Love v. Alfacell Corp.

ROBERT D. LOVE, Plaintiff,

v.ALFACELL CORPORATION, et al., Defendants.

CIVIL ACTION NO. 09-5199 (MLC)

UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY

Dated: October 17, 2011

NOT FOR PUBLICATION

MEMORANDUM OPINION

COOPER, District Judge

Plaintiff, Robert D. Love, brings this action against Defendants, Alfacell Corporation ("Alfacell"), Lawrence Kenyon, James Loughlin, Kuslima Shogen, David Sidransky, Paul Weiss, John Brancaccio, Stephen Carter, and Donald Conklin (together with Kenyon, Loughlin, Shogen, Sidransky, Weiss, Brancaccio, and Carter, "Individual Defendants" and, collectively,"Defendants").¹ Love alleges that Defendants: (1) violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) ("Section 10(b)"), and Securities and Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. § 240.10b-5 ("Rule 10b-5"); (2) violated Section 49:3-71 of the New Jersey Uniform Securities Law, N.J.S.A. § 49:3-71; (3) committed fraud ; (4) committed negligentmisrepresentation; and (5) breached various fiduciary duties. (Am. Compl.) Love also alleges that the Individual Defendants: (1) violated Section 20(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a) ("Section 20(b)"); (2) committed fraud; (3) breached various fiduciary duties; (4) committed gross negligence; and (5) committed corporate waste. (Id.)

Defendants move to dismiss the Amended Complaint pursuant to Federal Rule of Civil Procedure ("Rule") 9(b), Rule 12(b)(6), and the Private Securities Litigation Reform Act of 1995, Section 78u-4, et seq. ("PSLRA"). (Dkt. entry no. 32, Mot. Dismiss; dkt. entry no. 33, Defs. Br.) They argue, inter alia, that Love has not presented a claim under Section 10(a) and Rule 10b-5 upon which relief can be granted. (Defs. Brief at 11-17.)² Love opposes the motion. (See dkt. entry no. 36, Plt. Opp. Br.)

The Court, pursuant to Local Civil Rule 78.1(b), decides the motion on the papers. For the reasons set forth below, the Court will: (1) grant the motion with respect to Love's claims under Section 10(b), Rule 10b-5, and Section 20(a), and dismiss such claims with prejudice; and (2) dismiss the remaining state law claims without prejudice to recommence that part of the action in state court.

BACKGROUND

I. Love's Relationship With Alfacell

Alfacell, a Delaware corporation maintaining its principal place of business in Somerset, New Jersey, is a biopharmaceutical company engaged in the discovery, development, and commercialization of therapies for cancer and other diseases. (Am. Compl. at ¶ 16.) During the periods relevant to this action, Individual Defendants served as Alfacell's corporate officers, members of Alfacell's board of directors, or both. (Id. at ¶¶ 17-26.)

Love joined Alfacell in May of 2005 as its Vice President and Chief Financial Officer ("CFO"). (Am. Compl. ¶ 9). See also Alfacell Form 8-K, filed on May 26, 2006, at 2.³ As compensation, Love received stock options that vested subject to an established schedule. Upon vesting, the options permitted him to purchase up to 400,000 shares of Alfacell stock at $1.87 per share. (Am. Compl. at ¶ 10.) See Alfacell Form 8-K, filed on May 26, 2006, at 2. While employed by Alfacell, Love vestedinterests in and purchased 20,000 shares of Alfacell stock. (Am. Compl. at ¶ 12). He also vested an interest in 125,000 additional shares. His option to purchase these shares, if not exercised, would have expired on July 19, 2007. (Id. at ¶ 11.)

Love worked for Alfacell for approximately twenty months and announced his resignation in November of 2006. (See id. at ¶ 13.) See Alfacell Form 8-K, filed on Nov. 9, 2006, at 2. He ceased working for Alfacell on January 19, 2007. (Am. Compl. at ¶ 13.) Love was not thereafter involved in Alfacell's day-to-day operations and he thus lacked access to "inside information" about Alfacell. (Id. at ¶ 14.)

II. Alfacell's Experimental Cancer Drug, ONCONASE

At all times relevant to this action, Alfacell sought to commercialize ONCONASE, an experimental drug developed to treat unresectable malignant mesothelioma. (Id. at ¶¶ 1, 37). See Alfacell Form 8-K, filed on Oct. 31, 2006, at 4, 7.⁴ To further the development of ONCONASE, Alfacell conducted clinical trials. Such trials served as necessary predicates to the submission of a New Drug Application to the United States Food and Drug Administration ("FDA"). (See Am. Compl. at ¶¶ 34-35).

Pharmaceutical drug trials traditionally include three phases. (Id. at ¶ 33.) Phase I consists of safety studies, administered to healthy volunteers. (Id.) Phase II consists of "proof of concept" studies, administered to patients presenting the disease, to determine the new drug's safety and efficacy, and the optimum therapeutic dose. (Id.) Phase III then measures the extent of the new drug's efficacy and side effects against the standard treatment for a given medical condition, as determined by randomized and/or double-blind trials. (Id. at 34.) The endpoint of a Phase III trial is survival, i.e., the length of time that patients enrolled in the study live. Alfacell Form 10-Q, filed June 9, 2006, at 20.⁵ Pharmaceutical drug development companies typically include Phase III trial results with their FDA New Drug Applications. (Am. Compl. at ¶ 34.)

Alfacell established and conducted a Phase III clinical trial between 2006 and 2008, hoping to measure the efficacy and side effects of ONCONASE as compared to standard treatments for unresectable malignant mesothelioma. (Id. at ¶ 35.) See Alfacell Form 8-K, Oct. 30, 2006. To achieve statistical significance, it concluded and that the Phase III trial required 316 "patient events," i.e., patient deaths. (See Am. Compl. at 35.) See Alfacell Form 10-Q, filed June 9, 2006, at 20.

III. Alfacell's Oversight of the Phase III Clinical Trial

During Love's tenure with Alfacell, Alfacell issued five quarterly reports, i.e., SEC Form 10-Q, and two annual reports, i.e., SEC Form 10-K. Each report, which was electronically signed by Love and filed with the SEC, chronicled the progress of the Phase III clinical trial. See Alfacell Form 10-Q, filed Dec. 11, 2006; Alfacell Form 10-K, filed Oct. 16, 2006; Alfacell Form 10-Q, filed June 9, 2006; Alfacell Form 10-Q, filed Mar. 13, 2006; Alfacell Form 10-Q, filed Dec. 12, 2005; Alfacell Form 10-K, filed Oct. 14, 2005; Alfacell Form 10-Q, filed June 9, 2005.

Through these reports, Alfacell repeatedly stated that it "could not predict with certainty when a sufficient number of [clinical patient] deaths will occur to achieve statistical significance." Alfacell Form 10-Q, filed Dec. 11, 2006, at 12; Alfacell Form 10-K, filed Oct. 16, 2006, at 27; Alfacell Form 10-Q, filed June 9, 2006, at 13; Alfacell Form 10-Q, filed Mar. 13, 2006, at 11;

Alfacell Form 10-Q, filed Dec. 12, 2005, at 10; Alfacell Form 10-K, filed Oct. 14, 2005, at 19; Alfacell Form 10-Q, filed June 9, 2005, at 11; see also Alfacell Form S-3, filed Aug. 16, 2006, at 5.⁶ It clarified that it could not "predict how long it will take us nor how much it will cost us to complete our Phase III trial because it is a survival study . . . ." Alfacell Form 10-Q, filed Dec. 11, 2006, at 12; Alfacell Form 10-K, filed Oct. 16, 2006, at 27; Alfacell Form 10-Q, filed June 9, 2006, at 13; Alfacell Form 10-Q, filed Mar. 13, 2006, at 11; Alfacell Form 10-Q, filed Dec. 12, 2005, at 10; Alfacell Form 10-K, filed Oct. 14, 2005, at 19; Alfacell Form 10-Q, filed June 9, 2005, at 11.⁷ And it further clarified:

According to the [trial] protocol, a sufficient number of patient deaths must occur in order to perform the required statistical analyses to determine the efficiency of ONCONASE® in patients with unresectable (inoperable) malignant mesothelioma. Since it is impossible to predict with certainty when these terminal events in the Phase III trial will occur, we do not have the capability of reasonably determining when a sufficient number of deaths will occur.

Alfacell Form 10-K, filed Oct. 16, 2006, at 18; Alfacell Form 10-Q, filed June 9, 2006, at 19; Alfacell Form 10-Q, filed Mar. 13, 2006, at 19; Alfacell Form 10-Q, filed Dec. 12, 2005, at 17; Alfacell Form 10-K, filed Oct. 14, 2005, at 26; Alfacell Form 10-Q, filed June 9, 2005, at 16.⁸

To provide adequate oversight of the Phase III trial, Alfacell created a Research and Clinical Oversight Committee ("the Committee"), which it announced in a February 12, 2007 press release. (Am. Compl. at ¶¶ 38, 40.) Alfacell stated that the Committee would "work closely with management and the scientific advisory board to provide support and direction to the company's research and development programs," thereby providing watchful and responsible care of the Phase III trial. (Id. at ¶¶ 38, 40.)

After creating the Committee, Alfacell continued to advise the SEC and the public of the status of the Phase III trial through its ongoing quarterly and annual reports. Through those reports, it began to cautiously estimate an end-date for the Phase III trial:

The primary endpoint of the trial is overall survival. . . . At this time, we cannot predict with certainty the timing of the occurrence of the required number of deaths, but currently estimate that this will occur in the third quarter of 2007.

(Id. at ¶ 48.) See Alfacell Form 10-Q, filed Mar. 12, 2007.⁹ At a June 5, 2007 investor meeting, Alfacell reiterated its estimate. (Am. Compl. ¶ 49.) The company's acting Chief Executive Officer, Shogen, and its acting CFO, Kenyon, provided information about the creation of the Committee and an estimated(or targeted) end-date for the Phase III trial. (Id. at ¶¶ 41, 49-50.) In a slide deck presented to investors that day, Shogen and Kenyon, on behalf of Alfacell, noted:

This presentation includes statements that may constitute "forward-looking" statements, usually containing the words "believe," "estimate," "project," "expect" or similar expressions. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the

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