Twin Master Fund, Ltd. v. Akorn, Inc.
| Decision Date | 05 February 2020 |
| Docket Number | Case No. 19 C 4651,Case No. 19 C 3648 |
| Parties | TWIN MASTER FUND, LTD., TWIN OPPORTUNITIES FUND, LP, and TWIN SECURITIES, INC., Plaintiffs, v. AKORN, INC., RAJAT RAI, DUANE PORTWOOD, ALAN WEINSTEIN, RONALD JOHNSON, and BRIAN TAMBI, Defendants. MANIKAY MASTER FUND, LP, and MANIKAY MERGER FUND, LP, Plaintiffs, v. AKORN, INC., RAJAT RAI, DUANE PORTWOOD, ALAN WEINSTEIN, RONALD JOHNSON, and BRIAN TAMBI, Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
In 2017, Akorn, Inc., a pharmaceutical company, announced that it would be acquired by Fresenius, an international healthcare company. Before the merger closed, however, a whistleblower alerted Fresenius to possible regulatory compliance problems at Akorn facilities. Fresenius investigated these allegations, found substantial compliance problems, and subsequently announced that it was terminating the merger. After the termination announcement, the price of Akorn's stock dropped precipitously.
Twin Master Fund, Ltd., Twin Opportunities Fund, LP, and Twin Securities, Inc. (collectively "Twin") purchased Akorn securities shortly after it announced the merger with Fresenius. Manikay Master Fund, LP and Manikay Merger Fund, LP (collectively "Manikay") also purchased Akorn securities around this time. Twin and Manikay have each sued Akorn and several corporate officers and board members, alleging that they made misrepresentations regarding Akorn's regulatory compliance that were fraudulent and violated the Securities Exchange Act of 1934. The defendants have moved to dismiss all of the plaintiffs' claims.
Akorn is a pharmaceutical company that produces and sells generic drugs. At all times relevant to this suit, the individual defendants had the following roles at Akorn: Rajat Rai was the Chief Executive Officer, Duane Portwood was the Chief Financial Officer, and Alan Weinstein, Ronald Johnson, and Brian Tambi were board members.
Akorn is subject to U.S. Food and Drug Administration (FDA) regulations that set forth "current good manufacturing practices" for production of drugs. These regulations require manufacturers to meet certain data integrity standards, such as ensuring that data is backed-up and periodically reviewed for accuracy. Akorn's Vice President of Global Quality is in charge of ensuring that the company complies with the FDA's current good manufacturing practices.
To enforce compliance with its good manufacturing practices, the FDA periodically inspects drug manufacturing facilities. After inspection, the FDA may issue a "Form 483," which lists the observed violations and gives the manufacturer fifteendays to respond with a corrective action plan. Once the manufacturer submits this plan, the FDA informs the facility whether the agency is satisfied with the proposed changes or plans to take enforcement action.
Akorn, like all generic drug manufacturers, must receive FDA approval of its generics prior to releasing them on the market. To gain approval, a manufacturer submits an Abbreviated New Drug Application (ANDA) to the FDA. An ANDA must include data demonstrating that the generic drug performs in the same manner as the analogous brand-name drug, and this data is subject to the FDA's data integrity standards. If the data submission in the ANDA is inadequate, the FDA will issue the company a "complete response letter," which lists the deficiencies and the action needed to overcome them. The applicant can then address the issues and resubmit the ANDA.
In January 2016, an Akorn employee reported to Rai, Portwood, and other executive officers that Akorn's then-Vice President of Global Quality was providing misleading information to the FDA and thwarting Akorn's internal investigations of data integrity. In April 2016, Akorn's Global Quality Compliance team investigated data practices at the company's headquarters in Lake Forest, Illinois and found that it was not meeting data integrity standards. The team also investigated Akorn's research facility in Vernon Hills, Illinois and concluded that the data practices there were not meeting standards either. An independent data-integrity consulting company, Cerulean, inspected Akorn's manufacturing facility in Decatur, Illinois and found that its data practices did not meet FDA standards.
In mid-2016, the FDA also inspected Akorn's Decatur facility and issued a Form 483. Rai reported the Form 483 to investors. In December 2016, following up on the Form 483, the FDA reinspected the Decatur facility. Akorn passed the inspection, and agency informed the company that it would not take further enforcement action.
In April 2017, Akorn accepted a buyout bid from Fresenius, and the two companies executed a merger agreement. A provision in the agreement allowed Fresenius to terminate the merger if Akorn's representations in the agreement were not "true and correct" as of both the signing date and closing date of the merger. Among Akorn's representations was a regulatory compliance statement stating that, "to the [k]nowledge of Akorn":
[Akorn] and its Subsidiaries are[,] and . . . since July 1, 2013 . . . have been[,] in compliance with . . . all applicable Laws (including all rules, regulations, guidance and policies) relating to or promulgated by the U.S. Food and Drug Administration . . . and other Healthcare Regulatory Authorities . . . .
Merger Agr., Ex. 4, Akorn's Mot. to Dismiss, dkt. no. 29-6, at 33.1 Another provision allowed Fresenius to terminate if Akorn breached its commitment to operate "in the ordinary course of business" during the pendency of the merger. Id. at 40.
After the companies executed the merger agreement, Akorn filed a Form 8-K—announcing the merger and attaching the agreement—with the U.S. Securities and Exchange Commission (SEC). Twin and Manikay first purchased Akorn securities shortly thereafter, in April 2017 and August 2017, respectively.
In October 2017, Fresenius received a whistleblower complaint alerting it to issues with Akorn's product development and quality control processes. Both Akorn and Fresenius retained independent counsel to concurrently investigate the whistleblower's allegations. On February 26, 2018, Fresenius issued a press release announcing it was investigating "alleged breaches of FDA data integrity requirements . . . at Akorn" and that the "consummation of the [merger] may be affected" if the findings revealed that Akorn was not in compliance with the agreement conditions. Twin Compl., No. 19-cv-3648, dkt. no. 1, ¶ 130.2 The same day, Akorn released a statement in which is said that its investigation "investigation has not found any facts that would result in a material impact on Akorn's operations and the Company does not believe this investigation should affect the closing of the [sale] with Fresenius." Id. ¶ 131. After these announcements, Akorn's stock price dropped from $30.28 per share on February 26, 2018 to $18.65 per share on February 27.
Fresenius's investigation resulted in a determination that Akorn was not in compliance with data integrity standards, and on April 22, 2018, Fresenius informed Akorn that it was terminating the merger. Fresenius issued a press release stating that it planned to pull out, in part, because Akorn had breached FDA data integrity requirements. Akorn issued its own release, stating that its investigation had not uncovered any facts that would compromise the merger. Akorn's stock price fell from $19.70 per share on April 22, 2018, to $13.05 per share on April 23, the day after the companies' announcements.
On April 23, 2018, Akorn sued Fresenius in Delaware chancery court, seeking an order requiring consummation of the merger, and the court held a five-day trial. In October 2018, it issued a decision concluding that Fresenius's termination was valid on two independent grounds: the inaccuracy of Akorn's regulatory compliance statement and its failure to operate in "the ordinary course of business." First, the court concluded that Akorn's regulatory compliance statement was inaccurate because it had "widespread regulatory violations and pervasive compliance problems . . . [that] existed at signing and got worse." Akorn, Inc. v. Fresenius Kabi AG, No. 2018-300, 2018 WL 4719347, at *66 (Del. Ch. Oct. 1, 2008). Second, the court found that Akorn had breached its commitment to operate in ordinary course of business because it cancelled internal audits and failed to address data integrity deficiencies. Id. at *88.
In May 2019, Twin sued the defendants, asserting three fraud-based claims: (1) violation of section 10(b) the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5 (count 1); (2) violation of section 18 of the Act, 15 U.S.C. §§ 78r(a) (count 3); and (3) common law fraud (count 4).3 In July 2019, Manikay also sued, alleging the same misconduct by the defendants and asserting identical claims.
The defendants have moved to dismiss all of the plaintiffs' claims. First, theyargue that the section 18 claim is time-barred. Second, the defendants contend that Twin and Manikay failed to adequately plead two elements common to all of their claims: material misrepresentation and causation. Additionally, the defendants have moved to dismiss the section 18 claim, arguing that the plaintiffs did not adequately plead actual reliance. Finally, defendant Portwood has separately moved for dismissal from the common law fraud and section 10(b) claims, arguing that the plaintiffs' allegations were insufficient to establish the requisite mental state for these claims.
Section 18 imposes civil liability for false statements knowingly made in any SEC filing and sets a one-year limitations period from the time a "reasonably diligent plaintiff" would have discovered—or did...
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