Ross v. A. H. Robins Co., Inc.
| Decision Date | 24 September 1979 |
| Docket Number | D,No. 1017,1017 |
| Parties | Fed. Sec. L. Rep. P 97,115 Kalman ROSS and Anita Ross, Appellants, v. A. H. ROBINS COMPANY, INC., E. Claiborne Robins, William I. Zimmer, III, E. Claiborne Robins, Jr., George E. Thomas, Kenneth L. Roberts, Charles E. Saltzman and Stuart Shumate, Appellees. ocket 79-7106. |
| Court | U.S. Court of Appeals — Second Circuit |
Wolf, Popper, Ross, Wolf & Jones, New York City (Eric L. Keisman, Marian R. Probst, New York City, of counsel), for plaintiffs-appellants.
Cahill, Gordon & Reindel, New York City (William E. Hegarty, Joseph W. Muccia, Charles A. Gilman, John C. Koutsos, New York City, of counsel), and McGuire, Woods & Battle, Richmond, Va. (Rober H. Patterson, Jr., R. Gordon Smith, Anne Marie Whittemore, Richmond, Va., of counsel), for defendants-appellees.
Paul Gonson, Principal Associate Gen. Counsel, Michael K. Wolensky, Asst. Gen. Counsel, and Philip H. Becker, Washington, D.C., for amicus curiae, Securities and Exchange Commission.
Before MANSFIELD and GURFEIN, Circuit Judges, and MISHLER, * District Judge.
This is an appeal from an order of the United States District Court for the Southern District of New York, Pierce, J., dismissing plaintiffs' proposed class action. Plaintiffs, Kalman and Anita Ross, allege that on July 23, 1973 they purchased 100 shares of common stock of the defendant company, A. H. Robins Company, Inc., ("Robins"), a manufacturer and distributor of pharmaceutical products. They instituted this action pursuant to § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, Rule 10b-5, promulgated thereunder, 17 C.F.R. § 240.10b-5 and common law principles, on behalf of all persons who purchased such stock "from April 1972 through in or about July, 1974 . . . and who still owned shares of Robins at the end of said period and who have suffered damages as a result thereof." (Complaint P 2). In addition to Robins, also named as defendants are seven individuals who are identified as directors and/or officers of Robins. The gravamen of the complaint is that the defendants manipulated and artificially inflated the market price of Robins' common stock by disseminating false and misleading information about the effectiveness and safety of the Dalkon Shield, an interuterine birth control device which it manufactured, and by failing to reveal information which indicated that the shield was less effective and more dangerous than the company's earlier public statements had indicated. The district court determined that: (1) to the extent that the alleged false and misleading statements were contained in papers filed with the Securities and Exchange Commission, the plaintiffs could not maintain the action under § 10(b) and Rule 10b-5. Their exclusive remedy was under § 18 of the Exchange Act, 15 U.S.C. § 78r; and (2) the plaintiffs had failed to plead with the degree of specificity required in fraud actions by Rule 9(b) Fed.R.Civ.P. Therefore, the court dismissed the action with prejudice.
We hold that the district court erred in concluding that the action could not be maintained under § 10(b) of the Exchange Act and Rule 10b-5. On the question of the pleadings, we agree with the determination made below that the complaint fails to meet the requirements of Rule 9(b). However, because we are hesitant to preclude the prosecution of a possibly meritorious claim because of defects in the pleadings, we believe that the plaintiffs should be afforded an additional, albeit final opportunity to conform the pleadings to Rule 9(b).
The complaint which is the subject of this appeal was filed in the district court on June 1, 1978. 1 It contains the following The gist of plaintiffs' claim is contained in paragraph 13:
pertinent allegations: Robins is a Virginia corporation primarily engaged in the "development, manufacture and distribution of ethical pharmaceutical products and brand name consumer products." (Complaint P 4). The individual defendants were "at all times material hereto" directors of the defendant corporation. Some of the defendants were also officers of Robins. (Complaint P 5-P 9). 2 "At all relevant times, the Board of Directors of Robins had the responsibility for the dissemination of information to the public, including the statements alleged in the reports referred to in the complaint as well as the information not disclosed to the public as further alleged in the complaint." (Complaint P 10)
Since sometime in or about April 1972 and continuing in or about July, 1974, Robins and the individual defendants herein have engaged in a scheme and plan and continuous course of conduct to deceive the investing public, including plaintiffs, as to the true financial condition and prospects of Robins, particularly with respect to matters concerning the Dalkon Shield, and to conceal from the investing public, including plaintiffs, facts, among other things, concerning the safety and efficiency of the Dalkon Shield and the effect of such upon Robins operating and financial condition.
According to paragraph 14:
Prior to the commencement of the class period, Robins with approval of its Board of Directors which consisted of defendant Robins, Robins, Jr., Roberts, Saltzman and Shumate, 3 prepared, issued and disseminated statements to the investing public highlighting developments with regard to the Dalkon Shield and publicizing its significant impact upon the business affairs of Robins. Said statements also stressed the safety, reliability and efficiency of the Dalkon Shield, particularly with regard to Robins' testing procedures and practices.
These statements are quoted at length and identified as appearing in Robins' 1970 Annual Report, 1971 Annual Report and a prospectus issued in or about March 1972. (Complaint P 15 P 17). 4
Paragraph 18 is of crucial importance. 5 It charges that (d)uring the class period, Robins and the individual defendants knew or recklessly disregarded the fact that there were serious questions as to the safety and efficiency of the Dalkon Shield . . . .
Specifically, it alleges that "among other things" the "defendants knew or recklessly disregarded," Inter alia, the "facts" that the pregnancy rate from use of the shield "was significantly higher than the low pregnancy rate Robins had indicated in (its) 1970 Annual Report . . . ," and that, "the rate of medical removals of the shield required by manifestations of pain, bleeding and infection was significantly higher than . . . indicated in the 1970 Annual Report . . . ." These facts were evidenced by data "found in an updated April 1972 unpublished study on the Shield by Mary Gabrielson . . . ." Paragraph 18 further states the defendants knew or recklessly disregarded the fact that: their conclusions about the shield's safety and effectiveness were based on insufficient data; that in 1972 and 1973 there was an "alarming increase" in the rate of septic abortions and deaths resulting from the shield; and that other "significant health hazards" existed.
Paragraph 20 states that the defendants "failed to make proper and timely disclosure" of these facts and the fact that "Robins was incurring substantial risks to its reputation . . . and substantial risks of substantial liability for injuries from use of the Dalkon Shield."
The complaint also charges that "during the class period" further misleading statements "were made and issued with the knowledge, approval and/or acquiescence of Robins' Board of Directors which consisted at all relevant times of the individual defendants." (Complaint P 21). These statements, language of which is quoted, were allegedly contained in: Robins' 10-K forms for the fiscal years ending December 1972 and December 1973; a press release issued April 19, 1973; press releases dated July 18, 1973, January 31, 1974 and April 18, 1974; and Robins' 1973 Annual Report issued in March 1974. (Complaint P 22-P 33). In plaintiffs' view, these statements were misleading in that they continued to speak glowingly of the company and of continued expectations of success and did not disclose the serious problems concerning Robins' continued sale and distribution of the Dalkon Shield.
The named plaintiffs and members of the putative class allegedly "made their purchases of Robins' common stock at prices that were inflated by (these) misleading public reports and press releases and the representations contained therein and by Sometime beginning in or about the middle of May 1974, information about the serious medical problems which were resulting from use of the Dalkon Shield began to be disclosed to the public. 6 As a consequence of this, of resulting investigations by the Food and Drug Administration, and the Department of Health, Education and Welfare, and the institution of over 500 product liability suits, "Robins' reputation and position in its industry have been jeopardized and its business prospects adversely affected." (Complaint P 43). The value of its common stock "dropped from approximately $19 to $13 per share on the New York Stock Exchange." (Complaint P 45).
defendants' failure to disclose . . . adverse matter . . . ." (Complaint P 46).
The defendants' conduct is alleged to have violated § 10(b) and Rule 10b-5. 7 Specifically, it is stated that the "defendants had a duty to disclose (adverse) information (about the Dalkon Shield) in order to correct the false and misleading impression created by (their earlier) statements . . . ." (Complaint P 20). These statements had indicated that the shield was safe and reliable and would continue to contribute to Robins' sales and earnings.
The defendants moved the district court for an order dismissing the complaint on the grounds that: (1) the court lacked subject matter jurisdiction over the action; (2) the action could not be maintained under § 10(b) and Rule 10b-5 because § 18 of the...
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