sec. Litig., 1 F. Supp. 2d 1096 (D. Nev. 1998)....................................................................................34 23 In re Vantive Corp. Sec. Litig., 24 283 F.3d 1079 (9th Cir. 2002) ...........................................................................................21 25 In re Viropharma, Inc., Sec. Litig., No. 02-1627, 2003 U.S. Dist LEXIS 5623 26 (E.D. Pa. Apr. 7, 2003) ........................................................................................................3 27 In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994) .............................................................................................33 28 PLAINTIFFS' BRIEF IN OPPOSITION TO DEFENDANTS' MOTION TO DISMISS 4:07-cv-04972-CW

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1 2 3 4 Kaplan v. Rose, 49 F.3d 1363 (9th Cir. 1994) ..................................................................................... passim Page

5 Lee v. City of Los Angeles, 250 F.3d 668 (9th Cir. 2001) ...........................................................................................2, 3 6 Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 7 403 F.3d 1050 (9th Cir. 2005) ...........................................................................................16 8 Miller v. Thane Int'l, Inc., No. 05-56043, 2008 U.S. App. LEXIS 5687 9 (9th Cir. Mar. 18, 2008) .....................................................................................................12 10 Miss. Pub. Employees' Retirement Sys. v. Boston Scientific Corp., No. 07-1794, 2008 U.S. App. LEXIS 8140 11 (1st Cir. Apr. 16, 2008)......................................................................................................22 12 Nathenson v. Zonagen, Inc., 267 F.3d 400 (5th Cir. 2001) .......................................................................................23, 27 13 No. 84 Employer-Teamster Joint Council Pension Trust Fund 14 v. America West Holding Corp., 320 F.3d 920 (9th Cir. 2003) .............................................................................................27 15 Nursing Home Pension Fund, Local 144 v. Oracle Corp., 16 380 F.3d 1226 (9th Cir. 2004) ...........................................................................................32 17 Oppenheim Pramerica Asset Mgmt. S.a.r.l. v. Encysive Pharm., No. H-06-3022, 2007 U.S. Dist. LEXIS 69121 18 (S.D. Tex. Sept. 18, 2007) .................................................................................................33 19 Oran v. Stafford, 226 F.3d 275 (3rd Cir. 2000) .............................................................................................25 20 Padnes v. Scios Nova Inc., 21 No. C 95-1693 MHP, 1996 U.S. Dist. LEXIS 22858 (N.D. Cal. Sept. 18, 1996) .................................................................................................10 22 Pegasus Holdings v. Veterinary Ctrs. of Am., Inc., 23 38 F. Supp. 2d 1158 (C.D. Cal. 1998) ...............................................................................34 24 Provenz v. Miller, 102 F.3d 1478 (9th Cir. 1996) ................................................................................... passim 25 SEC v. Seaboard Corp., 26 677 F.2d 1301 (9th Cir. 1982) ...........................................................................................14 27 Sloman v. Presstek, Inc., No. 06-cv-377-JD, 2007 U.S. Dist. LEXIS 69475 28 (D.N.H. Sept. 18, 2007) .....................................................................................................22 PLAINTIFFS' BRIEF IN OPPOSITION TO DEFENDANTS' MOTION TO DISMISS 4:07-cv-04972-CW

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1 2 3 4 TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976).....................................................................................................18, 25 Page

5 Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007)............................................................................................... passim 6 Tello v. Dean Witter Reynolds, Inc., 7 410 F.3d 1275 (11th Cir. 2004) .........................................................................................15 8 Vess v. Ciba-Geigy Corp. U.S.A., 317 F.3d 1097 (9th Cir. 2003) .............................................................................................7 9 Warshaw v. Xoma Corp., 10 74 F.3d 955 (9th Cir. 1996) ...............................................................................................17 11 Wool v. Tandem Computers, Inc., 818 F. 2d 1433 (9th Cir. 1987) ..........................................................................................21 12 13 STATUTES, RULES AND REGULATIONS 14 15 U.S.C. §77k......................................................................................................................................2 15 §77k(a) .................................................................................................................................6 §77l(a)(2) .........................................................................................................................2, 6 16 §77o..........................................................................................................................2, 21, 34 §78o..........................................................................................................................2, 21, 34 17 Federal Rules of Civil Procedure 18 Rule 9(b) ..........................................................................................................................7, 8 Rule 12(b)(6)..............................................................................................................2, 6, 15 19 17 C.F.R. 20 §240.10b-5 ...........................................................................................................................2 21 22 23 24 25 26 27 28 PLAINTIFFS' BRIEF IN OPPOSITION TO DEFENDANTS' MOTION TO DISMISS 4:07-cv-04972-CW

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1 I. 2

INTRODUCTION This case involves materially false and misleading statements about TH-070, a drug being

3 developed by defendant Threshold Pharmaceuticals, Inc. ("Threshold" or the "Company") for the 4 treatment of benign prostatic hyperplasia ("BPH"), a bothersome condition affecting the lower 5 urinary tract of middle-aged and elderly men. ¶¶2-3, 28-42.1 Plaintiffs allege that defendants 6 initially negligently overstated TH-070's prospects for success by: (i) making overly optimistic 7 statements about past clinical trials; (ii) making unfounded claims about the safety of the drug to 8 treat BPH; and (iii) understating or failing to disclose material risks to ongoing clinical trials. E.g., 9 ¶¶64-74; 77-82. Plaintiffs further allege that, when the risks to the drug's approval began to 10 manifest themselves, defendants committed fraud by continuing to make positive statements 11 regarding the conduct of the ongoing trials, while deliberately concealing the negative conditions 12 they knew had arisen. ¶¶94-101. Even when the drug's safety concerns were belatedly revealed by 13 an announcement that the FDA had placed the trials on clinical hold, plaintiffs allege that defendants 14 continued to downplay those risks while making unfounded claims about the Company's ability to 15 revive the trials and gain FDA approval for the drug. ¶¶102-16. 16 Unable to find a cogent reason to dismiss the claims that plaintiffs did plead, defendants

17 mischaracterize plaintiffs' allegations so as to urge the Court to dismiss claims that simply have not 18 been pled. Throughout their brief, defendants accuse plaintiffs of pleading a claim of "fraud by 19 hindsight" based on the purported contention that defendants unequivocally knew from the 20 beginning of the Class Period that TH-070 was neither safe nor effective for the treatment of BPH, 21 yet deliberately put hundreds of patients at risk of potentially deadly side effects by proceeding with 22 clinical trials of the drug as part of an evil scheme to defraud the Company's investors. 23 Plaintiffs do not allege that defendants deliberately set about to harm their patients or steal

24 from their investors. To the contrary, plaintiffs allege that defendants were guilty of nothing more 25 than simple negligence at the outset of the Class Period, when they made overly optimistic 26
1 All paragraph ("¶") 27 for Violation of the Federalreferences refer to the Consolidated Amended Class Action Complaint Securities Laws ("Complaint"), filed January 15, 2008. 28

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1 statements about the safety and efficacy of the drug in the registration statements and prospectuses 2 for two public offerings, while omitting or understating the risks that rendered FDA approval 3 significantly less likely than investors had been led to believe. Plaintiffs' claims arising from these 4 misstatements arise only under §§11, 12(a)(2) and 15 of the Securities Act of 1933, 15 U.S.C. 5 §§77k, 77l(a)(2), 77o ("Securities Act"), and are not grounded in fraud. ¶¶6-7, 59. 6 It was not until later in the Class Period when those hidden risks began to manifest

7 themselves, that defendants, out of desperation or greed or a little of both, compounded their earlier 8 negligence with outright fraud in proclaiming that the clinical trials remained firmly on the road to 9 success, while failing to alert investors of the problems that had already arisen from those still10 concealed risks. These claims, commencing with CEO Harold E. "Barry" Selick's March 1, 2006 11 statement to investors that TH-070 was "going to be truly a home run" because the prior clinical data 12 had been "replicated" in the ongoing trials, do involve fraud, and are therefore brought under 13 §§10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S. C. §78j(b) ("Exchange Act"), and 14 Rule 10(b)(5) promulgated by the SEC (17 C.F.R. §240.10b-5). 15 Defendants' motion fails to distinguish between these two aspects of plaintiffs' claims,

16 suggesting that the Complaint must plead actual knowledge at the time of the IPO that TH-070 was 17 both unsafe and ineffective in order to survive. In painting the entire case with such a broad brush, 18 defendants incorrectly conflate plaintiffs' fraud- and non-fraud claims, ignoring that, as defendants' 19 knowledge of the problems with TH-070 grew during the Class Period, statements which were 20 negligently false at the outset became fraudulent when repeated later on. By failing to consider the 21 timing of these statements or the context in which they were made, and treating individual 22 allegations in isolation, defendants violated the Supreme Court's reminder that the Complaint be 23 construed holistically. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499, 2511 (2007). 24 Defendants' primary attack on the Complaint is factual. These arguments provide no ground

25 for granting a motion under Fed. R. Civ. P. 12(b)(6). E.g., Lee v. City of Los Angeles, 250 F.3d 668, 26 688-90 (9th Cir. 2001); see also In re NPS Pharm., Inc. Sec. Litig., No. 2:06-cv-00570, 2007 U.S. 27 Dist. LEXIS 48713, at *10 (D. Utah July 3, 2007) ("The problem with all of [defendant's] claims is 28 that they require the court to weigh evidence. Therefore, they are inappropriate at the motion to PLAINTIFFS' BRIEF IN OPPOSITION TO DEFENDANTS' MOTION TO DISMISS 4:07-cv-04972-CW

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1 dismiss stage."). Moreover, defendants' contentions are baseless. Defendants incorrectly contend, 2 for example, that plaintiffs have no claim because Threshold publicly reported the results of the 3 phase 2 Bari Study and urged investors to read the full report for themselves. But contrary to the 4 representations in defendants' brief, Threshold never made extensive efforts to publicize the report 5 or to encourage investors to read it, nor did it incorporate or even reference that report in its public 6 stock offering prospectuses and registration statements. Moreover, the report was couched with 7 reassuring statements regarding the efficacy and safety of the drug, which negated its ability to serve 8 as a storm warning even for those investors who happened to read it. 9 Defendants place undue reliance on their contention that Selick never called TH-070 a "home

10 run" or claimed that the Bari trial data had been "replicated" in the phase 3 study. Injecting fact 11 disputes is improper at the motion to dismiss stage. Lee, 250 F.3d at 688-90. Moreover, defendants' 12 contention is based entirely on a recently-prepared transcript of an unauthenticated conference call 13 recording which cannot be considered on a motion to dismiss. Opp. to RJN2 at 1, 3-5; Lyon Decl.,3 14 Exs. H, M. Defendants ignore the contemporaneous transcript of that conference call that was 15 independently prepared by Bloomberg and circulated to investors during the Class Period, and 16 which quotes Selick as saying exactly what the Complaint alleges he did. Herman Decl.4 Ex. A. 17 Even if the jury were to ultimately credit Selick's contention that he mumbled a few qualifiers into 18 his conference call statements, that alone would not establish that his statements, as qualified, were 19 not misleading to investors. Nor would such a finding say anything at all about the many other 20 statements made on March 1, 2006 or thereafter that told investors the clinical trials were proceeding 21 22 23 "Opp. to RJN" refers to Plaintiffs' Response to Request for Judicial Notice in Support of Defendants' Motion to Dismiss, filed herewith. 24 3 "Lyon Decl." refers to the Declaration of Alexander M.R. Lyon in Support of Defendants' 25 Motion to Dismiss Plaintiffs' Consolidated Amended Class Action Complaint for Violation of the Federal Securities Laws, filed March 7, 2008. 26 4 "Herman Decl." refers to the Declaration of Dennis J. Herman in Support of Plaintiffs' Brief 27 in Opposition to Defendants' Motion to Dismiss, filed herewith. 28 PLAINTIFFS' BRIEF IN OPPOSITION TO DEFENDANTS' MOTION TO DISMISS 4:07-cv-04972-CW
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1 as planned, even while defendants were scrambling behind the scenes to address the mounting liver 2 toxicity problems that had arisen. 3 II. 4 SUMMARY OF ALLEGATIONS Threshold is a development-stage drug company which had just 42 employees at the time of

5 its IPO. ¶¶2, 29. Threshold told investors it was attempting to develop a class of drugs using its 6 theory of "Metabolic Targeting." ¶2. During the Class Period,5 TH-070 was Threshold's lead 7 product candidate. Id. Unlike the drugs Threshold hoped to one day develop on its own, TH-070 8 was based upon an existing drug, lonidamine, that appeared to exhibit "Metabolic Targeting" 9 properties. ¶¶2-3, 28. Previously, lonidamine had only been prescribed overseas, principally in 10 Italy, for the treatment of seriously ill cancer patients. ¶¶3, 30. Although BPH was a lifestyle disease 11 that affected otherwise healthy individuals, Threshold repeatedly referred to lonidamine's past use to 12 treat cancer patients as evidence that the drug had a "demonstrated safety profile," suggesting that 13 the only serious question was whether TH-070 worked to treat BPH. ¶31; see generally ¶¶34-39. 14 To demonstrate its efficacy for the treatment of BPH, Threshold put together an extremely

15 small and quickly conducted study at Bari University in Bari, Italy. ¶¶4, 49-58. The purpose of the 16 Bari Study was to detect a "hint" of a positive effect that Threshold could then use to support its IPO 17 and generate the capital needed to fund full scale clinical trials of the drug. ¶¶49-52. Absent an 18 infusion of public capital, Threshold could not afford to complete those studies on its own, as its 19 access to the private equity markets was drying up. ¶¶43-48. The Bari Study was originally 20 designed to have two arms, a low dose and high dose arm. ¶55. After completion of the low dose 21 arm, Threshold had the results it wanted, and cancelled the high dose arm of the study. ¶56. 22 Threshold claimed that the Bari Study had demonstrated that TH-070 worked far better with

23 fewer side effects than either Proscar or Flomax, bolstering that claim by comparing the Bari Study 24 results to the clinical trials for those two drugs. ¶¶56, 63, 70. As a result, Threshold told investors 25 26 The Class Period runs from February 4, 2005, the date of Threshold's IPO, to July 14, 2006, the last trading date before Threshold revealed that TH-070 did not work and the Company had no 27 further plans to develop the drug. ¶1. 28 PLAINTIFFS' BRIEF IN OPPOSITION TO DEFENDANTS' MOTION TO DISMISS 4:07-cv-04972-CW
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1 that TH-070 was strongly positioned to capture a large share of the $2 billion market for the 2 treatment of BPH. ¶¶40-42, 63, 70. The market reacted favorably to this news, and investors poured 3 $100 million into the Company as the result of two public offerings: a February 4, 2005 IPO and an 4 October 12, 2005 Follow-on Offering. ¶¶61, 75. Threshold used the funds to conduct two further 5 clinical trials of the drug, one in Europe and another in the United States, as well as to pay rich 6 bonuses to Selick, CFO Janet I. Swearson and other members of management. ¶¶5, 30, 144-47. 7 Throughout the Class Period, Threshold told investors that the clinical studies were

8 proceeding as expected, and repeatedly trumpeted the Bari Study results as a strong indication of 9 TH-070's efficacy, and the past use of lonidamine as strong evidence that the drug was safe. ¶¶31, 10 83, 87, 92, 94, 100. In fact, the Bari Study had significant limitations that were not disclosed to 11 investors, and which rendered its reliability as an indicator of success in further clinical trials highly 12 suspect. ¶¶4-5, 31-33, 49-58, 82. This included a significant "placebo effect" that had been 13 identified and corrected for in the past clinical trials of Flomax and Proscar to which the TH-070 trial 14 results were compared, and which was recognized by the Bari Study investigator, who warned that 15 the Bari Study data could be "misleading" as a result. ¶¶53, 66-67. Moreover, prior clinical data 16 available to defendants indicated that liver toxicity issues could be associated with the drug ­ a risk 17 which was also not disclosed to investors. ¶¶33, 69-72. 18 By March 6, 2006, Threshold had conducted additional pharmacokinetic studies of

19 lonidamine which revealed significant liver toxicity issues associated with the drug. ¶¶84, 112, 114. 20 Later that month, two venture capital firms who had been among the Company's earliest investors, 21 and who had strong ties to members of its management, quickly liquidated significant amounts of 22 their holdings in the Company. ¶¶130-43. By April 10, 2006, liver toxicity issues had arisen in the 23 European clinical trial and been reported to the FDA. ¶¶99, 109. By May 10, 2006, additional 24 toxicity issues had arisen in both the European and U.S. trials. ¶¶102-11. Throughout this period, 25 defendants continued to make positive statements about TH-070, without revealing either the liver 26 toxicity issues that had arisen or correcting the past misstatements regarding the safety or efficacy of 27 the drug or the reliability of the Bari Study. ¶¶87, 92, 94, 100. 28 PLAINTIFFS' BRIEF IN OPPOSITION TO DEFENDANTS' MOTION TO DISMISS 4:07-cv-04972-CW

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1

On May 11, 2006, Threshold shocked investors by revealing that the FDA had placed the

2 clinical trials on hold due to three "significant adverse events" ("SAEs") in which patients being 3 treated with TH-070 had been hospitalized with elevated liver enzymes. ¶102. Threshold's stock 4 dropped $10.56 on this news, a staggering one day loss of 75% of its value. ¶¶103, 125. Seeking 5 to stem further losses, defendants assured investors that the clinical hold was a temporary setback, 6 that they remained confident of TH-070's efficacy, and that the FDA had indicated that the trials 7 could continue, suggesting that the FDA hold was an overly cautious response designed merely to 8 preserve "consistency" in its regulatory policies. ¶¶104-09. On July 17, 2006, Threshold finally 9 revealed that TH-070 did not work any better than a placebo and announced that it was canceling 10 further efforts to develop the drug. ¶117. On this news, Threshold's stock fell by $1.63, an 11 additional loss of 51% in shareholder value. ¶119. 12 III. 13 ARGUMENT In considering a motion brought under Fed. R. Civ. P. 12(b)(6), the Court must presume the

14 truth of all well-pled factual allegations. In re Daou Sys., Inc. Sec. Litig., 411 F.3d 1006, 1013 (9th 15 Cir. 2005). A court may not weigh the evidence that might be presented at trial, but must simply 16 determine whether the complaint itself is legally sufficient. E.g., Cahill v. Liberty Mut. Ins. Co., 80 17 F.3d 336, 337-38 (9th Cir. 1996). 18 19 20 The Securities Act imposes liability on persons who issue or sell stock pursuant to 21 registration statements or prospectuses that contain materially false or misleading statements 22 (including misleading omissions), as well as the directors of such issuers and other persons who sign 23 or are responsible for the contents of those filings. 15 U.S.C. §§77k(a), 77l(a)(2). Liability is 24 imposed under the Securities Act without regard to scienter. Ernst & Ernst v. Hochfelder, 425 U.S. 25 185, 200 (1976) ("Congress created express liability regardless of the defendant's fault"); Herman & 26 MacLean v. Huddleston, 459 U.S. 375, 381-82 (1983) ("liability against the issuer of a security is 27 28 PLAINTIFFS' BRIEF IN OPPOSITION TO DEFENDANTS' MOTION TO DISMISS 4:07-cv-04972-CW

A.

Defendants Initially Violated the Securities Act by Negligently Publishing Materially False and Misleading Information About TH070 in the Registration Statements for Threshold's Initial Public Offering and Prospectus/Follow-On Offering

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1 virtually absolute, even for innocent misstatements"); Daou, 411 F.3d at 1027("defendants will be 2 liable for innocent or negligent misrepresentations").6 3 To establish a prima facie claim under the Securities Act, a plaintiff need only plead a

4 material misstatement or omission in a registration statement (§11) or prospectus (§12(a)(2)). Daou, 5 411 F.3d at 1027. Neither the PSLRA nor Fed. R. Civ. P. 9(b) apply to claims brought under §§11 6 and 12(a)(2) of the Securities Act. E.g., In re Intrabiotics Pharm., Inc. Sec. Litig., No. C 04-02675 7 JWS, 2006 U.S. Dist. LEXIS 15753, at *40-*41 (N.D. Cal. Jan. 23, 2006). Sections 11 and 12(a)(2) 8 therefore "place[] a relatively minimal [pleading] burden on a plaintiff" as compared with §10(b). 9 Herman & MacLean, 459 U.S. at 382. 10 Defendants incorrectly contend that plaintiffs' Securities Act claims must nevertheless be

11 pled with particularity under Fed. R. Civ. P. 9(b) because they "sound in fraud." Motion at 9.7 12 Unlike the cases relied upon by defendants, the Complaint here specifically disclaims allegations of 13 fraud with respect to the Securities Act claims, and incorporates only the non-fraudulent allegations 14 into those claims. ¶¶6-7, 59, 156, 164, 173. Therefore, Fed. R. Civ. P. 9(b) does not apply. In re 15 JDS Uniphase Corp. Sec. Litig., No. C 02-1486 CW, 2005 U.S. Dist. LEXIS 20831, at *33-*35 16 (N.D. Cal. Jan. 6, 2005); In re Portal Software, Inc. Sec. Litig., No. C-03-5138 VRW, 2006 U.S. 17 Dist. LEXIS 61589, at *7, *12 (N.D. Cal. Aug. 17, 2006); cf. Daou, 411 F.3d at 1028-29 (complaint 18 expressly premised on a "fraudulent scheme and course of business" with "wholesale adoption" of 19 fraud allegations into Securities Act claims, and "plaintiffs . . . never rely on such conduct as 20 negligence or mistake in stating their claims"); In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1405 n.2 21 (9th Cir. 1996) ("the gravamen of the complaint is plainly fraud and no effort is made to show any 22 other basis for the claims levied at the Prospectus"). 23 Moreover, where, as here, fraud is not an essential element of a claim, Fed. R. Civ. P. 9(b)

24 only requires "averments of fraud" to be pled with particularity. E.g., Vess v. Ciba-Geigy Corp. 25
6

26

Here, as elsewhere, all citations are omitted and emphasis is added unless otherwise noted.

7 "Motion" refers to Defendants' Motion to Dismiss Plaintiffs' Consolidated Amended 27 Complaint for Violation of the Federal Securities Laws, filed March 7, 2008. 28

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1 U.S.A., 317 F.3d 1097, 1104-05 (9th Cir. 2003). Defendants' Motion points to no specific averments 2 that they contend sound in fraud. Rather, the Motion is based solely on the conclusory assertion that 3 the entire Complaint "sounds in fraud" because the "basis for all of Plaintiffs' claims is that TH-070 4 was represented to be safe and effective when Defendants knew the opposite to be true." Motion at 5 9. As set forth above, defendants' argument mischaracterizes the nature of plaintiffs' Securities Act 6 claims, which are premised on defendants' negligent failure to fully disclose the risks that clinical 7 trials at TH-070 would not be successful. Hence, there are no "averments of fraud" that are required 8 to be pled, with particularity or otherwise.8 9 10 11 1. The Prospectuses and Registration Statements Misled Investors About the Reliability and Significance of the Bari Study Results

The Complaint alleges that the registration statements and prospectuses were misleading

12 because they emphasized the positive results of the Bari Study while understating and omitting the 13 specific risks and uncertainties inherent in the design of that study. ¶¶59-82. In particular, plaintiffs 14 allege that: 15 16 17 18 19 20 21 22 23 24
8 This is not to suggest that plaintiffs' concede the allegations lack particularity. As set forth 25 below, the Complaint plainly identifies the information in the registration statements and prospectuses that is alleged to be misleading, and specifically identifies the reasons why that 26 information was false and misleading to investors at the time those filings became effective. ¶¶6474, 77-78. Hence, even if a particularity requirement were imposed, the Complaint plainly satisfies 27 Fed. R. Civ. P. 9(b).

·

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. ¶¶65(d), 66-67, 78(e), 82. Contrary to the registration statement and prospectus, the Bari Study was not designed to "determine the safety or tolerability of TH-070" or to "evaluate" the efficacy of the drug, but had instead merely assumed the safety of the drug based on limited and undisclosed prior clinical trial data, and had been designed merely to detect whether there was "a hint" of positive action of the drug. ¶¶63, 65(f), 68-69, 76, 78(g). There was no basis to compare the results of the Bari Study to the results of clinical trials of Proscar or Flomax, which were placebo-controlled studies in which an unusually strong placebo effect had been recognized. ¶¶65(e), 78(f).

·

·

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1 2 3 4 5 6 7

·

The representation that "TH-070 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. ¶¶78(h), 117. The combination of an exceedingly small sample size, no placebo control, a lack of a blind run in period, the early termination of the study, and a severely symptomatic patient group made it impossible to draw any meaningful conclusions about the results of the Bari Study, or to claim that the results were a "statistically significant" indicator of the safety or efficacy of TH-070 as a treatment for BPH. ¶¶65(a-c, f), 78(a-d, g).

·

Plaintiffs allege that the combination of all of these factors, when considered in light of the

8 glowingly positive statements by defendants suggesting that TH-070 worked better and with fewer 9 side effects than two blockbuster drugs which had captured the $2 billion market for BPH treatment, 10 misled investors: 11 12 13 14 15 16 17 Taken as a whole, the statements about TH-070 in Threshold's IPO Registration Statement were materially misleading to investors because they emphasized the purportedly positive results of the Bari Study while minimizing or failing to accurately or completely disclose the specific risks associated with TH-070, including that the results of the Bari Study were unreliable indicators of either the efficacy or safety of the drug. ¶64; see also ¶77. a. Defendants Did Not Disclose "All Relevant Details" of the Bari Study

Ignoring the foregoing specific allegations, defendants oversimplify plaintiffs' claims into

18 complaints that the Bari Study was "too small," "lacked a placebo control," and was "not adequately 19 designed" and then contend that the Complaint should be dismissed because the "precise[] points 20 Plaintiffs complain of" were disclosed.9 Motion at 11. But the information defendants point to as 21 being revealed is not the same information described above which plaintiffs allege was concealed. 22 23 24 Defendants also mischaracterize the Complaint as contending that Threshold said the Bari Study proved TH-070's safety and efficacy." Motion at 13. Not so. Plaintiffs' claim is that defendants provided investors with a one-sided presentation about the Bari Study, by repeatedly and 26 strongly touting the purported positive results of that trial while failing to disclose and minimizing the risks of that study. Hence, the argument in §III.B.1(c) of defendants' Motion is merely a straw 27 man that provides no ground to dismiss the Complaint. 25 28 PLAINTIFFS' BRIEF IN OPPOSITION TO DEFENDANTS' MOTION TO DISMISS 4:07-cv-04972-CW
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1

Defendants do not dispute that the claim that "TH-070 kills prostate cells" was false. ¶¶77,

2 78(h). Neither do defendants seriously attempt to dispute the allegation that the registration 3 statements falsely claimed that the "primary objective" of the Bari Study was "to determine the 4 safety and tolerability of TH-070." ¶¶63, 65(f), 76, 78(g). In a footnote, defendants contend this is 5 just "second-guessing of the design of Defendants' clinical trials." Motion at 16 n.7. Not so. 6 Plaintiffs' claim is that there was no design at all, not merely that the design they implemented was 7 deficient. ¶¶68-70. Assuming the safety and tolerability of a drug is far different than testing it.10 8 Defendants do contend that the Complaint should be dismissed because Threshold's

9 registration statements disclosed that the Bari Study was an "open label" trial in which no placebo 10 was used. Motion at 11-12. Plaintiffs do not contend that the lack of a placebo was concealed. ¶53. 11 Rather, plaintiffs contend that Threshold misled investors by not warning that the clinical trials of 12 Flomax and Proscar, which the registration statement used to demonstrate the purported strong 13 favorable results of the Bari Study, both did involve the use of placebos, nor did it warn investors 14 that those studies had documented ­ and corrected results for ­ a significant placebo effect showing 15 marked improvement in patients who had not received the drug. ¶¶65-67, 78, 82-83. This placebo 16 effect pertained specifically to the treatment of BPH. Id. As a result, the placebo risk was much 17 greater with respect to TH-070 than the generalized risk present in any study in which a placebo was 18 not used. Id. The failure to disclose this specific heightened risk, together with the repeated 19 comparisons of the Bari Study to clinical trials in which a placebo effect was noted and corrected for 20 to suggest stronger positive action of TH-070, was misleading. Kaplan v. Rose, 49 F.3d 1363, 137121 22 23 24 25 26 27 28 PLAINTIFFS' BRIEF IN OPPOSITION TO DEFENDANTS' MOTION TO DISMISS 4:07-cv-04972-CW

Defendants' reliance on In re Medimmune, Inc., Sec. Litig., 873 F. Supp. 953 (D. Md. 1995) and Padnes v. Scios Nova Inc., No. C 95-1693 MHP, 1996 U.S. Dist. LEXIS 22858 (N.D. Cal. Sept. 18, 1996), is therefore misplaced. The complaint in Medimmune was premised on "design limitations" ­ not the absence of a design. 873 F. Supp. at 959. Moreover, Medimmune arose only under §10(b), and was decided principally on grounds of scienter, an issue that is irrelevant under §11 of the Securities Act. Padnes similarly arises only under §10(b). Moreover, in Padnes, the Court noted that defendants were relying on a study published in a peer-reviewed journal, and that plaintiffs had failed to plead facts to show that there was no basis for the conclusions drawn from the study, or that there were undisclosed facts seriously undermining the accuracy of the study. 1996 U.S. Dist. LEXIS 22858, at *18-*19. Here, the Bari Study was not peer reviewed, and plaintiffs specifically explain why its conclusions were suspect. ¶¶32-33, 52-57, 66-74.

10

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1 72 (9th Cir. 1994) (triable issue on falsity existed where registration statement claimed medical 2 device "compared favorably" with competing products, without revealing facts from competing 3 clinical trials tending to undermine that statement); In re Immune Response Sec. Litig., 375 F. Supp. 4 2d 983, 1019 (S.D. Cal. 2005) ("Plaintiffs' criticism is not that what was said was inaccurate, but 5 that it was incomplete, thus portraying the results of the clinical trial in an unduly optimistic light."). 6 Defendants are similarly mistaken in contending that the Complaint should be dismissed

7 merely because the registration statement told investors that the Bari Study was "preliminary." In re 8 Amylin Pharm., Inc. Sec. Litig., No. 01cv1455 BTM(NLS), 2003 U.S. Dist. LEXIS 7667, at *20-*23 9 (S.D. Cal. May 1, 2003) ("Amylin II") (vague, boilerplate warnings that FDA approval is not 10 guaranteed and prior results were preliminary were not meaningful to warn investors of specific risks 11 present in trials); Immune Response, 375 F. Supp. 2d at 1039 ("While some risks were disclosed in 12 the Prospectus, the overall determination of whether there was adequate disclosure or whether they 13 rendered the allegedly misleading statements immaterial . . . are generally questions that should be 14 left to the trier of fact."); see also infra §III.A.2. 15 16 Defendants strenuously contend that the Complaint should be dismissed because Threshold 17 purportedly publicized a written report of the Bari Study's principal investigator in May 2005. 18 Defendants are incorrect. The Bari Study report was not published until months after the IPO 19 prospectus and registration statement became effective. ¶74. As such, it could hardly have corrected 20 anything in those filings. See In re Bank of Boston Corp. Sec. Litig., 762 F. Supp. 1525, 1537-39 (D. 21 Mass. 1991) (later statements cannot retroactively affect falsity of registration statement). 22 Neither was the publication of the Bari Study report sufficient to prevent the later 23 misstatements in the prospectus and registration statement for the Follow-on offering from 24 misleading investors. ¶74. "Truth on the market" is not a defense to claims arising under the 25 26 27 28 PLAINTIFFS' BRIEF IN OPPOSITION TO DEFENDANTS' MOTION TO DISMISS 4:07-cv-04972-CW

b.

The Publication of the Bari Study Report Did Not Reveal the Truth to the Market

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1 Securities Act.11 Miller v. Thane Int'l, Inc., No. 05-56043, 2008 U.S. App. LEXIS 5687, at *19 n.2 2 (9th Cir. Mar. 18, 2008). The Bari Study report was not attached as an exhibit to, or incorporated by 3 reference into, the prospectus and registration statement for that offering, nor was it listed among the 4 outside sources Threshold told investors to read and consider in the section of the Registration 5 Statement titled: "Where You Can Find More Information."12 See Lyon Decl., Ex. G at Table of 6 Contents, 92. Moreover, Threshold specifically cautioned investors to "rely only on the information 7 contained in this prospectus. We have not authorized anyone to provide you with information that is 8 different." Id. at Table of Contents. It is no defense to contend that investors should have looked 9 elsewhere to figure out that they were being misled. See Miller, 2008 U.S. App. LEXIS 5687, at *18 10 ("investors are not generally required to look beyond a given document to discover what is true and 11 what is not"); Kaplan, 49 F.3d at 1374 (denying summary judgment on grounds that omission of 12 clinical report from registration statement could be deemed material in light of positive statements 13 about efficacy of medical device essential to company's performance). 14 Nor does the "truth on the market" doctrine provide a defense to plaintiffs' Exchange Act

15 claims. To establish that defense, defendants bear a "heavy burden" of demonstrating that the report 16 was "transmitted to the public with a degree of intensity and credibility sufficient to effectively 17 counterbalance any misleading impression created by the insiders' one-sided representations" in the 18 registration statements. E.g., Kaplan, 49 F.3d at 1377. This involves an "intensively fact-specific" 19 inquiry that is not susceptible to resolution on the pleadings. Provenz v. Miller, 102 F.3d 1478, 20
11 "Truth on the market" is the analog on the market" doctrine, as it depends 21 the operation of an efficient stock market toof the "fraud corrective information into the market upon incorporate price for publicly traded securities. Kaplan, 49 F.3d at 1376. In a public stock offering, the price is set by 22 the issuer, not the market. Moreover, as set forth in the text, investors are entitled to rely upon the out 23 completeness of the offering documents, and are not under a duty to seek n.2. contrary companyspecific information. Miller, 2008 U.S. App. LEXIS 5687, at *19-*20 For both of these reasons, courts apply the truth on the market doctrine only in the context of claims under the 24 Exchange Act. Id.; see also Kaplan, 49 F.3d at 1371-76 (applying doctrine to §10(b), but not to §11 25 claims).

Indeed, that section told investors that Threshold had attached copies of any "contract, agreement, or other document" where the description of the document in the registration statement Lyon Decl., G at 92. By not attaching the Bari Study 27 was incomplete.investors thatEx. description of the investigator's findingsreport, Threshold was, in essence, telling its was complete. 26 28 PLAINTIFFS' BRIEF IN OPPOSITION TO DEFENDANTS' MOTION TO DISMISS 4:07-cv-04972-CW

12

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1 1492-93 (9th Cir. 1996); Immune Response, 375 F. Supp. 2d at 1036-37; In re Amgen, Inc. Sec. 2 Litig., No. CV 07-2536 PSG (PLAx), 2008 U.S. Dist. LEXIS 24611, at *25 (C.D. Cal. Feb. 1, 2008); 3 NPS Pharm., 2007 U.S. Dist. LEXIS 48713, at *16. 4 Contrary to defendants' arguments, the Bari Study report was not widely publicized by

5 Threshold. ¶74. Threshold did not "announce" the contents Bari Study report, or "hyperlink" it for 6 investors, as defendants claim in their brief. Motion at 11-12. To the contrary, the Company merely 7 mentioned that the study "will be" published, and did so at the end of a press release whose principle 8 focus was on boasting about the purportedly positive results of six-month follow-up examinations of 9 the Bari Study patients.13 See Lyon Decl., Ex. C. The "hyperlink" defendants tout is merely the web 10 address for a third-party republisher's home page, where users can search through thousands of 11 medical journal articles and read or download them for a fee ($1,250.00 for an annual pass; $20.00 12 for a single report). See id.; see also www.medreviews.com. Under these circumstances, it cannot 13 be said that the Bari Study report was conveyed to the market with sufficient "intensity and 14 credibility" to effectively counteract defendants' misleading statements about its results. E.g., 15 Kaplan, 49 F.3d at 1376-78 (denying summary judgment where 80 clinical reports published during 16 class period purportedly put plaintiffs on notice of the truth); Amgen, 2008 U.S. Dist. LEXIS 24611, 17 at *40-*41 ("that the DAHANCA 10 results were posted on its website does not mean the market 18 knew of these results")(emphasis in original). 19 Even for those investors who obtained a copy, the Bari Study report did not correct the

20 misleading information in the offering documents. Rather, like the Company's prospectuses and 21 registration statements, the report downplayed the risks associated with TH-070 by falsely claiming 22 23 24 25 26 27 28 PLAINTIFFS' BRIEF IN OPPOSITION TO DEFENDANTS' MOTION TO DISMISS 4:07-cv-04972-CW

The May 19, 2005 press release defendants rely upon in support of this argument was primarily focused on conveying to the market the results of six-month follow up lab tests of the Bari Study participants, which purportedly demonstrated "significant sustained improvement in symptoms six months off therapy." Lyon Decl., Ex. C. Where the past study results were mentioned, the release merely reiterated the previously-reported statistical data without warning of the limitations of the study, thereby perpetuating the false and misleading nature of Threshold's prior representations about the Bari Study. Id. It was not until the end of the press release that Threshold mentioned that "[d]etailed results of the study will be published by MedReviews in the quarterly journal of Reviews in Urology." Id.

13

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1 that there was "extensive" evidence demonstrating that the drug was safe, and that the purportedly 2 strong showing of efficacy minimized the risk of a placebo effect with the drug. ¶74. "Without 3 specialized knowledge or expertise in both BPH and the conduct of clinical trials," plaintiffs allege, 4 "it was not possible for investors to understand the significance of the differences between the 5 selective statements in the Registration Statements . . . and the article describing the Bari Study 6 results." ¶74. These specific, fact-based allegations must be taken as true, and do not permit 7 dismissal based on defendants' contrary ­ and conclusory ­ characterization of the Bari Study 8 report.14 E.g., Kaplan, 49 F.3d at 1377-78; NPS Pharm., 2007 U.S. Dist. LEXIS 48713, at *16. 9 10 c. Plaintiffs' Claims Are Not Time-Barred

Defendants incorrectly contend that plaintiffs' claims are time-barred because the statute of

11 limitations purportedly accrued on May 19, 2005, when Threshold announced that a report of the 12 Bari Study would be published by a third party, which they contend placed plaintiffs on inquiry 13 notice of their claims. Motion at 12. As just described, the report itself had not yet been published 14 on that date, nor was it hyperlinked to the press release on which defendants base their accrual 15 argument. 16 A plaintiff has inquiry notice when public disclosures "provide the plaintiff with sufficient

17 storm warnings to alert a reasonable person to the probability that there were either misleading 18 statements or significant omissions involved in the sale of the securities." In re Livent, Inc. Sec. 19 Litig., 148 F. Supp. 2d 331, 364-65 (S.D.N.Y. 2001). In the Ninth Circuit, "the question of notice of 20 fraud is for the trier of fact." SEC v. Seaboard Corp., 677 F.2d 1301, 1309-10 (9th Cir. 1982); see 21 22 23 24 25 26 27 28 PLAINTIFFS' BRIEF IN OPPOSITION TO DEFENDANTS' MOTION TO DISMISS 4:07-cv-04972-CW

Defendants' reliance on an analyst report from Fortis Bank to demonstrate that the Bari Study report was recognized by the market provides no legitimate defense to this action. Provenz, 102 F.3d at 1493; Immune Response, 375 F. Supp. 2d at 1037. Apart from raising factual issues incapable of resolutions on a motion to dismiss, the Fortis report makes no mention of the BPHspecific placebo effect, or of the Bari Study author's specific warning that the results may be "misleading" as a result. See Lyon Decl., Ex. F. To the contrary, like defendants' own one-sided statements about the Bari Study, the Fortis report specifically claims that the Bari Study "data suggest efficacy on-par with, or superior to, marketed drugs" (i.e., Flomax and Proscar), without mentioning the risks that the data was not comparable to data from prior clinical studies of those drugs. Id. at 12. That defendants relegate this contention entirely to a footnote plainly demonstrates the lack of credence the Court should give it. See Motion at 12 n.5.

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1 also Tello v. Dean Witter Reynolds, Inc., 410 F.3d 1275, 1283 (11th Cir. 2004) ("Whether a plaintiff 2 had sufficient facts to place him on inquiry notice of a claim for securities fraud . . . is a question of 3 fact, and as such is often inappropriate for resolution on a motion to dismiss under Rule 12(b)(6)."). 4 Furthermore, on a motion to dismiss, defendants must "irrefutably [demonstrate that] plaintiff 5 discovered or should have discovered the fraudulent conduct." City Nominees, Ltd. v. Macromedia, 6 Inc., No. 98-16058, 2000 U.S. App. LEXIS 8201, at *3 (9th Cir. Apr. 21, 2000); Gargiulo v. 7 Demartino, 527 F. Supp. 2d 384, 393 (E.D. Pa. 2007) (same). 8 Defendants have not met this burden. The mere issuance of a press release that contains a

9 brief reference to the fact that the Bari Study investigator would publish a report of his findings in a 10 third-party journal, without more, does not trigger the running of the statute of limitations.15 Neither 11 does the report itself trigger the running of the statute because, as described above, it was itself 12 misleading to investors including by providing false assurances that the purportedly strong efficacy 13 results significantly minimized the risks of not having a placebo control. See Kaplan, 49 F.3d at 14 1377-78 (issue of fact whether clinical reports published during class period put investors on notice 15 of the truth allegedly concealed in post-offering public statements); Gargiulo, 527 F. Supp. at 394 16 (reassuring statements are sufficient to dissipate storm warnings). 17 18 Taking a slightly different approach, defendants next contend that plaintiffs' claims must be 19 20 21 Of course, the publication of the have triggered the accrual 22 the statute of limitations on claims arisingBari Study could not statements in the Follow-onperiod for from the misleading Offering, because the report was published several months prior to the effective date of the registration 23 statement for that offering. Hence, defendants' argument cannot be that those claims are time it should be rejected under a "truth on the market" As previously explained, 24 barred, but thatunavailable under the Securities Act, unsupported theory. record here and is, in any that defense is by the event, an intensely factual issue that is inappropriate for resolution on the pleadings. See, supra, 25 §III.A.1(b). 26 In a footnote, defendants also assert that "[t]o the extent" any of the alleged misrepresentations are "generalized statements of optimism or `puffing,' they are also inactionable. 27 Motion at 14 n.6. Because defendants fail to point to any statement that they contend is inactionable 28 puffery, they have failed to demonstrate any basis for dismissal on this ground. Plaintiffs cannot PLAINTIFFS' BRIEF IN OPPOSITION TO DEFENDANTS' MOTION TO DISMISS 4:07-cv-04972-CW
16 15

2.

The Risk Warnings in the Registration Statements Were Neither Meaningful Nor Complete

dismissed under either the PSLRA's safe harbor or the analagous "bespeaks caution" doctrine.16

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1 Motion at 13-16. In order to establish this defense, defendants have the burden of proving that there 2 was sufficient cautionary language so that "reasonable minds could not disagree that the challenged 3 statements were not misleading." Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 403 F.3d 4 1050, 1056 (9th Cir. 2005). Because this defense also involves a fact-intensive inquiry, it too is 5 inappropriate for resolution on a motion to dismiss. E.g., Fecht v. Price Co., 70 F.3d 1078, 1081-82 6 (9th Cir. 1995); Asher v. Baxter Int'l Inc., 377 F.3d 727, 734 (7th Cir. 2004). 7 8 The PSLRA's safe harbor provides protection for statements that are forward-looking. 9 Defendants' Motion fails to identify any such forward-looking statements. Indeed, the Motion fails 10 to identify any specific alleged misrepresentation, either by quotation or paragraph reference to the 11 Complaint, that defendants contend is protected by the safe harbor or inactionable under the 12 bespeaks caution doctrine. Instead, the Motion vaguely refers to "[s]tatements pertaining to the 13 prospects for FDA approval" and "Plaintiffs' suggestion that Defendants misled investors as to the 14 substantial risks associated with TH-070's development." Motion at 14, 15. 15 Plaintiffs do not allege that the prospectuses failed to warn that the Bari Study results might 16 not be confirmed in subsequent clinical trials ­ they allege that defendants failed to disclose specific, 17 existing risks that diminished the likelihood that would occur. Inasmuch as those risks arose from 18 historical and current information omitted from the prospectuses and registration statements, they are 19 20 Gargiulo, 527 F. Supp. 2d at 391-92; In re Viropharma, Inc., Sec. Litig., No. 02-1627, 2003 U.S. 21 Dist LEXIS 5623 (E.D. Pa. Apr. 7, 2003). 22 23 respond to a hypothetical argument, and defendants' attempt to raise this point by innuendo should 24 be rejected out of hand. While the risks may have affected the likelihood of future events occurring, they were each based on current or historical information. The failure to correct the Bari Study data for the BPH26 specific placebo effect, or warn investors that such an effect had been documented in the Flomax and Proscar studies, related to prior clinical studies. ¶67. The Bari Study investigator's warning that 27 "the placebo effect may elicit misleading results" was a reference to historical, not future, data. ¶66. The trends of liver toxicity were evident in past, not future, clinical studies. ¶¶67-71. 28 25 PLAINTIFFS' BRIEF IN OPPOSITION TO DEFENDANTS' MOTION TO DISMISS 4:07-cv-04972-CW
17

a.

Neither the Safe Harbor Nor the Bespeaks Caution Doctrine Supports Dismissal of the Complaint

neither forward-looking nor protected by the safe harbor or bespeaks caution doctrine.17 E.g.,

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1

Neither were the warnings meaningful. To the contrary, as explained in the Complaint, the

2 warnings consist of generalized risks attendant to any clinical trial ­ results might not be replicated, 3 unanticipated side effects might crop up, and there is no assurance of ultimate FDA approval. ¶¶794 82. Nowhere did these or any other warnings in the registration statements alert investors of the 5 significant placebo effect present in clinical studies for BPH or the major escalation in risk due to the 6 lack of placebo, blind-run in period, and small size inherent in the Bari Study. This major escalation 7 in risk of failure of TH-070 constituted a significant increase in the magnitude of risk over the 8 generalized risk of failure in all advanced clinical trials as suggested in Threshold's generic risk 9 warnings. ¶82. Nor did these or any other warnings in the Registration Statements alert investors 10 that past clinical studies of lonidamine had detected trends indicative of potentially serious liver 11