Schwartz v. NOVO INDUSTRI A/S, 85 Civ. 5500 (EW).
| Decision Date | 24 April 1987 |
| Docket Number | No. 85 Civ. 5500 (EW).,85 Civ. 5500 (EW). |
| Citation | 658 F. Supp. 795 |
| Parties | Leonard S. SCHWARTZ, on behalf of himself and all others similarly situated, Plaintiff, v. NOVO INDUSTRI, A/S, Defendant. |
| Court | U.S. District Court — Southern District of New York |
Abbey & Ellis, New York City, for Leonard S. Schwartz; Stephen T. Rodd, of counsel.
Rosenman & Colin, New York City, for Novo Industri, A/S; J. Kelly Nevling, Jr., Peter Shapiro, of counsel.
After plaintiff's original complaint was dismissed for failure to comply with Fed.R. Civ.P. 9(b),1 he served an Amended and Supplemental Complaint, which defendant now moves to dismiss. The motion is made pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted and Fed.R.Civ.P. 9(b) for failure to state with particularity the circumstances comprising the alleged fraud. Alternatively, defendant moves for summary judgment pursuant to Fed.R.Civ.P. 56.
Plaintiff purchased 60 American Depository shares ("ADS") of defendant Novo Industri, A/S ("Novo") on August 3, 1984. When the price of the shares declined, plaintiff brought this action pursuant to § 10(b) of the Securities Exchange Act of 1934,2 and Securities Exchange Commission ("SEC") Rule 10b-5,3 alleging fraudulent misrepresentation and material omissions in the sale of securities.
Plaintiff's amended complaint includes six allegedly false and misleading misstatements or omissions to state material facts by which he argues defendant Novo Industri A/S ("Novo") gave a fraudulently rosy outlook on its future earnings for the purpose of maintaining its reputation within the market as a growth company. These are as follows:
In support of his contention that these statements were fraudulent, plaintiff provides excerpts from Novo's October 19, 1984 SEC Form 6-K. The Form 6-K report stated that Novo's performance was not up to par with the company's projections, and explained that it had assumed in its projections that it would receive approval from the Food and Drug Administration ("FDA") for a new line of insulin products, but such approval had not been forthcoming. Also, Novo stated that it learned one of its major enzyme customers was forming its own in-house enzyme manufacturing unit, and that the customer "has been able faster than anticipated to develop or acquire the necessary production technology to meet his own enzyme needs...."5 Finally, Novo stated that "in retrospect we may blame ourselves for not looking at the data we had on hand sufficiently critically."6
Novo's 1984 Annual Report, dated March 1985, reported an increase in sales from the first half of the year to the second. However, total earnings for 1984 were Danish Kroner ("Dkr.") 685 million, somewhat less than the 1983 figure of Dkr. 704 million. Novo attributed this earnings decrease to increased competition, the delay in FDA approval for its new products, and that distributors in the United Kingdom had built up large insulin inventories during 1983 in preparation for a changeover from U-40 and U-80 insulin to U-100 insulin.
The crux of plaintiff's argument is that Novo was reckless in failing to project more accurately its earnings given the information available. The six allegedly fraudulent statements will be discussed under this framework.
The first statement plaintiff relies on to state a claim of securities fraud, that Novo felt the in-house enzyme production of one of its customers would not have a material adverse impact on Novo's financial position, has already been held non-actionable by the Court's previous opinion.7 Although plaintiff has quoted more extensively from the report in his amended complaint, he has nevertheless failed to allege any facts upon which an inference of wrongdoing may be gleaned or is reasonably warranted from defendant's statements. Plaintiff has not alleged facts showing that this statement was untrue or that defendant had any reason to believe that this statement was fraudulent. To the contrary, the statement taken as a whole clearly "bespeaks caution"8 by informing the public that a primary customer may not be purchasing its enzymes from Novo to the extent of its previous purchases, and therefore is not actionable under Section 10(b).
Plaintiff urges as further evidence of the alleged fraud another portion of the 1983 Form 20-F stating that Novo's pharmaceutical sales increased by 28% in 1983 and 35% in 1982. While he does not dispute that these figures were accurate, plaintiff contends that this statement was misleading because it reinforced the "growth image of Novo and the prior sales projection of at least 20-25% annually."9 This assertion is meritless. The statement is confined to Novo's past growth in pharmaceutical sales and says nothing about possible future growth. Moreover, to the extent that the increase in growth was greater in 1982 than it was in 1983, the figures reveal a decrease in the growth rate for the pharmaceutical division. It strains credulity to think that truthful, objective statistics concerning a company's prior performance and revealing a decrease in its growth rate, serve to reinforce what plaintiff characterizes as a false image of the company's growth. Plaintiff has attributed no valid inference of wrongdoing to this statement, the accuracy of which he does not challenge. The statement is not misleading and states no cause of action under § 10(b).
Plaintiff asserts that the statement attributed to Novo's president in the November 15, 1983 Wall Street Journal, wherein he predicted 20% to 25% annual growth for his company over the next five years, was made recklessly because: 1) defendant knew that it would lose business due to ADM's in-house enzyme manufacture; 2) defendant knew that distributors of its insulin were stockpiling their insulin inventories and would therefore not require as much as previously; 3) the optimistic projection was based on Novo's expectation of receiving FDA approval for a new insulin product even though Novo had "no reasonable assurance" that such approval would be obtained by a particular date; and 4) the projection included an expected increase in insulin sales to the United Kingdom for which there was no reasonable basis because of the United Kingdom's change from using U-40 and U-80 insulin to U-100 insulin. Plaintiff further alleges that "there was a high risk that Novo's growth during the coming year would be substantially less than the projected 20-25% increase."10
To satisfy the particularity requirement of Fed.R.Civ.P. 9(b), a complaint must allege "(1) specific facts; (2) sources that support the alleged specific facts; and (3) a basis from which an inference of fraud may fairly be drawn."11 While plaintiff asserts that Novo knew or should have known of the above-mentioned circumstances, plaintiff, other than these bare categorical allegations, offers no sources for the knowledge it seeks to impute to defendant. Moreover, plaintiff fails to demonstrate how, even if Novo had such knowledge, it would be fair to draw an inference of fraud from a statement appearing in a news article over which defendant had less than complete control.12
Recognizing that a complaint will not be dismissed unless the plaintiff can prove no set of facts which would entitle him to relief,13 the Court holds that plaintiff's allegation of securities fraud in relation to the statement in the Wall Street Journal does not state a claim for relief under § 10(b). For his claim to survive, plaintiff is required to allege acts or conduct indicating an intent to deceive, manipulate or defraud.14 The statement is nothing more than a judgment subsequently found to have been overly optimistic. Plaintiff fails to offer a single objective fact to suggest that the prediction was other than an honestly held view based on Novo's considered judgment given the information before it.15 Rather, the complaint is an example of alleging "fraud by hindsight" and therefore not actionable under § 10(b) and Rule 10b-5.16
Plaintiff purchased his Novo stock on August 3, 1984. The statements made on August 23, 24 and September 26, 1984, subsequent to plaintiff's purchase, are not in themselves actionable under Section 10(b).17 Plaintiff, however, argues that the statements are circumstantial evidence of the fraud he alleges occurred prior to his stock purchase. Throughout this opinion, the Court has indeed viewed the three pre-purchase statements in light of subsequent events. Although plaintiff attempts to use these statements to bolster his complaint, none of them support an...
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