The opinion of the court was delivered by: Peter G. Sheridan, U.S.D.J.
This is a securities class action brought on behalf of purchasers of Par common stock between July 23, 2001 and July 5, 2006 (the "Class Period"). Plaintiffs Snow Capital Investment Partners and WR Capital Management, LP (collectively, "Plaintiffs") allege that during the Class Period, defendants Par Pharmaceuticals Companies, Inc. ("Par" or the "Company"), Kenneth Sawyer, Dennis O'Connor, and Scott Tarriff's (collectively, "Defendants") made numerous fraudulent statements, resulting in losses for shareholders that are actionable pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b), 78t(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. On June 24, 2008, the Court opined and granted Defendants' motion to dismiss Plaintiffs' consolidated amended complaint ("FAC") with leave to file an amended complaint within 30 days. Thereafter, on July 23, 2008, Plaintiffs filed a second consolidated amended complaint ("SAC").
Currently before the Court are three related motions:
1. Defendants' motion to dismiss Plaintiffs' SAC for failure to state a claim, which focuses particularly on Defendants' alleged lack of scienter, an element necessary to state a claim under Sections 10(b) and 20(a) of the Exchange Act;
2. Defendants' motion to strike paragraphs 47-62 and 64-66 of the SAC and for counsel fees and costs; and
3. Plaintiffs' motion to strike a declaration (the Wolfson Declaration) filed by Defendants' in support of their motion to strike.
Given the relatedness of these motions, the Court will first discuss Defendants' motion to dismiss. For the reasons set forth below, Defendants' motion to dismiss is granted in part and denied in part, Defendants' motion to strike paragraphs 47-62 and 64-66 of the SAC and for counsel fees and costs is denied, and Plaintiffs' motion to strike the Wolfson Declaration is granted.
In its June 24, 2008 opinion, the Court set forth the facts of this case at length. Those facts are incorporated in this opinion as if set forth at length. For purposes of the present motions, the Court will limit its discussion primarily to the SAC, which includes assertions from numerous confidential informants.
Par is a Delaware corporation, which maintains executives offices in New Jersey. Defendants Kenneth Sawyer ("Sawyer") was Par's Chairman of the Board, Chief Executive Officer, and President until July 2003; Scott Tarriff ("Tarriff") was Par's President and Chief Executive Officer from September 2003 to 2006, and Executive Vice President from January 1998 to September 2003; and Dennis O'Connor ("O'Connor") was Par's Vice President and Chief Financial Officer from 1996 to March 2006 (collectively, the "Individual Defendants"). Mark Auerbach, a defendant in the FAC and Executive Chairman of the Board until September 2006, was not named as a defendant in the SAC, and as such, the case is dismissed against him.
Defendant Par engages in the manufacture and distribution of generic and branded drugs in the United States. (SAC ¶ 30.) After what had apparently been several years of positive financial news, on July 5, 2006, Par announced that, as a result of "accounting errors," its financial statements for the periods 2004 to first quarter 2006 "should no longer be relied upon." (Id. ¶ 35.) Financial and legal fallout shortly ensued. The Company's stock price declined from $18.25 to $13.47 (id. ¶ 36); the Company announced that its Audit Committee had engaged the law firm Nixon Peabody to conduct an independent investigation (id. ¶ 155); the Securities and Exchange Commission ("SEC") informed the Company that it was conducting an informal investigation (id. ¶ 155); and on September 26, 2006, at the request of the board of directors, Defendant Tarriff resigned as President and CEO (id. at ¶ 156).
On March 13, 2007, Par filed an amended 2005 10-K with the SEC, which further disclosed its accounting errors. Among other things, the Company stated that its (a) Accounts Receivable Reserves and Revenues, and (b) its Inventory Valuation Existence, were misstated. (Id. ¶ 38.) As a result of these misstatements, the Company's operating results and enterprise value during the Class Period were overstated. (Id. ¶ 45.) In total, these restatements, stretching from 2001 through the end of the first quarter of 2006, revealed that par had understated its accounts receivable reserves by more than $83.5 million and overvalued its inventories by greater than $9.9 million. (Id. ¶ 9.)
Plaintiffs allege that Par's misstatements were the result of Defendants' intentional or reckless conduct in violation of securities laws. As evidence of Defendants' fraud, Plaintiffs point to, among other things, the magnitude of the restatements, the Company's significant internal control deficiencies, the Company's GAAP violations, the investigations which followed, and the numerous press releases touting the Company's financial success during the Class Period. (Id. ¶ 44; slip opinion at 7-14 (summarizing quarterly press releases); Pl. Br. at 31-33.)
Plaintiffs also point to Individual Defendants stock sales during the Class Period, which they deem "highly suspicious." (SAC¶ 188.) According to the SAC, a high percentage of Individual Defendants' total shares were allegedly sold during the Class Period at great financial benefit to Individual Defendants. (Id. ¶ 187.) Plaintiffs even include the stock sales of Mark Auerbach and Arie Gutman who are not defendants in the SAC.
Finally, and most relevant for the present motions, Plaintiffs provide circumstantial evidence allegedly supplied by eight confidential informants. Plaintiffs' FAC contained two confidential informants. (slip opinion at 5-6.) But following the Court's dismissal of the FAC, Plaintiffs obtained information from additional confidential informants. Through these additional confidential informants come allegations that Individual Defendants received reports on both the Company's accounts receivable and inventory issues, which support the inference that Individuals knew or consciously disregarded the Company's misstatements. With respect to accounts receivable, these reports were generated as part of a program to develop new accounting software. With respect to inventory, these reports were prepared by a Materials Review Board created to address the increasing and worsening inventory problems.
CI-1 (subsequently identified in Defendants' November 20, 2008 motion to strike as Gabrielle Wolfson) is a former senior executive of Par employed from early 2002 until late 2007. (Id. ¶ 48.) She began her career at Par as Vice President of Information Systems and by 2004 was promoted to Chief Information Officer. (Id.) CI-1 reported directly to Par's CEO throughout her tenure, had regular interactions with each of the Individual Defendants, and regularly attended senior management meetings with Individual Defendants. (Id.) She also supervised CI-2's design of an automated "gross-to-net" ("GTN") application intended to replace the outdated excel spreadsheets that Par used to calculate the accounts receivable reserves directly at issue in this case. (Id.)
CI-2 is a former Associate Director of Information Systems and was employed by Par from November 2002 to December 2004. (Id.) CI-1 oversaw at least some of CI-2's work on the GTN and confirmed that he was assigned to lead the design of the GTN. (Id. ¶ 52.) CI-2 reported to the Director of Finance, Lisa Pepe ("Pepe"), who reported to the Vice President of Information Systems, Joe Schott ("Schott"), who reported to the Chief Financial Officer, Defendant O'Connor. (Id. ¶ 48.) Some of CI-2's allegations were also "confirmed and corroborated" by CI-1. (Id. ¶ 54.)
CI-3 is a former Sales and Marketing Systems Manager employed by Par from March 2006 until December 2006. (Id. ¶ 48.) CI-3's responsibilities included maintenance of the GTN application and other responsibilities relating to Par's business and sales IT systems. (Id.) CI-3 reported to a business systems directors, who reported to CI-1. (Id.)
CI-4 was employed by Par from 1997 through early 2007, and held various positions in the operations group, including Manager of Packing, Production Manager and Associate Director of Operations and Plan. (Id. ¶ 63.)
CI-5 is a former Associate Director of Planning and Inventory for Par who was employed from April 1995 to October 2004. (Id.) In his position as Associate Director of Planning and Inventory, CI-5 monitored and participated in the manufacturing and scheduling processes to ensure timely production of products. (Id.) He was also charged with ensuring that Par did not have either excessive or too little inventory. (Id.)
CI-6 is a former Cost Accountant, Inventory Control Supervisor, and Cost Savings Manager who was employed at Par from 1996 through early 2007. (Id.) In 2002, CI-6 was an Inventory Control Supervisor wherein he was responsible for inventory counts, creating inventory reports, and coordinating the disposal of obsolete inventory. (Id.) In his position as Inventory Control Supervisor, CI-6 reported to CI-5. (Id.)
CI-7 is a former Director of Supply Chain and Logistics Management employed by Par from early 2004 to mid-2004. (Id.) CI-7 was responsible for planning, implementing, and controlling all operations related to Par's supply chain, and spent a significant time at the Company's warehouse/distribution facility. (Id.) CI-7 ...