Nat'l Junior Baseball League v. Pharmanet Dev. Group Inc.

Decision Date30 March 2010
Docket NumberCiv. Action. No. 08-5723 (FLW).
Citation720 F.Supp.2d 517
PartiesNATIONAL JUNIOR BASEBALL LEAGUE, individually and on Behalf of all others similarly situated, Plaintiff, v. PHARMANET DEVELOPMENT GROUP INC., Jeffrey P. Mcmullen, and John P. Hamill, Defendants.
CourtU.S. District Court — District of New Jersey

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Peter S. Pearlman, for Plaintiff.

Alan E. Kraus, Joan Ellen Karn, John M. Falzone, III, Larisa V.K. Gjivoje, Latham & Watkins, LLP, Newark, NJ, for Defendants.

OPINION

WOLFSON, District Judge:

Presently before the Court is a motion by Defendants PharmaNet Development Group, Inc. (“PharmaNet” or the “Company”), Jefferey P. McMullen (McMullen), and John P. Hamill (Hamill) (collectively, Defendants), to dismiss Lead Plaintiff Macomb County Employees' Retirement System's (Macomb County or Plaintiff) 1 Amended Class Action Complaint (“Amended Complaint”), pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6). In this putative class action securities litigation, Plaintiff alleges that it and other similarly situated investors purchased PharmaNet's stock between November 1, 2007 and October 29, 2008 (the “Class Period”), and that Defendants have violated Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated under, 17 C.F.R. § 240.10b-5; in addition, Plaintiff avers that Defendants McMullen and Hamill (collectively, Individual Defendants) have violated Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). Specifically, Plaintiff asserts that Defendants fraudulently inflated PharmaNet's stock by misrepresenting the Company's financial figures and concealing from the market serious problems that PharmaNet faced, and that Plaintiff and other investors relied on these material misrepresentations and omissions to their detriment. Defendants move to dismiss the Amended Complaint based on the fact that Plaintiff has failed to plead the elements of a Section 10(b) claim with particularity. For the reasons stated herein, Defendants' motion is granted and Plaintiff's claims are dismissed without prejudice; however, Plaintiff shall have 30 days from the date of the Order accompanying this Opinion to amend its Amended Complaint consistent with this Opinion.

BACKGROUND

For the purposes of this motion, the Court will accept the facts as alleged in the Amended Complaint as true. Defendant PharmaNet 2 is a contract/clinical research organization (“CRO”) that provides a range of drug development services globally to the pharmaceutical, biotechnology, generic drug, and medical device industries. Am. Compl. at ¶ 18. During the Class Period, PharmaNet was (and remains) headquartered in Princeton, New Jersey, Id. at ¶¶ 1, 15, and

“operated in two business segments: (i) the early-stage segment, which primarily consisted of Phase I and bioequivalency clinical trial services and bioanalytical laboratory services, and included designing studies, assisting clients in preparing study protocols, recruiting and screening study participants, conducting early stage clinical trials and collecting and reporting data to clients; and (ii) the late-stage segment, which primarily consisted of Phase II through Phase IV clinical trial services and a comprehensive array of related services, including data management and bio statistics, medical and scientific affairs, regulatory affairs and submissions, clinical information technology services and consulting services.”

Id. at ¶ 58. Defendant McMullen has served as President, CEO and a member of the Board of Directors of PharmaNet since March 2006, December 2005 and June 2005, respectively. Id. at ¶ 19. Defendant Hamill has served as Executive Vice President, CFO, Treasurer and Secretary of PharmaNet since 2006. Id. at ¶ 20. Hamill also began functionally serving as Chief Accounting Officer (“CAO”) of PharmaNet in November of 2007. Id.

In 1996, McMullen co-founded PharmaNet, Inc. (PNI), PharmaNet's predecessor. Id. In December of 2004, PNI was acquired, through a merger, by SFBC International, Inc. (“SFBC”), and PNI then became known as SFBC. Id. at ¶¶ 19, 58, 64. 3 After the merger, SFBC “began routinely disclosing the size and amount of its contractual backlog, [defined in PharmaNet's quarterly and annual filings] as the anticipated direct revenue from written notification of awards, letters of intent and written contracts,” a practice continued by PharmaNet. 4 Id. at ¶ 68. By the start of the Class Period, PharmaNet touted backlog to its investors and urged financial analysts to rely on backlog as the most important measure of its financial health and business prospects, and tied backlog to its book-to-bill ratio. 5 Id. at ¶ 70. PharmaNet also disclosed backlog on a quarterly basis, and Defendants McMullen and Hamill discussed backlog in annual reports and other filings and during earnings conference calls. Id. at ¶ 71. PharmaNet reported in its 2007 Annual Report that backlog was valued at $457 million, as opposed to $353 million the previous year, an increase of nearly 30%. Id. Revenue from late-stage clinical trials made up 85% of the 2007 backlog. Id.

Beginning in 2005, a series of adverse information regarding SFBC was made public, including, the payment of extra compensation to clinical trial participants in order to procure their participation in more than one study at a time and subsequent requests by SFBC for those participants to sign affidavits denying the improprieties, coupled with threats of deportation to coerce cooperation. See Id. at ¶¶ 60-61. When these improprieties became known, SFBC's stock fell 68% and the Senate Finance Committee launched an investigation into SFBC's treatment of patients. In December 2005, shareholders began filing suit against SFBC, and shortly thereafter, the Securities and Exchange Commission (“SEC”) also launched an investigation. Id. at ¶ 60. Consequently, several high-level executives of SFBC resigned amidst the firestorm, including Lisa Krinsky, SFBC's founder, President and Chairman. Id. at ¶¶ 59, 61.

SFBC's problems continued, as it was forced to raze its Miami testing facility, which “handled more than two-thirds of [its] workload and generated nearly 30% of [its] operating revenue.” Id. at ¶ 62. SFBC's testing operations were subsequently transferred to Canada, but in December 2005, a participant involved in a drug trial in Montreal infected other participants and SFBC employees with tuberculosis. Id. at ¶ 62-63. This caused several pharmaceutical companies to cease doing business with SFBC, including Isotecknika, Inc. and Bristol-Myers Squibb. Id. Following these negative events, in August 2006, SFBC changed its name to PharmaNet Development Group, Inc. (a defendant in this case). Id. at ¶ 64.

Numerous federal securities fraud class actions and federal shareholder derivative actions were filed, and then consolidated and settled on August 1, 2007 for $28.5 million (“the Settlement”). Id. at ¶¶ 64-65. A portion of the Settlement, $10.4 million, was not covered by insurance, and PharmaNet was authorized to issue up to $4 million of common stock to the shareholder class to cover this shortfall. Id. at ¶ 65-66. This additional common stock was to be valued according to the “volume weighted closing price for the 10 trading days leading up to the date the district court enters an order formally approving the settlement” Id. at ¶ 66 ( quoting PharmaNet's 2007 Annual Report). The Settlement was approved on March 10, 2008, and PharmaNet issued 135,870 shares of common stock valued at $4 million, or $29.44 per share, on March 24, 2008. Id.

In this action, Plaintiff's securities claims relate to PharmaNet's quarterly releases and earnings calls in November 2007, February 2008, April 2008, September 2008, and October 2008, as well as statements pertaining to PharmaNet's financial performance during the Class Period. See Id. ¶¶ 136-52, 156-72, 177-84. Plaintiff, relying, inter alia, on the statements of twelve Confidential Witnesses (“CWs”), see Amend. Compl. at ¶¶ 32-55, 82-102, 106-18, 124-34, alleges that a series of more than two-dozen public statements made by Defendants were materially misleading. See Id. at ¶¶ 136-204. These include: the failure to accurately portray the reasons for a growing number of contract cancellations; inclusion in the backlog of contracts that were unlikely to generate revenue; failure to promptly recognize an impairment charge to PharmaNet's goodwill and indefinite-lived assets; and the improper inclusion of unsigned changed orders 6 in backlog and in revenue, which served to intentionally and fraudulently inflate PharmaNet's financial figures. Id. at ¶ ¶ 4, 8, 79-80. Plaintiff asserts that this allegedly fraudulent financial picture enabled PharmaNet insiders to profit from insider trading and to artificially buoy the price of PharmaNet's stock in order to fund the Settlement, restore PharmaNet's damaged reputation, fund potential acquisitions and provide an alternative to less viable capital sources. Id. at ¶¶ 3, 9-10, 205. Plaintiff further alleges that as Defendants' improprieties became known to the market, PharmaNet's stock price fell from $35.95 per share at the beginning of the Class Period to $1.16 at the end, thus causing Plaintiff and the putative class of shareholders significant damages. 7 Id. at ¶¶ 11-12, 17, 26, 242-43. Plaintiff's allegations of misrepresentations and omissions on the part of Defendants fall into four categories: (1) undisclosed substantial “client dissatisfaction” with PharmaNet, which contributed to cancellations, thus making favorable financial statements inaccurate; (2) fraudulent inflation of PharmaNet's backlog due to cancelled projects and unsigned change orders; (3) unsigned change orders recognized as revenue; and (4) failure to timely...

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