On July 1, 2019, Judge Michael A. Shipp of the United States District Court for the District of New Jersey denied a motion to dismiss a complaint alleging insider trading in violation of Section 20A of the Securities Exchange Act of 1934. In re Valeant Pharma. Int’l Inc. Sec. Litig., 15-7685 (MAS) (LHG) (D.N.J. July 1, 2019). The complaint asserts the Section 20A claims against a board member of a large pharmaceutical corporation (the “Company”) and an investment advisory firm and affiliates co-founded by that board member that traded in the Company’s stock. The Court, which had already considered and denied a motion to dismiss the Section 10(b) and Rule 10b-5 claims in a prior ruling, concluded that the complaint adequately alleged Section 20A claims and denied the motion to dismiss.
Plaintiffs commenced the action against the Company and its officers and directors, principally alleging that the Company designed a “clandestine network” of pharmacies to block the sale of competing generic drugs and asserting Section 10(b) and Rule 10b-5 claims. In September 2017, the Court denied defendants’ motion to dismiss those claims. In September 2018, plaintiffs amended their complaint to add claims of insider trading against a corporate board member and an investment advisory firm (as well as its affiliates) co-founded by that board member (the “Insider Trading Defendants”). Plaintiffs allege the Insider Trading Defendants sold 4.2 million shares of the Company’s stock for proceeds of approximately $950 million while in possession of material nonpublic information regarding the Company’s improper business and accounting practices. Plaintiffs further allege that the Insider Trading Defendants had not sold the Company’s shares in over four years and that the sale took place only a few months before the alleged corrective disclosures.
To plead a violation of Section 20A, which is a private right of action for insider trading violations, a plaintiff must plead: (1) a predicate violation of the Exchange Act; (2) that plaintiff traded contemporaneously with the insider; and (3) that the insider was in possession of material nonpublic information. A plaintiff also must allege facts giving rise to a “‘strong inference’ of scienter,” which the Court noted requires an inference that is “at least as compelling as any opposing inference of nonfraudulent intent.”
As to the first element, there is a split of authority as to whether the predicate violation of the Exchange...
