Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—S.D. Cal.: Pharma company ducks securities fraud claim for lack of loss causation, (Sep 29, 2026)

By Lene Powell, J.D.

While the company may have acted fraudulently, the plaintiffs failed to show that the alleged fraud actually caused their losses.

A California federal district court again dismissed an action against Fate Therapeutics, a biopharmaceutical company, finding that while the investor plaintiffs adequately pleaded that company officials made misrepresentations with scienter, they did not show that the alleged fraud caused their losses. However, the court gave the plaintiffs “one last opportunity” to amend the complaint to show loss causation (Hadian v. Fate Therapeutics, No. 3:23-cv-00111-RBM-AHG (S.D. Cal. Sept. 22, 2026)).

Misrepresentations and scienter. Fate Therapeutics is a clinical-stage biopharmaceutical company focused on developing immunotherapies for cancer. Fate entered into a collaboration agreement in which Janssen Pharmaceuticals provided funding and research support in exchange for potential royalty payments if drug products received approval. Janssen terminated the agreement in January 2023.

The plaintiffs alleged that Fate employees made misleading positive statements about the Janssen collaboration and drug success while concealing various setbacks, causing Fate’s stock to trade at an artificially inflated price. The court previously dismissed the action, finding that the plaintiffs had adequately pleaded misrepresentations and scienter but failed to sufficiently allege loss causation.

No loss causation. The plaintiffs again failed to show loss causation. While a plaintiff is not required to show that a misrepresentation was the sole reason for the investment’s decline, “the ultimate issue is whether the defendant’s misstatement, as opposed to some other fact, foreseeably caused the plaintiff’s loss.”

First, the plaintiffs failed to show that corrective disclosures revealed the allegedly misleading statements. The bare-bones January 2023 announcement of partnership termination did not reveal any information from which the alleged fraud might reasonably be inferred. It did not include information about Fate’s financial performance, issues with its research platform, or Janssen’s rejection of a drug candidate. Instead, it solely attributed Janssen’s termination of the agreement to Fate’s rejection of “revised terms.”

The plaintiffs also failed to show loss causation under a proximate cause theory. A confidential witness’s statements could not support loss causation because the witness was not employed at the company when Janssen terminated the agreement. Further, the contention that a drug cancellation was a “substantial factor” in Fate’s stock decline was undermined by Janssen’s continued work in furtherance of the agreement. Also, the termination announcement pointed to a more plausible explanation—that Fate rejected its proposed terms.

Finally, the court rejected a “materialization of risk” argument. The Ninth Circuit has neither adopted nor rejected that theory and has “continued to require securities fraud plaintiffs to allege that the defendant lied about ‘the very facts’ causing the plaintiffs’ losses.” Here, the plaintiffs failed to plausibly establish that “the very facts about which the defendants lied” were a substantial cause of its alleged loss.

The court also dismissed a Section 20(a) control person claim for failure to show a primary violation.

Leave to amend. The court dismissed the complaint but granted “one last opportunity” to amend despite “significant deficiencies” in the plaintiffs’ loss causation theories.

This is case No. 3:23-cv-00111-RBM-AHG.

Judge: Montenegro, R.

Attorneys: Jennifer Pafiti (Pomerantz LLP) for Ali Hadian. Caroline Bullerjahn (Goodwin Procter LLP) for Fate Therapeutics, Inc.

Companies: Fate Therapeutics, Inc.

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