Illumina and Grail on Friday defeated a proposed class action alleging they lied to investors who bought artificially inflated Illumina stock whose prices plunged following several purported disclosures, after a California federal judge said the investors hadn't adequately pled which disclosures corrected any alleged misstatements that caused their losses.

In a nine-page ruling, U.S. District Judge Linda Lopez of the Southern District of California granted a pair of dismissal motions filed in November by Illumina and its spinoff cancer test maker Grail Inc. against a consolidated second amended complaint alleging securities law violations related to the parties' ill-fated $8 billion merger.

Judge Lopez, however, granted the plaintiffs leave to amend their suit, which they have until Oct. 27 to file.

According to court papers, Illumina created Grail as a subsidiary 10 years ago, and it went on to develop "Galleri," a noninvasive, multi-cancer-early-detection test that sought to identify different types of cancer from a single blood draw.

Investors, however, accused company insiders and executives of making misleading statements about the transaction, including that Illumina would expedite the adoption of the Galleri test that was nearing FDA approval and commercialization.

That caused stock prices to soar, the investors alleged. The U.S. Federal Trade Commission and the European Commission stepped in, expressing concerns that the deal could lessen competition, subjecting it to a "standstill," court records show. The FTC ordered Illumina to unwind the merger in the spring of 2023.

Eight months later, the Fifth Circuit vacated that order. Despite the Fifth Circuit's ruling, Illumina announced that it would either sell Grail directly or spin it off through a capital market transaction by summer of 2024.

Investors further alleged that Galleri was "unproven and clinically useless," that the FDA rejected proposed clinical trials for it, and that Illumina had no plan to speed up adoption of the technology. Illumina then purportedly issued several corrective disclosures that later caused stock prices to dip, the plaintiffs alleged.

Those disclosures include Illumina's announcement pushing forward with the merger in August 2021 despite the FTC stepping in, an article questioning the validity of Galleri, Illumina revealing information that raised questions regarding the timeline for Galleri's clinical validity and commercial adoption, the departure of its executive and a headcount reduction in its research and development. In addition, and the SEC opened an investigation into Illumina in August 2023.

The investors further referenced a verified complaint that alleged Illumina's directors were conflicted since they were "poisoned by their personal stake" in the Grail merger.

On Nov. 12, Grail and Illumina moved to axe the suit, arguing that it was nothing more than "hindsight-fueled criticisms" of Illumina's business decisions. Illumina maintained that nobody was "more disappointed" than it over the failed merger.

Illumina argued that the investors failed to plead loss causation through a "laundry list of alleged corrective disclosures" and didn't show a link between the fraud and their losses by tracing the losses back to the very facts the defendants purportedly lied about.

But investors opposed dismissal, arguing that the Ninth Circuit held in Mineworkers' Pension Scheme v. First Solar Inc. that there is an "infinite variety of causation theories" and that loss causation is pled "'even if the market was unaware at the time that fraud' resulted in the stock decline."

On Friday, Judge Lopez sided with the defendants' arguments, pointing out that the investors do not specify which misrepresentations the disclosures apparently rectified, "leaving it to defendants and this court to guesstimate the connections."

"This is inappropriate; 'precisely the kind of connect-the-dots-exercise that should not be required of courts and defense counsel,'" the order said, echoing Illumina's dismissal argument. "Indeed, such 'failure to plead with particularity and distinguish among the various misstatements and revelations that allegedly caused that decrease' in the market is grounds for dismissal."

Judge Lopez pointed out that the investors must lean on a fraud-on-the-market theory to show loss causation, which means they must link their losses back to the things the defendants allegedly lied about, with adequate particularity.

"Here, that means making some attempt to actually link each of the nine corrective disclosures to each defendant's prior misstatement on that topic instead of forcing the court — and more importantly Defendants — to speculate how the jigsaw puzzle connects in plaintiffs' mind," the order said.

John Rizio-Hamilton of Bernstein Litowitz Berger & Grossmann LLP, co-lead counsel for the proposed class and lead plaintiffs, said the plaintiffs' team had no comment on the order. Representatives for the Lumina defendants declined to comment.

The investors are represented by John Rizio-Hamilton, Jonathan D. Uslaner, Michael D. Blatchley, Alec Coquin, Michael Mathai and Emily A. Tu of Bernstein Litowitz Berger & Grossmann LLP.

Grail Inc. and its co-defendants are represented by Colleen C. Smith and Alexander C.K. Wyman of Latham & Watkins LLP.

Illumina Inc. and its co-defendants are represented by Koji F. Fukumura, Heather M. Speers and Brian M. French of Cooley LLP.

The case is In re Illumina Inc. Securities Litigation, case number 3:23-cv-02082, in the U.S. District Court for the Southern District of California.