Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

ORAN v. STAFFORD

February 5, 1999

ALBERT ORAN, INDIVIDUALLY AND ON BEHALF OF A CLASS OF OTHERS SIMILARLY SITUATED; TERRY ADOLPHS, PHILIP MORRIS, JAMES DOYLE LUPO; AND PAUL H. MAURER
v.
JOHN R. STAFFORD; ROBERT G. BLOUNT; JOSEPH J. CARR; LOUIS L. HOYNES, JR.; WILLIAM J. MURRAY; DAVID M. OLIVIER; JOHN R. CONSIDINE; PAUL J. JONES; FRED HASSAN; AND AMERICAN HOME PRODUCTS CORPORATION.



The opinion of the court was delivered by: Politan, District Judge.

LETTER OPINION

ORIGINAL ON FILE WITH CLERK OF THE COURT

Dear Counsel:

This matter comes before the Court on defendants' motion to dismiss the Amended Class Action Complaint. The Court heard oral argument on October 29, 1998. For the reasons explained below, defendants' motion is GRANTED and the Amended Class Action Complaint is DISMISSED WITH PREJUDICE as to the federal causes of action. The pendent state-law claims are MISSED WITHOUT PREJUDICE.

FACTUAL BACKGROUND

This class action is predicated upon defendants' allegedly false and misleading statements concerning the weight-loss drugs Pondimin and Redux (hereinafter collectively referred to as "Redux").

Defendant American Home Products Corporation ("AHP") is organized under the laws of the State of Delaware and maintains its principal corporate offices in Madison, New Jersey. AHP engages in the research, development, manufacture, and marketing of prescription and over-the-counter medications. At all times relevant to this litigation, AHP promoted, marketed, and sold the anti-obesity drug Redux, which was approved by the Food and Drug Administration during the Spring of 1996. The Complaint alleges, among other things, that AHP violated the Securities Exchange Act of 1934 during the period beginning March 1, 1997 and ending September 16, 1997.

The class plaintiffs allege that the defendants, while in possession of information suggesting that Redux is linked to serious heart-valve damage, misled the investing public to believe that the drug was safe and that it would continue to generate substantial revenues for defendant AHP. Plaintiffs further allege that the omissions and misstatements were made with fraudulent intent, that defendants' conduct artificially inflated the market price of AHP stock, and that this fraud on the market caused plaintiffs to suffer damages.

Plaintiffs allege that AHP first became aware, or should have become aware, that Redux caused heart-valve abnormalities in July of 1994. Three years later, on July 8, 1997, the Food and Drug Administration ("FDA") and AHP publicly disclosed that there had been reports of heart-valve problems in patients taking Redux. On September 15, 1997, AHP announced that it would voluntarily withdraw Redux from the market.

Defendants move to dismiss the Amended Class Action Complaint because it fails to state a claim upon which relief can be granted or, in the alternative, because it fails to plead the elements of fraud with sufficient particularity.

DISCUSSION

Plaintiffs bring this action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78j (b) and 78t (a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. The private right of action created by Section 10(b) and Rule 10b-5 imposes liability for false or misleading statements or omissions of material fact that affect trading on the secondary market. See Central Bank of Denver, N.A. v. First Interstate Bank of Denver N.A., 511 U.S. 164, 171, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994).

A claim under Rule 10b-5 has three essential elements. First, a plaintiff must establish that the defendant made a materially false or misleading statement, or that the defendant omitted to state a fact such that other statements of fact actually made were rendered materially misleading. See In re Phillips Petroleum Securities Litig., 881 F.2d 1236, 1243 (3d Cir. 1989). Second, a plaintiff must establish that the defendant acted with scienter and that plaintiff's reliance on defendant's misstatement caused an injury to plaintiff.*fn1 See id. at 1244. Third, a Rule 10b-5 plaintiff must satisfy the heightened pleading requirements set out in Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995. See In re Burlington Coat Factory Securities Litig., 114 F.3d 1410, 1417-20 (3d Cir. 1997); 15 U.S.C. § 78u-4 (b)(2).

I. Rule 9(b) & PLSRA: Allegations of Scienter

Federal Rule of Civil Procedure 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." This requirement has been "rigorously applied in securities fraud cases." In re Burlington Coat Factory, 114 F.3d 1410, 1417 (3d Cir. 1997). Moreover, and more specifically, the Private Securities Litigation Reform Act of 1995 requires a plaintiff to "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind" — in this case, fraudulent intent. 15 U.S.C. § 78u-4 (b)(2).

The Third Circuit has held that the requisite "strong inference" of fraudulent intent "may be established either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Burlington Coat, 114 F.3d at 1418 (quoting Acito v. IMCERA Group, Inc., 47 F.3d 47, 53 (2d Cir. 1995)).

A. The Corporate Defendant: American Home Products

Turning first to AHP's motive to commit fraud, plaintiffs allege that the company repeatedly touted Redux as a breakthrough weight-loss drug that would generate significantly increased corporate profits. Specifically, the Amended Class Action Complaint alleges that, in a July 23, 1996 press release, AHP announced that the company's "U.S. pharmaceutical sales increased 14 percent in the 1996 second quarter and 7 percent for the first half [and that these sales gains] were primarily due to introductory sales of Redux. . . ." ¶ 72. The Complaint also references an August 13, 1996 article in Investor's Business Daily which stated that "[n]ew products should continue to boost the company's earnings. Redux, a weight-loss drug, became available in June." ¶ 73 The article was titled "American Home Products Grows By Launching New Drugs." Id. In addition, plaintiffs allege that AHP sales representatives made more than 285,000 visits to physicians to promote Redux between May and December of 1996. See id. ¶ 68. These allegations, if proven, are sufficient to establish that AHP had a motive to fraudulently mislead the investing public about Redux's safety.

With regard to AHP's opportunity to commit fraud concerning Redux's link to heart problems, plaintiffs allege that, in February of 1994, a French pharmaceutical company informed AHP that Belgian doctors had reported at least thirty cases of heart-valve problems in patients taking Redux. See Amended Class Action Complaint ¶ 51. The Complaint also alleges that in March of 1997, representatives from the Mayo Clinic in Rochester, Minnesota provided AHP with detailed information concerning five patients taking fen-phen*fn2 who were at the time experiencing similar heart-valve abnormalities. See id. ¶ 83. These allegations, if proven, are sufficient to establish AHP's opportunity to mislead the investing public. The allegations are also corroborative of AHP's motive.

B. The Individual Defendants

With regard to the individual defendants, the Complaint alleges that several AHP executives intentionally concealed material information in order to artificially inflate the value of AHP's stock, and that they profited by selling portions of their shares at the inflated price. In support of this theory of liability, the Complaint gives the names of the insiders who sold stock, the quantities of stock sold and the prices at which the sales occurred, the dates of the sales, and each defendant's estimated profit. See Amended Class Action Complaint ΒΆ 167. The Complaint also ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.