holding that 21 company was “under no duty to disclose the precise extent of the anticipated revenue drop” 22 where the “prospectus clearly warned that [the company] expected lower net sales”
How later courts described this case
- holding that 21 company was “under no duty to disclose the precise extent of the anticipated revenue drop” 22 where the “prospectus clearly warned that [the company] expected lower net sales”
- noting that a statement often “will not 27 mislead even if it is incomplete or does not include all relevant facts’
- noting that consideration of “the full text of the 4 Prospectus, including portions which were not mentioned in the complaint[],” is 5 appropriate in the context of a motion to dismiss
- “We have expressly declined to require a rule of completeness 24 for securities disclosures because ‘no matter how detailed and accurate disclosure 25 statements are, there are likely to be additional details that could have been disclosed but 26 were not.’’’
Written by the judges who cited it.
The opinion
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9 UNITED STATES DISTRICT COURT
10 SOUTHERN DISTRICT OF CALIFORNIA
11
12 Case No.: 20-cv-1683-CAB-AHG
IN RE PROGENITY, INC. SECURITIES
13
LITIGATION ORDER ON DEFENDANTS’
14 MOTION TO DISMISS THE FIRST
AMENDED COMPLAINT
15
16
[Doc. No. 40]
17
18
19
This consolidated class action alleges violations of Sections 11 and 15 of the
20
Securities Act of 1933 arising out of alleged false and misleading statements contained in
21
the Registration Statement filed in connection with the June 2020 initial public offering
22
(the “IPO”) of shares of common stock of Progenity, Inc. (“Progenity”). Defendants now
23
move to dismiss Plaintiffs’ first amended class action complaint (the “FAC”). [Doc. No.
24
40.] The motion has been fully briefed and the Court finds it suitable for determination on
25
the papers submitted and without oral argument. See S.D. Cal. CivLR 7.1(d)(1). For the
26
reasons set forth below, Defendants’ motion to dismiss is granted.
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1 I. BACKGROUND
2 A. Parties
3 The FAC alleges various securities violations by three groups of defendants
4 (collectively, “Defendants”): (1) Progenity; (2) Harry Stylli, Eric d’Esparbes, Jeffrey Alter,
5 John Bigalke, Jeffrey Ferrell, Brian L. Kotzin, Samuel Nussbaum, and Lynne Powell (the
6 “Individual Defendants”); and (3) Piper Sandler & Co., Wells Fargo Securities, LLC,
7 Robert W. Baird & Co. Incorporated, Raymond James & Associates, Inc., and BTIG, LLC
8 (the “Underwriter Defendants”). [Doc. No. 38 ¶¶ 18-34.]
9 Progenity is a biotechnology company based in San Diego, California that develops
10 and commercializes molecular testing products and precision medicine applications,
11 including “in vitro molecular tests designed to assist parents in making informed decisions
12 related to family planning, pregnancy, and complex disease diagnosis.” [Id. ¶ 2.] At the
13 time of the IPO, Progenity’s two most successful products were its Innatal and Preparent
14 tests, which screen for fetal chromosomal conditions and mutations that cause genetic
15 diseases, respectively. [Id. ¶ 3.]
16 At all relevant times, Stylli served as Progenity’s Chief Executive Officer and
17 Chairman of the Board of Directors, and d’Esparbes served as Progenity’s Chief Financial
18 Officer. [Id. ¶¶ 19-20.] Alter, Bigalke, Ferrell, Kotzin, Nussbaum, and Powell served as
19 members of Progenity’s Board of Directors. [Id. ¶¶ 21-27.] All Individual Defendants
20 signed (or authorized the signing of) the Registration Statement issued in connection with
21 Progenity’s IPO, “reviewed and helped prepare the Registration Statement,” and
22 “participated in the solicitation and sale of [Progenity’s] common stock to investors in the
23 IPO for their own financial benefit and the financial benefit of Progenity.” [Id. ¶ 27]
24 Piper Sandler, Wells Fargo, Baird, Raymond James, and BTIG are financial services
25 companies that acted as underwriters for Progenity’s IPO. [Id. ¶¶ 28-34.] The Underwriter
26 Defendants collectively “sold more than 6.6 million Progenity shares in the IPO at $15 per
27 share and shared $7 million in underwriting discounts and commissions.” [Id. ¶ 34.]
28 According to the FAC, the Underwriter Defendants failed to “conduct adequate due
1 diligence in connection with the IPO and the preparation of the Registration Statement,”
2 thereby leading to the class harm. [Id.]
3 Lead Plaintiffs Lin Shen, Lingjun Lin, and Fusheng Lin bring this action on behalf
4 of a putative class of investors who purchased or otherwise acquired Progenity common
5 stock pursuant and/or traceable to the Registration Statement issued in connection with
6 Progenity’s IPO. [Id. ¶ 1.]
7 B. Factual Background
8 On May 27, 2020, Progenity filed a Form S-1 Registration Statement with the
9 Securities and Exchange Commission (“SEC”) registering Progenity’s common stock in
10 preparation for its IPO. [Id. ¶ 53.] Progenity subsequently filed four amendments to the
11 Registration Statement on June 4, June 15, and June 18, 2020, respectively (filing two
12 amendments on the last date). [Id. ¶ 54.] On June 22, 2020, Progenity filed a Form 424B4
13 Prospectus with the SEC, which was incorporated into the Registration Statement. [Id. ¶
14 56.] The Registration Statement, including all amendments and the Prospectus, took effect
15 on June 18, 2020. [Id. ¶¶ 1 n.1, 56.]
16 Progenity conducted its IPO from June 19 through June 23, 2020, during which it
17 issued and sold 6,666,667 shares of its common stock at a price to the public of $15.00 per
18 share. [Id. ¶¶ 4, 57.] The IPO generated over $100 million in gross offering proceeds and
19 approximately $88.7 million in net proceeds for Progenity. [Id.]
20 On August 13, 2020, Progenity filed a press release and slide deck with the SEC
21 reporting its second quarter 2020 financial results. [Id. ¶ 60.] The materials filed stated
22 that Progenity’s “second quarter revenues reflected a $10.3 million accrual for refunds to
23 government payors.” [Id.] In an investor call later that day, Stylli explained that a
24 commissioned third-party review of Progenity’s coding and billing processes revealed that
25 Progenity had “not appropriately transitioned the implementation of the new billing
26
27
28
1 requirements for larger carrier screening panels, which were introduced in early 2019.”
2 [Id. ¶ 61.] Because of these billing errors, Progenity “received an overpayment of
3 approximately $10.3 million from government payors during 2019 and early 2020.” [Id.]
4 On August 14, 2020, Progenity filed its Form 10-Q for the second quarter of 2020
5 with the SEC. The Form 10-Q confirmed that Progenity accrued $10.3 million for refunds
6 to government payors during the second quarter of 2020. [Id. ¶ 62.] The filing further
7 stated that Progenity’s deadline to “report and return the overpayment to the government
8 programs is 60 days from the time the overpayment was determined and quantified,” so
9 Progenity “expects to repay this amount to the relevant government programs by early
10 October 2020.” [Id.] According to Plaintiffs, that same day that Progenity filed its Form
11 10-Q, its stock price declined by $1.24 per share. [Id. ¶ 7.]
12 On October 29, 2020, Progenity disclosed in a press release reporting preliminary
13 third quarter 2020 revenue that it was “suffering from material negative trends with respect
14 to [its] testing volumes, average selling prices for tests, and revenues.” [Id. ¶ 8.] Plaintiffs
15 contend that Progenity did not disclose these trends to investors at the time of the IPO,
16 thereby leaving investors “ignorant of the significant deterioration in Progenity’s
17 prospects.” [Id.] According to Plaintiffs, over the three trading days following Progenity’s
18 disclosure, Progenity’s stock price declined by $3.42 per share. [Id.]
19 Plaintiffs argue that Defendants violated their disclosure obligations in the
20 Registration Statement by failing to disclose two categories of material facts that were
21
22
23 1 Progenity’s Form 10-Q for the second quarter of 2020 explains that in the U.S., the “American Medical
Association (‘AMA’) generally assigns specific billing codes for laboratory tests under a coding system
24
known as Current Procedure Terminology (‘CPT’), which we and our ordering healthcare providers must
25 use to bill and receive reimbursement for our molecular tests.” [Doc. No. 38 ¶ 62.] The Registration
Statement states that “effective January 1, 2019, the AMA approved the use of a CPT code for expanded
26 carrier screening tests, which may . . . cause reimbursement for our Preparent expanded carrier screening
tests to decline.” [Id. ¶ 66.] Plaintiffs allege that following this AMA approval, Progenity was required
27 to bill its Preparent tests under a new CPT code beginning in January 2019. However, Plaintiffs claim
that Progenity did not update its billing practices until early 2020, thereby resulting in a $10.3 million
28
1 known to Defendants at the time of the IPO. First, Defendants allegedly failed to disclose
2 the risk that Progenity would have to refund government payors for overbilled Preparent
3 tests, and thus have its revenue negatively impacted by at least $10.3 million. [Id. ¶ 161.]
4 Second, Defendants allegedly failed to disclose negative trends in Progenity’s testing
5 volumes, average selling prices, and revenues. [Id. ¶ 8.] Plaintiffs claim that Defendants’
6 failure to disclose the foregoing material facts violated Section 11 and Items 105 and 303
7 of SEC Regulation S-K.2 [Id. ¶¶ 161-162.] Plaintiffs also allege that as “controlling
8 persons of Progenity,” the Individual Defendants are liable under Section 15 for causing
9 Progenity’s Section 11 violations. [Id. ¶¶ 184-186.] As a result of Defendants’ alleged
10 securities laws violations, Plaintiffs claim that the class suffered significant losses. [Id. ¶
11 9.]
12 C. Procedural Background
13 On December 3, 2020, the Court consolidated two related securities class actions
14 against Progenity and appointed Lin Shen, Lingjun Lin, and Fusheng Lin as Lead Plaintiffs.
15 [Doc. No. 33.] Plaintiffs subsequently filed the FAC on February 4, 2021, alleging
16 violations of Sections 11 and 15 of the Securities Act of 1933. [Doc. No. 38.]
17 On April 5, 2021, Defendants moved to dismiss the FAC. [Doc. No. 40.]
18 Defendants argue that the FAC should be dismissed for (1) failure to plead a materially
19 false or misleading statement or omission under Section 11 of the Securities Act of 1933;
20 (2) failure to plead a violation of Items 303 and 105 of the U.S. Securities and Exchange
21 Commission Regulation S-K; and (3) failure to plead control person liability under Section
22 15 of the Securities Act. [Id. at 2.] The motion is now fully briefed and ripe for resolution.
23 II. LEGAL STANDARD
24 The familiar standards on a motion to dismiss apply here. To survive a motion to
25 dismiss under Rule 12(b)(6), “a complaint must contain sufficient factual matter, accepted
26
27
2 Regulation S-K sets forth various disclosure obligations for registration statements filed with the SEC.
28
1 as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S.
2 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Thus, the
3 Court “accept[s] factual allegations in the complaint as true and construe[s] the pleadings
4 in the light most favorable to the nonmoving party.” Manzarek v. St. Paul Fire & Marine
5 Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). On the other hand, the Court is “not bound
6 to accept as true a legal conclusion couched as a factual allegation.” Iqbal, 556 U.S. at 678
7 (quoting Twombly, 550 U.S. at 555). Nor is the Court “required to accept as true allegations
8 that contradict exhibits attached to the Complaint or matters properly subject to judicial
9 notice, or allegations that are merely conclusory, unwarranted deductions of fact, or
10 unreasonable inferences.” Daniels-Hall v. Nat’l Educ. Ass’n, 629 F.3d 992, 998 (9th Cir.
11 2010). “In sum, for a complaint to survive a motion to dismiss, the non-conclusory factual
12 content, and reasonable inferences from that content, must be plausibly suggestive of a
13 claim entitling the plaintiff to relief.” Moss v. U.S. Secret Serv., 572 F.3d 962, 969 (9th
14 Cir. 2009) (quotation marks omitted).
15 III. REQUEST FOR JUDICIAL NOTICE
16 A court generally cannot consider materials outside the pleadings on a motion to
17 dismiss for failure to state a claim. FED. R. CIV. P. 12(d). A court may, however, consider
18 materials subject to judicial notice without converting the motion to dismiss into one for
19 summary judgment. Barron v. Reich, 13 F.3d 1370, 1377 (9th Cir. 1994). Under Federal
20 Rule of Evidence 201(b), a court may take judicial notice, either on its own accord or by a
21 party’s request, of facts that are not subject to reasonable dispute because they are (1)
22 “generally known within the trial court’s territorial jurisdiction; or (2) can be accurately
23 and readily determined from sources whose accuracy cannot reasonably be questioned.”
24 FED. R. EVID. 201(b). A court may also take judicial notice of “matters of public record
25 without converting a motion to dismiss into a motion for summary judgment.” Lee v. City
26 of Los Angeles, 250 F.3d 668, 689 (9th Cir. 2001) (internal citations omitted). Finally,
27 under the incorporation by reference doctrine, courts may “take into account documents
28 whose contents are alleged in a complaint and whose authenticity no party questions, but
1 which are not physically attached to the [plaintiff’s] pleading.” Davis v. HSBC Bank
2 Nevada, N.A., 691 F.3d 1152, 1160 (9th Cir. 2012) (internal quotations and citations
3 omitted). The incorporation by reference doctrine “treats certain documents as though they
4 are part of the complaint itself,” Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 1002
5 (9th Cir. 2018), so long as “the plaintiff refers extensively to the document or the document
6 forms the basis of the plaintiff’s claim.” United States v. Ritchie, 342 F.3d 903, 907 (9th
7 Cir. 2003).
8 Defendants request that the Court take judicial notice of six exhibits: Excerpts from
9 Progenity’s Form 424B4 Prospectus, filed with the SEC on June 22, 2020 (Ex. A); a copy
10 of Progenity stock prices from June 19, 2020 to April 5, 2021, as obtained from Yahoo!
11 Finance (Ex. B); Progenity’s Form 10-Q, filed with the SEC on August 14, 2020 (Ex. C);
12 excerpts from the Financial Accounting Standards Board’s (FASB) Accounting Standards
13 Codification (ASC) 105 and 450 (Ex. D); and “excerpts” from ASC 606 (Exs. E-F). [Doc.
14 No. 40-3; Doc. No. 44-2; Doc. No. 46.] Plaintiffs oppose Defendants’ request as to Exhibit
15 D because ASC 450 “is mentioned nowhere in the [FAC] and does not otherwise ‘form the
16 basis’ of Plaintiffs’ allegations.” [Doc. No. 41 at 20.] Plaintiffs also oppose Defendants’
17 request as to Exhibit E because it is not an actual copy of ASC 606 but rather an editorial
18 secondary source “providing ‘interpretation and analysis’ of the FASB Codification.”3
19 [Doc. No. 45 at 2.]
20 The Court takes judicial notice of Progenity’s Form 424B4 Prospectus, filed with
21 the SEC on June 22, 2020, and of Progenity’s Form 10-Q, filed with the SEC on August
22
23
24
3 Defendants urge the Court to strike Plaintiffs’ “Opposition to Defendants’ Request for Judicial Notice
25 In Support of Reply” [Doc. No. 45] as an improper surreply. While Plaintiffs’ filing was improper under
the Local Rules, so too was Defendants’ “Response to Plaintiffs’ Opposition” [Doc. No. 46], as neither
26 party sought leave of the Court to file additional briefing. See Daniels v. ComUnity Lending, Inc., No.
13cv488-WQH-JMA, 2015 WL 2338713, at *4 (S.D. Cal. May 12, 2015) (“The Local Rules do not
27 provide for the filing of a surreply. Other district courts within the Ninth Circuit have found that a party
must seek leave of the court to file a surreply.”). Nevertheless, the Court did not consider either party’s
28
1 14, 2020, in their entirety as both matters of public record and as documents forming the
2 basis of Plaintiffs’ claims. See Ritchie, 342 F.3d at 907; see also In re Stac Elec. Sec. Litig.,
3 89 F.3d 1399, 1405 n.4 (9th Cir. 1996) (noting that consideration of “the full text of the
4 Prospectus, including portions which were not mentioned in the complaint[],” is
5 appropriate in the context of a motion to dismiss). The Court also takes judicial notice of
6 Progenity’s stock price history in Exhibit B, although that history does not affect the
7 Court’s analysis for purposes of the present motion. See In re Atossa Genetics Inc. Sec.
8 Litig., 868 F.3d 784, 799 (9th Cir. 2017) (“[H]istorical stock prices are not subject to
9 reasonable dispute”) (citing FED. R. EVID. 201(b)). Finally, the Court takes judicial notice
10 of ASC 105, ASC 450, and ASC 606 as publicly available materials taken from a “source
11 whose accuracy cannot reasonably be questioned,” the FASB. FED. R. EVID. 201(b).
12 However, the same cannot be said for Defendants’ Exhibit E, which appears to be an
13 editorial overview of ASC 606 rather than the accounting standard itself. Thus, the Court
14 declines to take judicial notice of Exhibit E.
15 IV. DISCUSSION
16 A. Section 11 Claim
17 Plaintiffs’ first cause of action is brought against all Defendants for alleged
18 violations of Section 11 of the Securities Act of 1933. Section 11 imposes liability where
19 a registration statement “contain[s] an untrue statement of a material fact or omit[s] to state
20 a material fact required to be stated therein or necessary to make the statements therein not
21 misleading.” 15 U.S.C. § 77k(a). Therefore, to prevail on a Section 11 claim, the plaintiff
22 must demonstrate “(1) that the registration statement contained an omission or
23 misrepresentation, and (2) that the omission or misrepresentation was material, that is, it
24 would have misled a reasonable investor about the nature of his or her investment.” In re
25 Daou Sys., Inc. Sec. Litig., 411 F.3d 1006, 1027 (9th Cir. 2005) (citing Stac Elec., 89 F.3d
26 at 1403-04). “No scienter is required for liability under § 11; defendants will be liable for
27 innocent or negligent material misstatements or omissions.” Id. (internal citations
28
1 omitted).
2 Section 11’s omissions clause “affords a cause of action only when an issuer’s failure
3 to include a material fact has rendered a published statement misleading.” Omnicare, Inc.
4 v. Laborers Dist. Council Const. Indus. Pension Fund, 575 U.S. 175, 194 (2015). “A
5 securities fraud complaint based on a purportedly misleading omission must ‘specify the
6 reason or reasons why the statements made by [the defendant] were misleading or untrue,
7 not simply why the statements were incomplete.’” Rubke v. Capitol Bancorp Ltd., 551
8 F.3d 1156, 1162 (9th Cir. 2009) (citing Brody v. Transitional Hospitals Corp., 280 F.3d
9 997, 1006 (9th Cir. 2002)). The plaintiff must also “demonstrate that the omitted
10 information existed at the time the registration statement became effective.” Id. at 1164.
11 Plaintiffs’ Section 11 claim is based on four allegedly material omissions from
12 Progenity’s Registration Statement: (1) that Progenity had overbilled government payors
13 for Preparent tests and would be required to refund them at least $10.3 million; (2) that
14 Progenity was experiencing a trend of decreasing test volume; (3) that Progenity was
15 experiencing a trend of decreasing average selling prices for tests; and (4) that Progenity
16 was experiencing a trend of decreasing revenues. [Doc. No. 38 ¶¶ 58-152.] Plaintiffs
17 identify various statements in the Registration Statement that they allege were
18 consequently “materially false and misleading when made” because of Defendants’ failure
19 to disclose the foregoing facts. [Id.] Plaintiffs claim that these omissions also violate Items
20 105 and 303 of Regulation S-K, which they argue constitutes another basis for liability
21 under Section 11.5 The Court addresses each category of alleged omissions in turn.
22
23
24
4 While Section 11 does not contain an element of fraud, a plaintiff may be subject to Rule 9(b)’s
25 particularity requirement if the complaint “sounds in fraud.” Daou Sys., 411 F.3d at 1027. Defendants
argue that Plaintiffs’ Section 11 claim “sounds in fraud” and therefore must satisfy the heightened pleading
26 standards of Rule 9(b). [Doc. No. 40-1 at 13.] The Court need not address whether Plaintiffs’ Section 11
claims sound in fraud because the claims fail regardless for the reasons set forth herein.
27 5 The parties dispute whether a violation of Item 303 of Regulation S-K can give rise to a Section 11 claim.
[Doc. No. 40-1 at 25; Doc. No. 41 at 25.] Because the Court finds that Plaintiffs failed to establish an
28
1 1. $10.3 Million Refund Liability to Government Payors
2 First, Plaintiffs claim that Defendants violated Section 11 by failing to disclose that
3 Progenity would “imminently have to accrue and refund $10.3 million” for overbilling
4 government payors for Preparent tests. [Id. ¶¶ 59, 64.] Plaintiffs suggest that the
5 overbilling and resulting $10.3 million refund liability both existed and was known to
6 Defendants at the time the Registration Statement took effect on June 18, 2020. According
7 to Plaintiffs, the failure to disclose this information made Progenity’s previously issued
8 financial statements (concerning revenue, accrued expenses, current and future liabilities,
9 and other financial metrics) reproduced in the Registration Statement misleading because
10 they do not account for the $10.3 million liability and revenue reversal. [Id. ¶¶ 68-70, 72.]
11 Plaintiffs also contend that the Registration Statement’s risk factor disclosures6 regarding
12 payors seeking reimbursement are misleading because the risks disclosed had actually
13 materialized by the time of the IPO. [Id. ¶¶ 73-74.]
14 Plaintiffs essentially claim that Defendants failed to disclose two separate facts: (1)
15 that Progenity overbilled government payors for Preparent tests, and (2) that Progenity
16 would have to accrue and refund $10.3 million for such overbilling. [Id. ¶ 64.] However,
17 an actionable omission under Section 11 must be material, and the fact that Progenity had
18 overbilled some payors could not be material until the amount of that overbilling and
19 resulting liability was quantified. Thus, it is the actual accrual of the $10.3 million refund
20 liability itself—and more specifically the calculation of the exact amount of that liability—
21 that is material and potentially actionable under Section 11.
22 Plaintiffs have failed to establish that the accrual of the $10.3 million refund liability
23
24
25 6 Specifically, the Registration Statement warned that “payors may seek refunds of amounts that they
claim were inappropriately billed to a specified CPT code” [Doc. No. 38 ¶ 71]; “commercial third-party
26 payors may . . . seek repayment from us of amounts previously reimbursed” [Id. ¶ 73]; and “[t]hird-party
payors may decide to deny payment or recoup payment for testing . . . for which they have otherwise
27 overpaid, and we may be required to refund reimbursements already received . . . Any of these outcomes
. . . could have a material and adverse effect on our business, operating results, and financial condition.”
28
1 existed at the time that Progenity’s Registration Statement took effect. See Rubke, 551
2 F.3d at 1164. Plaintiffs’ allegations indicate that at the very least, Defendants were aware
3 of the AMA’s implementation of a new billing code for Preparent tests by the time of the
4 IPO.7 However, Defendants’ awareness that the Preparent billing code had changed in
5 January 2019 does not mean that Progenity’s $10.3 million refund liability existed on June
6 18, 2020. Rather, the actual accrual of the $10.3 million liability did not materialize until
7 Progenity’s second quarter 2020 financial results were prepared following the end of that
8 quarter.
9 Publicly reporting companies have at least 40 days to file Forms 10-Q following the
10 end of a fiscal quarter, and generally “need time to audit [financial] data before including
11 it in any public materials.” Berg v. Velocity Fin., Inc., No. 2:20-cv-06780-RGK-PLA, 2021
12 WL 268250, at *5 n.1 (C.D. Cal. Jan. 25, 2021); see 17 C.F.R. § 240.13a-13. Defendants
13 were thus under no obligation to audit and report their second quarter 2020 financial results
14 prior to the end of that fiscal quarter. See In re Restoration Robotics, Inc. Sec. Litig., 417
15 F. Supp. 3d 1242, 1254 (N.D. Cal. 2019) (“[O]missions are actionable only if a defendant
16 has a duty to disclose information and fails to do so.”) (citing Basic Inc. v. Levinson, 485
17 U.S. 224, 239 n.17 (1988)). Moreover, Defendants would only be required by ASC 450 to
18 accrue the refund liability in the first quarter of 2020 if it were “probable that . . . a liability
19 had been incurred at the date8 of the financial statements” and the “amount of loss [could]
20 be reasonably estimated.” [Doc. No. 40-2 at 44.] The amount of Progenity’s refund
21 liability could not be reasonably estimated until it was calculated and accrued following
22
23
24
25
26 7 The Registration Statement itself states that “effective January 1, 2019, the AMA approved the use of a
CPT code for expanded carrier screening tests, which may . . . cause reimbursement for our Preparent
27 expanded carrier screening tests to decline.” [Doc. No. 38 ¶ 66.]
8 ASC 450 defines “date of the financial statements” to mean “the end of the most recent accounting period
28
1 the end of the second quarter of 2020. Accordingly, the $10.3 million liability accrual did
2 not exist “at the time the registration statement became effective,” Rubke, 551 F.3d at 1164,
3 and therefore cannot be an actionable omission under Section 11.10
4 In sum, liability under Section 11 “only attaches for misrepresenting [or omitting]
5 information that was available when the offering materials became effective.” Berg, 2021
6 WL 268250, at *5 (citing Stac Elec., 89 F.3d at 1403-04). The $10.3 million liability
7 accrual reported in Progenity’s second quarter 2020 Form 10-Q did not exist when the
8 Registration Statement became effective. Accordingly, to the extent that Plaintiffs’ Section
9 11 claim is premised on an alleged omission of the $10.3 million refund liability, it is
10 hereby DISMISSED without prejudice.
11 2. Negative Trends in Test Volume, Average Price, and Revenue
12 Next, Plaintiffs claim that Defendants violated Section 11 by failing to disclose
13 Progenity’s negative trends in test volume, average selling price, and revenue. [Doc. No.
14 38 ¶¶ 82-152.] Plaintiffs claim that “these material facts existed at the time of the IPO,
15 were necessary to make the statements in the Registration Statement not misleading, and
16 were required to be included in the Registration Statement but were negligently omitted.”
17 [Id. ¶ 86.] The Court analyzes each alleged trend in turn.
18
19
20
9 Plaintiffs also claim that Progenity wrongfully included “variable consideration” in its revenue reported
21 in the Registration Statement, although it was likely to reverse $10.3 million of that revenue for refunds.
Under ASC 606, estimates of variable consideration are recognized as revenue “only to the extent that it
22 is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when
the uncertainty . . . is subsequently resolved.” [ACCT. STANDARDS CODIFICATION § 606-10-05-04-c (FIN.
23 ACCT. STANDARDS BOARD 2019).] Plaintiffs’ limited allegations do not indicate that Defendants had
reason to believe a “significant reversal in the amount of cumulative revenue recognized” would occur at
24
the time the Registration Statement took effect. Therefore, the Court declines to find Section 11 liability
25 on this basis.
10 Plaintiffs’ claims regarding Defendants’ risk factor disclosures fail for the same reason: Plaintiffs cannot
26 show that the risk of accruing a $10.3 million refund liability had materialized by the time the Registration
Statement took effect. See In re Pivotal Sec. Litig., No. 3:19-cv-03589-CRB, 2020 WL 4193384, at *6
27 (N.D. Cal. July 21, 2020) (“The Ninth Circuit has noted that ‘risk factors’ are not actionable without
further factual allegations indicating that the risks had already ‘come to fruition.’”) (citing Siracusano v.
28
1 a. Negative Trend in Test Volume
2 As Plaintiffs point out, the Registration Statement contains three separate disclosures
3 relating to Progenity’s test volume growth that slightly contradict each other. [Id. ¶ 99.]
4 First, in the Prospectus Summary section of Progenity’s Form 424B4, which appears at the
5 beginning of the Registration Statement and “highlights selected information contained
6 elsewhere in this prospectus,” Defendants state:
7 Since our inception, we have accessioned approximately 1.5 million tests in
the United States and the growth rate of our test volume was accelerating over
8
a multi-year period, including early 2020. However, we are currently
9 observing a slowdown in volume growth as a result of the COVID-19
pandemic. The figure below shows our test volume growth from 2016 through
10
2019, as well as the first quarter of 2020, in which quarter we observed
11 volumes largely consistent with the fourth quarter of 2019 despite the
challenges presented by the COVID-19 pandemic. We believe our business is
12
resilient and we have observed positive signs of recovery so far.
13
[Id. ¶ 101.] Next, on page 91 of the Prospectus under “Management’s Discussion and
14
Analysis of Financial Condition and Results of Operations” and the subsection titled
15
“Factors Affecting Our Performance,” Defendants state:
16
Beginning in March 2020, we began to observe significant declines in the
17 volumes of our molecular tests as well as the pathology tests conducted by
Avero Diagnostics due to the impact of the COVID-19 pandemic and work-
18
from-home policies and other operational limitations mandated by federal,
19 state and local governments as a result of the pandemic. However, we believe
our business is resilient and we have observed positive signs of recovery so
20
far. While we are implementing mitigation strategies to address these
21 limitations, such as supporting patients and physicians virtually, there can be
no assurance that the rate of decline in our testing volumes will not continue
22
or accelerate in future periods. Our initial assessment of the impact of the
23 COVID-19 pandemic is that our NIPT test volumes have proved more
resilient than our carrier screening test volumes; however, the comparative
24
impact may change over time.
25 [Id. ¶ 102.] Finally, on page 115 of the Prospectus under the “Business” section,
26 Defendants state:
27 Since our inception, we have accessioned approximately 1.5 million tests in
28 the United States and the growth rate of our test volume is accelerating. The
1 figure below shows our test volume growth from 2016 through 2019, as well
as the first quarter of 2020, in which quarter we observed volumes largely
consistent with the fourth quarter of 2019 despite the challenges presented by
3 the COVID-19 pandemic. We believe our business is resilient and we have
A observed positive signs of recovery so far.
5 ||Ud. § 100.] This statement is followed by a graph representing Progenity’s test volume
6 || growth from 2016 through the first quarter of 2020:
7 5th 379
8 7 136
9 z 2450 ain
10 3
1 Co
12 2 .
13
J01& A017 MOLE 201 770
14
[Progenity, Inc., Prospectus (Form 424B4), at 115 (June 19, 2020).]
15
Defendants were under no obligation to disclose their test volume data for the second
16
quarter of 2020 in the Registration Statement. As discussed above, publicly held
17
companies are not required to report the results of a fiscal quarter until at least 40 days
18
following the end of that quarter. See 17 C.F.R. § 240.13a-13. Nor are companies required
19
to disclose all material adverse events to investors—“even if investors would consider the
20
omitted information significant’—so long as the omission does not make the actual
21
statements made misleading. In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869, 880 n.8
22
(9th Cir. 2012); accord Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 759 F.3d
23
1051, 1061 (9th Cir. 2014) (“We have expressly declined to require a rule of completeness
24
for securities disclosures because ‘no matter how detailed and accurate disclosure
25
statements are, there are likely to be additional details that could have been disclosed but
26
were not.’’’); see also Brody, 280 F.3d at 1006 (noting that a statement often “will not
27
mislead even if it is incomplete or does not include all relevant facts’). Nevertheless,
28
1 Defendants’ failure to disclose a negative trend may be actionable under Section 11 if it
2 “affirmatively create[s] an impression of a state of affairs that differs in a material way
3 from the one that actually exists.” Brody, 280 F.3d at 1006; see also Rigel Pharm., 697
4 F.3d at 881 n.10 (finding that public statements were not false or misleading when “the
5 omitted information did not contradict, or render misleading, the original [statements]”).
6 Plaintiffs argue that “reading the above three passages together and in their full
7 context, a reasonable investor could conclude that although Progenity may have observed
8 declines in test volumes in March 2020, at the time of the June 2020 IPO these declines
9 had ceased and core test volumes were again growing and even accelerating . . . albeit at a
10 temporarily slower growth rate than pre-pandemic.” [Doc. No. 41 at 29 (emphasis in
11 original).] The Court disagrees. Although the statements above have slight inconsistencies
12 between them, a reasonable investor reviewing the Registration Statement in its entirety
13 would not be misled to believe that Progenity’s test volume was increasing at the time of
14 the IPO. In all three statements, Defendants mention COVID-19’s negative effect on test
15 volume and other challenges they faced because of the pandemic. Defendants expressly
16 warn that “there can be no assurance that the rate of decline in our testing volumes will not
17 continue or accelerate in future periods.” [Doc. No. 38 ¶ 102.] Moreover, under the “Risks
18 Related to Our Business and Industry” subsection of the Registration Statement,
19 Defendants caution that the spread of COVID-19 “may materially affect us economically,
20 including a significant reduction in laboratory testing volumes.”11 [Id. ¶ 104.] Although
21 Plaintiffs claim that Defendants failed to disclose Progenity’s “significant test volume
22
23
11 Plaintiffs claim that these statements were false and misleading because they presented the risk of
24
decreasing test volumes as hypothetical, although the risks had already materialized by the time of the
25 IPO. [Doc. No. 38 ¶ 103.] As shown by the Registration Statement excerpts reproduced herein,
Defendants disclosed that Progenity was experiencing a decrease in test volume at the time of the IPO.
26 Moreover, “risk factors are not actionable without further factual allegations indicating that the risks had
already come to fruition.” Pivotal, 2020 WL 4193384, at *6. Plaintiffs have not established that
27 Defendants knew or reasonably could have known at the time that Progenity’s test volume would continue
to decrease beyond the date of the IPO. In other words, Plaintiffs do not plead “anything beyond
28
1 declines” at the time of the IPO, Defendants reiterated several times that they had begun to
2 observe “significant declines in the volumes of our molecular tests as well as the pathology
3 tests” in March 2020. [Id. ¶ 102.] The one inconsistent statement that “the growth rate of
4 our test volume is accelerating,” when read in context with the various other statements
5 emphasizing Progenity’s declining test volumes stemming from the pandemic, is
6 insufficient to establish that a reasonable investor would have been misled about the nature
7 of their investment. See Daou Sys., 411 F.3d at 1027.
8 Plaintiffs also argue that Defendants’ statement that “we believe our business is
9 resilient and we have observed positive signs of recovery so far” is false and misleading
10 because it emphasizes resilience and recovery, though Defendants knew at the time that
11 Progenity’s test volumes were likely to remain depressed. [Doc. No. 38 ¶ 102.] Insofar as
12 Defendants’ statement is a sincere statement of pure opinion, it generally cannot be an
13 “untrue statement of material fact” generating liability under Section 11. 12 Omnicare, 575
14 U.S. at 186. However, liability under Section 11’s false-statement provision follows if the
15 “speaker did not hold the belief she professed” or “if the supporting fact she supplied were
16 untrue.” Id. at 185-186. Thus, to establish a Section 11 claim based on this statement,
17 Plaintiffs must show that Defendants either did not believe their business to be resilient or
18 had not observed any signs of recovery. Plaintiffs have not pleaded facts to support either
19 possibility.
20 Plaintiffs argue that at the time of the IPO, Progenity knew its declining test volume
21 was unlikely to recover, as supported by five former Progenity employees’ (“Confidential
22 Witnesses” or “CWs”) accounts describing their experiences working for Progenity.
23 However, Defendants’ disclosures in the Registration Statement are largely consistent with
24
25
12 The first portion of the sentence at issue—Defendants’ statement that “[w]e believe our business is
26 resilient”—is not actionable insofar as it constitutes a statement of corporate optimism, which expresses
an opinion that generally cannot be objectively verified. See Restoration Robotics, 417 F. Supp. 3d at
27 1254 (“[B]usiness puffery or opinion (vague, optimistic statements) are not actionable because they do
not ‘induce the reliance of a reasonable investor.’”) (citing Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc.,
28
1 these witnesses’ statements. For example, CW1 states that “low testing rates in Progenity’s
2 lab commenced with the pandemic and continued through her departure in October 2020.”
3 [Doc. No. 38 ¶ 90.] CW2 similarly states that within her sales territory, “sales volume
4 went down significantly during the initial COVID lockdown.” [Id. ¶ 91.] These claims
5 are consistent with Defendants’ disclosure that “we are currently observing a slowdown in
6 volume growth as a result of the COVID-19 pandemic.” [Id. ¶ 101.] The remaining CW
7 accounts do not provide any additional support for Plaintiffs’ theory of liability.13
8 Plaintiffs also claim that Progenity’s declining test volume trend was due in part to
9 its decision to “let go 10% to 15% of its healthcare provider customers and to discontinue
10 the flexible billing policy that had previously been Progenity’s main selling point with its
11 customers,” which Defendants were aware of at the time of the IPO. [Id. ¶ 82.] In support
12 of their claim, Plaintiffs refer to Progenity’s November 9, 2020 investor call where Stylli
13 disclosed that Progenity had let 10% to 15% of its customers go due to “revenue cycle
14 considerations” and indicated that Progenity was “already at the tail end” of suffering the
15 customer turnover effects.14 [Id. ¶ 85.] Plaintiffs also cite to CW2’s statement that in
16 March 2020, Progenity implemented a new billing policy which resulted in lost business
17 as customers turned to competitors offering lower prices. [Id. ¶ 92.] While these
18 allegations, taken as true, highlight other factors that may have contributed to Progenity’s
19
20
21 13 CW4 and CW5’s accounts purport to establish that Progenity “had access to real-time data regarding
its business.” [Doc. No. 38 ¶¶ 94-95.] Most companies in existence today have access to similar data for
22 their businesses. Nevertheless, companies filing registration statements are not required to disclose every
shred of data in their possession in real-time, so long as the omission of that data does not render the
23 statements they do share misleading. See Rigel Pharm., 697 F.3d at 880 n.8. For the reasons discussed
above, Plaintiffs have not established that Defendants had an obligation to share their real-time data, nor
24
that the failure to disclose such data rendered any statement false or misleading to Progenity’s potential
25 investors.
14 Plaintiffs also cite to CW3’s account that she was laid off from her position at Progenity in July 2020
26 as evidence that Progenity’s 10% to 15% reduction in customers occurred or was planned at the time of
the IPO. [Doc. No. 38 ¶ 93.] Plaintiffs do not explain how CW3’s termination (allegedly due to
27 Progenity’s business underperforming in Oklahoma) relates to Progenity’s reduction of its customer base,
nor how CW3’s termination is evidence that Progenity had reduced or planned to reduce its customer base
28
1 decreased test volume, they were also disclosed in the Registration Statement. Under the
2 section titled “Management’s Discussion and Analysis of Financial Condition and Results
3 of Operations” and the subsection titled “Factors Affecting Our Performance,” Defendants
4 disclose the customer reduction and resulting decreases in test volume:
5 As the types and categories of tests that are covered by reimbursement
increase or decrease, the volume of testing may correspondingly increase or
6
decrease, respectively. In 2019, we conducted a comprehensive review of our
7 existing accounts and sought to eliminate accounts that did not contribute to
our gross margin. Our test volumes decreased as a result of this exercise.
8
9 [Progenity, Inc., Prospectus (Form 424B4), at 20 (June 19, 2020).] Under the section titled
10 “Risk Factors,” Defendants warn that they “may face competitive pricing or reimbursement
11 rate pressures, and we may not be able to maintain our sales volume and/or reimbursement
12 rates in the future, which would adversely affect our business, operating results, and
13 financial condition.” [Id., at 45.] Defendants also note that “[i]ncreased competition is
14 likely to result in pricing pressures, which could harm our revenues, operating income, or
15 market share.” [Id., at 91.] In light of these disclosures, Plaintiffs’ allegations do not show
16 that a reasonable investor reviewing the Registration Statement in its entirety would be
17 misled about the nature of their investment.
18 Defendants were under no obligation to disclose their real-time test volume data
19 from the second quarter of 2020 at the time that the Registration Statement took effect. See
20 In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1419 (9th Cir. 1994) (holding that
21 company was “under no duty to disclose the precise extent of the anticipated revenue drop”
22 where the “prospectus clearly warned that [the company] expected lower net sales”).
23 Nevertheless, the Registration Statement clearly warned that at the time of the IPO,
24 Progenity had experienced a significant drop in test volume due to the COVID-19
25 pandemic. Defendants also cautioned that they could not guarantee that the decline in test
26 volumes would not continue or even accelerate in the future. Accordingly, Plaintiffs have
27 not established that Defendants made any false statement or omitted to state a material fact
28 necessary to make the other statements in the Registration Statement not misleading. 15
1 U.S.C. § 77k(a). To the extent that Plaintiffs’ Section 11 claim is premised on an alleged
2 omission of Progenity’s negative trend in test volume, it is hereby DISMISSED without
3 prejudice.
4 b. Negative Trend in Average Price
5 Plaintiffs next claim that the Registration Statement failed to disclose that at the time
6 of the IPO, Progenity was experiencing a “significant decline in the average selling price
7 (‘ASP’) for its tests” and expected further decreases. [Doc. No. 38 ¶¶ 123, 127.] Plaintiffs
8 define ASP as “Progenity’s revenue from testing divided by the number of such tests.” [Id.
9 ¶ 108.] Plaintiffs also claim that Progenity’s failure to disclose the negative ASP trend
10 “rendered materially false and misleading numerous statements contained in the
11 Registration Statement.” [Id. ¶ 129.]
12 The question presented on a motion to dismiss a Section 11 claim is whether
13 Plaintiffs have plausibly alleged that Defendants’ “failure to include a material fact has
14 rendered a published statement misleading.” See Omnicare, 575 U.S. at 194. Here,
15 Plaintiffs do not identify any statements that were rendered misleading because of the
16 failure to disclose the alleged decline in ASP or the ASP of Progenity’s tests across any
17 specific period. 15
18 The first two statements Plaintiffs present as false and misleading both relate to
19 changes in the volume sold of each of Progenity’s test offerings. Plaintiffs first claim that
20 Defendants’ statement that “our NIPT [i.e., Innatal] test volumes have proved more
21 resilient than our carrier screening [i.e., Preparent] test volumes” during the COVID-19
22 pandemic was false and misleading because it did not disclose that the Innatal test had a
23 lower ASP than the Preparent test, so a change in those tests’ respective sales volumes
24
25
26 15 Defendants note that the Registration Statement contains a single reference to ASP when explaining
how Progenity calculates its gross margins: “Higher gross margins reflect the average selling price of our
27 tests, as well as the operating efficiency of our laboratory operations.” [Doc. No. 40-1 at 24.] However,
the Registration Statement does not mention the actual ASP charged for any of Progenity’s test offerings
28
1 would harm Progenity’s revenue. [Doc. No. 38 ¶ 130.] Plaintiffs next argue that
2 Defendants’ statement that the “Avero Diagnostics laboratory [Progenity’s affiliate] is
3 providing molecular testing for diagnosing COVID-19” was false and misleading because
4 it failed to disclose that the COVID-19 test had a much lower ASP than Progenity’s other
5 tests, so an increase in COVID-19 tests’ sales volume over other tests would also harm
6 Progenity’s revenue. [Id. ¶ 131.] Plaintiffs do not maintain that either of these statements
7 was untrue.
8 As discussed above, a statement often “will not mislead even if it is incomplete or
9 does not include all relevant facts.” Brody, 280 F.3d at 1006. The two statements at issue
10 disclose a fluctuation in the respective test volumes for each of Progenity’s test offerings.
11 Although they do not mention the allegedly resulting decrease in Progenity’s ASP and
12 revenue, nothing in the statements is rendered misleading by failing to disclose that
13 information. Defendants’ failure to disclose a potential decrease in ASP and revenue,
14 “even if investors would consider the omitted information significant,” is not actionable
15 insofar as it did not make the actual statements made about test volume fluctuation
16 misleading.16 Rigel Pharm., 697 F.3d at 880 n.8.
17 Moreover, although Defendants did not disclose the potential effect of the test
18 volume changes on Progenity’s revenue, the allegedly omitted information is still
19 consistent with other disclosures made in the Registration Statement relating to Progenity’s
20 test volumes and revenue. For example, Defendants disclosed that although the revenue
21 derived from the Innatal and Preparent tests were roughly equal at the time of the IPO, the
22 “ratio may fluctuate over time.” [Progenity, Inc., Prospectus (Form 424B4), at 93 (June
23 19, 2020).] Defendants also stated that “the high level of competition in our industry could
24
25
16 Plaintiffs also allege that Defendants failed to disclose that around March 2020, Progenity reduced the
26 cash price for both its Preparent and Innatal tests, which Defendants knew would affect ASP in the second
quarter of 2020 and beyond. [Doc. No. 38 ¶ 128.] However, Plaintiffs do not point to any statement made
27 by Defendants that was rendered misleading by the failure to disclose this information. Therefore, the
Court finds that Plaintiffs have not stated a plausible claim under Section 11’s omissions clause based on
28
1 force us to reduce the price at which we sell our products,” and that these pricing pressures
2 “could harm our revenues, operating income, or market share.” [Id., at 20.] It is unlikely
3 that a reasonable investor reviewing the Registration Statement in its entirety would be
4 misled to believe that Progenity’s ASP would never decrease or that its revenue could not
5 be affected as a result.
6 Plaintiffs have not adequately pleaded that Defendants were required to disclose the
7 alleged negative trend in Progenity’s ASP in order to make the other statements in the
8 Registration Statement not misleading. Accordingly, to the extent that Plaintiffs’ Section
9 11 claim is premised on an alleged omission of Progenity’s negative trend in ASP, it is
10 hereby DISMISSED without prejudice.
11 c. Negative Trend in Revenue
12 Finally, Plaintiffs claim that the Registration Statement failed to disclose that at the
13 time of the IPO, Progenity was experiencing a “significant decline in revenue” caused by
14 the events and trends discussed above. [Doc. No. 38 ¶¶ 134-135.] Plaintiffs broadly claim
15 that Progenity’s failure to disclose the negative revenue trend rendered the entire
16 Registration Statement materially false and misleading. [Id. ¶ 150.]
17 First, Plaintiffs’ broad assertion that Defendants’ failure to disclose a negative trend
18 in revenue rendered the entire Registration Statement false and misleading is insufficient
19 to state a claim. At a minimum, Federal Rule of Civil Procedure 8 requires that a complaint
20 include “a short and plain statement of the claim showing that the pleader is entitled to
21 relief.” FED. R. CIV. P. 8(a)(2). To adequately state a claim under Section 11’s omissions
22 clause, a plaintiff must demonstrate that the defendant’s failure to include a material fact
23 rendered a published statement misleading. Omnicare, 575 U.S. at 194. Plaintiffs’
24 allegation that a 222-page Registration Statement is false and misleading in its entirety is
25 exactly the type of “conclusory, unwarranted deduction[] of fact or unreasonable
26 inference[]” that the Court must disregard in analyzing a motion to dismiss under Rule
27 12(b)(6). Daniels-Hall, 629 F.3d at 998.
28 Moreover, the Registration Statement actually discloses negative trends in
1 Progenity’s revenue that Defendants had observed by the time the Registration Statement
2 took effect. Under the section titled “Management’s Discussion and Analysis of Financial
3 Condition and Results of Operations,” Defendants compare the fiscal results of Progenity’s
4 operations from the first quarter of 2019 and the first quarter of 2020. [Progenity, Inc.,
5 Prospectus (Form 424B4), at 96 (June 19, 2020).] Defendants disclose that Progenity’s
6 revenue for the first quarter of 2020 was down $30.7 million from its revenue for the first
7 quarter of 2019, which it notes was a 64.6% decrease. [Id., at 97.] Further, under the
8 subsection titled “Risks Related to Our Business and Industry,” the Registration Statement
9 states in bold, italicized font: “We have incurred losses in the past, and we may not be able
10 to achieve or sustain profitability in the future.” [Id., at 19.] It then goes on to state that
11 “[i]t is possible that we will not generate sufficient revenue from the sale of our products
12 to cover our costs . . . and achieve or sustain profitability.” [Id.] These disclosures would
13 not mislead a reasonable investor to believe that Progenity’s revenue was increasing or
14 even stable at the time the Registration Statement took effect.
15 Defendants were under no obligation to disclose their real-time revenue data at the
16 time that the Registration Statement took effect. See Worlds of Wonder, 35 F.3d at 1419
17 (holding that company was “under no duty to disclose the precise extent of the anticipated
18 revenue drop” where the “prospectus clearly warned that [the company] expected lower
19 net sales”). Nevertheless, the Registration Statement clearly warned that in the first quarter
20 of 2020, Progenity had experienced a significant drop in revenue as compared to the first
21 quarter of 2019. Accordingly, Plaintiffs have not established that Defendants omitted to
22 state a material fact necessary to make other statements in the Registration Statement not
23 misleading. 15 U.S.C. § 77k(a). To the extent that Plaintiffs’ Section 11 claim is premised
24 on an alleged omission of Progenity’s negative trend in revenue, it is hereby DISMISSED
25 without prejudice.
26 3. Items 105 and 303 Disclosure Obligations
27 Plaintiffs also claim that Defendants violated Section 11 by failing to meet their
28 disclosure obligations under Items 303 and 105 of SEC Regulation S-K. [Doc. No. 38 ¶¶
1 161-162.] The Court analyzes each provision in turn.
2 a. Item 303
3 Item 303 of Regulation S-K requires that registrants describe “any unusual or
4 infrequent events or transactions or any significant economic changes that materially
5 affected the amount of reported income from continuing operations,” as well as “any
6 known trends or uncertainties that have had or that the registrant reasonably expects will
7 have a material favorable or unfavorable impact on net sales or revenues or income from
8 continuing operations.” 17 C.F.R. § 229.303(b)(2)(i)-(ii). Under the SEC’s 1989 release
9 interpreting Item 303(a), a “disclosure duty exists where a trend, demand, commitment,
10 event or uncertainty is both [1] presently known to management and [2] reasonably likely
11 to have material effects on the registrant's financial condition or results of operation.”
12 Steckman v. Hart Brewing, Inc., 143 F.3d 1293, 1296-97 (9th Cir. 1998). Plaintiffs argue
13 that Defendants violated Item 303 by failing to disclose the $10.3 million liability
14 Progenity would incur due to its Preparent overbilling, as well as the company’s negative
15 trends in test volumes, average selling prices, and revenues. [Doc. No. 38 ¶ 162.]
16 As for the $10.3 million liability, Plaintiffs claim that “[t]o the extent that Progenity
17 knew of its overbilling prior to the IPO, this was a ‘known trend’ reasonably expected to
18 have a material unfavorable impact on revenues, and so required disclosure under Item
19 303.” [Doc. No. 41 at 18-19.] However, Plaintiffs cannot establish that Defendants knew
20 or had reason to know of Progenity’s $10.3 million overbilling liability by the time of the
21 IPO because that liability did not come to fruition until Progenity issued its second quarter
22 2020 Form 10-Q almost two months later. Plaintiffs’ argument that this event or “trend”
23 was known to management at the time the Registration Statement took effect therefore
24 must fail, and Plaintiffs cannot show an Item 303 violation on this basis.
25 As for the negative trends, Defendants plainly disclosed that Progenity was
26 experiencing downturns in test volume and revenue at the time the Registration Statement
27 took effect. Further, Plaintiffs define ASP as “Progenity’s revenue from testing divided by
28 the number of such tests.” [Doc. No. 38 ¶ 108.] While the ASP of Progenity’s test offerings
1 was not explicitly disclosed by Defendants, it could easily be calculated from Progenity’s
2 disclosed revenue and test volume data. See In re Dropbox Sec. Litig., No. 19-cv-06348-
3 BLF, 2020 WL 6161502, at *8 (N.D. Cal. Oct. 21, 2020) (rejecting Item 303 allegations
4 based on failure to disclose trend of declining revenue growth rate where “[a]nyone with
5 basic mathematical skills could discern” the trend in light of defendant’s disclosure of its
6 annual revenue); see also In re Netflix, Inc. Sec. Litig., No. C04-2978 FMS, 2005 WL
7 1562858, at *6 (N.D. Cal. June 28, 2005) (rejecting Section 11 allegations based on failure
8 to disclose number of subscription cancellations where the “number could be calculated
9 through simple arithmetic using other numbers that were disclosed”). Accordingly,
10 Plaintiffs have failed to show that Defendants omitted a known material trend from the
11 Registration Statement that was not adequately captured by the disclosure of declining test
12 volume and revenue data. Plaintiffs’ Section 11 claim predicated on Item 303 violations
13 is thus DISMISSED without prejudice.
14 b. Item 105
15 Item 105 of Regulation S-K requires a “discussion of the material factors that make
16 an investment in the registrant or offering speculative or risky.” 17 C.F.R. § 229.105.
17 Plaintiffs argue that Defendants violated Item 105 by failing to disclose that Progenity’s
18 Preparent overbilling “presented a significant risk that Progenity would have to refund the
19 overbilled amounts, and as a result Progenity’s revenue would be negatively impacted by
20 at least $10.3 million.” [Doc. No. 38 ¶ 161.]
21 Plaintiffs’ Item 105 claim is based on the same alleged omission of the $10.3 million
22 liability as Plaintiffs’ Item 303 claim. Accordingly, Plaintiffs’ Item 105 claim fails for the
23 same reason—Plaintiffs have not established that the liability existed at the time the
24 Registration Statement took effect. Because the liability did not exist, Defendants could
25 not have reasonably known about it, and they could not have discussed it in the Registration
26 Statement as a material factor making an investment in Progenity “speculative or risky.”
27 Moreover, Defendants made various statements in the Registration Statement disclosing
28 the possibility that payors could seek refunds of amounts paid. For example, the
1 Registration Statement stated that “payors may seek refunds of amounts that they claim
2 were inappropriately billed to a specified CPT code” [Id. ¶ 71]; “commercial third-party
3 payors may . . . seek repayment from us of amounts previously reimbursed” [Id. ¶ 73]; and
4 “[t]hird-party payors may decide to deny payment or recoup payment for testing . . . for
5 which they have otherwise overpaid, and we may be required to refund reimbursements
6 already received . . . Any of these outcomes . . . could have a material and adverse effect
7 on our business, operating results, and financial condition.” [Id. ¶ 74.] These statements
8 are sufficient to satisfy Item 105’s disclosure requirements. Accordingly, Plaintiffs’
9 Section 11 claim predicated on Item 105 violations is DISMISSED without prejudice.
10 B. Section 15 Claim
11 Plaintiffs’ second cause of action is brought against the Individual Defendants for
12 alleged violations of Section 15 of the Securities Act of 1933. Section 15 imposes joint
13 and several liability upon every person who controls any person liable under Section 11.
14 15 U.S.C. § 77o. The section provides:
15 “Every person who, by or through stock ownership, agency, or otherwise, or
who, pursuant to or in connection with an agreement or understanding with
16
one or more other persons by or through stock ownership, agency, or
17 otherwise, controls any person liable under sections 77k or 77l of this title,
shall also be liable jointly and severally with and to the same extent as such
18
controlled person to any person to whom such controlled person is liable,
19 unless the controlling person had no knowledge of or reasonable ground to
believe in the existence of the facts by reason of which the liability of the
20
controlled person is alleged to exist.”
21
Id. Nevertheless, “[t]here can be no Section 15 violation without an underlying Section 11
22
violation.” In re Ubiquiti Networks, Inc. Sec. Litig., 669 Fed. Appx. 878, 880 (9th Cir.
23
2016). For the reasons stated above, Plaintiffs fail to adequately plead a Section 11
24
violation. Accordingly, the Court GRANTS the motion to dismiss Plaintiffs’ Section 15
25
claim, and Plaintiffs’ second cause of action is hereby DISMISSED without prejudice.
26
27
28
1 Vv. CONCLUSION
2 For the reasons set forth above, Defendant’s motion to dismiss the FAC is
3 || GRANTED, and Plaintiff's claims are DISMISSED WITHOUT PREJUDICE.
4 Plaintiffs may file a second amended complaint no later than twenty-one (21)
5 ||calendar days following the date of this order. Should Plaintiffs choose to file a second
6 ||amended complaint, it must be filed in compliance with Local Civil Rule 15.1(c). If
7 || Plaintiffs choose not to file an amended complaint by the above deadline, the Clerk of
8 Court shall close this case.
9 Itis SO ORDERED.
10 ||Dated: September 1, 2021 (jb
1]
Hon. Cathy Ann Bencivengo
12 United States District Judge
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