On July 1, 2024, Judge Denise J. Casper of the United States District Court for the District of Massachusetts granted a motion to dismiss a putative class action asserting claims under the Securities Exchange Act of 1934 against a drug-development company and certain of its officers. State Teachers Ret. Sys. v. Charles River Lab. Int'l, Inc., No. 23-cv-11132-DJC (D. Mass. July 1, 2024). Plaintiff alleged that defendants misled investors to believe that the company complied with all applicable laws in its importation of endangered non-human primates ("NHPs") for animal testing of biologic pharmaceuticals. The Court dismissed the action, holding that plaintiff failed to identify any actionable statement or omission in the company's filings or to adequately allege that defendants acted with the requisite scienter.
The company is in the business of importing animals, including NHPs, either to sell to pharmaceutical companies for use in drug-safety assessment studies or to use, itself, in conducting such assessments for clients. The NHP most frequently used for pharmaceutical testing is the long-tailed macaque. The commercial trade of macaques is protected by federal and international law, which essentially prohibit the possession, sale, or receipt of any macaque that is captured from the wild, as opposed to captive bred. As COVID-19 emerged in late 2019 and early 2020, demand for macaques surged for the purpose of testing the safety and efficacy of a vaccine. Yet, at the same time, China—where the company allegedly sourced most of its NHPs—imposed strict restrictions on the export of macaques, forcing the company to turn elsewhere. Plaintiff alleged the company shifted to Cambodia, from where it obtained more than 15,000 macaques between 2020 and 2022 from several Cambodia-based suppliers.
In 2021, the Department of Justice ("DOJ") announced that it was investigating the unlawful trafficking of wild macaques into the United States from Cambodia. That year, the DOJ allegedly issued grand jury subpoenas to three Cambodian-based suppliers from whom the company received thousands of macaques, as well as to the company. As a result of the investigation, the DOJ indicted executives at a network of related companies that own macaque breeding farms in Southeast Asia, including in Cambodia, for allegedly conspiring to introduce wild macaques into the supply chain of customers in the United States. Several of the company's suppliers allegedly obtained macaques from this farming network. The company's stock fell when this news broke.
Plaintiff filed suit in 2023, alleging that the company made numerous statements in its public filings that were false and misleading at the times made. These purported misrepresentations primarily concern the company's: (1) contacts with the Cambodian supplier whose executives were indicted in 2022; (2) dealings with "non-preferred suppliers"; (3) sourcing of "purpose-bred" macaques; and (4) compliance with applicable import laws and regulations regarding NHPs.
The Court addressed each category of alleged misstatements in turn, ultimately finding that plaintiff failed to identify any actionable statement. First, the Court found that, even crediting plaintiff's allegations, the company's representations that (1) it had no "direct contracts" with indicted suppliers, (2) it did not engage "non-preferred suppliers" of macaques, and (3) it provided only purpose-bred, specific pathogen free macaques, all were true, because plaintiff never actually alleged that the company had violated any pertinent law or actually obtained macaques from the indicted supplier. The Court also found it to be significant that the company disclosed that it received a DOJ subpoena in connection with the investigation no less than five days after it had been issued. To the extent that plaintiff sought to premise falsity on statements in the company's codes of business conduct and ethics, the Court found that such statements lacked enough specificity to amount to anything more than non-actionable corporate puffery.
The Court next addressed plaintiff's theory of scienter. The gravamen of plaintiff's allegations centered upon the individual defendants' alleged pattern of selling and transferring company stock during the pendency of the DOJ's investigation and before that investigation was publicized. But the Court found that these allegations failed to raise a strong inference of scienter because trading data disclosed that the individual defendants frequently sold or gifted stock and, moreover, that the individual defendants' holdings increased in the period leading up to the company's publicization of the DOJ investigation and its receipt of a grand jury subpoena in 2022. The individual defendants, therefore, increased their financial exposure to drops in company stock during the period of the DOJ's investigation and leading up to its indictment, thereby weakening the inference that defendants sought to defraud investors by selling off stock.
The Court also denied plaintiff's "informal request" for leave to further amend the complaint, emphasizing that plaintiff had not formally sought leave but rather had merely included the request in a footnote in its opposition brief.
Links & Downloads
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.