Indiana State District Council of Laborers and Hod Carriers Pension and Welfare Fund v. Omnicare, Inc. et al

Filing 133

MEMORANDUM OPINION AND ORDER; 1)Def's 125 Renewed Motion to Dismiss is GRANTED; 2)Pla's 118 Motion to file a second amended complaint is GRANTED; 3)Tendered Second Amended complaint is DEEMED FILED CONCURRENTLY. Signed by Judge William O. Bertelsman on 07/14/2011. (LST)cc: COR

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
NORTHERN DIVISION AT COVINGTON

CIVIL ACTION NO. 2006-26 (WOB)
INDIANA STATE DISTRICT
COUNCIL OF LABORERS
AND HOD CARRIERS PENSION
AND WELFARE FUND, ET AL.
VS.

PLAINTIFFS

MEMORANDUM OPINION AND ORDER

OMNICARE, INC.,
ET AL.

DEFENDANTS

This matter is before the court on plaintiffs’ motion
to file a Second Amended Complaint (Doc. #118) and
defendants’ renewed motion to dismiss (Doc. #125).
The court heard oral argument on these motions on
Wednesday, July 13, 2011.

Henry Rosen, Jennifer Gmitro,

and Kevin Murphy represented the plaintiffs.

Harvey

Kurzweil, John Schreiber, and William Robinson represented
the defendants.

Official court reporter Joan Averdick

recorded the proceedings.
Background
The procedural history of this case is lengthy and
need not be recounted here.

Suffice to say that the case

has been once to the Sixth Circuit and is now before this
court on a single remanded claim under § 11 of the
Securities Act of 1933.

See Indiana State Dist. Council of

Laborers and HOD Carriers Pension and Welfare Fund v.
Omnicare, Inc., 583 F.3d 935, 947-48 (6th Cir. 2009).

As

to the § 11 claim, the Sixth Circuit held that this court
had improperly dismissed the claim at the Rule 12 stage on
the grounds that plaintiffs had not shown “loss causation”
because such is not an element of a § 11 claim but rather
is an affirmative defense thereto.

Id. at 947.

Defendants have now moved to dismiss the § 11 claim as
it stands on remand, and plaintiffs have moved to file an
amended complaint to restate that claim.
Analysis
A.

Section 11 of the Securities Act of 1933

Section 11 of the Securities Act of 1933, 15 U.S.C. §
77k, imposes liability on persons who sign securities
registration statements containing untrue statements of
material fact or omissions of material fact.

J & R

Marketing, SEP v. General Motors Corp., 549 F.3d 384, 390
(6th Cir. 2008).
“Loss causation,” which refers to the causal
connection between the material misrepresentation or
omission and plaintiff’s loss, is not an element of a claim
under § 11 of the Securities Act.

See Indiana State, 583

F.3d at 947 (citing 15 U.S.C. § 77l(b)).

Rather, loss

causation is an affirmative defense to a § 11 claim.

2

Id.

Although § 11 plaintiffs are not required to plead or
prove that the defendant acted with scienter, where the
underlying allegations regarding the alleged
misrepresentations or omissions sound in fraud, the
requirements of Rule 9(b) apply.

Indiana State, 583 F.3d

at 948.
B.

Renewed Motion to Dismiss § 11 Claim

As noted, defendants have moved to dismiss the § 11
claim contained in the current complaint as it stands on
remand, prior to any consideration of the proposed
amendment.

Plaintiffs have made no substantive opposition

to this motion, effectively conceding that the § 11 claim
as pled in the current complaint fails at the pleading
stage.

On its own review, the court finds that dismissal

of that claim is proper.
Defendants base this motion to dismiss, in part, on
their defense of loss causation.

“Where a Rule 12(b)(6)

motion is based on an affirmative defense, the complaint
must show on its face that the claim is barred by the
defense.”

Local 295/Local 851 IBT Employer Group Pension

Trust and Welfare Fund v. Fifth Third Bancorp, 731 F.
Supp.2d 689, 710 (S.D. Ohio. 2010) (citation omitted).
The § 11 claim set forth in the current complaint
(Doc. 52-1 ¶117-118) rests on alleged GAAP violations

3

discussed in the prior opinions of this court and the Sixth
Circuit.

See Indiana State, 583 F.3d at 941. 1

The

complaint specifically pleads that certain government
investigations of Omnicare became public in January 2006,
causing Omnicare stock to drop in price.

(Doc. 52-1 ¶ 27) 2

However, as the Sixth Circuit noted in its opinion,
those government investigations were unrelated to any
alleged GAAP violations, and their disclosure thus cannot
establish the requisite loss causation.

Indiana State, 583

F.3d at 945.
On its face, therefore, the current complaint
establishes a failure of loss causation because it
specifically alleges disclosures -– the announcements of
the government investigations -– which did not reveal to
the market the “truth” regarding the alleged GAAP
violations.

Indiana State, 583 F.3d at 945; Fifth Third,

731 F. Supp.2d at 710 (finding affirmative defense of loss
causation established on face of complaint where disclosure
1

The alleged accounting irregularities were: (1) improper
revenue recognition, (2) overvaluation and improper
recognition of receivables; (3) overvaluation of
inventories, and (4) the failure to establish, in a timely
manner, litigation settlement reserves with respect to
several government investigations. Id.
2

It is important to note that the named plaintiffs purchased
their stock in Omnicare on December 12, 2005 and sold all
of it by January 31, 2006. (Docs. 16-4, 35-5)

4

alleged did not address many of the alleged
misrepresentations and omissions forming the basis for § 11
claim); In re Britannia Bulk Holdings Inc. Sec. Litigation,
665 F. Supp.2d 404, 418-20 (S.D.N.Y. 2009) (similar);
Davdico Investors, LLC v. Anchor Glass Container Corp., No.
8:04CV2561T-24EAJ, 2006 WL 547989, at *24-*25 (M.D. Fla.
Mar. 6, 2006) (similar).
Second, as defendants note, conclusory allegations of
GAAP violations generally do not satisfy the requirements
of Rule 9(b).

See Garfield v. NDC Health Corp., 466 F.3d

1255, 1269 (11th Cir. 2006).

Indeed, as the Sixth Circuit

noted, Omnicare’s auditors certified Omnicare’s GAAP
compliance with respect to the financial statements in
issue, and Omnicare has never restated these financials.
Indiana State, 583 F.3d at 945.

Plaintiffs’ allegations

regarding these GAAP violations thus do not satisfy the
particularity requirements of Rule 9(b).
The § 11 claim as currently pled thus fails to state a
claim.

5

C.

Motion to Amend to Replead the § 11 Claim 3

Generally, leave to amend is “freely given when
justice so requires.”

Morse v. McWhorter, 290 F.3d 795,

799-800 (6th Cir. 2002) (citation omitted).

“In the

securities litigation context, leave to amend is
particularly appropriate where the complaint does not
allege fraud with particularity.”

Id. at 800 (citation

omitted).
“Denial may be appropriate, however, where there is
undue delay, bad faith or dilatory motive on the part of
the movant, repeated failure to cure deficiencies by
amendments previously allowed, undue prejudice to the
opposing party by virtue of allowance of the amendment,
futility of the amendment, etc.”

Id. (citations and

internal quotations omitted).
Given the procedural history of this case, it might
seem that further amendment of the complaint should not be
allowed.

However, upon closer inspection, and under

applicable authority, the requested amendment will be
allowed for several reasons.
First, although plaintiffs were previously allowed to
amend their complaint, this is the first time they have
3

The parties agree that the more restrictive standards for
amendments under the PSLRA do not apply to § 11 claims.

6

sought to amend the § 11 claim, and they seek to do so
based on information which became available only after this
court dismissed the case.
Second, while defendants’ argument that the amendment
should be denied for futility because plaintiffs cannot
show loss causation has strong appeal, close review of the
proposed Second Amended Complaint (“SAC”) shows that, by
careful pleading, plaintiffs have arguably crafted a viable
complaint.
As noted above, Congress specifically made loss
causation an affirmative defense to a § 11 claim rather
than an element that plaintiffs must plead.
§77k(e).

See 15 U.S.C.

And, while dismissal on the basis of loss

causation may sometimes be appropriate at the pleading
stage, the applicability of that defense must be clear on
the face of the complaint.
The cases on which defendants rely in which courts
granted motions to dismiss, several of which are cited
above, involve complaints in which the plaintiffs
specifically pled “corrective disclosures” in such a way
that the lack of loss causation was readily apparent, for
example, where the disclosure occurred after the plaintiffs
sold their stock, or where the disclosure was unrelated to
the alleged misrepresentation or omission.

7

Indeed, as

noted above, the § 11 claim set forth in the current
complaint suffers from such a flaw.
The proposed SAC, however, is different: it pleads no
corrective disclosures or revelations whatsoever.
court assumes that this is by design.

The

Plaintiffs are not

required to plead loss causation as an element because they
assert only a § 11 claim, not a § 10(b)(5) claim.

Further,

because there are no allegations regarding corrective
disclosures, the court cannot find loss causation lacking
on the face of the complaint.

“Thus, the Complaint does

not on its face negate the factual presumption of
causation, as it must for defendant to succeed at this
early stage.”

Levine v. Atricure, Inc., 508 F. Supp.2d

268, 274 (S.D.N.Y. 2007).
Indeed, the court in Levine noted that were a
plaintiff to omit any references to corrective disclosures
in his complaint, “he would still have stated a § 11 claim
and defendant would be unable to argue that the absence of
loss causation was apparent from the face of the
Complaint.”

Id. at n. 9.

This appears to be the case

here.
The court notes, however, that it reaches this
conclusion without any prejudice to defendants’ right to

8

move for dismissal of the SAC, on any grounds, after it is
filed.

Therefore, having heard the parties, and the court
being otherwise advised,
IT IS ORDERED that: (1) Defendants’ renewed motion to
dismiss (Doc. #125) be, and is hereby, GRANTED; and (2)
Plaintiffs’ motion to file a Second Amended Complaint (Doc.
#118) be, and is hereby, GRANTED.

The tendered Second

Amended Complaint is DEEMED FILED CONCURRENTLY HEREWITH.

This 14th day of July, 2011.

TIC: 20 min.

9