UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF...

Case 1:13-cv-23878-UU Document 98 Entered on FLSD Docket 08/19/2014 of 12

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA

Case No. 13-cv-23878-UU Judge: Hon. Ursula Ungaro

ATUL KAMAR SOOD, INDIVIDUALLY AND ON I CASE No.: 13-cv-23878-UU BEHALF OF ALL OTHERS SIMILARLY SITUATED,

REPLY IN FURTHER SUPPORT Plaintiff, OF MOTION FOR CLASS

vs. CERTIFICATION

CATALYST PHARMACEUTICAL PARTNERS INC., PATRICK J. MCENANY

Defendants.


I. Introduction Defendants concede that Catalyst’s stock traded in an efficient market during the class

period, thereby entitling Plaintiffs to a presumption of reliance on the integrity of the market

price. Thus, the Court should grant the motion for class certification unless it finds that

Defendants have proven that their false statements had no impact on Catalyst’s share price.

This is an unlikely case to argue price impact. Catalyst’s stock price went up statistically

significantly (by 40%) on the day, August 27, when it falsely stated that there was “no ...

effective treatment” for LEMS. It fell statistically significantly (by 43%) as a result of an

October 18 news article that there was such a treatment. But citing Halliburton Co. v. Erica P.

John Fund, Inc., 134 S. Ct. 2398 (2014) (“Halliburton II”), Defendants claim that the Court,

rather than the jury, must hear their “price impact” arguments. Halliburton II was a modest

decision that granted defendants the right to rebut a presumption of reliance in certain

circumstances. It did not presume to overrule the Court’s recent decisions that neither materiality

nor loss causation was properly before the Court. But Defendants’ argument is that the truth

correcting their false statements was already known by the market and were therefore immaterial

and could not have contributed to Catalyst’s share price rise on August 27 nor caused its share

price decline on October 18, and thus did not have any “price impact”.

In any case, Defendants’ arguments are without merit on the facts. The cases Defendants

cite establish that they had to establish by a preponderance of the evidence that the true facts

were disclosed to the market prior to the Class Period with as much intensity and credibility as

the false statement that there was no effective treatment for LEMS on August 27. Clearly, they

were not, since when they were disclosed to investors on October 18, Catalyst’s stock price fell

by 43%, and did not recover in the following two and a half months.

In fact, Defendants only cite a few disclosures scattered through their SEC filings.

Defendants ignore that the Court has already held these exact disclosures are inadequate to put

the market on notice . Defendants add analyst reports, three of which make the same disclosures

the Court held are insufficient, and the fourth of which was issued by a firm without a working

website. This report hardly equals the defendants’ own false statements, which were repeated by

the Wall Street Journal and the Associated Press.

And Defendants, citing their expert, blame overreaction and bad publicity for the 42%

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fall on October 18. But Defendants’ expert admitted that she never actually analyzed whether the

stock price overreacted or whether bad publicity caused the stock price drop. Defendants thus

offer only speculation to assert that the October 18 price decline was an “overreaction” to “bad

publicity”. Indeed, Defendants’ expert testified that, on a theoretical level, Catalyst’s stock price

“shouldn’t overreact”. And in speculating that Catalyst’s stock price overreacted to the October

18, Feuerstein article, Defendants admit that it did have an impact on Catalyst’s share price.

Defendants offer an argument about damages, not about rebutting the presumption of reliance.

Defendants concede that Plaintiffs are entitled to a presumption of reliance, but fail to

rebut it. The class should be certified.

II. Defendants must show that the fact that 3,4-DAP was an effective treatment was transmitted with as much intensity and credibility as their false claim that there was no such treatment.

Defendants concede that Catalyst’s stock trades on an efficient market, and that Plaintiffs

are entitled to the presumption of reliance. The only argument they raise is that they have

rebutted the presumption. Their burden is a preponderance of the evidence. Fed. R. Evid. 301;

Fogarazzo v. Lehman Bros., Inc. , 263 F.R.D. 90, 103 (S.D.N.Y. 2009). Defendants’ claim that

the false statement that there was no effective treatment for LEMS had no price impact because

the market already knew that it was false is a truth-on-the-market defense. Though they do not

mention it in their brief, it requires Defendants to show, by a preponderance of the evidence, that

the true information was disclosed with the same intensity and credibility as the false statements.

In re Apple Computer Sec. Litig. , 886 F.2d 1109, 1114 (9th Cir. 1989); cf. Provenz v. Miller , 102

F.3d 1478, 1493 (9th Cir. 1996) (statement must be transmitted with intensity and credibility

sufficient to counterbalance any misleading impressions).

III. Defendants may not raise a materiality defense to class certification by labeling it a price impact argument.

Defendants are not advancing a price impact argument properly so-called. They readily

concede that Catalyst’s stock price rose by 40% following the false August 27 statement that

there was no effective treatment for LEMS, and that it fell materially (by 43%) on October 18

and 21 as a result of Mr. Feuerstein’s article. Instead, Defendants argue that the stock price

increase on the day of their false statement was not due to their false statement. The market knew

that there was an effective treatment for LEMS despite Defendants’ concededly false claim that

there was not. – i.e., the truth was “on the market.” (Allen Tr. 55-56; Feinstein Rebuttal ¶¶ 21-

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22).1

Defendants’ argument that the stock price movement on August 27, the day they falsely

stated that there was “no effective treatment” for LEMS was caused by something other than that

statement is an argument that the statement was immaterial. Provenz, 102 F.3d at 1492. But in

2013, the Supreme Court held that on class certification, courts should not consider whether the

false statements plaintiffs complain of were material. Amgen Inc. v. Connecticut Ret. Plans &

Trust Funds, 133 S. Ct. 1184, 1191 (2013). The Court reasoned that even if statements are

immaterial, the class should be certified. Then, a class action will generate a common answer to

the common question of materiality. The Halliburton II Court never said it was effectively

overruling the just-decided Amgen , But as Defendants tell it, had those defendants, instead,

simply argued that the false statements were not material and therefore had no price impact –

true by definition, see id. at 1191 – class certification would have been denied (exactly what

Defendants do here).

Halliburton II did not overrule Amgen, instead repeatedly citing Amgen and stating that it

was being reaffirmed. Halliburton II, 134 S. Ct. at 2407. Indeed, all six Justice who joined the

majority opinion in Halliburton II also joined the majority opinion in Amgen , and Justices

Ginsburg, Breyer, and Sotomayor, whose votes were necessary for the majority, joined the

opinion on the express understanding that it would “impose no heavy toll on securities-fraud

plaintiffs with tenable claims”. Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398,

2417 (2014) (Ginsburg, J., concurring). The only example of price impact evidence it gave,

clarifying its scope, was a demonstration that the company’s stock price did not move

statistically significantly as a result of the false statement or its disclosure. Halliburton II, 134 S.

Ct. at 2415. The unstated exception does not swallow the rule; Halliburton II does not impose on

district courts the obligation to conduct at class certification mini-trials on materiality,

materiality, or whichever other element a defendant argues relates to price impact.

1 Citation to “Allen Tr. __” are to pages of the deposition transcripts of Lucy P. Allen, attached as Exhibit 1to the Declaration of Jonathan Horne, filed herewith. Citations to “Allen ¶ __” are to Paragraphs of the Expert Report of Lucy T. Allen, Dkt. # 94-1. Citations to “Feinstein Rebuttal ¶__” are to paragraphs of the Rebuttal Report of Steven P. Feinstein, attached as Exhibit 2 to the Declaration of Jonathan Horne, filed herewith. Citations to “Horne Dec. Ex. __” are to exhibits to the Declaration of Jonathan Horne, filed herewith. Citations to “Def. Opp. __” are to pages of Defendants’ Opposition to Motion for Class Certification and Appointment of Class Representative and Class Counsel, Dkt. # 94.

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If the truth was on the market, then class-members’ claims will all fall together; it is for

the jury to decide. See also Lapin v. Goldman Sachs & Co. , 254 F.R.D. 168, 186 (S.D.N.Y.

2008) (defendants’ claim that the market was aware that their statements were false was not

relevant to rebutting the presumption of efficiency); City of Livonia Employees' Ret. Sys. v.

Wyeth , 284 F.R.D. 173, 182 (S.D.N.Y. 2012) (claim that stock price fell on day of disclosure in

reaction not to news but to other fact is loss causation and cannot be considered at class cert

stage). Defendants’ cases are inapposite, since they all precede Amgen .

IV. Even if Defendants may in theory rebut the presumption of reliance by showing that the truth was on the market, they have not met their burden of proof here.

As the Court has already held, the statement that there was “no effective treatment” for

LEMS is false. In reality, because 3,4-DAP is “safe and effective” and “virtually identical to

Firdapse” the misstatement is “highly material.” Sood v. Catalyst Pharm. Partners Inc., 13-CV-

23878-UU, 2014 WL 1245271, at *7 (S.D. Fla. Mar. 26, 2014). A defendant claiming that its

false statements are excused by other disclosures is advancing a truth-on-the-market argument,

and must show that the disclosures were made with as much intensity and credibility as its own

false statements. See 2-3 above; accord Nguyen v. Radient Pharm. Corp. , 946 F. Supp. 2d 1025,

1036 n.13 (C.D. Cal. 2013).

Courts are wary of excusing defendants’ false statements on grounds that the market

knew they were lying. See, e.g. , In re LDK Solar Sec. Litig. , 255 F.R.D. 519, 527 (N.D. Cal.

2009).). In LDK , the defendants sought to truncate the class period, claiming that they had

rebutted the presumption of reliance for part of the class period following a disclosure of their

fraud. An analyst at investment bank Piper Jaffray issued a report disclosing the defendants’

fraud. The day after, the company itself issued a press release responding to the analyst report.

The analyst report was closely followed. Other analyst reports claimed that the Piper Jaffray

report changed the investment thesis, that the stock would “trade with some uncertainty”

following it, and indeed, trading volume and the stock’s short interest increased following the

Piper Jaffray report. Indeed, the Piper Jaffray report caused the company’s stock price to fall.

The court nonetheless held that the defendants had not succeeded in rebutting the presumption of

reliance for the portion of the class period falling after the Piper Jaffray report was published.

LDK was much closer than this case.

a. Company disclosures

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Defendants must show that their “highly material” statement that there was no effective

treatment for LEMS was effectively counterbalanced by statements made with the same intensity

and credibility. They point to their own partial and isolated disclosures, which they all raised in

their motion to dismiss. Compare Defendants’ Motion to Dismiss Plaintiff’; Complaint For

Violation of the Federal Securities Laws, Dkt. # 29, at 5-8, with Allen Report, ¶¶ 19-24. The

Court has already held these very same statements disclosed that Firdapse is a proprietary form

of 3,4-DAP and that a company was holding Phase II trials using 3,4-DAP but not that 3,4-DAP

was effective . Sood, 2014 WL 1245271, at *7 n.6.

And though Defendants try to color their falsehood as an aberration, August 27 was not

the only time Defendants falsely stated or implied that there was no effective treatment for

LEMS. Catalyst announced its acquisition of the U.S. rights to Firdapse on October 31, 2012,

through a press release and accompanying current report on Form 8-K, both filed with the SEC.

In the 8-K, Catalyst represented that “[t]here are no approved drugs in the United States for the

treatment of LEMS. Current options rely on intravenous immunoglobulin, plasmapheresis and/or

immuno suppressant drugs.” (Horne Dec. Ex. 3). In fact, the leading treatment was 3,4-DAP,

which Defendants do not dispute. In the press release, Catalyst announced that “[a]s part of this

arrangement, we are gaining access to a late-stage U.S. orphan drug targeting LEMS, a disease

of the central nervous system for which there is not currently an effective treatment approved in

the United States.” (Horne Dec. Ex. 4). In fact, there was an effective treatment, which the

academic literature called safe and effective, and that could be approved on an individual basis

by the FDA; there was instead no treatment which was approved for marketing by the FDA. In

written questions and answers released the following day, Catalyst stated that it “believes that the

reason for the limited Firdapse sales in the EU to date by BioMarin is compounding pharmacy

competition, reimbursement issues and the fact that this product has not been actively promoted

by BioMarin as a result of other product priorities. Catalyst does not expect to face these

challenges in North America.” (Horne Dec. Ex. 5). Because of Jacobus, Catalyst faced much

stiffer competition in the US. Thus, notwithstanding Defendants’ claims to this Court, they

regularly claimed or implied that there was no effective treatment for LEMS.

b. News reports Ms. Allen’s report cites a November 2011 article as advising the market that there was an

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effective treatment for LEMS. But at her deposition, she acknowledged that Catalyst investors

would have no particular reason to be aware of the article because it was written at a time when

Catalyst had no connection with LEMS and is about another company . (Allen Tr. 18).

The Wall Street Journal, Associated Press, and Bloomberg BNA all reported on

Catalyst’s announcement, and all repeated Defendants’ claim that there was no effective

treatment for LEMS, with Associated Press claiming that the lack of an effective treatment for

LEMS was part of the “big picture” in investing in Catalyst. (Horne Dec. Ex. 6-8). At her

deposition, Ms. Allen admitted that her claim that the articles did not focus on the statement that

there was no effective treatment for LEMS that they quoted is simply that the claim does not

appear in the articles’ headlines. (Allen Tr. 58-59).

c. Analyst reports. Defendants state that Roth Capital Partners and Aegis Capital disclosed that 3,4-DAP

was an effective treatment for LEMS. But Roth’s article merely discloses that Jacobus was

conducting a Phase II trial, and Aegis’s merely discloses that 3,4-DAP and Firdapse are

bioequivalent. Allen ¶ 26. These are the statements the Court has already held did not alert the

markets. Sood, 2014 WL 1245271, at *7 n.6. Maxim, for its part, merely stated that

Amifampridine is available for LEMS treatment in the United States from “a few compounding

pharmacies” – not Jacobus – and never stated that 3,4-DAP was effective. Allen ¶ 26. And

though H.C. Wainwright’s is the only article that states that amifampridine compounding has

been cited as a competitive threat to Firdapse, albeit in the EU market, it added that

compounding may or may not be a threat in the U.S., did not disclose that Jacobus could

continue to offer 3,4-DAP, and did not claim that 3,4-DAP was effective .

Even if the H.C. Wainwright article could be taken to disclose that 3,4-DAP was

effective, if third party statements merely conflict, rather than unanimously correct the false

statements, courts usually hold that the curative statements have not been made with sufficient

intensity and credibility. See, e.g. , Flecker v. Hollywood Entm't Corp. , 1997 WL 269488, at *6

(D. Or. Feb. 12, 1997); In re Seagate Tech. II Sec. Litig. , 802 F. Supp. 271, 275 (N.D. Cal. 1992)

(contradictory analyst statements precludes establishment of truth-on-the-market defense). Here,

the entire burden of disclosing to the market the falsity of Catalyst’s claim, repeated by three

reputable news sources, that there was no effective treatment for LEMS, falls on the shoulders

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of an H.C. Wainwright report issued on August 29. Even if Defendants could in theory establish

that the H.C. Wainwright report was sufficient, they have not done so. All they have established

was that H.C Wainwright issued a report. This leaves many open questions. On intensity: Was

H.C Wainwright’s report available online? Starting at least June 2013, H.C. Wainwright’s

website has been under construction, and it is impossible to obtain analyst reports from it.2 How

else did investors obtain the report? Was it emailed? Emailed to H.C. Wainwright’s clients only?

Was it emailed to investors upon their request? Did H.C. Wainwright publicize the report?

And on credibility: Catalyst obviously knows more about its products and the markets for

them than H.C. Wainwright. It also has an obligation to speak truthfully in its SEC filings. And

the Wall Street Journal, Investors’ Business Daily, the Associated Press, and Bloomberg BNA,

obviously are highly reputable news sources. H.C. Wainwright is an obscure investment bank

without even a website. Is H.C. Wainwright’s reputation so stellar that its saying that there was

an effective treatment for LEMS was equivalent to all of these sources’ statement that there was

no effective treatment for LEMS? Kaplan v. Rose , 49 F.3d 1363, 1377 (9th Cir. 1994) (fact that

articles came from relatively obscure sources weighed against finding that truth was on the

market).

And notably, though Defendants cite many cases, they have not found a single case in

which a court held that the presumption of reliance was rebutted because the false information

was already incorporated into the stock price. Some are cases simply stating the standard that a

defendant may defeat the presumption by severing the link between the false statements and

investors’ losses. Findwhat Investor Grp. v. Findwhat.com , 658 F.3d 1282, 1310 (11th Cir.

2011) (noting that confirmatory information from the company not expected to have price

impact); Ganino v. Citizens Utilities Co. , 228 F.3d 154, 167 (2d Cir. 2000) (noting the truth-on-

the-market defense, but finding that the defendants had not established it); Basic, 485 U.S. at 248

(noting that the presumption of reliance may be rebutted). Others concern rebutting the

presumption of reliance by showing that the stock price did not increase contemporaneously with

the misrepresentation or fall with the corrective disclosures. Nathenson v. Zonagen Inc. , 267 F.3d

2 History of domain names http://hcwainwright.com and http://hcwco.com on the internet archive, www.archive.org , caches dated June 3, 2013 and June 5, 2013. Both http://hcwainwright.com and http://hcwco.com were also last visited August 18, 2014.

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400, 417 (5th Cir. 2001); Semerenko v. Cendant Corp. , 223 F.3d 165, 179 (3d Cir. 2000); Peil v.

Speiser, 806 F.2d 1154, 1162 (3d Cir. 1986); In re Moody's Corp. Sec. Litig. , 274 F.R.D. 480

(S.D.N.Y. 2011) (Defendants rebutted presumption of reliance because there was no statistically

significant price impact coinciding with any false statements, and the only negative statistically

significant price reactions were outside the class period or coincided with an announcement the

court had already held was not a corrective disclosure).3 Their inability to find a case supporting

their position speaks volumes.

d. The stock drop on October 18 shows that the Defendants’ misrepresentations had a price impact.

For three reasons, Defendants must show that the stock drop on October 18 did not result

from Defendants’ false statements. First , the cases Plaintiffs cited in their opening brief so hold.

Second, Defendants must show that the true facts were disclosed to the market with the same

intensity and clarity as their own false statements. That Catalyst’s stock price fell by 43% over

two days and never recovered when Mr. Feuerstein revealed that there was an effective treatment

for LEMS is compelling evidence that this fact was not conveyed to the market, if at all, with the

same intensity and clarity as Defendants’ claim that there was none. Indeed, Defendants’ own

brief, citing a recent Eleventh Circuit case, provides that “disclosure of confirmatory information

– or information already known by the market – will not cause a change in the stock price.”

Findwhat, 658 F.3d at 1310. Mr. Feuerstein’s article must thus have contained new information –

or at least information that had not been conveyed to the market with sufficient intensity and

clarity to counterbalance Defendants’ false statements. And third :

[A]t the class certification stage courts generally do not close a class period on the basis of one disclosure when a subsequent disclosure caused a significant drop in stock price. The reason is that such cases present factual issues as to whether early

3 Defendants do not cite it, but the Court’s previous decision in Andrx is distinguishable. There, on January 9, 2002, a defendant was quoted as saying that but for pending litigation, its drug would have been approved. The plaintiffs claimed the statement was false, because there were other reasons that the drug would not have been approved. Over the previous four months, Defendants themselves, and eleven separate articles published in reputable news sources had all claimed that there were many other reasons Defendants’ drug would not have been approved, with no contrary disclosures. In re Andrx Corp., Inc. , 296 F. Supp. 2d 1356, 1364 (S.D. Fla. 2003). Based on the uncontested showing that the defendants had adequately shown that these articles intensely and credibly communicated the truth, see id. at 1366 (noting that the plaintiffs had abandoned the claims in their complaint), this Court found that the defendants had established their truth-on-the-market defense.

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disclosures were fully or partially curative.

In re Mills Corp. Sec. Litig. , 257 F.R.D. 101, 106 (E.D. Va. 2009) (citing, among others, In re Scientific-Atlanta, Inc. Sec. Litig. , 571 F. Supp. 2d 1315, 1343 (N.D. Ga. 2007).

Defendants’ attempt to explain how the 43% October 18 stock drop is consistent with

their claim that the truth was on the market are incoherent. Defendants claim, as they must, that

Mr. Feuerstein’s article did not reveal to the market that 3,4-DAP was an effective treatment for

LEMS, since they claim that the market already knew it. Instead, Defendants blame the stock

price collapse on “market overreaction” and bad publicity, citing their expert. (Def. Opp. at 15;

Allen ¶ 62).

On bad publicity, both Defendants and their expert claim that the market learned no new

facts from Mr. Feuerstein’s article. (Allen ¶ 64). And despite the claims in her report, Ms. Allen

admits that she hasn’t analyzed whether bad publicity had an impact on Catalyst’s stock price.

(Allen Tr. 87). Indeed, beyond stating that Mr. Feuerstein’s article painted Catalyst as “villains”,

she could not explain what the bad publicity was, instead simply stating that the article’s “tone”

was negative. (Allen Tr. 68, 70). Nor could she explain why Mr. Feuerstein’s repeating facts the

market already knew and then adding that he disapproved could possibly drive down the stock

price:

Q: So I just marked Exhibit 27 and, with your pen, please underline the new information in the Adam Feuerstein article that caused the stock price to decline.

A: [...] And so I don’t believe there is any actual new information about Catalyst’s business other than that there’s a, you know, a guy writing an article who people portray as a short seller trying to drive down the stock and paint the company as being evil and profiting. So they are claiming the company is going to profit, which for shareholders is obviously not necessarily a bad thing, but painting the company as a villain is negative publicity. (Allen Tr. 65-66). On market overreaction, Defendants’ expert admits that though she claimed that “market

commentary further indicates that the stock price was an overreaction”, she never attempted to

determine whether the stock drop was an overreaction. (Allen Tr. 81). As Ms. Allen testified,

there are accepted quantitative tests to determine if a stock price overreacted to news, which

generally test to see whether the stock price rebounded. She never ran them and, indeed, the

stock price had not rebounded by the end of 2013. (Allen Tr. 80; Horne Dec. Ex. 9). Ms. Allen

testified that an overreaction over old news is not consistent with the efficient market and that it

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is, in fact, evidence that the stock does not trade on an efficient market. (Allen Tr. 71-72; 75; 77-

78). The claim that the stock price overreacted might feature in an argument that Catalyst’s stock

price does not trade on an efficient market; but it doesn’t lend any weight to rebutting the

presumption. And an “overreaction” necessarily implies a “reaction”; Defendants’ argument

goes to damages, but not to whether there was a price reaction.

V. Conclusion

Defendants concede that the class is entitled to a presumption of reliance, and have not

met their burden to rebut it. The motion for class certification should be granted.

Dated: August 18, 2014 Respectfully submitted,

THE ROSEN LAW FIRM, P.A.

/s/ Laurence M. Rosen Laurence M. Rosen, Esq, Fla. Bar # 0182877 275 Madison Avenue, 34th Floor New York, NY 10016 Phone: (212) 686-1060 Fax: (212) 202-3827

Counsel for Plaintiff

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CERTIFICATE OF SERVICE

I hereby certify that on August 18, 2014, I electronically filed the foregoing document

with the Clerk of the Court using CM/ECF, which sent notification of such filing to all counsel

of record.

/s/ Laurence M. Rosen

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