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`UNITED STATES DISTRICT COURT
`EASTERN DISTRICT OF NEW YORK
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`KENNETH GORDON, Individually and
`On Behalf of All Others Similarly
`Situated,
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`Plaintiff,
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`-against-
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`VANDA PHARMACEUTICALS INC.,
`MIHAEL H. POLYMEROPOULOS,
`JAMES P. KELLY, GIAN PIERO
`REVERBERI, AND THOMAS E.
`GIBBS,
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`Defendants.
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`------------------------------------------------x
`Appearances:
`For the Plaintiff:
`MICHAEL G. CAPECI, ESQ.
`Robbins Geller Rudman & Dowd LLP
`58 South Service Road, Suite 200
`Melville, NY 11747
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`BLOCK, Senior District Judge:
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`MEMORANDUM AND ORDER
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`Case No. 1:19-cv-01108-FB-LB
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`For the Defendant:
`AUDRA J. SOLOWAY, ESQ.
`Paul, Weiss, Rifkind, Wharton &
`Garrison LLP
`1285 Avenue of the Americas
`New York, NY 10019
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`The plaintiffs in this securities-fraud action claim that Vanda Pharmaceuticals
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`Inc. (“Vanda”) and company executives Mihael Polymeropoulos, James Kelly, Gian
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`Piero Reverberi, and Thomas Gibbs knowingly made statements in violation of the
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`Securities Exchange Act of 1934 (“Exchange Act”) and SEC Rule 10b-5. The
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`defendants move to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) on
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`1
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`Case 1:19-cv-01108-FB-LB Document 55 Filed 03/10/21 Page 2 of 10 PageID #: 1491
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`the grounds that the plaintiffs have not adequately alleged scienter, material
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`misrepresentations or omissions, or loss causation. For the following reasons the
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`motion is granted in part and denied in part.
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`I.
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`The following facts are taken from the amended complaint. For present
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`purposes, the Court accepts them as true and draws all reasonable inferences in favor
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`of the plaintiffs. See, e.g., Gamm v. Sanderson Farms, Inc., 944 F.3d 455, 458 (2d
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`Cir. 2019).
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`Vanda is a biopharmaceutical company that markets and sells two drugs. See
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`Am. Compl. ¶ 2. Fanapt is FDA approved to treat schizophrenia in adults. Id. Hetlioz
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`is FDA approved to treat Non-24, a rare circadian rhythm disorder that occurs almost
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`exclusively in blind individuals. Id. For a consumer, the average monthly price of
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`Hetlioz in February 2019 was $18,600, for a yearly total of $223,200. See Am.
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`Compl. ¶ 160.
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`The complaint alleges that defendants made materially false and misleading
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`statements and omissions regarding an off-label promotion scheme in which Fanapt
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`and Hetlioz were marketed to treat disorders for which the drugs were not FDA-
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`approved. See Am. Compl. ¶ 3. This allegedly involved, for example, promoting
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`sales of Fanapt to children with schizophrenia – rather than adults – in a manner that
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`was inconsistent with the FDA’s authorization. See Am. Compl. ¶ 120. According
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`2
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`Case 1:19-cv-01108-FB-LB Document 55 Filed 03/10/21 Page 3 of 10 PageID #: 1492
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`to plaintiffs, Hetlioz was promoted off-label for conditions other than Non-24,
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`including mundane sleep issues in individuals who are not blind (or otherwise
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`suffering from the condition).1 These allegations were revealed to the public in a
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`highly critical report issued by short seller Aurelius Value (“Aurelius Report”) on
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`February 11, 2019, causing Vanda’s stock to “drop[] precipitously.” Am. Compl. ¶
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`9.2
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`The complaint further alleges that company executives Polymeropoulos,
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`Kelly, Reverberi, and Gibbs made materially false or misleading public statements
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`and prepared false and misleading investor reports. See Am. Compl. ¶ 25.
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`II.
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`“To survive a motion to dismiss, a complaint must contain sufficient factual
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`matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’”
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`Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550
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`U.S. 544, 570 (2007)). A claim is facially plausible when “the plaintiff pleads factual
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`1 According to one expert, “[t]here have been fewer than 100 cases of sighted people with Non-
`24 sleep-wake disorder reported in the scientific literature.” Am. Compl. ¶ 148.
`2 Plaintiff also alleges that the defendants made materially false and misleading statements
`concerning Tradipitant – a drug in clinical trials – because Vanda failed to disclose to investors
`that the FDA believed it would need to conduct a nine-month non-rodent study to ensure the
`drug is safe for humans. Am. Compl. ¶ 6. This prompted Vanda to sue the FDA. Am. Compl.
`¶ 9. Because the defendant’s motion to dismiss fails as to Vanda and individual defendant
`Polymeropoulos under the off-label drug promotion theory, as a practical matter the Court will
`not analyze this claim.
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`3
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`Case 1:19-cv-01108-FB-LB Document 55 Filed 03/10/21 Page 4 of 10 PageID #: 1493
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`content that allows the court to draw the reasonable inference that the defendant is
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`liable for the misconduct alleged.” Id. (citing Twombly, 550 U.S. at 556).
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`To state a claim under Section 10(b) of the Exchange Act, a plaintiff must
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`establish (1) a material misrepresentation or omission by the defendant; (2) scienter;
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`(3) a connection between the misrepresentation or omission and the purchase or sale
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`of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss;
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`and (6) loss causation. In re Petrobras Sec., 862 F.3d 250, 275 (2d Cir. 2017).
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`III.
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`To adequately plead scienter, a complaint must “state with particularity facts
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`giving rise to a strong inference that the defendant acted with” the intent to
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`deceive, manipulate, or defraud. 15 U.S.C. § 78u-4(b)(2)(A); see also Tellabs, Inc.
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`v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007). Under this heightened
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`pleading standard, “[a] complaint will survive ‘only if a reasonable person would
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`deem the inference of scienter cogent and at least as compelling as any opposing
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`inference one could draw from the facts alleged.’” Setzer v. Omega Healthcare
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`Inv'rs, Inc., 968 F.3d 204, 212 (2d Cir. 2020) (quoting Tellabs, 551 U.S. at 324).
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`According to plaintiffs, the complaint establishes that the individual
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`defendants each participated in the off-label marketing scheme and the individual
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`defendants’ scienter is imputed to Vanda. Since Fanapt and Hetlioz were the only
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`4
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`Case 1:19-cv-01108-FB-LB Document 55 Filed 03/10/21 Page 5 of 10 PageID #: 1494
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`two revenue generating drugs sold by Vanda, the plaintiffs contend that the
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`defendants are presumed to be knowledgeable about the off-label sales scheme.
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`The second amended complaint repeats factual allegations that were also
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`conveyed in a Washington D.C. qui tam suit. That case was recently dismissed. See
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`United States ex rel. Gardner v. Vanda Pharm., Inc., No. 17-CV-00464 (APM),
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`2020 WL 2542121, at *1 (D.D.C. May 19, 2020) (“dismiss[ing] all of Relator's
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`claims” with the “opportunity to amend”). The defendants contend that unproven
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`allegations from a qui tam action cannot establish securities fraud, and that
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`dismissal of the qui tam action undercuts its reliability. Alternatively, defendants
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`argue even if Vanda’s agents encouraged off-label use of Fanapt and Hetlioz, it
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`does not necessarily follow that those same agents intended to deceive
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`shareholders.
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`The Court agrees that, even with the heightened pleading standard, plaintiffs
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`have adequately pled corporate scienter as to individual defendant
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`Polymeropoulos, and that such intent can be imputed to Vanda Pharmaceuticals.
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`See Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531
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`F.3d 190, 195 (2d Cir. 2008). Specifically, the complaint sufficiently alleges that
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`Polymeropoulos actively participated in trainings where Vanda’s salesforce was
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`directed to market Hetlioz and Fanapt to individuals who did not suffer from
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`diseases those drugs were approved to treat.
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`5
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`Case 1:19-cv-01108-FB-LB Document 55 Filed 03/10/21 Page 6 of 10 PageID #: 1495
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`By contrast, the Court disagrees that the plaintiffs have met the heightened
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`pleading standard with respect to defendants Kelly, Reverberi, and Gibbs. In the
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`Second Circuit, plaintiffs must supply “connective tissue” between the corporate
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`misconduct and the alleged false statements. Jackson v. Abernathy, 960 F.3d 94, 99
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`(2d Cir. 2020). Complaints that leave the Court to “guess what role those
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`employees played in crafting or reviewing the challenged statements and whether it
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`would otherwise be fair to charge the Corporate Defendants with their knowledge”
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`must be dismissed. Jackson, 960 F.3d at 99. The amended complaint lacks
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`sufficient factual information establishing the involvement of Kelly, Reverberi, and
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`Gibbs in the dissemination of false statements about off-label marketing.
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`Therefore, the Court dismisses the plaintiffs’ claims as to defendants Kelly,
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`Reverberi, and Gibbs.
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`IV.
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`Section 10(b) and Rule 10b-5 prohibit corporate officers from making “any
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`untrue statement of a material fact or to omit to state a material fact necessary in
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`order to make the statements made, in the light of the circumstances under which
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`they were made, not misleading.” 17 C.F.R. § 240.10b–5(b). “[V]eracity of a
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`statement or omission is measured not by its literal truth, but by its ability to
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`accurately inform rather than mislead prospective buyers.” Kleinman v. Elan
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`Corp., 706 F.3d 145, 153 (2d Cir. 2013) (internal citations omitted). Even
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`6
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`Case 1:19-cv-01108-FB-LB Document 55 Filed 03/10/21 Page 7 of 10 PageID #: 1496
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`“[s]tatements of literal truth ‘can become, through their context and manner of
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`presentation, devices which mislead investors.’” Kleinman, 706 F.3d at 153 (citing
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`McMahan & Co. v. Wherehouse Entm't, Inc., 900 F.2d 576, 579 (2d Cir. 1990)).
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`The defendants contend the complaint fails to establish false or misleading
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`statements related to the alleged off-label marketing activities because (1)
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`companies are not obligated to disclose unadjudicated, unproven allegations like
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`the qui tam action; and (2) plaintiffs principally allege omissions, which are not
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`actionable except in limited circumstances.
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`The Court finds that the plaintiffs have alleged omissions which are
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`material, in that there is a “substantial likelihood” disclosure “would have been
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`viewed by the reasonable investor as having significantly altered the ‘total mix’ of
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`information made available.” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27,
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`38 (2011); see also Singh v. Cigna Corp., 918 F.3d 57, 63 (2d Cir. 2019) (“An
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`alleged misrepresentation is material if there is a substantial likelihood that a
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`reasonable person would consider it important in deciding whether to buy or sell
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`shares of stock.”). The complaint alleges Polymeropoulos made affirmative
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`statements regarding the company’s marketing practices which failed to convey the
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`company’s suspect drug promotion activities. See Meyer v. Jinkosolar Holdings
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`Co., 761 F.3d 245, 250-51 (2d Cir. 2014) (“Even when there is no existing
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`independent duty to disclose information, once a company speaks on an issue or
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`7
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`Case 1:19-cv-01108-FB-LB Document 55 Filed 03/10/21 Page 8 of 10 PageID #: 1497
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`topic, there is a duty to tell the whole truth.”). Specifically, Polymeropoulos stated
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`that “Fanapt . . . will be a drug that will be used once patients switch from another
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`medication,” “Fanapt is considered in the US a second line treatment,” and “[o]ur
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`sales team continues making progress in introducing Fanapt as an additional option
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`in treating adult patients with schizophrenia.” Am. Compl. ¶ 265, 278, 302. These
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`statements did not communicate that Vanda appears to have been actively
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`promoting and marketing Fanapt off-label, as a first-line treatment. Materiality is
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`established because Fanapt accounted for between forty to sixty percent of
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`revenues during the class period – cumulatively amounting to hundreds of millions
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`of dollars.
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`V.
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`Unlike scienter, loss causation is governed by the traditional “short and plain
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`statement” rule laid out in Rule 8. Fed. Rule Civ. Proc. 8(a)(2); see also Dura
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`Pharm., Inc. v. Broudo, 544 U.S. 336, 346 (2005). A securities fraud complaint is
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`sufficient if it sets forth what the “relevant economic loss” and “causal connection
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`might be.” Dura Pharm., 544 U.S. at 347.
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`The amended complaint alleges that the February 11, 2018 revelations in the
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`Aurelius Report produced unusually high levels of trading activity and caused
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`Vanda’s stock to decline over five percent. Am. Compl. ¶ 434-35.
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`8
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`Case 1:19-cv-01108-FB-LB Document 55 Filed 03/10/21 Page 9 of 10 PageID #: 1498
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`The defendants argue the complaint fails to adequately plead loss causation
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`because the Aurelius Report described allegations of off-label marketing that had
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`been previously disclosed a week earlier, upon unsealing of the qui tam action.
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`Media reports and other similar public disclosures are adequate to establish
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`loss causation in this context. See In re Winstar Commc’ns, No. 01 CV 11522,
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`2006 WL 473885, at *14 (S.D.N.Y. Feb. 27, 2006) (finding short seller’s report of
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`alleged fraud sufficient to establish loss causation at the motion to dismiss stage).
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`Contrary to the defendant’s contentions, the fact that the qui tam action was
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`unsealed a few days before the Aurelius Report does not defeat the plaintiffs’
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`claims, especially in this procedural posture. The “effect of [an] intervening event
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`on plaintiff’s theory of loss causation ‘is a matter of proof at trial and not to be
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`decided on a Rule 12(b)(6) motion to dismiss.’” In re Sequans Commc'ns S.A. Sec.
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`Litig., No. 17CV4665FBSJB, 2019 WL 4805072, at *3 (E.D.N.Y. Sept. 30, 2019)
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`(citing Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc., 343 F.3d 189,
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`197 (2d Cir. 2003)).
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`Case 1:19-cv-01108-FB-LB Document 55 Filed 03/10/21 Page 10 of 10 PageID #: 1499
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`CONCLUSION
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`For the foregoing reasons, the defendants’ motion to dismiss is granted with
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`respect to the claims against James Kelly, Gian Piero Reverberi and Thomas Gibbs
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`and otherwise denied.
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`SO ORDERED.
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`_/S/ Frederic Block____________
`FREDERIC BLOCK
`Senior United States District Judge
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`Brooklyn, New York
`March 10, 2021
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