Unreported / Non-Citable
Background
Kyverna Therapeutics, a clinical-stage biopharmaceutical company, conducted its initial public offering (IPO) in February 2024. Its lead product candidate, KYV-101, a CD19 CAR T-cell therapy for autoimmune diseases, was in early clinical development with only three patients enrolled across two trials (KYSA-1 in the U.S. with two patients, KYSA-3 in Germany with one). The offering documents highlighted promising early biomarker data for Patients 1 and 2 through December 31, 2023, while including standard cautionary language about the uncertainty of clinical trials. In June 2024, Kyverna disclosed that Patient 1's disease had recurred between months five and six post-treatment (December 2023 or January 2024) and that Patient 2 had experienced a recurrence of proteinuria between days 67 and 95—adverse data not included in the offering documents. Kyverna's stock price fell from $14.44 to $9.53 on the disclosure day. Plaintiff Clement Matthys purchased shares on the secondary market between June and July 2024 and filed a putative class action asserting claims under Sections 11, 12(a)(2), and 15 of the Securities Act. The court previously dismissed the first amended complaint with leave to amend; defendants moved to dismiss the second amended complaint.
The second amended complaint relies on statements from three confidential witnesses—former Kyverna employees involved in the KYSA-1 trial—to support the inference that the adverse data was reasonably discoverable before the February 8, 2024 IPO. Former Employees #1 and #2, a project manager and a medical science liaison, stated they did not learn of Patient 1's relapse until the June 2024 public disclosure but that such information would normally have been shared with them. Former Employee #3, a Clinical Trial Manager responsible for ensuring timely data transmission from study sites, indicated that patient test results were typically available within roughly a week of recording and that Kyverna could expedite entry by contacting site coordinators. The complaint also notes that Patient 2's data for three biomarkers was reported through day 95 in the offering documents, while proteinuria data was reported only through day 67, though the adverse proteinuria data (days 67–95) must have been available simultaneously.
The Court’s Holding
The court denied the motion to dismiss the Section 11 claim. Section 11 imposes virtually absolute liability on issuers for material misstatements or omissions in a registration statement, with no scienter requirement; even innocent or negligent omissions suffice. Defendants conceded materiality but argued plaintiff failed to plead the adverse data was known or reasonably available before the IPO. The court rejected a knowledge requirement as inconsistent with Section 11's negligence standard. Instead, the inquiry is whether defendants could have reasonably discovered the information. The court found the second amended complaint plausibly alleges such discoverability: the trial involved only three patients, making any adverse data highly significant; Former Employee #3's statements support an inference that Kyverna could have obtained Patient 1's relapse data (which occurred by January 12, 2024) by contacting the site coordinator before the February 8 IPO; and the fact that Patient 2's other biomarker data through day 95 was included in the offering documents supports a plausible inference that the adverse proteinuria data from the same period was also available and could have been discovered.
The court held the Section 15 control-person claim rises or falls with the primary Section 11 violation. Because the Section 11 claim survives, the Section 15 claim is adequately alleged. The court dismissed the Section 12(a)(2) claim with prejudice and without leave to amend, adhering to its prior ruling that Matthys, as a secondary-market purchaser, cannot satisfy the direct-purchaser requirement for Section 12(a)(2) liability. Matthys acknowledged the claim was reasserted only to preserve it for appeal.
Key Takeaways
- Section 11 liability does not require scienter; a plaintiff need only plausibly allege a material omission in a registration statement and that the issuer could have reasonably discovered the omitted information before the offering.
- Confidential witness allegations about internal data-flow processes can support a plausible inference that adverse clinical data was reasonably discoverable by the issuer before an IPO, even if no employee actually knew of it.
- When an issuer selectively includes favorable clinical data through a certain timepoint, the omission of unfavorable data for the same patients and time period supports an inference that the unfavorable data was available and discoverable.
- A Section 15 control-person claim survives if the underlying primary violation (here, Section 11) is adequately pleaded.
- Secondary-market purchasers cannot maintain Section 12(a)(2) claims, which require a direct purchaser-seller relationship.
Why It Matters
This decision reinforces the plaintiff-friendly framework of Section 11 in the Ninth Circuit, confirming that issuers cannot avoid liability for material omissions in IPO registration statements merely by showing they lacked actual knowledge of adverse information. The court's emphasis on reasonable discoverability—particularly in small clinical trials where data flows are tightly controlled—signals that biopharmaceutical companies must implement robust processes to ensure all material clinical data is captured and disclosed before going public. The ruling also illustrates how confidential witness allegations about operational practices can bridge the gap between an omission's existence and its discoverability at the pleading stage.