Acito v. IMCERA Group, Inc.

• Decision Date: 01 February 1995
• Docket Number: No. 367,D,367
• Citation: 47 F.3d 47
• Parties: Fed. Sec. L. Rep. P 98,667, 31 Fed.R.Serv.3d 581 Thomas E. ACITO, on behalf of himself and all others similarly situated and Neil Blinderman, Plaintiffs-Appellants, v. IMCERA GROUP, INC.; George D. Kennedy; Blakeman M. Ingle; Raymond F. Bentele; and Boyd D. Wainscott, Defendants-Appellees. ocket 94-7149.
• Court: U.S. Court of Appeals — Second Circuit

Page 47

47 F.3d 47

Fed. Sec. L. Rep. P 98,667, 31 Fed.R.Serv.3d 581

Thomas E. ACITO, on behalf of himself and all others

similarly situated and Neil Blinderman, Plaintiffs-Appellants, v. IMCERA GROUP, INC.; George D. Kennedy; Blakeman M. Ingle;

Raymond F. Bentele; and Boyd D. Wainscott,

Defendants-Appellees.

No. 367, Docket 94-7149.

United States Court of Appeals,

Second Circuit.

Argued Oct. 12, 1994.

Decided Feb. 1, 1995.

Curtis V. Trinko, New York City (Timothy J. MacFall, Law Offices of Curtis V. Trinko, and Lee Squitieri, Abbey & Ellis, of counsel), for plaintiffs-appellants.

Richard W. Reinthaler, New York City (Cyrus Benson III, White & Case), for defendants-appellees.

Before: OAKES, KEARSE, and MINER, Circuit Judges.

MINER, Circuit Judge:

Plaintiffs-appellants Thomas E. Acito and Neil Blinderman, on behalf of themselves and all others similarly situated, appeal from a judgment entered on October 13, 1993 in the United States District Court for the Southern District of New York (Owen, J.) granting a motion made by defendants-appellees, pursuant to Fed.R.Civ.P. 9(b) and 12(b)(6), to dismiss the complaint. The court held that the complaint failed to include the specific factual allegations necessary to make out a claim of securities fraud under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), and Rule 10b-5, 17 C.F.R. Sec. 240.10b-5, promulgated thereunder. Plaintiffs also appeal from the denial of their motion to amend the judgment and for leave to amend the pleadings, pursuant to Fed.R.Civ.P. 59(e), entered on January 26, 1994, the court having concluded that the additional allegations did not cure the deficiencies noted in its prior judgment. For the reasons that follow, we affirm.

BACKGROUND

Plaintiffs-appellants commenced this class action against defendants-appellees IMCERA Group, Inc. ("IMCERA"), its Chairman of the Board of Directors and former CEO, George D. Kennedy, and three of its then-current officers--two of whom were also directors--Blakeman M. Ingle, Raymond F. Bentele and Boyd D. Wainscott. Plaintiff Acito purchased 100 shares of IMCERA stock on December 24, 1991 at $40.50 per share, and plaintiff Blinderman purchased shares of IMCERA stock on February 3, 1992 at $40 per share. Plaintiffs claimed that defendants had misled the investing public by disseminating materially false information and failing to correct prior statements, in violation of Rule 10b-5.

IMCERA, a New York corporation with business operations throughout the world, principally is engaged in three business segments--medical, specialty chemical, and agricultural and animal health products. In 1989, IMCERA's agricultural and animal health products subsidiary, Pitman-Moore ("Pitman"), acquired Coopers Animal Health, Inc. ("Coopers"), which included a manufacturing plant in Kansas City, Kansas. When acquired, the Kansas City plant produced ten animal health care products. As part of the consolidation plan, Pitman submitted applications (known as Supplemental New Animal Drug Applications or "SNADAs") to the Federal Drug Administration ("FDA"), seeking approval for the manufacture of seven additional animal health products at the Kansas City plant. These products already were being produced at other facilities and the Kansas City plant was to be utilized as an alternative production site. The FDA, as part of the application process, inspected the Kansas City plant in 1990. The 1990 inspection revealed thirty-four deficiencies and approval of the SNADAs was delayed pending a reinspection. The FDA reinspected the plant during April-May 1991 and noted fourteen deficiencies. Approval of the SNADAs again was delayed. However, the FDA did not impose any sanctions on Pitman and no other adverse consequences resulted from these two inspections.

In September 1991, IMCERA issued its annual report to shareholders for the period ending June 30, 1991. IMCERA highlighted the progress made in its three subsidiaries. The report represented that Pitman's position in the market was greatly enhanced by the acquisition of Coopers in July 1989 and expressed optimism for the upcoming year. These representations were repeated on IMCERA's Form 10-K, filed with the Securities and Exchange Commission. Further, on September 26, 1991, IMCERA issued a press release stating that management was "comfortable" with analysts' estimates predicting earnings from continued operations of $.85 to $.90 per share for the fiscal quarter ending September 30, 1991. IMCERA also expressed comfort with full-year earning estimates of $5 per share, which was decreased to $1.67 per share due to a three-for-one stock split. At that time, IMCERA announced that its three operating companies, including Pitman, were expected to contribute to the step-up in earnings for fiscal 1992, and the company was bullish on its long-term growth potential.

In October 1991, the company announced that it earned $.89 per share from continued operations for the first quarter, a 22% increase from the first quarter of the previous year. Moreover, IMCERA announced that Pitman posted an increase in earnings of between $1.1 to $1.8 million compared to the previous year. The company again expressed optimism for the 1992 fiscal year.

On December 3, 1991, a spokesperson for IMCERA announced that IMCERA was still comfortable with previous projections of $1.67 per share for the fiscal year, and that "some folks would find some comfort with estimates of about $.33 per share for the second fiscal quarter of 1992 compared with the $.28 per share earned in the year earlier period." On the same day, the FDA began its third inspection of the Kansas City plant. On January 16, 1992, defendant Ingle, then IMCERA's CEO and a director, announced that Pitman's operating earnings for the second quarter were $16 million, an increase of 5% over the previous year, and he again expressed optimism that the company's overall growth would continue.

The following day, January 17, FDA inspector Gwyn Dickinson presented Ronald Berke, Pitman's Director of Operations, with a twenty-page report citing eighty-five manufacturing deficiencies uncovered at the Kansas City plant. On that day, Pitman agreed to suspend production and sales on seven products produced at the Kansas city plant, but failed to notify the investing public of this until February 18, 1992. In the February 18 announcement, IMCERA estimated that it could face an after-tax charge against earnings of up to $.06 per share, but that the actual cost would depend on the duration of the sales suspension and the cost of any corrective actions necessary at the Kansas City plant. The suspension in sales represented less than 2% of Pitman's 1991 sales and less than 1% of IMCERA's total sales. The company also announced that it no longer felt comfortable with analysts' predictions of earnings over $1.65 per share. On February 19, as a result of the suspended sales and IMCERA's new position on projected earnings, IMCERA shares dropped $4.50, or almost 12%, to $34.125.

Plaintiffs alleged in their complaint that IMCERA should have foreseen that the third FDA inspection would have negative consequences, given the deficiencies noted in the first two inspections. Therefore, IMCERA's representations that the company was comfortable with analysts' predictions of earnings of up to $1.67 per share and that the acquisition of Coopers would enhance Pitman were false and misleading. Plaintiffs also alleged that insiders benefitted from their knowledge of this material, adverse information and the false statements concerning IMCERA's future because the inflated share price increased defendants' executive compensation. Plaintiffs further alleged that defendant Kennedy had a motive and opportunity to defraud investors in that, between December 3, 1991 and January 28, 1992, he sold over 380,000 shares, 30,000 of which were sold after the results of the third inspection were known to defendants but before the company notified the public.

Defendants' moved to dismiss the action pursuant to Fed.R.Civ.P. 9(b) and 12(b)(6). The court granted the motion, finding that, because the plant represented a small portion of IMCERA's business and the first two inspections did not result in any adverse action that affected earnings, the results of those two inspections were not material. The court further noted that the first inspection revealed thirty-four deficiencies and the second inspection revealed fourteen, indicating that the plant was on the upswing. Thus, the first two inspections did not give rise to a strong inference that defendants knew that the third inspection would result in adverse consequences. As to the statements expressing comfort with analysts' predictions of earnings and predicting that the acquisition of Coopers would enhance Pitman, the court found that these claims were based solely on hindsight. Lastly, the court determined that there were no facts to provide a strong inference of intent to defraud the investing public.

Plaintiffs subsequently moved for leave to amend their complaint to cure the deficiencies. The court reviewed the new matter to be included in the amended complaint and denied the motion, ruling that the new information was insufficient to cure the original complaint. This appeal followed.

DISCUSSION

In reviewing the district court's dismissal of an action pursuant to Fed.R.Civ.P. 12(b)(6), we accept the facts alleged in the complaint as true. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974). "Generally, we will uphold a district court's dismissal of a claim only if it appears that the plaintiff can prove no set of facts upon which relief may be granted." Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1127 (2d Cir.1994). When the complaint contains allegations of fraud, however, Fed.R.Civ.P. 9(b) requires that "the circumstances constituting fraud ... be stated with particularity." We...