punzalan law, p.c.securities.stanford.edu/.../1048/ngsx00_01/20131029_r01c_12cv05… · 2013-10-29...

Case4:12-cv-05034-YGR Document63 Filed10/29/13 Page1 of 23

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Mark Punzalan (State Bar No. 247599) PUNZALAN LAW, P.C. 600 Allerton Street, Suite 201 Redwood City, CA 94063 Tel: (650) 362-4150 Fax: (650) 362-4151 Email: [email protected]

Nicholas I. Porritt Thomas M. Gottschlich LEVI & KORSINSKY LLP 1101 30th Street NW, Suite 115 Washington, DC 20007 Tel: (202) 524-4290 Fax: (202) 337-1567 Email: [email protected] Email: [email protected]

Counsel for Lead Plaintiff Maritime Asset

Management, LLC

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

MARITIME ASSET MANAGEMENT, No. 4:12-cv-05034-YGR LLC, On Behalf of Itself and All Others Similarly Situated, SECOND AMENDED CLASS ACTION

COMPLAINT Plaintiff,

v.

NEUROGESX, INC., ANTHONY A. DITONNO, STEPHEN F. GHIGLIERI, and JEFFREY K. TOBIAS, M.D.,

Defendants.

SECOND AMENDED CLASS ACTION COMPLAINT No. 4:12-cv-05034-YGR


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Lead Plaintiff, Maritime Asset Management, LLC (“Maritime”), by its counsel, hereby

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alleges the following upon personal knowledge as to itself and its transactions in NeurogesX,

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Inc. (“NeurogesX”) stock and the conversations in which its representative, Andrew Evans

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(“Evans”) participated, and upon information and belief as to all else, based upon the

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investigation of counsel, including the review and analysis of Defendants’ filings with the

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United States Securities and Exchange Commission (the “SEC”), Maritime’s own investigation

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and firsthand knowledge, news articles, and analyst reports:

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NATURE OF THE CLAIM

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1. This is a securities class action on behalf of all persons who purchased or

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otherwise acquired the securities of NeurogesX, Inc. (“NeurogesX” or the “Company”) on or

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around July 21, 2011 pursuant to a private placement against NeurogesX and certain of its

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officers and/or directors for violations of the Securities Exchange Act of 1934 (the “Exchange

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Act”), 15 U.S.C. § 78a, et seq . This action also encompasses claims on behalf of Maritime

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individually for breach of contract and fraud in the inducement against NeurogesX and

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Defendant Dr. Jeffrey K. Tobias (“Tobias”), the Company’s former Chief Medical Officer and

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Executive Vice President of Research and Development.

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2. This action concerns misrepresentations and omissions concerning the continued

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employment of Tobias as NeurogesX’s Chief Medical Officer and Executive Vice President of

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Research and Development. As Chief Medical Officer and Executive Vice President, Defendant

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Tobias was a crucial officer for the Company, overseeing all the research and development for

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the drugs in the Company’s portfolio. NeurogesX, as a biopharmaceutical company, is entirely

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dependent on generating revenue through the approval and sale of the drugs it develops.

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Defendant Tobias’s work was therefore of the utmost importance to the Company going

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forward. Defendant Tobias was particularly important to the Company in light of the pending

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retirement in December 2011 of Defendant Anthony DiTonno, the Company’s President and

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Chief Executive Officer. Indeed, Defendant DiTonno has stated that Defendant Tobias was

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28 SECOND AMENDED CLASS ACTION COMPLAINT No. 4:12-cv-05034-YGR


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“instrumental” to the Company in public statements, and the Company alluded to its reliance on

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Defendant Tobias in two Form 10-Qs, filed with the SEC on May 9, 2011 and August 15, 2011,

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respectively, acknowledging the extent to which the Company was “highly dependent on the

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principal members of NeurogesX’s management and commercial and scientific staff.”

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3. Upon information and belief, since April 2011 Defendant Tobias had engaged in

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an extensive recruiting process to leave the Company and work for a competitor, Jazz

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Pharmaceuticals, Inc. (“Jazz”). Jazz’s Chief Executive Officer, Bruce Cozadd (“Cozadd”), is a

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long-time acquaintance of Defendant Tobias. Cozadd identified Defendant Tobias as the first

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choice candidate to be Jazz’s new Executive Vice President of Research and Development and

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Chief Medical Officer. Defendant Tobias then underwent an extensive recruiting and

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interviewing process with Jazz executives and its board of directors throughout the spring and

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summer of 2011. As early as May 2011, Tobias was advising some of his colleagues at

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NeurogesX that he was planning on leaving to join Jazz.

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4. On July 21, 2011, Maritime and twenty other individual and institutional

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investors entered into a Securities Purchase Agreement (the “SPA”) to purchase shares and

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warrants of the Company in a private placement. Of paramount importance to Maritime and the

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other investors was the assurance that Defendant Tobias would continue on in his current

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capacity at the Company as Chief Medical Officer and Executive Vice President. Tobias’s

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continued employment was critical to obtaining regulatory approval for NeurogesX’s pain drug

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candidates and the future success of the Company. Just days before entering into the SPA,

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Evans, an analyst at Maritime, had two conversations with Defendant Tobias, one on a due

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diligence call arranged by the Company’s underwriter, Leerink Swan, which included

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Defendant Tobias and other members of NeurogesX’s management, and the other a direct

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telephone conversation between Evans and Tobias. On both of those calls, in response to

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multiple direct questions, Defendant Tobias stated that he had no plans to leave the Company

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and that he was committed to staying at NeurogesX. Tobias assured Evans that he was “not

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going anywhere” and committed to seeing NeurogesX be successful. Tobias acknowledged that

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“the medical success of [NeurogesX’s] products relies on me.” On information and belief, each

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investor in the private placement received similar assurances and representations from Tobias

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and NeurogesX.

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5. The SPA contains a provision which also states that “[t]he Company is not aware

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that any key employee or significant group of employees of the Company or the Subsidiary

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plans to terminate employment with the Company.” This provision and the entire SPA were

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made public when the SPA was included as an exhibit to a press release issued by the Company

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on July 27, 2011. In other public statements during the relevant period, the Company failed to

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disclose that Defendant Tobias was actively seeking to leave NeurogesX, despite his critical

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importance to the future success of the Company.

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6. Contrary to the direct representations of Defendant Tobias in his capacity as an

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officer of the Company and public statements made on the Company’s behalf that Defendant

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Tobias was committed to remaining a member of NeurogesX’s management, Tobias in fact had

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an intention from at least May 2011 to leave NeurogesX. By July 19, 2011, Tobias had already

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had several meetings with Jazz about leaving NeurogesX and joining Jazz and he had already

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informed some NeurogesX colleagues of his intention to leave. On September 27, 2011,

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NeurogesX finally announced that Defendant Tobias had tendered his resignation with the

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Company on September 21, 2011. The release did not disclose, however, that Defendant Tobias

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had already accepted ajob with NeurogesX’s competitor Jazz.

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7. Given the importance of Defendant Tobias, the market reaction to his resignation

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was severe. NeurogesX stock rapidly declined by almost forty percent, and by October 3, 2011,

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the Company had lost over half its market value. This market reaction confirms the importance

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Defendant Tobias played at the Company and the materiality of his continued employment.

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Had Maritime and the other class members been aware that Defendant Tobias intended to leave

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the Company, they never would have invested in the Company or participated in the SPA.

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JURISDICTION AND VENUE

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8. The federal law claims asserted herein arise under section 10(b) and section

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20(a) of the Exchange Act, 15 U.S.C. section 78j(b) and section 78t(a), and Rule 10b-5

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promulgated thereunder by the SEC, 17 C.F.R. section 240.10b-5, as well as under the common

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law.

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9. This Court has subject matter jurisdiction over this action pursuant to 28 U.S.C.

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section 1331 and section 27 of the Exchange Act.

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10. This Court has supplemental jurisdiction over the state common law claims in

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this action pursuant to 28 U.S.C. § 1367.

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11. This Court has jurisdiction over each defendant named herein because each

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defendant is an individual who has sufficient minimum contacts with this District so as to render

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the exercise of jurisdiction by the District Court permissible under traditional notions of fair

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play and substantial justice.

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12. Venue is proper in this Court pursuant to 28 U.S.C. section 1391(a) and section

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27 of the Exchange Act because NeurogesX is headquartered in this District. Furthermore, at

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all times relevant to this action, many of the acts and transactions alleged herein occurred in

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substantial part in this District.

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THE PARTIES

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13. Maritime purchased NeurogesX’s securities as set forth herein and in its

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certification previously filed in this action. Maritime is a citizen of the State of Washington.

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14. Defendant NeurogesX is a California corporation with its principal place of

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business located at 2215 Bridgepointe Parkway, Suite 200, San Mateo, CA 94404.

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15. Defendant Anthony DiTonno (“DiTonno”) was at all relevant times the

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Company’s President and Chief Executive Officer (“CEO”). DiTonno retired as CEO of the

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Company on December 31, 2011. In his capacity as CEO of NeurogesX, Defendant DiTonno

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had general authority over all matters relating to the business and affairs of the Company,

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including, among other things, the dissemination of information regarding the Company’s

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operations, financial condition, performance, and growth. Defendant DiTonno participated in

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the Company’s issuance of the false and misleading press release during the relevant period.

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I DiTonno is a citizen of the State of California.

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16. Defendant Stephen F. Ghiglieri (“Ghiglieri”) was at all relevant times the

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Company’s Executive Vice President, Chief Operating Officer (“COO”) and Chief Financial

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Officer (“CFO”). In his capacity as CFO of NeurogesX, Defendant Ghiglieri had general

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authority over all matters relating to the business and affairs of the Company, including, among

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other things, the dissemination of information regarding the Company’s operations, financial

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condition, performance, and growth. Defendant Ghiglieri participated in the Company’s

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issuance of the false and misleading press releases during the relevant period. Ghiglieri is a

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citizen of the State of California.

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17. Defendant Dr. Joseph Tobias was at all relevant times the Company’s Chief

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Medical Officer and Executive Vice President of Research and Development. Tobias is a

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citizen of the State of California.

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18. Defendants NeurogesX, DiTonno, Ghiglieri and Tobias are collectively referred

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to hereinafter as the “Defendants.” Defendants DiTonno, Ghiglieri and Tobias are collectively

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referred to hereinafter as the “Individual Defendants.”

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19. The Individual Defendants, because of their positions with the Company,

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possessed the power and authority to control the contents of NeurogesX’s quarterly reports,

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press releases, and presentations to securities analysts, money and portfolio managers, and

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institutional investors, i.e. , the market. They were provided with copies of the Company’s

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reports and press releases alleged herein to be misleading prior to or shortly after their issuance

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and had the ability and opportunity to prevent their issuance or cause them to be corrected.

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Because of their positions with the Company, and their access to material, non-public

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information available to them but not to the public, the Individual Defendants knew that the

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adverse facts specified herein had not been disclosed to and were being concealed from the

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public, and that the positive representations being made were then materially false and

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misleading. The Individual Defendants are liable for the false statements pleaded herein.

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SUBSTANTIVE ALLEGATIONS

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NeurogesX and Defendant Tobias

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20. NeurogesX was a biopharmaceutical company that focused on developing and

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commercializing pain management therapies. Qutenza was the Company’s lead product and

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was approved by the U.S. Food and Drug Administration in November 2009 and by the

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European Medicines Agency in May 2009. During 2011, NeurogesX was developing seven

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other drugs in its product pipeline at various stages of regulatory approval.

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21. The biopharmaceutical industry is a highly competitive industry, and the hiring

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and retention of key medical employees is critical in maintaining the competitive edge,

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producing successful products, and maintaining confidence in the company’s mission.

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Therefore it was of the utmost importance that the Company retain someone of Defendant

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Tobias’s experience and reputation.

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22. The Company was well aware of the importance of Defendant Tobias. In a press

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release announcing Defendant Tobias’s promotion to Executive Vice President dated February

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4, 2010, Defendant DiTonno is quoted as saying that Defendant Tobias’s leadership “will be

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instrumental as [NeurogesX] prepare[s] for the successful U.S. and E.U. commercialization of

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Qutenza, as well as further advancement of NGX-1998, later this year.”

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23. On April 29, 2011, the Company announced the planned retirement of DiTonno,

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the Company’s President and CEO, by December 31, 2011. The Company also announced that

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it had entered into amended and restated employment agreements with the Company’s named

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executive officers, including Defendants DiTonno, Tobias, and Ghiglieri, and that the Board

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also approved bonuses for, among others, Defendants Ghiglieri and Tobias. These bonuses

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included cash compensation of $100,000 for each executive officer provided he remained

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employed with the Company for 12 months following April 27, 2011, and equity compensation

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in the form of an option grant under the Company’s 2007 Stock Plan, as amended (the “2007

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Plan”), to each executive officer for 75,000 shares of common stock that vest as to 50% of such

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shares if such executive officer remains employed with the Company for six months following

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April 27, 2011 and the remaining 50% if such executive officer remains employed with the

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Company for two years following April 27, 2011.

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Jazz Recruits Defendant Tobias

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24. Jazz, like NeurogesX, is a biopharmaceutical company. Jazz is headquartered in

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I Dublin, Ireland, but has an office located in Palo Alto, California, a short drive from

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NeurogesX’s headquarters. Cozadd is Jazz’s Chief Executive Officer and has known Defendant

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Tobias for several years. In March 2011, Cozadd identified a need to recruit a new Chief

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Medical Officer for Jazz. In Cozadd’s opinion there was no internal candidate with the requisite

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experience and skills for this position, therefore an external appointment would be required.

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Furthermore, Cozadd identified Defendant Tobias as his first choice for this position. Although

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Cozadd recognized that Defendant Tobias was a suitable candidate for the position, he also

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recognized that he had to go through a formal recruiting process and involve Jazz’s board of

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directors in that process. These facts, as well as other facts regarding the recruiting process for

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Tobias set forth below, have been confirmed by Cozadd in a conversation with Evans on

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November 28, 2011 at the Piper Jaffrey Healthcare Conference, held in New York, New York.

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25. Accordingly, in March 2011, Jazz retained Spencer Stuart, a leading global

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executive firm, to commence a search for a new Chief Medical Officer. From the beginning of

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the search, which began in Apri l 2011, Defendant Tobias was the lead candidate for the position

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and he remained the lead candidate until he was formally offered the position on September 16,

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2011.

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26. According to Cozadd, the recruitment of Defendant Tobias took place

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“throughout the spring and summer” of 2011, including multiple meetings with Jazz

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management and board of directors. Jazz management also introduced Defendant Tobias to the

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management of Azur Pharma Ltd., a company with whom Jazz was in the process of

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consummating a merger. According to Cozadd, Azur and Defendant Tobias had been “working

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together for some time before [Tobias] came aboard Jazz officially.” Indeed, at the Piper

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Jaffrey Healthcare Conference on November 28, 2011, Cozadd was already describing

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I Defendant Tobias as the backbone of Jazz.

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27. In May 2011, a Regional Business Director at NeurogesX was told by a

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colleague that Tobias was leaving NeurogesX. This information upset the Regional Business

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Director who understood the importance of Tobias to the Company and understood that the

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information had to be kept confidential because it would be harmful to the Company if publicly

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disclosed. At the time NeurogesX had just four Regional Business Directors. This individual

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worked for NeurogesX from August 2009 to February 2 012 and served as a Regional Business

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Director from November 2010 to February 2012 and reported to Tim Arndt, NeurogesX Vice

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President of Sales. The individual learned of Tobias’s plans to leave NeurogesX from Michael

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Markels, NeurogesX Senior Vice President of Commercial and Business Development who

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worked closely with Tobias, including on slide presentations for investors.

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NeurogesX and Tobias Misrepresentations - July 2011 Private Placement

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28. Also during the summer of 2011, NeurogesX was soliciting investors for a

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private placement of its securities. Following the late withdrawal of one of the investors in the

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private placement, on July 17, 2011, Maritime was approached to participate. Of key

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importance to Maritime was the assurance that Defendant Tobias would remain with the

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Company, because he was widely regarded as the key driver to any future growth and success at

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the Company. On July 19, 2011, in response to Maritime’s request, Leerink Swann,

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NeurogesX’s underwriter, arranged a du e diligence call with NeurogesX’s management team,

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including Defendant Tobias. Evans participated on the call for Maritime. Defendant Tobias

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participated in this conference call as a representative of the Company. Also present were

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Defendants Ghiglieri and Di Tonno. During this conversation, Evans stated to Tobias that

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NeurogesX would not be able to survive without further FDA approval of its pain drugs and he

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did not believe NeurogesX would obtain approval without Tobias. Evans then asked Tobias if

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was committed to NeurogesX and seeing the regulatory process through to approval.

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29. In response, Tobias acknowledged that “I understand that the medical success of

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this product relies on me.” Tobias stated to Evans that “I joined NeurogesX with [Ghiglieri]

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and [Di Tonno] and I am committed to see it through to a success.” Tobias further stated that “I

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am not going anywhere. I am staying to overcome every hurdle at the FDA to get the pain

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medication approved.” On information and belief, each of the other investors in the private

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placement had a similar conversation, either in person or by telephone, with Defendant Tobias

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and received the same representation.

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30. Later on July 19 or July 20, 2011, Evans telephoned Defendant Tobias directly.

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During this telephone call, Defendant Tobias repeated his prior representations that he was

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committed to staying at the Company.

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31. Defendant Tobias made the representations set forth in ¦¦ 28-30 even though at

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this time he was already significantly advanced in the process of leaving NeurogesX for Jazz ,

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had already had several meetings with Jazz senior management about leaving NeurogesX and

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joining Jazz instead, and had even told colleagues within NeurogesX months earlier that he was

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leaving.

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32. On July 21, 2011, the Company entered into the private placement, where it

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privately sold shares to Maritime and twenty other investors pursuant to a Securities Purchase

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Agreement (“SPA”) in which it agreed to sell 11,749,552 shares of common stock and warrants

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to purchase 5,874,782 shares of common stock. The private placement yielded approximately

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$20.2 million before deduction of placement agent fees and other transaction expenses.

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Maritime’s portion of the private placement consisted of 872,093 common shares and

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accompanying warrants at a cost of $1,500,000.

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33. In addition to Defendant Tobias’s representations made in the presence of

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NeurogesX’s management, NeurogesX warranted in the SPA that “[t]he Company is not aware

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that any key employee or significant group of employees of the Company or the Subsidiary

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plans to terminate employment with the Company.”

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34. The SPA became public on July 27, 2011, filed as an exhibit to a Form 8-K filed

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I with the SEC.

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35. NeurogesX acknowledged in the SPA that Maritime and the other investors were

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relying on the foregoing representations and affirmed that the representations were “true and

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correct in all material respects and [did] not contain any untrue statements of a material fact or

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omit to state any material fact necessary in order to make the statements made therein, in light

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of the circumstances under which they were made, not misleading.”

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36. Therefore, the Company was well aware and acknowledged the importance and

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materiality of retaining key employees, particularly those who are involved in the development

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of medical products, most significantly Defendant Tobias.

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37. Following the completion of the private placement, on August 5, 2011 the

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Company also secured a $20 million debt facility, which includes a $5 million accounts

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receivable line of credit and a $15 million term loan. This debt facility was announced in a

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Form 8-K, filed with the SEC, on August 8, 2011. Again, Defendants did not make any

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representations that Tobias was actively looking to leave the Company, since doing so would

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jeopardize its ability to obtain the debt facility.

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THE TRUTH IS REVEALED

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38. During May 2011, Tobias informed some NeurogesX colleagues that he was

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planning on leaving NeurogesX. In May 2011, a Regional Business Director at NeurogesX was

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told by a colleague that Tobias was leaving NeurogesX. This information upset the Regional

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Business Director who understood the importance of Tobias to the Company and understood

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that the information had to be kept confidential because it would be harmful to the Company if

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publicly disclosed.

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39. On September 16, 2011, Jazz formally offered Defendant Tobias a position as its

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Chief Medical Officer. Tobias’ initial annual base salary with Jazz was $407,000 and he

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received a signing bonus of $125,000 and subsequent bonuses of $62,500 each after six and

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twelve months of continued employment.

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40. On September 21, 2011, Dr. Tobias purportedly formally informed NeurogesX

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of his resignation.

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41. On September 27, 2011, NeurogesX filed a press release on a Form 8-K,

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announcing that Defendant Tobias resigned his position with the Company. The Company did

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not disclose, however, that Defendant Tobias had already accepted the position of Senior Vice

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President of Research & Development and Chief Medical Officer of Jazz. Defendant Tobias’

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resignation went into effect on October 15, 2011.

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42. The market reacted negatively to Defendant Tobias’ resignation. NeurogesX

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stock rapidly declined almost 40 percent on heavy trading volume, and continued to decline

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thereafter. By October 3, 2011, the Company had lost over half its market value. In fact, the

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Company’s stock has been performing so poorly that NASDAQ announced on February 9, 2012

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that it halted trading on the Company’s common stock.

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43. On October 31, 2011, scarcely a month after NeurogesX announced Dr. Tobias’

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resignation, the Company announced that it was replacing Defendant Tobias with Dr. Stephen J.

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Petroutka.

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44. NeurogesX never recovered from Tobias’ departure. On March 8, 2012, after the

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FDA failed to approve the use of Qutenza for some HIV patients, the Company terminated 57

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percent of its workforce. It terminated all but three of its remaining employees during the rest of

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2012 and early 2013. Pursuant to an Asset Purchase Agreement dated April 15, 2013,

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Neurogesx sold most of its remaining assets, including its rights to Qutenza, to Accorda

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Therapeutics, Inc. After this sale closed on July 9, 2013, the remaining assets of the Company

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were insufficient to meet its outstanding debt, its remaining employees were terminated and its

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entire Board of Directors resigned. NeurogesX shares currently trade for less than a penny per

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I share.

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ADDITIONAL SCIENTER ALLEGATIONS

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45. As alleged herein, Defendant Tobias acted with scienter as he had formed an

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intent as of at least May 2011 to leave NeurogesX for Jazz and had no intention to stay

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employed as NeurogesX’s Chief Medical Officer. Therefore, he knew his representations to the

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contrary during the due diligence for the July 2011 private placement were false and misleading.

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Furthermore, he knew that the representations made by the Company in the SPA regarding his

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continued employment with NeurogesX were also false and misleading. As an officer of the

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Company, Defendant Tobias’s knowledge is also imputed to NeurogesX.

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46. As alleged herein, the other Individual Defendants acted with scienter in that

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they knew or disregarded with deliberate recklessness that the public documents and statements,

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issued or disseminated in the name of the Company, were materially false and misleading; knew

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that such statements or documents would be issued or disseminated to the investing public; and

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knowingly and substantially participated or acquiesced in the issuance or dissemination of such

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statements or documents. As set forth elsewhere herein in detail throughout this complaint,

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Defendants, by virtue of their receipt of information reflecting the true facts regarding

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NeurogesX and Defendant Tobias’ plan to leave, their control over, and/or receipt, and/or

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modification of NeurogesX’s allegedly materially misleading misstatements, and/or their

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associations with the Company which made them privy to confidential proprietary information

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concerning NeurogesX, participated in the fraudulent scheme alleged herein.

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47. The small size of NeurogesX and its executive team, the importance of

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Defendant Tobias and the proximity of Jazz to NeurogesX’s office means it may be strongly

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inferred that the other Individual Defendants, all members of NeurogesX management, were

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also aware of his discussions with Jazz. Further, knowledge of Tobias’ intention to leave

NeurogesX was known to certain senior Company employees as early as May 2011.

48. The prompt announcement that the Company was replacing Defendant Tobias

with Dr. Stephen J. Petroutka on October 31, 2011 further suggests that NeurogesX

management and its Board had significant advance notice of Defendant Tobias’s departure,

while still keeping it hidden from investors such as the Maritime. Indeed, the Company’s own

filings with the SEC highly suggest that it is not feasible to select a replacement for Defendant

Tobias in such short order. In the 10-Qs issued on May 9, 2011 and August 15, 2011,

respectively, the Company gave an example of the time and due diligence required to replace an

executive. The 10-Qs stated:

If we lose one or more of these key employees, our ability to implement and

execute our business strategy successfully could be seriously harmed. Replacing

key employees may be difficult and may take an extended period of time because

of the limited number of individuals in our industry with the breadth of skills and experience required to develop, gain regulatory approval of and commercialize

products successfully. For example, on April 29, 2011, we announced the

planned retirement of Anthony DiTonno, our President and Chief Executive

Officer, by December 31, 2011. We initiated a formal executive search for a

Chief Executive Officer, however there can be no assurance that our search

will be successful in identifying a proper candidate, that a candidate will accept

the position on terms acceptable to us or how long such a search will take to

perform . . . .

49. Given that the Company expressed concerns that it would be unable to find a

suitable replacement for its outgoing CEO during a period of more than seven months, it is

highly unlikely that it would be able to have found a suitable replacement for its outgoing Chief

Medical Officer and Executive Vice President in a little over a month. This evidence is highly

suggestive that Defendants DiTonno and Ghiglieri were well aware of Defendant Tobias’

pending departure during the summer of 2011 and planned for it, yet failed to notify the

investing public of such a change. Quite the contrary, the Company affirmatively disavowed

that any employee was planning on leaving the Company in the SPA, which was made public


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on July 27, 2011.

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50. The facts alleged herein compel a strong inference that the Individual

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Defendants, the Company’s senior management, knew about Defendant Tobias’ plan to leave

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the Company and decided to withhold that information from the investors in the private

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placement. While this information was withheld from the market and NeurogesX’s stock price

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was artificially inflated, the Individual Defendants and NeurogesX decided to raise capital

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through the private placement on July 21, 2011 and the August 2011 debt facility, capital that

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NeurogesX would have been unable to raise if the truth about Defendant Tobias’ plan to leave

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the Company had been publicly disclosed. Defendants were thus motivated to perpetuate the

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fraudulent scheme and course of conduct described herein.

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LOSS CAUSATION

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51. As detailed herein, the Defendants made false and misleading statements and

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engaged in a scheme to deceive the class and a course of conduct that artificially inflated the

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price of NeurogesX’s securities and operated as a fraud or deceit on the purchasers of

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NeurogesX securities by materially misleading the investors in the private placement. Later,

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when the Defendants’ misrepresentations became apparent to the market, the price of

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NeurogesX’s securities fell precipitously, as the prior artificial inflation came out of the price

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over time. As a result of their purchases of NeurogesX’s securities pursuant to the SPA, Lead

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Plaintiff and other members of the Class suffered economic loss, i.e., damages, under the federal

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securities laws.

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NO SAFE HARBOR

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52. The statutory safe harbor provided for forward-looking statements under certain

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circumstances does not apply to any of the allegedly false statements pleaded in this Complaint.

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The statements alleged to be false and misleading herein all relate to then-existing facts and

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conditions. In addition, to the extent certain of the statements alleged to be false may be

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characterized as forward looking, they were not identified as “forward-looking statements”

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when made and there were no meaningful cautionary statements identifying important factors

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that could cause actual results to differ materially from those in the purportedly forward-looking

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statements. In the alternative, to the extent that the statutory safe harbor is determined to apply

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to any forward-looking statements pleaded herein, Defendants are liable for those false forward-

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looking statements because at the time each of those forward-looking statements was made, the

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speaker had actual knowledge that the forward-looking statement was materially false or

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misleading, and/or the forward-looking statement was authorized or approved by an executive

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officer of NeurogesX who knew that the statement was false when made.

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CLASS ACTION ALLEGATIONS

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53. Lead Plaintiff brings this action on behalf of a class of persons who purchased or

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otherwise acquired NeurogesX securities on July 21, 2011 pursuant to the SPA (the “Class”).

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Excluded from the Private Placement Class are Defendants and their families, the officers and

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directors of the Company, at all relevant times, members of their immediate families and their

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legal representatives, heirs, successors, or assigns, and any entity in which Defendants have or

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had a controlling interest.

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54. The members of the Class are so numerous that joinder of all members is

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impracticable. Upon information and belief, the Class numbers twenty-one entities or

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individuals and that they are geographically dispersed.

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55. There is a well-defined community of interest in the questions of law and fact

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involved in this case. Questions of law and fact common to the members of the Private

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Placement Class which predominate over questions which may affect individual Class members

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include:

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a) whether the Exchange Act was violated by Defendants;

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b) whether Defendants omitted and/or misrepresented material facts;

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c) whether Defendants’ statements omitted material facts necessary to make

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the statements made, in light of the circumstances under which they were made, not

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misleading;

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d) whether Defendants participated and pursued the fraudulent scheme or

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course of business complained of herein;

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e) whether Defendants acted willfully, with knowledge or recklessly in

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omitting and/or misrepresenting material facts;

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f) whether the price of NeurogesX securities was artificially inflated as a

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result of the material nondisclosures and/or misrepresentations complained of herein; and

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g) whether the members of the Class have sustained damages as a result of

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the decline in value of NeurogesX’s stock when the truth was revealed, and if so, what is the

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appropriate measure of damages.

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56. Lead Plaintiff’s claims are typical of those of the Class because Plaintiff and the

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Class sustained damages from Defendants’ wrongful conduct in a substantially identical

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manner.

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57. Plaintiff will adequately protect the interests of the Class and has retained

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counsel who are experienced in class action securities litigation. Plaintiff has no interests which

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conflict with those of the Class.

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58. A class action is superior to other available methods for the fair and efficient

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adjudication of this controversy.

21 CLAIMS FOR RELIEF

22 COUNT I

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Against Defendant Tobias for Fraud In the Inducement

(on behalf of Maritime individually) 24

59. Maritime incorporates by reference and realleges each and every allegation

25 contained in paragraphs 1 to 51 above, as though fully set forth herein.

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60. Defendant Tobias induced Maritime into executing the SPA based upon the false

representation that he did not intend to leave the Company.

61. When Defendant Tobias, as duly authorized agent of NeurogesX, made those

false statements, other members of NeurogesX’s management were present and did not dispute

I or correct those statements.

62. Defendant Tobias made those representations aware of their falsity, but

Defendant Tobias and the rest of NeurogesX’s management knew that the only way to induce

Maritime to execute the SPA was by making such a promise.

63. Maritime believed and justifiably relied upon the statements made by Defendant

Tobias and was induced by those statements to execute the SPA.

64. Maritime, because of its reliance upon Defendant Tobias’s representation, has

suffered losses in connection with the shares and warrants purchased pursuant to the SPA.

COUNT II Against NeurogesX and Tobias for Violation of Section 10(b) of the

Exchange Act and SEC Rule 10b-5 (on behalf of the Class)

65. Lead Plaintiff incorporates by reference and realleges each and every allegation

contained in paragraphs 1 to 58 above, as though fully set forth herein.

66. As set forth herein, Defendant NeurogesX made the false statements specified

above, which it knew or deliberately disregarded were misleading in that they contained

misrepresentations and failed to disclose material facts necessary in order to make the

statements made, in light of the circumstances under which they were made, not misleading.

67. Defendant NeurogesX violated section 10(b) of the Exchange Act and SEC Rule

10b-5 in that it:

a) employed devices, schemes, and artifices to defraud;

b) made untrue statements of material facts or omitted to state material facts

necessary in order to make the statements made, in light of the circumstances under which

they were made, not misleading; or


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c) engaged in acts, practices, and a course of business that operated as a

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fraud or deceit upon Plaintiff and others similarly situated in connection with their purchases

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of NeurogesX’s securities.

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68. NeurogesX and Tobias are liable as primary violators in making false and

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misleading statements, and for participating in a fraudulent scheme and course of business that

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operated as a fraud or deceit on purchasers of NeurogesX stock pursuant to the private

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placement and SPA. NeurogesX had a motive to pursue a fraudulent scheme in furtherance of

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their common goal, i.e. , inflating the trading price of NeurogesX stock by making false and

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misleading statements and concealing material adverse information. The fraudulent scheme and

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course of business was designed to and did: (i) deceive the investing public, including Lead

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Plaintiff and other members of the Class; (ii) artificially inflate the prices of NeurogesX stock;

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(iii) cause Lead Plaintiff and other members of the Class to purchase NeurogesX stock at

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inflated prices; and (iv) substantially cause the severe decline in NeurogesX’s stock price as the

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artificial inflation was released.

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69. Lead Plaintiff and the Class have suffered damages in that, in reliance on the

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misrepresentations set forth herein, they paid artificially inflated prices for NeurogesX’s

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securities. Lead Plaintiff and the Class would not have purchased NeurogesX’s securities at the

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price they paid, or at all, if they had been aware that the price had been artificially and falsely

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inflated by Defendants’ misleading statements. As a result of NeurogesX’s false statements,

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NeurogesX was able to sell securities in the private placement to the Class members at prices

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higher than if the truth about Tobias’ imminent departure from NeurogesX had been known.

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The Class members suffered millions of dollars of damages when the truth of Tobias’ departure

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was revealed and the artificial inflation was released from NeurogesX’s stock price.

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//

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//

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//

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COUNT III Against Individual Defendants for Violation of Section 20(a) of the Exchange Act

(on behalf of the Class)

70. Lead Plaintiff incorporates by reference and realleges each and every allegation

contained in paragraphs 1 to 58 and 65 to 69 above, as though fully set forth herein.

71. Each of the Individual Defendants, as senior executive officers and/or directors

of NeurogesX, were privy to non-public information concerning Defendant Tobias’ plans to

leave NeurogesX via access to internal corporate documents, conversations and connections

with other corporate officers and employees, attendance at management and Board of Directors

meetings and committees thereof and via reports and other information provided to them in

connection therewith. Because of their possession of such information, the Individual

Defendants knew or recklessly disregarded the fact that adverse facts specified herein had not

been disclosed to, and were being concealed from, the Class. Lead Plaintiff and other members

of the Class had no access to such information, which was, and remains solely under the control

of the Defendants.

72. The Individual Defendants were involved in drafting, producing, reviewing

and/or disseminating the materially false and misleading statements complained of herein. The

Individual Defendants were aware (or recklessly disregarded) that materially false and

misleading statements were being issued by the Company and nevertheless approved, ratified

and/or failed to correct those statements, in violation of federal securities laws. The Individual

Defendants were able to, and did, control the contents of the Company’s SEC filings, reports,

press releases, and other public statements. The Individual Defendants were provided with

copies of, reviewed and approved, and/or signed such filings, reports, releases and other

statements prior to or shortly after their issuance and had the ability or opportunity to prevent

their issuance or to cause them to be corrected.

73. The Individual Defendants also were able to, and did, directly or indirectly,

control the conduct of NeurogesX’s business, the information contained in its filings with the

SEC, and its public statements. Moreover, the Individual Defendants made or directed the


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making of affirmative statements to securities analysts and the investing public at large, and

participated in meetings and discussions concerning such statements. Because of their positions

and access to material non-public information available to them but not the public, each of the

Individual Defendants knew that the adverse facts specified herein had not been disclosed to

and were being concealed from the public and that the positive representations that were being

made were false and misleading. As a result, each of the Individual Defendants is responsible

for the accuracy of NeurogesX’s corporate releases and statements detailed herein and is

therefore responsible and liable for the misrepresentations contained herein.

74. Individual Defendants acted as controlling persons of NeurogesX within the

meaning of section 20(a) of the Exchange Act. By reason of their positions with the Company,

Individual Defendants had the power and authority to cause NeurogesX to engage in the

wrongful conduct complained of herein. Individual Defendants controlled NeurogesX and all of

its employees. As alleged above, NeurogesX is a primary violator of section 10(b) of the

Exchange Act and SEC Rule 10b-5. By reason of their conduct, Individual Defendants are

liable pursuant to section 20(a) of the Exchange Act.

COUNT IV Against Defendant NeurogesX for Breach of Contract

(on Behalf of Maritime Individually)

75. Maritime incorporates by reference and realleges each and every allegation

contained in paragraphs 1 to 51 above, as though fully set forth herein.

76. Maritime entered into the SPA with the Company whereby it purchased shares of

stock and warrants from the Company.

77. The SPA contained an express representation clause which stated that the

Company was not aware of any key personnel planning to terminate employment with the

Company.


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78. NeurogesX breached the contract by failing to disclose when the contract was

executed that Defendant Tobias, a key personnel of NeurogesX, was planning to terminate his

employment.

79. As a direct and proximate result of NeurogesX’s breach of the SPA, Maritime

suffered damages in connection with its respective purchase of the Company’s securities.

PRAYER FOR RELIEF

WHEREFORE, Maritime prays for judgment as follows:

A. Declaring this action to be a proper class action pursuant to Rule 23 of the

Federal Rules of Civil Procedure and certifying Lead Plaintiff as a representative of the Class;

B. Awarding Lead Plaintiff and the members of the Class damages, including

interest;

C. Rescinding the SPA entered into by Maritime and the Company and returning

the principal paid by Maritime ;

D. Awarding Lead Plaintiff reasonable costs and attorneys’ fees; and

E. Awarding such equitable/injunctive or other relief as the Court may deem just

and proper.

JURY TRIAL DEMANDED

Plaintiff hereby demands a trial by jury.

Dated: October 29, 2013 PUNZALAN LAW, P.C.

By: /s/ Mark Punzalan

Mark Punzalan 600 Allerton Street , Suite 201 Redwood City, CA 94063 Tel: (650) 362-4150 Fax: (650) 362-4151


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Nicholas I. Porritt Thomas M. Gottschlich LEVI & KORSINSKY LLP 1101 30th Street NW, Suite 115 Washington, DC 20007 Tel: (202) 524-4290 Fax: (202) 337-1567

Counsel for PlaintiffMaritime Asset Management, LLC


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punzalan law, p.c.securities.stanford.edu/.../1048/ngsx00_01/20131029_r01c_12cv05… · 2013-10-29...

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