In re OvaScience Inc. Stockholder Litigation (Lawyers Weekly No. 09-051-17)

NO. 2015-3087-BLS2
(Consol. with 16-0645)
This is a putative class action alleging violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 ( the Securities Act). Plaintiffs Westmoreland County Employee Retirement System (Westmoreland), Phillip Hofmann, Carlos Rivas, and Cesar Castellanos are investors who purchased stock in the defendant OvaScience, Inc. (OvaScience).1 They allege that a Prospectus and Prospectus Supplement issued in connection with a secondary offering of OvaScience stock contained false statements and material omissions of fact concerning an experimental fertility treatment that OvaScience was in the process of developing. In addition to suing OvaScience, plaintiffs have also named as defendants certain of the company’s officers and directors as well as the three investment banks who served as the underwriters. The defendants now move for summary judgment against Castellanos, Hofmann, and Rivas (the Individual Plaintiffs). This Court concludes that the Motion must be ALLOWED.
1 Heather Carlson was also a plaintiff in the action. However, on August 1, 2017, the parties filed a joint stipulation voluntarily dismissing her from the action without prejudice. Judgment was entered on the docket pursuant to Mass. R. Civ. P. 58(a) on August 3, 2017.
On January 8, 2015, OvaScience conducted a secondary public stock offering in which it sold 2,645,000 shares at $ 50 per share (the January 8 Offering). J.P. Morgan Securities LLC, Credit Suisse Securities (USA) LLC, and Leerink Partners LLC served as the Underwriters. The offering closed on January 13, 2015, at which point there were over 27 million OvaScience shares outstanding.
At various points in 2015, the Individual Plaintiffs made purchases of OvaScience stock through online brokers E*Trade and Capital One Investing. On January 8, 2015, Castellano purchased 350 shares at $ 50.488. He made four more purchases between January 12 and February 3, 2015 for a price per share that ranged from $ 40.0899 up to $ 48.1799. Rivas made seven purchases between March 2015 and August 2015 for a price per share ranging from $ 24.32 to $ 41.49. Hoffman made three purchases between February and April 2015 for a price per share that ranged from $ 31.83 to $ 42.107485.
In October 2015, plaintiffs Hofmann and Rivas filed a lawsuit against the defendants; Castellanos filed a separate complaint based on the same allegations five months later, and the two actions were consolidated. In August 2016, Westmoreland intervened as plaintiff in the consolidated actions. After this Court denied a motion to dismiss, discovery proceeded on a bifurcated basis. Phase I of the discovery was limited to “class certification and standing issues” and was to be complete by May 19, 2017. See Scheduling Order dated January 20, 2017. That deadline was extended to June 19, 2017. This motion followed.
Sections 11 and 12(a) (2) of the Securities Act impose liability for untrue statements of material fact or omissions of material fact in a registration statement or prospectus. Section 15
of the Securities Act imposes secondary liability upon persons who control those liable under Sections 11 and 12. See Pyramid Holdings, Inc. v. Inverness Med. Innovations, Inc., 638 F. Supp. 2d 120, 124 (D. Mass. 2009); Cooperman v. Individual, Inc., 171 F.3d 43, 52 (1st Cir. 1999). In order to have standing to bring a claim under Section 11, plaintiffs must have purchased shares in the offering in question or, if the shares were purchased in an aftermarket, be able to trace their shares to the offering at issue. In re Century Aluminum Co. Sec. Litig, 729 F. 3d 1104, 1106 (9th Cir. 2013). For claims asserted under Section 12(a) (2), plaintiffs have standing only if they purchased the stock directly from a “seller”— a person that owned the security and passed title or successfully solicited the purchase of the security, motivated at least in part by a desire to serve its own financial interests or those of the securities owner. See Pinter v. Dahl, 486 U.S. 622 (1988); Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 48-50 (2d Cir. 1991). It is plaintiffs’ burden to show that the circumstances of their purchases provide them with the requisite standing. See In re Puda Coal Sec. Inc. Litig. (Puda Coal), 2013 WL 5493007, at *6, *9 (S.D.N.Y. Oct. 1, 2013).
Defendants first raised the issue of standing in a motion to dismiss pursuant to Rule 12(b) (6), Mass.R.Civ.P. Concluding that, at the very least, the plaintiff Westmoreland had standing, this Court denied the motion and allowed the case to proceed through discovery. Phase I of discovery was to allow plaintiffs the opportunity to compile evidence relating to the standing issue. The deadline for that discovery has now passed. Based on the summary judgment record, this Court concludes that the Individual Plaintiffs have no reasonable expectation of proving that they have standing to sue under either Section 11 or Section 12 of the Securities Act. Because their Section 15 claim is derivative of the Section 11 and Section 12 claims, that too must be dismissed.
As to their Section 12 claim, it is undisputed that the Individual Plaintiffs purchased their shares from two online brokers and thus did not purchase any shares either directly from any of the defendants or as a result of their solicitations. As to their Section 11 claim, the Individual Plaintiffs have failed to demonstrate either that they purchased their stocks directly in the January 8 Offering or that their stocks are traceable to someone who bought shares in the Offering. Purchases by three of the four Individual Plaintiffs were made after the January 8 Offering for a price per share that is considerably less than the offering price. As to plaintiff Castellanos, he purchased a block of shares on the date of the offering at $ 50.4888 per share, which was just over the offering price of $ 50. However, given that several million shares were already outstanding at the time of the Offering, such evidence merely indicates that the stock might be connected to the Offering. That is simply too speculative to support a Section 11 claim. See Puda Coal, 2013 WL 5493007, at *7 (observing that plaintiff cannot rely solely on the similarity of date and share price to demonstrate traceability); In re Quarterdeck Office Sys., Inc. Sec. Litig., 1993 U.S. Dist. LEXIS 19806, at *8 (C.D. Cal. Sept. 30, 1993), quoting Abbey v. Computer Memories, Inc., 634 F. Supp. 870, 874 (N.D. Cal. 1986) (“Courts have uniformly interpreted § 11 as requiring more than a showing that a plaintiff’s stock ‘might’ have come from the relevant offering.”). In arguing that this similarity in price and date is sufficient, plaintiffs rely on In re Everyware Global, Inc. Sec. Litig., 175 F.Supp.3d 837 (S.D. Ohio 2016), but that was a decision on a motion to dismiss, not summary judgment. Indeed, in concluding that the complaint stated a claim, the court in Everyware specifically noted that, with a chance to proceed past the pleading stage, plaintiffs would seek to prove traceability through third party subpoenas as well as discovery from the underwriter defendants. Plaintiffs in the instant case have made no such effort.
The Individual Plaintiffs contend that the motion is premature because traceability is a “merits issue” not properly the subject of Phase I discovery. This Court disagrees. Defendants clearly flagged the issue of standing in their motion to dismiss and then successfully obtained a scheduling order that bifurcated discovery so as to focus first on that question of standing. With the deadline for that discovery now passed, the issue is ripe for decision. Moreover, the Individual Plaintiffs have not invoked Mass.R.Civ.P. 56(f), nor have they met its requirements. That rule requires the party seeking to obtain its benefits to explain why he or she is currently unable to adduce the facts essential to an opposition and to provide a plausible basis for believing that the sought-after facts can be assembled within a reasonable time. Plaintiffs have done neither here.
For these reasons and for other reasons articulated in the defendants’ memoranda, the claims asserted by the Individual Plaintiffs in these two consolidated actions are hereby DISMISSED. The sole remaining plaintiff is Westmoreland. This matter is scheduled for a Rule 16 Conference on January ___ 2018 at 2:00 p.m.
Janet L. Sanders
Justice of the Superior Court
Dated: November 21, 2017

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