Plumbers & Pipefitters Nat'l Pension Fund v. Orthofix Int'l N.V.

• Decision Date: 06 March 2015
• Docket Number: No. 13 Cv. 5696JGK.,13 Cv. 5696JGK.
• Citation: 89 F.Supp.3d 602
• Parties: PLUMBERS & PIPEFITTERS NATIONAL PENSION FUND, individually and on behalf of all others Similarly situated,Plaintiff, v. ORTHOFIX INTERNATIONAL N.V., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

89 F.Supp.3d 602

PLUMBERS & PIPEFITTERS NATIONAL PENSION FUND, individually and on behalf of all others Similarly situated¹ Plaintiff

v.ORTHOFIX INTERNATIONAL N.V., et al., Defendants.

No. 13 Cv. 5696JGK.

United States District Court, S.D. New York.

Signed March 6, 2015.

Carol V. Gilden, Cohen Milstein Sellers & Toll PLLC, Chicago, IL, Daniel Stephen Sommers, Stephen Douglas Bunch, Cohen Milstein Sellers & Toll PLLC, Washington, DC, Michael Benjamin Eisenkraft, Cohen Milstein Sellers & Toll P.L.L.C., New York, NY, for Plaintiff.

David Franklin Wertheimer, Hogan Lovells U.S. LLP, Jonathan Paul Bach, Richard T. Marooney, JR, King & Spalding LLP, Cooley LLP, New York, NY, George H. Mernick, III, Hogan Lovells U.S. LLP, Dixie L. Johnson, King & Spalding LLP, Washington, DC, Robert Lovett, Elizabeth C. Inglis, Cooley LLP, Boston, MA, for Defendants.

OPINION AND ORDER

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.

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.” Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir.1985). 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.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). 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 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.

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 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.” SAC ¶ 145. 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 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...