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Lewis v. Termeer

August 3, 2006


The opinion of the court was delivered by: Louis L. Stanton, U.S.D.J.


In this class action alleging violations of federal law, state law, and SEC Rule 10b-5, defendants*fn1 move to dismiss the fourth amended complaint ("FAC") pursuant to Fed. R. Civ. P. 12(b)(6). For the reasons that follow, the motion is granted in part and denied in part.


The lead plaintiffs bring this action on behalf of the purported class of shareholders who held Genzyme Biosurgery tracking stock ("GZBX Stock") on May 8, 2003 when Genzyme Corporation ("Genzyme") announced it would exchange all GZBX Stock for Genzyme General Stock ("GENZ Stock"). The following allegations are taken from the FAC and are accepted as true on this motion to dismiss. See Mills v. Polar Molecular Corp., 12 F.3d 1170, 1174 (2d Cir. 1993).

On December 19, 2000, Biomatrix Inc. merged into Genzyme.

Internally, Genzyme merged Biomatrix's assets (which included Synvisc, a "blockbuster" medical product that was used to treat osteoarthritis) with those of its Surgical Products and Tissue Repair Division, creating Genzyme's Biosurgery Division. From the merger until June 30, 2003, Genzyme's corporate structure consisted of three distinct business divisions: the Genzyme General Division, the Biosurgery Division and the Molecular Oncology Division. In order to "track" the value and performance of each division, rather than the company as a whole, each division had its own tracking stock which was traded on the NASDAQ.*fn2

The merger agreement included an Optional Exchange provision authorizing the Genzyme Board of Directors, "at any time," to declare the exchange of outstanding GZBX stock for GENZ stock on an Exchange Date set by the Board.*fn3 February 10, 2006 Declaration of William I. Sussman, Ex. A, Genzyme Corporation's Joint Proxy Statement/Prospectus, F-3. Under this provision, an exchange would be made at the ratio of the price of Biosurgery shares (plus a 30% premium) to Genzyme General shares, based on the average closing prices of each during a prior 20 days' trading. These provisions were reflected in Genzyme's Restated Articles of Organization:

The Board of Directors may at any time . . . declare that each of the outstanding shares of GBS Stock*fn4 shall be exchanged, on an Exchange Date, as determined by the Board of Directors, for (a) a number of fully paid and nonassessable shares of GGD Stock*fn5 (calculated to the nearest five decimal places) equal to (1) 130% of the Fair Market Value of one share of the GBS Stock (the "GBS Optional Exchange Amount") as of the date of the first public announcement by the Corporation (the "GBS Optional Exchange Announcement Date") of such exchange divided by (2) the Fair Market Value of one share of GGD Stock as of such GBS Optional Exchange Announcement Date.

February 10, 2006 Declaration of William I. Sussman, Ex. B, Restated Articles of Organization, Art. IV(E)(6)(a)(1). Fair Market Value was defined as:

(1) as to shares of any series of stock of the Corporation as of any date, the average of the daily Closing Prices for the 20 consecutive Business Days commencing on the 30th Business Day prior to such date, except that in the event such Closing Prices are unavailable, Fair Market Value shall be determined by the Board of Directors.

Id. at Art. IV(F)(7)(f).

On May 8, 2003, Genzyme announced that the Board was exercising its rights under the Optional Exchange provision and exchanging all GZBX stock for GENZ stock on June 30, 2003 (the "Exchange"). The announcement retroactively set the pricing period for determining the Fair Market Value of GZBX and GENZ stocks as March 26, 2003 through April 23, 2003. On June 30, 2003, each share of GZBX stock was exchanged for .0491 shares of GENZ, a value of $1.77 per share of GZBX stock.*fn6

Plaintiffs allege that defendants engaged in a fraudulent scheme aimed at implementing the Exchange at the most beneficial price to GENZ shareholders.*fn7 Because the terms of the Optional Exchange provision provided for the exchange rate to be based on the ratio of the Fair Market Values of GZBX and GENZ, the defendants sought to artificially depress the price of GZBX in relation to that of GENZ, and then timed the announcement of the Exchange to occur while the GZBX stock was depressed.

Defendants allegedly managed the Biosurgery Division's corporate earnings and withheld positive information about the Biosurgery Division in an orchestrated effort to obscure the actual value and profitability of the Biosurgery Division and artificially depress the price of GZBX. In early 2003 GZBX announced poorer-than-expected sales for the fourth quarter of 2002 without fully disclosing the reasons for the decreased revenue. Defendants partially attributed the decreased sales to a draw down in inventory by one its major distributors, but did not disclose that defendants had urged the company to take the entire draw down during the fourth quarter, rather than spreading it over the second and third quarters as the parties had originally agreed. Defendants also failed to disclose that the Biosurgery Division had terminated its French distributor in order to distribute Synvisc directly in France beginning January 1, 2003, leading the distributor to reduce its inventory during the fourth quarter.

Plaintiffs allege that defendants also intentionally withheld the following positive information about the Biosurgery Division from the market in order to artificially depress the price of GZBX stock: (1) the planned sale of Biosurgery's cardiothoracic devices business, which was performing poorly and obscuring Biosurgery's positive results; (2) a new product development which would use Synvisc to modify osteoarthritis, rather than just relieving its symptoms; (3) internal valuations of the Biosurgery division which far exceeded the value reflected by the Exchange; (4) two companies had expressed interest in purchasing Synvisc and were turned down because Genzyme would not sell Synvisc at any price; (5) positive news of Synvisc's 2003 first-quarter sales; and (6) the FDA had given conditional approval for a Synvisc hip trial. Following a pre-arranged time-line, the last two positive pieces of information were disclosed during a first-quarter "earnings call" (a public announcement by telephone conference, regarding anticipated financial results) scheduled for April 16, 2003. The Exchange announcement date was chosen so that the pricing period would expire on April 23, 2003, and thus limit the impact the positive news would have on the Exchange ratio.

The purpose and result of defendants' scheme was that the ratio at which the Exchange took place did not accurately reflect the value of the GZBX stock being exchanged.


On a motion to dismiss a complaint pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief may be granted, a court must accept the factual allegations of the complaint as true, and draw all inferences in favor of the plaintiff. Mills, 12 F.3d 1170 at 1174. The court may consider exhibits annexed to the complaint or incorporated in it by reference. Brass v. American Film Technologies, Inc., 987 F.2d 142, 150 (2d Cir. 1993). The complaint may be dismissed only where "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957).

I. Section 10(b) of the Exchange Act and Rule 10b-5

Claim one alleges violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Section 10(b) makes it unlawful to: use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

15 U.S.C. ยง 78j(b). SEC Rule 10b-5 makes it unlawful, in connection with the purchase ...

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