The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.
A group of investors bring this action for common law fraud in connection with the purchase and holding of Enzo Biochem, Inc. ("Enzo") securities, against the corporation, certain of its officers and directors (collectively, the "Enzo defendants") and one outside consultant. Enzo has been a public company since 1970, engaged in the research and development of treatments to fight the human immunodeficiency virus ("HIV") and other diseases.*fn1 The gravamen of the consolidated complaints is that defendants conspired to fraudulently inflate the price of Enzo stock through a series of misrepresentations and omissions about the speed of development and effectiveness of Enzo's medical treatments in order to sell their shares in the company at artificially inflated prices. Plaintiffs allege that they suffered financial losses by relying on defendants' misstatements and omissions when deciding to purchase and hold an unspecified amount of Enzo stock and options. This Court has diversity jurisdiction over this matter pursuant to section 1332 of Title 28 of the United States Code. Venue is proper in this district pursuant to section 1391(a) of Title 28 of the United States Code.
Defendants now move to dismiss this suit on the ground that it is time barred, or, in the alternative, that it fails to satisfy Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. Defendants argue that plaintiffs have failed to plead fraud with the requisite particularity and have failed to plead loss causation, reliance and the purchase or sale of a security. For the following reasons, defendants' motion to dismiss is granted with leave to replead as to all plaintiffs, except those whose claims are time-barred.
A. Overview of the Conspiracy
Beginning in 1998, defendants entered into a "pump and dump" scheme in which insiders first fraudulently inflated the price of Enzo stock through a series of misrepresentations and omissions and then sold their stock at artificially inflated prices. The false disclosures and omissions related to: (1) Enzo's patent estate; (2) the progress of its HIV pre-clinical and clinical trials; (3) the efficacy of its gene therapy; and (4) the timing of a major transaction with a pharmaceutical company.*fn3 The misrepresentations were made at an annual shareholders meeting in January 2000, in press releases and in news articles, and according to the Hunt but not the Roberts Complaint, through dissemination of insider information to stockbrokers, analysts and shareholders.
By April 1999, defendants were concealing that Enzo's Phase I trial of its HIV therapy was not going well.*fn4 In the first quarter of 2000, defendants fraudulently represented that the Phase I trials were successful so as to permit the Phase II trials to begin and to allow Enzo to open clinics to treat HIV positive and acquired immunodeficiency syndrome ("AIDS") patients in April 2000.*fn5 These misrepresentations artificially inflated Enzo's stock, causing some of the individual defendants to sell large amounts of stock in March of 2000. Soon thereafter, Enzo's stock price collapsed, at which point defendants began to again engage in misrepresentation and omission to boost the stock price.
By the end of the first quarter of 2001, Enzo's stock price had returned to the price level it had traded at over the prior two decades. The fall in price occurred because the market discovered defendants' exaggerations and omissions when Enzo's promises of medical and commercial success failed to materialize. The company had also disclosed data in March of 2001 indicating that the treatments whose efficacy defendants had touted had no therapeutic power. Plaintiffs do not specify the dates and amounts of Enzo securities (stocks and options) they purchased and held, but simply state that they each bought and held Enzo securities from 1998 to 2003 collectively.*fn6 Plaintiffs made "all" of their decisions to purchase and hold Enzo securities in reliance on the defendants' "representations" as described in the complaints.*fn7
B. Misrepresentations to Brokers
As part of defendants' scheme to artificially boost the price of Enzo stock, at unspecified dates in 1999, defendants Barry Weiner and Heiman Gross disseminated non-public information concerning Enzo's prospects to various brokers, including George Somkin, Bob Berlin, Phil Sloan, and Doug Yates, with the intent that they pass on such information to their clients thereby generating demand for the company's stock.*fn8 Yates relayed such information to broker Ed Stephen, who was in "constant communication" with plaintiffs Hunt, McMahon and Cavanagh, telling them that he had received inside information - most of which was ultimately false - from defendants Gross, Weiner, Elazar and Shahram*fn9 Rabbani ("Rabbanis") or Dean Engelhardt concerning "major material events" that were likely to result in a rise in Enzo's stock price if and when they occurred.*fn10 As part of the conspiracy to disseminate false information to pump the stock price, Keating, a paid consultant to Enzo, told plaintiffs that when Enzo announced its successful treatment for AIDS, its stock would trade at over $5,000 a share.*fn11
Defendants did not limit their dissemination of insider information to brokers. For example, in 1999, Gross told Robert Jernigan, an investment advisor, that a major diagnostic deal with a European company was expected to occur shortly.*fn12 Gross also made numerous misstatements to Jernigan as to the great successes of Enzo's gene therapy, HIV treatment, and Phase I trials.*fn13 Defendants provided false revenue estimates to an analyst from Brenner Securities who relied upon such bogus financials to project that Enzo stock would hit $111 per share sometime in mid-2000.*fn14
C. The January 2000 Shareholders' Meeting
Numerous misrepresentations were made at the annual shareholders' meeting in January 2000 that were largely responsible for the rise in Enzo stock from $44 to $133 within two weeks of the meeting.*fn15 At that meeting, Weiner and Engelhardt, Enzo's president and executive vice president, respectively, made several deliberate misstatements concerning Enzo's progress in developing a new HIV treatment and gene therapy. Engelhardt's misrepresentations were: (1) "It's all over, but the shouting," commenting on the progress of the Phase I trial;*fn16 (2) "it works, they both work" in reference to Enzo's gene therapy treatments for HIV and Hepatitis B;*fn17 and (3) that Enzo's treatment kills the AIDS virus.*fn18 In fact, the Phase I trial was "woefully behind" schedule.*fn19 It was not successful because there was no increase in patients' T-cell counts or decrease in the viral load which are the "standard [Food and Drug Administration's ("FDA")] markers of efficacy" for this type of treatment.*fn20
At the same shareholders' meeting, Weiner made the following misrepresentations: (1) that Enzo's Phase I clinical trial was proceeding satisfactorily and on schedule;*fn21 (2) that Enzo would open three clinics to treat HIV and AIDS patients by the end of 2000 and that Enzo could treat 9,500 patients per clinic at a charge of $30,000 per patient but failed to disclose that Enzo needed to have FDA approval - which Enzo had not even sought;*fn22 (3) that Enzo had submitted Phase I data to the FDA and was awaiting approval of Phase II even though it had no such data as it had only treated one patient and the results were not positive;*fn23 (4) that HGTV-43, a component of Enzo's new gene therapy, which delivered genes to certain cells to enhance immune responses in a process called transduction, had reduced successful transduction from a period of up to three months to eighteen hours;*fn24 (5) that Enzo had made a technical breakthrough because HGTV-43 achieved levels of stable transduction to patients' non-growing blood stem cells greater than thirty percent;*fn25 and (6) that the HGTV vector was ready for commercialization.*fn26 Weiner failed to mention that the absence of any positive test results had caused Enzo to modify its transduction process, that the new eighteen hour transduction process had negative results, and that this had delayed the development of Enzo's clinical trials.*fn27
Defendants repeated some of the same misrepresentations concerning the efficacy of the Enzo therapies to the press. In a January 20, 2000 Business Week article, Weiner was quoted as saying that the clinical trials have produced "[i]mpressive positive results."*fn28 A February 16, 2000 Dow Jones News Service article quoted Weiner as stating, "[w]e can stop the virus cold" and quoted Engelhardt as saying that Enzo's treatment "makes the virus disappear."*fn29
D. Defendants Sell Their Shares in Enzo
Within a few months after the January shareholder meeting, Enzo officers and directors sold large amounts of stock. John DeLucca sold all the Enzo shares that he owned for approximately two million dollars.*fn30 Weiner and the Rabbanis collectively transferred or sold 600,000 shares of Enzo stock on March 28, 2000, which had a market value of over forty-eight million dollars.*fn31 Engelhardt sold approximately $350,000 of shares in March of 2000.*fn32
Within two weeks of the March 28 sales, the value of Enzo stock dropped from $81 to $35 per share.*fn33 Enzo's failure to announce that it had achieved a cure for AIDS at a conference in early 2000, or to make good on its prior representations that it would begin Phase II trials and open new clinics by April 2000 "undoubtedly cast doubt in the market" as to the truth of the statements made at the January 2000 shareholder meeting.*fn34 While sophisticated investors began to realize that Enzo had overstated the efficacy of its cures, plaintiffs were not aware that defendants had intentionally perpetrated a classic pump and dump scheme.*fn35
E. Defendants' Second Pump
After the price of Enzo stock fell to $35, defendants once again attempted to artificially pump the price back up through a series of misrepresentations. Enzo issued a press release, dated April 13, 2000, claiming that overall the company was in good shape, well-positioned in the market and that its clinical trials were producing promising results.*fn36 The press release stated that the drop in Enzo's stock price could not be explained as an accurate reflection of any infirmity on Enzo's part but was merely a mirroring of the general loss in value that befell the entire biotech industry at the time.*fn37 Defendants knew these statements were false because the clinical trials were not going well, nor were they on schedule, and the HIV trials were producing unfavorable results.*fn38 The April 13 press release also claimed that Enzo had two hundred patents worldwide, when in reality Enzo only had thirty-six patents, the remainder being the same patents issued in other countries.*fn39
Once again, Weiner and Gross provided brokers with deliberately misleading information about Enzo that defendants knew would be disseminated to the brokers' clients - some of whom were contacted directly.*fn40 These misrepresentations included: (1) an announcement that Enzo had found a cure for liver cancer; (2) a "blockbuster news" announcement at an AIDS conference in June 2000; (3) a "major announcement" about its HIV therapy; (4) a planned secondary offering in the summer of 2000 with an offering price of $250 per share; (5) announcing a large joint venture with Hoffman LaRoche; and (6) that a Texas billionaire would underwrite the entire cost of human testing in return for Enzo's treatment of his daughter who suffered from AIDS.*fn41
A press release dated October 2, 2000 stated that the "new data on the first individual treated in the Phase I clinical trial of HGTV-43, the company's HIV-1 gene medicine product, show that after nine-and-one-half-months Enzo engineered cells have successfully engrafted in the patient's bone marrow and were spawning new differentiated CD4 cells designed to fight the virus."*fn42 However, the engraftment had actually failed and Enzo's treatment had not met any of the recognized clinical markers of an effective HIV treatment - namely increased T-cell count and lower viral loads. The clinical data revealing that the engraftment had actually failed "was exposed to the public" at a meeting of the Recombinant DNA Advisory Committee (the "RAC meeting") of the National Institutes of Health on March 8, 2001.*fn43 At the RAC meeting, Enzo reported that no clinical patient's T-cell counts had improved and that the viral loads of several patients had increased.*fn44 Plaintiffs do not allege that the disclosure of this data caused a drop in Enzo's stock price.
F. Defendants' Misrepresentations Became Known
In June of 2001, pursuant to the Freedom of Information Act ("FOIA"), plaintiffs received the informed consent forms that Enzo gave to potential participants in its HIV clinical trials.*fn45 That consent form indicated that those who had high viral loads or low T-cell counts were excluded from participating in the study, which revealed the falsity of earlier press releases claiming that Enzo had begun to treat patients with AIDS.*fn46 More importantly, "Enzo's claims in the press releases that its treatment was effective were contradicted in its admission in the informed consent form that there was no anticipated therapeutic benefit."*fn47
Through 2000 and 2001, when Enzo failed to announce that it was in Phase II testing, that it had opened clinics, or that it had found any cures, the price of Enzo stock continued to drift lower "as sophisticated investors recognized that Enzo's claims were either outright false or hyped . . . . By the first quarter of 2001, Enzo stock was trading approximately where it had traded for the past two decades, as the market digested and corrected for the hype."'*fn48
G. The Prior Suit Against Enzo
Michael J. Rovell, one of plaintiffs' attorneys in this action, filed suit on March 6, 2002 against Enzo and several of the individual defendants named here in the United States District Court for the Eastern District of Virginia (the "Glaser action" or "Glaser Complaint").*fn49 After the trial court granted defendants' motion to dismiss the Glaser Complaint in its entirety, the Fourth Circuit affirmed in part, but found that the Glaser Complaint sufficiently pled that defendants had made several misrepresentations and remanded for further proceedings.*fn50 On remand, the trial court granted defendants' renewed motion to dismiss: (1) as to certain individual defendants because they did not make any of the alleged misrepresentations that the Fourth Circuit found to be actionable; and (2) as to all defendants because plaintiffs failed to adequately plead loss causation under the Supreme Court's decision in Dura Pharmaceuticals v. Broudo ("Dura"),*fn51 by failing to allege that Enzo's stock price fell after the truth was disclosed.*fn52 The Fourth Circuit affirmed the dismissal in all respects on September 21, 2006, after the briefing on this motion to dismiss was completed.*fn53