Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—W.D. Wash.: Shareholder action, alleging company misled investors about efficacy of COVID-19 drug, may proceed, (Jun 26, 2025)

By Rebecca E. Hoffman, J.D.

The defendants’ stance that they merely focused more on the positive news in their statements did not entitle them to dismissal.

Six plaintiffs representing purchasers of CytoDyn stock between March 2020 and March 2022 overcame a motion to dismiss their claims that the company led investors to believe its Investigational New Drug’s HIV biologic license application (BLA) was complete when it wasn’t, that the results of trials showed that the drug was effective when they didn’t, that the company had requested emergency use authorization for COVID-19 treatment when it hadn’t, and that the FDA was not requiring another clinical trial for the HIV BLA when it was (Courter v. CytoDyn, Inc., No. C21-5190 (W.D. Wash. June 25, 2025)).

The plaintiffs claimed that the company and three former officers made false and misleading statements causing the stock price to rise and then fall when the truth was revealed, and that two of the former officer defendants strategically timed their exercise of options to sell their stock, in violation of Exchange Act Section 10(b), Rule 10b-5, Section 20(a), and Section 20A.

FDA Exchanges. CytoDyn was attempting to obtain FDA approval for its drug, Leronlimab, for the treatment of HIV and, later, COVID-19. In July 2020, the court said, the FDA sent a “refuse to file” letter, saying that CytoDyn’s submission was so lacking, they would have to perform another trial to get the required data. After trials were conducted, the company claimed the drug was proven effective, but the FDA denied the company’s Emergency Use Authorization (EUA) request and said the drug was at risk of a “clinical hold.” The company did not tell investors this until months had passed and clinical holds were placed on both programs.

The shareholders brought suit, and the defendants moved to dismiss, arguing that the plaintiffs failed to show the statements were false and misleading, failed to show scienter, and that the court must account for plausible, nonculpable explanations for the defendants’ choice of statements.

Misleading. The FDA had told the company that its BLA was incomplete. Even though the plaintiffs’ claims are subject to a heightened pleading standard, that standard requires the plaintiffs here “to plausibly allege that CytoDyn’s statements were knowingly false or misleading when made,” and this allegation is not contradicted by an assumption that investors would understand the company would be having an ongoing dialogue with the FDA, the court found. Further, the FDA’s “refuse to file” letter requested the missing data it had already asked for, and did not indicate that further trials were unnecessary. Rather, the plaintiffs “specifically and plausibly pled that CytoDyn knew, and did not disclose, that it did not have the safety and dosage data the FDA insisted it needed, and that it could not get that data without additional trials.”

Focus on the Positive? The plaintiffs alleged that the company did not tell investors that the information needed to complete the BLA foreshadowed the FDA’s refuse to file letter. The defendants argued that the plaintiffs “inappropriately focus[] on sentences and phrases ‘divorced’ from the context of the unambiguously negative RTF letter.” Acknowledging that this is a “truth on the market” affirmative defense used to refute materiality, the court found that the plaintiffs sufficiently pleaded that the defendants knew they didn’t have the data and that they would have to conduct further trials to obtain it. Therefore, the statements “gave reasonable investors an impression of a state of affairs that differed in a material way from the one that existed.”

As to statements that the drug was shown to be effective at treating COVID-19, even though the FDA was unconvinced, the company again tried to argue that it was “not obligated to focus on the disappointing part of the news.” But no positive aspect of the FDA communications could overshadow the FDA’s refusal to grant an EUA, in the mind of a reasonable investor. In fact, the court found that the plaintiffs “plausibly and specifically pled that CytoDyn misleadingly spun the FDA’s adverse decision as a demonstration of Leronlimab’s efficacy, and a ‘green light’ to proceed with clinical trials.”

The court determined that the defendants’ boilerplate cautions did not invoke the PSLRA safe harbor for forward-looking statements, and that its “predictions” did not logically follow from the data it had. At this juncture, claims of puffery and opinion fail as well, the court said. Statements cannot be puffery if the speaker “was aware of facts rendering the optimistic statements false or misleading.”

The plaintiffs plausibly alleged a scheme to defraud investors, the court found, since they showed that the stock declined after each “corrective event,” in which the truth was revealed about the company’s failure to get any closer to FDA approval. The complaint also adequately sets forth claims for control person liability and insider trading, the court concluded.

The case is No. C21-5190.

Judge: Settle, B.

Attorneys: Bradley S. Keller (Byrnes Keller Cromwell LLP) for Brian Joe Courter and Courter and Sons LLC. Kevin P. Muck (Wilmer Cutler Pickering Hale and Dorr LLP) for CytoDyn Inc.

Companies: Courter and Sons LLC; CytoDyn Inc.

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