In re Alpharma Inc. Securities Litigation

• Decision Date: 15 June 2004
• Docket Number: No. 02-3348.,02-3348.
• Citation: 372 F.3d 137
• Parties: In re: ALPHARMA INC. SECURITIES LITIGATION Maverick Capital, Ltd., Appellant.
• Court: U.S. Court of Appeals — Third Circuit

Page 137

372 F.3d 137

In re: ALPHARMA INC. SECURITIES LITIGATION Maverick Capital, Ltd., Appellant.

No. 02-3348.

United States Court of Appeals, Third Circuit.

Argued on June 16, 2003.

June 15, 2004.

COPYRIGHT MATERIAL OMITTED

Joseph J. DePalma, Lite, Depalma, Greenberg & Rivas, LLC, Newark, Marc I. Willner, (Argued), David Kessler, Bala Cynwyd, for Appellant.

Anthony J. Marchetta, John P. Scordo, Pitney, Hardin, Kipp & Szuch, LLP, Morristown, William H. Pratt, Frank Holozubiec, Wendy E. Long, (Argued), Kirkland & Ellis, New York, for Appellees.

Before ALITO, ROTH, and HALL,^* Circuit Judges.

OPINION

ROTH, Circuit Judge.

This case involves a proposed class action suit brought by investors who purchased shares of Alpharma, Inc., common stock between April 1999 and October 2000. Specifically, plaintiffs allege that defendants made materially false or misleading statements by reporting and then commenting on inflated revenue, net income, and earnings per share results during the proposed class period. These results are alleged to have artificially inflated the company's stock price, thereby damaging members of the proposed class.

The District Court, concluding that plaintiffs failed to state a claim for relief under federal securities laws and that granting leave to amend would be futile, dismissed the Complaint with prejudice pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons set forth below, we will affirm the final judgment of the District Court.

I. Factual Background

A. Overview

This case began as six separate proposed class actions, all of which were brought by shareholders alleging they suffered damages as a result of being induced to purchase shares of Alpharma's common stock on the basis of false or misleading statements made by the company and its top executives. On March 27, 2001, the District Court consolidated these actions, appointed Maverick Capital, Ltd., as lead plaintiff, and ordered the filing of a consolidated amended complaint

Plaintiffs filed the Consolidated Amended Class Action Complaint (the "Complaint") on June 8, 2001. In the Complaint, plaintiffs seek to represent investors who purchased Alpharma stock between April 28, 1999, and October 30, 2000. They allege that the company and four of its executives caused the issuance of materially false and misleading financial results during the proposed class period, thereby artificially inflating the value of the company's common stock. Plaintiffs further allege that these misstatements were the result of improper accounting procedures which inflated the company's reported revenue, net income, and earnings per share.

B. Parties

As stated above, plaintiffs seek to represent a proposed class of investors who purchased shares of Alpharma stock during the class period. Defendant Alpharma, Inc., is a multinational corporation that produces pharmaceuticals for both animal and human use. Its domestic headquarters is located in Fort Lee, New Jersey. At all times relevant to the Complaint, the company's common stock traded on the New York Stock Exchange (N.Y.SE). Alpharma sold a total of $537 million of common stock to underwriters during the class period.

Defendant Einar Sissener is Alpharma's Chairman. Sissener served as Chief Executive Officer (CEO) between June 1994 and June 1999, and then as Chairman of the Office of the Chief Executive from June 1999 to December 1999. He signed Alpharma's Form 10-K annual report for 1999. The Complaint alleges that he, together with relatives, owns sufficient voting shares to effectively control the company.

Defendant Ingrid Wiik assumed the position of President and CEO in January 2000 and became a director in February 2000. She too signed the company's Form 10-K annual report for 1999. Wiik sold forty-six percent of her shares in Alpharma for a total of $839,075 during a four day period in the first week of August 2000 when the value of Alpharma's stock was near its high point of $71 per share.

Defendant Jeffrey Smith served as Alpharma's Vice President and Chief Financial Officer (CFO) at all times relevant to the Complaint. He signed the Form 10-K annual report for 1999, as well as each of the Form 10-Q quarterly reports issued during the proposed class period. During the first week of August 2000, Smith sold twenty-six percent of his holdings in the company for a total of $1,240,549.

Defendant Bruce Andrews served as president of Alpharma's Animal Health Division (AHD) during all times relevant to the Complaint. Andrews sold seventy-seven percent of his shares in the company for a total of $1,658,965 during the first week of August 2000.¹

C. Substantive Allegations

The primary basis for the proposed class action is plaintiffs' allegation that the financial results released by defendants during the class period were the product of accounting irregularities which caused Alpharma to report inflated revenue figures. These revenue figures, in turn, affected the accuracy of its net income and earnings per share calculations, thereby fueling an increase in the value of the company's stock during the class period.

More specifically, plaintiffs allege that the individual defendants violated both Generally Accepted Accounting Principles (GAAP) and Alpharma's own revenue recognition policy² by recording AHD sales as revenue even though the products sold were not shipped to customers until as long as six months after the purported sale. In practice, this meant that AHD customers had agreed to purchase Alpharma products but delayed receipt and payment until subsequent quarters. The purchased products were then put on "customer hold" and shipped to a warehouse until the customers were ready to receive and pay for them. These so-called "pre-sales" began when Andrews became president of the AHD in May 1997 and had allegedly become part of Alpharma's "corporate culture" by the beginning of the class period. As a result, plaintiffs allege that defendants either knew or recklessly disregarded the fact that (1) instances would arise in which customers would later refuse to receive and pay for orders already recognized as revenue in previous quarters, (2) they had failed to disclose that pre-sales essentially sapped future demand for the company's products, and (3) the use of pre-sales encouraged the creation of fictitious sales.

Alpharma restated its results for the full year 1999, each quarter during 1999, and the first two quarters of 2000 following the close of trading on the NYSE on October 30, 2000. In its press release, the company placed the blame for the overstatements on employees in the Brazil division of the AHD and noted that, after a full investigation, it was convinced that the problem had not spread beyond Brazil.³ Prior to the announcement on October 30, the stock traded at $56.50. By the time the NYSE closed the following day, the value of Alpharma's shares had fallen to $38.81.

In placing the blame for this drop in share price on the individual defendants, plaintiffs allege in their complaint:

Each of the Individual Defendants by virtue of his or her executive and managerial positions with the Company, directly participated in the daily management of the Company, and was directly involved in the day-to-day operations of the Company at the highest level, and was privy to confidential proprietary information concerning the Company and its business and operations, and revenue recognition policies. The Individual Defendants were involved or participated in drafting, producing, reviewing and/or disseminating the false and misleading statements alleged [in the Complaint].

They further assert that the individual defendants "had a duty to promptly disseminate truthful and accurate information with respect to Alpharma and to promptly correct any public statements issued by or on behalf of the Company that had become false or misleading." Plaintiffs allege this duty was violated when defendants knowingly or recklessly disregarded the fact that "the misleading statements and omissions would adversely affect the integrity of the market for the Company's stock and would cause the price of the Company's common stock to become artificially inflated."

D. Details of AHD's Pre-Sales

Alpharma's AHD conducts business with its customers through a staff of sales representatives. At all times relevant to the Complaint, these sales representatives were supervised by regional sales managers. The sales managers reported to Randy Maclin, AHD's vice president of sales and marketing within the United States, and Loren Williams, vice president of sales and marketing for AHD in Latin America. In a typical transaction, sales representatives would provide the company's Customer Service Department (CSD) with the details of the purchase, including whether the product was to be shipped, picked up, or placed on "customer hold." The CSD would then enter the transaction into the company's Business Planning and Control System (BPCS), which allocated inventory for the sale and created an invoice. Each warehouse would conduct a monthly inventory, the results of which were submitted to Alpharma's headquarters in New Jersey. However, the Brazil division of AHD did not use the BPCS. Instead, it recorded sales by sending copies of sales reports and financial statements directly to Alpharma's New Jersey headquarters, which then entered the data into the BPCS. Further, Michael Weaver, AHD's vice president of finance and one of Andrews' subordinates, made monthly trips to Brazil to review sales records and audit inventory. Based on these facts, plaintiffs allege that personnel in Alpharma's New Jersey headquarters were "aware of or should have been aware of and able to access sales results from its Brazilian operations."

Beginning when he became president of the AHD in May 1997, Andrews is alleged to have engaged in a number of questionable practices, including (1) telling AHD staff that he would take...