To establish loss causation in a securities class action does the company’s stock price have to decline immediately after the alleged corrective disclosure that revealed the truth to the market? In Shash v. Biogen, Inc., 84 F.4th 1 (1st Cir. 2023), the court considered this question in a case involving a drug study and the FDA approval process.
In Biogen, the plaintiffs alleged that the truth about a drug study’s results was revealed when Biogen and the FDA issued jointly prepared briefing materials on November 4, 2020 prior to an Advisory Committee meeting. The FDA commentary on the drug’s effectiveness was favorable, but the materials also included a negative report from the agency’s statistical reviewer that allegedly acted as a corrective disclosure. On that trading day, the company’s stock price increased by 39%. The stock price then fell a day later and fell by even more the next trading day after the Advisory Committee voted negatively on several questions related to the drug’s effectiveness. The FDA ultimately approved the drug in June 2021.
The plaintiffs argued that it took time for the market to fully understand the negative report from the FDA’s statistical reviewer, which ultimately led to the price decline on subsequent trading days. The district court rejected that position, holding that “causation is not tied to when the market reacts to information, but rather when that information became available to the public.” On appeal, Biogen argued in its brief that plaintiffs were putting forward the “novel theory that the market processed positive news several days faster than negative news in a single disclosure.” The later stock price decline arguably was caused by the Advisory Committee decision, which did not reveal any new information about the alleged fraud. The First Circuit, however, rejected the idea that a “gap in time” rendered the plaintiffs’ “theory of loss causation per se implausible.” The court held that “the issue of when Biogen’s stock price actually dropped is a question of fact” that would need to be resolved later in the litigation.
Holding: Dismissal affirmed in part and reversed in part.
The 10b-5 Daily 