Connetics Corporation is a specialty pharmaceutical company that engages in the development and commercialization of products for the medical dermatology market.

The original Complaint charges Connetics and certain of its officers and directors with violations of the Securities Exchange Act of 1934. Specifically, the Complaint alleges that during the Class Period, Defendants made false statements about the Company's most important new drug (Velac) concerning findings that would likely prevent FDA approval. Defendants also reported false financial results by failing to properly reserve for rebates. On May 3, 2006, Connetics announced it could not file its quarterly report on time due to a restatement of its financial results. As a result of Defendants' false statements, Connetics' stock traded at inflated levels during the Class Period, which allowed Defendants to reap millions of dollars in insider trading proceeds. However, after the May 3, 2006 announcement, the Company's shares collapsed 45% from their high. The stock then traded at $10-$11 per share, some 63% below the Class Period high of $29.92.

According to the Complaint, the true facts, which were known by the Defendants but concealed from the investing public during the Class Period, were as follows: (a) the carcinogenicity study of Velac had indicated that 89 out of 160 mice treated with Velac developed tumors; (b) prior to the Class Period, Connetics had been informed by a panel of toxicology experts that they were unaware of any drug with similar results to Velac ever being approved by the FDA; (c) the Company's new Velac drug would be deemed unsafe by the FDA and would not provide the revenue and income promised by the Company; (d) the Company would not be able to achieve the operating results for 2006-2007 as projected due to its inability to launch Velac; and (e) the Company was falsifying its financials for at least 2005 and likely earlier due to improper accounting for rebates.

According to the Company’s FORM 10-Q for the Quarterly Period Ended September 30, 2006, two Complaints have been filed in the United States District Court, Northern District of California: Plumbers & Pipefitters Local #562 Pension Fund vs. Connetics Corporation (N.D. Cal. Case No. 06-5691 PJH) and Almar T. Widiger Living Trust vs. Connetics Corporation (N.D. Cal. Case No. 06-06250 VRW). Two similar class actions were also filed in the United States District Court, Southern District of New York: Fishbury, Limited vs. Connetics Corporation (S.D. N.Y. Case No. 06-CV-11496) and Bruce Gallant vs. Connetics Corporation (S.D. N.Y. Case No. 06-CV-12875).

On November 7, 2006, Plaintiff Plumbers' & Pipefitters' Local #562 Pension Fund filed a Notice of Voluntary Dismissal Pursuant to Fed. R. Civ. P. 41(a)(1). On November 9, 2006, the Complaint was voluntarily dismissed, and the civil case was terminated. The class action Complaint filed by Plaintiff Almar T. Widiger Living Trust was also voluntarily dismissed in November 2006. The class action allegations are continuing under the class actions filed against Connetics Corporation in the U.S. District Court for the Southern District of New York. Motions for consolidation, appointment of lead Plaintiff and lead Counsel are pending.

According to a press release dated December 26, 2006, on December 14, 2006, the court consolidated two related class action Complaints asserting that Defendant corporation engaged in securities fraud violating §§10(b) and 20 (a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. It concluded that both actions rested on identical public statements and involved common issues of law and fact. The court also appointed the Teachers' Retirement System of Oklahoma (Oklahoma Teachers) as sole lead Plaintiff, finding that it met the requirements of 15 USC §78u-4(a)(3)(A), alleged the largest financial interest in the relief sought by the class and showed that its claims were typical of the class. The court determined that Plaintiff Fishbury Limited failed to rebut Oklahoma Teachers' presumptive lead Plaintiff status noting, among other things, that Fishbury failed to show a conflict of interest between Oklahoma Teachers -- which bought only Defendant's common stock -- and stock option purchasers.

On May 23, 2007 the judge presiding over the case in the Southern District of New York entered an order granting Defendants' motion of change of venue. The case has been transferred to the Northern District of California and an Amended Consolidated Complaint was filed on June 28, 2007. On September 17, 2007 a number of motions and declarations, in support of and opposition to, were made to dismiss portions of the Complaint and the Complaint in its entirety.

On January 19, 2008, Judge Susan Illston granted the Defendants’ motions to dismiss the Complaint, with leave to amend. On March 14, 2008, a Second Amended Consolidated Class Action Complaint was filed. The Defendants responded by filing several motions to dismiss the Second Amended Consolidated Class Action Complaint.

According to a press release dated August 15, 2008, Connetics was unable to sink a number of allegations raised in a proposed securities class action accusing the pharmaceutical firm of concealing information from shareholders about its new acne medication Velac Gel. Judge Susan Illston of the U.S. District Court for the Northern District of California on Thursday dismissed some, but not all, of the claims in the case alleging Connetics kept stock prices artificially high by failing to disclose a 2004 study that showed the drug caused tumors in 55% of mice. Connetics argued that several portions of the Plaintiffs’ second amended Complaint should be stricken because they were lifted from an insider trading Complaint filed by the U.S. Securities and Exchange Commission, but the district court refused to strike them, which helped Plaintiffs keep a number of their allegations afloat in the case. “Although plaintiffs continue to rely in part on the SEC complaint, plaintiffs have explained what other sources they rely on to formulate their factual allegations,” Judge Illston said. The judge did dismiss the Plaintiffs’ claim alleging that Connetics made fraudulent statements predicting that Velac would gain U.S. Food and Drug Administration approval by June 2005, finding that the forward-looking statements fell under the safe harbor provision of the Private Securities Litigation Reform Act. But the judge found that the Plaintiffs adequately pled a claim alleging Connetics made false statements about Velac’s safety after June 2004, when the Company became aware of the outcome of the pre-clinical mouse study.

On January 9 and 29, 2009, certain individual Defendants filed motions to dismiss the Second Amended Consolidated Class Action Complaint. On February 21, 2009, those motions were granted with prejudice. On March 16, 2009, the lead Plaintiff filed a motion to certify the class, and on May 12, 2009, the motion was granted. On July 10, 2009, the lead Plaintiff filed a motion for preliminary approval of the settlement. The proposed settlement is in the amount of $12.75 million. On July 20, 2009, Judge Illston preliminarily approved the settlement. On October 9, 2009, Judge Illston gave final approval to the settlement and also approved the plan of allocation. On November 10, 2009, lead Counsel was awarded in attorney fees in the amount of 25% of the settlement fund and reimbursement of expenses in the amount of $398,689.23.