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

Filing 148

MEMORANDUM, OPINION AND ORDER; 1)Def's 138 Motion to Dismiss Pla's Third amended complaint is GRANTED; 2)A separate Judgment to enter concurrently. Signed by Judge William O. Bertelsman on 2/13/2012. (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 defendants’ motion
to dismiss plaintiffs’ Third Amended Complaint (Doc. 138).
Having previously heard oral argument on this motion,
the Court now issues the following Memorandum Opinion and
Order.
Background
The lengthy factual background to this case may be
found in a prior opinion of the United States Court of
Appeals for the Sixth Circuit, as well this Court’s opinion
from which that appeal arose.

Indiana State Dist. Council

of Laborers and HOD Carriers Pension and Welfare Fund v.
Omnicare, Inc., 583 F.3d 935 (6th Cir. 2009); Indiana State
Dist. Council of Laborers and HOD Carriers Pension and
Welfare Fund v. Omnicare, Inc., 527 F. Supp.2d 698 (E.D.
Ky. 2007).

For present purposes, it suffices to repeat that
Defendant Omnicare, Inc. is a provider of pharmaceutical
care services to residents of long-term care facilities in
the United States and Canada.

Defendant Gemunder was

Omnicare=s CEO; defendant Froesel was its CFO and a Senior
Vice-President; defendant Hodges was its Secretary and a
Senior Vice-President; defendant Hutton was Chairman of the
Omnicare Board of Directors;1 and defendant Laney was a
Director.
On December 15, 2005, Omnicare completed a public
offering of 12.8 million shares of common stock, in
conjunction with which the company made certain filings
with the Securities and Exchange Commission in August and
November 2005, which were incorporated into a Registration
Statement and Prospectus.

(Third Amended Complaint (“TAC”)

¶ 23).
Plaintiffs purchased stock through this public
offering.

(TAC ¶ 184).

However, plaintiffs held that

stock for only a short time, selling all of it by January
31, 2006.

(Doc. 16-4 at 4; Doc. 52-2 at 3).

1

Defendants state that Mr. Hutton passed away while
this case was on appeal to the Sixth Circuit.
2

A.

Procedural History of the Case

A review of the procedural history of the case is
helpful to understand the issues now before the Court.
This case was filed on February 2, 2006, as a putative
securities class action alleging claims for violations of §
10(b) and § 20(a) of the Securities Exchange Act of 1934.
Plaintiffs alleged generally that defendants engaged in a
fraudulent scheme that artificially inflated Omnicare’s
stock price by misrepresenting the company’s financial
results and business practices.
Following various preliminary matters, plaintiffs
moved for leave to amend their complaint to add, as
relevant here, an additional plaintiff (Cement Masons
pension funds), asserting a claim for violation of § 11 of
the Securities Act of 1933 based on allegedly false
statements made in the Registration Statement issued in
conjunction with the December 15, 2005, public offering.
The court granted plaintiffs’ motion to amend their
complaint.2

2

Because plaintiffs had previously filed an amended
complaint styled as a Consolidated Amended Complaint (Doc.
27), what was labeled the “First Amended Complaint” was
actually the second amendment to the pleadings. This
accounts for the fact that plaintiffs continue to label the
present incarnation of their complaint the “Second Amended
Consolidated Complaint” when it is, in fact, a Third
Amended Complaint, which label the Court uses herein.
3

Defendants moved to dismiss the amended complaint on
various grounds.

In an Opinion and Order dated October 12,

2007, this Court granted defendants’ motion to dismiss
plaintiffs’ complaint in its entirety.

Indiana State Dist.

Council of Laborers and HOD Carriers Pension and Welfare
Fund v. Omnicare, Inc., 527 F. Supp.2d 698 (E.D. Ky. 2007).
Plaintiffs appealed.

(Doc. 95).

On October 21, 2009,

the Sixth Circuit issued an opinion affirming the dismissal
of all claims, except the § 11 claim.

Indiana State Dist.

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

The

Sixth Circuit held that this Court had improperly dismissed
the § 11 claim 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.
Although the Sixth Circuit agreed with defendants that
plaintiffs’ § 11 claim sounds in fraud and is thus subject
to Rule 9(b)’s heightened pleading requirements, the Court
declined to reach defendants’ alternative argument that the
claim failed on that basis.

Id. at 948.

Instead, the

Court stated that it would “leave the application of Rule
9(b)’s standards to the district court.”

4

Id.

After a stay during which plaintiffs pursued a
petition for writ of certiorari, which they later
dismissed, plaintiffs moved for leave to amend the
complaint to replead the § 11 claim based on newlydiscovered information, and the Court granted this motion
on July 14, 2011.

(Doc. 133).

Defendants responded with

the motion to dismiss which is now ready for resolution.
B.

Facts Alleged in Third Amended Complaint

As part of its Pharmacy Services Division, Omnicare
provides consultant services in Long Term Care Facilities
(LTCFs).

(TAC ¶ 3).

Plaintiffs allege that Omnicare

utilized its pharmacy services to engage in extensive
therapeutic interchange programs designed to market and
sell high-profit drugs to LTCF patients.

(TAC ¶ 4).

Further, “Omnicare often implemented such initiatives in
order to effect kickback arrangements with pharmaceutical
manufacturers, whereby the Company received rebates in
exchange for promoting the manufacturers’ drugs.”

(Id.).

For the details of these alleged kickback schemes,
plaintiffs cite to and incorporate allegations from
whistleblower lawsuits filed against Omnicare, an
investigation by the Department of Justice (“DOJ”), and a
lawsuit against Johnson & Johnson filed by the DOJ and the
United States Attorney’s Office in Massachusetts.
5

(TAC ¶

6).

Plaintiffs allege that these and other schemes were

“approved and implemented at Omnicare’s highest levels of
management.”

(Id.).

In particular, plaintiffs allege that Omnicare and
Johnson & Johnson developed a scheme to market the drug
Risperdal to nursing home patients with dementia, which was
an illegal “off-label” use because the drug had been
approved by the FDA only for the treatment of
schizophrenia.

(TAC ¶ 7).

Plaintiffs further allege that Omnicare “violated the
Federal Anti-Kickback Statute by paying tens of millions of
dollars to LTCFs in order to obtain or maintain pharmacy
and services contracts with Omnicare.”

(TAC ¶ 8).

Plaintiffs allege that, at the time of the December
2005 public offering which is the basis of their § 11
claim, investors were unaware of these illegal activities
because Omnicare concealed the kickback schemes and stated
that the therapeutic interchanges were meant to “provide
[patients with] . . . more efficacious and/or safer drugs
than those presently being prescribed” and that its
contracts with drug companies were “legally and
economically valid arrangements that bring value to the
healthcare system and the patients that we serve.”
10).

(TAC ¶

Plaintiffs allege that these statements contained in
6

the Registration Statement were materially false and
misleading.

(TAC ¶ 11).

Plaintiffs also allege that Omnicare failed to comply
with Generally Accepted Accounting Principles (“GAAP”) such
that the financial statements filed in connection with the
December 2005 public offering contained material
misrepresentations and/or omissions.
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).
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.

Omnicare, 583 F.3d at

948.3

3

Because plaintiffs’ allegations are clearly based on
allegedly fraudulent and/or illegal activities, their
attempted disavowal of any reliance on fraud in the TAC
(TAC ¶ 178) is ineffective. See In re Axis Holdings Ltd.
7

Rule 9(b) requires that a plaintiff “allege the time,
place, and content of the alleged misrepresentations on
which he or she relied; the fraudulent scheme; the
fraudulent intent of the defendants; and the injury
resulting from the fraud.”

Sanderson v. HCA-The Healthcare

Co., 447 F.3d 873, 877 (6th Cir. 2006) (citation omitted).
ALoss 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 Dist. Council of

Laborers and HOD Carriers Pension and Welfare Fund v.
Omnicare, Inc., 583 F.3d 935, 947 (6th Cir. 2009) (citing
15 U.S.C. ' 77l(b)).

Rather, loss causation is an

affirmative defense to a ' 11 claim.

Id.

Defendants have moved to dismiss the TAC on both Rule
9(b) and loss causation grounds.
B.

GAAP-Based Statements/Omissions

Plaintiffs allege that, due to certain improper
accounting practices, the 2005 Prospectus and related SEC
filings substantially overstated the company’s revenue,
operating income, and goodwill.

(TAC ¶¶ 118-139).

Thus,

they allege, the statement that the filings contained no

Sec. Litig., 456 F. Supp.2d 576, 597-98 (S.D.N.Y. 2006)
(discussing numerous cases so holding).
8

untrue statement of material fact and fairly presented the
financial condition of the company were false and
materially misleading.

(TAC ¶¶ 166-67).

As this Court previously noted, allegations of GAAP
violations, standing alone, do not satisfy the
particularity requirements of Rule 9(b).

(Doc. 133 at 5

(citing Garfield v. NDC Health Corp., 466 F.3d 1255, 1269
(11th Cir. 2006)).

“Omnicare‘s auditors certified

Omnicare’s GAAP compliance with respect to the financial
statements in issue, and Omnicare has never restated these
financials.”

Id.

Plaintiffs’ TAC details numerous accounting practices
that they allege violated GAAP.

(TAC ¶¶100-167).

However,

a close review of these densely-detailed paragraphs –- many
of which simply incorporate allegations from other legal
actions against Omnicare -- shows that plaintiffs allege no
particularized facts showing that defendants knew or were
reckless in regard to the fact that financial statements in
question were compiled in violation of GAAP.4
For example, plaintiffs allege that Gemunder and
Froesel were personally involved in one of the underlying
transactions which plaintiffs allege was unlawful (TAC ¶¶

4

In fact, the TAC contains not a single factual allegation
specific to defendants Hodges, Hutton, and Laney.
9

118-128), but they do not allege that these defendants had
any involvement with how that transaction was booked or how
it was treated for accounting purposes.

The allegation

that these defendants knew that the financial statements
issued in connection with the December 2005 public offering
were false or misleading thus requires an inference that
lacks any alleged factual basis.
Plaintiffs also allege, based on information from a
confidential informant (“CW2”), that Omnicare failed to
adequately reserve for doubtful receivables and failed to
write-off uncollectible receivables.

(TAC ¶¶ 145-146).

Again, however, no allegations link these accounting
deficiencies to knowledge on the part of the defendants as
to the accuracy of the financial statements contained in
the offering materials.5

The allegations from confidential

witnesses CW3, CW4, CW5 (TAC ¶¶ 147-151) suffer from the
same flaws.
Similarly, CW6’s allegation that Froesel and Gemunder
wanted the company’s financial reporting to “look good, not

5

The closest allegation is: “It was CW2’s experience that
defendant Gemunder and other senior management . . . denied
write-offs” that would have been called for under GAAP.
(TAC ¶ 145). This is still vague, however, and it does not
actually allege that Gemunder or anyone else knew such
denials to be in violation of GAAP, much less that he knew
that such denials resulted in false financial statements.
10

to make it accurate” lacks the specificity required by Rule
9(b) for a claim grounded in fraud.6
For these reasons, plaintiff’s allegations of material
misstatements or omissions in the 2005 offering documents
based on GAAP violations do not satisfy the requirements of
Rule 9(b).
C.

Statements Regarding Legal Compliance

Plaintiffs allege a second category of material
misstatements/omissions in the December 2005 offering
materials by way of statements that: Omnicare’s therapeutic
drug interchange programs were meant to provide patients
with more efficacious or safer drugs; Omnicare’s contracts
with drug manufacturers were legally and economically valid
and brought value to patients; and Omnicare believed that
its contracts complied with federal and state laws.

(TAC

¶¶ 10, 27, 46).
As both this Court and the Sixth Circuit have noted,
statements regarding a company’s belief as to its legal
compliance are considered “soft” information and are
6

The Court assumes for purposes of this discussion that

these confidential witnesses are identified with sufficient
detail. However, it notes that plaintiffs’ statement that
the Court previously found similarly-described confidential
witnesses to be reliable (Doc. 139 at 31) is incorrect. In
fact, the Court held the exact opposite. See Indiana State
Dist. Council of Laborers and HOD Carriers Pension and
Welfare Fund v. Omnicare, Inc., 527 F. Supp.2d 698, 710-11
(E.D. Ky. 2007).
11

generally not actionable.

See Indiana State Dist. Council

of Laborers and HOD Carriers Pension and Welfare Fund v.
Omnicare, Inc., 583 F.3d 935, 945 (6th Cir. 2009) (citing
In re Sofamor Danek Group, Inc., 123 F.3d 394, 401-02 (6th
Cir. 1997)); Omnicare, 527 F. Supp.2d at 709-10.
Plaintiffs argue that this principle is inapplicable
here because they allege that “defendants knew the
statements were untrue at the time they were made.”
139 at 25).

(Doc.

In support of this assertion, plaintiffs again

identify allegations concerning only two of the defendants:
Froesel and Gemunder.
These allegations, taken as true, establish that these
two defendants were involved in planning and implementing
Omnicare’s therapeutic drug interchange programs and did so
with the goal of improving the company’s profitability.
This does not get plaintiffs very far.

Presumably all

publicly-traded companies conduct their activities in order
to be profitable.

That is a far cry, however, from

inferring that the company’s officers knew they were
violating the law.
Plaintiffs further state in their brief that the TAC
alleges that Froesel directed that “false clinical data” be
created and provided to physicians.

(Doc. 139 at 26).

The

paragraphs of the TAC cited, however, do not support that
12

serious allegation.

Although couched in ominous tones,

these paragraphs actually allege (through a confidential
witness, CW1) only that Froesel identified regions that
needed a “revenue boost” and directed Regional CFOs to
garner data to support initiatives which would lead to such
increased revenues through the drug interchanges.
33-34).

(TAC ¶¶

The ensuing paragraphs which allege that Omnicare

employees then put a “clinical spin” on information
communicated to physicians and LTCFs support no inference
of illegality.

The averment that letters sent by Omnicare

to physicians “misrepresent[ed] the efficacy and/or cost
benefits of the target drug” lacks any alleged nexus to
Froesel.

(TAC ¶ 38).

Nor does the complaint allege that

such misrepresentations were made at Froesel’s direction or
with his knowledge.
The allegations against Gemunder are similarly
lacking.

For example, the TAC -– as opposed to plaintiffs’

brief -– alleges only that Gemunder approved drug-switching
initiatives that would increase Omnicare’s profitability.
(TAC ¶ 31).

The allegations about the “Risperdal

Initiative” specifically make no mention of Gemunder.

(TAC

¶¶ 67-71).7

7

Plaintiffs cite in their brief a “corporate document”
attached to the TAC as Exhibit 7 as evidence of their claim
13

Further, contrary to plaintiffs’ arguments, the Sixth
Circuit has also rejected the argument that Omnicare had a
“duty to disclose” its allegedly illegal activities.
Omnicare, 583 F.3d at 946.
Conclusion
In sum, the TAC does not provide sufficient factual
basis to support the § 11 claim asserted against
defendants.

The Court thus need not reach the arguments

regarding loss causation.

Therefore, having reviewed this matter, and the Court
being otherwise sufficiently advised,
IT IS ORDERED that defendants’ motion to dismiss
plaintiffs’ Third Amended Complaint (Doc. 138) be, and is
hereby, GRANTED.

A separate Judgment shall enter

concurrently herewith.
This 13th day of February, 2012.

against Gemunder. This document – which is unexplained and
unauthenticated (indeed, it is not clear who the author
is), merely states: “Joel Gemunder, President of Omnicare
contacted David Norton, Pres. of Janssen on Friday, Sept.
18 to say that Omnicare would continue to support
Risperdal.” The Court finds nothing in this document to
support the inferences plaintiffs advocate.
14

15