Oxford Asset Management, Ltd. v. Jaharis, 99-11690.

• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)
• Citation: 297 F.3d 1182
• Docket Number: No. 99-11690.,No. 00-13220.,99-11690.,00-13220.
• Parties: OXFORD ASSET MANAGEMENT, LTD, Plaintiff-Appellant, Lowey Dannenberg & Knapp, P.C. Profit Sharing Plan & Trust, a.k.a. Lowey Dannenberg, Bemporad & Selinger P.C. Profit Sharing Plan, Plaintiff, v. Michael JAHARIS, Daniel M. Bell, et al., Defendants-Appellees. Oxford Asset Management, Ltd, Plaintiff-Appellant, Lowey Dannenberg & Knapp, P.C. Profit Sharing Plan & Trust, a.k.a. Lowey Dannenberg, Bemporad & Selinger P.C. Profit Sharing Plan, Plaintiff, v. Michael Jaharis, Daniel M. Bell, Duncan Cocroft, Juan F. Rodriguez, Robert E. Baldini, et al., Defendants-Appellees.
• Decision Date: 16 July 2002

297 F.3d 1182 OXFORD ASSET MANAGEMENT, LTD, Plaintiff-Appellant,
Lowey Dannenberg & Knapp, P.C. Profit Sharing Plan & Trust, a.k.a. Lowey Dannenberg, Bemporad & Selinger P.C. Profit Sharing Plan, Plaintiff,
v.
Michael JAHARIS, Daniel M. Bell, et al., Defendants-Appellees.
Oxford Asset Management, Ltd, Plaintiff-Appellant,

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Lowey Dannenberg & Knapp, P.C. Profit Sharing Plan & Trust, a.k.a. Lowey Dannenberg, Bemporad & Selinger P.C. Profit Sharing Plan, Plaintiff,
v.
Michael Jaharis, Daniel M. Bell, Duncan Cocroft, Juan F. Rodriguez, Robert E. Baldini, et al., Defendants-Appellees. No. 99-11690. No. 00-13220. United States Court of Appeals, Eleventh Circuit. July 16, 2002.

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Ricardo A. Banciella, Miami, FL, Atlee W. Wampler, III., Wampler, Buchanan & Breen, P.A., Miami, FL, Arthur T. Susman, Chicago, IL, for Plaintiff-Appellant in No. 99-11690.

Linda Collins Hertz, Tracy A. Nichols, Louise M. Brais, Holland & Knight, LLP, Miami, FL, for Defendants-Appellees in No. 99-11690.

Robert E. Williams, Arthur T. Susman, Susman & Watkins, Chicago, IL, Charles R. Watkins, Chicago, IL, for Plaintiffs-Appellants in No. 00-13220.

Louise M. Brais, Tracy Nichols, Holland & Knight, Miami, FL, Gerald J. Houlihan, Houlihan and Partners, P.A., Miami, FL, for Defendants-Appellees in No. 00-13220.

Appeals from the United States District Court for the Southern District of Florida.

Before EDMONDSON, Chief Judge, and FAY and GARWOOD,^* Circuit Judges.

GARWOOD, Circuit Judge:

In this securities action (our No. 99-11690), plaintiff-appellant Oxford Asset Management, Ltd. (Oxford) appeals the dismissal of its 1933 Act claims.¹ We Affirm.

Oxford also appeals (in our No. 00-13220) the district court's award of $520,091.82 in legal fees to the Kos and Underwriter defendants. We affirm in part, reverse in part, and vacate and remand.

Facts and Proceedings Below

1. Appeal of the dismissal (No. 99-11690)

Kos Pharmaceuticals, Inc. (Kos) is a pharmaceutical company that develops and markets prescription drugs. Kos completed an initial public offering of its common stock on March 12, 1997, selling 4,772,500 shares at $15 per share. From October 21, 1997, to October 24, 1997, Kos completed a secondary offering of its common stock. On October 21, 1997, Kos filed the prospectus and registration statement for the secondary offering with the Securities and Exchange Commission. The offering price was $42.75. A total of 3,625,000 shares were sold in the secondary offering. Kos sold 1,085,000 shares. Michael Jaharis, Kos's founder, majority shareholder and chairman, sold 2,390,000 shares. Daniel Bell, Kos's president and chief executive officer, sold 150,000 shares.

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Kos's only prescription drug product that was publicly available at the time of the secondary offering was an extended release niacin preparation called Niaspan. Niaspan was approved by the Food and Drug Administration in July 1997. Kos began shipping Niaspan to wholesalers in August 1997, and its sales force began detailing physicians in September 1997. On November 12, 1997, a Salomon Brothers analyst, Robert Uhl, released a report in which he slashed Kos's projected revenue for 1998 by half, from $92 million to $46 million, and changed the rating of Kos's stock from buy to hold. The next day, the price of Kos's stock plummeted from $30-15/16 to $16 9/16 per share. Uhl's report was premised on estimates² of the numbers of new and refill prescriptions for Niaspan during the first eight weeks that Kos's sales force marketed Niaspan. Uhl's conclusions were based on the assumption (that he and many other pharmaceutical analysts apparently share) that the number of new prescriptions filled during the eighth week of a new prescription drug product's initial marketing is particularly predictive of the market success the product will enjoy. The eighth week of Niaspan's marketing ended on October 31, 1997. Uhl stated that to achieve the original $92 million revenue projection, 5,000 new prescriptions of Niaspan during the eighth week were needed. IMS America estimated that only 708 new prescriptions for Niaspan were filled during the eighth week. Uhl explained that, considering the small size of Kos's sales force and their program of providing sample packs (which contain a three-week supply of Niaspan) to physicians, he would have been satisfied with 4,000 new prescriptions during week eight. Uhl concluded by noting that due to the sampling program and the anti-niacin bias of many physicians, Niaspan could be the first drug for which the "initial weekly prescriptions are not indicative of the product's ultimate success."

Kos's fifty-two page prospectus, filed October 21, 1997, explained the many risks of investing in Kos, among them: 1) "The Company's ability to successfully commercialize Niaspan will depend significantly on the acceptance of Niaspan by physicians and their patients"; 2) Niaspan has been designed to minimize the severity of the side effect of flushing, but most patients taking Niaspan will experience flushing and "there can be no assurance... that patients using Niaspan will not suffer episodes of flushing that they consider intolerable."; 3) Kos's clinical trials indicate that less than one per cent of patients taking Niaspan experience clinically significant elevations in liver enzymes, but physicians have historically been reluctant to prescribe niacin preparations because of such risk and it is possible that the actual incidence of hepatotoxicity will exceed one per cent; 4) Kos has fewer marketing resources than its competitors, a smaller sales force, and "limited" marketing experience, which could prevent Niaspan from achieving "market acceptance"; 5) "during the initial months following the launch of Niaspan, many physicians may start only a limited number of selected patients on Niaspan"; 6) physicians' anti-niacin bias combined with the distribution of three-week starter packs (which are dispensed without prescription) may result in only a modest increase in Niaspan prescriptions for the first three to six months of its marketing; and 7) since its inception, Kos had lost about $80 million and there can be no assurance that Kos will ever achieve profitability.

On August 10, 1998, Oxford and Lowey, Dannenberg & Knapp, P.C. (Lowey) filed this suit in the northern district of Illinois. On December 7, 1998, the action was

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transferred to the southern district of Florida. Plaintiffs brought this action as a proposed class action.³ Oxford proposed to represent plaintiffs that purchased Kos stock in the secondary offering. Lowey proposed to represent plaintiffs that purchased Kos stock on the open market between July 29, 1997, and November 13, 1997. The complaint alleged violations of sections 11(a), 12(a)(2) and 15 of the 1933 Act, 15 U.S.C. §§ 77k(a), 77l(a)(2) and 77o, sections 10(b) and 20(a) of the 1934 Act, 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10(b)(5), 17 C.F.R. § 240.10b-5. The complaint also alleges common law fraud, negligent misrepresentation and breach of fiduciary duty. All of the causes of action in plaintiffs' original complaint are based on defendants' alleged material misrepresentations and omissions (in press releases, the prospectus, the registration statement, and other SEC filings) concerning the safety, efficacy, tolerability and sales volume of Niaspan. On January 7, 1999, the Kos defendants moved to dismiss the complaint pursuant to FED.R.Civ.P. 12(b)(6). The Underwriter defendants so moved on February 8, 1999. At the dismissal hearing, the plaintiffs advanced a new basis for recovery, namely that the prospectus should have disclosed the first six weeks of IMS America's estimates of Niaspan's prescription volume. In the interests of justice, the district court considered this as an amended claim. On May 19, 1999, the district court granted the motions to dismiss, holding that the omission of the prescription volume data was immaterial as a matter of law and that plaintiffs' allegations as to the safety, efficacy, tolerability and sales volume of Niaspan were mere legal conclusions masquerading as facts. On August 3, 1999, the district court dismissed the complaint with prejudice.

Oxford appeals the dismissal of its 1933 Act and the common law claims of fraud and negligent misrepresentation, but admits that dismissal of the common law claims was proper if dismissal of the federal claims was proper. Oxford does not appeal the dismissal of its 1934 Act claims. Lowey, which was not named as a plaintiff in the 1933 Act counts, does not appeal to this Court.

2. Appeal of the attorneys' fees award (No. 00-13220)

On July 6, 1999, the Kos defendants moved for sanctions pursuant to the Private Securities Litigation and Reform Act (PSLRA) and Rule 11. On July 16, 1999, the Underwriter defendants so moved. On January 31, 2000, the district court granted the motions for sanctions, finding that the plaintiffs were deliberately indifferent to the lack of factual support for the allegations in the complaint and that, therefore, the complaint was objectively frivolous. On May 22, 2000, the district court awarded $502,576.82 in attorney's fees to the defendants. On June 7, 2000, the district court clarified its earlier order and increased the award to $520,091.82. Oxford appeals the district court's grant of defendants' motions for sanctions and its award of attorney's fees to defendants.

3. Consolidation

This Court subsequently granted Oxford's motion to consolidate the appeals for oral argument.

Discussion

I. Standard of Review

This court reviews de novo the dismissal of a complaint pursuant to Rule 12(b)(6).

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Harris v. Ivax Corp., 182 F.3d 799, 802 (11th Cir.1999). The plaintiff's factual allegations are accepted as true. South Florida Water Management Dist. v. Montalvo, 84 F.3d 402, 406 (11th Cir.1996). Dismissal is not appropriate unless it is plain...