Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

IN RE ULTRAFEM INC. SECURITIES LITIGATION

April 6, 2000

IN RE ULTRAFEM INC. SECURITIES LITIGATION.


The opinion of the court was delivered by: Preska, District Judge.

        OPINION

Defendants move to dismiss the complaint on varied grounds, including failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure, Fed. R. Civ. Proc. 12(b)(6) ("Rule 12(b)(6)"), failure to plead fraud with particularity under Rule 9(b) of the Federal Rules of Civil Procedure, Fed. R. Civ. Proc. 9(b) ("Rule 9(b)"), and failure to set forth a short and plain statement showing that the plaintiffs are entitled to relief under Rule 8(a) of the Federal Rules of Civil Procedure, Fed. R. Civ. Proc. 8(a) ("Rule 8(a)"). For the reasons stated below, defendants' motions are granted.*fn1

BACKGROUND

I. Factual Background and Plaintiffs' Allegations.

Ultrafem®, Inc. ("Ultrafem") was formed to design, develop and manufacture products, based upon its proprietary and patented SoftCup® Technology (the "SoftCup Technology"), to address women's health care needs. (Compl. ¶ 40.)*fn2 The SoftCup Technology was described as a physical barrier-type vaginal device designed to enhance the comfort, functionality and effectiveness of products designed for women in the areas of feminine protection, contraception, the prevention of sexually transmitted diseases and the treatment of vaginal infections. (Id. ¶ 40.) Using the SoftCup Technology, Ultrafem manufactured INSTEAD TM ("INSTEAD"), a disposable menstrual fluid collection product. (Id. ¶ 2.)

Effective November 13, 1996, defendants made a $40 million Ultrafem common stock offering of two million shares at $20.00 per share (the "Offering"). (Id. ¶ 1.) Plaintiffs allege that defendants made various material misstatements and omissions in the November 13, 1996 prospectus, (Curnin Aff. Ex. B (the "Prospectus")), and in public statements in connection with said Offering and subsequent to the Offering in SEC filings and public statements. (Compl. ¶ 1.) Plaintiffs are those persons who purchased or otherwise acquired Ultrafem shares between November 13, 1996 and February 13, 1998 (the "Class Period"). (Id.) Defendants John W. Andersen ("Andersen"),*fn3 Dori M. Reap ("Reap"), Tonya G. Hinch ("Hinch"), Charles D. Peebler ("Peebler"), Gary Nordmann ("Nordmann"), Richard A. Cone ("Cone"), Joy Vida Jones ("Jones"), Martin Nussbaum ("Nussbaum"), Wendell Guthrie ("Guthrie"), Barrie R. Zesiger ("Zesiger") (collectively, the "Individual Defendants"), former officers and/or directors of the now bankrupt Ultrafem, move to dismiss the Complaint for failure to plead fraud with particularity and failure to state a claim under Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure, respectively. Defendant Audrey Contente ("Contente"), a former officer and director of Ultrafem, moves to dismiss the Complaint for failure to state a claim under Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure.*fn4 Defendants Jefferies & Company, Inc. ("Jefferies") and Hampshire Securities Corporation ("Hampshire"), co-lead underwriters of the Offering of Ultrafem securities in November 1996, (collectively, the "Underwriter Defendants"), also move to dismiss the Complaint. Jefferies moves to dismiss for failure to plead fraud with particularity and failure to state a claim under Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure, respectively.*fn5 Hampshire moves to dismiss on the same grounds and also for failure to set forth a short and plain statement showing that the plaintiffs are entitled to relief under Rule 8(a) of the Federal Rules of Civil Procedure.

A. Statements In Connection with the Offering

On November 13, 1996, two million shares of Ultrafem common stock at $20 per share were offered pursuant to a prospectus and registration statement (the "Registration Statement"). The alleged misstatements and omissions made prior to and in the Offering are as follows.

1. Consumer Use Testing

The Prospectus*fn6 states under a heading "Consumer Use Testing":

During the nine-month period of November 1991 through July 1992, [INSTEAD] was use tested among a total of 300 women, ages 18-55, at seven different geographical locations in the United States. . . .
The research concluded that approximately 80% of the women were interested in continuing to use [INSTEAD], with approximately 54% of the women indicating they would be likely to use [INSTEAD] as their primary method of feminine protection in the future.

(Prospectus, at 33.)

With respect to this statement, plaintiffs contend:

(1) Defendants failed to disclose the existence or results of a clinical trial of INSTEAD's safety and efficacy (the "Clinical Trial") that was conducted in addition to the consumer use test. (Compl. ¶ 41-43.)

(2) Defendants failed to disclose that the results of the Clinical Trial were never analyzed. (Id. ¶ 47.)

(3) Defendants failed to disclose that Dr. Barbara North resigned as principal investigator of the Clinical Trial because of Ultrafem's refusal to analyze the data collected from the Clinical Trial. (Id. ¶ 43.)

(4) Defendants failed to disclose the methodology used to translate the study participants' questionnaire answers into determinations of the likelihood of participants to continue to use INSTEAD (the 80% figure) or to use INSTEAD as their primary method of protection (the 54% figure). (Id. ¶¶ 43-44.)

(5) Defendants failed to disclose Dr. North's advisements "of disturbing trends which became apparent from Dr. North's data regarding instances of cramping and leaking" among INSTEAD Clinical Trial participants. (Id. ¶ 45.)

2. Design and Performance of INSTEAD

The Prospectus also states:

The Company*fn7 believes that the unique design of [INSTEAD] provides several distinct benefits over currently available forms of feminine protection, including increased comfort, improved performance, reduced health concerns and freedom to engage in most physical (including sexual) activities during menstruation.

(Prospectus, at 3, 27.)

The commercial products which will employ the SoftCup Technology will be disposable, single use, universal size and made from a soft, inert thermoplastic material which becomes more pliable at body temperature and molds to fit the individual user's anatomy.

(Prospectus, at 27.)

Plaintiffs contend the statements regarding INSTEAD's "fit" were false and misleading because: (1) thermoplastic construction related only to the manufacture of INSTEAD and not its fit once inside the user and (2) prior to the issuance of the Prospectus, Ultrafem's scientific advisory board had informed defendant Contente that INSTEAD could not comfortably fit all women. (Id. ¶ 49.) Plaintiffs also allege that Ultrafem's scientific advisory board advised defendant Contente that INSTEAD "did not provide `improved performance' because leakage remained a problem with INSTEAD, as it was with other forms of feminine protection." (Id.) Allegedly, Dr. North had advised Contente that data "revealed numerous instances of cramping and leakage experienced by women" who used INSTEAD. (Id.)

3. Financial Condition

With respect to Ultrafem's financial condition and outlook, the Prospectus stated in a section entitled "RISK FACTORS" under a heading "Need for Additional Financing for Unforeseen Risks":

The Company believes that the level of financial resources available to it is an important factor in its ability to achieve the marketing and distribution of [INSTEAD] and in its ability to develop and eventually bring medical products to market. Management believes that the financial resources available to it, together with the net proceeds of the Offering, will satisfy the Company's working capital needs for at least 12 months. However, the Company may require additional financing if unforeseen risks are encountered. If the Company is unable to raise additional capital or arrange satisfactory working capital or additional equity financing, the Company may be unable to complete the distribution of [INSTEAD] into the full United States market. Additional financings may require the issuance of new equity securities, and there can be no assurance that the Company will be able to obtain working capital or additional financing at a favorable rate, if at all.

(Prospectus, at 9.)

Plaintiffs contend this statement was false and misleading because prior to and during the Class Period, Ultrafem used a business plan drafted by Contente (the "Business Plan") which contained assumptions regarding the number of cups used per month per woman, the number of times each cup would be used and pricing based on the number of cups each woman was projected to use. (Compl. ¶ 51(a).) Plaintiffs contend that internal Ultrafem reports indicated that the average woman used only 9 to 10 cups per month, rather than the 18 to 24 cups projected by the Business Plan. (Id.) Furthermore, plaintiffs contend that although INSTEAD was marketed as a "single use" product, women reused INSTEAD, thus reducing the number of cups per month used. (Id. ¶ 51(b).) The decrease in cup usage, plaintiffs allege, resulted in Ultrafem's inability to follow the pricing structure set forth in the Business Plan. (Id. ¶ 51(c).) Plaintiffs claim that the decreased sales from the lesser usage resulted in the need for cash and expensive advertising and that at the time the Prospectus was issued, Ultrafem required additional financing and such financing was not "unforeseen." (Id. ¶ 51(d).)

4. Uniqueness of INSTEAD

Finally, plaintiffs take issue with the following statements in the Prospectus:

Management believes that [INSTEAD] represents one of the most significant technological developments for feminine protection since the introduction of the first commercial disposable tampon in 1933. [INSTEAD] differs from other forms of feminine protection currently on the market in that it collects, rather than absorbs, menstrual fluid.

(Prospectus, at 3, 27.)

A September 16, 1996 press release also stated that INSTEAD was "`the first feminine protection product to provide a true alternative to tampons and pads in 60 years[.]'" (Compl. ¶ 52 n. 1.)

Plaintiffs contend that defendants failed to disclose "that cup-like feminine hygiene devices had been developed since the 1930s, but had never successfully garnered more than a very small niche share of the feminine protection market," (id. ¶ 53), and that "INSTEAD was not a new technology and that its prospects for mass acceptance posed an extreme risk," (id. ¶ 56(e).) Plaintiffs also allege that Ultrafem representatives received information regarding the other menstrual cup-like devices from Harry Finley, "a recognized resource of information on menstruation and menstrual devices." (Id. ¶ 55.)

B. Post-Offering Statements*fn8

According to the Complaint, Ultrafem's December 31, 1996 Form 10-Q states:

The Company believes that the level of financial resources available to it is an important factor in its ability to achieve the marketing and distribution of [INSTEAD] and in its ability to develop and eventually bring medical products to market. The Company's need for funds has increased from period to period as it has incurred expenses for, among other things, the manufacturing, marketing and distribution of [INSTEAD], research and development activities, engineering and design of fully automated manufacturing systems, clinical testing, meeting domestic and international regulatory requirements, applications for domestic and international patent protection, applications for domestic trademark protection and market research. The Company may require additional financing if unforeseen risks are encountered. If the Company is unable to raise additional capital or arrange satisfactory working capital or additional equity financing, the Company may be unable to complete the distribution of [INSTEAD] into the full United States market. Additional financing may require the issuance of new equity securities, and there can be no assurance that the Company will be able to obtain working capital or additional financing at a favorable rate, if at all.

(Compl. ¶ 57.) Plaintiffs claim these Form 10-Q statements were repeated in substantially the same form in other post-Offering SEC filings, (id.), and that such statements were false and misleading because the defendants knew of the Business Plan, (id. at ¶ 58.)

The Complaint also contains allegations that Ultrafem and certain officers and directors made false statements regarding INSTEAD's sales and distribution. (Id. ¶¶ 59-77.) On January 31, 1997, Ultrafem's stock price was $15.50 per share. (Id. ¶ 61.) On February 3, 1997, Ultrafem allegedly announced that it had reached distribution agreements with certain stores. (Id. ¶ 60.) Andersen allegedly claimed that these agreements stemmed from "positive sales results" and "strong consumer demand" for INSTEAD. (Id. ¶ 61.) On February 3, 1997, Ultrafem's common stock price was $19.25 per share. (Id.) On June 5, 1997, Ultrafem's stock price was $14.50 per share. (Id. ¶ 66.) On or about June 6, 1997, Ultrafem announced agreements with other stores and announced that it expected the product to generate positive sales results for the retailers. (Id.) On June 6, 1997, Ultrafem's stock closed at $16 per share. (Id.) Plaintiffs claim that INSTEAD distribution agreements contemplated sales at large discounts and/or sales with a right of return that should not have been recognized under Generally Accepted Accounting Principles ("GAAP"). (Id. ¶¶ 77-83.) ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.