Harris v. Ivax Corp., 98-4818

CourtUnited States Courts of Appeals. United States Court of Appeals (11th Circuit)
Citation182 F.3d 799
Docket NumberNo. 98-4818,98-4818
Parties(11th Cir. 1999) Alan M. HARRIS, Yitzchok Wolpin, Fausto Pombar, Plaintiffs-Appellants, v. IVAX CORPORATION, Phillip Frost, Michael W. Fipps, Defendants-Appellees.
Decision Date27 July 1999

[Copyrighted Material Omitted] Appeal from the United States District Court for the Southern District of Florida. (No. 97-559-CIV-FAM), Federico A. Moreno, Judge.

Before COX and HULL, Circuit Judges, and COHILL*, Senior District Judge.

COX, Circuit Judge:

This appeal invites application of the safe harbor for forward-looking statements added to the Securities Exchange Act of 19341 by the Private Securities Litigation Reform Act of 1995, Pub.L. 104-67, 109 Stat. 737 (1995) (PSLRA). We affirm the district court's dismissal of the complaint under Fed.R.Civ.P. 12(b)(6).


According to the complaint-our only source of the facts-the defendant Ivax Corporation is a manufacturer of generic drugs, a highly volatile business. Ivax was profitable in 1995, but lost money in the second quarter of 1996. On August 2, 1996 Ivax issued a press release that, while acknowledging business problems, also showed some optimism.2 Ivax stock rose. On September 30, the last day of the quarter, Ivax announced in another press release that it anticipated a $43 million loss.3 On November 11, Ivax announced a $179 million loss for the third quarter, $104 million of which was a reduction in the carrying value of the goodwill ascribed to certain of Ivax's businesses. Neither of the earlier press releases had mentioned the possibility of this goodwill writedown based on third-quarter results. The price of Ivax stock plummeted.

Investors hoping to represent a class of purchasers of Ivax Corporation stock between August 2, 1996 and November 11, 1996 sued Ivax, its chairman and chief executive officer, and its chief financial officer. They claimed that the defendants had committed fraud under the Securities Exchange Act 10(b), 15 U.S.C. 78j, and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. 240.10b-5, as well as common-law negligent misrepresentation. There are two theories of liability: first, that Ivax's economic projections were fraudulent, and second, that Ivax's disclosure of factors affecting its projections misled by omitting the possibility of a goodwill writedown. The defendants moved to dismiss based on the safe-harbor provision4 and heightened pleading requirements5 added to the Securities and Exchange Act of 1934 by the PSLRA.

In a thoughtful opinion, the district court dismissed the complaint under Fed.R.Civ.P. 12(b)(6). See Harris v. IVAX Corp., 998 F.Supp. 1449 (S.D.Fla.1998).6 The plaintiffs appeal and challenge the district court's dismissal on several grounds. We review the dismissal of a complaint under Fed.R.Civ.P. 12(b)(6) de novo. See Davis v. Monroe County Bd. of Educ., 120 F.3d 1390, 1393 (11th Cir.1997) (en banc). In addition, the plaintiffs argue that the district court should have granted them leave to amend the complaint. We review the district court's refusal to do so for abuse of discretion, although we review de novo the underlying legal conclusion of whether a particular amendment to the complaint would be futile. See Motorcity of Jacksonville, Ltd. v. Southeast Bank N.A., 83 F.3d 1317, 1323 (11th Cir.1996) (en banc), summarily vacated and remanded on other grounds sub nom. Hess v. FDIC, 519 U.S. 1087, 117 S.Ct. 760, 136 L.Ed.2d 708, reinstated, 120 F.3d 1140, 1145 (11th Cir.1997).


The PSLRA made two changes to the Securities Exchange Act of 1934 that potentially affect the complaint here. First, the Act provides a safe harbor from liability for certain "forward-looking statements." See PSLRA 102(b), 109 Stat. at 754, codified at 15 U.S.C. 78u-5(c)(1). In that safe harbor, corporations and individual defendants may avoid liability for forward-looking statements that prove false if the statement is "accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement." Id., codified at 15 U.S.C. 78u-5(c)(1)(A)(i). Even if the forward-looking statement has no accompanying cautionary language, the plaintiff must prove that the defendant made the statement with "actual knowledge" that it was "false or misleading." Id., codified at 15 U.S.C. 78u-5(c)(1)(B). Second, the Act has introduced a heightened pleading requirement. Now a complaint seeking recovery for securities fraud must allege specific facts that raise a "strong inference" of "the required state of mind" on the part of officers responsible for an allegedly fraudulent statement. Id. 101(b), codified at 15 U.S.C. 78u-4(b)(2).

The district court concluded that all of the statements alleged in the complaint to be fraudulent were forward-looking, and that the statements' "cautionary language" was "meaningful." See Harris v. IVAX Corp., 998 F.Supp. 1449, 1453-54 (S.D.Fla.1998). The court thus concluded that Ivax's statements were anchored within the statutory safe harbor, and that the cautionary language shielded Ivax from liability. The court went further to conclude in the alternative that the complaint stumbled on the new pleading standards by failing to allege adequate facts to support a "strong inference," as the statute requires, that the defendants made the forward-looking statements with actual knowledge of their falsity. See id. at 1454-55.

The plaintiffs make two central legal arguments against the district court's holdings. First, they argue that the statements they allege to be fraudulent were either not forward-looking or were unaccompanied by sufficient cautionary language. For this reason, they contend that the district court should not have dismissed the current complaint. Second, they argue that the current amended complaint sufficiently alleges scienter, which they believe to be reckless indifference to the falsity of the statements, not actual knowledge. Even if the current complaint does not adequately allege scienter, the plaintiffs argue in the alternative that the district court should have permitted them to amend their complaint, since their proposed second amended complaint adequately pleads scienter.

For the more detailed reasons that follow, we reject the plaintiffs' arguments. All of the statements that the plaintiffs claim to be false or misleading are forward-looking. They were accompanied, moreover, by "meaningful cautionary language." Because we reach this conclusion, we need not in this case enter the thicket of the PSLRA's new pleading requirements for scienter; if a statement is accompanied by "meaningful cautionary language," the defendants' state of mind is irrelevant. See H.R. Conf. Rep. 104-369, at 44 (1995), reprinted in 1995 U.S.C.C.A.N. 730, 743 ("The first prong of the safe harbor requires courts to examine only the cautionary statement accompanying the forward-looking statement. Courts should not examine the state of mind of the person making the statement."). We do not address, therefore, the question of what exactly a "strong inference" of the appropriate scienter is, an issue that has vexed the courts since the PSLRA's enactment. See, e.g., In re Silicon Graphics Secs. Litig., No. 97-16204, --- F.3d ---- (9th Cir. July 2, 1999); In re Advanta Secs. Litig., No. 98-1846, --- F.3d ---- (3d Cir. June 17, 1999); In re Physicians Corp. Securities Litig., --- F.Supp.2d ---- (S.D.Fla. Feb. 18, 1999); In re Aetna Inc. Securities Litig., 34 F.Supp.2d 935, 951 (E.D.Pa.1999).

B.Were the August 2 and September 30 Statements in the Safe Harbor for Forward-Looking Statements?

Settling on a level of specificity for the forward-looking analysis is the first problem here. In the argument section of their brief, the plaintiffs have specifically mentioned only one of the fraudulent statements alleged in the complaint. From that, we gather that they urge us to treat the August 2 and September 30 press releases with a broad brush, in effect concluding that the releases as a whole were either forward-looking or not. Such an approach would not, however, comport with the Act's demand of articulate pleading: The PSLRA closes the universe of supposedly false statements under scrutiny to those "specif[ied]" in the complaint. PSLRA 101(b), codified at 15 U.S.C. 78u-4(b)(1). While the legislative history does not explain this particular pleading requirement, it implies piecemeal examination of the statements found in a company communication.

The complaint quotes, with added emphasis apparently meant to indicate the misleading statements, seven passages from these two press releases. Two of those passages are, however, outside the sphere of the plaintiffs' allegations of falsehood. First, there is a statement in the August 2, 1996 press release that "we have taken a hard look at our generic drug business," and that "[w]e have instituted actions to enhance the profitability of our U.S. generics business." (R.2-36 37.) (The press release goes on to describe restructuring meant to increase efficiency.) Second, there is a statement in the September 30, 1996 press release that "we have scrutinized our generic drug business" and that "we created a task force ... to rapidly identify and implement strategies to reduce costs and improve efficiencies in our U.S. generic drug business." (Id. 49.) As far as we can tell from the complaint, the plaintiffs believe it to be true that Ivax management reevaluated its generic drug business, and the plaintiffs do not allege that Ivax failed in fact to plan to restructure the business to improve efficiency. The plaintiffs' core theories appear rather to be two: first, that Ivax's hopeful outlooks concealed an intent to write down goodwill by $104 million in the third quarter of 1996, and second, that a limited list of clouds on the horizon deliberately omitted the risk of a goodwill...

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