By Zachary Taylor, an associate, and Genevieve York-Erwin and Doug Greene, partners, with Baker & Hostetler LLP.


Public companies face constant scrutiny over their public statements, primarily from investors, analysts, the government, and plaintiffs’ lawyers. Whenever a company’s stock price drops after a disappointing disclosure (e.g., lower than expected earnings, downward revised guidance, etc.), that company can expect plaintiffs’ lawyers to file securities class-action litigation.  The most common securities class-action claim is under Section 10(b) of the Securities Exchange Act of 1934.1 To prevail on a Section 10(b) claim, plaintiffs must establish, among other things, that the company made a public “misstatement or omission of material fact” (known as “falsity”) with an intent to defraud (known as “scienter”).2

Supreme Court precedent has made clear that, in determining whether a challenged statement is false or misleading, courts must review the statement in context, including its “surrounding text, including hedges, disclaimers, and apparently conflicting information” as well as “the customs and practices of the relevant industry.”3 Likewise, in assessing scienter, courts must weigh “plausible, nonculpable explanations for the defendant’s conduct” based upon all of the relevant facts and circumstances.4.

A recent U.S. Court of Appeals for the Second Circuit decision provides a good example of the legal analysis of falsity and scienter, and deals with common accusations made by plaintiffs in Section 10(b) cases—particularly in the pharmaceutical and/or biotech contexts. In Arkansas Pub. Emps. Ret. Sys. v. Bristol-Myers Squibb Co., 28 F.4th 343 (2d Cir. 2022), the plaintiffs-appellants (“Plaintiffs”) alleged that the defendant company, and certain of its executives (collectively “Defendants”), made materially false statements and omissions in connection with the clinical trials of the drug Opdivo for treatment of non-small cell lung cancer (“NSCLC”). Plaintiffs also alleged that Defendants defrauded the market for the purpose of artificially inflating the company’s stock price and then selling their holdings at those artificially inflated prices.


Plaintiffs’ falsity allegations centered around the word “strong.” At a high level, the relevant facts are as follows: Bristol-Myers was conducting clinical trials of the drug Opdivo for treatment of NSCLC. Opdivo worked to prevent the interaction of two proteins in cancer cells: PD-L1 and PD-1. Typically, PD-L1 acts in healthy cells to bind with PD-1 in immune system T-cells to prevent them from attacking the healthy cells. However, when PD-L1 is present in cancer cells, this interaction can prevent the immune system from attacking the cancer cells as well. Not all cancer cells have PD-L1. And, as relevant here, the higher the percentage of cancer cells with PD-L1, the “stronger” the patient’s PD-L1 “expression.”

During the relevant period, the company made statements about its clinical trials indicating that they would target patients “strongly expressing” PD-L1. Internally, the company set a 5% expression threshold as indicative of “strong” patient PD-L1 expression. The company did not disclose the 5% threshold until after the clinical trials fell through, and the company attributed the failure to the selection of the 5% threshold (rather than a higher threshold). Plaintiffs alleged that the company’s prior statements indicating that it was conducting the trials on patients with “strong” PD-L1 expression were false and misleading because “industry consensus” of “strong” PD-L1 expression meant 50% expression or higher. In support, Plaintiffs relied on, among other things, a comparable successful clinical study conducted by Merck & Co. that used the 50% threshold.

A unanimous Second Circuit panel rejected Plaintiffs’ falsity allegations by attacking their notion of the “industry consensus” of the definition of “strong” PD-L1 expression.5 Notably, the court drew upon various publicly available medical sources to show that there was no industry consensus of “strong” expression.6 The court also relied upon analyst reports introduced by Defendants that estimated that the company was using a 5% threshold—reflecting that certain market analysts perceived the company’s “strong” expression criteria to be 5%.7


Plaintiffs only alleged one motive to defraud: Defendants sought to inflate the company’s stock price to sell their holdings at higher prices.8 Specifically, Plaintiffs alleged that four of the individual defendants collectively realized $55 million in profits from stock sales during the relevant period preceding revelation of the alleged fraud.9 Plaintiffs alternatively alleged that Defendants were reckless in making the challenged statements given that they disregarded industry consensus by describing the clinical trial patient population as those with “strong” PD-L1 expression.10

The Second Circuit rejected Plaintiffs’ scienter allegations. Courts in the Second Circuit (and in other circuits) find insider stock sales probative of scienter only where those stock sales are sufficiently “unusual” or “suspicious” in timing or amount.11 The factors courts consider include: the amount of profit from the sales, the portion of stockholdings sold, the change in volume of insider sales, and the number of insiders selling.12 Here, the Second Circuit found that while the defendants’ stock sales generated significant net profits, certain other factors negated any inference that the stock sales were the product of fraudulent intent. The court noted, among other things, that the individual defendants all bought more shares than they sold during the relevant period—indicating that the defendants remained heavily invested in the company and the strength of its stock price.13 Clearly, it would not have made sense for them to buy shares during the relevant period knowing that the price was artificially inflated and doomed to collapse. Additionally, the court found that because the majority of the stock sales were conducted pursuant to a 10b5-1 trading plan (i.e., a non-discretionary trading plan corporate executives enter into to sell shares at predetermined times),14 they “could not be timed suspiciously.”15

The court also rejected Plaintiffs’ argument that Defendants acted recklessly when they made the challenged statements, reasoning that there was no industry consensus as to the definition of “strong” PD-L1 expression.16


Bristol-Myers provides several insights that are helpful to defendants and defense counsel. First, use of contemporaneous public materials reflecting the market’s perception of a company’s public statements is crucial for providing the necessary context to undermine falsity. In this case, the Second Circuit affirmed the district court’s taking judicial notice of certain analyst reports presented by Defendants (and not cited in the complaint) for the proposition that market players equated the company’s statements concerning “strong” expression with 5% PD-L1 expression. The court explained:

The Complaint refers to analyst reports that predicted a variety of possible PD-L1 expression thresholds higher than 5%, to argue that Bristol-Myers misled the market by describing a 5% threshold as capturing a population of strong expressors. The fact that other reports, relying on the same public information, correctly predicted Bristol-Myers’s use of a 5% threshold is relevant to that argument and properly considered on this motion to dismiss.17

Second, the decision underscores the importance of the holdings in Omnicare and Tellabs that challenged statements must be evaluated in the context of market information and the customs and practices (and understandings) of the relevant industry. Falsity and scienter cannot be pleaded in a vacuum. Courts must reach outside the complaint to determine whether a challenged statement was false or misleading in context, and whether defendants acted with the requisite intent to defraud.

Third, the decision strengthens the defense that stock sales executed pursuant to 10b5-1 plans do not support an inference of scienter. As a general matter, the case law surrounding use of 10b5-1 plans as a defense was not particularly well-developed or unanimous. Bristol-Myers states definitively that “sales conducted pursuant to a 10b5-1 trading plan or [that] were executed for procedural purposes . . . could not be timed suspiciously.”18 While courts have more or less taken that position when 10b5-1 plans are adopted prior to the beginning of the alleged fraud, Bristol-Myers addressed a 10b5-1 plan adopted during the class period. Courts typically do not find 10b5-1 plans adopted during the time of the alleged fraud a proper scienter defense because they may have been adopted in a way to capitalize on the alleged fraud.19 The Second Circuit explained, however, that even where a 10b5-1 plan is adopted during the class period, plaintiffs are still required to plead facts sufficiently alleging “that the purpose of the plan was to take advantage of an inflated stock price” or that the plan was not “given or entered into in good faith.”20


  1. 15 U.S.C. § 78j(b).
  2. Arkansas Pub. Emps. Ret. Sys. v. Bristol-Myers Squibb Co., 28 F.4th 343, 351 (2d Cir. 2022).
  3. Omnicare Inc. v. Laborers District Council Construction Industry Pension Fund, 575 U.S. 175, 190 (2015).
  4. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322-24 (2007)
  5. Bristol-Myers Squibb Co., 28 F.4th at 353-54.
  6. Id. at 350 (relying on sources including the Journal of Thoracic Oncology and Translational Oncology).
  7. Id. at 350, 352-54 (Alliance Bernstein and Goldman Sachs analyst reports). The court also concluded that the company was under no obligation to disclose the 5% threshold during the time of the clinical trials because, among other things, such disclosure could undermine its competitive advantage. Id. at 353.
  8. Id. at 355.
  9. Id. at 351, 355. Plaintiffs also alleged that certain personnel departures following the disclosure of the failure of the clinical trials supported an inference of scienter, which the court also rejected. Id. at 356.
  10. Id. at 356.
  11. Id. at 355.
  12. Id.
  13. Id.
  14. See, e.g., KBC Asset Mgmt. NV v. 3D Sys. Corp., 2016 WL 3981236, at *10 (D.S.C. July 25, 2016) (describing a 10b5-1 plan as “a non-discretionary trading plan corporate executives can set up to sell shares at predetermined times to avoid allegations of insider trading”).
  15. Bristol-Myers Squibb Co., 28 F.4th at 355-56.
  16. Id. at 356.
  17. Id. at 352.
  18. Id. at 355-56.
  19. Id. at 356 n.4.
  20. Id.