There Can Be Only One Ultimate Authority

In re Galena Biopharma, Inc. Sec. Litig., 2015 WL 4643474 (D. Or. Aug. 5, 2015) involves an interesting fact pattern.  The defendants are alleged to have “entered into an unlawful promotional scheme” that included the placement of “misleading articles on investor websites touting Galena.”   These articles allegedly were written by a stock promotion company hired by the company.

Plaintiffs argued that both Galena and the stock promotion company could be held primarily liable for the alleged misstatements contained in the web articles.  Under the Janus decision, however, primary liability is limited to the maker of the statement – i.e., “the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.”  The court rejected the idea that the individual authors (to whom the statements were attributed) or the stock promotion company (who employed the authors) were the makers of the statements.  Instead, the court found that the “lesson of Janus is that where legally distinct entities are involved, only one entity has the final say in what, if anything, is published.”  Because the plaintiffs had adequately alleged that Galena and its officers “had the final word regarding approved content and whether the article would be published,” primary liability for the alleged Rule 10b-5(b) violations was limited to those defendants.

Holding: Motion to dismiss denied in part and granted in part.  The extensive decision contains a number of other holdings, including on the issues of scienter, scheme liability, the applicability of the fraud-on-the-market presumption of reliance, and loss causation.

Quote of note:  “If the Court were to consider the individual authors [who worked for the stock promotion company] as the makers of those statements, then companies could avoid liability under the Exchange Act simply by paying third parties to write and publish false or misleading statements about the company, even when the company retains final decision-making authority over the content.  The holding in Janus does not support such a broad reading.”

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