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March 16, 1990


The opinion of the court was delivered by: Robert P. Patterson, Jr., District Judge.


Plaintiffs, asserting violations of the federal securities laws and RICO, bring this class action on behalf of purchasers of the common stock of Par Pharmaceutical, Inc. ("Par") during the period December 29, 1986 to April 18, 1989.*fn1 The class has yet to be certified. The defendants now move under Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure to dismiss the Consolidated Amended and Supplemental Class Action Complaint ("complaint").*fn2

Plaintiffs are investors in Par, a corporation engaged in the manufacture and sale of generic drugs. Plaintiffs allegedly purchased Par's stock at inflated prices because Par's public statements and its filings with the Securities and Exchange Commission failed to disclose that Par and its subsidiary had made illegal payments to government officials to expedite approval of the companies' applications for permission to manufacture certain drugs. After information concerning the alleged payments was publicly disclosed, the price of Par's stock fell dramatically. Plaintiffs assert violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder, violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(c), (d), and common law fraud, deceit and negligent misrepresentation.


Defendant Par is a corporation in the business of manufacturing and marketing prescription and over the counter oral and topical generic drugs. Par owns 60% of a subsidiary, Quad Pharmaceutical, Inc. ("Quad"), which manufactures and markets injectable generic drugs. The individual defendants Perry Levine, Ashok Patel ("A. Patel"), R.K. Patel and Jacob Robbins (collectively the "Director Defendants") constituted the entire Board of Directors of Par from the beginning of the alleged class period until December, 1988. All except Robbins were also officers of Par.*fn3 Defendant Dilip P. Shah was President and Chief Executive Officer of Quad from April 1985 until July 14, 1989, and was responsible for all regulatory aspects of Quad's product development. Complaint at ¶¶ 6-14.

In connection with their businesses, Par and Quad are required to obtain approval of their products from the Food and Drug Administration ("FDA"). As a prerequisite for FDA approval, Par and Quad must demonstrate that their manufacturing facilities meet FDA requirements and that their generic drug products are safe and effective. Id. at ¶¶ 33-37.

The 62-page complaint alleges that, as with all generic drug companies, Par's financial well being was dependent upon its ability to obtain continually first or early FDA approval for new products, and that defendants were "well aware of the necessity for expediting FDA approval of new Products."*fn4 Id. at ¶¶ 39-40.

According to the complaint, defendants A. Patel and Shah made a series of 14 illegal payments to two FDA employees, beginning some time in 1986 and continuing until March, 1988, for the purpose of securing expedited approval of Par products and to delay the approval of competing products. It is further alleged that the bribery scheme allowed Par to obtain FDA approval for the manufacture of a number of generic products before certain of its competitors. Id. at ¶¶ 56-65.

All of the defendants allegedly "were aware of the bribery scheme and its potential consequences or recklessly disregarded its existence." Id. at ¶ 88. In support of this contention, the complaint asserts that Quad and/or Par, Levine, R.K. Patel and Robbins "delegated full authority" to A. Patel and Shah "to determine Par's course of conduct concerning the company's activities in regard to obtaining expedited approval from the FDA of Par Products." Id. The complaint also states that Par and the Director Defendants, as a matter of company policy, "developed, refined, supervised, implemented and/or acquiesced to the bribery scheme. . . .," and calls defendants Quad and Shah "knowing and direct participants in the bribery scheme." Id. at ¶ 124-125.

Plaintiffs also allege that, in conjunction with the bribery scheme, the defendants determined to create the illusion within the investment community that Par had a special expertise in obtaining expeditious FDA approvals of its products and that this expertise would result in continued growth and income. Their purpose was to inflate artificially the price of Par's common stock. Id. at ¶ 123.

To that end, it is alleged, defendants falsely represented, in a series of public filings and other public statements during 1987 and 1988, that the company's ability to secure speedy FDA approval for its products was because of Par's "legitimate business acumen and ingenuity," rather than the illegal payments, and failed to disclose that projections of Par's future prospects "were based on past illegal activities" that, once revealed, "could not be sustained," and that subjected Par to the "prospect of serious criminal penalties and sanctions." Id. at ¶ 67-90.

In June 1988, three months after the illegal payments to FDA officials stopped, the United States Congress began an investigation of the generic drug approval process at the FDA. On July 5, 1988, records of Par were subpoenaed in connection with that investigation. Par did not disclose this event, or make any reference to the alleged bribery scheme, in its July 1988 10-Q. Id. at ¶¶ 92-93.

On August 15, 1988, Par disseminated its July 1988 Quarterly Report, which acknowledged the fact of the congressional investigation, but stated that "we are not aware of any instances of the favoritism that has been alleged in the investigation." Id. at ¶¶ 94-95.

On October 21, 1988, Par issued a press release stating that it had been informed by the United States Attorney in Maryland that Par, Quad and one of Quad's executives were "targets" in an ongoing Grand jury investigation relating to improper payments to employees of the FDA's generic drug division, and went on to say that Par "had no reason to believe that this matter would have any immediate impact upon its business or that of Quad." Id. at ¶¶ 95-96.*fn5

Prior to the inception of the scheme to bribe FDA employees, Par had experienced limited success in securing FDA approval for its products. During the period the bribery scheme was in operation, Par's and Quad's success in obtaining rapid approvals improved dramatically, as did their earnings and sales. After the bribes ceased, the pace at which Par and Quad were receiving approvals subsided, earnings and sales declined, and the market price of Par common stock, which had traded as high as 27.25 per share during the class period, eventually fell to $8 per share. Id. at ¶¶ 55, 87, 100, 103.

According to the complaint, Par and each of the Director Defendants "participated in, aided and abetted, controlled and/or acquiesced in Par's dissemination of the false and misleading statements," id. at ¶ 122, and "knew, or but for a reckless disregard for the truth should have known of the falsity of the material misstatements and omissions," id. at 124, and knew that such misstatements would injure the integrity of the market for Par's stock and inflate the price of Par common stock. Id. at ¶ 126.

On the basis of these allegations, plaintiffs assert the following claims: (i) violations of Sections 10(b) and 20(a), and Rule 10b-5 promulgated thereunder, on the part of all defendants; (ii) violations of Sections 1962(c) and (d) of RICO, on the part of defendants Levine, A. Patel, R.K. Patel, Robbins, Quad and Shah; (iii) common law fraud and deceit on the part of all defendants; and (iv) negligent misrepresentation on the part of Par, Levine, A. Patel, R.K. Patel and Robbins.

Defendants move to dismiss the entire complaint on the grounds that it does not state a cause of action. For these purposes, the Court accepts the allegations of the complaint as true. Jenkins v. McKeithen, 395 U.S. 411, 421-22, 89 S.Ct. 1843, 1848-49, 23 L.Ed.2d 404 (1969). The motions to dismiss must be denied unless it appears that plaintiffs can prove no set of facts in support of their claim which would allow them to recover. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957).


Defendants argue that Count I of the complaint, which asserts violations of Sections 10(b) and 20 of the Exchange Act and Rule 10b-5 promulgated thereunder against all of the defendants, fails to state a claim upon which relief can be granted.

Plaintiffs argue that the complaint alleges sufficiently that financial statements and reports issued by Par extolling the company's ability to obtain future FDA approvals expeditiously omitted facts that would make the statements not misleading due to the failure to disclose that Par's track record for securing FDA approvals quickly was the product of the illegal bribery scheme. Plaintiffs also say the complaint alleges that defendants continually linked the importance of obtaining expeditious FDA approvals to Par's favorable financial performance.

A. Duty to Disclose

A party charged with failing to disclose material information must be under a duty to disclose it in order to be held liable under Rule 10b-5. Chiarella v. United States, 445 U.S. 222, 228-29, 100 S.Ct. 1108, 1114-15, 63 L.Ed.2d 348 (1980), citing Frigitemp Corp. v. Financial Dynamics Fund, 524 F.2d 275, 282 (2d Cir. 1975). Defendants argue that no such duty arose in this case.

Defendants rely heavily on a line of cases holding that a corporation is under no duty to announce publicly that it or its officers are guilty of uncharged criminal behavior, or to accuse itself of antisocial or illegal policies. See Roeder v. Alpha Industries, Inc., 814 F.2d 22, 26-28 (1st Cir. 1987); United States v. Matthews, 787 F.2d 38, 49 (2d Cir. 1986); GAF Corp. v. Heyman, 724 F.2d 727, 740 (2d Cir. 1983); Amalgamated Clothing and Textile Workers Union v. J.P. Stevens & Co., 475 F. Supp. 328, 331-32 (S.D.N.Y. 1979), vacated as moot, 638 F.2d 7 (2d Cir. 1980); Crouse-Hinds Co. v. InterNorth, Inc., 518 F. Supp. 416, 475 (N.D.N.Y. 1980). However, these cases are not dispositive here. The illegality of corporate behavior is not a justification for withholding information that the corporation is otherwise obligated to disclose. See also Roeder, 814 F.2d at 25 ("The securities laws do not operate under the assumption that material information need not be disclosed if management has reason to suppress it."); Ballan v. Wilfred American Educational Corp., 720 F. Supp. 241, 249 (E.D.N.Y. 1989) ("The fact that a defendant's act may be a crime does not justify its concealment.").*fn8

According to plaintiffs, Par's obligation to disclose the bribery scheme and its probable effects on the corporation arises from that portion of Rule 10b-5 requiring disclosure of additional facts "necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." Under this provision, even though no duty to make a statement on a particular matter has arisen, once corporate officers undertake to make statements, they are obligated to speak truthfully and to make such additional disclosures as are necessary to avoid rendering the statements made misleading. Securities and Exchange Commission v. Texas Gulf Sulphur Co., 401 F.2d 833, 860-862 (2d Cir. 1968) (en banc), cert. denied, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969); Schlanger v. Four-Phase Systems, Inc., 582 F. Supp. 128, 133 (S.D.N.Y. 1984). See also Basic, Inc. v. Levinson, 485 U.S. 224, n. 17, 108 S.Ct. 978, n. 17, 99 L.Ed.2d 194 (1988) ("the ever-present duty not to mislead").

The complaint alleges that defendants' public disseminations touting Par's and Quad's competitive advantage in obtaining speedy FDA approvals and Par's earnings performance were false and misleading because defendants' failed to disclose (1) that such advantage was obtained through an illegal scheme of bribes rather than through defendants' expertise and business acumen, and (2) that the public disclosure and/or termination of the bribery scheme would have a profound harmful effect on Par's sales, profit margins and earnings. Complaint ¶¶ 67-83.

1. The Statements

Briefly, the 62-page complaint alleges that defendants made the following public statements that were false and misleading because they did not disclose the existence of the bribery scheme:

(1) Par's 1986 10-K, filed with the SEC on or about December 29, 1986, stated that during the 1986 fiscal year ending September 27, 1986 Par had received FDA approval for the manufacture of 37 tablet and capsule products and 40 injectable products; compared the 37 approvals for tablets and capsules in fiscal 1986 to the 13, 24 and 15 such approvals received in 1983, 1984 and 1985, respectively; and it further stated that, to date, Quad had received approvals for 67 injectable products. Complaint at ¶¶ 67-69, 89, 106.

(2) In a letter included in the 1986 Annual Report to Shareholders, also issued on December 29, 1986, defendant Levine noted that a trade journal had reported that the Par/Quad combination "led the industry in obtaining approvals from FDA in 1986," and that "our number of approvals was almost double that of our nearest competitor. This is an achievement in which we take great pride and we will do our best to repeat it in 1987." The letter also noted the increase in FDA approvals over 1985, noted Quad's ability to obtain approvals for injectable products since January 1986, ...

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