United States District Court, S.D. New York
March 31, 2004.
IN RE QLT INC. SECURITIES LITIGATION
The opinion of the court was delivered by: SIDNEY STEIN, District Judge
OPINION AND ORDER
This action arises from a sharp fall in the price of QLT Inc. common
stock on December 14, 2000, after QLT, a Vancouver-based pharmaceutical
manufacturer whose common stock is listed on the NASDAQ and Toronto stock
exchanges, issued a financial update stating that the fourth quarter 2000
sales of its main product, Visudyne, were expected to be lower than
previously forecast. This announcement triggered a drastic reaction by
the investing public, as the price of QLT shares fell from approximately
$40.44 per share at the close of December 13 to a low of $28.06 per share
on December 14.*fn1
Plaintiffs, the class of purchasers of QLT stock between August 1, 2000
and December 14, 2000, brought these actions pursuant to Section 10(b) of
the Securities Exchange Act of 1934 (the "Exchange Act"),
15 U.S.C. § 78j(b), Section 20 of the Exchange Act, 15 U.S.C. § 78t(a), and
Rule 10b-5 of Securities and Exchange Commission, 17 C.F.R. § 240.10b-5. The
Consolidated Class Action Complaint ("the Complaint") alleges that QLT
and its Chief Executive Officer and Chief Financial Officer
individual defendants Dr. Julia Levy and Kenneth Galbraith,
respectively issued false and misleading information to the
public concerning sales projections for Visudyne. Plaintiffs seek
compensatory damages for the losses
they incurred due to their purchases of QLT shares during the class
period, interest, and attorneys' fees.
Defendants have moved pursuant to Rule 12(b)(6) of the Federal Rules of
Civil Procedure to dismiss the complaint for failure to state a claim
upon which relief may be granted. For the reasons set forth below, that
motion is granted.
Visudyne treats symptoms of age-related macular degeneration ("AMD"), a
disease of the eye that typically afflicts people over age 65.*fn2
(Complaint at ¶ 29). There are two types of AMD, "wet" and "dry." Wet
AMD results from leakage of abnormal blood vessels under the macula
the central part of the retina and can cause vision loss
and sometimes blindness. (Complaint at ¶ 30). Wet AMD can be further
classified according to the location of the abnormal blood vessels into
subfoveal, juxtafoveal, and extrafoveal CNV forms or according to the
pattern of leakage into "occult" or "classic" forms. Id.
Visudyne was approved to treat the "predominantly classic subfoveal CNV
form of AMD" by the Food and Drag Administration ("FDA") on April 12,
2000. (Complaint at ¶ 32). Visudyne treatment involves "infusion by
doctor of Visudyne, a light-activated drag, followed by the use of a
non-thermal laser," which "activates and temporarily closes the leaking
blood vessels." (Complaint at ¶ 31).
A. Alleged Misrepresentations of the Size of the Market for
Plaintiffs allege that defendants had exaggerated the potential market
for Visudyne treatment. In an April 12, 2000 press release, QLT described
the potential market for Visudyne
Specifically, the FDA approved Visudyne therapy
for the treatment of AMD in patients with
predominantly classic subfoveal choroidal
neovascularization (CNV). Medical experts estimate
that of the 500,000 new patients that develop wet
AMD every year around the world, 40-60% will
develop predominantly classic lesions during the
progression of their disease. Patients with this
condition lose their ability to read, drive and
recognize faces in as little as two months to
As the first approved drug therapy for this
devastating condition, Visudyne provides new hope
to many of the 200,000 Americans who lose their
vision from wet AMD every year.
(Attached to Chlapowski Declaration at Exhibit 6)
According to plaintiffs, the 40-60% figure in the press release greatly
exaggerates the prevalence of the forms of AMD suitable for Visudyne
treatment. (Complaint at ¶ 36). The actual percentage, plaintiffs
claim, is "far less than [QLT] represented." Id. For example, a
survey of retinal specialists conducted by a Merrill Lynch research
analyst reported that only 17% to 20% of "patients with wet AMD fit the
FDA's criteria for Visudyne treatment," and a similar survey contained in
a research report by analysts at Leerink Swann & Co. indicated
"doctors expected up to 17% of their patients with wet AMD to be eligible
to use Visudyne." Id. Plaintiffs also cite a statement of Dr.
Dan Montzka, a retinologist, that only 2% of patients with wet AMD "would
benefit from treatment [with Visudyne]." Id. Finally, a
February 9, 2001 article in the National Post (Canada) reported that
"[a]bout 200,000 people in North America suffer from wet AMD. Scientists
working for QLT believe that 40,000 of these patients have the classic
form and can be treated with Visudyne. Adding occult sufferers could make
Visudyne available to another 80,000 patients." Plaintiffs allege that
defendants knew that the press release had exaggerated the market for
Visudyne prescriptions or that they acted recklessly in disregarding this
fact. Plaintiffs further allege that, in light of the exaggeration of the
market for Visudyne, defendants knew that the initial forecasts for
Visudyne sales in the fourth quarter of
2000 were false and misleading or that they recklessly disregarded
In August and early September of 2000, individual defendants Levy and
Galbraith sold large blocks of their QLT shares. Specifically, the
Complaint alleges that beginning in early August 2000, Galbraith sold
115,800 QLT shares approximately 85% of his holdings at the time
for 13.67 million Canadian dollars ("CN$"). Similarly, in early
September 2000, Levy sold 42,000 QLT shares for CN$4.65 million.
(Complaint at ¶ 53-a, 53-b, 72).
B. Alleged Misrepresentations of Fourth Quarter 2000 Visudyne
Plaintiffs' allegation also focus on the discrepancy between the
expectations allegedly created by a series of statements by QLT and the
individual defendants in October of 2000 including initial fourth
quarter 2000 Visudyne sales forecasts on one hand, and the
revised sales forecast released by QLT on December 14, 2000, on the
other. According to the Complaint, Galbraith was quoted in a Dow Jones
News article on October 17, 2000 that "QLT Inc. sees 30-50% growth in
Visudyne sales for the fourth quarter over the third quarter (of 2000)."
(Complaint at ¶ 57-b). Galbraith also expected, according to an
October 18, 2000 article in the Globe and Mail, the sales of
Visudyne to be between $40-million and $50-million" for the fourth
quarter of 2000.*fn3 (Complaint at ¶ 60). In addition, defendant
Levy allegedly told research analysts during a teleconference: "we just
want the $40-50 [million] in sales of Visudyne [in fourth quarter 2000].
We're comfortable with the 35% quarter-over-quarter growth [from third
quarter 2000]." (Complaint at ¶ 57-d).
The Complaint also identifies a number of other allegedly fraudulent
statements regarding Visudyne sales. During a conference call with
financial analysts on August 1, 2000, Galbraith
stated that there was growing demand for Visudyne and that "I don't
think [the second quarter 2000] is going to be a one-quarter blip."
(Complaint at ¶ 50). In an October 11, 2000 press release, QLT
included quotes by Levy that Visudyne received "strong endorsement by
retinal specialists" and that "we are confident in CIBA Vision's (QLT's
marketing partner) ability to continue strong growth in sales in the U.S.
and rapidly introduce Visudyne in Europe and other markets. . . ."
(Complaint at ¶ 54). Galbraith echoed those sentiments in a QLT press
release accompanying its third quarter 2000 financial results. (Complaint
at ¶ 57-a). Galbraith also stated during a CNN interview that "the
uptick for [Visudyne] looks excellent" and that "[Visudyne would] do
about 100 million (U.S. dollars in sales) this year and hopefully grow
that to 6 or 700 by 2003. So pretty good growth rates." (Complaint at
QLT revised those forecasts in its December 14, 2000 press release and
stated that "fourth quarter demand for Visudyne vials is expected to grow
20 to 25% over Q3[,] which will translate into sales of approximately US
$36-38 million," down from the earlier forecast of $40-50 million sales
and 35% growth. (Complaint at ¶ 65; Press Release dated December 14,
2000, attached to Chlapowski Declaration at Exhibit 10). The press
release attributed the slower than expected growth to "lack of
reimbursements in some countries in Europe and in the U.S. as well as a
reduction in revenue caused by the [currency fluctuation]." As noted
above, although on December 13, 2000, QLT shares had closed at
approximately $40.44 on the NASDAQ, they reached a low of $28.06 on
December 14.*fn4 (Complaint at ¶ 4, ¶ 67).
C. Alleged Misrepresentations Regarding HCFA Reimbursement
Approval by the Health Care Financing Administration ("HCFA") or by
local Medicare Carrier Medical Directors is required before physicians
are permitted to receive Medicare reimbursement for Visudyne treatment.
In June 2000, the HCFA assigned a temporary billing code for Visudyne
treatment, known as photodynamic treatment or "PDT," as an unlisted
procedure. (Complaint at ¶ 42). Furthermore, when approval for
Visudyne was pending before the U.S. Pharmacopoeia, Visudyne was
reimbursed as a supply by Medicare, instead of as a drug, until July 18,
2000. (Complaint at ¶ 43-44). After engaging in extensive discussions
with the HCFA, QLT resolved the reimbursement issues on November 8, 2000
when the HCFA released a national coverage policy for PDT and Visudyne
reimbursements, which was to take effect on July 1, 2001. (Complaint at
During this period, Levy discussed the issue of reimbursements during a
conference call with financial analysts. She noted the process of seeking
HCFA approval and stated that "[QLT] made progress in Texas, Florida,
Ohio the payment procedures are much clearer. Some of the hiccups
that was there in July and August ha[ve] gone away." (Complaint at ¶
57-e). On November 2 and 10, 2000, QLT publicized the HCFA approval of
Visudyne but did not discuss the implications of not having received HCFA
approval sooner. (Complaint at ¶ 63-64).
Plaintiffs claim that defendants "knew that Visudyne's market potential
was held back by the delay in formulating reimbursement criteria by
HCFA," which made physicians "reluctant to invest in the lasers required
to perform the procedure until these reimbursement issues were resolved."
(Complaint at ¶ 52-a, 52-b). Plaintiffs further allege that
defendants "failed to disclose the true impact that the delay between
April 2000 and November 2000 [of Medicare
reimbursements] had on the demand for Visudyne" during and after
they provided the initial forecasts for fourth quarter 2000 sales for
Visudyne. (Complaint at ¶ 65).
Defendants offer four sets of reasons in support of their motion to
dismiss. First, they argue that misrepresentations identified in the
Complaint are either immaterial or otherwise protected by the statutory
safe harbor of the Private Securities Litigation Reform Act of 1995 or
the judicial "bespeaks caution" doctrine. Second, defendants assert that
the Complaint fails to plead the falsity of QLT's initial forecasts for
Visudyne sales in fourth quarter 2000 with requisite particularity.
Third, they argue that the Complaint fails to plead sufficient facts to
support an inference of scienter; i.e., that defendants knew or
recklessly disregarded the falsity of their public statements. Finally,
defendants assert that the Complaint does not support a finding of loss
causation between the alleged misrepresentation of the size of the market
for Visudyne treatment and the damages suffered by the plaintiffs due to
the fall in the share price of QLT on December 14, 2000.
A. Standard of Review
In evaluating a Fed.R.Civ.P. 12(b)(6) motion to dismiss, this Court
looks to facts contained in the pleadings, including documents referenced
in the Complaint "as well as public disclosure documents required to be,
and that have been, filed with the SEC." Rothman v. Gregor,
220 F.3d 81, 88 (2d Cir. 2000); see also Cortec Indus., Inc. v. Sum
Holdings, L.P., 949 F.2d 42, 47 (2d Cir. 1991); Cameron v.
Church, 253 F. Supp.2d 611, 618 (S.D.N.Y. 2003). The facts alleged
in the Complaint are presumed to be true and all reasonable inferences
are drawn in the plaintiffs' favor. See Lee v. Bankers Trust
Co., 166 F.3d 540, 543 (2d Cir. 1999). Plaintiffs' claims may be
dismissed only if "it appears beyond doubt that the plaintiff can prove
no set of
facts in support of his claim which would entitle him to relief."
Drake v. Delta Airlines, Inc., 147 F.3d 169, 171 (2d Cir.
1998) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 2 L
Ed.2d 80, 78 S.Ct.99 (1957)).
B. Elements of a Section 10(b) Claim and Its Heightened
A claim pursuant to section 10(b) of the Exchange Act,
15 U.S.C. § 78j(b), which forbids the use of a "manipulative or deceptive
device or contrivance" in connection with the purchase or sale of
securities, is subject to the pleading requirements of the Private
Securities Litigation Reform Act of 1995 (the "PSLRA"), 15 U.S.C. § 78u-4,
as well as the heightened pleading requirements for fraud contained in Rule
9(b) of the Federal Rules of Civil Procedure. See Rombach v. Chang,
355 F.3d 164, 170 (2d Cir. 2004). The PSLRA requires a complaint to specify
"each statement alleged to have been misleading [and] the reason or
reasons why the statement is misleading," 15 U.S.C. § 78u-4(b)(1),
and to state "with particularity facts giving rise to a strong inference
that the defendant acted with the required state of mind."
15 U.S.C. § 78u-4(b)(2); see also In re Globalstar Securities
Litigation, 01 Civ. 1748, 2003 WL 22953163, 2003 U.S. Dist. LEXIS
22496 at *12-13, (S.D.N.Y. Dec. 15, 2003).
To satisfy the pleading requirements of Rule 9(b), moreover, a
complaint asserting a section 10(b) claim must identify four elements:
(1) the statements deemed fraudulent, (2) the speaker, (3) the time and
circumstances of the allegedly fraudulent statements, and (4) the reasons
as to why the statements are fraudulent. See Globalstar, 2003
U.S. Dist. LEXIS 22496 at *13; Rombach, 355 F.3d at 172 ("[t]o
meet the pleading standard of Rule 9(b), this Court has repeatedly
required, among other things, that the pleading `explain why the
statements were fraudulent.'" (internal citations omitted)). Accordingly,
to state adequately a claim for relief for violation of section 10(b) and
Rule 10b-5, a complaint must plead that "the defendant[s] made a
false statement or omitted a material fact, with scienter, and that
plaintiff's reliance on defendants' action caused plaintiff injury."
Kalnit v. Eichler, 264 F.3d 131, 138 (2d Cir. 2001) (quoting
San Leandro Emergency Medical Group Profit Sharing Plan v. Philip
Morris Co., 75 F.3d 801, 808 (2d Cir. 1996)); see also Lawrence
v. Cohn, 325 F.3d 141, 147 (2d Cir. 2003) (same).
C. Application of PSLRA "Safe Harbor" and the "Bespeaks Caution"
At the outset, defendants urge that none of the alleged
misrepresentations identified in the Complaint are actionable under the
federal securities laws because they fall within the "safe harbor"
provisions of the PSLRA, 15 U.S.C. § 78u-5(c), or are protected by
the judicial "bespeaks caution" doctrine.
The PSLRA creates two categories of statutory "safe harbors." First,
there is no fraud liability under federal securities laws for making a
forward-looking statement if such a statement is either (i) identified as
forward-looking "and is accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those in the statement;" or "(ii) immaterial"
15 U.S.C. § 78u-5(c)(1)(A). Secondly, the statutory "safe harbor" also
insulates from fraud liability the making of a forward-looking statement
unless a plaintiff can prove that such a statement was "made with actual
knowledge by that person that the statement was false or misleading."
15 U.S.C. § 78u-5(c)(1)(B)(i); see also In re. Independent Energy
Holdings PLC Securities Litigations, 154 F. Supp.2d 741, 755
(S.D.N.Y. 2001) (applying 15 U.S.C. § 77z-2(c), the parallel "safe
harbor" provision applicable to the Securities Act of 1933,
15 U.S.C. § 77a et seq).
The judicial "bespeaks caution" doctrine operates in a similar fashion
and protects forward-looking statements accompanied by adequate
cautionary language from being
actionable. Specifically, under the "bespeaks caution" doctrine,
"`alleged misrepresentations . . . are immaterial as a matter of law
[if] it cannot be said that any reasonable investor could consider them
important in light of adequate cautionary language . . .'"
Rambach, 355 F.3d at 173 (quoting Halperin v. Ebanker
USA.com, Inc., 295 F.3d 352, 357 (2d Cir. 2002)). Because statements
identified in the Complaint regarding the size of the existing market for
Visudyne and QLT's progress in seeking HCFA approval concern existing
facts and are therefore not "forward-looking," such statements are
subject to neither the statutory "safe harbor" nor the "bespeaks caution"
The PSLRA deems generalized expressions of corporate optimism
immaterial as a matter of law and therefore insufficient as the basis for
an action alleging securities fraud. See Rambach, 355 F.3d at
174 ("[u]p to a point, companies must be permitted to operate with a
hopeful outlook: `people in charge of an enterprise are not required to
take a gloomy, fearful or defeatist view of the future; subject to what
current data indicates, they can be expected to be confident of their
stewardship and the prospects of the business that they manage.'")
(internal citations omitted); Lasker v. New York State Elec. &
Gas Corp., 85 F.3d 55, 58 (2d Cir. 1996). This "safe harbor" applies
to many of the statements identified in the Complaint. For example,
Galbraith's August 1, 2000 statement that QLT's results from the second
quarter of 2000 "is [not] going to be a one-quarter blip" and Levy's
expression of confidence on October 11, 2000 in "CIBA Vision's ability to
continue strong growth in sales in the U.S." are clearly expressions of
the corporate stewards' optimistic opinions.*fn6 Accordingly,
pursuant to 15 U.S.C. § 78u-5(c)(1)(A)(ii), such statements are
immaterial as a matter of law and constitute an insufficient basis on
which to support a claim of securities fraud.
In contrast, when Levy allegedly told research analysts that "[QLT was]
comfortable with the 35% quarter-over-quarter growth (in Visudyne
sales)," this was not merely a generic statement of optimism but a
concrete projection of future performance. This and similar specific
projections regarding the rate of growth in Visudyne sales or regarding
QLT's revenue in fourth quarter 2000 also do not fall within the purview
of the "immateriality" safe harbor and may provide the basis for a
section 10(b) action. See In re Int'l Bus. Machs. Corporate
Securities Litigations, 163 F.3d 102, 107 (2d Cir. 1998)
("[s]tatements regarding projection of future performance may be
actionable under section 10(b) or Rule 10b-5 if they . . . are
supported by specific statements of fact"); Globalstar, 2003
U.S. Dist. LEXIS 22496 at *26-27.
Defendants further contend that even if defendants made certain
material "forward-looking" statements, they are nonetheless entitled to
the statutory safe harbor and protection of the "bespeaks caution"
doctrine because such statements were accompanied by meaningful
cautionary language. To illustrate this point, defendants offer the "Risk
Factors" section of QLT's 1999 10-K filed with the SEC, the risk
disclosure that prefaced Galbraith's August 1, 2000 conference call with
research analysts, and the cautionary disclaimer included in QLT's August
1, October 11, and October 17, 2000 press releases.
Because the forward-looking statements in the aforementioned press
immaterial, there is no need to ascertain the adequacy of the
cautionary language attached to them. More importantly, however,
defendants do not aver whether meaningful cautionary language had been
included when Levy's allegedly made the statement "we're comfortable with
the 35% quarter-over-quarter growth" during a research analyst
teleconference. This Court cannot infer, on the basis of the other
instances of cautionary language QLT included, that such language had
been provided in conjunction with Levy's statement or that it was in fact
meaningful and adequate. Accordingly, neither the statutory safe harbor
nor the "bespeaks caution" doctrine applies to this and similar specific
D. False Statements Made with Scienter
The Complaint recites the alleged misrepresentations and identifies the
source and party or entity making those statements; accordingly, it
satisfies the first three prongs of the Rule 9(b) pleading requirements
set forth above. See Globalstar, 2003 U.S. Dist. LEXIS 22496 at
*14. As to the fourth requirement the reasons why the statements
were fraudulent the plaintiffs must "state with particularity the
specific facts in support of [their] belief that [such] statements were
false when made." Rambach, 355 F.3d at 172; see also
Globalstar, 2003 U.S. Dist. LEXIS 22496 at * 14-15 ("plaintiffs
must plead both that defendants made false statements and that they did
so with the requisite scienter") (internal citations omitted). In this
case, the Complaint identifies two distinct categories of
misrepresentations: exaggeration of existing facts concerning potential
market size and intentionally inflated forward-looking sales forecasts
(including HCFA reimbursement issues).*fn7 We will first set forth the
standards for pleading falsity and scienter in each context and then
analyze those two categories of misrepresentations in that sequence.
With respect to defendants' exaggeration of market potential for
Visudyne, the Complaint alleges that defendants knew information that was
contrary to the alleged misrepresentations; therefore, "the falsity and
scienter [pleading] requirements are essentially combined." In re
Revlon Inc. Securities Litigation, 2001 WL 293820 at *7 (S.D.N.Y.,
Mar. 27 2001) (citing Rothman, 230 F.3d at 89-90). That is, "if
[the Complaint has] sufficiently pled facts to support scienter, [it has]
also met the pleading requirements for falsity." Id.
Scienter may be established in one of two ways: (1) "by alleging facts
to show that defendants had both motive and opportunity to commit fraud,"
or (2) "by alleging facts that constitute strong circumstantial evidence
of conscious behavior or recklessness." Globalstar, 2003 U.S.
Dist. LEXIS 22496 at *15 (quoting Novak, 216 F.3d at 307). As
the United States Court of Appeals for the Second Circuit explained in
Novak, motive denotes concrete benefits that
misrepresentations could create and opportunity entails "the means and
the likely prospect of achieving concrete benefits by the means alleged."
216 F.3d at 307 (quoting Shields v. Citytrust Bancorp, Inc.,
25 F.3d 1124, 1130 (2d Cir. 1994)). Reckless conduct, while "harder to
identify with . . . precision and consistency," can involve "an
egregious refusal to see the obvious, or to investigate the doubtful."
Id. at 308 (quoting Chill v. General Electric Co.,
101 F.3d 263, 269 (2d Cir. 1996)).
The allegedly inflated sales forecasts present a slightly different
issue and require an examination into both the adequacy of pleading for
falsity and for scienter. Sales forecasts are forward-looking statements
instead of statements of existing facts. The plaintiffs cannot simply
prove the falsity of those forecasts by stating that they ultimately
proved erroneous this would be the essence of a "fraud by
hindsight" claim that courts in consistently reject. See Stevelman
v. Alias Research Inc., 174 F.3d 79, 85 (2d Cir. 1999);
Shields, 25 F.3d at 1129. Instead, the
plaintiffs must plead specific facts to support a finding that, in
view of information possessed by the defendants in October 2000 when they
made the initial forecasts, such sales forecasts were clearly inflated.
1. The Market for Visudyne Treatment
Defendants contend that the description of the market for Visudyne
treatment in QLT's April 12, 2000 press release is factually correct. The
contrary evidence cited in the Complaint, such as lower percentages of
eligible patients discussed in research reports, use different
definitions of eligibility or suitability and, defendants contend, do not
actually prove the falsity of the percentage cited in the press release.
A correct statement of fact is not a misrepresentation and cannot,
therefore, support a cause of action for securities fraud. The accuracy
of the percentage contained in the press release is clearly a question of
fact. This Court cannot dismiss the Complaint on this basis because the
truth of plaintiffs' factual allegations is assumed at this stage of
litigation. See Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir.
1996) (when evaluating a 12(b)(6) motion, the "issue is not whether a
plaintiff will ultimately prevail but whether the claimant is entitled to
offer evidence to support the claims") (internal quotation marks and
The pleading requirement of scienter is satisfied here because
defendants Levy and Galbraith sold significant amounts of QLT shares in
August and September 2000, shortly after publication of the alleged
exaggeration of the market for Visudyne treatment. The trades completed
by the individual defendants provided them with concrete benefits; and,
as senior QLT corporate officers, they were in position to control the
information released to the investing public. Accordingly, the "motive
and opportunity" prong of the pleading requirements for scienter is met.
See In re Scholastic Corp. Securities Litigations, 252 F.3d 63,
74-75 (2d Cir.
2001) (finding "motive and opportunity" where a corporate officer
realized gains from stock sales while withholding information on
declining trend of sales); Novak, 216 F.3d at 318 (holding that
insider sales of stock is a classic instance of "motive and
2. Fourth Quarter 2000 Visudyne Sales Forecasts
Plaintiffs have not sufficiently pled that the fourth quarter 2000
Visudyne sales forecasts were false when made. Plaintiffs allege that the
optimistic forecasts were clearly false when made in light of two types
of information regarding Visudyne known by defendants: delays in Medicare
reimbursement approval for Visudyne treatment and a limited demand due to
a smaller than publicized market. However, the plaintiffs state this
conjecture as an indisputable conclusion*fn8 but fail to articulate how
possession of such information made it clear to defendants that their
initial sales forecasts were erroneous. Without identifying any concrete
mechanism through which possession of such information reveals the
misleading nature of the sales forecasts in October 2000,*fn9 a bald
assertion of falsity of the initial sales forecasts is deficient. See
San Leandro, 75 F.3d 801, 812-813 (2d Cir. 1996) ("unsupported
general claims of the existence of confidential company sales reports
[revealing larger decline in sales] is insufficient to survive a motion
to dismiss"); In re IBM, 163 F.3d at 109 (dismissing fraud
claim based on forward-looking statement for lack of evidence of its
falsity); compare In re Scholastic Corp., 252 F.3d at
70-74 (holding that securities fraud claim against publisher for failure
to disclose declining revenue trends had been sufficiently pled because
plaintiffs identified link between defendant's
knowledge of specific facts on a higher rate of book returns and
lower sales); Globalstar, 2003 U.S. Dist. LEXIS 22496 at *15
(denying motion to dismiss because plaintiffs specifically identified
facts contradicting premises of earnings forecast based on statements of
"an ex-Globalstar senior business development manager").
Plaintiffs also fail to plead sufficiently that the initial fourth
quarter sales forecasts had been made with scienter. As discussed above,
plaintiffs' chief evidence of scienter was Levy and Galbraith's sales of
QLT shares in August and September of 2000. (Complaint at ¶ 72).
Because the allegedly overoptimistic fourth quarter Visudyne sales
forecasts were made in October 2000 after Levy and Galbraith had
completed their stock trades those trades do not bear on
defendants' scienter at the time they made the forecasts. As there is was
no credible allegation of circumstantial evidence of knowledge or
reckless behavior, this Court need not engage in an analysis of the
second prong of the test for scienter.
E. Loss Causation
Finally, in addition to requirements for falsity and scienter, the
Complaint must also plead sufficient facts to establish transaction and
loss causation in order to survive a motion to dismiss. See In re
Initial Public Offering Securities Litigations, 297 F. Supp.2d 668,
669-670 (S.D.N.Y. 2003). The Complaint pleads that transaction
causation, also known as reliance, should be presumed under the theory of
"fraud on the market." (Complaint at ¶ 73-74) Pursuant to the PSLRA,
plaintiffs "have the burden of proving that the act or omission of the
defendant alleged to violate this title caused the loss which the
plaintiff seeks to recover damages." 15 U.S.C. § 78u-4(b)(4). Here,
the plaintiffs must plead the element of loss causation, which links
damages they suffered to the alleged exaggeration of the market for
Visudyne. They cannot do so.
The Second Circuit has analogized the concept of loss causation in
securities actions to
the notion of proximate cause in torts "because, similar to
proximate cause, in order to establish loss causation, a plaintiff must
prove that the damage suffered was a foreseeable consequence of the
misrepresentation." Citibank, N.A. v. K-H Corp.,
968 F.2d 1489, 1495 (2d Cir. 1992). Thus, if an intervening cause supercedes
the effects of an initial misrepresentation, then a Section 10(b) claim
fails. See Suez Equity Investors, L.P. v. Toronto-Dominion
Bank, 250 F.3d 87, 96 (2d Cir. 2001) (citing Bastian v. Petren
Res. Corp., 892 F.2d 680, 685 (7th Cir. 1990)).
In this case, plaintiffs seek compensatory damages for losses due to
the fall in price of QLT shares on December 14, 2000. The Complaint
alleges that the fall was caused by the disclosure of the shortfall in
fourth quarter 2000 Visudyne sales forecast. It contains no allegation
that the alleged exaggeration of the market for Visudyne treatment
directly caused the sharp fall in the price of QLT shares. Insofar as the
Complaint alleges the shortfall in sales forecast was related to the
alleged exaggeration of the Visudyne market, such arguments have already
been rejected in part II.D.2 supra.
Therefore, the revised fourth quarter sales forecast released on
December 14, 2000 was clearly an intervening cause that superceded any
direct effect of the alleged exaggeration contained in the April 12, 2000
press release regarding the size of the market for Visudyne treatment
Accordingly, loss causation linking the damages sought by plaintiffs and
the alleged exaggeration of market size cannot be shown on the pleadings.
For the reasons set forth above, defendants' motion to dismiss the
complaint pursuant to Rule 12(b)(6) for failure to state a claim upon
which relief may be granted is granted. Furthermore, even a liberal
reading of the Complaint does not indicate that a valid claim for
securities fraud may be alleged in conformity with the pleading
requirements of Rule 9(b) and the PSLRA. Accordingly, the Consolidated
Class Action Complaint is hereby dismissed with prejudice. See Van
Buskirk v. New York Times Co., 325 F.3d 87, 91-92 (2d Cir. 2003);
Branum v. Clark, 927 F.2d 698, 705 (2d Cir. 1991).