Attorney: Michael J. Wernke
Pomerantz Monitor September/October 2017
In a decision issued by the Ninth Circuit on August 18, 2017, Pomerantz scored a major victory for investors in the securities class action against Atossa Genetics, Inc. This is the latest in a series of cases concerning drug companies’ failure to disclose accurately the regulatory approval status of their products. In Atossa, the company represented that two of its cancer screening tests, which were its main source of revenue, had been approved by the FDA, but, in fact, neither had been approved. When the truth finally came out, Atossa’s share price plummeted by more than 46%.
The Ninth Circuit held that the complaint pleaded facts establishing that the company’s statements were materially misleading, in violation of Section 10(b) of the Securities Exchange Act, and reversed the district court’s dismissal of the claims Pomerantz brought on behalf of investors.
Atossa develops and markets products used to detect pre-cancerous conditions that foreshadow the development of breast cancer. At issue in the case are Atossa’s statements concerning FDA clearance of its MASCT System and ForeCYTE Test, which it marketed as being able to detect breast cancer. Our complaint alleges that Atossa’s CEO misled investors by repeatedly stating that the MASCT System and ForeCYTE Test had been approved by the FDA for cancer screening. In truth, the ForeCYTE Test had never been approved. While the MASCT System had been FDA-cleared as a collection device for tissue samples, Atossa was marketing it as part of the cancer screening test. Moreover, Atossa had materially altered the MASCT System but never sought the required updated FDA clearance. Defendants also misled investors by concealing an FDA Warning Letter that demanded that the company cease marketing the ForeCYTE Test as FDA-cleared. Investors were injured when, on October 4, 2013, Atossa publicly disclosed that the FDA demanded that it recall the MASCT System and ForeCYTE Test, admitting that the ForeCYTE Test has not been cleared or approved by the FDA for any purpose and that the MASCT System had never been approved for cancer screening.
Reversing the district court’s dismissal, the Ninth Circuit held that Pomerantz’s complaint adequately alleges that the CEO’s statements that the ForeCYTE Test was “FDAcleared” were materially misleading because they misrepresented the true status of the test. It had never been approved by the FDA, which was material to investors because the test was Atossa’s main source of revenue. Defendants asserted that the company had disclosed in prior SEC filings that the ForeCYTE Test was a type of diagnostic test that did not require FDA clearance, but likely would require such clearance in the near future. The court rejected the argument that this constituted adequate disclosure, because the prior statements did not contradict the CEO’s assertions of FDA approval but, rather, highlighted why his statements were misleading. “That the FDA did not require clearance at the time of the IPO, does not indicate that the ForeCYTE test was not cleared. … If the FDA was likely to start requiring clearance, then surely a reasonable investor would care whether Atossa’s test was FDA-cleared.”
The court also found materially misleading Atossa’s SEC filing that purported to provide notice of the FDA Warning Letter that the company received. While the notice stated that the company received a Warning Letter and identified the FDA’s concerns regarding the modifications to the MASCT System that required a new clearance application, it left out the FDA’s concerns about the ForeCYTE Test lacking FDA clearance. The court rejected defendants’ argument that the notice was not misleading because it stated that the Warning Letter identified “other matters” and that until they were resolved Atossa may be subject to additional regulatory action. For cautionary language to cure an otherwise misleading statement, it must be a forward-looking statement and must be specific enough such that “reasonable minds could not disagree that the challenged statements were not misleading.” The court found that the misleading part of the notice concerned past facts concerning FDA clearance and the FDA’s findings, and the cautionary language was insufficient because it was “vague enough to cover any concern the FDA might have related to Atossa.”
The Ninth Circuit remanded the case to the district court for further proceedings consistent with the court’s decision.
Attorneys Marc I. Gross and Michael J. Wernke were involved in the appeal.