Picard Chemical Inc. Profit Sharing Plan v. Perrigo
| Decision Date | 25 July 1996 |
| Docket Number | No. 1:95-CV-141.,No. 1:95-CV-290.,1:95-CV-141.,1:95-CV-290. |
| Citation | 940 F.Supp. 1101 |
| Parties | PICARD CHEMICAL INC. PROFIT SHARING PLAN, et al., on behalf of themselves and all others similarly situated, Plaintiffs, v. PERRIGO COMPANY, et al., Defendants. |
| Court | U.S. District Court — Western District of Michigan |
Stephen C. Bransdorfer, Bransdorfer & Bransdorfer, P.C. Grand Rapids, MI, Reed Richard Kathrein, Milberg, Weiss, Bershad, Hynes, L.L.P., San Francisco, CA, Ellen A. Gusikoff, Spector & Roseman, P.C., San Diego, CA, for plaintiffs.
Stephen D. Turner, Law, Weathers & Richardson, Grand Rapids, MI, Joe A. Sutherland, Gardner, Carton & Douglas, Chicago, IL, for Perrigo Company, Michael J. Jandernoa, Lonnie L. Smith, M. James Gunberg, Steven N. Hutchinson, Robert P. Lasner, Mark Olesnavage, F. Folsom Bell, William C. Swaney, Ralph E. Klingenmeyer, Michael J. Jandernoa Trust, Michael J. Jandernoa, Swaney Associates, Ralph E. Klingenmeyer Trust, J. Klingenmeyer Trust, John Klingenmeyer Trust, Amy Klingenmeyer Trust, Sandra E. Hansen Trust, Richard G. Hansen, Richard G. Hansen Trust, Elizabeth A. Hansen Trust, Kristi L. Hansen Trust, Richard G. Hansen and Sandra E. Hansen Charitable Remainder Trust, Kristi L. Hansen, Elizabeth A. Hansen, Amy Klingenmeyer, John Klingenmeyer, Wilmington Investment Inc., Hillman Company, Henry L. Hillman Trust, Elsie Hillman.
Bruce W. Neckers, Rhoades, McKee, Boer, Goodrich, et al., Grand Rapids, MI, Michael B. Reuben, Gordon, Altman, Butowsky, Weitzen, et al., New York City, for Henry L. Hillman, The Hillman Family Trusts, Edward A. Craig, III, C.G. Grefenstette, Juliet Challenger, Inc., Audrey Hilliard Hillman, Juliet Lea Hillman, William Talbott Hillman, Henry Lea Hillman, Jr.
William K. Holmes, Warner, Norcross & Judd, L.L.P., Grand Rapids, MI, Dennis E. Glazer, Davis, Polk & Wardwell, New York City, for J.P. Morgan Securities Ltd., Morgan Stanley International, Smith Barney Shearson, Inc., Dean Witter Reynolds, Inc.
I. Background Facts .......................................................... 1112
II. Standards of Review ....................................................... 1114
A. Pleading a Short and Plain Statement .................................. 1114
B. Pleading Fraud with Particularity ..................................... 1114
C. Standard for Dismissal for Failure to State a Claim ................... 1115
III. Discussion ................................................................ 1115
A. Form of the Complaint ................................................. 1115
B. Reviewing the Complaint ............................................... 1117
C. Statute of Limitations Arguments ...................................... 1118
D. Count I: Section 10(b) and Rule 10b-5 "Fraudulent Scheme" Claims ...... 1119
1. Distinguishing Primary Liability from Secondary Liability .......... 1119
2. The Prima Facie Case ............................................... 1121
a. Misleading Statements .......................................... 1121
b. Materiality .................................................... 1121
c. Scienter ....................................................... 1125
d. Causation ...................................................... 1126
3. Reviewing the Specific Allegations in the Complaint Under Fed
R.Civ.P. 9(b) .................................................... 1126
a. Allegations Common to Many Defendants .......................... 1126
b. The Perrigo Defendants ......................................... 1127
i) Outside Directors ........................................ 1127
ii) The "Remaining Perrigo Defendants" ....................... 1127
c. Underwriter Defendants ......................................... 1128
d. The Main Hillman Defendants .................................... 1128
E. Count II: Section 10(b) "Misuse of Insider Information Claims ......... 1128
1. The Perrigo Defendants ............................................. 1129
2. The Underwriter Defendants ......................................... 1129
3. The Main Hillman Defendants ........................................ 1129
4. Defendant Swaney Associates ........................................ 1130
F. Counts III and IV: Section 20A "Insider Trading and Communication"
Claims .............................................................. 1130
G. Count VI: Section 11 "False Filings" Claims ........................... 1131
H. Count VII: Section 12(2) "Statutory Seller" Claims .................... 1132
I. Counts V and VIII: Section 15 Securities Act and Section 20(a) Exchange
Act "Controlling Person" Allegations ................................ 1133
1. The Perrigo Defendants ............................................. 1134
2. The Underwriter Defendants ......................................... 1135
3. The Main Hillman Defendants ........................................ 1135
J. Counts IX through XII: "Equitable" Claims ............................. 1136
K. Motion for Rule 11 Sanctions .......................................... 1137
L. Motion for an Undertaking of Costs and Attorneys' Fees ................ 1137
IV. Conclusion ................................................................ 1137
This case arises out of the secondary public offering of Perrigo Company ("Perrigo") common stock held in October of 1993. Plaintiffs,1 seeking to represent the class of all purchasers of Perrigo stock between May 11, 1993, and May 10, 1994,2 allege in the First Amended Consolidated Class Action Complaint that defendants perpetrated a "fraud on the market." The Complaint seeks to recover damages under §§ 10(b), 20(a), and 20A of the Securities and Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 promulgated thereunder, and §§ 11, 12(2), and 15 of the Securities Act of 1933 ("Securities Act"). This matter is before the Court on motions to dismiss filed by the "Underwriter defendants,"3 defendant Swaney Associates, the "main Hillman defendants,"4 the "nominal Hillman defendants,"5 the "nominal H/K defendants,"6 and "the Perrigo defendants."7 The Perrigo defendants' motion is titled in the alternative as a motion to strike. Also before the Court are the Perrigo and the nominal H/K defendants' motion for Rule 11 sanctions and the Perrigo defendants' motion to require certain plaintiffs to post an undertaking for the payment of costs and attorneys' fees.
This case involves the consolidation of two separate cases. The first case, No. 1:95-CV-141, was filed on March 8, 1995, while the second, No. 1:95-CV-290, was filed on May 10, 1995. The first Consolidated Class Action Complaint was filed on June 9, 1995. The First Amended Consolidated Class Action Complaint (hereinafter "Complaint") was filed on September 22, 1995.
Perrigo is a manufacturer and seller of over-the-counter ("OTC") pharmaceutical and personal care products for the store (private) brand market. Perrigo's nearly 2,250 customers are national and regional retail, drug, supermarket and mass merchandise chains.
In October 1993, 13 million shares of Perrigo common stock were sold in a secondary public offering. The public offering was underwritten on a firm commitment basis8 at $31 per share by the Underwriter defendants. In May 1993, prior to the secondary offering, the price of Perrigo stock was $20 per share. After a Barron's article dated January 31, 1994, suggested that the fiscal 1995 earnings forecasts for Perrigo may be too high, the stock dropped 1½ points. The biggest one-day drop in stock price occurred after Perrigo's March 15, 1994, conference with industry analysts, when the price dropped 6¼ points to $22 per share. As of May 10, 1995, the price had fallen to $12.25 per share.
The Complaint is 129 pages and 161 paragraphs long. It asserts 11 counts against 19 defendants and 20 "nominal defendants." After a description of the parties and class allegations, plaintiffs claim that there was a general scheme by defendants to artificially inflate the price of Perrigo stock so that defendants could sell their shares at a huge profit. The Complaint does not allege that the defendants "cooked the books." Rather, the shareholder defendants are alleged to have utilized a registered secondary public offering accompanied by highly favorable press releases, influenced unaffiliated analysts and the press, and effected highly favorable filings with the Securities and Exchange Commission ("SEC"). The shareholder defendants are also alleged to have wrongfully manipulated the Perrigo stock price prior to October 1993 by announcing a stock split in July 1991 [¶ 32], and giving false reasons for the split [¶ 33]. The Underwriter defendants are alleged to have assisted in the shareholder defendants' scheme by, among other things, issuing favorable press releases and research reports, performing minimal due diligence, holding "road shows" to tout Perrigo stock, influencing the press and unaffiliated analysts to issue favorable reports regardless of whether the reports were false or misleading, and promising to support the price of the stock.
The plaintiffs' complaint, in essence, is that defendants put a positive spin on Perrigo's results, and made overly optimistic projections of Perrigo's future performance while not disclosing fundamental problems which might enable the reasonable investor to understand that these profits and projections...
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