CRITCHLEY v. DR. REDDYS LABORATORIES LIMITED et al

Filing 57

MEMORANDUM AND ORDER granting in part and denying in part Defendants' 47 Motion to Dismiss. Signed by Judge Peter G. Sheridan on 3/20/2019. (mmh)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
In re DR. REDDY’S LABORATORY
LIMITED SECURITIES LITIGATION

Civil Action No.
3:17-cv-6436 (PGS) (DEA)
MEMORANDUM
AND ORDER

SHERIDAN, U.S.D.J.
Defendant Dr. Reddy’s Laboratories, Ltd. (Dr. Reddy’s), Dr. Reddy’s Laboratories Inc.
(Dr. Reddy’s USA), Abhijit Mukherjee, Satish Reddy, Saumen Chakraborty, and G. V. Prasad
(collectively, Defendants), bring this motion to dismiss Plaintiff’s Amended Consolidated Class
Action Complaint (“Amended Complaint” or “AC”) in its entirety for lack of standing and
failure to state a claim. (ECF No. 47).
The allegations in this complaint arise under 15 U.S.C. § 78j(b), 78t(a), and 17 C.F.R. §
240.10b-5. Therefore, this Court has jurisdiction pursuant to 15 U.S.C. § 78aa and 28 U.S.C. §
1331. On May 9, 2018, Defendant filed this motion to dismiss the Amended Complaint. (ECF
No. 47).
BACKGROUND
The Public Employees’ Retirement System of Mississippi provides retirement benefits to
Mississippi public employees, and manages approximately $27.1 billion on behalf of beneficiaries.
The Amended Complaint alleges Plaintiff purchased securities “at artificially inflated prices during
the Class Period and was damaged upon revelation of the alleged corrective disclosures.” (AC at
1

¶ 53). Plaintiff purchased Dr. Reddy’s securities between March 30, 2016 and April 6, 2016.
(Declaration of Joel B. Strauss in Support of the Motion to Appoint Lead Plaintiff (Strauss Decl.),
ECF No. 12, Ex. A, Certification of Jacqueline H. Ray, Ex. A, Mississippi PERS’ Transactions in
Dr. Reddy’s Securities). However, the Amended Complaint defines the class period as November
27, 2014 through September 15, 2017. (AC at p. 1).
Defendant Dr. Reddy’s is an Indian pharmaceutical manufacturing company with a United
States headquarters in New Jersey. (AC at ¶ 54). Dr. Reddy’s securities are traded on the New
York Stock Exchange. (Id.). Defendant Dr. Reddy’s, USA, is a wholly owned United States
subsidiary of Dr. Reddy’s that “is primarily engaged in developing, manufacturing, and marketing
generic pharmaceuticals and [active pharmaceutical ingredients] in the United States.” (Id. at ¶
55).
Defendant G.V. Prasad was the Chief Executive Officer and co-chairman of Dr. Reddy’s
during the class period. (Id. at ¶ 56). Defendant Saumen Chakraborty was the Chief Financial
Officer and President of Dr. Reddy’s during the class period. (Id. at ¶ 58). Defendant Abhijit
Mukherjee was the Chief Operating Officer of Dr. Reddy’s during the class period. (Id. at ¶ 60).
Satish Reddy was co-chairman of Dr. Reddy’s during the class period. (Id. at ¶ 62). All of the
individual Defendants are alleged to have had “actual power and influence over Dr. Reddy’s and
the statements made by Dr. Reddy’s.” (Id. at ¶ 53, 55, 57, 59).
Dr. Reddy’s allegedly misrepresented that it met mandatory manufacturing quality
standards when it did not. This misdeed was in violation of the U.S. Federal Food, Drug and
Cosmetic Act (FD&C Act) which prohibits the import of “adulterated” drugs. See 21 U.S.C. §
331(a); (AC at ¶ 1). Plaintiff asserts that Defendants are subject to current good manufacturing
practices (cGMP) which sets minimum standards for safely manufacturing drugs by outlining

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general rules for all aspects of drug manufacture including facilities, personnel, equipment, drug
components and containers, production, packaging, labeling, and record keeping. (AC at ¶ 2). Dr.
Reddy’s compliance with cGMP came into question after investors learned that the FDA observed
nine potential violations at Dr. Reddy’s manufacturing facility Unit VI, one of the largest facilities,
in November 2014. (Id. ¶ 3). Dr. Reddy’s and other corporate executives falsely assuaged the
market’s fears and downplayed the potential impact on manufacturing by stating in the June 17,
2015 annual report that “[a]ll of the [Dr. Reddy’s] facilities are designed in accordance with and
are compliant with current Good Manufacturing Practice requirements.” (Id.).
According to Plaintiff, the fraud began to unravel in November 2015 when the Food and
Drug Administration (FDA) publicly issued a Warning Letter (the “Warning Letter”) that
described three of Dr. Reddy’s manufacturing facilities as suffering from “recurrent” and “longstanding failures,” with some violations dating back to 2008. (Id. at ¶ 4). The Warning Letter
questioned Dr. Reddy’s ability “to achieve overall compliance with CGMP” and concluded, “It is
apparent that [Defendants] have not implemented a robust quality system at [Dr. Reddy’s] sites.”
(Id. at Exhibit 5). The FDA “strongly recommend[ed]” that Defendants “evaluate global
manufacturing operations to ensure compliance with CGMP regulations and requirements,
comprehensively and immediately.” (Id. ¶ 4).
Following the receipt of the November 2015 Warning Letter, Defendants allegedly
continued to fraudulently downplay the impact of their purported compliance-related efforts on
ongoing manufacturing. (Id. at ¶ 5). In February and July 2016, Defendants disclosed that
production had been slowed as a result of the remediation. (Id.). In an October 25, 2016 earnings
call, Defendants also touted that they had “done [their] part of it in terms of completing all the
remediation activities.” (Id. at ¶ 263).

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However, between February 27 and March 8, 2017, the FDA re-inspected the three
facilities under the Warning Letter and again found problems at all three facilities. (Id. at ¶ 6). One
facility – Unit VII – was particularly problematic; the FDA’s internal Establishment Inspection
Report regarding the early 2017 inspection “found that numerous items had not been corrected”
and during the inspection “repeated instances of employees providing false or misleading
statements [were] discussed with firm management.” (Id. at ¶¶ 6, 321).
During the summer of 2017, a string of disclosures revealed just how little Dr. Reddy’s had
accomplished in its purportedly “network wide” remediation. (Id. at ¶ 7). In August 2017, the
German equivalent of the FDA rescinded Dr. Reddy’s compliance certificate for a whole new
facility, Unit II, which had not been implicated by the Warning Letter. (Id.). Similarly, in
September 2017, the FDA found more observations of potential non-compliance at a facility based
in the United Kingdom. As a result of these disclosures, the price of Defendants’ U.S.-traded
securities dropped over 50% from their pre-Warning Letter class period high. (Id.).
Plaintiff alleges that investors were damaged by Defendants’ materially false and
misleading statements throughout the class period concerning: (i) Dr. Reddy’s compliance with
manufacturing quality regulations, including cGMP; (ii) the scope and severity of the FDA’s
observations of non-compliance; (iii) the company’s purported progress getting back into
compliance; and (iv) the extent to which getting back into compliance would impact ongoing
production. (Id. at ¶ 8).
Dr. Reddy’s, like all pharmaceutical manufacturers, has a non-delegable duty to ensure that
the drugs and pharmaceutical ingredients it produces are safe, effective, and in compliance with
the regulations in the jurisdictions in which they are sold. (Id. at ¶ 9). For drugs sold in the United
States, the regulatory regime is premised on the cGMP, which are promulgated by the FDA and

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codified in the Code of Federal Regulations (21 C.F.R. Parts 210 and 211). (Id. at ¶ 9). Plaintiff
alleges that Dr. Reddy’s routinely violated fundamental precepts of the cGMP. (Id. at ¶ 10). For
example, when errors or discrepancies in the manufacture of a drug are discovered during the
quality control testing phase – such as the accidental production of a batch of super- or sub-potent
drugs – the manufacturer must “thoroughly” investigate and identify the cause of the error. (Id.);
See 21 C.F.R. § 211.192. The FDA allegedly found numerous instances where Dr. Reddy’s
management knew about deviations and errors in the production of drugs at three of its largest and
most important facilities yet took no action to investigate the cause of the error or to correct it.
(Id.).
Starting in 2012 through the start of the class period, Dr. Reddy’s management oversaw a
dramatic increase in the volume of production at the company’s manufacturing facilities, including
those at the center of this action. (Id. ¶ 12). However, a well-placed confidential witness and former
Dr. Reddy’s employee, identified as “CW 1,” who had firsthand information of Dr. Reddy’s
manufacturing facilities in India, stated that the ramp up in production output led to increased
quality problems and delays. (Id.). As a result, significant pressure was put on the quality teams to
cut corners and release batches of products from the review cycle without performing adequate
quality assurance or control. (Id.).
In November 2014, after performing an unannounced on-site inspection of Unit VI, one of
Dr. Reddy’s largest manufacturing facilities, the FDA caught Dr. Reddy’s shirking on its
responsibility to follow the cGMP and other mandatory regulations used to ensure drug safety. (Id.
at ¶ 13). They communicated that they observed nine objectionable instances of potential noncompliance. (Id.). For example, Dr. Reddy’s allegedly had manipulated and deleted quality control
testing data using a quality control laboratory that was not disclosed to the FDA. (Id.). Dr. Reddy’s

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had used the undisclosed lab to test and retest batches of pharmaceutical products that had failed
quality control until they successfully passed muster. (Id.). The FDA privately communicated these
observations to Defendants in a November 21, 2014 FDA Form 483 Notices of Inspectional
Observations. (Id. at ¶¶ 13, 120).
At the start of the class period, on November 27, 2014, investors learned of the FDA’s
observations of potential non-compliance at Unit VI from an online industry publication named
In-Pharmatechnologist.com and an Indian publication named the Deccan Chronicle. (Id. at ¶¶ 14,
214, 224). Nevertheless, that same day, Defendants immediately issued a press release
“clarification” and commented in the industry publication. (Id. at ¶¶ 14, 158, 214). They
acknowledged receipt of the FDA Form 483, but then inaccurately assuaged investors’ fears,
claiming “there is no implication on manufacturing,” and that they were “confident it [wouldn’t]
lead to any further enforcement.” (Id. at ¶¶ 14, 158, 214).
Analysts covering Dr. Reddy’s apparently did not believe the FDA Form 483 would
adversely affect the company. (Id. at ¶¶ 15, 221). The next day, November 28, 2014, an analyst
named IndiaNevish issued a report stating: “[Dr. Reddy’s] has clarified that these observation[s]
would not have any material impact on company’s operation or consolidated results . . . . We find
non-stoppage of production from facility under observation to be positive for [Dr. Reddy’s] as it
implies [Dr. Reddy’s] following norms to comply with USFDA regulation.” (Id. ¶¶ 15, 221). The
report was available on publications including Bloomberg INNS, Thomson First Call, Reuters, and
Factiva INDIV. (Id. at ¶ 221 n.6).
Dr. Reddy’s went on to privately receive at least two more FDA Form 483s for two other
manufacturing facilities in India in January and March 2015. (Id. at ¶ 16). Together, the thirtythree observations at three different facilities depicted a pervasive pattern of: (1) neither recording

6

nor maintaining quality control testing data; (2) failing to investigate the cause of failing quality
control test results; and (3) failing to mitigate the risks of microbiological contamination. (Id.).
Despite receiving these two additional FDA Form 483s, Defendants allegedly knowingly
misled investors by claiming that they were in full compliance with cGMP. (Id. at ¶ 17). For
example, on June 17, 2015, Defendants claimed in their annual report for the year ended March
31, 2015, that “[a]ll of the facilities are designed in accordance with and are compliant with” the
cGMP. (Id.).
Further, on July 30, 2015, Defendants falsely claimed that their compliance issues were
“pretty much a one site specific issue” and that they had “comprehensively addressed almost all
the observations raised” despite having received two additional FDA Form 483s for two separate
facilities and, according to the FDA, having proposed woefully inadequate corrective actions. (Id.
at ¶ 18 (emphasis omitted)).
Plaintiff contends that Defendants failed to fix the problems at their manufacturing
facilities – despite claiming they had – and the FDA escalated its enforcement by issuing the
November 2015 Warning Letter to Defendant Reddy. (Id. at ¶ 19). The Warning Letter had
revealed that Dr. Reddy’s manufacturing quality problems were not an isolated “one site specific
issue,” but rather, a pattern of cross-facility, persistent violations. Multiple violations dating back
to 2008 and multiple observations from the FDA Form 483s remained uncorrected. (Id.; see AC
at Exhibits 2 (March 6, 2015 Form 283), 3 (January 31, 2015 Form 283), 4 (November 21, 2014
Form 483), 5 (November 2015 Warning Letter)).
Furthermore, the Warning Letter memorialized portions of Defendants’ responses to the
FDA following their receipt of the three FDA Form 483s. (AC at ¶ 20). The FDA’s descriptions

7

of these responses show that Defendants knew about the specific non-compliant conditions at the
same time they claimed that all manufacturing facilities were “compliant” with the cGMP. (Id.).
For instance, in a December 15, 2014 letter responding to the FDA Form 483 issued to
Unit VI in November 2014, Defendants attempted to justify their use of an undisclosed quality
control lab to test and retest products until they passed, while only recording passing results. (Id.
at ¶ 21). According to the FDA, Defendants’ response “acknowledged that [their] analysts failed
to document and start investigating [out-of-specification] results” in the undisclosed quality
control lab. (Id.). However, the November 2015 Warning Letter concluded that eleven months
after the December 2014 letter, Defendants still had “not assessed how [their] reliance on the
incomplete and inaccurate data generated by the [custom quality control] laboratory” affected the
quality of the facility’s products. (Id.) Defendants’ late 2014 and early 2015 acknowledgments in
their responses to the FDA establish their knowledge that the statements were false and misleading.
(Id.).
Based on these observations and others, the Warning Letter concluded: “Several violations
are recurrent or represent long-standing failures to adequately resolve significant manufacturing
quality problems. It is apparent that you have not implemented a robust quality system at your
sites.” (Id. at ¶ 22, Ex. 5, Warning Letter at 9).
Wall Street analysts covering Dr. Reddy’s were surprised by the Warning Letter. A Morgan
Stanley analyst stated, “Hitherto, only one site, which is located at Srikakulam [(Unit VI)] was
perceived to be under FDA risk; warning letters to two additional sites is disappointing.” (Id. at ¶
21). Equirus echoed the surprise: “While we knew about the Srikakulam facility issues, we never
knew about the seriousness of observations at the other plants – mainly as management

8

commentary was very optimistic in the quarterly calls. This clearly is significantly against our
expectations . . . .” (Id. at ¶ 23).
On November 6, 2015, Dr. Reddy’s issued a press release publicly acknowledging that it
had received the Warning Letter, marking the first time the market learned of same. (Id. at ¶¶ 198,
248, 291). Dr. Reddy’s American Depositary Shares (“ADSs”) dropped 18%. (Id. at ¶ 24). When
reports in the media first circulated on November 27, 2015, Dr. Reddy’s ADSs dropped an
additional 5.6%. (Id. at ¶ 24).
Nevertheless, instead of acknowledging the significant impact that an “organization-wide”
“revamp [of their] quality systems and processes” to “fully comply with the cGMP quality
standards across all of [their] facilities” would have on production, Defendants claimed on
November 9, 2015 that they had “de-risked” the three facilities subject to the Warning Letter and
there would be minimal impact on manufacturing. (Id. at ¶ 25). As part of the remediation,
Defendants promised to engage an outside consultant to perform a “third party assessment of
[their] quality systems and evaluate [their] global manufacturing operations to ensure compliance
with CGMP regulations” as required by the FDA. (Id. at ¶ 26).
On November 5, 2015, Defendants hired Lachman Consultants Services, Inc.
(“Lachman”), a consulting firm that specializes in responding to FDA warning letters. (Id. at ¶¶
26, 61). According to CW 1, Lachman came in after Dr. Reddy’s received the Warning Letter; due
to Dr. Reddy’s extended review process and Lachman’s subsequent review, Dr. Reddy’s batch
releases slowed down by as much as 66%, and management was fully aware of this slow down.
(Id. ¶ 27).
Just three months after receiving the Warning Letter, on February 9, 2016, Defendants had
to admit, contrary to their earlier public statements, that Dr. Reddy’s was indeed experiencing

9

manufacturing delays due to the remediation, causing the price of Dr. Reddy’s ADSs to drop
almost 6%. (Id. at ¶ 28).
Defendants then falsely claimed these delays were essentially a one-time occurrence and
manufacturing was “back on track.” (Id. at ¶ 29). However, on July 26, 2016, Dr. Reddy’s revealed
that the company’s remediation efforts had once again substantially delayed production at the
impacted facilities. (Id.). As a result of this news on July 26, 2016, the price of Dr. Reddy’s ADSs
dropped an additional 15%. (Id.).
Plaintiff alleges that in addition to misleading the market about production delays caused
by the remediation, Defendants misled the market about their progress in remediating the
company’s non-compliance. (Id. at ¶ 30). On May 12, 2016, Defendants claimed that they believed
that “most of [their] commitments to the [FDA] will be over by the end of [May 2016].” (Id.).
Similarly, Defendants claimed on July 26, 2016, that they had completed up to 98% of their
commitments to the FDA. (Id.). However, at the time of these statements, Defendants knew they
had not corrected the problems at the three facilities under the Warning Letter, nor had they
completed a network wide revamp of the company’s compliance processes. (Id.).
On March 8, 2017, the market further learned the true state of Dr. Reddy’s purported
“system wide” remediation efforts when news broke that Dr. Reddy’s had failed the FDA’s reinspection of Unit VII, receiving thirteen FDA observations in a March 8, 2017 Form 483. (Id. at
¶ 31; Exhibit 7). This news revealed the falsity of Defendants’ claims that, since July 2016, they
had basically addressed all of the FDA concerns and were merely awaiting re-inspection. (Id. at ¶
31). Based on the news, the price of Dr. Reddy’s ADSs fell once again, this time by more than 5%
over two days. (Id.).

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Thirteen days later, on March 21, 2017, additional information about the failed reinspection came to light following an economic news channel’s report that “US FDA finds repeat
observations from 2015 warning letter. Failed to maintain complete data to ensure compliance.”
(Id. at ¶ 35). The news of five repeat observations from the Warning Letter continued to reveal the
falsity of Defendants’ claims that they had fully addressed the FDA’s concerns. (Id. at ¶ 32).
Additionally, the subsequently-released Unit VII establishment inspection report, dated
April 4, 2017, which accompanied the Form 483, made clear that management knowingly took no
action concerning, among other things, more than 1,200 documentation errors from May 2016 to
October 2016 in violation of cGMP. (Id. at ¶ 32; Exhibit 9). Consequently, the price of Dr. Reddy’s
ADSs took another hit, falling more than 6%. (Id. at ¶ 32).
Finally, a string of disclosures during the summer of 2017 fully revealed just how little Dr.
Reddy’s had accomplished in its purportedly “network wide” remediation. (Id. at ¶ 33). On August
10, 2017, the company revealed that a German regulator would not renew a cGMP compliance
certificate for a manufacturing facility that was entirely separate from the facilities under the
Warning Letter. (Id.). After investors learned about the revocation of a compliance certificate at
the new facility, the price of Dr. Reddy’s ADSs fell almost 6% from its previous close. (Id.).
Similarly, on September 15, 2017, Dr. Reddy’s disclosed that the company had been advised of
new FDA observations of potential non-compliance at a United Kingdom manufacturing facility.
(Id.).
When the truth was fully and finally revealed on September 15, 2017, the value of Dr.
Reddy’s ADSs had dropped to $33.78 from its class period high of $65.25 just before the issuance
of the November 2015 Warning Letter. (Id. at ¶¶ 34, 297). From its class period high just before

11

the issuance of the Warning Letter, Dr. Reddy’s ADSs had fallen a staggering 50.17% in value.
(Id.).
Overall, Plaintiff has set forth twenty-two individual misstatements upon which the
complaint is based:
•

Misstatement 1: In an online publication named In-Pharmatechnologist.com dated
November 27, 2014, a Dr. Reddy’s spokesperson commented that the Form 483
observations by the FDA “were largely related to procedural and other compliances of
the plant system”; “there is no implication on manufacturing and at this stage
production continues as normal.” The spokesperson also stated she was “confident that
it [wouldn’t] lead to any further enforcement.” (AC at ¶ 214-15 (emphasis omitted)).

•

Misstatement 2: Dr. Reddy’s posted a clarification on November 27, 2014, on the
Bombay Stock Exchange website clarifying a news article, which stated:
The Company clarified stating that the company had
received some inspectional observations from the US FDA
after their visit to their API manufacturing facility in
Srikakulam district of Andhra Pradesh. The company is
committed to respond to the agency within stipulated
timelines with their remedial plans and start implementing
the necessary measures immediately. At this stage, it has no
implication on any activity at the plant. Hence, these are not
expected to be material to the Company[’]s operations or
consolidated results.
(AC at ¶ 216 (emphasis omitted)).

•

Misstatement 3: During a January 29, 2015 earnings call to address “Q3 FY 2015,”
Defendant Mukherjee engaged in the following conversation:
Analyst: A quick question on Srikakulam [(Unit VI)]. My
understanding has been that over the last few years, FDA
generally does not stop product approvals with the 483s. It
requires a warning letter, so why is that for you FDA has
taken that stance?
12

Abhijit Mukherjee: . . . [I]f your question is a direct question
that whether we will be [getting a] warning letter, I do not
know. That is not our expectation. We have responded
comprehensively to the nine observations [regarding
Srikakulum]. We are sending an update as we speak and let
us see how that pans out.
....
Analyst: So just a personal thought and since it is very
important for everyone, so therefore I am just pressing on
that. Sir observations such as readings falling out of
specifications being recorded as falling within the
specifications, does it not really border on the lines of data
integrated issues, what is really our internal assessment on
observations such as these?
Abhijit Mukherjee: So what is available and you read are the
observation by FDA. What you do not have access to are the
rationale and the reasoning and the answers on this. So what
I am telling you is that we have answered fairly
comprehensively on most of these. Are not there insights and
learning? - Yes there are insights and learning but we have
answered fairly comprehensively to more of the
observations. Per se if you read the observations it does not
give you the full story.
(AC at ¶ 225 (emphases omitted)).
•

Misstatement 4: During a July 30, 2015 earnings call to address “Q1 FY 2016,”
Defendant Mukherjee engaged in this exchange:
Analyst: So per se, the 483 issue does not like really stop you
from getting on the other ANDAs, right?
Mukherjee: By no means. This is pretty must one site
specific issue. A huge amount of organizational effort is
standing for us everywhere where we are. Taking this is a
drive to see how else we could more train, more do IT
backup.
(AC at ¶ 228 (emphasis omitted)).

13

•

Misstatement 5: On December 26, 2014, Defendants posted a clarification on the
Bombay Stock Exchange in response to a report that Canada had placed an import
restriction on the Unit VI facility. It stated:
The Exchange had sought clarification from Dr. Reddy’s
Laboratories Ltd. with respect to news article appearing in
Asian Age on December 26, 2014, titled “DRL under health
Canada Scanner.”
. . . Our products continue to meet intended quality
standards, and we believe that, our APIs and Finished drug
products manufactured using these APIs pose no risk to the
health and safety of the Canadian people. The Company is
working with the agency for a satisfactory resolution of the
matter. At this stage, it has no implication on any activity at
the plant and hence, these are not expected to be material to
the Company’s operation or consolidated results.
(AC at ¶ 230 (emphases omitted)).

•

Misstatement 6: In Dr. Reddy’s May 12, 2015 Annual Report for 2014-2015,
Defendants stated that their “focus on innovation-led affordability gives our customers
access to the most complex active ingredients, while maintaining a consistent global
quality standard.”
(AC at ¶ 231 (emphasis omitted)).

•

Misstatement 7: On June 17, 2015, Defendants filed their Form 20-F for the year ending
March 31, 2015; it stated:
Quality. We are fully dedicated to quality and have robust
quality processes and systems in place at our developmental
and manufacturing facilities to ensure that every product is
safe and of high quality. In addition, we have integrated
“Quality by Design” to build quality into all processes and
use quality tools to minimize process risks.
(AC at ¶ 232 (emphasis omitted)).

•

Misstatement 8: That same Form 20-F also provided:
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Manufacturing for our Global Generics segment entails
converting active pharmaceutical ingredients (“API”) into
finished dosages. As of March 31, 2015, we had thirteen
manufacturing facilities within this segment. Eleven of these
facilities are located in India and two are located in the
United States (Shreveport, Louisiana; and Bristol,
Tennessee). In addition, we also have one packaging facility
in the United Kingdom. All of the facilities are designed in
accordance with and are compliant with current Good
Manufacturing Practice (“cGMP”) requirements and are
used for the manufacture of tablets, hard gelatin capsules,
injections, liquids and creams for sale in India as well as
other markets. All of our manufacturing sites’ laboratories
and facilities are designed and maintained to meet
increasingly stringent requirements of safety and quality.
(AC at ¶ 233 (emphases omitted)).
•

Misstatement 9: On June 23, 2016, Defendants filed their Form 20-F for the year ending
March 31, 2016; it stated:
Quality. We are fully dedicated to quality and have robust
quality processes and systems in place at our developmental
and manufacturing facilities to ensure that every product is
safe and of high quality. In addition, we have integrated
“Quality by Design” to build quality into all processes and
use quality tools to minimize process risks.
(AC at ¶ 238 (emphasis omitted)).

•

Misstatement 10: That same Form 20-F also provided:
Manufacturing for our Global Generics segment entails
converting active pharmaceutical ingredients (“API”) into
finished dosages. As of March 31, 2016, we had thirteen
manufacturing facilities within this segment. Eleven of these
facilities are located in India and two are located in the
United States (Shreveport, Louisiana; and Bristol,
Tennessee). In addition, we also have one packaging facility
in the United Kingdom. All of the facilities are designed in
accordance with and are compliant with current Good
Manufacturing Practice (“cGMP”) requirements and are
used for the manufacture of tablets, hard gelatin capsules,
injections, liquids and creams for sale in India as well as
other markets. All of our manufacturing sites’ laboratories
and facilities are designed and maintained to meet
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increasingly stringent requirements of safety and quality. All
of our sites outside of India are approved by the respective
regulatory bodies in the jurisdictions where they are located.
(AC at ¶ 239 (emphases omitted)).
•

Misstatement 11: Misstatement 11 refers to multiple statements on Dr. Reddy’s
website, which are relevant because on May 12, 2015, Defendants issued their annual
report for the year 2014-2015, which stated that the “primary source of information
regarding

the

operations

of

the

Company

is

the

corporate

website:

www.drreddys.com.” Those statements appeared on the corporate website in or around
July 2016:
•

“Dr. Reddy’s custom manufacturing operates in India,
Mexico and the UK. These facilities have been built and are
operated in accordance with the latest cGMP regulatory
guidelines. Health and safety compliance is of the highest
priority.”

•

“Our expertise in intellectual property and regulatory issues
helps us consistently deliver the highest quality APIs that
meet or exceed regulatory standards.”

•

“CPS’ API manufacturing operates across nine cGMP
facilities: seven in India; one in Mexico; and one in the UK.
These facilities have been built and are operated in
accordance with the latest cGMP regulatory guidelines. All
of our facilities have been inspected by the USFDA and
numerous other international regulatory agencies for all
major products. Health and safety compliance is of the
highest priority across all aspects of CPS, including plant
installation, equipment, systems, and trained personnel.”

(AC at ¶¶ 240-43 (emphases omitted)).
•

Misstatement 12: In a June 12, 2016 annual report for 2015-2016 signed by Defendant
Reddy, Dr. Reddy’s stated that “focus on innovation-led affordability gives our

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customers access to the most complex active ingredients, while maintaining a
consistent global quality standard.” (AC at ¶ 244 (emphasis omitted)).
•

Misstatement 13: In a November 6, 2015 press release, Defendant Prasad stated: “We
take quality and compliance matters seriously and stand by our commitment to fully
comply with the cGMP quality standards across all of our facilities,” and also stated
that Defendants “embarked on an initiative to revamp our quality systems and
processes, as an organization-wide priority.” (AC at ¶ 248 (emphases omitted)).

•

Misstatement 14: In a November 9, 2015 conference call concerning the Warning
Letter, Defendant Prasad commented:
[W]e plan to do a comprehensive assessment of any risk to
the quality of our products. . . . This recent letter underscores
the need for us to re-evaluate the work done in light of the
observations received, and continue to implement the
CAPAs fully, assist the impact of FDA’s observation on our
products as well as enhance our overall quality management
system. We’d also need to perform additional detailed third
party assessment of our quality systems and evaluate our
global manufacturing operations to ensure compliance with
CGMP regulations.
(AC at ¶ 249 (emphasis omitted)). He also stated, “We have embarked on an initiative
to revamp our quality systems and processes as a top organizational priority” and that
Dr. Reddy’s would “not compromise on making any required investments in terms of
investments, training, consultancy as well as other areas as may be required to bring us
back into compliance.” (AC at ¶ 250 (emphases omitted)).

•

Misstatement 15: In a February 9, 2016 earnings call concerning “Q3 FY 2016,”
Defendant Mukherjee stated:
. . . Post receipt of the warning letter from US FDA in early
November 2015 for three of our sites, we submitted on
December 7, 2015, a comprehensive, corrective and
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preventive action plan, which in short is called CAPA to
address all the issues raised. The CAPA plan includes sitespecific CAPA, manufacturing network-wide CAPA and
CAPA to sustain and enhance our quality and compliance
performance on an ongoing basis. As of January 31, 2016,
all the CAPA which were due for completion have been
completed.
We have submitted a status update to the warning letter
response on January 28, 2016, stating our progress on
accelerated remediation efforts towards sustainable
compliance. As part of this quality journey, we have engaged
well-respected third-party consultants, US-based Lachman
[C]onsultants to provide necessary compliance and
remediation support for assuring robust implementation and
verification of the CAPA plan.
(AC at ¶ 251 (emphases omitted)).
•

Misstatement 16: In a May 12, 2016 earnings call concerning “Q4 FY 2016,”
Defendant Mukherjee stated:
[W]e submitted our first update to the FDA on January 28,
followed by a second update on March 30th this year, stating
our progress toward sustainable compliance. We believe
most of our commitments to the agency will be over by the
end of this quarter and post which we will request the agency
for re-inspection.
(AC at ¶ 257 (emphases omitted)).

•

Misstatement 17: During a July 26, 2016 earnings call concerning Q1 FY 2017,
Defendants Mukherjee and Chakraborty made multiple statements:
o Mukherjee: Defendants “have completed most of the commitments.”
(AC at ¶ 258 (emphasis omitted)).
o Chakraborty: Remediation measures’ completion is “[v]ery high, closer
to 97%, 98%. (AC at ¶ 259 (emphasis omitted)).
o Mukherjee: “We’re almost done, and percentage will not give the right
– so essentially everything whatever is committed has been done. The
18

institutionalization of activities, which are ongoing which will always
continue. Right. So we are about to send out the letter with a request for
re-inspection very soon.” (AC at ¶ 260 (emphasis omitted)).
o Chakraborty: The remediation cost “is pretty much done. So far, we
would have spent altogether around $36 million and I think it could be
couple of million more in future.” (AC at ¶ 261 (emphasis omitted)).
o Unidentified Defendant: “Progress on quality management processes
[was] in line with expectations [and they] [s]ubstantially completed the
commitments on the CAPAs.” (AC at ¶ 262 (emphasis omitted)).
•

Misstatement 18: During an October 25, 2016 earnings call concerning Q2 FY 2017,
Defendant Mukherjee stated that investors “have done [their] part of it in terms of
completing all the remediation activities,” and that there was “[c]onsiderable progress
in [their] remediation efforts.” (AC at ¶¶ 263-64 (emphases omitted)).

•

Misstatement 19: In a Form 9-K, issued October 25, 2016, Defendants stated:
Co-chairman and CEO, G V Prasad said “All our major
businesses have shown sequential improvement over the
previous quarter with revenues growing by 11% and
EBITDA by 61%. We have made considerable progress in
our remediation efforts and continue to work on addressing
the concerns of the regulators. Looking ahead we will
continue to focus on launching new products in our generics
business, improving productivity and strengthening our
quality management systems.”
(AC at ¶ 265 (emphasis omitted)).

•

Misstatement 20: In a February 4, 2017 earnings call concerning Q3 FY 2017,
Defendant Mukherjee stated:
On the quality front as communicated earlier, our warning
with the impacted sites are scheduled to get reaudited during
19

the month of February and March. A substantial remediation
work has been put in place from our side. Our application of
corrective and preventive actions or CAPAs were not just
site specific, but they were also network wide and
incorporated third-party review and assessments. We believe
we have prepared ourselves well for the audit. In the process
of implementing the CAPAs, we have made significant
progress in enhancing our quality systems and infilling the
consumer quality and [continuous] improvement.
(AC at ¶ 266 (emphasis omitted)).
•

Misstatement 21: During a November 9, 2015 conference call with Defendants
Chakraborty, Reddy, and Mukherjee, Prasad made the following statements:
o First statement:
The issues cited in the letter are GMP violations
relating primarily to (a) documentation practices and
control, (b) laboratory testing procedures, (c)
incident investigation practices as well as (d) some
standard operating procedures. At this time, we feel
confident in the safety and efficacy of our products;
however, we plan to do a comprehensive assessment
of any risk to the quality of our products. This time,
there is no directive from the FDA to stop the
manufacturing activity or shipment of any products
from these sites. As we respond to the agency, it is
imperative for us to continue to strengthen our
quality management systems and processes and
enhance the infrastructure for training and
development of our staff on the current cGMP
practices. We have instituted corrective actions to
address the 483 observations received earlier in each
of these sites, which formed part of the updates
shared with the agency.
(AC at ¶ 278 (emphases omitted)).
o Prasad also assured that Dr. Reddy’s had taken steps to “derisk supply
by transferring select products to alternate sites.” (AC at ¶ 279
(emphasis omitted)).

20

o Finally, he stated, “[O]ur first priority today is products in the market,
ensuring thereof they will meet all requirements and ensure there is no
risk to entertain. That is our primary focus. . . . [O]ur first priority
today is remediation, risk assessment and ensuring products are
available what we’re producing in the marketplace.” (AC at ¶ 280
(emphases omitted)).
•

Misstatement 22: During a February 9, 2016 conference call concerning “Q3 FY 2016,”
Defendant Mukherjee had the following exchange:
Analyst: On the USFDA again, just trying and
understanding after having assessed the warning letter and
having consulted your third party, if there is any supply
disruption in order to have third-party validation of goods
or delay in shipments or because US run rate seem to be
very much on track. Do you anticipate that happening or
any disruption in supply or any delay in shipments?
Mukherjee: As we had mentioned earlier that PSAI
business had some impact of batch releases. We are closely
in touch with the shortage loop if there is anything. But
there is nothing major to be reported at this juncture from
the existing set of products. For future – we do not want to
comment, but currently there is nothing meaningful. PSAI
part also is largely behind us, it is now back on track.
Analyst: Just a clarification here on PSAI; the decline is
largely due to one off impact, because warning letter you
were clearly supplying and there is no issue as such for the
upcoming quarters?
Chakraborty: No, we mentioned that because of the
remediation thing there were some delays in dispatches of
API from these facilities.
Analyst: But you are back on track?
Chakraborty: Yes.

(AC at ¶ 281 (emphases omitted)).
21

On August 25, 2017, Plaintiff filed the original complaint alleging violations of Section
10(b) and Section 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. (ECF No.
1). On November 21, 2017, the Court appointed Lead Plaintiff. (ECF No. 16). On February 16,
2018, Plaintiff filed a consolidated class action complaint, adding Defendants Dr. Reddy’s USA
and individual Defendants Reddy, and Mukherjee. (ECF No. 30). On March 5, 2018, Plaintiff filed
the Amended Complaint. (ECF No. 35-36). The alleged class period is November 27, 2014 through
September 15, 2017. (AC 18). Plaintiff purchased Dr. Reddy’s securities between March 30, 2016
and April 6, 2016. (ECF No. 12-4).
LEGAL ANALYSIS
Standing
First, Defendants argue that Plaintiff cannot establish standing to bring this action because
the pre-November 2015 alleged misstatements were corrected months prior to Plaintiff’s first stock
purchase on March 30, 2016, and the post-November 2015 alleged misstatements were made after
Plaintiff’s last stock purchase on April 6, 2016. In opposition, Plaintiff argues first that the preNovember 2015 statements were not fully corrected by disclosures made before Plaintiff’s
purchases because “the full truth” concerning the misstatements was not revealed until after
Plaintiff purchased Dr. Reddy’s securities. Second, Plaintiff contends that in similar actions, courts
routinely have allowed lead plaintiffs to assert claims based on post-purchase statements if the lead
plaintiff has standing for related claims based on pre-purchase misstatements. Finally, Plaintiff
argues that any issues with standing would be better addressed at class certification.
The elements of Article III standing are well-established:
[A] plaintiff must adequately establish: (1) an injury in fact (i.e., a “concrete and
particularized” invasion of a legally protected interest”); (2) causation (i.e., a “fairly
… trace[able]” connection between the alleged injury in fact and the alleged
conduct of the defendant); and (3) redressability (i.e., it is “likely” and not “merely
22

’speculative” that the plaintiff’s injury will be remedied by the relief plaintiff seeks
in bringing suit).
Sprint Comm’cns Co. v. APCC Servs., Inc., 554 U.S. 269, 273-74 (2008) (quoting Lujan v.
Defenders of Wildlife, 504 U.S. 555, 560-61 (1992). Generally, a “plaintiff may not maintain an
action on behalf of a class against a specific defendant if the plaintiff is unable to assert an
individual cause of action against that defendant.” Haas v. Pittsburgh Nat’l Bank, 526 F.2d 1083,
1086 n.18 (3d Cir. 1975). “[N]amed representative plaintiffs initially need only establish that they
individually have standing to bring their claims.” Ramirez v. STi Prepaid LLC, 644 F. Supp. 2d
496, 504 (D.N.J. 2009). “If the named plaintiffs bringing a class action claims do not individually
have standing to bring those claims, the case should be dismissed prior to the class certification
process.” Id. The reason for this is that “a plaintiff who lacks the personalized redressable injury
required for standing to assert claims on his own behalf would also lack standing to assert similar
claims on behalf of the class.” Id. (quoting Holmes v. Pension Plan of Bethlehem Streel Corp., 213
F. 3d 124, 135 (3d Cir. 2000)).
“There is no private right of action under Rule 10b-5 for mere holders of securities.” Winer
Family Tr. v. Queen, 503 F.3d 319, 325 (3d Cir. 2007). The plaintiff “must be a purchaser or seller
to pursue its Rule 10b-5 claims.” Id.; see also Blue Chip Stamps v. Manor Drug Stores, 421 U.S.
723, 755 (1975).
The standard as stated above, quickly dispenses with Plaintiff’s argument that standing
issues should be resolved at the class certification stage.
Pre-November 2015 Statements
Defendant contends Plaintiff cannot rely upon any statements made prior to the November
2015 Warning Letter because Plaintiff did not own shares in Dr. Reddy’s until March 30, 2016.
One case cited by Defendant found lack of standing in a similar action where a defendant corrected
23

prior disclosures in a press release before a lead plaintiff’s securities purchase. “Generally, a
plaintiff who did not reasonably rely on a misrepresentation or who suffered no loss because of a
misrepresentation lacks standing to sue.” Id. at 235. Accordingly, “a plaintiff who purchased after
a corrective disclosure was made would have no standing, because relying on the earlier
misrepresentation would no longer be reasonable in light of the new information; furthermore, the
market is presumed to have processed the correction, which would be reflected in the stock price.”
Id. The court found the plaintiff may have grounds for suit for a later misstatement but, considering
the intervening corrective disclosure, “they are not the same misrepresentation, or sufficiently
similar, to constitute a single ‘common scheme.’” Id.
The statements cited by Plaintiff concerning “the existence and extent of violations at Units
V-VII” and “the existence and extent of violations at Dr. Reddy’s other facilities” were clearly
corrected by the Warning Letter. The Warning Letter provided a detailed description of the
violations at United V, VI, and VII. It also addressed the totality of the violations in general terms:
“Several violations are recurrent or represent long-standing failures to adequately resolve
significant manufacturing quality problems. It is apparent that you have not implemented a robust
quality system at your sites.” (AC, Ex. 5, FDA Warning Letter).
The Warning Letter also addressed the alleged November 27, 2014 misstatement by Shilpi
Lathia, a Dr. Reddy’s spokesperson, “that the violations and corresponding remediation plans
would have ‘no implication on manufacturing,’” (Id. at ¶ 309), including by “strongly
recommend[ing]” that Dr. Reddy’s “evaluate global manufacturing operations to ensure
compliance with CGMP regulations and requirements, comprehensively and immediately.” (AC,
Ex. 5, Warning Letter). The FDA also provided a contact number if Dr. Reddy’s, “as a result of
receiving [the] warning letter” decided to reduce the number of “finished products produced by

24

your manufacturing facility,” (Id. at Ex. 5, Warning Letter). And finally, the FDA outlined
potential steps to take as part of a “global corrective action and preventive action plan,” including,
“recalling product,” “conducting additional testing,” and “revising procedures,” all of which could
logically impact on manufacturing. (Warning Letter at 10-11).
Therefore, consistent with City of Bristol Pension Fund, Plaintiff here lacks standing to
assert claims relating to alleged misstatements which were made prior to November 2015 –
statements: 1 and 2 (both made on November 27, 2014), 3 (January 29, 2015), 4 (July 30, 2015),
5 (December 26, 2014), 6 (May 12, 2015), and 7 and 8 (both made in a June 17, 2015 form). (See
AC at ¶¶ 214-237). The FDA Warning Letter sufficiently corrected the prior statements such that
reliance on same would no longer be reasonable.
Post-November 2015 Statements
Defendants also challenge Plaintiff’s standing to assert claims based on statements 9
through 12 and 16 through 20 because they “were allegedly made after Lead Plaintiff’s last
purchase of Dr. Reddy’s stock” on April 6, 2016. (Defendant’s Brief, ECF No. 47-2, at 12).
Plaintiff urges this Court to apply an exception to the general rule that “[p]laintiffs cannot rely on
statements made subsequent to their purchases in order to state a securities fraud claim.” In re
Donald J. Trump Sec. Litig., 793 F. Supp. 543, 565 (D.N.J. 1992). Under the exception, a plaintiff
may rely upon such statements if based on a “‘common scheme to defraud’ or ‘interrelated
misstatements and omissions.’” Renz v. Schreiber, 832 F. Supp. 766, 772 (D.N.J. 1993); see also
Hoexter v. Simmons, 140 F.R.D. 416, 422 (D. Ariz. 1991).
However, recent case law leads the Court to conclude that such an exception is unavailable
to Plaintiff. In Winer Family Tr. v. Queen, 503 F.3d 319, 325 (3d Cir. 2007) (emphasis added), the
court affirmed dismissal of claims based on fraudulent conduct that occurred after the purchase of

25

shares without considering the exception, holding that the plaintiff “only has standing to assert
claims based on activity prior to the date Winer purchased its stock.” Another decision only a few
years later reprised that holding: “As an individual, a lead plaintiff can only bring claims
concerning alleged fraudulent activity occurring before its last sale or purchase.” In re
NutriSystem, Inc. Sec. Litig., 653 F. Supp. 2d 563, 580 (E.D. Pa. 2009) (emphasis added); see also
In re Gen. Motors Class E Stock Buyout Sec. Litig., 694 F. Supp. 1119, 1126 (D. De. 1988)
(dismissing because “[n]o reliance can be established for events occurring after the purchase of
stock”).
Therefore, Plaintiff may not assert claims arising out of alleged misstatements 9 and 10
(both made in a June 23, 2016 form); 11 (statements appearing on corporate website “at least since
July 2016” (AC at ¶ 241)); 12 (June 17, 2016); 16 (May 12, 2016); 17 (July 26, 2016); 18 (October
25, 2016); 19 (October 25, 2016); and 20 (February 4, 2017). (AC at ¶¶ 238-247, 257-277). Each
of these statements were made after April 6, 2016, the last day Plaintiff purchased shares.
Plaintiff does, however, have standing to pursue claims based on alleged misstatements 13
(November 6, 2015); 14 (November 9, 2015); 15 (February 9, 2016); 21 (November 9, 2015), and
22 (February 9, 2016). Each of these statements was made after the market learned of the Warning
Letter on November 6, 2015, and prior to Plaintiff’s purchases. As such, they could not have been
corrected by the Warning Letter, and Plaintiff has a plausible claim that it relied upon them in
connection with a transaction. Because Plaintiff has standing to pursue its claims arising out of
those alleged misstatements, the complaint is not subject to dismissal on this ground.
Failure to State a Claim
Defendants’ remaining arguments challenge the substantive viability of the complaint
under Federal Rule of Civil Procedure 12(b)(6). The Court is required to accept as true all

26

allegations in the Complaint and all reasonable inferences that can be drawn therefrom, and to
view them in the light most favorable to the non-moving party. See Oshiver v. Levin, Fishbein,
Sedran & Berman, 38 F.3d 1380, 1384 (3d Cir. 1994). “To survive a motion to dismiss, a
complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is
plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007)). While a court will accept well-pleaded allegations as true
for the purposes of the motion, it will not accept bald assertions, unsupported conclusions,
unwarranted inferences, or sweeping legal conclusions cast in the form of factual allegations.
Iqbal, 556 U.S. at 678-79; see also Morse v. Lower Merion Sch. Dist., 132 F.3d 902, 906 (3d Cir.
1997). A complaint should be dismissed only if the well-pleaded alleged facts, taken as true, fail
to state a claim. See In re Warfarin Sodium, 214 F.3d 395, 397-98 (3d Cir. 2000).
“In alleging fraud or mistake, a party must state with particularly the circumstances
constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind
may be alleged generally.” Fed. R. Civ. P. 9(b). “This stringent particularity requirement . . .
applies to allegations of securities fraud.” In re Westinghouse Sec. Litig., 832 F. Supp. 948, 965
(W.D. Pa. 1993), rev’d in part on other grounds, 90 F.3d 696 (3d Cir. 1996).
Scienter Pleading
Defendant next contends the complaint should be dismiss because it does not adequately
establish an inference of scienter for any defendant. “To Adequately allege a § 10(b) securities
fraud claim, a plaintiff must plead ‘(1) a material misrepresentation or omission, (2) scienter, (3)
a connection between the misrepresentation or omission and the purchase or sale of a security, (4)
reliance upon the misrepresentation or omission, (5) economic loss, and (6) loss causation.’” In re
Hertz Global Holdings, Inc., 905 F.3d 106, 114 (3d Cir. 2018) (emphasis added) (quoting City of

27

Edinburgh Council v. Pfizer, Inc., 754 F.3d 159, 167 (3d Cir. 2014)).
To adequately plead scienter, “a plaintiff must ‘state with particularity facts giving rise to
a strong inference that the defendant acted with the required state of mind.’” Id. (quoting 15 U.S.C.
§ 78u-4(b)(2)(A)). In considering a motion to dismiss, the inquiry “is whether all of the facts
alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual
allegation scrutinized in isolation, meets that standard.” Tellabs, Inc. v. Makor Issues & Rights,
Ltd., 551 U.S. 308, 322-23 (2007). The inference of scienter alleged “must be more than merely
plausible or reasonable – it must be cogent and at least as compelling as any opposing inference
of nonfraudulent intent.” City of Edinburgh Council, 754 F.3d at 176 (quoting Tellabs, Inc., 551
U.S. at 314). Plaintiffs allege three bases to support an inference of scienter: (1) direct
contradictions of the truth by Defendants; (2) misstatements by Defendants about a core Dr.
Reddy’s operation; and (3) allegations by a confidential witness.
Direct Contradictions of the Truth
Pointing to the alleged misstatements themselves, Plaintiff argues that “[t]he striking
contrast between the true state of affairs at Defendants’ manufacturing facilities” and Defendants’
statements creates “a strong inference of scienter.” (Plaintiff’s Brief, at 17). Oftentimes “the most
powerful evidence of scienter is the content and context of [the] statements themselves.” Inst.
Investors Grp. v. Avaya, Inc., 564 F.3d 242, 269 (3d Cir. 2009). Plaintiff points to discrepancies
between Defendants’ statements to analysts and their statements to the FDA, and Defendants’
apparent ignorance of non-compliance despite the Warning Letter and Form 483s from the FDA.
Plaintiff has pointed to statements by Defendants that directly contradicted the truth about
the company’s actions at the time. For example, during conference calls with investors on
November 9, 2015 and February 9, 2016, Defendants Prasad, Mukherjee, and Chakraborty made

28

statements indicating: Dr. Reddy’s planned to comprehensively assess risks; Dr. Reddy’s had
begun to implement a comprehensive and preventative action plan; and the company’s
pharmaceutical services and active ingredient business was “back on track.” According to the
complaint, at the time of these statements, “Defendants had no intention of adequately addressing
the violations of cGMP detailed in the Warning Letter, because they knowingly failed to
implement the FDA’s corrective plan of action.” (AC, at ¶ 252). That allegation is bolstered by
additional allegations that “upon reinspection of their Units V, VI, and VII facilities, the FDA
determined that serious cGMP violations still existed and in fact ‘found that numerous items had
not been corrected,’” (AC at ¶ 255), and that Defendants knew or should have known that their
third-party consulting firm retained to provide compliance and remediation support in
implementing the CAPA plan “caused substantial delays in approving products for dispatch,” (Id.
at ¶ 282).
In addition, Plaintiff identifies other statements of Defendants. During a July 30, 2015
conference call Defendant Mukherjee claimed that the problems the FDA raised in November
2014 were a “one site specific issue”; a claim that contradicted two prior undisclosed FDA Form
483 observations regarding two other facilities. (AC at ¶ 228-229). Later, Defendant Mukherjee
stated in a May 12, 2016 conference call that “most” of the company’s “commitments to the agency
will be over by the end of the year,” (AC at ¶ 257), and in a February 4, 2017 conference call that
the company had “made significant progress in enhancing our quality systems,” (Id. at ¶ 266).
These statements were in stark contrast to the allegation that the FDA subsequently discovered
“that serious cGMP violations still existed and in fact . . . that numerous items had not been
corrected.” (Id. at ¶ 267). Although some of these statements were made outside the purchase
period, they are nonetheless relevant “as circumstantial evidence of fraudulent intent.” Renz, 832

29

F. Supp. at 774.
Defendants’ alleged failure to investigate FDA warnings weighs further in favor of finding
scienter and falsity. “[W]hen the FDA tells a company about a problem with a product, and the
company nonetheless continues to make confident predictions about a product, courts have
inferred scienter and falsity.” Frater v. Hemispherx Biopharma, Inc., 996 F. Supp. 2d 335, 350
(E.D. Pa. 2014) (quoting In re MannKind Sec. Actions, 835 F. Supp. 2d 797, 811 (C.D. Cal. 2011)).
Indeed, the FDA Warning Letter itself stated, “You are responsible for determining the causes of
these violations and deviations, for preventing their recurrence, and for preventing other violations
and deviations.” (AC at Ex. 5, Warning Letter at 9). The allegations that Defendants’ statements
were false at the time they were made is sufficient evidence of scienter for this analysis.
Misstatements About Core Operations
Plaintiff also argues that Defendants’ misstatements about Dr. Reddy’s compliance with
FDA regulations concerned a core operation, giving rise to a strong inference of scienter. The
Third Circuit has recognized “a core operations doctrine” in assessing scienter. Rahman v. Kid
Brands, Inc., 736 F.3d 237, 246 (3d Cir. 2013) (quoting Avaya, 564 F.3d at 271-72). More
specifically, “under the core operations doctrine, misstatements and omissions made on ‘core
matters of central importance’ to the company and its high-level executives give[] rise to an
inference of scienter when taken together with additional allegations connecting the executives’
positions to their knowledge.” In re Urban Outfitters, Inc. Sec. Litig., 103 F. Supp. 3d 635, 65354 (E.D. Pa. 2015).
One court has held, “Given that [the brand, which comprised 44% of all sales,] is a core
operation of [the defendant], combined with plaintiff’s allegations and circumstantial evidence . .
. plaintiff’s allegations are sufficient to give rise to the strong inference that defendants were, at

30

minimum, reckless in their statements.” In re Urban Outfitters, 103 F. Supp. 3d at 654. Another
court has found a “logical, and strong, inference that the defendants were aware of the alleged
severe and pervasive problems” in light of “the importance of manufacturing and quality control .
. . and the fact that both areas of operation had been flagged by the FDA.” Mulligan v. Impax Labs.,
Inc., 36 F. Supp. 3d 942, 970 (N.D. Cal. 2014).
According to the allegations, as a pharmaceutical company, a core aspect of Dr. Reddy’s
business “is ensuring compliance with safety and manufacturing quality standards for each
jurisdiction in which they sell products.” (AC at ¶ 356). The FDA Warning Letter cautioned that
absent corrective action, the “FDA may withhold approval of any new applications or supplements
listing [Dr. Reddy’s] as a drug product or API manufacturer,” and that the “FDA may also refuse
admission of articles into the United States.” (Id. at Ex. 5, Warning Letter at 10). As United States
sales comprised nearly half of Dr. Reddy’s revenue, (AC at ¶¶ 84, 66-72), an interruption in those
sales would constitute a disruption in the company’s core operations. It can therefore be inferred
at this stage of the litigation that Defendants were aware of the threat to operations posed by the
company’s noncompliance with cGMP.
Statements by a Confidential Witness
“[A] plaintiff in securities fraud actions can support a complaint by reliance on information
attributed to confidential sources” but only “in two situations: (1) if the complaint sets forth other
factual allegations, such as documentary evidence, which are sufficient alone to support a fraud
allegation, or (2) when the confidential sources are described in the complaint with sufficient
particularity to support the probability that a person in the position occupied by the confidential
source would possess the information alleged.” In re Intelligroup Sec. Litig., 527 F. Supp. 2d 262,
290 (D.N.J. 2007); see also Nat’l Junior Baseball League v. Pharmanet Dev. Grp., Inc., 720 F.

31

Supp. 2d 517, 538-39 (D.N.J. 2010).
In this case, the one confidential witness serves only to bolster the allegations which are
otherwise pled with sufficient particularity. The allegations are not solely or substantially
dependent on CW 1’s statements. This case is therefore distinguishable from Institutional Investors
Group v. Avaya, Inc., 564 F.3d 242, 260 (3d Cir. 2009), where the plaintiffs’ “allegations primarily
relied on the representations of [six] confidential witnesses.” Therefore, the information provided
by the confidential witness here is sufficient to support an inference of scienter. The Court need
not consider whether CW 1 provided information with sufficient particularity because the totality
of the allegations in the complaint provide sufficient particularity.
Overall Indicia of Scienter
Overall, the totality of the direct contradictions of the truth, statements about core
operations, information provided by Plaintiff’s confidential witness, and additional allegations
support a strong inference of scienter. Plaintiff alleges that the company emphasized its “rigorously
implemented Quality Management System,” (AC at ¶ 82), had received prior warning letters and
Form 483s, (AC at ¶¶ 13, 16, 120, 140, 144, 376-378), and Defendants operated “an undisclosed
quality control laboratory that selectively reported passing results,” (AC, at ¶ 126).
These allegations serve to further bolster Plaintiff’s arguments. “In sum, the reviewing
court must ask: When the allegations are accepted as true collectively, would a reasonable person
deem the inference of scienter at least as strong as any opposing inference?” See Tellabs, Inc.,
551 U.S. at 326. Plaintiff has sufficiently alleged scienter, in considering the totality of the
allegations.

32

Actionability of the Misstatements
Corporate Puffery
Defendants next contend that statements 13 and 14 are too vague to be actionable and
therefore amount to no more than corporate puffery. “[V]ague and general statements of optimism
‘constitute no more than “puffery” and are understood by reasonable investors as such.’” In re
Advanta Corp. Sec. Litig., 180 F.3d 525, 538 (3d Cir. 1999) (quoting Burlington Coat Factory Sec.
Litig., 114 F.3d 1410, 1418 (3d Cir. 1997)). “Such statements, even if arguably misleading, do not
give rise to a federal securities claim because they are not material: there is no ‘substantial
likelihood that the disclosure of the omitted fact would have been viewed by the reasonable
investor as having significantly altered the “total mix” of information available.’” Advanta Corp.,
180 F.3d at 538 (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). For
example, court has declined to find statements about a company’s “dedication to disciplined
pricing” to be actionable. In re Aetna, Inc. Sec. Litig., 617 F.3d 272, 284 (3d Cir. 2010).
Statements 13 and 14 were not mere puffery because they addressed steps the company
had purportedly taken to comply with the cGMP, which the FDA had found that the company
violated. Statements about whether the company has taken steps to bring itself into compliance
with this standard are “determinate” and “verifiable” and thus “not mere puffery.” Omnicare, Inc.
v. Laborers Dist. Council Constr. Indus. Pension Fund, 135 S.Ct. 1318, 1326 (2015). The Court
also notes a similar case where the plaintiffs alleged that the defendants “took corrective action to
address the company’s problems,” which the court found posed a question of fact. Wilkof v. Caraco
Pharm. Laboratories, Ltd., No. 09-CV-12830, 2010 WL 4184465 at 4 (E.D. Mich. Oct. 21, 2010).
That case also held that “whether [the defendant] was compliant with cGMP regulations is an issue
subject to objective verification.” The Court declines to dismiss the claims relating to statements

33

13 and 14 as mere puffery.1
PSLRA Safe Harbor
Defendants next argue that statements 13, 14, and 21 are not actionable because they are
protected by the PSLRA safe harbor provision, which provides that statements are not actionable
if they are “forward-looking as defined by the statute provided that they are (1) identified as such,
and accompanied by meaningful cautionary statements; or (2) immaterial; or (3) made without
actual knowledge that the statement was false or misleading.” Aetna, Inc., 617 F.3d 272, 278-79
(3d Cir. 2010). “A mixed present/future statement is not entitled to the safe harbor with respect to
the part of the statement that refers to the present.” Inst. Investors Grp. v. Avaya, Inc., 564 F.3d
242, 255 (3d Cir. 2009) (quoting Makor Issues & Rights, Ltd. v. Tellabs, Inc., 513 F.3d 702, 705
(7th Cir. 2008)).
Certain statements made on November 6 and 9, 2015, (statements 13, 14, and 21) were not
forward looking and thus were not covered by the safe harbor provision. In a November 6, 2015
press release, Defendants stated, “We have embarked on an initiative to revamp our quality
systems and processes, as an organization-wide priority” (See AC at ¶ 248 (emphasis added)). In
a November 9, 2015 conference call Defendants stated, “We have embarked on an initiative to
revamp our quality systems and processes, as an organization-wide priority” (AC at ¶ 250
(emphasis added)). In the same conference call, a claim was made that Defendants had “instituted
corrective actions to address the 483 observations received earlier in each of these sites” (AC at ¶
278 (emphasis added)). These statements are not within the safe harbor provision merely because
Defendants made other related statements that were forward looking: “The mere fact that a

1

Relatedly, the statements cited in the complaint are not mere statements of opinion. Statement 21, the only statement
over which Plaintiff has standing that is challenged as an opinion, included factual claims; specifically, that Dr.
Reddy’s “instituted corrective actions to address the 483 observations received earlier in each of these sites.” (AC at
¶ 278).

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statement contains some reference to a projection of future events cannot sensibly bring the
statement within the safe harbor if the allegation of falsehood relates to non-forward-looking
aspects of the statement.” In re Stone & Webster, Inc., Sec. Litig., 414 F.3d 187, 213 (1st Cir. 2005)
The Court therefore need not address the remaining safe harbor criteria.
Section 20(a) Claim
Defendants seek dismissal of Plaintiff’s claims against individual Defendants (Prasad,
Chakraborty, Mukherjee, and Reddy) and against Dr. Reddy’s, USA, for failure to adequately
allege joint and several liability. According to section 20(a) of the Exchange Act:
Every person who, directly or indirectly, controls any person liable
under any provision of this chapter or of any rule or regulation
thereunder shall also be liable jointly and severally with and to the
same extent as such controlled person to any person to whom such
controlled person is liable, unless the controlling person acted in
good faith and did not directly or indirectly induce the act or acts
constituting the violation or cause of action.
15 U.S.C. § 78t(a). To set forth a claim for joint and several liability under section 20(a), a plaintiff
must allege that defendants “exercise[] control over a ‘controlled person’ who violates Section
10(b).” Carmack v. Amaya, Inc., 258 F. Supp. 3d 454, 466 (D.N.J. 2017). “The three elements of
a Section 20(a), or “control person” claim are as follows: (1) the defendant controlled another
person or entity; (2) the controlled person or entity committed a primary violation of the securities
laws; and (3) the defendant was a culpable participant in the fraud.” Id. (citing In re Suprema
Specialties, Inc., Sec. Litig., 438 F.3d 256, 286 (3d Cir. 2006)).
As to the joint and several liability allegations against Dr. Reddy’s, USA, the complaint
alleges that Dr. Reddy’s, USA, is the registered agent of Dr. Reddy’s and its wholly owned United
States subsidiary. (AC at ¶ 51). Plaintiff also alleges that Dr. Reddy’s, USA, “acted as a controlling
person of the company,” (AC at ¶ 448), and that there was “a significant degree of overlap between
directors” at both companies. (Plaintiff’s Brief, ECF No. 48 at 44). The Court finds these
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allegations sufficient for the complaint to survive this motion and shall permit discovery as to,
among other topics, Dr. Reddy’s USA’s liability.
With regard to the individual Defendants, Plaintiff alleges each held high positions at Dr.
Reddy’s – CEO, CFO, COO, and co-chairman. According to the complaint, Prasad, Chakraborty,
and Mukherjee signed germane documents and participated in earnings calls. (AC at ¶ 52-57).
Reddy also signed germane documents and was “responsible in part for the Annual Reports.” (Id.
at ¶ 58). In addition, the Amended Complaint details the alleged misstatements of each individual
Defendant.2 Plaintiff has adequately alleged that the individual Defendants were controlling
persons; “an intensely factual question.” Sec. Exch. Comm’n v. Todd, 642 F.3d 1207, 1223 (9th
Cir. 2011). The Court therefore declines to dismiss Plaintiff’s complaint against either the
individual Defendants or Dr. Reddy’s USA.
ORDER
This matter comes before the Court on a motion filed by Defendants to dismiss Plaintiff’s
Amended Consolidated Class Action Complaint. The Court has considered the papers submitted
in support of and in opposition to the motion and the exhibits attached thereto and held oral
argument on the matter on August 8, 2018. Accordingly, for the reasons set forth in the written
memorandum that accompanies this order, and for good cause shown;
IT IS on this 20th day of March, 2019,
ORDERED that Defendants’ motion to dismiss, (ECF No. 47), is granted in part and
denied in part; and it is further
ORDERED that Plaintiffs lack standing to assert claims relating to the following alleged

2

See AC at ¶¶ 201, 202, 207, 225, 227, 228, 229, 251, 257, 258, 260, 263, 266, 278, 280, 281, 317 (Mukherjee); ¶¶
198, 199, 200, 232, 238, 248, 249, 250, 278, 279, 280, 298, 404 (Prasad); ¶¶ 208, 232, 238, 259, 261, 278, 281, 292,
311, 317, 369, 402, 405 (Chakraborty); ¶¶ 237, 244, 278 (Reddy).

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misstatements:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•

Misstatement 1: Amended Complaint, ¶¶ 214-15
Misstatement 2: Amended Complaint, ¶ 216
Misstatement 3: Amended Complaint, ¶ 225
Misstatement 4: Amended Complaint, ¶ 228
Misstatement 5: Amended Complaint, ¶ 230.
Misstatement 6: Amended Complaint, ¶ 231
Misstatement 7: Amended Complaint, ¶ 232
Misstatement 8: Amended Complaint, ¶ 233
Misstatement 9: Amended Complaint, ¶ 238
Misstatement 10: Amended Complaint ¶ 239
Misstatement 11: Amended Complaint, ¶¶ 240-43
Misstatement 12: Amended Complaint, ¶ 244
Misstatement 16: Amended Complaint, ¶ 257
Misstatement 17: Amended Complaint, ¶¶ 258-62
Misstatement 18: Amended Complaint, ¶¶ 263-64
Misstatement 19: Amended Complaint, ¶ 265
Misstatement 20: Amended Complaint, ¶ 266; and it is further
ORDERED that Plaintiffs do have standing to assert claims relating to the following

alleged misstatements:
•
•
•
•
•

Misstatement 13: Amended Complaint, ¶ 248
Misstatement 14: Amended Complaint, ¶ 249
Misstatement 15: Amended Complaint, ¶ 251
Misstatement 21: Amended Complaint, ¶ 266
Misstatement 22: Amended Complaint, ¶ 280; and it is further
ORDERED that in all other respects, Defendants’ motion is denied.

s/Peter G. Sheridan
PETER G. SHERIDAN, U.S.D.J.
March 20, 2019

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