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In re Bradley Pharmaceuticals

March 23, 2006

IN RE BRADLEY PHARMACEUTICALS, INC. SECURITIES LITIGATION


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

FOR PUBLICATION

OPINION

This matter comes before the Court upon Defendants Bradley Pharmaceuticals, Inc. ("Bradley" or "the Company"), Daniel Glassman, Bradley Glassman, and Brent Lenczycki's (collectively the "Individual Defendants") Motion to Dismiss the Consolidated Amended Complaint pursuant to Fed. R. Civ. P. 9(b), 12(b)(6), and Section 21D of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). The Court has reviewed the submissions of the parties and considers the motion on the papers pursuant to Fed. R. Civ. P. 78.

I. Background

Plaintiffs represent a class of purchasers of common stock of Bradley between October 28, 2004 and February 25, 2005 ("the Class Period"). Bradley is a publicly-traded pharmaceutical company that specializes in over-the-counter and prescription products in the dermatological, gastrointestinal and podiatric markets. Defendants are Bradley, its President and Chief Executive Officer, Daniel Glassman, its Senior Vice President, Bradley Glassman, and its Chief Financial Officer, Brent Lenczycki.

Plaintiffs' Amended Consolidated Complaint (the "Complaint") alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a), and Securities and Exchange Commission Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. The Complaint alleges that the Defendants engineered a $1 million "sham" sale of Deconamine, a cold remedy, to artificially inflate Bradley's net income for the Third Quarter of 2004. Plaintiffs claim that the Deconamine sale was a "sham" because "it was designed solely to boost Third Quarter financials without any expectation that the customer would actually keep the product."

The earnings resulting from the Deconamine sale were included in Bradley's Third Quarter Press Release issued on October 28, 2004 (the "October 28, 2004 Press Release"). The press release reported net sales of approximately $28.5 million (up 43% compared to the same period in 2003) and net income of $3.7 million (down 28% compared to the same period in 2003) for the three months ended September 30, 2004. The press release stated that "[t]he increase in Net Sales were led by new product sales of FLORA-Q(TM), launched in First Quarter of 2004, of $61,000 and product sales growth from ANAMANTLE(R)HC of $2,708,000 and DECONAMINE(R) products of $1,264,000 ..."

On November 9, 2004, Bradley filed its quarterly Form 10-Q with the SEC, reaffirming the Company's previously announced financial results. In it, Bradley stated that "[t]he increase in DECONAMINE(r) products was primarily due to an increase in wholesaler buying patterns."

On February 28, 2005 (the first trading day after February 25, 2005, which is the last day of the Class Period), Bradley issued a press release (the "February 28, 2005 Press Release") disclosing that Bradley was notified in December 2004 that the SEC was conducting "an informal inquiry relating to the Company to determine whether there have been violations of the federal securities laws." The press release stated, in relevant part that "in connection with the inquiry, the SEC staff has requested that the Company provide it with certain information and documents including with respect to revenue recognition and capitalization of certain payments." The press release also quoted the SEC as stating that "the inquiry is confidential and non-public" and "should not be construed as an indication by the Commission or its staff that any violation of the federal securities laws has occurred, or as a reflection upon any person, entity, or security." Finally, the press release announced that "[i]n light of the ongoing SEC staff inquiry and separate counsel's review, the Company will not be releasing its 2004 earnings at this time, as originally anticipated." Immediately following this announcement, Bradley's stock price fell $3.50 per share, or 26.4%, declining from $13.25 to $9.75 per share.

On March 11, 2005, Bradley issued a press release to announce that Plaintiffs had filed the present class action, and that "[a]s a result of the lawsuits, SEC inquiry, Audit Committee review and associated expenses that are not currently estimatable" Bradley was "withdrawing its previously announced financial guidance for unreported periods."

In a press release dated April 27, 2005 (the "April 27, 2005 Press Release"), Bradley announced that it was restating the financial results for the Third Quarter of 2004 released on October 28, 2004 after its independent auditors "became aware of information indicating that a transaction recorded as a sale by the Company in the Quarter ended September 30, 2004 did not meet the criteria for revenue recognition in such period." The Company explained that "[t]he transaction consisted of a sale of approximately $1 million of Deconamine Syrup shipped and paid for in the third quarter" and that the auditors had concluded "that the sale did not meet the criteria for revenue recognition after the customer expressed its intention to return the product and the sale was modified in that the Company would accept all unsold product as of February 1, 2005, with credit granted against other trade amounts owed by the customer." The new statements reduced the previously reported net sales for the Third Quarter of 2004 by $1,043,907 and the net income by $613,594. On April 27, 2005, the day of the announcement, Bradley's share price fell by $0.10, or 1%, closing at $8.95 per share. The following day, on April 28, 2005, the share price increased by $0.38, or 4.2%, closing at $9.33 per share.

This class action lawsuit was filed on March 2, 2005, and was consolidated with substantially identical suits subsequently brought by other plaintiffs on May 5, 2005. Plaintiffs filed their Consolidated Amended Complaint on June 20, 2005. Invoking the heightened pleading standards of both Fed. R. Civ. P. 9(b) and the PSLRA, Defendants have moved to dismiss the Consolidated Amended Complaint for failure to state a claim for a violation of Section 10(b) and Rule 10b-5.

II. Standard of Review.

A motion to dismiss under Fed. R. Civ. P. 12(b)(6) should be granted "if it appears to a certainty that no relief could be granted under any set of facts which could be proved." Morse v. Lower Merion Sch. Dist., 132 F.3d 902, 906 (3d Cir. 1997). While a court need not credit a complaint's "bald assertions" or "legal conclusions," it is required to accept as true all of the allegations in the complaint and all reasonable inferences that can be drawn therefrom, and view them in the light most favorable to the plaintiff. Id. (citing Rocks v. City of Philadelphia, 868 F.2d 644, 645 (3d Cir. 1989)); In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1429-30 (3d Cir. 1997). In evaluating a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), the Court may consider only the Complaint, exhibits attached to the ...


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