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August 10, 2005.


The opinion of the court was delivered by: HAROLD ACKERMAN, Senior District Judge


This matter comes before the Court on Defendants' Motion to Dismiss the Consolidated Amended Class Action Complaint. For the following reasons, Defendants' motion is GRANTED, and the Consolidated Amended Class Action Complaint is DISMISSED WITHOUT PREJUDICE.


  This case is a purported securities class action brought by investors who purchased shares of Bio-Technology General Corporation ("BTG") between April 19, 1999 and August 2, 2002 (the "Class Period"). BTG, now known as Savient Pharmaceuticals, Inc.,*fn1 is a New Jersey-based biopharmaceutical company that develops, manufactures, and markets human healthcare products. Its stock is traded on NASDAQ, and, as is required of publicly-traded companies, BTG files quarterly and annual reports with the Securities and Exchange Commission ("SEC").

  During fiscal years 1999, 2000, and 2001, Arthur Andersen, L.P. ("Andersen") served as BTG's outside auditor. In this capacity, Andersen reviewed BTG's revenue and earnings data and issued unqualified, or "clean" opinions*fn2 on BTG's financial statements for those years. The audited financial statements appeared in the annual reports that BTG filed with the SEC. After Andersen ceased conducting public company audits, BTG retained KPMG as its new outside auditor in May 2002. On August 2, 2002, under KPMG's guidance, BTG publicly warned that a restatement of its financial results for 1999, 2000, and 2001 would be forthcoming.

  On September 25, 2002, BTG filed restated year-end and quarterly results for 1999, 2000, and 2001. Nine days later, on Friday, October 4, 2002, KPMG announced that it was resigning as BTG's outside auditor and expressed its opinion that BTG's internal controls were deficient and needed significant strengthening. As a result of these revelations, BTG's common stock fell to $2.10 per share on Monday, October 7, 2002, down from a Class Period high of $20.44.

  BTG shareholders quickly responded to these developments by filing the first of several securities class actions on December 20, 2002. Five other securities class actions soon followed. On September 4, 2003, this Court granted a motion to consolidate the six pending actions into the instant action, and appointed Plaintiff PKN Group ("Plaintiff") as lead plaintiff. See A.F.I.K. Holding SPRL v. Fass, 216 F.R.D. 567 (D.N.J. 2003).

  On March 19, 2004, Plaintiff filed a 120-page Consolidated Amended Class Action Complaint (the "Complaint"). The Complaint alleges that BTG and certain of its executive officers*fn3 (collectively "Defendants") violated federal securities laws by disseminating materially false and misleading statements concerning BTG's revenue and earnings, which caused the stock price to become artificially inflated, damaging investors. Specifically, the Complaint charges Defendants with having conducted a two-part scheme to overstate BTG's financial performance and thereby defraud investors during the Class Period. First, Plaintiff contends that BTG and its management knowingly or recklessly engaged in a pattern of accounting fraud that violated Generally Accepted Accounting Principles ("GAAP") and BTG's own internal accounting policies. Plaintiff's contentions in this regard focus on three specific items that BTG improperly reported in its financial statements during the Class Period and that BTG later corrected in its restatements. Second, Plaintiff claims that BTG and its management falsely attributed the source of a sharp increase in sales of its premier drug product, Oxandrin, to the successful penetration of a new therapeutic market, when in fact BTG's management knew that the spike in sales was the result of wholesalers stocking their inventories ahead of an expected Oxandrin price increase. Plaintiff alleges that Defendants' fraudulent accounting practices and false statements regarding sales of Oxandrin violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5, promulgated thereunder. This Opinion will discuss Plaintiff's specific allegations of fraud and misleading statements in greater detail below.

  On July 9, 2004, Defendants moved to dismiss the Complaint pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995 ("PSLRA"). Specifically, Defendants contend that the Complaint fails to plead its allegations with sufficient particularity to satisfy the heightened pleading requirements of Rule 9(b) and the PSLRA, and therefore fails to state a claim under Rule 12(b)(6). Under an extended briefing schedule agreed upon by the parties, Plaintiff filed its opposition brief on October 14, 2004, and Defendants filed their reply brief on December 22, 2004. II. ANALYSIS

  In considering a motion to dismiss for failure to state a claim, a district court must accept all well-pleaded allegations in a complaint as true and view them in a light most favorable to the plaintiff. In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1420 (3d Cir. 1997). A district court must confine its inquiry to the complaint, and may not consider allegations set forth in the plaintiff's brief. Id. at 1424-25. The court may, however, consider documents incorporated by reference in the complaint. In re Rockefeller Ctr. Props., Inc. Sec. Litig., 311 F.3d 198, 205-06 (3d Cir. 2002). Dismissal is appropriate only when no relief can be granted under any set of facts that may be proven. In re Adams Golf, Inc. Sec. Litig., 381 F.3d 267, 273 (3d Cir. 2004).

  To sustain an action under Section 10(b) and Rule 10b-5, a private plaintiff must plead "(1) that the defendant made a misrepresentation or omission of (2) a material (3) fact; (4) that the defendant acted with knowledge or recklessness and (5) that the plaintiff reasonably relied on the misrepresentation or omission and (6) consequently suffered damage." In re Westinghouse Sec. Litig., 90 F.3d 696, 710 (3d Cir. 1996). Federal Rule of Civil Procedure 9(b) imposes additional pleading requirements on allegations of fraud or mistake. Rule 9(b) requires a plaintiff alleging violation of Section 10(b) and Rule 10b-5 to plead "(1) a specific false representation [or omission] of material fact; (2) knowledge by the person who made it of its falsity; (3) ignorance of its falsity by the person to whom it was made; (4) the intention that it should be acted upon; and (5) that the plaintiff acted upon it to his damage." In re Rockefeller, 311 F.3d at 216. Stated broadly, Rule 9(b) requires the complaint to set forth "the `who, what, when, where and how' of the events at issue." Id. at 217 (citing In re Burlington, 114 F.3d at 1422). Section 21(D)(b)(1) of the PSLRA, 15 U.S.C. § 78u-4(b)(1) (2000), augments this standard. In securities fraud actions, the complaint must "specify each statement alleged to have been misleading" and "the reason or reasons why the statement is misleading." 15 U.S.C. § 78u-4(b)(1). The PSLRA additionally provides that "if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." Id.; Cal. Pub. Employees' Ret. Sys. v. Chubb Corp., 394 F.3d 126, 144 (3d Cir. 2004). Echoing the standard of Rule 9(b), the PSLRA requires private securities fraud plaintiffs to plead the details of who was involved in the alleged fraud, where and when the contested events took place, and why any statements made by the defendants were misleading. In re Rockefeller, 311 F.3d at 217-18. When a private securities fraud plaintiff fails to meet these heightened standards, the PSLRA directs a trial court to dismiss the complaint. 15 U.S.C. § 78u-4(b)(3)(A).

  Scienter is a crucial element of any Rule 10b-5 action. Rule 9(b) of the Federal Rules of Civil Procedure explicitly permits generalized averment of a defendant's state of mind. However, the PSLRA superseded this provision as it pertains to private securities fraud actions. GSC Partners CDO Fund v. Washington, 368 F.3d 228, 237 (3d Cir. 2004). Section 21(D)(b)(2) of the PSLRA provides that in private securities fraud actions, a complaint must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). The Third Circuit has held that a "strong inference" is established either when the plaintiff alleges facts showing that the defendant had both motive and opportunity to commit fraud, or when the plaintiff alleges facts constituting strong circumstantial evidence of conscious misbehavior or recklessness. GSC Partners, 368 F.3d at 237. Together, the heightened pleading requirements of Rule 9(b) and the PSLRA function as a threshold that private securities fraud plaintiffs must surmount before receiving the favorable inferences ordinarily afforded to plaintiffs under Federal Rule of Civil Procedure 12(b)(6). In re Rockefeller, 311 F.3d at 224. The PSLRA, in particular, reflects Congress's express intention to "`substantially heighten' the existing pleading requirements." Chubb, 394 F.3d at 145 (quoting In re Rockefeller, 311 F.3d at 217). In appropriate circumstances, however, a court may afford some latitude to a plaintiff pleading allegations where the facts supporting those allegations are particularly within the knowledge or control of the defendant. In re Burlington, 114 F.3d at 1418. Mindful of these general principles, the Court turns its inquiry to the allegations set forth in Plaintiff's Complaint.

  A. Restated Items

  Plaintiff alleges that three items reported in BTG's financial statements during the Class Period and subsequently restated in September 2002 demonstrate that Defendants engaged in a pattern of accounting fraud during the period for which Andersen audited BTG's financial statements. This Opinion will discuss each item in turn.

  1. Improper Reporting of the DePuy Agreement Fee

  Plaintiff first identifies a $5 million contract fee that BTG reported as income in Q2 2000. The contract in question was a license agreement entered into by BTG and DePuy Orthopaedics, Inc. ("DePuy"), a subsidiary of Johnson & Johnson, in June 2000. Under this agreement, BTG granted DePuy an exclusive license to sell its BioHy proprietary product in certain markets over a ten-year period. In return, DuPuy paid BTG a $5 million fee and committed to undertake the necessary clinical trials and submit the necessary applications for regulatory approval of BioHy in all licensed markets except Europe, where BTG was already conducting clinical trials. Defendants contend that DePuy paid $5 million in cash to BTG upon execution of the agreement, and the Complaint does not plead otherwise. Plaintiff does allege, however, that the agreement was executed four days before the end of Q2 2000. BTG reported the entire amount of the payment as income earned in Q2 2000, ostensibly because it had regarded the payment as a performance "milestone." Subsequently, at KPMG's recommendation, BTG restated the DePuy payment by amortizing it over the ten-year life of the agreement. As a result of this restatement, BTG's reported revenues for FY 2000 were reduced by $4.687 million.

  Plaintiff alleges that Defendants violated SEC Staff Accounting Bulletin ("SAB") 101 and BTG's own stated accounting policies by reporting the full amount of the DePuy payment as income earned in Q2 2000. SAB 101 provides an SEC staff interpretation of applicable GAAP relating to revenue recognition and calls for deferral of revenue unless an up-front fee, such as the DePuy payment, is received "in exchange for products or services performed that represent the culmination of a separate earnings process." (Compl. ¶ 45.) Plaintiff contends that no "culmination of a separate earnings process" could have been, nor was, achieved in the first four days of a ten-year license agreement such that the entire $5 million payment was properly recorded as income earned in Q2 2000. Thus, Plaintiff posits that Defendants "either falsely claimed a milestone was achieved when in fact none had been or they contrived a `milestone' for the purpose of wrongfully recognizing revenue." (Id. ¶ 11(1).)

  SAB 101 was to be effective December 3, 1999. Two subsequent bulletins, SABs 101A and 101B, delayed full implementation of SAB 101. Plaintiff contends that BTG nevertheless announced that it was adopting SAB 101 as of January 1, 2000. At the same time, BTG announced that it would review its then-existing long-term contracts to amortize revenues that it has previously recognized in earlier years.

  Defendants' primary basis for seeking dismissal of the Complaint in regard to the DePuy allegations is that Plaintiff has failed to plead scienter. In support of their argument, Defendants point to the following asserted facts: (1) DePuy paid the $5 million fee to BTG at the time the agreement was executed in June 2000; (2) the fee was non-refundable; (3) BTG characterized the fee as a completed milestone payment and reported it as income earned when received; (4) Andersen gave a clean opinion of BTG's reporting; (5) KPMG later disagreed with Andersen's interpretation of SAB 101 and recommended that BTG restate these revenues; and (6) BTG complied with KPMG's recommendation. Thus, Defendants characterize the DePuy restatement as "nothing more than a disagreement between Andersen and its successor, KPMG, over the application of an accounting rule, SAB 101." (Defs.' Br. at 22.)

  As noted earlier, this Circuit recognizes two alternative standards by which a private securities fraud plaintiff may establish a strong inference that a defendant acted with the required state of mind: either the plaintiff must allege facts demonstrating that the defendant had both motive and opportunity to commit fraud, or the plaintiff must allege facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness. GSC Partners, 368 F.3d at 237. Accordingly, the Court must weigh Plaintiff's allegations against each of these standards.

  a. Motive and opportunity to commit fraud

  Allegations of motive and opportunity satisfy the PSLRA's pleading requirements for scienter only if supported by "facts stated `with particularity' that give rise to a `strong inference' of scienter." In re Alpharma Inc. Sec. Litig., 372 F.3d 137, 149 (3d Cir. 2004) (some internal quotation marks omitted) (quoting 15 U.S.C. § 78u-4(b)(2)). "Blanket assertions of motive and opportunity" and "catch-all allegations that defendants stood to benefit from wrongdoing and had the opportunity to implement a fraudulent scheme" are insufficient to establish a strong inference of scienter. GCS Partners, 368 F.3d at 237. Likewise, generalized motives that would be possessed by most corporate directors or officers do not establish scienter. Id. (quoting Kalnit v. Eichler, 264 F.3d 131, 139 (2d Cir. 2001)). A plaintiff seeking to establish scienter through motive and opportunity must allege "a concrete and personal benefit to the individual defendants resulting from the fraud." Id. (quoting Kalnit, 264 F.3d at 139).

  Plaintiff raises three allegations that purportedly establish Defendants' "clear motive" to misreport the DePuy licence fee as income for FY 2000. First, Plaintiff alleges that the portion of the DePuy license fee that BTG improperly reported as income in FY 2000, amounting to $4.687 million, represented 5.5% of BTG's originally reported revenues for the year. (Compl. ¶ 48(1).) Second, Plaintiff alleges that the $4.687 million overstatement constituted a large percentage of BTG's originally reported net income of $7.717 million for FY 2000, and that BTG's actual net income in 2000, as later restated, was only $765,000 — less than 10% of the originally reported figure.*fn4 (Id. ¶ 48(2).) Such allegations do not, in themselves, establish motive sufficient for creating a strong inference of scienter. See Chill v. Gen. Elec. Co., 101 F.3d 263, 270 (2d Cir. 1996) (noting, in a case where $350 million in false profits masked an actual loss of $85 million, that allegations of a violation of GAAP or SEC regulations do not in themselves establish scienter). Plaintiff's third and final allegation of motive concerns BTG's acquisition of Myelos Corporation ("Myelos"), a biopharmaceutical company. On February 22, 2001, BTG announced a definitive agreement to acquire Myelos, and the transaction was finalized on March 19, 2001 following approval by Myelos's shareholders. Plaintiff alleges that Defendants had a strong motive to maximize BTG's share price prior to February 21, 2001, the day on which the Myelos agreement was executed. Of the $35 million acquisition cost, approximately $21 million was paid in BTG stock. For this purpose, BTG stock was assigned a value determined by the average closing price of BTG common shares during the 20-trading-day period ending on February 20, 2001. Having thus assigned a value of $8.9564 per share, BTG's board was able to determine the number of BTG shares necessary to provide the $21 million consideration. A higher share valuation would have meant that fewer shares were needed for consideration.

  Plaintiff avers that Defendants delayed announcing BTG's Q4 2000 and FY 2000 results until February 22, 2001, the day after the Myelos agreement was executed. In prior years, BTG had announced its results earlier (e.g., February 4, 1999 and February 11, 2000). According to Plaintiff, the inflated results that BTG announced on February 22, 2001 were "not very impressive," but were certainly better than the "disastrous actual figures" that came to light in BTG's restatements. (Compl. ¶ 4(1).) Plaintiff alleges that if Defendants had announced BTG's actual results for 2000 prior to February 21, 2001, Myelos executives would not have agreed to the acquisition or would have demanded a different exchange ratio; alternatively, if Defendants had announced BTG's actual results on February 22, 2001, BTG's share price would have declined sharply and Myelos shareholders likely would not have approved the transaction at the $8.9564 valuation for BTG common shares. From these allegations, Plaintiff urges the Court to infer that Defendants had a clear motive to misreport the DePuy agreement fee.

  As a matter of law, Plaintiff's allegations of motive based on the Myelos acquisition are insufficient to create a strong inference of scienter. Plaintiff's argument assumes that Defendants had the Myelos acquisition in mind when they reported the DePuy agreement fee in Q2 2000. Yet, nowhere does Plaintiff allege that the Myelos acquisition was pending or contemplated in Q2 2000, an allegation that the Court views as essential to any attribution of motive. See In re Digital Island Sec. Litig., 357 F.3d 322, 330-31 (3d Cir. 2004) (holding that an assumption devoid of factual allegation does not suffice to create a strong inference of motive). Indeed, the Myelos acquisition occurred more than six months after BTG recognized the DePuy agreement fee as income earned in Q2 2000. The Myelos acquisition cannot serve as evidence of Defendants' motive to misrepresent income in Q2 2000 if Defendants did not anticipate that their misrepresentation could later be advantageous to such an acquisition. See In re K-tel Int'l., Inc. Sec. Litig., 300 F.3d 881, 895 (8th Cir. 2002) (finding no intent to defraud in absence of allegation that defendants' GAAP violations in June 1998 evinced expectation that they would be receiving NASD delisting letter in October 1998).

  Furthermore, even if Defendants had intended to boost BTG share price in advance of the Myelos acquisition, Plaintiff does not adequately aver why Defendants waited until two days after the valuation period closed to announce BTG's artificially inflated results. Indeed, this fact would seem to be at odds with any inference of nefarious motive on the part of Defendants. See In re Digital Island, 357 F.3d at 330 (rejecting plaintiff's weak inference of motive because a more compelling interpretation of the facts was that defendants had acted lawfully); Helwig v. Vencor, Inc., 251 F.3d 540, 553 (6th Cir. 2001) (en banc) ("[T]he `strong inference' requirement means that plaintiffs are entitled only to the most plausible of competing inferences."). Nor does Plaintiff allege any basis for Defendants to be concerned in June 2000 that BTG's full-year financial results would be viewed as problematic by Myelos's board or shareholders. There is likewise no allegation that any of the Individual Defendants received "a concrete and personal benefit" from the alleged fraud. See GSC Partners, 368 F.3d at 237.

  Thus, absent additional, particularized allegations to explain these apparent discrepancies and connect Defendants' reporting of the DePuy agreement fee with the Myelos acquisition, Plaintiff's contentions of motive amount to nothing more than a generalized allegation that Defendants sought to boost BTG's share price. Allegations of a general desire to increase stock price could be made against virtually any director or officer, and therefore do not suffice to create an inference of motive. See id. at 238; see also In re Digital Island, 357 F.3d at 330 (holding that allegation that directors of target company took measures to artificially suppress share price to ensure that tender offer would not be withdrawn created only a weak inference of motive under the PSLRA); Leventhal v. Tow, 48 F. Supp. 2d 104, 115 (D. Conn. 1999) (holding that an allegation that defendants artificially inflated a corporation's stock price to enhance their position in ...

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