JOHN WOLFE, individually and on behalf of all others similarly situated; MIKE MARNHOUT, individually and on behalf of all others similarly situated; SHAZI IQBAL, individually and on behalf of all others similarly situated, Plaintiffs - Appellants,
ASPENBIO PHARMA, INC., a Colorado corporation; RICHARD G. DONNELLY; GREGORY PUSEY; JEFFREY G. MCGONEGAL; MARK COLGIN; ROBERT CASPARI, Defendants-Appellees.
(D.C. No. 1:11-CV-00165-REB-KMT) (D. Colo.)
Before BRISCOE, Chief Judge, HOLLOWAY [**] and HOLMES, Circuit Judges.
ORDER AND JUDGMENT[*]
Jerome A. Holmes Circuit Judge
Plaintiffs John Wolfe, Mike Marnhout, and Shazi Iqbal filed a class action complaint against AspenBio Pharma, Inc. ("AspenBio") and several of its current and former executives. Suing on behalf of a putative class of all persons who purchased that company's common stock between February 2007 and July 2010, the plaintiffs (hereinafter "the Investors") alleged that AspenBio had violated section 10(b) of the Securities Exchange Act of 1934 ("the Act"), 15 U.S.C. § 78j(b), and Securities and Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. § 240.10b-5. Together, these provisions "prohibit fraudulent acts done in connection with securities transactions." Adams v. Kinder-Morgan, Inc., 340 F.3d 1083, 1094–95 (10th Cir. 2003). The Investors also asserted "control person" claims under section 20(a) of the Act, 15 U.S.C. § 78t(a), against the individual defendants. The present appeal addresses only the section-10 allegations against AspenBio and Richard Donnelly (the company's Chief Executive Officer from the beginning of the class period until February 2009) and the control person claims against Mr. Donnelly and Jeffrey McGonegal (the company's Chief Financial Officer during the class period).
To state a claim under section 10(b) and Rule 10b-5, a complaint must allege:
(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.
Amgen Inc. v. Conn. Retirement Plans & Trust Funds, ___ U.S.___, 133 S.Ct. 1184, 1192 (2013) (quoting Matrixx Initiatives, Inc. v. Siracusano, ___U.S. ___, 131 S.Ct. 1309, 1317 (2011)) (internal quotation marks omitted). In the Private Securities Litigation Reform Act ("PSLRA"), Congress subjected the first and second of these elements to heightened pleading requirements. See 15 U.S.C. §§ 78u-4(b)(1), 78u-4(b)(2); Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 321 (2007).
In the case on appeal, the district court granted AspenBio's Federal Rule of Civil Procedure 12(b)(6) motion to dismiss the Investors' claims based on a finding that the Investors failed to allege facts establishing the first element of a section-10 claim, the existence of a false or misleading statement. We do not reach that issue, however. "We have long said that we may affirm on any basis supported by the record, even if it requires ruling on arguments not reached by the district court or even presented to us on appeal." Richison v. Ernest Grp., Inc., 634 F.3d 1123, 1130 (10th Cir. 2011). And we conclude that the Investors failed to adequately plead here the second element—viz., scienter. On that basis, and exercising jurisdiction under 28 U.S.C. § 1291, we affirm the judgment of the district court.
AspenBio is a self-described "bio-pharmaceutical company" whose business is the "discovery, development, manufacture, and marketing of novel proprietary products." Aplt. App. at 19 (Am. Compl., filed Aug. 23, 2011) (internal quotation marks omitted). The present litigation concerns alleged misrepresentations relating to one such product, a diagnostic test called "AppyScore." Id. at 14. AppyScore was conceived as a screening test that could help physicians rule out appendicitis in patients presenting the symptoms of that disease by testing for elevated levels of a specific protein. AspenBio began work on the test some time around 2003, and by early 2006, the company issued a press release announcing its work on the product and touting the potential market for a new appendicitis test.
In 2007, AspenBio issued a number of press releases relating to its ongoing research involving AppyScore. The allegedly false content of these releases, and of an additional comment made by Mr. Donnelly, forms the core of the Investors' claim. The first press release, issued on February 22 (the "February 2007 Press Release"), announced the results of three studies that had purportedly been conducted in the preceding 30 months, as well as preliminary results of an additional ongoing study. The reported results were, by and large, extremely promising. Indeed, AspenBio reported that "[b]ased on the data obtained to-date, " AppyScore "appears able to identify patients with appendicitis at a very high sensitivity level of 94% to 97%." Id. at 36. In a second press release a few months later (the "September 2007 Press Release"), AspenBio again struck an optimistic tone, claiming that the large ongoing study referenced in its earlier press release had been completed, and quoting Mr. Donnelly to the effect that this study had demonstrated sensitivity for AppyScore of 98%. In a presentation to investors on May 22, 2007, Mr. Donnelly stated that, under the system of categorization for appendices that AspenBio was using, cases were divided into four numerical categories—with 1s being normal appendices, 4s reflecting highly symptomatic cases of appendicitis, and 2s and 3s representing the difficult-to-detect cases in between—and AppyScore was capable of detecting 2s and 3s.
In their amended complaint, the Investors alleged that these sanguine reports were in fact false,  and that they actually reflected "rigged studies designed to make AppyScore look good rather than to test its capabilities, so that AspenBio could sell its stock at [an] inflated price." Id. at 44. The Investors alleged that these false reports artificially inflated the price of AspenBio stock, and that when the truth came out, the Investors were left in the lurch.
As the Investors tell it, the facade ultimately began to crumble when AspenBio undertook the process of seeking FDA approval to market AppyScore in the United States. When AspenBio released the results of its first clinical trial (i.e., its first "official" trial, conducted pursuant to FDA regulations, and intended for use in a regulatory submission) in January 2009, "[t]he reported results were devastating, " id. at 55, and the company's stock lost more than 75% of its value in a single day. Even then, however, AspenBio purportedly refused to give up the ghost, choosing instead to issue yet another press release, this one claiming that the first clinical trial's negative results could be traced to "an unexpected number of patients who presented with mild appendicitis when compared to peer reviewed published literature statistics." Id. at 57. It was not until July 2010, when AspenBio released the unimpressive results of its second clinical trial, that the scales allegedly fell fully from the market's eyes. AspenBio's stock price fell a further 27%.
The Investors filed a putative class action against AspenBio on the basis of the foregoing allegations, asserting claims under sections 10(b) and 20(a) of the Act, as well as under SEC Rule 10b-5. AspenBio filed a motion to dismiss pursuant to Rule 12(b)(6). The district court granted the motion, finding that the Investors failed to state a claim under the heightened pleading standards established by the PSLRA. It ...