Why Confidential Witness Allegations Fail the Tellabs Test in the District of Massachusetts
While securities class action filings are on the rise within the First Circuit, the District of Massachusetts continues to apply a high degree of scrutiny to securities fraud allegations, including particularized facts necessary to establish a strong inference of scienter.
In this final installment of our three-part series, we examine the District of Massachusetts’ approach to dissecting scienter pleadings, key takeaways from the court’s recent decisions, and considerations for practitioners litigating securities fraud claims in the forum. For more on First Circuit trends and on the element of material misrepresentations, see our first and second posts in this series.
We analyze two recent cases—Celano v. Fulcrum Therapeutics and Gill v. Bluebird Bio Inc.—that demonstrate how plaintiffs have struggled to overcome legal thresholds and what litigants on both sides of future securities class action filings should bear in mind.
Comparative Inference Analysis: A Key Hurdle for Securities Plaintiffs
Securities class action complaints that have adequately alleged an actionable misstatement or omission may nevertheless fail on scienter, an intent to deceive or a reckless disregard for the truth. The Private Securities Litigation Reform Act (“PSLRA”) standard for scienter requires plaintiffs to “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Under First Circuit precedent, a district court “must engage in ‘a comparative evaluation’ by weighing the ‘inferences urged by the plaintiff’ against ‘competing inferences rationally drawn from the facts alleged.’” Shash v. Biogen, 84 F.4th 1, 13 (1st Cir. 2023) (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007)).
Why Direct Evidence Matters for Securities Fraud Scienter Allegations
In Celano v. Fulcrum Therapeutics, Inc., No. 1:23-cv-11125-IT (D. Mass. Mar. 27, 2025) (Talwani, J.), the court explained that an inference of scienter is most compelling “where a complaint contains clear allegations of admissions, internal records or witnessed discussions.” According to the court, without such direct evidence, “the indirect-evidence allegations in the complaint will need to do more work to carry the burden of raising a ‘strong inference of scienter.’”
As discussed in part two of this series, the court in Celano found that only one of the many alleged statements was sufficiently pleaded as misleading. However, turning to scienter, the court concluded that the plaintiff did not plausibly plead an inference of scienter because the allegedly misleading statement concerning “no adverse effects” did not pertain to the same studies that the FDA had referenced in its clinical hold letter, which was the basis for the defendants’ purported knowledge that their statement was misleading. This deficiency pervaded even confidential employee statements that were “vague assertions” concerning “observed problems in non-clinical results,” unrelated to statements that no adverse events had been observed during clinical trials. As a result, beyond its falsity analysis, the court also dismissed the plaintiff’s claims for lack of scienter.
Confidential Witness Allegations: Why Motive Alone Isn’t Enough Without Connecting the Dots to Misstatements
In Gill v. Bluebird Bio Inc., No. 24-cv-10803-PBS (D. Mass. May 23, 2025) (Saris, J.) the plaintiffs challenged two statements by defendants suggesting that bluebird’s gene therapy, “lovo-cel,” was eligible for a Priority Review Voucher (“PRV”) from the FDA. By statute, a PRV is unavailable if the product shares the same active ingredient as a previously approved drug. The complaint alleged lovo-cel shared an active ingredient with an earlier bluebird product approved a year prior to lovo-cel submission to the FDA, and argued defendants must have known PRV eligibility was therefore off the table. Plaintiff alleged that this was evidence supporting a strong inference of scienter. The court rejected that inference.
Even accepting, arguendo, that there was no possibility bluebird would receive a PRV (and thus statements concerning eligibility were false when made), the court did not find a strong inference of scienter based on confidential witness allegations that the company needed a cash infusion at the time and had a financial motive to improve results. The court was not persuaded because the confidential witness allegations did not connect any insider knowledge to the specific PRV statements and did not explain how touting possible PRV eligibility would realistically change the company’s financing options or cash runway.
The court observed that plaintiff had failed to “describe in any detail the actual composition of lovo-cel or the process for determining whether defendants must have known that two biologics share an active ingredient.” For these reasons, plaintiff’s theory failed even if bluebird had “reused ‘the information, processes, and technology from [its] prior drugs to develop lovo-cel.”
Because the complaint was “not clear why proclaiming the possibility that bluebird would receive a PRV would put bluebird in a stronger position,” the allegations taken together did not rise to a compelling inference greater than an innocent intent or mere negligence. As a result, the court dismissed all claims.
Key Takeaway: Dissecting Misstatements and Scienter Allegations in the District of Massachusetts
Recent decisions on motions to dismiss securities fraud class action claims provide critical guidance for litigants facing a growing number of recently filed cases. The Gill and Celano decisions reflect a stringent approach to class actions brought under Section 10(b) and Rule 10b-5 that rigorously embraces the heightened pleading requirements imposed by the PSLRA.
These decisions underscore that plaintiffs must tether insider knowledge to the specific misstatement and provide particularized facts showing why a culpable inference is at least as compelling as an innocent one. For defense counsel, dissect each alleged misstatement, test whether the scienter theory relies on the same data set, and press gaps where confidential witness allegations fail to link statement, timing, and speaker or decisionmaker
Securities class action litigants should expect a high degree of scrutiny from the District of Massachusetts, which has shown it will act decisively when pleadings lack particularized facts. While this approach aligns with recent decisions of other federal courts emphasizing Tellabs’s comparative-inference analysis, the District of Massachusetts is a notably demanding forum. Defense counsel should embrace the court’s strict standards by focusing on the PSLRA’s requirements, dissecting the complaint and each alleged misstatement with precision, and emphasizing the absence of particularized facts supporting each element of the claim.
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Thank you to firm summer associate Jeff Supple for his contribution to this post.