LaSalle v. Medco Research, Inc.

• Decision Date: 15 May 1995
• Docket Number: Nos. 94-3576,94-3577,s. 94-3576
• Parties: Fed. Sec. L. Rep. P 98,721 Anthony LASALLE, Alan Totah, Mark Law, and Marlene E. Calvert, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. MEDCO RESEARCH, INCORPORATED, Archie W. Prestayko, Donald B. Siegel, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 443

54 F.3d 443

Fed. Sec. L. Rep. P 98,721

Anthony LASALLE, Alan Totah, Mark Law, and Marlene E.

Calvert, on behalf of themselves and all others

similarly situated, Plaintiffs-Appellants, v. MEDCO RESEARCH, INCORPORATED, Archie W. Prestayko, Donald B.

Siegel, et al., Defendants-Appellees.

Nos. 94-3576, 94-3577.

United States Court of Appeals, Seventh Circuit.

Argued April 13, 1995.

Decided May 15, 1995.

Aram A. Hartunian, Hartunian & Associates, Chicago, IL (argued), Michael J. Molder, Rudolph, Seidner, Goldstein, Rochester, Salmon & Dorian, Philadelphia, PA, for Anthony Lasalle and Alan Totah.

Clinton A. Krislov, Jonathan Nachsin, Krislov & Associates, Chicago, IL, Joseph S. Rosenthal, Joseph B. Pritti, Joan A. Zooper, Bondy & Schloss, New York City, for Medco Research, Inc., Archie W. Prestayko, Donald B. Siegel and Sanford J. Hillsberg.

Peter R. Sonderby, Chicago, IL, for Kemper Securities Group, Inc. and John R. Boettiger.

Donna L. McDevitt (argued), Timothy A. Nelson, Skadden, Arps, Slate, Meagher & Flom, Chicago, IL, for Vector Securities Intern., Inc.

Before POSNER, Chief Judge, and ESCHBACH and MANION, Circuit Judges.

POSNER, Chief Judge.

Tregenza v. Great American Communications Co., 12 F.3d 717, 721-22 (7th Cir.1993), holds that the one-year "borrowed" statute of limitations applicable to fraud suits brought under the SEC's Rule 10b-5 begins to run when the plaintiff first learned of facts that would have caused a reasonable person to suspect the possibility of a misrepresentation or misleading omission. (All other reported appellate cases are in accord. See references in id. at 718, plus Dodds v. Cigna Securities, Inc., 12 F.3d 346 (2d Cir.1993), which, having been decided only nine days before Tregenza, we overlooked; and cf. Freeman v. Laventhol & Horwath, 34 F.3d 333, 341 (6th Cir.1994).) In the present case, the district judge granted the defendants' motion to dismiss for failure to state a claim on the ground that it was plain on the face of the complaint that the plaintiffs had had in their possession, for more than a year before they filed suit, information that should have alerted them to the possibility of fraud and impelled them to begin to investigate.

The complaint, our only source of facts, is long and intricate, but it can be summarized very briefly. The principal defendant, Medco, is a pharmaceutical company that develops drugs for the diagnosis and treatment of heart disease. In 1988 it had licensed a predecessor of Fujisawa-USA to manufacture Medco's first product, "Adenocard." The following year the Food and Drug Administration had approved Adenocard for sale in the United States. Sales grew rapidly, but Medco was anxious because all its revenues came from the sale of this one product and the product was beginning to encounter competition. Medco had to develop another successful product--fast. The candidate of choice was a related product that Medco dubbed "Adenoscan" and that is designed to simulate the physiological effects of a treadmill stress test for cardiac patients who are for one reason or another unable to take the test or perform adequately on it. Again Medco licensed Fujisawa-USA to do the actual manufacturing. Before Adenoscan could be sold in the United States, it (like Adenocard before it) had to receive the FDA's approval. The fraud alleged in the complaint is that the defendants represented that approval was imminent even though they knew that, because of problems with safety and quality control at Fujisawa's plant, the application for approval was in serious trouble and the approval would be substantially delayed. On April 7, 1992, about a week after Medco had temporarily withdrawn its application for the approval of the sale of Adenoscan, Medco was telling its shareholders that its application was on track and that Adenoscan could be expected to be approved by the end of the year. In April of 1993, a year later, with Adenoscan still not approved (it was not approved until December 14, 1993), Medco announced that it was going to sue Fujisawa. The suit was filed the following month. The announcement of the impending suit was publicized in the business press, revealing to investors--for the first time, say the plaintiffs--the problems at Fujisawa's plant that had been responsible for Medco's inability to obtain timely approval of Adenoscan from the FDA and the existence of which contradicted the representations that Medco and the other defendants had made that approval was imminent.

The present suit, a class action on behalf of persons who bought stock in Medco during the period of the alleged fraudulent concealment of the difficulties Medco had encountered in seeking approval to market Adenoscan, was filed on September 1, 1993. The question whether the suit is untimely depends therefore on whether the plaintiffs should have suspected before September 1, 1992, that the defendants were engaged in fraud. In arguing that they should have suspected, the defendants rely on two "critical facts," in their words. The first is a precipitate decline in the price of Medco's stock. That price had peaked at $31.75 per share on January 24, 1992. By April 24, 1992, it had plunged to $15.25, a decline of slightly more than 50 percent, and while it rose a bit afterward it was still only $15.50 at the end of August of that year. The second allegedly critical fact is that on June 9 the FDA recalled several batches of Adenocard because of "short filling": presumably as a consequence of a manufacturing problem at Fujisawa's plant, some vials did not contain as much of the drug as they were supposed to.

We have great difficulty in seeing how these two facts, even in conjunction, would cause a reasonable investor to suspect fraud. Everyone knows that the process of obtaining the FDA's approval for a new drug is fraught with uncertainty; and when a drug company's entire earnings are from one declining product and it is counting on a new product for its financial salvation, unexpected delays in obtaining an approval without which the product cannot be sold are likely to have a devastating impact on the company's stock price. Stated differently but equivalently, much of the price of Medco stock during the relevant period must have represented simply a capitalization of the expected earnings from the sale of Adenoscan, and those earnings in turn depended critically on the timing of the FDA's approval. If that approval was long delayed, then as had happened with Adenocard the earnings from the new drug would be eroded by competition in the market for new drugs, which is dynamic. It is misleading to point to the January 24, 1992, peak of $31.75. There can be no inference that it represented a stable value of Medco's shares. Three weeks before, the price had been only $25. Two and a half months before that it had been only $16.75. And in January of 1991, only a year before it reached its peak of $31.75, it had been only $6.75. What goes up fast sometimes comes down fast--without fraud.

As for the recall of Adenocard, product recalls have become a familiar...