In re Evolus Sec. Litig., 20 Civ. 8647 (PGG)

IN RE EVOLUS INC. SECURITIES LITIGATION

No. 20 Civ. 8647 (PGG)

United States District Court, S.D. New York

September 17, 2021

ORDER

PAUL G. GARDEPHE, U.S.D.J.:

This is a putative class action brought under federal securities laws on behalf of those who purchased or otherwise acquired Evolus, Inc. securities between February 1, 2019 and July 6 2020. Pending before the Court are four motions for the appointment of lead plaintiff and approval of lead counsel.^[1] (Ahmad Mot. (Dkt. No. 24); Lefebvre Mot. (Dkt. No. 27) Diaferia and Sisun Mot. (Dkt. No. 38); Investor Group Mot (Dkt. No. 45)) For the reasons stated below, Raja Ahmad will be appointed as lead plaintiff, and the Rosen Law Firm, PA will be appointed lead counsel.

BACKGROUND

Evolus is a public company headquartered in California whose shares are listed on the New York Stock Exchange under the symbol “EOLS.” (Malakouti Cmplt. (Dkt. No. 1) ¶¶ 2, 13)^[2] Evolus is a “medical aesthetics company” that “develops, produces, and markets clinical neurotoxins for the treatment of aesthetic concerns.” (Id ¶ 2) Evolus sought to “develop and introduce a cheaper alternative to Botox® to the U.S. market.” (Id ¶ 19) Botox is a “purified botulinum toxin . . . that is widely used for temporarily reducing or eliminating facial fine lines and wrinkles.” Botox is manufactured by Allergan plc and Allergan Inc. (“Allergan”) and is distributed by Allergan's partner, Medytox Inc. (Id ¶ 18)

Evolus's Botox alternative is Jeuveau. In September 2013, as part of its effort to develop Jeuveau, Evolus entered into a licensing agreement with Daewoong Pharmaceuticals Co., Ltd. which had served as Allergan's exclusive distributor of Botox for more than a decade. And between January 2014 and February 2019, Evolus hired five “former high-level Allergan employees with significant Botox® experience. . . .” (Id ¶¶ 20-21)

On January 30, 2019, Allergan and Medytox filed a complaint with the U.S. International Trade Commission (“ITC”) alleging that, in developing Jeuveau, Evolus and Daewoong had used and misappropriated Medytox's trade secrets. (Id ¶ 23) Evolus dismissed these allegations as “speculative” and “intended to create confusion.” (Id ¶ 24)

On February 1, 2019, Evolus issued a press release announcing that the U.S. Food and Drug Administration (“FDA”) had approved the marketing of Jeuveau for cosmetic use, and initiated its campaign to promote the commercial launch of Jeuveau in the United States. (Id ¶¶ 3, 25) Evolus also told investors - in dozens of public statements promoting Jeuveau - that Jeuveau is a proprietary product that is backed by “years of clinical research and millions of dollars' worth of investment in research and development.” (Id ¶¶ 3, 27) Evolus also predicted that Jeuveau “would attain the number two U.S. market position within 24 months of launch.” (Id ¶¶ 3, 26)

On July 6, 2020, an ITC administrative law judge (“ALJ”) issued an Initial Final Determination in the case brought by Allergan and Medytox. The ALJ concluded that Evolus and Daewoong had “misappropriated [from Medytox] the botulinum toxin bacterial strain as well as the manufacturing process that led to [Jeuveau's] development and manufacture.” (Id ¶¶ 5, 63) The ALJ recommended that Evolus be barred - for ten years - from importing and selling Jeuveau in the United States. (Id.) In the two days after this decision was issued, Evolus's stock price dropped 37 percent. (Id. ¶ 6)

Plaintiffs in the instant actions claim that - during the alleged class period of February 1, 2019 to July 6, 2020 -

Defendants made materially false and misleading statements, and failed to disclose material adverse facts about the Company's business, operational, and compliance policies. Specifically, Defendants made false and/or misleading statements and failed to disclose to investors that: (i) the real source of botulinum toxin bacterial strain as well as the manufacturing processes used to develop Jeuveau™ originated with and were misappropriated from Medytox; (ii) sufficient evidentiary support existed for the allegations that Evolus misappropriated certain trade secrets relating to the botulin toxin strain and the manufacturing processes for the development of Jeuveau™; (iii) as a result, Evolus faced a real threat of regulatory and/or court action, prohibiting the import, marketing, and sale of Jeuveau™; which in turn (iv) seriously threatened Evolus' ability to commercialize Jeuveau™ in the United States and generate revenue; and (v) any revenues generated from the sale of Jeuveau™ were based on Evolus' unlawful activities, including the misappropriation of trade secrets and secret manufacturing processes belonging to Allergan and Medytox.

(Id. ¶ 4)

On October 16, 2020, Plaintiff Armin Malakouti filed an action against Defendants Evolus Inc., David Moatazedi, Rui Avelar, and Lauren Silvernail (“Defendants”), on behalf of a class of all those who acquired Evolus common stock between February 1, 2019 and July 6, 2020. (Id. ¶ 31) On October 28, 2020, Plaintiff Clinton Cox filed a largely identical putative class action. (Cox Cmplt. (Case No. 20 Civ. 9053, Dkt. No. 1)) On November 13, 2020, this Court consolidated the Malakouti and Cox actions pursuant to a joint stipulation under the caption In re Evolus Inc. Securities Litigation. (See Malakouti Order (Case No. 20 Civ. 8647, Dkt. No. 12); Cox Order (Case No. 20 Civ. 9053, Dkt. No. 8))

I. APPOINTMENT OF LEAD PLAINTIFF

A. Presumptive Lead Plaintiff: Largest Financial Interest

1. Legal Standard

The Private Securities Litigation Reform Act (the “PSLRA”) directs courts to “appoint as lead plaintiff the member or members of the purported plaintiff class that the court determines to be most capable of adequately representing the interests of class members.” 15 U.S.C. § 78u-4(a)(3)(B)(i). The PSLRA creates a “[r]ebuttable presumption” that “the most adequate plaintiff . . . is the person or group of persons” that “has the largest financial interest in the relief sought by the class, ” provided that such person or group “otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure.'” Id. § 78u-4(a)(3)(B)(iii)(I). This presumption may be rebutted upon a showing that the presumptive lead plaintiff “will not fairly and adequately protect the interests of the class, ” or “is subject to unique defenses that render such plaintiff incapable of adequately representing the class.” 15 U.S.C. § 78u-4(a)(3)(B)(iii)(II).

“The PSLRA does not specify a method for calculating which plaintiff has the ‘largest financial interest'. . . .” In re Fuwei Films Sec. Litig., 247 F.R.D. 432, 436 (S.D.N.Y. 2008) (quoting Pirelli Armstrong Tire Corp. Retiree Med. Benefits Tr. v. LaBranche & Co., Inc., 229 F.R.D. 395, 404 n.15 (S.D.N.Y. 2004)). Many courts in this District, however, determine a prospective lead plaintiff's financial interest by looking to “(1) the number of shares purchased; (2) the number of net shares purchased; (3) total net funds expended by the plaintiff[] during the class period; and (4) the approximate losses suffered by the plaintiff[].” In re CMED Sec. Litig., No. 11 Civ. 9297 (KBF), 2012 WL 1118302, at *3 (S.D.N.Y. Apr. 2, 2012) (citing Richman v. Goldman Sachs Grp., Inc., 274 F.R.D. 473, 475 (S.D.N.Y. 2011); Foley v. Transocean Ltd., 272 F.R.D. 126, 127-28 (S.D.N.Y. 2011); Pirelli, 229 F.R.D. at 404; Lax v. First Merchs. Acceptance Corp., No. 97 C 2715 et al., 1997 WL 461036, at *5 (N.D. Ill. Aug. 11, 1997)).

Courts in this District “‘place the most emphasis on the last of the four factors: the approximate loss suffered by the movant.'” In re Orion Sec. Litig., No. 08 Civ. 1328 (RJS), 2008 WL 2811358, at *5 (S.D.N.Y. July 8, 2008) (quoting Kaplan v. Gelfond, 240 F.R.D. 88, 93 (S.D.N.Y. 2007)). And in calculating loss, “[c]ourts in this [D]istrict have a ‘very strong preference' for the ‘last-in, first-out' [‘LIFO'] method of calculating losses.”^[3] Rosian v. Magnum Hunter Res. Corp., Nos. 13 Civ. 2668 (KBF) et al., 2013 WL 5526323, at *1 (S.D.N.Y. Oct. 7, 2013) (quoting Richman, 274 F.R.D. at 473)).

2. Lead Plaintiff Applicants

The following parties seek appointment as lead plaintiff: (1) Raja Ahmad; (2) James LeFebvre; (3) Peter Diaferia and Mitchell Sisun, who seek appointment as co-lead plaintiffs; and (4) Armin Malakouti, Mahmood Gholami, and Daniel Mierlak, who seek appointment as the “Investor Group.” (See Dkt. Nos. 24, 27, 38, 45)

Based on the motion papers submitted to this Court, the relevant financial interest components are as follows:

Movant

Shares Purchased During Class Period

Net Shares Retained

Net Funds Expended

Approximate Loss

Raja Ahmad

340, 000

0

$6, 607, 762.51

$748, 294.84

James LeFebvre

46, 496

15, 000

$262, 314.39

$233, 821.91 (LIFO)^[4]

Diaferia & Sisun

45, 050

36, 050

$1, 089, 024

$652, 565 (FIFO); $626, 306 (LIFO)

Investor Group

47, 922

35, 208

$651, 706.96

$526, 444.45

(See Ahmad Br., Ex. 3 (Dkt. No. 26-3); Linkh Decl Ex. C (Dkt. No. 29-3); Lieberman Decl., Ex. A (Dkt. No. 43-1); Investor Group Br. (Dkt. No. 47) at 11; Wilson Decl., Ex. C (Dkt. No. 48-3))^[5]

While LeFebvre, Diaferia and Sisun, and the Investor Group acknowledge that Ahmad claims the largest loss, they argue that Ahmad does not have the largest financial interest, because he sold all of his Evolus securities before Defendants' alleged fraud was disclosed to the market, and his losses are therefore not recoverable. (See Diaferia and Sisun Opp. Br. (Dkt. No. 54) at 11-13; Investor Group Opp. Br. (Dkt. No. 57) at 8-10; Lefebvre Reply (Dkt. No. 59) at 6; Diaferia and Sisun Reply (Dkt. No. 60) at 13-14)

Ahmad sold all of his Evolus securities between March 13, 2019 and January 14, 2020. (Ahmad Br., Ex. 3 (Dkt. No. 26-3)) He argues...