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Emerson v. Genocea Biosciences, Inc.

United States District Court, D. Massachusetts

February 12, 2018

STEVEN EMERSON, individually and on behalf of all others similarly situated; SHELDON GRONER; BARRY HEANY; and MARK HANESS, Plaintiffs,




         In this proposed class action, two competing lead plaintiffs allege securities fraud by a biopharmaceutical company. The plaintiffs assert that Genocea Biosciences, Inc. (“Genocea”) and two officers artificially inflated the company's stock price by reporting overly optimistic prospects for a potential herpes treatment when, in reality, the company's finances could not support successful regulatory approval of the drug. When the company later reported that it was abandoning the treatment, its share price fell precipitously. This prompted several plaintiffs to sue under the federal securities laws.

         Now before the Court are two competing motions to appoint a lead plaintiff and class counsel. After hearing and consideration of the parties' submissions, the motion to appoint the Genocea Investor Group as lead plaintiff with Scott䧊, Attorneys at Law, LLP, and Levi & Korsinsky, LLP, as co-lead class counsel and Block & Leviton, LLP, as liaison counsel (Docket No. 22) is ALLOWED. The competing lead-plaintiff motion of Sheldon Groner (Docket No. 16) is DENIED.


         Genocea is a biopharmaceutical company based in Cambridge, Massachusetts, that researches and develops vaccines and immunotherapies. Docket No. 1, ¶¶ 2-3, 18.[1] Between May and September 2017, Genocea's lead product candidate was a genital herpes immunotherapy product called GEN-003. Id. ¶¶ 1, 4, 19. The complaint alleges that the company and its officers made materially false or misleading statements, or failed to disclose information about GEN-003 -- primarily that Genocea's financial health was inadequate to support Phase 3 trials of the drug. Id. ¶ 5. As a result, the plaintiffs believe Genocea overstated the prospects of bringing GEN-003 to market. Id.

         For instance, in May 2017, Genocea disclosed that the company expected GEN-003 to be ready for Phase 3 trials by the fourth quarter of 2017. Id. ¶ 20. In July and August 2017, the company made additional disclosures indicating positive results of Phase 2b trials and reiterating the company's expectation that GEN-003 would soon be ready for Phase 3 trials. Id. ¶¶ 21-22. However, after the markets closed on September 25, 2017, Genocea disclosed that it was halting spending on GEN-003, “exploring strategic alternatives for the drug, ” and cutting 40 percent of its workforce. Id. ¶¶ 6, 23. The next day, the company's share price fell $4.08, or 75 percent, to close at $1.25 per share. Id. ¶¶ 6, 24.

         The drop in Genocea's share price prompted three putative class action lawsuits under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j (b) and 78t(a), and under Rule 10b-5, 17 C.F.R. § 240.10b-5. See Id. ¶¶ 1, 26-50. At a hearing in January 2018, the Court allowed a motion to consolidate the three cases. The Court took under advisement competing motions for the appointment of a lead plaintiff and class counsel. Those motions are now ripe for decision.


         I. General Framework for Appointing a Lead Plaintiff

         The Private Securities Litigation Reform Act (“PSLRA”) requires the Court to “appoint as lead plaintiff the member or members of the purported plaintiff class that the court determines to be most capable of adequately representing the interests of class members.” 15 U.S.C. § 78u-4(a)(3)(B)(i). A class member may trigger a rebuttable presumption that she is the “most adequate plaintiff” by satisfying three criteria: (1) filing the complaint or making a timely motion to be lead plaintiff; (2) having the largest financial interest in the relief sought; and (3) otherwise satisfying Rule 23 of the Federal Rules of Civil Procedure. 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I). Another class member may rebut this presumption “only upon proof” that the presumptive “most adequate plaintiff” either (1) “will not fairly and adequately protect the interests of the class, ” or (2) “is subject to unique defenses that render such plaintiff incapable of adequately representing the class.” 15 U.S.C. § 78u-4(a)(3)(B)(iii)(II).

         II. Aggregating Plaintiffs to Form Largest Financial Interest

         When analyzing who has the “largest financial interest in the relief sought, ” courts are divided on whether and when to allow groups of class members to aggregate their losses. See 7B Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1806 (3d ed. 2017) (discussing various approaches and noting that “many courts have emphasized that the decision . . . must be made on a case-by-case basis”). See also Elizabeth Chamblee Burch, Optimal Lead Plaintiffs, 64 Vand. L. Rev. 1109, 1137-39 (2011) (describing various approaches). On one end of the spectrum, some courts have flatly refused to appoint groups of unrelated persons as lead plaintiffs. See, e.g., In re Donnkenny Inc. Sec. Litig., 171 F.R.D. 156, 157-58 (S.D.N.Y. 1997) (ruling that “aggregation of unrelated plaintiffs to serve as lead plaintiffs defeats the purpose of choosing a lead plaintiff” and undermines PSLRA purpose of “prevent[ing] lawyer-driven litigation”). Others permit aggregation, taking note of the PSLRA's direction to consider the “person or group of persons” with the largest financial interest in the case. See, e.g., In re Advanced Tissue Scis. Sec. Litig., 184 F.R.D. 346, 350 (S.D. Cal. 1998) (quoting 15 U.S.C. § 78u- 4(a)(3)(B)(iii)(I)). Still others fall somewhere in between. See Burch, supra, at 1138 (discussing courts that have appointed groups where no bad faith exists, where the group has demonstrated cohesiveness, or where close-knit group members had pre-litigation relationships).

         In what appears to be the only Court of Appeals decision on point, the Third Circuit has adopted a “rule of reason” approach. See In re Cendant Corp. Litig., 264 F.3d 201, 266-67 (3d Cir. 2001). Noting that the PSLRA expressly permits a “group of persons” to serve as lead plaintiff, the Third Circuit “disagree[d] with those courts that have held that the statute invariably precludes a group of ‘unrelated individuals' from serving as a lead plaintiff.” Id. at 266 (citing 15 U.S.C. §§ 78u-4(a)(3)(B)(iii)(I) and 78u-4(a)(3)(B)(i)). Instead, the Third Circuit held that the nature and extent of the group members' prior relationship, if any, as well as the size ...

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