Counsel for Plaintiffs and Proposed Lead Class Counsel · 21-09-2016 · Beverly Hills, CA 90210...

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

PLAINTIFFS’ OPPOSITION TO DEFENDANT SHKRELI’S MOTION TO DISMISS THE FIRST CONSOLIDATED AMENDED COMPLAINT (DKT. 61) AND HIS REQUEST FOR JUDICIAL

NOTICE (DKT. 61-3) IN CASE NO. 5:15-cv-05841-EJD

Jennifer Pafiti (SBN 282790)

POMERANTZ LLP

468 North Camden Drive

Beverly Hills, CA 90210

Telephone: (818) 532-6449

Email: [email protected]

Marc I. Gross

Jeremy A. Lieberman

Matthew L. Tuccillo

J. Alexander Hood II

POMERANTZ LLP

600 Third Avenue, 20th Floor

New York, New York 10016

Telephone: (212) 661-1100

Facsimile: (212) 661-8665


[email protected]

[email protected]

[email protected]

Counsel for Plaintiffs and Proposed Lead Class Counsel

[Additional Counsel Listed On Signature Page]

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

IN RE KALOBIOS

PHARMACEUTICALS, INC.

SECURITIES LITIGATION

________________________________

THIS DOCUMENT RELATES TO ALL

ACTIONS

Case No. 5:15-cv-05841-EJD

PLAINTIFFS’ OPPOSITION TO

DEFENDANT SHKRELI’S MOTION TO

DISMISS THE FIRST CONSOLIDATED

AMENDED COMPLAINT (DKT. 61) AND

HIS REQUEST FOR JUDICIAL NOTICE

(DKT. 61-3)

Date: February 2, 2017

Time: 9:00 a.m.

Place: Courtroom 4, 5th Floor

Judge: Hon. Edward J. Davila

Complaint filed: July 14, 2016

Case 5:15-cv-05841-EJD Document 65 Filed 09/21/16 of 35

mailto:[email protected]



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


NOTICE (DKT. 61-3) IN CASE NO. 5:15-cv-05841-EJD i

TABLE OF CONTENTS

Page

INTRODUCTION .................................................................................................................................. 1

STATEMENT OF THE ISSUES TO BE DECIDED............................................................................. 3

STATEMENT OF RELEVANT FACTS ............................................................................................... 4

I. KALOBIOS’S STOCK CRATERED AS IT NEARED BANKRUPTCY .................... 4

II. SHKRELI BEGAN A PUMP-AND-DUMP SCHEME AT KALOBIOS ..................... 5

III. SHKRELI QUICKLY TOOK CONTROL OF KALOBIOS ......................................... 6

IV. SHKRELI’S FALSE AND MISLEADING CLASS PERIOD

MISSTATEMENTS ....................................................................................................... 6

A. That Shkreli’s Work At MSMB And Retrophin Qualified Him To

Lead KaloBios .................................................................................................... 7

B. That Shkreli’s MSMB And Retrophin Cronies Were Fit To Help

Lead KaloBios .................................................................................................... 7

C. That Shkreli Was Credible, Trustworthy, And Working For

KaloBios Investors .............................................................................................. 8

D. That Shkreli Was Delivering Necessary Funding And Financing

To KaloBios ........................................................................................................ 8

E. That KaloBios Was Continuing Operations And Growing Under

His Leadership .................................................................................................... 9

F. That KaloBios’s Drug Candidates Were Advancing Under His

Leadership ........................................................................................................... 9

G. That Shkreli Was Leading KaloBios In Potential Acquisitions ....................... 10

V. SHKRELI’S MISSTATEMENTS INFLATED KALOBIOS’S STOCK

PRICE ........................................................................................................................... 10

VI. THE EXTENSIVE, UNDISCLOSED MISCONDUCT OF SHKRELI

AND HIS CRONIES .................................................................................................... 11

VII. SHKRELI’S ARREST DECIMATED KALOBIOS’S STOCK .................................. 13


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


NOTICE (DKT. 61-3) IN CASE NO. 5:15-cv-05841-EJD ii

ARGUMENT ........................................................................................................................................ 14

I. APPLICABLE LEGAL STANDARDS ....................................................................... 14

II. THE REQUEST FOR JUDICIAL NOTICE SHOULD BE DENIED IN

PART ............................................................................................................................ 16

III. SHKRELI HAS NOT REBUTTED THE FRAUD-ON-THE-MARKET

PRESUMPTION OF RELIANCE ................................................................................ 16

IV. PLAINTIFFS ADEQUATELY PLED FALSITY ....................................................... 21

A. The FAC Alleges False Statements .................................................................. 21

B. The FAC Alleges That Shkreli Had A Duty To Disclose ................................. 22

C. Shkreli’s Statements Were Not Inactionable Puffery Or Optimism ................. 23

D. Shkreli’s Statements Are Ineligible For The PSLRA Safe Harbor................... 24

E. Shkreli’s “Bootstrap” Argument Fails .............................................................. 25

V. THE §20(A) CLAIM SHOULD NOT BE DISMISSED .................................................... 25

CONCLUSION ..................................................................................................................................... 25


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


NOTICE (DKT. 61-3) IN CASE NO. 5:15-cv-05841-EJD iii

TABLE OF AUTHORITIES

Page(s)

Cases

Affiliated Ute Citizens of the State of Utah v. U.S.,

406 U.S. 128 (1972) .................................................................................................................... 2, 20

Allstate Ins. Co. v. Countrywide Fin. Corp.,

824 F. Supp. 2d (C.D. Cal. 2011) ................................................................................................... 21

Appling v. Wachovia Mortg., FSB,

745 F. Supp. 2d 961 (N.D. Cal. 2010) ............................................................................................ 16

Ashcroft v. Iqbal,

129 S. Ct. 1937 (2009) .................................................................................................................... 14

Avila v. Los Angeles Police Dept., No. 12-55931,

2014 WL 3361123 (9th Cir. Feb. 6, 2014) ..................................................................................... 15

Basic, Inc. v. Levinson,

485 U.S. 224 (1988) ........................................................................................................ 1, 15, 16, 17

Bell Atl. Corp. v. Twombly,

550 U.S. 544 (2007) ........................................................................................................................ 14

Berry v. Valence Tech., Inc.,

175 F.3d 699 (9th Cir. 1999) .......................................................................................................... 19

Berson v. Applied Signal Tech.,

527 F.3d 982 (9th Cir. 2008) ................................................................................................ 2, 22, 23

Brody v. Transitional Hosps. Corp.,

280 F.3d 997 (9th Cir. 2002) .................................................................................................... 22, 23

Centaur Classic Convertible Arbitrage Fund Ltd. v. Countrywide Fin. Corp.,

793 F. Supp. 2d 1138 (C.D. Cal. 2011) .......................................................................................... 21

Colin v. Onyx Acceptance Corp.,

31 Fed. App’x 359 (9th Cir. 2002) ................................................................................................. 25

Connecticut Ret. Plans & Trust Funds v. Amgen, Inc.,

660 F.3d 1170 (9th Cir. 2011) ............................................................................................ 15, 16, 17

Curry v. Hansen Med., Inc., No. 5:09-cv-05094-JF (HRL),

2011 WL 3741238 (N.D. Cal. Aug. 25, 2011) ......................................................................... 14, 25


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


NOTICE (DKT. 61-3) IN CASE NO. 5:15-cv-05841-EJD iv

Eminence Capital, LLC v. Aspeon, Inc.,

316 F.3d 1048 (9th Cir. 2003) ........................................................................................................ 25

Gerritsen v. Warner Bros. Entm’t, Inc.,

112 F. Supp. 3d 1011 (C.D. Cal. 2015) .......................................................................................... 16

Hanon v. Dataproducts Corp.,

976 F.2d 497 (9th Cir. 1992) .................................................................................. 17, 19, 22, 23, 24

Heliotrope Gen., Inc. v. Ford Motor Co.,

189 F.3d 971 (9th Cir. 1999) .................................................................................................... 16, 21

In re Am. Apparel, Inc. S’holder Litig.,

855 F. Supp. 2d 1043 (C.D. Cal. 2012) .......................................................................................... 16

In re Amgen Inc. Sec. Litig.,

544 F. Supp. 2d 1009 (C.D. Cal. 2008) .................................................................................... 17, 21

In re Apple Computer Sec. Litig.,

886 F.2d 1109 (9th Cir. 1989) ............................................................................................ 17, 19, 21

In re Cisco Sys., Inc. Sec. Litig., No. C 11-1568 SBA,

2013 WL 1402788 (N.D. Cal. Mar. 29, 2013) ................................................................................ 17

In re Countrywide Fin. Corp. Sec. Litig.,

588 F. Supp. 2d 1132 (C.D. Cal. 2008) .......................................................................................... 18

In re Cutera Sec. Litig.,

610 F.3d 1103 (9th Cir. 2010) ........................................................................................................ 24

In re Diamond Foods, Inc. Sec. Litig.,

295 F.R.D. 240 (N.D. Cal. 2013) .................................................................................................... 17

In re Gilead Scis. Sec. Litig.,

536 F.3d 1049 (9th Cir. 2008) ........................................................................................................ 23

In re Immune Response Sec. Litig.,

375 F. Supp. 2d 983 (S.D. Cal. 2005) ............................................................................................. 18

In re Iso Ray, Inc. Sec. Litig., No. CV-15-5046-LRS,

2016 WL 3129425 (E.D. Wash. June 1, 2006) ......................................................................... 17, 20

In re Rigel Pharm. Sec. Litig.,

697 F.3d 869 (9th Cir. 2012) .......................................................................................................... 23

In re Syntex Corp. Sec. Litig.,

95 F.3d 922 (9th Cir. 1996) ............................................................................................................ 14


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


NOTICE (DKT. 61-3) IN CASE NO. 5:15-cv-05841-EJD v

In re Thoratic Corp. Sec. Litig., No. C-04-03168 RMW,

2006 WL 1305226 (N.D. Cal. May 11, 2006) ................................................................................ 17

In re Yahoo! Inc. Sec. Litig.,

611 Fed. App’x 387 (9th Cir. 2015) ............................................................................................... 23

Kairalla v. Advanced Med. Optics, Inc., No. CV 07-05569 (SJO),

2008 WL 2879087 (June 6, 2008) .................................................................................................. 17

Kaplan v. Rose,

49 F.3d 1363 (9th Cir. 1995) .............................................................................................. 17, 18, 19

Larsen v. Trader Joe’s Co.,

917 F. Supp. 2d 1019 (N.D. Cal. 2013) .......................................................................................... 14

Lee v. City of Los Angeles,

250 F.3d 668 (9th Cir. 2001) .......................................................................................................... 16

Livid Holdings Ltd. v. Salomon Smith Barney, Inc.,

416 F.3d 940 (9th Cir. 2005) .......................................................................................................... 24

Matrixx Initiatives, Inc. v. Siracusano,

131 S. Ct. 1309 (2011) .............................................................................................................. 22, 23

McKay v. Ingleson,

558 F.3d 888 (9th Cir. 2009) .......................................................................................................... 15

Mulligan v. Impax Labs., Inc., No. C-13-1307 EMC,

2014 WL 1569246 (N.D. Cal. Apr. 18, 2014) ................................................................................ 15

Nathamson v. Polycom, Inc.,

87 F. Supp. 3d 966 (N.D. Cal. 2015) ........................................................................................ 23, 25

Nguyen v. Radient Pharms. Corp., No. SA CV 11-0406 DOC,

2011 WL 5041959 (C.D. Cal. Oct. 20, 2011) ..................................................................... 17, 18, 21

Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund,

135 S. Ct. 1318 (2015) ................................................................................................................ 3, 24

Oregon Pub. Emps. Ret. Fund v. Apollo Grp. Inc.,

774 F.3d 598 (9th Cir. 2014) .......................................................................................................... 14

Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc.,

759 F.3d 1051 (9th Cir. 2014) .................................................................................................. 14, 23

Provenz v. Miller

102 F.3d 1478 (1996) ...................................................................................................... 1, 17, 18, 19


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


NOTICE (DKT. 61-3) IN CASE NO. 5:15-cv-05841-EJD vi

Retail Wholesale & Dept. Store Union Local 338 Ret. Fund v. Hewlett-Packard Co.,

52 F. Supp. 3d 961 (N.D. Cal. 2014) .............................................................................................. 23

S.E.C. v. Mercury Interactive, LLC, No. 5:07-cv-02822-JF/PVT,

2010 WL 3790811 (N.D. Cal. Sept. 27, 2010) ............................................................................... 15

Santa Fe Indus., Inc. v. Green,

430 U.S. 462 (1977) ........................................................................................................................ 25

Scott v. ZST Dig. Networks, Inc., No. CV 11-03531 GAF,

2012 WL 538279 (C.D. Cal. Feb. 14, 2012)............................................................................. 17, 20

U.S. v. Corinthian Colls.,

655 F.3d 984 (9th Cir. 2011) .......................................................................................................... 16

Usher v. City of Los Angeles,

828 F.2d 556 (9th Cir. 1987) .......................................................................................................... 14

Zucco Partners, LLC v. Digimarc Corp.,

552 F.3d 981 (9th Cir. 2009) .......................................................................................................... 15

Statutes

15 U.S.C. §78j(b) [Exhange Act §10(b)] .................................................................................... 3, 15, 25

15 U.S.C. §78t(a) [Exchange Act §20(a)]......................................................................................... 3, 25

15 U.S.C. §78u-5(c)(1)(A) ................................................................................................................ 3, 24

Rules

17 C.F.R. 240.10b-5 [Rule 10b-5] ............................................................................................ 15, 17, 23

Fed. R. Civ. P. 12(b)(6)................................................................................................................... 14, 16

Fed. R. Civ. P. 12(d) ............................................................................................................................. 16

Fed. R. Civ. P. 56 .................................................................................................................................. 16


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


NOTICE (DKT. 61-3) IN CASE NO. 5:15-cv-05841-EJD 1

Lead Plaintiffs Kaniz Fatema, Zeke Ingram, Bhaskar R. Gudlavenkatasiva, and Abuhena M.

Saifulislam (“Lead Plaintiffs”) and Plaintiff Austin Isensee (together with the Lead Plaintiffs

collectively the “Plaintiffs”) respectfully submit this consolidated opposition to Defendant Martin

Shkreli’s (“Shkreli”) Motion to Dismiss (Dkt. No. 61) (the “Motion”) the First Consolidated

Amended Class Complaint For Violation of the Federal Securities Laws (Dkt. No. 55) (the “FAC”)

and his Request for Judicial Notice (Dkt. No. 61-3) in support thereof (the “RJN Request”).1

INTRODUCTION

Shkreli, the lone non-settling Defendant, seeks dismissal almost entirely based on a truth-on-

the-market defense (see Motion at 16-17), which is strongly disfavored at this stage and which

challenges application of the presumption of reliance under the fraud-on-the-market doctrine of

Basic, Inc. v. Levinson, 485 U.S. 224 (1988). He argues that investors already knew the full extent

of his misdeeds at his prior companies, Retrophin and MSMB, due to four news articles published in

fall 2015, none of which are cited in the FAC, and that his alleged misstatements were neither false

nor misleading simply “because he failed to remind his audience on each occasion of a pending

criminal investigation described earlier in the New York Times and Newsweek.” See Motion at 2.

This centerpiece argument, based on facts wholly outside the FAC, is deficient, both

factually and legally, and should be rejected. First, it fails to account for Shkreli’s “heavy burden”

to establish a truth-on-the-market defense at this stage, whereby he “must prove that the information

that was withheld or misrepresented was ‘transmitted to the public with a degree of intensity and

credibility sufficient to effectively counterbalance any misleading impression created by the insiders’

one-sided representations.’” Provenz v. Miller 102 F.3d 1478, 1492-1493 (1996) (emphasis added).

Second, it fails to acknowledge that the very articles Shkreli cites included his strong denials of

wrongdoing and his threats to counter-sue his former companies, rendering them incapable of

1 As used herein, unless otherwise noted: (i) all defined terms have the definitions ascribed to them in the FAC, (ii) all “¶” references are to the FAC’s numbered paragraphs, (iii) all “Def. Exh.” references are to the numbered exhibits to the Buckley Declaration in support of Shkreli’s Motion, and (iv) all “SOF §” and “ARG §” references are to sections of the Statement of Facts or Argument herein.


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



sustaining such a defense. Third, it fails to acknowledge that the criminal indictments and Securities

and Exchange Commission (“SEC”) complaint against Shkreli, which were revealed after his

December 17, 2015 arrest, contained extensive, previously-undisclosed details of his prior misdeeds,

including fraudulent schemes involving outside legal counsel and corrupt employees, as discussed in

the FAC. Fourth, it fails to refute the fact that his arrest itself was a corrective event, which went

far beyond any prior write-ups indicating that he was being investigated. Fifth, it fails to account for

the fact that the NASDAQ was so shocked by Shkreli’s arrest that it took the highly unusual step of

halting trading in KaloBios’s stock on December 17, 2015 so it could get more information from

KaloBios. Sixth, it fails altogether to account for KaloBios’s stock chart, including both the sharp

rise coinciding with Shkreli’s fraud and the precipitous post-arrest decline (once trading resumed),

which strongly and indisputably evidence the market’s having been misled. Finally, even assuming,

arguendo, none of the foregoing infirmities existed, Shkreli has characterized the FAC as pleading a

predominantly omissions-based fraud (see Motion at 17-20), which would give rise – as pled in the

FAC (see ¶100) – to a presumption of reliance under Affiliated Ute Citizens of the State of Utah v.

U.S., 406 U.S. 128 (1972), which he fails to even address, let alone refute.

Shkreli otherwise resorts to a grab-bag of meritless arguments, which should also be rejected.

Duty to disclose. Incorrectly claiming that the FAC fails to allege any false statements (see,

e.g., Motion at 17, 20), Shkreli argues he was under no duty to disclose his prior misconduct and

that of his former colleagues at Retrophin and MSMB. See id. at 17-20. This argument ignores both

bedrock Ninth Circuit precedent regarding the duty to speak the whole truth, see, e.g., Berson v.

Applied Signal Tech., 527 F.3d 982, 987 (9th Cir. 2008) (once defendants chose to speak, they “were

bound to do so in a manner that wouldn’t mislead investors”), and the fact that many of Shkreli’s

misstatements expressly touted, inter alia, his ability, and that of former Retrophin and MSMB

cronies who he appointed to high-ranking positions at KaloBios, to lead KaloBios based on their

purported expertise, credentials, and successes at Retrophin and MSMB.

Puffery. Shkreli cherry-picks isolated snippets of his misstatements that begin with “I think”


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



or “I expect” and claims they are inactionable puffery merely due to phrasing. See Motion at 20-22.

He ignores that such opinion statements are actionable as alleged in the FAC. See, e.g., Omnicare,

Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, 135 S. Ct. 1318, 1328 (2015) (“[A]

reasonable investor may…understand an opinion statement to convey facts about how the speaker has

formed the opinion – or, otherwise put, about the speaker’s basis for holding that view. And if the real

facts are otherwise, but not provided, the opinion statement will mislead the audience.”).

Safe harbor. Shkreli attempts to invoke the safe harbor provisions for forward-looking

statements accompanied by meaningful risk warnings, codified in the Private Securities Litigation

Reform Act of 1995 (“PSLRA”), 15 U.S.C. §78u-5(c)(1)(A). See Motion at 22-23. Yet, he fails to

identify which statements are forward-looking and fails to identify any purported, meaningful

cautionary language accompanying his statements warning investors as to the risks posed by his own

and his cronies’ misconduct at Retrophin and MSMB, including the possibility of his arrest.

“Bootstrap.” Shkreli seeks to dodge liability for his misstatements as KaloBios CEO by

blaming its outgoing Board for naming him CEO in the first place. See 23-24. This argument ignores

the fact that his appointment occurred after Shkreli gained majority control over KaloBios and just

before its Board resigned en masse, such that it was clearly orchestrated by Shkreli himself. See ¶¶7,

52. It also seeks to create a new exemption from liability under the federal securities laws that has no

basis in the law or public policy, one that would insulate CEOs from any accountability for

misstatements made while at the helm, if their fraud implicated in part facts predating their

appointment by a company’s board. That is simply not the law of this Circuit, for good reason.

§20(a). Unable to dispute his total control of KaloBios during the Class Period, Shkreli argues

only that the FAC’s claim under Exchange Act §20(a), 15 U.S.C. §78t(a), should rise and fall with its

§10(b) claim. See Motion at 25. If his other arguments fail, so too must his §20(a) argument.

Thus, as discussed below, Plaintiffs respectfully urge the Court to deny Shkreli’s Motion.

STATEMENT OF THE ISSUES TO BE DECIDED

1. Whether the few news articles cited by Shkreli, if considered by the Court, satisfy his


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



heavy burden for establishing a truth-on-the-market defense disfavored at this stage. [No.]

2. Whether Shkreli’s misstatements were false or misleading when made. [Yes.]

3. Whether Shkreli had a duty to disclose his own prior misconduct and that of the

individuals he placed into high-ranking positions at KaloBios when making statements, inter alia, as

to his qualifications and those of these individuals to lead KaloBios. [Yes.]

4. Whether Shkreli’s misstatements were forward-looking and accompanied by

meaningful cautionary language, such that they are eligible for the PSLRA safe harbor. [No.]

5. Whether Shkreli’s misstatements were inactionable puffery or optimism. [No.]

6. Whether Shkreli’s appointment as CEO and Chairman, after taking effective control

as KaloBios’s majority stockholder, a day before its Board resigned en masse, serves to insulate him

against liability for his subsequent false and misleading statements and omissions. [No.]2

STATEMENT OF RELEVANT FACTS

I. KALOBIOS’S STOCK CRATERED AS IT NEARED BANKRUPTCY

KaloBios is a biopharmaceutical company founded in 2000 that traded on the NASDAQ

before the Class Period of November 19, 2015 through December 16, 2015, inclusive (¶2).3 ¶4.

Approaching the Class Period, KaloBios was under severe financial distress. ¶¶4, 41-49. Its

primary drug candidates had failed to achieve clinical trial milestones, causing the loss of $225

million in potential partnership funds. ¶42. With losses mounting and an accumulated $194 million

in debt (¶42), KaloBios leadership began to search for investors during mid-2015. ¶¶43-44.

However, KaloBios began to run out of funds and layoffs mounted. ¶¶42-46.

On November 5, 2015, KaloBios announced a 61% workforce reduction and the pursuit of

“strategic alternatives” (¶¶4, 46), which included a potential sale of KaloBios or its assets, a

corporate acquisition, or a wind-down of operations and bankruptcy. ¶47. By November 9, 2015,

2 Plaintiffs respectfully submit that the correct response to each of the four issues as framed by Defendant Shkreli (see Motion at 3 (setting forth issues A-D)) is “No.” 3 Defendants Martell, Cross, and KaloBios have agreed to settle claims against them during a slightly different class period of November 18, 2015 through December 16, 2015, inclusive. ¶3.


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



KaloBios announced it was halting enrollment in clinical studies, which were cancelled. ¶¶47, 48.

By November 13, 2015, KaloBios instituted steep layoffs, discontinued its drug development

programs, and announced that its limited cash prevented continued investigation of strategic

alternatives, such that consultants were retained to oversee wind-down of operations and liquidation

of its assets. ¶¶4, 48. As Shkreli concedes (see Motion at 3), KaloBios was teetering on the brink of

bankruptcy. ¶47. Its stock closed at $0.90 on November 13, 2015. ¶¶4, 49.

By that point, investors were exceedingly unlikely to buy KaloBios’s stock, which was fast

losing nearly all its value. Defendant Shkreli’s fraud is what attracted investors to the company and

drove up its stock price. A month later, these investors suffered massive losses.

II. SHKRELI BEGAN A PUMP-AND-DUMP SCHEME AT KALOBIOS

Defendant Shkreli was a hedge fund manager and pharmaceutical company investor who,

among other things, co-founded investment company MSMB in 2009 and drug company Retrophin

in 2011. ¶¶5, 29. Entering the Class Period, he was CEO of Turing Pharmaceuticals AG. ¶54(a).

With KaloBios winding down operations, Shkreli seized the chance to orchestrate a pump-

and-dump scheme by buying a controlling stake at cut-rate prices on the open market then driving

up its stock price with false promises of a turnaround. By November 17, 2015, Shkreli and his

investment group had already acquired more than 50% of KaloBios’s outstanding stock. ¶¶6-7. By

November 23, 2015, they controlled 70% of KaloBios’s stock (2.885 million shares purchased for

$4.364 million). ¶7. Significantly, Shkreli’s group purchased its stake for an average price of just

$1.51 per share and Shkreli himself controlled 72% of the stake. ¶¶7, 53.

How do we know, today, that Shkreli intended to capitalize on his fraud by selling KaloBios

stock at inflated prices? He admitted as much during an interview, in which he made clear that he

had researched how quickly he could sell his stock and retain the profits for himself. ¶108.

Specifically, citing SEC Act §16B, he said that after acquiring over 10% of KaloBios, he could not

sell within six months without disgorging the profits to KaloBios, and, as he put it, “I don’t’ plan on

disgorging the profits to the company.” Id. As such, Shkreli was highly motivated to drive up the


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



value of his majority stake through the fraud at issue, long enough to cash in at inflated prices once

he could retain the proceeds just six months later. ¶¶7, 53, 108. His fraud succeeded in driving up

the value of his group’s 70% stake in KaloBios to $132 million (with Shkreli’s piece worth $95

million) at the stock’s Class Period high of $45.82. ¶¶14, 107. His plan failed only when he was

arrested after just one month, on December 17, 2015. ¶81. Thus, contrary to the Motion at 7-8,

Shkreli’s lack of sales during the one-month Class Period is not an exonerating fact.

III. SHKRELI QUICKLY TOOK CONTROL OF KALOBIOS

KaloBios issued a press release on November 18, 2015, disclosing that Shkreli had informed

the company of his ownership stake and initiated discussion regarding its future direction. ¶50.

This was the first public disclosure of Shkreli’s controlling stake or any possibility that KaloBios

would continue operations. Id. Significantly, the specifics, if any, as to Shkreli’s plans for the

company were closely guarded and restricted to the highest levels of KaloBios. ¶51. Multiple CWs,

including KaloBios’s former chief archivist, stated they lacked of any such knowledge. Id.

The next day, Shkreli orchestrated KaloBios’s rejection of alternative funding, his own

appointments as CEO and Chairman, and the resignation of its Board “effectively immediately after

such appointments.” ¶¶52, 62(b). He thereafter filled KaloBios’s top leadership positions with

long-time cronies from MSMB and Retrophin, including, inter alia: (i) Marek Biestek (“Biestek”), a

co-founder and managing member of MSMB from September 2009 - 2011, a VP and Co-Head of

Business Development at Retrophin for four years, and a member of Shkreli’s investor group who

acquired control of KaloBios (¶30); (ii) Thomas Fernandez (“Fernandez”), a co-founder and SVP –

Corporate Development at Retrophin from 2011 - August 2015 and a President of MSMB (¶31); (iii)

Michael Harrison (“Harrison”), Retrophin’s Controller from July 2013 - November 2014 (¶32); and

(iv) Patrick Crutcher (“Crutcher”), a key member of Retrophin’s business development team (¶33).

IV. SHKRELI’S FALSE AND MISLEADING CLASS PERIOD MISSTATEMENTS

Shkreli also began a steady stream of false and misleading misstatements, speaking in both

his own voice and that of KaloBios, to inflate its stock price while fraudulently inducing investments


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



in a company still on the verge of bankruptcy.4 His fraud included, inter alia, false and misleading

assurances as to all the following topics.

A. That Shkreli’s Work At MSMB And Retrophin Qualified Him To Lead KaloBios

The 11/23/2015 8-K, signed by Shkreli, touted his experiences as MSMB’s founder and

managing partner from 2006-2013, as founder and President of Retrophin LLC from March 2011 -

December 2012, and as CEO and Director of Retrophin, Inc. from December 2012 - October 2014,

before stating, “The Company believes that Mr. Shkreli’s prior experiences, attributes, and skills

are indicators of his professional competence for the role as Chief Executive Officer of the

Company.” ¶¶10, 62(a). See also SOF §IV.C. (“track record” statement), infra. His appointment as

KaloBios CEO and Chairman was also announced in the 11/25/2015 13D, which he signed and

certified: “After reasonable inquiry and to the best of my knowledge and belief, I certify that the

information set forth in this statement is true, complete, and correct.” ¶70.

B. That Shkreli’s MSMB And Retrophin Cronies Were Fit To Help Lead KaloBios

The 11/23/2015 8-K also announced appointment of Shkreli cronies to high-level positions at

KaloBios, including: (i) Biestek as a Board member, (ii) Fernandez as a Board and Audit Committee

member, and (iii) Harrison as a Board member and Audit Committee Chairman. ¶¶10, 62(b)-(c).

The 11/25/2015 13D, which Shkreli signed and certified as “true, complete, and correct,” also

disclosed appointment of Biestek, Fernandez, and Harrison to KaloBios’s Board. ¶70. The

4 Plaintiffs urge the Court to rely on the FAC’s allegations setting forth Shkreli’s misstatements and omissions (see ¶¶8-13, 54-80), rather than the long, misleading recitation in Shkreli’s Motion at 8-14, which: (a) understates the total number of “statements” (e.g., “Statement Three” is multiple social media posts, while “Statement Eight” is three separate press releases); (b) mischaracterizes the points of emphasis within each “statement,” changing them from those set forth in the FAC; and (c) invents, from whole cloth, bracketed text inserted into his actual remarks to diminish the degree to which they were false and misleading when made. Regarding this last point (c), when Shkreli was asked in the 11/25/2015 Bloomberg Interview why he could succeed at leading KaloBios where its prior leadership had failed, he stated, “I think it’s credibility and trustworthiness.” ¶68(d). He was clearly talking about, and touting, his own purported credibility and trustworthiness, as evidenced by his ensuing remarks (e.g., “investors who have been in my last two companies know my track record is very good”). Id. Yet, Shkreli now seeks to rewrite his statement, by adding in bracketed text that completely changes its substance. See Motion at 11, bottom bullet (changing the statement to “I think it’s credibility and trustworthiness [that led to KaloBios’ prior failure].”)


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



12/3/2015 Management Press Release, written by Shkreli, touted, inter alia, Crutcher’s appointment

as Head of Business Development, and included Shkreli’s statement that “We are moving quickly to

build a very high quality team focused on optimizing the growth opportunities at KaloBios

Pharmaceuticals.” ¶¶12, 73(a). The 12/3/2015 Slides, part of the 12/3/2015 Conference Call and

filed with the SEC as an attachment to the 12/4/2015 8-K signed by Shkreli, boasted that

“Employees #1 and #2 of Retrophin, Inc. (NASDAQ: RTRX) have joined the Board of Directors of

KaloBios” and that “Turing and Retrophin are two of the fastest growing biopharmaceutical

companies in the history of the industry.” ¶¶12, 75(b). The 12/3/2015 Slides also touted the

“Addition of experienced business development team led by Patrick Crutcher.” ¶75(d).

C. That Shkreli Was Credible, Trustworthy, And Working For KaloBios Investors

During his 11/24/2015 NBC Interview, Shkreli stated, “At the end of the day my

constituency is not the media, it’s my investors, who I work for, and the patients who we all work

for together.” ¶65. During his 11/25/2015 Bloomberg Interview, when asked why he would

succeed at leading KaloBios when its prior leadership had failed, he stated, “I think it’s credibility

and trustworthiness.” and “I think when we came in with fresh capital and fresh ideas and said we

underwrite this; we support this. And investors who have been in my last two companies know my

track record is very good, and I think we’ll see success with lenzilumab in CMML.” ¶¶11, 68(d).

D. That Shkreli Was Delivering Necessary Funding And Financing To KaloBios

The 11/19/2015 Press Release, which listed Shkreli as the company contact, and the

11/23/2015 8-K, which he signed, stated, “KaloBios has received a commitment from Mr. Shkreli

and other investors for an equity investment of at least $3.0 million” and “Mr. Shkreli and the

group of investors have committed to a $10.0 million equity financing facility.” ¶¶8, 54(a).

During his 11/25/2015 Bloomberg Interview, Shkreli said, “[W]e went in and we bought the

company in the open market ourselves and named ourselves the management… and now the

company has the cash to this clinical trial….” ¶¶11, 68(a). He added, “KaloBios needs another

$100 million that I’m going to give to it so that we can develop lenzilumab for CMML.” ¶¶11,


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



68(e). The 11/25/2015 13D, which Shkreli signed and certified as “true, complete, and correct,”

stated that he had presented a plan for “financing options (including those that may lead to the

acquisition of additional securities of [KaloBios] by the Reporting Persons and third parties).” ¶70.

The 12/3/2015 Funding Press Release, written by Shkreli, announced a purported private placement,

stating, inter alia, “Upon closing of the transaction, the Company will receive gross proceeds of

approximately $8.2 million…. The Company intends to use the proceeds from the PIPE financing

for an acquisition and to advance its pipeline of drug candidates, including its lead compound

lenzilumab….” ¶¶12, 73(b). The 12/3/2015 Slides touted the Shkreli group’s taking control of

KaloBios, his being named KaloBios Chairman and CEO, and that these developments meant

“Permanent access to capital and M&A deal flow.” ¶¶12, 75(a). A day before his arrest, he signed

the 12/16/2015 8-K, boasting that KaloBios had closed its $8.2 million PIPE financing. ¶¶13, 78.

E. That KaloBios Was Continuing Operations And Growing Under His Leadership

The 11/19/2015 Press Release and 11/23/2015 8-K stated, “In his new role, Mr. Shkreli will

work with the company’s senior management team to ensure the company’s continued operations.”

¶¶8, 54(a). In his 11/20/2015 Bloomberg Interview, Shkreli stated, “I think we will grow KBIO into

a large company.” ¶57. On November 23, 2015 Shkreli posted a self-photo with management on

Twitter, stating, “Turnaround in progress. $KBIO.” The 11/23/2015 8-K stated, “Under

[NSADAQ’s listing] rules, the Company has 60 calendar days from November 17, 2015 to submit a

plan to NASDAQ to regain compliance…. The company intends to file the 2015 Third Quarter 10-

Q prior to such date and will submit a compliance plan to NASDAQ on or prior to January 16,

2016.” ¶62(d). During his 11/24/2015 NBC Interview, he stated his purported plans to increase

KaloBios’s staff: “Right now, we’re about 12, and we’re looking to double and triple that number

over the next few months.” ¶65. The 11/25/2015 13D, which he signed and certified as “true,

complete, and correct,” stated that he had a plan for the “continuing operations” of KaloBios. ¶70.

F. That KaloBios’s Drug Candidates Were Advancing Under His Leadership

The 11/19/2015 Press Release and 11/23/2015 8-K stated, “We believe that [ ] KaloBios’


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



lenzilumab is a very promising candidate for the treatment of various rare and orphan diseases.”

¶54(a). On November 22, 2015 Shkreli stated on Twitter, “CMML and JMML are rapidly fatal

blood cancers. Lenzilumab, the important asset at $KBIO is an exciting potential agent for these

diseases.” ¶60. During his 11/25/2015 Bloomberg Interview, Shkreli said, “The main asset of the

company is a drug called lenzilumab… . Trials starting right now actually, so we’re really excited

to see that…and we’ll know in Q1 or Q2 if our trial works.” ¶¶11, 68(a). The 12/3/2015 Slides

laid out operational milestones, including ones KaloBios was purportedly already working to meet:

“Turnaround focused on benznidazole and lenzilumab,” “Focused on lenzilumab (formerly

KB003),” and “Initiating Phase 1 / 2 study in CMML by YE 2015” (just weeks away). ¶¶12, 75(c).

G. That Shkreli Was Leading KaloBios In Potential Acquisitions

During his 11/25/2015 Bloomberg Interview, Shkreli said, “We’re focused on creating the value

of KaloBios through not only lenzilumab, but I expect that we could announce in acquisition for

KaloBios to acquire new products as soon as by the end of this year. In fact, we’re in talks with

three separate acquisitions that could create even more value for KaloBios.” ¶¶11, 68(c). When

asked for details, he added, “Probably rare diseases. Two of them are not yet FDA approved, and

one of them is FDA approved. So all three are progressing rapidly and could be great fits for

KaloBios.” Id. The 12/3/2015 Benznidazole Press Release, written by Shkreli, described a deal to

acquire a drug program for an upfront payment of $2 million plus regulatory milestones and royalties,

and included his statement that “KaloBios will work to bring this vital therapy to help patients….”

¶73(c). The 12/3/2015 Slides stated that “KaloBios is in near-term negotiations to acquire several

assets in the next 30 to 90 days” and that “Opportunities include transactions with large pharma,

biotech and specialty pharma companies.” ¶¶12, 75(e).

V. SHKRELI’S MISSTATEMENTS INFLATED KALOBIOS’S STOCK PRICE

Shkreli’s misstatements had the intended effect, driving up KaloBios’s stock price to closing

prices of $10.40 on November 19, 2015, $18.25 on November 20, 2015, $39.50 (after reaching an

intra-day and Class Period high of $45.82) on November 23, 2015, $18.40 on November 24, 2015),


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



$26.63 on November 25, 2015, $29.32 on December 3, 2015, $31.13 on December 4, 2015, and

$23.50 on December 16, 2015. ¶¶9-12, 14, 56, 59, 64, 67, 72, 77, 80. At these prices, the Shkreli

group’s 70% stake in KaloBios rose in value to between $30 million and $114 million. Id.

VI. THE EXTENSIVE, UNDISCLOSED MISCONDUCT OF SHKRELI AND HIS

CRONIES

Yet, unbeknownst to investors, Shkreli and the cronies he appointed to high-ranking

KaloBios positions had engaged in a broad array of misconduct while running MSMB and

Retrophin, sufficiently egregious as to warrant Shkreli’s arrest, as was revealed post-Class Period,

after his arrest, in a 30-page criminal indictment unsealed on December 17, 2015 (and superseded

in June 2016) and a 22-page SEC complaint filed December 17, 2015. ¶¶5, 15, 82. These detailed

filings provided new information that materially altered the total mix available to investors. ¶83.

Shkreli’s widespread misconduct defrauding MSMB’s investors and brokers was detailed,

including, inter alia: (i) without knowledge or consent of its limited partners, Shkreli

misappropriated MSMB funds by withdrawing amounts far above the permissible 1% management

fee and 20% net profit incentive allocation, to the tune of $200,000 (¶¶5, 83(a)); (ii) from October

2009 - January 2011, Shkreli used over $450,000 in MSMB funds to pay expenses, including at least

$120,000 not properly chargeable to MSMB for things like medical expenses and clothing (id.); (iii)

from September 2009 - December 2010, Shkreli fraudulently induced $700,000 in MSMB investments

by falsely stating it was a transparent investment vehicle with monthly liquidity (when it was not),

falsely stating it had retained independent CPAs to audit its financials (when it had not), and falsely

touting his own acumen (failing to disclose he had lost all funds he managed in Elea Capital, his prior

hedge fund, and faced a $2.3 million default judgment by Lehman Brothers resulting from his trading

activity) (¶¶5, 83(b)); (iv) Shkreli fraudulently induced a $1.25 million investment in MSMB on

December 2, 2010 by falsely stating it had $35 million in assets under management (when it had only

$700,000), it had retained Kass & Company, P.C. as its auditor (when it had not), and it had retained

NAV Consulting as fund administrator (when it had not) (¶¶5, 83(c)); (v) Shkreli falsely represented

to Merrill Lynch that he had located sufficient shares in Orexigen Therapeutics, Inc. to cover a large


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



February 1, 2011 short position of over 11 million shares (when he had not) that he had taken in

MSMB’s account (¶83(d); and (vi) as a result, MSMB failed to settle the short, which Merrill Lynch

closed at a $7 million loss, dropping MSMB’s account to just $58,000 (id.).

The SEC Shkreli Complaint and Shkreli Indictments revealed a massive fraudulent scheme

from February 2011 - September 2014 by Shkreli and Evan Greebel (“Greebel”), a Partner at the law

firm of Katten Muchin Rosemann LLP who was lead outside counsel to Retrophin and counsel to

Shkreli and MSMB and who was also arrested. ¶¶5, 34, 83(e)-(g).

Shkreli and Greebel caused Retrophin to enter into sham “consulting” agreements from

September 2013 - March 2014 with defrauded Elea Capital and MSMB investors that were actually

settlement agreements with releases for Shkreli and MSMB to settle liabilities they owed. ¶¶5, 83(e)

and (g). Retrophin received no legitimate consulting services, and Shkreli and Greebel tried to conceal

the scheme by, inter alia, never presenting three of the agreements to Retrophin’s Board for approval

(the fourth was put on its agenda but never approved). Id. The SEC Shkreli Complaint and Shkreli

Indictments quoted emails documenting the scheme. Id.

Shkreli and Greebel also engaged in a scheme, likewise well-documented in emails quoted in

the SEC Shkreli Complaint and Shkreli Indictments (see ¶83(f)), whereby they fabricated MSMB’s

investment in Retrophin in November/December 2012 via fraudulent transfers of 75,000 Retrophin

shares to Shkreli from “Co-Conspirator 1,” “Corrupt Employee 1” and “Corrupt Employee 2,” which

were backdated to summer 2012 and thereafter transferred by Shkreli, pursuant to a backdated

agreement, to MSMB. ¶¶5, 83(e)-(f). Shkreli and Greebel compensated “Co-Conspirator 1,” “Corrupt

Employee 1” and “Corrupt Employee 2” for their roles in the scheme by letting them acquire, for a

nominal amount, 5% of Retrophin’s shares. Id. “Corrupt Employee 1” and “Corrupt Employee 2” are

identified in the Shkreli Indictments as “individuals employed by Shkreli.” ¶83(e). The FAC alleges

that they are among the cronies Shkreli rewarded with high-level positions at KaloBios. Id. Shkreli’s

Motion ignores these allegations and does nothing to refute them.

These facts and circumstances, known to Shkreli throughout the Class Period but first revealed


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



to investors on December 17, 2015, after his arrest, made clear that he and his cronies from MSMB

and Retrophin had been utterly unfit to run KaloBios, the funding and financing he had promised for

KaloBios had been a non-viable mirage only obtainable (if at all) via additional frauds, his

descriptions of KaloBios’s continuing operations including strategic acquisitions and advancement of

its drug pipeline had been unrealistic, and KaloBios still faced imminent bankruptcy. ¶¶15, 55, 58. 61,

63, 66, 69, 71, 74, 76, 79, 82, 84. As such, they rendered Shkreli’s Class Period misstatements

materially false and misleading when made because, as he knew or was reckless in not knowing: (i)

they rendered him incapable of ensuring KaloBios’s continued operations, overseeing its filing of 10-

Qs and its conduct of clinical trials, advancing its drug candidates to FDA approval, executing on

strategic acquisitions, expanding its workforce and growing it as a company, sustaining any progress

in its “turnaround,” legitimately securing necessary funding and financing (including the $8.2 million

PIPE financing also obtained through his fraud and the $100 million he personally promised to

deliver), or generating bona fide investment returns for its investors, and, conversely, rendered

KaloBios incapable of taking those steps with Shkreli at the helm; (ii) Shkreli was unfit to lead

KaloBios, and his cronies from Retrophin and MSMB, who either knew of his misconduct (and/or

participated in it) or were reckless in not knowing it, including Biestek, Harrison, Fernandez, and

Crutcher, were likewise unfit to do so; (iii) his prior work as founder, CEO, managing partner, and

director at MSMB and Retrophin were negatives, not “indicators of his professional competence” to

serve as KaloBios CEO, and did not support his positive statements about his own “credibility and

trustworthiness,” the appointment of Retrophin Employees # 1 and 2 to KaloBios’s Board, or

Retrophin’s being one of the fastest growing biopharmaceutical companies. Id.

VII. SHKRELI’S ARREST DECIMATED KALOBIOS’S STOCK

Shkreli’s pump-and-dump scheme failed when, to the market’s shock, he was arrested, led

off in handcuffs, and terminated as KaloBios CEO pre-market-open on December 17, 2015 – the day

after he had boasted of closing the $8.2 million PIPE financing. ¶¶15, 82. KaloBios’s stock fell

53% in pre-market trading that day before NASDAQ took the highly unusual step of halting all


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



trading so NASDAQ itself could seek more information from KaloBios. ¶¶16, 85. With trading

halted, KaloBios’s independent accounting firm, hired just weeks before (and very clearly misled as

well), resigned on December 21, 2015. ¶¶16, 86-87. On December 24, 2015, NASDAQ announced

that, due to Shkreli’s arrest, KaloBios’s stock would be delisted on December 30, 2015. ¶¶16, 88.

On December 29, 2015, KaloBios filed for bankruptcy. ¶¶16, 89. When KaloBios’s stock resumed

trading, on the over the counter (OTC) market, it opened at $2.51, reached an intra-day low of $1.02,

and closed at $4.39 on January 13, 2016. ¶¶16, 90. The FAC alleges revelation of Shkreli’s fraud

prompted KaloBios’s stock decline, causing Plaintiffs and the Class members significant damages.

¶¶17, 91, 111-115. His Motion ignores these facts and makes no loss causation argument.

ARGUMENT

I. APPLICABLE LEGAL STANDARDS

“To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted

as true, to ‘state a claim to relief that is plausible on its face.’ A claim has facial plausibility when

the plaintiff pleads factual content that allows the court to draw the reasonable inference that the

defendant is liable for the misconduct alleged.” Curry v. Hansen Med., Inc., No. 5:09-cv-05094-JF

(HRL), 2011 WL 3741238, at *2 (N.D. Cal. Aug. 25, 2011), quoting Ashcroft v. Iqbal, 129 S. Ct.

1937, 1949 (2009) and Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007). Rule 12(b)(6)

dismissal “is appropriate only where the complaint lacks a cognizable legal theory or sufficient facts

to support a cognizable legal theory.” Id. at *2 (quotation omitted). In deciding this issue, “the

Court must assume the plaintiff’s allegations are true and draw all reasonable inferences in the

plaintiff’s favor.” Larsen v. Trader Joe’s Co., 917 F. Supp. 2d 1019, 1022 (N.D. Cal. 2013)

(quoting Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987)).5

5 Shkreli generalizes that, because “context” matters, a different, more stringent standard uniquely applies for securities frauds alleged against pharmaceutical companies or their executives as versus that which applies to all other industries. See Motion at 15-16 and 22 (quoting Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051, 1060 (9th Cir. 2014), In re Syntex Corp. Sec. Litig., 95 F.3d 922, 933-934 (9th Cir. 1996), and Oregon Pub. Emps. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598 (9th Cir. 2014)). Not so. In re Syntex is the only case of the three Shkreli cites that really


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



To state a claim for securities fraud under §10(b) and Rule 10b-5, a plaintiff must allege: “(1)

a material misrepresentation or omission of fact; (2) scienter; (3) a connection with the purchase or

sale of a security; (4) transaction and loss causation; and (5) economic loss.” Mulligan v. Impax

Labs., Inc., No. C-13-1307 EMC, 2014 WL 1569246, at *9 (N.D. Cal. Apr. 18, 2014). Of these

elements, Defendant Shkreli challenges only falsity and transaction causation (or reliance).6

“To properly plead falsity, a securities fraud complaint “must ‘specify each statement alleged

to have been misleading, the…reasons why…, and if an allegation…is made on information and

belief, state with particularity all facts on which that belief is formed.’” Mulligan, 2014 WL

1569246 at *10 (quotation omitted). A plaintiff “must allege the ‘who, what, where, when, and

how’ of the fraudulent conduct.” S.E.C. v. Mercury Interactive, LLC, No. 5:07-cv-02822-JF/PVT,

2010 WL 3790811, at *2 (N.D. Cal. Sept. 27, 2010) (citation omitted).

To plead reliance, a class action plaintiff may rely upon the fraud-on-the-market presumption

of Basic v. Levinson, 485 U.S. 224 (1988), which “rests on the efficient capital market hypothesis:

The price of a stock traded in an efficient market fully reflects all publicly available information

about the company and its business.” Connecticut Ret. Plans & Trust Funds v. Amgen, Inc., 660 F.3d

1170, 1173 (9th Cir. 2011) (citing Basic, 485 U.S. at 241-242). “Anyone who buys stock at the

prevailing market prices is presumed to have relied on that price – and, by extension, each piece of

publicly available information it reflects – as a measure of the stock’s value, even if the investor never

saw that information.” Id. (emphasis added) (citing Basic, 485 U.S. at 247). “Thus, the fraud-on-the-

addresses the proposition. However, it was a fact-driven decision in which forecasts about future profits were assessed for actionability, an instance where the industry’s risk profile was relevant. The fraud at issue here involved Shkreli’s statements of then-present fact rendered false and misleading principally due to the effects of prior, undisclosed misconduct. 6 It is black-letter law that arguments that could have been raised in an opening brief, but were not, are waived. See, e.g., Avila v. Los Angeles Police Dept., No. 12-55931, 2014 WL 3361123, at *3 (9th Cir. Feb. 6, 2014) (“Arguments ‘not raised clearly and distinctly in the opening brief’ are waived.”), quoting McKay v. Ingleson, 558 F.3d 888, 891 n.5 (9th Cir. 2009). Shkreli has waived any potential challenges to the FAC based on the other elements of a §10(b) and Rule 10b-5 claim, scienter, which he only passingly references in his recitation of legal standards (see Motion at 15 (citing Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009)) and loss causation.


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



market presumption is a way to prove reliance – a causal link from the defendant’s misrepresentation,

reflected in the prevailing market price, to each class member’s decision to buy the stock.” Id.

II. THE REQUEST FOR JUDICIAL NOTICE SHOULD BE DENIED IN PART

Plaintiffs oppose Shkreli’s RJN Request for Def. Exhs. 11-14, four news articles not cited in

the FAC. “As a general rule, a district court may not consider any material beyond the pleadings in

ruling on a 12(b)(6) motion to dismiss for failure to state a claim.” Appling v. Wachovia Mortg.,

FSB, 745 F. Supp. 2d 961, 967 (N.D. Cal. 2010) (citing Lee v. City of Los Angeles, 250 F.3d 668,

688 (9th Cir. 2001) (Rule 12(b)(6) “review is limited to the complaint”)). “Rule 12(d) provides that

when ‘matters outside of the pleadings are presented to and not excluded by the court, the motion

must be treated as one for summary judgment under Rule 56.” Id. Courts “may not, on the basis of

evidence outside the Complaint, take judicial notice of facts favorable to Defendants that could

reasonably be disputed.” U.S. v. Corinthian Colls., 655 F.3d 984, 999 (9th Cir. 2011); see also ARG

§III. (citing cases refusing judicial notice of facts for a truth-on-the-market defense). Plaintiffs also

oppose judicial notice of Def. Exhs. 5 and 6, purported transcriptions of interviews quoted in FAC

¶¶65 and 68, whose accuracy Plaintiffs do not concede, which are unnecessary given that the source

videos are short and readily available. See http://www.nbcbayarea.com/news/local/Martin-Shkreli-

Discusses-Most-Hated-CEO-Title-353412941.html (11/14/2015 NBC Interview) and

https://www.bloomberglaw.com/s/news/0ba933a2d6ffcad67af50e67eff863f4/document/NYE5HT6K

LVRA?headlineOnly=false (11/25/2015 Bloomberg Interview).7

III. SHKRELI HAS NOT REBUTTED THE FRAUD-ON-THE-MARKET PRESUMPTION OF RELIANCE

The FAC adequately pleads facts giving rise to a presumption of reliance under Basic v.

Levinson (see, e.g., ¶¶98-99), which Shkreli’s truth-on-the-market defense seeks to rebut. See Motion

7 Shkreli’s cited cases (see Motion at 4 n.3 and at 17 n.6) are distinguishable. In In re Am. Apparel,

Inc. S’holder Litig., 855 F. Supp. 2d 1043, 1062 (C.D. Cal. 2012), both sides sought judicial notice of

articles, unopposed. Heliotrope Gen., Inc. v. Ford Motor Co., 189 F.3d 971 (9th Cir. 1999) involved

motions for summary judgment, not a motion to dismiss. Gerritsen v. Warner Bros. Entm’t, Inc., 112

F. Supp. 3d 1011 (C.D. Cal. 2015) was a breach of contract case, not a securities fraud case.


http://www.nbcbayarea.com/news/local/Martin-Shkreli-Discusses-Most-Hated-CEO-Title-353412941.html

http://www.nbcbayarea.com/news/local/Martin-Shkreli-Discusses-Most-Hated-CEO-Title-353412941.html

https://www.bloomberglaw.com/s/news/0ba933a2d6ffcad67af50e67eff863f4/document/NYE5HT6KLVRA?headlineOnly=false

https://www.bloomberglaw.com/s/news/0ba933a2d6ffcad67af50e67eff863f4/document/NYE5HT6KLVRA?headlineOnly=false

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



at 16-17. He fails to acknowledge his “heavy burden” to do so. Provenz v. Miller 102 F.3d 1478,

1493 (1996); Kaplan v. Rose, 49 F.3d 1363, 1376 (9th Cir. 1995). “[T]o avoid Rule 10b-5 liability,

any material information which insiders fail to disclose must be transmitted to the public with a degree

of intensity and credibility sufficient to effectively counterbalance any misleading impression created

by the insiders’ one-sided representations.” Hanon v. Dataproducts Corp., 976 F.2d 497, 503 (9th Cir.

1992) (quoting In re Apple Computer Sec. Litig., 886 F.2d 1109, 1116 (9th Cir. 1989)); Kaplan, 49

F.3d at 1376 (same); Provenz, 102 F.3d at 1492-1493 (same). “As a general rule, the truth-on-the-

market defense is intensely fact-specific, so courts rarely dismiss a complaint on this basis.” In re

Amgen Inc. Sec. Litig., 544 F. Supp. 2d 1009, 1025 (C.D. Cal. 2008) (citing In re Thoratic Corp. Sec.

Litig., No. C-04-03168 RMW, 2006 WL 1305226, at *10 (N.D. Cal. May 11, 2006)).8 Indeed, Basic,

at the class certification stage, said, “[p]roof of that sort is a matter for trial,” 485 U.S. at 249 n.29,

and the Ninth Circuit has held that “[s]ummary judgment is proper only if [defendants] show that

‘no rational jury could find’ that the market was misled.” Provenz, 102 F.3d at 1493; Kaplan, 49

F.3d at 1376 (“Our inquiry is ‘whether the evidence presents a sufficient disagreement to require

submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.’”).9

As a threshold matter, Shkreli’s truth-on-the-market defense is based entirely on purported

facts outside the four corners of the FAC, which, as discussed in ARG §II. supra, are not proper

subjects of judicial notice. Courts are loathe to credit such a defense, at the motion to dismiss stage,

8 See also Nguyen v. Radient Pharms. Corp., No. SA CV 11-0406 DOC (MLGx), 2011 WL 5041959, at *7 (C.D. Cal. Oct. 20, 2011) (same); Kairalla v. Advanced Med. Optics, Inc., No. CV 07-05569 (SJO), 2008 WL 2879087, at *14 (June 6, 2008) (same); Scott v. ZST Dig. Networks, Inc., No. CV 11-03531 GAF (JCx), 2012 WL 538279, at *11-*12 (C.D. Cal. Feb. 14, 2012) (same); In re Iso Ray, Inc. Sec. Litig., No. CV-15-5046-LRS, 2016 WL 3129425, at *8-*10 (E.D. Wash. June 1, 2006) (same); In re Cisco Sys., Inc. Sec. Litig., No. C 11-1568 SBA, 2013 WL 1402788, at *16 (N.D. Cal. Mar. 29, 2013) (“it is questionable whether a truth-on-the-market defense is available at the pleadings stage”). 9 The truth-on-the-market defense is thus heavily disfavored, even at the later class certification stage. See, e.g., Connecticut, 660 F.3d at 1177 (affirming district court’s rejection of truth-on-the-market defense at class certification stage after stating, “The only elements a plaintiff must prove at the class certification stage are whether the market for the stock was efficient and whether the alleged misrepresentations were public…”); In re Diamond Foods, Inc. Sec. Litig., 295 F.R.D. 240, 250 (N.D. Cal. 2013) (rejecting truth-on-the-market defense at class certification).


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



based on such materials. See, e.g., In re Immune Response Sec. Litig., 375 F. Supp. 2d 983, (S.D. Cal.

2005) (rejecting motion to dismiss based on truth-on-the-market defense, “[i]n light of the extremely

high burden posed by this fact-based inquiry,” where, inter alia, “determination of the issue would

require the Court to consider, in part, documents…which were neither quoted nor referenced in

Plaintiffs’ Complaint; nor are the documents ‘integral’ to any statement made in the Complaint”);

Nguyen, 2011 WL 5041959 at *7 (rejecting truth-on-the-market defense, inter alia, because “[a]ny

conflicting interpretation of the false or misleading statements…will likely lead to consideration of

facts that are inappropriate at the 12(b)(6) stage of the litigation”). However, even if these materials

are considered, they fail to support a truth-on-the-market defense under the applicable standards.

Shkreli bases his defense on four news articles from fall 2015. See Motion at 4-5, 16-17.10

Yet, those very same articles include his strong denials of wrongdoing and his threats to counter-sue.

In the 8/18/2015 Forbes Article, he called Retrophin’s claims “preposterous,” saying it “draws a lot of

speculative conclusions and half-truths.” See Def. Exh. 14. He also denied the allegations that he

caused Retrophin to pay cash and stock to appease defrauded MSMB investors as “completely

inaccurate,” adding, “Yes, there was a trade, but it certainly was not the way it was described in

[Retrophin’s] lawsuit. It’s distorted and out of context. I don’t know what basis Retrophin has in any

of these claims.” Id. He also said Retrophin broke the law by accessing his MSMB emails and said he

10 Shkreli claims that “no less than thirty (30) publications published articles in 2015…reporting either (or both) the federal investigation directed to alleged wrongdoing by Shkreli at Retrophin and MSMB Capital or the allegations brought by Retrophin against Shkreli in federal court.” See Motion at 5 n.4. Yet, despite copiously (and improperly) expanding the record with materials outside the FAC, he submitted only four articles, and his counsel’s Declaration (see Dkt. No. 61-1) does not describe others. Thus, this wholly unsubstantiated statement should be disregarded. Moreover, the purported number of articles is irrelevant. Indeed, courts often reject a truth-on-the-market defense, even where volumes of public materials purportedly countered the alleged fraud. See, e.g., In re Countrywide Fin. Corp. Sec. Litig., 588 F. Supp. 2d 1132, 1159-1160 (C.D. Cal. 2008) (rejecting truth-on-the-market defense at motion to dismiss stage because complexity of information coupled with defendant’s alleged misrepresentations would “blunt the effect” of any disclosures in 250,000 pages of publicly-available prospectuses); Provenz, 102 F.3d at 1493 (rejecting truth-on-the-market defense at summary judgment because 31 analyst reports and articles cited by defendants did not “effectively counterbalance” their misstatements); Kaplan, 49 F.3d at 1376-1377 (rejecting truth-on-the-market defense at summary judgment despite 60 articles from class period, as “[t]he impression that this mix of information conveyed cannot be resolved as a matter of law”) (citation omitted).


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



intends to file “several” lawsuits against Retrophin, including one for breach of contract, because “The

company hasn’t paid me close to $50 million that it owes me in severance. … [It] owes me roughly

$1.5 million of the company’s stock, back pay, and other damages.” Id. In the 9/22/15 NYT Article,

he called Retrophin’s lawsuit “a sad attempt to avoid paying a very large severance amount” he was

owed. See Def. Exh. 11. The 8/17/15 FierceBioTech Article cited his Twitter response to Retrophin’s

$65 million lawsuit (“yeah, whatever”) and his plan to counter-sue for $150 million. See Def. Exh. 12.

The 9/23/15 Newsweek Article stated, “of course, the fact that Shkreli is under investigation does not

establish he has committed any crimes.” See Def. Exh. 13. The articles also cite as positives Shkreli’s

post-Retrophin work at Turing Pharmaceuticals, including Turing’s having two drugs on the market

and its development of several other therapies (see Def. Exh. 14), as well as Shkreli’s acting as lead

investor in a $90 million fundraise for Turing to accelerate work on rare disease treatments (see Def.

Exhs. 11, 12, 14). He was even quoted as saying “After being kicked out of my own company, I’ve

built a bigger and better one.” See Def. Exh. 11. Shkreli cites no cases where the proponent of a truth-

on-the-market defense actively undercut the purported revelations of truth in such a fashion. Cf. Berry

v. Valence Tech., Inc., 175 F.3d 699, 706 (9th Cir. 1999) (Forbes article would not lead reasonable

investor to investigate a potential fraud where, inter alia, CEO immediately refuted its content).

It is also undisputed that the Shkreli Indictments and SEC Shkreli Complaint, made public after

his arrest on December 17, 2015 and together over 50 pages in length, set forth extensive, previously

undisclosed details as to MSMB and Retrophin misconduct not discussed in the articles Shkreli cites

(compare ¶83 with Def. Exhs. 11-14) such as fraudulent schemes with outside legal counsel, Greebel,

involving “Co-Conspirator 1,” “Corrupt Employee 1” and “Corrupt Employee 2” – the latter two

allegedly among the cronies Shkreli rewarded with high-level positions at KaloBios. ¶83(e). These

differences alone illustrate that the cited articles did not convey the MSMB and Retrophin misconduct

to investors “with a degree of intensity and credibility sufficient to effectively counterbalance any

misleading impression created by the insiders’ one-sided representations.” Hanon, 976 F.2d at 503; In

re Apple, 886 F.2d at 1116; Kaplan, 49 F.3d at 1376; Provenz, 102 F.3d at 1492-1493.


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



Shkreli’s Motion also ignores the important distinction between an investigation, a fact

referenced in the four articles he cites, versus a filed SEC complaint, filed indictments, an arrest, and

termination as KaloBios CEO, which together served as the alleged corrective event on December 17,

2015 (see ¶¶81-85) – a distinction recognized even by his cited articles. See Def. Exh. 13 (“of course,

the fact that Shkreli is under investigation does not establish he has committed any crimes”). Even

had his articles fully disclosed all prior misconduct at MSMB and Retrophin (which they did not) and

had Shkreli not denied it all (which he did), the fact that the investigation later led to his being led

away in handcuffs and removed as KaloBios CEO precludes dismissal now.

Shkreli also fails to account for the FAC’s allegations evidencing that the market was misled,

including, inter alia, that: (i) NASDAQ took the unusual step of halting trading on December 17, 2015

so it could seek more information from KaloBios as to his arrest (¶85); (ii) KaloBios’s accounting

firm, hired less than two weeks prior, resigned just after his arrest (¶87); and (iii) its stock price rose

sharply in conjunction with the alleged misstatements (¶¶9-12, 14, 56, 59, 64, 67, 72, 77, 80) and

cratered after his arrest, falling 53% pre-market on December 17, 2015 (¶85) and suffering a huge,

sustained decline after KaloBios was delisted and trading resumed on the OTC market (¶90). These

facts also preclude his truth-on-the-market defense. See, e.g., In re Iso Ray, at *8-*9 (rejecting truth-

on-the-market defense, despite prior publication of full study that an allegedly misleading press release

summarized, due, inter alia, to observation that alleged fraud caused company stock to sharply climb

and alleged corrective caused it to sharply decline); Scott, 2012 WL 538279, at *12 (rejecting truth-on-

the-market defense “in light of the market’s non-reaction to the previous article [upon which the

defense was based]…and its vigorous reaction to the publication of the [alleged corrective] article”).

Finally, Shkreli characterizes the FAC as pleading a predominantly omissions-based fraud.

See Motion at 17-20. In that case, a presumption of reliance arises under Affiliated Ute Citizens of

the State of Utah v. United States, 406 U.S. 128 (1972) – as pled in the FAC (see ¶100) – which he

fails to address or refute. Plaintiffs are thus entitled to the presumption on this alternative grounds.


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



For all these reasons, Ninth Circuit courts routinely reject truth-on-the-market defenses, like

the one advanced by Shkreli here, as involving mixed questions of law and fact inappropriate for

resolution on a motion to dismiss.11 Plaintiffs respectfully urge this Court to follow suit.12

IV. PLAINTIFFS ADEQUATELY PLED FALSITY

A. The FAC Alleges False Statements

Mischaracterizing the FAC as an omissions-only pleading, Shkreli wrongly argues that it failed

to allege he “made false statements of fact.” See Motion at 17. To the contrary, every misstatement is

expressly alleged to have been “false and misleading.” See ¶¶54, 57, 60, 62, 65, 68, 70, 73, 75, 78.

That they were false for similar reasons (compare ¶¶55, 58, 61, 63, 66, 69, 71, 74, 76, and 79), or due

to undisclosed facts he knew when speaking, does nothing to negate the allegation as to their falsity.13

11 See, e.g., In re Amgen, 544 F. Supp. 2d at 1025 (rejecting truth-on-the-market defense regarding alleged misrepresentations as to nature of FDA advisory committee meeting because “mere fact that the agenda for the [ ] meeting was available to the public, or that the meeting itself was public, is not enough to shield defendants from liability” on a motion to dismiss); Nguyen, 2011 WL 5041959 at *6-*7 (rejecting truth-on-the-market defense based on argument that the omitted information had previously been disclosed by the company in its SEC filings); Centaur Classic Convertible Arbitrage Fund Ltd. v. Countrywide Fin. Corp., 793 F. Supp. 2d 1138, 1145 (C.D. Cal. 2011), (reliance adequately pled and truth-on-the-market defense rejected, because whether plaintiffs relied on alleged misstatements and whether corrective disclosures sufficiently counter-balanced them are questions of fact unresolvable on motion to dismiss). See also Allstate Ins. Co. v. Countrywide Fin. Corp., 824 F. Supp. 2d, 1164, 1184-1185 (C.D. Cal. 2011) (truth-on-the-market defense more appropriately considered on summary judgment). 12 Shkreli’s two cited cases (see Motion at 16-17) are distinguishable and do not counsel otherwise. In Heliotrope, 189 F.3d at 975-978, the alleged fraud was based on failure to disclose things that were indisputably public knowledge: Ford’s tax strategy (its holding company at issue was expressly created for tax purposes), a deconsolidation provision of the Tax Code and its requirement that Ford maintain under 80% ownership, and Ford’s need to pay taxes on dividends received from the holding company (which was expressly described in analyst reports). In In re Apple, 886 F.2d at 1116, the court found “[t]he market could not have been made more aware of [a technology’s] risks” where the press portrayed it as a “gamble with the potential for…enormous failure,” “[a]t least twenty articles stressed the risks Apple was taking, and detailed the underlying problems producing those risks,” and “[m]any of the optimistic statements challenged by plaintiffs appeared in those same articles, essentially bracketed by the facts which plaintiffs claim Apple wrongfully failed to disclose.” 13 His patently false statements included, inter alia: “The Company believes that Mr. Shkreli’s prior experience, attributes and skills are indicators of his professional competence for the role as Chief Executive Officer of the Company (¶62(a)), “now the company has the cash to do this clinical trial” (¶68(b)), he would succeed at KaloBios due to his “credibility and trustworthiness” and “investors who have been in my last two companies know my track record is very good” (¶68(d)), “KaloBios needs another $100 million that I’m going to give to it” (¶68(e)), “we are moving quickly to build a


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



B. The FAC Alleges That Shkreli Had A Duty To Disclose

To the extent the FAC is based on omissions, Shkreli claims he had no duty to disclose the

omitted information. See Motion at 17-20.14 Not so. The FAC alleges that, during the Class

Period, Shkreli violated duties: to monitor information indicating his statements were false (¶106);

to disseminate timely, accurate, and truthful information (¶124); to disclose information omitted

from his statements (¶100); and to speak truthfully and, having chosen to speak, to speak the whole

truth (¶109). It also pled that the SEC Shkreli Complaint and the Shkreli Indictments contained

new information that materially altered the total mix of information for KaloBios investors. ¶83.

As Shkreli concedes (see Motion at 18), Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct.

1309 (2011) governs. The Matrixx court held that material omissions were adequately pled in the

form of adverse event reports about a drug and third party studies linking it to an adverse effect,

which, even absent statistical significance, had to be disclosed where “there is ‘a substantial

likelihood that the disclosure of the omitted fact would have been viewed by the reasonable

investor as having significantly altered the ‘total mix’ of information made available’” and “when

necessary ‘to make … statements made, in the light of the circumstances under which they were

made, not misleading.’” Id. at 1318-1323. This holding was consistent with duties long-recognized

by the Ninth Circuit to ensure that statements made, whether required or voluntary, are not

misleading by omission. See, e.g., Berson, 527 F.3d at 987 (once defendants chose to speak, they

“were bound to do so in a manner that wouldn’t mislead investors”).15

very high quality team” (¶73(a)), and that his control of KaloBios meant “permanent access to capital and M&A deal flow” (¶75(a)), which were false (and misleading) as per ¶¶63, 69, 74, and 76. 14 Shkreli asserts that the FAC is based on Plaintiffs’ “subjective belief that Shkreli’s alleged misconduct is material,” which he claims is “not sufficient.” See Motion at 17. This conclusory assertion, which, inter alia, fails to account for KaloBios’s stock movement (see SOF §§V., VII.), is wholly inadequate to challenge the FAC’s materiality allegations. His assertion that the omitted information “was already public knowledge” (see Motion at 18) fails. See ARG §III., supra. 15 See also Brody v. Transitional Hosps. Corp., 280 F.3d 997, 1006 (9th Cir. 2002) (omissions actionable when misleading and “creat[ing] an impression of a state of affairs that differs in a material way from the one that actually exists”); Hanon, 976 F.2d at 502-503 (noting “difference between knowing any product-in-development may run into a few snags, and knowing that a


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



Inasmuch as the FAC is based on Shkreli’s omission of information later revealed to

investors by and after his arrest (e.g., in the SEC Shkreli Complaint and the Shkreli Indictments),

he was under a clear duty to disclose it when he chose to speak, inter alia, about specific topics,

e.g., how his prior work at MSMB and Retrophin purportedly qualified him to lead KaloBios (see

SOF §IV.A.), how his cronies from MSMB and Retrophin were purportedly fit to lead KaloBios

(see SOF §IV.B.), how his purported “credibility and trustworthiness” and “track record” at MSMB

and Retrophin were assets to KaloBios investors (see SOF §IV.C.), how he was delivering necessary

funding and financing to KaloBios (see SOF §IV.D.), and how under his leadership KaloBios was

continuing operations, advancing its drug pipeline, and engaging in acquisitions (see SOF §§IV.E.-

G.). Under Matrixx, Berson, Brody, Hanon, Gilead, and their progeny, he had a clear duty of

disclosure, which he violated. §109. That the market was misled is self-evident. See SOF §VII.

Shkreli’s cited cases (see Motion at 18-20) are distinguishable and/or involved omitted

information with only a tangential relationship (if any) to misstatements made (if any).16

C. Shkreli’s Statements Were Not Inactionable Puffery Or Optimism

Cherry-picking isolated snippets of his misstatements starting with “I think” or “I expect,”

Shkreli argues that the entire statement (e.g., a whole interview) is inactionable as puffery. See

particular product has already developed problems” and rejecting summary judgment as jury could find nondisclosure of product’s technical problems materially affected stock price) and at 504 (“Rule 10b-5 imposes a duty to disclose material facts…necessary to make disclosed statements, whether mandatory or volunteered, not misleading.”); In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1052 (9th Cir. 2008) (“Omitting the role of [prohibited] off-label marketing in a press release highlighting the drug’s success made a true statement (that demand was strong) also a misleading one.”). 16 Retail Wholesale & Dept. Store Union Local 338 Ret. Fund v. Hewlett-Packard Co., 52 F. Supp. 3d 961, 964, 971 (N.D. Cal. 2014) held a company’s adoption of a code of business code conduct did not create a duty by its CEO to disclose false expense reports or sexual advances on a contractor. In In re Rigel Pharm. Sec. Litig., 697 F.3d 869, 880 and n.8 (9th Cir. 2012), a press release discussing “key” safety results and certain patient categories did not have to disclose mild side effects outside those categories. In re Yahoo! Inc. Sec. Litig., 611 Fed. App’x 387 (9th Cir. 2015), the court found no false or misleading statements. In Police Ret. Sys. Of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051, 1061 (9th Cir. 2014), the plaintiff conceded the annual report at issue was accurate. In Nathamson v. Polycom, Inc., 87 F. Supp. 3d 966, 975 (N.D. Cal. 2015), a generic statement about corporate hirings and departures did not trigger a duty to disclose the CEO’s misappropriation of funds. Shkreli’s extra-jurisdictional cases and pre-PSLRA cases (see Motion at 19) likewise do not alter the outcome.


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



Motion at 20-23. Not so. His argument would only extend to those specific sentences so phrased.

Even then, however, it fails. See Omnicare, 135 S. Ct. at 1328 (“[A] reasonable investor may…

understand an opinion statement to convey facts about how the speaker has formed the opinion – or,

otherwise put, about the speaker’s basis for holding that view. And if the real facts are otherwise, but

not provided, the opinion statement will mislead the audience.”). Even assuming, arguendo, pieces of

his statements expressed his opinions about KaloBios’s operations with him at the helm, Shkreli had

no reasonable basis for them in light of the undisclosed information he possessed. See SOF §VI.17

D. Shkreli’s Statements Are Ineligible For The PSLRA Safe Harbor

Shkreli’s attempt to invoke the PSLRA’s safe harbor (see Motion at 20, 22-23) fails. Such

protection extends only to statements identified as forward-looking and accompanied by

meaningful cautionary language. 15 U.S.C. §78u-5(c)(1)(A)(i); In re Cutera Sec. Litig., 610 F.3d

1103, 1112 (9th Cir. 2010). Yet, Shkreli fails to identify which specific statements within the SEC

filings, interviews, press releases, and online posts at issue are purportedly forward-looking, or

what meaningful cautionary language purportedly accompanied them. See Motion at 20 (“In

addition, 4 of the statements contain a forward-looking statement which appropriately cautions that

the information provided is subject to various risks and uncertainties.”) and at 22 (same). Indeed,

Def. Exhs. 1, 4, 8, and 9 contain only boilerplate cautionary language, none of it regarding risks

posed by the extensive misconduct at MSMB and Retrophin by Shkreli and his cronies who he

appointed to high-ranking positions at KaloBios. Such off-point warnings, at most, raise disputes

for the trier of fact inappropriate for resolution now. See, e.g., Hanon, 976 F.2d at 503-504

(whether disclosures effectively warned market of specific risks is a question for trier of fact) ; Livid

Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940, 946-48 (9th Cir. 2005) (warnings must be

such “that reasonable minds could not disagree that the challenged statements were not misleading.”).

17 Shkreli’s cited cases are distinguishable inasmuch as they involved, as quoted in his Motion at 21-22, vague statements like “good,” “well-regarded,” “high quality” and “reliable” service, “well-positioned” and “hit the ball out of the park,” “best ever” products, a “robust” product portfolio, and being a “leader” with an “extremely broad product line.”


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



E. Shkreli’s “Bootstrap” Argument Fails

Shkreli seeks to insulate himself from §10(b) liability for everything he said as KaloBios

CEO via his “bootstrap” argument (see Motion at 23-24), which not surprisingly is not supported

by the facts, the law, or public policy. This lawsuit is about what Shkreli said after he assumed

control of KaloBios. The fact that KaloBios’s outgoing Board appointed him to the position

beforehand is irrelevant, particularly so where the FAC alleges that Shkreli himself orchestrated

such appointment right after he had taken control of KaloBios and just before the Board resigned

en masse. See SOF §III. Such an exemption is simply not the law of this Circuit. By crediting his

argument, this court would create a precedent insulating CEOs, particularly controlling shareholder

CEOs, from any liability under the federal securities laws for all future misstatements rendered

false or misleading by facts within their indisputable knowledge, e.g., their own prior misconduct.

Shkreli’s cited cases (see Motion at 23-24) are distinguishable and do not counsel otherwise.18

V. THE §20(A) CLAIM SHOULD NOT BE DISMISSED

Conceding the obvious, that Shkreli controlled KaloBios during the Class Period, his §20(a)

argument simply rises and falls with his §10(b) argument. See Motion at 25. Thus, if the Court

decides that the FAC’s §10(b) claim survives, in whole or part, so too will its §20(a) claim.

CONCLUSION

For all these reasons, Plaintiffs respectfully request that Shkreli’s Motion be denied in full.19

18 In Nathanson v. Polycom, Inc., 87 F. Supp. 3d 966, 977-978 (N.D. Cal. 2015), a statement in annual

SEC filings as to the sufficiency of internal controls, absent allegations as to their inadequacy or the

intent to deceive investors about them, was not actionable. In Colin v. Onyx Acceptance Corp., 31

Fed. App’x 359, 361 (9th Cir. 2002), allegations that its officers engaged in sham transactions that

enabled the company to manipulate reported earnings did not give rise to a §10(b) claim. In Santa Fe

Indus., Inc. v. Green, 430 U.S. 462, 479 (1977), the court refused to extend §10(b) to serve the same

role as a Delaware appraisal remedy.

19 If the Court is inclined to grant Shkreli’s Motion, Plaintiffs respectfully request leave to amend. See, e.g., Curry, 2011 WL 3741238 at *2 ((in §10(b) cases, “[l]eave to amend must be granted unless it is clear that the complaint’s deficiencies cannot be cured by amendment”); Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003) (“In this technical and demanding corner of the law, the drafting of a cognizable complaint can be a matter of trial and error.”).


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



Dated: September 21, 2016 Respectfully submitted,

By: /s/Jennifer Pafiti____________

Jennifer Pafiti (SBN 282790)

POMERANTZ LLP 468 North Camden Drive

Beverly Hills, CA 90210

Telephone: (818) 532-6449

E-mail: [email protected]

Marc I. Gross

Jeremy A. Lieberman

Matthew L. Tuccillo

J. Alexander Hood II

POMERANTZ LLP 600 Third Avenue, 20th Floor

New York, New York 10016

Telephone: (212) 661-1100

Facsimile: (212) 661-8665


[email protected]

[email protected]

[email protected]

Patrick V. Dahlstrom

POMERANTZ LLP 10 South La Salle Street, Suite 3505

Chicago, Illinois 60603

Telephone: (312) 377-1181

Facsimile: (312) 377-1184


Counsel for Plaintiffs and Proposed Lead Counsel

for the Class

Lionel Z. Glancy

Robert V. Prongay

Ex Kano S. Sams II

GLANCY PRONGAY & MURRAY LLP 1925 Century Park East , Suite 2100

Los Angeles, CA 90067

Telephone: (310) 201-9150

Facsimile: (310) 201-9160


[email protected]

[email protected]


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



William B. Federman

A. Brooke Murphy

FEDERMAN & SHERWOOD 10205 North Pennsylvania Avenue

Oklahoma City, Oklahoma 73120

Telephone: (405) 235-1560

Facsimile: (405) 239-2112


[email protected]

Additional attorneys for Plaintiffs


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28



CERTIFICATE OF SERVICE

I hereby certify that this document filed through the CM/ECF system will be sent electronically

to the registered participants as identified on the Notice of Electronic Filing and paper copies will be

sent to those indicated as non-registered participants on September 21, 2016.

/s/ Jennifer Pafiti

Jennifer Pafiti


Counsel for Plaintiffs and Proposed Lead Class Counsel · 21-09-2016 · Beverly Hills, CA 90210...

Documents

Transcript of Counsel for Plaintiffs and Proposed Lead Class Counsel · 21-09-2016 · Beverly Hills, CA 90210...