75 F.3d 801 (2nd Cir. 1996), 97, San Leandro Emergency Medical Group Profit Sharing Plan v. Philip Morris Companies, Inc.

Docket Nº:97, Docket 95-7156.
Citation:75 F.3d 801
Party Name:34 Fed.R.Serv.3d 530 SAN LEANDRO EMERGENCY MEDICAL GROUP PROFIT SHARING PLAN, Randy Stark, Daniel D. Kleppner, Stuart Wechsler, Craig Aronberg, Rubin Kreis, Irma Kreis, Samuel Spear Pension Plan, Clyde Cutner, The Scotus Fund, Naomi L. Raphael, Martin Offenberg, Susan Burt Collins, as custodian for Katherine M. Collins, Victor Rone, Steven J. Weiss
Case Date:January 25, 1996
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

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75 F.3d 801 (2nd Cir. 1996)

34 Fed.R.Serv.3d 530


Randy Stark, Daniel D. Kleppner, Stuart Wechsler, Craig

Aronberg, Rubin Kreis, Irma Kreis, Samuel Spear Pension

Plan, Clyde Cutner, The Scotus Fund, Naomi L. Raphael,

Martin Offenberg, Susan Burt Collins, as custodian for

Katherine M. Collins, Victor Rone, Steven J. Weiss, Irvin

Reiss, Alexander Ledonne, Ronald A. Stokley, Trustee F/B/O

Marcella L. Cohen U/A Trust dated 2/5/83 and 12/29/89, M.A.

Silver, D.C. Silver, Trustee, Lisa F. Cannon Irrevocable

Trust dated 12/14/91, F/B/O Lisa F. Cannon, Esther Salsitz

Dezube, Lonnie B. Reiver, Robert Thomas Securities in

Restricted Reserve Account for the Benefit of Greenwood

Financial Services, Inc., John W. Turner, Judith Beldock,

George Weisz, Frank Noble, Jane Hillman, and Caren Groffman,



PHILIP MORRIS COMPANIES, INC., Michael A. Miles, William B.

Murray, Hans G. Storr, William I. Campbell and

Hamish Maxwell, Defendants-Appellees.

No. 97, Docket 95-7156.

United States Court of Appeals, Second Circuit

January 25, 1996

Argued Sept. 12, 1995.

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Nicholas deB. Katzenbach, Princeton, NJ (Arthur N. Abbey, Judith L. Spanier, Abbey & Ellis, New York City; Melvyn I. Weiss, Sharon Levine Mirsky, Jeffrey S. Abraham, Milberg Weiss Bershad Hynes & Lerach, New York City; Leonard Barrack, Gerald J. Rodos, Anthony J. Bolognese, Barrack Rodos & Bacine, Philadelphia, PA, on the brief), for plaintiffs-appellants.

Herbert M. Wachtell, New York City (George T. Conway III, Stuart C. Berman, Dan Himmelfarb, Wachtell, Lipton, Rosen & Katz, New York City, on the brief), for defendants-appellees.

Before: NEWMAN, Chief Judge, LUMBARD and VAN GRAAFEILAND, Circuit Judges.

JON O. NEWMAN, Chief Judge:

This appeal concerns the recurring issue of whether a complaint alleging securities fraud is sufficient to survive a motion to dismiss. More precisely, the issue is whether, under the circumstances of this case, a company has a duty to disclose its consideration of an alternative business plan in order to prevent its prior statements from becoming misleading. The issue arises on an appeal by members of a plaintiff class of shareholders who bought stock in Philip Morris Companies Inc. ("Philip Morris") at an allegedly inflated price during a portion of 1993. They appeal from the January 18, 1995, judgment of the District Court for the Southern District of New York (Richard Owen, Judge) granting the motion of defendants, Philip Morris and five of its senior executive officers, 1 to dismiss the Consolidated Amended Class Action Complaint (the "Complaint") pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure. See In re Philip Morris Securities Litigation, 872 F.Supp. 97 (S.D.N.Y.1995). Plaintiffs also appeal from the District Court's denial of their motion for leave to amend the pleadings. For the reasons that follow, we conclude that the claim

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of issuing misleading statements was properly dismissed, but that an allegation of individual insider trading must be reinstated against one of the defendants. We therefore affirm in part, reverse in part, and remand.


In recent years, cigarette sales have been declining because of health concerns and changing demographics. The entry of discount brands into the marketplace has led to a further decline in sales in premium brands such as Philip Morris' Marlboro line, the most popular and largest selling brand of cigarettes in the United States. Marlboro is sold and manufactured through Philip Morris U.S.A. ("PMUSA"). 2 Historically, in order to sustain or increase its profit levels, Philip Morris has responded to decreasing demand for Marlboro by raising Marlboro's price and at the same time narrowing the price gap between its discount and premium brands in order to make the discount brands less attractive. Philip Morris engaged in this strategy through the first quarter of 1993, and implemented price increases on discount cigarettes during the class period. As plaintiffs acknowledge, however, retailers foiled the company's strategy by deciding to absorb the price increases rather than pass them on to consumers, thus maintaining the large retail price gap between discount and premium brand cigarettes.

At the end of the first quarter of 1993, in the face of a declining sales volume and decreasing market share for Marlboro, Philip Morris adopted a new marketing strategy. On March 31, 1993, a plan to reduce the price of Marlboro was presented to Philip Morris' Board of Directors, and on April 2, 1993, Philip Morris announced that it would cut the price of Marlboro by $0.40 per pack, a move estimated to reduce its earnings by $2 billion in 1993. Following this announcement, Philip Morris stock dropped almost 25 percent. Within five hours of the announcement, the first of several lawsuits against Philip Morris had been filed. 3

Plaintiffs asserted a claim for relief under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a) (1988), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1995). Plaintiffs alleged that during the class period, which runs from January 7, 1993, to April 1, 1993, Philip Morris misrepresented or failed to disclose to the market that Marlboro sales were declining at such a rate that raising prices would not compensate for the loss of sales, and that the company was actively considering a new and alternative strategy of cutting Marlboro prices in order to increase market share at the expense of short-term profits. Specifically, plaintiffs alleged that numerous statements made by defendants during the class period are actionable because they misrepresented or omitted to state material facts relating to the company's: (1) marketing strategy for Marlboro and discount brands, (2) results of operations, e.g., sales volume of Marlboro, and (3) expected 1993 earnings. We set out below the statements that plaintiffs alleged are materially false or misleading, with clarifications or additional context offered by Philip Morris included in the margin where relevant:

1. In a press release responding to an analyst's report, Philip Morris stated:

While the environment in 1993 will be as challenging as in 1992, we are budgeting for and expecting a strong year for all of our businesses.

We are encouraged by recent retail supermarket share gains 4 for Marlboro as

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well as the recent narrowing of the price difference between discount and premium brands.

We believe the recent weakness in the price of our stock is based on an overreaction to exaggerated and negative media accounts of tobacco industry issues.

Philip Morris Press Release, Jan. 7, 1993 (quoting defendant Storr). Compl. p 44.

2. Reuters reported that, at an analyst's meeting, Philip Morris representatives stated that the company's domestic tobacco business "should deliver income growth consistent with our historically superior performance." The report also quoted the following:

We expect to do better this year than last year. Marlboro is still very strong in the face of very low pricing [of discount cigarettes].... I think we'll be able to cut the decline rate.

Reuters, Jan. 13, 1993 (quoting defendant Campbell and PMUSA executive John Nelson). Compl. pp 45-46. 5

3. In an article about Philip Morris and Marlboro, the Wall Street Journal reported that "tobacco executives" had stated that the main focus for 1993 would be on profits and not on market share. Wall Street Journal, Jan. 13, 1993 (unattributed). Compl. p 48. 6

The newspaper also reported that Philip Morris had said that "the tobacco business is strong and growing" and "is doing quite well within the competitive environment." Wall Street Journal, Jan. 13, 1993 (quoting defendant Campbell and Philip Morris executive Lawrence Wexler). Compl. p 48-49. 7

4. Philip Morris issued a press release stating: "[B]ased on our growth and productivity initiatives, increasing volume momentum, and a narrowing of price gaps in a number of our key categories, we are optimistic about 1993." Philip Morris Press Release, Jan. 27, 1993 (quoting defendant Miles). Compl. p 52. 8

5. Philip Morris announced that it had once again raised the prices of its discount cigarettes, and stated: "[I]t's part of our strategy to narrow the price gap between branded and private label, and to add value to premium brands." Dow Jones News

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Wire, Feb. 19, 1993 (quoting Philip Morris spokesman Nick Rolli). Compl. p 53. 9

6. The company's Annual Report to shareholders stated, "We expect 1993 to mark another year of strong growth in earnings per share," and described the company's tobacco business as "hav[ing] excellent volume growth and income potential for the future." The Report continued:

In the U.S. market, we continued to compete successfully in both the full priced and discount segments. In spite of a volume decline, our full priced cigarettes reached a record 49% share of the full priced segment, while our discount brands grew more than 10%. Despite intense price competition, we widened our position as the profit leader in the U.S. cigarette industry, accounting for more than half the industry's profits, and nearly all its profit growth.

In a section entitled "Review of the Year" the Report further stated:

The growth of the discount segment, particularly deep discount products, hurt the performance of full priced brands--particularly our competitors' brands. Benefiting from decades of experience in overseas markets with...

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