United States District Court, D. New Jersey
August 16, 2005.
In re PDI Securities Litigation.
The opinion of the court was delivered by: JOSE LINARES, District Judge
[EDITOR'S NOTE: This case is unpublished as indicated by the issuing court.] OPINION AND ORDER
This matter comes before the Court on the motion of Defendants
PDI, Inc. ("PDI") and several PDI officers (hereinafter,
collectively "Defendants") to dismiss the Second Consolidated and
Amended Class Action Complaint and Jury Demand (hereinafter
"Second Amended Complaint") pursuant to Federal Rules of Civil
Procedure 12(b)(6) and 9(b). This is a securities fraud class
action suit brought by individuals who purchased the common stock
of PDI between May 22, 2001 and August 12, 2002 (hereinafter, the
"Class Period"). Lead Plaintiffs Gary Kessel, Rita Lesser and
Lewis Lesser (collectively, "Plaintiffs") are purchasers of
common stock during the Class Period. Plaintiffs aver that
Defendants defrauded investors by artificially inflating that
value of the common stock through accounting manipulations and
false statements. The Court has jurisdiction over this action
pursuant to 28 U.S.C. § 1331. Oral argument was previously heard
on this matter. For the reasons discussed below, Defendants'
motion to dismiss is GRANTED in part, and DENIED in part. FACTUAL AND PROCEDURAL BACKGROUND
For purposes of the instant motion, the relevant facts are as
follows. PDI is a Delaware corporation, with its principal
executive offices in Upper Saddle River, New Jersey. (Second
Amended Complaint (hereinafter "Compl."), ¶ 7). PDI provides
customized sales and marketing services to the pharmaceutical
industry. (Id. ¶ 21). PDI is a publicly held corporation whose
common stock is registered with the United States Securities and
Exchange Commission ("SEC") and is traded on the NASDAQ National
Market. (Id. ¶ 11). Defendant Charles T. Saldarini was the
Chief Executive Officer and Vice Chairman of the Board of
Directors of PDI during the Class Period. (Id. ¶ 8). Defendant
Bernard C. Boyle was PDI's Chief Financial Officer and Executive
Vice President during the Class Period (collectively Saldarini
and Boyle will be referred to as "Individual Defendants"
hereinafter). (Id. ¶ 9).
Until October 2000, PDI's business historically consisted
entirely of what is referred to as "contract sales" or
"professional detailing," which consists of providing sales
representatives to pharmaceutical manufacturers who choose to
outsource selling activities for particular drugs. (Compl. ¶ 21).
This business is referred to as "fee-for-service" because PDI's
revenues are principally derived from the services that it
provides, not the sale of the particular drug. (Id.). For
several year, up to and including 2000, PDI's contract sales
business enjoyed substantial growth in revenues and earnings.
(Id. ¶ 22). In a November 2001 conference call, Defendant
Saldarini stated that PDI knew that it was necessary to "develop
additional avenues of growth . . . beyond just contract sales."
(Compl. ¶ 22). Consequently, PDI sought to develop alternative
types of arrangements for the sales and marketing of drugs for
pharmaceutical companies. (Id.). The events that triggered the
present litigation are as follows: The Ceftin Contract
PDI negotiated its first non fee-for-service arrangement with
GlaxoSmithKline ("GSK") in October 2000, which gave PDI exclusive
United States marketing, sales and distribution rights for Ceftin
tablets and oral suspension.*fn1 At the time PDI entered
into the Ceftin contract, Ceftin had a 10.8% share of the
Cephalosporin antibiotic market. (Compl. ¶ 24). This contract
with GSK required PDI to make minimum quarterly Ceftin purchases
and provided that the agreement could be cancelled by either
party upon 120 days written notice. (Id.). Although PDI
allegedly publicly stated that the Ceftin contract with GSK had a
five-year term, the Ceftin patent was due to expire in 2003.
Plaintiffs allege that upon executing the contract, PDI
promptly took steps to increase Ceftin sales and profits for the
fourth quarter of 2000, by inducing drug distributors to stock up
on Ceftin. (Compl. ¶ 25). As a result, that quarter, PDI reported
$101 million of Ceftin revenues, representing more than half of
PDI's total reported revenues for that period. (Id.).
Additionally, Ceftin sales also had a dramatic effect on PDI's
reported earnings for the fourth quarter of 2000, which increased
to $0.77 per share, from $0.24 per share in the fourth quarter of
1999 and $0.41 per share in the third quarter of 2000. (Id.).
Plaintiffs contend that PDI promoted the product for uses which
had not been approved by the United States Food and Drug
Administration ("FDA"), although there was no substantial
evidence that the drug was effective for the unapproved uses.
(Id.). Consequently, in March 2001, the FDA advised PDI that
their promotional materials violated the U.S. Food, Drug and Cosmetic Act and applicable FDA regulations, and ordered PDI to
"immediately cease distribution of the sales ads and other
similar promotional materials for Ceftin that contain the same or
similar claims or presentations." (Compl. ¶ 26). Following the
FDA's actions, Ceftin's share of the Cephalosporin market
declined such that by May 2001, it was 10.7%.*fn2 (Id. ¶
27). By July 2001, Ceftin's share of prescriptions for
Cephalospotin fell further to 8.7%, representing a 20% decline
from the drug's market share at the commencement of the Ceftin
contract, and a decline of more than 30% from the level attained
when the aforementioned marketing materials were in use. (Id.).
Additionally, Plaintiffs allege that when faced with this
declining market share in the second quarter of 2001, PDI
attempted to boost Ceftin's sales by announcing that price
increases were to take effect in the beginning of July of that
year, thereby inducing distributors to increase the Ceftin
inventories in anticipation of the price change. (Compl. ¶ 28).
As a result, PDI's reported Ceftin's sales in the second quarter
of 2001 increased by an additional $10 million to $15 million and
added $0.13-0.20 per share to its reported earnings. (Id.).
Approximately one and one-half years prior to PDI entering into
the Ceftin contract with GSK, another company, Ranbaxy
Pharmaceuticals, Inc. ("Ranbaxy"), had applied to the FDA for
marketing approval for a generic version of Ceftin. GSK initiated
a patent infringement action seeking to enjoin Ranbaxy from
producing the generic version of Ceftin. (Compl. ¶ 29). The
district court entered an injunction against Ranbaxy, who then
appealed to the United States Court of Appeals for the Federal
Circuit. (Id.). In August 2001, the Federal Circuit reversed
the lower court's decision on grounds that Ranbaxy's version of
Ceftin did not violate the Ceftin patent. (Compl. ¶ 30). Plaintiffs contend that Defendants
allegedly assured investors that reduced profits were the "worst
case scenario" for the Ceftin contract because the projections
were based upon the first launch of the generic form on October
1, 2001, and PDI could avoid losses by terminating the contract.
(Id.). Plaintiffs allege that not only was the October 1, 2001
date exaggerated (since no generic form of Ceftin was ever
introduced in 2001), the representation concerning contract
termination was false given PDI's knowledge of the millions of
dollars in write-offs of capitalized contract acquisition costs,
the continued liability for sales returns, and the cost of
administering Medicaid rebates as a result of the Ceftin contract
termination. (Id.). It was not until November 13, 2001 that PDI
publicly disclosed that PDI would incur these costs if the Ceftin
contract was terminated. (Id.).
The Lotensin Contract
In 2001, Novartis Pharmaceutical Corporation ("Novartis") was
selling three drugs for treating hypertension, namely, Diovan,
Lotrel and Lotensin, and was expected to introduce five new drugs
in 2002. (Compl. ¶¶ 33-35). Lotensin, an angiotension converting
enzyme ("ACE") inhibitor had been selling in the market for many
years and was nearing the end of its patent life. (Id. ¶ 35).
Plaintiffs allege that in order to develop a relationship with
Novartis, which PDI hoped would lead to profitable future
contracts, PDI agreed to market Lotensin in the United States at
its own expense. (Id. ¶ 36). PDI's sole compensation for these
efforts was a split of net Lotensin sales over a baseline amount.
(Id.). Plaintiffs allege that the exact amount, undisclosed at
the time, would cause PDI to lose money on the contract
throughout 2001. (Id.) Additionally, Plaintiffs contend that
although Lotensin's market share was decreasing at this time, PDI
was guaranteed to lose money on the contract even if it realized
a substantial increase in market share. (Id.).
Plaintiffs maintain that the baseline above which PDI would
profit from Lotensin sales was so high that PDI lost $5 million
on the contract in that quarter, even though Lotensin's share of
the ACE inhibitor market had increased by the fourth quarter of
2001. (Compl. ¶ 36). According to Plaintiffs, PDI would have been
required to increase Lotensin sales by another $10 million in the
quarter in order to offset that loss . (Id.). Further, in order
to achieve a projected $0.25 earnings per share, Lotensin sales
would have had to have been increased over 30%. (Id.).
Plaintiffs further allege that Defendants concealed this
impediment to profitability that was created by the baseline.
(Compl. ¶ 37). In support of this assertion, Plaintiffs rely on a
statement made analyst in May 23, 2001, where he stated that
"PDI's main goal with Lotensin will be to try and slow-down its
market share deterioration. . . ." (Id.). It is Plaintiffs'
contention that this was misleading because as stated above,
Defendants believed that PDI needed to do a lot more than merely
"slow-down" Lotensin's market share deterioration. (Id.).
Plaintiffs claim that PDI regularly forecasted the future
earnings and the earnings effect of large contract gains and
losses. (Compl. ¶ 38). Thus, they maintain that PDI told the
public that although the contract would be unprofitable in the
second and third quarters of 2001, it would produce earnings of
$0.25 per share by the fourth quarter of that year, knowing that
this was impossible. (Id. ¶ 38).
When the Defendants finally disclosed that the Lotensin
contract would not produce $0.25 earnings in the fourth quarter
in 2001, but would produce a loss of $0.23 per share, Defendants
blamed this disparity on delay in completing market research and
the preparation of marketing materials. (Compl. ¶ 39). Defendants
also stated, for the first time, that the Lotensin contract was a
"long-term strategic opportunity," presumably aimed at obtaining
future profitable business from Novartis. (Id.). At the time, Defendants
announced the Lotensin contract, they refused to reveal the
specific baselines that would be used to compute PDI's revenues.
(Id. ¶ 40). Plaintiffs admit that Defendants revealed that the
baseline amount would decline over the contract life. (Id.).
Despite the decline in 2002, PDI lost additional money on the
contract in the first quarter of 2002, although Lotensin's market
share had increased. (Id. ¶ 40). Similarly, at this time the
Defendants stated that PDI would reduce the number of
representatives assigned to sell Lotensin by 75%. (Id.).
The Evista Contract
On October 2, 2001, PDI declared that it entered into an
agreement with Eli Lilly and Company ("Eli Lilly"), to co-promote
Evista, an osteoporosis drug, in the United States. (Compl. ¶
41). Pursuant to the agreement, PDI would provide a sizeable
number of sales representatives to augment the existing Eli Lilly
sales force already promoting Evista. (Id.). PDI's compensation
for its participation in the co-promotion of Evista was a split
of net sales over the baseline amount. (Id. ¶ 43). The
specifics of the Evista agreement, however, were not publicly
disclosed. (Id. ¶ 44).
At the end of the Class Period, Defendants admitted that the
Evista contract was a "long-term strategic opportunity." (Compl.
¶ 46). However, according to Plaintiffs, it was not until
November 2002 that Defendants admitted that PDI cancelled the
Evista contract because it was expected to continue to incur tens
of millions of dollars of losses. (Id.). Given that the
contract committed PDI to a certain level of spending for
promotional activities which would result in expenses of
approximately $32-48 million per year, the Evista contract,
Plaintiffs assert, needed to exceed the contractual baseline by
$32-48 million in order to break even. (Id. ¶ 47). By November 2002, the Evista contract had cost PDI almost $50
million in losses as a result of prior losses on the contract in
addition to a $9.1 million charge related to the contract. (Id.
Thereafter, Eli Lilly awarded a contract involving the
promotion of the drug Cymbalta, a drug used to treat depression,
to a competitor, Innovex. (Id. ¶ 49). The Cymbalta contract
could have been very profitable for PDI as there is, as
Plaintiffs explain, significant promotional potential for new
prescription drugs that treat depression. (Id.).
Allegedly False and Misleading Statements
On May 22, 2001, the first day of the Class Period, PDI held a
conference call with securities analysts to discuss the contract
with Novartis for the distribution of Lotensin. (Compl. ¶ 51).
During the conference call, Saldarini represented that the
Lotensin agreement was expected to add $0.25 earnings per share
to the company's fourth quarter 2001 earnings, although startup
costs, such as training and promotional costs, would likely
depress earnings for the second and third quarters. (Id.).
Plaintiffs claim that these statements were intended to increase
the price of PDI common stock. (Id. ¶ 52). Plaintiffs further
claim that the price did increase by $5.10 following the May 22
conference from $86.08 per share on May 22, 2001 to close at
$91.18 on May 23, 2001. (Id.). Plaintiffs further allege that
these statements were intended to convey the false and misleading
impression that the terms of the Lotensin contract were
advantageous to PDI, and that PDI would earn significant profits
after the initial investment of start-up costs. (Id. ¶ 53).
Plaintiffs further charge that Defendants knowing or recklessly
failed to disclose that PDI had purposefully entered into an
unprofitable contract with Novartis in order to: (1) retain the
services of marketing representatives who would otherwise have
left PDI; and (2) to obtain future profitable business from
Novartis. (Id.). PDI subsequently issued a press release on July 20, 2001
announcing that Pfizer, Inc. ("Pfizer") had elected not to renew
a product detailing agreement that was due to expire on October
31, 2001. (Compl. ¶ 54). The press release assured investors that
the termination would not adversely affect its earnings for 2001
or 2002. (Id.; Declaration of Israel David ("David Decl."),
Thereafter, a conference call was held on August 14, 2001,
involving Saldrini and Boyle. (Compl. ¶ 55; David Decl. Ex.4).
They discussed PDI's results for the second quarter of 2001 and
its expected results for the remainder of 2001. (Id.).
Defendants further noted that PDI would likely earn $0.20 per
share less than previously forecasted for the third quarter due
to a Ceftin inventory glut at distributors. (Compl. ¶ 55; David
Decl. Ex.4 at 8). However, both Defendants advised that despite
the expected weakness in the third quarter, PDI would meet
previously announced expected earnings for the year 2001 of $2.30
per share based on expected strength in the fourth quarter.
(Compl. ¶ 55). Plaintiffs allege that the aforementioned
statements were materially false and misleading because
Defendants failed to divulge that PDI had never increased
Ceftin's market share, except for the periods where it was
allegedly employing unlawful marketing materials or artificially
increasing market share by "incentivizing" distributors to stock
up on Ceftin. (Id. ¶ 56).
Subsequently, PDI issued a press release on August 21, 2001,
announcing the Federal Circuit's decision holding that Ranbaxy's
generic Ceftin did not infringe GSK's patent. (Compl. ¶ 57; David
Decl. Ex.5). Defendants advised that Ranbaxy could begin selling
generic Ceftin upon obtaining FDA approval. (Id.). Further, the
press release advised that PDI was evaluating its options and
additional announcements would be forthcoming. (Compl. ¶ 57). PDI subsequently issued a press release on August 23, 2001,
discussing its options in light of the Federal Circuit's
decision. (Id. ¶ 58). PDI also discussed the financial
implications on PDI's business for the remainder of 2001 and 2002
resulting from the immediate introduction of generic Ceftin,
noting that in the third and fourth quarters of 2001, PDI
"expects a severe impact on net revenue and profitability," and
that "[s]uch impact will result partly from wholesalers and other
trade customers reducing projected purchases from PDI in
anticipation of building generic cefuroxime axetil tablet
inventories from other suppliers, and partly because sales and
marketing costs cannot be significantly reduced over the
short-term." (Compl. ¶ 59).
On August 24, 2001, Saldarini held a conference call to address
concerns prompted by the aforementioned developments concerning
Ceftin. (Compl. ¶ 60; David Decl. Ex.7). Saldarini explained that
even if introduced in October of that year, the generic Ceftin
could not satisfy the entire fourth quarter demand for Ceftin,
and he expected that 80% of the fourth quarter demand would be
satisfied by Ceftin and not the generic competition. (Compl. ¶
61). He further claimed that the company was expecting Ceftin to
contribute $0.30-0.40 earnings per share by 2002. (Id.; David
Decl. Ex.7 at 6). Plaintiffs contend Saldarini's statements
regarding the impact of generic competition for Ceftin were false
and misleading because the Defendants failed to disclose that the
termination of the Ceftin contract would cause PDI to incur
"massive expenses," and further, PDI never increased Ceftin's
market share, except when it "had unlawfully promoted the drug or
artificially inflated reserve by shifting sales into an earlier
quarter at the expense of a later quarter." (Compl. ¶ 62).
On November 12, 2001, PDI issued another press release
announcing a loss of $17.3 million for the third quarter of 2001.
(Compl. ¶ 63). Saldarini stated that PDI would terminate the Ceftin agreement with GSK, but that PDI had "positive
developments in the pipeline. . . ." (Id.). Plaintiffs maintain
that the revelations in the November press release were much
worse than PDI had previously led investors to believe. (Id. ¶
65). The price of PDI common stock declined from a $29 per share
close on November 12, 2001, to close at $18.35 per share on
November 13, 2001. (Id.).
On November 13, 2001, PDI held a conference call with investors
and analysts. (Compl. ¶ 66; David Decl. Ex.8). During the call,
Saldarini revealed that PDI would not profit from the Ceftin
contract in the fourth quarter. (Compl. ¶ 66). He further advised
that the Lotensin contract would not contribute to fourth quarter
earnings as expected because PDI "did not have the marketing
materials, the positioning and support programs in place."
Plaintiffs initiated the instant action on January 16, 2002. On
May 23, 2002, the Honorable Magistrate Judge Ronald J. Hedges,
U.S.M.J. granted Plaintiff Gary Kessel's motion to consolidate
civil case 02-cv-211, with 02-cv-367 and 02-cv-699. Thereafter, a
Consolidated and Amended Class Action Complaint was filed on July
30, 2002. On November 19, 2002, Plaintiffs' motion to file an
Amended Complaint was granted, and the Second Amended Complaint
was subsequently filed on December 13, 2002. Count I of
Plaintiffs' Second Amended Complaint is premised on violations of
Section 10(b) of the Securities Exchange Act of 1934 (the
"Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated
thereunder, 17 C.F.R. § 240.10b-5, against all the Defendants.
Count II alleges a violation of Section 20(a) of the Exchange
Act, 15 U.S.C. § 78t(a), against Defendants Saldarini and Boyle
as the controlling persons of PDI. Defendants presently move to
dismiss the Second Amended Complaint under Fed.R.Civ.P. 9(b), 12(b)(6), and the Private Securities
Litigation Reform Act of 1995 (hereinafter the "Reform Act" or
"PSLRA"), 15 U.S.C. §§ 78u-4, et seq.
A. Rule 12(b)(6), Rule 9(b), and the Reform Act
1. Fed.R.Civ.P. 12(b)(6)
The applicable inquiry under Federal Rule 12(b)(6) is
well-settled. Courts must accept all well-pleaded allegations in
the complaint as true and to draw all reasonable inferences in
favor of the non-moving party. Scheuer v. Rhodes, 416 U.S. 232,
236 (1974), overruled on other grounds, Harlow v. Fitzgerald,
457 U.S. 800 (1982); Allegheny Gen. Hosp. v. Philip Morris,
Inc., 228 F.3d 429, 434-35 (3d Cir. 2000). The question is not
whether plaintiffs will ultimately prevail in a trial on the
merits, but whether they should be given an opportunity to offer
evidence in support of their claims. Scheuer, 416 U.S. at 236.
Dismissal under Rule 12(b)(6) is not appropriate unless it
appears beyond doubt that plaintiff can prove no set of facts in
support of his claim which would entitle him to relief. Official
Comm. of Unsecured Creditors v. R.F. Lafferty & Co.,
267 F.3d 340, 346 (citing Conley v. Gibson, 355 U.S. 41, 45-46 (1957)).
The Third Circuit has further noted that courts are not
required to credit bald assertions or legal conclusions
improperly alleged in the complaint. In re Burlington Coat Fact.
Sec. Litig., 114 F.3d 1410, 1429 (3d Cir. 1997). Similarly,
legal conclusions draped in the guise of factual allegations may
not benefit from the presumption of truthfulness. In re Nice
Sys., Ltd. Sec. Litig., 135 F. Supp. 2d 551, 565 (D.N.J. 2001). 2. Heightened pleading requirement
Fed.R.Civ.P. 9(b) imposes a heightened pleading requirement
of factual particularity with respect to allegations of fraud,
independent of the standard applicable to a Rule 12(b)(6) motion.
Rule 9(b) states: "In all averments of fraud or mistake, the
circumstances constituting fraud or mistake shall be stated with
particularity." Fed.R.Civ.P. 9(b). "This particularity
requirement has been rigorously applied in securities fraud
cases." In re Burlington, 114 F.3d at 1417 (citations omitted).
As such, plaintiffs averring securities fraud claims must specify
"`the who, what, when, where, and how: the first paragraph of any
newspaper story.'" In re Advanta Corp. Sec. Litig.,
180 F.3d 525, 534 (3d Cir. 1999) (quoting DiLeo v. Ernst & Young,
901 F.2d 624, 627 (7th Cir. 1990)). The Third Circuit has further
noted that "[a]lthough Rule 9(b) falls short of requiring every
material detail of the fraud such as date, location, and time,
plaintiffs must use `alternative means of injecting precision and
some measure of substantiation into their allegations of fraud.'"
In re Rockefeller Ctr. Props. Sec. Litig., 311 F.3d 198, 216
(3d Cir. 2002) (quoting In re Nice Sys.,
135 F. Supp. 2d at 577).
In addition to the Rule 9(b) requirements, plaintiffs alleging
securities fraud must also comply with the heightened pleading
requirements of the Reform Act, 15 U.S.C. § 78u-4(b)(1) and
(b)(2). Specifically, § 78u-4(b)(1) of the Act requires
plaintiffs to "specify each statement alleged to have been
misleading, the reason or reasons why the statement is
misleading, and, 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." 15 U.S.C. § 78u-4(b)(1). Further, with respect to
securities fraud claims, such as Rule 10b-5 claims, the Reform
Act requires that "the complaint shall, with respect to each act
or omission alleged to violate this chapter, 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 Reform Act modified the traditional Rule 12(b)(6) analysis.
"`[W]hereas under Rule 12(b)(6), we must assume all factual
allegations in the complaint are true . . . under the Reform Act,
we disregard `catch-all' or `blanket' assertions that do not live
up to the particularity requirements of the statute.'" In re
Rockefeller Center, 311 F.3d at 224 (quoting Florida State Bd.
of Admin. v. Green Tree Fin. Corp., 270 F.3d 345, 660 (8th Cir.
2001)). The Reform Act requires a `strong inference' of scienter,
and accordingly, alters the normal operation of inferences under
Rule 12(b)(6). In re Digital Island Sec. Litig., 357 F.3d 322,
328 (3d Cir. 2004) (citing In re Rockefeller Ctr.,
311 F.3d at 224) ("[U]nless plaintiffs in securities fraud actions allege
facts . . . with the requisite particularity . . . they may not
benefit from inferences flowing from vague or unspecific
allegations-inferences that may arguably have been justified
under a traditional Rule 12(b)(6) analysis.")); see also
Greebel v. FTP Software, Inc., 194 F.3d 185, 196 (1st Cir.
1999) ("A mere reasonable inference is insufficient to survive a
motion to dismiss."). The failure to meet the Reform Act's
pleading requirements will result in dismissal of the complaint.
In re Advanta, 180 F.3d at 531.
With these heightened pleading requirements in mind, the Court
will apply the requirements of Rule 9(b) and § 78u-4(b)(1) and
(2). The Court now turns to the particulars of Plaintiffs' Second
Amended Complaint.*fn3 B. Section 10(b) and Rule 10b-5
Plaintiffs bring claims pursuant to Sections 10(b) and 20(a) of
the Exchange Act, 15 U.S.C. §§ 78j(b), 78t(a), and Rule 10b-5
promulgated thereunder, 17 C.F.R. § 240.10b-5. Section 10(b)
proscribes the "use or employ[ment], in connection with the
purchase or sale of any security, . . . [of] any manipulative or
deceptive device or contrivance in contravention of such rules
and regulations as the Commission may prescribe."
15 U.S.C. § 78j(b). Rule 10b-5, in turn, makes it illegal "[t]o make any
untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made in
the light of the circumstances under which they were made, not
misleading . . . in connection with the purchase or sale of any
security." 17 C.F.R. § 240.10b-5(b). As the Third Circuit has
observed, "[t]he private right of action under Section 10(b) and
Rule 10b-5 reaches beyond statements and omissions made in a
registration statement or prospectus or in connection with an
initial distribution of securities and creates liability for
false or misleading statements or omissions of material fact that
affect trading on the secondary market." In re Burlington Coat
Factory, 114 F.3d at 1417 (citing Central Bank of Denver, N.A.
v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994));
Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1216-17 (1st Cir.
1996); Eckstein v. Balcor Film Investors, 8 F.3d 1121, 1123-24
(7th Cir. 1993), cert. denied, 510 U.S. 1073 (1994).
A Rule 10b-5 plaintiff must first establish that the defendant
made a materially false or misleading statement, or that
defendant omitted to state a material fact necessary to make a
statement not misleading. Id. (citing In re Phillips Petroleum
Sec. Litig., 881 F.2d 1236, 1243 (3d Cir. 1989)); Lovelace v.
Software Spectrum, Inc., 78 F.3d 1015, 1018 (5th Cir. 1996).
Next, the plaintiff must demonstrate that the defendant acted with
scienter and that the plaintiff's reliance on the defendant's
misstatement caused injury to the plaintiff. Id. (citing
Phillips, 881 F.2d at 1244); San Leandro Emergency Med. Group
Profit Sharing Plan v. Philip Morris Cos., Inc., 75 F.3d 801,
808 (2d Cir. 1996). Finally, given that a "fraud" claim is being
asserted, the plaintiff must satisfy the heightened pleading
requirements of Federal Rule 9(b). Id.
C. Section 20(a)
Section 20(a) provides a cause of action against individual
defendants who are alleged to have been `control persons' of
companies deemed guilty of securities fraud. Jones v.
Intelli-Check, Inc., 274 F. Supp. 2d 615, 644 (D.N.J. 2003).
Section 20(a) states:
Every person who, directly or indirectly, controls
any person liable under any provision of this chapter
or of any rule or regulation thereunder shall also be
liable jointly and severally with and to the same
extent as such controlled person to any person to
whom such controlled person is liable, unless the
controlling person acted in good faith and did not
directly or indirectly induce the act or acts
constituting the violation or cause of action.
15 U.S.C. § 78t(a). A party can be held liable under this
provision for exercising control over the corporation that has
committed the securities fraud. In re MobileMedia Sec. Litig.,
28 F. Supp. 2d 901, 940 (D.N.J. 1998). Plaintiffs asserting a
Section 20(a) violation "must plead facts showing: (1) an
underlying violation by the company; and (2) circumstances
establishing defendant's control over the company's actions."
Jones, 274 F. Supp. 2d at 645. In order to establish a
defendant is a control person, a plaintiff must demonstrate "the
defendant had actual power or influence over the allegedly
controlled person." In re MobileMedia, 28 F. Supp. 2d at 940
(quoting Kersh v. Gen. Council of Assemblies of God,
804 F.2d 546
, 548 (9th Cir. 1986)). LEGAL DISCUSSION
A. Whether PDI's Statements Are Protected by Both Statutory
Safe Harbors and the Bespeaks Caution Doctrine
1. Safe harbor
The Reform Act establishes a safe harbor protecting oral or
written forward-looking statements from Rule 10b-5 liability.
15 U.S.C.A. § 78u-5. Specifically, § 78u-5(c)(1)(A) provides that:
[A] person . . . shall not be liable with respect to
any forward-looking statement, whether written or
oral, if and to the extent that (A) the
forward-looking statement is (i) identified as a
forward-looking statement, and is accompanied by
meaningful cautionary language statements identifying
important factors that could cause actual results to
differ materially from those in the forward looking
Id. A forward-looking statement is defined as, inter alia,
(A) a statement containing a projection of revenues,
income (including income loss), earnings (including
earnings loss) per share, capital expenditures,
dividends, capital structure, or other financial
(B) a statement of the plans and objectives of
management for future operations, including plans or
objectives relating to the products or services of
(C) a statement of future economic performance,
including any such statement contained in a
discussion and analysis of financial condition by the
management or in the results of operations included
pursuant to the rules and regulations of the [SEC].
15 U.S.C.A. § 78u-5(i)(1). The cautionary language needs to be
"directly related to the alleged misrepresentations," but it does
not have to "actually accompany the alleged misrepresentation."
GSC Partners CDO Fund v. Washington, 368 F.3d 228
, 243 (3d Cir.
2004) (quoting EP Medsystems, Inc. v. EchoCath, Inc.,
235 F.3d 865
, 874 (3d Cir. 2000)); see also Semerenko v. Cendant Corp., 223 F.3d 165, 182 (3d Cir. 2000) (quoting In re
Donald J. Trump Casino Sec. Litig.-Taj Mahal Litig., 7 F.3d 357
369 (3d Cir. 1993)). In In re Trump, the Third Circuit
[A] vague or blanket (boilerplate) disclaimer which
merely warns the reader that the investment has risks
will ordinarily be inadequate to prevent
misinformation. To suffice, the cautionary statements
must be substantive and tailored to the specific
future projections, estimates or opinions in the
prospectus which the plaintiffs challenge.
In re Trump, 7 F.3d at 371-72. In Kline v. First Western Gov't
Sec., Inc., 24 F.3d 480
, 489 (3d Cir. 1994), the Third Circuit
clarified that "Trump requires that the language bespeaking
caution relate directly to that by which plaintiffs claim to have
been misled." The safe-harbor will not apply, however, if the
statement was made with actual knowledge that the statement was
false or misleading. 15 U.S.C. § 78u-5(c)(1)(B)(i); In re
Advanta Corp., 180 F.3d at 535. Here, Defendants contend that
the statements challenged by Plaintiffs are virtually all
forward-looking in that they all address PDI's prospects in the
future, and in particular, its earnings and revenue prospects for
the third and fourth quarters of 2001 and for the full-year 2002.
Plaintiffs do not contest this assertion.
Defendants claim that the Second Amended Complaint challenges
earning and revenue projections, which fall within the plain
language of § 78u-5(i)(1)(A), and thus, as forward-looking
statements, the statements qualify for protection under the safe
harbor provision. Defendants maintain that each of the challenged
statements were specifically identified by PDI as forward-looking
statements by virtue of the fact that they were referred to as
"projections," and consequently, by their very language they
identify themselves as forward-looking. In re Clorox Co. Sec. Litig., 2002 U.S. Dist. LEXIS 25221, *16 (N.D.Cal.
Nov. 21, 2002) ("[A] prediction about future events is
self-evidently a forward-looking statement."). These statements,
identified in Defendants' moving brief, are the:
May 22, 2001 conference call where Saldarini
discussed expected earnings from the Lotensin
contract. (Compl. ¶ 51).
July 20, 2001 press release assuring investors that
the termination by Pfizer would not adversely impact
its earnings and its earnings guidance for 2001 or
2002 will not be changed. (Id. ¶ 54).
August 14, 2001 conference call with the Individual
Defendants regarding Ceftin and PDI's expected
earnings. (Id. ¶ 55).
August 23 press release providing an estimated
financial impact the immediate introduction of
generic Ceftin would have on PDI's business for the
remainder if 2001 and 2002. (Id. ¶ 59).
August 24, 2001 conference call discussing the
potential impact of generic Ceftin, as well as PDI's
expected earnings from Ceftin. (Compl. ¶ 61).
November 13, 2001 conference call with investors
and analysts discussing the expected earnings in
connection with the Ceftin and Lotensin contracts.
(Compl. ¶ 66).
February 20, 2002 conference call where Saldarini
discussed expected earnings in connection with the
Lotensin contract. (Id. ¶ 73).
(Defendants' Memorandum in Support of Motion to Dismiss ("Defs.'
Mem. in Supp."), at 13).
According to Defendants, language incorporated in the Second
Amended Complaint further supports their assertion that the
statements are forward-looking, as Plaintiffs indicate that PDI
used broad terms such as "expected" "would likely earn" and
"anticipated." (See, e.g., Compl. ¶¶ 51, 54, 55, 59, 61, 64,
68, 70, 77). This Court finds that these statements are
forward-looking within the meaning of § 78u-5(i)(1)(A) as they
pertain to earning and revenue prospects. Moreover, these
statements were all identified as such as the time they were
made. For example, the July 20, 2001 press release included an entire
paragraph on the Reform Act's safe harbor provision, and
specifically identified the statements contained therein as
forward-looking statements. (David Decl. Ex.3).*fn4
Next, Defendants urge this Court to find these statements are
entitled to safe harbor protection because they used meaningful,
pervasive cautionary language before and throughout the alleged
class period regarding the very risks that ultimately caused the
Ceftin, Lotensin and Evista contracts to become unprofitable and
the PDI's projections to falter. Defendants rely on the following
statements to support their safe harbor defense: Risks associated with new line of business "We
have entered into a new line of business [performance
based contracts] with which we have no prior
experience and, therefore, our prospects for success
are uncertain." (David Decl. Ex.16 at 6).
Risks associated with performance based contracts
"[I]f we fail to meet certain performance objectives,
or if we incorrectly assess the market potential of a
particular product, the margins on that contract and
our overall profitability may be adversely affected."
(David Decl. Ex.16 at 10).
Risks associated with introduction of generic
equivalents "[R]isks include . . . competition from
new or existing drug products, including introduction
of generic equivalents. . . ." (Id. at 6).
Risks relating to early termination of contracts
"The termination of a contract by one of our major
clients would not only result in lost revenue, but
may cause us to incur additional costs and expenses."
(David Decl. Ex.1 at 9).
Risks relating to the ceftin agreement "In the
event that management's estimates of the demand for
Ceftin are not accurate . . . the Ceftin transaction
could have a material adverse impact on [PDI's]
financial condition, cash flows and liquidity."
(David Decl. Ex.16 at 4-5).
"If we cannot maintain or increase sales of Ceftin
from their current levels, our business, operations
and financial results could be adversely affected."
(Id. at 7).
"If Ceftin's patent rights expire, the introduction
of generic alternatives will adversely impact the
market for Ceftin." (Id. at 8).
Risks relating to Lotensin "In the event our
estimates of the demand for Lotensin are not accurate
or more sales and marketing resources than
anticipated are required, the [Lotensin] transaction
could have material adverse impact on our results or
operations, cash flows and liquidity." (David Decl.
Ex.21 at 13).
Risks relating to Evista "In the event the
predetermined net sales levels are not achieved, we
will not receive any revenue to offset expenses
incurred." (David Decl. Ex.11 at 4).
"While the company currently estimates that its
future revenues from Evista sales will exceed its
costs associated with this agreement, there is no
assurance that actual revenues will exceed costs; in
which event the activities covered by this agreement
would continue to yield an operating loss." (David
Decl. Ex.13 at 8). Defendants contend that in light of these warnings,
all of the challenged forward-looking statements are
fully immunized by the statutory safe harbor.
Plaintiffs maintain that Defendants' statements were not
accompanied by meaningful cautionary language relating to
Defendants' warnings regarding the Ceftin, Lotensin and Evista
contracts. Plaintiffs contend that the language used by the
Defendants renders their warnings insufficient because they had
the materially adverse information that would affect the
profitability of the contracts that they entered into but
Defendants failed to disclose this information.
As Defendants have outlined certain cautionary language
relating to the Ceftin, Lotensin and Evista contracts, the Court
will now examine the warnings in relation to the forward-looking
statements in order to determine whether they are accompanied by
substantive and tailored cautionary language to satisfy the
requirements of the Reform Act's safe harbor provision. In re
Trump Casino Sec. Litig., 7 F.3d at 371-72.
First, Plaintiffs challenge the May 22, 2001 conference call
related to PDI's contract with Novartis for the distribution of
Lotensin. (Compl. ¶ 51). During the call, Saldarini advised that
startup costs such as training and promotional costs could have a
negative effect on earnings during the second and third quarters
of that year, and that PDI expected an increase in earnings to
its fourth quarter 2001 earnings. (Compl. ¶ 51). In the August
14, 2001 SEC filing, Defendants warned that inaccurate estimates
on demand, sales or marketing, could negatively impact PDI's
revenues. (David Decl. Ex.21 at 13). Plaintiffs allege, however,
that the statements were false and misleading because, among
other things, Defendants did not disclose the terms of the
Lotensin contract, including the baseline on the contract, and
that Defendants' statement "was intended to convey the false and misleading impression that the
terms of the Lotensin contract were very favorable, and that PDI
would earn significant profits after the initial investments in
start-up costs. . . ." (Compl. ¶ 53). Although the cautionary
language relates to training and promotional costs associated
with Lotensin, it is not clear that the challenged statements can
be deemed immaterial, as information about the contract baseline
may have assumed actual significance to a reasonable investor.
"Materiality is a mixed question of law and fact, and the
delicate assessments of the inferences a reasonable shareholder
would draw from a given set of facts are peculiarly for the trier
of fact." Shapiro v. UJB Financial Corp., 964 F.2d 272, 281 (3d
Cir. 1992). Only if the adequacy of the representation or the
materiality of the statement is so obvious that reasonable minds
could not differ, will the representation or omission be
immaterial as a matter of law. EP Medsystems, 235 F.3d at 877
(citing Weiner v. Quaker Oats Co., 129 F.3d 310, 321 (3d Cir.
1997)). Here, the adequacy of the warnings is not so obvious to
this Court, and thus, Defendants' motion to dismiss as to this
statement based on the safe harbor defense, is denied. In re
Lucent Techs., Inc. Sec. Litig., 217 F. Supp. 2d 529, 557
(D.N.J. 2002) (noting that it is for trier of fact to determine
sufficiency of cautionary language).
The next challenged statement is the July 20, 2001 press
release announcing that Pfizer had elected not to renew its
contract with PDI. (Compl. ¶ 54). In the press release, PDI
advised that the termination would not adversely affect earnings.
(David. Decl. Ex.3). In a November 15, 2000 SEC filing, PDI
addressed the termination of a contract by an existing client,
noting: "Our contracts are generally for a term of one year and
may be terminated by the client at any time for any reason. The
termination of a contract by one of our major clients would not
only result in lost revenue but may cause us to incur additional
costs and expenses." (David Decl. Ex.16). The cautionary language suffices to negate as a matter of
law any alleged misrepresentations concerning the impact a
termination would have on earnings. Therefore, inasmuch as the
statement relates to the affect of the termination of the Pfizer
agreement on earnings, this statement is protected by the
statutory safe harbor.
In their Second Amended Complaint, Plaintiffs also challenge
the August 14, 2001 conference call, where Saldarini explained
that PDI would earn less than previously forecasted for the third
quarter of 2001 due to an oversupply of Ceftin inventory with
distributors. (Compl. ¶ 55). In a November 15, 2000 SEC
Registration Statement on Form S3, Defendants advised that there
could be an adverse financial impact if management's estimated
demand for Ceftin was not accurate. (David Decl. Ex.16 at 4-5).
PDI further warned: "If we cannot maintain or increase sales of
Ceftin from their current levels, our business, operations and
financial results could be adversely affected." (Id. at 7).
Plaintiffs allege, however, that these statements were false and
misleading because Defendants "failed to disclose that except for
the period where it was employing unlawful marketing materials,
or artificially increasing market share by "incentivizing"
distributors to stock up on ceftin, PDI had never increased
Ceftin's market share." (Compl. ¶ 56). While the cautionary
statements seemingly have a connection to the issue of Ceftin
inventory, it is not so clear to this Court that the accompanying
warnings negate any potentially misleading effect that omissions
concerning marketing materials or "incentivizing" would have on a
reasonable investor. Therefore, the motion to dismiss based on
the safe harbor defense is also denied as to this statement.
In the Second Amended Complaint, Plaintiffs also challenge the
November 13, 2001 conference call, where Saldarini explained that
due to the lack of marketing and support programs, the Lotensin and Ceftin contracts would not contribute
to fourth quarter earnings in 2001. (Compl. ¶ 66). In an August
14, 2001 Form 10Q filing with the SEC, Defendants advised that
inaccurate estimates on demand, sales or marketing, could
negatively impact PDI's revenues. (David Decl. Ex.21 at 13).
Morever, PDI advised that if it "incorrectly assess[es] the
market potential of a particular product, the margins on that
contract and our overall profitability may be adversely
affected." (David Decl. Ex.17 at 13). However, as Plaintiffs
explain, during the call, Saldarini failed to disclose the
baselines in the Lotensin contract. (Compl. ¶ 66). Although
addressing potential marketing and support concerns, the
cautionary disclaimers do not appear to address Plaintiffs'
allegations concerning the baseline or otherwise discuss the
terms of the Lotensin contract. Accordingly, whether the warnings
are sufficient to neutralize Defendants' representations is not
so obvious as to be decided as a matter of law. Likewise, this
Court finds that the February 20, 2002 conference call, where
Saldarini commented on fiscal results of the Lotensin contract,
may also not be protected. (Compl. ¶ 73). It is true that
Defendants previously advised that inaccurate estimates on the
demand for Lotensin, or regarding sales or marketing, could have
a materially adverse impact, and further cautioned that they were
entering into a new line of business which involved
performance-based contracts, with which there was no prior
experience, and therefore, the results were uncertain. (David
Decl. Ex.24 at 13; David Decl. Ex.17 at 10). However, during the
call, Saldarini also makes reference to a "declining baseline."
(Compl. ¶ 74). Again, it is not obvious to this Court that
cautionary statements were precisely tailored to address
Defendants' failure in discussing the terms of the baseline.
Accordingly, as a matter of law, these statements may not be
dismissed as immaterial. Finally, the Court cannot say that the warnings in connection
with the August 23 and August 24, 2001 statements are so obvious
as to render the statements immaterial. In the August 23, 2001
press release, Saldarini addressed the estimated financial impact
of generic Ceftin on PDI's business for the remainder of 2001 and
2002. (Compl. ¶ 59). PDI had provided warnings as to the risks
associated with "competition from new or existing drug products,
including introduction of generic equivalents prior to the
expiration of Ceftin's patents[.]" (David Decl. Ex.16 at 6).
While PDI does advise of the general risks associated with the
introduction of generic equivalents, it is not clear that the
warning is substantive or specific enough on the impact of the
immediate release of generic Ceftin into market or on customer
inventories. Accordingly, this statement cannot be deemed
immaterial as a matter of law. Further, during the August 24,
2001 conference call, Saldarini explained that 80% of the fourth
quarter of 2001 demand would be satisfied by Ceftin and not the
generic competition. (Compl. ¶ 61). Again, it is not clear that
these statements are neutralized, as PDI's warnings about the
introduction of generic did not appear to disclose the risks
associated with termination of the Ceftin contract due to generic
competition. (Compl. ¶ 62). Accordingly, these statements may not
be dismissed as a matter of law, and should be addressed by the
trier of fact.
To summarize, it is clear that a defendant has no liability for
a forward-looking statement if the statement is either immaterial
or is "identified as a forward-looking statement, and is
accompanied by meaningful cautionary statements identifying
important factors that could cause actual results to differ
materially from those in the forward-looking statement." §
78u-5(c)(1)(A). This Court finds that all of challenged
statements discussed above are forward-looking statements. It is
not so clear to this Court, however, that the cited cautionary
language renders all of the statements immaterial as a matter of law. Accordingly,
with the exception of the July 20, 2001 press release,
Defendants' motion to dismiss based on safe harbor grounds is
2. The common law "bespeaks caution" doctrine
Defendants also argue that PDI's forward-looking statements are
independently protected by the judicially-created "bespeaks
caution" doctrine, which was reaffirmed by the Reform Act. Under
the doctrine, "cautionary language, if sufficient, renders the
alleged omissions or misrepresentations immaterial as a matter of
law." EP Medsystems, 235 F.3d at 873 (citing In re Trump,
7 F.3d at 371). The doctrine only applies to forward-looking
statements, and cannot be invoked for misleading statements of
existing fact. In re Trump, 7 F.3d at 371; Shaw v. Digital
Equip. Corp., 82 F.3d 1194, 1213 (1st Cir. 1996); In re
MobileMedia Sec. Litig., 28 F. Supp. 2d 901, 928 (D.N.J. 1998);
Voit v. Wonderware Corp., 977 F. Supp. 363, 371-72 (E.D. Pa.
1997). Furthermore, the Third Circuit has recognized that for the
doctrine apply, "the cautionary language must be directly related
to the alleged misrepresentations or omissions." EP Medsytems,
235 F.3d at 874 (citing Kline, 24 F.3d at 480). For the reasons
already discussed above, this Court finds that it is for the
trier of fact to determine whether the forward-looking statements
identified above, with the exception of July 20, 2001 press
release, are immunized from challenge. B. Particularity Requirement of 15 U.S.C. § 78u-4(b)(1)
Defendants maintain that Plaintiffs have not met the
requirements of § 78u-4(b)(1) because the earnings and revenue
projection allegations lack any factual basis. As indicated
above, the Reform Act requires that any securities fraud claim
brought under the 1934 Act "specify each statement alleged to
have been misleading, the reason or reasons why the statement is
misleading, and, 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." 15 U.S.C. § 78u-4(b)(1). If this pleading requirement is
not satisfied, "the court shall . . . dismiss the complaint."
15 U.S.C. § 78u-4(b)(3)(A). It is not disputed that, with the
exception of several statements grounded in confidential sources
(discussed more fully below), Plaintiffs herein identify
Defendants' allegedly false and misleading statements with
particularity. However, the Reform Act also directs plaintiffs to
specify "the reason or reasons why the statement is misleading."
15 U.S.C. § 78u-4(b)(1). The Court must now determine whether
this particularity requirement has been satisfied.
1. May 22, 2001 conference call (regarding Lotensin)
During the call, Saldarini stated that PDI expected the
Lotensin agreement to "to add $0.25 earnings per share to the
company's fourth quarter of 2001, although startup costs, such as
training and promotional costs would likely depress earnings for
the second and third quarters." (Compl. ¶ 51). Plaintiffs allege
that the statements were false and misleading because Defendants
"knew" that PDI was "guaranteed to lose money" on the Lotensin
contract. (Id. ¶¶ 36-38, 51, 53, 69, 71). Plaintiffs have not
cited to any facts that suggest that Defendants did not actually
believe that these earnings would materialize, and point to no
documents or statements suggesting that any Defendant doubted that the earnings would
materialize as predicted or that Lotensin was guaranteed to lose
money. Furthermore, Plaintiffs' claim that PDI lost money in the
fourth quarter of 2001 and first two quarters of 2002, see
Compl. ¶¶ 39, 40, 64, is an unacceptable attempt to plead fraud
by hindsight. California Pub. Employees' Ret. Sys. v. Chubb
Corp., 394 F.3d 126, 158 (3d Cir. 2004) ("CalPERS") (the Third
Circuit has "long rejected attempts to plead fraud by
hindsight"); see also In re Suprema Specialities, Inc. Sec.
Litig., 334 F. Supp. 2d 637, 647 (D.N.J. 2004) ("Allegations
that a company's later financial difficulties imply that earlier
financial statements were untrue or misleading are `fraud by
hindsight' and do not state a claim.") (citations omitted).
Moreover, Plaintiffs' reliance on the proximity in time between
the favorable statement of May 22 regarding its fourth quarter
earnings and the alleged downward revision made by Saldarini
during a November 13, 2001 conference call, is also unavailing.
(Compl. ¶ 39). This Court rejects Plaintiffs' temporal proximity
argument, finding that the six-month period between the two
statements is not enough to sustain the Complaint. See, e.g.,
Ronconi v. Larkin, 253 F.3d 423, 437 (9th Cir. 2001) (holding
that a five week lapse was too long).
Additionally, this Court finds that the motivation alleged by
Plaintiffs for PDI entering into the Lotensin contract to
retain employees and obtain future profitable business from
Novartis is irrelevant in light of the fact that Plaintiffs
have offered no factual support suggesting that the Lotensin
agreement was in fact guaranteed to lose money. (Compl. ¶¶ 53,
71, 74). Indeed, there have been no factual allegations plead to
support Plaintiffs' claims that PDI was apprehensive that members
of the sales force would leave PDI if it had not entered into the
Lotensin contract; nor are there factual allegations to support
Plaintiffs' assertion that PDI purposefully incurred losses in exchange for obtaining future
profitable business. Therefore, for all of these reasons, is not
reasonable to infer falsity as to these statements.*fn6
However, Plaintiffs argue that the May 15, 2002 projection
regarding Lotensin was also materially false and misleading
because Defendants failed to disclose the contract baselines.
(Compl. ¶¶ 36,51,53). In the Third Circuit, it is clear that a
duty to disclose "`may arise when there is insider trading, a
statute requiring disclosure, or an inaccurate, incomplete, or
misleading prior disclosure.'" In re Digital Island Sec.
Litig., 223 F. Supp. 2d 546, 552 (D.Del. 2002) (quoting Oran v.
Stafford, 226 F.3d 275, 285-286 (3d Cir. 2000)). Here, the
Second Amended Complaint has identified prior disclosures that
were rendered "inaccurate, incomplete, or misleading" by the
alleged omission. Accordingly, this Court cannot disregard the
allegations pertaining to the baseline. Nevertheless, for all the
reasons already discussed above, Defendants' motion to dismiss
shall be granted as to Plaintiffs' remaining challenges to the
May 22, 2001 statements for failure to adequately plead falsity. 2. The November 13, 2001 and February 20, 2001 statements
During a November 13, 2001 conference call, Saldarini stated
that he expected the Evista contract to provide "approximately
$53-60 million in revenue for 2002," and further, that he
expected to report a contribution from Evista in the fourth
quarter of 2002. (Compl. ¶ 68). During a subsequent conference
call on February 20, 2002, Saldarini discussed an increase in the
brand share for Evista. (Compl. ¶ 77). Additionally, he declared
an expectation of an approximately 50% increase in brand share,
resulting in a net sales growth of 25-30% year-over-year basis.
(Id.). Plaintiffs maintain that the statements were false
because Defendants "knowingly or recklessly failed to disclose . . .
that PDI had purposefully entered into an unprofitable
[Evista] contract with Eli Lilly" and because "the contract's
baselines were set at levels that guaranteed PDI would not earn
revenue, even in the event it materially increased Evista's rate
of growth. . . ." (Compl. ¶¶ 69,78).
Plaintiffs further allege that Defendants' projections of
$53-60 million in Evista revenue for 2002 are actionable because
they did not genuinely believe them in light of the statements of
former PDI employees. In support, they rely on two unnamed
confidential sources, namely, an alleged "former senior PDI
employee" and an alleged "former PDI regional manager." (Compl. ¶
97). The Second Amended Complaint states,
[A]ccording to a former senior PDI employee with
personal knowledge, defendant Saldarini stated in his
presence at or about the time the Evista contract was
entered into, that he did not expect the Evista
contract to be profitable. According to a former PDI
regional manager, the fact that the Evista contract
was not expected to be profitable was confirmed by
PDI executives in meetings of regional managers, and
was common knowledge at PDI. (Compl. ¶ 97). Although the Third Circuit rejects any
requirement under the Reform Act that confidential
sources be named as a general matter, a plaintiff
must still, nonetheless, meet the pleading
requirements of the Reform Act. CalPERS,
394 F.3d at 147. A plaintiff's confidential sources must be
"`described with sufficient particularity to support
the probability that a person in the position
occupied by the source would possess the information
alleged.'" Id. at 155. (quoting Novak v. Kasaks,
216 F.3d 300, 313-14 (2d Cir.), cert. denied,
531 U.S. 1012 (2000)). The CalPERS court, adopting the
Second Circuit's approach in Novak, held that a
court must evaluate the "detail provided by the
confidential sources, the sources' basis of
knowledge, the reliability of the sources, the
corroborative nature of other facts alleged,
including from other sources, the coherence and
plausibility of the allegations, and similar
indicia." CalPERS, 394 F.3d at 147. Applying these
standards, Plaintiffs fail to plead falsity of
Defendants' statements with the particularity
demanded by the Reform Act because the confidential
sources relied upon by Plaintiffs are not accompanied
by corroborative facts. Notably, Plaintiffs have
failed to provide supporting facts that explain what
department the "former senior PDI employee" worked
in, what Saldarini actually said, and what other
parties were present. Similarly, Plaintiffs have not
provided any details on how the "former PDI regional
manager" determined that it was allegedly "common
knowledge at PDI" that Evista was guaranteed to lose
money that is, to whom was this language common,
and when and how did this knowledge become common. In
light of the foregoing, this Court finds that
Plaintiffs' sources have not been described with
sufficient particularity to support the probability
that a person in the position occupied by the source would possess the information alleged, and
therefore, Plaintiffs have failed to plead the
falsity of Defendants' statements with the
particularity demanded by the Reform Act.*fn7
Additionally, Plaintiffs point to Saldarini's statements during
an August 13, 2002 conference call wherein he advised that PDI
did not earn any revenues on account of Evista in the first two
quarters of 2002, and noted that the results were "consistent
with our actual expectations." (Declaration of Lee A. Weiss
("Weiss Decl."), Ex.3 at 5). Plaintiffs have not however,
explained how the August 2002 statement renders Defendants'
admissions regarding the 2002 Evista revenue projection made
November 13, 2001, nine-months earlier, actually false or
misleading at the time. Furthermore, it is also not reasonable to
draw the inference of actual knowledge of falsity based on
Plaintiffs' allegation that the Evista contract was terminated
upon PDI learning that Eli Lilly had awarded the Cymbalta
contract to Innovex. (Pls.' Opp'n at 14, 23). Therefore, for all
of these reasons, it is not reasonable to infer falsity as to
As already indicated, Plaintiffs also maintain that the
statements were false because "the contract's baselines were set
at levels that guaranteed PDI would not earn revenue, even in the
event it materially increased Evista's rate of growth. . . ."
(Compl. ¶¶ 69,78). Here, the Plaintiffs have identified prior
disclosures that were rendered "inaccurate, incomplete, or
misleading" by the alleged omission. Digital Island,
223 F. Supp. 2d at 552. Accordingly, this Court cannot disregard these
allegations pertaining to the baseline terms. Nonetheless,
Defendants' motion to dismiss is granted with respect to the
remaining challenges to the November 13, 2001 and February 20,
2001 statements for all the reasons already discussed above. 3. July 20, August 14 and August 21, 23-24 statements
This Court will now evaluate whether Plaintiffs have pled
falsity as to the Ceftin statements with the requisite
particularity mandated by the Reform Act.
15 U.S.C. § 78u-4(b)(1). Plaintiffs claim that Defendants' July 20,*fn8
August 14, August 23 and August 24, 2001 earnings projections are
actionable because Defendants "failed to disclose that except for
the periods where it was employing unlawful marketing materials,
or artificially increasing market share by incentivizing
distributors to stock up on Ceftin, PDI had never increased
Ceftin's market share." (Compl. ¶ 56). Initially, this Court
finds that for the reasons indicated by Defendants, the Ceftin
allegations set forth in the July 20 and August 14 statements
fail to properly plead particularized facts explaining why the
statements made by PDI were false when made. For example,
Plaintiffs cite no facts indicating that Defendants did not
actually believe that these earnings projections would
materialize. Furthermore, the FDA letter issued to PDI in
mid-March does not support claims of falsity. Since Plaintiffs
have not alleged that Defendants failed to take the FDA letter
into account in making future projections, the unlawful promotion
allegations do not reasonably support allegations of falsity. In
addition, simply because Ceftin sales in the second quarter of
2001 exceeded PDI's expectations, that alone does not support the
allegation that PDI had reason to believe that its earnings
projections for the third and fourth quarters of 2001 and for
full year 2002 would not materialize. Moreover, this Court finds
Defendants' motion to dismiss paragraphs 25-28 and paragraphs
54-59 of the Second Amended Complaint, which include the July 20
and August 14 statements, as well as the August 21 and 23
statements, is also deemed unopposed inasmuch as Plaintiffs have failed to address these
portions of Defendants' motion in their opposition to the motion
to dismiss. (Pls.' Opp'n at 25) Accordingly, Plaintiffs have
abandoned these claims. Therefore, Defendants' motion to dismiss
shall be granted as to the July 20 and August 14, 21 and 23
statements regarding Ceftin.
The remaining Ceftin claims concern Plaintiffs' challenge to
PDI's projections regarding the supposed "worst-case scenario,"
and ability to minimize losses in connection with Ceftin. (Compl.
¶¶ 61, 62). Plaintiffs allege that Defendants' statements during
the August 24 conference call were clearly false and misleading
when made because Defendants failed to disclose the costs to be
incurred upon termination of the Ceftin contract. (Compl. ¶¶ 30,
63, 98). Plaintiffs argue that the results of the termination
could actually be more grave than the "worst-case scenario"
referenced by Saldarini. Specifically, Plaintiffs allege that
Defendants "knew all of the expenses for which PDI was
contractually responsible in the event of early
termination. . . ." (Compl. ¶ 98). There is not allegation, as
Defendants correctly observe, that Defendants failed to consider
the contract costs in formulating its projection. Thus,
Plaintiffs' attempt to characterize Saldarini's statements as
false or misleading is unreasonable. Accordingly, falsity has not
been adequately pled, and therefore, the motion to dismiss is
also granted as to the August 24, 2001 Ceftin statements.
In addition to the particularity requirement of
15 U.S.C. § 78u-4(b)(1), the Reform Act requires that the complaint "state
with particularity facts giving rise to a strong inference that
the defendant acted with" scienter. 15 U.S.C. § 78u-4(b)(2). A
plaintiff may establish the requisite strong inference of
fraudulent intent in one of two ways: (1) by alleging facts
"establishing a motive and an opportunity to commit fraud"; or (2) "by setting
forth facts that constitute circumstantial evidence of either
recklessness or conscious behavior." In re Advanta,
180 F.3d at 534; see also In re Burlington, 114 F.3d at 1418.
Defendants contend that the Second Amended Complaint is devoid of
particularized facts giving rise to a "strong inference" of
fraudulent intent. This Court confines its analysis to
Plaintiffs' challenge to the remaining Lotensin and Evista
projections based on the failure to disclose the baseline terms.
1. Motive and opportunity
As noted by the Third Circuit, after the passage of the Reform
Act, it remains sufficient for plaintiffs to plead scienter by
alleging facts establishing motive and opportunity to commit
fraud. In re Advanta, 180 F.3d at 534 (citations omitted).
"[B]lanket assertions of motive and opportunity" are inadequate,
and "catch-all allegations that defendants stood to benefit from
wrongdoing and had the opportunity to implement a fraudulent
scheme are no longer sufficient, because they do not state facts
with particularity or give rise to a strong inference of
scienter." Id. at 535. Moreover, "`[m]otives that are generally
possessed by most corporate directors and officers do not
suffice; instead, plaintiffs must assert a concrete and personal
benefit to the individual defendants resulting from this fraud.'"
GSC Partners CDO Fund v. Washington, 368 F.3d 228, 237 (3d Cir.
2004) (quoting Kalnit v. Eichler, 264 F.3d 131, 139 (2d Cir.
2001)). As Defendants herein correctly observe, the Second
Amended Complaint does not contain any allegations of motive and
To the extent that this Court can construe an allegation of
motive based on Plaintiffs' claims that Defendants' projections
regarding the Lotensin and Evista contracts were a part of an
undisclosed business strategy in order to "obtain future
profitable contracts," see Compl, ¶¶ 46, 53,71,74, and to "retain the services of hundreds of marketing
representatives who otherwise would have left the company," see
Compl. ¶¶ 53, 71, 74, this Court concludes that Plaintiffs'
allegations are inadequate and fail to meet the scienter
requirement. In re Boeing Sec. Litig., 40 F. Supp. 2d 1160,
1175 (W.D.Wash. 1998) (noting that "the desire to remain
profitable? is a generic motive that fails to satisfy the
heightened pleading standards for scienter under the PSLRA.");
accord San Leandro Emergency Med. Group Profit Sharing Plan v.
Philip Morris Cos., 75 F.3d 801, 814 (2d Cir. 1996) (finding
that a "company's desire to maintain a high bond or credit
rating" is an insufficient motive for fraud because such motive
could be imputed to any company); Tuchman v. DSC Communications
Corp., 14 F.3d 1061, 1068 (5th Cir. 1994) ("[I]ncentive
compensation can hardly be the basis on which an allegation of
fraud is predicated.") (citation omitted). The allegations before
this Court fail to provide the specificity necessary to raise a
strong inference of fraudulent intent.
2. Recklessness or conscious behavior
Given that Plaintiffs have failed to adequately plead that
Defendants had both motive and opportunity to commit fraud, the
Second Amended Complaint survives the motion to dismiss only if
they allege specific facts that constitute "strong circumstantial
evidence of conscious misbehavior or recklessness." Oran,
226 F.3d at 288-89; Kalnit, 264 F.3d at 142 ("Where motive is not
apparent, it is still possible to plead scienter by identifying
circumstances indicating conscious behavior by the defendant,
though the strength of the circumstantial allegations must be
correspondingly greater.") (citations omitted). The Reform Act
requires a strong as opposed to merely reasonable inference
in order to withstand a motion to dismiss. Rockefeller,
311 F.3d at 224; In re Burlington, 114 F.3d at 1424; see also
Greebel v. FTP Software, Inc., 194 F.3d 185, 197 (1st Cir. 1999); Bryant v. Avado Brands, Inc.,
187 F.3d 1271, 1282-83 (11th Cir. 1999). "[I]t is not enough for
plaintiffs to merely allege that defendants `knew' their
statements were fraudulent or that defendants `must have known'
their statements were false." GSC, 368 F.3d at 239 (citations
omitted). Rather, plaintiffs must plead allegations of scienter
with particularity. 15 U.S.C. § 78u-4(b)(2). Plaintiffs must
support their allegations by specifying "the who, what, when,
where and how" of the events at issue. In re Burlington,
114 F.3d at 1422 (citing DiLeo v. Ernst & Young, 901 F.2d 624, 627
(7th Cir. 1990)).
In this matter, Plaintiffs argue that the Lotensin projections
were materially false and misleading because Defendants failed to
disclose the contract baselines. (Compl. ¶¶ 36,51,53). Similarly,
they contend that Evista projections were false because the
contract's baselines "were set at levels that guaranteed PDI
would not earn revenue, even in the event it materially increased
Evista's rate of growth. . . ." (Compl. ¶¶ 69,78). While the
facts alleged may raise the prospect of fraud this is not
enough under the heightened pleading requirements of the Reform
Act. Plaintiffs have not made the requisite showing of a strong
inference of fraudulent intent. Rockefeller, 311 F.3d at 224
Likewise, this Court finds that the recklessness standard is
not met. A reckless statement has been defined as a material
misrepresentation or omission "`involving not merely simple, or
even inexcusable negligence, but an extreme departure from the
standards of ordinary care, and which presents a danger of
misleading buyers or sellers that is either known to the
defendant or is so obvious that the actor must have been aware of
it.'" In re Advanta, 180 F.3d at 535 (quoting McLean v.
Alexander, 599 F.2d 1190, 1197 (3d Cir. 1979)). To satisfy the
recklessness standard in a case alleging non-disclosure, a
plaintiff must demonstrate: "(1) the defendant knew of the potentially material fact, and (2) the defendant knew that
failure to reveal the potentially material fact would likely
mislead investors." Wilson v. Bernstock, 195 F.Supp.2d 619, 639
(D.N.J. 2002) (citations omitted). Here, Plaintiffs have failed
to allege particularized facts that Defendants knew their
statements were misleading to investors.
Hence, this Court therefore holds that the specific allegations
set forth in Plaintiffs' Second Amended Complaint fail to provide
strong circumstantial evidence of either conscious or reckless
misconduct giving rise to the requisite strong inference of
fraudulent intent with respect to Plaintiffs' allegations of
falsity as to the remaining Lotensin and Evista projections based
on a failure to discuss the baseline terms. Accordingly,
Plaintiffs' claims based on these statements are dismissed.
15 U.S.C. § 78u-4(b)(3)(A).*fn9
D. Whether the Non-Forward Looking Statements Should Be
Dismissed for Failing to State a Claim
Defendants maintain that while the forward looking statements
account for a majority of the challenged statements, the
remaining allegations cited by Plaintiffs fail to state a claim.
Specifically, Defendants argue that Plaintiffs' challenges
regarding the February 19, 2002 press release, February 20, 2002
conference call and May 14, 2002*fn10 conference call should
all be dismissed for failing to state a claim. Each statement
will be addressed in turn. 1. February 19, 2002 press release
In the press release, PDI stated that "there was a `positive
contribution' from Lotensin in the fourth quarter." (Compl. ¶
72). Plaintiffs contend that this statement was false because
Saldrini, in a conference call on May 14, 2002, admitted that PDI
lost $5 million in connection with the Lotensin contract in the
fourth quarter of 2001. Defendants respond that this allegation
is frivolous because a review of the document cited by Plaintiffs
reveal that he stated no such thing. When allegations contained
in a complaint are contradicted by the document it cites, the
document controls. In re Hunter Envtl. Servs. Inc. Sec. Litig.,
921 F. Supp. 914, 918 (D. Conn. 1996). In this matter, a review
of the transcript of the call reveals Saldarini commenting that
first quarter revenues were off $4.5 million. (David Decl.
Ex.12 at 8) (emphasis supplied). This Court agrees that no such
statements are supported by the record, and accordingly,
Defendants' motion is granted to the extent the Seconded Amended
Complaint relates to statements in the February 19 press release.
2. February 20, 2002 conference call
During the February 20 call, Saldarini commented on PDI's
ability to minimize losses from Lotensin. (Compl. ¶ 75).
Saldarini stated: "It's important for everyone to realize that we
control all the spending on the brand [Lotensin] and if the
performance is not in line or the performance does not follow we
can make adjustments. . . ." (Id.). He further noted: "Because
we control the spending on the product, we can manage the income
statement effect of Lotensin very successfully." (Id.).
However, as Defendants note, Plaintiffs fail to challenge the
historical accuracy of the statements because they fail to
explain how the alleged losses render an accurate statement of fact concerning PDI's control over expenses to be
false. Therefore, this statement is inactionable.
Similarly, Plaintiffs also challenge several additional
statements made by Saldarini during the February 20, 2002
"[Lotensin] is currently trending in the right
direction for our 2002 expectations. I think it's
fair to characterize our view of Lotensin as delayed,
not damaged." (Compl. ¶ 73).
"Lotensin is currently trending ahead of our
revised expectations. We are creating a substantive
delta over a declining baseline." (Id.).
"In the fourth quarter we have made progress
against both our baseline as well as against our
growth target." (Id.).
Here, too, Plaintiffs have failed to challenge the historical
accuracy of these statements, and, accordingly, these factual
recitations fail to state a claim. In re Advanta,
180 F.3d at 538 (finding that "positive portrayals [that] do not contradict
any of defendants' other statements but merely report previous
successes and express confidence" are not actionable). Thus, this
Court shall grant Defendants' motion as to these statements as
3. May 14, 2001 press release and May 14, 2002 conference
In their Second Amended Complaint, Plaintiffs also challenge
the May 14, 2002 conference call, where "the Company announced
that it had reduced the number of representatives selling
Lotensin from 500 to 150 in order to decrease its losses from the
Lotensin contract." (Compl. ¶ 80). Plaintiffs, however, fail to
allege that the statement was false i.e., that PDI did not
reduce the number of representatives selling Lotensin.
Plaintiffs' allegations that Defendants knew PDI would continue
to suffer losses on the Lotensin contract do not contradict
Defendants' statement that they were reducing the number of sales
representatives to decrease losses. Accordingly, this statement
is also not actionable. Plaintiffs' Second Amended Complaint also references a May 14,
2002 press release as well as the May 14, 2002 PDI conference
call, where PDI reported "that it lost $8.5 million in the first
quarter of 2002 in connection with the Evista contract." (Compl.
¶ 81). Plaintiffs allege that the statements were materially
false and misleading because Defendants failed to disclose that
the losses would have been higher "absent significant distributor
overstocking during the quarter." (Compl. ¶ 81). In support,
Plaintiffs rely on a July 18, 2002 Eli Lilly press release, which
stated: "[Evista] [s]ales growth in the U.S. was negatively
affected by wholesaler destocking in the second quarter of
2002. . . ." (Weiss Decl. Ex.6 at 4). Plaintiffs explain such
"destocking" would only have been necessitated by overstocking in
the prior quarter. However, there can be no claim based on this
statement because Plaintiffs have not alleged that the historical
data was false, and, Plaintiffs fail to provide any factual
allegations that Defendants were aware of overstocking.
Therefore, there is no actionable claim arising from this
"[V]ague and general statements of optimism `constitute no more
than puffery and are understood by reasonable investors as
such.'" In re Advanta, 180 F.3d at 538 (quoting In re
Burlington, 114 F.3d at 1428 n. 14). See also In Re ATI
Techs., Inc. Sec. Litig., 216 F. Supp. 2d 418, 433 (E.D. Pa.
2002) (holding that "ATI's spin on its historical performance, as
setting a `record in revenue,' conferring a `strong start,' and
giving ATI `market leadership,' is puffery") (citations omitted);
In re Milestone Scientific Sec. Litig., 103 F. Supp. 2d 425,
457-58 (D.N.J. 2000) (finding various statements to be puffery).
General and vague statements of optimism have been held to not
constitute actionable statements under the securities laws. San
Leandro Emergency Med. Plan v. Philip Morris Cos., 75 F.3d 801,
811 (2d Cir. 1996). In In re Burlington, the court noted that "[c]laims that these kinds of
vague expressions of hope by corporate managers could dupe the
market have been almost uniformly rejected by the courts."
114 F.3d at 1427; see also Parnes v. Gateway 2000, Inc.,
122 F.3d 539, 547 (8th Cir. 1997) ("[S]ome statements are so vague
and such obvious hyperbole that no reasonable investor would rely
upon them."). Here, Defendants contend that the following
statements fall into this category:
"We are confident we will be able to transition
this Pfizer team successfully onto other efforts."
(Compl. ¶ 54).
"We continue to feel confident about Lotensin's
ability to contribute positively to 2002 financial
results. . . ." (Id. ¶ 64).
This Court agrees. These statements appear to be nothing more
that vague and general statements of optimism, see Advanta,
180 F.3d at 538, and can therefore be deemed puffery.
Accordingly, the Second Amended Complaint will be dismissed
insofar as it asserts securities fraud on the basis of these
F. Statements of Independent Third-Party Analysts
The Second Amended Complaint cites a May 23, 2001 report where
an analyst stated "PDI's main goal with Lotensin will be to try
and slow-down its market share deterioration." (Compl. ¶ 37).
This statement cannot be imputed to them unless Plaintiffs "pled
facts showing that a particular defendant both made the statement
to the analyst and controlled the content of the report." In re
U.S. Interactive, Inc. Sec. Litig., 2002 U.S. Dist. LEXIS 16009,
*48 (E.D. Pa. Aug. 23, 2002) (citing Klein v. Gen. Nutrition
Cos., 186 F.3d 338, 345 (3d Cir. 1999)). There is no liability
arising from the May 23 analysts statement as it is not
specifically attributable to any particular Defendant.
Accordingly, the motion is granted insofar as the Second Amended
Complaint relies on same. G. Defendant Boyle
Plaintiffs invoke the group pleading doctrine*fn11 to
attribute statements to Bernard C. Boyle (PDI's Chief Financial
Officer and Executive Vice President) in order to hold him liable
for violations of section 10(b) and Rule 10b-5. Under this
[T]he identification of the individual sources of
statements is unnecessary when the fraud allegations
arise from misstatements or omissions in
group-published documents, such as annual reports,
prospectuses, registration statements, press
releases, or other `group published information' that
presumably constitute the collective actions of those
individuals involved in the day-to-day affairs of the
corporation. . . . In the typical scenario, the group
pleading doctrine is used . . . to attribute group
published information to senior executives of a
In re Aetna Sec. Litig., 34 F. Supp. 2d 935
, 949 (E.D. Pa.
1999) (quoting Wool v. Tandem Computers, Inc., 818 F.2d 1433
1440 (9th Cir. 1987)) . Plaintiffs claim that they have alleged
the elements necessary to use the group pleading doctrine to link
the false and misleading statements set forth in Second Amended
Complaint, even though they were not specifically attributed to
Defendants contend that since Plaintiffs do not allege a
misstatement or omission on the part of Boyle, the claims against
him should also be dismissed. Relying on Pinker v. Roche
Holdings, Ltd., 292 F.3d 361 (3d Cir. 2002), Defendants argue
that under Third Circuit precedent, section 10(b) liability may
be incurred by the one who actually makes a material misstatement
or omission. Id. at 373 (noting that in order "[t]o state a
valid claim for securities fraud under § 10(b) and Rule 10b-5, a plaintiff must allege
[among other elements] that the defendant . . . made a
misstatement or an omission of a material fact.").
While the Third Circuit has not specifically addressed the
applicability of group pleading under the Reform Act, numerous
district courts within this Circuit have persuasively held that
the Reform Act has effectively abolished the doctrine. See
e.g., P. Schoenfeld Asset Mgmt. LLC v. Cendant Corp.,
142 F. Supp. 2d 589, 620 (D.N.J. 2001); Marra v. Tel-Save Holdings,
Inc., 1999 WL 317103, at *5 (E.D. Pa. May 18, 1999) ("The
continued vitality of the judicially created group pleading
doctrine is suspect since the PSLRA specifically requires that
the untrue statements or omissions be set forth with
particularity. . . ."); see also In re Home Health Corp. of
Am. Sec. Litig., 1999 WL 79057, at *21 (E.D. Pa. Jan.29, 1999)
("The court agrees that the group published information doctrine
is inconsistent with the PSLRA's pleading requirements, and thus,
that specific allegations as to the actions and scienter of each
defendant are necessary.").
This Court agrees with P. Schoenfeld and other district
courts' refusal to recognize the group published information
doctrine subsequent to the passage of the Reform Act. It appears
that the application of the group pleading doctrine "would
circumvent the PSLRA's heightened pleading requirements," see
Jones, 274 F. Supp. 2d at 646, and as such, the doctrine is not
available to Plaintiffs herein. Accordingly, Defendants' motion
to dismiss is granted as to Defendant Boyle.
H. Control Person Claim
Plaintiffs also bring a claim against each of the Individual
Defendants Saldarini and Boyle based on § 20(a) of the
Exchange Act. As discussed above, a § 20(a) plaintiff must plead facts demonstrating: (1) an underlying securities
violation, and (2) a defendant's control over the corporation
guilty of the fraud. Jones, 274 F. Supp. 2d at 645; Campbell
Soup, 145 F. Supp. 2d at 599. But see In re Cendant Corp.
Litig., 60 F. Supp. 2d 354, 379 (D.N.J. 1999) (citing Rochez
Bros., Inc. v. Rhoades, 527 F.2d 880, 885 (3d Cir. 1975)
(holding that plaintiff must also allege that control persons are
"in some meaningful sense culpable participants in the fraud
perpetrated by controlled persons.")).
In the Second Amended Complaint, Plaintiffs specifically allege
that the both of these Defendants acted as control persons of PDI
within the meaning of § 20(a) of the Exchange Act. Plaintiffs
By virtue of their high level positions with the
Company, participation in and awareness of the
Company's operations, and intimate knowledge of the
Company's actual performance, [the Individual
Defendants] had the power to influence and control,
and did influence and control, directly or
indirectly, the decision-making of the Company,
including the content and dissemination of the
various statements Lead plaintiffs contend are
materially false and misleading.
(Compl. ¶ 114). In Shapiro, the Third Circuit noted, "[t]he
text of the statute plainly requires the plaintiff to prove not
only that one person controlled another person, but also that the
`controlled person' is liable under the Act. If no controlled
person is liable, there can be no controlling person liability."
964 F.2d at 279 (citing Wool, 818 F.2d at 1440-41 n. 8).
"Liability under Section 20(a) is derivative and must be
predicated upon an independent violation of the '34 Act." In re
Digital Island, 357 F.3d at 337 (citing In re Advanta,
180 F.3d at 541). Here, because Plaintiffs fail to adequately plead
an actionable predicate violation of § 10(b) or Rule 10b-5,
Plaintiffs' Count II claim for "control person" liability under §
20(a) must also be dismissed. Shapiro, 964 F.2d at 279. Defendants' motion to
dismiss is therefore also granted on Plaintiffs' § 20(a) claim.
I. Leave to Amend
The legal standard governing a motion to amend is well settled.
Federal Rule of Civil Procedure 15(a) provides that "leave [to
amend] shall be freely given when justice so requires." Among the
grounds that could justify a denial of leave to amend are undue
delay, bad faith, dilatory motive, prejudice, and futility.
Foman v. Davis, 371 U.S. 178, 182 (1962); Lorenz v. CSX
Corp., 1 F.3d 1406, 1414 (3d Cir. 1993). The Court does not see
any basis to justify denying Plaintiffs leave to amend.
Accordingly, this request is granted, and Plaintiffs are hereby
granted leave to amend the Second Amended Complaint.
For the foregoing reasons, it is on this 16th day of August,
ORDERED that Defendants' motion to dismiss based on the
statutory safe harbors and the bespeaks caution doctrine is
DENIED as to all statement with the exception of the July 20,
2001 press release, for which the motion is GRANTED WITHOUT
PREJUDICE; and it is further
ORDERED that Defendants' motion to dismiss the challenges to
the Lotensin, Evista and Ceftin projections for failure to meet
the particularity requirements of 15 U.S.C. § 78u-4(b)(1) is
GRANTED WITHOUT PREJUDICE, with the exception of the challenges
to the Lotensin and Evista projections in connection with the
baseline terms; and it is further ORDERED that Defendants' motion to dismiss the remaining
Lotensin and Evista projections for failure to plead scienter in
accordance with 15 U.S.C. § 78u-4(b)(2), is hereby GRANTED
WITHOUT PREJUDICE; and it is further
ORDERED Defendants' motion is also GRANTED WITHOUT PREJUDICE
with respect to Plaintiffs' challenges to the February 19, 2002
press release, February 20, 2002 conference call and May 14, 2002
conference call, for failure to state a claim; and it is further
ORDERED that the motion to dismiss Plaintiffs' Section 10(b)
and Rule 10b-5 claims as against Defendant Boyle is also GRANTED
WITHOUT PREJUDICE; and it is further
ORDERED that Defendants' motion to dismiss Plaintiffs'
section 20(a) claims against Defendants Boyle and Saldarini, is
also GRANTED WITHOUT PREJUDICE;
ORDERED that the motion to dismiss the statements set forth
in paragraph 37 of the Second Amended Complaint is also GRANTED;
and it is further
ORDERED that the motion to dismiss the statements contained
in paragraphs 52 and 64 of the Second Amended Complaint is also
GRANTED; and it is further
ORDERED that Plaintiffs are hereby GRANTED leave to amend the
Second Amended Complaint.
It is so ordered.