In re Galena Biopharma, Inc., Case No. 3:14-cv-367-SI (LEAD)

In re GALENA BIOPHARMA, INC. SECURITIES LITIGATION

Case No. 3:14-cv-367-SI (LEAD)

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF OREGON

August 5, 2015

OPINION AND ORDER

Jeffrey S. Ratliff, RANSOM GILBERTSON MARTIN & RATLIFF, LLP, 1500 N.E. Irving Street, Suite 412, Portland, OR 97232; Leigh R. Handelman Smollar and Patrick V. Dahlstrom, POMERANTZ LLP, Ten South La Salle Street, Suite 3505, Chicago, IL 60603; Jeremy A. Lieberman, POMERANTZ LLP, 600 Third Avenue, 20th Floor, New York, NY 10016; Laurence M. Rosen and Phillip Kim, THE ROSEN LAW FIRM, P.A. 275 Madison Avenue, 34th Floor, New York, NY 10016. Of Attorneys for Plaintiffs.

Kristen Tranetzki, ANGELI UNGAR LAW GROUP LLC, 121 S.W. Morrison Street, Suite 400, Portland, OR 97204; Jonathan R. Tuttle and Scott N. Auby, DEBEVOISE & PLIMPTON LLP, 555 13th Street N.W., Suite 1100E, Washington D.C., 20004. Of Attorneys for Defendant Mark J. Ahn.

Robert L. Aldisert, PERKINS COIE LLP, 1120 N.W. Couch Street, 10th Floor, Portland, OR 97209. Of Attorneys for Defendants Rudolph Nisi, Sanford Hillsberg, Steven Kriegsman, Stephen Galliker, and Richard Chin.

Lois O. Rosenbaum, STOEL RIVES LLP, 900 S.W. Fifth Avenue, Suite 2600, Portland, OR 97204; Paul R. Bessette, Michael J. Biles, and James P. Sullivan, KING & SPALDING LLP, 401 Congress Avenue, Suite 3200, Austin, TX 78701. Of Attorneys for Defendants Galena Biopharma, Inc., Ryan M. Dunlap, Remy Bernarda, and Mark Schwartz.

James T. McDermott and Ciaran P.A. Connelly, BALL JANIK LLP, 101 S.W. Main Street, Suite 1100, Portland, OR 97204; Jacob S. Frenkel, Russell D. Duncan, and Renee B. Kramer, SHULMAN, ROGERS, GANDAL, PORDY & ECKER, P.A., 12505 Park Potomac Avenue, Sixth Floor, Potomac MD 20854. Of Attorneys for Defendants Michael McCarthy and The DreamTeam Group, LLC.

Joseph C. Arellano and Daniel L. Keppler, KENNEDY WATTS ARELLANO LLP, 1211 S.W. Fifth Avenue, Suite 2850, Portland, OR 97204; Edward Gartenberg, GARTENBERG GELFAND HAYTON LLP, 801 S. Figureroa Street, Suite 2170, Los Angeles, CA 90017. Of Attorneys for Defendants Lidingo Holdings, LLC and Kamilla Bjorlin.

Michael H. Simon, District Judge.

This putative class action securities fraud case is brought by shareholders ("Plaintiffs") of Defendant Galena Biopharma, Inc. ("Galena" or "Company"). Plaintiffs allege that Galena, certain members of Galena's Board of Directors ("Board"), and executive officers of Galena engaged in a fraudulent scheme to promote Galena and increase its stock price so that many of Galena's officers and directors could (and did) sell their personally-owned Galena stock at artificially high prices, in a "pump and dump" insider trading scheme. Plaintiffs further allege that The DreamTeam Group LLC ("DreamTeam"), its Managing Member Michael McCarthy, its employee or agent Thomas Michael Meyer,¹ Lidingo Holdings, LLC ("Lidingo"), and Lidingo's Managing Member Kamilla Bjorlin,² participated in the scheme by publishing bullish articles, comments, blogs, posts, and email blasts, including having authors publish articles using false aliases, without including the required disclosure that they were being paid by Galena to try to inflate its stock price.³

Before the Court are five motions to dismiss: (1) a motion to dismiss filed by Defendants Rudolph Nisi, Sanford Hillsberg, Steven Kriegsman, Stephen Galliker, and Richard Chin (collectively "Outside Directors") (Dkt. 80); (2) a motion to dismiss filed by Defendant Mark J. Ahn (Dkt. 81); (3) a motion to dismiss filed by Defendants Mark Schwartz, Ryan Dunlap, and Remy Bernarda (collectively "Management Defendants") and Galena⁴ (Dkt. 82); (4) a motion to dismiss filed by Defendants Lidingo and Bjorlin (collectively "Lidingo Defendants") (Dkt. 136); and (5) a motion to dismiss filed by Defendants DreamTeam and McCarthy (collectively "DreamTeam Defendants") (Dkt. 138). For the following reasons, the pending motions to dismiss are granted in part and denied in part.

STANDARDS

A motion to dismiss for failure to state a claim may be granted only when there is no cognizable legal theory to support the claim or when the complaint lacks sufficient factual allegations to state a facially plausible claim for relief. Shroyer v. New Cingular Wireless Servs., Inc., 622 F.3d 1035, 1041 (9th Cir. 2010). In evaluating the sufficiency of a complaint's factual allegations, the court must accept as true all well-pleaded material facts alleged in the complaint and construe them in the light most favorable to the non-moving party. Wilson v. Hewlett-Packard Co., 668 F.3d 1136, 1140 (9th Cir. 2012); Daniels-Hall v. Nat'l Educ. Ass'n, 629 F.3d 992, 998 (9th Cir. 2010). To be entitled to a presumption of truth, allegations in a complaint "may not simply recite the elements of a cause of action, but must contain sufficient allegationsof underlying facts to give fair notice and to enable the opposing party to defend itself effectively." Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 2011). All reasonable inferences from the factual allegations must be drawn in favor of the plaintiff. Newcal Indus. v. Ikon Office Solution, 513 F.3d 1038, 1043 n.2 (9th Cir. 2008). The court need not, however, credit the plaintiff's legal conclusions that are couched as factual allegations. Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009).

A complaint must contain sufficient factual allegations to "plausibly suggest an entitlement to relief, such that it is not unfair to require the opposing party to be subjected to the expense of discovery and continued litigation." Starr, 652 F.3d at 1216. "A claim has facial plausibility when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 663 (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007)).

BACKGROUND⁵

A. Company Background

As alleged in the Consolidated Class Action Complaint for Violations of the Federal Securities Laws ("Consolidated Complaint" or "CAC"), Galena is a biotechnology company based in Lake Oswego, Oregon. In 2007 the Company was spun off from its parent, CytRx Corporation ("CytRx"). CytRx remained Galena's majority owner until 2008. In connection with the spin-off, Ahn was appointed a director of Galena. Ahn became Galena's President and Chief Executive Officer ("CEO") in March 2011.

Galena focuses on the development and commercialization of targeted oncology treatments. Galena's only commercial-stage product is Abstral®, a propriety form of fentanyl, an opiate analgesic. Fentanyl can be abused and has been resold as a street drug. At least four other companies already offer generic fentanyl in the United States. As alleged by Plaintiffs, Galena is "far from obtaining financial success from selling Abstral." Galena also is pursuing the development of cancer therapeutics, including its main product candidate, NeuVax™, for the treatment of breast cancer.

B. Galena's Relationship with DreamTeam and Lidingo

Galena's relationship with DreamTeam dates back to 2008, and its relationship with Lidingo dates back to 2012. Galena previously had hired these investor relations firms to tout Galena's stock in advance of stock offerings. In early summer 2013, Galena did not have any open contracts with either company.

In July 2013, Ahn asked Galena's Vice President of Marketing & Communications, Remy Bernarda, to interview three investor relations firms that could potentially increase Galena's stock price. Two of these companies were Tiberend Strategic Advisors ("Tiberend") and DreamTeam. Bernarda recommended that Galena hire Tiberend, a traditional, full service investor relations firm specializing in the healthcare and life sciences industry. Bernarda recommended that Galena not hire DreamTeam. Bernarda noted that Tiberend treated writers as "journalists," unlike DreamTeam. Bernarda further noted that if Galena hired DreamTeam, she believed it would cause "issues." Galena hired Tiberend at $3,500 per month for an initial three-month trial.

Despite Bernarda's recommendation to the contrary, Ahn also hired DreamTeam. DreamTeam began its work under a 90-day, $25,000 contract for "Platinum Services" datedJuly 23, 2013 and a 240-day, $50,000 contract also dated in July 2013. The total monthly payment to DreamTeam was approximately $14,583.

In addition, Ahn signed a contract with Lidingo on August 1, 2013, which obliged Galena to pay Lidingo a cash fee of $20,000 per month plus expenses. The contract also gave Lidingo an option to buy 250,000 shares of Galena common stock at an exercise price based on the day the agreement closed, 100,000 shares of which vested immediately. Plaintiffs allege that Ahn did not have the corporate authority to award stock options.

C. Alleged Scheme

Plaintiffs allege that Galena and its management and directors entered into an unlawful promotional scheme with DreamTeam and Lidingo artificially to inflate the stock price of Galena using a variety of different channels. Galena intended that DreamTeam and Lidingo would place misleading articles on investor websites touting Galena. DreamTeam and Lidingo did so, often using third parties and aliases that falsely claimed to be established, credible investment professionals. The articles did not disclose the paid relationship with Galena and often included false disclaimers that they were not paid promotions. Galena required that it approve every article before that article could be published, and either Ahn or Bernarda approved each article.

By way of example, on or about August 6, 2013, DreamTeam submitted to the online investment advice website Seeking Alpha⁶ an article entitled "Galena Biopharma Presents anAttractive Investment Opportunity." This article recommended investment in Galena stock, but failed to disclose any financial relationship between the author, who was identified only as "Wonderful Wizard," and either Galena or DreamTeam. The article affirmatively misrepresented that it was not a paid promotion.

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