In re Philip Morris Securities Litigation

Decision Date09 January 1995
Docket NumberNo. 93 Civ. 2131(RO).,93 Civ. 2131(RO).
Citation872 F. Supp. 97
PartiesIn re PHILIP MORRIS SECURITIES LITIGATION.
CourtU.S. District Court — Southern District of New York

Melvyn I. Weiss, Sharon Levine Mirsky, Jeffrey S. Abraham, Milberg Weiss Bershad Hynes & Lerach, Arthur N. Abbey, Mark C. Gardy, Abbey & Ellis, New York City, Leonard Barrack, Anthony J. Bolognese, Barrack, Rodos & Bacine, Philadelphia, PA, for plaintiffs.

Herbert M. Wachtell, Paul Vizcarrondo, Jr., Stuart C. Berman, Wachtell, Lipton, Rosen & Katz, New York City, for defendant.

OPINION AND ORDER

OWEN, District Judge.

This class action had its genesis on Friday, April 2, 1993. That morning Philip Morris announced that it would reduce the average price on its flagship Marlboro cigarette brand by forty cents per pack. Philip Morris expected that, as a result of this, operating earnings for 1993 from its United States tobacco business would be down as much as forty percent.

Less than five hours later, at 1:25 p.m., the first of these class action lawsuits was filed on behalf of a plaintiff that had bought 60 shares during the alleged class period. Four more lawsuits were filed that same day, and on the very next business day — Monday, April 5 — five additional lawsuits were commenced. In each of these complaints, pleaded almost entirely on information and belief, plaintiffs accused defendants of having made fraudulent statements so as to artificially raise the price of Philip Morris' common stock. Supporting plaintiffs' conclusory allegations were a few public statements made earlier in the year with a comparison to the April 2 announcement, and the allegation that because of differences in the announcements the defendants must have committed fraud. I note that in the few hours counsel devoted to getting the initial complaints to the courthouse, overlooked was the fact that two of them contained identical allegations, apparently lodged in counsel's computer memory of "fraud" form complaints, that the defendants here engaged in conduct "to create and prolong the illusion of Philip Morris' success in the toy industry." (Emphasis supplied).

Under the circumstances, an observation by the court in Ferber v. Travelers Corp., 785 F.Supp. 1101 (D.Conn.1991) at 1106, n. 8 seems remarkably apt:

... The court finds it peculiar that four of the lawsuits consolidated in this action were filed around 10:00 a.m. on the first business day following Travelers' announcement of the loss reserve increase. Most of the complaints are virtually identical (including typographical errors). At the hearing the court inquired about the swiftness of the plaintiffs' response to the announcement by Travelers. Counsel for the plaintiffs represented that "people in his firm worked throughout the weekend" to obtain the documentation necessary to file the complaints.... The court also asked:
How did you get to be so smart and to acquire all this knowledge about fraud from Friday to Tuesday? ... On Friday afternoon did your client suddenly appear at your doorstep and say "My God, I just read in the Wall Street Journal about Travelers. They defrauded me," and you agreed with them and you interviewed them and you determined that there was fraud and therefore you had a good lawsuit, so you filed it Tuesday morning, is that what happened?
Id. Counsel for the plaintiffs was not responsive to this line of inquiry.

Now before me is a motion to dismiss the "Consolidated Amended Class Action Complaint" of plaintiffs and thirty-four law firms. The action, basically pleaded on information and belief1, alleges violations of § 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j(b), claiming misstatements and omissions relating to defendant Philip Morris' domestic tobacco operations and, specifically, their flagship Marlboro cigarette brand. Plaintiffs' class is defined as those who invested in Philip Morris stock between January 7 and April 2, 1993. Defendant Philip Morris is incorporated in Virginia, headquartered in New York, and is well known in the tobacco, food and beer industries. Half of its operating profits are generated from domestic tobacco operations, and full-priced brands such as Marlboro constitute nearly 90% of the profits from tobacco operations. Largely because Marlboro is the most popular cigarette sold in America, Philip Morris has been the domestic tobacco industry leader for the past nine years.

Plaintiff's claim of fraud2 is predicated on various statements made by Philip Morris officials between January 7 and mid-March 1993 that allegedly inflated the price of Philip Morris stock and induced plaintiffs to purchase shares. On April 2, Philip Morris announced the said new marketing strategy that included a price reduction of $0.40 per pack of Marlboro cigarettes, which, it was estimated, would decrease projected earnings of domestic tobacco products for 1993 by nearly 40% in comparison with the previous year. This announcement caused Philip Morris common stock to lose nearly 25% of its value, falling from $64.125/share at the close of the market on April 1 to $49.375/share by the close of April 2.

Defendants now move to dismiss the consolidated amended complaint pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6). Such a motion must be denied unless "it appears beyond doubt that plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957), and in viewing any claim, I must draw all reasonable inferences in favor of the plaintiff. Defendants contend that the complaint neither pleads an actionable claim under § 10(b) or Rule 10b-5 of the Securities Exchange Act nor satisfies Federal Rule of Civil Procedure 9(b)'s requirement that fraud be pleaded with particularity. There must be some allegations of acts or conduct indicating that the Philip Morris declarants knew or should have known the statements to be false at the time they were made. Schwartz v. Novo Industri, A/S, 658 F.Supp. 795, 799 (S.D.N.Y.1987). For a § 10(b) and Rule 10b-5 fraud claim, plaintiffs must establish (1) material misstatements or omissions, (2) indicating an intent to deceive or defraud, (3) in connection with the purchase or sale of a security. Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir.1986).

The complaint does set forth arguably optimistic statements as follows:

On January 7, 1993, Philip Morris issued a press release in which Hans G. Storr, Executive Vice President, Chief Financial Officer and a director of the Company, remarked:

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.

On January 12, 1993, John Nelson, a senior vice president of Philip Morris, was reported by Reuter's as saying,

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

The following day The Wall Street Journal reported that Philip Morris' central concern in 1993 would be on profits rather than market share. Senior Vice President Lawrence Wexler is quoted as saying that Marlboro "is doing quite well within the competitive environment."

On January 27, Philip Morris released its financial results for the fourth quarter and fiscal year 1992, indicating a 20% growth in earnings. The complaint quotes Chairman of the Board and Chief Executive Officer of Philip Morris Michael A. Miles' statement:

Based on our growth and productivity initiatives, increasing volume momentum, and narrowing of price gaps in a number of our key categories, we are optimistic about 1993.

The complaint also quotes that a February 19 statement by an unnamed Philip Morris official, "It's part of our strategy to narrow the price gap between branded and private labels, and to add value to premium brands."

On March 11, 1993, Philip Morris issued its 1992 Annual Report, which included a letter to shareholders in which defendants Miles and Murray stated that the tobacco industry had "excellent volume growth and income potential for the future.... We expect 1993 to mark another year of strong growth in earnings per share." The Letter to Shareholders: further stated: "our 1992 performance demonstrates the underlying strength of our business, as well as our momentum for continued growth." With respect to domestic tobacco operations, the Letter stated that Philip Morris

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.

Plaintiffs highlight other statements from the Annual Report, including:

The growth of the discount segment, particularly deep discount products, hurt the performance of full priced brands — particularly our competitors brands.
We strive to accomplish our objectives by emphasizing trademark value on all our cigarette brands to maintain our competitive advantage. Our position as the lowcost producer in the U.S. cigarette industry should help us continue to increase our profits from our domestic tobacco business.
Our major challenge is to maintain this superior performance. We believe that we have the plans, programs and people to achieve this goal.

On April 2 William Campbell, President and Chief Operating Officer of Philip Morris U.S.A., announced the new pricing strategy. Campbell stated, as reported in The Wall Street Journal, that "the news had gone from good to bad in a very short time.... This market has moved very quickly. We don't see it today the way we saw it in January."

Plaintiffs, on the basis of the foregoing, assert...

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4 cases
  • In re Bausch & Lomb, Inc. Securities Litigation
    • United States
    • U.S. District Court — Western District of New York
    • November 13, 2008
    ...mind that disclosure requirements "are not intended to `attribute to investors a childlike simplicity.'" See In re Philip Morris Sec. Litig., 872 F.Supp. 97, 101 (S.D.N.Y. 1995), aff'd in part rev'd in part, 75 F.3d 801 (1996) (citation omitted). Rather, investors are presumed to have the a......
  • In re Hunter Environmental Services, Inc. Securities Litigation, 3:93cv031 (DJS).
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    ...the market if that market does not have material information or has incomplete or inaccurate information." In re Philip Morris Sec. Litig., 872 F.Supp. 97, 102 (S.D.N.Y.1995), aff'd in relevant part sub nom. San Leandro Emergency Medical Group Profit Sharing Plan v. Philip Morris Cos., 75 F......
  • Pitten v. Jacobs
    • United States
    • U.S. District Court — District of South Carolina
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    ...which would allow plaintiffs "a second chance to add scatter-shot allegations to their complaint"); In re Philip Morris Securities Litigation, 872 F.Supp. 97, 103 n. 6 (S.D.N.Y.1995) (denying request to replead as it would not "cure the failure to have adequately pleaded fraud by foresight"......
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5 books & journal articles
  • Securities fraud.
    • United States
    • American Criminal Law Review Vol. 45 No. 2, March 2008
    • March 22, 2008
    ...if the information the defendants were alleged to withhold entered the market through another channel); In re Philip Morris See. Litig., 872 F. Supp. 97, 102 (S.D.N.Y. 1995) (holding fraud on the market can only be found if the "market does not have material information or has incomplete or......
  • Securities fraud.
    • United States
    • American Criminal Law Review Vol. 42 No. 2, March 2005
    • March 22, 2005
    ...significant correct information in order to diffuse the damage of the alleged misrepresentation); see In re Philip Morris Sec. Litig., 872 F. Supp. 97, 102 (S.D.N.Y. 1995) (holding fraud on the market can only be found if the "market does not have material information or has incomplete or i......
  • Securities fraud.
    • United States
    • American Criminal Law Review Vol. 44 No. 2, March 2007
    • March 22, 2007
    ...if the information the defendants were alleged to withhold entered the market through another channel); In re Philip Morris Sec. Litig., 872 F. Supp. 97, 102 (S.D.N.Y. 1995) (holding fraud on the market can only be found if the "market does not have material information or has incomplete or......
  • Securities fraud.
    • United States
    • American Criminal Law Review Vol. 46 No. 2, March 2009
    • March 22, 2009
    ...if the information the defendants were alleged to withhold entered the market through another channel); In re Philip Morris Sec. Litig., 872 F. Supp. 97, 102 (S.D.N.Y. 1995) (holding fraud on the market can only be found if the "market does not have material information or has incomplete or......
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