(Reuters) - On Monday, after eight days of trial and nearly four days of deliberation, a federal jury in Santa Ana, California found the pharmaceutical company Puma Biotechnology and its CEO, Alan Auerbach, liable for securities fraud for a statement Auerbach made on a call with stock analysts in July 2014. The jury said Auerbach knowingly misrepresented clinical trial results on the disease-free survival rate of breast cancer patients treated with the drug neratinib, which is intended to prevent recurrences in patients who have already received chemotherapy. Puma’s share price, according to jurors, was inflated by $4.50 per share as a result of the fraud.
That is the factual outcome of this rare securities class action trial, only the 15th shareholder fraud class action to be tried to a verdict since the passage of the Private Securities Litigation Reform Act in 1995. Interpreting the outcome isn’t nearly as simple as stating it, however. Yes, investors won a liability verdict and a damages award. But the jury, as I’ll explain, let Puma off the hook for three other alleged misstatements – and jurors tagged Puma with responsibility for only a small fraction of the billion-dollar loss in its share price when the market absorbed bad news about its neratinib product, known as Nerlynx.
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The verdict somehow left room for both the lead plaintiff and Puma to claim victory in statements issued after the trial concluded.
How can that be? Let’s look first at the press release from Robbins Geller Rudman & Dowd, which represented the lead plaintiff, Britain’s Norfolk Pension Fund. Robbins Geller, as you would expect, highlighted the jury’s finding that Puma was liable for knowingly deceiving the market in that fateful 2014 analysts’ call. “Any day we can hold bad actors responsible for investor losses is a good day,” Robbins founder Patrick Coughlin said in the release, which said the jury’s verdict could be worth as much as $100 million. “It’s hard to overstate the significance of this verdict because it confirms that jurors and investors alike demand integrity from corporations and their executives,” said Robbins partner Jason Forge, who tried the case with Coughlin.
In a followup interview Tuesday, Forge told me that the key to the case was testimony by Auerbach, the founder and CEO of Puma. Auerbach’s testimony spanned three days of trial, during which he was grilled about all four of the contested statements he made during that fateful call with analysts in 2014, after Puma had received the results of crucial clinical tests on its sole product - a neratinib drug developed by Pfizer and licensed to Puma – but before the results were released publicly. (The alleged misstatements involved the drug’s so-called disease-free survival rate, the number of patients who experienced extreme diarrhea as a side effect, the study’s discontinuation rate and the difference in a long-term survival rate metric between patients on the drug and those who took a placebo.)
But the most dramatic part of the CEO’s testimony, according to Forge, came when his partner Coughlin questioned Auerbach about an email Puma sent to a lawyer for underwriters of a $218 million public stock offering in 2015. The email purported to be minutes of a meeting between Puma and the Food and Drug Administration about approval of Puma’s neratinib product. But Robbins Geller lawyers had discovered that the minutes Puma sent to its underwriters’ lawyer did not match the FDA’s version of the meeting minutes.
Coughlin pressed Auerbach to explain the discrepancy in light of metadata indicating that he created the version sent to the underwriters’ lawyer, which, according to Robbins Geller, omitted key information about clinical trial results. The CEO first said he had no recollection of creating or altering the document nor of ordering anyone on his team to do so. Then he said that someone on his team might have made a mistake. He elaborated that Puma’s practice is to prepare internal notes on FDA meetings and that the version sent to the underwriters’ lawyer stripped out information about clinical trials because the FDA turned out not to want to discuss that data at the meeting. At closing arguments, Coughlin told jurors that Auerbach’s shifting explanations for the altered version of the FDA minutes “spoke volumes about the deception here, and you watched it actually occur in the courtroom before your eyes.”
“If they had believed him,” Forge said, “the case would have been over. They would have run us out of Orange County on a rail.” Instead, Forge told me, Auerbach’s testimony, as well as the jury’s determination that the company committed securities fraud, may end up attracting attention from government investigators, especially because the trial made public documents that Puma wanted to keep under seal. “This is a field day for a prosecutor,” Forge said.
That’s the view of one side. Now let’s hear the other side’s story of the trial and the verdict.
Puma’s post-trial press release, titled “Puma Biotechnology Announces Litigation Victory,” touted the company’s exoneration on three of the four alleged misstatements. Shareholders had claimed the company’s deception led to two separate plunges in its share price when the market received corrective disclosures; as Puma pointed out in its press release, jurors said Puma bore no responsibility at all for one of those slides. And for the other, the press release said, “jurors found liability such that (shareholders) may recover no more than $4.50 per share, which represents approximately 5 percent or less of the claimed damages.” Puma CEO Auerbach said, “We are extremely pleased with the jury verdict.”
What about those allegations that Auerbach was responsible for altering FDA minutes he sent to his underwriters’ lawyer? After Coughlin spotlighted that accusation in his closing argument to jurors, Puma co-lead counsel Andrew Clubok of Latham & Watkins called the FDA meeting minutes a “sideshow” with a perfectly legitimate explanation. For one thing, he said, the entire line of questioning had nothing to do with the securities fraud case because the class action did not allege fraud in the 2015 stock offering and no underwriter claimed Puma did anything wrong.
Clubok argued that Puma wasn’t hiding anything from anyone – the company, after all, sent its clinical trial data to the FDA “because they were so proud of it.” The FDA, according to Clubok, didn’t want to discuss the clinical data and only wanted to hear from Puma about the length of a study on rats treated with the drug. Puma’s internal minutes of the meeting reflected that the clinical data wasn’t discussed, Clubok said, but the FDA’s official meeting minutes mistakenly said it was. Somehow, Clubok told jurors, Auerbach ended up sending his underwriters’ lawyer minutes that showed what actually happened at the FDA meeting.
“He realizes he stupidly sent the wrong version,” Clubok told jurors. “He regrets not double-checking it before it was sent. But the fact of the matter is none of that goes to any investors.”
During the trial, Puma tried to show that the lead plaintiff, the Norfolk fund, wasn’t deceived by any of Auerbach’s statements to investors. Norfolk’s investment manager, Alex Younger, testified that as Norfolk’s investment advisor, the U.K. fund manager Capital International decided to buy Puma shares. In a deposition, the Capital research analyst who recommended Puma said she had known Puma CEO Auerbach for years and did not believe he ever misled or defrauded her.
Jurors largely agreed, as Puma and its lawyers tell the story. Clubok co-lead counsel Michele Johnson of Latham said in an email statement that the jury verdict reflects the safety and effectiveness of neratinib as a last hope for breast cancer patients “who have otherwise run out of treatment options.” (The FDA approved Puma’s product in July 2017.) Clubok said the jury verdict, in combination with a pre-trial summary judgment ruling for the company on claims stemming from a press release announcing a 33 percent improvement in the disease-free survival rate for patients who took the drug, amount to “an almost complete exoneration.”
Clubok also said Robbins Geller’s estimation of up to $100 million in potential damages is “wildly inflated and misleading, which is particularly troubling given the accusations they have made in this case regarding public statements.” Total damages will depend on both the number of shares traded in the class period and the claims rate by absent class members. By one estimate, the number could be as little as $10 million or $20 million.
I’ll give the last word to Forge of Robbins Geller, since the docket entry on the jury verdict, after all, says, “Jury finds: In favor of plaintiff(s).” When I told Forge about Puma’s press release, he was quite surprised. “They’re celebrating a finding that they committed securities fraud?” he said. “I don’t know what’s more damning – the jury finding or their celebration. It’s hard to imagine less humility.”
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