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Friedman v. Endo International PLC

United States District Court, S.D. New York

January 16, 2018

CRAIG FRIEDMAN, Plaintiff,
v.
ENDO INTERNATIONAL PLC, et al., Defendants.

          OPINION AND ORDER

          JESSE M. FURMAN, UNITED STATES DISTRICT JUDGE

         In this putative class action, Plaintiffs bring securities fraud claims against Endo International PLC (“Endo”) and three of its executives, Rajiv De Silva, Suketu Upadhyay, and Paul Campanelli (collectively, the “Individual Defendants” and, together with Endo, “Defendants”). Plaintiffs allege two principal violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and Securities Exchange Commission (“SEC”) Rule 10b-5, 17 C.F.R. § 240: first, that Defendants engaged in an unlawful scheme to defraud investors by inflating sales of two of its prescription drugs and, second, that Defendants made material misrepresentations in public statements and securities filings. Defendants now move, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, to dismiss Plaintiffs' claims. For the reasons stated below, Defendants' motion is GRANTED and the Third Amended Complaint (Docket No. 72 (“Compl.”)) is dismissed.

         BACKGROUND

         The following facts, which are taken from the Third Amended Complaint, documents it incorporates, and matters of which the Court may take judicial notice, are construed in the light most favorable to Plaintiffs. See, e.g., Kleinman v. Elan Corp., PLC, 706 F.3d 145, 152 (2d Cir. 2013); LaFaro v. N.Y. Cardiothoracic Grp., PLLC, 570 F.3d 471, 475 (2d Cir. 2009); Aurecchione v. Schoolman Transp. Sys., Inc., 426 F.3d 635, 638 (2d Cir. 2005).

         Endo “develops, manufactures, and distributes pharmaceutical products and devices worldwide.” (Compl. ¶ 25). Its business involves both “branded” and “generic” pharmaceuticals (id. ¶ 45), which Endo markets and distributes to “physicians, retail pharmacies, healthcare professionals and wholesalers, ” (id. ¶ 47). Defendant De Silva was Endo's President and Chief Executive Officer, as well as a Director of the company, from February 2013 to September 2016. (Id. ¶ 26). Defendant Upadhyay served as the company's Chief Financial Officer. (Id. ¶ 27). And Defendant Campanelli served as President of Par Pharmaceuticals (“Par”), (id. ¶ 28), another company involved in the distribution of generic pharmaceutical products, until Endo acquired Par in 2015, (id. ¶¶ 6, 92-93). In September 2016, Campanelli became Endo's President and CEO. (Id. ¶¶ 28, 224).

         Plaintiffs' claims relate predominantly to Endo's generic pharmaceuticals business. By way of background, Plaintiffs allege that, in November 2010, Endo acquired Qualitest Pharmaceuticals, thereby securing a “critical mass in the generics market.” (Id. ¶ 49). According to the Third Amended Complaint, however, the company took a turn after De Silva took over as CEO in February 2013, when it began reducing research and development expenditures and buying up other pharmaceutical companies. (Id. ¶¶ 79-81). As a result, Plaintiffs claim that, by May 11, 2015 - the start of the Class Period - Endo owned “an amalgam of unrelated and disjointed pharmaceutical businesses, which were failing to generate meaningful sales growth.” (Id. ¶ 81). Plaintiffs allege that Endo's acquisition of Par on May 18, 2015, was a continuation of that ill-advised business plan. (Id. ¶¶ 91, 95, 100).

         Between May 11, 2015, and May 6, 2016 (the “Class Period”), Defendants publicly commented in press releases, conference calls, and at investor conferences that the company was “mak[ing] progress . . . toward achieving a number of [its] strategic priorities, (id. ¶ 115), and was “well positioned to support [its] key organic growth drivers, ” (id. ¶ 116). For example, after Endo completed the purchase of Par, Defendants stated at an investor conference on May 20, 2015, that they anticipated the acquisition would yield greater revenue growth. (See Id. ¶¶ 132-36). Likewise, in a Registration Statement filed with the SEC in June 2015, Defendants stated that the company believed that its “acquisition of Par” would “enhance [its] existing generics platform.” (Id. ¶ 142). In subsequent press releases, presentations, and earnings calls during the Class Period, Defendants continued to make optimistic comments regarding the strength of Endo's market position and the success of the integration of Par. (See, e.g., id. ¶¶ 152, 157-61; 163-68; 170-71). It was not until May 5, 2016, that Defendants stated publicly that the integration of Par was not entirely seamless and announced that the company would “transition[] the legacy Qualitest systems and processes to the Par business platform.” (Id. ¶ 214-15).

         Defendants initially proclaimed that the Par acquisition and integration was “going extremely well, ” but later reported significant “revenue and earnings shortfalls in its generics division due to sales issues at Qualitest.” (Id. ¶ 100). Endo's stock price dropped dramatically following the company's announcements of poor financial results. On February 29, 2016, for example, the company's stock price declined twenty-one percent after it announced losses totaling $118.46 million during the fourth quarter of 2015. (See Id. ¶¶ 185, 203). Similarly, after Endo publicly softened expectations for earnings in 2016 at an investor conference on March 17, 2016, the stock price declined more than eleven percent. (See Id. ¶¶ 204, 211). On the last day of the Class Period - May 5, 2016 - Endo revised its 2016 revenue expectations downward; the stock price dropped thirty-nine percent. (See Id. ¶¶ 212, 221).

         Separately, Plaintiffs allege that Defendants engaged in illegal practices to inflate the sales of two migraine drugs: Sumavel DosePro and Frova. (Id. ¶ 10). Specifically, Plaintiffs claim that Endo sales representatives were instructed to provide “pre-filled” reimbursement forms to physicians in order to incentivize them to prescribe Sumavel DosePro. (Id. ¶ 66). Citing a former employee, Plaintiffs contend that, in February 2015, sales representatives were told to “stop using and shred all of the . . . pre-filled forms.” (Id.). Plaintiffs also allege that Endo offered “improper discounts and rebates to” Pharmaceutical Benefit Managers (“PBMs”) “to induce them to list Frova” as one of the drugs covered by the benefits policy. (Id. ¶ 10; see also Id. ¶¶ 70-74). On May 6, 2016, Endo announced that, in March 2016, the company had received a civil investigative demand from the U.S. Attorney's Office for the Southern District of New York seeking information relating to Frova and PMBs. (Id. ¶ 17).

         LEGAL STANDARDS

         In reviewing a motion to dismiss pursuant to Rule 12(b)(6), the Court must accept the factual allegations set forth in the complaint as true and draw all reasonable inferences in favor of the plaintiff. See, e.g., Cohen v. Avanade, Inc., 874 F.Supp.2d 315, 319 (S.D.N.Y. 2012). The Court will not dismiss any claims unless Plaintiffs have failed to plead sufficient facts to state a claim to relief that is facially plausible, see Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007), that is, one that contains “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged, ” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). More specifically, Plaintiffs must allege facts showing “more than a sheer possibility that a defendant has acted unlawfully.” Id. A complaint that offers only “labels and conclusions” or “a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555. Further, if Plaintiffs “have not nudged their claims across the line from conceivable to plausible, [those claims] must be dismissed.” Id. at 570.

         Because Plaintiffs in this case allege securities fraud, they must also satisfy the heightened pleading requirements of both Rule 9(b), which requires that the circumstances constituting fraud be “state[d] with particularity, ” Fed.R.Civ.P. 9(b), and the Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. § 78u-4(b), which requires that scienter - that is, a defendant's “intention to deceive, manipulate, or defraud” - also be pleaded with particularity, Tellabs, Inc. v Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007) (internal quotation marks omitted). To satisfy Rule 9(b), a plaintiff generally “must ‘(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.'” Anschutz Corp. v. Merrill Lynch & Co., 690 F.3d 98, 108 (2d Cir. 2012) (quoting Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004)). To satisfy the PSLRA, a complaint must, “with respect to each act or omission alleged to [constitute securities fraud], state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007) (quoting 15 U.S.C. § 78u-4(b)(2)(A)).

         Finally, Plaintiffs in this case allege liability not only under subsection (b) of Rule 10b-5, which prohibits material misrepresentations and omissions, but also under subsections (a) and (c), which prohibit schemes to defraud investors. See 17 C.F.R. § 240.10b-5(a)-(c). (See Compl. ¶ 242). Because scheme liability “does not require an allegation that the defendant[s] made a statement, ” claims brought under Rule 10b-5(a) and (c) “need not comport with Subsection (b)(1) of the PSLRA, which requires that . . . plaintiff[s] set forth each statement alleged to have been misleading, and facts giving rise to this belief.” In re Eletrobras Sec. Litig., 245 F.Supp.3d 450, 457 n. 2 (S.D.N.Y. 2017). But scheme liability claims are subject to the PSLRA pleading standards with respect to scienter. Id. at 470. Thus, to state a scheme liability claim, a plaintiff must plead facts demonstrating “a strong inference that the defendant acted with the required state of mind.” Tellabs, Inc., 551 U.S. at 321. Pursuant to Federal Rule of Civil Procedure 9(b), plaintiffs must also ...


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