No. 16-2057

UNITED STATES COURT OF APPEALS FOR THE FIRST CIRCUIT

TERRY BRENNAN; RON KENNER; KEVIN KOZIATEK; JEFFREY BUTERBAUGH; DRAGON GATE , LTD; VINCENT RAMPE,

Plaintiffs-Appellants,

AVIAD BESSLER, individually and on behalf of all others similarly situated; THEODORE J. DALY,

Plaintiffs,

v.

ZAFGEN, INC.; THOMAS E. HUGHES,

Defendants-Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS

Brief of Defendants-Appellees

Deborah S. Birnbach (Bar #38722) Kevin P. Martin (Bar #89611) Adam Slutsky (Bar #1176144) Kate MacLeman (Bar #1161337) Joshua Bone (Bar #1177074) GOODWIN PROCTER LLP 100 Northern Avenue Boston, Massachusetts 02210 Tel.: +1 617 570 1000 Fax.: +1 617 523 1231 CORPORATE DISCLOSURE STATEMENT Pursuant to Fed. R. App. P. 26.1, Defendant Zafgen, Inc., by its undersigned counsel, states that it has no parent and that no publicly held company owns 10% or more of its . TABLE OF CONTENTS

Page PRELIMINARY STATEMENT ...... 1

COUNTERSTATEMENT OF THE ISSUES ...... 5

COUNTERSTATEMENT OF THE CASE ...... 6

A. Factual Background ...... 6

1. Zafgen Developed Beloranib To Treat PWS, Severe Obesity And Related Medical Conditions...... 6

2. Zafgen Disclosed Important Investment Risks...... 9

3. A Sudden Patient Death Resulted In FDA Placing Beloranib On Partial Clinical Hold...... 15

4. In The Aftermath Of The Patient Death, Zafgen Examined And Disclosed All Adverse Thrombotic Events In All Trials...... 17

B. Procedural Background ...... 19

1. Plaintiffs’ Complaint ...... 19

2. The Decision Below ...... 20

SUMMARY OF ARGUMENT ...... 22

ARGUMENT ...... 26

I. STANDARD OF REVIEW ...... 26

II. PLAINTIFFS HAVE FAILED TO SATISFY THE PSLRA’S HEIGHTENED SCIENTER PLEADING REQUIREMENTS...... 27

A. Plaintiffs Must Plead Particularized Facts Supporting A Strong Inference Of Intentional Fraud Or Extreme Recklessness...... 27

B. The Amended Complaint Fails To Allege A Strong Inference Of Scienter...... 31

i 1. Plaintiffs’ Factual Allegations Are Insufficient To Support A Strong Inference Of Fraudulent Intent or Extreme Recklessness...... 31

(a) The academic articles are not probative of scienter...... 34

(b) The language of the disclosures does not support scienter...... 37

(c) Plaintiffs have largely abandoned their weak motive allegations...... 38

(d) Plaintiffs’ remaining arguments are unavailing...... 41

2. Where Omitted Information Was Not Material, Or Materiality Is Particularly Weak, Scienter Needs To Be Stronger...... 43

C. The Non-Fraudulent Inferences Are Far More Cogent and Compelling...... 44

III. THE AMENDED COMPLAINT FAILS TO PLEAD SPECIFIC FACTS DEMONSTRATING THAT THE OMISSIONS WERE MATERIAL...... 46

A. Disclosure Of Two Superficial AEs Would Not Have Significantly Altered The Total Mix Of Information Available...... 47

B. Plaintiffs Plead Only Materiality By Hindsight...... 49

IV. DEFENDANTS HAD NO DUTY TO DISCLOSE SUPERFICIAL THROMBOTIC EVENTS...... 50

V. THIS COURT SHOULD, IF NECESSARY, REMAND THE LOSS- CAUSATION ISSUE...... 53

VI. THE SECTION 20(a) CLAIM FAILS BECAUSE THE UNDERLYING CLAIM FAILS...... 54

CONCLUSION ...... 54

ii TABLE OF AUTHORITIES

Page(s)

Cases ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46 (1st Cir. 2008) ...... passim

Aldridge v. A.T. Cross Corp., 284 F.3d 72 (1st Cir. 2002) ...... 29

In re ARIAD Pharm., Inc. Sec. Litig., No. 15-1491 (1st Cir. Nov. 28, 2016) ...... 32, 33, 39, 43

In re Atl. Power Corp. Sec. Litig., 98 F. Supp. 3d 119 (D. Mass. 2015) ...... 40, 41

Aulson v. Blanchard, 83 F.3d 1 (1st Cir. 1996) ...... 26

Auto. Indus. Pension Trust Fund Inc. v. Textron Inc., 682 F.3d 34 (1st Cir. 2012) ...... 32

Backman v. Polaroid Corp., 910 F.2d 10 (1st Cir. 1990) (en banc) ...... 51

In re Bos. Sci. Corp. Sec. Litig., 686 F.3d 21 (1st Cir. 2012) ...... 43

In re Bos. Tech., Inc. Sec. Litig., 8 F. Supp. 2d 43 (D. Mass. 1998) ...... 51

City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Waters Corp., 632 F.3d 751 (1st Cir. 2011) ...... 43, 45, 47

Cooperman v. Individual Inc., 171 F.3d 43 (1st Cir. 1999) ...... 52

Coyne v. Metabolix, Inc., 943 F. Supp. 2d 259 (D. Mass. 2013) ...... 53

iii Cunningham v. Nat’l City Bank, 588 F.3d 49 (1st Cir. 2009) ...... 26

Deka Int’l v. Genzyme Corp. (In re Genzyme Corp. Sec. Litig.), 754 F.3d 31 (1st Cir. 2014) ...... 52

Fire & Police Pension Ass’n of Colo. v. Abiomed, Inc., 778 F.3d 228 (1st Cir. 2015) ...... 27, 39, 45

Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir. 1999) ...... 28, 39, 40, 54

Hill v. Gozani, 638 F.3d 40 (1st Cir. 2011) ...... 50, 52

Lenartz v. Am. Superconductor Corp., 879 F. Supp. 2d 167 (D. Mass. 2012) ...... 38

Local No. 8 IBEW Ret. Plan & Trust v. Vertex Pharm., Inc., 838 F.3d 76 (1st Cir. 2016) ...... passim

Local No. 8 IBEW Ret. Plan v. Vertex Pharm. Inc., 140 F. Supp. 3d 120, 135-36 (D. Mass. 2015) ...... 31

Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011) ...... 31, 47, 48

Miss. Pub. Emps.’ Ret. Sys. v. Bos. Sci. Corp., 523 F.3d 75 (1st Cir. 2008) ...... 37

N.J. Carpenters Pension & Annuity Funds v. Biogen IDEC Inc., 537 F.3d 35 (1st Cir. 2008) ...... passim

Plumbers & Steamfitters Local 773 Pension Fund v. Canadian Imperial Bank of Commerce, 694 F. Supp. 2d 287 (S.D.N.Y. 2010) ...... 36

In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869 (9th Cir. 2012) ...... 51

Schatz v. Republican State Leadership Comm., 669 F.3d 50 (1st Cir. 2012) ...... 26

iv Serabian v. Amoskeag Bank Shares, Inc., 24 F.3d 357 (1st Cir. 1994) ...... 28

Shaw v. Digital Equip. Corp., 82 F.3d 1194 (1st Cir. 1996) ...... 26

Suna v. Bailey Corp., 107 F.3d 64 (1st Cir. 1997) ...... 50

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) ...... 26, 29

Statutes and Regulations

21 C.F.R. § 312.20 ...... 8

21 C.F.R. § 312.21 ...... 8

21 C.F.R. § 312.32 ...... 9

21 C.F.R. § 312.33 ...... 9

21 C.F.R. § 312.40 ...... 8

21 C.F.R. § 312.56 ...... 9

21 C.F.R. § 312.64 ...... 9

21 C.F.R. § 314.50 ...... 8

21 C.F.R. § 314.125 ...... 8

15 U.S.C. § 78u-4(b)(1) ...... 46

15 U.S.C. § 78u-4(b)(2)(A) ...... 27

Fed. R. Civ. P. 9(b) ...... 20, 28

Fed. R. Civ. P. 12(b)(6) ...... 20, 26, 28

Other Authorities 2014 Current Medical Diagnosis & Treatment (Maxine A. Papadakis et al. eds., 53d ed. 2014) ...... 14, 15

v PRELIMINARY STATEMENT This is a case against Zafgen, a Boston-based pharmaceutical company, and its CEO, Dr. Thomas E. Hughes (“Defendants”).

Zafgen has no FDA-approved commercial products for sale and, consistent with industry practice for early-stage companies that have yet to demonstrate the safety or efficacy of their clinical-stage drugs, it warned investors that, “[o]f the large number of drugs in development in the United States, only a small percentage will successfully complete the [FDA’s] regulatory approval process and [be] commercialized.” JA069. At all relevant times, Zafgen was developing a drug candidate, beloranib, as a treatment for severe obesity, including for patients with a rare fatal genetic disease, Prader-Willi syndrome (“PWS”). The filing of the original complaint in October 2015 came on the heels of Zafgen’s public announcement that a PWS patient in one of its clinical trials had died and that the

FDA placed beloranib on partial clinical hold, delaying or suspending clinical trials. This news caused Zafgen’s stock price to plummet. When problems delay drug development and cause a stock drop, the inevitable securities fraud case is filed, alleging that there must have been fraud.

Plaintiffs were unable to allege securities fraud in connection with the

patient death and clinical hold that caused the stock drop, as those events were

disclosed promptly. Straining to find some piece of information that had not been disclosed earlier, Plaintiffs contend that Zafgen engaged in securities fraud by not

disclosing, since its April 2014 IPO, that patients in a 2013 clinical trial had

experienced two cases of superficial thrombophlebitis, a minor type of blood clot treatable with home remedies, or often not treated at all. According to Plaintiffs, this omission fraudulently misled investors with respect to the risks of beloranib, even though, since the IPO, Zafgen had disclosed two serious thrombotic adverse events (i.e., pulmonary embolisms) from the same 2013 trial, and even though independent clinical investigators did not attribute any of these events to beloranib.

Plaintiffs relied on this fraud-by-hindsight theory to support their claims

under Section 10(b) of the Securities Exchange Act and Rule 10b-5 (as well as for

“control person” liability against Dr. Hughes under Section 20(a) of the Securities

Exchange Act). The Private Securities Litigation Reform Act (PSLRA), however, imposes strict pleading requirements for such claims, including that plaintiffs must plead particularized facts to show that defendants knew that their public statements were materially false or misleading when made. Here, Plaintiffs speculate—by stitching together a handful of publicly available scientific articles—that Zafgen must have fraudulently concealed the superficial thrombotic events in the 2013 clinical trial, ZAF-201. This speculation lacks a single particularized fact—no witnesses, conversations, documents, or emails—suggesting that Dr. Hughes knew that the two superficial events were significant at the time, or that he formed any

2 intent not to disclose them.

Zafgen’s risk disclosures surrounding the ZAF-201 trial further undercut any inference of scienter. Zafgen warned investors that it may not disclose adverse events (AEs)—even serious ones—for which it did not know of any causal relationship with beloranib: “SAEs [serious adverse events] that are not characterized by clinical investigators as possibly related to beloranib or SAEs that occur in small numbers may not be disclosed to the public until such time the various documents submitted to the FDA as part of the approval process are made public.” JA072. Zafgen took this conservative approach to disclosing adverse events so as to not mislead its investors. An adverse event “does not in and of itself show a causal relationship between a drug and the illness mentioned in the report,” because “[s]ome adverse events may be expected to occur randomly, especially with a drug designed to treat people that are already ill.” N.J.

Carpenters Pension & Annuity Funds v. Biogen IDEC Inc., 537 F.3d 35, 50 (1st

Cir. 2008). Although Zafgen never knew of any causal relationship between beloranib and ZAF-201’s serious adverse events, it repeatedly disclosed those

SAEs to investors with the qualification that the SAEs were not “deemed to be possibly, probably, or definitely related to beloranib.” JA077.

As Judge Saylor recognized, “the complaint presents allegations of scienter that are fairly weak, and the resulting inference is certainly not ‘cogent and

3 compelling,’” JA323 (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551

U.S. 308, 324 (2007)), as the Supreme Court requires when balancing inferences of

fraudulent and non-fraudulent intent, particularly where the Amended Complaint’s

“motive allegations add little, if anything, to the complaint’s relatively weak

inference of scienter.” JA317. “Without the benefit of hindsight,” as he explained,

“the complaint fails to plead particularized facts demonstrating that defendants had

‘sufficient information at the relevant time to form an evaluation that there was a need to disclose’ the ‘superficial’ [adverse events], and to form an intent not to disclose them.” JA291 (quoting Biogen, 537 F.3d at 45). Judge Saylor therefore

dismissed the Amended Complaint as a fraud-by-hindsight pleading that failed to

satisfy the PSLRA’s heightened pleading requirements: “In hindsight, the

superficial thrombotic [adverse events] that occurred during the ZAF-201 trial

perhaps took on added significance more than two years later when a patient died .

. . . However, ‘[p]leading fraud by hindsight, essentially making general

allegations that defendants knew earlier what later turned out badly, is not

sufficient.’” JA290-91 (quoting Ezra Charitable Trust v. Tyco Int’l, Ltd., 466

F.43d 1, 6 (1st Cir. 2006)).

On appeal, Plaintiffs recycle the same weak factual allegations in support of

the same implausible theory of fraud. This Court should affirm Judge Saylor’s

well-reasoned ruling on the scienter grounds described above. The District Court’s

4 judgment also could be affirmed on the ground that Plaintiffs have failed to plead particularized facts showing that the two cases of superficial thrombophlebitis were material and, even if the omissions were material, the judgment could be affirmed because the securities laws do not require clairvoyance; a biopharmaceutical company such as Zafgen does not have a duty to disclose all minor adverse events in this context.

COUNTERSTATEMENT OF THE ISSUES 1. Whether the District Court correctly dismissed the Amended Complaint where it lacked a single particularized fact that Dr. Hughes knew that any statement was materially false or misleading when made (such as allegations from confidential witnesses or contemporaneous internal reports or communications) and gave rise to the far more cogent and compelling non-fraudulent inference that

the unfortunate event of a patient death prompted Zafgen to focus on a potential

connection between beloranib and thrombotic events and, as part of that focus,

Zafgen assessed and discussed with investors all thrombotic events—even minor

ones—across all completed and ongoing clinical trials.

2. Whether Zafgen made materially misleading statements, such that a

reasonable investor would have found that the omission of two superficial adverse

thrombotic events deemed by independent clinical investigators not to have been

related to a drug, in light of Zafgen’s express disclosure of two serious adverse

5 thrombotic events also deemed not to have been related to the drug, significantly altered the total mix of information available.

3. Whether a clinical-stage company has a duty to disclose under the securities laws every superficial adverse event designated not related to a drug, including

AEs that do not become meaningful until two years later with the benefit of

hindsight, when it discloses serious adverse events and warns that AEs not related

to the study drug may not be disclosed.

4. Whether the District Court correctly dismissed the Section 20(a) control person claim because Plaintiffs have failed to plead an underlying securities fraud claim.

COUNTERSTATEMENT OF THE CASE

A. Factual Background1

1. Zafgen Developed Beloranib To Treat PWS, Severe Obesity And Related Medical Conditions.

Zafgen was founded in 2005. Dr. Thomas E. Hughes has served as Zafgen’s

CEO since 2008.

At all relevant times, Zafgen had only one product candidate in clinical

development. That drug, beloranib, was designed to treat diseases such as the rare

1 While Defendants accept the truth of the well-pleaded facts in the complaint for purposes of their Motion to Dismiss, the Court should not accept the truth of facts that are contradicted on the face of documents referenced in the complaint. See infra at 26.

6 genetic disorder PWS, as well as severe obesity and obesity-related complications, such as diabetes. JA090. Condemned to feeling constantly hungry, the typical

PWS patient cannot control her food intake; as a result, she becomes morbidly obese and dies, on average, at age 32. JA073. PWS often affects young children.

Standard weight-loss treatments such as diet and surgery are ineffective for PWS patients—following weight-loss surgery, many PWS patients rupture their

surgically-shrunken stomachs because they cannot control their insatiable hunger.

JA073.

Zafgen was developing beloranib as a treatment that might work where

others had failed. In scientific terms, beloranib inhibits the body’s ability to utilize

the MetAP2 enzyme. JA070. Because that enzyme has been implicated in

angiogenesis—the formation of blood vessels—MetAP2 inhibitors were originally

developed to treat cancer by halting the development of blood vessels in tumors.

Although cancer trials showed limited results, Zafgen’s insight was to explore a

side effect of such drugs at lower doses: their ability to “drive unprecedented

weight loss” by altering how the body breaks down fatty tissue and reducing

hunger. JA100. Dramatic weight-loss effects were observed at low doses and

without affecting the formation of blood vessels. JA227.

Zafgen has to complete a closely regulated, years-long process of clinical

trials, preceded by nonclinical (including animal) studies, and obtain FDA

7 approval before it can sell beloranib to the public. Once a drug has shown promise in animal studies, the drug developer must file an Investigational New Drug

Application (IND) with the FDA before beginning human trials. See 21 C.F.R. §

312.20; see also Biogen, 537 F.3d at 39 (describing this process). If and when the

IND “goes into effect,” see 21 C.F.R. § 312.40, clinical testing may begin.

Clinical trials are conducted in three phases. 21 C.F.R. § 312.21. During Phase 1, the drug is tested in closely monitored studies to identify how it interacts with the human body at various doses—including potential —and, if possible, to collect preliminary evidence of effectiveness. Id. § 312.21(a). Phase 2 studies seek to determine drug effectiveness and identify short-term side effects at various doses. Id. § 312.21(b). During Phase 3, the drug is evaluated to develop the

necessary data to label the drug accurately for sale to the public. Id. § 312.21(c).

After a drug has gone through sufficient clinical trials at each phase and if

the results of the trials are supportive, the company developing the drug (the

“sponsor”) can submit a New Drug Application (NDA) to the FDA. Id. § 314.50.

The FDA then must take into consideration, among other things, all data from all

clinical trials and nonclinical studies before finally determining whether there is

sufficient information to conclude that the drug is safe and effective and therefore

can be approved for public sale. See ibid. (NDA must contain all data from all

nonclinical and clinical studies); id. § 314.125(b)(5) (FDA “will refuse to approve

8 the application” if “lack of substantial evidence” of safety and efficacy).

Throughout the clinical trial process, the FDA monitors the safety of trial subjects. Over the course of a clinical trial, the sponsor and the clinical investigators—independent third parties conducting the trial—analyze observed health issues (“adverse events”), see id. § 312.32(b) (requiring a sponsor to promptly review all information relevant to safety of the drug); id. § 312.56(c), and assess their severity, including identifying “serious” adverse events. See id. §

312.32(a); id. § 312.64(b). An adverse event is “serious” where “it results in . . .

[d]eath, a life-threatening adverse event, inpatient hospitalization or prolongation of existing hospitalization, a persistent or significant incapacity or substantial disruption of the ability to conduct normal life functions, or a congenital anomaly/birth defect,” or where it “may require medical or surgical intervention to prevent one of [these] outcomes.” Id. § 312.32(a). Although all adverse events are ultimately reported to the FDA in the NDA, during a trial the drug sponsor must, within seven days, notify FDA of any unexpected fatal or life-threatening suspected adverse reaction. Id. § 312.32(c)(2). By contrast, during clinical testing a sponsor need not report to the FDA all non-serious adverse events, even in its

IND annual reports to the FDA. Id. § 312.33(b)(1).

2. Zafgen Disclosed Important Investment Risks. At the time of its Initial Public Offering (IPO) in June 2014, Zafgen had

9 completed two Phase 2 clinical trials of beloranib: one involving PWS patients and one involving severely obese patients in the general population. Although the early results had been promising, Zafgen took pains in its investor disclosures, including its IPO Form S-1 and subsequent SEC filings, to emphasize the continued high level of uncertainty surrounding beloranib’s ultimate FDA approval and marketability:

 Zafgen has “only one product candidate, beloranib, in clinical development, and [its] depends almost entirely on [beloranib’s] successful clinical development, regulatory approval and commercialization”;

 it has “no drug products for sale and may never be able to develop marketable drug products”;

 beloranib would “require substantial additional clinical development, testing and regulatory approval before [Zafgen would be] permitted to commence its commercialization”;

 “[o]f the large number of drugs in development in the United States, only a small percentage will successfully complete the [FDA’s] regulatory approval process and [be] commercialized”; and

 Zafgen “may not be able to demonstrate that beloranib is safe and effective in treating obesity and hyperphagia in PWS patients[.]”

JA069-70 (Form S-1); see also JA083-84; JA091-92; JA106-07; JA114-15;

JA121-22 (subsequent filings); JA64-65 (chart listing all risk disclosures).

Zafgen disclosed that, even were it able to complete clinical trials and

10 submit an NDA for beloranib, “obtaining approval of an NDA is [still] a complex, lengthy, expensive and uncertain process, and the FDA may delay, limit or deny approval of beloranib for many reasons.” Ibid; see also JA104 (2014 Form 10-K)

(describing range of FDA sanctions, including “the FDA’s refusal to approve pending applications” and “a clinical hold,” and warning that “[a]ny agency or judicial enforcement action could have a material adverse effect on [Zafgen]”).

For example, Zafgen disclosed that it “may not be able to demonstrate that beloranib is safe and effective in treating obesity and hyperphagia in PWS patients, craniopharyngioma-associated obesity or severe obesity in the general population,

to the satisfaction of the FDA”; that “the FDA may find the data from pre-clinical

studies and clinical trials insufficient to demonstrate that beloranib’s clinical and

other benefits outweigh its safety risks”; and that “the FDA may change its approval policies or adopt new regulations.” JA070 (Form S-1); see also JA084;

JA091-92; JA107-08; JA115-16; JA122-23 (subsequent filings). Zafgen further disclosed that “because [its] business is almost entirely dependent upon this one product candidate, any such setback in [its] pursuit of regulatory approval would have a material adverse effect on [its] business and prospects.” Ibid.

Zafgen informed investors that it may not publicly disclose adverse events, even SAEs, observed during beloranib clinical trials:

SAEs that are not characterized by clinical investigators as possibly related to beloranib or SAEs that occur in small numbers may not be

11 disclosed to the public until such time as the various documents submitted to the FDA as part of the approval process are made public. [Zafgen is] unable to determine if the subsequent disclosure of SAEs will have an adverse effect on [its] stock price.

JA72 (Form S-1) (emphasis added); see also JA086; JA094; JA110; JA117; JA124

(subsequent filings). As with many life sciences companies, Zafgen took this

approach because disclosing SAEs without evidence of causation could mislead

investors by implying a nonexistent causal relationship. Patients taking beloranib

were already seriously ill and at an increased risk for many life-threatening

conditions, so some number of SAEs was likely regardless of beloranib. In

addition, the clinical trials were double-blind and placebo-controlled, meaning both

that some patients were receiving a placebo rather than beloranib, and that Zafgen,

when it received adverse event reports, did not know during the trial which patients

were taking which. Zafgen warned investors that previously undisclosed adverse

events might set back beloranib’s clinical development, perhaps decreasing the

value of the company’s stock:

Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials after achieving positive results in early-stage development, and [Zafgen] cannot be certain that [it] will not face similar setbacks. These setbacks have been caused by, among other things, pre-clinical findings made while clinical trials were underway or safety or efficacy observations made in clinical trials, including previously unreported adverse events.

JA071 (Form S-1) (emphasis added); see also JA085; JA093; JA108-09; JA116;

12 JA123 (subsequent filings).

Nonetheless, Zafgen disclosed two serious adverse events that already had

occurred in a 2013 Phase 2 clinical trial of beloranib in morbidly obese patients.

This trial—ZAF-201—was double-blind and placebo controlled (i.e., Zafgen did not know whether patients were taking beloranib or a placebo when it received adverse event reports), JA101, and enrolled 160 patients, with 122 receiving beloranib, JA075. The adverse event results had been encouraging: “the most commonly reported [adverse events] were gastrointestinal disorders, mainly nausea, diarrhea, or vomiting, nervous system disorders, mainly dizziness, and psychiatric disorders, mainly insomnia, sleep disorder, or abnormal dreams,”

JA077, and “[t]here were no deaths or any SAEs deemed to be possibly, probably,

or definitely related to beloranib.” Ibid. While Zafgen concluded, based on its

interpretation of specific disclosed data, that “beloranib treatment does not increase

the risk of cardiovascular disease and may be associated with reduced

cardiovascular disease risk”, JA076, Zafgen cautioned that “there were two serious

thrombotic [i.e., involving blood clotting] adverse events which, while not

attributed to beloranib treatment [by the independent clinical investigator], may

point to the utility of assessment of prior history of thrombotic events in patients

enrolled in subsequent trials and added vigilance for [adverse events] related to

blood clotting during future clinical trials.” JA077. Contrary to Plaintiffs’

13 representation, see Appellants’ Br. 1, at no point before the patient death in 2015 did Zafgen purport to disclose the “rate” of thrombotic adverse events.

Zafgen did not pretend that the list of observed adverse events was exhaustive. Although Zafgen disclosed the two thrombotic events classified as serious—both pulmonary embolisms, a potentially deadly condition in which a blood clot blocks an artery in the lungs—and although Zafgen disclosed “the most

commonly reported” minor adverse events, it did not also disclose two other

superficial thrombotic events, neither classified as serious nor among the most

common. Both of these minor thrombotic events were cases of superficial

thrombophlebitis—a blood clot in the veins close to the surface of the skin, often in

the arm or calf—characterized by independent clinical investigators as not related

to beloranib. JA136. Superficial thrombophlebitis can cause redness and

tenderness along the affected vein. This event is not concerning; unlike with deep-

vein thrombosis (DVT), a much more serious clotting event, there is no realistic

concern that superficial thrombophlebitis might cause a pulmonary embolism. See

2014 Current Medical Diagnosis & Treatment 462 (Maxine A. Papadakis et al.

eds., 53d ed. 2014). Moreover, treatment for a superficial clot, if treated at all,

typically consists of local heat and an aspirin, whereas treatment for a DVT often

requires powerful prescription blood thinners. Id. at 463. And DVT and

superficial thrombophlebitis often have entirely different causes. For instance,

14 unlike a DVT, a superficial clot can result from a simple blow to the leg. Id. at

462.

3. A Sudden Patient Death Resulted In FDA Placing Beloranib On Partial Clinical Hold. Following its IPO, Zafgen initiated two additional double-blind, placebo controlled clinical trials: a Phase 2 clinical trial (ZAF-203) consisting of patients with severe obesity complicated by type 2 diabetes, and a Phase 3 clinical trial

(ZAF-311) consisting of PWS patients. Tragedy struck in late September 2015, when a PWS patient in the ZAF-311 trial died suddenly at home. JA128. After reporting the death to the FDA, and only upon the FDA’s request in October, the patient’s treatment assignment (beloranib or placebo) was unblinded, and Zafgen learned that the patient had been taking beloranib. Ibid. (Because the patient did not die in a hospital, Zafgen learned only later, after the October 2015 disclosed events, that the patient had died of a pulmonary embolism. JA022.) The FDA further requested that Zafgen also unblind the treatment assignment for a patient in the ZAF-203 trial who had suffered a pulmonary embolism. Zafgen complied, and learned that the ZAF-203 patient had also been taking beloranib. JA130. Based on this information, the FDA informed Zafgen on October 15 that it was placing beloranib on partial clinical hold. JA031.

While these events unfolded, Zafgen disclosed information to investors as it became available, culminating in an October 16 announcement of the FDA’s

15 partial clinical hold.2 Zafgen’s quarterly report synthesized the timeline:

In late-September 2015, [Zafgen] learned of a patient death in the ongoing Phase 3 clinical trial of beloranib in patients with PWS but at that time did not know whether the patient’s treatment assignment was beloranib. In October 2015, [Zafgen] learned that the patient was receiving beloranib after the patient’s treatment assignment was unblinded per the request of the [FDA], and, on October 15, 2015, [Zafgen] received notice from the FDA that the [IND] for beloranib has been placed on a partial clinical hold. Subsequently, [Zafgen] received the patient’s death certificate and learned that the cause of death was determined to be respiratory failure as a consequence of pulmonary emboli. However, it is not known if this event was related to treatment with beloranib.

JA128. Emphasizing the patient death, FDA partial clinical hold, and a resulting

50% drop in Zafgen’s stock price, investment analysts published reports lowering the price target for Zafgen stock.3 In mid-September 2015, weeks before Zafgen

learned of the patient death and the partial clinical hold, several Zafgen insiders,

2 Plaintiffs suggest that when Zafgen issued a press release on October 14, it hid knowledge “that the patient who died was receiving beloranib and was not in the control group that was receiving a placebo.” Appellants’ Br. 14-15. As Judge Saylor observed, however, “it is clear from the disclosures and press releases that Zafgen did not learn whether the patient was receiving [b]eloranib until the FDA ordered it to unblind the patient’s treatment assignment on October 16.” JA308 n.16. 3 See, e.g., Cowen & Co., Zafgen: Beloranib On Partial Clinical Hold Following Death, Thrombotic Event Imbalance, at 1 (Oct. 16, 2015), JA023-24; JMP, Zafgen, Inc.: Downgrading to Market Perform; Additional Details from PWS Trial Do Not Allay Potential Safety Concerns, at 1 (Oct. 16, 2015), JA023 (“[I]t is not necessarily concerning that a patient died in the PWS trial, considering a 2-3% mortality rate,” on average, for a trial of this sort.); Leerink, Zafgen, Inc.: Pt. Death on Beloranib-Arm, Cause Unknown, Trial to Continue, PT Down to $46, at 1 (Oct. 16, 2015), JA022. (All cited analyst reports are available at http://research.thomsonib.com.)

16 including Dr. Hughes, sold a small portion of their total Zafgen stock, see JA176

(chart of holdings retained),4 once the stock price hit $40, per the terms of their

Rule 10b5-1 trading plans, JA 204-05 (Zafgen stock hit $40 when the

occurred in mid-September). See also JA033-34 (Amended Complaint); JA177-

202 (SEC Form 4s).

4. In The Aftermath Of The Patient Death, Zafgen Examined And Disclosed All Adverse Thrombotic Events In All Trials.

Based on the events in October 2015, Zafgen undertook an examination of

all thrombotic events, at all levels of severity, that had occurred in all previous

clinical trials. JA130. Out of over 500 patients in eight different clinical trials,

four patients had experienced SAEs (all pulmonary embolisms): the two from the

ZAF-201 trial that Zafgen had already disclosed; the patient who had died; and the

patient from the ZAF-203 trial, about whom Zafgen had just learned following the

unblinding of this patient’s treatment assignment after the patient death. JA032.

Another PWS patient in the ZAF-311 trial had experienced a moderate adverse

thrombotic event: a deep-vein thrombosis (DVT) that did not become a pulmonary

embolism. Ibid. And two patients had experienced minor events: the ZAF-201

patients who had suffered cases of superficial thrombophlebitis. JA021-22.

Independent clinical investigators had found that only two of these events—the

4 Dr. Hughes retained 95% of his shares; non-defendants Avi Goldberg retained 96% of his shares, Dennis Kim retained 86% of his shares, and Alicia Secor retained 88% of her shares.

17 DVT and the patient death, both in the ZAF-311 trial—were even possibly related to beloranib. JA136. As Dr. Hughes explained on a November 10, 2015 investor conference call, the victims all had “independent risk factors that may have predisposed them to thrombotic events.” JA156. In the ZAF-201 trial: one of the

SAE patients had a “[g]out attack and extended immobilization”; the other SAE patient had “Factor V Leiden mutation,” see JA168 (Factor V Leiden mutation provides “eight-fold increase” in the risk of developing thromboembolism); one of the two AE patients had “Varicose veins;” and both AE patients had “implanted contraceptive[s].” JA136. Indeed, simply being part of the severely obese and

PWS patient populations meant the patients were predisposed to thrombotic adverse events.

Despite the limited evidence of causation (indeed, causation never was established), see JMP, supra, at 1 (identifying 2-3% expected mortality rate for a

PWS study like ZAF-311), Zafgen informed investors during an October 16, 2015 conference call and a November 10 presentation of the results of its post-patient- death examination of thrombotic adverse events. See JA136 (November 10 presentation). Investment analysts, following Zafgen’s lead, observed an

“emerging association between beloranib and thromboembolic events” following the patient death and partial clinical hold. Cowen, supra, at 1. These analysts still

focused, however, on the patient death and other thrombotic SAE that caused the

18 FDA clinical hold, not the two cases of superficial thrombophlebitis. See, e.g.,

Leerink, supra, at 1 ( “2 of these 4 events [from the ZAF-201 trial] were superficial thrombophlebitis, which may not be clinically meaningful”).5

B. Procedural Background

1. Plaintiffs’ Complaint Plaintiffs filed this putative class action in the United States District Court

for the District of Massachusetts on October 21, 2015, less than a week after

Zafgen announced the patient death and partial clinical hold, and an Amended

Complaint on February 22, 2016. The putative class includes “all investors who purchased or otherwise acquired [Zafgen] common stock between June 19, 2014 through October 16, 2015, inclusive (the ‘Class Period’).” JA008. Claim I of the

Amended Complaint is for securities fraud against Zafgen and Dr. Hughes under

Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5. To state a claim under Section 10(b) and Rule 10b-5, plaintiffs must plead (1) a material

5 In their brief, Plaintiffs suggest that one analyst made much of “superficial” adverse events, Appellants’ Br. 16 (emphasis in original), and another “not[ed] that Zafgen’s prior reporting was incomplete” for failure to disclose superficial adverse events, id. at 17. But neither of these statements is accurate. Both reports simply observed that, as of the time of publication, Zafgen had disclosed a total of six events, including two superficial events. See JMP, supra, at 2; Cowen, supra, at 1. Plaintiffs also misleadingly suggest that “[t]wo other analysts echoed this emphasis on the total number of events, regardless of severity.” Appellants’ Br. 17. But nothing in the reports suggests that conclusion; the analysts observed an “emerging” relationship between beloranib and adverse thrombotic events following the patient death and partial clinical hold, not superficial thrombotic events that had occurred over a year-and-a-half earlier.

19 misrepresentation or omission; (2) scienter; (3) in connection with the purchase or

sale of a ; (4) reliance; (5) economic loss; and (6) loss causation. ACA Fin.

Guar. Corp. v. Advest, Inc., 512 F.3d 46, 58 (1st Cir. 2008). Claim II alleges a

claim against Dr. Hughes under Section 20(a), which allows plaintiffs to seek

damages against “control persons.” Because Zafgen disclosed the patient death

and partial clinical hold as soon as practicable, Plaintiffs had no basis for arguing

that they were somehow fraudulently duped by nondisclosure of the real reason for

the stock drop. Instead, Plaintiffs dug back to the Company’s disclosures since

Zafgen’s IPO, and based their allegations of fraud on Zafgen’s failure at that time

to disclose the two cases of superficial thrombophlebitis from the 2013 ZAF-201

trial.

2. The Decision Below On April 7, 2016, Defendants moved to dismiss the case under Federal

Rules of Civil Procedure 12(b)(6) and 9(b). The motion argued that the Amended

Complaint failed to state a claim for securities fraud under Sections 10(b) of the

Exchange Act and Rule 10b-5, and failed to state a Section 20(a) claim for control person liability.

On August 9, 2016, Judge Saylor granted Defendants’ Motion to Dismiss on the ground that Plaintiffs failed to satisfy the PSLRA’s heightened scienter

pleading requirements. He began by explaining that “Defendants’ knowledge must

20 be analyzed at the time that they made the allegedly misleading disclosures, not in hindsight of the patient death.” JA314. He observed that “[i]n the context of clinical drug trials, the First Circuit has stated that ‘defendants cannot have committed fraud if they did not know at the time [of the allegedly misleading disclosure] that the failure to provide additional information was misleading.’”

JA315 (quoting Biogen, 537 F.3d at 48). Proceeding to canvass Plaintiffs’ factual allegations carefully, he observed that “[P]laintiffs’ subjective, selective, and post- hoc interpretation of scientific articles after the patient death is, at best, weak circumstantial evidence of scienter.” JA316. Likewise, he found Plaintiffs’ insider trading allegations “relatively weak, because the trades are fairly unsuspicious in both timing and amount,” particularly given that the insiders retained the vast majority of their total shares. JA318. And he noted that the alleged omissions were, at most, only marginally material, further “weaken[ing] any inference of scienter.” JA322.

Judge Saylor then reasoned that the far more cogent and compelling non- fraudulent inference is that, at the time of the disclosures at issue, “the superficial

[adverse events] were [not] sufficiently meaningful to warrant disclosure.” JA322-

23. But “after the patient death, [Defendants] focused on a potential connection between [b]eloranib and thrombotic events,” and, “[a]s part of that focus, . . . decided to reassess and disclose all thrombotic [adverse events] in [b]eloranib’s

21 completed and ongoing trials.” JA320. This non-fraudulent inference was particularly cogent and compelling given that “Zafgen warned investors that it may not disclose all [SAEs] (much less superficial [adverse events]) until the final FDA approval process, and that previously unreported [adverse events] could negatively affect the company.” JA322. “[T]he fundamental theory of [P]laintiffs’ case—that

[D]efendants misled investors by fraudulently failing to disclose the superficial

[adverse events] when they had already disclosed the serious [adverse events] promptly and transparently—is unpersuasive.” JA 323.

In addition to finding the Amended Complaint’s scienter pleading inadequate to state a claim for securities fraud, Judge Saylor acknowledged that the materiality of the alleged omissions was “questionable,” and that Zafgen did not have a duty to disclose all material information. But he determined that the facts

were insufficiently clear, at the motion-to-dismiss stage, to resolve the case on

materiality or duty-to-disclose grounds. JA309. He did not address Defendants’

loss causation arguments.

Because the District Court dismissed the underlying securities fraud claim, it

also dismissed the “control person” claim against Dr. Hughes. JA324.

SUMMARY OF ARGUMENT

Plaintiffs’ Amended Complaint fails to state a claim for securities fraud.

First, Plaintiffs have failed to plead any particularized facts supporting a

22 strong inference that Dr. Hughes acted with scienter—fraudulent intent or extreme recklessness—as the PSLRA requires. Plaintiffs’ theory is that beginning in April

2014, Zafgen disclosed two serious thrombotic adverse events in its ZAF-201 trial that clinical investigators did not deem related to the drug beloranib, but knowingly or recklessly deceived investors by concealing two additional superficial adverse

events from that clinical trial that were also not deemed related to beloranib. In

support of this theory, Plaintiffs allege zero facts from witnesses, conversations,

documents, or emails to suggest that Dr. Hughes knew at the time that the

superficial adverse events would be significant to investors; zero facts to suggest

that Dr. Hughes ignored or rejected someone’s advice to disclose the superficial

adverse events; zero facts to suggest that there was even so much as an internal

debate about whether Zafgen should disclose the superficial adverse events; and

zero facts to suggest that Dr. Hughes even knew at the time (or knows today) that

beloranib actually caused the thrombotic events.

Instead, Plaintiffs fall back on the only contemporaneous “facts” in their

Amended Complaint—scientific articles from years earlier that they found in the

public domain and subjectively interpreted. But these articles—and Plaintiffs’

opinions about them—are not probative of Dr. Hughes’s state of mind. The

articles discuss different drugs, at dramatically higher dosage levels, designed to

treat cancer patients, not PWS and morbidly obese patients. Plaintiffs also try to

23 parse the language of Zafgen’s disclosures to find signs of fraud, but the hidden meaning Plaintiffs assert is not there. Finally, Plaintiffs have largely abandoned their insider trading allegations, and for good reason. These insiders retained the overwhelming majority of their Zafgen stock, and were trading under 10b5-1 plans

that were triggered as Zafgen’s stock price rose to $40 for the first time. Plaintiffs

also assert in their brief, but not their Amended Complaint, that Defendants’

motive to commit fraud was to raise capital. But the First Circuit has long held

that such generalized, speculative motive allegations are insufficient to support a

strong inference of scienter, as they would apply to any early-stage

biopharmaceutical company.

Given that Plaintiffs’ factual allegations fail to give rise to anything

resembling a cogent and compelling inference of scienter, the far stronger

inference is that Zafgen did not disclose cases of superficial thrombophlebitis at

the time of its IPO and in subsequent SEC filings because those AEs were not

significant at the time. Only after the patient death and partial FDA clinical hold in

late 2015 did a possible relationship between thrombotic AEs and beloranib begin

to emerge, prompting Zafgen, at that time, to examine and disclose all thrombotic

AEs in completed and ongoing clinical trials.

Second, the Court should hold that the omission of two cases of superficial

thrombophlebitis was not material. Disclosing two superficial adverse thrombotic

24 events would not have significantly altered the total mix of information Zafgen

made available to investors, particularly given the lack of factual allegations

suggesting a causal link between beloranib and the events, and given Zafgen’s

disclosure of two serious adverse thrombotic events.

Third, regardless of whether the omissions were material, Plaintiffs have

failed to plead facts to establish that Defendants had a duty to disclose the

superficial adverse events. Defendants explained the reasonable scope of their

disclosure of adverse events: SAEs and the “most common” adverse events.

Superficial thrombophlebitis fits into neither category, and omission of two

clinically insignificant events does not make a list of serious thrombotic or most

common events so incomplete as to mislead.

Fourth, Plaintiffs have failed to plead loss causation: they have not

adequately alleged that the drop in Zafgen’s stock price resulted from disclosure of

two cases of superficial thrombophlebitis rather than from the patient death and

FDA partial clinical hold. If this Court finds against Defendants on the other three

independent bases for affirmance, the Court should remand the loss-causation issue

for the District Court to address in the first instance.

Because, for these independent reasons, Plaintiffs have failed to plead

securities fraud, they have also failed to plead a “control person” claim against Dr.

Hughes.

25 ARGUMENT

I. STANDARD OF REVIEW This Court reviews the District Court’s dismissal of the Amended Complaint de novo. Aulson v. Blanchard, 83 F.3d 1, 3 (1st Cir. 1996); Cunningham v. Nat’l

City Bank, 588 F.3d 49, 52 (1st Cir. 2009). To survive a motion to dismiss, a

complaint must “contain sufficient factual matter, accepted as true, to ‘state a claim

to relief that is plausible on its face.’” Cunningham, 588 F.3d at 52 (quoting

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) and Bell Atl. Corp. v. Twombly, 550

U.S. 544, 570 (2007)). “[B]ald assertions, unsupportable conclusions, periphrastic

circumlocutions, and the like need not be credited” under the Rule 12(b)(6)

standard. Aulson, 83 F.3d at 3. The Court must consider the actual text of

documents referenced in the Amended Complaint, and may consider documents

that are “integral” to plaintiffs’ claims. See Tellabs, 551 U.S. at 322; Shaw v.

Digital Equip. Corp., 82 F.3d 1194, 1220 (1st Cir. 1996). The Court is not

required to accept as true those facts which are contradicted by such sources or by

other allegations in the Amended Complaint. See Schatz v. Republican State

Leadership Comm., 669 F.3d 50, 55 n.3 (1st Cir. 2012); accord Shaw, 82 F.3d at

1206 n.13.

Under a de novo standard of review, this Court may affirm the District

Court’s decision “on any independently sufficient ground,” not necessarily that on

26 which the district court relied. Advest, 512 F.3d at 58.

II. PLAINTIFFS HAVE FAILED TO SATISFY THE PSLRA’S HEIGHTENED SCIENTER PLEADING REQUIREMENTS. Scienter is a “mental state embracing intent to deceive, manipulate, or

defraud.” Fire & Police Pension Ass’n of Colo. v. Abiomed, Inc., 778 F.3d 228,

240 (1st Cir. 2015). Under the PSLRA, “the complaint shall, with respect to each

act or omission . . . , state with particularity facts giving rise to a strong inference

that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-

4(b)(2)(A). In his careful and thorough opinion, Judge Saylor found that Plaintiffs

had not pled particularized facts giving rise to any reasonable inference of

fraudulent intent, let alone a “strong inference.” Plaintiffs now insist that Judge

Saylor applied incorrect legal standards, ignored their factual allegations, and

inappropriately required them to plead “direct evidence.” But none of this is true.

For the following reasons, Judge Saylor reached a correct result on a correct

application of the PSLRA’s scienter standard.

A. Plaintiffs Must Plead Particularized Facts Supporting A Strong Inference Of Intentional Fraud Or Extreme Recklessness. “[A] plaintiff may satisfy the scienter requirement with a showing of either

conscious intent to defraud or a high degree of recklessness.” Advest, 512 F.3d at

58. Recklessness “does not include ordinary negligence, but is closer to being a lesser form of intent.” Abiomed, 778 F.3d at 240. To properly plead recklessness,

27 a plaintiff must show “a highly unreasonable omission, involving not merely simple, or even inexcusable, negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.” Greebel v. FTP Software, Inc., 194 F.3d 185, 198 (1st Cir.

1999); see also Local No. 8 IBEW Ret. Plan & Trust v. Vertex Pharm., Inc., 838

F.3d 76, 80 (1st Cir. 2016). An inference of fraudulent intent is appropriate only

where the defendant had “sufficient information at the relevant time to form an evaluation that there was a need to disclose certain information and to form an

intent not to disclose it.” Biogen, 537 F.3d at 45 (emphasis added). In other

words, “[a] plaintiff may not plead ‘fraud by hindsight’; i.e., a complaint ‘may not

simply contrast a defendant’s past optimism with less favorable actual results’ in

support of a claim of securities fraud.” Advest, 512 F.3d at 62 (quoting Shaw, 82

F.3d at 1223).

“While under Rule 12(b)(6) all inferences must be drawn in plaintiffs’ favor,

inferences of scienter do not survive if they are merely reasonable, as is true when

pleadings for other causes of action are tested by motion to dismiss under Rule

12(b)(6).” Greebel, 194 F.3d at 195. Nor will “general averments of the

defendants’ knowledge of material falsity . . . suffice.” Serabian v. Amoskeag

Bank Shares, Inc., 24 F.3d 357, 361 (1st Cir. 1994) (applying Fed. R. Civ. P. 9(b)).

28 Instead, to determine whether allegations in a complaint are sufficiently cogent and compelling to make out a “strong” inference of scienter, courts must draw non- fraudulent inferences from the same facts, and “weigh [those] competing inferences” to determine whether plaintiffs’ inference of scienter is cogent and at least as compelling as the non-fraudulent inference. Advest, 512 F.3d at 59; see

also Tellabs, 551 U.S. at 324; Aldridge v. A.T. Cross Corp., 284 F.3d 72, 78 (1st

Cir. 2002).

Biogen is instructive of the high bar plaintiffs must meet to adequately plead

scienter. In that case, the FDA had granted Biogen accelerated approval for a

promising new multiple-sclerosis drug. 537 F.3d at 37. Over the ensuing months,

two patients contracted progressive multifocal leukoencephalopathy (PML), an

often-fatal opportunistic infection, and one died. Id. at 41. The FDA pulled the

drug from the market, causing a sharp drop in Biogen’s stock price. Ibid.

Investors sued, claiming that Biogen had “trumpet[ed the drug’s] safety and

efficacy and its consequent significant positive financial impact on Biogen’s

profitability,” while simultaneously withholding “knowledge of . . . safety risks”—

including failing to disclose five non-PML opportunistic infections observed in

earlier clinical trials. Id. at 43, 50. In support, the plaintiffs relied on: (1) various

statements by Biogen and FDA officials purportedly suggesting Biogen’s

knowledge of the non-PML opportunistic infections, willingness to ignore that risk

29 when making market projections, and failure to disclose data properly to the FDA;

(2) statements by confidential informants suggesting that Biogen knew of a high

rate of adverse events during clinical trials, including several possible cases of

opportunistic infections; and (3) the sale before the price dropped of “virtually all”

stock held by company insiders, including a significant sale by Biogen’s general

counsel on the day the company first learned about the PML diagnoses. Id. at 42,

48-50.

Affirming dismissal for lack of scienter, the Court held that “[t]here is no

plausible inference from the reports of just five patients with non-PML

opportunistic infections that the defendants knew of any causal relationship

between the use of [the drug] and the separate opportunistic infections diagnosed

for the five patients, and then intentionally withheld data.” Id. at 50. “The receipt of an adverse event report,” the Court elaborated, “does not in and of itself show a causal relationship between a drug and the illness mentioned in the report. Some adverse events may be expected to occur randomly, especially with a drug designed to treat people that are already ill.” Ibid. As for the insider trading allegations, the Court found the general counsel’s sale “concern[ing],” but noted that all other stock sales had occurred before Biogen learned of the two PML cases.

Id. at 55-56. “[A] strong inference of scienter on the part of Biogen and the other individual defendants [could not] be drawn” based on the general counsel’s sales

30 alone. Id. at 56.

B. The Amended Complaint Fails To Allege A Strong Inference Of Scienter. Plaintiffs want the Court to infer from their allegations that Dr. Hughes, for no personal benefit whatsoever, see infra at 38-41, acted with fraudulent intent or extreme recklessness when Zafgen disclosed two serious pulmonary embolism adverse events and a list of the most common minor adverse events, but not two cases of superficial thrombophlebitis—even though none of the thrombotic events was linked by investigators to beloranib, and even though all occurred in a population already prone to such events. In support, Plaintiffs rely extensively on the Supreme Court’s discussion of materiality in Matrixx Initiatives, Inc. v.

Siracusano, 563 U.S. 27 (2011), thereby conflating materiality and scienter.6

Appropriately following Biogen, and entirely consistent with Matrixx, Judge

Saylor found this fraudulent inference neither cogent nor compelling, and far

weaker than a competing non-fraudulent inference.

1. Plaintiffs’ Factual Allegations Are Insufficient To Support A Strong Inference Of Fraudulent Intent or Extreme Recklessness. To overcome the facial implausibility of their theory, Plaintiffs must marshal

6 Because Matrixx did not change the standards plaintiffs must meet to plead scienter, Matrixx did not abrogate Biogen, which addressed scienter, not materiality. See, e.g., Local No. 8 IBEW Ret. Plan v. Vertex Pharm. Inc., 140 F. Supp. 3d 120, 135-36 (D. Mass. 2015) (relying on Biogen post-Matrixx), aff’d, 838 F.3d 76 (1st Cir. 2016).

31 specific factual allegations giving rise to a strong inference that Dr. Hughes acted with the intent to defraud or extreme recklessness. See supra at 27-29. But they have alleged no specific facts supporting this fraudulent inference.

The Amended Complaint contains no factual allegations supporting the conclusion that Dr. Hughes or anyone at Zafgen actually knew, or were highly

reckless in failing to realize, that it would be misleading not to tell investors about

two cases of superficial thrombophlebitis not determined to be related to beloranib.

Indeed, the Amended Complaint contains no allegation that Dr. Hughes and others

at Zafgen discussed or even considered whether to disclose the two superficial

events. The Amended Complaint’s scienter allegations are thus far weaker than in

many securities fraud cases, dismissed for lack of scienter, involving some

allegation that company leadership withheld information from investors despite

knowing or being told that failure to disclose would be misleading. See Auto.

Indus. Pension Trust Fund Inc. v. Textron Inc., 682 F.3d 34, 39 (1st Cir. 2012)

(inference of scienter weaker where “warnings by subordinates or expressions of

concern by executives are notably absent”).

The Court’s recent decision, In re ARIAD Pharmaceuticals, Inc. Securities

Litigation, No. 15-1491 (1st Cir. Nov. 28, 2016), is instructive. There, this Court

affirmed dismissal of securities fraud claims for all but one statement on the

ground that the complaint included only “conclusory allegations that the defendant

32 possessed ‘contemporaneous’ knowledge” that its statements were false or materially misleading when made. Id. (slip op. at 11). The one statement for

which the Court found scienter adequately pled was different because, unlike here,

the plaintiffs had pled specific factual allegations about the context of that

statement and the subjective knowledge of the speakers. The complaint alleged

that in an October 25, 2012 email and a November 1, 2012 meeting, FDA

personnel, citing an 8% rate of serious cardiovascular events, had informed high-

level ARIAD executives that FDA “had rejected ARIAD’s proposed label” and

“directed ARIAD to submit a revised label with a black box warning. See id. (slip

op. at 13-15). On December 11, 2012, according to the factual allegations in the

complaint, an investment bank reported on a breakfast meeting with a number of

the same high-level ARIAD executives, at which those executives had

“express[ed] optimism about [the drug’s] chances for approval with a ‘favorable

label,’” and had “cite[d] pancreatitis as the most prevalent serious adverse event”

at a 5% occurrence rate. Id. (slip op. at 14-15). Because Plaintiffs alleged that

both of these assertions were directly contradicted by the specific, earlier FDA

communications, this Court found the factual allegations in the complaint

sufficient.

Lacking such allegations, Plaintiffs here focus on three categories of

allegations that are hardly probative of Dr. Hughes’ state of mind at the time of the

33 IPO and the allegedly misleading disclosures: academic publications purportedly suggesting a link between beloranib and adverse events; Defendants’ purported use of “careful parsing” in disclosures while disclosing pulmonary embolisms; and insider trading allegations. Even considered together, these allegations fail to give rise to any inference of fraud, let alone a strong one.

(a) The academic articles are not probative of scienter.

Based on the articles, Plaintiffs argue that Dr. Hughes should have known, at

the time of the disclosures at issue beginning in 2014, that there was “a link

between drugs like beloranib and thrombotic adverse events.” Appellants’ Br. 28.

But the actual articles Plaintiffs cite do not support their post-hoc interpretation,

even if Plaintiffs’ opinions of third party articles could be sufficient to allege

anything about Dr. Hughes’ state of mind. As an initial matter, the articles largely

address different drugs, at much higher dosage levels, and intended to treat cancer

patients, not PWS and severely obese patients. Francesca Elice et al., Thrombosis

Associated with Angiogenesis Inhibitors, 22 Best Prac. & Res. Clinical

Haematology 115, 115-17 (2009); see also Jose L. Mauriz & Javier González-

Gallego, Antiangiogenic Drugs: Current Knowledge & New Approaches to Cancer

Therapy, 97:10 J. Pharmaceutical Sci. 4129, 4129, 4144 (2008); Ken Garber,

Angiogenesis Inhibitors Suffer New Setback, 20 Nature Biotech. 1067, 1067

(2002). Indeed, doses in the cancer trials discussed in the articles often easily

34 exceeded 100mg. See Mauriz & González-Gallego, supra, at 4133-34 (describing

400mg doses of Avastin). By contrast, in the ZAF-201 clinical trial, beloranib doses ranged from 0.6 mg to 2.4 mg. JA075.

There is no basis for Plaintiffs’ speculative assumption that articles about cancer trials at vastly stronger doses say anything about beloranib causing thrombotic events in PWS clinical trials, let alone their assumption that based on such articles Dr. Hughes either knew or should have known that minor thrombotic events in beloranib clinical trials designated not related to the drug would be material to investors. Dramatically undercutting any inference of scienter, one article Plaintiffs cite was co-written by Dr. Hughes. That article identifies patient population and dosage level as reasons not to extrapolate from cancer studies to beloranib:

Much higher doses of beloranib (doses up to 50 mg/m2) tested in human oncology studies . . . (in subjects with advanced cancer taking concomitant cytotoxic agents) have shown potential toxic effects . . . . These events were isolated to doses above 20 mg/m2 per injection and have not been observed with much lower doses tested in the current study (or in animal models with human equivalent exposures).

T.E. Hughes et al., Ascending Dose-Controlled Trial of Beloranib, a Novel Obesity

Treatment for Safety, Tolerability, and Weight Loss in Obese Women, 21:9 Obesity

1782, 1785-87 (2013); see also Jocelyn Rice, Co-Opting a Cancer Treatment to

Spur Fat Loss, MIT Tech. Rev. (July 15, 2009) (“[S]tudies suggest that the doses

sufficient for fat loss are lower than that required for tumor suppression, which

35 might reduce the potential for side effects.”).

Insofar as it might be possible to infer from the articles that Dr. Hughes should have been aware of hypothetical thrombotic risks, Defendants disclosed information related to those risks: the two serious pulmonary embolism cases in

ZAF-201. Nothing in the articles suggests that Dr. Hughes knew that, at the time of these disclosures, there was anything materially misleading about not disclosing the clinically insignificant cases of superficial thrombophlebitis. See Plumbers &

Steamfitters Local 773 Pension Fund v. Canadian Imperial Bank of Commerce,

694 F. Supp. 2d 287, 300 (S.D.N.Y. 2010) ( “news articles cited still must indicate particularized facts about a defendant’s conduct in order to support [the] claims,” and the articles in issue did not because “knowledge of a general economic trend does not equate to harboring a mental state to deceive, manipulate, or defraud”

(citation omitted)); cf. Vertex, 838 F.3d at 82 (alleged discoveries from scientific research not probative of scienter where no allegation that specific decision makers at the company viewed the discoveries as calling their disclosures into question).

As Judge Saylor put it, the academic articles did not prove that Defendants knew that they “risked misleading investors by not disclosing the superficial AEs,” much less that they “knew of that risk at the time of the disclosures—that is, before the

Phase III patient death.” JA315.

36 (b) The language of the disclosures does not support scienter.

Nor do any of the factual allegations support Plaintiffs’ theory that Zafgen

was engaging in “careful parsing” to avoid disclosing cases of superficial

thrombophlebitis. Focusing special attention on Zafgen’s statement suggesting

“added vigilance for [adverse events] related to blood clotting during future

clinical trials,” JA077, Plaintiffs insist that by omitting the word “serious,” Zafgen

was acknowledging the importance of even minor adverse events. Appellants’ Br.

27. Not so. This statement nowhere indicates anything that Dr. Hughes believed,

much less a belief that any small number (e.g., two) of minor events not

determined to be related to beloranib were or would be material to investors.7

Being attentive to the possibility that minor events could be become more

common, or that additional serious events may occur, is far different from

intentionally or recklessly disregarding a known causal relationship between a drug

and adverse thrombotic events.

In support of Plaintiffs’ argument that Zafgen’s disclosures were

7 Plaintiffs unconvincingly compare Defendants’ statements to actions of the defendants in Mississippi Public Employees’ Retirement System v. Boston Scientific Corp., 523 F.3d 75 (1st Cir. 2008). There, several users of a medical device had suffered serious adverse events, and the company had planned product recalls and a manufacturing change to reduce the risk of future similar events. Id. at 82-83. But, plaintiffs there alleged, defendants had withheld this information to “build up inventory prior to announcing recalls” and “avoid loss of market share.” Id. at 88-89. Here, by contrast, Defendants’ “added vigilance” suggests the opposite of an intent to delude investors by denying a known risk while working behind the scenes to fix the problem.

37 intentionally misleading, Plaintiffs also make much of the fact that Defendants disclosed “other minor adverse events—such as nausea and itching—but not minor thrombotic adverse events . . . .” Appellants’ Br. 22-23. But Plaintiffs ignore the

actual language of Defendants’ disclosures. Far from seeking “to create the

impression of full disclosure,” id. at 23, Defendants not only emphasized that they

may not disclose all adverse events, but also clarified that their disclosure of non-

serious adverse events was limited to those that were “most common[].” See supra

at 11-15. Superficial thrombophlebitis simply did not fit into this category. In any

event, it is doubtful that revealing two SAEs would have “lull[ed] investors

through a show of apparent candor,” Appellants’ Br. 32, but revealing two cases of

superficial AEs in a morbidly obese population already at “increased risk of

thrombotic adverse events,” id. at 1, would have scared those same investors away.

(c) Plaintiffs have largely abandoned their weak motive allegations.

Plaintiffs alleged that Dr. Hughes and other non-defendant Zafgen insiders

had withheld information about minor adverse events in order to engage in insider

trading. JA318-20. Although Plaintiffs “bear[] the burden of showing that insider

sales were in fact unusual or suspicious in timing or amount,” Lenartz v. Am.

Superconductor Corp., 879 F. Supp. 2d 167, 186 (D. Mass. 2012), Plaintiffs have

now all but abandoned their insider trading arguments, see Appellants’ Br. 34-36,

and for good reason. As to timing, the stock sales occurred more than a year after

38 the nondisclosure of the two superficial events, and before Zafgen insiders had learned of the unanticipated death and partial clinical hold, making it beyond implausible that Zafgen insiders timed the sales to take advantage of undisclosed inside information. See Greebel, 194 F.3d at 198 (“[M]ere pleading of insider trading, without regard to either context or the strength of the inferences to be drawn, is not enough.”). Moreover, “Plaintiffs acknowledge that the executives sold shares pursuant to Rule 10b-5 trading plans,” JA319 n.22,8 which allowed

sales only once Zafgen’s stock price reached a pre-designated level. See JA204-05

(Zafgen stock exceeded $40 per share for the first time in mid-September 2015, when the trades occurred); see also Abiomed, 778 F.3d at 246 (deeming an

executive’s “first sales of Abiomed stock . . . hardly suspicious given that he had

just joined the company in December 2008 and first became eligible to in

December 2009”).9 As to amount, all Zafgen insiders retained the vast majority of

their Zafgen holdings, suggesting no intent to cash out before bad news became

public. See JA319-20. Courts have consistently found no scienter on insider

8 Although entering into Rule 10b5-1 trading plans during the class period—a period that Plaintiffs here extended in the Amended Complaint by more than six months to include virtually the entire time Zafgen was a —may make those plans not dispositive of insider trading, the plans still relate to whether the allegations of insider trading are cogent and compelling. See In re ARIAD, No. 15-1491 (slip op. at 18-19 & n.6). 9 Given the extreme uncertainty facing early-stage biopharmaceutical companies, executives enter into 10b5-1 trading plans precisely to avoid any appearance of impropriety when their trades are evaluated with the benefit of hindsight.

39 trading allegations more cogent and compelling than these. See, e.g., Vertex, 838

F.3d at 84-86 (defendants sold almost $32 million in stock); Biogen, 537 F.3d at

42, 55-56 (one defendant sold $35 million in stock).

In their Opposition to the Motion to Dismiss and their brief, but not in their

Amended Complaint, Plaintiffs also argue that Defendants had an incentive to

engage in fraud “because they wanted to lull investors into complacency so they

could raise $240 million from an initial and secondary offering—cash they needed

to stay in business.” Appellants’ Br. 31. Even were this allegation procedurally

proper, it would provide Plaintiffs no help. The same could be said of any early-

stage company and any corporate officer; indeed, life sciences companies needing

to raise hundreds of millions to bring a drug to market through clinical trials would

be at constant risk of securities class actions if such a motive were sufficient to

plead scienter. For these reasons, courts have refused to find this sort of

speculative, general allegation sufficient to support the specific inference that

particular defendants acted with scienter. E.g., Greebel, 194 F.3d at 197 (finding

“catch-all allegations that defendants stood to benefit from wrongdoing” insufficient); In re Atl. Power Corp. Sec. Litig., 98 F. Supp. 3d 119, 133 (D. Mass.

2015) (motivation to raise capital is too general to give rise to a cogent and compelling inference of scienter). And Plaintiffs do not allege that Dr. Hughes made a single penny in additional compensation as a result of his alleged

40 fraudulent scheme. Cf. In re Atl. Power, 98 F. Supp. 3d at 133 (“That the executives may have gained some compensation is not enough, since stock-based compensation is a common feature of pay packages.”). It strains credulity to think that corporate officers terrified of scaring off investors would disclose two serious adverse events while hiding two superficial events.

(d) Plaintiffs’ remaining arguments are unavailing.

Unable to allege specific facts to support their implausible theory of fraud,

Plaintiffs inaccurately criticize Judge Saylor for “requiring” that they produce

“direct evidence.” Appellants’ Br. 25-27. But he required nothing of the sort.

Instead, he appropriately observed the absence of any specific factual allegations

that might support scienter—for instance, confidential-source allegations,

witnessed discussions, internal emails, or contemporaneous internal reports.

JA291. He never suggested that such factual allegations are necessary, and he is

correct that their absence is probative. See supra at 31-33. Plaintiffs argue that it

is unfair to expect them to identify “direct evidence” pre-discovery, and that

Zafgen’s small size makes finding confidential informants difficult. Appellants’

Br. 25-26. But this Court already has rejected such arguments, and the PSLRA

contains no small company exception. See Vertex, 838 F.3d at 83 n.9

(acknowledging that it might prove difficult for plaintiffs to identify credible

factual allegations supporting scienter pre-discovery but observing that “Congress,

41 for reasons of its own, deliberately raised the entry bar to discovery through the

PSLRA’s heightened pleading standards”).

In another attempt to buttress their total failure to plead facts probative of

Dr. Hughes’s state of mind, Plaintiffs emphasize FDA guidance. But Plaintiffs are

simply wrong to suggest that the FDA looks at the “number” of adverse events,

without regard to severity, when evaluating drug safety and efficacy. See supra at

7-9 (FDA does not require reporting of non-serious adverse events as they occur

and considers severity of adverse events when determining whether a drug is safe

and effective and therefore can be approved for public sale). Moreover, the two

FDA guidance documents and two unpublished district court cases Plaintiffs cite

for the importance of the rate of events all address FDA review at the NDA and

post-approval stages, far from where Zafgen was at the time of the disclosures at

issue here, having just completed two Phase 2 clinical trials. See Appellants’ Br.

33-34. At that time, Zafgen did not have an obligation to disclose minor adverse

events to the FDA on an ongoing basis, see supra at 9, and in dramatic contrast to

Plaintiffs’ cited cases, Plaintiffs allege no facts that Dr. Hughes had any

communication whatsoever from FDA at the time of the statements at issue with

which FDA disagreed. Zafgen is not even alleged to have completed its NDA

submission to FDA, and Plaintiffs’ views on what FDA would have considered

significant at the time of the statements during early clinical trials is utter

42 speculation.

2. Where Omitted Information Was Not Material, Or Materiality Is Particularly Weak, Scienter Needs To Be Stronger. Further weakening the strength of Plaintiffs’ already under-supported scienter theory, the two cases of superficial thrombophlebitis were not material; at the absolute most, their materiality was marginal. See infra at 46-50. Although materiality and scienter are distinct requirements, see supra at 31, lack of materiality undermines a claim of scienter: “‘the materiality and scienter inquiries are linked’ . . . because the marginal materiality of an omitted fact ‘tends to undercut the argument that defendants acted with the requisite intent in not disclosing’ it.” In re ARIAD, No. 15-1491 (slip op. at 8) (quoting Abiomed, 778

F.3d at 240, 242); see also, e.g., City of Dearborn Heights Act 345 Police & Fire

Ret. Sys. v. Waters Corp., 632 F.3d 751, 757 (1st Cir. 2011) (questionable or

marginal materiality “tends to undercut the argument that defendants acted with the

requisite intent or extreme recklessness in not disclosing the fact”); In re Bos. Sci.

Corp. Sec. Litig., 686 F.3d 21, 31 (1st Cir. 2012) (“Marginal materiality not only defeats any independent inference of deliberate withholding but also makes the pled facts insufficient for a factfinder to find the ‘extreme recklessness in not disclosing the fact[.]’”). After all, a defendant has little to gain from fraudulently

withholding questionably or marginally material information and is unlikely to

have acted with extreme recklessness.

43 C. The Non-Fraudulent Inferences Are Far More Cogent and Compelling. Under the PSLRA, courts must weigh competing inferences to determine whether the fraudulent inference is cogent and at least as compelling as a competing non-fraudulent inference. See supra at 28-29. Given the lack of any specific factual allegations to suggest that Dr. Hughes acted with fraudulent intent or extreme recklessness, Plaintiffs’ fraudulent inference is neither cogent nor compelling. On the other hand, there is an extremely compelling non-fraudulent explanation: far from seeking to hide information, Zafgen disclosed thrombotic

SAEs, but did not even consider disclosing the two cases of superficial thrombophlebitis because these minor events were not significant at the time.

Superficial thrombophlebitis is an uncomfortable but not particularly concerning condition (only two cases were observed) and, according to independent clinical investigators, neither case—in an already morbid PWS and severely obese population—was related to beloranib. See Biogen, 537 F.3d at 45 (nondisclosure

“cannot be intentionally misleading if the defendant did not have sufficient

information at the relevant time to form an evaluation that there was a need to disclose certain information and to form an intent not to disclose it”).

While not disclosing the two lesser adverse events, Zafgen stated that: (1) it was disclosing only “the most commonly reported” minor adverse events, clearly indicating there could be others (those not “most commonly reported”); (2) Zafgen

44 might not disclose even SAEs if small in number or not related to beloranib; and

(3) undisclosed adverse events may decrease Zafgen’s stock price down the road.

See Waters Corp., 632 F.3d at 760 (“Attempts to provide investors with warnings

of risks generally weaken the inference of scienter.”); Abiomed, 778 F.3d at 243

(same). Out of the same interest in transparency, Zafgen disclosed two SAEs— pulmonary embolisms—even though independent clinical investigators had found that the events were not related to beloranib, and even though some number of events was to be expected given the severely obese beloranib patient population’s

“higher risk for thrombotic adverse events.” Appellants’ Br. 1. Only after the patient death in 2015, the two patients’ treatment orientations (beloranib vs. placebo) were unblinded, and the FDA imposed the partial clinical hold did Zafgen have new information and a reason to examine possible signs of a causal link between beloranib and thrombotic events. As a result of this examination, Zafgen reported all observed thrombotic adverse events from that analysis, including the two lesser cases of superficial thrombophlebitis.

In sum, the factual allegations in the Amended Complaint are insufficient to support any inference, let alone a strong one, that Dr. Hughes acted with fraudulent intent or extreme recklessness. Indeed, Plaintiffs’ scienter allegations are far less strong than those the Court found insufficient in Biogen, which featured a drug approved for sale, a greater number of more serious adverse events, allegations

45 from confidential informants asserting the company’s knowledge of a large number of serious, unreported adverse events, and far stronger insider trading allegations, including the Executive Chairman’s sale of 78% of his shares for a

total value over $35 million. See supra at 29-31. As Judge Saylor concluded,

Plaintiffs’ facially unlikely theory is thus nowhere near as cogent and compelling

as the competing non-fraudulent inference that, at the time it made its disclosures,

Zafgen simply did not view a mere two cases of superficial thrombophlebitis as

significant.

III. THE AMENDED COMPLAINT FAILS TO PLEAD SPECIFIC FACTS DEMONSTRATING THAT THE OMISSIONS WERE MATERIAL. Under the PSLRA, in addition to stating specific facts giving rise to a strong

inference of scienter, a complaint must “specify each statement alleged to have been misleading, [and] the reason or reasons why the statement is misleading.” 15

U.S.C. § 78u-4(b)(1). To satisfy this requirement, plaintiffs must allege specific

facts demonstrating why each allegedly misleading statement was material.

Plaintiff has not alleged facts sufficient to show that the two cases of superficial

thrombophlebitis were material before the patient death in September 2015 (or

even now). Indeed, Judge Saylor suggested as much. See JA309 (calling the

materiality of the omissions “questionable”). For this independent reason, the

judgment should be affirmed.

46 A. Disclosure Of Two Superficial AEs Would Not Have Significantly Altered The Total Mix Of Information Available. “A fact is material when there is ‘a substantial likelihood’ that a reasonable

investor would have viewed it as ‘significantly alter[ing] the total mix of

information made available.’” Waters Corp., 632 F.3d at 756 (quoting Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988)). In Matrixx, after clarifying that adverse event reports by patients purchasing a commercially-approved drug might be material even in the absence of statistical significance, the Court stressed that

“[a]pplication of . . . [the] ‘total mix’ standard does not mean that pharmaceutical manufacturers must disclose all reports of adverse events[,] . . . [which] are daily events in the pharmaceutical industry.” 563 U.S. at 43. Matrixx reaffirms that the key question “remains whether a reasonable investor” would have viewed the nondisclosed information “‘as having significantly altered the “total mix” of information made available.’” Ibid. As the Supreme Court made clear, “the mere existence of reports of adverse events—which says nothing in and of itself about whether the drug is causing the adverse events—will not satisfy this standard.” Ibid. Instead, “something more is needed” before an adverse event report can be considered material. Ibid.

In Matrixx, the Court concluded that materiality was adequately pled because the company received “information that plausibly indicated a reliable causal link between Zicam”—the drug at issue in that case, which is designed to

47 provide symptomatic relief from the common cold and allergies—and “anosmia,” a condition in which patients lose their sense of smell. Id. at 45. This information included: (1) “reports from three medical professionals and researchers about more than 10 patients who had lost their sense of smell after using Zicam,” (2)

“additional reports of anosmia” from other sources, including products-liability lawsuits, and (3) a presentation to a “national medical conference devoted to

treatment of diseases of the nose” about “a causal link between Zicam and

anosmia.” Ibid. Importantly, Matrixx publicly denied any link between Zicam and

anosmia and announced optimistic revenue forecasts based on Zicam’s projected

sales, without taking the serious risk of anosmia into account. See id. at 47. In

Matrixx, the undisclosed information—the risk of anosmia for persons seeking

relief from mere cold symptoms—would have significantly altered the total mix of

information available to investors, making the company’s statements materially

misleading, particularly because Matrixx had made a voluntary affirmative

statement denying causation, without scientific basis, that “reports indicating that

Zicam caused anosmia were completely unfounded and misleading.” Ibid.

Here, by contrast, there is not “something more”; there are adverse event

reports with other contributing medical causes in a patient population prone to

these events, and without contemporaneous information at the time of the AEs to

suggest that beloranib had anything to do with them. Unlike Matrixx, which was

48 marketing a purportedly safe commercial product, Zafgen was a clinical-stage company with one drug in clinical trials, for which, as Zafgen disclosed to investors, it may never be able to prove safety and efficacy. See JA069-70. It is

difficult to imagine that an investor evaluating the potentially life-saving drug

beloranib, already knowing that two trial participants had suffered from thrombotic

SAEs, would view the disclosure that two other severely obese trial participants

had experienced superficial events not tied by clinical investigators to beloranib, as

significantly altering the mix of available information. See Advest, 512 F.3d at 61

(plaintiffs inadequately pled a material omission where defendants “omitt[ed]

information about the precise attrition rate” but “more pertinent measures of the

college’s financial health [were] presented forthrightly”).

B. Plaintiffs Plead Only Materiality By Hindsight. Relying primarily on FDA guidance and the analyst reports, Plaintiffs

suggest that the two cases of superficial thrombophlebitis were material because

they contributed to a concerning trend, even if they were not particularly

significant on their own. See Appellants’ Br. 32-34. This argument alleges “fraud

by hindsight,” Advest, 512 F.3d at 62; it asks the Court, following the material

developments during the clinical trials of a patient death and FDA clinical hold, to

look back at adverse thrombotic events occurring over a year and a half earlier,

discern a trend, and hold that the trend was also discernable at the time of the

49 disclosures at issue. But at that time, the patient death and FDA partial clinical

hold had not occurred and no adverse thrombotic events had been deemed related to beloranib by independent clinical investigators. Plaintiffs plead no facts sufficient to establish even for pleading purposes that, prior to the patient death,

investors would have viewed two serious and two minor thrombotic events—none

tied by independent clinical investigators to beloranib, and in a severely obese

population prone to such events—materially differently than the two disclosed

SAEs standing alone. Zafgen’s decision to disclose the minor adverse events after

the patient death and further SAEs does not bridge this gap for Plaintiffs. See Suna

v. Bailey Corp., 107 F.3d 64, 68-69 (1st Cir. 1997) (holding it insufficient for

plaintiffs to plead that “defendants must have known of the severity of their problems earlier because conditions became so bad later on”).

IV. DEFENDANTS HAD NO DUTY TO DISCLOSE SUPERFICIAL THROMBOTIC EVENTS. Even were the omissions material, and even if Plaintiffs have adequately

pled scienter, the Amended Complaint still fails to state a securities fraud claim for

a third independent reason: Defendants were under no duty to disclose the omitted

information. “[T]he mere possession of material, nonpublic information does not

create a duty to disclose it.” Hill v. Gozani, 638 F.3d 40, 57 (1st Cir. 2011). Here,

Plaintiffs insist that the disclosure of two thrombotic SAEs and certain minor AEs

at the early clinical trial stage created a duty to disclose the two minor thrombotic

50 events. Appellants’ Br. 21-22. But as the Court put it in Backman v. Polaroid

Corp., 910 F.2d 10, 16 (1st Cir. 1990) (en banc), although a disclosure must be

complete and accurate . . . [,] [t]his, however, does not mean that by revealing one fact about a product, one must reveal all others that, too, would be interesting, market-wise, but means only such others, if any, that are needed so that what was revealed would not be so incomplete as to mislead.

For two independent reasons, the omissions at issue here did not render the disclosures so incomplete as to mislead.

First, Defendants informed investors that they would not disclose all serious events, and then disclosed only the “the most commonly reported [adverse

events],” as well as “serious thrombotic events.” JA077; JA102 (emphasis added).

But Defendants were not also obligated to disclose minor adverse events, like

superficial thrombophlebitis, that were not among the “most commonly reported”

such events. These minor events plainly fell outside the scope of what Defendants

purported to disclose, and thus their omission did not render the statements

misleading. See In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869, 880 n.8 (9th

Cir. 2012) (“[A]s long as the omissions do not make the actual statements

misleading, a company is not required to disclose every safety-related result from a

clinical trial, even if the company discloses some safety-related results and even if

investors would consider the omitted information significant.”); In re Bos. Tech.,

Inc. Sec. Litig., 8 F. Supp. 2d 43, 53 (D. Mass. 1998) (“[A] duty to disclose arises

51 only where both the statement made is material, and the omitted fact is material to the statement in that it alters the meaning of the statement.” (emphasis added)).

Second, this Court has consistently distinguished between withholding information that strikes at the core of a company’s livelihood on the one hand, and omissions of details on the other. See Hill, 638 F.3d at 57-60 (rejecting argument that disclosure of a risk of non-reimbursement also required disclosure of billing experts’ opinion that company’s reimbursement coding system was “incorrect and possibly fraudulent,” because plaintiffs had not shown that “the danger posed by the reimbursement strategy was, at the time the statement was made, a near certainty of ruin”); Cooperman v. Individual Inc., 171 F.3d 43, 51 (1st Cir. 1999)

(dismissing claim that section of prospectus was misleading for failure to include internal dissent on the ). In light of

Defendants’ disclosure of “the most commonly reported” adverse events and the two pulmonary embolisms, a mere two cases of superficial thrombophlebitis not linked by investigators to beloranib were, at the time, simply additional detail.

After the patient death and FDA partial clinical hold, Zafgen examined and disclosed all such events. See Deka Int’l v. Genzyme Corp. (In re Genzyme Corp.

Sec. Litig.), 754 F.3d 31, 42 (1st Cir. 2014) (“That [information] was not disclosed

at an earlier time that plaintiffs would have preferred, does not amount to a breach

of the duty to disclose.”).

52 What Plaintiffs’ argument demands, in essence, is that clinical stage biopharmaceutical companies list every adverse event for each patient as soon as they list some adverse events experienced by some patients, even if no causal connection is then known. The securities laws require no such untenable duty; details are not required every time a company discloses what it generally saw in a clinical trial and how it intends to proceed going forward. That is particularly true given Zafgen’s disclosure of investment risks, including that it “may not be able to demonstrate that beloranib is safe and effective in treating obesity and hyperphagia in PWS patients.” JA070. Given Zafgen’s extensive risk disclosures, no reasonable investor could have been misled by the omission of minor, clinically insignificant AEs. Requiring disclosure of every adverse event, however minor, would discourage companies from ever disclosing any adverse events.

V. THIS COURT SHOULD, IF NECESSARY, REMAND THE LOSS- CAUSATION ISSUE. For reasons given in their Motion to Dismiss, Plaintiffs also failed to plead loss causation. Although Plaintiffs insist that the drop in Zafgen’s stock price was due to disclosure of two cases of superficial thrombophlebitis, the price dropped after the death, partial clinical hold, and disclosure of additional, more serious thrombotic events known to be in patients given beloranib vs. placebo. See Coyne v. Metabolix, Inc., 943 F. Supp. 2d 259, 275 (D. Mass. 2013) (dismissing securities fraud complaint on loss-causation grounds because “Plaintiff fails to plead a

53 plausible connection between the event causing her loss and the statements she alleges were false or misleading”). But because the District Court did not address this issue, Defendants agree with Plaintiffs that this Court, should it reach the issue, should remand for the District Court to address the merits in the first instance. See Appellants’ Br. 37.

VI. THE SECTION 20(a) CLAIM FAILS BECAUSE THE UNDERLYING CLAIM FAILS. Because the Section 20(a) claim depends on a violation of Section 10(b) and

Rule 10b-5, see Vertex, 838 F.3d at 86; Greebel, 194 F.3d at 207, and because

Plaintiffs’ allegations are inadequate to state a claim for securities fraud, Plaintiffs

have failed to plead a “control person” claim against Dr. Hughes.

CONCLUSION For the foregoing reasons, the judgment of the United States District Court

for the District of Massachusetts should be affirmed.

54 Respectfully submitted,

/s/ Deborah S. Birnbach Deborah S. Birnbach (Bar #38722) Kevin P. Martin (Bar #89611) Adam Slutsky (Bar #1176144) Kate MacLeman (Bar #1161337) Joshua Bone (Bar #1177074) GOODWIN PROCTER LLP 100 Northern Avenue Boston, Massachusetts 02210 Tel.: +1 617 570 1000 Fax.: +1 617 523 1231

Dated: December 8, 2016

55 CERTIFICATE OF COMPLIANCE The undersigned, Deborah S. Birnbach, counsel for Defendants-Appellees, hereby certifies pursuant to Fed. R. App. P. 32(a)(7)(C) that the Brief for Defendants-Appellees complies with the type-volume limitations of F.R.A.P. 29(d).

1. Exclusive of the parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B), the brief contains 12,849 words, including footnotes, according to the word count of Word for Windows, the word-processing system used to prepare the brief.

2. The brief has been prepared in a proportionally spaced typeface in fourteen- point Times New Roman.

/s/ Deborah S. Birnbach Deborah S. Birnbach (Bar #38722) GOODWIN PROCTER LLP 100 Northern Avenue Boston, Massachusetts 02210 Tel.: +1 617 570 1000 Fax.: +1 617 523 1231

Dated: December 8, 2016 CERTIFICATE OF SERVICE

I, Deborah S. Birnbach, hereby certify that on December 8, 2016 I electronically filed the Brief of Defendants-Appellees with the Clerk of the Court for the United States Court of Appeals for the First Circuit by using the CM/ECF system. I certify that all participants in the case are registered CM/ECF users and that service will be accomplished by the CM/ECF system.

/s/ Deborah S. Birnbach Deborah S. Birnbach (Bar #38722) GOODWIN PROCTER LLP 100 Northern Avenue Boston, Massachusetts 02210 Tel.: +1 617 570 1000 Fax.: +1 617 523 1231

Dated: December 8, 2016