Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—S.D.N.Y.: No loss where share prices went up following a corrective disclosure, (Jun 20, 2025)

By Rodney F. Tonkovic, J.D.

The stock price rose sharply at the close of the day on which the alleged corrective disclosure was made.

This district court siting in Manhattan dismissed with prejudice a fraud case alleging that a biopharmaceutical company for lack of loss causation. The court agreed that the plaintiff adequately pleaded that the company failed to disclose that, based on input from the FDA, it was going to use a different endpoint for an upcoming clinical trial. Because the company's share price rose sharply on the day that the company admitted it would use a different metric, however, the plaintiff failed to show loss causation. The court accordingly dismissed the complaint and denied leave to amend (Huey v. Anavex Life Sciences Corporation, No. 1:24-cv-01910 (S.D. N.Y. Jun. 18, 2025)).

Endpoint metrics. Between 2017 and 2024, Anavex Life Sciences Corporation was in the process of developing a drug to treat a rare neurological disorder. During this time, two clinical trials were conducted. For the first trial, called AVATAR, Anavex used an endpoint metric known as RSBQ AUC, and it publicly stated that it planned to use the same metric for the second trial, called EXCELLENCE.

On February 2, 2023, however, Anavex issued a press release stating that it had received input from the FDA about the endpoint metrics—without specifying what that input was. Shortly afterward, on February 7, the company's CEO said that EXCELLENCE would be using a "slightly different" metric than was used in AVATAR.

Misleading endpoint. The plaintiff claimed that the February 2023 press release was misleading because it failed to disclose that the FDA told Anavex that the use of RSBQ AUC was unacceptable. The court agreed that once Anavex had spoken about the endpoint to be used in EXCELLENCE it had a duty to disclose that the FDA would not accept the use of the planned endpoint. It was fair to infer, the court said, that the communication with the FDA was the reason for the sudden switch. That said, the February 7 statements by the CEO were not misleading because it was a curative statement, and the CEO admitted that the endpoint would be different.

The complaint also sufficiently alleged that the press release statement was made with scienter. The allegation that Anavex learned information from the FDA that contradicted previous statements made about endpoints presented strong circumstantial evidence of conscious misbehavior or recklessness in presenting incomplete information in the press release.

The court rejected all of the plaintiff's claims as to statements made before February 2, 2023, because they were literally true. There were no facts alleged showing that Anavex was not going to use a different endpoint at that time.

Close, but no loss causation. Unfortunately for the plaintiff, she, as the court put it stumbled before the finish line for failure to plead loss causation. On February 7, 2023, the day on which the curative information was revealed, Anavex's stock closed almost 6 percent higher than on the previous day. The court noted that in the Second Circuit, a plaintiff must allege that the share price fell significantly after the truth is out. While the stock price declined in subsequent days, the court noted that the market moved sharply higher on the day of the corrective disclosure, and the court was not persuaded that the market movements over the next few days were fatal to loss causation.

The case is No. 1:24-cv-01910.

Judge: McMahon, C.

Attorneys: Adam M. Apton (Levi & Korsinsky, LLP) for Jonathan Blum. Stephen Gregory Topetzes (K&L Gates LLP) for Anavex Life Sciences Corp. and Christopher U. Missling.

Companies: Anavex Life Sciences Corp.

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