Securities Litigation and Market Volatility: Assessing the Risks in Soleno Therapeutics (SLNO)

In the volatile world of biopharmaceuticals, Soleno Therapeutics (NASDAQ: SLNO) has become a case study in the intersection of securities litigation, regulatory scrutiny, and market volatility. The company's flagship product, VYKAT™ XR—a once-daily oral treatment for Prader-Willi syndrome (PWS)—has been at the center of a storm since August 15, 2025, when activist short seller Scorpion Capital released a 415-page forensic report alleging safety concerns, data integrity issues, and overinflated commercial prospects. The report triggered a 7.41% drop in SLNO's stock price, closing at $71.63, and sparked multiple class-action investigations. For long-term investors, the question is no longer just about the drug's efficacy but about the company's ability to navigate a perfect storm of legal, regulatory, and reputational risks.

The Short-Seller Report: A Catalyst for Crisis

Scorpion Capital's report painted a grim picture of Soleno's business model. It accused the company of overstating the safety of VYKAT™ XR, citing anecdotal reports of children hospitalized for potential heart failure shortly after using the drug. The firm also questioned the scientific rigor of clinical trials, pointing to a “controversial physician” in Gainesville, Florida, whose role in the drug's development and launch raised red flags. The report further dismissed Soleno as a “one-trick pony,” with no meaningful pipeline to offset the impending patent expiration of VYKAT™ XR in 2026.

The allegations were not merely speculative. Scorpion Capital provided detailed claims about data discrepancies in clinical trial publications and highlighted the company's reliance on a single physician for key trial data. These assertions, while unverified, were amplified by the short-seller's track record of targeting biotech firms and the inherent financial incentives of short-and-distort campaigns.

Legal and Regulatory Risks: A High-Stakes Game

The aftermath of the report has seen two prominent law firms—Pomerantz LLP and Hagens Berman—launch investigations into Soleno. These lawsuits, if successful, could force the company to pay substantial damages and face heightened regulatory scrutiny from the SEC and DOJ. The legal landscape for such cases is evolving, with courts increasingly skeptical of short-seller reports that lack independent corroboration or rely on anonymous sources. For example, in Defeo v. IonQ, Inc. (2025), the Fourth Circuit dismissed a securities class action because the short-seller report cited anonymous sources and disclaimed accuracy. Similarly, in MacPhee v. MiMedx Group, Inc. (2023), the Eleventh Circuit ruled that repackaging public information in a short-seller report does not qualify as a corrective disclosure.

For Soleno, the challenge lies in proving the credibility of its disclosures. If courts dismiss the class-action lawsuits on procedural grounds, the company may avoid immediate financial penalties. However, the reputational damage could persist, deterring investors and insurers from supporting VYKAT™ XR's commercialization. The SEC's recent enforcement actions against short sellers like Andrew Left also suggest a regulatory environment increasingly hostile to market manipulation, but this does not guarantee Soleno's innocence.

Market Volatility: A Double-Edged Sword

The stock price of SLNO has been a rollercoaster since the report's release. While short-term volatility is par for the course in biotech, the depth of the selloff raises concerns about investor confidence. reveals a sharp spike in risk metrics, reflecting the market's fear of regulatory action and commercial failure.

For long-term investors, the key question is whether this volatility is justified. VYKAT™ XR's approval for PWS—a rare and underserved condition—suggests a niche but potentially lucrative market. However, the allegations of safety risks and data integrity could delay or derail its adoption. If the FDA initiates a post-market review or imposes restrictions on the drug's use, Soleno's revenue projections could collapse.

Strategic Considerations for Investors

1. Monitor Legal Developments: The outcome of the class-action lawsuits will be pivotal. Investors should track motions to dismiss and any rulings on the admissibility of Scorpion Capital's report. A dismissal on procedural grounds could stabilize the stock, while a ruling against Soleno could deepen the selloff.
2. Assess Regulatory Responses: The FDA's stance on VYKAT™ XR's safety profile will shape the drug's commercial viability. Any adverse regulatory action, such as a black box warning or a mandate for additional trials, could be catastrophic.
3. Evaluate the Pipeline: Soleno's lack of a robust pipeline is a critical vulnerability. Investors should scrutinize any announcements about new drug candidates or partnerships that could diversify the company's revenue streams.
4. Reputational Risk: Even if legal and regulatory hurdles are cleared, the shadow of the short-seller report may linger. Rebuilding trust with healthcare providers and insurers will be essential for VYKAT™ XR's long-term success.

Conclusion: A High-Risk, High-Reward Proposition

Soleno Therapeutics' situation exemplifies the precarious balance between innovation and accountability in the biotech sector. While VYKAT™ XR has the potential to revolutionize PWS treatment, the company's ability to sustain its market position hinges on resolving the current legal and regulatory challenges. For investors, the path forward is fraught with uncertainty. Those with a high-risk tolerance and a long-term horizon may find opportunities if the stock rebounds on favorable legal rulings or positive regulatory news. However, the risks—ranging from securities litigation to reputational damage—demand a cautious approach. In a market where short-seller reports can trigger seismic shifts, Soleno's story is a reminder that even the most promising drugs cannot thrive without trust.