Quinones v. Frequency Therapeutics, Inc.

665 F.Supp.3d 156

Julian QUINONES, Individually and on Behalf of All Others Similarly Situated, Plaintiffs, v. FREQUENCY THERAPEUTICS, INC.,David L. Lucchino, and Carl LeBel, Defendants.

CIVIL ACTION NO. 21-10933-WGY

United States District Court, D. Massachusetts

Signed March 29, 2023

Amanda F. Lawrence, Scott & Scott Attoneys at Law, LLP, Colchester, CT, Thomas L. Laughlin, IV, Pro Hac Vice, Scott Scott, Attorneys at Law, LLP, New York, NY, for Plaintiff Paul Evans.

Jacob B. Lieberman, Pro Hac Vice, Amanda F. Lawrence, Scott & Scott Attoneys at Law, LLP, Colchester, CT, Thomas L. Laughlin, IV, Pro Hac Vice, Scott Scott, Attorneys at Law, LLP, New York, NY, for Plaintiff Julian Quinones.

Jeff G. Hammel, Pro Hac Vice, Kevin M. McDonough, Pro Hac Vice, Latham & Watkins LLP, New York, NY, William J. Trach, Latham & Watkins LLP, Boston, MA, for Defendants.

MEMORANDUM AND ORDER

YOUNG, District Judge¹

I. INTRODUCTION

Lead plaintiff Julian Quinones ("Quinones") brings a securities class action against the defendants Frequency Therapeutics, Inc. ("Frequency"), David L. Lucchino ("Lucchino"), Frequency's Chief Executive Officer, and Carl LeBel ("LeBel"), Frequency's Chief Development Officer (collectively "the Defendants"). The essence of Quinones' case is that the Defendants deceived Frequency investors into thinking that the clinical trial for a hearing loss treatment called "FX-322" was proceeding according to plan -- despite the Defendants' alleged knowledge to the contrary. Specifically, Quinones alleges that the Defendants made fourteen false and misleading statements regarding Phase 2a of FX-322's trial in the period between October 29, 2020, and March 22, 2021, inclusive (the "Class Period").

The Defendants moved to dismiss for failure to state a claim, arguing that Quinones has failed to plead facts with particularity establishing (1) false or misleading statements, and (2) a strong inference of scienter.

After careful examination, this Court GRANTS the Defendants' motion to dismiss. First, Quinones has failed to allege sufficient facts to establish that twelve out of the fourteen challenged statements are false and misleading. Absent in the complaint are sufficient particularized facts showing that the Defendants had knowledge of the patients' unmet hearing deficit criteria at the time these statements were made. Moreover, several of the challenged statements are either opinion statements or statements protected by the safe harbor provision of the Private Securities Litigation Reform Act ("PSLRA"), Securities Exchange Act of 1934, § 21E(c)(1), as amended, 15 U.S.C. § 78u-5(c)(1), and they are thus not actionable.

Second, even if Quinones has alleged sufficient facts that might allow this Court to infer that not "all" subjects enrolled in the study had a meaningful word recognition deficit as claimed by Frequency, this action must be dismissed because Quinones' scienter allegations are not made out. Contrary to what Quinones alleges, Lucchino's disposition of a small portion of his holdings following a steep increase in the price of Frequency stock is not suspicious and does not support scienter. This is especially so given that Lucchino is the only Frequency executive that is alleged to have sold stock during the Class Period. Moreover, Quinones' confidential witness' ("CW1") second-hand, unparticularized account of what an unnamed investigator supposedly told LeBel at an unspecified time cannot support a strong inference of scienter. Nor can Quinones' "core operation" argument by itself bootstrap an otherwise lacking complaint above the high pleading standard imposed by the PSLRA. Taken together, Quinones' allegations fail to articulate a cohesive theory of fraud. Therefore, the complaint does not survive the Defendants' motion to dismiss.

A. Procedural History

Pursuant to Federal Rules of Civil Procedure 23(a) and (b)(3), a two-count class action complaint for violation of the Securities Exchange Act of 1934 was initially filed on June 3, 2021 by lead plaintiff Paul Evans ("Evans"), individually and on behalf of others similarly situated, against Frequency and Lucchino. Class Action Compl. ("Orig. Compl."), ECF No. 1. Evans and the class members alleged a violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder (count one) and a violation of Section 20(a) of the Securities Exchange Act (count two). Id. ¶¶ 46-60.

The Court subsequently consolidated this matter with a nearly identical class action against Frequency and Lucchino, Case No. 1:21-cv-11040-WGY, Micheal Hingston, Individually and on Behalf of All Others Similarly Situated v. Frequency Therapeutics, Inc. and David L. Lucchino (D. Mass. June 22, 2021). See Order of Consolidation, March 21, 2022, ECF No. 28. Julian Quinones was appointed as lead plaintiff for the class. See Elec. Clerk's Notes, March 15, 2022, ECF No. 27.

On May 16, 2022, Quinones filed a consolidated class action complaint -- containing the same two counts as the original complaint -- against Frequency, Lucchino, and Lebel. Consol. Class Action Compl. ("Compl."), ECF No. 29; id. ¶¶ 104-18. Approximately two months later, the Defendants filed a 12(b)(6) motion to dismiss both counts of the consolidated complaint, Defs.' Mot. Dismiss Consol. Class Action Compl. ("Defs.' Mot."), ECF No. 34, and the parties fully briefed the issue, Mem. Law Supp. Defs.' Mot. Dismiss Consol. Class Action Compl. ("Defs.' Mem."), ECF No. 35; Opp'n Mot. Dismiss Consol. Class Action Compl. ("Pls.' Opp'n"), ECF No. 41; Reply Br. Supp. Defs.' Mot. Dismiss Consol. Class Action Compl. ("Defs.' Reply"), ECF No. 42.

This Court has federal question subject matter jurisdiction pursuant to section 27 of the Exchange Act, 15 U.S.C. § 78aa, and 28 U.S.C. § 1331. Venue is proper in this district pursuant to section 27 of the Exchange Act, 15 U.S.C. § 78aa, and 28 U.S.C. § 1391(b).

B. Factual Background

Quinones alleges that the Defendants -- specifically Lucchino and Lebel acting in their capacity as Frequency executives -- made fourteen separate false, misleading, incomplete, or inaccurate statements throughout the class period between October 29, 2020, and March 22, 2021, inclusive (the "Class Period"), related to a clinical trial for the company's key product that were purportedly deceiving to investors. Compl. ¶¶ 67-79. The crux of Quinones' allegations relates to one of the criteria for admission to the clinical trial: the requirement that all study participants have some form of hearing loss. Id. ¶¶ 5, 13, 36, 47, 68, 69, 73, 75, 77, 79, 86. Specifically, Frequency conveyed to investors that "all subjects" in the clinical trial "have meaningful word recognition deficits." Id. Quinones alleges that Lucchino and Lebel knew this was not the case. Id. ¶¶ 105-118. Quinones therefore claims that the challenged statements are false or misleading and, when combined with the strong inference of scienter created by, inter alia, Lucchino's increase in stock sales during the Class Period, thus constitute a violation of § 10(b) and § 20(a) of the Securities and Exchange Act of 1934. Id. ¶¶ 105-118.

1. The Parties

Frequency is a publicly traded clinical-stage biotechnology start-up. Compl. ¶ 2; Defs.' Mem. 2. Lucchino, co-founded Frequency in 2014. Defs.' Mem. 2. Lucchino is the company's President and Chief Executive Officer. Compl. ¶ 24. LeBel has been the company's Chief Development Officer since 2018. Id. ¶ 25.

The plaintiffs are a class of shareholders who purportedly purchased Frequency's common stock at artificially inflated prices between October 29, 2020, and March 22, 2021, inclusive Id. ¶¶ 1, 22. Quinones claims they were harmed by the false, misleading, incomplete, or inaccurate statements made by Lucchino and Lebel throughout the Class Period. Id. These false or misleading statements ostensibly deceived Quinones into thinking that the FX-322 trial was proceeding according to plan -- despite the Defendant's alleged knowledge to the contrary. Id. ¶¶ 22, 80-87. Quinones alleges that they would not have purchased or otherwise acquired Frequency's stock if Defendants revealed that the study was methodologically flawed. Id. ¶ 110.

2. FX-322 Clinical Trial

Frequency was founded to develop a hearing loss treatment called FX-322, promoted as a potential treatment for patients with severe sensorineural hearing loss ("SNHL"). Id. ¶¶ 2, 28. Frequency announced promising safety and efficacy results after the first phase of the FX-322 clinical trial (Phase 1), but this study did not have enough patients fully to evaluate the effects of FX-322 on hearing loss. Id. ¶¶ 3, 31-32. Frequency announced the launch of a Phase 2a trial of FX-322 in October 2019 further to evaluate the efficacy of FX-322 as a treatment for SNHL. Id. ¶¶ 4, 35. The Phase 2a trial of FX-322 ran from September 2020 to December 2020, with study participants receiving weekly injections of either FX-322 or a placebo. Id. ¶ 8, 9. Trial participants were tracked weekly after the first injection. Id. ¶ 8.

Ultimately, Phase 2a was "unlikely to deliver results that could support the efficacy of the FX-322". Compl. ¶ 66. Frequency revealed the disappointing results of the study on the morning of March 23, 2021:

The interim results [of Phase 2a] show that four weekly injections in subjects with mild to moderately sever [sic] [SNHL] did not demonstrate improvements in hearings measures versus placebo. . . . The Phase 2a interim results also showed an unexpected apparent level of hearing benefit in the placebo group that did not occur in previous trials and exceeded well-established published standards, potentially suggesting bias due to trial design. Given these challenges observed in the Phase 2a study design, there was no discernible benefit of FX-322 over placebo.

Compl. ¶ 80 (emphasis added).

The market did not react well to these disappointing results and investors -- including Quinones -- took a beating: Frequency's common stock...