NorthWest Biotherapeutics Inc (NWBO)

[sentiment_stocks]

I finally had a chance to read through the 85 page Report and Recommendation written by US Magistrate Judge Gary Stein. If I had to sum it up in one sentence, I’d say it was about 68 pages of love for the Plaintiff (Northwest) and about 17 pages of what is needed to repair it to make the dismissal an entire R&R statement of love. :)

I doubt that everyone has had a chance to read through the document, or even have access to it, but I would recommend that interested shareholders do so if they’re able. You can download the R&R at Pacer.

I took notes as I read through the R&R, for my own purposes, but also to provide them here to you, in the event that you are interested. A great deal of what I’ve noted below is taken directly from the document (I tried to remember to quote those sections); while some of this are just my own impressions of how the document reads.

Notes as follows:

The US Magistrate is recommending that the MTD be granted for Northwest’s failure to plead “loss causation” and that Northwest be given leave to re-plead. This is not a decision on the MTD, but rather a Report and Recommendation.

OTC Link Data:
Court does not consider this material on the MTD (page 20)

Defendants contend that the Plaintiffs “cherry picked” data that was favorable to it. Court believes the Defendants argument would stretch the “integral-to-the-complaint” doctrine beyond its proper bounds and so the argument is rejected. (Page 21)

Me: It’s interesting because the defendant states that the OTC Link Data disproves the Plaintiff’s allegations, whereas the Plaintiff claims that data from OTC Link proves their case. If neither claim can be proven at this time … which presumably Discovery would help to determine … then this argument seems to merit moving on to discovery to support or not support the interpretation of this data.

Defendant asks the Court to consider and analyze the OTC Link data to establish the truth of their assertions, which is NOT the province of the Court on an MTD. (Page 26)

And then the Court notes that the Defendants proceed to cite cases that do not even support their position (that the Court should establish this truth). (Page 26 and 27)

1. Adequacy of First Amended Complaint (FAC) Allegations
Court finds the Defendants arguments against the FAC’s allegations and standards governing a MTD claiming the Defendants were engaged in a manipulative act… unconvincing. ( page 35); and that the Defendants “mischaracterize(s)” the FAC” (page 36).

Defendants use a straw man type of argument to claim that the FAC fails to claim that Baiting Orders were placed and cancelled by the same client, and that this is fatal to the Plaintiff claiming a manipulative act. Yet the judge points out that the Plaintiff never made such a pleading in the FAC (hence a strawman argument) and that instead it may have been executed by the Defendants for their own accounts or for client accounts. So because Northwest never even stated that the Defendants were following their clients’ instructions, the Defendants version of the facts cannot be resolved on a MTD; nor is it is relevant to the Plaintiff’s theory of the case as the case instead focuses on the Defendants’ control over the high-speed trading algorithm and their responsibility to monitor such algorithms. (Page 40)

Regarding the Defendants’ argument that 95% of all placed orders are canceled in the market… that still does “nothing to explain the frequent pattern of spoofing alleged in the Complaint.”

Re: “Parking” allegations, the Court cannot consider the Defendants’ trading data on this MTD, and whether the Plaintiff can ultimately prove the Defendants parked their buys and sells behind others in front of them must await a summary judgement or trial.

In the Eighth argument, the Defendants argue that the FAC failed to allege the number of so-called Baiting Orders in each time frame of the time of each order, and often fails to allege the price and volume of each order. Yet the judge points out that the FAC indeed does includes 16 “Example Episodes” offering all of the details that the Defendants claim the Plaintiffs did not do. The Court finds these 16 allegations are more than sufficient at the pleading stage. (Page 44)

Regarding the Defendants claim that the FAC is insufficient because it alleges that the Defendants placed and then cancelled these orders within one or two minutes rather than “milliseconds” that they (the Defendants) suggest is required for spoofing… the judge states that the Defendants are mischaracterizing the allegations in the FAC. Instead, the FAC clearly states, that the Baiting Orders were w/in “one to two minutes, and at times seconds and even milliseconds.” And in the 16 Example Episodes contained in the the FAC, the Plaintiff alleges that the Defendants began cancelling the buys or sells either in milliseconds, or in less than five seconds after the Executing Purchase were made.

2. Effect on the Market for NWBO
The judge finds that the defendants’ argument that the Plaintiff insufficiently pled that the Defendants’ activity depressed the price of its shares as “unpersuasive.”

Court disagrees with Defendants’ assertion that Plaintiff’s price decline formula always generates a negative number. He does however note that the Plaintiff’s formula may be biased toward generating a negative number. (Page 48)

But the judge suggests that the Plaintiff’s price decline formula is best left to the expert analysis and should not be resolved by the Court at the MTD stage.

The judge also notes that the FAC changed the time of the best bid and offer (as they were originally presented in the original Complaint.) (Page 50)

Yet despite this change (and it’s not clear to the Court why this change was made), the Court still maintains that the Plaintiff’s allegations support the inference that the spoofing drove down the stock price during the Spoofing Episodes and therefore had an effect on the market for NWBO stock. (Page 52)

Scienter
Regarding Scienter, the Court finds that a “scheme to take advantage of depressed prices” suffices to plead scienter under a motive and opportunity theory.

Defendants claim that a total of just $94k is the total “discount” the Defendants would have made from the thousands of Spoofing Episodes in Exhibit 1 (over a 5 year period). And while its “difficult to prove intent to deceive if Defendants did not make any money off their alleged spoofing”, the court finds their argument “unpersuasive at this stage of the litigation”. The Court also notes that while “profits from a single episode may be minuscule, spoofers can generate substantial returns by repeating the scheme thousands of times across the same and different issuers’ securities.”

To that point, the Court also states that the Defendants’ metrics “understate the potential profitability of the alleged spoofing in several ways. First, while Northwest only lists 7.4mm shares in their Exhibit 1, their case “alleges that Defendants placed Executing Purchases for ‘a total of 19,300,908 shares’ below the prevailing best offer.” The Court then goes on to state that, “at its height, the alleged schemes were generating gains at a substantially higher rate than Defendants’ calculation of less than $3,000 per year per Defendant”. (Page 57)

Next, the Court doubles down on the issue of the MMs working on behalf of their clients and how that takes away any motive on the part of the Defendants, stating that while they may have traded on behalf of their clients, the FAC also alleges that they designed and operated the algorithms that spoofed Northwest’s stock. (Page 59)

The Court finds in their filing that the Plaintiff’s have adequately alleged the Defendants had an economic motive to engage in the alleged spoofing. The Court also points out the Defendants also had the opportunity as market makers and sophisticated trading firms to do so. (Page 59)

The “Court also concludes that the circumstantial evidence of a conscious spoofing scheme, when viewed holistically and together with the allegations of motive and opportunity, established the requisite strong inference of an intent to manipulate the market - one that is cogent and at least as compelling as the inference that Defendants were simply engaged in legitimate trading activity.” (Page 64)

The Court also provides in footnote 28 that the “financial literature suggests another reason why Defendants did not need to coordinate a spoofing scheme: their algorithmic trading programs can do it for them. A recent study found that algorithms can ‘learn to coordinate their spoofing when they learn together,’ even without human intervention. This is known as “algorithmic collusion.” (Page 64 - https://www.pacermonitor.com/view/DK3H7KQ/Northwest_Biotherapeutics_Inc_v_Canaccord_Genuity_LLC_et_al__nysdce-22-10185__0137.0.pdf)

Loss Causation
It’s on the issue of Loss Causation that the MTD is recommended, unless the Plaintiff repleads the case. The Defendants argue that the Plaintiff allegations fail to plead loss causation under either of the two theories presented (from Gamma Traders).

Temporal Proximity
Northwest argues that it traded so close in time to Defendants’ spoofing as to permit the court to “infer as a matter of common sense that the market prices were artificial” when traded. An issue for the Court is that when the alleged Spoofing Episodes occurred and ended, the closing price from which the NWBO sale price was “purported “formulaically derived.”

The Court states that nowhere does the Plaintiff explain what it means when it says that the “sale price was formulaically derived from the closing price.” And in the absence of an explanation in the FAC, it is impossible to tell what is meant. (Page 67)

The Court then notes that pleading that one or more Spoofing Episodes took place on a day whose closing price factored into the determination of NWBO’s sale of its shares does not, by itself, establish loss causation with respect to that sale. (Page 68)

And while the Plaintiff’s counsel provided further color in the oral argument, the figures are nowhere in the FAC, nor is their origin explained. The Court reviewed the Exhibit 1 further and found that an alleged Spoofing Episode on Feb 25, 2021 involving an Executing Purchase at 3:58:35 - 85 seconds before the 4:00 pm market close. This spoofing episode is associated in the Plaintiff’s loss causation chart with NWBO stock sales aggregating 302k shares on March 2, 2021. Therefore, the Court assumes the accuracy of the counsel’s representations… for now. (Page 69)

The Court then assumes that if the formulaic connection of the 30 instance in the Plaintiff’s chart to the pricing dates and the sales price all occurred within an hour of the market’s close is properly pled, then the Plaintiff’s claims are sufficient to please loss causation under the temporal proximity theory outlined in Gamma Traders. (Page 70)

The Court indicates that the Plaintiff has alleged enough facts to support a common-sense inference that NWBO’s stock price remained artificially depressed at the close of trading on the Pricing Dates in question. However, (and this is the important part) to complete the circle of causation, the Plaintiff must plead in an amended complaint “a sufficient explanation as to how the various stock sale prices were ‘formulaically derived’ from the closing prices on the days when Spoofing Episodes took place.” (Page 71)

Finally, “the Court finds that NWBO has sufficiently alleged loss causation based on the temporal proximity between the spoofing and stock sales in the case of the 30 asterisked transactions in the chart in Paragraph 289, provided it submit an amended complaint adequately explaining how the sales prices were “formulaically derived” from the relevant closing prices”.

The Court goes on to state that while Harrington’s case did show a drop in price over the relevant period of time (from $28.03 to $3.13), NWBO price actually increased during the relevant period (from $0.26 to $0.70). The Court finds, then that at most, the Plaintiff’s “allegations suggest a theoretical possibility of a long-term price impact from spoofing.”

The Court thinks that while the "Plaintiff’s allegations suggest a theoretical possibility of a long-term price impact from spoofing”, that “is not enough. Plaintiff must allege sufficient facts to ‘nudge their claims across the line from conceivable to plausible.” (Page 79)

Market Efficiency
While the Court thinks that NWBO (the Plaintiff) could have done a better job of pleading market efficiency, the Court notes that “it has pled enough to satisfy its burden under Rule 8. NWBO’s failure to specifically allege coverage by securities analysts “is not fatal at the pleading stage.” (Page 83). The Court also notes that determining whether a market is efficient “normally should not be decided on a motion to dismiss. (Page 84)

Conclusion
While the Court is recommending that the MTD be granted, IF the Plaintiff were to amend the complaint to cure the deficiencies in the FAC (which Northwest is doing), IT WOULD NOT BE FUTILE.

Please note: All words capped are my emphasis.

And that’s it! Hope that helps. :)