United States Court of Appeals For the First Circuit

No. 23-1393

JULIAN QUINONES, individually and on behalf of all others similarly situated,

Plaintiff, Appellant,

PAUL EVANS, individually and on behalf of all others similarly situated; MICHAEL HINGSTON, individually and on behalf of all others similarly situated,

Plaintiffs,

v.

FREQUENCY THERAPEUTICS, INC.; DAVID L. LUCCHINO; CARL LEBEL,

Defendants, Appellees.

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

[Hon. William G. Young, U.S. District Judge]

Before

Kayatta, Selya, and Howard, Circuit Judges.

Amanda F. Lawrence, with whom Thomas L. Laughlin, IV and Scott & Scott Attorneys at Law LLP were on brief, for appellant. Roman Martinez, with whom William J. Trach, Christine C. Smith, Jeff G. Hammel, Kevin M. McDonough, and Latham & Watkins LLP were on brief, for appellees. July 2, 2024 KAYATTA, Circuit Judge. Frequency Therapeutics is a

biotechnology start-up that tried to develop a treatment called

"FX-322" for individuals suffering from severe sensorineural

hearing loss. While initial clinical trials of FX-322 were

positive, subsequent testing produced disappointing results. When

announced, those results triggered a sharp drop in the price of

Frequency's publicly traded stock. That, in turn, led three

stockholders to file this putative class action seeking recourse

for alleged violations of sections 10(b) and 20(a) of the

Securities and Exchange Act of 1934, 15 U.S.C. §§ 78t(a), 78j(b),

and Securities and Exchange Commission Rule 10b-5.

Plaintiffs claim that Frequency's Chief Executive

Officer, David Lucchino, and its Chief Development Officer, Carl

LeBel, knew of problems with the study before the results were

announced, yet gave investors assurances to the contrary. The

district court dismissed the complaint for failing to allege

sufficient facts to support a finding of scienter under the Private

Securities Litigation Reform Act ("PSLRA") § 21D(b), 15 U.S.C.

§ 78u-4(b). We agree and affirm the dismissal.

I.

On a motion to dismiss, "we accept the factual

allegations set forth" in the complaint, "as 'supplemented by

certain materials the defendants filed in the district court in

support of their motion to dismiss.'" Constr. Indus. & Laborers

- 3 - Joint Pension Tr. v. Carbonite, Inc.,

(1st Cir. 2021)

(quoting Mehta v. Ocular Therapeutix, Inc.,

(1st

Cir. 2020)). Initial trials of FX-322 indicated that the treatment

was "likely safe and may have a beneficial effect on patients."

So in October 2019, Frequency announced that it would be launching

a Phase 2a trial of FX-322 with a wider study population. To guard

against the possibility of bias in the Phase 2a trial, Frequency

kept confidential certain participation eligibility requirements.

It made a particular point of not disclosing how poorly a person

would need to score on a word-recognition test to qualify for the

study. The concern was that persons who knew the qualifying

threshold might manipulate their results on the eligibility test

to get into the study, and then -- when tested at the end -- show

a marked "improvement" in hearing that was not actually a real

change.

Frequency's concern was not farfetched. Some tinnitus

patients apparently believed that FX-322 could help alleviate

their condition. They were therefore eager to gain early access

to the treatment through clinical trials even though they might

not otherwise have met the study participation criteria. So when

a user on Tinnitus Talk -- an online forum for people with tinnitus

-- posted in February 2020 that a patient would need to score less

than eighty-five percent on a word-recognition test to qualify for

the trial, at least some individuals used that information to fake

- 4 - their way into the study. Thus, plaintiffs allege, by the time

Frequency completed its Phase 2a recruitment in September 2020, at

least some study participants were fraudulent enrollees.

Subsequent analysis of the Phase 2a trial did not

produce statistically significant results. On March 23, 2021,

Frequency issued a press release announcing that FX-322 "did not

demonstrate improvements in hearing measures versus placebo," and

explained that the lackluster results of the Phase 2a study

"potentially suggest[ed] bias due to trial design." In the

aftermath of the announcement, Frequency stock plummeted from

$36.29 per share to $7.99 per share.

Plaintiffs filed their initial complaint on June 3,

2021, and the operative amended complaint on May 16, 2022. They

asserted causes of action under sections 10(b) and 20(a) of the

Securities and Exchange Act, alleging that defendants knowingly

misrepresented the experimental validity of the Phase 2a trial to

investors in order to inflate Frequency stock prices. As relevant

to this appeal the complaint described two occasions when Frequency

officers touted the study design. First on October 29, 2020,

Frequency representatives stated in a presentation to investors

that Phase 2a was a "double-blind, placebo-controlled, multi-

center" study of adults, all of whom "have meaningful word

recognition deficits." Second on January 11, 2021, Frequency

reiterated in another investor presentation that "all subjects

- 5 - have meaningful word recognition deficits" as required by the

Phase 2a entrance criteria.

The district court agreed that the statements made on

October 29, 2020, and January 11, 2021, could be found to be

materially false, misleading, incomplete, or inaccurate. See

Quinones v. Frequency Therapeutics, Inc.,

,

167-69 (D. Mass. 2023). It therefore viewed the pivotal question

as one of scienter: Did defendants know of or recklessly disregard

the falsity of the statements when they made them?

To prove scienter, plaintiffs relied on three categories

of evidence. First, they pointed to statements from a confidential

witness ("CW1") who worked as a Senior Manager of Clinical

Operations at Frequency from January 2018 to September 2021. CW1

stated that defendants "must have . . . known" that the

confidential Phase 2a participation criteria "were being

disseminated online via online posts." CW1 additionally reported

that clinicians who helped administer the drug to Phase 2a trial

participants told LeBel about a "concerning discrepancy between

certain patients' responses during the screening process for

admission into Phase 2a and subsequent examinations by the

investigators." And so, say plaintiffs, by December 2020,

defendants "already knew that Phase 2a was hopelessly biased."

Second, plaintiffs highlighted the cadence of CEO Lucchino's stock

sales during the pendency of the Phase 2a trial. From December

- 6 - 2020 (when the first batch of study data was collected) through

February 2021, Lucchino averaged over 57,000 shares sold per month

compared with the 15,000 shares per month he had been selling

previously. Third, plaintiffs emphasized that FX-322 was

essential to Frequency's commercial success, and as such

defendants would have been paying close attention to the Phase 2a

trial.

The district court was not persuaded. It concluded that

the complaint failed to demonstrate that defendants had made the

false statements with the degree of scienter required to state a

Securities and Exchange Act claim and dismissed the case.

.

Plaintiffs subsequently filed a notice of appeal. About

three months later, they filed in the district court a motion for

leave to file a second amended complaint. The second amended

complaint contained allegations from additional confidential

witnesses, which plaintiffs asserted would cure any deficiencies

identified in the district court's dismissal order. The district

court denied the motion, reasoning that because the case had been

appealed, the court "ha[d] no business now volunteering its views

about post-decision events."

II.

We review de novo a district court's dismissal of a

securities fraud complaint for failure to state a claim under

- 7 - Rule 12(b)(6). Carbonite, Inc.,

. To state a claim

under section 10(b), a complaint must allege: "(1) a material

misrepresentation or omission; (2) scienter; (3) a connection with

the purchase or sale of a security; (4) reliance; (5) economic

loss; and (6) loss causation." In re Biogen Inc. Sec. Litig.,

(1st Cir. 2017) (citing Fire & Police Pension Ass'n of

Colo. v. Abiomed, Inc.,

(1st Cir. 2015)).

A.

Frequency first asks us to backtrack, arguing that the

district court was overly generous to plaintiffs in finding that

plaintiffs had adequately alleged a false statement. We disagree.

The complaint alleges that CW1 "confirmed that multiple patients

enrolled in Phase 2a . . . despite not having met the inclusion

criteria" by "fak[ing] being deaf." Taking that as true,

Frequency's subsequent statements to investors representing that

all Phase 2a trial participants had "meaningful word recognition

deficits" are necessarily false. Therefore, like the district

court, we train our attention on the issue of scienter.

B.

To support a finding of scienter under the PSLRA, a

complaint must "state with particularity facts giving rise to a

strong inference that the defendant . . . either . . . consciously

intended to defraud, or that they acted with a high degree of

recklessness." Mehta,

(quoting 15 U.S.C.

- 8 - § 78u-4(b)(2)(A) and Kader v. Sarepta Therapeutics, Inc.,

(1st Cir. 2018)). A "strong" inference is "more than merely

'reasonable' or 'permissible' -- it must be cogent and compelling,

thus strong in light of other explanations." Tellabs, Inc. v.

Makor Issues & Rts., Ltd.,

(2007). In

considering whether a complaint has alleged enough facts to survive

a motion to dismiss under these heightened pleading standards,

"courts must . . . accept all factual allegations in the complaint

as true," but "[a] complaint will survive . . . only if a

reasonable person would deem the inference of scienter cogent and

at least as compelling as any opposing inference one could draw

from the facts alleged."

.

Plaintiffs contend that defendants were reckless in

ignoring signs that the Phase 2a trial might be infected with bias.

First, they point to CW1's allegations that clinicians told LeBel

about certain participants who at the beginning of the study

reported not being able to hear certain sounds, then at the end

told clinicians they could hear those same sounds. This

information apparently should have tipped LeBel off to the

possibility of bias within the study design. But plaintiffs do

not allege when the clinicians conveyed that information to LeBel.

Moreover, plaintiffs do not explain why reports of improved hearing

would be a concern unless the individuals making the reports were

in the placebo group. Given that the study was double-blind, even

- 9 - the clinicians could not have known which participants were in

that group until the end of December. Recall that earlier trials

of FX-322 produced promising results. So the minimal allegations

in the complaint do not allow us to fault anyone for seeing the

initial Phase 2a trial data and thinking that participants with

improved hearing were in the treatment group.

That does leave open the possibility that the final study

results revealing the problems with the study were conveyed to

LeBel prior to his January 11, 2021 investor presentation. But

even plaintiffs' confidential witness offers no actual fact that

would create a strong inference that defendants knew of the study

results by January 11, 2021 (much less by the time of the earlier

challenged statements on October 29, 2020). Like Conan Doyle's

dog that did not bark, this silence says much. See In re Ariad

Pharms., Inc. Sec. Litig.,

(1st Cir. 2016)

(noting that plaintiffs' failure to "allege any specific facts

about when the defendants learned of these adverse events" was "a

glaring omission"); see also In re Biogen Inc. Sec. Litig.,

(finding that where statements from confidential

witnesses do not "go specifically to what the defendants knew at

the time they made [the misleading] statements," then they are

insufficient to establish scienter).

Plaintiffs respond that because LeBel went on the

Tinnitus Talk podcast in July 2020, he must have known about (or

- 10 - recklessly disregarded) the forum post revealing the study's word-

recognition criteria even before the study began. But the

complaint is silent as to why LeBel would or should have discovered

the post when he participated in the interview. Merely alleging

that a person went on a podcast associated with a website does not

by itself generate a strong inference that the person reviewed

prior posts on that website. As our case law makes clear, "fraud

cannot be established by hindsight." Shash v. Biogen, Inc.,

(1st Cir. 2023).

The complaint does allege that CW1, a senior manager who

helped oversee the Phase 2a study, was in a good position to know

about potential issues with the study. But it contains no

allegations that CW1 said anything to LeBel -- with whom CW1 worked

"hand-in-hand" -- about any concerns.

Nor do any of plaintiffs' other allegations support a

finding of scienter. Plaintiffs attempt to rely on the sudden

increase in Lucchino's sales of Frequency stocks from December

2020 to February 2021, right before Frequency made its announcement

that the Phase 2a trial had been a bust. But all of plaintiffs'

claims as to knowledge of the study's flaws are specific only to

LeBel -- who is not alleged to have engaged in any inconsistent

stock activity during the relevant period. "'[E]ven unusual sales

by one insider do not give rise to a strong inference of scienter'

when other insiders ha[ve] not engaged in suspicious trading during

- 11 - the class period." N.J. Carpenters Pension & Annuity Funds v.

Biogen IDEC Inc.,

(1st Cir. 2008) (quoting Abrams

v. Baker Hughes Inc.,

(5th Cir. 2002)); see also

Local N. 8 IBEW Ret. Plan & Tr. v. Vertex Pharms., Inc.,

(1st Cir. 2016) (finding that an increase in stock sales

by some defendants did not prove scienter where other defendants

did not engage in inconsistent trading patterns and complaint

offered no reason why only certain defendants would know of

negative study results).

Moreover, while it is true that Lucchino sold stock, he

sold only fifteen percent of his shares, and at the same time

received additional shares in the company as part of his

compensation. So on the whole, he did not reduce his investment

in the company by enough to allow for the strong inference of

scienter claimed by plaintiffs. See City of Dearborn Heights Act

345 Police & Fire Ret. Sys. v. Waters Corp.,

(1st Cir. 2011) (noting that a court can "consider[] both shares

and vested stock options in determining the significance of a sale"

(citation omitted)). When a defendant keeps the "vast majority"

of their holdings, the "strength of the insider trading allegations

drifts toward the marginal end." Brennan v. Zafgen, Inc.,

(1st Cir. 2017) (discussing an allegation that

defendants had kept at least eighty-five percent of their stock

holdings). We agree with plaintiffs that fifteen percent is not

- 12 - a talismanic number below which any defendant is immune from claims

of fraud. But we are also cognizant that "while . . . insider

trading may be 'probative of scienter,' it is not sufficient to

establish an inference of scienter on its own." In re Ariad

Pharms., Inc. Sec. Litig.,

(quoting Greebel v. FTP

Software, Inc.,

(1st Cir. 1999)).

Plaintiffs additionally point out that because FX-322

was Frequency's "core" product, defendants must have known about

the problems with the Phase 2a study population. Certainly the

importance of FX-322 to the company makes it reasonable to think

that senior management paid attention to what they were told about

the study, and would have been curious to know the results.

Carbonite,

. But in this case, that importance

provides no sufficient basis for determining when and what senior

management were told, at least within the narrow timeframes at

issue here. See

(noting that the complaint must allege

facts strongly suggesting that increased attention to a product

exposed senior management to any incongruity); see also Auto.

Indus. Pension Tr. Fund v. Textron Inc.,

(1st Cir.

2012) (observing that plaintiff's allegation that "survival of the

company [was] on the line" was "hardly the particularized showing

required by the PSLRA").

Plaintiffs insist that the totality of the other

evidence supports the conclusion that defendants must have known

- 13 - about the flaws in the Phase 2a trial before they made the

statements at issue. They argue that CW1's allegations coupled

with Lucchino's stock sales "strongly suggest" that defendants'

close attention to FX-322 "exposed them to information that either

rendered their public statements false or necessarily invited

further investigation." Carbonite,

. But in

Carbonite, the complaint alleged that employees had reported

problems with the product before the false statements were made.

. Moreover, none of the preceding product tests had been

successful.

In contrast, previous trials of FX-322 had

delivered promising results. And critically, none of CW1's

allegations are specific as to whether defendants learned of

testing discrepancies before they made the statements at issue.

Plaintiffs' "core-operations" argument therefore hardly becomes

more convincing when coupled only with unspecific claims about

when and how defendants learned that the Phase 2a trial might have

been contaminated. See Metzler Asset Mgmt. GmbH v. Kingsley,

(1st Cir. 2019).

At base, plaintiffs fault the district court for failing

to consider whether "all of the facts alleged, taken collectively,

give rise to a strong inference of scienter." Tellabs, Inc.,

. Certainly while "'[e]ach individual fact about

scienter may provide only a brushstroke,' . . . our obligation

[is] to consider 'the resulting portrait.'" Vertex Pharms., Inc.,

- 14 -

(first alteration in original) (quoting In re

Cabletron Sys., Inc.,

(1st Cir. 2002)). At the

same time plaintiffs cannot amalgamate a series of sketchy

brushstrokes and call it a van Gogh. The PSLRA dictates that to

survive a motion to dismiss, "[a]n inference of scienter" must be

"cogent and at least as compelling as any opposing inference one

could draw from the facts alleged." In re Genzyme Corp. Sec.

Litig.,

(1st Cir. 2014) (quoting Tellabs, Inc.,

). Viewing the complaint in its totality, we do

not conclude that it meets this standard. We accordingly affirm

the district court's dismissal of the complaint on its merits.1

Finally, plaintiffs contend that they now have the

benefit of additional and previously unavailable witnesses whose

testimony can make clear that Frequency's senior officers knew of

the Phase 2a study's flaw before making the challenged statements.

However, any Rule 60 motion, as well as any Rule 15(a) motion,

should be presented first to the district court after this appeal

is concluded and the case remanded. We express no opinion at all

concerning the disposition of any such motion.

1Because a section 20(a) claim is "derivative" of a section 10(b) claim, see Textron Inc.,

n.2, it cannot stand where there is no underlying section 10(b) violation, ACA Fin. Guar. Corp. v. Advest, Inc.,

, 67-68 (1st Cir. 2008).

- 15 - III.

We therefore affirm the judgment of the district court.

- 16 -