PSLRA Home Depot Class Action Defense Cases–Mizzaro v. Home Depot:  Eleventh Circuit Affirms Dismissal Of Securities Fraud Class Action Holding Class Action Complaint Failed To Satisfy PSLRA’s Heightened Pleading Requirements

Securities Fraud Class Action Properly Dismissed by District Court because Class Action Complaint Failed to Allege Scienter under Heightened Pleadings Requirements of the PSLRA (Private Securities Litigation Reform Act of 1995) Eleventh Circuit Holds

In May 2006, plaintiff John Mizzaro filed a securities fraud class action against Home Depot and six of its officers and directors; the gravamen of the class action complaint was that “(1) Home Depot obtained excessive rebates from its vendors, and (2) violated the securities laws by not informing investors that the financial results it reported for fiscal years 2001-2004 were inflated by these excessive rebates.”  Mizzaro v. Home Depot, Inc., ___ F.3d ___ (11th Cir. October 8, 2008) [Slip Opn., at 5-6].  According to the class action, the failure to make this disclosure constituted a violation of § 10(b) of the Exchange Act of 1934 and Rule 10b-5. The class action complaint also sought to hold the individual defendants liable based on the allegation that they were “control persons” under § 20(a) of the Exchange Act.  _Id._, at 6.  Four identical class action lawsuits followed; the class actions were consolidated and plaintiff Bucks County Retirement Board was appointed lead plaintiff.  _Id._, at 5.  Defense attorneys moved to dismiss each of the class actions; in response, Bucks County filed a 150-page Amended Class Action Complaint, which became the operative class action complaint in all five cases.  _Id._  Defense attorneys again moved to dismiss the class action complaint arguing, in part, that the allegations “failed to create a ‘strong inference’ that [defendants] acted with the requisite scienter” under the Private Securities Litigation Reform Act of 1995 (PSLRA).  _Id._, at 6. The district court dismissed the class action and denied plaintiff’s motion for leave to further amend its class action complaint; the court held that the amended class action complaint “failed to adequately plead scienter, and that granting leave would be futile because the additional facts presented in the motion for leave would not change t hat result.”  _Id._, at 7.  In a 60-page opinion, the Eleventh Circuit affirmed.

The Circuit Court explained that “[t]o survive a motion to dismiss under the [PSLRA], the factual allegations contained in a private securities fraud class action complaint must raise a ‘strong inference,’ one that is ‘cogent and compelling,’ that the named defendants acted with the requisite scienter.”  Mizzaro, at 4.  This article assumes the reader is familiar with the PSLRA and with the U.S. Supreme Court opinion in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499 (2007); the author’s summary of Tellabs may be found here

.  Central to the Eleventh Circuit’s analysis was its determination of an issue not addressed in Tellabs – viz., “how courts should go about evaluating allegations based on statements made by unidentified, confidential witnesses.”  Id., at 14.  As a matter of first impression, the Circuit Court held that a securities fraud complaint need not name a confidential source “so long as the complaint unambiguously provides in a cognizable and detailed way the basis of the whistleblower’s knowledge.”  Id., at 16.  However, in light of legitimate reasons to be “skeptical of confidential sources cited in securities fraud complaints,” id., the Eleventh Circuit held that “the weight to be afforded to allegations based on statements proffered by a confidential source depends on the particularity of the allegations made in each case, and confidentiality is one factor that courts may consider,” id., at 16-17.  The Court clarified its holding at page 17 as follows, “Confidentiality… should not eviscerate the weight given if the complaint otherwise fully describes the foundation or basis of the confidential witness’s knowledge, including the position(s) held, the proximity to the offending conduct, and the relevant time frame.”

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PSLRA Class Action Defense Cases–Little Gem v. Orphan Medical: Eighth Circuit Affirms Dismissal Of Securities Class Action Holding Class Action Complaint Failed To Meet Heightened Pleading Requirements Under PSLRA

Securities Class Action Properly Dismissed for Failure of Allegations in Class Action Complaint to Meet PSLRA’s Heightened Pleading Standards because Defendants were Under no Legal Duty to “Search out and Disclose” Raw Data of FDA Clinical Trials Prior to FDA Issuing Results of Drug Trial Eighth Circuit Holds

Plaintiff filed a class action against Orphan Medical and two of its officers for violations of federal securities laws; specifically, the class action complaint alleged that defendants “negligently failed to disclose material information to Orphan’s stockholders before asking the stockholders to approve Orphan’s merger with [Jazz Pharmaceuticals], in violation of §§ 14(a) and 20(a) of the Securities Exchange Act of 1934…, and Securities and Exchange Commission (SEC) Rule 14a-9.” Little Gem Life Sciences LLC v. Orphan Medical, Inc., 537 F.3d 913, 914 (8th Cir. 2008). Defense attorneys moved to dismiss the class action complaint on the grounds that the class action’s allegations “failed to meet the heightened pleading standards required by the Private Securities Litigation Reform Act (PSLRA)”; the district court agreed and dismissed the class action. Id. On appeal, plaintiff argued that the district court should have converted the motion to dismiss into a motion for summary judgment, and that the allegations in the class action complaint satisfied the PSLRA. Id., at 914-15. The Eighth Circuit affirmed.

According to the class action complaint, Orphan, a pharmaceutical company, sought a merger because it was experiencing financial difficulties. At the time, the company’s future profitability was uncertain, largely because it was unclear whether its drug Xyrem, upon which it heavily relied, had broader medical uses. In particular, Orphan was testing whether Xyrem could be used to treat fibromyalgia, and it initiated Phase I of its FDA clinical trials in June 2004, which it passed. Xyrem still had to pass Phase II and Phase III trials before it could obtain FDA approval to treat fibromyalgia. Little Gem, at 915. The gravamen of the class action was that shareholders voted on the merger in June 2005, and in July 2005 it was announced that Xyrem successfully passed Phase II: plaintiff alleges that defendants should have disclosed the successful completion of Phase II before the shareholders voted on the merger with Jazz. Id., at 915-16. In support of its motion to dismiss the class action, defendants “asserted factual allegations that went beyond the face of [the class action] complaint.” Id., at 916. The district court did not consider those factual allegations in holding that the class action “failed to meet the heightened pleading standards mandated by the PSLRA.” Id.

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PSLRA Class Action Defense Cases–Silverman v. Motorola: Illinois Federal Court Grants Defense Motion To Dismiss Certain Claims In Securities Class Action Finding Some Class Action Allegations Inadequate Under PSLRA

Defense Motion to Dismiss Securities Class Action Claims Granted in Part, but Class Action Plaintiffs Adequately Alleged Existence of Certain Omissions or Misrepresentations as to Most Defendants as well as Control Person Liability as to All Individual Defendants Illinois Federal Court Holds

Plaintiffs filed a class action against Motorola and some of its officers and directors alleging violations of federal securities law; the class action complaint alleged that defendants artificially inflated the company’s stock price by issuing statements that omitted important facts or contained material misrepresentations in violation of Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5. Silverman v. Motorola, Inc., ___ F.Supp.2d ___ (N.D.Ill. September 23, 2008) [Slip Opn., at 1-2]. Count I of the class action complaint was premised on the Section 10(b) and Rule 10b-5 violations (material misrepresentations and omissions); Count II of the class action complaint was premised on the Section 20(a) violation (asserting control person liability). _Id._, 1-2. The allegations in the class action centered on Motorola’s development of its third generation cell phones, or “3G” cell phones. _Id._, at 3. Defense attorneys moved to dismiss the class action complaint for failure to satisfy the heightened pleading requirements under the PSLRA (Private Securities Litigation Reform Act), _id._, at 2. The federal court granted defendants’ motion in part, but refused to dismiss the class action in its entirety.

After detailing the statements underlying the class action complaint, see Silverman, at 3-12, the district court noted that plaintiffs’ misrepresentation claims fall into two categories: (1) the drop in price of the company’s RAZR cell phones, and (2) the delayed rollout of the company’s new 3G cell phones, id., at 15. The federal court readily rejected the RAZR category, noting that the company had expressly discussed the price drop in the RAZR line and the reasons for the price reductions. See id. “Therefore, any allegations of fraud based on statements regarding the RAZR price decrease are dismissed.” Id. With respect to the 3G cell phone claims in the class action complaint, the district court agreed that some of the alleged misrepresentations were “mere puffery,” see id., at 15-16, and that company representations concerning projected sales and revenue were protected as “forward-looking statements,” see id., at 18-19. However, the federal court rejected the puffery defense as to other company statements, finding that representations such as whether new products will be “competitive” and “on track” would be material if defendants knew these statements to be untrue, id., at 16-17, and found that the “forward-looking” safe harbor did not apply to statements of present or future facts that could have materially affected an investor’s decisions, id., at 18-19. Similarly, omissions concerning potential delays in the 3G rollout could be actionable, id., at 17-18, particularly as the delay severely impacted sales during the Christmas holiday season, see id., at 27.

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Class Action Defense Cases–In re Merck: Third Circuit Reinstates Class Action Against Merck Holding District Court Erred In Dismissing Securities Class Action Because Class Action Plaintiffs Were Not On Inquiry Notice Sufficient To Time Bar Claims

Fact Stock Price did not React to “Storm Warnings” Contradicted District Court Finding that Class Action Plaintiffs were on Inquiry Notice of Class Action Claims so as to Commence Statute of Limitations Third Circuit Holds

“[Plaintiffs], purchasers of Merck & Co., Inc. stock, filed the first of several class action securities fraud complaints on November 6, 2003, alleging that the company and certain of its officers and directors…misrepresented the safety profile and commercial viability of Vioxx, a pain reliever that was withdrawn from the market in September 2004 due to safety concerns.” In re Merck & Co., Inc. Securities, Derivative & “ERISA” Litig., 543 F.3d 150 (3d Cir. 2008) [Slip Opn., at 3]. The class action complaint alleged that defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934, and Rule 10b-5 by “materially misrepresent[ing] the safety and commercial viability of VIOXX,” id., at 15. Defense attorneys moved to dismiss the class action claims on the ground that they were barred by the statute of limitations, and that the allegations in the class action complaint failed to meet the heightened pleading requirements under the Private Securities Litigation Reform Act of 1995 (PSLRA); the district court granted the motion to dismiss on the first ground, and did not reach the PSLRA argument. Id., at 15-16 and n.8. Plaintiffs appealed, challenging the district court’s finding that “there was sufficient public information prior to November 6, 2001 to trigger Appellants’ duty to investigate the alleged fraud.” Id. The Third Circuit reversed.

We do not discuss the Circuit Court’s 36-page majority opinion in detail, and we do not here summarize the history of Vioxx, leading up to the first class action lawsuit in May 2001, see In re Merck, at 4-9. The FDA sent Merck a warning letter on September 21, 2001, regarding the “marketing and promotion” of Vioxx and stating in part “that Merck’s ‘promotional activities and materials’ for the marketing of Vioxx were ‘false, lacking in fair balance, or otherwise misleading in violation of the Federal Food, Drug, and Cosmetic Act (the Act) and applicable regulations.’” Id., at 9. The FDA’s letter “received widespread coverage by the media and securities analysts,” id., at 10; nonetheless, securities analysts “all maintained their ratings for Merck stock at ‘buy’ or ‘hold’ and/or continued to project increased future revenues for Vioxx,” id., at 11-12. Merck’s stock price did decline in the days immediately following the FDA warning letter, it quickly rebounded and by October 1, 2001 the stock price closed higher than before the announcement of the FDA warning letter a week before. Id., at 12. More product liability class action lawsuits were filed against Merck on September 27, 2001, see id., and the New York Times reported on the health risks of Vioxx in early October 2001, see id., at 12-13. Cutting to the chase, Merck withdrew Vioxx from the market in September 2004, and securities analysts began recommending that Merck stock be sold. See id., at 14-15.

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Attorney Fee Class Action Defense Cases–In re Nortel Networks: Second Circuit Affirms Class Action Attorney Fee Award Of 3% Of Value Of Nortel Securities Class Action Settlement Rather Than 8.5% Negotiated With Lead Plaintiff

District Court Order Reducing Fee Award from 8.5% Negotiated with Lead Plaintiff to 3% of Value of Securities Class Action Settlement not Subject to Attack on PSLRA Grounds because Argument Waived as not Raised below and Attorney Fee Award is Reasonable Second Circuit Holds

Plaintiffs filed a class action complaint against Nortel Networks alleging violations of federal securities laws; specifically, the class action alleged that defendant “knowingly and recklessly issued false and misleading statements and engaged in various accounting manipulations causing its stock price to be inflated between October 24, 2000 and February 15, 2001.” In re Nortel Networks Corp. Securities Litig., 539 F.3d 129, 130-31 (2d Cir. 2008). After several years of litigation, the parties reached a settlement of the class action (Nortel I); the district court gave final approval to a class action settlement valued at more than $700,000,000. Id., at 131. As part of the settlement, class counsel negotiated a fee award under the Private Securities Litigation Reform Act of 1995 (PSLRA) that provided for an attorney fee award of 8.5%. Id., at 130. At the same time, Nortel settled another class action involving similar securities claims filed on behalf of a separate class of plaintiffs (Nortel II); the value of that class action settlement also was valued at more than $700 million. Id., at 131. Class counsel in each class action sought an award of attorney fees: the district court in Nortel II awarded approximately 8% of the total class recovery in fees; the district court in Nortel I awarded approximately 3% of the total class recovery in fees. Id. Class counsel in Nortel I, Milberg Weiss & Bershad LLP, appealed the fee award, id., at 130, and the Second Circuit affirmed.

The district court based its attorney fee award on its independent analysis of the factors set forth by the Second Circuit in Goldberger v. Integrated Resources, Inc., 209 F.3d 43, 50 (2d Cir. 2000); this analysis led the district court to conclude that an 8.5% fee award would be excessive and that a 3% fee award – amounting to approximately $34 million – would be “fair and reasonable.” In re Nortel Networks, at 131-32. On appeal, “Milberg argues that the district court erred by disregarding the purportedly altered fee-award scheme under the [PSLRA] pursuant to which Milberg’s negotiated fee with the lead plaintiff would have been presumptively reasonable.” Id., at 130. The Second Circuit held that Milberg waived the argument by failing to raise it in the district court. See id., at 132-34. Turning to the reasonableness of the fee award itself, the Second Circuit held that it “will not overturn a district court’s award of attorneys’ fees ‘absent an abuse of discretion, such as a mistake of law or a clearly erroneous factual finding.’” Id., at 134 (citation omitted). The Circuit Court noted that the district court properly considered each of the relevant factors, and that it “carefully weighed” those factors in making its award. Id. The Court rejected Milberg’s argument that “the district court abused its discretion in part because it awarded a fee significantly below those awarded in other cases where we have upheld higher percentage fees and higher lodestar multipliers” and “erred by not using the 8% Nortel II award as a ‘benchmark,’” id. While the award was “toward the lower end of reasonable fee awards,” and while the Circuit Court was “troubled by the district court’s failure to discuss Nortel II and why it believed the fee award here to be more reasonable,” the question on appeal was “not whether we would have awarded a different fee, but rather whether the district court abused its discretion in awarding this fee.” Id. Accordingly, the Circuit Court affirmed the district court’s attorney fee award. Id.

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PSLRA Class Action Defense Cases–In re Hutchinson: Eighth Circuit Affirms Dismissal Of Class Action Holding Class Action Complaint Failed To Meet Heightened Pleading Requirements Under The Private Securities Litigation Reform Act (PSLRA)

Securities Class Action Properly Dismissed because Allegations in Class Action Complaint Failed to Meet PSLRA’s Heightened Pleading Requirements Eighth Circuit Holds

Plaintiff filed a class action complaint against Hutchinson Technology and six of its officers and directors alleging violations of federal securities law; the class action complaint asserted claims under Section 10(b) of the Securities Exchange Act of 1934 and under Rule 10b-5 of the Securities and Exchange Commission implementing regulation, as well as control person liability under Section 20 of the 1934 Act. In re Hutchinson Technology, Inc. Securities Litig., 536 F.3d 952, 954-55 (8th Cir. 2008). Defense attorneys filed a motion to dismiss the class action complaint on the ground that it failed to meet the heightened pleading requirements of the Private Securities Litigation Reform Act (PSLRA). Id., at 955. The district court granted the motion and denied plaintiff’s request for leave to file an amended class action complaint. Id. Plaintiff appealed, and the Eighth Circuit affirmed.

Very briefly, Hutchinson manufactures and supplies suspension assemblies for computer hard disk drives. In re Hutchinson, at 955. In 2005, the company’s five largest customers accounted for 90% of its revenue, and sales of suspension assemblies accounted for 95% of its total revenue. Id. After giving guidance of $0.10 earnings per share (EPS) for the fourth quarter of 2004, the company reported EPS of $0.15 to $0.20 for that quarter and announced that it expected an increase in product demand in the first quarter of 2005. Id. Hutchinson stock price increased more than 10% on the news, from $30.93 to $34.09. Id. Thereafter, despite releasing positive information, Hutchinson’s stock price dropped to about $30 per share; also during this time, certain officers sold a total of 137,750 shares of stock at $29-$30 per share for a total of about $6 million, and later sold another 26,820 shares at $33.55-$34 per share for a total of about $1 million. Id., at 956. We do not summarize further additional positive guidance provided by the company, or additional shares of stock sold by insiders. See id., at 956-57. But on August 30, 2005, the company issued a press release disclosing lower demand and a reduction in sales and earnings for fourth quarter 2005: in response, the company stock price dropped from $31.51 to $26.16. Id., at 957. In addition to the financial allegations, the class action complaint contained allegations from five confidential witnesses. Id., at 957-58. In granting the defense motion to dismiss the class action complaint, the district court “[held] that the complaint did not meet the heightened pleading standards for falsity and scienter required by the PSLRA.” Id., at 958. Additionally, it dismissed the Section 20 class action claim (concerning “control person” liability) as derivative of the class action’s Section 78j(b) claim. Id. Finally, the district court denied leave to amend the class action complaint because it found that amendment would be futile, id.

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SLUSA Class Action Defense Cases–In re Enron: Fifth Circuit Affirms Dismissal Of Class Action Lawsuits Holding SLUSA Preempts Securities Fraud Class Action Claims Originally Filed In State Court Were Covered Class Actions

Class Action Claims Preempted by SLUSA (Securities Litigation Uniform Standards Act of 1998) because Ten Class Actions had been Litigated as a Single Proceeding by Plaintiffs’ Common Counsel Fifth Circuit Holds

Numerous class action complaints were filed against various defendants following the collapse of Enron; ten of those class action complaints, which filed by former Enron investors against various financial institutions, certain former members of Enron’s management, and Arthur Anderson (Enron’s former accounting firm) and certain Arthur Anderson partners, but not against Enron itself, were consolidated into the action now at issue. In re Enron Corp. Securities, Derivative & ERISA Litig., ___ F.3d ___, 2008 WL 2689248, *1 (5th Cir. 2008). Most of the class actions had been filed in state court, but they were removed to federal court based on Enron’s bankruptcy filing on the ground that they were “‘related to’ bankruptcy jurisdiction,” and the class actions were later consolidated in the Southern District of Texas by order of the Judicial Panel on Multidistrict Litigation. _Id._, at *3. The class actions “allege virtually identical state law claims for fraud, fraud on the market, civil conspiracy, aiding and abetting, negligent misrepresentation, negligence, violations of the Texas Business and Commerce Code, and violations of the Texas Securities Act.” _Id._ Defense attorneys moved to dismiss the class action complaints as preempted by SLUSA (Securities Litigation Uniform Standards Act of 1998). _Id._, at *1. The district court granted the defense motion and dismissed all of the class action claims, _id._, at *3. In dismissing the class actions, the district court denied class action plaintiffs leave to amend because it found that amendment would be futile. _Id._ Plaintiffs appealed, arguing that the district court lacked jurisdiction to enter the order dismissing the class action complaints and, alternatively, that the class actions that had been removed to federal court were not “covered class actions” within the meaning of SLUSA; the Fifth Circuit affirmed.

We do not summarize the facts surrounding the rise and fall of Enron. See In re Enron, at *2 and Newby v. Enron Corp., 394 F.3d 296, 299 (5th Cir. 2004). The issues on appeal were (1) whether the district court had jurisdiction over the class actions, and (2) whether the class action claims were preempted by SLUSA. In re Enron, at *3. We do not here discuss the bankruptcy jurisdiction issue; the Fifth Circuit’s analysis, leading to its conclusion that bankruptcy jurisdiction did exist, may be found at pages *3 through *6 of the Circuit Court’s opinion. With respect to the SLUSA preemption issue, plaintiffs’ argued that “for preemption purposes, SLUSA’s definition of a ‘covered class action’ should be applied only at the time a state action is removed to federal court, not after a federal court issues a consolidation order.” Id., at *6. As a backdrop to is legal analysis, the Circuit Court provided a summary of the “evolution of federal securities law,” including the Private Securities Litigation Reform Act (PSLRA). See id., at *7-*8. This summary including the language in SLUSA that “[n]o covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party,” see id., at *8 (citation omitted) (italics added by court). The central issue was whether the class actions were “covered class actions” within the meaning of SLUSA.

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Class Action Defense Cases–In re Nortel Networks: Second Circuit Affirms Attorney Fee Award Of 3% Of Class Action Settlement Value Finding No Abuse Of Discretion In Rejecting Negotiated Fee Following Settlement Of Securities Class Action

District Court Carefully Analyzed Requisite Factors in Determining Reasonable Attorney Fee Award in Securities Class Action and did not Abuse its Discretion in Awarding Class Counsel 3% of the Value of Class Action Settlement Rather than 8.5% Requested by Class Counsel, even though Lead Plaintiffs in Class Action Supported 8.5% Award Second Circuit Holds

Plaintiffs filed a class action against Nortel Networks alleging violations of federal securities laws (Nortel I); specifically, the Nortel I class action complaint alleged that Nortel “knowingly and recklessly issued false and misleading statements and engaged in various accounting manipulations causing its stock price to be inflated between October 24, 2000 and February 15, 2001.” In re Nortel Networks Corp. Securities Litig., ___ F.3d ___ (2d Cir. August 19, 2008) [Slip Opn., at 2]. Plaintiffs in the Nortel I class action were represented by Milberg Weiss & Bershad LLP, _id._ After several years of litigation, the district court approved a class action settlement of almost $439 million in cash, plus more than 300,000,000 shares of Nortel common stock valued at more than $700 million at the time the class action settled was approved. _Id._ As part of the “same overall settlement,” Nortel settled a separate action securities class action lawsuit (Nortel II); the terms of that class action settlement involved common stock also valued at more than $700 million plus $370 million in cash (roughly $68.5 million less than the Nortel I class action settlement). _Id._, at 2-3. The district court in Nortel II awarded class counsel 8% of the settlement value in attorney fees, but the Nortel I court awarded Milberg attorney fees amounting to only 3% of the settlement value. _Id._, at 3. Milberg Weiss appealed the attorney fee award, and the Second Circuit affirmed.

Milberg argued on appeal that they were entitled to 8.5% of the value of the class action settlement they obtained in prosecuting the private securities class action and that the district court erred in reducing the award to only 3%. In re Nortel, at 2. Milberg argued that it had a “negotiated fee” which, under the terms of the Private Securities Litigation Reform Act of 1995 (PSLRA), should have been deemed “presumptively reasonable.” Id. The Second Circuit held that Milberg waived its PSLRA argument because it failed to raise it in the district court, id. The Circuit Court’s analysis of the waiver issue may be found at pages 5 through 8.

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Class Action Defense Cases–In re Parmalat Securities: New York Federal Court Grants Summary Judgment On Class Action Claims Holding Plaintiffs Failed To Establish Reliance To Support Class Action’s Securities Fraud Claims

Defense (Bank of America, Citigroup and Pavia e Ansaldo) Entitled to Summary Judgment on Securities Fraud Claims because Plaintiffs Failed to Establish Reliance on any Deceptive Acts by Moving Defendants New York Federal Court Holds Plaintiffs filed a class action complaint against various defendants, including various Bank of America entities, various Citigroup entities, and Pavia e Ansaldo, alleging violations of federal securities laws; specifically, the Third Amended Consolidated Class Action Complaint alleged violations of Rule 10b-5 and Section 10(b) “on behalf of purchasers or securities of the international dairy conglomerate Paramalat Finanziaria S.

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Class Action Defense Cases–In re Gilead Sciences: Ninth Circuit Reverses Dismissal Of Securities Fraud Class Action Holding Class Action Complaint Adequately Alleges Loss Causation Under Dura Pharmaceuticals

Securities Fraud Class Action Complaint Adequately Alleged Loss Causation when Facts were Considered as a Whole so District Court Erred in Granting Defense Motion to Dismiss Class Action Complaint Ninth Circuit Holds

Plaintiffs, a group of investors, filed a class action against Gilead Sciences, “a biopharmaceutical company that specializes in developing and marketing treatments for life-threatening diseases,” alleging violations of federal securities law; specifically, the class action complaint alleged that defendants “misled the investing public by representing that demand for its most popular product” – Viread, an antiretroviral agent used to treat HIV – was “strong without disclosing that unlawful marketing was the cause of that strength.” In re Gilead Sciences Securities Litig., ___ F.3d ___ (9th Cir. August 11, 2008) [Slip Opn., at 10322-23]. Viread accounted for almost two-thirds of Gilead’s total revenues, and the fourth amended class action complaint alleged that defendants Gilead and “some of its top officers” violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by aggressively promoting Viread for “off-label” uses, that is, for uses that had not been approved by the FDA, _id._, at 10323-24. The class action complaint outlined an alleged scheme to promote off-label uses and further alleged that ultimately “75% to 95% of Viread sales resulted from off-label marketing efforts.” _Id._, at 10324-25. Defense attorneys moved to dismiss the class action under Rule 12(b)(6) for failure to adequately allege loss causation; the district court agreed and dismissed the class action complaint. _Id._, at 10323. The Ninth Circuit reversed.

As with all securities fraud cases, the specific facts detailed in the class action complaint are central to the Circuit Court’s analysis of the district court order dismissing the class action with prejudice. In this case, those facts span more than 9 pages of the appellate court’s opinion. See In re Gilead Sciences, at 10323-31. We do not summarize those facts here, noting only that, according to “two confidential witnesses who served as Gilead salespeople,” the off-label marketing efforts “took three forms: (1) marketing to HIV patients co-infected with Hepatitis B; (2) marketing Viread as a first-line or initial therapy for HIV infection; and (3) marketing against Viread’s safety profile,” and that, ultimately, “75% to 95% of Viread sales resulted from off-label marketing efforts.” Id., at 10325 (footnote omitted). The FDA sent Gilead a letter in March 2002, accusing the company of off-label marketing, id., and in August 2003 the FDA made public a July 2003 “warning letter,” but the investing public did not yet appreciate the letter’s significance, id., at 10328-29. According to the class action complaint, Gilead also encouraged overstocking of Viread but publicly stated that overstocking was not a basis for Viread’s increased sales, id., at 10326-27. It was not until October 2003 that investors realized the impact of off-label marketing on Viread sales, id., at 10330. The district court dismissed the class action with prejudice on the ground that plaintiffs “failed to adequately plead loss causation” under Dura Pharmaceuticals, Inc.. v. Broudo, 544 U.S. 336 (2005), because the class action complaint failed to “connect the following chain of events…: 1) that [the] alleged failure to disclose the off-label marketing scheme caused a material increase in sales; 2) that practitioners materially decreased their demand for Viread due to the publication of the FDA Warning Letter; and most importantly, 3) that the alleged decrease in sales due to the FDA letter proximately caused Gilead’s stock to decrease three months later,” id., at 10331. The Ninth Circuit explained that the district court order rested entirely on its conclusions concerning loss causation, id.

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