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. Addressing the pleading requirements for the elements of falsity and materiality in fraud claims under Section 10(b) of the Securities Exchange Act, the Ninth Circuit’s decision 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. The MASCT System is a pump designed to extract nipple aspirate fluid (“NAF”) from women’s breasts. The ForeCYTE Test is a laboratory test Atossa used to inspect the NAF samples for cancer indications. The complaint drafted by Pomerantz 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, 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. As a result, Atossa’s share price plummeted by more than 46%.
Reversing the district court’s dismissal, the Ninth Circuit held that Pomerantz’ complaint adequately alleges that the CEO’s statements that the ForeCYTE Test was FDA-cleared were materially misleading. His statements directly contradicted the true status of the ForeCYTE Test as neve r having been approved by the FDA and the lack of FDA approval would be material to investors because the test was Atossa’s main source of revenue. Asserting what is commonly referred to as the “truth-on-the-market” defense, Defendants argued that the statements were not materially misleading because the company 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 this argument, finding that 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.”