Filed: Jun. 15, 2004
Latest Update: Mar. 02, 2020
Summary: Opinions of the United 2004 Decisions States Court of Appeals for the Third Circuit 6-15-2004 In Re: Alpharma Inc Precedential or Non-Precedential: Precedential Docket No. 02-3348 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2004 Recommended Citation "In Re: Alpharma Inc " (2004). 2004 Decisions. Paper 556. http://digitalcommons.law.villanova.edu/thirdcircuit_2004/556 This decision is brought to you for free and open access by the Opinions of the Unit
Summary: Opinions of the United 2004 Decisions States Court of Appeals for the Third Circuit 6-15-2004 In Re: Alpharma Inc Precedential or Non-Precedential: Precedential Docket No. 02-3348 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2004 Recommended Citation "In Re: Alpharma Inc " (2004). 2004 Decisions. Paper 556. http://digitalcommons.law.villanova.edu/thirdcircuit_2004/556 This decision is brought to you for free and open access by the Opinions of the Unite..
More
Opinions of the United
2004 Decisions States Court of Appeals
for the Third Circuit
6-15-2004
In Re: Alpharma Inc
Precedential or Non-Precedential: Precedential
Docket No. 02-3348
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2004
Recommended Citation
"In Re: Alpharma Inc " (2004). 2004 Decisions. Paper 556.
http://digitalcommons.law.villanova.edu/thirdcircuit_2004/556
This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
University School of Law Digital Repository. It has been accepted for inclusion in 2004 Decisions by an authorized administrator of Villanova
University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.
PRECEDENTIAL Joseph J. DePalma, Esquire
UNITED STATES COURT OF Lite, Depalma, Greenberg & Rivas, LLC
APPEALS Two Gateway Center, 12 th Floor
FOR THE THIRD CIRCUIT Newark, New Jersey 07102
____________
Marc I. Willner, Esquire (Argued)
No: 02-3348 David Kessler, Esquire
_____________ Three Bala Plaza East, Suite 400
Bala Cynwyd, PA 19004
IN RE: ALPHARMA INC.
SECURITIES LITIGATION Counsel for Appellant
Maverick Capital, Ltd., Anthony J. Marchetta, Esquire
John P. Scordo, Esquire
Appellant Pitney, Hardin, Kipp & Szuch, LLP
P.O. Box 1945
Morristown, New Jersey 07962
Appeal from the United States
District Court William H. Pratt, Esquire
for the District of New Jersey Frank Holozubiec, Esquire
(D.C. Civil Action Nos. 00-cv-05452, Wendy E. Long, Esquire (Argued)
00-cv-05507, 00-cv-05508, 00-cv-05630, Kirkland & Ellis
00-cv-05657 and 00-cv-06267) 153 East 53rd Street
District Judge: Honorable Joel A. Pisano New York, New York 10022
______________________
Argued on June 16, 2003 Counsel for Appellees
Before: ALITO, ROTH, and HALL* , __________________
Circuit Judges
OPINION
(Opinion filed June 15, 2004) __________________
ROTH, Circuit Judge:
This case involves a proposed class
action suit brought by investors who
*The Hon. Cynthia H. Hall, Circuit purchased shares of Alpharma, Inc.,
Judge for the United States Court of common stock between April 1999 and
Appeals for the Ninth Circuit, sitting by October 2000. Specifically, plaintiffs
designation. allege that defendants made materially
1
false or misleading statements by reporting 2000. They allege that the company and
and then commenting on inflated revenue, four of its executives caused the issuance
net income, and earnings per share results of materially false and m isleading
during the proposed class period. These financial results during the proposed class
results are alleged to have artificially period, thereby artificially inflating the
inflated the company’s stock price, thereby value of the company’s common stock.
damaging members of the proposed class. Plaintiffs further allege that these
misstatements were the result of improper
The District Court, concluding that
accounting procedures which inflated the
plaintiffs failed to state a claim for relief
company’s reported revenue, net income,
under federal securities laws and that
and earnings per share.
granting leave to amend would be futile,
dismissed the Complaint with prejudice B. Parties
pursuant to Federal Rule of Civil
As stated above, plaintiffs seek to
Procedure 12(b)(6). For the reasons set
represent a proposed class of investors
forth below, we will affirm the final
who purchased shares of Alpharma stock
judgment of the District Court.
during the class period. Defendant
I. Factual Background Alpharma, Inc., is a multinational
corporation that produces pharmaceuticals
A. Overview
for both animal and human use. Its
This case began as six separate domestic headquarters is located in Fort
proposed class actions, all of which were Lee, New Jersey. At all times relevant to
brought by shareholders alleging they the Complaint, the company’s common
suffered damages as a result of being stock traded on the New York Stock
induced to purchase shares of Alpharma’s Exchange (NYSE). Alpharma sold a total
common stock on the basis of false or of $537 million of common stock to
misleading statements made by the underwriters during the class period.
company and its top executives. On
Defendant Einar Sissener is
March 27, 2001, the District Court
Alpharma’s Chairman. Sissener served as
consolidated these actions, appointed
Chief Executive Officer (CEO) between
Maverick Capital, Ltd., as lead plaintiff,
June 1994 and June 1999, and then as
and ordered the filing of a consolidated
Chairman of the Office of the Chief
amended complaint
Executive from June 1999 to December
Plaintiffs filed the Consolidated 1999. He signed Alpharma’s Form 10-K
Amended Class Action Complaint (the annual report for 1999. The Complaint
“Complaint”) on June 8, 2001. In the alleges that he, together with relatives,
Complaint, plaintiffs seek to represent owns sufficient voting shares to effectively
investors who purchased Alpharma stock control the company.
between April 28, 1999, and October 30,
Defendant Ingrid Wiik assumed the
2
position of President and CEO in January accounting irregularities which caused
2000 and became a director in February Alpharma to report inflated revenue
2000. She too signed the company’s Form figures. These revenue figures, in turn,
10-K annual report for 1999. Wiik sold affected the accuracy of its net income and
forty-six percent of her shares in Alpharma earnings per share calculations, thereby
for a total of $839,075 during a four day fueling an increase in the value of the
period in the first week of August 2000 company’s stock during the class period.
when the value of Alpharma’s stock was
More specifically, plaintiffs allege
near its high point of $71 per share.
that the individual defendants violated
Defendant Jeffrey Smith served as both Generally Accepted Accounting
Alpharma’s Vice President and Chief Principles (GAAP) and Alpharma’s own
Financial Officer (CFO) at all times revenue recognition policy2 by recording
relevant to the Complaint. He signed the AHD sales as revenue even though the
Form 10-K annual report for 1999, as well products sold were not shipped to
as each of the Form 10-Q quarterly reports customers until as long as six months after
issued during the proposed class period. the purported sale. In practice, this meant
During the first week of August 2000, that AHD customers had agreed to
Smith sold twenty-six percent of his purchase Alpharma products but delayed
holdings in the company for a total of receipt and payment until subsequent
$1,240,549. quarters. The purchased products were
then put on “customer hold” and shipped
Defendant Bruce Andrews served
to a warehouse until the customers were
as president of Alpharma’s Animal Health
ready to receive and pay for them. These
Division (AHD) during all times relevant
so-called “pre-sales” began when Andrews
to the Complaint. Andrews sold seventy-
became president of the AHD in May 1997
seven percent of his shares in the company
and had allegedly become part of
for a total of $1,658,965 during the first
Alpharma’s “corporate culture” by the
week of August 2000.1
beginning of the class period. As a result,
C. Substantive Allegations plaintiffs allege that defendants either
knew or recklessly disregarded the fact
The primary basis for the proposed
that (1) instances would arise in which
class action is plaintiffs’ allegation that the
customers would later refuse to receive
financial results released by defendants
and pay for orders already recognized as
during the class period were the product of
revenue in previous quarters, (2) they had
1 2
Adopting the language used in the Alpharma’s revenue recognition
Complaint, we will refer to Sissener, policy stated that revenue would not be
Wiik, Smith, and Andrews collectively as recognized until its products were
the “individual defendants”. shipped to customers.
3
failed to disclose that pre-sales essentially October 30, the stock traded at $56.50. By
sapped future demand for the company’s the time the NYSE closed the following
products, and (3) the use of pre-sales day, the value of Alpharma’s shares had
encouraged the creation of fictitious sales. fallen to $38.81.
Alpharma restated its results for the In placing the blame for this drop in
full year 1999, each quarter during 1999, share price on the individual defendants,
and the first two quarters of 2000 plaintiffs allege in their complaint:
following the close of trading on the
Each of the Individual
NYSE on October 30, 2000. In its press
Defendants by virtue of his
release, the company placed the blame for
or her executive and
the overstatements on employees in the
managerial positions with
Brazil division of the AHD and noted that,
the Compa ny, directly
after a full investigation, it was convinced
participated in the daily
that the problem had not spread beyond
management of the
Brazil.3 Prior to the announcement on
Company, and was directly
involved in the day-to-day
3 operations of the Company
In connection with the press release,
at the highest level, and was
Wiik stated as follows:
p ri v y t o c o n f i d e n t i a l
proprietary inform ation
We are extremely
concerning the Company
disappointed by the actions
and its business and
of these employees who
operations, and revenue
breached our established
recognition policies. The
policies and controls and
Individual Defendants were
who violated the trust we
involved or participated in
placed in them. We have
d r a f t in g , prod ucin g ,
removed the individuals
reviewing and/or
involved and appointed
disseminating the false and
new management to run
m i s l e a d i n g s t a te m e n t s
our Animal Health
alleged [in the Complaint].
operations in Brazil. While
we do not consider the net They further assert that the individual
financial impact of this defendants “had a duty to promptly
matter material to the dissem inate truthful and accurate
period affected, we will information with respect to Alpharma and
restate our financial results to promptly correct any public statements
because it is the right thing
to do.
4
issued by or on behalf of the Company that reports and financial statements directly to
had become false or misleading.” Alpharma’s New Jersey headquarters,
Plaintiffs allege this duty was violated which then entered the data into the BPCS.
when defendants knowingly or recklessly Further, Michael Weaver, AHD’s vice
disregarded the fact that “the misleading president of finance and one of Andrews’
statements and omissions would adversely subordinates, made monthly trips to Brazil
affect the integrity of the market for the to review sales records and audit
Company’s stock and would cause the inventory. Based on these facts, plaintiffs
price of the Company’s common stock to allege that personnel in Alpharma’s New
become artificially inflated.” Jersey headquarters were “aware of or
should have been aware of and able to
D. Details of AHD’s Pre-Sales
access sales results from its Brazilian
A lpharma’s AHD conducts operations.”
business with its customers through a staff
Beginning when he became
of sales representatives. At all times
president of the AHD in May 1997,
relevant to the Complaint, these sales
Andrews is alleged to have engaged in a
representatives were supervised by
number of questionable practices,
regional sales managers. The sales
including (1) telling AHD staff that he
managers reported to Randy Maclin,
would take whatever action was necessary
AHD’s vice president of sales and
to raise Alpharma’s stock price, (2) firing
marketing within the United States, and
AHD sales representatives and managers
Loren Williams, vice president of sales
and replacing them with former co-
and marketing for AHD in Latin America.
workers from his prior employer, and (3)
I n a t yp i c a l t r a nsaction , sale s
no longer seeking input from sales
representatives wo uld provide the
representatives as to appropriate yearly
company’s Customer Service Department
sales quotas. This last action was relevant,
(CSD) with the details of the purchase,
as year-end bonuses were tied to the staff’s
including whether the product was to be
ability to meet the sales goals set by
shipped, picked up, or placed on
Andrews. Plaintiffs allege that these
“customer hold.” The CSD would then
purportedly unrealistic sales targets caused
enter the transaction into the company’s
employees to engage in questionable
Business Planning and Control System
activities such as the pre-sales described
(BPCS), which allocated inventory for the
above. Because the number of products on
sale and created an invoice. Each
customer hold could be determined from
warehouse would conduct a monthly
an examination of BPCS entries, plaintiffs
inventory, the results of which were
conclude that examination of such entries
submitted to Alpharma’s headquarters in
“did or could have alerted [defendants] to
New Jersey. However, the Brazil division
the fact that [AHD] was inflating its
of AHD did not use the BPCS. Instead, it
results by, essentially, shipping to itself.”
recorded sales by sending copies of sales
5
income, and earnings per share compared
to the first quarter of 1998. Because a
The Complaint goes on to detail a
report issued by a Wall Street analyst
number of setbacks and expensive
following the announcement of first
acquisitions which purportedly weighed on
quarter results mentioned increased sales
the company and pressured executives to
in Latin America and Southeast Asia,
increase revenue in AHD. Plaintiffs allege
plaintiffs allege that defendants “were
that, as a result of these difficulties, the use
aware that the market was attributing
of pre-sales spread beyond AHD.
Alpha rma’s a ppa re n t s u c c e s s to
Specifically, they assert that Knut
international oper ations, in cludin g
Moksnes and Laritz Valderhaug, the
specifically Latin America.”
president and senior controller of the
Aquatic Animal Health Division (AAHD), The company filed its Form 10-Q
asked AAHD controllers to record for the first quarter of 1999 with the
unreceived cash as accounts receivable Securities and Exchange Commission
despite the fact that the products in (SEC) on May 12, 1999.4 This form,
question had not yet been shipped to the signed by vice president and CFO Smith
customer. This resulted in the resignation on behalf of himself and the company,
of one AAHD controller, who cited her contained the same inflated numbers as the
concerns during an exit interview, which, April 28 press release. These numbers
she believes, was documented and placed were revenue of $156,759,000, net income
in her personnel file at Alpharma’s New of $7,436,000, and earnings per share of
Jersey headquarters. The Complaint twenty-seven cents. In its October 30,
further alleges that Loren Williams, who 2000, restatement, Alpharma lowered
served until October 2000 as AHD’s vice revenue by $810,000, net income by
president of sales and marketing for Latin $238,000, and earnings per share by one
Am eric a , r e s i g n e d o v e r s imila r cent.
disagreements with management but that
(2) Second Quarter of 1999
Williams is unable to assist plaintiffs’
counsel due to a non-disclosure agreement.
4
Each of the 10-Q Forms filed by
E. Statements Made During the Class
Alpharma contained a notes section
Period
which stated, in part, that “[t]he
(1) First Quarter of 1999 accompanying consolidated condensed
financial statements include all
The class period began on April 28,
adjustments (consisting only of normal
1999, when Alpharma announced results
recurring accruals) which are, in the
for the first quarter of 1999. The company
opinion of management, considered
issued a press release which highlighted
necessary for a fair presentation of the
the marked improvement in revenues, net
results for the periods presented.”
6
Alpharma announced results for the highlighted increases in revenue, net
second quarter of 1999 on July 28, 1999. income, and earnings per share. The
Comparing results to the second quarter of earnings per share number exceeded Wall
1998, the accompanying press release Street’s consensus estimate by two cents,
highlighted increases in revenue, net extending Alpharma’s streak of consensus-
income, and earnings per share. The beating quarters to eleven. The value of
earnings per share number exceeded Wall the company’s stock increased by
Street’s consensus estimate by one cent, approximately thirteen percent following
thereby continuing Alpharma’s streak of the issuance of third quarter results.
ten consecutive quarters of exceeding
The company filed its Form 10-Q
analysts’ expectations. The value of the
for the third quarter of 1999 with the SEC
c o m p a n y ’ s s t o c k in c r e a s e d b y
on November 2, 1999. This form, signed
approximately twelve percent following
by Smith on behalf of himself and the
the issuance of second quarter results.
company, contained the same inflated
The company filed its Form 10-Q numbers as the October 25 press release.
for the second quarter of 1999 with the These num bers w ere revenue of
SEC on August 9, 1999. This form, signed $203,131,000, net income of $11,263,000,
by Smith on behalf of himself and the and earnings per share of thirty-eight
company, contained the same inflated cents. In its October 30, 2000 restatement,
numbers as the July 28 press release. Alpharma lowered revenue by $3,302,000,
These numbers were revenue of net income by $890,000, and earnings per
$163,839,000, net income of $7,772,000, share by three cents. As with the second
and earnings per share of twenty-eight quarter, Alpharma would have missed
cents. In the October 30, 2000, analysts’ earnings estimates absent the
restatement, Alpharma lowered revenue by overstatement of revenue.
$1,622,000, net income by $404,000, and
(4) Fourth Quarter and Full Year
earnings per share by two cents. The
1999
consensus estimate for the second quarter
of 1999 had called for earnings per share The company’s fourth quarter and
of twenty-seven cents. Thus, Alpharma full year results for 1999 were issued on
would have missed this estimate by one February 23, 2000. The accompanying
cent had its results been reported correctly press release highlighted both quarterly
in the first instance. and yearly growth in revenue, net income,
and earnings per share. The earnings per
(3) Third Quarter of 1999
share number exceeded expectations for
Alpharma announced its third the twe lf th c o n s e cutive quar te r.
quarter results on October 25, 1999. Highlighting this fact, Sissener issued the
Comparing results to the third quarter of following statement:
1998, the accompanying press release
Alpharma has now achieved
7
12 conse cutive February 23 press release. The fourth
quarters of growth quarter numbers were revenue of
above the goals we $218,447,000, net income of $13,080,000,
have set. I am and earnings per share of forty-one cents.
pleased with these In its October 30, 2000, restatement,
exceptional results, Alpharma lowered fourth quarter revenue
w hich I believe by $3,999,000, net income by $1,047,000,
reflect the success of and earnings per share by three cents. The
the focused growth full year numbers for 1999 were similarly
strategies we have lowered following restatement. Revenue
established and of of $742,176,000, net income of
the efforts of our $39,551,000, and earnings per share of
employees all around $1.34 were decreased by $9,733,000,
the world. The $2,579,000, and nine cents, respectively.
record results are The 10-K for 1999 further stated “that
p art icu la rly ‘revenue is recognized upon shipment of
gratifying because products to customers.’”
they were achieved
(5) First Quarter of 2000
as we continued to
m a k e a n d Alpharma announced results for the
successfully absorb first quarter of 2000 on April 26, 2000. As
significant strategic before, the company highlighted increases
acquisitions that are in revenue, net income, and earnings per
an integral part of share compared to the first quarter of
our long-term growth 1999. In connectio n w ith this
strategy. announcement, Wiik stated that “[t]hese
record first quarter results reflect the
continued successful implementation of
Similarly, Wiik stated that “[c]learly, our growth strategies to build the global
Alpharma’s established strategies for Alpharma enterprise. We are experiencing
growth are working. By continuing to strong top line growth due to both new
execute, we look for this profitable growth product introductions and complimentary
to continue in 2000 and beyond.” acquisitions . . . we expect continued
strong revenue growth throughout 2000.”
The company filed its Form 10-K
The earnings per share number exceeded
for the fourth quarter and full year 1999
Wall Street’s consensus estimate by two
with the SEC on M arch 29, 2000. This
cents, extending Alpharma’s streak of
form, signed by Smith, Sissener, and W iik
consensus-beating quarters to thirteen.
on behalf of themselves and the company,
Between April 25 and May 1, the value of
contained the same inflated numbers as the
Alpharma’s stock increased by nine
8
percent. announcement on October 30. They
further claim that employees in the
The company filed its Form 10-Q
company’s New Jersey headquarters were
for the first quarter of 2000 with the SEC
notified of incidents of improper
on May 8, 2000. This form, signed by
accounting by Paulo Andreoli, a technical
Smith on behalf of himself and the
sales manager in AHD’s Brazil division.
company, contained the same inflated
Andreoli allegedly was told that there
numbers as the April 26 press release.
would be no investigation into his
These numbers were revenue of
allegations. However, plaintiffs contend
$118,280,000, net income of $11,114,000,
that the information submitted by Andreoli
and earnings per share of thirty-five cents.
“was reviewed or available for review by
Following restatement, revenue was
all Defendants, and in particular,
lowered by $2,202,000, net income by
defendant Andrews, president of[AHD].”
$749,000, and earnings per share by two
As an example of the activities occurring
cents. As in previous quarters, Alpharma
at Alpharma, plaintiffs allege that the
would have missed analysts’ earnings
Brazil division’s December 1999 sales
estimates absent the overstatement of
report contained nineteen fraudulent sales,
revenue.
eighteen of which occurred three days
(6) Second Quarter of 2000 before the end of the quarter and reflected
sales activity that was “grossly out of line
Alpharma announced its results for
with the sales made during the rest of the
the second quarter of 2000 on July 31,
month.”
2000. As before, the company highlighted
increases in revenue, net income, and Quoting 17 C.F.R. § 229.303(a)(1)-
earnings per share compared to the second 3(3) and Instruction 3, plaintiffs further
quarter of 1999. On August 1, the value of allege that defendants had a duty under
Alpharma’s stock rose ten percent to applicable SEC regulations to “disclose in
$71.94, the highest close reached at any periodic reports filed with the SEC ‘known
time during the class period. trends or a ny known de man d s ,
commitments, events or uncertainties’ that
F. The Discovery of the Accounting
are reasonably likely to have a material
Irregularities
impact on a company’s sales revenues,
Plaintiffs assert that the internal income or liquidity, or cause previously
i n v e s ti g a t io n o f the ac coun tin g reported financial information not to be
irregularities described by Alpharma indicative of future operating results.”
would have taken a significant amount of Ad ditionally, plaintiffs assert that
time to complete and that the company defendants had “a duty ‘to make full and
must therefore have been aware of the prompt announcements of material facts
accounting irregularities occurring in regarding the company’s financial
B r a z i l l o n g b e f o r e t h e pu b l i c
9
condition.’” 5 They allege that these duties On May 20, 2002, the District Court,
were violated by defendants’ issuance of concluding that plaintiffs failed to state a
financial results that violated both GAAP claim under either Rule 10b-5 or Section
and Alpharma’s own revenue recognition 20(a), dismissed the Complaint with
policy. As noted by the District Court, this prejudice pursuant to Federal Rule of Civil
section of the Complaint is followed by Procedure 12(b)(6). Plaintiffs’ motion for
additional allegations of scienter which reconsideration was denied by the District
add nothing of substance to the claims Court on August 12, 2002, and this appeal
described above. followed.
H. Plaintiffs’ Rule 10b-5 and Section III. Jurisdiction and Standard of
20(a) Claims Review
The above-described allegations lay the Plaintiffs filed this proposed class
groundwork for the two counts asserted in action pursuant to Sections 10(b) and 20(a)
of the Exchange Act, 15 U.S.C. §§ 78j(b)
the Complaint. Count I is brought against
and 78t(a). As such, the District Court
all defendants pursuant to Rule 10b-5. In
exercised jurisdiction over this case
broad terms, it asserts that defendants
pursuant to 28 U.S.C. § 1331. We have
acted both individually and collectively to
jurisdiction to review the final judgment of
defraud investors by making materially
the District Court pursuant to 28 U.S.C. §
false or misleading statements in
1291.
connection with the sale of the company’s
stock. Count II alleges that the individual Our review of the District Court’s
defendants were “controlling persons” of dismissal of the Complaint pursuant to
Alpharma, and thus violated Section 20(a) Rule 12(b)(6) is plenary. Brown v. Philip
of the Securities Exchange Act of 1934, 15 Morris, Inc., 250 F.3d 789, 796 (3d Cir.
U.S.C. § 78, et seq. (the “Exchange Act”), 2001). As the District Court did, “[w]e
by causing the Section 10(b) violation must accept as true all of the factual
described in Count I. allegations in the complaint as well as the
reasonable inferences that can be drawn
II. Procedural History
from them,” and “may dismiss the
As noted above, the Complaint was complaint only if it is clear that no relief
filed on June 8, 2001, following could be granted under any set of facts that
consolidation of the six initial proposed could be proved consistent with the
class actions pending against Alpharma. allegations.” Id. We similarly exercise
plenary review over the District Court’s
interpretation of the applicable federal
5
Quoting SEC Release No. 34-8995, securities laws. In re Rockefeller Center
3 Fed. Sec. L. Rep. (CCH) ¶ 23,120A, at Properties, Inc. Sec. Litig., 311 F.3d 198,
17,095, 17 C.F.R. § 241.8995 (October 215 (3d Cir. 2002). However, we review
15, 1970).
10
the District Court’s denial of plaintiffs’ Solutions, Inc., 277 F.3d 658, 666 (3d Cir.
alternative request for leave to amend the 2002) (quoting 15 U.S.C. § 78j(b)).
Complaint for abuse of discretion. See In Section 10(b) is enforced through Rule
re NAHC, Inc. Sec. Litig.,
306 F.3d 1314, 10b-5, which creates a private cause of
1323 (3d Cir. 2002); In re Burlington Coat action for investors harmed by materially
Factory Sec. Litig.,
114 F.3d 1410, 1434 false or misleading statements. In re
(3d Cir. 1997). Advanta Corp. Sec. Litig.,
180 F.3d 525,
535 (3d Cir. 1999). Specifically, Rule
IV. Discussion
10b-5 “makes it unlawful for any person
Plaintiffs’ argument is straightforward. ‘[t]o make any untrue statement of a
They contend that the District Court erred material fact or to omit to state a material
fact necessary to make the statements
in dismissing the Complaint for failure to
made in light of the circumstances under
state a claim upon which relief may be
which they were made, not misleading . . .
granted and, in the alternative, that the
in connection with the purchase or sale of
court abused its discretion in failing to
any security.’” In re Ikon, 277 F.3d at 666
grant them leave to amend. We begin our
(quoting 17 C.F.R. § 240.10b-5(b)).
analysis with an overview of the relevant
pleading requirements and then address in In order to state a claim pursuant to
turn each of plaintiffs’ assignments of Rule 10b-5, plaintiffs must allege that
error. defendants “(1) made a misstatement or an
omission of a material fact (2) with
A. Overview
scienter
The gravamen of the Complaint is
(3) in connection with the purchase or the
the Rule 10b-5 claim asserted against all
sale of a security (4) upon which
defendants in Count I.6 Thus, we begin by
[plaintiffs] reasonably relied and (5) that
noting that “Section 10(b) prohibits the
[plaintiffs’] reliance was the proximate
‘use or employ, in connection with the
cause of [their] injury.” Id. In so doing,
purchase or sale of any security, . . . [of]
the Private Securities Litigation Reform
any manipulative or deceptive device or
Act (PSLRA), 15 U.S.C. § 78u-4 et seq.,
contrivance in contravention of such rules
requires plaintiffs to “specify each
and regulations as the Commission may
statement alleged to have been misleading,
prescribe . . ..’” In re Ikon Office
the reason or reasons why the statement is
misleading, and, if an allegation regarding
6 the statement or omission is made on
As discussed in greater detail below,
information and belief, the complaint shall
the viability of Count II, which alleges
state with particularity all facts on which
controlling person liability pursuant to
that belief is formed.” 15 U.S.C. § 78u-
Section 20(a) of the Exchange Act
against the individual defendants, is
contingent upon the success of Count I.
11
4(b)(1)(B). 7 Of particular significance ‘strong inference’ of fraud may be
here, the PSLRA also requires that the established either (a) by alleging facts to
applicable mental state be pled with show that defendants had both motive and
particularity. In re Advanta, 180 F.3d at opportunity to commit fraud, or (b) by
530. Specifically, it states, in relevant alleging facts that constitute strong
part, as follows: circumstantial evidence of conscious
misbehavior or recklessness.” In re
In any private action arising
Burlington Coat Factory, 114 F.4d at 1418.
under this chapter in which
The appropriate sanction for complaints
the plaintiff may recover
which fail to meet these requirements is
money damages only on
dismissal. In re Advanta, 180 F.3d at 531
proof that the defendant
(citing 15 U.S.C. § 78u-4(b)(3)(A)).
acted with a particular state
of mind, the complaint shall, In addition to the requirements
with respect to each act or contained in the PSLRA, Plaintiffs also
omission alleged to violate must comply with those set forth in
this chapter, state with Federal Rule of Civil Procedure 9(b). Id.
particularity facts giving rise Rule 9(b) provides, in relevant part, that
to a strong inference that the plaintiffs alleging fraud must state “the
defendant acted with the circumstances constituting fraud or
required state of mind. mistake . . . with particularity.” Fed. R.
Civ. P. 9(b). However, plaintiffs may
15 U.S.C. § 78u-4(b)(2). “The requisite
generally alleg e “[m]a lice, intent,
knowledge, and other condition of mind of
a person.” Id. As applied to Rule 10b-5
7
The purpose of the heightened claims, “Rule 9(b) requires a plaintiff to
pleading requirements contained in the plead (1) a specific false representation [or
PSLRA is “to restrict abuses in securities omission] of material fact; (2) knowledge
class-action litigation, including: (1) the by the person who made it of its falsity; (3)
practice of filing lawsuits against issuers ignorance of its falsity by the person to
of securities in response to any whom it was made; (4) the intention that it
significant change in stock price, should be acted upon; and (5) that the
regardless of defendants’ culpability; (2) plaintiff acted upon it to his damage.” In
targeting of ‘deep pocket’ defendants; (3) re Rockefeller Center Properties, 311 F.3d
the abuse of the discovery process to at 216 (citation and internal quotations
coerce settlement; and (4) manipulation omitted); GSC Partners CDO Fund v.
of clients by class action attorneys.” In Washington, F.3d [14](3d Cir. 2004).
re Advanta, 180 F.3d at 531 (citing H.R. Further, “Rule 9(b) requires plaintiffs to
Conf. Rep. No. 104-369, at 28 (1995), identify the source of the allegedly
reprinted in 1995 U.S.C.C.A.N. 679, fraudulent misrepresentation or omission.”
748).
12
Id. In sum, “Rule 9(b) requires, at a must “alleg[e] facts ‘establishing a motive
minimum, that plaintiffs support their and an opportunity to commit fraud, or . .
allegations of securities fraud with all of . set[] forth facts that constitute
the essential factual background that circumstantial evidence of either reckless
would accompany ‘the first paragraph of or conscious behavior.’” In re Advanta,
any newspaper story’ — that is, the
‘who, 180 F.3d at 534-35 (quoting Weiner v.
what, when, where and how’ of the events Quaker Oats Co.,
129 F.3d 310, 318 n.8
at issue.”
Id. at 217 (quoting In re (3d Cir. 1997)); In re Digital Island
Burlington Coat Factory, 114 F.3d at Securities Litigation,
357 F.3d 322, 328-29
1422); GSC Partners at [20]. Importantly, (3d Cir. 2004). In so doing, plaintiffs
to the extent that Rule 9(b)’s allowance of “must allege facts that could give rise to a
general pleading with respect to mental ‘strong’ inference of scienter”; general
state conflicts with the PSLRA’s allegations that defendants knew or
requirement that plaintiffs “state with recklessly disregarded the false nature of
particularity facts giving rise to a strong the statements at issue are insufficient. In
inference that the defendant acted with the re Burlington Coat Factory, 114 F.3d at
required state of mind,” 15 U.S.C. § 78u- 1422.
4(b)(2), the PSLRA “supersedes Rule 9(b)
Plaintiffs pleading scienter through
as it relates to Rule 10b-5 actions.” In re
motive and opportunity must support their
Advanta, 180 F.3d at 531 n.5.
allegations with “facts stated ‘with
Here, the primary basis for the particularity’” that “give rise to a ‘strong
District Court’s dismissal of the Complaint inference’ of scienter.” In re Advanta, 180
was plaintiffs’ failure to adequately plead F.3d at 535 (quoting 15 U.S.C. § 78u-
the essential element of scienter. We have 4(b)(2)). Thus, under the PSLRA, “catch-
previously defined “scienter” in the all allegations that defendants stood to
context of securities fraud as “a mental benefit from wrongdoing and had the
state embracing intent to deceive, opportunity to implement a fraudulent
manipulate or defraud, or, at a minimum, scheme are no longer sufficient, because
highly unreasonable (conduct), involving they do not state facts with particularity or
not merely simple, or even excusable give rise to a strong inference of scienter.”
negligence, but an extreme departure from Id.; GSC Partners, F3d at [15-16].
the standards of ordinary care, . . . which Plaintiffs attempting to satisfy their burden
presents a danger of misleading buyers or of pleading scienter by alleging facts
sellers that is either known to the establishing recklessness must allege a
defendant or is so obvious that the actor statement “involving not merely simple, or
must have been aware of it.” In re Ikon, even inexcusable negligence, but an
277 F.3d at 667 (citations and internal extreme departure from the standards of
quotations omitted). In order to properly ordinary care, and which presents a danger
plead scienter under the PSLRA, plaintiffs of misleading buyers or sellers that is
13
either known to the defendant or is so They argue that motive and opportunity
obvious that the actor must have been are established by their allegations
aware of it.” In re Advanta, 180 F.3d at regarding the defendants’ sale of stock
535 (citation and internal quotations during the class period.
omitted). It is against this backdrop that
We disagree. Turning first to the
we examine the Complaint at issue here.
issue of recklessness, we concur with the
B. Dismissal of the Complaint District Court’s conclusion that, at bottom,
plaintiffs’ allegations rest primarily upon
(1) Plaintiffs’ Rule 10b-5 Claim
the premise that the individual defendants
As noted above, the District Court are liable simply by virtue of the positions
held that plaintiffs failed to adequately they hold within the company. We
plead the essential element of scienter, and recently rejected similar allegations in In
thus failed to state a claim under the re Advanta, holding that “[g]eneralized
federal securities laws. In particular, the imputations of knowledge” do not satisfy
court concluded that the allegations the scienter requirement “regardless of the
contained in the Complaint failed to satisfy defe ndan ts’ positio ns w ithin the
the strict pleading requirements of Rule company.” 180 F.3d at 539. Rather,
9(b) and the PSLRA. In reaching this plaintiffs must allege “an extreme
conclusion, the District Court noted that departure from the standards of ordinary
the Complaint merely imputes scienter to care,” in order to establish recklessness.
the individual defendants as a result of
Id. at 535. As explained below, they fail to
their positions within the company, and do so here with respect to any of the four
thus fails to establish that either they or, by individual defendants.
extension, the corporation were involved
The Complaint fails to allege that
with the accoun ting irreg ularities
Sissener, Wiik, or Smith were involved in
occurring in AHD’s Brazil division.
any way with the violations of GAAP and
On appeal, plaintiffs assert that the Alpharma’s revenue recognition policy
Complaint adequately pleads scienter by occurring in Brazil. The allegations
alleging both recklessness and motive. against Andrews similarly fail. As
More specifically, they contend they have defendants note, the Complaint fails to
demonstrated recklessness by alleging that identify any pre-sales made pursuant to
(1) defendants violated GAAP as well as Andrews’ instruction. Rather, plaintiffs
Alpharma’s internal revenue recognition simply allege that Andrews set “lofty”
policy, and (2) that “whistleblowers” quarterly sales goals and then pressured
within AHD’s Brazil division reported the sales representatives to meet them.8 We
use of pre-sales and questionable
accounting practices to Alpharma’s New
Jersey headquarters where it could be 8
Paragraphs 53 and 55 of the
accessed by the individual defendants.
Complaint allege the following:
14
hold that such conclusory allegations are rather, “Plaintiffs must accompany their
insufficient to state a claim under the legal theory with factual allegations that
applicable pleading requirements. See In make their theoretically viable claim
re Burlington Coat Factory, 114 F.3d at plausible”) (emphasis deleted); see also
1418 (holding that “even under a relaxed Kushner v. Beverly Enterprises, Inc., 317
application of Rule 9(b), boilerplate and F.3d 820, 827-28 (8th Cir. 2003) (holding
conclusory allegations will not suffice”; that allegations that defendants “designed
and implemented” improper accounting
policies failed to state a claim for
securities fraud in the absence of
[I]n order to move volumes
“ a l l e g a t i o n s o f p a r t ic u l a r fa c ts
of products necessary to
demonstrating how the defendants knew of
meet the lofty quarter-end
the scheme at the time they made their
numbers set by defendant
statements of compliance, that they knew
Andrews, sales
the financial statements overrepresented
representatives were
the company’s true earnings, or that they
instructed to offer
were aware of a GAAP violation and
customers incentives and
disregarded it . . .. Rote allegations that
special sales terms in order
the defendants knowingly made false
to get the customers to buy
statements of material fact fail to satisfy
product they already had in
the heightened pleading standard of the
stock. To this end, sales
Reform Act.”) (citation and internal
representatives were
quotations omitted). Further, allegations
instructed to extend the
that Williams, Andrews’ subordinate,
payment and shipping
knew of the irregularities occurring in
period from 30 days to as
Brazil provide an insufficient basis upon
much as 180 days.
which to impute knowledge to Andrews.
See Kushner, 317 F.3d at 828 (holding that
***
an allegation that someone involved in the
relevant scheme reported to one of the
[I]n response to defendant
named defendants was “not specific
Andrews’ directive, sales
enough to support a strong inference that
invoices were issued and
[the defendant] knew of or participated in
sales were immediately
the fraudulent practice while it was
recorded on Alpharma’s
occurring”).
books and identified as
accounts receivable, even if Indeed, “[w]hile under Rule
the product was not paid for 12(b)(6) all inferences must be drawn in
and shipped out to the plaintiffs’ favor, inferences of scienter do
c u s t o m e r f o r s e v e ra l not survive if they are merely reasonable .
months.
15
. .. Rather, inferences of scienter survive required state of mind.” 15 U.S.C. § 78u-
a motion to dismiss only if they are both 4(b)(2). Looked at as a whole, plaintiffs’
reasonable and ‘strong’ inferences.” In re allegations rest on nothing more than a
Navarre Corp. Sec. Litig., 299 F.3d 735, “series of inferences . . . too tenuous to
741 (8th Cir. 2002) (citation and internal amount to one of those highly
quotations omitted). Such clearly cannot unreasonable omissions or
be said here. Thus, the District Court misrepresentations that involve not merely
correctly concluded that the Complaint simple or even inexcusable negligence, but
fails to “link Alpharma’s executives or any an extreme departure from the standards of
of the named Individual Defendants to the ordinary care.” Ziemba v. Cascade Int’l,
Brazil incidents.” Inc.,
256 F.3d 1194, 1210 (11th Cir. 2001).
Plaintiffs’ so-called
“whistleblower” allegations — which Moreover, we note that the
assert that Alpharma’s New Jersey Complaint is devoid of any allegations
headquarters was alerted to the violation of which would establish that AHD’s Brazil
the company’s revenue recognition policy division was so central to Alpharma’s
by employees within AHD’s Brazil business that its increased revenue figures
division and that the individual defendants should have received particular attention
therefore had access to this information — from company executives. Indeed, the
fare little better. As defendants note, the Brazil division’s total revenue accounted
Complaint simply alleges that a sales for only slightly more than one half of one
manager in AHD’s Brazil division notified percent of the company’s total revenue in
employees in New Jersey of the 1999. In view of this, it strains credulity to
accounting irregularities in Brazil. There assert that company executives must have
was no investigation of these allegations, known that a spike in the Brazil division’s
nor does the Complaint allege that the sales was the result of violations of GAAP
allegations of improper accounting were and of the company’s revenue recognition
ever passed up the chain of command to policies rather than a normal increase in
Sissener, Wiik, or Smith. In addition, business. See In re Advanta, 180 F.3d at
plaintiffs’ allegation that Andrews knew of 539 (noting that “[i]t is well established
this information is wholly conclusory and that a pleading of scienter may not rest on
thus cannot survive a motion to dismiss. a bare inference that a defendant must
See In re Burlington Coat Factory, 114 have had knowledge of the facts.”)
F.3d at 1418. Moreover, the mere fact that (citation and internal quotations omitted);
the information was sent to Alpharma’s see also Kushner, 317 F.3d at 829 (noting
headquarters and therefore was available that “‘the failure of a parent company to
for review by the individual defendants is i n t e rp r e t e x t r a or d i n a rily positiv e
insufficient to “giv[e] rise to a strong performance by its subsidiary . . . as a sign
inference that [defendants] acted with the of problems and thus to investigate further
16
does not amount to recklessness under the claims premised on recklessness.
securities laws’”) (quoting Novak v.
We turn next to plaintiffs’
Kasaks, 216 F.3d 300, 309 (2d Cir. 2000));
allegations as to motive and opportunity.
Chill v. General Elec. Co., 101 F.3d 263,
To summarize, plaintiffs assert that the
270 (2d Cir. 1996) (holding that, “[g]iven
existence of scienter is established by the
the significant burden on the plaintiff in
fact that (1) both the company and three of
stating a fraud claim based on
the four individual defendants sold shares
recklessness, the success, even the
of common stock at inflated prices during
extraordinary success, of a subsidiary will
the class period, and (2) that all defendants
not suffice in itself to state a claim that the
thus benefitted from the alleged fraud at
parent was reckless in failing to further
the expense of investors. The District
investigate. Fraud cannot be inferred
Court rejected these allegations, noting
simply because [the parent corporation]
that (1) Sissener, Alpharma’s largest
might have been more curious or
shareholder, and thus the one who stood
concerned about the activity at [its
gain the most from the alleged fraud, sold
subsidiary].”); In re Comshare, Inc. Sec.
no stock during the class period and
Litig., 183 F.3d 542, 554 (6th Cir. 1999)
therefore failed to benefit from the
(citing Chill for the proposition that courts
fraudulent scheme of which he is alleged
“should not presume recklessness or
to have been a major participant; and (2)
intentional misconduct from a parent
the Complaint fails to allege how much
corporation’s reliance on it subsidiary’s
stock the individual defendants received as
internal controls”). At worst, the
a portion of their regular compensation.
Complaint alleges little more than
mismanagement. As we have previously Having carefully reviewed the
held, such claims “are not cognizable Complaint we similarly reject plaintiffs’
under federal law.” In re Advanta, 180 arguments. In so doing, we note, as the
F.3d at 540 (citations and internal District Court did, that “‘[a] large number
quotations omitted); In re Digital Island, of today’s corporate executives are
357 F.3d at 332. compensated in terms of stock and stock
options.’” In re Advanta, 180 F.3d at 541
Thus, we conclude that plaintiffs’
(quoting In re Burlington Coat Factory,
allegations as stated that (1) defendants
114 F.3d at 1424). Thus, “‘[i]t follows . .
violated GAAP and Alpharma’s revenue
. that these individuals will trade those
recognition policy, and (2) that employees
securities in the normal course of events.’”
within the Brazil division reported these
Id. Although we have recognized that an
violations to the company’s headquarters
inference of scienter may be created when
in New Jersey do not amount to “an
plaintiffs demonstrate that sales are
extreme departure from the standards of
“unusual in scope or timing,” id. at 540,
ordinary care,” In re Advanta, 180 F.3d at
we concluded that the plaintiffs in both In
535, and therefore fail to state Rule 10b-5
re Burlington Coat Factory and In re
17
Advanta failed to establish such an to give rise to a strong inference of
inference based in part on the fact that scienter. Thus, we will affirm the District
some key insiders sold no stock during the Court’s refusal to impute knowledge of the
class period. See In re Burlington Coat false accounting practices to the individual
Factory, 114 F.3d at 1423; In re Advanta, defendants based solely upon their
stock
180 F.3d at 540-41. sales.
Here, in addition to the fact that the We reach a similar conclusion with
company’s controlling shareholder did not respect to the motive allegations leveled
engage in any sales during the class period, against the company, which, as defendants
we note that the Complaint fails to allege note, could be made against virtually any
that the sales of the remaining three for-profit entity. See In re K-Tel Int’l, Inc.
individual defendants were unusual in Sec. Litig., 300 F.3d 881, 895 (8th Cir.
scope (e.g., compared to their total level of 2002) (holding that “general allegations of
compensation or the size of previous sales) a desire to increase stock prices, increase
or timing (e.g., compared to the timing of officer compensation or maintain
past trades).9 The allegations therefore fail continued employment are too generalized
and are insufficient” to establish scienter);
Chill, 101 F.3d at 268 (holding that
9
Even plaintiffs’ assertion that these general motives that can “be imputed to
defendants had not sold any stock during any publicly-owned, for-profit endeavor,
the preceding fifteen months, standing [are] not sufficiently concrete for purposes
alone, is insufficient. Defendants assert of inferring scienter”); see also In re The
that they were precluded from doing so Vantive Corp. Sec. Litig., 283 F.3d 1079,
as a result of a “blackout period” during 1097 (9th Cir. 2002) (concluding that a
which insiders were prohibited from corporation’s desire to increase its stock
engaging in such transactions. While we value as part of an acquisition strategy is
cannot credit defendants’ explanations at an insufficient basis upon which to
this stage of the litigation, we note their maintain a claim for violation of federal
argument that the existence of such a securities laws); In re Nice Systems, Ltd.
blackout period may be inferred from the Sec. Litig.,
135 F. Supp. 2d 551, 583-84
Complaint, which alleges a series of (D.N.J. 2001) (same); In re Cendant Corp.
corporate acquisitions during the class Sec. Litig.,
76 F. Supp. 2d 539, 548 (D.N.J.
period. Because the individual 1999) (same) (citing Chill, 101 F.3d at
defendants are alleged to have known 267). Thus, we conclude that plaintiffs
about these acquisitions, and thus
possessed material non-public
information, they would have been blackout period or other facts which
prohibited by law from trading during would demonstrate that the fifteen month
much of the class period. Moreover, period of inactivity was in any way
plaintiffs failed to allege the absence of a unusual.
18
have similarly failed to allege facts giving that “a District Court may deny leave to
rise to a strong inference of scienter as to amend on the grounds that amendment
the corporation. We therefore will affirm would cause undue delay or prejudice, or
the District Court’s dismissal of Count I that amendment would be futile.” Oran v.
for failure to state a claim. Stafford, 226 F.3d 275, 291 (3d Cir.
2000); In re Digital Island, 357 F.3d at
(ii) Plaintiffs’ Section 20(a) Claim
337; GSC Partners, F.3d at [34].
As we have previously noted,
Here, the District Court cited
“Section 20(a) imposes joint and several
futility, the “significant extensions of
liability on any person who ‘controls a
time” already provided to plaintiffs, and
person liable under any provision of’ the
the aim of the PSLRA to filter out weak
[Exchange Act].” Shapiro v. UJB
claims at the early stages of litigation as
Financial Corp., 964 F.2d 272, 279 (3d
the bases for its denial of leave to amend
Cir. 1992). Accordingly, under the plain
and dismissal of the Complaint with
language of the statute, plaintiffs must
prejudice. Focusing in particular on
“prove not only that one person controlled
futility, the District Court noted that
another person, but also that the
plaintiffs failed to proffer any proposed
‘controlled person’ is liable under the Act.
amendment, let alone one that would
If no controlled person is liable, there can
satisfy the stringent pleading requirements
be no controlling person liability.” Id.
which govern Rule 10b-5 claims.
Here, the alleged “controlled person” is
Alpharma. Thus, because plaintiffs failed Following careful review of the
to state a Rule 10b-5 claim against the record, we conclude that this was not an
company, its Section 20(a) claim against abuse of discretion. As we have
the Individual Defendants fails as well. previously held, “‘[f]utility’ means that the
See
Shapiro, 964 F.2d at 279; In re Digital complaint, as amended, would fail to state
Island, 357 F.3d at 337. Thus, we also will a claim upon which relief could be
affirm the District Court’s dismissal of granted.” In re Burlington Coat Factory,
Count II for failure to state a
claim. 114 F.3d at 1434. Thus, “[i]n assessing
‘futility,’ the district court applies the same
C. Denial of Leave to Amend
standard of legal sufficiency as applies
Having concluded that the District under Rule 12(b)(6).” Id.
Court properly granted defendants’ motion
Had plaintiffs satisfied the
to dismiss as to both counts, we must now
requirements of the PSLRA and merely
determine whether the court abused its
failed to allege facts with sufficient
discretion by failing to grant plaintiffs
particularity under Federal Rule of Civil
leave to amend the Complaint. Although
Procedure 9(b) we would be presented
Federal Rule of Civil Procedure 15 states
with a closer issue. See id. at 1435.
that leave to amend “shall be freely given
However, because plaintiffs (1) failed to
when justice so requires,” we have held
19
satisfy the stringent pleading requirements
of the PSLRA, and thus failed to state a
claim under federal securities law, and (2)
failed to propose an amendment that
would satisfy these requirements, we agree
that leave to amend would be futile.
Moreover, we note, as the District Court
did, that its denial of leave to amend is
further supported by the fact that plaintiffs
(1) had already filed previous complaints
and (2) were given an extension of time to
assemble the amended consolidated
complaint currently at issue. See id. Thus,
we will affirm the District Court’s denial
of leave to amend and dismissal of the
Complaint with prejudice.
V. Conclusion
For the reasons stated above, we
will affirm the final judgment of the
District Court.
20
