MANSON v. SCHERING-PLOUGH CORPORATION et al
Filing
314
OPINION. Signed by Judge Dennis M. Cavanaugh on 9/25/12. (jd, )
NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
Hon. Dennis M. Cavanaugh
IN RE SCHERING-PLOUGH:
CORPORATION! ENHANCE:
SECURITIES LITIGATION
OPINION
Civil Action No. 8-397 (DMC)(JAD)
DENNIS M. CAVANAUGH, U.S.D.J.
This matter comes before the Court on Lead Plaintiffs’ Amended Motion for Class
Certification, for the Appointment of Plaintiffs as Class Representatives, and for the Appointment
of Co-Lead Counsel, Labaton Sucharow LLP (“Labaton”) and Bernstein Litowitz Berger &
Grossman LLP (“BLBG”) as Class Counsel. ECF No. 241. Pursuant to FED, R. Civ. P. 78, nor oral
argument was heard. Based on the submissions of the parties, and for the reasons expressed herein,
it is the decision of this Court that Lead Plaintiffs’ Motion is granted, and the Court certifies a class
as defined below.
L
BACKGROUND
This putative class action concerns alleged misrepresentations and omissions relating to a
clinical trial of prescription drug products. Lead Plaintiffs are the Massachusetts Pension Reserves
Investment Management Board (“Mass PRIM”), the Arkansas Teacher Retirement System
(“ATRS”), the Mississippi Public Employees’ Retirement System (“MPERS”), and the Louisiana
Municipal Police Retirement System (“LMPERS”) (collectively “Plaintiffs” or “Lead Plaintiffs”).
Defendants are the Schering-Plough Corporation (“Schering”) and a large group of defendants
known as the “Underwriter Defendants” (Schering and the Underwriter Defendants are collectively
referred to as “Defendants”).
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Plaintiffs’ allegations concern the ENHANCE clinical trial ofprescription drug products that
Merck & Co., Inc. (“Merck”) co-marketed with Schering through the joint venture MercklSchering
Plough Pharmaceuticals, MSP Distribution Services (C) LLC, MSP Singapore Company LLC
(collectively, “M/S-P”). The ENHANCE study compared patients who were prescribed Vytorin, a
fixed-dose combination pill containing the anti-cholesterol agent Zetia and the drug Zocor (the active
ingredient of which is simvastatin), with patients who were prescribed a pill only containing Zocor.
The study intended to compare the relative effectiveness of Vytorin and Zocor on reducing arterial
plaque, as measured by changes in carotid artery intima-media thickness (‘CA IMT”). Defendants
expected the study to demonstrate that Vytorin’s combination of Zetia and Zocor would stop or
reduce the growth of fatty arterial plaque more than Zocor alone.
Plaintiffs allege that Schering knew or recklessly disregarded, but did not disclose, the results
of the ENHANCE study, which showed that Vytorin was in fact no more effective at reducing CA
IMT than simvastatin alone. Plaintiffs allege that Schering knew the results of the ENHANCE test
well before the results were “un-blinded,” but withheld that information in order to forestall any
negative implications the results would have on Defendants’ common stock price. According to
The Underwriter Defendants include ABN AMRO Rothschild LLC; Banc of America
Securities LLC; Banca IMI SpA; BBVA Securities Inc.; Bear, Stearns & Co. Inc. (now J.P.
Morgan Securities LLC); BNP Paribas Securities Corp.; BNY Capital Markets, Inc.; Citigroup
Global Markets, Inc.; Credit Suisse Securities (USA) LLC; Daiwa Securities America Inc. (now
Daiwa Capital Markets America Inc.); Goldman, Sachs & Co.; ING Financial Markets LLC; J.P.
Morgan Securities Inc. (now J.P. Morgan Securities LLC); Mizuho Securities USA Inc.; Morgan
Stanley & Co. Incorporated (now Morgan Stanley & Co. LLC); Santander Investment Securities
Inc.; and The Williams Capital Group, L.P.
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Plaintiffs, Schering used the pretext of data issues to delay the release of the results, and
simultaneously made public statements actually touting the ENHANCE study and the purportedly
greater medical benefits of Vytorin over simvastatin alone.
On January 14, 2008, apparently in response to growing criticism over the delay in releasing
the ENHANCE results, Merck and Schering released what Plaintiffs call “selected top-line results”
of the ENHANCE study, which showed that Vytorin failed to reduce the buildup of arterial plaque
more than simvastatin alone. Around that same time, reports were published about Congressional
and regulatory investigations into improper marketing and advertising of Vytorin in connection with
the ENHANCE study. In response to this news, Schering’s stock price fell approximately 8%,
removing approximately $3.5 billion in market capitalization.
Plaintiffs contend that Defendants’ improper actions continued beyond these dates.
According to Plaintiffs, the response of investors, analysts, and the medical community was
tempered by Defendants’ appeal to wait for the release of the full ENHANCE results. This release
occurred on March 30, 2008, which again showed that Vytorin provided no benefit over generic
simvastatin alone in reducing plaque buildup in the arteries. This release also showed that the
Vytorin portion of the study actually experienced an increase in arterial plaque. A panel of experts
then released a statement calling for cardiologists to rein in the use of Zetia and Vytorin. Following
the release of this news, Schering’s stock price again dropped, this time by approximately 26%,
erasing approximately $8.2 billion in market capitalization.
A group of plaintiffs filed the original Complaint in this action on January 18, 2008. ECF
No. 1. In an Order dated April 18, 2008, the Court appointed Mass PRIM, ATRS, MPERS, and
LMPERS as Lead Plaintiffs, and appointed Labaton and BLBG as Co-Lead Counsel. ECF No. 30.
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Plaintiffs filed the currently operative Amended Complaint (“AC”) on September 15, 2008. ECF
No. 52. The AC asserts claims under Section 10(b), 20(a), and 20A of the Exchange Act and
Sections 11, 15, and 12(a)(2) of the Securities Act.
Plaintiffs filed the present Amended Motion to Certify Class on September 22,2011, seeking
to certify a Class defined as:
All persons and entities that purchased or acquired Schering common stock, or call
options, and/or sold Schering put options, during the period between January 3, 2007
through and including March 28, 2008, and who were damaged thereby.
Excluded from the Class are: (a) Defendants; (b) members of the immediate families
ofthe Individual Defendants; (c) the subsidiaries and affiliates ofDefendants; (d) any
person or entity who was a partner, executive officer, director, or controlling person
of Schering, M/S-P or Merck (including any of their subsidiaries or affiliates), or any
other Defendants; (e) any entity in which any Defendant has a controlling interest;
(0 Defendants’ directors’ and officers’ liability insurance carriers, and any affiliates
or subsidiaries thereof; and (g) the legal representatives, heirs, successors and assigns
of any such excluded party.
Schering filed Opposition to Plaintiffs’ Motion on December 6, 2011, contending that the
proposed Class Period is too long, that the proposed Class cannot include “in and out” traders or
options traders, and that none of the Lead Plaintiffs are “typical” or “adequate.” ECF No. 255. The
Underwriter Defendants also filed Opposition on December 6, 2011. contending that Plaintiffs have
not met their burden of establishing standing to pursue their claims under Sections 11 and 12 of the
Securities Act. ECF No. 251. Plaintiffs filed a Reply on January 31, 2012. ECF No. 262.2 The
matter is now before this Court.
2
The parties have also requested and submitted supplemental briefing in this matter.
ECF Nos. 264, 266, 267. The Court has reviewed the parties’ submissions to that effect, and is
aware of their contentions.
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II.
LEGAL STANDARDS
Class certification under FED. R. Civ. P. 23 has two primary requirements. First, pursuant
to Rule 23(a), the party seeking class certification must demonstrate the existence of numerosity of
the class, commonality of the questions of law or fact, typicality of the named parties’ claims or
defenses, and adequacy of representation. Second, the party must demonstrate that the class fits
within one of the three categories of class actions set forth in
FED.
R. Civ. P. 23(b). Rule 23(b)(l)
allows certification of a class if prosecuting separate actions would result in prejudice either to
Plaintiff or Defendants. In re Ikon Office Solutions. Inc. Sec. Litig., 191 F.R.D. 457, 466 (E.D.Pa.
200). Rule 23(b)(2) allows certification of a class where the party opposing the class has acted or
refused to act in a manner generally applicable to the class, so that final injunctive or declaratory
relief would be appropriate with respect to the class as a whole. Certification under Rule 23(b)(3)
is permitted when the court “finds that the questions of law or fact common to class members
predominate over any questions affecting only individual members, and that a class action is superior
to other available methods for fairly and efficiently adjudicating the controversy.” In re Hydrogen
Peroxide Antitrust Litig.., 552 F.3d 305, 310 (3d Cir. 2008) (quoting FED. R. CIV. P. 23(b)(3)). “The
twin requirements of Rule 23(b)(3) are known as predominance and superiority.” Ii.
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DISCUSSION
A.
FED. R. Civ. P. 23(a)
1, Numerosity
The numerosity element is met where the class is so numerous that joinder of all class
members is impracticable. The Third Circuit has advised that the numerosity requirement is satisfied
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where the proposed class consists of “more than 90 geographically dispersed plaintiffs.” Eisenberg
v. Gagnon, 766 F.2d 770, 785-86, cert, denied, 424 U.S. 946 (1985). Further, this Court has
previously recognized that numerosity is “obviously” present where the securities issuer is “a large
and prominent publicly held company, and its SEC filings confirm that its shareholders number in
the thousands.” Inre Honeywell Int’l, 211 F.R.D. 255,260 (D.N.J. 2002). In this instance, Plaintiffs
clearly have satisfied this element. Schering was a large, publicly-held company traded on the New
York Stock Exchange (“NYSE”), and there were between approximately 1.48 and 1.62 billion shares
of Schering common stock outstanding during the Class Period. Accordingly, the numerosity
element is met.
2. Commonality
Rule 23(a)(2) states that commonality exists if “there are questions of law or fact common
to the class.” All claims or facts do not have to be common to all class members, and the
commonality requirement will be satisfied if the named plaintiffs share at least one question of fact
or law with the grievances of the prospective class.” Baby Neal v. Casey, 43 F.3d 48, 56 (3d Cir.
1994). Further, “factual differences among the putative claims of the class members will not defeat
certification.” Id. at 56. Lastly, with respect to the this criteria, the United States Court of Appeals
for the Third Circuit “has recognized that courts have set a low threshold for satisfying this
requirement.” Georgine v. Amchem Prods. Inc., 83 F.3d 610, 627 (3d Cir. 1996).
Here, Plaintiffs have easily surpassed this low bar. “Where [ajll plaintiffs, both individual
representatives and member of the class, seek to establish the defendants’ fraudulent conduct under
the federal securities laws, commonality is found to exist.” In re Loewen Gorup Sec. Litig., 233
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F.R.D, 154, 162 (D.Pa. 2005).
Further, in a securities fraud class action, “questions of
misrepresentation, materiality and scienter are the paradigmatic common question[s] of law
or fact
,“
and therefore, “the commonality requirement has been permissively applied in the context
of
securities fraud class actions.” Inre DaimlerChryslerAG Sec. Litig., 216 F.R,D, 291, 296
(D. Del,
2003). This securities fraud class action involves questions such as whether Defendants’
alleged
statements and omissions were misleading, whether these statements and omissions were material,
and whether Defendants acted with scienter. Accordingly, the commonality element is met.
3. Typicality
To satisfy the typicality requirement, “the claims or defenses of the representative parties
[must bej typical of the claims or defenses of the class.” FED. R. Civ. P. 23(a)(3). “The typicality
requirement is said to limit the class claims to those fairly encompassed by the named plaintiffs
claims.” Gen. Tel. Co. of the Northwest, Inc. v. EEOC, 446 U.S. 318, 330 (1980). The typicality
inquiry is “intended to assess whether the action can be efficiently maintained as a class and whether
the named plaintiffs have incentives that align with those of absent class members so as to assure
that the absentees’ interests will be fairly represented.” Weisfeld v. Sun Chern. Corp., 210 F.R.D.
136, 140 (D.N.J. 2002) (citing Baby Neal, 43 F.3d at 57). The requirement is satisfied as long as the
Lead Plaintiffs, the other representatives, and the Class “point to the same broad course of alleged
fraudulent conduct to support a claim for relief.” In re Lucent Techs., Inc. Sec. Litig., 307 F. Supp.
2d 633, 640 (D.N.J. 2004). As with the commonality requirement, “factual differences between the
claims of the putative class members do not defeat certification.” Baby Neal, 43 F.3d at 56. Further,
“[un instances wherein it is alleged that the defendants engaged in a common scheme relative to all
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members of the class, there is a strong presumption that the claims of the representative parties will
be typical of the absent class members.” Sun Chem., 210 F,R,D. at 140 (quoting In re Catfish
Antitrust Litig., 826 F. Supp. 1019, 1035 (N.D. Miss. 1993)).
Typicality is only destroyed “where the defenses against named plaintiffs are likely to
consume a significant portion of the litigant’s time and energy and where there is a danger that
preoccupation with defenses unique to the representatives will cause absent class members to suffer.”
In re Sys. Software Assocs., Sec. Litig., No. 97-177, 2000 U.S. Dist. LEXTS 18285, *6 (D. Ill. Dec.
6, 2000). The Third Circuit has held that in order to defeat class certification, a defendant must show
the “likelihood a unique defense will play a significant role at trial.” Beck v. Maximus, Inc., 457
F.3d 291, 300 (3d Cir. 2006). It is worth noting that “a unique defense is merely a factor that
informs the court’s decision on class certification and need not destroy typicality.” In re Sys., 2000
U.S. Dist LEXIS 18285, at *6.
There is no question that Plaintiffs “point to the same broad course of alleged fraudulent
conduct” with respect to each Lead Plaintiff and the class. In this instance, Schering challenges the
typicality requirement by arguing that each Lead Plaintiff did not actually rely on the ENHANCE
results, and that each Lead Plaintiff is subject to other unique defenses. The Court will address each
argument in turn.
Plaintiffs seek to establish the reliance element oftheir claims with the “fraud-on-the-market”
theory, Under this theory, Plaintiffs may be entitled to a rebuttable presumption of reliance when
a fraudulent misrepresentation or omission impairs the value of a security traded in an efficient
market.” Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 175 (3d Cir. 2001).
The first question on this issue is therefore whether the Schering stock was traded on an efficient
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market.
To make such a determination, the Court looks to several factors, including (1) the
existence of a large weekly trading volume; (2) the existence of a significant number of analyst
reports; (3) the existence of market makers and arbitrageurs in the security; (4) the eligibility of the
company to file an S-3 registration statement; and (5) a history of immediate movement of the stock
price caused by unexpected corporate events or financial releases. Cammer v. Bloom, 71 1 F. Supp.
1264, 1286-87 (D.N.J. 1989). Schering has not challenged that the stock was traded on an efficient
market; rather, Schering only argues that the presumption established by each Lead Plaintiffhas been
rebutted. Accordingly, the Court will only briefly discuss the above stated Cammer factors, before
turning to Defendants’ rebuttle arguments.
As an initial matter, the Court notes that securities traded on the NYSE are routinely
recognized as trading in an efficient market. In re DVI Inc. Sec. Litig,, 249 F.R.D. 196,208 (E.D,Pa.
2008) (citing Oran v. Stafford, 226 F.3d 275, 282 (3d Cir.2000)). The fact that Schering’s common
stock is traded on the NYSE is of course not a per se indicator of market efficiency, but the Cammer
factor analysis in this case once again shows that a stock traded on the NYSE is trading in an
efficient market. Under the first factor, an “average weekly trading of two percent or more of the
outstanding shares would justify a strong presumption that the market for the security is an efficient
one; one percent would justify a substantial presumption.” Jci at 209 (citing Cammer, 711 F.Supp.
at 1286)). Plaintiffs’ demonstrate that Schering stock traded at a volume closer to 4.18 percent for
common stock, and 4.63 percent for preferred stock, well over the threshold justifying a “strong
presumption,” and this factor accordingly weighs in favor of an efficient market.
The analysts
well
coverage also weighs in favor of an efficient market, given that analysts from a number of
also
known firms published reports on Schering’s securities during the Class Period. Schering was
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clearly eligible to file a Form S-3, as demonstrated by the fact that Schering filed a form S-3 when
registering the preferred stock at issue in this case. Finally, Plaintiffs have sufficiently demonstrated
the existence of a causal relationship between the announcement of unexpected news and an
immediate response in the price of Schering common stock. This is evidenced by the drops in
Schering stock in response to the events at issue, as discussed above, and is borne out by
the “event study” submitted as evidence by Plaintiffs. Accordingly, the Court has no doubt that
Schering stock traded on an efficient market, and that Plaintiffs are entitled to a presumption of
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reliance.
Defendants argue that this presumption has been rebutted with respect to each individual
Lead Plaintiff. In each instance, Defendants’ arguments essentially boil down to the contention that
the Lead Plaintiffs’ mechanical index purchasing and basket trades did not rely on Defendants’
alleged misstatements or omissions. The Court disagrees with the fundamental premise of this
contention, however, and finds that the law fully supports the notion that index purchases and the
like are in fact a perfect example of reliance on the market. As the Central District of California
noted, “because index purchases seek only to match the index and exclude other considerations (such
as, for example, reliance on nonpublic information or other idiosyncratic motivations), index
purchases rely exclusively upon the market to impound any representations (including
misrepresentations) into securities’ prices.” In re Countrywide Fin. Corp. Sec. Litig., 273 F.R.D.
586, 602 (C.D.Cal. 2009). Defendants’ argument that none of the Lead Plaintiffs can establish
‘Because market makers are used only for securities traded on the NASDAQ or in the
over-the-counter market, this factor is not relevant for our purposes.” In re DVI Inc. Sec. Litig.,
249 F.R.D, at 210.
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reliance therefore fails to destroy the typicality of Lead Plaintiffs.
Defendants’ challenge to the typicality element is not limited to the reliance arguments.
Defendants also argue that each Lead Plaintiff is subject to certain unique defenses. Defendants’
contentions fail, however, for the simple reason that the Court is not convinced that discussion of
these defenses will play a significant role at trial. Defendants’ Opposition only brings to light a
handful of representatives from the various Lead Plaintiffs whose previous testimony may or may
not prove damaging at trial, and the Court finds this insufficient to establish a likelihood that these
defenses will prove a “major distraction,” as Defendants suggest. Finally, to the extent that such
defenses could play any role at trial, the Court again recognizes that this is merely a factor that
informs the Court’s decision, and need not destroy typicality. The Court therefore finds that the
typicality requirement is satisfied.
4. Adequacy
Finally, the adequacy requirement is met where the class representatives’ interests are not
adverse to those of other members of the class, and the class representative is represented by
attorneys who are qualified, experienced, and generally able to conduct the litigation. The Court
has no doubt that the Class Counsel in this matter is qualified, experienced, and generally able to
conduct the litigation, and Defendants do not challenge this issue. The other prong of the adequacy
inquiry “‘serves to uncover conflicts of interest between named parties and the class they seek to
represent’ and does not mandate that the interests of all class members be identical.” La. Mun.
Police Employees Ret. Sys. v. Dunphy, No. 3-4372, 2008 WL 700181, at *6 (D.N.J. March 13,
2008) (citing Amchern Prods. Inc. v. Windsor, 521 U.S. 591, 625 (1997)). “A class cannot be
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certified when its members have opposing interests or when it consists ofmembers who benefit from
the same acts alleged to be harmful to other members of the class”
(citing Pickett v. Iowa Beef
Processors, 209 F.3d 1276, 1280 (11th Cir.2000)). “Further, when Lead Plaintiffs have a strong
interest in establishing liability under federal securities law, and seek similar damages for similar
injuries, the adequacy requirement can be met.” ii (citations omitted). In this matter, Lead
Plaintiffs’ claims are identical to those of the Class: they claim that they purchased Schering
securities during the Class Period and have been injured by the allegedly wrongful course of conduct
at issue. The Court is therefore satisfied that the adequacy requirement is met.
B.
FED. R. Civ. P. 23(b)
Lead Plaintiffs seek certification under Rule 23(b)(3), which is permissible when “the court
finds that the questions of law or fact common to class members predominate over any questions
affecting only individual members, and that a class action is superior to other available methods for
fairly and efficiently adjudicating the controversy.” FED.R.CIv.P. 23(b)(3).
The predominance requirement of Rule 23(b)(3) “tests whether proposed classes are
sufficiently cohesive to warrant adjudication by representation.” Hydrogen Peroxide, 552 F.3d at
311 (quoting Windsor, 521 U.S. at 623). “It requires more than a common claim.
.
.
rather, issues
common to the class must predominate over individual issues.” Neale v. Volvo Cars of N. Am.,
LLC, No.10-4407, 2011 U.S. Dist. LEXIS 39154, at *5 (D.N.J. April 11,2011) (citations omitted).
“Because the nature of the evidence that will suffice to resolve the question determines whether the
question is common or individual, a district court must formulate some prediction as to how specific
issues will play out in order to determine whether common or individual issues predominate in a
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given case.” Id. (citations omitted). “If proof of the essential elements of the cause of action
requires individual treatment, then class certification is unsuitable.” jj at *5,.6 (citations omitted).
As discussed at length above, the reliance inquiry in this matter is the primary issue, and
given Plaintiffs’ use of the fraud-on-the-market theory, common questions of Defendants’ alleged
misrepresentations and how those statements and omissions affected Schering stock during the class
period will be the critical and predominant issues at trial,
The superiority inquiry requires a balancing, based on fairness and efficiency, of the merits
of a class action against those of alternative methods of adjudication. Georgine, 83 F.3d at 632.
One consideration is the economic burden class members would bear in bringing suits on a
case-by-case basis.” In re Ins. Brokerage Antitrust Litig., No. 4-5 184, 2012 WL 1071240, at *12
(D.N.J. March 30, 2012). Another such consideration is judicial economy; for example, “[i]n a
situation where individual cases would each require weeks or months to litigate, would result in
needless duplication of effort by all parties and the Court, and would raise the very real possibility
of conflicting outcomes, the balance may weigh heavily in favor of the class action.”
(citations
and internal quotation marks omitted).
This is a classic example of a case that warrants class action. Plaintiffs seek to represent
large Class of securities purchasers who are geographically dispersed and whose individual damages
may well be small enough to render individual litigation prohibitively expensive. Further, given the
amount of Class members, individually litigating these matters could certainly raise the possibility
of conflicting outcomes. Accordingly, the Court finds that this action satisfies the requirements of
Rule 23(b)(3), and the Court will certify this matter as a class action.
1—,
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C.
Defendants’ Remaining Contentions
1. Length of the Class Period
Having determined that this matter should be certified as a class action, the Court must now
define that Class. The primary issue raised by Defendants in this regard is their argument that
“Plaintiffs seek a class period that is at least two and one-half months too long.” Defs.’ Opp’n Br.
12. Stating that the issue is “whether the disclosure is sufficiently robust such that ‘facts which
underlie the gravamen of the plaintiffs complaint [no longer] continue to represent a reasonable
basis on which an individual purchaser or the market would rely,” Defendants argue that the January
14, 2008 disclosure marks the appropriate end date for the class. Defs.’ Opp’n Br. 12-13 (citing jn
re Data Access Sys. Sec. Litig., 103 F.R.D. 130, 143-44 (D.N.J. 1984)). According to Defendants,
the fraud alleged by Plaintiffs is Defendants’ purported failure to disclose the results of the
ENHANCE trial and that Vytorin was no more effective than Zocor alone in reducing plaque build
up in the carotid arteries. Defendants state that this is exactly what was disclosed on January 14,
2008, that this disclosure and ENHANCE’s failure was widely known and reported, and that no
reasonable investor would purchase Schering stock after that date under the mistaken view that the
ENHANCE trial was a success. Accordingly, Defendants argue that the class period must close on
January 14, 2008.
Defendants take issue with Plaintiffs’ conclusion that the January 14, 2008 disclosure was
only ‘partial,” and further argue that Plaintiffs’ proposed end date of March 28, 2008 should be
rejected for a number of reasons. Defendants’ first argument on this point cites to Alaska Elec,
Pension Fund v. Pharmacia Corp. for the proposition that “as a matter of law, the class period
terminates upon a curative disclosure when ‘investors should have known that there was a possibility
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that defendants’ claims were false.” Defs.’ Opp’n Br. 17 (citing Pharmacia, 554 F.3d 342, 351 n. ii
(3d Cir. 2009)). Defendants note that in Pharmacia, the Third Circuit held that an earlier disclosure
of alleged fraud discussed in a major national newspaper closed the class period, finding that
following that publication it was no longer “reasonable for plaintiffs to rely upon defendants’
statements,” and that any subsequent disclosures were “different in only degree, and not in kind.”
Defs.’ Opp’n Br. 22 (citing Pharmacia, 554 F.3d at 346, 351 & n.1 1). Defendants therefore argue
that following the January 14, 2008 disclosure, investors “should have known there was a
possibility” of fraud, and that any subsequent disclosures were different only in degree. Defs.’
Opp’n Br. 22-23.
Defendants’ second disagreement with Plaintiffs’ proposed end date is that the more detailed
statistical information Plaintiffs point to was in fact not new information, and was not information
ants,
Defendants allegedly knew, but failed to disclose. Defs.’ Opp’n Br. 23. According to Defend
was
the only “new” information Plaintiffs cite to, that Vytorin actually increases plaque buildup,
the
already disclosed on January 14, 2008. Defs.’ Opp’n Br. 23. Further, Defendants argue that
ea
“more detailed statistical information” is actually irrelevant anyways, because Plaintiffs mistak
partial disclosure of the ENHANCE clinical results with a partial disclosure of the alleged fraud.
Defs.’ Opp’n Br. 23.
Finally, with respect to Plaintiffs’ proposed end date, Defendants take issue with Plaintiffs’
of
assertion that the January 2008 release was tempered by Schering’ s appeal to wait for the release
to
the full ENHANCE results. Defs.’ Opp’n Br. 24. Defendants argue that Plaintiffs do not point
were
a single statement in which Defendants assert that the trial results disclosed on January 14
Opp’n
wrong, or that any of Defendants’ statements concerning those results were untrue. Defs.’
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Br. 24-25.
Each of Defendants’ contentions on this point argues, as a central premise, that the January
14, 2008 disclosure “cured” any prior misrepresentations. The problem with these contentions,
however, is that they are simply premature. Whether a disclosure actually cured any previous
misrepresentations is a fact sensitive inquiry, and is more appropriately resolved after sufficient fact
finding. See, e.g., In re LDK Solar Sec. Litig., 255 F.R.D. 519, 529 N.D.Ca1. 2009) (“whether or
not a particular release or disclosure ‘actually cured a prior misrepresentation’ is a sensitive issue
to rule on at this early stage of the proceedings because it comes so close to assessing the ultimate
merits in the case, and courts therefore decline to find reliance thereafter ‘unreasonable, as a matter
of law,’ unless there is ‘no substantial doubt as to the curative effect of the announcement.”) (citing
In re Federal Nat. Mortg. Ass’n Sec., Derivative and
“
ERISA” Litig., 247 F.R,D. 32, 38
(D.D.C .2008)). Accordingly, the Court will not limit the Class Period to Defendants’ suggested time
period. Rather, the Court agrees with Plaintiff that the Class Period should extend from December
6, 2006 through and including and March 28, 2008.
2. “In and Out” Traders
Defendants also seek to exclude so called “in and out” traders from the Class definition.
Defendants note that it is “well established that shareholders cannot seek recovery unless they were
damaged by the alleged fraud.” Defs.’ Mot. Br. 27 (quoting In re FleetBoston Fin. Corp. Sec. Litig.,
No. 02-5461, 2007 WL 4225832, at *11 (D.N.J. Nov. 28, 2007). Accordingly, Defendants assert
that shareholders who sold their shares while the company stock was allegedly inflated, and before
any disclosure corrected that inflation, cannot be included in the class because they have not been
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damaged. Plaintiffs have already conceded this point, however, and the Court need not delve deeply
into the issue. $ç Pl.’s Reply Br. 27 n.29. Accordingly, the Court’s definition of the Class will
exclude “in and out” traders.
3. Options Traders and Preferred Stock Traders
Finally, Defendants ask this Court to exclude options traders and preferred stock traders from
the Class, arguing that none of the Lead Plaintiffs has standing to represent options traders or traders
of preferred securities. To this end, Defendants assert that no Lead Plaintiff purchased any Schering
options during the class period, and that no Lead Plaintiff has shown a loss on preferred securities
issued by Schering. Defendants rely on In re Bank of America Corp. Sec., Derivative, and Employee
Retirement Income Security Act (ERISA) Litig., No. 9-2058, 2011 WL 3211472, (S.D.N.Y. July 29,
2011), for its holding that plaintiffs did not have standing to bring claims on behalf of a class that
invested in options and preferred stock that plaintiffs themselves did not trade during the class
period. In this instance, however, the Court finds that Lead Plaintiffs do have standing to represent
options and preferred stock traders. The Eastern District ofPennsylvania addressed nearly this exact
same issue, confronting the argument by defendants that “common stock holders have interests that
2000
diverge from proposed members who held options.” In re Tel-Save Sec. Litig., No. 98-3145,
U.S. Dist. LEXIS 10134, at *18 (E.D. Pa July 19, 2000). The court disagreed with this argument,
finding that “option traders have standing under Rule 10(b) to seek damages for the affirmative
misrepresentations that Defendants allegedly made,just as holders of common stock do. Both option
by
and stock holders have an interest in proving that stock prices were artificially inflated
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defendants’ material misrepresentations and omissions.” j at * 18-1 94 Similarly, this District has
previously approached the issue as well, holding that a lead plaintiff “may represent purchasers of
securities other than common stock because the claims of those purchasers arise from the same
alleged fraud as the claims of the common stock purchasers.” In re Cendant Corp. Litig., 60 F. Supp.
2d 354, 376 (D.N.J. 1999). That opinion went on to note that “[w]here the claims of absentee class
members arise out of the same basic allegations of fraud as those of the lead plaintiff, the lead
plaintiff may adequately represent the interests of those absentee class members.” jc. (citing !nj
Prudential, 148 F.3d 283, 313 (3d Cir. 1998)).
The gravamen of Plaintiffs’ allegation is the same whether Lead Plaintiffs purchased
common stock, preferred stock, or options; that is, Lead Plaintiffs need to prove, inter alia, that
Defendants made material misstatements and/or omissions regarding the ENHANCE trial.
Accordingly, the Court finds that Lead Plaintiffs may represent options traders and preferred stock
traders, and the Court will not exclude those traders from the class.
D,
The Underwriter Defendants’ Standing Arguments
Finally, the Court turns to the Underwriter Defendants’ arguments that Plaintiffs have not
met their burden of establishing standing, as is required under
FED.
R. Civ. P. 23. Underwriter
Defendants’ Br. 6 (citing Lewis v. Casey, 518 U.S. 343, 357-58 (1996).
Specifically, the
Underwriter Defendants argue that ATRS, the only Lead Plaintiff asserting claims under Sections
That opinion went on to note that lead plaintiffs in that instance did purchase both
common stock and options. However, the logic of that opinion, that “[both option and stock
holders have an interest in proving that stock prices were artificially inflated” by the defendants’
fraud, still properly guides this Court’s analysis.
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11 and 1 2(a)(2) of the Securities Act, does not have standing to assert such claims. The Underwriter
Defendants also argue that Plaintiffs’ proposed Class is over-broad generally. The Court will address
each argument in turn.
The Underwriter Defendants note that Section 1 1 ofthe Securities Act provides a remedy for
investors who purchase a security pursuant to a registration statement only if there is a material
misrepresentation or omission in the statement, and the security purchased is sold for a loss or is
worth less than the purchase price at the time of the suit. Underwriter Defendants’ Br. 6-7 (citing
15 U.S.C.
§
77k.
The Underwriter Defendants thus note that a plaintiff “cannot establish a
cognizable loss if it sold its shares for more than the offering price.” Underwriter Defendants’ Br.
7 (citing In re Initial Pub. Offering Sec. Litig., 241 F.Supp.2d 281, 351 (S.D.N.Y. 2003)). The
Underwriter Defendants present two arguments in favor of their contention that ATRS cannot
establish standing for its Section 11 claims. First, the Underwriter Defendants argue that ATRS
purchased Schering common stock before and after the Class period, and those holdings were
commingled with stock purportedly purchased in the 2007 offering. The Underwriter Defendants
thus argue that ATRS cannot distinguish between these stocks, and cannot trace its holdings to show
that securities purchased in the 2007 offering were later sold at a loss. Second, the Underwriter
Defendants argue that ATRS suffered no cognizable losses with regard to the 2007 Preferred
Securities because it effectively paid an uninflated price for them. According to the Underwriter
Defendants, ATRS “effectively invested in securities that were not alleged to be inflated (the 2004
Preferred Securities), sold them at an inflated price.
.
.
profited from the alleged fraud, and then
reinvested those profits in the 2007 Preferred Securities.” Underwriter Defendants’ Br. 14-15.
With respect to the argument that ATRS cannot trace its damages to the 2007 offering, the
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Court finds this argument premature. The Underwriter Defendants do not direct the Court’s attention
to any law indicating that a plaintiff is required to trace Section 11 damages in order to establish
standing. Further, to the extent that this would be a requirement, the Court finds this to be a highly
fact sensitive inquiry, and better resolved at a later stage in these proceedings.
While the Court finds the tracing argument to be merely premature, the Court finds the
Underwriter Defendants’ argument that ATRS effectively paid an uninflated price for the 2007
Preferred Securities to be devoid of merit. Whether ATRS realized a gain on its sale of earlier
purchased securities is simply irrelevant to whether ATRS suffered a loss with regard to the
securities at issue. The concern is not where Plaintiffs’ funding to purchase the securities came
from; rather, the concern is what happened as a result of the alleged fraud. Accordingly, the Court
finds that ATRS does have standing to pursue its Section 11 claims,
The Underwriter Defendants also challenge Plaintiffs’ standing to pursue claims under
Section 1 2(a)(2) of the Securities Act, reasserting the same arguments used with respect to the
Section 11 claims, and also challenging the ability of ATRS to pursue a claim for shares purchased
in the secondary market. The Court rejects the first set of arguments for the same reasons as it does
for the Section 11 claims: these arguments are either premature or without merit. With respect to
the later argument, the Underwriter Defendants cite to In re Suprema Specialties. Inc. Sec. Litig., 438
F.3d 256, 274 (3d Cii’. 2006) for the proposition that defendants may be entitled to judgment on
Section 1 2(a)(2) claims should they eventually prove that the shares came from the secondary
market. Underwriter Defendants’ Br. 17. The later argument fails because it too is premature. The
parties’ arguments demonstrate that there is a significant factual dispute over whether or not ATRS
purchased the 2007 Preferred Stock on the secondary market, and the Court will therefore decline
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to consider the Underwriter Defendants’ argument at this time.
Finally, the Underwriter Defendants assert that Plaintiffs class definition is overly broad. To
this end, the Underwriter Defendants argue that not every member of the proposed Class can “trace”
its shares to a materially untrue registration statement issued in connection with the offering, and
these class members should therefore not be included. As with many of the arguments presented in
both Schering’s and the Underwriter Defendants’ submissions, the Court finds this discussion to be
premature. This is a fact issue more appropriately addressed at a later stage in the litigation. Sc
g, Freeland v Iridium World Communications Ltd 233 F R D 40, 46 (D D C 2006) (
,
difficulty by individual class members in tracing their particular aftermarket-purchased shares
any
.
is a secondary issue to be resolved after the predominant issue of [defendant’s] liability has been
decided. It would be inappropriate to foreclose.
.
.
class action format simply because some of their
cases may be difficult to prove.”).
E.
The Class
For the reasons stated herein, the Court certifies this matter as a class action, and approves
the definition of a Class as follows:
All persons and entities that purchased or acquired Schering common stock, or call options,
and/or sold Schering put options, during the period between January 3, 2007 through and including
March 28, 2008, and who did not sell their stock and/or options on or before January 14. 2008, and
who were damaged thereby.
Excluded from the Class are: (a) Defendants; (b) members of the immediate families of the
Individual Defendants; (c) the subsidiaries and affiliates of Defendants; (d) any person or entity who
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-
was a partner, executive officer, director, or controlling person of Schering, M/S-P
or Merck
(including any oftheir subsidiaries or affiliates), or any other Defendants; (e) any entity in
which any
Defendant has a controlling interest; (f) Defendants’ directors’ and officers’ liability
insurance
carriers, and any affiliates or subsidiaries thereof; and (g) the legal representatives, heirs, succes
sors
and assigns of any such excluded party.
I
CONCLUSION
For the foregoing reasons, Plaintiffs Motion is granted. An appropriate Order accompanies
this Opinion.
‘sM.avana,.S.D.J
Date:
Orig.:
cc:
rk
All Counsel of Record
Hon. Joseph A. Dickson, U.S.M.J.
File
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