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CLASS ACTION COMPLAINT
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LAW OFFICES OF HOWARD G. SMITHHoward G. Smith3070 Bristol Pike, Suite 112Bensalem, PA 19020Telephone: (215) 638-4847Facsimile: (215) 638-4867
GLANCY PRONGAY & MURRAY LLPLionel Z. GlancyRobert V. Prongay1925 Century Park East, Suite 2100Los Angeles, California 90067Telephone: (310) 201-9150Facsimile: (310) 201-9160
Attorneys for Plaintiff
UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF CALIFORNIA
_______, Individually and on Behalf of AllOthers Similarly Situated,
Plaintiff,
v.
VITAL THERAPIES CORPORATION,TERENCE E. WINTERS, and MICHAELV. SWANSON
Defendants.
Case No.: DRAFT
CLASS ACTION COMPLAINT FORVIOLATIONS OF THE FEDERALSECURITIES LAWS
JURY TRIAL DEMANDED
CLASS ACTION COMPLAINT1
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Plaintiff ______ (“Plaintiff”), by and through his attorneys, alleges the following upon
information and belief, except as to those allegations concerning Plaintiff, which are alleged
upon personal knowledge. Plaintiff’s information and belief is based upon, among other things,
his counsel’s investigation, which includes without limitation: (a) review and analysis of
regulatory filings made by VITAL THERAPIES CORPORATION (“Vital Therapies” or the
“Company”), with the United States Securities and Exchange Commission (“SEC”); (b) review
and analysis of press releases and media reports issued by and disseminated by Vital Therapies;
and (c) review of other publicly available information concerning Vital Therapies.
NATURE OF THE ACTION AND OVERVIEW
1. This is a class action on behalf of those who purchased or otherwise acquired
Vital Therapies’ securities between September 8, 2014 and August 21, 2015, inclusive (the
“Class Period”), seeking to pursue remedies under the Securities Exchange Act of 1934 (the
“Exchange Act”).
2. Vital Therapies, a biotherapeutic company, focuses on developing a cell-based
therapy for the treatment of acute liver failure in the United States. Its ELAD system is an
extracorporeal bio-artificial liver therapy that is in Phase III clinical trials to allow the patient’s
own liver to regenerate to a healthy state, or to stabilize the patient until transplant. The
Company was formerly known as Vitagen Acquisition Corp. and changed its name to Vital
Therapies, Inc. in June 2003.
3. On July 14, 2015, an analyst report published in Seeking Alpha alleged that the
Company misled investors regarding the ELAD systems patients’ overall survival rate, as Vital
Therapies included survival data from a patient who received a liver transplant, while no
CLASS ACTION COMPLAINT2
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equivalent patient in the control group had received a transplant. This fact was not disclosed in
any of the company's prior disclosures.
4. On this news, the Company’s shares fell $3.61 per share, or 14%, to close at
$23.10 on July 15, 2015, on unusually heavy trading volume.
5. On August 21, 2015, the Company announced topline results from its VTI-208
study, and reported that the study, “failed to achieve primary or secondary endpoints of
improvement in overall survival.”
6. On this news, the Company’s shares fell $13.55 per share, or over 76%, during
intra-day trading on August 24, 2015.
7. Throughout the Class Period, Defendants made false and/or misleading statements
regarding the future prospects of Vital Therapies’ ELAD system for the treatment of liver
disease. Specifically, Defendants made false and/or misleading statements and/or failed to
disclose: (1) that the ELAD system is using an immortal line of human cancer liver cells to filter
the blood of acute liver failure patients; (2) that inaccurate data was released regarding ELAD
patients’ overall survival rates; (3) that ELAD failed to demonstrate superiority across any
parameters when compared to a standard non-biological liver dialysis systems; and (4) that, as a
result of the foregoing, the Company’s statements were materially false and misleading at all
relevant times.
8. As a result of Defendants’ wrongful acts and omissions, and the precipitous
decline in the market value of the Company’s securities, Plaintiff and other Class members have
suffered significant losses and damages.
CLASS ACTION COMPLAINT3
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JURISDICTION AND VENUE
9. The claims asserted herein arise under Sections 10(b) and 20(a) of the Exchange
Act (15 U.S.C. §§ 78j(b) and 78t(a)) and Rule 10b-5 promulgated thereunder by the SEC (17
C.F.R. § 240.10b-5).
10. This Court has jurisdiction over the subject matter of this action pursuant to 28
U.S.C. § 1331 and Section 27 of the Exchange Act (15 U.S.C. § 78aa).
11. Venue is proper in this Judicial District pursuant to 28 U.S.C. § 1391(b) and
Section 27 of the Exchange Act (15 U.S.C. § 78aa(c)). Substantial acts in furtherance of the
alleged fraud or the effects of the fraud have occurred in this Judicial District. Many of the acts
charged herein, including the preparation and dissemination of materially false and/or misleading
information, occurred in substantial part in this Judicial District. Additionally, Vital Therapies’
principal executive offices are located within this Judicial District.
12. In connection with the acts, transactions, and conduct alleged herein, Defendants
directly and indirectly used the means and instrumentalities of interstate commerce, including the
United States mail, interstate telephone communications, and the facilities of a national securities
exchange.
PARTIES
13. Plaintiff, as set forth in the accompanying certification, incorporated by reference
herein, purchased or otherwise acquired Vital Therapies’ common stock during the Class Period,
and suffered damages as a result of the federal securities law violations and false and/or
misleading statements and/or material omissions alleged herein.
14. Defendant Vital Therapies is a Delaware corporation with its principal executive
offices located at 15010 Avenue of Science, Suite 200, San Diego, CA 92128.
CLASS ACTION COMPLAINT4
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15. Defendant Terence E. Winters (“Winters”) was, at all relevant times, Chief
Executive Officer (“CEO”) and a chairman of Vital Therapies.
16. Defendant Michael V. Swanson (“Swanson”) was, at all relevant times, Chief
Financial Officer (“CFO”) and treasurer of Vital Therapies.
17. Defendants Winters and Swanson are collectively referred to hereinafter as the
“Individual Defendants.” The Individual Defendants, because of their positions with the
Company, possessed the power and authority to control the contents of Vital Therapies’ reports
to the SEC, press releases and presentations to securities analysts, money and portfolio managers
and institutional investors, i.e., the market. Each defendant was provided with copies of the
Company’s reports and press releases alleged herein to be misleading prior to, or shortly after,
their issuance and had the ability and opportunity to prevent their issuance or cause them to be
corrected. Because of their positions and access to material non-public information available to
them, each of these 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
which were being made were then materially false and/or misleading. The Individual
Defendants are liable for the false statements pleaded herein, as those statements were each
“group-published” information, the result of the collective actions of the Individual Defendants.
SUBSTANTIVE ALLEGATIONS
Background
18. Vital Therapies, a biotherapeutic company, focuses on developing a cell-based
therapy for the treatment of acute liver failure in the United States. Its ELAD system is an
extracorporeal bio-artificial liver therapy that is in Phase III clinical trials to allow the patient’s
own liver to regenerate to a healthy state, or to stabilize the patient until transplant. The
CLASS ACTION COMPLAINT5
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Company was formerly known as Vitagen Acquisition Corp. and changed its name to Vital
Therapies, Inc. in June 2003.
Materially False and MisleadingStatements Issued During the Class Period
19. The Class Period begins on September 8, 2014. On this day, Vital Therapies
issued a press release entitled, “Vital Announces Management Addition; Enrollment in VTI-208
Phase 3 Trial Now 75 Percent Complete.” Therein, the Company, in relevant part, stated:
Vital Therapies, Inc. (Nasdaq:VTL), a biotherapeutic company developingELAD®, a cell-based therapy targeting treatment of acute liver failure, isannouncing an addition to the management team and providing an update on thestatus of its VTI-208 clinical trial.
Al Kildani has joined the Company as Vice President, Investor Relations andBusiness Development. Most recently, Mr. Kildani served as Senior Director,Investor Relations for Hologic, Inc., a global medical device company. Mr.Kildani held the same role with Gen-Probe Incorporated prior to its acquisition byHologic in 2012. Before entering the life sciences industry, Mr. Kildani spentover 12 years on Wall Street as a sell-side analyst, buy-side analyst andinvestment banker with a focus on emerging technologies in biotechnology andmedical devices. Mr. Kildani will report to Duane Nash, Executive Vice Presidentand Chief Business Officer, who will remain actively involved in investorrelations.
"We are excited to have Al join the Vital Therapies team as he brings a uniqueskill set that combines strong Wall Street and life sciences industryexperience. We are confident he will add value and continue our credible andtransparent communications with the investment community," said Terry Winters,Ph.D., Chief Executive Officer and Co-Chairman of Vital Therapies.
As of today, 150 of a targeted 200 subjects have been enrolled in VTI-208, ourrandomized, controlled Phase 3 clinical trial in alcohol induced liverdecompensation. Enrollment rates remain consistent with prior projections, andpreliminary results are expected in the first half of 2015. Forty-nine clinical sitesare now open in the USA, UK, Spain and Australia, and 38 sites have enrolled atleast one subject.
CLASS ACTION COMPLAINT6
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20. On November 13, 2014, the Company issued a press release entitled, “Vital
Therapies Announces Third Quarter 2014 Financial Results and Provides a Corporate Update.”
Therein, the Company, in relevant part, stated:
Vital Therapies, Inc. (Nasdaq:VTL), a biotherapeutic company developingELAD®, a cell-based therapy targeting treatment of acute liver failure, todayannounced results for the third quarter ended September 30, 2014 and provided acorporate update.
"We are pleased to be nearing completion of enrollment in VTI-208, our phase 3clinical trial in alcohol-induced liver decompensation, and expect to report toplinedata in the second quarter of 2015," said Terry Winters, Ph.D., Chief ExecutiveOfficer and Co-Chairman of Vital Therapies. "Our recently completed follow-onoffering puts us in a strong financial position to get through a number ofsignificant milestones between now and late 2016."
Recent Highlights
Enrolled 175 subjects as of November 12, 2014, in VTI-208, a phase 3randomized, controlled, open-label trial, evaluating the ELAD System in 200subjects with alcohol-induced liver decompensation. There are 51 clinical sites inthe United States, Europe and Australia currently open for enrollment.
Opened the ninth site for the Company's second phase 3 trial, VTI-210, arandomized, controlled, open-label study evaluating the ELAD System in acutealcoholic hepatitis patients who have failed steroid therapy. This event-driven trialtargets enrollment of a minimum of 150 subjects with a primary endpoint ofoverall survival. The Company continues to expect enrollment of the first subjectin 2014 and topline data in 2016.
Opened one site for VTI-212, a single-arm phase 2 trial, evaluating the ELADSystem in 40 subjects with either fulminant hepatic failure or surgery-inducedacute liver failure. Enrollment has begun and the Company continues to expecttopline data in 2016.
Completed a follow-on offering of 2,050,000 shares of common stock at a price tothe public of $17.50 per share early in the fourth quarter. Based on the currentbusiness plan, the Company believes it has enough cash to fund the Company intothe fourth quarter of 2016.
In related news, the Company would like to note the recent release of theSTOPAH (Steroids or Pentoxifylline for Alcoholic Hepatitis) trialresults. STOPAH, which enrolled 1,103 subjects at 65 sites in the United
CLASS ACTION COMPLAINT7
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Kingdom, was sponsored by the UK National Institute for Health Research HealthTechnology Assessment Board, and evaluated the effect of steroids and/orpentoxifylline, two anti-inflammatory drugs that are often used in the treatment ofacute alcoholic hepatitis (AAH), on the survival of patients suffering from thecondition. The results highlight the unmet need for AAH patients since there wasno statistically significant impact on patient survival at 90 days or one year byeither drug, although there was a short term benefit on survival at 28 days in thesubjects receiving steroids.
Third Quarter 2014 Financial Results
Cash Position
Cash and cash equivalents at September 30, 2014, totaled $79.1 million comparedto $38.2 million at December 31, 2013. Based on its current business plan, theCompany believes its existing cash and cash equivalents as of September 30,2014, along with the net proceeds after underwriting commissions and discountsof $33.4 million from its recent follow-on offering, will be sufficient to fundoperations into the fourth quarter of 2016.
Results of Operations
Three Months Ended September 30, 2014
The Company reported a net loss, and a net loss attributable to commonstockholders, for the quarter ended September 30, 2014 of $12.8 million. Thiscompares to a net loss of $7.0 million and a net loss attributable to commonstockholders of $9.0 million for the quarter ended September 30, 2013. Thisresulted in a net loss attributable to common stockholders of $0.59 per share forthe three months ended September 30, 2014, as compared to a net loss of $16.31per share for the corresponding period in 2013, on both a basic and fully dilutedbasis. These per share figures are based on weighted-average common sharesoutstanding of 21,759,061 shares and 553,790 shares, respectively, with the largeincrease in common shares outstanding resulting from the Company's initialpublic offering (IPO) in the second quarter of this year and the conversion ofpreferred stock to common stock in conjunction with the IPO.
Total operating expenses for the three months ended September 30, 2014were $12.8 million as compared to $9.2 million for the comparable period of2013. Research and development expenses increased to $10.2 million during thethree months ended September 30, 2014 as compared to $6.2 million in the threemonths ended September 30, 2013. This was primarily associated with anincrease in Phase 3 clinical trial activities. General and administrative expenseswere $2.6 million for the three months ended September 30, 2014, down from$3.0 million for the comparable period of 2013, primarily due to lower utilizationof outside services.
CLASS ACTION COMPLAINT8
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The net loss for the three months ended September 30, 2013 was net of otherincome of $2.2 million, reflecting the revaluation of future purchase rightsliabilities. These future purchase rights terminated in conjunction with the IPO.
21. On November 13, 2014, Vital Therapies also filed its Quarterly Report with the
SEC on Form 10-Q for the 2014 fiscal third quarter. The Company’s Form 10-Q was signed by
Defendant Swanson, and reaffirmed the Company’s statements previously announced that day.
22. On March 19, 2015, the Company issued a press release entitled, “Vital
Therapies Announces Fourth Quarter and Full Year 2014 Financial Results and Provides a
Corporate Update.” Therein, the Company, in relevant part, stated:
Vital Therapies, Inc. (Nasdaq:VTL), a biotherapeutic company developingELAD®, a cell-based therapy targeting the treatment of acute liver failure, todayannounced results for the fourth quarter and fiscal year ended December 31, 2014and provided a corporate update.
"With completion of enrollment in VTI-208 and topline results expected later thisyear, we are now focused on enrolling our second phase 3 trial, VTI-210, andpreparing for a potential Biologics License Application submission targeted forthe first half of 2016 should VTI-208 yield positive results," said Terry Winters,Ph.D., Chief Executive Officer and Co-Chairman of Vital Therapies.
Key Developments
Completed enrollment in VTI-208, a phase 3 randomized, controlled, open-labeltrial, evaluating the ELAD System in subjects with alcohol-induced liverdecompensation. The total number of subjects enrolled was 203 with the lastsubject enrolled on January 31, 2015, reflecting the further enrollment of subjectswho were already in the screening process when enrollment reached 200. TheCompany now expects to report topline results from this trial in the third quarterof 2015 due to a decision to wait until database lock before beginning toplineanalysis of the data. The Company still anticipates filing a Biologics LicenseApplication (BLA) in the first half of 2016 if the results of VTI-208 are positive.
Commenced enrollment in the Company's second phase 3 trial, VTI-210, arandomized, controlled, open-label study evaluating the ELAD System in severeacute alcoholic hepatitis patients who have failed standard therapy. As of March18, 2015, 6 subjects have been enrolled and 18 sites are open for enrollment. The
CLASS ACTION COMPLAINT9
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Company expects to open over 40 sites for enrollment in this trial by year-end. This event-driven trial targets enrollment of a minimum of 150 subjects witha primary endpoint of overall survival up to at least study day 91. Based on theCompany's decision to wait until database lock to begin topline analysis of datafrom its phase 3 trials, the Company now expects to release topline results fromVTI-210 in early 2017.
Opened a tenth site for VTI-212, a single-arm phase 2 trial, evaluating the ELADSystem in 40 subjects with either fulminant hepatic failure or surgery-inducedliver failure, and enrolled 4 patients as of March 18, 2015. The Companycontinues to expect topline results from VTI-212 in 2016.
Completed a follow-on offering of 2,050,000 shares of common stock at a price tothe public of $17.50 per share early in the fourth quarter. Cash and cashequivalents at December 31, 2014, totaled $102.2 million compared to $38.2million at December 31, 2013. Based on the current business plan, the Companybelieves it has enough cash to fund the Company into the third quarter of 2016,which is a quarter earlier than previously expected due to higher projected costsprincipally associated with preparations to file a BLA in the event of positiveVTI-208 results.
Fourth Quarter and Full Year 2014 Financial Results
Results of Operations
Three Months Ended December 31, 2014
The Company reported both a net loss and net loss attributable to commonstockholders of $14.0 million for the quarter ended December 31, 2014, whichcompared with a net loss of $10.2 million, and a net loss attributable to commonstockholders of $12.5 million for the same prior year period. This resulted in a netloss attributable to common stockholders of $0.59 per share for the three monthsended December 31, 2014, as compared to a net loss of $22.28 per share for thecorresponding period in 2013, on both a basic and fully diluted basis. These pershare figures are based on weighted-average common shares outstanding of23,689,613 shares and 559,016 shares, respectively, with the large increase incommon shares outstanding in 2014 resulting from the Company's initial publicoffering (IPO) in the second quarter of 2014, the conversion of preferred stock tocommon stock in conjunction with the IPO, and the Company's follow-onoffering in the fourth quarter of 2014.
Total operating expenses for the three months ended December 31, 2014were $14.0 million as compared to $10.2 million for the comparable period of2013. Research and development expenses increased to $10.9 million during thethree months ended December 31, 2014 as compared to $7.7 million in the threemonths ended December 31, 2013. This was primarily associated with an
CLASS ACTION COMPLAINT10
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increase in phase 3 clinical trial activities. General and administrative expenseswere $3.1 million for the three months ended December 31, 2014, up from $2.6million for the comparable period of 2013.
Twelve Months Ended December 31, 2014
The Company reported a net loss of $47.7 million for the year ended December31, 2014, which compared with a net loss of $32.7 million for the prior year. Thenet loss attributable to common stockholders was $56.8 million for the year endedDecember 31, 2014, which compared with a net loss attributable to commonstockholders of 39.1 million for the prior year. This resulted in a net lossattributable to common stockholders of $3.54 per share for the year endedDecember 31, 2014, as compared to a net loss attributable to commonstockholders of $74.86 per share for 2013, on both a basic and fully dilutedbasis. These per share figures are based on weighted-average common sharesoutstanding of 16,054,452 shares and 522,102 shares, respectively, with the largeincrease in common shares outstanding resulting from the Company's IPO in thesecond quarter of 2014, the conversion of preferred stock to common stock inconjunction with the IPO, and the Company's follow-on offering in the fourthquarter of 2014.
Total operating expenses for the year ended December 31, 2014 were $50.3million as compared to $31.4 million for 2013. Research and developmentexpenses increased to $39.5 million during the year ended December 31, 2014 ascompared to $21.8 million for the year ended December 31, 2013. This wasprimarily associated with an increase in phase 3 clinical trial activities. Generaland administrative expenses were $10.9 million for the year ended December 31,2014, up from $9.6 million for 2013.
23. On March 30, 2015, Vital Therapies filed its Annual Report with the SEC on
Form 10-K for the 2014 fiscal year. The Company’s Form 10-K was signed by Defendants
Winters and Swanson, and reaffirmed the Company’s statements previously announced.
24. On May 12, 2015, the Company issued a press release entitled, “Vital Therapies
Announces First Quarter 2015 Financial Results and Provides a Corporate Update.” Therein, the
Company, in relevant part, stated:
Vital Therapies, Inc. (Nasdaq:VTL), a biotherapeutic company developingELAD®, a cell-based therapy targeting the treatment of liver failure, todayannounced results for the first quarter ended March 31, 2015 and provided acorporate update.
CLASS ACTION COMPLAINT11
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"We are working diligently to advance our clinical programs while continuingimportant research into ELAD's mechanisms of action," said Terry Winters,Ph.D., Chief Executive Officer and Co-Chairman of Vital Therapies. "We lookforward to reporting topline results from our phase 3 VTI-208 trial in the thirdquarter of this year."
Key Developments
On track for database lock and release of topline results for the VTI-208 clinicaltrial in the third quarter of 2015. VTI-208 is a phase 3 randomized, controlled,open-label trial, evaluating the ELAD System in subjects with alcohol-inducedliver decompensation (AILD). Enrollment was completed in January with 203subjects.
Enrolled the ninth subject as of May 11, 2015 in the Company's second phase 3trial, VTI-210, a randomized, controlled, open-label study evaluating the ELADSystem in severe acute alcoholic hepatitis subjects who have failed standardtherapy. Twenty-four sites have been opened to date and the Company expects toopen over 40 sites for enrollment in this trial by year-end. Enrollment and siteopenings are currently behind plan due to prioritization of VTI-208 datacompletion at the sites also anticipated to participate in the VTI-210 trial. Thisevent-driven trial targets enrollment of a minimum of 150 subjects with a primaryendpoint of overall survival up to at least study day 91. The Company continuesto expect to release topline results from VTI-210 in early 2017.
Enrolled the sixth subject as of May 11, 2015 in VTI-212, a single-arm phase 2trial, evaluating the ELAD System in 40 subjects with either fulminant hepaticfailure or surgery-induced liver failure. The Company continues to expect toplineresults from VTI-212 in 2016.
Presented two posters at the annual meeting of the European Association for theStudy of the Liver (EASL) in Vienna last month. The first poster describes thedemographics and baseline laboratory values of subjects enrolled in the VTI-208trial showing that the key parameters of average age and MELD (Model of End-stage Liver Disease) score at baseline were both within the trial's target rangesestablished from VTI-206, the Company's phase 2b AILD trial. The second posterdescribes research into ELAD's possible mechanisms of action. The postercharacterizes the expression levels of liver-specific cytochrome P450 isoenzymesand oxygenases in ELAD C3A cells during cartridge production and after use inclinical treatment. Both posters are available on the Company's web site.
First Quarter 2015 Financial Results
Cash Position
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Cash and cash equivalents at March 31, 2015, totaled $88.3 million compared to$102.2 million at December 31, 2014. Based on the current business plan, theCompany believes it has enough cash to fund the Company into the third quarterof 2016, although the Company's projected cash runway will be highly dependenton the topline results of the VTI-208 clinical trial. The Company is filing auniversal shelf registration statement on Form S-3 with the United StatesSecurities and Exchange Commission (SEC) today. However, the Company willnot access the public markets prior to the release of VTI-208 topline results in thethird quarter of 2015.
Results of Operations
Three Months Ended March 31, 2015
The Company reported both a net loss and net loss attributable to commonstockholders of $14.8 million for the quarter ended March 31, 2015, whichcompared with a net loss of $10.7 million, and a net loss attributable to commonstockholders of $13.8 million for the same prior year period. This resulted in a netloss attributable to common stockholders of $0.62 per share for the three monthsended March 31, 2015, as compared to a net loss of $24.49 per share for thecorresponding period in 2014, on both a basic and fully diluted basis. These pershare figures are based on weighted-average common shares outstanding of23,972,599 shares and 564,186 shares, respectively, with the large increase incommon shares outstanding in 2014 resulting from the Company's initial publicoffering (IPO) in the second quarter of 2014, the conversion of preferred stock tocommon stock in conjunction with the IPO, and the Company's follow-onoffering in the fourth quarter of 2014.
Total operating expenses for the three months ended March 31, 2015 were $14.8million as compared to $11.9 million for the comparable period of 2014. Researchand development expenses increased to $11.8 million during the three monthsended March 31, 2015 as compared to $9.2 million in the three months endedMarch 31, 2014. This was primarily associated with an increase in clinical trial-related activities. General and administrative expenses were $3.1 million for thethree months ended March 31, 2015, up from $2.7 million for the comparableperiod of 2014.
25. On May 12, 2015, Vital Therapies also filed its Quarterly Report with the SEC on
Form 10-Q for the 2015 fiscal first quarter. The Company’s Form 10-Q was signed by
Defendant Swanson, and reaffirmed the Company’s statements previously announced that day.
26. The statements contained in ¶¶17-23 were materially false and/or misleading
when made because defendants failed to disclose or indicate the following: (1) that the ELAD
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system is using an immortal line of human cancer liver cells to filter the blood of acute liver
failure patients; (2) that inaccurate data was released regarding ELAD patients’ overall survival
rates; (3) that ELAD failed to demonstrate superiority across any parameters when compared to a
standard non-biological liver dialysis system; and (4) that, as a result of the foregoing, the
Company’s statements were materially false and misleading at all relevant times.
Disclosures at the End of the Class Period
27. On July 16, 2015, an article was published on Seeking Alpha entitled, “Vital
Therapies’ ELAD VTI-208 Study – Chronicle of a Failure Foretold.” Therein, the article, in
relevant part, stated:
Summary
Vital’s ELAD system is using an immortal line of human cancer liver cellsto filter the blood of acute liver failure patients. After over 20 years of R&D and several bankruptcies, the ELADtechnology has yet to succeed in a single pivotal trial with statistical significance. ELAD failed to demonstrate superiority across any parameters whencompared to the MARS system, an approved non-biological liver dialysis system. Based on past clinical data and patient baseline characteristics, we assumethat Vital’s ongoing VTI-208 phase 3 study will fail to demonstrate statisticalsignificance in 91-day overall survival.
In 2003 Vital Therapies (NASDAQ:VTL) emerged from the ashes of twobankrupt companies who had been trying to develop the Extracorporeal LiverAssist Device (ELAD) biological liver dialysis technology for over 10 years.Hepatix Inc, founded in 1991, was the initial developer of ELAD. The companydeclared bankruptcy by 1996 and was re-registered under the trade name VitaGen- which in turn went bankrupt in 2003. The ELAD technology was acquired byVital Therapies in the bankruptcy proceedings of VitaGen and, over 20 yearslater, the technology has yet to succeed in a single pivotal trial with statisticalsignificance.
The ELAD system is using an immortal line of liver cells to filter the blood ofacute liver failure (ALF) patients. Although this solution sounds highly lucrative,ELAD appears to be nothing more than living proof that the efficacy of such asystem does not currently extend beyond sheer theoretical hype. ThroughoutELAD's laborious 20-year quest in search of patients it can help, both the weight
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of the cells in a single ELAD cartridge and the number of hepatic indications atwhich the device has tried its luck have steadily accumulated. Unfortunately,neither did the trick as the technology has yet to find its match in terms of hepaticindication and, due to the fact that liver disease comprises one of the mostheterogeneous patient populations in medicine, this may take a very long time.
According to Vital's latest annual report, the U.S. FDA is also skeptical of ELAD:"the FDA has noted its view that preliminary clinical evidence…does not indicatethat the ELAD System may demonstrate a substantial improvement over thecurrent standard of care". Added to that is the fact that the incidence of mostadverse events was found to be nearly three-fold in ELAD-treated patients vscontrol (and vs patients treated with other dialysis systems in similar settings),and the fact that ELAD runs a potential risk of leaking cancerous liver cells intothe very patients it treats.
Performance in previous trials is a good indication of the drug/therapy'sperformance in future trials, and in the case of VTL, the future appears to be atotal failure. After dozens of studies in humans and petri dishes ELAD has givenabsolutely no indication that it can demonstrate statistical significance in theongoing Phase 3 trials.
An even more telling sign of failure is the fact that ELAD failed to demonstratesuperiority across any parameters when compared to a standard non-biologicalliver dialysis system, perhaps superseding such a device only in its cost, beingapproximately 10 times more expensive. When the results of ELAD's latest trialwere directly compared with the Phase 3 results of the non-biological MARSdialysis system (with the obvious limitations of a cross trial comparison), ELADwas shown to have poorer efficacy even despite the fact that MARS failed itsPhase 3 study. For this reason it is extremely unlikely that the VTI-208 trial, theresults of which are being awaited in Q3 '15, will meet its 91-day overall survivalprimary endpoint.
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Conclusion
Clinical trials so far have shown that the benefits of the ELAD system beingdeveloped by Vital Therapies are purely hypothetical, as this live human cell linedialysis therapy repeatedly failed to show a survival benefit and has proven to beinferior to a standard non-biological system across most endpoint parameters.
Moreover, the benefits which the device has demonstrated in previous trials wereexaggerated and are much smaller than the figures commonly presented to VTL'sinvestors. In addition, the adverse events associated with the ELAD therapy aredangerously numerous and serious. This report has presented proof that the Phase3 VTI-208 trial is extremely likely to fail.
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Upon the likely failure of the VTI-208 study, the future of ELAD in liver failuretreatment should be finally (and a bit too late) doomed. Accordingly, Vital's stockprice should drop considerably since further studying ELAD in other ALF sub-populations will bare an even greater failure risk.
28. On this news, the Company’s shares fell $3.61 per share, or 14%, to close at
$23.10 on July 15, 2015, on unusually heavy trading volume.
29. On August 21, 2015, the Company issued a press release announcing topline
results from its VTI-208 study, and reported that the study, “failed to achieve primary or
secondary endpoints of improvement in overall survival.” The press release further disclosed
that:
VTI-208, the Company's phase 3 randomized, controlled, open-label trial,evaluating the ELAD System in subjects with alcohol-induced liverdecompensation (AILD) failed to meet the primary endpoint of overall survivalthrough at least 91 days assessed using the Kaplan Meier statistical method. Of203 total subjects enrolled in VTI-208, 96 were randomized to the treated groupand 107 were randomized to the control group. A hazard ratio of 1.027 (slightlyfavoring the control group) with a log rank p-value of 0.90 (not statisticallysignificant, N.S.) indicated that there was no difference between treated andcontrol subjects in the primary endpoint.
The Company will be analyzing the data from the VTI-208 clinical trial duringthe next several weeks, including data from the pre-specified subset analyses. TheCompany will stop the VTI-210 and VTI-212 clinical trials, and also plans tomeet with the FDA as soon as possible to discuss restructuring its clinicaldevelopment program, including a potential new trial to confirm the informationsuggested by the subset analyses. The Company will then give more details on apossible path forward with ELAD.
While the overall results are disappointing, the Company is encouraged that alarge pre-specified subset of 120 subjects with a MELD score of less than 28 hada hazard ratio of 0.575 and a log-rank p-value of 0.077 (N.S.) in favor of theELAD group, suggesting that future clinical studies should focus on this cohortwith MELD scores less than 28. Separately, a pre-specified subset of 101subjects under age 46.9 years (the study median age) had a hazard ratio of 0.634with a log-rank p-value of 0.167 (N.S.) in favor of the ELAD treated subjects,suggesting that future study designs may incorporate stratification by age. Indeedthese effects appear to be additive and a subset of 59 subjects with MELD lessthan 28 and age less than 46.9 years had a hazard ratio of 0.375 in favor of theELAD group (p=0.085 (N.S.)). Finally, pre-specified analyses suggest that
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subjects with impaired kidney function and severe coagulopathy may have worseoutcomes and therefore future clinical trials will exclude these subjects.
With $62.0 million in current cash, the Company believes it could complete a newtrial without raising additional capital, although that will depend on discussionswith regulatory authorities and the exact design of any new trial.
30. On this news, the Company’s shares fell $13.55 per share, or over 76%, during
intra-day trading on August 24, 2015.
CLASS ACTION ALLEGATIONS
31. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b)(3) on behalf of a class, consisting of all those who purchased or
otherwise acquired Vital Therapies’ securities between September 8, 2014 and August 21, 2015,
inclusive and who were damaged thereby (the “Class”). Excluded from the Class are
Defendants, the officers and directors of the Company, at all relevant times, members of their
immediate families and their legal representatives, heirs, successors or assigns and any entity in
which Defendants have or had a controlling interest.
32. The members of the Class are so numerous that joinder of all members is
impracticable. Throughout the Class Period, Vital Therapies’ securities were actively traded on
the Nasdaq Stock Market (“NASDAQ”). While the exact number of Class members is unknown
to Plaintiff at this time and can only be ascertained through appropriate discovery, Plaintiff
believes that there are hundreds or thousands of members in the proposed Class. Millions of
Vital Therapies shares were traded publicly during the Class Period on the NASDAQ. As of
February 27, 2015, Vital Therapies had 23,993,389 shares of common stock outstanding. Record
owners and other members of the Class may be identified from records maintained by Vital
Therapies or its transfer agent and may be notified of the pendency of this action by mail, using
the form of notice similar to that customarily used in securities class actions.
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33. Plaintiff’s claims are typical of the claims of the members of the Class as all
members of the Class are similarly affected by Defendants’ wrongful conduct in violation of
federal law that is complained of herein.
34. Plaintiff will fairly and adequately protect the interests of the members of the
Class and has retained counsel competent and experienced in class and securities litigation.
35. Common questions of law and fact exist as to all members of the Class and
predominate over any questions solely affecting individual members of the Class. Among the
questions of law and fact common to the Class are:
(a) whether the federal securities laws were violated by Defendants’ acts as
alleged herein;
(b) whether statements made by Defendants to the investing public during the
Class Period omitted and/or misrepresented material facts about the business, operations, and
prospects of Vital Therapies; and
(c) to what extent the members of the Class have sustained damages and the
proper measure of damages.
35. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all members is impracticable. Furthermore, as
the damages suffered by individual Class members may be relatively small, the expense and
burden of individual litigation makes it impossible for members of the Class to individually
redress the wrongs done to them. There will be no difficulty in the management of this action as
a class action.
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UNDISCLOSED ADVERSE FACTS
36. The market for Vital Therapies’ securities was open, well-developed and efficient
at all relevant times. As a result of these materially false and/or misleading statements, and/or
failures to disclose, Vital Therapies’ securities traded at artificially inflated prices during the
Class Period. Plaintiff and other members of the Class purchased or otherwise acquired Vital
Therapies’ securities relying upon the integrity of the market price of the Company’s securities
and market information relating to Vital Therapies, and have been damaged thereby.
37. During the Class Period, Defendants materially misled the investing public,
thereby inflating the price of Vital Therapies’ securities, by publicly issuing false and/or
misleading statements and/or omitting to disclose material facts necessary to make Defendants’
statements, as set forth herein, not false and/or misleading. Said statements and omissions were
materially false and/or misleading in that they failed to disclose material adverse information
and/or misrepresented the truth about Vital Therapies’ business, operations, and prospects as
alleged herein.
38. At all relevant times, the material misrepresentations and omissions particularized
in this Complaint directly or proximately caused or were a substantial contributing cause of the
damages sustained by Plaintiff and other members of the Class. As described herein, during the
Class Period, Defendants made or caused to be made a series of materially false and/or
misleading statements about Vital Therapies’ financial well-being and prospects. These material
misstatements and/or omissions had the cause and effect of creating in the market an
unrealistically positive assessment of the Company and its financial well-being and prospects,
causing the Company’s securities to be overvalued and artificially inflated at all relevant times.
Defendants’ materially false and/or misleading statements during the Class Period resulted in
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Plaintiff and other members of the Class purchasing the Company’s securities at artificially
inflated prices, causing the damages complained of herein.
LOSS CAUSATION
39. Defendants’ wrongful conduct, as alleged herein, directly and proximately caused
the economic loss suffered by Plaintiff and the Class.
40. During the Class Period, Plaintiff and the Class purchased Vital Therapies’
securities at artificially inflated prices and were damaged thereby. The price of the Company’s
securities significantly declined when the misrepresentations made to the market, and/or the
information alleged herein to have been concealed from the market, and/or the effects thereof,
were revealed, causing investors’ losses.
SCIENTER ALLEGATIONS
41. As alleged herein, Defendants acted with scienter in that Defendants knew that
the public documents and statements issued or disseminated in the name of the Company were
materially false and/or misleading; knew that such statements or documents would be issued or
disseminated to the investing public; and knowingly and substantially participated or acquiesced
in the issuance or dissemination of such statements or documents as primary violations of the
federal securities laws. As set forth elsewhere herein in detail, Defendants, by virtue of their
receipt of information reflecting the true facts regarding Vital Therapies, his/her control over,
and/or receipt and/or modification of Vital Therapies’ allegedly materially misleading
misstatements and/or their associations with the Company which made them privy to
confidential proprietary information concerning Vital Therapies, participated in the fraudulent
scheme alleged herein.
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APPLICABILITY OF PRESUMPTION OF RELIANCE(FRAUD-ON-THE-MARKET DOCTRINE)
42. The market for Vital Therapies’ securities was open, well-developed and efficient
at all relevant times. As a result of the materially false and/or misleading statements and/or
failures to disclose, Vital Therapies’ securities traded at artificially inflated prices during the
Class Period. On April 24, 2015, the Company’s stock closed at a Class Period high of $29.37
per share. Plaintiff and other members of the Class purchased or otherwise acquired the
Company’s securities relying upon the integrity of the market price of Vital Therapies’ securities
and market information relating to Vital Therapies, and have been damaged thereby.
43. During the Class Period, the artificial inflation of Vital Therapies’ stock was
caused by the material misrepresentations and/or omissions particularized in this Complaint
causing the damages sustained by Plaintiff and other members of the Class. As described herein,
during the Class Period, Defendants made or caused to be made a series of materially false
and/or misleading statements about Vital Therapies’ business, prospects, and operations. These
material misstatements and/or omissions created an unrealistically positive assessment of Vital
Therapies and its business, operations, and prospects, thus causing the price of the Company’s
securities to be artificially inflated at all relevant times, and when disclosed, negatively affected
the value of the Company stock. Defendants’ materially false and/or misleading statements
during the Class Period resulted in Plaintiff and other members of the Class purchasing the
Company’s securities at such artificially inflated prices, and each of them has been damaged as a
result.
44. At all relevant times, the market for Vital Therapies’ securities was an efficient
market for the following reasons, among others:
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(a) Vital Therapies stock met the requirements for listing, and was listed and
actively traded on the NASDAQ, a highly efficient and automated market;
(b) as a regulated issuer, Vital Therapies filed periodic public reports with the
SEC and/or the NASDAQ;
(c) Vital Therapies regularly communicated with public investors via
established market communication mechanisms, including through regular dissemination of
press releases on the national circuits of major newswire services and through other wide-
ranging public disclosures, such as communications with the financial press and other similar
reporting services; and/or
(d) Vital Therapies was followed by securities analysts employed by
brokerage firms who wrote reports about the Company, and these reports were distributed to the
sales force and certain customers of their respective brokerage firms. Each of these reports was
publicly available and entered the public marketplace.
45. As a result of the foregoing, the market for Vital Therapies’ securities promptly
digested current information regarding Vital Therapies from all publicly available sources and
reflected such information in Vital Therapies’ stock price. Under these circumstances, all
purchasers of Vital Therapies’ securities during the Class Period suffered similar injury through
their purchase of Vital Therapies’ securities at artificially inflated prices and a presumption of
reliance applies.
NO SAFE HARBOR
46. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this Complaint.
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
characterized as forward looking, they were not identified as “forward-looking statements” when
made and there were no meaningful cautionary statements identifying important factors that
could cause actual results to differ materially from those in the purportedly forward-looking
statements. In the alternative, to the extent that the statutory safe harbor is determined to apply to
any forward-looking statements pleaded herein, Defendants are liable for those false forward-
looking statements because at the time each of those forward-looking statements was made, the
speaker had actual knowledge that the forward-looking statement was materially false or
misleading, and/or the forward-looking statement was authorized or approved by an executive
officer of Vital Therapies who knew that the statement was false when made.
FIRST CLAIMViolation of Section 10(b) of
The Exchange Act and Rule 10b-5Promulgated Thereunder Against All Defendants
47. Plaintiff repeats and realleges each and every allegation contained above as if
fully set forth herein.
48. During the Class Period, Defendants carried out a plan, scheme and course of
conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing
public, including Plaintiff and other Class members, as alleged herein; and (ii) cause Plaintiff and
other members of the Class to purchase Vital Therapies’ securities at artificially inflated prices.
In furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of
them, took the actions set forth herein.
49. Defendants (i) employed devices, schemes, and artifices to defraud; (ii) made
untrue statements of material fact and/or omitted to state material facts necessary to make the
statements not misleading; and (iii) engaged in acts, practices, and a course of business which
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operated as a fraud and deceit upon the purchasers of the Company’s securities in an effort to
maintain artificially high market prices for Vital Therapies’ securities in violation of Section
10(b) of the Exchange Act and Rule 10b-5. All Defendants are sued either as primary
participants in the wrongful and illegal conduct charged herein or as controlling persons as
alleged below.
50. Defendants, individually and in concert, directly and indirectly, by the use, means
or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a
continuous course of conduct to conceal adverse material information about Vital Therapies’
financial well-being and prospects, as specified herein.
51. These defendants employed devices, schemes and artifices to defraud, while in
possession of material adverse non-public information and engaged in acts, practices, and a
course of conduct as alleged herein in an effort to assure investors of Vital Therapies’ value and
performance and continued substantial growth, which included the making of, or the
participation in the making of, untrue statements of material facts and/or omitting to state
material facts necessary in order to make the statements made about Vital Therapies and its
business operations and future prospects in light of the circumstances under which they were
made, not misleading, as set forth more particularly herein, and engaged in transactions,
practices and a course of business which operated as a fraud and deceit upon the purchasers of
the Company’s securities during the Class Period.
52. Each of the Individual Defendants’ primary liability, and controlling person
liability, arises from the following facts: (i) the Individual Defendants were high-level executives
and/or directors at the Company during the Class Period and members of the Company’s
management team or had control thereof; (ii) each of these defendants, by virtue of their
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responsibilities and activities as a senior officer and/or director of the Company, was privy to and
participated in the creation, development and reporting of the Company’s internal budgets, plans,
projections and/or reports; (iii) each of these defendants enjoyed significant personal contact and
familiarity with the other defendants and was advised of, and had access to, other members of the
Company’s management team, internal reports and other data and information about the
Company’s finances, operations, and sales at all relevant times; and (iv) each of these defendants
was aware of the Company’s dissemination of information to the investing public which they
knew and/or recklessly disregarded was materially false and misleading.
53. The defendants had actual knowledge of the misrepresentations and/or omissions
of material facts set forth herein, or acted with reckless disregard for the truth in that they failed
to ascertain and to disclose such facts, even though such facts were available to them. Such
defendants’ material misrepresentations and/or omissions were done knowingly or recklessly and
for the purpose and effect of concealing Vital Therapies’ financial well-being and prospects from
the investing public and supporting the artificially inflated price of its securities. As
demonstrated by Defendants’ overstatements and/or misstatements of the Company’s business,
operations, financial well-being, and prospects throughout the Class Period, Defendants, if they
did not have actual knowledge of the misrepresentations and/or omissions alleged, were reckless
in failing to obtain such knowledge by deliberately refraining from taking those steps necessary
to discover whether those statements were false or misleading.
54. As a result of the dissemination of the materially false and/or misleading
information and/or failure to disclose material facts, as set forth above, the market price of Vital
Therapies’ securities was artificially inflated during the Class Period. In ignorance of the fact
that market prices of the Company’s securities were artificially inflated, and relying directly or
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indirectly on the false and misleading statements made by Defendants, or upon the integrity of
the market in which the securities trades, and/or in the absence of material adverse information
that was known to or recklessly disregarded by Defendants, but not disclosed in public
statements by Defendants during the Class Period, Plaintiff and the other members of the Class
acquired Vital Therapies’ securities during the Class Period at artificially high prices and were
damaged thereby.
55. At the time of said misrepresentations and/or omissions, Plaintiff and other
members of the Class were ignorant of their falsity, and believed them to be true. Had Plaintiff
and the other members of the Class and the marketplace known the truth regarding the problems
that Vital Therapies was experiencing, which were not disclosed by Defendants, Plaintiff and
other members of the Class would not have purchased or otherwise acquired their Vital
Therapies securities, or, if they had acquired such securities during the Class Period, they would
not have done so at the artificially inflated prices which they paid.
56. By virtue of the foregoing, Defendants have violated Section 10(b) of the
Exchange Act and Rule 10b-5 promulgated thereunder.
57. As a direct and proximate result of Defendants’ wrongful conduct, Plaintiff and
the other members of the Class suffered damages in connection with their respective purchases
and sales of the Company’s securities during the Class Period.
SECOND CLAIMViolation of Section 20(a) of
The Exchange Act Against the Individual Defendants
58. Plaintiff repeats and realleges each and every allegation contained above as if
fully set forth herein.
59. The Individual Defendants acted as controlling persons of Vital Therapies within
the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level
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positions, and their ownership and contractual rights, participation in and/or awareness of the
Company’s operations and/or intimate knowledge of the false financial statements filed by the
Company with the SEC and disseminated to the investing public, the Individual Defendants had
the power to influence and control and did influence and control, directly or indirectly, the
decision-making of the Company, including the content and dissemination of the various
statements which Plaintiff contends are false and misleading. The Individual Defendants were
provided with or had unlimited access to copies of the Company’s reports, press releases, public
filings and other statements alleged by Plaintiff to be misleading prior to and/or shortly after
these statements were issued and had the ability to prevent the issuance of the statements or
cause the statements to be corrected.
60. In particular, each of these Defendants had direct and supervisory involvement in
the day-to-day operations of the Company and, therefore, is presumed to have had the power to
control or influence the particular transactions giving rise to the securities violations as alleged
herein, and exercised the same.
61. As set forth above, Vital Therapies and the Individual Defendants each violated
Section 10(b) and Rule 10b-5 by their acts and/or omissions as alleged in this Complaint. By
virtue of their positions as controlling persons, the Individual Defendants are liable pursuant to
Section 20(a) of the Exchange Act. As a direct and proximate result of Defendants’ wrongful
conduct, Plaintiff and other members of the Class suffered damages in connection with their
purchases of the Company’s securities during the Class Period.
PRAYER FOR RELIEF
WHEREFORE, Plaintiff prays for relief and judgment, as follows:
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(a) determining that this action is a proper class action under Rule 23 of the Federal
Rules of Civil Procedure;
(b) awarding compensatory damages in favor of Plaintiff and the other Class
members against all defendants, jointly and severally, for all damages sustained as a result of
Defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;
(c) awarding Plaintiff and the Class their reasonable costs and expenses incurred in
this action, including counsel fees and expert fees; and
(d) such other and further relief as the Court may deem just and proper.
JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by jury.
Dated: GLANCY PRONGAY & MURRAY LLP
By: DRAFTLionel Z. GlancyRobert V. Prongay1925 Century Park East, Suite 2100Los Angeles, CA 90067Telephone: (310) 201-9150Facsimile: (310) 201-9160
LAW OFFICES OF HOWARD G. SMITHHoward G. Smith3070 Bristol Pike, Suite 112Bensalem, PA 19020Telephone: (215) 638-4847Facsimile: (215) 638-4867
Attorneys for Plaintiff