Indiana State Dist. Council of Labs. v. Omnicare

• Decision Date: 12 October 2007
• Docket Number: Civil Action No. 2006-26 (WOB).
• Parties: INDIANA STATE DISTRICT COUNCIL OF LABORERS AND HOD CARRIERS PENSION AND WELFARE FUND, Plaintiffs v. OMNICARE, INC., et al, Defendants.
• Court: U.S. District Court — Eastern District of Kentucky

527 F.Supp.2d 698

INDIANA STATE DISTRICT COUNCIL OF LABORERS AND HOD CARRIERS PENSION AND WELFARE FUND, Plaintiffs v. OMNICARE, INC., et al, Defendants.

Civil Action No. 2006-26 (WOB).

United States District Court, E.D. Kentucky, Northern Division at Covington.

October 12, 2007.

COPYRIGHT MATERIAL OMITTED

Darren J. Robbins, Jennifer L. Gmitro, William S. Lerach, Lerach Coughlin Stoia Geller Rudman & Robbins, San Diego, CA, Kevin L. Murphy, Graydon, Head & Ritchey, LLP, Ft. Mitchell, KY, Shirley Huang, Lerach Coughlin Stoia Geller Rudman & Robbins, San Francisco, CA, Marc A. Topaz, Richard A. Maniskas, Schiffrin & Barroway, LLP, Radnor, PA, for Plaintiffs.

James P. Smith, III, John E. Schreiber, Richard W. Reinthaler, Harvey Kurzweil, Mindy S. Dolgoff, William T. Conway, III, Dewey Ballantine LLP, New York City, Stephen M. Gracey, Frost Brown Todd LLC, Cincinnati, OH, William T. Robinson, III, Frost, Brown, Todd, LLC, Florence, KY, for Defendants.

Henry Rosen, Lerach Coughlin Stoia Geller Rudman & Robbins, San Diego, CA, for Plaintiffs/Defendant.

MEMORANDUM OPINION AND ORDER

WILLIAM O. BERTELSMAN, District Judge.

This matter is before the court on defendants' motion to dismiss (Doe. # 59), plaintiffs' to add an additional named plaintiff (Doc. # 76), and defendants' motion for leave to file a surreply (Doc. # 89).

Factual and Procedural Background

Defendant Omnicare, Inc. is a provider of pharmaceutical care services to the elderly and other residents of long-term care facilities in the United States and Canada. During the relevant time, Omnicare securities traded publicly on the NASDAQ National Market. Defendant Joel Gemunder is Omnicare's CEO; defendant David Froesel is its CFO and a Senior Vice-President; defendant Cheryl Hodges is its Secretary and a Senior Vice-President; defendant Edward Hutton is Chairman of the Omnicare Board of Directors; and defendant Sandra Laney is a Director.

This proposed class action was filed on February 2, 2006, alleging claims for violations of § 10(b) and § 20(a) of the Securities Exchange Act of 1934. (Doc. # 1) Plaintiffs alleged generally that defendants engaged in a fraudulent scheme that artificially inflated Omnicare's stock price by misrepresenting the company's financial results and business practices. A second, and essentially identical, case was filed on February 13, 2006, styled Chi v. Omnicare, Inc., et al., Cov. Civil Action No. 06-31 ("the Chi action").

As directed by the PSLRA, upon filing this action, the Lerach firm published a notice over a national wire service describing the claims asserted in the original complaint and advising potential class members that they had 60 days within which to move to serve as lead plaintiff.¹ By order dated May 22, 2006, this court consolidated this action with Chi, appointed the Laborers District Council Construction Industry Pension Fund as lead plaintiff, and approved the Lerach Coughlin firm as lead class counsel. (Doc. # 22)²

On July 20, 2006, plaintiffs filed their Consolidated Amended Complaint ("CAC") against all defendants. (Doe. # 27)

On July 27, 2006—one week after the CAC was filed—Omnicare disclosed that its profits fell 51% after losing $18.3 million as a result of the decision by United-HealthGroup ("UHG") to switch its Medicare Part D contracts with Omnicare to less favorable "any willing provider" contracts held through a newly-acquired UHG subsidiary.³

On October 31, 2006, plaintiffs filed a motion for leave to file a first amended consolidated complaint. Through the proposed amendment, plaintiffs sought to: (1) extend the Class Period from an end date of January 27, 2006 to an end date of July 27, 2006; (2) add claims against new defendants Sandra Laney and Edward. Hutton for § 10(b) violations; and (3) add a new plaintiff to assert claims against all defendants for violation of § 11 of the Securities Act of 1933 for allegedly false statements made in an SEC filing on November 23, 2005.

Following a hearing, the court granted the motion to amend the complaint, and plaintiffs filed their amended complaint. The amended complaint purports to bring claims on behalf of all persons who purchased publicly traded shares of Omnicare from August 3, 2005 to July 27, 2006 (the "Class Period"). (Doc. # 52, First Amended Consolidated Complaint for Violation of the Federal Securities Laws, ¶ 1)

Plaintiffs allege that defendants made false and misleading statements or omissions that fall into four general categories:

(1) Omnicare falsely represented that it abided by all applicable federal and state laws and regulations regarding its practices concerning unused drugs. (Am. Compl.¶¶ 13-14);

(2) Omnicare issued false financial statements in 2005 and 2006 which were based on financial practices which failed to comply with Generally Accepted Accounting Principles ("GAAP"). (Am. Compl.¶¶ 49-55, 67-72, 99-105, 109-115);

(3) Omnicare failed to disclose in a timely manner its contract dispute with UHG, which ultimately caused Omnicare to post a 51% decline in profits for second quarter 2006. (Am.Compl.¶¶ 29, 97-98, 125); and

(4) Omnicare made false and misleading statements regarding its transition to the Medicare Part D program. (Am. Compl.¶¶ 58-62, 75-78).

For their § 11 claim, plaintiffs allege that the same GAAP violations discussed in conjunction with their § 10(b) claim rendered false and misleading Omnicare's prospectus that was issued in conjunction with its December 15, 2005 public offering. (Am.Compl.¶¶ 117-118)

Defendants filed a motion to dismiss the amended complaint, and that motion was fully briefed and then argued on August 2, 2007. Shortly before that hearing, plaintiffs filed a motion to add a new named plaintiff. (Doc. # 76) Because that motion was not ripe at the time of the hearing, the court deferred ruling on all motions pending completion of briefing. (See Doc. # 84)

All briefing having now been completed, and the court finding that no further oral argument is necessary, the court issues the following memorandum opinion and order.

Analysis

A. Legal Standards

Plaintiffs' allegations of securities fraud arise under Sections 10(b)⁴ of the Securities Exchange Act (Security Act) and Rule 10b-5⁵ promulgated thereunder.

Section 10(b) and Rule 10b-5 prohibit "`fraudulent, material misstatements or omissions in connection with the sale or purchase of a security.'" Miller v. Champion Enterprises, Inc., 346 F.3d 660, 661 (6th Cir.2003) (quoting Morse v. McWhorter, 290 F.3d 795 (6th Cir.2002)). The basic elements of this cause Of action are:

(1) a material misrepresentation or omission;

(2) scienter, i.e., a wrongful state of mind;

(3) a connection with the purchase or sale of a security;

(4) reliance;

(5) economic loss; and

(6) "loss causation," i.e., a causal connection between the material misrepresentation and the loss.

Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005) (citations omitted).⁶

In 1995, Congress passed the PSLRA in an effort to prevent abuse of the securities laws by private litigants. Tellabs, Inc. v. Makor Issues & Rights, Ltd. ___ U.S. ___, ___, 127 S.Ct. 2499, 2504, 168 L.Ed.2d 179 (2007). Among other things, the PSLRA created a heightened pleading standard for securities fraud cases. Specifically, a plaintiff now must (1) specify each statement alleged to have been misleading and the reason or reasons why the statement is misleading; and (2) "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. §§ 78u-4(b)(1), (2). The PSLRA provides that if a plaintiff does not meet this requirement, a court shall, on any defendant's motion, dismiss the complaint. 15 U.S.C. § 78u-4 (b)(3).

The Supreme Court has defined "scienter" as "a mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). In securities fraud claims based on statements of present or historical fact, scienter consists of knowledge or recklessness. PR Diamonds, Inc. v. Chandler, 364 F.3d 671, 681 (6th Cir.2004) (citation omitted). As the Sixth Circuit recently stated, scienter

is limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinbry care, and that present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it.

Brown v. Earthboard Sports USA, Inc., 481 F.3d 901, 917-18 (6th Cir.2007) (citation omitted).

The Supreme Court also recently considered whether, and to what extent, a trial court must consider competing inferences in determining whether a securities fraud complaint gives rise to a "strong" inference of scienter as required by the PSLRA. Tellabs, Inc. v. Makor Issues & Rights, Ltd. ___ U.S. ___, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). After reviewing the history of the PSLRA, the Court established the following analytical framework for courts reviewing motions to dismiss securities fraud complaints:

First, faced with a Rule 12(b)(6) motion to dismiss a § 10(b) action, courts must, as with any motion to dismiss for failure to plead a claim on which relief can be granted, accept all factual allegations in the complaint as true. . . .

Second, courts must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice .... The inquiry, as several Courts of Appeals have recognized, is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard...