Singh v. Orthofix International N.V. et al

Filing 85

OPINION AND ORDER. The Court has considered all of the remaining arguments of the parties. To the extent not specifically addressed above, they are either moot or without merit. For the foregoing reasons, the defendants' motion to dismiss is gra nted in part and denied in part. The claims against defendant Milinazzo are dismissed with prejudice and the motion to dismiss is otherwise denied. The Clerk is directed to close Docket Nos. 49, 53, 63, and 66. re: 63 MOTION to Dismiss wit h prejudice all claims asserted against the Moving Defendants in the Second Amended Complaint filed in this action filed by Robert S. Vaters, Orthofix International N.V., Emily V. Buxton, Brian McCollum, 66 MOTION to Dismiss with prej udice all claims asserted against Defendant Alan W. Milinazzo in the Second Amended Complaint filed in this action filed by Alan W. Milinazzo, 53 MOTION to Dismiss filed by Alan W. Milinazzo, 49 JOINT MOTION to Dismiss filed by Robert S. Vaters, Orthofix International N.V., Emily V. Buxton, Brian McCollum. (Signed by Judge John G. Koeltl on 3/6/2015) (rjm)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
────────────────────────────────────
PLUMBERS & PIPEFITTERS NATIONAL PENSION
FUND, Individually and on Behalf of All
Others Similarly Situated, 1
Plaintiff,

13 Cv. 5696 (JGK)
OPINION AND ORDER

- v.ORTHOFIX INTERNATIONAL N.V., ET AL.,
Defendants.
────────────────────────────────────
JOHN G. KOELTL, District Judge:
The plaintiff, Plumbers & Pipefitters National Pension
Fund, brought this securities class action against Orthofix
International N.V. (“Orthofix”) and four of its former officers.
The plaintiff alleges that the defendants misrepresented
Orthofix’s financial health to the public at various times.

The

plaintiff alleges that these misrepresentations violate Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 (“the
Exchange Act”), as amended by the Private Securities Litigation
Reform Act of 1995 (“PSLRA”), 15 U.S.C. §§ 78j(b), 78t, 78u-4,
and Securities and Exchange Commission Rule 10b-5 promulgated
thereunder, 17 C.F.R. § 240.10b-5.

The putative class consists

of persons who purchased Orthofix common stock between March 2,
2010, and July 29, 2013.

Second Am. Compl. (“SAC”) ¶ 1.

1

Tejinder Singh was the named plaintiff in the original caption in this action
before the Court appointed Plumbers & Pipefitters National Pension Fund as
lead plaintiff. The Clerk is directed to change the caption as it is
reflected in this Opinion and Order.

1

The defendants move to dismiss the Second Amended Complaint
for failure to state a claim pursuant to Rules 9(b) and 12(b)(6)
of the Federal Rules of Civil Procedure.

The defendants argue

that the plaintiff has failed to allege facts supporting a
strong inference of scienter, and has not alleged loss
causation.
The Court has jurisdiction over the alleged Exchange Act
violations pursuant to 15 U.S.C. § 78aa, and 28 U.S.C. § 1331.
For the reasons explained below, the defendants’ motion is
granted in part and denied in part.
I.
In deciding a motion to dismiss pursuant to Rule 12(b)(6),
the allegations in the complaint are accepted as true, and all
reasonable inferences must be drawn in the plaintiff’s favor.
McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir.
2007).

The Court's function on a motion to dismiss is “not to

weigh the evidence that might be presented at a trial but merely
to determine whether the complaint itself is legally
sufficient.”
1985).

Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir.

A complaint should not be dismissed if the plaintiff has

stated “enough facts to state a claim to relief that is
plausible on its face.”
544, 570 (2007).

Bell Atl. Corp. v. Twombly, 550 U.S.

“A claim has facial plausibility when the

plaintiff pleads factual content that allows the court to draw
2

the reasonable inference that the defendant is liable for the
misconduct alleged.”
(2009).

Ashcroft v. Iqbal, 556 U.S. 662, 678

While factual allegations should be construed in the

light most favorable to the plaintiff, “the tenet that a court
must accept as true all of the allegations contained in a
complaint is inapplicable to legal conclusions.”

Id.

A claim under Section 10(b) of the Securities Exchange Act
sounds in fraud and must meet the pleading requirements of Rule
9(b) of the Federal Rules of Civil Procedure and of the PSLRA,
15 U.S.C. § 78u–4(b).

Rule 9(b) requires that the complaint

“(1) specify the statements that the plaintiff contends were
fraudulent, (2) identify the speaker, (3) state where and when
the statements were made, and (4) explain why the statements
were fraudulent.”

ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493

F.3d 87, 99 (2d Cir. 2007).

The PSLRA similarly requires that

the complaint “specify each statement alleged to have been
misleading [and] the reason or reasons why the statement is
misleading,” and it adds the requirement that “if an allegation
regarding the statement or omission is made on information and
belief, the complaint shall state with particularity all facts
on which that belief is formed.”

15 U.S.C. § 78u–4(b)(1); ATSI,

493 F.3d at 99.
When presented with a motion to dismiss pursuant to Rule
12(b)(6), the Court may consider documents that are referenced
3

in the complaint, documents that the plaintiff relied on in
bringing suit and that are either in the plaintiff’s possession
or that the plaintiff knew of when bringing suit, or matters of
which judicial notice may be taken.

See Chambers v. Time

Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002).

The Court can

take judicial notice of public disclosure documents that must be
filed with the Securities and Exchange Commission (“SEC”) and
documents that both “bear on the adequacy” of SEC disclosures
and are “public disclosure documents required by law.”

Kramer

v. Time Warner, Inc., 937 F.2d 767, 773–74 (2d Cir. 1991); see
also Silsby v. Icahn, 17 F. Supp. 3d 348, 353-54 (S.D.N.Y.
2014).
II.
The following facts are undisputed or accepted as true for
purposes of the defendants’ motion to dismiss.
A.
Orthofix is a medical device company engaging in the
design, development, manufacture, and distribution of medical
equipment used principally for spine and orthopedic
applications.

SAC ¶ 25.

Orthofix distributes its products

domestically and internationally by coordinating with doctors to
sell nonsurgical devices to patients, selling devices to
hospitals, or selling products by piece or in bulk to
independent distributors.

SAC ¶ 3.
4

The individual defendants were all officers of Orthofix
during some portion of the class period.

Defendant Alan

Milinazzo served as President and Chief Executive Officer
(“CEO”) of Orthofix from April 2006 until July 2011.

SAC ¶ 26.

Defendant Robert Vaters served as the Chief Financial Officer
(“CFO”) and then Chief Operating Officer (“COO”) of Orthofix’s
Global Spine Business Unit from September 2008 to July 2011, and
then served as President and CEO of Orthofix from August 2011 to
March 2013.

SAC ¶ 27.

Defendant Brian McCollum served as the

CFO of Orthofix from March 2011 to November 2012, and then
served as President of the Global Spine Business Unit from
November 2012 until July 2013.

SAC ¶ 28.

Defendant Emily

Buxton served as the CFO of Orthofix’s Global Orthopedics unit
from July 2010 until November 2012, and then served as CFO of
Orthofix from November 2012 until April 2014.

SAC ¶ 29.

According to the plaintiff, from 2010 to 2013, the
individual defendants and Orthofix conducted a “scheme” to
“inflate [Orthofix’s] revenue and to distort the truth about its
profitability.”

SAC ¶ 14.

The plaintiff alleges, based on

several confidential sources, that Orthofix employed various
methods to recognize revenue improperly when the revenue was not
yet actually received or unlikely ever to be received.

This

scheme allegedly ended with Orthofix’s announcement on July 29,
2013, that it would delay filing its quarterly report with the
5

SEC because “additional time [was] needed to review matters
relating to revenue recognition for prior periods.”

SAC ¶ 14.

Orthofix’s July 29 press release stated that an “Audit Committee
has commenced an independent review into these matters, with the
assistance of outside professionals.

The Audit Committee cannot

predict the length of time or outcome of its review.”
¶ 145.

SAC

Orthofix also stated that it would not be “providing

annual or quarterly guidance for 2013.”

Id.

Immediately following the July 29 announcement, the price
of Orthofix shares declined from $27.40 per share on July 29 to
$22.71 per share on July 31, falling 17% on a volume of 1.3
million shares.

SAC ¶ 146.

On August 6, 2013, Orthofix

announced that it intended to restate its financial statements
for the fiscal years 2011 and 2012 and the first quarter of
2013.

SAC ¶ 14.
B.

On March 24, 2014, Orthofix restated its financial
statements for the 2010, 2011, and 2012 fiscal years, and the
first quarter of 2013.

SAC ¶ 15.

The Restatement revised

Orthofix’s reported net income downward for each year except
2010.

SAC ¶ 16.

For the 2011 fiscal year, Orthofix’s net

income was originally reported as a $1.1 million loss but
restated as an $18.1 million loss.

Id.

For 2012, Orthofix’s

net income was originally reported as $51.3 million but restated
6

as $42.8 million.

Id.

Although the Restatement adjusted 2010

from $44.2 million to $44.3 million, the plaintiff alleges that
this was due to shifting income forward from the 2008 and 2009
fiscal years.

Id.

In connection with the Restatement, Orthofix released the
results of an internal investigation triggered by concerns
raised by “senior management” and conducted by the Audit
Committee in consultation with Ernst & Young LLP.

SAC ¶ 110.

The Audit Committee concluded “that certain revenues recognized
during 2012 and 2011 should not have been recognized, or should
not have been recognized during the periods in which they were
recognized,” and that therefore, Orthofix’s previously released
financial statements “should no longer be relied upon.”

Id.

The background to the Restatement stated that the internal
investigation into the company’s practices indicated:
(i) the existence of extra-contractual terms or
arrangements at the onset of the sale and concessions
agreed to subsequent to the initial sale (such as extended
payment terms and return and exchange rights for sales to
distributors with respect to certain transactions),
including some with which certain senior-level personnel
were involved, (ii) that at the time of some sales
collection was not reasonably assured, and (iii) that
certain amounts previously characterized as commissions
were paid to related parties of the applicable customer.
Id.

Accordingly, the Audit Committee concluded that Orthofix

“had material weaknesses in its internal control over financial
reporting as of December 31, 2012 related to revenue recognition

7

practices for sales to the Company’s distributors, inventory
reserves and foreign subsidiary oversight.”

SAC ¶ 111.

The

Audit Committee further concluded that the weaknesses in these
controls “resulted in material misstatements in our previously
filed annual audited and interim unaudited consolidated
financial statements.”

SAC ¶ 112.

Although the Restatement does not reveal the specific
practices that were under investigation or the names of the
“senior-level personnel” that were involved with the practices,
the plaintiff relies on its confidential sources to describe the
individual defendants’ purported knowing or reckless personal
involvement in Orthofix’s improper revenue recognition.

The

plaintiff alleges that Orthofix and the individual defendants
encouraged several practices that led to its misstated revenue
for the years 2010 to 2013.
C.
According to the plaintiff, in 2012, Orthofix engaged in
what it informally termed “dope deals”—large bulk sales to
distributors designed to inflate revenue before the end of a
quarter.

SAC ¶¶ 41-42, 51.

These bulk sales allegedly began in

late 2011 or early 2012, and each bulk sale involved multiple
contracts in order to separate the terms of the sale, which
would be recognized immediately, from the sale’s substantial

8

rebates, which would not be recognized in that quarter.

SAC

¶¶ 39-40, 51.
In 2012, Orthofix made one such sale to Synergy Medical
Systems (“Synergy”), as described by two confidential sources—an
Orthofix distributor (“CW 1”) and the President of Synergy (“CW
2”).

According to CW 1 and CW 2, three nondefendant

representatives of Orthofix, including the CFO of Orthofix’s
Global Spine unit, negotiated the bulk sale with Synergy.
¶ 39.

SAC

Orthofix presented the terms of the sale to Synergy in

two contracts—the first with the undiscounted terms of the sale,
and the second with the terms of a 15 to 20% rebate.

Id.

Orthofix ensured that the sale occurred before the end of the
quarter, and the company recognized the income from the sale in
the third quarter, but understated the related expense of the
rebate.

SAC ¶ 40.

Orthofix also allowed Synergy an extended

term to make the payment.

SAC ¶ 49.

Another confidential source, the Director of Sales for
Spinal Stimulation in Orthofix’s Western region for four years
until April 2013 (“CW 3”), claimed to have been involved in many
“dope deals” starting in early 2012.

SAC ¶ 51.

According to CW

3, this program was initiated by nondefendant Bryan McMillan,
the President of Global Spine from October 2011 until October
2012, and defendant Vaters, who was CEO of Global Spine until
July 2011, when he became CEO of Orthofix.
9

SAC ¶¶ 27, 41, 51.

When defendant McCollum replaced McMillan as President of Global
Spine, the practice continued.

SAC ¶ 51.

McMillan, Vaters, and

McCollum all allegedly pressured regional distributors to
execute these deals in order to meet revenue quotas by a
quarter’s end.

SAC ¶ 41.

The plaintiff alleges that whatever

revenue was recognized at the end of each quarter due to the
bulk sale deals would then “disappear” the next quarter due to
the substantial rebates, whereupon employees would be directed
to complete more bulk sales.

SAC ¶ 51.
D.

Another set of the plaintiff’s allegations concerns
improper revenue recognition practices at Orthofix’s Brazilian
subsidiary, Orthofix do Brasil (“Brasil”).

In early 2011,

allegedly at the direction of defendant Buxton, Brasil began to
recognize income for Orthofix hospital products as soon as they
were used, several months before relevant authorizing documents
and payment were eventually received.

SAC ¶ 72.

Furthermore,

after Brasil lost a significant client in 2012, it began a more
aggressive approach to increase sales to distributors.
¶¶ 73, 75.

SAC

Brasil was pressured to maintain the same level of

sales before it lost the big client, but did not have many
additional distributors to which it could market.

SAC ¶ 87.

According to a confidential witness, Brasil’s controller from
2009 to 2012 (“CW 10”), Brasil consequently began to loosen its
10

policies around sales to distributors to encourage a high volume
of sales to each distributor.

SAC ¶ 76.

For example, Brasil

would provide extended payment plans and then not charge
distributors or report them to credit monitoring services when
distributors failed to make payments.

Id.

Thus, Brasil was

able to increase its reported sales, SAC ¶¶ 76, 84, 87, but did
not receive a corresponding increase in revenue.

SAC ¶ 76.

Brasil informed top management internationally about these
loosened terms and discounts in sales to distributors, including
discounts up to 70%.

SAC ¶¶ 77, 87.

CW 10 sent monthly reports

to an email listserv that included defendant Buxton.

SAC ¶ 77.

CW 10 discussed Brasil’s finances directly with Brasil’s
financial director, who interacted with defendant Buxton
regarding Brasil’s finances.

Id.

CW 10 also attended meetings

where Buxton was present and Brasil’s finances were discussed.
SAC ¶ 78.

In 2012, CW 10 attended a meeting in Germany, with

Buxton present, where some international Orthofix
representatives discussed their concerns with sales to
distributors.

Id.

Buxton allegedly told everyone at the

meeting not to raise any questions discussed at that meeting at
a subsequent training meeting with Ernst & Young on revenue
recognition practices.

Id.

Despite Orthofix’s United States

headquarters purportedly receiving information about the

11

discounts and delayed payments, SAC ¶ 87, Orthofix reported the
full undiscounted numbers in its financial reports.

SAC ¶ 79.

In 2012, Orthofix negotiated one particularly large sale
with Grupo Implamed, a Brazilian spinal products distributor.
According to Confidential Witness 11 (“CW 11”), the operations
director of Grupo Implamed, on September 27, 2012, Implamed
agreed to receive a $1.5 million shipment of Orthofix products
on consignment.

SAC ¶ 83.

CW 11 purportedly negotiated this

sale with Brian McMillan, the President of Global Spine at the
time.

Id.

The products were housed in a shipping warehouse in

Atlanta, Georgia, and would be sent to Implamed in Brazil if the
products received regulatory approval in Brazil.

Id.

Implamed

had been awaiting approval for those products for two years, and
when the necessary approval never came, the products were
returned to Orthofix.

Id.

Nevertheless, Orthofix allegedly

recorded the sale as revenue in 2012.

SAC ¶¶ 83 n.5, 144h.

E.
The plaintiff also takes Orthofix to task for a “morally
deficient corporate culture.”

SAC ¶ 4.

In so doing, much of

the Second Amended Complaint details various criminal and civil
actions against Orthofix representatives.

SAC ¶¶ 4-8, 88-107.

The Second Amended Complaint does not explain how any of these
actions or offenses are tied to any of the specific

12

misstatements or omissions alleged in the Second Amended
Complaint.
F.
The plaintiff alleges that throughout the class period,
Orthofix and the individual defendants made misleading
statements in Orthofix’s public disclosure documents filed with
the SEC.

United States Generally Accepted Accounting Principles

(“GAAP”) generally require that revenue not be recognized until
it is “realized” or “realizable,” and until it is “earned.”
¶ 122.

SAC

From 2010 through the first quarter of 2013, Orthofix

filed public disclosure reports with the SEC, including a Form
10-K for each fiscal year, and a Form 10-Q for each quarter of
each fiscal year.

SAC ¶¶ 131-140.

In the reports, Orthofix

represented that its financial statements to the SEC were
“prepared in accordance with [GAAP].”

Id.

The reports also

stated that Orthofix had conducted evaluations of “the
effectiveness of the design and operation of our disclosure
controls and procedures,” and of “the effectiveness of the
Company’s system of internal control over financial reporting,”
and affirmed that these controls were effective.

Id.

The reports each included a Sarbanes-Oxley Act (“SOX”)
Certification affirming the truth and completeness of the
reports, and attesting to the company’s internal controls over
financial reporting and disclosure systems.
13

SAC ¶ 131.

Each

individual defendant signed at least one SOX Certification.
Defendant Milinazzo signed Certifications for Form 10-K reports
for the 2009 and 2010 fiscal years, and for the Form 10-Q report
for the first quarter of 2011.

SAC ¶¶ 26, 131-133.

Milinazzo

resigned from his position of CEO of Orthofix in July 2011.
¶ 26.

SAC

Defendant Vaters signed Certifications for Form 10-K

reports for the 2009, 2011, and 2012 fiscal years, and for Form
10-Q reports for the second quarter of 2011 through the third
quarter of 2012.

SAC ¶¶ 27, 134-40.

On March 12, 2013,

Orthofix announced that Vaters, the CEO of Orthofix at the time,
had resigned from the company, effective immediately.

SAC

¶¶ 26, 141.
Defendant McCollum signed SOX Certifications for Form 10-K
reports for the 2010 and 2011 fiscal years, and for Form 10-Q
reports from the first quarter of 2011 through the third quarter
of 2012.

SAC ¶¶ 28, 132-39.

On June 18, 2013, Orthofix

announced that McCollum, then the President of the Global Spine
Business Unit, would resign from Orthofix in July 2013.
¶¶ 28, 143.

SAC

Finally, defendant Buxton signed Certifications for

the Form 10-K report for the 2012 fiscal year, and the Form 10-Q
report for the first quarter of 2013.

SAC ¶¶ 29, 140, 142.

Buxton resigned from the company in April 2014.

SAC ¶ 29.

According to the plaintiff, Orthofix’s public disclosure
reports for the class period and the individual defendants’
14

corresponding affirmations were materially false and misleading
when they were made because each defendant was aware that
Orthofix’s financial statements failed to conform to GAAP and
that there were material weaknesses in the company’s internal
controls, as described in the Restatement issued on March 24,
2014.

Although Orthofix’s public disclosure documents claimed

that its financial statements were “prepared in accordance with
[GAAP]” and that Orthofix’s internal controls over financial
reporting and disclosure procedures were effective, SAC ¶ 131,
the Restatement stated that Orthofix “had material weaknesses in
its internal control over financial reporting as of December 31,
2012 related to revenue recognition practices . . . [and]
disclosure controls and procedures and internal control over
financial reporting were not effective as of December 31, 2012.”
SAC ¶ 111.

The Restatement also made clear that the company’s

“controls were not effective to reasonably ensure accurate
recognition of revenue in accordance with GAAP for certain
distributor sales transactions previously recorded by the
Company’s domestic and international business units.”
¶ 113.

SAC

Orthofix explained that the material weaknesses in its

internal controls over financial reporting “resulted in material
misstatements in our previously filed annual audited and interim
unaudited consolidated financial statements.”

15

SAC ¶ 112.

The plaintiff contends that the practices described in
Sections II.C, II.D, and II.E of this Opinion are among those
being referred to in the Restatement.

The Restatement describes

an internal investigation that indicated “(i) the existence of
extra-contractual terms or arrangements at the onset of the sale
and concessions agreed to subsequent to the initial sale (such
as extended payment terms and return and exchange rights for
sales to distributors with respect to certain transactions),
including some with which certain senior-level personnel were
involved.”

SAC ¶ 110.

The plaintiff argues that this passage

includes the “dope deals,” or discounted bulk sales,
orchestrated by Orthofix distributors.

The plaintiff alleges

that, contrary to the statements made in Orthofix’s public
disclosure documents at the time, the revenue from these bulk
sales was not recorded in accordance with GAAP because the
extra-contractual terms made Orthofix’s revenues appear greater
than they actually were.

SAC ¶ 127.

The Restatement also reported that the company’s internal
investigation found that “at the time of some sales collection
was not reasonably assured.”

SAC ¶ 110.

According to the

plaintiff, this passage includes Orthofix do Brasil’s alleged
dealings with distributors, where Brasil recorded revenue from
sales with extended payment periods in which it was unlikely to
collect payment.

The plaintiff alleges that these practices
16

also are not in conformance with GAAP because the defendants
recorded revenue that had not yet been earned.

SAC ¶ 127.

Finally, the Restatement elaborates on instances where the
company’s controls were “not effective to reasonably ensure
accurate recognition of revenue in accordance with GAAP,”
including “[r]evenue recognition practices for sales to the
Company’s distributors,” and “[o]versight of certain foreign
subsidiaries.”

SAC ¶ 113.

According to the plaintiff, these

instances include both the “dope deals” and Brasil’s distributor
sales, among other things.

Consequently, the defendants’

representation that Orthofix had effective internal controls
over financial reporting at that time was false and materially
misleading.
Orthofix’s executives are paid annual performance-based
bonuses that are tied to the company’s “immediate financial
performance,” among other retention bonuses.

SAC ¶ 155.

When

Orthofix restated its financial statements in March 2014, all of
its numbers were adjusted downward, except for the 2010 fiscal
year, which the plaintiff alleges increased due to revenue
rolling forward from 2008 and 2009 after it had been
inappropriately recognized in those years.

SAC ¶ 154.

According to the plaintiff, the individual defendants
misrepresented and inflated Orthofix’s revenue in order to
receive higher annual bonuses.

SAC ¶ 155.
17

III.
Section 10(b), as effectuated by Rule 10b–5, makes it
“unlawful for any person . . . [t]o make any untrue statement of
a material fact or to omit a material fact necessary in order to
make the statements made, in the light of the circumstances
under which they were made, not misleading.”
§ 240.10b–5(b).

17 C.F.R.

To state a claim under Section 10(b) and Rule

10b–5, the plaintiff must allege that the defendants, in
connection with the purchase or sale of securities, made a
materially false statement or omitted a material fact, with
scienter, and that the plaintiff’s reliance on the defendants'
action caused injury to the plaintiff.

Ganino v. Citizens

Utils. Co., 228 F.3d 154, 161 (2d Cir. 2000); see also Silsby,
17 F. Supp. 3d at 358.

The defendants do not dispute that there

were material misstatements or omissions of fact.

The

defendants move to dismiss the asserted violations of Section
10(b) and Rule 10b–5 on the grounds that the plaintiff has
failed to allege sufficient facts to show loss causation and
scienter.
A.
The defendants argue that this action should be dismissed
because the plaintiff has not alleged facts sufficient to
support a strong inference of scienter.

The scienter required

to support a securities fraud claim can be “intent to deceive,
18

manipulate, or defraud, or at least knowing misconduct.”

SEC v.

First Jersey Sec., Inc., 101 F.3d 1450, 1467 (2d Cir. 1996)
(internal citations omitted).

The PSLRA requires that a

complaint alleging securities fraud “state with particularity
facts giving rise to a strong inference that the defendant[s]
acted with the required state of mind.”
4(b)(2).

15 U.S.C. § 78u-

Scienter may be inferred from (i) facts showing that a

defendant had “both motive and opportunity to commit the fraud,”
or (ii) facts that constitute “strong circumstantial evidence of
conscious misbehavior or recklessness.”

ATSI, 493 F.3d at 99;

see also City of Roseville Emps.' Ret. Sys. v. EnergySolutions,
Inc., 814 F. Supp. 2d 395, 418-19 (S.D.N.Y. 2011).
In order to plead scienter adequately, the plaintiffs must
allege facts supporting a strong inference with respect to each
defendant.

See Plumbers & Pipefitters Local Union No. 630

Pension–Annuity Trust Fund v. Arbitron Inc., 741 F. Supp. 2d
474, 488 (S.D.N.Y. 2010).

“[I]n determining whether the pleaded

facts give rise to a ‘strong’ inference of scienter, the court
must take into account plausible opposing inferences.”

Tellabs,

Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 323 (2007).
A complaint sufficiently alleges scienter when “a reasonable
person would deem the inference of scienter cogent and at least
as compelling as any opposing inference one could draw from the

19

facts alleged.”

Id. at 324; see also Slayton v. Am. Express

Co., 604 F.3d 758, 766 (2d Cir. 2010).
In this case, the plaintiff does not attempt to allege
scienter by showing that the defendants had a “motive and
opportunity” to commit fraud, relying instead on the defendants’
alleged “conscious misbehavior or recklessness.” 2

Where the

defendants’ motive to commit fraud is not apparent, “the
strength of the circumstantial allegations [that a defendant
consciously or recklessly misbehaved] must be correspondingly
greater.”

Kalnit v. Eichler, 264 F.3d 131, 142 (2d Cir. 2001).

Plaintiffs typically allege conscious or reckless misbehavior by
pleading with specificity that the defendants had “knowledge of
facts or access to information contradicting their public
statements.”

Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir. 2000).

As the Second Circuit Court of Appeals has explained,
“[r]eckless conduct is, at the least, conduct which is highly
unreasonable and which represents an extreme departure from the
standards of ordinary care . . . to the extent that the danger
was either known to the defendant or so obvious that the
defendant must have been aware of it.”

2

Chill v. Gen. Elec. Co.,

Indeed, the only motive to inflate revenue alleged in the Complaint is the
individual defendants’ desire to increase their annual bonuses. SAC ¶ 155.
Such incentives are “possessed by virtually all corporate insiders,” and
therefore “not sufficient to plead scienter through motive and opportunity.”
Shemian v. Research In Motion Ltd., 570 F. App'x 32, 35 (2d Cir. 2014)
(summary order) (quoting S. Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d
98, 109 (2d Cir. 2009)).

20

101 F.3d 263, 269 (2d Cir. 1996) (alterations in original); see
also Silsby, 17 F. Supp. 3d at 364-66.
The defendants argue that the plaintiff has not alleged
facts sufficient to show that the individual defendants had
knowledge of facts or access to information showing that
Orthofix’s financial statements were materially misleading or
that Orthofix’s internal controls had material weaknesses prior
to July 2013, when Orthofix management first raised concerns
that eventually led to the Restatement.

Defendants McCollum,

Vaters, and Buxton argue that the facts alleged against them are
conclusory, not credible, and do not support an inference of
scienter.

Defendant Milinazzo argues that the plaintiff has not

alleged any facts against him at all, other than that he signed
SOX Certifications for several public disclosure documents.
1.
The plaintiff has failed to raise a strong inference of
scienter with respect to Milinazzo.

The only facts alleged

against Milinazzo in the Second Amended Complaint are that he
signed SOX Certifications for the company’s public disclosure
documents, and one conclusory allegation that “Defendants Vaters
and McCollum instituted a culture of revenue-at-all costs, and,
along with Milizzano [sic], promoted a variety of other improper
revenue recognition practices.”

SAC ¶ 152.

The plaintiff

cannot raise an inference of fraudulent intent based on the
21

signing of a certification without alleging any facts to show a
concomitant awareness of or recklessness to the materially
misleading nature of the statements.

See Glazer Capital Mgmt.

v. Magistri, 549 F.3d 736, 747 (9th Cir. 2008) (concluding that
absent a showing of recklessness, the fact of an officer's SOX
certification is “not sufficient, without more, to raise a
strong inference of scienter on the part of [the certifying
officer]”); Garfield v. NDC Health Corp., 466 F.3d 1255, 1266
(11th Cir. 2006) (holding that an officer’s SOX certification
alone is not probative of scienter; rather, the plaintiff must
allege facts showing the officer was “severely reckless” in
certifying the accuracy of the financial statements).
Accordingly, defendant Milinazzo’s motion to dismiss the
plaintiff’s claim under Section 10(b) and Rule 10b-5 against him
is granted.
2.
The allegations against Vaters and McCollum regarding
Orthofix’s alleged “dope deals” are significantly more
particularized than the allegations against Milinazzo.

The

plaintiff describes in detail Orthofix’s alleged practice of
making bulk sales to distributors combined with large discounts
on those sales on separate contracts, and then reporting the
full undiscounted amount of the sale as revenue.

Based on

confidential sources, the plaintiff alleges that Vaters was
22

involved in this program, and that McCollum assumed a role in
the program when he became President of the Global Spine Unit.
SAC ¶ 41.

The defendants respond that the Court cannot credit

the plaintiff’s confidential witnesses because there is no
showing that the witnesses “had any contact with the Individual
Defendants or would have knowledge of what they knew or should
have known during the Class Period.”

In re Am. Express Co. Sec.

Litig., No. 02cv5533, 2008 WL 4501928, at *8 (S.D.N.Y. Sept. 26,
2008), aff'd sub nom. Slayton v. Am. Exp. Co., 604 F.3d 758 (2d
Cir. 2010).
This argument is without merit.

“Information presented

through Confidential Witnesses in a complaint is allowed as long
as the witnesses ‘are described in the complaint with sufficient
particularity to support the probability that a person in the
position occupied by the source would possess[] the information
alleged.’”

Cornwell v. Credit Suisse Grp., 689 F. Supp. 2d 629,

637 (S.D.N.Y. 2010) (quoting Novak, 216 F.3d at 314).

The

confidential witnesses that describe the discounted bulk sales
include CW 1, an Orthofix distributor, CW 2, the President of
another company, and CW 3, Orthofix’s Director of Sales for
Spinal Stimulation for four years, each of whom played some role
in the bulk sales.

SAC ¶¶ 37, 47, 51.

CW 3, who describes the

involvement of Vaters and McCollum, interacted directly with
Bryan McMillan about the bulk sales, and when McCollum filled
23

McMillan’s position, the practice allegedly continued.
¶ 51.

SAC

The CWs’ identities here are sufficiently particular to

make it probable that they possessed the information alleged.
See, e.g., In re Scottish Re Grp. Sec. Litig., 524 F. Supp. 2d
370, 392-93 (S.D.N.Y. 2007) (crediting witnesses who “occupied
positions that would have allowed for relevant hands-on
experience in various parts of the Company”).
Although several courts within this District have declined
to credit the allegations of confidential witnesses where they
do not specifically allege “contact” with the individual
defendants, see, e.g., Glaser v. The9, Ltd., 772 F. Supp. 2d
573, 589-90 (S.D.N.Y. 2011), there is no baseline requirement of
such contact in order to allege “sufficient particularity to
support the probability that a person in the position occupied
by the source would possess the information alleged.”
216 F.3d at 314.

Novak,

In this case, it is “highly probable” that the

regional director of sales in a region, who has interacted
directly with a President of that unit in the past, would be
“well-positioned to attest to the participation of the
individual defendants in promoting” certain sales practices in
that region.

In re EVCI Colleges Holding Corp. Sec. Litig., 469

F. Supp. 2d 88, 97 (S.D.N.Y. 2006) (crediting the testimony of
confidential witnesses without regard to their contact with the
individual defendants).
24

The defendants argue that even if this Court were to credit
the confidential witnesses’ account of Orthofix’s discounted
sales, discounted sales are a common practice in the industry,
and the plaintiff has not alleged anything to show that Vaters
and McCollum were aware of anything improper.

This argument

misses the full picture of wrongdoing presented by the
plaintiff.

While “offering discounts to stimulate sales is not

automatically manipulation and may well stimulate demand,” In re
Smith & Wesson Holding Corp. Sec. Litig., 669 F.3d 68, 76 (1st
Cir. 2012), the plaintiff has alleged that Vaters and McCollum
directed bulk sales that were recorded in full in Orthofix’s
revenue calculations despite discounts outside of the sales
contract that essentially nullified any revenue gain.

SAC ¶ 51.

The plain import of the program in which Vaters and McCollum
were allegedly directly involved was to boost revenue
artificially at the end of quarters in order to present a false
and misleading picture of Orthofix’s actual revenue.

There are

sufficient allegations that Vaters and McCollum acted
deliberately or recklessly in promoting this program.
GAAP requires that income not be recognized until it is
“realized or realizable” and “earned,” SAC ¶ 122 (citing
Financial Accounting Standards Board (“FASB”) Concepts Statement
No. 5, ¶ 83), and the SEC cautions that parties entering into
“side agreements” to contracts affecting revenue recognition
25

must have sufficient controls to ensure that they are accounted
for in accordance with GAAP.

SAC ¶ 126 (citing SEC Staff

Accounting Bulletin No. 101: Revenue Recognition in Financial
Statements, 17 C.F.R. Part 211, at 4 (Dec. 3, 1999)).

Indeed,

among its concessions regarding material misstatements and
weaknesses in internal controls, Orthofix’s Restatement noted
“extra-contractual terms or arrangements at the onset of sale,”
and that such terms “were not evaluated, or not evaluated
correctly” in the company’s files.

SAC ¶¶ 110, 113.

The

plaintiff has alleged sufficient facts that raise a strong
inference that Vaters and McCollum were aware of the revenue
recognition problems that gave rise to the Restatement.

See

Varghese v. China Shenghuo Pharm. Holdings, Inc., 672 F. Supp.
2d 596, 608 (S.D.N.Y. 2009) (holding that scienter requirement
was met where GAAP violations led to restatement and individual
defendants were aware of “weak internal controls”).
3.
The plaintiff alleges that it has raised a strong inference
of scienter at least with regard to defendant Buxton based on
Orthofix do Brasil’s allegedly improper revenue recognition
practices.

The plaintiff alleges that Brasil mounted an

aggressive campaign to increase recorded revenue by making large
volume sales to distributors with “loosened terms,” rendering
collection of payment for those sales less likely.
26

According to

the plaintiff, Buxton’s awareness or reckless disregard of the
accounting treatment of these sales is shown by, among other
things, her presence at a meeting where concerns about
distributor sales were discussed and by the fact that reports
were sent to her showing the rapidly increasing receivables and
loosened terms.

One confidential witness also alleges that the

loosened terms were “shared with top management.”

SAC ¶ 76.

The defendants contend that the reference to “top
management” is too vague to support an inference of scienter
with respect to any individual defendant.

See Plumbers &

Pipefitters Local Union No. 719 Pension Trust Fund v. Conseco
Inc., No. 09cv6966, 2011 WL 1198712, at *23 (S.D.N.Y. Mar. 30,
2011) (holding that “vague allegations” against unnamed
“executives” and “senior . . . employees” do not raise a strong
inference of scienter).

However, unlike in Conseco, the

allegation that the terms were shared with “top management” is
supported by additional specific allegations as to Buxton’s
scienter.

The defendants respond that the plaintiff’s

allegations of what was said at the meeting and what was in the
reports sent to Buxton are too vague to support a strong
inference of scienter, and that the plaintiff fails to allege
that Buxton ever read the reports.
The plaintiff’s allegations about the Germany meeting and
the reports are not conclusive, but the plaintiff does not need
27

a smoking gun to allege sufficient facts to support a strong
inference of scienter.

The plaintiff argues that the meeting in

Germany supports Buxton’s knowledge of Brasil’s issues with
sales to distributors, but the Second Amended Complaint only
states, “Several issues were discussed, including practices
concerning sales to distributors in France, Italy, and Brazil.
In particular, the Italian representatives expressed concerns
over their sales to distributors.”

SAC ¶ 78 (emphasis added).

The plaintiff argues that the reports sent to Buxton put her on
notice of the loosened terms in the sales to distributors, but
the Second Amended Complaint’s description of those reports is
imprecise, stating that “[t]he reports contained data showing
that there was a trend of many months of fast-increasing
receivables, and thus that clients were effectively being
financed by Orthofix do Brasil.”

SAC ¶ 77.

A separate

confidential witness alleged that “the changes in sales to
distributors, as well as the effects of the relaxed policies,
were easy to see in the financial reports . . . .

These reports

showed there were discounts of as much as 70% given to
distributors.”

SAC ¶ 87.

At the motion to dismiss stage, the Court must read the
Complaint “in toto and most favorably to [the] plaintiff.”

In

re Regeneron Pharm., Inc. Sec. Litig., No. 03cv3111, 2005 WL
225288, at *24 (S.D.N.Y. Feb. 1, 2005) (citation and quotation
28

marks omitted).

Read most favorably to the plaintiff and

accepting the Complaint’s allegations as true, the above
allegations raise an inference that Buxton either knew or had
access to information about Brasil’s large sales increases with
loosened terms, and thus possessed information contrary to her
public statements in the SOX Certifications regarding the
adequacy of Orthofix’s revenue recognition practices.

See

Cornwell, 689 F. Supp. 2d at 637 (finding scienter met where the
plaintiff alleged that “executives reviewed specific reports
that should have alerted them to the problems they later
allegedly misrepresented”); In re AOL Time Warner, Inc. Sec. &
"ERISA" Litig., 381 F. Supp. 2d 192, 221-22 (S.D.N.Y. 2004)
(finding scienter met based on individual defendant’s position
as “the executive most responsible for the Company’s accounting”
and attendance at meetings where issues were discussed).

The

facts alleged by the plaintiff, coupled with Orthofix’s later
admission in the Restatement that there were failures in revenue
recognition practices with respect to sales where “collection
was not reasonably assured” and “sales comprised of higher risk
distributor revenues” at “certain foreign subsidiaries,” SAC
¶¶ 110, 113, raise a strong inference of scienter with respect
to Buxton.
The defendants argue that the plaintiff does not
specifically allege that Buxton read the reports, but such an
29

allegation is not required in this case.

Buxton was the CFO of

Orthofix’s Global Orthopedics Unit at the time, and the
plaintiff has alleged that the reports were sent to her and that
she discussed Brasil’s finances, the subject matter of those
reports, with Brasil’s financial director.

SAC ¶¶ 29, 77, 87.

Therefore, information regarding the loosened terms was
“reasonably available” to Buxton, and she either knew about the
information or showed a reckless disregard for it.

See Novak,

216 F.3d at 308 (allegations of recklessness may be sufficient
“where plaintiffs alleged facts demonstrating that defendants
failed to review or check information that they had a duty to
monitor”).
Orthofix also argues that for the Implamed sale, the
plaintiff has not alleged sufficient facts to establish scienter
for any individual defendant.

It is not necessary to reach the

issue of whether scienter is established for the Implamed sale
because the plaintiff argues that McCollum is the only defendant
implicated, and the Court has already concluded that the
plaintiff has alleged sufficient facts to establish scienter as
to McCollum.
4.
In order to determine whether a plaintiff has established
scienter, courts must “engage in a comparative evaluation,”
considering “not only inferences urged by the plaintiff . . .
30

but also competing inferences rationally drawn from the facts
alleged.”

Tellabs, 551 U.S. at 314.

The defendants argue that

there are compelling inferences either that “no one responsible
for the [financial] statements made to investors had reason to
believe” those statements were incorrect when issued, or that
the Restatement was “the result of merely careless mistakes at
the management level based on false information fed it from
below.”

Teamsters Local 445 Freight Div. Pension Fund v. Dynex

Capital Inc., 531 F.3d 190, 197 (2d Cir. 2008).

However, the

Court has already found that the plaintiff has made specific
factual allegations that Vaters, McCollum, and Buxton each had
reasons to know that their statements in the SOX certifications
were false or misleading.

Moreover, additional considerations

contribute to the strong inference of the defendants’ scienter
in this case.
As shown by Orthofix’s Restatement, Orthofix undisputedly
has made material misstatements and admitted to violations of
GAAP.

The GAAP regarding revenue recognition that were

admittedly violated by the defendants are basic accounting
principles.

See S.E.C. v. Egan, 994 F. Supp. 2d 558, 565

(S.D.N.Y. 2014) (“Allegations that the accounting rules are
straightforward and the company's accounting treatment was
obviously wrong may create an inference of scienter.”) (citation
and quotation marks omitted).

GAAP violations, accounting
31

irregularities, and the issuance of a restatement, “standing
alone, are insufficient to state a securities fraud claim.”
Novak, 216 F.3d at 309; City of Brockton Ret. Sys. v. Shaw Grp.
Inc., 540 F. Supp. 2d 464, 472 (S.D.N.Y. 2008) (“[I]t is well
settled that mere fact of a restatement of earnings does not
support a strong, or even a weak, inference of scienter.”).
However, when “coupled with evidence of ‘corresponding
fraudulent intent,’” a restatement or accounting violations may
provide some evidence of scienter.

Novak, 216 F.3d at 309

(quoting Chill, 101 F.3d at 270); In re Dynex Capital, Inc. Sec.
Litig., No. 05cv1897, 2009 WL 3380621, at *15 (S.D.N.Y. Oct. 19,
2009).

In this case, the plaintiff has paired Orthofix’s

admissions in the Restatement with sufficient factual
allegations to create a strong inference of scienter for Vaters,
McCollum, and Buxton.
The Second Circuit Court of Appeals has held that the size
of the purported fraud may also contribute to an inference of
scienter.

See In re Scholastic Corp. Sec. Litig., 252 F.3d 63,

77 (2d Cir. 2001) (holding that a total of $24 million in
charges “undermines, at the pleading stage, the argument that
the defendants were unaware” of any increase in returns);
Rothman v. Gregor, 220 F.3d 81, 92 (2d Cir. 2000) (deeming
significant the “magnitude” of a defendant’s write-off in
determining scienter).

Although the defendants point to the
32

fact that the Restatement did not uniformly lower Orthofix’s net
income across the fiscal years it corrected, the only increase
was by $100,000 in 2010, from $44.2 million to $44.3 million.
SAC ¶ 16.

In contrast, the Restatement revised every other year

downward, the first quarter of 2013 from $12.0 million to $9.4
million (a 22% decrease), the fiscal year 2012 from $51.3
million to $42.8 million (a 17% decrease), and the fiscal year
2011 from a $1.1 million loss to an $18.1 million loss (a
roughly 1600% decrease).

These numbers are large enough to

render less credible the defendants’ arguments that they had no
notice of any of the accounting improprieties that led to the
Restatement.

See In re Scholastic, 252 F.3d at 77.

Moreover, the timing and circumstances of individual
defendants’ resignations may add some further weight to an
overall inference of scienter.

See In re OSG Sec. Litig., 12 F.

Supp. 3d 622, 633 n.84 (S.D.N.Y. 2014) (collecting cases).

The

plaintiff alleges that on March 12, 2013, Orthofix announced
that Vaters, then President and CEO, would resign from the
company immediately, and on June 18, 2013, Orthofix announced
that McCollum, then Vice President of Finance and CFO, would
resign from the company less than one month later.
28, 141, 143.

SAC ¶¶ 27-

These resignations occurred in the lead-up to

Orthofix’s announcement on July 29, 2013, that it would delay
filing its quarterly report for the second quarter of 2013,
33

which ultimately led to issuance of the Restatement.

The timing

and circumstances of the resignations of Vaters and McCollum
thus lend further weight to an inference of scienter.
In light of the foregoing, a reasonable person would deem
an inference of scienter for defendants Vaters, McCollum, and
Buxton “at least as compelling as any opposing inference one
could draw from the facts alleged.”

Tellabs, 551 U.S. at 324.

Accordingly, their motion to dismiss the plaintiff’s claims
under Section 10(b) and Rule 10b-5 as against them is denied.
5.
Orthofix moves to dismiss the plaintiff’s Section 10(b)
claim as against it, arguing that the plaintiff has failed to
plead scienter by the corporation.

But because the Second

Amended Complaint properly alleges scienter against three key
officers of Orthofix, it necessarily alleges scienter against
Orthofix itself. See Dynex Capital, 531 F.3d at 195 (“In most
cases, the most straightforward way to raise [an inference of
scienter] for a corporate defendant will be to plead it for an
individual defendant.”); Arbitron, 741 F. Supp. 2d at 491
(“Because the plaintiffs have successfully pleaded scienter as
to . . . Arbitron's then-president, CEO, and chairman, they have
also pleaded corporate scienter as to Arbitron.”); see also City
of Roseville, 814 F. Supp. 2d at 420.

Accordingly, Orthofix’s

motion to dismiss the plaintiff’s Section 10(b) claim is denied.
34

B.
The defendants argue that the plaintiff has failed to plead
that the alleged misrepresentations and omissions caused the
plaintiff’s loss.

To allege loss causation under Section 10(b)

and Rule 10b–5, the plaintiff must provide in the Second Amended
Complaint “notice of what the relevant economic loss might be
and what the causal connection might be between that loss and
the [alleged] misrepresentation.”
544 U.S. 336, 347 (2005).

Dura Pharms., Inc. v. Broudo,

To provide the requisite notice, the

plaintiff must plead economic loss and either “that the loss was
foreseeable and caused by the materialization of the risk
concealed by the fraudulent statement,” ATSI, 493 F.3d at 107,
or “that the misstatement or omission concealed something from
the market that, when disclosed, negatively affected the value
of the security.”

Lentell v. Merrill Lynch & Co., 396 F.3d 161,

173 (2d Cir. 2005); see also In re New Oriental Educ. & Tech.
Grp. Sec. Litig., 988 F. Supp. 2d 406, 428 (S.D.N.Y. 2013).
“[P]artial disclosures can satisfy the loss causation
requirement.”

Freudenberg v. E*Trade Fin. Corp., 712 F. Supp.

2d 171, 202 (S.D.N.Y. 2010).
The plaintiff argues that the defendants’ misstatements or
omissions first materialized on July 29, 2013, when Orthofix
announced that it would be delaying the release of its financial
35

statement for the second quarter of 2013 in order to “review
matters relating to revenue recognition for prior periods.”
¶ 145.

SAC

Following that disclosure, the price of Orthofix stock

dropped by 17%.

The defendants argue that this announcement was

not a corrective disclosure because it did not reveal any
misconduct.

The defendants rely heavily on Loos v. Immersion

Corp., 762 F.3d 880 (9th Cir. 2014), a recent opinion in which
the Ninth Circuit Court of Appeals held that the plaintiff had
not sufficiently pleaded loss causation because the
“announcement of an investigation, without more, is insufficient
to establish loss causation.”

Id. at 890.

However, the Court

made clear that it was not suggesting that the announcement of
an investigation can “never form the basis of a viable loss
causation theory,” and noted that the announcement may be
sufficient if it “contains an express disclosure of actual
wrongdoing.”

Id. at 890 n.3.

Although Orthofix did not

expressly disclose wrongdoing in its announcement, it did state
that it would be reviewing “revenue recognition for prior
periods” with the assistance of independent auditors, and
shortly thereafter it announced that it would be restating its
revenue for prior periods.

SAC ¶¶ 145, 147.

In any event, Loos is plainly not controlling within the
Second Circuit, and this Court and other courts within this
District have concluded that the disclosure of an investigation
36

“into a particular business practice can be sufficient to allege
loss causation with respect to alleged misstatements regarding
that practice.”

In re New Oriental, 988 F. Supp. 2d at 428; see

also In re IMAX Sec. Litig., 587 F. Supp. 2d 471, 485–86
(S.D.N.Y. 2008) (finding public disclosure of SEC investigation
into company's “multiple element accounting” sufficiently
specific to constitute corrective disclosure with respect to
misstatements about application of that accounting procedure);
In re Take–Two Interactive Sec. Litig., 551 F. Supp. 2d 247,
286–90 (S.D.N.Y. 2008) (finding public disclosure of SEC
investigation “into certain stock option grants” sufficiently
specific to constitute corrective disclosure with respect to
alleged misstatements about process for granting stock options).
The defendants attempt to distinguish those cases on the grounds
that the announcements in those cases disclosed SEC
investigations, and Orthofix only disclosed an internal
investigation that would be conducted with the assistance of
outside professionals.

However, in determining whether loss

causation is established, the dispositive question is not which
type of entity announced an investigation, or how strongly
worded the announcement was, but rather whether the plaintiff
has alleged a “causal connection” between the loss and the
alleged misrepresentations.

Dura, 544 U.S. at 347.

In this

case, the July 29 announcement “revealed to the market a
37

potential problem” with the defendants’ revenue recognition
practices that had been previously concealed by the defendants’
now-undisputed misstatements in its prior financial disclosures.
See In re New Oriental, 988 F. Supp. 2d at 428.

Following this

announcement, the price of Orthofix shares declined from $27.40
to $22.71 per share on July 31, falling approximately 17% on
about two days of trading.

Accordingly, the July 29

announcement is sufficient to establish loss causation.
IV.
The plaintiffs also allege that the individual defendants
and Orthofix are liable under Section 20(a) of the Exchange Act
because they controlled Orthofix, which in turn violated Section
10(b) and Rule 10b-5.

Section 20(a) provides:

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 establish a prima facie case of control

person liability, a plaintiff must show (1) a primary violation
by the controlled person, (2) control of the primary violator by
the defendant, and (3) that the defendant was, in some
meaningful sense, a culpable participant in the controlled
person's fraud.”

ATSI, 493 F.3d at 108.

38

The individual

defendants argue that they are not liable under Section 20(a),
first, because Orthofix did not violate Section 10(b) and Rule
10b-5, and second, because none of the individual defendants
were culpable participants in Orthofix’s alleged fraud.

The

first argument fails because, as discussed above, there are
sufficient allegations of Orthofix’s liability.

Similarly, with

respect to the second argument, there are sufficient allegations
as to the culpable participation of Vaters, McCollum, and
Buxton.

However, there are insufficient allegations concerning

the culpable participation of defendant Milinazzo.

Therefore,

the Section 20(a) claim is dismissed only against defendant
Milinazzo.

39

CONCLUSION
The Court has considered all of the remaining arguments of
the parties. To the extent not specifically addressed above,
they are either moot or without merit. For the foregoing
reasons, the defendants' motion to dismiss is granted in part
and denied in part.

The claims against defendant Milinazzo are

dismissed with prejudice and the motion to dismiss is otherwise
denied.

The Clerk is directed to close Docket Nos. 49, 53, 63,

and 66.

SO ORDERED.
Dated:

New York, New York
March 6, 2015

___________/S/_______________
John G. Koeltl
United States District Judge

40