The opinion of the court was delivered by: LARIMER
This is a class action brought on behalf of persons who purchased Bausch & Lomb, Inc. ("B&L") common stock from October 13, 1993 through January 25, 1995. Plaintiffs allege that during that period, defendant B&L engaged in a scheme to mislead the investing public about its financial condition and its prospects for future sales and income. Plaintiffs allege that over a period of time beginning around June 1994, certain facts were revealed to the public which showed that B&L's sales were lower than B&L had reported and predicted them to be. As a result, the value of B&L stock--and hence of the plaintiffs' holdings--fell considerably.
Plaintiffs commenced this action on June 6, 1994. Defendants include B&L and five individuals ("the individual defendants"), all of whom allegedly held the following positions within B&L during the relevant time periods: Daniel E. Gill, Chairman, Chief Executive Officer; Ronald L. Zarella, President and Chief Operating Officer; Peter Stephenson, Senior Vice President-Finance; Alan H. Resnick, Vice-President and Treasurer; and Stephen L. McCluski, Controller. The third amended complaint asserts two causes of action. The first, which is brought against all defendants, alleges securities fraud in violation of 10(b) of the Securities and Exchange Act of 1934 ("the Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. The second cause of action is brought against the individual defendants under § 20(a) of the Act, 15 U.S.C. § 78t(a), which provides for so-called "control person" liability.
Defendants have moved to dismiss the complaint pursuant to Fed. R. Civ. P. 9(b) and 12(b)(6). Both B&L and the individual defendants contend that the allegations fail to state a claim for securities fraud because they fail to plead a strong inference of scienter, and that defendants' alleged misrepresentations do not state a claim for fraud because they were immaterial and were protected by the "bespeaks caution" doctrine. B&L also contends that plaintiffs' claims based on events prior to December 13, 1993 are barred by the statute of limitations. The individual defendants assert that certain claims against Zarella, Stephenson, Resnick and McCluski are barred by the statute of limitations, and that plaintiffs' allegations of control person liability are legally insufficient.
The first complaint alleging securities fraud by B&L was filed on June 6, 1994. That action was filed on behalf of members of a putative class of plaintiffs who had purchased B&L stock between December 14, 1993 and June 3, 1994 ("the Class I period"). Defendant Gill was the only individual defendant named in that action.
Plaintiffs filed an amended complaint on November 21, 1994. Additional plaintiffs were named, but the defendants and class period remained the same as in the original complaint.
In September 1995, a second amended complaint was filed, which incorporated a second alleged class period that had been separately pleaded in Grossman v. Bausch & Lomb, 95-CV-6052L. The Grossman action had been commenced on January 31, 1995. Grossman asserted claims on behalf of a putative class of plaintiffs who had purchased B&L stock between June 4, 1994 and January 25, 1995 ("the Class II period"). The named defendants in Grossman included, for the first time, defendants Zarella, Stephenson, Resnick, and McCluski ("the additional individual defendants"). The second amended complaint also included these defendants. Pursuant to a case management order of this court governing this litigation, Grossman was consolidated with the instant case for purposes of trial on the day it was commenced.
On November 21, 1995, a third amended complaint was filed, which purported to extend the Class I period back in time to include claims on behalf of persons who bought B&L stock between October 13, 1993 and December 13, 1993. It is this complaint that is the subject of the present motions.
The facts alleged in the complaint, which must be accepted as true for purposes of these motions are set forth in over forty pages of the complaint, but may be summarized as follows. B&L's revenues have for many years been heavily dependent on its sales of contact lenses and sunglasses. Prior to 1994, B&L experienced consistent growth and high levels of sales for both of these products.
Plaintiffs allege that defendants concocted a scheme to conceal this declining growth from the investing community. One of the primary ways defendants did this, plaintiffs allege, was by issuing various types of public statements giving the appearance that B&L was enjoying high levels of sales and profits, when in fact those sales and profit figures had been inflated by "stuffing" B&L's distribution channels, i.e., by sending out far more products to its distributors than was actually justified by consumer demand. B&L representatives allegedly assured the distributors that any unsold products could be returned to B&L without cost, or that other arrangements would be made to the dealers' satisfaction. Defendants also allegedly recorded sales, or knew that sales were being recorded, based on faked invoices. In these instances, sales were attributed to nonexistent distributors and the products were then stored in B&L's own warehouses. Plaintiffs allege that through such devices, defendants were able to maintain an illusion of continued growth and prosperity.
This illusion, plaintiffs contend, was presented to the public through press releases reporting sales and revenue figures, reports to shareholders, Securities and Exchange Commission ("SEC") reports, and so on. These documents reported sales figures and concomitant growth that was far more favorable than was actually the case. These documents also made unjustifiably optimistic predictions about B&L's future prospects. As a result, B&L's stock price continued to rise.
Plaintiffs contend that defendants were aware of B&L's actual sales figures because B&L's distributors were required to download their weekly sales and inventory reports to B&L's computer system every week. They also allege that defendant Gill personally received sales reports filed by certain B&L representatives.
Despite their awareness of B&L's mounting difficulties, defendants continued to report favorable sales and revenue figures, and to make optimistic predictions for the future, until June 3, 1994. On that date, B&L announced publicly that its anticipated 1994 revenues would be decreased by $ 75 million because of inventory imbalances, which it attributed to slower than expected improvement in consumer demand. This announcement precipitated an immediate drop in the value of B&L stock, which fell $ 8 per share to $ 41 3/8 per share.
Plaintiffs allege that even the June 3 announcement was deceptive. Even though the report was negative, it nevertheless omitted certain other negative information. For example, the announcement failed to state that B&L was going to reduce distributor inventories by repurchasing merchandise from its distributors, and that some of the merchandise previously reported as sales had never been paid for by the distributors.
On July 11, 1994, B&L announced that it had made substantial progress in reducing inventories, but that the inventory reduction program would have a negative impact on second-quarter earnings. On July 14, 1994, B&L announced earnings of $ .55 per share, adding that it would probably take until 1995 to bring a return to "predictable growth." These announcements caused B&L's stock price to fall further to $ 34.25 per share.
B&L's next announcement came on August 3, 1994, when it revealed that it expected its 1994 earnings to be fifteen to twenty percent below the 1993 operating net of $ 3.21 per share before a charge of an expected $ 17 million resulting from B&L's cutting 1500 positions worldwide.
On August 9, 1994, B&L filed a Form 10-Q with the SEC for the quarter ended June 25, 1994. The Form 10-Q stated that B&L's consolidated revenues for the second quarter had increased one percent from the second quarter of 1993, and that net sales were up four percent over the previous year. The form also stated that as a result of inventory imbalances, sales to date had been reduced or penalized by $ 30 million.
On October 3, 1994, B&L announced that it expected its 1994 earnings to fall fifteen to twenty percent compared to 1993, due primarily to inventory imbalances. Defendant Gill, however, said in the statement that he anticipated the inventory situation to "normalize," and that he expected strong growth in 1995.
On October 12, 1994, B&L announced a decline in revenues and net earnings due to its inventory reduction efforts. Revenues fell $ 49.4 million to $ 449.4 million for the third quarter compared to the same period in 1993.
B&L's Form 10-Q for the third quarter of 1994, issued on November 15, 1994, stated that "a new pricing and product return policy for distributors of traditional contact lenses in the U.S. ... will allow these distributors to return the excess portion of their unsold traditional lens inventories and eliminate the inventory imbalance in the U.S." The report admitted that excess inventory had resulted in a $ 5 million sales penalty during the third quarter.
On January 25, 1995, B&L announced its fiscal year 1994 earnings. This report also disclosed that the SEC was investigating B&L's accounting practices concerning the distributor inventory imbalance. B&L stated that "inappropriately recorded" sales had resulted in an apparent $ 10 million earnings gain in 1993.
The following day, an article in the Wall Street Journal stated that the SEC investigation had been triggered by a December 19, 1994 Business Week article. The Business Week story had reported that in late 1993, B&L pressured its distributors to buy $ 25 million worth of contact lenses at inflated prices, which represented half of the contact lens division's earnings for that year. Business Week also claimed that B&L had violated standard revenue recognition accounting principles in this process.
As a result of B&L's January 25 announcement, the price of its stock fell from $ 34.625 to $ 32.375 in one day. The complaint alleges that B&L's failure to disclose the nature, cause and magnitude of the inventory imbalance sooner had caused B&L's stock price to be artificially inflated, and that its decline when the truth became known caused substantial harm to plaintiffs.
THE THIRD AMENDED COMPLAINT
Based on these allegations, plaintiffs assert two causes of action. Count 1 alleges that defendants violated 15 U.S.C. § 78j(b), which makes it unlawful "to use or employ, in connection with the purchase or sale of any security ... , any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." Plaintiffs allege that defendants violated SEC Rule 10b-5, which was promulgated under § 78j, and which makes it unlawful
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of ...