On 26 October 2016, in Schueneman v. Arena Pharmaceuticals, Inc., the federal appeals court based in California reversed the lower court's dismissal of claims brought under the Exchange Act for failure to plead scienter (i.e., fraudulent intent). The court reached its conclusion based on the principle that, while a party trading securities has no freestanding duty under the Exchange Act to disclose information, once the party decides to speak about an issue, it must do so accurately and cannot withhold information that contradicts positive statements it has made.
While it was applying to the US Food and Drug Administration ("FDA") for approval of a weight-loss drug that it was developing, Arena Pharmaceuticals made positive statements to the public about its chances for FDA approval, including that its efforts were supported by "all the animal studies that ha[d] been completed" at that time. Despite these positive statements, the plaintiffs alleged that the defendants (Arena and several of its high-level officers) knew that a study done on rats showed the drug to have potentially carcinogenic effects that concerned the FDA. The lower court held that the defendants did not have fraudulent intent when failing to disclose the existence of the rat study because the defendants had a legitimate difference of opinion with the FDA about the study's significance.
According to the court of appeals, however, it was clear that the defendants understood that the FDA did not agree with the company's view of the rat study. The FDA had asked the company to defend its continued clinical testing of the drug in light of the rat study and the company then hired a world-renowned toxicologist to address the FDA's concerns. The court's finding of scienter was closely tied to its holding that the company's positive statements about animal studies gave rise to a duty to disclose the rat study. As the court explained, while the "securities laws do not create an affirmative duty to disclose any and all material information", once a party chooses to make positive statements to the market, it is bound to "do so in a manner that wouldn't mislead investors". The company could have "remained silent about the dispute or it could have addressed its discussions with the FDA head-on. But it could not represent that there was no controversy here because all the data was favorable."
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