Soe v. Progenity, Inc.

• Court: District Court, S.D. California
• Decided: January 13, 2023
• Docket: 3:20-cv-01683
• Status: Unknown

Opinion

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 Case No.: 3:20-cv-01683-RBM-AHG IN RE PROGENITY, INC. SECURITIES

12 LITIGATION ORDER GRANTING DEFENDANTS’ 13 MOTION TO DISMISS THE SECOND AMENDED COMPLAINT 14

15 [Doc. 52] 16 17 On November 15, 2021, Defendants Progenity, Inc., Harry Stylli, Eric d’Esparbes, 18 Jeffrey Alter, John Bigalke, Jeffrey Ferrell, Brian L. Kotzin, Samuel Nussbaum, Lynne 19 Powell, Piper Sandler & Co., Wells Fargo Securities, LLC, Robert W. Baird & Co. 20 Incorporated, Raymond James & Associates, Inc., and BTIG, LLC (“Defendants”) filed a 21 Motion to Dismiss the Second Amended Complaint (“Motion”). (Doc. 52.) On January 22 14, 2022, Plaintiffs Lin Shen, Lingjun Lin and Fusheng Lin (“Plaintiffs”) filed an 23 opposition to the Motion. (Doc. 54.) Defendants filed a reply on February 22, 2022. (Doc. 24 55.) On August 10, 2022, Plaintiffs filed a Statement of Recent Authority. (Doc. 59.) 25 After being granted leave to respond by the Court, Defendants filed a Response to 26 Plaintiffs’ Statement of Recent Authority. (Doc. 62.) 27 For the reasons discussed below, Defendants’ Motion is GRANTED. 28 / / / 1 I. BACKGROUND 2 A. Parties 3 Plaintiffs’ second amended complaint (“SAC”) alleges various securities violations 4 by Defendants, who may be organized in three groups: (1) Progenity; (2) Harry Stylli, Eric 5 d’Esparbes, Jeffrey Alter, John Bigalke, Jeffrey Ferrell, Brian L. Kotzin, Samuel 6 Nussbaum, and Lynne Powell (the “Individual Defendants”); and (3) Piper Sandler & Co., 7 Wells Fargo Securities, LLC, Robert W. Baird & Co. Incorporated, Raymond James & 8 Associates, Inc., and BTIG, LLC (the “Underwriter Defendants”). (Doc. 49 at 13–19.) 9 Defendant Progenity is a biotechnology company based in San Diego, California 10 that develops and commercializes molecular testing products and precision medicine 11 applications, including “in vitro molecular tests designed to assist parents in making 12 informed decisions related to family planning, pregnancy, and complex disease diagnosis.” 13 (Id. at 7.) Purchasers of Progenity’s securities claim that they are entitled to damages 14 caused by Progenity’s allegedly false and misleading Registration Statement issued in 15 connection with its June 2020 Initial Public Offering (“IPO”). (Id. at 6.) At the time of 16 the IPO, Progenity’s two most successful products were its Innatal and Preparent tests, 17 which screen for fetal chromosomal conditions and mutations that cause genetic diseases, 18 respectively. (Id. at 7.) 19 At all relevant times, Defendant Stylli served as Progenity’s Chief Executive Officer 20 and Chairman of the Board of Directors, and Defendant d’Esparbes served as Progenity’s 21 Chief Financial Officer. (Id. at 13–14.) Defendants Alter, Bigalke, Ferrell, Kotzin, 22 Nussbaum, and Powell served as members of Progenity’s Board of Directors. (Id. at 14– 23 17.) All Individual Defendants signed (or authorized the signing of) the Registration 24 Statement issued in connection with Progenity’s IPO, “reviewed and helped prepare the 25 Registration Statement,” and “participated in the solicitation and sale of [Progenity’s] 26 common stock to investors in the IPO for their own financial benefit and the financial 27 benefit of Progenity.” (Id. at 17.) 28 / / / 1 Defendants Piper Sandler, Wells Fargo, Baird, Raymond James, and BTIG are 2 financial services companies that acted as underwriters for Progenity’s IPO. (Id. at 17– 3 19.) The Underwriter Defendants collectively “sold more than 6.6 million Progenity shares 4 in the IPO at $15 per share and shared $7 million in underwriting discounts and 5 commissions.” (Id. at 19.) According to the SAC, the Underwriter Defendants failed to 6 “conduct adequate due diligence in connection with the IPO and the preparation of the 7 Registration Statement,” thereby leading to the class’ harm. (Id.) 8 Lead Plaintiffs Lin Shen, Lingjun Lin, and Fusheng Lin bring this action on behalf 9 of a putative class of investors who purchased or otherwise acquired Progenity common 10 stock pursuant and/or traceable to the Registration Statement issued in connection with 11 Progenity’s IPO. (Id. at 6.) 12 B. Factual Background 13 On May 27, 2020, Progenity filed a Form S-1 Registration Statement with the 14 Securities and Exchange Commission (“SEC”) registering Progenity’s common stock in 15 preparation for its IPO. (Id. at 64.) Progenity subsequently filed four amendments to the 16 Registration Statement on June 4, June 15, and June 18, 2020, respectively (filing two 17 amendments on the last date). (Id.) On June 22, 2020, Progenity filed a Form 424B4 18 Prospectus with the SEC, which was incorporated into the Registration Statement. (Id.) 19 The Registration Statement, including all amendments and the Prospectus, took effect on 20 June 18, 2020. (Id. at 6, 64.) 21 Progenity conducted its IPO from June 19 through June 23, 2020, during which it 22 issued and sold 6,666,667 shares of its common stock at a price to the public of $15.00 per 23 share. (Id. at 64.) The IPO generated over $100 million in gross offering proceeds and 24 approximately $88.7 million in net proceeds for Progenity. (Id.) 25 On August 13, 2020, Progenity filed a press release and slide deck with the SEC 26 reporting its second quarter 2020 financial results. (Id. at 65.) The materials filed stated 27 that Progenity’s “second quarter revenues reflected a $10.3 million accrual for refunds to 28 government payors.” (Id.) In an investor call later that day, Stylli explained that a 1 commissioned third-party review of Progenity’s coding and billing processes revealed that 2 Progenity had “not appropriately transitioned the implementation of the new billing 3 requirements for larger carrier screening panels, which were introduced in early 2019.”1 4 (Id.) Because of these billing errors, Progenity “received an overpayment of approximately 5 $10.3 million from government payors during 2019 and early 2020.” (Id.) 6 On August 14, 2020, Progenity filed its Form 10-Q for the second quarter of 2020 7 with the SEC. (Id. at 65.) The Form 10-Q confirmed that Progenity accrued $10.3 million 8 for refunds to government payors during the second quarter of 2020. (Id.) The filing 9 further stated that Progenity’s deadline to “report and return the overpayment to the 10 government programs is 60 days from the time the overpayment was determined and 11 quantified,” so Progenity “expects to repay this amount to the relevant government 12 programs by early October 2020.” (Id. at 66.) According to Plaintiffs, that same day that 13 Progenity filed its Form 10-Q, its stock price declined by $1.24 per share. (Id. at 69.) 14 On October 29, 2020, Progenity filed a press release with the SEC reporting 15 preliminary third quarter 2020 revenue and test volumes, and Plaintiffs argue the press 16 release indicated “a dramatic decline from the first and second quarter [average selling 17 prices].” (Id. at 71–72.) “In the three trading sessions following Progenity’s October 29, 18 2020 disclosures, Progenity’s stock price declined by $3.42 per share.” (Id. at 72.) 19

20 21 1 Progenity’s Form 10-Q for the second quarter of 2020 explains that in the U.S., the “American Medical Association (‘AMA’) generally assigns specific billing codes for 22 laboratory tests under a coding system known as Current Procedure Terminology (‘CPT’), 23 which we and our ordering healthcare providers must use to bill and receive reimbursement for our molecular tests.” (Doc. 49 at 66.) The Registration Statement states that “effective 24 January 1, 2019, the AMA approved the use of a CPT code for expanded carrier screening 25 tests, which may . . . cause reimbursement for our Preparent expanded carrier screening tests to decline.” (Id. at 119.) Plaintiffs allege that following this AMA approval, 26 Progenity was required to bill its Preparent tests under a new CPT code beginning in 27 January 2019. (Id. at 34.) However, Plaintiffs claim that Progenity did not update its billing practices until early 2020, thereby resulting in a $10.3 million overpayment for 28 1 Plaintiffs argue that Defendants violated their disclosure obligations because the 2 “Registration Statement for the IPO contained untrue statements of material fact, omitted 3 material facts necessary to make the statements contained therein not misleading, and failed 4 to make the necessary disclosures required under the rules and regulations governing its 5 preparation.” (Id. at 9.) Specifically, Plaintiffs ague: 6 The Registration Statement failed to disclose that (i) Progenity had improperly billed government payors for Preparent tests beginning in 2019 and ending in 7 or before “early 2020,” (ii) there was a high probability that Progenity had 8 received, and would have to refund, a material amount of overpayments from government payors for Preparent tests, (iii) in February 2020 Progenity ended 9 the illegal marketing practice on which the competitiveness of its business 10 depended, and (iv) Progenity was presently suffering from known negative trends in test volumes, [average selling prices], and revenues. 11

12 (Id. at 9–10.) 13 C. Procedural Background 14 On December 3, 2020, the Court consolidated two related securities class actions 15 against Progenity and appointed Lin Shen, Lingjun Lin, and Fusheng Lin as Lead Plaintiffs. 16 (Doc. 33.) Plaintiffs subsequently filed a first amended complaint (“FAC”) on February 4, 17 2021, alleging violations of Sections 11 and 15 of the Securities Act of 1933 (“Securities 18 Act”). (Doc. 38.) On April 5, 2021, Defendants filed a motion to dismiss the FAC (Doc. 19 40), and on September 1, 2021, the Court granted the request and allowed Plaintiffs leave 20 to amend (Doc. 48). 2 Plaintiffs filed the SAC on September 22, 2021. (Doc. 48.) 21 On November 15, 2021, Defendants moved to dismiss the SAC. (Doc. 52.) 22 Defendants again argue the SAC should be dismissed for (1) failure to plead a materially 23

24 25 2 The September 1, 2021 order granting Defendants’ Motion to Dismiss Plaintiffs’ FAC was issued by District Judge Cathy Ann Bencivengo. (See Doc. 48.) This case was 26 transferred to District Judge Linda Lopez on January 3, 2022 and subsequently transferred 27 to the undersigned on April 6, 2022. (See Docs. 53, 56.) Accordingly, the undersigned hereby incorporates by reference various findings in Judge Bencivengo’s September 1, 28 1 false or misleading statement or omission under Section 11 of the Securities Act; (2) failure 2 to plead a violation of Items 303 and 105 of the U.S. SEC Regulation S-K; and (3) failure 3 to plead control person liability under Section 15 of the Securities Act. (Doc. 52–1 at 15, 4 29–30.) In particular, Defendants state the SAC alleges many of the same arguments the 5 Court previously rejected and that “[t]he SAC includes only one new theory: that Progenity 6 failed to disclose the ‘decision’ in February 2020 to end an allegedly improper marketing 7 practice.” (Id. at 13.) Defendants assert the new theory also fails as a matter of law. (Id. 8 at 6, 25–28.) 9 II. LEGAL STANDARD 10 Pursuant to Federal Rule of Civil Procedure (“Rule”) 12(b)(6), an action may be 11 dismissed for failure to allege “enough facts to state a claim to relief that is plausible on its 12 face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim has facial 13 plausibility when the plaintiff pleads factual content that allows the court to draw the 14 reasonable inference that the defendant is liable for the misconduct alleged. The 15 plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than a 16 sheer possibility that a defendant acted unlawfully.” Ashcroft v. Iqbal, 556 U.S. 662, 678 17 (2009) (internal citations omitted). For purposes of ruling on a Rule 12(b)(6) motion, the 18 Court “accept[s] factual allegations in the complaint as true and construe[s] the pleadings 19 in the light most favorable to the nonmoving party.” Manzarek v. St. Paul Fire & Marine 20 Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). 21 However, the Court is “not bound to accept as true a legal conclusion couched as a 22 factual allegation.” Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 555). Nor is the 23 Court “required to accept as true allegations that contradict exhibits attached to the 24 Complaint or matters properly subject to judicial notice, or allegations that are merely 25 conclusory, unwarranted deductions of fact, or unreasonable inferences.” Daniels-Hall v. 26 Nat’l Educ. Ass’n, 629 F.3d 992, 998 (9th Cir. 2010). “In sum, for a complaint to survive 27 a motion to dismiss, the non-conclusory factual content, and reasonable inferences from 28 that content, must be plausibly suggestive of a claim entitling the plaintiff to relief.” Moss 1 v. U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 2009) (quotation marks omitted). 2 III. DISCUSSION 3 A. Request for Judicial Notice 4 A court generally cannot consider materials outside the pleadings on a motion to 5 dismiss for failure to state a claim. FED. R. CIV. P. 12(d). A court may, however, consider 6 materials subject to judicial notice without converting the motion to dismiss into one for 7 summary judgment. Barron v. Reich, 13 F.3d 1370, 1377 (9th Cir. 1994). Under Federal 8 Rule of Evidence 201(b), a court may take judicial notice, either on its own accord or by a 9 party’s request, of facts that are not subject to reasonable dispute because they are (1) 10 “generally known within the trial court’s territorial jurisdiction; or (2) can be accurately 11 and readily determined from sources whose accuracy cannot reasonably be questioned.” 12 FED. R. EVID. 201(b). A court may also take judicial notice of “matters of public record 13 without converting a motion to dismiss into a motion for summary judgment.” Lee v. City 14 of Los Angeles, 250 F.3d 668, 689 (9th Cir. 2001) (internal citations omitted). Finally, 15 under the incorporation by reference doctrine, courts may “take into account documents 16 whose contents are alleged in a complaint and whose authenticity no party questions, but 17 which are not physically attached to the [plaintiff’s] pleading.” Davis v. HSBC Bank 18 Nevada, N.A., 691 F.3d 1152, 1160 (9th Cir. 2012) (internal quotations and citations 19 omitted). The incorporation by reference doctrine “treats certain documents as though they 20 are part of the complaint itself,” Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 1002 21 (9th Cir. 2018), so long as “the plaintiff refers extensively to the document or the document 22 forms the basis of the plaintiff’s claim.” United States v. Ritchie, 342 F.3d 903, 907 (9th 23 Cir. 2003). 24 Defendants request the Court take judicial notice of three exhibits: (1) a copy of 25 Progenity stock prices from June 19, 2020 to November 10, 2021, as obtained from Yahoo! 26 Finance (Ex. A); (2) an excerpt from the Financial Accounting Standards Board’s 27 (“FASB”) Accounting Standards Codification (“ASC”) 606 (Ex. B); (3) and excerpts from 28 Progenity’s Prospectus on Form 424B4, dated June 19, 2020, and filed with the SEC on 1 June 22, 2020 (Ex. C). (Doc. 52–2 at 4, 17, 19.) Plaintiffs do not oppose Defendants’ 2 request for judicial notice “to the extent that the Court takes notice of the fact those 3 documents exist and what those documents say, but not for the truth of the factual matters 4 stated therein.” (Doc. 54 at 8.) 5 The Court takes judicial notice of Progenity’s stock price history in Exhibit A, 6 although that history does not affect the Court’s analysis for purposes of the present motion. 7 See In re Atossa Genetics Inc. Sec. Litig., 868 F.3d 784, 799 (9th Cir. 2017) (“historical 8 stock prices are not subject to reasonable dispute”) (citing FED. R. EVID. 201(b)). The 9 Court also takes judicial notice of ASC 606 in Exhibit B as a publicly available material 10 taken from a “source whose accuracy cannot reasonably be questioned,” the FASB. FED. 11 R. EVID. 201(b). Finally, the Court takes judicial notice of Progenity’s Form 424B4 12 Prospectus in Exhibit C, filed with the SEC on June 22, 2020 in its entirety as it is a matter 13 of public record and as a document forming the basis of Plaintiffs’ claims. See Ritchie, 14 342 F.3d at 907; see also In re Stac Elec. Sec. Litig., 89 F.3d 1399, 1405 n.4 (9th Cir. 1996) 15 (noting that consideration of “the full text of the Prospectus, including portions which were 16 not mentioned in the complaint[],” is appropriate in the context of a motion to dismiss). 17 B. Section 11 Claim 18 Plaintiffs’ first cause of action is brought against all Defendants for alleged 19 violations of Section 11 of the Securities Act. Section 11 imposes liability where a 20 registration statement “contain[s] an untrue statement of a material fact or omit[s] to state 21 a material fact required to be stated therein or necessary to make the statements therein not 22 misleading.” 15 U.S.C. § 77k(a). To prevail on a Section 11 claim, the plaintiff must 23 demonstrate “(1) that the registration statement contained an omission or 24 misrepresentation, and (2) that the omission or misrepresentation was material, that is, it 25 would have misled a reasonable investor about the nature of his or her investment.” In re 26 Daou Sys., Inc. Sec. Litig., 411 F.3d 1006, 1027 (9th Cir. 2005) (citing Stac Elec., 89 F.3d 27 at 1403–04). “No scienter is required for liability under § 11; defendants will be liable for 28 innocent or negligent material misstatements or omissions.” Id. (internal citations 1 omitted). 2 Section 11’s omissions clause “affords a cause of action only when an issuer’s failure 3 to include a material fact has rendered a published statement misleading.” Omnicare, Inc. 4 v. Laborers Dist. Council Const. Indus. Pension Fund, 575 U.S. 175, 194 (2015). In other 5 words, an actionable omission “must affirmatively create an impression of a state of affairs 6 that differs in a material way from the one that actually exists.” Brody v. Transitional 7 Hospitals Corp., 280 F.3d 997, 1006 (9th Cir. 2002). The plaintiff must also “demonstrate 8 that the omitted information existed at the time the registration statement became 9 effective.” Rubke v. Capitol Bancorp Ltd., 551 F.3d 1156, 1164 (9th Cir. 2009). 10 Plaintiffs’ Section 11 claim is based on five allegedly material omissions from 11 Progenity’s Registration Statement: (1) that Progenity had overbilled government payors 12 for Preparent tests and would be required to refund them at least $10.3 million; (2) that 13 Progenity was experiencing a trend of decreasing test volumes; (3) that Progenity was 14 experiencing a trend of decreasing average selling prices for tests; (4) that Progenity was 15 experiencing a trend of decreasing revenues; (5) and that Progenity discontinued an alleged 16 illegal marketing practice on which its business depended. (Doc. 49 at 89–121.) Plaintiffs 17 identify various statements in the Registration Statement that they allege were 18 consequently “materially false and misleading when made” because of Defendants’ failure 19 to disclose the foregoing facts. (Id.) Plaintiffs claim that these omissions also violate Items 20 105 and 303 of Regulation S-K, which they argue constitutes another basis for liability 21 22 23

24 25 3 While Section 11 does not contain an element of fraud, a plaintiff may be subject to Rule 9(b)’s particularity requirement if the complaint “sounds in fraud.” Daou, 411 F.3d at 26 1027. Defendants argue that Plaintiffs’ Section 11 claim sounds in fraud and therefore 27 must satisfy the heightened pleading standards of Rule 9(b). (Doc. 52–1 at 13–14.) The Court need not address whether Plaintiffs’ Section 11 claims sound in fraud because the 28 1 under Section 11. 2 Defendants counter that “Progenity had no obligation to disclose the overbilling of 3 some government payors until the existence and amount of the overbilling became known, 4 and Plaintiffs plead no facts demonstrating that the $10.3 million liability was known at 5 the time of the IPO.” (Doc. 52–1 at 6–7.) Further, Defendants claim that the Registration 6 Statement specifically warned investors that Progenity could be required to reimburse 7 government payors who challenged its billing practices, thereby making any alleged 8 omission not misleading. (Id. at 18.) Defendants also argue that any alleged omission of 9 negative trend information did not render the Registration Statement misleading because 10 the information Progenity disclosed “[made] clear that the [Progenity]’s testing volumes 11 and other financial metrics were declining and might not recover.” (Id. at 7.) Finally, 12 Plaintiffs provide “no factual support” for their conclusion that Progenity’s marketing 13 practices were unlawful and similarly does not demonstrate how an alleged shift in the 14 marketing strategy created any false or misleading statement. (Id.) The Court addresses 15 each category of alleged omissions in turn. 16 a. $10.3 Million Refund Liability to Government Payors 17 First, Plaintiffs claim that Defendants violated Section 11 by failing to disclose that 18 Progenity had overbilled government payors for Preparent tests, and that “there was a high 19 probability that Progenity had received, and would have to refund, a material amount of 20 overpayments.” (Doc. 49 at 89.) Plaintiffs claim that “these material facts existed at the 21 time of the IPO, were necessary to make the statements in the Registration Statement not 22 misleading, and were required to be included in the Registration Statement.” (Id.) 23 Plaintiffs also argue that statements in the Registration Statement concerning Progenity’s 24 revenue and liabilities were misleading because they do not account for the $10.3 million 25

26 27 4 The parties dispute whether a violation of Item 303 of Regulation S-K can give rise to a Section 11 claim. (Doc. 52–1 at 29; Doc. 54 at 30.) Because the Court finds that Plaintiffs 28 1 liability and revenue reversal. (Id. at 91–96.) Plaintiffs contend that Progenity failed “to 2 account for loss contingencies relating to its Preparent billing and make required qualitative 3 disclosures, which rendered numerous statements in the Registration Statement materially 4 false and misleading.” (Id. at 96–97.) Finally, Plaintiffs argue that the Registration 5 Statement contained misleading risk factor disclosures regarding payors seeking 6 reimbursement because the risks portrayed as hypothetical had already materialized by the 7 time of the IPO. (Id. at 101.) Plaintiffs believe these alleged misleading statements and 8 omissions would be highly material to a reasonable investor. (Id. at 104.) 9 Plaintiffs suggest that Progenity’s improper billing of government payors was a 10 “known trend” and that “there was a high probability that Progenity had received, and 11 would have to refund, a material amount of overpayments.” (Id. at 90–91.) Plaintiffs 12 explain that “Progenity improperly billed government payors for Preparent tests beginning 13 in 2019, but identified and stopped this practice in or before early 2020, prior to the IPO,” 14 which was conducted from June 19 through June 23, 2020. (Id. at 39, 64.) Plaintiffs 15 contend that “[h]aving identified and ceased its improper billing of government payors for 16 Preparent tests, Progenity had ample information that would have allowed it to reasonably 17 estimate the amount, or at least the magnitude, of the resulting overpayments.” (Id. at 46.) 18 Further, Plaintiffs argue that Progenity settled with government agencies in March 2020 to 19 resolve allegations of overbilling government payors for Innatal tests and, thus, “Progenity 20 had information prior to the IPO which showed that government payors would seek to 21 recoup amounts of overpayments resulting from improper billing by failing to effectively 22 transition to a new CPT code.” (Id. at 49.) 23 However, the Court finds Plaintiffs have not demonstrated that the alleged omitted 24 information—that Progenity had overbilled government payors and would need to refund 25 $10.3 million in overpayments—“existed at the time the registration statement became 26 effective.” Rubke, 551 F.3d at 1164. Plaintiffs point to the Registration Statement to 27 establish that at the time of the IPO “Progenity was already aware of the CPT code that 28 became effective in 2019 for Progenity’s Preparent tests.” (Doc. 49 at 40.) However, 1 Defendants argue that, as stated in Progenity’s Form 10-Q filed August 14, 2020, the 2 overpayment was not “determined and quantified” until August 2020 following a third- 3 party review of Progenity’s coding and billing processes. (Doc. 52–1 at 10–11, 18.) Thus, 4 the scope of the potential overpayment was not determined until nearly two months after 5 the June 2020 IPO, “but before [Progenity’s] second quarter financial statements were 6 prepared.” (Id. at 11.) Publicly reporting companies have at least 40 days to file Forms 7 10-Q following the end of a fiscal quarter, and generally “need time to audit [financial] 8 data before including it in any public materials.” Berg v. Velocity Fin., Inc., No. 2:20-cv- 9 06780-RGK-PLA, 2021 WL 268250, at *5 n.1 (C.D. Cal. Jan. 25, 2021); see 17 C.F.R. § 10 240.13a–13. Thus, as the Court previously held, Defendants were under no obligation to 11 audit and report their second quarter 2020 financial results prior to the end of that fiscal 12 quarter. (See Doc. 48 at 11); see also In re Restoration Robotics, Inc. Sec. Litig., 417 F. 13 Supp. 3d 1242, 1254 (N.D. Cal. 2019) (“omissions are actionable only if a defendant has a 14 duty to disclose information and fails to do so”) (citing Basic Inc. v. Levinson, 485 U.S. 15 224, 239 n.17 (1988)). 16 Plaintiffs SAC includes allegations by former Progenity employees’ (“CWs”) who 17 describe their experiences working for Progenity to show that Defendants were aware of 18 the overbilling (see Doc. 49), which Defendants scrutinize stating that “Plaintiffs rely 19 entirely on CW statements that Progenity had access to unspecific ‘real-time’ data 20 regarding its billing and reimbursement practices, and that [Progenity] had audited its 21 processes beginning in late 2019.” (Doc 52–1 at 17.) However, as the Court previously 22 noted, “Defendants were under no obligation to disclose their real-time revenue data at the 23 time that the Registration Statement took effect.” (Doc. 48 at 22.) Defendants state that 24 “Progenity’s refund liability did not exist until it was calculated, and it was not ‘determined 25 and quantified’ until nearly two months after the IPO and still longer after May 27, 2020” 26 when Progenity filed a Form S-1 Registration Statement with the SEC registering 27 Progenity’s common stock in preparation for its IPO. (Doc. 52–1 at 17; see Doc. 49 at 64.) 28 While Plaintiffs speculate that Defendants became aware of their overbilling in 1 “early 2020,” the Court cannot assume that Defendants could both determine Progenity 2 had probably incurred a refund liability and reasonably estimate the loss amount before 3 issuing its financial statements for the first quarter of 2020.5 Therefore, Plaintiffs have 4 presented no basis for inferring that Defendants knew or reasonably could have known 5 about the $10.3 million refund liability by the time that the Registration Statement took 6 effect. 7 Plaintiffs’ allegations indicate that, at the very least, Defendants were aware of the 8 AMA’s implementation of a new billing code for Preparent tests by the time of the IPO.6 9 However, Defendants’ awareness that the Preparent billing code had changed in January 10 2019, without more, does not warrant the conclusory deduction that Progenity’s overbilling 11 and $10.3 million refund liability was knowable by the time the Registration Statement 12 took effect. See Daniels-Hall, 629 F.3d at 998. Moreover, the fact that Defendants had 13 previously settled with government agencies to resolve allegations related to Innatal 14 overbilling does not necessarily relate to Preparent overbilling discovered later. Plaintiffs 15 still have not established that Defendants knew or reasonably could have known they had 16 overbilled for Preparent tests by the time the Registration Statement took effect. 17 Finally, Plaintiffs argue that various statements in the Registration Statement were 18 19 5 Plaintiffs also claim that Progenity wrongfully included “variable consideration” in its 20 revenue reported in the Registration Statement, although it was likely to reverse $10.3 21 million of that revenue for refunds. (Doc. 49 at 32–33.) Under ASC 606, estimates of variable consideration are recognized as revenue “only to the extent that it is probable that 22 a significant reversal in the amount of cumulative revenue recognized will not occur when 23 the uncertainty . . . is subsequently resolved.” (ACCT. STANDARDS CODIFICATION § 606- 10-05-04-c (FIN. ACCT. STANDARDS BOARD 2019).) Plaintiffs’ limited allegations do not 24 indicate that Defendants had reason to believe a “significant reversal in the amount of 25 cumulative revenue recognized” would occur at the time the Registration Statement took effect. Therefore, the Court declines to find Section 11 liability on this basis. 26 6 The Registration Statement itself states that “effective January 1, 2019, the AMA 27 approved the use of a CPT code for expanded carrier screening tests, which may . . . cause reimbursement for our Preparent expanded carrier screening tests to decline.” (Doc. 49 at 28 1 “materially false and misleading” because the risk factor disclosure “merely stated in 2 hypothetical terms that the new CPT code ‘may’ cause a decline in Preparent 3 reimbursement.” (Doc. 49 at 101.) Specifically, the Registration Statement warned that 4 “payors may seek refunds of amounts that they claim were inappropriately billed to a 5 specified CPT code”; “commercial third-party payors may . . . seek repayment from us of 6 amounts previously reimbursed”; and “[t]hird-party payors may decide to deny payment 7 or recoup payment for testing . . . for which they have otherwise overpaid, and we may be 8 required to refund reimbursements already received . . . [a]ny of these outcomes . . . could 9 have a material and adverse effect on our business, operating results, and financial 10 condition.” (Id. at 101–03.) Plaintiffs’ claims regarding Defendants’ risk disclosures fail 11 for the same reason discussed above: Plaintiffs fail to plead anything beyond conclusory 12 assertions to establish that the risk of refunding government payors had materialized by the 13 time the Registration Statement took effect. See In re Pivotal Sec. Litig., No. 3:19-cv- 14 03589-CRB, 2020 WL 4193384, at *6 (N.D. Cal. July 21, 2020) (“[t]he Ninth Circuit has 15 noted that ‘risk factors’ are not actionable without further factual allegations indicating that 16 the risks had already ‘come to fruition’”) (citing Siracusano v. Matrixx Initiatives, Inc., 17 585 F.3d 1167, 1181 (9th Cir. 2009), aff’d, 563 U.S. 27). As such, Plaintiffs have failed to 18 adequately allege that these risk factor statements were false or misleading when made. 19 Liability under Section 11 “only attaches for misrepresenting [or omitting] 20 information that was available when the offering materials became effective.” Berg, 2021 21 WL 268250, at *5 (citing In re Stac, 89 F.3d at 1403–04). Accepting all factual allegations 22 in the SAC as true, Plaintiffs’ evidence that the $10.3 million liability was “knowable” at 23 the time of the IPO amounts to no more than speculation. Plaintiffs have not established 24 that Defendants knew or reasonably could have known by June 18, 2020 that they had 25 overbilled and would have to refund $10.3 million to government payors. Moreover, 26 Defendants were under no obligation to audit and report their second quarter 2020 financial 27 results prior to the end of that fiscal quarter. See In re Restoration Robotics, Inc. Sec. Litig., 28 417 F. Supp. 3d at 1254. Plaintiffs have not shown that any financial metrics or related 1 statements in the Registration Statement were false or misleading at the time the Statement 2 took effect. Accordingly, to the extent that Plaintiffs’ Section 11 claim is premised on an 3 alleged omission of the $10.3 million refund liability, it is hereby DISMISSED without 4 prejudice. 5 b. Negative Trends in Test Volume, Average Selling Price, and 6 Revenue 7 Next, Plaintiffs claim that Defendants violated Section 11 by failing to disclose 8 Progenity’s negative trends in test volume, average selling price, and revenue. (Doc. 49 at 9 113–21.) Plaintiffs claim that “these material facts existed at the time of the IPO, were 10 necessary to make the statements in the Registration Statement not misleading, and were 11 required to be included in the Registration Statement but were omitted.” (Id. at 113, 118, 12 120.) The Court analyzes each alleged trend in turn. 13 i. Negative Trend in Test Volume 14 As Plaintiffs point out, the Registration Statement contains “three different versions 15 of the same disclosure relating to Progenity’s test volume growth, each of which was 16 misleading in its own way.” (Id. at 115.) First, Plaintiffs point to a section of the 17 Registration Statement in which Defendants state: 18 Since our inception, we have accessioned approximately 1.5 million tests in the United States and the growth rate of our test volume is accelerating. The 19 figure below shows our test volume growth from 2016 through 2019, as well 20 as the first quarter of 2020, in which quarter we observed volumes largely consistent with the fourth quarter of 2019 despite the challenges presented by 21 the COVID-19 pandemic. We believe our business is resilient and we have 22 observed positive signs of recovery so far.

23 (Id.) Plaintiffs argue that these statements were materially false or misleading when made 24 because they indicated that Progenity’s test volumes were accelerating, but “they failed to 25 disclose that Progenity’s test volumes were sharply lower in April and May of 2020 and 26 were likely to remain depressed due to known trends.” (Id.) Second, Plaintiffs point to a 27 nearly identical statement by Defendants: 28 Since our inception, we have accessioned approximately 1.5 million tests in 1 the United States and the growth rate of our test volume was accelerating over a multi-year period, including early 2020. However, we are currently 2 observing a slowdown in volume growth as a result of the COVID-19 3 pandemic. The figure below shows our test volume growth from 2016 through 2019, as well as the first quarter of 2020, in which quarter we 4 observed volumes largely consistent with the fourth quarter of 2019 despite 5 the challenges presented by the COVID-19 pandemic. We believe our business is resilient and we have observed positive signs of recovery so far. 6

7 (Id. at 115–16.) In looking at this portion of the Registration Statement, Plaintiffs allege 8 “the Registration Statement admitted to ‘a slowdown in volume growth’ rather than 9 accelerating growth, but nonetheless claimed that Progenity was currently experiencing 10 ‘volume growth.’” (Id. at 115.) 11 Next, Plaintiffs reference a section of the Registration Statement in which 12 Defendants state: 13 Beginning in March 2020, we began to observe significant declines in the 14 volumes of our molecular tests as well as the pathology tests conducted by Avero Diagnostics due to the impact of the COVID-19 pandemic and work- 15 from-home policies and other operational limitations mandated by federal, 16 state and local governments as a result of the pandemic. However, we believe our business is resilient and we have observed positive signs of recovery so 17 far. While we are implementing mitigation strategies to address these 18 limitations, such as supporting patients and physicians virtually, there can be no assurance that the rate of decline in our testing volumes will not continue 19 or accelerate in future periods. Our initial assessment of the impact of the 20 COVID-19 pandemic is that our NIPT test volumes have proved more resilient than our carrier screening test volumes; however, the comparative 21 impact may change over time. 22

23 (Id. at 116.) Plaintiffs argue these statements were also materially false and misleading 24 when made because they “misleadingly emphasized resilience and recovery in Progenity’s 25 test volumes, and failed to disclose that Progenity’s test volumes were sharply lower in 26 April and May of 2020 and were likely to remain depressed due to known trends.” (Id.) 27 Additionally, Plaintiffs acknowledge that “the Registration Statement contained a risk 28 factor relating to fluctuations in test volumes and other performance metrics.” (Id.) 1 However, Plaintiffs argue these statements “presented as a mere hypothetical risk that 2 Progenity ‘may’ experience a decrease in test volumes, pricing or revenue, and failed to 3 disclose that Progenity was at the time of the IPO experiencing significant declines for each 4 of these metrics.” (Id.) Plaintiffs also provide that the above statements “were additionally 5 misleading for failing to disclose that Progenity’s decision to end its key illegal marketing 6 practice in February 2020 had, and would foreseeably have, the effect of depressing test 7 volumes, pricing and revenue.” (Id. at 115–17.) The Court notes alleged illegal marketing 8 practices will be discussed in full below. (See infra, pp. 24–26.) Moreover, Plaintiffs 9 contend these negative trends in Progenity’s test volumes were material facts that would 10 be highly material to a reasonable investor. (Id. at 117–18.) 11 Defendants counter that they were under no obligation to disclose their test volume 12 data for the second quarter of 2020 in the Registration Statement. (Doc. 52–1 at 22.) As 13 discussed above, publicly held companies are not required to report the results of a fiscal 14 quarter until at least 40 days following the end of that quarter. See 17 C.F.R. § 240.13a– 15 13. Nor are companies required to disclose all material adverse events to investors—“even 16 if investors would consider the omitted information significant”—so long as the omission 17 does not make the actual statements made misleading. In re Rigel Pharm., Inc. Sec. Litig., 18 697 F.3d 869, 880 n.8 (9th Cir. 2012); accord Police Ret. Sys. of St. Louis v. Intuitive 19 Surgical, Inc., 759 F.3d 1051, 1061 (9th Cir. 2014) (“[w]e have expressly declined to 20 require a rule of completeness for securities disclosures because ‘no matter how detailed 21 and accurate disclosure statements are, there are likely to be additional details that could 22 have been disclosed but were not.’”); see also Brody, 280 F.3d at 1006 (noting that a 23 statement often “will not mislead even if it is incomplete or does not include all relevant 24 facts”). Nevertheless, Defendants’ failure to disclose a negative trend may be actionable 25 under Section 11 if it “affirmatively create[s] an impression of a state of affairs that differs 26 in a material way from the one that actually exists.” Brody, 280 F.3d at 1006; see also In 27 re Rigel Pharm., Inc. Sec. Litig., 697 F.3d at 881 n.10 (finding that public statements were 28 not false or misleading when “the omitted information did not contradict, or render 1 misleading, the original [statements]”). 2 While Plaintiffs allege the above statements “contained three different versions of 3 the same disclosure relating to Progenity’s test volume growth, each of which was 4 misleading in its own way,” the Court disagrees. (See Doc. 49 at 115.) Although the 5 statements have slight inconsistencies between them, a reasonable investor reviewing the 6 Registration Statement in its entirety would not be misled to believe that Progenity’s test 7 volume was increasing at the time of the IPO. As the Court previously noted (see Doc. 8 48), in all three statements, Defendants mention COVID-19’s negative effect on test 9 volume and other challenges they faced because of the pandemic. (Doc. 49 at 115–16.) 10 Defendants expressly warn that “there can be no assurance that the rate of decline in our 11 testing volumes will not continue or accelerate in future periods.” (Id. at 116.) Although 12 Plaintiffs claim that Defendants failed to disclose Progenity’s decreasing test volumes at 13 the time of the IPO, Defendants reiterated several times that they had begun to observe 14 “significant declines in the volumes of our molecular tests as well as the pathology tests” 15 in March 2020. (Id.) The statement that “the growth rate of our test volume is 16 accelerating,” when read in context with the various other statements emphasizing 17 Progenity’s declining test volumes stemming from the pandemic, is insufficient to establish 18 that a reasonable investor would have been misled about the nature of their investment. 19 See Daou Sys., 411 F.3d at 1027. 20 Plaintiffs also argue that Defendants’ statement that “we believe our business is 21 resilient and we have observed positive signs of recovery so far” is false and misleading 22 because it emphasizes resilience and recovery, though Defendants knew at the time that 23 Progenity’s test volumes were likely to remain depressed. (Doc. 49 at 116.) Insofar as 24 Defendants’ statement is a sincere statement of pure opinion, it generally cannot be an 25 “untrue statement of material fact” generating liability under Section 11. 7 Omnicare, 575 26 27 7 The first portion of the sentence at issue—Defendants’ statement that “[w]e believe our 28 1 U.S. at 186. However, liability under Section 11’s false-statement provision follows if the 2 “speaker did not hold the belief she professed” or “if the supporting fact she supplied were 3 untrue.” Id. at 185–86. Thus, to establish a Section 11 claim based on this statement, 4 Plaintiffs must show that Defendants either did not believe their business to be resilient or 5 had not observed any signs of recovery. Plaintiffs have not pleaded facts to support either 6 possibility. 7 Plaintiffs argue that at the time of the IPO, Progenity knew its declining test volume 8 was unlikely to recover, as supported by CW accounts describing their experiences 9 working for Progenity. (See Doc. 49 at 59–60.) Defendants counter that “[t]he conclusory 10 statements attributed to the CWs offer at most anecdotal discussions regarding various 11 Progenity business practices, including coding, billing, and reimbursement.” (Doc. 52–1 12 at 23.) For example, “CW1 and CW2 assert that Progenity’s testing volumes declined in 13 the spring of 2020” and “[o]ther CW allegations merely confirm what the Company 14 disclosed in the Offering Materials—that testing volumes had declined in the period before 15 the IPO.” (Id.) The Court finds Defendants’ disclosures in the Registration Statement, 16 such as “we are currently observing a slowdown in volume growth as a result of the 17 COVID-19 pandemic,” are largely consistent with CW statements. For example, 18 “[a]ccording to CW1, in the spring of 2020 as the COVID crisis began in the United States, 19 Progenity’s testing volume became very low and employees working in the lab had almost 20 no samples coming in.” (Doc. 49 at 59.) CW2 similarly states that her territory sales 21 volume “went down significantly during the initial COVID lockdown.” (Id. at 60.) These 22 claims are consistent with Defendants’ disclosure that “we are currently observing a 23 slowdown in volume growth as a result of the COVID-19 pandemic.” (Id. at 58–59, 115.) 24 25 optimism, which expresses an opinion that generally cannot be objectively verified. See 26 In re Restoration Robotics, Inc. Sec. Litig., 417 F. Supp. 3d at 1254 (“business puffery or 27 opinion (vague, optimistic statements) are not actionable because they do not ‘induce the reliance of a reasonable investor’”) (citing Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc., 28 1 The remaining CW accounts do not provide any additional support for Plaintiffs’ theory of 2 liability.8 3 The Court finds that Defendants were under no obligation to disclose their real-time 4 test volume data from the second quarter of 2020 at the time that the Registration Statement 5 took effect. See In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1419 (9th Cir. 1994) 6 (holding that company was “under no duty to disclose the precise extent of the anticipated 7 revenue drop” where the “prospectus clearly warned that [the company] expected lower 8 net sales”). Nevertheless, the Registration Statement clearly warned that at the time of the 9 IPO, Progenity had experienced a significant drop in test volume due to the COVID-19 10 pandemic. Defendants also cautioned that they could not guarantee that the decline in test 11 volumes would not continue or even accelerate in the future. Accordingly, Plaintiffs have 12 not established that Defendants made any false statement or omitted to state a material fact 13 necessary to make the other statements in the Registration Statement not misleading. 15 14 U.S.C. § 77k(a). To the extent that Plaintiffs’ Section 11 claim is premised on an alleged 15 omission of Progenity’s negative trend in test volume, it is hereby DISMISSED without 16 prejudice. 17 ii. Negative Trend in Average Selling Price 18 Plaintiffs next claim that the Registration Statement failed to disclose Progenity’s 19 known trend of decreasing average selling prices (“ASPs”). (Doc. 49 at 118.) Plaintiffs 20 define ASP as “Progenity’s revenue from testing divided by the number of such tests.” (Id. 21

22 23 8 CW4 and CW5’s accounts purport to establish that Progenity “had access to real-time data regarding its business.” (Doc. 49 at 60.) Many companies have access to similar data 24 for their businesses. Nevertheless, companies filing registration statements are not required 25 to disclose every shred of data in their possession in real-time, so long as the omission of that data does not render the statements they do share misleading. See In re Rigel Pharm., 26 Inc. Sec. Litig., 697 F.3d at 880 n.8. For the reasons discussed above, Plaintiffs have not 27 established that Defendants had an obligation to share their real-time data, nor that the failure to disclose such data rendered any statement false or misleading to Progenity’s 28 1 at 61.) Plaintiffs contend that Progenity’s decreasing ASP “was reasonably likely to have 2 a material unfavorable impact on net sales and revenues and income from continuing 3 operations.” (Id. at 118.) 4 Upon review of the Registration Statement, the Court cannot locate any disclosures 5 regarding the actual ASP of Progenity’s test offerings.9 Nevertheless, the question 6 presented on a motion to dismiss a Section 11 claim is whether Plaintiffs have plausibly 7 alleged that Defendants’ “failure to include a material fact has rendered a published 8 statement misleading.” See Omnicare, 575 U.S. at 194. The Court finds that Plaintiffs 9 have not pointed to any statements that were rendered misleading by Defendants’ failure 10 to disclose the ASP of Progenity’s tests across any specific period. 11 Plaintiffs identify two statements that they allege were rendered false or misleading 12 by the supposed decline in Progenity’s ASPs which are: (1) that “[i]n response to the 13 COVID-19 pandemic, the Avero Diagnostics laboratory is providing molecular testing for 14 diagnosing COVID-19”; and (2) that “effective January 1, 2019, the AMA approved the 15 use of a CPT code for expanded carrier screening tests, which may similarly cause 16 reimbursement for our Preparent expanded carrier screening tests to decline.” (Doc. 49 at 17 119.) In regard to the first statement, Plaintiffs contend that Defendants “failed to disclose 18 that Progenity’s COVID tests had much lower ASP than its other tests, that Progenity’s 19 core test volumes were in decline in part due to its decision to discontinue its illegal 20 marketing practice, and that Progenity’s revenues and business would be harmed as a result 21 of Progenity’s core tests becoming a smaller portion of its product mix relative to COVID 22 tests.” (Id.) Plaintiffs argue the second statement is materially false and misleading 23 because it presents “a mere hypothetical risk that this CPT code ‘may’ cause Preparent 24 25 9 Defendants note that the Registration Statement contains a single reference to ASP when 26 explaining how Progenity calculates its gross margins: “Higher gross margins reflect the 27 average selling price of our tests, as well as the operating efficiency of our laboratory operations.” (Doc. 52–1 at 24.) However, the Registration Statement does not mention 28 1 reimbursement to decline, while omitting to disclose that Progenity had.” (Id.) 2 As discussed above, a statement often “will not mislead even if it is incomplete or 3 does not include all relevant facts.” Brody, 280 F.3d at 1006. Although the two statements 4 at issue do not mention the allegedly resulting decrease in Progenity’s ASP and revenue, 5 nothing in the statements would be rendered misleading by failing to disclose that 6 information. If Defendants had suggested that this fluctuation in test volumes would not 7 impact Progenity’s ASP or revenue, the statements at issue may well have been misleading. 8 However, the actual statements made did not state or imply anything regarding the fiscal 9 impact of the changes. Defendants’ failure to disclose a potential decrease in ASP and 10 revenue, “even if investors would consider the omitted information significant,” is not 11 actionable insofar as it did not make the actual statements made about test volume 12 fluctuation misleading.10 In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d at 880 n.8. 13 Moreover, although these two statements did not disclose the potential effect of the 14 changes on Progenity’s revenue, the Court finds that they are consistent with other 15 disclosures made in the Registration Statement relating to Progenity’s test volumes and 16 revenue. For example, Defendants disclosed that although the revenue derived from the 17 Innatal and Preparent tests were roughly equal at the time of the IPO, the “ratio may 18 fluctuate over time.” (Progenity, Inc., Prospectus (Form 424B4), at 93 (June 19, 2020).) 19 Defendants also stated that “the high level of competition in our industry could force us to 20 reduce the price at which we sell our products,” and that these pricing pressures “could 21 harm our revenues, operating income, or market share.” (Id. at 20.) It is unlikely that a 22 23 24 10 Plaintiffs also allege that Defendants failed to disclose that around March 2020, 25 Progenity reduced the cash price for both its Preparent and Innatal tests, which Defendants knew would affect ASP in the second quarter of 2020 and beyond. (Doc. 49 at 62.) 26 However, Plaintiffs do not point to any statement made by Defendants that was rendered 27 misleading by the failure to disclose this information. Therefore, the Court finds that Plaintiffs have not stated a plausible claim under Section 11’s omissions clause based on 28 1 reasonable investor reviewing the Registration Statement in its entirety would be misled to 2 believe that Progenity’s ASP would never decrease or that its revenue could not be affected 3 as a result. 4 Plaintiffs have not adequately pleaded that Defendants were required to disclose the 5 alleged negative trend in Progenity’s ASP in order to make the other statements in the 6 Registration Statement not misleading. Accordingly, to the extent that Plaintiffs’ Section 7 11 claim is premised on an alleged omission of Progenity’s negative trend in ASP, it is 8 hereby DISMISSED without prejudice. 9 iii. Negative Trend in Revenue 10 Plaintiffs also claim that the Registration Statement failed to disclose “the decreasing 11 trends in Progenity’s revenue” even though “these material facts existed at the time of the 12 IPO.” (Doc. 49 at 120.) 13 The Court finds Plaintiffs’ broad assertion that Defendants’ failure to disclose a 14 negative trend in revenue rendered the entire Registration Statement false and misleading 15 is insufficient to state a claim. At a minimum, Rule 8 requires that a complaint include “a 16 short and plain statement of the claim showing that the pleader is entitled to relief.” FED. 17 R. CIV. P. 8(a)(2). As the Court has previously noted and repeats throughout this opinion, 18 in order to adequately state a claim under Section 11’s omissions clause, a plaintiff must 19 demonstrate that the defendant’s failure to include a material fact rendered a published 20 statement misleading. Omnicare, 575 U.S. at 194. 21 The Registration Statement discloses negative trends in Progenity’s revenue that 22 Defendants had observed by the time the Registration Statement took effect. Under the 23 section titled “Management’s Discussion and Analysis of Financial Condition and Results 24 of Operations,” Defendants compare the fiscal results of Progenity’s operations from the 25 first quarter of 2019 and the first quarter of 2020. (Progenity, Inc., Prospectus (Form 26 424B4), at 96 (June 19, 2020).) Defendants disclose that Progenity’s revenue for the first 27 quarter of 2020 was down $30.7 million from its revenue for the first quarter of 2019, 28 which it notes was a 64.6% decrease. (Id. at 97.) Further, under the subsection titled “Risks 1 Related to Our Business and Industry,” the Registration Statement states in bold, italicized 2 font: “We have incurred losses in the past, and we may not be able to achieve or sustain 3 profitability in the future.” (Id. at 19.) It then goes on to state that “[i]t is possible that we 4 will not generate sufficient revenue from the sale of our products to cover our costs . . . and 5 achieve or sustain profitability.” (Id.) These disclosures would not mislead a reasonable 6 investor to believe that Progenity’s revenue was increasing or even stable at the time the 7 Registration Statement took effect. 8 Defendants were under no obligation to disclose their real-time revenue data at the 9 time that the Registration Statement took effect. See Worlds of Wonder, 35 F.3d at 1419 10 (holding that company was “under no duty to disclose the precise extent of the anticipated 11 revenue drop” where the “prospectus clearly warned that [the company] expected lower 12 net sales”). Nevertheless, the Registration Statement clearly warned that in the first quarter 13 of 2020, Progenity had experienced a significant drop in revenue as compared to the first 14 quarter of 2019. Accordingly, Plaintiffs have not established that Defendants omitted to 15 state a material fact necessary to make other statements in the Registration Statement not 16 misleading. 15 U.S.C. § 77k(a). To the extent that Plaintiffs’ Section 11 claim is premised 17 on an alleged omission of Progenity’s negative trend in revenue, it is hereby DISMISSED 18 without prejudice. 19 c. Marketing Practices 20 Finally, Plaintiffs’ SAC includes a new allegation that “[n]owhere did the 21 Registration Statement disclose that Progenity had recently ended the illegal marketing 22 practice on which the competitiveness of its business depended.” (Doc. 49 at 106.) 23 However, “this material fact existed at the time of the IPO, was necessary to make the 24 statements in the Registration Statement not misleading, and was required to be included 25 in the Registration Statement.” (Id.) 26 It is Plaintiffs’ position that: 27 Progenity’s February 2020 decision to end its key illegal marketing practice of waiving patient payment amounts made an investment in Progenity 28 1 speculative or risky because, inter alia: (i) this illegal marketing practice had been Progenity’s main selling point for its entire history through February 2 2020, (ii) Progenity’s competitors offered higher quality tests at lower prices, 3 (iii) Progenity’s historical results reflected additional testing and revenue which Progenity would not have achieved absent its illegal marketing 4 practice, (iv) the end of this illegal marketing practice had already resulted in 5 Progenity losing certain customers and angering others, and (v) the end of this illegal marketing practice would make it more difficult for Progenity to obtain 6 new customers in the future. 7 8 (Id. at 107.) Defendants counter that this new theory fails as a matter of law because: (1) 9 Plaintiffs fail to identify any statement in the Offering Materials rendered false or 10 misleading by the omission of details regarding Progenity’s allegedly improper marketing 11 practices, (2) Plaintiffs plead no facts supporting their legal conclusion that Progenity’s 12 marketing practices from April 2018 until February 2020—which they allege were “more 13 disguised and subtle” than prior practices—were unlawful, (3) Plaintiffs plead no facts 14 supporting their premise that there was a change in policy in February 2020, and (4) 15 Plaintiffs’ conclusory allegation that the supposedly improper marketing practices were the 16 reason for the Progenity’s past success is unsupported. (Doc. 52–1 at 26–28.) 17 The Court finds Plaintiffs’ argument that Progenity failed to disclose that it had 18 ended the alleged illegal marketing practice on which the competitiveness of its business 19 depended is insufficient to constitute a Section 11 violation. Plaintiffs’ SAC references 20 several “false and misleading” statements included in the Registration Statement such as 21 “[s]ince 2010, our molecular testing business has achieved consistent year-over-year test 22 volume growth through our robust product portfolio and our strong commercial 23 organization” and “[w]e believe our future success will be driven by continued capture of 24 market share by our molecular testing business and new revenue streams resulting from 25 our diversified product development pipeline, both within and beyond women’s health.” 26 (Doc. 49 at 108.) Plaintiffs claim these statements were materially false and misleading 27 when made because “the volume growth in Progenity’s genetic testing business was driven 28 primarily by Progenity’s illegal marketing practices, which Progenity had ended in 1 February 2020 shortly before the IPO,” and Progenity failed to disclose they ended a 2 marketing practice key to their success. (Id.) However, the Court fails to see how such 3 statements relate to alleged illegal marketing practices. 4 As the Court previously noted (see supra, p. 17), companies are not required to 5 disclose all material adverse events to investors so long as the omission does not make the 6 actual statements made misleading. See Police Ret. Sys. of St. Louis v. Intuitive Surgical, 7 Inc., 759 F.3d 1051, 1061 (9th Cir. 2014) (“[w]e have expressly declined to require a rule 8 of completeness for securities disclosures because ‘no matter how detailed and accurate 9 disclosure statements are, there are likely to be additional details that could have been 10 disclosed but were not.’”); see also Brody, 280 F.3d at 1006 (noting that a statement often 11 “will not mislead even if it is incomplete or does not include all relevant facts”). Progenity 12 had not discussed historical marketing practices and was not required to discuss alleged 13 changes to its marketing strategy. Moreover, Plaintiffs do not sufficiently plead how the 14 alleged improper marketing practices were unlawful. See In re Paypal Holdings, Inc. 15 S’holder Derivative Litig., No. 17-CV-00162-RS, 2018 WL 466527, at *3 (N.D. Cal. Jan. 16 18, 2018) (“[f]ederal securities laws do not impose upon companies a ‘duty to disclose 17 uncharged, unadjudicated wrongdoing’”). Additionally, the Court finds Plaintiffs’ 18 allegation that the improper marketing practice “was its main selling point” is 19 unsubstantiated. (See Doc. 49 at 52.) Plaintiffs reference several accounts of CWs; 20 however, Plaintiffs do not offer any statistical data or further factual support to aid this 21 conclusion. (See id. at 52–53.) 22 Based on the foregoing, to the extent that Plaintiffs’ Section 11 claim is premised on 23 Progenity’s alleged failure to disclose its decision to end improper marketing practices, it 24 is hereby DISMISSED without prejudice. 25 C. Items 303 and 105 Disclosure Obligations 26 Plaintiffs also claim that Defendants violated Section 11 by failing to meet their 27 disclosure obligations under Items 303 and 105 of SEC Regulation S-K. (Doc. 49 at 9, 87– 28 89.) The Court will analyze Items 303 and 105 separately. 1 a. Item 303 2 Item 303 of Regulation S-K requires that registrants describe “any unusual or 3 infrequent events or transactions or any significant economic changes that materially 4 affected the amount of reported income from continuing operations,” as well as “any 5 known trends or uncertainties that have had or that the registrant reasonably expects will 6 have a material favorable or unfavorable impact on net sales or revenues or income from 7 continuing operations.” 17 C.F.R. § 229.303(b)(2)(i)-(ii). Under the SEC’s 1989 release 8 interpreting Item 303(a), a “disclosure duty exists where a trend, demand, commitment, 9 event or uncertainty is both [1] presently known to management and [2] reasonably likely 10 to have material effects on the registrant’s financial condition or results of operation.” 11 Steckman v. Hart Brewing, Inc., 143 F.3d 1293, 1296–97 (9th Cir. 1998). 12 Plaintiffs explain that since Progenity had overbilled government payors for 13 Preparent tests and would be required to refund them at least $10.3 million, and since there 14 was a high probability that Progenity had received, and would have to refund, a material 15 amount of overpayments from government payors for Preparent tests, there “were known 16 trends or uncertainties that had and were reasonably likely to have a material unfavorable 17 impact on net sales and revenues and income from continuing operations.” (Id. at 90.) 18 Moreover, Plaintiffs argue the Registration Statement did not fully disclose decreasing 19 trends in Progenity’s test volumes, average selling prices, and revenues “[h]owever, these 20 material facts existed at the time of the IPO, were necessary to make the statements in the 21 Registration Statement not misleading, and were required to be included in the Registration 22 Statement but were omitted.” (Doc. 49 at 113, 118, 120.) It is Plaintiffs’ position that 23 Progenity’s test volumes, average selling prices, and revenues “constituted a known trend 24 that had and was reasonably likely to have a material unfavorable impact on net sales and 25 revenues and income from continuing operations.” (Id.) Additionally, Plaintiffs contend 26 the Registration Statement failed to disclose that Progenity discontinued its allegedly 27 improper marketing practice on which its business depended. (Id. at 106–07.) Thus, “Item 28 303 of SEC Regulation S-K required Progenity to describe [these] trend[s] in the 1 Registration Statement.” (Id. at 107.) 2 The Court again finds Plaintiffs have not established that Defendants knew or had 3 reason to know of Progenity’s $10.3 million overbilling liability by the time of the IPO. 4 Plaintiffs’ argument that this was a “known trend” at the time the Registration Statement 5 took effect fails, and Plaintiffs cannot prove an Item 303 violation on this basis. As for the 6 negative trends, Defendants disclosed that Progenity was experiencing downturns in test 7 volume and revenue at the time the Registration Statement took effect. As previously 8 explained by the Court (see Doc. 48), while the average selling prices of Progenity’s test 9 offerings was not explicitly disclosed by Defendants, it could easily be calculated from 10 Progenity’s disclosed revenue and test volume data. See In re Dropbox Sec. Litig., No. 19- 11 cv-06348-BLF, 2020 WL 6161502, at *8 (N.D. Cal. Oct. 21, 2020) (rejecting Item 303 12 allegations based on failure to disclose trend of declining revenue growth rate where 13 “[a]nyone with basic mathematical skills could discern” the trend in light of defendant’s 14 disclosure of its annual revenue); see also In re Netflix, Inc. Sec. Litig., No. C04-2978 FMS, 15 2005 WL 1562858, at *6 (N.D. Cal. June 28, 2005) (rejecting Section 11 allegations based 16 on failure to disclose number of subscription cancellations where the “number could be 17 calculated through simple arithmetic using other numbers that were disclosed”). Moreover, 18 “to the extent ‘Progenity’s February 2020 decision to end its key illegal marketing practice 19 of waiving patient payment amounts was a known trend,’ this too was properly disclosed 20 in Progenity’s historical data.” (Doc. 52–1 at 30 (quoting Doc. 49 at 107).) 21 The Court agrees with Defendants that “Item 303 did not require [Progenity] to make 22 future projections based on those trends, as Plaintiffs allege.” See In re Verifone Sec. Litig., 23 784 F. Supp. 1471, 1483 (N.D. Cal. 1992), aff’d sub nom, In re VeriFone Sec. Litig., 11 24 F.3d 865 (9th Cir. 1993) (quoting In re Convergent Techs. Sec. Litig., 948 F.2d 507, 516 25 (9th Cir. 1991), as amended on denial of reh’g (Dec. 6, 1991)) (“Regulation S–K thus 26 governs the disclosure of known historic trends, but does not provide a basis of liability 27 where a corporation fails to ‘disclose’ the future”). 28 Accordingly, Plaintiffs have failed to show that Defendants omitted a known 1 material trend from the Registration Statement. Thus, Plaintiffs’ Section 11 claim 2 predicated on Item 303 violations fails. 3 b. Item 105 4 Item 105 of Regulation S-K requires a “discussion of the material factors that make 5 an investment in the registrant or offering speculative or risky.” 17 C.F.R. § 229.105. 6 Plaintiffs argue that Item 105 required Defendants to include a discussion of the 7 following factors in the Registration Statement, and to explain how they affect Progenity 8 or the stock offered in the IPO: 9 (i) Progenity had improperly billed government payors for Preparent tests beginning in 2019 and ending in or before early 2020, and (ii) there was a high 10 probability that Progenity had received, and would have to refund, a material 11 amount of overpayments from government payors for Preparent tests, made an investment in Progenity speculative or risky. 12

13 (Doc. 49 at 89–90.) Plaintiffs assert that “[t]his trend and these uncertainties had already 14 materially unfavorably affected sales, revenues, and income because Progenity had already 15 stopped its improper billing, thus reducing revenues.” (Id. at 91.) Moreover, Plaintiffs 16 contend that “Progenity’s February 2020 decision to end its key illegal marketing practice 17 of waiving patient payment amounts made an investment in Progenity speculative or 18 risky.” (Id. at 106.) “Item 105 of SEC Regulation S-K required Progenity to include a 19 discussion of this factor in the Registration Statement, and to explain how it affects 20 Progenity or the stock offered in the IPO,” which they failed to do. (Id. at 107.) 21 The Court finds Plaintiffs’ Item 105 claim fails for the same reason as Plaintiffs’ 22 Item 303 claim because Plaintiffs have not established that Defendants knew or had reason 23 to know of the company’s liability at the time the Registration Statement was issued. As 24 noted in the Court’s prior order (see Doc. 48), if Defendants could not have reasonably 25 known about the liability, they could not have discussed it in the Registration Statement as 26 a material factor making an investment in Progenity “speculative or risky.” Moreover, 27 Defendants made various statements in the Registration Statement disclosing the 28 possibility that payors could seek refunds of amounts paid. For example, the Registration 1 Statement stated that “payors may seek refunds of amounts that they claim were 2 inappropriately billed to a specified CPT code” (Doc. 49 at 101); “commercial third-party 3 payors may . . . seek repayment from us of amounts previously reimbursed” (Id. at 102); 4 and “[t]hird-party payors may decide to deny payment or recoup payment for testing . . . 5 for which they have otherwise overpaid, and we may be required to refund reimbursements 6 already received . . . [a]ny of these outcomes . . . could have a material and adverse effect 7 on our business, operating results, and financial condition” (Id. at 102–03). These 8 statements are sufficient to satisfy Item 105’s disclosure requirements. Accordingly, 9 Plaintiffs’ Section 11 claim based on Item 105 violations also fails. 10 D. Section 15 Claim 11 Plaintiffs’ second cause of action alleges violations of Section 15 of the Securities 12 Act against the Individual Defendants. (Id. at 125–27.) Section 15 imposes joint and 13 several liability upon every person who controls any person liable under Section 11. 15 14 U.S.C. § 77o (West). The section provides: 15 Every person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with 16 one or more other persons by or through stock ownership, agency, or 17 otherwise, controls any person liable under sections 77k or 77l of this title, shall also be liable jointly and severally with and to the same extent as such 18 controlled person to any person to whom such controlled person is liable, 19 unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the 20 controlled person is alleged to exist. 21 22 Id. Nevertheless, “[t]here can be no Section 15 violation without an underlying Section 11 23 violation.” In re Ubiquiti Networks, Inc. Sec. Litig., 669 Fed. Appx. 878, 880 (9th Cir. 24 2016). As explained supra, the Court does not find a Section 11 violation and, as such, 25 finds Plaintiffs fail to adequately plead a Section 15 violation. 26 E. Leave to Amend 27 If a court dismisses a complaint for failure to state a claim, it must then determine 28 whether to grant leave to amend. Doe v. United States, 58 F.3d 494, 497 (9th Cir. 1995). 1 “A district court may deny a plaintiff leave to amend if it determines that ‘allegation of 2 other facts consistent with the challenged pleading could not possibly cure the deficiency,’ 3 or if the plaintiff had several opportunities to amend its complaint and repeatedly failed to 4 cure deficiencies.” Telesaurus VPC, LLC v. Power, 623 F.3d 998, 1003 (9th Cir. 2010) 5 (internal quotation marks and citations omitted). In deciding whether justice requires 6 granting leave to amend, factors to be considered include “undue delay, bad faith or 7 dilatory motive on the part of the movant, repeated failure to cure deficiencies by 8 amendments previously allowed, undue prejudice to the opposing party by virtue of 9 allowance of the amendment [or] futility of amendment.” Foman v. Davis, 371 U.S. 178, 10 182 (1962); see also Moore v. Kayport Package Exp., Inc., 885 F.2d 531, 538 (9th Cir. 11 1989). Here, Plaintiffs argue that, if necessary, the Court should grant leave to amend 12 because “Plaintiffs could further supplement their allegations with additional research, 13 witness interviews, and other sources.” (Doc. 54 at 31.) Furthermore, Plaintiffs explain 14 that “after filing the SAC Plaintiffs have obtained documentary evidence, produced to 15 Plaintiffs in response to freedom of information requests to government health care 16 programs, corroborating key allegations, and providing significant additional facts, 17 regarding Progenity’s improper Preparent billing.” (Id. at 31–32.) In considering the 18 Foman factors listed above, the Court GRANTS Plaintiffs leave to amend. The request 19 does not appear to be frivolous or in bad faith. Moreover, the Court does not find 20 amendment will create undue prejudice or delay. 21 IV. CONCLUSION 22 Based on the foregoing, the Court: 23 1. GRANTS Defendants’ Motion. (Doc. 52.) 24 2. DISMISSES Plaintiffs’ SAC for failure to state a claim upon which relief 25 may be granted. 26 3. GRANTS Plaintiffs twenty-one (21) days leave from the date of this Order in 27 which to file an amended complaint which cures all the deficiencies of pleading noted. If 28 Plaintiffs choose not to file an amended complaint by then, the Clerk of Court shall close 1 ||this case. See Lira v. Herrera, 427 F.3d 1164, 1169 (9th Cir. 2005) (“[h]f a plaintiff does 2 ||not take advantage of the opportunity to fix his complaint, a district court may convert the 3 || dismissal of the complaint into dismissal of the entire action’’). 4 IT IS SO ORDERED. 5 || DATE: January 13, 2022 eth Beaman, Micteayys 7 HON. RUTH BERMYUDEZ MONTENEGRO UNITED STATES DISTRICT JUDGE 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 32