Fourth Circuit Applies Tellabs

In Cozzarelli v. Inspire Pharmaceuticals, Inc., 549 F.3d 618 (4th Cir. Dec. 12, 2008), the Fourth Circuit applied the strict pleading standards for scienter set forth by the PSLRA and interpreted by the Supreme Court in Tellabs, Inc. v. Makor Issues & Rights, Ltd., ---U.S. ----, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). The Court affirmed the District Court’s dismissal, finding that plaintiffs failed to raise a strong inference of wrongful intent required to support their securities fraud claims.

Plaintiff class sued biopharmaceuticals company, Inspire, for violations of the federal securities laws, alleging defendants made false and misleading statements regarding clinical trials of a new drug, diquafasol, a treatment for dry eye disease. Plaintiffs alleged that defendants fraudulently misled investors as to the trial’s likelihood of success in meeting the FDA's standards for approval.


In it’s first application of Tellabs, the Fourth Circuit found that when faced with two competing inferences, based on the facts as a whole, it “must weigh those competing inferences and determine whether plaintiffs' inference of scienter is ‘cogent and at least as compelling’ as defendants' inference of a legitimate business judgment.” Where the inference that defendants acted with non-fraudulent intent is “more powerful and compelling” than the inference that defendants acted with an intent to deceive, there can be no strong inference of scienter and the case should be dismissed. Cozarrelli, 549 F.3d at 618.


Here, the Court considered analyst reports, incorporated in the complaint by reference, as a whole to determine that defendants conduct was intended merely to protect its competitive interests, not to mislead investors. At most, statements made by defendants supported an inference of imprecise or negligent use of language, not an inference of scienter.



...continue