The opinion of the court was delivered by: Sidney H. Stein, U.S. District Judge
This securities fraud action arises from a merger between Bioenvision, Inc. and Genzyme Corporation, two pharmaceutical companies. Plaintiffs-sellers of securities in Bioenvision during the period from April 11, 2007 through May 28, 2007 (the "class period")-bring this putative class action against Bioenvision and six of its corporate officers and directors (collectively, the "Bioenvision defendants"), and against Perseus-Soros Biopharmaceutical Fund, LP ("Perseus-Soros"), the largest pre-merger shareholder in Bioenvision. The action is brought pursuant to section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder and includes both claims against Perseus-Soros for violation of section 13(d) of the Exchange Act, 15 U.S.C. § 78m(d), and control person liability against the individual defendants and Perseus-Soros pursuant to section 20(a) of the Exchange Act. In their supplemental amended class action complaint, plaintiffs claim that defendants artificially deflated the value of Bioenvision's stock by issuing and by failing to correct or update statements that contained material misrepresentations and omissions as to Bioenvision's plan to enter into a merger with Genzyme. As a result, plaintiffs allegedly sold their Bioenvision securities during the class period at prices below the actual value of those securities.
Defendants have now moved to dismiss the action pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief can be granted. They contend that the complaint does not plead securities fraud with the particularity required by Fed. R. Civ. P. 9(b) and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Pub. L. No. 104-67, 109 Stat. 737 (1995) (codified in various sections of 15 U.S.C.), and therefore should be dismissed. The defendants also argue that, contrary to plaintiffs' assertions, they had no duty to disclose the merger discussions until May 29, 2007, the date when the merger was announced publicly.
For the reasons set forth in this Opinion, defendants' motions to dismiss the complaint are granted without prejudice. As alleged, the statements that form the basis of this action either did not give rise to a duty to disclose the merger discussions or are not pled with sufficient particularity.
The supplemental amended complaint alleges the following relevant facts, which the Court assumes to be true for the purposes of this motion to dismiss.
Prior to its October 23, 2007 merger with Genzyme, Bioenvision was a Delaware biopharmaceutical corporation with its principal place of business in New York City. (Supp. Am. Compl. ¶ 8.)
Perseus-Soros was, until the merger, the largest common stockholder of Bioenvision, owning approximately twenty percent of Bioenvision equity as of January 2007. (Id. ¶ 9.) Prior to and during the class period, Perseus-Soros exercised control over Bioenvision's Board of Directors (the "Board") and the company itself. (Id.) Plaintiffs allege that as an insider to Bioenvision, Perseus-Soros had a duty to disclose all material non-public information concerning the company or to abstain from trading, and yet Perseus-Soros failed to amend its Schedule 13D/A to disclose the events leading up to the merger, specifically, Perseus-Soros's plan to change control of Bioenvision. (Id.)
Two Bioenvision officers who were also board members have been named as individual defendants. Christopher B. Wood was Bioenvision's Chairman and Chief Executive Officer. (Id. ¶ 10.) James S. Scibetta served as the Chief Financial Officer of Bioenvision. (Id. ¶ 16.) According to plaintiffs, Wood and Scibetta issued public statements and signed SEC filings on behalf of the company that were materially false and misleading. (Id. ¶¶ 10, 16.)
The other individual defendants had connections to Perseus-Soros or Perseus-Soros affiliates. Joseph P. Cooper served as a director of Bioenvision after Perseus-Soros recommended him to that position in 2006. (Id. ¶ 11.) He also served as the Executive Vice President of Medicis Pharmaceutical Corp. ("Medicis"), which had extensive business dealings with Perseus-Soros and its senior management. (Id.) Steven A. Elms at all relevant times served as a director of Bioenvision and as a managing director of Perseus-Soros Management LLC ("Perseus-Soros Management"), an affiliate of Perseus-Soros. (Id. ¶ 12.) Michael G. Kauffman served as a director of Bioenvision at all relevant times and served as President and Chief Executive Officer of Predix Pharmaceuticals ("Predix"), in which Perseus-Soros had a significant investment. (Id. ¶ 13.) Perseus-Soros recommended Kauffman to become a member of the Board in 2004. (Id.) Andrew Schiff served as a director of Bioenvision and served as a Managing Director of Perseus-Soros Management. (Id. ¶ 14.)*fn1
The lead plaintiffs in this putative class action are Bert Vladimir and Gary Thesling. They sold Bioenvision securities during the class period and claim to have been injured by defendants' conduct. (Id. ¶¶ 4-5.)
Bioenvision developed a variety of pharmaceutical products, but its "flagship product" was clofarabine, a drug for the treatment of pediatric leukemia that Bioenvision developed with Genzyme in Europe under the brand name Evoltra. (Id. ¶ 25.) From 2005 to 2006, representatives of Genzyme and Bioenvision met from time to time to discuss licensing opportunities for clofarabine and to explore the possibility that Genzyme would acquire Bioenvision. (Id. ¶ 26.)
Beginning in August 2006, Genzyme took a number of steps that led to the eventual acquisition of Bioenvision. It engaged Banc of America Securities LLC ("BOA") as its investment adviser. (Id. ¶ 27.) In January 2007, its executive vice president, Earl M. Collier, met with Dennis Purcell, a Senior Managing Director of Aisling Capital, an investment manager for Perseus-Soros. (Id. ¶ 28.) Collier discussed with Purcell the possibility that Genzyme might be interested in acquiring Bioenvision. (Id.) Purcell suggested that Genzyme should speak directly to Bioenvision about a possible acquisition. (Id.)
The Complaint then makes allegations, not on plaintiff's own knowledge, but rather on the basis of allegations made in a New York State litigation filed by former General Counsel and Chief Financial Officer of Bioenvision, David P. Luci, that Bioenvision improperly terminated his employment agreement. Specifically, plaintiffs here allege on the basis of Luci's state court allegations that, after Collier and Purcell discussed the possibility of a Genzyme-Bioenvision combination, Genzyme and Perseus-Soros "secretly agreed upon a course of action pursuant to which Genzyme would make a tender offer to acquire all of the outstanding Bioenvision stock owned by Perseus-Soros and the public shareholders (including management of Bioenvision) and then merge Bioenvision into a wholly owned subsidiary of Genzyme." (Id. (quoting Verified Am. Compl. of David P. Luci, Luci v. Bioenvision, No. 111478/07 (N.Y. Sup. Ct. Aug. 22, 2007) ("Luci Compl.") ¶ 18, Ex. C to Decl. of Maria J. Ciccia dated Feb. 29, 2008).) After the January 2007 meeting between Collier and Purcell, the Perseus-Soros-connected directors, including Elms, Schiff, Cooper, and Kauffman, according to plaintiffs' quotation from Luci's state court complaint, "determined to accept an offer from Genzyme to acquire Bioenvision." (Id. ¶ 29 (quoting Luci Compl. ¶ 45).)
In March 2007, plaintiffs continue, Genzyme and Bioenvision became more involved in discussions and negotiations concerning a merger. (Id. ¶¶ 33-34.) On March 6, BOA sent Bioenvision requests for information from Genzyme, and on March 15, Wood sent an email to BOA requesting that Genzyme submit a bid specifying a price at which Genzyme would be prepared to acquire Bioenvision. (Id. ¶¶ 33, 34(a).) Again relying on Luci's employment action complaint as the basis of its allegations, plaintiffs allege that, the Bioenvision Board met "secretly" on March 16 to discuss the anticipated Genzyme offer, and the Perseus-Soros-connected directors allegedly insisted that Bioenvision's management agree to sell their shares of Bioenvision's stock to Genzyme. (Id. ¶ 34(b) (citing Luci Compl. ¶ 48).) According to Luci's complaint, as cited by plaintiffs here, Wood "believes" that Scibetta was in constant contact with the Perseus-Soros-connected directors during this time. (Id. ¶ 34(c) (citing Luci Compl. ¶ 48).)
In early April 2007, Bioenvision put forward a dilutive public offering of 8 million shares of its common stock at a price of $3.75 per share. (Id. ¶ 35.) A Supplemental Prospectus issued in anticipation of the offering noted the challenges facing Bioenvision in realizing value from Evoltra, including the possibility that Genzyme might fail to meet the obligations of a co-development agreement with Bioenvision. (Id. ¶ 37.) It explained that the price of Bioenvision's common stock might decline, and that even if stockholders thought that a merger might be in Bioenvision's interest in the future, a number of factors might delay or prevent a merger from happening. (Id.) Finally, it noted that certain future events might have a dilutive effect on stockholders' shares. (Id.) No specific merger partner or other details were referenced. (Id.) As a result of this public offering, the price of Bioenvision stock declined from $4.09 on March 30, 2007 to $3.81 on April 4, 2007. (Id. ¶ 40.)
According to the complaint, the class period began when, less than two weeks later, on April 11, 2007, Genzyme sent "an indication of interest" to Bioenvision's Board that it sought to acquire Bioenvision at a price of $5.25 per share. (Id. ¶ 41.) Genzyme also requested access to information for due diligence purposes. (Id.) Over the next week, the Bioenvision board discussed the Genzyme offer with management, UBS Securities LLC, and Goodwin Procter LLP (legal counsel to Bioenvision). (Id. ¶ 44.) Throughout April, Bioenvision and Genzyme shared confidential information and entered into a confidentiality agreement. (Id. ¶¶ 45-46.)
Merger plans picked up steam in early May. On May 1, 2007, the Bioenvision Board created a committee tasked with working with Bioenvision's senior management, UBS, and Goodwin Procter to negotiate with Genzyme. (Id. ¶ 48.) On May 2, 2007, Perseus-Soros exercised its fixed-price warrants to purchase three million shares of Bioenvision common stock at a purchase price of $2 per share. (Id. ¶ 51.) On May 10, 2007, Genzyme reiterated its $5.25 offer to Bioenvision, and on May 15, 2007, Bioenvision management expressed to BOA an agreement to move forward and, to that end, provided Genzyme with advanced due diligence. (Id. ¶ 61.)
The last steps towards finalizing the merger took place in late May. As the news of the merger allegedly began to leak into the market, the Bioenvision stock price began to rise from a close of $4.22 on May 22, 2007. (Id. ¶ 62.) On May 24, 2007, Genzyme's Board of Directors approved the transaction. (Id. ¶ 63.) On May 25, 2007, the parties agreed to proceed with an acquisition at $5.60 per share, or approximately $345 million. (Id. ¶¶ 64, 66.) On May 28, 2007, the day the class period ends, the final merger agreement was approved, and on May 29, 2007, it was signed. (Id. ¶ 64.) On May 29, 2007, the price of Bioenvision's stock closed at $5.63, and on May 30, 2007, it closed at $5.88 per share.
Plaintiffs contend that during the class period, defendants "perpetrated a fraudulent scheme" by making false and misleading statements and "by failing to disclose the plan to sell Bioenvision to Genzyme." (Id. ¶¶ 89-91, 98-101.) Defendants' material misstatements and omissions had the effect, plaintiffs claim, of "artificially suppress[ing]" the price of Bioenvision securities during the class period. (Id. ¶¶ 92-95, 102-05.) Plaintiffs sold their stock before the merger was officially announced and thus before the resulting sharp increase in the stock price. (Id. ¶¶ 92-95, 102-105.)
According to the complaint, Bioenvision's public filings "touted the focus of its business as the acquisition, development, distribution and marketing of compounds and technologies for the treatment of cancer, autoimmune disease and infection" when, in fact, the company's "primary focus" was "no longer to develop and market cancer treatments, but rather to find a merger partner and to effectuate a takeover of the Company." (Id. ¶¶ 25, 70.) Because they participated in the pre-merger events detailed above, defendants knew the "true facts regarding the Company's strategic objectives and future business prospects" and were "privy to confidential proprietary information." (Id. ¶ 79.) Yet defendants' public statements, plaintiffs contend, were in conflict with this material information. (Id. ¶ 80.)
Plaintiffs allege that defendants knew or recklessly disregarded the false and misleading nature of the statements they disseminated to investors. (Id. ¶ 82.) Plaintiffs allege that defendants as a whole engaged in the fraudulent scheme to "purposefully deflate the price of Bioenvision securities" so that Genzyme could acquire Bioenvision quickly and easily for cash. (Id. ¶ 83.) Relying once again on Luci's state court complaint, plaintiffs allege that Wood and Scibetta participated in the scheme because the controlling shareholders of Bioenvision had threatened to terminate key officers of Bioenvision in advance of the merger in order to avoid having to pay change of control bonuses that would be triggered by the merger. (Id. ¶ 84 (citing Luci Compl.).)
In support of these allegations, plaintiffs claim, the Bioenvision defendants failed to make adequate disclosures or to correct inadequate disclosures in seven specific filings and press releases: (1) a February 8, 2007 press release (id. ¶¶ 30-32); (2) an April 2, 2007 press release, registration statement, and prospectus supplement (id. ¶¶38-39); (3) a May 1, 2007 press release announcing a quarterly conference call (id. ¶¶ 49-50); (4) a May 7, 2007 press release (id. ¶¶ 52-53); (5) a May 8, 2007 press release (id. ¶¶ 54-56); (6) a May 9, 2007 address to investors and analysts at the UBS Global Generic and Specialty Pharmaceuticals Conference (id. ¶ 57); and (7) a May 9, 2007 Quarterly Report on Form 10-Q, which included the Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") (id. ¶¶ 58-60).
Each of these statements were false and misleading, according to plaintiffs, because they stated that Bioenvision's primary focus was to develop and market cancer treatments when, since January 2007, the company's primary focus actually had become finding a merger partner and effectuating a takeover of the company. (Id. ¶¶ 69-70.) With respect to the pre-class period statements, plaintiffs allege that the Bioenvision defendants had a duty to correct or update the statements made prior to May 1, 2007 because those statements were still "'alive' and influencing the price of Bioenvision stock in the market" during the class period. (Id. ¶ 69.) As for the statements made on and after April 11, 2007-the start of the class period-the Bioenvision defendants were under a duty to make those statements truthful, complete, and accurate. (Id.)
Perseus-Soros also allegedly misled the investing public by (1) failing to file an amended Schedule 13D as early as January 2007, once the merger plans were set in motion and (2) breaching its duty to disclose material information or abstain from trading when it exercised warrants on May 2, 2007 to purchase three million shares of Bioenvision stock at $2 per share. (Id. ¶¶ 43, 51.)
Each of these allegations is analyzed in detail below.
A complaint will survive a motion to dismiss it pursuant to Rule 12(b)(6) only if the plaintiff has pled "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). Pursuant to this "flexible 'plausibility standard,'" Iqbal v. Hasty, 490 F.3d 143, 157 (2d Cir. 2007), a plaintiff's "[f]actual allegations must be enough to raise a right to relief above the speculative level," Twombly, 550 U.S. at 555. When deciding a motion to dismiss, the Court assumes the truth of all facts asserted in the complaint and draws all reasonable inferences from those facts in favor of the plaintiffs. See Shah v. Meeker, 435 F.3d 244, 248 (2d Cir. 2006). Thus, at this stage of the proceedings, the Court's sole focus is on the sufficiency of the pleadings and not on the weight of the evidence that might be presented at trial. See Chosun Int'l, Inc. v. Chrisha Creations, Ltd., 413 F.3d 324, 327 (2d Cir. 2005). However, it is appropriate for the Court to consider "any written instrument attached to [the complaint] as an exhibit or any statements or documents incorporated in it by ...