Opinions of the United
2000 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


9-7-2000

Oran v. Stafford
Precedential or Non-Precedential:

Docket 99-5184




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Filed September 7, 2000

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 99-5184

ALBERT ORAN; TERRY ADOLPHS; PHILIP MORRIS;
JAMES DOYLE LUPO; PAUL H. MAURER, individually and
on behalf of a class of others similarly situated,
       Appellants

v.

JOHN R. STAFFORD; ROBERT G. BLOUNT; JOSEPH J.
CARR; LOUIS L. HOYNES, JR.; WILLIAM J. MURRAY;
DAVID M. OLIVIER; JOHN R. CONSIDINE;
PAUL J. JONES; FRED HASSAN; AMERICAN HOME
PRODUCTS CORPORATION

ON APPEAL FROM THE
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY

(Dist. Court No. 97-cv-04513)
District Court Judge: Nicholas H. Politan

Argued: February 29, 2000

Before: ALITO and STAPLETON, Circuit Judges, and
POLLAK, District Judge.*

(Opinion Filed: September 7, 2000)



_________________________________________________________________
* The Honorable Louis H. Pollak, Senior Judge of the United States
District Court for the Eastern District of Pennsylvania, sitting by
designation.
       MARIAN P. ROSNER (Argued)
       MICHAEL A. SCHWARTZ
       Wolf Popper LLP
       845 Third Avenue
       New York, NY 10022

       ALLYN Z. LITE
       JOSEPH J. DEPALMA
       Lite DePalma Greenberg &
        Rivas, LLC
       Two Gateway Center - 12th Floor
       Newark, NJ 07102

       Counsel for Appellants

       ANTHONY F. PHILLIPS (Argued)
       ELIZABETH S. STRONG
       Willkie Farr & Gallagher
       787 Seventh Avenue
       New York, NY 10019

       DONALD A. ROBINSON
       Robinson, Lapidus & Livelli
       Two Penn Plaza East
       Newark, NJ 07105

       Counsel for Appellees

OPINION OF THE COURT

ALITO, Circuit Judge:

Plaintiffs brought this securities class action against
American Home Products Corporation ("AHP") and certain
of its directors and officers1 after AHP, in response to
_________________________________________________________________

1. The individual defendants are: (1) John R. Stafford, AHP's Chief
Executive Officer and President, and Chairman of its Board of Directors;
(2) Robert J. Blount, a Senior Executive Vice President and Director; (3)
Joseph J. Carr, a Senior Vice President; (4) Louis L. Hoynes, Jr., General
Counsel and Senior Vice President; (5) William J. Murray, a Senior Vice
President; (6) John R. Considine, Vice President of Finance; (7) Paul J.
Jones, Comptroller and Vice President; and (8) Fred Hassan, a senior
executive and Director.

                                2
reports of serious medical side effects, withdrew its
prescription weight-loss drugs Pondimin and Redux from
the market. Stockholder plaintiffs allege that AHP made
material misrepresentations and omissions regarding the
safety of the drugs while failing to disclose several studies
linking the drugs to heart-valve damage. As a result,
plaintiffs claim, they suffered substantial financial loss
when AHP's stock prices dropped following public
disclosure of the withheld information. The District Court
dismissed all claims on the pleadings for failure to state a
claim, and we affirm.

I.

Because this is an appeal from the District Court's grant
of a motion for judgment on the pleadings, we accept as
true all allegations in the complaint and draw all
reasonable inferences in favor of the plaintiffs. See
Consolidated Rail Corp. v. Portlight, Inc., 

, 94
(3d Cir. 1999). Plaintiffs' complaint sets forth the following
facts.

A. The Heart Valve Reports.

Defendant American Home Products Corporation ("AHP"),
a Delaware corporation headquartered in New Jersey, is
engaged in the research, development, manufacture and
marketing of prescription and over-the-counter
medications. During the period relevant to this litigation,
AHP marketed the weight-loss drugs Pondimin
(fenfluramine) and Redux (dexfenfluramine). Pondimin was
marketed together with another drug, phentermine, in a
combination popularly known as "fen-phen." Pondimin was
approved by the Food and Drug Administration in 1973.
Redux was recommended for approval by an FDA Advisory
Committee in November 1995 and approved by the FDA in
1996.

In February 1994, AHP learned that a Belgian
cardiologist had documented leaky heart valves in seven
patients who had been taking diet pills containing
Pondimin and Redux. By the time the FDA Advisory
Committee voted to approve Redux in November 1995, AHP

                               3
knew of at least 31 cases of heart valve abnormalities in
European diet-pill users, but had informed the FDA about
only eight of those cases. During the same time period, AHP
also received hundreds of adverse reaction reports of
patients displaying symptoms often associated with heart
and lung problems. AHP represented to the FDA that these
symptoms were reactions to the drugs and were not caused
by any underlying heart condition.

In March 1997, AHP representatives met separately with
cardiologists from the Mayo Clinic and MeritCare Health
Systems, who informed AHP that they had documented
heart-valve abnormalities in a total of 17 fen-phen users.
Dr. Heidi Connolly, the Mayo cardiologist, informed AHP
that she had never seen this type of valve damage except in
patients with rare cancers or in those who had taken
ergotamine, a migraine drug that, like Redux and
Pondimin, affects the body's serotonin level. Although AHP
continued to investigate the Mayo data throughout 1997, it
did not immediately release the reports to the public.

The Mayo data, which by that time included 24 reports of
heart-valve abnormalities in fen-phen users, wasfinally
disclosed to the public on July 8, 1997. On that date, AHP,
Mayo, MeritCare and the FDA each made a public
announcement concerning the reports. The Mayo
announcement noted that the information "raise[d]
significant concern that this combination of appetite
suppressants has important implications regarding valvular
disease." (App. 52-53.) AHP's announcement similarly
stated that the company was investigating "the potential
association of valvular heart disorders with the combination
use of [fen-phen]." (App. 56.) The Mayo, FDA, and AHP
announcements, however, all emphasized that there was no
conclusive evidence establishing a causal relationship
between fen-phen and heart valve disorders and that
further study was needed before such a link could be
confirmed. Following these announcements, there was no
decline in the New York Stock Exchange price of AHP
common stock.

B. The Withdrawal of Redux and Pondimin

On September 12, 1997, the FDA informed AHP of a
survey showing that 92 of 291 fen-phen users had

                               4
developed heart-valve abnormalities. The next business
day, September 15, 1997, AHP announced that it was
withdrawing Pondimin and Redux from the market. The
same day, AHP issued a press release estimating total lost
profits of 14 cents per share for 1997 and 1998 as a result
of lost sales of the two drugs, as well as a one-time product
withdrawal loss of $200 million to $300 million. On
September 15, the day of the withdrawal announcement,
the closing price of AHP common stock fell 3 11/16 points,
to 73 1/4.

On September 16, 1997, a Wall Street Journal article
reported that AHP "face[s] lawsuits, including one seeking
class-action status, from people who claim to have been
harmed by the drugs. American Home says it is likely it will
face legal action." (App. 103.) Nevertheless, AHP's stock
rose slightly for the day. On September 17, 1997, articles in
the Wall Street Journal and the New York Times reported
that AHP had known about possible heart-valve
abnormalities since at least March 1997, and that the
company faced substantial personal injury liability
exposure. That day, AHP stock suffered a 4 1/4 point
decline, to close at 69 15/16.

C. AHP's Public Statements During the Class Period.

Plaintiffs allege that from March 1, 1997, through
September 16, 1997 (the "Class Period"), AHP made
material misrepresentations and omissions regarding the
safety of Pondimin and Redux, as well as AHP's knowledge
of the heart-valve reports. For example, on March 27, 1997,
AHP issued its Annual Report, which contained a statement
that "Redux, the first prescription weight-loss drug to be
cleared by the FDA in more than 20 years, was one of the
most successful drug launches ever." (App. 47.) The report
contained no reference to either the European or the Mayo
data. On April 21, 1997, AHP issued a press release
addressing newspaper reports of a death that had been
mistakenly attributed to Redux by an FDA official. The
press release noted that "[s]cientific evidence has shown
Redux to be safe and effective when used as indicated."
(App. 50.) In addition, in various releases listing Redux and

                               5
Pondimin's side effects, AHP omitted any mention of heart-
valve damage.

Plaintiffs also contend that, following the public
disclosure of the Mayo data on July 8, 1997, AHP issued
further misleading statements that were designed to
minimize the impact of that data. Although AHP's
statements to the public discussed "a possible serious heart
valve disorder" and "an unusual type of serious regurgitant
valvular heart disease," AHP failed to disclose that it had
been aware of the Mayo data since March 1997, and of the
European data since early 1995. (App. 57.) According to
plaintiffs, this omission served to materially mislead
investors as to AHP's potential exposure to damages from
products liability litigation arising out of the two drugs.

D. Stock Sales By Individual Defendants.

In the period between the March meeting with Mayo and
the end of the Class Period, seven of the individual
defendants sold a total of $40 million of AHP stock,
resulting in profits of $25 million. Plaintiffs allege that
these sales were consciously designed to take advantage of
AHP's artificially-inflated stock price prior to public
disclosure of the heart-valve data.

E. The District Court Decision.

Plaintiffs filed this securities class action in federal court
on September 18, 1997, alleging that defendants violated
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, 15 U.S.C. SS 78j(b) and 78t(a), as well as Rule 10b-5,
17 C.F.R. S 240.10b-5. On January 30, 1998, the plaintiffs
filed an Amended Class Action Complaint (the "Amended
Complaint"). Defendants moved to dismiss the complaint,
and the District Court granted their motion in its entirety
without leave for plaintiffs to amend further. See Oran v.
Stafford, 

(D.N.J. 1999).

Finding that plaintiffs had failed to plead any material
misstatement or omission under federal securities law, the
court noted that on July 8, 1997--halfway through the
Class Period--there had been full disclosure of the Mayo

                                  6
data without any appreciable effect on AHP's stock price. As
a result, the court concluded, "the medical data disclosed
by AHP on July 8, 1997 was immaterial as a matter of law."

The court also held that disclosure of the
European data and earlier adverse reaction reports would
not have materially altered the substance of the July 8
release. In addition, the court held that AHP's failure to
disclose when it had first learned of the adverse health data
was not a material omission. As to the individual
defendants, the District Court held that the Amended
Complaint was not pled with sufficient particularity to give
rise to the necessary strong inference of scienter required
under the PSLRA. Plaintiffs appealed.

II.

Plaintiffs raise four arguments on appeal. First, they
claim that the District Court erred in holding that AHP's
misstatements and omissions were not material as a matter
of law. Second, they argue that AHP violated SEC
Regulation S-K, Item 303(a), which requires disclosure of
"known trends and uncertainties," and that such a violation
can support a claim under Section 10(b) of the Securities
Exchange Act and Rule 10b-5. Third, plaintiffs maintain
that the District Court erred by holding that the claims
against AHP's insiders were not stated with sufficient
particularity to satisfy the heightened pleading
requirements of Federal Rule of Civil Procedure 9(b) and the
Private Securities Litigation Reform Act of 1995 (PSLRA), 15
U.S.C. S 78u-4 et seq. Finally, plaintiffs claim that the
District Court should have granted leave to amend in order
to remedy any deficiencies in the Amended Complaint. We
address these contentions in turn.2
_________________________________________________________________

2. We exercise plenary review over the District Court's dismissal of the
Amended Complaint for failure to state a claim, accepting plaintiffs'
factual allegations as true. See In re Westinghouse Sec. Litig., 

, 707 (3d Cir. 1996). We also have plenary review over the District
Court's interpretation of the federal securities laws. See Shapiro v. UJB
Financial Corp., 

, 279 (3d Cir. 1992). We review the District
Court's denial of leave to amend for abuse of discretion. See In re
Burlington Coat Factory Sec. Litig., 

, 1417 (3d Cir. 1997).

                               7
A.

To state a valid securities fraud claim under Rule 10b-5,
a plaintiff must first establish that defendant, in connection
with the purchase or sale of a security, "made a materially
false or misleading statement or omitted to state a material
fact necessary to make a statement not misleading." See In
re Burlington Coat Factory Sec. Litig., 

, 1417
(3d Cir. 1997). The plaintiff must additionally establish that
the defendant acted with scienter and that plaintiff 's
reasonable reliance on defendant's misstatement
proximately caused him injury. See In re Phillips Petroleum
Sec. Litig., 

, 1244 (3d Cir. 1989).

The District Court held that the misrepresentations pled
by the plaintiffs were immaterial as a matter of law, and we
begin by addressing this issue. Plaintiffs maintain that they
pled several material misrepresentations and omissions,
namely: (1) that AHP failed to disclose the Mayo data prior
to June 8, 1997, and issued misleading statements
minimizing the import of that data following disclosure; (2)
that AHP failed to disclose the European data and adverse
reaction reports, even after the Mayo data became public;
(3) that AHP misled investors by publicizing the fact of
Redux's FDA approval without disclosing that it had
withheld much of the European data from the FDA; and (4)
that AHP failed to disclose when it had first learned about
the European data, the adverse reaction reports, or the
Mayo data. Before we address these alleged omissions and
misrepresentations in detail, we briefly review this Circuit's
explication of the materiality standard.

Material information is "information that would be
important to a reasonable investor in making his or her
investment decision." 

.
Generally, undisclosed information is considered material if
"there is a substantial likelihood that the disclosure would
have been viewed by the reasonable investor as having
`significantly altered the "total mix" of information' available
to that investor." See In re Westinghouse Sec. Litig., 

, 714 (3d Cir. 1996) (quoting T.S.C. Indus., Inc. v.
Northway, Inc., 

, 449 (1976)).

In Burlington, however, this Court fashioned a special
rule for measuring materiality in the context of an efficient

                               8
securities market. This rule was shaped by the basic
economic insight that in an open and developed securities
market like the New York Stock Exchange, the price of a
company's stock is determined by all available material
information regarding the company and its business. In
such an efficient market, "information important to
reasonable investors . . . is immediately incorporated into
the stock price." 

. As a result,
when a stock is traded in an efficient market, the
materiality of disclosed information may be measured post
hoc by looking to the movement, in the period immediately
following disclosure, of the price of the firm's stock.
Because in an efficient market "the concept of materiality
translates into information that alters the price of the firm's
stock," if a company's disclosure of information has no
effect on stock prices, "it follows that the information
disclosed . . . was immaterial as a matter of law."

.

With these standards in mind, we turn to plaintiffs'
specific allegations of material misrepresentation.

1.

AHP first learned of the Mayo data suggesting a link
between fen-phen and heart-valve disorders in March 1997.
It did not, however, release this data to the public until
July 8, 1997. The District Court concluded that AHP's
failure to disclose this data prior to July 8 was not a
material omission, and we agree.

Because the Mayo data was actually disclosed on July 8,
we apply Burlington and look to the movement in the price
of AHP's stock following disclosure to determine if the
information was material.3 As the District Court noted, the
July 8 disclosure had no appreciable negative effect on the
company's stock price; in fact, AHP's share price rose by
$3.00 during the four days after the Mayo disclosure.
Under Burlington's market test, this price stability is
dispositive of the question of materiality.
_________________________________________________________________

3. Plaintiffs allege that "the market for AHP common stock was an
efficient market." Amended Complaint, para. 38. (App. 12.)

                                9
Plaintiffs counter, however, that this lack of adverse price
movement may be traceable to defendant's own "spinning"
of the Mayo data--which, plaintiffs maintain, itself
constituted a material misrepresentation. Plaintiffs argue,
in effect, that had AHP not deceptively downplayed the
significance of the Mayo data through its sanguine and
allegedly misleading statements, investors would have
realized the import of the information, and share prices
would have tumbled following the June 8 announcement.

We reject this argument, and agree with the District
Court that AHP's so-called "spinning" of the Mayo data was
not materially misleading. AHP, in its public statements,
did characterize the Mayo data as "limited and therefore
inconclusive," and emphasized that "additional scientific
investigation must be conducted before any possible link
can be confirmed." (App. 56.) There is, however, nothing in
these statements that could reasonably be characterized as
inaccurate. The FDA's own June 8 press release confirmed
that "[p]resently there is no conclusive evidence
establishing a causal relationship between [Pondimin and
Redux] and valvular heart disease." (App. 54.) Mayo's public
statement that same day was similarly ambivalent:"We
believe these cases raise significant concern that this
combination of appetite suppressants has important
implications regarding valvular heart disease. But more
comprehensive study is needed to confirm the associations."
(App. 52-53) (emphasis added).

These third-party statements support the District Court's
conclusion that AHP's characterization of the Mayo data as
"inconclusive" was neither false nor misleading. Plaintiffs do
not allege that, when AHP made its statements on June 8
and afterward, there was any conclusive medical evidence
linking its products to heart valve disorders. From the face
of the Amended Complaint, then, it is clear that AHP's
characterization of the Mayo data cannot serve as the basis
for liability under the federal securities laws.

2.

Plaintiffs next argue that AHP's statements regarding the
Mayo data must be viewed in light of the company's failure

                                10
to disclose the European data and the adverse reaction
reports. In their view, had this data not been withheld, it
would have corroborated the Mayo report and alerted
investors to the possibility of a significant link between the
two drugs and valvular heart disease. In particular,
plaintiffs assert that AHP's statements characterizing the
Mayo data as "inconclusive" became materially misleading
in light of this additional withheld data.

Plaintiffs do not allege that the European data and
adverse reaction reports, taken by themselves, established
any statistically significant relationship between AHP's
products and valvular heart disease. Nor does the Amended
Complaint assert that the withheld data, even when viewed
in conjunction with the Mayo report, could have
demonstrated any medically conclusive link in light of the
millions of prescriptions written for Pondimin and Redux.
In fact, plaintiffs never clearly explain how the
accumulation of additional anecdotal data, short of the
point of statistical significance, would have added anything
to the disclosures already made on July 8, 1997. Because
the link between the two drugs and heart-valve disorders
was never definitively established during the relevant period
even after the withheld data is taken into account, AHP's
failure to disclose this data cannot render its statements
about the inconclusiveness of the relationship materially
misleading.

AHP characterized the Mayo data as inconclusive. Had it
simultaneously disclosed the European data and the
adverse reaction reports, the aggregate of available
information would nevertheless have led a reasonable
investor to the same conclusion--that the relationship
between the two drugs and heart valve disorders was still
inconclusive. As the Second Circuit has noted, "[d]rug
companies need not disclose isolated reports of illnesses
suffered by users of their drugs until those reports provide
statistically significant evidence that the ill effects may be
caused by--rather than randomly associated with--use of
the drugs and are sufficiently serious and frequent to affect
future earnings." In re Carter-Wallace, Inc. Sec. Litig., 

, 157 (2d Cir. 1998). The withheld reports did not
provide such statistically significant evidence. Therefore, we

                               11
agree with the District Court that the disclosure of the
European data and the adverse reaction reports would not
have "significantly altered the `total mix' of information"
available to AHP's investors. 

.

3.

Plaintiffs next contend that they were materially misled
about the FDA approval process for Redux. Although AHP
had become aware of at least 31 cases of heart valve
abnormalities in European diet-pill users by the time that
the FDA Advisory Committee voted to approve Redux in
1995, the company informed the FDA of only eight of those
reports. This non-disclosure, plaintiffs contend, rendered
materially misleading AHP's later statements about the
approval process, which plaintiffs claim suggested that AHP
had disclosed to the agency all available safety data.4

As an initial matter, we note that plaintiffs do not allege
that AHP withheld any information that it was legally
required to disclose to the FDA. Certainly, the simple
failure to disclose the additional European cases--which, as
we have explained above, fail to establish a statistically
significant causal relationship--cannot by itself serve as a
basis for securities fraud liability.

Plaintiffs, however, argue that AHP put the subject of
FDA approval "in play" by publicizing the agency's
determination that Redux was safe, and that once that
subject was in play, AHP was required to disclose any
material facts that would have tended to contradict its
positive representations. Plaintiffs rely principally on
Shapiro v. UJB Financial Corp., 

, 281 (3d Cir.
1992), which dealt with a defendant's characterization of its
financial management practices as "adequate." Finding that
such a statement could, in some circumstances, be
actionable, this Court reasoned that
_________________________________________________________________

4. For example, on August 19, 1997, AHP issued a press release stating
that "[t]he FDA cleared Redux for marketing in April, 1996 following a
thorough review of more than 17 clinical trials which indicated that, at
the dose recommended for treatment of obesity, dexfenfluramine is an
effective appetite suppressant with an acceptable safety profile." (App.
60.)

                               12
       if a defendant has not commented on the nature and
       quality of the management practices that it has used to
       reach a particular statement of loan loss reserves,
       earnings, assets, or net worth, it is not a violation of
       the securities laws to fail to characterize these
       practices as inadequate, meaningless, out of control, or
       ineffective. However, where a defendant affirmatively
       characterizes management practices as "adequate,"
       "conservative," "cautious," and the like, the subject is
       "in play." For example, if a defendant represents that
       its lending practices are "conservative" and that its
       collateralization is "adequate," the securities laws are
       clearly implicated if it nevertheless intentionally or
       recklessly omits certain facts contradicting these
       representations. Likewise, if a defendant characterizes
       loan loss reserves as "adequate" or "solid" even though
       it knows they are inadequate or unstable, it exposes
       itself to possible liability for securities fraud. By
       addressing the quality of a particular management
       practice, a defendant declares the subject of its
       representation to be material to the reasonable
       shareholder, and thus is bound to speak truthfully.

(citation omitted).

We do not believe that AHP's statements regarding the
FDA approval process were materially misleading under
Shapiro. Unlike the defendant in Shapiro, AHP did not
make any "affirmative characterization" that the FDA's
approval was based on a complete review of every piece of
relevant medical information. Rather, AHP made a simple
(and accurate) factual assertion that the FDA had found
that Redux had an "acceptable safety profile" following a
"thorough review of more than 17 clinical trials." (App. 60.)
Accordingly, we find that these statements did not
constitute any material misrepresentation or omission.

4.

Finally, plaintiffs charge that AHP's failure to disclose the
dates on which it first learned of the European data,
adverse reaction reports, and Mayo data constituted a
material omission. This information was material to

                               13
investors, they assert, because of the light it would have
cast on AHP's potential products liability exposure.
According to the plaintiffs, the materiality of this
undisclosed information was confirmed by the four-percent
drop in share prices on September 17, the day that the
New York Times and Wall Street Journal reported that AHP
had known about possible heart-valve abnormalities since
at least March 1997.

Under the rationale of Burlington, this share price activity
does suggest that investors viewed this final category of
undisclosed information as material.5 This does not end our
inquiry, however. Even non-disclosure of material
information will not give rise to liability under Rule 10b-5
unless the defendant had an affirmative duty to disclose
that information. "Silence, absent a duty to disclose, is not
misleading under Rule 10b-5." Basic, Inc. v. Levinson, 

, 239 n.17 (1988); see also Burlington , 114 F.3d at
1432 ("Except for specific periodic reporting requirements
. . . there is no general duty on the part of a company to
provide the public with all material information."). Such a
duty to disclose may arise when there is insider trading, a
statute requiring disclosure, or an inaccurate, incomplete
or misleading prior disclosure. See Glazer v. Formica Corp.,

, 157 (2d Cir. 1992); Backman v. Polaroid
Corp., 

, 12 (1st Cir. 1990) (en banc); In re
General Motors Class E Stock Buyout Sec. Litig., 694 F.
Supp. 1119, 1129 (D. Del. 1988).

None of these circumstances were present here. Plaintiffs
_________________________________________________________________

5. The District Court pointed to an alternative explanation for this share
price drop that it found more plausible: a delayed investor reaction to
AHP's withdrawal of Pondimin and Redux two days earlier. While we
agree that this is a reasonable explanation--more reasonable, perhaps,
than that proffered by plaintiffs--we note that in deciding a motion to
dismiss, a court must draw all reasonable inferences in favor of the non-
moving party. Here, there is nothing inherently implausible in the theory
advanced by plaintiffs. Consequently, we believe that the District Court
erred in adopting its own interpretation of the September 17 share price
drop rather than accepting the theory put forward by plaintiffs. We
believe, however, that this error was harmless because, as we explain
below, plaintiffs have not pled any affirmative duty on AHP's part to
disclose the disputed information.

                                14
do not allege that there was any statute requiring
disclosure of this information.6 Nor do they allege that AHP
was trading in its own stock during the relevant period.7
Accord Staffin v. Greenberg, 

, 1203 (3d Cir.
1981).

Plaintiffs argue, however, that AHP's prior disclosures
regarding its potential liability--particularly its July 8
disclosure of the Mayo study--were incomplete and
therefore misleading because they failed to mention when
the company first became aware of the adverse heart-valve
data. We cannot agree. As an initial matter, it is clear that
until the FDA notified AHP on September 12 of its own data
showing a link between the two drugs and heart-valve
disorders, there was no statistically significant evidence
establishing a serious health risk. Prior to that date, then,
the threat of product liability exposure was purely
speculative, and any evidence of when AHP first learned of
the adverse Mayo and European data was immaterial as a
matter of law.

Moreover, AHP had no legal duty to correct or update
even following its September 12 receipt of the FDA report.
The duty to correct exists "when a company makes a
historical statement that, at the time made, the company
believed to be true, but as revealed by subsequently
discovered information actually was not." 

(quoting Stransky v. Cummins Engine Co.,
Inc., 

(7th Cir. 1995)). Here, because AHP
never made any prior statement regarding when it learned
of the heart-valve data, there can be no legal duty to
correct.

The duty to update, in contrast, "concerns statements
that, although reasonable at the time made, become
_________________________________________________________________

6. For the reasons discussed in section IIB, infra, we reject plaintiffs'
claim that SEC Regulation S-K, Item 303(a) imposed an affirmative duty
of disclosure on AHP that could give rise to a claim under Rule 10b-5.
Moreover, we note that the last of the SEC filings that are governed by
the regulation was filed in August 1997, well before there was anything
more than a speculative possibility of tort liability for AHP.

7. We address the insider trading claims asserted against the individual
officer-defendants in section IIC, infra.

                                15
misleading when viewed in the context of subsequent
events." 

. After the release of
the FDA study, which established a probable link between
AHP's drugs and heart-valve disorders, AHP's notice of the
earlier data could be viewed as material by a reasonable
investor because it beared on the company's potential
liability. Nevertheless, the omission of material information
from a prior statement is actionable under a duty to update
theory only if the previous statement contained an"implicit
factual representation that remained `alive' in the minds of
investors as a continuing representation." 

. In this case, AHP never made any factual
representation--implicit or explicit--regarding when it was
first placed on notice about potential heart-valve problems.
AHP's earlier statements about the Mayo and European
data did not relate any incorrect or misleading information
about when the company had learned of that data; rather,
they were simply silent on the subject. In the absence of a
misleading prior representation, AHP was under no legal
duty to update.

In short, even assuming arguendo that the date on which
AHP was put on notice of the adverse health data was
material at the time the public learned of it, we hold that
AHP was under no affirmative duty to disclose this
information under federal securities law. Therefore, this
omission cannot form the basis for liability.

B.

Plaintiffs next argue that AHP had an affirmative
obligation to disclose the heart-valve data's effect on AHP's
future prospects under SEC Regulation S-K, Item 303(a)
("S-K 303"), 17 C.F.R. S 229.303. S-K 303 requires a
company to include in its SEC filings a discussion of "any
known trends or uncertainties that have had or that the
registrant reasonably expects will have a material favorable
or unfavorable impact on net sales or revenues or income
from continuing operations." 17 C.F.R. S 229.303(a)(3)(ii).
Plaintiffs allege that by omitting material information
concerning the link between its drugs and valvular heart
disorder from its 1996 Form 10-K and Annual Report, and

                               16
its 1997 First and Second Quarter Form 10-Qs,8 AHP
breached its duty of disclosure under the regulation.

To succeed on this claim, however, plaintiffs mustfirst
establish either that S-K 303 creates an independent
private right of action, or that the regulation imposes an
affirmative duty of disclosure on AHP that, if violated,
would constitute a material omission under Rule 10b-5. We
address these possibilities in turn.

In Burlington, this Court noted that "[i]t is an open issue
whether violations of Item 303 create an independent cause
of action for private plaintiffs." Burlington , 114 F.3d at 1419
n.7. Today, we hold that they do not. Neither the language
of the regulation nor the SEC's interpretative releases
construing it suggest that it was intended to establish a
private cause of action, and courts construing the provision
have unanimously held that it does not do so. See, e.g., In
re Sofamor Danek Group, Inc., 

, 402 (6th Cir.
1997); In re Boston Tech., Inc., Sec. Litig., 

,
67 (D. Mass. 1998); In re Canandaigua Sec. Litig., 944 F.
Supp. 1202, 1209 n.4 (S.D.N.Y. 1996); In re F&M Distrib.,
Inc. Sec. Litig., 

, 654 (E.D. Mich. 1996);
Kriendler v. Chemical Waste Mgmt., Inc., 

,
1157 (N.D. Ill. 1995).

Plaintiffs respond, however, that even if there is no
independent private cause of action under SK-303, the
regulation nevertheless creates a duty of disclosure that, if
violated, constitutes a material omission under Section
10(b) of the Securities Exchange Act and Rule 10-b5. In
evaluating this argument, we must examine whether the
disclosure mandated by SK-303 is governed by standards
consistent with those that the Supreme Court has imposed
for private fraud actions under the federal securities laws.

The SEC, whose interpretation is entitled to considerable
deference, has characterized a company's disclosure
obligations under SK-303 as follows:
_________________________________________________________________

8. AHP filed its 1996 Annual Report and Form 10-K on March 27, 1997,
its First Quarter 1997 Form 10-Q on May 13, 1997, and its Second
Quarter 1997 Form 10-Q on August 13, 1997.

                                17
       Where a trend, demand, commitment, event or
       uncertainty is known, management must make two
       assessments:

       (1) Is the known trend, demand, commitment, event or
       uncertainty likely to come to fruition? If management
       determines that it is not reasonably likely to occur, no
       disclosure is required.

       (2) If management cannot make that determination, it
       must evaluate objectively the consequences of the
       known trend, demand, commitment, event or
       uncertainty, on the assumption that it will come to
       fruition. Disclosure is then required unless
       management determines that a material effect on the
       registrant's financial condition or results of operations
       is not reasonably likely to occur.

Management's Discussion and Analysis of Financial
Condition and Results of Operations, Exchange Act Release
No. 34-26831, 54 Fed. Reg. 22427, 22430 (May 24, 1989).
This test varies considerably from the general test for
securities fraud materiality set out by the Supreme Court in
Basic, Inc. v. Levinson, which premised forward-looking
disclosure "upon a balancing of both the indicated
probability that the event will occur and the anticipated
magnitude of the event in light of the totality of the
company activity." 

, 237 (1988) (quoting SEC
v. Texas Gulf Sulphur Co., 

, 849 (2d Cir. 1968)
(en banc)). As the SEC specifically noted, "[t]he
probability/magnitude test for materiality approved by the
Supreme Court in Basic . . . is inapposite to Item 303
disclosure"; rather, SK-303's disclosure obligations extend
considerably beyond those required by Rule 10b-5.
Exchange Act Release No. 34-26831, 54 Fed. Reg. at 22430
n.27.

Because the materiality standards for Rule 10b-5 and
SK-303 differ significantly, the "demonstration of a violation
of the disclosure requirements of Item 303 does not lead
inevitably to the conclusion that such disclosure would be
required under Rule 10b-5. Such a duty to disclose must
be separately shown." Alfus v. Pyramid Tech. Corp., 764 F.
Supp. 598, 608 (N.D. Cal. 1991); see also Sofamor,123 F.3d

                               18
at 402; In re Quintel Entertainment, Inc., Sec. Litig., 72 F.
Supp. 283, 293 (S.D.N.Y. 1999); Wilensky v. Digital Equip.
Corp., 

, 181 & n.10 (D. Mass.1995), rev'd
in part on other grounds sub nom. Shaw v. Digital Equip.
Corp., 

(1st Cir. 1996); 

.9 We find this reasoning persuasive, and thus hold
that a violation of SK-303's reporting requirements does not
automatically give rise to a material omission under Rule
10b-5. Because plaintiffs have failed to plead any
actionable misrepresentation or omission under that Rule,
SK-303 cannot provide a basis for liability.

C.

Having affirmed the District Court's dismissal of the
claims against AHP, we turn now to plaintiffs' claims
against the individual officer-defendants. The District Court
dismissed these claims because plaintiffs' allegations
concerning the individual defendants' motive and
opportunity to commit fraud failed to meet the PSLRA's
rigorous requirements for pleading scienter. The court
noted that two of the officer-defendants, Stafford and
Jones, were not alleged to have traded stock during the
Class Period. As to the other officers, the court held that
there was no allegation that their disputed trades were not
routine or that the profits made were "substantial enough
in relation to the compensation levels . . . to produce a
suspicion that they might have had an incentive to commit
fraud." 

(quoting 

).

Both the PSLRA and Federal Rule of Civil Procedure 9(b)
impose heightened pleading requirements on plaintiffs who
allege securities fraud. Rule 9(b) requires that"[i]n all
_________________________________________________________________

9. In Steckman v. Hart Brewing, Inc., 

, 1296 (9th Cir.
1998), the Ninth Circuit held that allegations which state a claim under
SK-303 also sufficiently state a claim under Sections 11 and 12(a)(2) of
the Securities Exchange Act. The court carefully limited its holding,
however, making clear that it did not extend to claims under Section
10(b) or Rule 10b-5. See 

re VeriFone Sec. Litig., 

,
870 (9th Cir. 1993)). Accordingly, Steckman does not support plaintiffs'
position here.

                               19
averments of fraud or mistake, the circumstances
constituting fraud or mistake shall be stated with
particularity." The PSLRA more specifically requires that a
securities fraud complaint "state with particularity facts
giving rise to a strong inference that the defendant acted
with the required state of mind." 15 U.S.C. S 78u-4(b)(2). In
Burlington, this Court held that a plaintiff may establish
this strong inference "either (a) by alleging facts to show
that defendants had both motive and opportunity to
commit fraud, or (b) by alleging facts that constitute strong
circumstantial evidence of conscious misbehavior or

; see also In re Advanta
Corp. Sec. Litig., 

, 534-35 (3d Cir. 1999).

The gravamen of plaintiffs' case against the individual
officer-defendants is that they intentionally concealed
material information in order to artificially inflate the price
of AHP's stock, and then profited by selling their own stock
at this inflated price shortly before the public disclosure of
the Mayo data.

Plaintiffs do not dispute that Stafford and Jones traded
no stock during the relevant period. This reason alone
requires that we affirm the District Court's dismissal of the
claims against these two defendants.

As to the remaining defendants, plaintiffs attempt to
show motive and opportunity for fraud by alleging that, in
the period from May through July 1997, these seven AHP
executives sold over $40 million of AHP stock at a profit of
$24.98 million. The Amended Complaint sets forth the
number of shares sold by each officer-defendant, the dates
of the trades, and the profit realized on each transaction.
(App. 73.) However, the Amended Complaint does not allege
the total number of shares held by each of the officers or
the amounts of their base compensation. The District Court
found that the absence of this information was fatal to
plaintiffs' case against the officer-defendants because
"plaintiffs provide[d] no information as to whether the
trades were normal and routine for each executive." 

.

On appeal, appellants urge this Court to take judicial
notice of the defendants' compensation levels and their

                               20
10. The Form 14As, which provide information on the executives' base
compensation, were not presented to the District Court in any form.
total direct stockholdings at the time of the trades.
Appellants argue that the information is a matter of public
record, derived from Form 4s and 5s and Form 14A Proxy
statements filed with the SEC.10

Federal Rule of Evidence 201 permits a court to take
judicial notice of facts that are "capable of accurate and
ready determination by resort to sources whose accuracy
cannot reasonably be questioned." Fed. R. Evid. 201(b)(2).
A number of our sister circuits have held that this rule
permits a court, in deciding a motion for judgment on the
pleadings, to take judicial notice of properly-authenticated
public disclosure documents filed with the SEC. See Bryant
v. Avado Brands, Inc., 

, 1276 (11th Cir.
1999); Lovelace v. Software Spectrum, Inc., 

,
1018 (5th Cir. 1996); Kramer v. Time Warner, Inc., 

, 774 (2d Cir. 1991); see also In re Rockefeller Ctr.
Properties, Inc. Sec. Litig., 

, 293 (3d Cir. 1999)
(Nygaard, Circuit Judge, concurring in part and dissenting
in part). As the Second Circuit reasoned,

       the documents are required by law to be filed with the
       SEC, and no serious questions as to their authenticity
       can exist. Second, the documents are the very
       documents alleged to contain the various
       misrepresentations or omissions and are relevant not
       to prove the truth of their contents but only to
       determine what the documents stated.

. We find this reasoning
persuasive. Moreover, we note that there is no risk of unfair
prejudice or surprise here because defendants do not object
to our considering the proffered forms. See Appellee's Br.
54 n.32. Accordingly, we will take judicial notice of the SEC
filings.

Our perusal of the Amended Complaint and the SEC
documents taken together yields the following information
on trading activity during the Class Period:

                               21
Defendant Date of    Shares   Total     Percent   Proceeds      Base Pay
          Trade      Traded   Shares    Traded

Blount    6/12/1997 93,333    105,164   88.75%     $7,366,744   $650,000
Carr      6/12/1997 20,600     44,017   46.8%      $1,606,800   $350,000
Considine 5/6/1997  25,000     38,390   65.12%     $1,778,000   unknown
          7/25/1997 41,800     49,803   83.93%     $3,536,280
Hassan    5/6/1997 233,200    257,082   90.71%    $18,189,600   $589,000
Hoynes    7/31/1997 41,800     58,527   71.42%     $3,437,632   $407,000
Murray    5/6/1997   6,000     11,407   52.6%        $426,000   unknown
Olivier   6/12/1997 71,200    105,899   67.24%     $5,553,600   $457,083


While we will not infer fraudulent intent from the mere
fact that some officers sold stock, "if the stock sales were
unusual in scope or timing, they may support an inference
of scienter." 

. Defendants
correctly note that these trades were not suspicious in
scope; all seven of the defendants sold similar numbers of
shares in the previous year. Indeed, a chart relied on by
plaintiffs during oral argument on the motion to dismiss
demonstrates that Blount, Carr, Hoynes, Murray, and
Olivier all disposed of more shares in 1996 than in 1997.
(App. 360.)11

Plaintiffs counter, however, that the 1997 sales were
unusual in timing because the seven officer-defendants
sold stock during the months of May, June and July 1997
(the three months immediately prior to the Mayo
disclosure), while in 1996, those same defendants sold
stock only in January, February, March, November, and
December. However, the relevant filings show that, while
the officer-defendants did make substantial trades during
the Class Period, there was also significant trading activity
throughout the rest of 1997. In February 1997--a month
_________________________________________________________________

11. SEC filings disclose that in the six-and-a-half month period
immediately preceding the Class Period, the officer-defendants disposed
of the following numbers of shares: Blount: 93,333; Carr: 63,200;
Hoynes: 80,200; Murray: 18,000; Olivier: 130,000; Considine: 40,000.
(Supp. App. 40-68.)

                               22
before AHP first learned of the Mayo data--these individual
defendants collectively disposed of over 233,000 shares.
Moreover, in August 1996--approximately six months
before the beginning of the Class Period--one defendant
(Blount) had sold an additional 177,600 shares. Taken
together, the SEC disclosures merely reveal that the
individual officer-defendants engaged in trading activity
during various months in both 1996 and 1997; they do not
demonstrate any concerted insider effort to dispose of
shares during the Class Period. Consequently, we do not
believe that the individual defendants' trading patterns
establish the requisite strong inference of scienter.

Nor have plaintiffs alleged facts that constitute strong
circumstantial evidence of misbehavior or recklessness. In
essence, plaintiffs argue that because the District Court
found a sufficiently strong inference of conscious
misbehavior or recklessness as to AHP, the same state of
mind should be imputed against the individual defendants.
This approach, however, is foreclosed by the PSLRA. This
Court has held that "[g]eneralized imputations of knowledge
do not suffice regardless of the defendant's position within
the company." 

. Plaintiffs did not
aver which officer-defendants, if any, were aware of the
Mayo data prior to its public release. Nor have they made
any allegations regarding individual knowledge or
recklessness with respect to the European data. Therefore,
plaintiffs cannot meet the heightened pleading
requirements under this theory.

Because plaintiffs have failed to meet their burden of
alleging particularized facts that give rise to a strong
inference of fraudulent intent, we will affirm the District
Court's dismissal of the counts against the individual
officer-defendants.

D.

After dismissing all of the plaintiffs' claims, the District
Court denied plaintiffs leave to amend their complaint. We
review this ruling for abuse of discretion.

The Federal Rules of Civil Procedure express a preference
for liberally granting leave to amend. See Fed. R. Civ. Pro.

                               23
15(a) ("[L]eave shall be freely given when justice so
requires."). Nonetheless, a District Court may deny leave to
amend on the grounds that amendment would cause
undue delay or prejudice, or that amendment would be
futile. See Foman v. Davis, 

, 182 (1962);

. In this case, the District
Court denied leave to amend because of undue delay and
futility of amendment. See 

.

In denying leave to amend, the District Court correctly
noted that "[f]utility is governed by the same standard of
legal sufficiency that applies under rule 12(b)(6)." 

114 F.3d at 1435). The court had earlier
determined that the information allegedly omitted from the
July 8 press release was not material because it would not
have "altered the basic mix of information" available to
investors. In arguing that amendment would not be futile,
plaintiffs rely on a number of "new" facts that they claim
have emerged since the Amended Complaint was filed. See
Reply Br. at 30. Plaintiffs attach particular importance to
the facts that (1) the FBI has reportedly begun an
investigation into Redux's FDA approval process, and (2)
that AHP has reached a $4.4 billion settlement in a
products liability class action arising from its sale of the
two drugs. We fail to see, however, how the inclusion of
these additional allegations would change the analysis
underpinning the District Court's dismissal.

Moreover, plaintiffs have not rebutted the District Court's
findings regarding undue delay. The court noted that
plaintiffs had already amended their complaint once, that
"the case [was] already one and a half years old; no
discovery had been taken; and plaintiffs had four months to
file the instant Amended Class Action Complaint." 

. In light of these facts, we hold that the
District Court did not abuse its discretion in denying
plaintiffs leave to amend.

III.

For the foregoing reasons, the judgment of the District
Court is affirmed.

                               24
A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

                               25