Attorney: Jennifer Banner Sobers
Pomerantz Monitor September/October 2015
In August, Pomerantz won an important victory for investors against Galena Biopharma, certain of its officers and directors, and others when the district court of Oregon largely rejected defendants’ motion to dismiss the action.
The complaint alleges that defendants manipulated the market price of Galena stock when Galena hired Dream-Team, a promotional consulting company, to publish bullish articles to inflate Galena’s stock. According to the complaint, DreamTeam published articles on websites touting Galena and falsely claiming that the articles were written by established, credible investment professionals, whereas in fact the articles were paid promotions using a variety of aliases for the “authors”. Investors reading the many varied web and social media positive postings about Galena could conceivably be convinced that they should invest in the company. While Galena stock was being pumped up, Galena’s officers dumped large amounts of company stock, reaping enormous profits. In short, this was a classic “pump and dump” scheme.
Defendants’ motion to dismiss relied primarily on the argument that under a recent Supreme Court case, Janus Cap. Grp. Inc. v. First Derivative Traders, only the “maker” of a statement can be held liable for alleged misrepresentations and omissions in violation of the securities laws. Here, they claimed, only the individual authors of the articles hired by the third party stock promoters were “makers” of these statements In response, we argued that, under Janus, the maker of a statement is not just the person identified as the author, but the person or entity with ultimate authority over the content and communication of the statement. Since Galena officers had final authority over the articles and had to approve the content before they were published, Galena and its officers were the “makers” of the allegedly false statements.
The District Court agreed with us and refused to extend the holding of Janus to say that only the individual authors were “makers” of the statements. The Court noted that if it were to consider the individual authors as the makers of those statements, then companies could avoid liability under the securities laws by paying third parties to write and publish false or misleading statements about the company, even when the company retains final decision making authority over content.
Defendants also argued that the articles were written by and attributed to the individual authors, and under Janus, the attribution within the articles serves to prove that the authors are the “makers” of the statements. The District Court did not agree. The Supreme Court in Janus noted that in the “ordinary case” attribution within a statement is strong evidence that the statement was made by the party to whom it is attributed. However, the District Court found that this case is not ordinary and attributions under false aliases like “Kingmaker” and “Wonderful Wizard” are meaningless, as no reasonable reader would believe that the statements were made by people with those names. Moreover, the purported biographies associated with the author aliases were allegedly false. Thus, the District Court found that the attribution was not strong evidence that the false aliases were the “makers” of statements contained in the articles.
However, the District Court did hold that Galena, as the only party that had ultimate authority over the published articles, was the maker of these statements, and not also the DreamTeam as we argued. The Court noted that the lesson of Janus is that where legally distinct entities are involved, only one entity has the final say in what, if anything, is published.
Defendants’ motion to dismiss also invoked the so-called “truth on the market defense,” arguing that defendants’ alleged misstatements could not have been material because corrective information was already disclosed to the market. This “corrective” information was supposedly revealed by an obscure website, which disclosed that one of the stock promoters touting the company was receiving compensation from Galena.
The District Court rejected that argument, holding that it is not reasonable for investors to have to research every stock promotion-related website to make sure that each company recommended by purportedly independent analysts and investors has not hired a promotional firm to engage in secret stock promotions. Moreover, as alleged in the complaint, further evidence that the paid promotional campaign was not already incorporated into Galena’s stock price was that after articles revealing the fraudulent scheme were published, the company’s stock price dropped significantly. Defendants in securities cases often attempt to rebut materiality allegations by showing that corrective information was published on some obscure website or in an article that is not widely circulated. Thus, the District Court’s finding on this point is an important victory for investors.