Schwartz v. Arena Pharmaceuticals, Inc.

The district court erred in dismissing plaintiff’s 10b-5 complaint based on lack of scienter, since defendant told its investors a misleading half-truth by disclosing that animal studies had confirmed the drug’s efficacy but omitting the fact that rats who received the drug had shown increased incidence of cancer.  Plaintiff adequately alleged scienter.  It was error to dismiss his 10b-5 complaint.  While defendant did not have a duty to disclose all information about its weight-loss drug in the test stage, it did have a duty to avoid misleading half-truths.  Here, defendant touted the drug to investors, stating that all completed animal studies demonstrated the long-term efficacy and safety of the drug.  The disclosure was misleading, as defendants knew, because studies of the drug in rats had shown increased incidence of cancer, and the FDA had questioned the safety of the drug for human use for precisely that reason.

Ninth Circuit Court of Appeals (Bybee, J.); October 26, 2016; 2016 WL 6246875

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